Filed Pursuant to Rule 485(b)
As filed with the Securities and Exchange Commission on April 28, 1998
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 )
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Pre-Effective Amendment No. ( )
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Post-Effective Amendment No. 45 ( X )
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 (X)
Amendment No. 47 ( X )
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(Check appropriate box or boxes)
SSgA FUNDS
(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: (253) 627-7001
Name and Address of Copies to:
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Agent for Service:
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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:
( ) This post-effective amendment designates a new effective date for
--- a previously filed post-effective amendment.
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SSgA FUNDS
Form N-1A Cross Reference Sheet
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PART A ITEM NUMBER AND CAPTION PROSPECTUS CAPTION
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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); SSgA Funds;
Highlights (Life Solutions Funds only); 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; Investment Objectives and
Asset Allocation of the SSgA Life Solutions Funds
(Life Solutions Funds only)
(c) Investment Restrictions and Policies; Life Solutions
Funds: Special Risk Considerations (Life Solutions
Funds only)
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
(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
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(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 Purchase
(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 NUMBER AND CAPTION STATEMENT OF ADDITIONAL INFORMATION CAPTION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Not Applicable
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--Advisor; General
Management--Advisory Agreement (Prospectus)
(c) Not Applicable
(d) Operation of Investment Company--Administrator
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(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)
17. Brokerage Allocation and Other Policies
(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 Fund 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
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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.
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SSgA FUNDS
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
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Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
SSgA FUNDS
One International Place
Boston, Massachusetts 02110
(800) 647-7327
SPECIAL SMALL CAP FUND
SSgA Funds is a registered, open-end management investment company with
multiple portfolios, each of which is commonly referred to as a mutual fund.
This Prospectus describes and offers shares of beneficial interest in one such
mutual fund, the SSgA Special Small Cap Fund (the "Special Small Cap Fund" or
the "Fund") The Fund seeks to maximize total return through investment in mid-
and small capitalization US equity securities. Under normal market conditions,
at least 65% of total assets will be invested in securities of smaller and
mid-sized capitalized issuers included in the Russell Special Small Company(R)
Index. The Fund's shares are offered without sales commissions. However, the
Fund pays certain distribution expenses under its Rule 12b-1 plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES IN THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY, AND INVOLVE RISKS INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please read and retain this
document for future reference. Additional information about the SSgA Funds has
been filed with the Securities and Exchange Commission ("SEC") in Statements of
Additional Information ("SAI") dated April 28, 1998. The SAI is incorporated
herein by reference and is available without charge from Distributor at its
address noted below or by calling (800) 647-7327. The SEC also maintains a
website (www.sec.gov) that contains the SAI, material incorporated by reference
and other information regarding the SSgA Funds. You may also access the SSgA
Funds' website at www.ssgafunds.com.
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Investment Advisor, Custodian
and Transfer Agent: Distributor: Administrator:
State Street Bank and Trust Frank Russell Investment
Company Russell Fund Distributors, Inc. Management Company
225 Franklin Street One International Place 909 A Street
Boston, Massachusetts 02110 Boston, Massachusetts 02110 Tacoma, Washington 98402
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PROSPECTUS DATED APRIL 28, 1998
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TABLE OF CONTENTS
Page
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Fund Operating Expenses...............................................3
SSgA Funds............................................................4
Manner of Offering....................................................4
Investment Objectives, Policies and Restrictions......................4
Portfolio Turnover....................................................8
Dividends and Distributions...........................................8
Taxes.................................................................9
Valuation of Fund Shares..............................................10
Purchase of Fund Shares...............................................10
Redemption of Fund Shares.............................................12
General Management....................................................14
Fund Expenses.........................................................17
Performance Calculations..............................................17
Additional Information................................................17
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FUND OPERATING EXPENSES AFTER FEE REIMBURSEMENT
SSgA SPECIAL SMALL CAP FUND
The following table is intended to assist the investor in understanding the
various costs and expenses that an investor in the Special Small Cap Fund will
incur directly or indirectly. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. For additional information, see "General Management."
Shareholder Transaction Expenses:
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Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses:
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(as a percentage of average daily net assets)
Advisory Fees (After Fee Reimbursement)(1) .57%
12b-1 Distribution and Shareholder Servicing Fees(1),(2),(3) .07
Other Expenses(1),(2) .46
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Total Operating Expenses (After Fee Reimbursement)(1),(3) 1.10%
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Examples: 1 year 3 years
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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: $11 $35
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(1) The Advisor has voluntarily agreed to reimburse the Fund for all expenses
in excess of 1.10% of average daily net assets on an annual basis. The
total operating expenses of the Fund absent reimbursement would be 1.28% of
average daily net assets on an annual basis. This agreement will remain in
effect for the current fiscal year. The gross annual Advisory expenses
before reimbursement would be .75% of average daily net assets.
(2) The ratios for "12b-1 fees" and "other expenses" are based on estimated
amounts for the current fiscal year.
(3) The ratio includes .04% for 12b-1 Distribution and .03% for 12b-1
Shareholder Servicing Fees.
(4) Investors purchasing Fund shares through a financial intermediary, such as
a bank or an investment advisor, may also be required to pay additional
fees for services provided by the intermediary. Such investors should
contact the intermediary for information concerning what additional fees,
if any, will be charged.
Long-term shareholders of the Fund may pay more in Rule 12b-1 fees than the
economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc.
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SSgA FUNDS
SSgA Funds ("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, the
Investment Company is authorized to issue an unlimited number of shares
evidencing beneficial interest in different investment portfolios. Through this
Prospectus, the Investment Company offers shares in one such portfolio, the
Special Small Cap Fund. State Street Bank and Trust Company (the "Advisor" or
"State Street") serves as the investment advisor for the Fund.
MANNER OF OFFERING
Distribution and Eligible Investors. Shares of the Fund are offered without
a sales commission by Russell Fund Distributors, Inc. (the "Distributor"), the
Investment Company's distributor, to US and foreign institutional and retail
investors that invest for their own account or in a fiduciary or agency
capacity. The Fund will incur distribution expenses under its Rule 12b-1 plan.
See "General Management -- Distribution Services and Shareholder Servicing."
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The Fund's nonfundamental investment objective is to maximize total
return through investment in mid- and small capitalization US equity securities.
Under normal market conditions, at least 65% of total assets will be invested in
securities of smaller and mid-sized capitalized issuers included in the Russell
Special Small Company(R) Index. This objective may be changed with the approval
of a majority of the Fund's Trustees. Shareholders would, however, receive at
least 60 days prior notice of any change to the Fund's investment objective.
There can be no assurance that the Fund will meet its investment objective.
Securities will be selected on the basis of a proprietary analytical
model developed by the Advisor. The model is tailored toward small to
mid-capitalization securities and includes both value and growth components.
Sector, industry, and security weights will be maintained at a level
similar to the Russell Special Small Company Index (the "RSMALL" Index) in order
to avoid unintended exposure to factors such as the direction of the economy,
interest rates, energy prices, and inflation.
The RSMALL Index is comprised of the largest 3,000 US securities based
on market capitalization (the securities comprising the Russell 3000(R) Index),
excluding all securities in the S&P500 Index. The small capitalization segment
of the RSMALL Index ranges from approximately $25 million to $3 billion in
capitalization and represents about 40% of the RSMALL Index's total
capitalization weight. The mid-capitalization segment's capitalization range is
approximately $3 billion to $25 billion, and makes up the remaining 60% of the
RSMALL Index's cap weight. The capitalization weightings of the Fund will
reflect the composition of the benchmark. The average market capitalization for
the RSMALL Index is about $1 billion.
Investments in smaller companies may involve greater risks because
these companies generally have a limited track record and often experience
higher price volatility.
In addition to investments in mid- and small capitalization US equity
securities, the Fund may invest in other equity securities and may temporarily
for defensive purposes, without limitation, invest in certain short-term
investment grade debt securities. Such securities may be used to invest
uncommitted cash balances or to maintain liquidity to meet shareholder
redemptions. See "Investment Policies -- Cash Reserves." For additional
investment strategies, see "Investment Policies."
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Investment Policies
The investment policies described below reflect the Fund's current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. For more information on the
Fund's Investment Policies, see the Statement of Additional Information. To the
extent consistent with the Fund's investment objective and restrictions, the
Fund may invest in the following instruments and may use the following
investment techniques:
US Government Securities. US Government securities include US Treasury
bills, notes and bonds and other obligations issued or guaranteed as to interest
and principal by the US Government and its agencies or instrumentalities.
Obligations issued or guaranteed as to interest and principal by the US
Government, its agencies or instrumentalities include securities that are
supported by the full faith and credit of the United States Treasury, securities
that are supported by the right of the issuer to borrow from the United States
Treasury, discretionary authority of the US Government agency or
instrumentality, and securities supported solely by the creditworthiness of the
issuer.
Repurchase Agreements. The Fund may enter into repurchase agreements
with banks and other financial institutions, such as broker-dealers. In
substance, a repurchase agreement is a loan for which the Fund receives
securities as collateral. 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 limit repurchase transactions to
those member banks of the Federal Reserve System and broker-dealers whose
creditworthiness Advisor 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." In
substance, a reverse repurchase agreement is a borrowing for which the Fund
provides securities as collateral. 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 marketable securities held by the Fund of a dollar
amount sufficient to make payment for the portfolio securities to be purchased
will be segregated on the Fund's records at the trade date and maintained until
the transaction is settled. The failure of the other party to the transaction to
complete the transaction may cause the Fund to miss an advantageous price or
yield. The Fund bears the risk of price fluctuations during the period between
the trade and settlement dates.
When-Issued Transactions. The Fund may purchase securities on a
when-issued basis. In these transactions, a Fund purchases securities with
payment and delivery scheduled for a future time. Until settlement, the Fund
segregates cash and marketable securities equal in value to their when-issued
commitments. Between the trade and settlement dates, the Fund bears the risk of
any fluctuation in the value of the securities. These transactions involve the
additional risk that the other party may fail to complete the transaction and
cause the Fund to miss a price or yield considered advantageous. The Fund will
engage in when-issued transactions only for the purpose of acquiring portfolio
securities consistent with its investment objective and policies and not for
investment leverage. The Fund will not invest more than 25% of its net assets in
when-issued securities.
Illiquid Securities. The Fund will not invest more than 15% of its net
assets in illiquid securities or securities that are not readily marketable,
including repurchase agreements and time deposits of more than seven days'
duration. The absence of a regular trading market for illiquid securities
imposes additional risks on investments in these securities. Illiquid securities
may be difficult to value and may often be disposed of only after considerable
expense and delay.
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Variable Amount Master Demand Notes. Variable amount master demand notes
are unsecured obligations that are redeemable upon demand and are typically
unrated. These instruments are issued pursuant to written agreements between
their issuers and holders. The agreements permit the holders to increase
(subject to an agreed maximum) and the holders and issuers to decrease the
principal amount of the notes, and specify that the rate of interest payable on
the principal fluctuates according to an agreed formula.
Futures Contracts and Options on Futures. For hedging purposes, including
protecting the price or interest rate of securities that the Fund intends to
buy, the Fund may enter into futures contracts that relate to securities in
which they may directly invest and indices comprised of such securities and may
purchase and write call and put options on such contracts.
A financial futures contract is a contract to buy or sell a specified
quantity of financial instruments such as US Treasury bills, notes and bonds,
commercial paper and bank certificates of deposit or the cash value of a
financial instrument index at a specified future date at a price agreed upon
when the contract is made. A stock index futures contract is a contract to buy
or sell specified units of a stock index at a specified future date at a price
agreed upon when the contract is made. The value of a unit is based on the
current value of the contract index. Under such contracts no delivery of the
actual stocks making up the index takes place. Rather, upon expiration of the
contract, settlement is made by exchanging cash in an amount equal to the
difference between the contract price and the closing price of the index at
expiration, net of variation margin previously paid.
Substantially all futures contracts are closed out before settlement date
or called for cash settlement. A futures contract is closed out by buying or
selling an identical offsetting futures contract. Upon entering into a futures
contract, a Fund is required to deposit an initial margin with a custodian for
the benefit of the futures broker. The initial margin serves as a "good faith"
deposit that the Fund will honor their futures commitments. Subsequent payments
(called "variation margin") to and from the broker are made on a daily basis as
the price of the underlying investment fluctuates.
Options on futures contracts give the purchaser the right to assume a
position at a specified price in a futures contract at any time before
expiration of the option contract.
When trading futures contracts, the Fund will not commit more than 5% of
the market value of its total assets to initial margin deposits on futures and
premiums paid for options on futures.
Options on Securities and Securities Indices. The Fund may write and
purchase covered put and call options on securities in which it may directly
invest. Option transactions of the Fund will be conducted so that the total
amount paid on premiums for all put and call options outstanding will not exceed
5% of the value of the Fund's total assets. Further, the Fund will not write a
put or call option or combination thereof if, as a result, the aggregate value
of all securities or collateral used to cover its outstanding options would
exceed 25% of the value of the Fund's total assets.
The Fund may purchase or sell options on securities indices that are
comprised of securities in which it may directly invest, subject to the
limitations set forth above and provided such options are traded on a national
securities exchange or in the over-the-counter market. Options on securities
indices are similar to options on securities except there is no transfer of a
security and settlement is in cash. A call option on a securities index grants
the purchaser of the call, for a premium paid to the seller, the right to
receive in cash an amount equal to the difference between the closing value of
the index and the exercise price of the option times a multiplier established by
the exchange upon which the option is traded.
Lending Portfolio Securities. The Fund may lend portfolio securities with
a value of up to 33-1/3% of its total assets. Such loans may be terminated at
any time. The Fund will receive cash or US Treasury bills, notes and bonds in an
amount equal to at least 100% of the current market value (on a daily
marked-to-market basis) of the loaned securities plus accrued interest. In a
loan transaction, as compensation for lending it securities, the Fund will
receive a portion of the dividends or interest accrued on the securities held as
collateral or, in the case of cash collateral, a portion of the income from the
investment of such cash. In addition, the Fund will receive the amount of all
dividends, interest and other distributions on the loaned securities. However,
the borrower has the right to vote the loaned securities. The Fund will call
loans to vote proxies if a material issue affecting the investment is to be
voted upon. Should the borrower of the securities fail financially, the Fund may
experience delays in recovering the securities or exercising its rights in the
collateral. Loans are made only to borrowers that are deemed by Advisor 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.
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<PAGE>
Equity Swaps. Equity swap agreements are contracts between parties in which
one party agrees to make payments to the other party based on the change in
market value of a specified index or asset. In return, the other party agrees to
make payments to the first party based on the return of a different specified
index or asset. Although swap agreements entail the risk that a party will
default on its payment obligations, the portfolios will minimize this risk by
entering into agreements only with counterparties that the Advisor deems
creditworthy. Swap agreements also bear the risk that the portfolios will not be
able to meet their obligation to the counterparty. This risk will be mitigated
by investing the portfolios in the specific asset for which it is obligated to
pay a return.
Cash Reserves. For the purpose of investing uncommitted cash balances or to
maintain liquidity to meet shareholder redemptions, the Fund may invest
temporarily and without limitation in high quality short-term fixed income
securities. These securities include obligations issued or guaranteed as to
principal and interest by the US Government, its agencies or instrumentalities
and repurchase agreements collateralized by these obligations, commercial paper,
bank certificates of deposit, bankers' acceptances and time deposits.
Warrants. The Fund may invest in warrants which entitle the holder to buy
equity securities at a specific price for a specific period of time. Warrants
may be considered more speculative than certain other types of investments in
that they do not entitle a holder to dividends or voting rights with respect to
the securities which may be purchased nor do they represent any rights in the
assets of the issuing company.
Convertible Securities. The Fund may invest in convertible securities of
foreign or domestic issues. A convertible security is a fixed-income security (a
bond or preferred stock) which may be converted at a stated price within a
specified period of time into a certain quantity of the common stock of the same
or a different issuer. Convertible securities are senior to common stocks in a
corporation's capital structure but are usually subordinated to similar
nonconvertible securities. Convertible securities provide, through their
conversion feature, an opportunity to participate in capital appreciation
resulting from a market price advance in a convertible security's underlying
common stock. The price of a convertible security is influenced by the market
value of the underlying common stock and tends to increase as the market value
of the underlying stock rises, whereas it tends to decrease as the market value
of the underlying stock declines.
American Depository Receipts (ADRs). The Fund may invest in ADRs under
certain circumstances as an alternative to directly investing in foreign
securities. Generally, ADRs, in registered form, are designed for use in the US
securities markets. ADRs are receipts typically issued by a US bank or trust
company evidencing ownership of the underlying securities. ADRs represent the
right to receive securities of foreign issuers deposited in a domestic bank or a
correspondent bank. ADRs do not eliminate the risk inherent in investing in the
securities of foreign issuers. However, by investing in ADRs rather than
directly in a foreign issuer's stock, the Fund can avoid currency risks during
the settlement period for either purchases or sales. In general, there is a
large liquid market in the US for many ADRs. The information available for ADRs
is subject to the accounting, auditing and financial reporting standards of the
domestic market or exchange on which they are traded, which standards are more
uniform and more exacting than those to which many foreign issuers are subject.
Debt Securities. The Fund may also invest temporarily in investment grade
debt securities for defensive purposes. The Fund will primarily invest in equity
securities as defined under the Securities Exchange Act of 1934 (including
convertible debt securities). Please see the Statement of Additional Information
for a description of securities ratings.
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<PAGE>
Purchase of Other Investment Company Funds. 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 a substantially similar investment objective and
policies.
Investment Restrictions
The Fund has fundamental investment restrictions, which may be changed
only with the approval of a majority of the Fund's shareholders as defined in
the 1940 Act. A more detailed discussion of the Fund's investment restrictions
and investment policies appears in the Statement of Additional Information.
Unless otherwise noted, the fundamental restrictions apply at the time an
investment is made. The Fund may not:
1. Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US
Government, its agencies or instrumentalities). Concentration may occur as
a result of changes in the market value of portfolio securities, but may
not result from investment.
2. Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to facilitate
redemptions (not for leveraging or investment), provided that borrowings do
not exceed an amount equal to 33-1/3% of the current value of the Fund's
assets taken at market value, less liabilities other than borrowings. If at
any time a Fund's borrowings exceed this limitation due to a decline in net
assets, such borrowings will within three days be reduced to the extent
necessary to comply with this limitation. The Fund will not purchase
investments once borrowed funds (including reverse repurchase agreements)
exceed 5% of its total assets.
3. Pledge, mortgage, or hypothecate its assets. However, the Fund may pledge
securities having a market value at the time of the pledge not exceeding
33-1/3% of the value of the Fund's total assets to secure permitted
borrowings.
PORTFOLIO TURNOVER
The portfolio turnover rate cannot be predicted, but it is anticipated
that the Fund's annual turnover rate generally will not exceed 200%. A high
turnover rate (over 100%) will: (1) increase transaction expenses which will
adversely affect a Fund's performance; and (2) result in increased brokerage
commissions and other transaction costs, and the possibility of realized capital
gains.
The Fund may effect portfolio transactions through State Street Brokerage
Services, Inc., an affiliate of the Advisor, when the Advisor determines that
the Fund will receive competitive execution, price and commissions.
DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare and pay dividends on shares of
the Fund annually from net investment income. The Board of Trustees intends to
declare distributions annually from net short-term capital gains and from net
20% or 28% 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 the 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 for Federal income tax
purposes 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 30 days' written notice to the Transfer Agent. If it is determined that
the US Postal Service cannot properly deliver Fund mailings to an investor, the
Fund will terminate the investor's election to receive dividends and other
distributions in cash. Thereafter, subsequent dividends and other distributions
will be automatically reinvested in additional shares of the relevant Fund until
the investor notifies the SSgA Funds in writing of the correct address and
request in writing that the election to receive dividends and other
distributions in cash be reinstated.
-8-
<PAGE>
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.
Distribution Option. Investors can choose from four different distribution
options as indicated on the account Application:
o Reinvestment Option--Income dividends and capital gains distributions
will be automatically reinvested in additional shares of the Fund. If
the investor does not indicate a choice on the Application, this
option will be automatically assigned.
o Income-Earned Option--Capital gain distributions will be automatically
reinvested, but a check or wire will be sent for each income dividend
distribution.
o Cash Option--A check or wire will be sent for each income dividend and
capital gain distribution.
o Direct Dividends Option--Dividends and capital gain distribution will
be automatically invested in another identically registered SSgA Fund.
Distributions will be sent to a pre-designated bank by the Automatic Clearing
House ("ACH") on the payable date.
TAXES
The Fund intends to qualify 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 subject to federal income taxes to the extent it
distributes its net investment income and net capital gain (long term capital
gains in excess of short term capital losses) to its shareholders. The Board
intends to distribute each year substantially all of the Fund's net investment
income and net capital gain.
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 20% gains and 28% gains are taxable as 20% gains or 28% gains regardless of
the length of time a shareholder has held such shares and whether paid in cash
or additional shares.
Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by a Fund attributable to direct obligations of the US Treasury
and certain agencies may be exempt from state and local taxes.
The sale of Fund shares by a shareholder is a taxable event and may result
in capital gain or loss. A capital gain or loss may be realized from an ordinary
redemption of shares or an exchange of shares between two mutual funds (or two
series of portfolios of a mutual fund). Any loss incurred on the sale or
exchange of Fund shares held for one year or more will be treated as a 20% loss
or a 28% loss to the extent of capital gain dividends received with respect to
such shares.
Shareholders will be notified after each calendar year of the amounts of
income dividends and net capital gains distributions and the percentage of a
Fund's income attributable to US Treasury and agency obligations. The Fund is
required to withhold a legally determined portion of all taxable dividends,
distributions, and redemption proceeds payable to any noncorporate shareholder
that does not provide the Fund with the shareholder's correct taxpayer
identification number or certification that the shareholder is not subject to
backup withholding.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax advisor.
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<PAGE>
VALUATION OF FUND SHARES
Net Asset Value Per Share. The Fund determines net asset value once each
business day as of the close of the regular trading session of the New York
Stock Exchange (ordinarily 4 p.m. Eastern time). A business day is one on which
the New York Stock Exchange is open for business. Net asset value per share is
computed by dividing the current value of the Fund's assets, less its
liabilities, by the number of shares of the Fund outstanding and rounding to the
nearest cent.
Valuation of Fund Securities. With the exceptions noted below, the Fund
values portfolio securities at market value. This generally means that equity
and fixed-income securities listed and traded principally on any national
securities exchange are valued on the basis of the last sale price or, lacking
any sales, at the closing bid price, on the primary exchange on which the
security is traded. United States equity and fixed income securities traded
principally over-the-counter and options are valued on the basis of the last
reported bid price. Futures contracts are valued on the basis of the last
reported sell price.
Because many fixed income securities do not trade each day, last sale or
bid prices are frequently not available. Fixed income securities therefore may
be valued using prices provided by a pricing service when such prices are
determined by Custodian to reflect the market value of such securities.
International securities traded on a national securities exchange are
valued on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of best bid or official bid, as
determined by the relevant securities exchange. In the absence of a last sale or
best or official bid price, such securities may be valued on the basis of prices
provided by a pricing service if those prices are believed to reflect the market
value of such securities.
Securities maturing within 60 days of the valuation date are valued at
amortized cost unless the Board determines that the amortized cost method does
not represent market value. The amortized cost valuation method initially prices
an instrument at its cost and thereafter assumes a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method provides
certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price a Fund would
receive if it sold the instrument.
The Fund values securities for which market quotations are not readily
available at fair value, as determined in good faith pursuant to procedures
established by the Board of Trustees.
PURCHASE OF FUND SHARES
Minimum Initial and Subsequent Investments and Account Balance. The
Fund requires a minimum initial investment of $1,000, with the exception of IRA
accounts, for which the minimum initial investment is $250. Subsequent
investments must be at least $100. An investment in the Fund (other than IRA
accounts) may be subject to redemption at the Fund's discretion if the account
balance is less than $1,000 as a result of shareholder redemptions. The Transfer
Agent will give shareholders 60 days' notice that the account will be closed
unless an investment is made to increase the account balance to the $1,000
minimum. Failure to bring the account balance to $1,000 may result in the
Transfer Agent closing the account at the net asset value ("NAV") next
determined on the day the account is closed and mailing the proceeds to the
shareholder's address shown on the Transfer Agent's records. The Fund reserves
the right to reject any purchase order. Investors purchasing Fund assets through
a pension or other participation plan should contact their plan administrator
for further information on purchases.
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 (described below) and payments for Fund shares in
Federal funds (or converted to Federal funds) must be received by the Transfer
Agent prior to 4:00 p.m. Eastern time to be effective on the date received. The
Fund reserves the right to reject any purchase order if payment for Fund shares
has not been received by the Transfer Agent prior to 4:00 p.m. Eastern time.
Order and Payment Procedures. There are several ways to invest in the
Fund. The Fund requires a purchase order in good form, which consists of a
completed and signed Application for each new account regardless of the
investment method. For additional information, including the IRA package,
additional Applications or other forms, call the Customer Service Department at
(800) 647-7327, or write: SSgA Funds, P.O. Box 8317, Boston, MA 02266-8317.
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<PAGE>
Mail. For new accounts, please mail the completed Application and check
in the return envelope provided. Additional investments should also be made by
check. Investors must include the Fund name and account number on their checks,
or use the remittance form attached to the confirmation statement (in the return
envelope provided). All checks should be made payable to the SSgA Funds (or in
the case of a retirement account, the check should be payable to the account's
custodian or trustee). All purchase requests should be mailed to one of the
following addresses:
Regular Mail: Registered, Express or Certified Mail:
SSgA Funds SSgA Funds
P.O. Box 8317 2 Heritage Drive
Boston, MA 02266-8317 North Quincy, MA 02171
All purchases made by check should be in US dollars from a US bank.
Third party checks and checks drawn on credit card accounts will not be
accepted. Normally, checks are converted to Federal funds within two business
days following receipt of the check. A purchase cannot be effective until
Federal funds are received. When purchases are made by check or periodic account
investment, payment for redemptions may be withheld until the check or account
clears, which may take up to 15 calendar days from the date of purchase.
Telephone Exchange Privilege. Subject to the Fund's minimum investment
requirement, investors may exchange a minimum of $100 of their Fund shares
without charge for shares of any other SSgA Fund. To use this option, contact
the Customer Service Department at (800) 647-7327. Shares are exchanged on the
basis of relative net asset value per share on the business day on which the
call is placed or upon written receipt of instructions in good form by the
Transfer Agent. Exchanges may be made over the phone if the registrations of the
two accounts are identical. If the shares of the Fund were purchased by check,
the shares must have been present in an account for 15 days before the exchange
is made. The exchange privilege will only be available in states which permit
exchanges and may be modified or terminated by the Fund upon 60 days' written
notice to shareholders. For Federal income tax purposes, an exchange constitutes
a sale of shares, which may result in a capital gain or loss.
Federal Funds Wire. An investor may make initial or subsequent
investments by wiring federal funds to State Street, as Transfer Agent, by:
1. Telephoning the Customer Service Department at (800) 647-7327
between the hours of 8 a.m. and 4 p.m. Eastern time, and
stating: (a) the investor's account registration number,
address and social security or tax identification number; (b)
the name of the Fund in which the investment is to be made and
the account number; and (c) the amount being wired.
2. Instructing the wiring bank to wire federal funds to:
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
ABA #0110-0002-8
DDA #9904-631-0
SSgA Special Small Cap Fund
Account Number and Registration
Failure to properly identify all wires, checks and transfers as
indicated above may cause the Transfer Agent to delay, reject and or incorrectly
apply the settlement of an investor's purchase.
Systematic Investment Plan. Investors can make regular investments in
the Fund with the Systematic Investment Plan by completing the appropriate
section of the Application and attaching a voided personal check. Investors may
make investments monthly, quarterly or annually by deducting $100 or more from
their bank checking accounts. An investor may change the amount or stop
systematic purchase at any time by calling the Customer Service Department at
(800) 647-7327. Investors must meet the Fund's minimum initial requirement
before establishing the Systematic Investment Plan. Shares will be purchased at
the offering price next determined following receipt of the order by the
Transfer Agent.
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<PAGE>
Systematic Exchange. The Fund offers the option of having a set amount
exchanged within the SSgA Funds for accounts with identical registrations.
Investors can choose the date, the frequency (monthly, quarterly or annually)
and the amount. Exchanges may be done among the SSgA Funds once the initial
investment per Fund has been satisfied.
Third Party Transactions. Investors purchasing Fund shares through a
program of services offered by a financial intermediary, such as a bank,
broker-dealer, investment advisor or others, may be required by the intermediary
to pay additional fees. Investors should contact the intermediary for
information concerning what additional fees, if any, may be charged.
In Kind Exchange of Securities. The Transfer Agent may, at its
discretion, permit investors to purchase shares through the exchange of
securities they hold. Any securities exchanged must meet the investment
objective, policies and limitations of the Fund, must have a readily
ascertainable market value, must be liquid and must not be subject to
restrictions on resale. The market value of any securities exchanged, plus any
cash, must be at least $10 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 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.
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 by following one of
the methods described below. Payments 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. Payment for redemption of shares by check may be
withheld for up to 15 days after the date or purchase to assure that the check
is honored.
Redemption requests must be received prior to 4:00 p.m. Eastern time in
order be effective on the date received. Shareholder servicing agents with
underlying shareholders in omnibus accounts who receive redemption requests by
4:00 p.m. Eastern time may transmit the request to the Transfer Agent by 9:00
a.m. Eastern time the next business day and receive the dividend as of the day
the redemption request was originally made by the underlying shareholder.
Telephone Redemption. Shareholders may normally redeem Fund shares by
telephoning the Customer Service Department at (800) 647-7327 between 8:00 a.m.
and 4:00 p.m. Eastern time. Shareholders must complete the appropriate section
of the application and attach a voided check (if applicable) before utilizing
this feature. The Fund and the Transfer Agent will employ reasonable procedures
to confirm that instructions communicated by telephone are properly authorized.
The Fund and the Transfer Agent will not be liable for executing instructions
that are deemed to be authorized after following reasonable procedures. These
procedures include recording telephonic instructions, mailing to the shareholder
a written confirmation of the transaction, performing a personal identity test
with private information not likely to be known by other individuals, and
restricting mailing of redemptions to the shareholder's address of record, if
the address has not been changed within 60 days of the redemption request.
By Wire. Proceeds exceeding $1,000 may be sent via wire transfer to the
investor's pre-designated bank. Proceeds may be sent, depending on the Fund, on
the same or the next day. Although the Fund does not charge a fee for this
feature, the investor's bank may charge a fee for receiving the wire. Investors
are advised to check with their bank before requesting this feature. Requests
must be received prior to 4:00 p.m. The shares will be redeemed using that day's
closing price, and the proceeds will be wired the following business day.
Check. Proceeds less than $50,000 may be mailed only to the address
shown on the Transfer Agent's registration record, provided that the address has
not been changed within 60 days of the redemption request. Shares will be
redeemed using that day's closing price (NAV). All proceeds by check will
normally be sent the following business day.
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<PAGE>
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. In certain circumstances, a shareholder will need to make a
request to sell shares in writing (please use the addresses for purchases by
mail listed under "Purchase of Fund Shares"). The shareholder may need to
include additional items with the request, as shown in the table below.
Shareholders may need to include a signature guarantee, which protects them
against fraudulent orders. A signature guarantee will be required if:
1. The shareholder's address of record has changed within the past 60
days;
2. The shareholder is redeeming more than $50,000 worth of shares; or
3. The shareholder is requesting payment other than by a check mailed to
the address of record and payable to the registered owner(s).
Signature guarantees can usually be obtained from the following
sources:
1. A broker or securities dealer, registered with a domestic stock
exchange;
2. A federal savings, cooperative or other type of bank;
3. A savings and loan or other thrift institution;
4. A credit union; or
5. A securities exchange or clearing agency.
Please check with the institution prior to signing to ensure that they
are an acceptable signature guarantor. A NOTARY PUBLIC CANNOT PROVIDE A
SIGNATURE GUARANTEE.
<TABLE>
<CAPTION>
Seller Requirements for Written Requests
<S> <C> <C>
Owner of individual, o Letter of instruction, signed by all persons
joint, sole proprietorship, authorized to sign for the account stating general
UGMA/UTMA (custodial accounts titles/capacity, exactly as the account is
for minors) or general registered; and
partner accounts o Signature guarantee, if applicable (see above).
Owners of corporate or o Letter of instruction signed by authorized
association accounts person(s), stating capacity as indicated by the
corporate resolution;
o Corporate resolution, certified within the past 90
days; and
o Signature guarantee, if applicable (see above).
Owners or trustees of o Letter of instruction, signed by all trustees;
trust accounts o If the trustees are not named in the registration,
please provide a copy of the trust document certified
within the past 60 days; and
o Signature guarantee, if applicable (see above).
Joint tenancy shareholders o Letter of instruction signed by surviving tenant(s);
whose co-tenants are o Certified copy of the death certificate; and
deceased o Signature guarantee, if applicable (see above).
</TABLE>
Please contact the Customer Service Department at (800) 647-7327 for
questions and further instructions.
The Fund may pay any portion of the redemption amount in excess of
$250,000 by a distribution in kind of readily marketable securities from the
portfolio of the Fund in lieu of cash. Investors will incur brokerage charges on
the sale of these portfolio securities. The Funds reserve the right to suspend
the right of redemption or postpone the date of payment if emergency conditions,
as specified in the 1940 Act or as determined by the Securities and Exchange
Commission, should exist.
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<PAGE>
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Fund and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
Advisory Agreement. The Investment Company employs State Street, through
its division State Street Global Advisors, 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
Global Advisors is the investment management business of State Street, a 200
year old pioneer and leader in the world of financial services. State Street
Global Advisors is a wholly owned subsidiary of State Street Corporation a
publicly held bank holding company. State Street, with over $458 billion (US)
under management as of April 15, 1998, provides complete global investment
management services from offices in Atlanta, Boston, Brussels, Copenhagen,
Dubai, Hong Kong, London, Minneapolis, Montpellier, Montreal, Munich, Paris, San
Francisco, Sydney, Tokyo, and Toronto.
Advisor, subject to Board supervision, directs the investment of the Fund
in accordance with the Fund's investment objective, policies and restrictions.
Ms. Jennifer Bardsley, Assistant Vice President, is the portfolio manager
primarily responsible for investment decisions regarding the Fund. Ms. Bardsley
joined State Street in March 1993. She became a member of the Investments
Systems Group and moved into the US Active Equities Group in January 1996. She
holds BA degrees in Economics and Russian from Middlebury College, and an MS
degree in Computer Science from Boston College. There are seven other portfolio
managers who work with Ms. Bardsley in managing the Fund. For these services,
the Fund pays Advisor a fee, calculated daily and paid monthly, that on an
annual basis is equal to .75% of the Fund's average daily net assets.
The Glass-Steagall Act prohibits a depository state chartered bank such as
Advisor from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Advisor 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. Advisor
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 Advisor from continuing to perform all or a part of
the above services for its customers and/or the Fund. If Advisor 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 Advisor that
existing shareholders would suffer any adverse financial consequences (if
another advisor with equivalent abilities is found) as a result of any of these
occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit the
use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street, who retains voting control of such shares. As of April 15, 1998, State
Street held of record less than 25% of the issued and outstanding shares of
Investment Company in connection with its discretionary accounts. Consequently,
State Street is not deemed to be a controlling person of Investment Company for
purposes of the 1940 Act.
Under State Street Global Advisors' Code of Ethics, State Street Global
Advisors' employees in Boston (where investment management operations are
conducted) who are deemed to have access to management information are only
permitted to engage in personal securities transactions which do not involve
securities which the Advisor 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
Advisor.
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<PAGE>
Administration Agreement. Frank Russell Investment Management Company
("Administrator") serves as administrator of the Fund. Administrator currently
serves as investment manager and administrator to 32 mutual funds with assets of
$13.4 billion as of April 15, 1998, and acts as administrator to 23 mutual
funds, including the Fund, with assets of $13.6 billion as of April 15, 1998.
Pursuant to the Administration Agreement with Investment Company,
Administrator will: (1) supervise all aspects of the Fund's operations; (2)
provide the Fund with administrative and clerical services, including the
maintenance of certain of the Fund's books and records; (3) arrange the periodic
updating of the Fund's prospectuses and any supplements thereto; (4) provide
proxy materials and reports to Fund shareholders and the Securities and Exchange
Commission; and (5) provide the Fund with adequate office space and all
necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. For these services, the Fund
and Investment Company's other domestic investment portfolios pay Administrator
a combined fee that on an annual basis is equal to the following percentages of
their average aggregate daily net assets: $0 to and including $500 million --
.06%; over $500 million to and including $1 billion -- .05%; and over $1 billion
- -- .03%. The percentage of the fee paid by a particular Fund is equal to the
percentage of average aggregate daily net assets that are attributable to that
Fund. Administrator will also receive reimbursement of expenses it incurs in
connection with establishing new investment portfolios. Further, the
administration fee paid by the Investment Company will be reduced by the sum of
certain distribution related expenses, up to certain maximum percentages, as
follows: (1) 10% from January 1, 1997 to December 31, 1997; 5% from January 1,
1998 to December 31, 1998; and (3) 0% from January 1, 1999 thereafter.
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a "time spent"
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted
to engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted by
the Investment Company, Administrator and Distributor. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
Distribution Services and Shareholder Servicing Arrangements. Pursuant to
the Distribution Agreement with Investment Company, Russell Fund Distributors,
Inc., 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) payments made to certain broker-dealers, investment
advisors and other third-party intermediaries; (2) the costs of prospectuses,
reports to shareholders and sales literature; (3) advertising; and (4) 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 Advisor ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Under the Service
Agreements, the Service Organizations may provide various services for such
customers including: answering inquiries regarding the Fund; assisting customers
in changing dividend options, account designations and addresses; performing
subaccounting for such customers; establishing and maintaining customer accounts
and records; processing purchase and redemption transactions; providing periodic
statements showing customers' account balances and integrating such statements
with those of other transactions and balances in the customers' other accounts
serviced by the Service Organizations; arranging for bank wires transferring
customers' funds; and such other services as the customers may request in
connection with the Fund, to the extent permitted by applicable statute, rule or
regulation. Service Organizations may receive from the Fund, for shareholder
servicing, monthly fees at a rate that shall not exceed .20% per annum of the
average daily net asset value of the Fund's shares owned by or for shareholders
with whom the Service Organization has a servicing relationship. Banks and other
financial service firms may be subject to various state laws, and may be
required to register as dealers pursuant to state law.
-15-
<PAGE>
The Investment Company has entered into Service Agreements with the
Advisor and the following entities related to the Advisor: State Street
Brokerage Services, Inc. ("SSBSI"), Metropolitan Division of Commercial Banking
("Commercial Banking"), Retirement Investment Services ("RIS") Division and
State Street Solutions ("Solutions"). The purpose of the Service Agreements is
to obtain shareholder services for Fund shares owned by clients of each of these
entities. In return for these services, the Investment Company pays each of the
entities a fee each year. These agreements are reviewed annually by the Board of
Trustees.
Payments to the Distributor, as well as payments to Service Organizations
from a Fund are not permitted by the Plan to exceed .25% of the Fund's average
net asset value per year. Any payments that are required to be made by the
Distribution Agreement and any Service Agreement but could not be made because
of the .25% limitation may be carried forward and paid in subsequent years so
long as the Plan is in effect. A Fund's liability for any such expenses carried
forward shall terminate at the end of two years following the year in which the
expenditure was incurred. Service Organizations will be responsible for prompt
transmission of purchase and redemption orders and may charge fees for their
services.
FUND EXPENSES
The Fund will pay all of its expenses other than those expressly
assumed by Advisor and Administrator. The principal expenses of the Fund is the
annual advisory fee payable to Advisor 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 Advisor or any of its affiliates; (11)
insurance, interest, brokerage and litigation costs; (12) extraordinary expenses
as may arise, including expenses incurred in connection with litigation
proceedings and claims and the legal obligations of Investment Company to
indemnify its Trustees, officers, employees, shareholders, distributors and
agents; and (13) other expenses properly payable by the Fund.
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise its total return. The total
return of a Fund refers to the average annual compounded rates of return from a
hypothetical investment in the Fund over one-, five- and ten-year periods or for
the life of the Fund (as stated in the advertisement), assuming the reinvestment
of all dividend and capital gain distributions.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Wall Street Journal Score Card, Russell Special Small Company
Index, or other industry publications, business periodicals, rating services and
market indices. The Fund may also advertise nonstandardized performance
information which is for periods in addition to those required to be presented.
Total return and other performance figures are based on historical
earnings and are not indications of future performance.
-16-
<PAGE>
ADDITIONAL INFORMATION
Custodian, Transfer Agent and Independent Accountants. State Street holds
all portfolio securities and cash assets of the Fund, provides portfolio
recordkeeping services and serves as the Fund's transfer agent ("Transfer
Agent") and custodian ("Custodian"). State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Fund except as investment advisor. 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, financial statements and shareholder
balances may be made by calling Distributor at (800) 647-7327.
Organization, Capitalization and Voting. Investment Company was organized
as a Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement dated October 13, 1993, as amended.
Investment Company issues shares divisible into an unlimited number of
series (or funds), each of which is a separate trust under Massachusetts law.
The Fund is one such series.
The Fund share represents an equal proportionate interest in the Fund, has
a par value of $.001 per share and is entitled to such relative rights and
preferences and dividends and distributions earned on the assets belonging to
the Fund as may be declared by the Board of Trustees. Fund shares are fully paid
and nonassessable by Investment Company and have no preemptive rights.
Each Fund share has one vote. There are no cumulative voting rights. There
is no annual meeting of shareholders, but special meetings may be held. On any
matter that affects only a particular investment fund, only shareholders of that
fund vote unless otherwise required by the 1940 Act or the Master Trust
Agreement. The Trustees hold office for the life of the Trust. A Trustee may
resign or retire, and a Trustee may be removed at any time by a vote of
two-thirds of the Investment Company shares or by a vote of a majority of the
Trustees. The Trustees shall promptly call and give notice of a meeting of
shareholders for the purpose of voting upon removal of any Trustee when
requested to do so in writing by holders of not less than 10% of the shares then
outstanding. A vacancy on the Board of Trustees may be filled by the vote of a
majority of the remaining Trustees, provided that immediately thereafter at
least two-thirds of the Trustees have been elected by shareholders.
Investment Company does not issue share certificates for the Fund.
Transfer Agent sends shareholders of the Fund statements concurrent with any
transaction activity, confirming all investments in or redemptions from their
accounts. Each statement also sets forth the balance of shares held in the
account.
-17-
<PAGE>
SSgA FUNDS
One International Place
Boston, Massachusetts 02110
INVESTMENT ADVISOR, CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
One International Place
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
-18-
<PAGE>
SSgA FUNDS
SSgA Money Market Fund
SSgA US Government Money Market Fund
SSgA Tax Free Money Market Fund
SSgA S&P 500 Index Fund
SSgA Small Cap Fund
SSgA Special Small Cap Fund
SSgA Matrix Equity Fund
SSgA Yield Plus Fund
SSgA Growth and Income Fund
SSgA Intermediate Fund
SSgA Active International Fund
SSgA Emerging Markets Fund
SSgA Bond Market Fund
SSgA Life Solutions Growth Fund
SSgA Life Solutions Balanced Fund
SSgA Life Solutions Income and Growth Fund
SSgA International Growth Opportunities Fund
SSgA High Yield Bond Fund
SSgA Real Estate Equity Fund
-19-
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
SSgA FUNDS
One International Place
Boston, Massachusetts 02110
(800) 647-7327
INTERNATIONAL GROWTH OPPORTUNITIES FUND
SSgA Funds is a registered, open-end management investment company with
multiple portfolios, each of which is commonly referred to as a mutual fund.
This Prospectus describes and offers shares of beneficial interest in one mutual
fund, the SSgA International Growth Opportunities Fund (the "International
Growth Opportunities Fund" or the "Fund"). The International Growth
Opportunities Fund seeks to provide long-term capital growth by investing
primarily in securities of foreign issuers. The Fund's shares are offered
without sales commissions. However, the Fund pays certain distribution expenses
under its Rule 12b-1 plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please read and retain this
document for future reference. Additional information about the SSgA Funds has
been filed with the Securities and Exchange Commission ("SEC") in Statements of
Additional Information ("SAI") dated April 28, 1998. The SAI is incorporated
herein by reference and is available without charge from Distributor at its
address noted below or by calling (800) 647-7327. The SEC also maintains a
website (www.sec.gov) that contains the SAI, material incorporated by reference
and other information regarding the SSgA Funds. You may also access the SSgA
Funds' website at www.ssgafunds.com.
<TABLE>
<S> <C> <C>
Investment Advisor, Custodian
Transfer Agent: Distributor: Administrator:
State Street Bank and Trust Russell Fund Distributors, Inc. Frank Russell Investment
Company One International Place Management Company
225 Franklin Street Boston, Massachusetts 02110 909 A Street
Boston, Massachusetts 02110 Tacoma, Washington 98402
</TABLE>
PROSPECTUS DATED APRIL 28, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
Fund Operating Expenses.................................................... 3
SSgA Funds................................................................. 4
Manner of Offering......................................................... 4
Investment Objective, Policies and Restrictions............................ 4
Risk Factors............................................................... 9
Portfolio Turnover......................................................... 10
Dividends and Distributions................................................ 10
Taxes...................................................................... 11
Valuation of Fund Shares................................................... 12
Purchase of Fund Shares.................................................... 13
Redemption of Fund Shares.................................................. 14
General Management......................................................... 16
Fund Expenses.............................................................. 19
Performance Calculations................................................... 19
Additional Information..................................................... 19
-2-
<PAGE>
FUND OPERATING EXPENSES AFTER FEE WAIVER
SSgA INTERNATIONAL GROWTH OPPORTUNITIES FUND
The following table is intended to assist the investor in understanding the
various costs and expenses that an investor in the International Growth
Opportunities Fund will incur directly or indirectly. THE EXAMPLES SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN. For additional information, see "General
Management."
Shareholder Transaction Expenses:
- ---------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses:
- -------------------------------
(as a percentage of average daily net assets)
Advisory Fees (After Fee Waiver)(1) .60%
12b-1 Distribution and Shareholder Servicing Fees(1),(2),(3) .07
Other Expenses(1),(2) .43
---
Total Operating Expenses (After Fee Waiver)(1),(4) 1.10%
=====
Examples: 1 year 3 years
- -------- ------ -------
You would pay the following expenses on
a $1,000 investment, assuming: (i) 5%
annual return; and (ii) redemption at
the end of each time period: $11 $35
=== ===
- --------------
(1) The Advisor has agreed to reimburse the Fund for all expenses in excess of
1.10% of average daily net assets on an annual basis. The total operating
expenses of the Fund absent reimbursement would be 1.25% of average daily
net assets on an annual basis. The reimbursement agreement will remain in
effect for the current fiscal year. The gross annual Advisory fee expense
before reimbursement would be .75% of average daily net assets.
(2) The ratios for 12b-1 Distribution and Shareholder Servicing Fees and Other
Expenses are based on estimated amounts for the current fiscal year.
(3) The ration includes .04% for 12b-1 Distribution and .03% for 12b-1
Shareholder Servicing Fees.
(4) Investors purchasing Fund shares through a financial intermediary, such as
a bank or an investment advisor, may also be required to pay additional
fees for services provided by the intermediary. Such investors should
contact the intermediary for information concerning what additional fees,
if any, will be charged.
Long-term shareholders of the Fund may pay more in Rule 12b-1 fees than the
economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc.
-3-
<PAGE>
SSgA FUNDS
SSgA Funds ("Investment Company") is an open-end management investment
company that is organized as a Massachusetts business trust. In addition, each
series of the Investment Company is diversified as defined in the Investment
Company Act of 1940, as amended ("1940 Act"). As a "series" company, Investment
Company is authorized to issue an unlimited number of shares evidencing
beneficial interests in different investment portfolios. Through this
Prospectus, Investment Company offers shares in one such portfolio, the
International Growth Opportunities Fund. State Street Bank and Trust Company
(the "Advisor" or "State Street") serves as the investment advisor for the Fund.
MANNER OF OFFERING
Distribution and Eligible Investors. Shares of the Fund are offered without
a sales commission by Russell Fund Distributors, Inc. (the "Distributor"),
Investment Company's distributor, to US and foreign institutional and retail
investors that invest for their own account or in a fiduciary or agency
capacity. The Fund will incur distribution expenses under its Rule 12b-1 plan.
See "General Management -- Distribution Services and Shareholder Servicing."
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The Fund's nonfundamental investment objective is to provide long-term
capital growth by investing primarily in securities of foreign issuers. This
objective may be changed by the Fund's Board of Trustees without shareholder
approval, although shareholders will receive prior notice of any change to the
Fund's investment objective. There can be no assurance that the Fund will meet
its stated investment objective.
The Fund will attempt to meet its objective through the active selection
of equity securities through the fundamental analysis of companies and
investment themes. Quantitative techniques and the use of securities other than
common stock will be used primarily to control risk and to efficiently capture
opportunities of investment themes. Investments will be made in, but not limited
to, countries included in the Morgan Stanley Capital International Europe,
Australia, Far East ("MSCI EAFE") Index. For additional investment policies, see
"Investment Policies."
The MSCI EAFE Index is an arithmetic, market value-weighted average of the
performance of over 1,000 securities listed on the stock exchanges of the
following countries: Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Luxembourg, Malaysia,
the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland and the United Kingdom. The Fund may also invest in the countries of
the MSCI Emerging Markets Free ("MSCI EMF") Index on an opportunistic basis.
Countries included in this index are: China, India, Indonesia, Korea, Malaysia,
Pakistan, the Philippines, Sri Lanka, Taiwan, Thailand, Argentina, Brazil,
Chile, Colombia, Mexico, Peru, Venezuela, Czech Republic, Egypt, Hungary,
Israel, Jordan, Morocco, Poland, Russia, South Africa, and Turkey. These are the
countries listed in the MSCI EAFE and MSCI EMF Indexes as of the date of this
Prospectus. Countries may be added to or deleted from the list.
The Fund will invest at least 65% of its total assets in equity securities
of foreign issuers. In addition to investment in equities, the Fund may hold
fixed-income instruments (including convertibles), forward contracts, cash, and
cash equivalents as well as derivatives, including options on securities and
securities indices and futures contracts and options on futures. For investment
restrictions on the use of these derivatives, please refer to the investment
policies section of this Prospectus. However, the Fund may invest in other
equity securities and may temporarily for defensive purposes, without
limitation, invest in certain short-term fixed income securities. Such
securities may be used to invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. See "Investment Policies -- Cash
Reserves."
-4-
<PAGE>
Of the total number of fixed-income instruments in which the Fund will
invest, less than 5% will be considered below investment-grade. Such securities
are regarded as speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation.
These lower rated debt securities may include obligations that are in default or
that face the risk of default with respect to principal or interest. Therefore,
such securities are sometimes referred to as "junk bonds." Please see the
Statement of Additional Information for a description of the securities ratings.
Investment Policies
The investment policies described below reflect the Fund's current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. For more information on the
Fund's Investment Policies, see the Statement of Additional Information. To the
extent consistent with the Fund's investment objective and restrictions, the
Fund may invest in the following instruments and may use the following
investment techniques:
Depository Receipts. The Fund may invest in securities of foreign issuers
in the form of American Depository Receipts ("ADRs"), European Depository
Receipts ("EDRs") and similar instruments, or other securities convertible into
securities of eligible issuers. These securities may not necessarily be
denominated in the same currency as the securities for which they may be
exchanged. Generally, ADRs, in registered form, are designed for use in the US
securities markets, and EDRs are issued for trading primarily in European
securities markets. ADRs are receipts typically issued by a US bank or trust
company evidencing ownership of the underlying securities. ADRs represent the
right to receive securities of foreign issuers deposited in a domestic bank or a
correspondent bank. ADRs do not eliminate the risk inherent in investing in the
securities of foreign issuers. In general, there is a large liquid market in the
US for many ADRs. The information available for ADRs is subject to the
accounting, auditing and financial reporting standards of the domestic market or
exchange on which they are traded, which standards are more uniform and more
exacting than those to which many foreign issuers are subject. For purposes of
the Fund's investment policies, the Fund's investments in ADRs, EDRs and similar
instruments will be deemed to be investments in the equity securities
representing securities of foreign issuers into which they may be converted.
US and International Equity Securities. The Fund may invest in common and
preferred equity securities publicly traded in the United States or in foreign
countries. The Fund's equity securities may be denominated in foreign currencies
and may be held outside the United States. The risks associated with investment
in securities issued by foreign governments and companies are described under
"Risk Factors -- Foreign Securities."
Investments in Other Funds. As permitted by the SEC, the Fund may invest in
open- and closed-end mutual funds with similar investment objectives.
Foreign Currency. The Fund has authority to deal in forward foreign
currency exchange contracts (including those involving the US dollar) as a hedge
against possible variations in the exchange rate between various currencies.
This is accomplished through individually negotiated contractual agreements to
purchase or to sell a specified currency at a specified future date and price
set at the time of the contract. The Fund's dealings in forward foreign currency
exchange contracts may be with respect to a specific purchase or sale of a
security, or with respect to its portfolio positions generally. The Fund is not
obligated to hedge its portfolio positions and will enter into such transactions
only to the extent, if any, deemed appropriate by Advisor. Forward commitments
generally provide a cost-effective way of defending against losses due to
foreign currency depreciation in which the securities are denominated.
-5-
<PAGE>
In addition to the forward exchange contracts, the Fund may also purchase
or sell listed or over-the-counter foreign currency options and foreign currency
futures and related options as a short or long hedge against possible variations
in foreign currency exchange rates. The cost to the Fund of engaging in foreign
currency transactions varies with such factors as the currencies involved, the
length of the contract period and the market conditions then prevailing.
Transactions involving forward exchange contracts and futures contracts and
options thereon are subject to certain risks. Put and call options on currency
may also be used to hedge against fluctuation in currency notes when forward
contracts and/or futures are deemed to be not cost effective. Options will not
be used to provide leverage in any way. See "Risk Factors -- Futures Contracts
and Options on Futures" for further discussion of the risks associated with such
investment techniques.
Certain differences exist among these hedging instruments. For example,
foreign currency options provide the holder thereof the rights to buy or sell a
currency at a fixed price on a future date. A futures contract on a foreign
currency is an agreement between two parties to buy and sell a specified amount
of a currency for a set price on a future date. Futures contracts and options on
futures contracts are traded on boards of trade of futures exchanges. The Fund
will not speculate in foreign security or currency options or futures or related
options. Long hedges (buying foreign currency futures or options) and short
hedges (selling foreign currency futures or options) are a cost-effective way to
hedge (eliminate or limit) the risk of possible variations in the exchange rate
between various currencies.
The Fund may not hedge its positions with respect to the currency of a
particular country to an extent greater than the aggregate market value (at the
time of making such sale) of the securities held in its portfolio denominated or
quoted in that particular foreign currency. The Fund may enter into forward
exchange contracts for hedging purposes to the extent the Fund holds foreign
currencies. The Fund will not enter into a forward contract with a term of more
than one year.
Emerging Markets. The Fund may invest in equity securities issued by
companies domiciled, or doing a substantial portion of their business, in
countries determined by the Fund's Advisor to have a developing or emerging
economy or securities market. The Fund will diversify investments across many
countries (typically at least 10) in order to reduce the volatility associated
with specific markets. The countries in which the Fund invests will be expanded
over time as the stock markets in other countries evolve. In determining
securities in which to invest, the Advisor will evaluate the countries' economic
and political climates and take into account traditional securities valuation
methods, including (but not limited to) an analysis of price in relation to
assets, earnings, cash flows, projected earnings growth, inflation, and interest
rates. Liquidity and transaction costs will also be considered.
Equity Swaps. Equity swap agreements are contracts between parties in which
one party agrees to make payments to the other party based on the change in
market value of a specified index or asset. In return, the other party agrees to
make payments to the first party based on the return of a different specified
index or asset. Although swap agreements entail the risk that a party will
default on its payment obligations, the portfolios will minimize this risk by
entering into agreements only with counterparties that the Advisor deems
creditworthy. Swap agreements also bear the risk that the portfolios will not be
able to meet their obligation to the counterparty. This risk will be mitigated
by investing the portfolios in the specific asset for which it is obligated to
pay a return.
Foreign Government Securities. Foreign government securities which the Fund
may invest in generally consist of obligations issued or backed by the national,
state or provincial government or similar political subdivisions or central
banks in foreign countries. Foreign government securities also include debt
obligations of supranational entities, which include international organizations
designated or backed by governmental entities to promote economic reconstruction
or development, international banking institutions and related government
agencies. These securities also include debt securities of quasi-government
agencies and debt securities denominated in multinational currency units of an
issuer.
-6-
<PAGE>
US Government Securities. US Government securities include US Treasury
bills, notes, and bonds and other obligations issued or guaranteed as to
interest and principal by the US Government and its agencies or
instrumentalities. Obligations issued or guaranteed as to interest and principal
by the US Government, its agencies or instrumentalities include securities that
are supported by the full faith and credit of the United States Treasury,
securities that are supported by the right of the issuer to borrow from the
United States Treasury, discretionary authority of the US Government agency or
instrumentality, and securities supported solely by the creditworthiness of the
issuer.
When-Issued Transactions. The Fund may purchase securities on a when-issued
basis. In these transactions, a Fund purchases securities with payment and
delivery scheduled for a future time. Until settlement, the Fund segregates cash
and marketable securities equal in value to their when-issued commitments.
Between the trade and settlement dates, the Fund bears the risk of any
fluctuation in the value of the securities. These transactions involve the
additional risk that the other party may fail to complete the transaction and
cause the Fund to miss a price or yield considered advantageous. The Fund will
engage in when-issued transactions only for the purpose of acquiring portfolio
securities consistent with its investment objective and policies and not for
investment leverage. The Fund will not invest more than 25% of its net assets in
when-issued securities.
Variable and Floating Rate Securities. A floating rate security provides
for the automatic adjustment of its interest rate whenever a specified interest
rate changes. A variable rate security provides for the automatic establishment
of a new interest rate on set dates. Interest rates on these securities are
ordinarily tied to, and are a percentage of, a widely recognized interest rate,
such as the yield on 90-day US Treasury bills or the prime rate of a specified
bank. These rates may change as often as twice daily. Generally, changes in
interest rates will have a smaller effect on the market value of variable and
floating rate securities than on the market value of comparable fixed income
obligations. Thus, investing in variable and floating rate securities generally
allows less opportunity for capital appreciation and depreciation than investing
in comparable fixed income securities.
Special Situations and Illiquid Securities. The Fund and the Advisor
believe that carefully selected investments in joint ventures, cooperatives,
partnerships, private placements, unlisted securities, and other similar
vehicles (collectively, "special situations") could enhance the Fund's capital
appreciation potential. These investments are generally illiquid. The Fund will
invest no more than 15% of its net assets in all types of illiquid securities or
securities that are not readily marketable, including special situations. The
Fund is not likely to hold illiquid securities initially. However, due to
foreign ownership restrictions, the Fund may invest periodically in illiquid
securities which are or become illiquid due to restrictions on foreign ownership
imposed by foreign governments. Said securities may be more difficult to price
and trade. The absence of a regular trading market for illiquid securities
imposes additional risks on investment in these securities. Illiquid securities
may be difficult to value and may often be disposed of only after considerable
expense and delay.
Lending Portfolio Securities. The Fund may lend portfolio securities with a
value of up to 33-1/3% of its total assets. For these purposes, total assets
shall include the value of all assets received as collateral for the loan. 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 Advisor to be of good financial standing. In a loan transaction,
the Fund will also bear the risk of any decline in value of securities acquired
with cash collateral. The Fund will minimize this risk by limiting the
investment of cash collateral to high quality instruments of short maturity.
-7-
<PAGE>
Repurchase Agreements. The Fund may enter into repurchase agreements with
banks and other financial institutions, such as broker-dealers. In substance, a
repurchase agreement is a loan for which the Fund receives securities as
collateral. 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 limit repurchase transactions to those member banks
of the Federal Reserve System and broker-dealers whose creditworthiness Advisor
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.
Cash Reserves. For the purpose of investing uncommitted cash balances or to
maintain liquidity to meet shareholder redemptions, the Fund may invest
temporarily and without limitation in high quality short-term fixed income
securities. These securities include obligations issued or guaranteed as to
principal and interest by the US Government, its agencies or instrumentalities
and repurchase agreements collateralized by these obligations, commercial paper,
bank certificates of deposit, bankers' acceptances and time deposits.
Options on Securities and Securities Indices. The Fund may write and
purchase covered put and call options on securities in which it may directly
invest. Option transactions of the Fund will be conducted so that the total
amount paid on premiums for all put and call options outstanding will not exceed
5% of the value of the Fund's total assets. Further, the Fund will not write a
put or call option or combination thereof if, as a result, the aggregate value
of all securities or collateral used to cover its outstanding options would
exceed 25% of the value of the Fund's total assets.
The Fund may purchase or sell options on securities indices that are
comprised of securities in which it may directly invest, subject to the
limitations set forth above and provided such options are traded on a national
securities exchange or in the over-the-counter market. Options on securities
indices are similar to options on securities except there is no transfer of a
security and settlement is in cash. A call option on a securities index grants
the purchaser of the call, for a premium paid to the seller, the right to
receive in cash an amount equal to the difference between the closing value of
the index and the exercise price of the option times a multiplier established by
the exchange upon which the option is traded. Please refer to the section
entitled "Hedging Strategies and Related Investment Techniques" in the Statement
of Additional Information for further information.
Futures Contracts and Options on Futures. For hedging purposes, including
protecting the price or interest rate of a security the Fund intends to buy, the
Fund may enter into futures contracts that relate to securities in which it may
directly invest and indices comprised of such securities and may purchase and
write call and put options on such contracts.
A financial futures contract is a contract to buy or sell a specified
quantity of financial instruments such as US Treasury bills, notes and bonds,
commercial paper and bank certificates of deposit or the cash value of a
financial instrument index at a specified future date at a price agreed upon
when the contract is made. A stock index futures contract is a contract to buy
or sell specified units of a stock index at a specified date at a price agreed
upon when the contract is made. The value of a unit is based on the current
value of the stock index. Under such contracts, no delivery of the actual
securities making up the index takes place. Rather, upon expiration of the
contract, settlement is made by exchanging cash in an amount equal to the
difference between the contract price and the closing price of the index at
expiration, net of variation margin previously paid.
Substantially all futures contracts are closed out before settlement date
or called for cash settlement. A futures contract is closed out by buying or
selling an identical offsetting futures contract. Upon entering into a futures
contract, the Fund is required to deposit an initial margin with Custodian for
the benefit of the futures broker. The initial margin serves as a "good faith"
deposit that the Fund will honor its futures commitment. Subsequent payments
(called "variation margin") to and from the broker are made on a daily basis as
the price of the underlying investment fluctuates.
-8-
<PAGE>
Options on futures contracts give the purchaser the right to assume a
position at a specified price in a futures contract at any time before
expiration of the option contract.
When trading futures contracts, the Fund will not commit more than 5% of
the market value of its total assets to initial margin deposits on futures and
premiums paid for options on futures. Please refer to the section entitled
"Hedging Strategies and Related Investment Techniques" in the Statement of
Additional Information for further information.
Purchase of Other Funds. 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 a substantially similar investment objective and policies.
Investment Restrictions
The Fund has fundamental investment restrictions, which may be changed only
with the approval of a majority of the Fund's shareholders as defined in the
1940 Act. A more detailed discussion of the Fund's investment restrictions and
investment policies appears in the Statement of Additional Information.
Unless otherwise noted, the fundamental restrictions apply at the time an
investment is made. The Fund may not:
1. Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US
Government, its agencies or instrumentalities. Concentration may occur
as a result of changes in the market value of portfolio securities,
but may not result from investment.
2. Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to
facilitate redemptions (not for leveraging or investment), provided
that borrowings do not exceed an amount equal to 33-1/3% of the
current value of the Fund's assets taken at market value, less
liabilities other than borrowings. If at any time a Fund's borrowings
exceed this limitation due to a decline in net assets, such borrowings
will within three days be reduced to the extent necessary to comply
with this limitation. A Fund will not purchase investments once
borrowed funds (including reverse repurchase agreements) exceed 5% of
its total assets.
3. Pledge, mortgage, or hypothecate its assets. However, a Fund may
pledge securities having a market value at the time of the pledge not
exceeding 33-1/3% of the value of the Fund's total assets to secure
permitted borrowings.
RISK FACTORS
Foreign Securities. Investors should consider carefully the substantial
risks involved in securities of companies and governments of foreign nations.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published regarding US companies. Foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards, and auditing practices and requirements may not
be comparable to those applicable to US companies. Many foreign markets have
substantially less volume than either the established domestic securities
exchanges or the over-the-counter markets. Securities of some foreign companies
are less liquid and more volatile than securities of comparable US companies.
Commission rates in foreign countries, which may be fixed rather than subject to
negotiation as in the US, are likely to be higher. In many foreign countries
there is less government supervision and regulation of securities exchanges,
brokers and listed companies than in the US, and capital requirements for
brokerage firms are generally lower. Settlement of transactions in foreign
securities may, in some instances, be subject to delays and related
administrative uncertainties.
-9-
<PAGE>
Foreign Currency. The Fund may be affected either favorably or unfavorably
by fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments. The Fund endeavors to buy and sell foreign currencies on
favorable terms. Such price spread on currency exchange (to cover service
charges) may be incurred, particularly when the Fund changes investments from
one country to another or when proceeds from the sale of shares in US dollars
are used for the purchase of securities in foreign countries. Also, some
countries may adopt policies which would prevent the Fund from repatriating
invested capital and dividends, withhold portions of interest and dividends at
the source, or impose other taxes, with respect to the Fund's investments in
securities of issuers of that country. There also is the possibility of
expropriation, nationalization, confiscatory or other taxation, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), default in foreign government securities, political or social
instability, or diplomatic developments that could adversely affect investments
in securities of issuers in those nations.
Futures Contracts and Options on Futures. There are certain investment
risks in using futures contracts and options as a hedging technique. Such risks
may include: (1) the inability to close out a futures contract or option caused
by the nonexistence of a liquid secondary market; and (2) an imperfect
correlation between price movements of the futures contracts or option with
price movements of the portfolio securities or securities index subject to the
hedge. Finally, the successful use of options and futures also depends on the
Advisor's ability to correctly predict price movements in the market involved in
a particular option or futures transaction. Please refer to the section "Hedging
Strategies and Related Investment Techniques - Risk Factors in Options, Futures,
Forward and Currency Transactions" in the Statement of Additional Information
for further information.
Emerging Markets. Investments in companies domiciled in emerging market
countries may be subject to additional risks. These risks include: (1) Volatile
social, political and economic conditions can cause investments in emerging or
developing markets exposure to economic structures that are generally less
diverse and mature. Emerging market countries can have political systems which
can be expected to have less stability than those of more developed countries.
The possibility may exist that recent favorable economic developments in certain
emerging market countries may be suddenly slowed or reversed by unanticipated
political or social events in such countries. Moreover, the economies of
individual emerging market countries may differ favorably or unfavorably from
the US economy in such respects as the rate of growth in gross domestic product,
the rate of inflation, capital reinvestment, resource self-sufficiency and
balance of payments position. (2) The small current size of the markets for such
securities and the currently low or nonexistent volume of trading can result in
a lack of liquidity and in greater price volatility. Until recently, there has
been an absence of a capital market structure or market-oriented economy in
certain emerging market countries. Because the Fund's securities will generally
be denominated in foreign currencies, the value of such securities to the Fund
will be affected by changes in currency exchange rates and in exchange control
regulations. A change in the value of a foreign currency against the US dollar
will result in a corresponding change in the US dollar value of the Fund's
securities. In addition, some emerging market countries may have fixed or
managed currencies which are not free-floating against the US dollar. Further,
certain emerging market currencies may not be internationally traded. Certain of
these currencies have experienced a steady devaluation relative to the US
dollar. Many emerging markets countries have experienced substantial, and in
some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had, and may continue to have,
negative effects on the economies and securities markets of certain emerging
market countries. (3) The existence of national policies may restrict the Fund's
investment opportunities and may include restrictions on investment in issuers
or industries deemed sensitive to national interests. (4) Some emerging markets
countries may not have developed structures governing private or foreign
investment and may not allow for judicial redress for injury to private
property.
-10-
<PAGE>
PORTFOLIO TURNOVER
The portfolio turnover rate cannot be predicted, but it is anticipated
that the Fund's annual turnover rate generally will not exceed 100%. A high
turnover rate (over 100%) will: (1) increase transaction expenses which will
adversely affect a Fund's performance; and (2) result in increased brokerage
commissions and other transaction costs, and the possibility of realized capital
gains. The Advisor's sell discipline for the Fund's investment in securities of
foreign issuers is based on the premise of a long-term investment horizon,
however, sudden changes in valuation levels arising from, for example, new
macroeconomic policies, political developments, and industry conditions could
change the assumed time horizon. Some countries impose restrictions on
repatriation of capital and/or dividends which would lengthen the Advisor's
assumed time horizon in those countries. Liquidity, volatility, and overall risk
of a position are other factors considered by the Advisor in determining the
appropriate investment horizon. Therefore, the Fund may dispose of securities
without regard to the time they have been held when such action, for defensive
or other purposes, appears advisable.
The Fund may effect portfolio transactions through State Street Brokerage
Services, Inc. an affiliate of the Advisor, when the Advisor determines that the
Fund will receive competitive execution, price and commissions.
DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare and pay dividends on shares of the
Fund annually from net investment income. The Board of Trustees intends to
declare distributions annually from net short-term capital gains and from net
20% or 28% 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 the 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 for Federal income tax
purposes 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 dividend and capital gain 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 30 days'
written notice to the Transfer Agent. If it is determined that the US Postal
Service cannot properly deliver Fund mailings to an investor, the Fund will
terminate the investor's election to receive dividends and other distributions
in cash. Thereafter, subsequent dividends and other distributions will be
automatically reinvested in additional shares of the relevant Fund until the
investor notifies the SSgA Funds in writing of the correct address and request
in writing that the election to receive dividends and other distributions in
cash be reinstated.
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.
Distribution Option. Investors can choose from four different distribution
options as indicated on the account Application:
o Reinvestment Option--Income dividends and capital gains distributions
will be automatically reinvested in additional shares of the Fund. If
the investor does not indicate a choice on the Application, this
option will be automatically assigned.
-11-
<PAGE>
o Income-Earned Option--Capital gain distributions will be automatically
reinvested, but a check or wire will be sent for each income dividend
distribution.
o Cash Option--A check or wire will be sent for each income dividend and
capital gain distribution.
o Direct Dividends Option--Dividends and capital gain distribution will
be automatically invested in another identically registered SSgA Fund.
Distributions will be sent to a pre-designated bank by the Automatic Clearing
House ("ACH") on the payable date.
TAXES
The Fund intends to qualify 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 subject to federal income taxes to the extent it
distributes its net investment income and net capital gain (long-term capital
gains in excess of short-term capital losses) to its shareholders. The Board
intends to distribute each year substantially all of the Fund's net investment
income and net capital gain.
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 20% gains and 28% gains are taxable as 20% gains or 28% gains regardless of
the length of time a shareholder has held such shares and whether paid in cash
or additional shares.
Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by the Fund attributable to direct obligations of the US Treasury
and certain agencies may be exempt from state and local taxes.
The sale of Fund shares by a shareholder is a taxable event and may result
in capital gain or loss. A capital gain or loss may be realized from an ordinary
redemption of shares or an exchange of shares between two mutual funds (or two
series of portfolios of a mutual fund). Any loss incurred on the sale or
exchange of Fund shares held for one year or more will be treated as a 20% loss
or a 28% loss to the extent of capital gain dividends received with respect to
such shares.
Shareholders will be notified after each calendar year of the amounts of
income dividends and net capital gains distributions and the percentage of the
Fund's income attributable to US Treasury and agency obligations. The Fund is
required to withhold a legally determined portion of all taxable dividends,
distributions, and redemption proceeds payable to any noncorporate shareholder
that does not provide the Fund with the shareholder's correct taxpayer
identification number or certification that the shareholder is not subject to
backup withholding.
Foreign Income Taxes. Investment income received by the Fund from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which would entitle the Fund to a reduced rate of such taxes or
exemption from taxes on such income. It is impossible to determine the effective
rate of foreign tax for the Fund in advance since the amount of the assets to be
invested within various countries is not known.
If the Fund invests in an entity that is classified as a "passive foreign
investment company" ("PFIC") for federal income tax purposes, the application of
certain provisions of the Code applying to PFICs could result in the imposition
of certain federal income taxes on the Fund. The Fund can elect to
mark-to-market its PFIC holdings in lieu of paying taxes on gains or
distributions therefrom. It is anticipated that any taxes on a Fund with respect
to investments in PFICs would be insignificant.
Foreign shareholders should consult with their tax advisors as to if and
how the federal income tax and its withholding requirements applies to them.
-12-
<PAGE>
If more than 50% in value of a Fund's total assets at the close of any
taxable year consists of securities of foreign corporations, the Fund may file
an election with the Internal Revenue Service (the "Foreign Election") that
would permit shareholders to take a credit (or a deduction) for foreign income
taxes paid by the Fund. The Fund may be subject to certain holding period
requirements with respect to securities held in order to take advantage of the
credit. If the Foreign Election is made, shareholders would include in their
gross income both dividends received from the Fund and foreign income taxes paid
by the Fund. Shareholders of the Fund would be entitled to treat the foreign
income taxes withheld as a credit against their United States federal income
taxes, subject to the limitations set forth in the Internal Revenue Code with
respect to the foreign tax credit generally. Alternatively, shareholders could
treat the foreign income taxes withheld as a deduction from gross income in
computing taxable income rather than as a tax credit. It is anticipated that the
Fund will qualify to make the Foreign Election; however, the Fund cannot be
certain that it will be eligible to make such an election or that any particular
shareholder will be eligible for the foreign tax credit.
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 advisor.
VALUATION OF FUND SHARES
Net Asset Value Per Share. The Fund determines net asset value once each
business day as of the close of the regular trading session of the New York
Stock Exchange (ordinarily 4 p.m. Eastern time). A business day is one on which
the New York Stock Exchange is open for business. Net asset value per share is
computed by dividing the current value of the Fund's assets, less its
liabilities, by the number of shares of the Fund outstanding and rounding to the
nearest cent.
Valuation of Fund Securities. With the exceptions noted below, the Fund
values portfolio securities at market value. This generally means that equity
and fixed income securities listed and traded principally on any national
securities exchange are valued on the basis of the last sale price or, lacking
any sales, at the closing bid price, on the primary exchange on which the
security is traded. United States equity and fixed income securities traded
principally over-the-counter and options are valued on the basis of the last
reported bid price. Futures contracts are valued on the basis of the last
reported sale price.
Because many fixed income securities do not trade each day, last sale or
bid prices are frequently not available. Fixed income securities therefore may
be valued using prices provided by a pricing service when such prices are
determined by Custodian to reflect the market value of such securities.
International securities traded on a national securities exchange are
valued on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of best bid or official bid, as
determined by the relevant securities exchange. In the absence of a last sale or
best or official bid price, such securities may be valued on the basis of prices
provided by a pricing service if those prices are believed to reflect the market
value of such securities.
Fixed income securities maturing within 60 days of the valuation date are
valued at amortized cost unless the Board determines that the amortized cost
method does not represent market value. The amortized cost valuation procedure
initially prices an instrument at its cost and thereafter assumes a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price a Fund
would receive if it sold the instrument.
The Fund values securities for which market quotations are not readily
available at fair value, as determined in good faith pursuant to procedures
established by the Board of Trustees.
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<PAGE>
PURCHASE OF FUND SHARES
Minimum Initial and Subsequent Investments and Account Balance. The
Fund requires a minimum initial investment of $1,000, with the exception of IRA
accounts, for which the minimum initial investment is $250. Subsequent
investments must be at least $100. An investment in the Fund (other than IRA
accounts) may be subject to redemption at the Fund's discretion if the account
balance is less than $1,000 as a result of shareholder redemptions. The Transfer
Agent will give shareholders 60 days' notice that the account will be closed
unless an investment is made to increase the account balance to the $1,000
minimum. Failure to bring the account balance to $1,000 may result in the
Transfer Agent closing the account at the net asset value ("NAV") next
determined on the day the account is closed and mailing the proceeds to the
shareholder's address shown on the Transfer Agent's records. The Fund reserves
the right to reject any purchase order. Investors purchasing Fund assets through
a pension or other participation plan should contact their plan administrator
for further information on purchases.
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 (described below) and payments for Fund shares in
Federal funds (or converted to Federal funds) must be received by the Transfer
Agent prior to 4:00 p.m. Eastern time to be effective on the date received. The
Fund reserves the right to reject any purchase order if payment for Fund shares
has not been received by the Transfer Agent prior to 4:00 p.m. Eastern time.
Order and Payment Procedures. There are several ways to invest in the
Fund. The Fund requires a purchase order in good form, which consists of a
completed and signed Application for each new account regardless of the
investment method. For additional information, including the IRA package,
additional Applications or other forms, call the Customer Service Department at
(800) 647-7327, or write: SSgA Funds, P.O. Box 8317, Boston, MA 02266-8317.
Mail. For new accounts, please mail the completed Application and check
in the return envelope provided. Additional investments should also be made by
check. Investors must include the Fund name and account number on their checks,
or use the remittance form attached to the confirmation statement (in the return
envelope provided). All checks should be made payable to the SSgA Funds (or in
the case of a retirement account, the check should be payable to the account's
custodian or trustee). All purchase requests should be mailed to one of the
following addresses:
Regular Mail: Registered, Express or Certified Mail:
SSgA Funds SSgA Funds
P.O. Box 8317 2 Heritage Drive
Boston, MA 02266-8317 North Quincy, MA 02171
All purchases made by check should be in US dollars from a US bank.
Third party checks and checks drawn on credit card accounts will not be
accepted. Normally, checks are converted to Federal funds within two business
days following receipt of the check. A purchase cannot be effective until
Federal funds are received. When purchases are made by check or periodic account
investment, payment for redemptions may be withheld until the check or account
clears, which may take up to 15 calendar days from the date of purchase.
Telephone Exchange Privilege. Subject to the Fund's minimum investment
requirement, investors may exchange a minimum of $100 of their Fund shares
without charge for shares of any other SSgA Fund. To use this option, contact
the Customer Service Department at (800) 647-7327. Shares are exchanged on the
basis of relative net asset value per share on the business day on which the
call is placed or upon written receipt of instructions in good form by the
Transfer Agent. Exchanges may be made over the phone if the registrations of the
two accounts are identical. If the shares of the Fund were purchased by check,
the shares must have been present in an account for 15 days before the exchange
is made. The exchange privilege will only be available in states which permit
exchanges and may be modified or terminated by the Fund upon 60 days' written
notice to shareholders. For Federal income tax purposes, an exchange constitutes
a sale of shares, which may result in a capital gain or loss.
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<PAGE>
Federal Funds Wire. An investor may make initial or subsequent
investments by wiring federal funds to State Street, as Transfer Agent, by:
1. Telephoning the Customer Service Department at (800) 647-7327 between
the hours of 8 a.m. and 4 p.m. Eastern time, and stating: (a) the
investor's account registration number, address and social security or
tax identification number; (b) the name of the Fund in which the
investment is to be made and the account number; and (c) the amount
being wired.
2. Instructing the wiring bank to wire federal funds to:
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
ABA #0110-0002-8
DDA #9904-631-0
SSgA International Growth Opportunities Fund
Account Number and Registration
Failure to properly identify all wires, checks and transfers as
indicated above may cause the Transfer Agent to delay, reject and or incorrectly
apply the settlement of an investor's purchase.
Systematic Investment Plan. Investors can make regular investments in
the Fund with the Systematic Investment Plan by completing the appropriate
section of the Application and attaching a voided personal check. Investors may
make investments monthly, quarterly or annually by deducting $100 or more from
their bank checking accounts. An investor may change the amount or stop
systematic purchase at any time by calling the Customer Service Department at
(800) 647-7327. Investors must meet the Fund's minimum initial requirement
before establishing the Systematic Investment Plan. Shares will be purchased at
the offering price next determined following receipt of the order by the
Transfer Agent.
Systematic Exchange. The Fund offers the option of having a set amount
exchanged within the SSgA Funds for accounts with identical registrations.
Investors can choose the date, the frequency (monthly, quarterly or annually)
and the amount. Exchanges may be done among the SSgA Funds once the initial
investment per Fund has been satisfied.
Third Party Transactions. Investors purchasing Fund shares through a
program of services offered by a financial intermediary, such as a bank,
broker-dealer, investment advisor or others, may be required by the intermediary
to pay additional fees. Investors should contact the intermediary for
information concerning what additional fees, if any, may be charged.
In Kind Exchange of Securities. The Transfer Agent may, at its
discretion, permit investors to purchase shares through the exchange of
securities they hold. Any securities exchanged must meet the investment
objective, policies and limitations of the Fund, must have a readily
ascertainable market value, must be liquid and must not be subject to
restrictions on resale. The market value of any securities exchanged, plus any
cash, must be at least $10 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 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.
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<PAGE>
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 by following one of
the methods described below. Typically, payments 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. Payment for redemption of shares by check
may be withheld for up to 15 days after the date or purchase to assure that the
check is honored.
Redemption requests must be received prior to 4:00 p.m. Eastern time in
order be effective on the date received. Shareholder servicing agents with
underlying shareholders in omnibus accounts who receive redemption requests by
4:00 p.m. Eastern time may transmit the request to the Transfer Agent by 9:00
a.m. Eastern time the next business day and receive the dividend as of the day
the redemption request was originally made by the underlying shareholder.
Telephone Redemption. Shareholders may normally redeem Fund shares by
telephoning the Customer Service Department at (800) 647-7327 between 8:00 a.m.
and 4:00 p.m. Eastern time. Shareholders must complete the appropriate section
of the application and attach a voided check (if applicable) before utilizing
this feature. The Fund and the Transfer Agent will employ reasonable procedures
to confirm that instructions communicated by telephone are properly authorized.
The Fund and the Transfer Agent will not be liable for executing instructions
that are deemed to be authorized after following reasonable procedures. These
procedures include recording telephonic instructions, mailing to the shareholder
a written confirmation of the transaction, performing a personal identity test
with private information not likely to be known by other individuals, and
restricting mailing of redemptions to the shareholder's address of record, if
the address has not been changed within 60 days of the redemption request.
By Wire. Proceeds exceeding $1,000 may be sent via wire transfer to the
investor's pre-designated bank. Proceeds may be sent, depending on the Fund, on
the same or the next day. Although the Fund does not charge a fee for this
feature, the investor's bank may charge a fee for receiving the wire. Investors
are advised to check with their bank before requesting this feature. Requests
must be received prior to 4:00 p.m. The shares will be redeemed using that day's
closing price, and the proceeds will be wired the following business day.
Check. Proceeds less than $50,000 may be mailed only to the address
shown on the Transfer Agent's registration record, provided that the address has
not been changed within 60 days of the redemption request. Shares will be
redeemed using that day's closing price (NAV). All proceeds by check will
normally be sent the following business day.
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. In certain circumstances, a shareholder will need to make a
request to sell shares in writing (please use the addresses for purchases by
mail listed under "Purchase of Fund Shares"). The shareholder may need to
include additional items with the request, as shown in the table below.
Shareholders may need to include a signature guarantee, which protects them
against fraudulent orders. A signature guarantee will be required if:
1. The shareholder's address of record has changed within the past 60 days;
2. The shareholder is redeeming more than $50,000 worth of shares; or
3. The shareholder is requesting payment other than by a check mailed to
the address of record and payable to the registered owner(s).
-16-
<PAGE>
Signature guarantees can usually be obtained from the following
sources:
1. A broker or securities dealer, registered with a domestic stock
exchange;
2. A federal savings, cooperative or other type of bank;
3. A savings and loan or other thrift institution;
4. A credit union; or
5. A securities exchange or clearing agency.
Please check with the institution prior to signing to ensure that they
are an acceptable signature guarantor. A NOTARY PUBLIC CANNOT PROVIDE A
SIGNATURE GUARANTEE.
<TABLE>
<CAPTION>
Seller Requirements for Written Requests
<S> <C> <C>
Owner of individual, o Letter of instruction, signed by all persons
joint, sole proprietorship, authorized to sign for the account stating general
UGMA/UTMA (custodial accounts titles/capacity, exactly as the account is
for minors) or general registered; and
partner accounts o Signature guarantee, if applicable (see above).
Owners of corporate or o Letter of instruction signed by authorized
association accounts person(s), stating capacity as indicated by the
corporate resolution;
o Corporate resolution, certified within the past 90
days; and
o Signature guarantee, if applicable (see above).
Owners or trustees of o Letter of instruction, signed by all trustees;
trust accounts o If the trustees are not named in the registration,
please provide a copy of the trust document certified
within the past 60 days; and
o Signature guarantee, if applicable (see above).
Joint tenancy shareholders o Letter of instruction signed by surviving tenant(s);
whose co-tenants are o Certified copy of the death certificate;
and deceased o Signature guarantee, if applicable (see above).
</TABLE>
Please contact the Customer Service Department at (800) 647-7327 for
questions and further instructions.
The Fund may pay any portion of the redemption amount in excess of
$250,000 by a distribution in kind of readily marketable securities from the
portfolio of the Fund in lieu of cash. Investors will incur brokerage charges on
the sale of these portfolio securities. The Funds reserve the right to suspend
the right of redemption or postpone the date of payment if emergency conditions,
as specified in the 1940 Act or as determined by the Securities and Exchange
Commission, should exist.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Fund and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
Advisory Agreement. The Investment Company employs State Street,
through its division State Street Global Advisors, 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 Global Advisors is the investment management business of State
Street, a 200 year old pioneer and leader in the world of financial services..
State Street is a wholly owned subsidiary of State Street Corporation, a
publicly held bank holding company. State Street, with over $458 billion (US)
under management as of April 15, 1998, provides complete global investment
management services from offices in Atlanta, Boston, Brussels, Copenhagen,
Dubai, Hong Kong, London, Minneapolis, Montpellier, Montreal, Munich, Paris, San
Francisco, Sydney, Tokyo, and Toronto.
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<PAGE>
Advisor, subject to Board supervision, directs the investment of the Fund
in accordance with the Fund's investment objective, policies and restrictions.
Mr. Jeffrey Davis, Managing Director, is the portfolio manager primarily
responsible for investment decisions regarding the Fund. Mr. Davis was with
State Street since November 1992, primarily involved in international and
emerging markets investing, and worked closely with the International Finance
Committee in launching emerging markets index funds. In early 1997 Mr. Davis
left State Street to work with Schooner Asset Management on managing emerging
market private equity and debt funds, and then returned to State Street in
December 1997 as a chief investment strategist and manager of international
global opportunities funds. There are three other portfolio managers who assist
in managing the Fund.For these services, the Fund pays Advisor a fee, calculated
daily and paid monthly, that on an annual basis is equal to .75% of the Fund's
average daily net assets. This fee is higher than the investment advisory fees
paid by most investment companies. However, the fee is comparable to that of
other funds with similar investment objectives.
The Glass-Steagall Act prohibits a depository state chartered bank such as
Advisor from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Advisor 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. Advisor
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 Advisor from continuing to perform all or a part of
the above services for its customers and/or the Funds. If Advisor were
prohibited from serving the Funds in any of its present capacities, the Board of
Trustees would seek an alternative provider(s) of such services. In such event,
changes in the operation of the Fund may occur. It is not expected by Advisor
that existing shareholders would suffer any adverse financial consequences (if
another advisor with equivalent abilities is found) as a result of any of these
occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit the
use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street, who retains voting control of such shares. As of April 15, 1998, State
Street held of record less than 25% of the issued and outstanding shares of
Investment Company in connection with its discretionary accounts. Consequently,
State Street is not deemed to be a controlling person of Investment Company for
purposes of the 1940 Act.
Under State Street Global Advisors' Code of Ethics, State Street Global
Advisors' employees in Boston (where investment management operations are
conducted) who are deemed to have access to management information are only
permitted to engage in personal securities transactions which do not involve
securities which the Advisor 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
Advisor.
-18-
<PAGE>
Administration Agreement. Frank Russell Investment Management Company
("Administrator") serves as administrator of the Fund. Administrator currently
serves as investment manager and administrator to 32 mutual funds with assets of
$13.4 billion as of April 15, 1998, and acts as administrator to 20 mutual
funds, including the Fund, with assets of $13.6 billion as of April 15, 1998.
Pursuant to the Administration Agreement with Investment Company,
Administrator will: (1) supervise all aspects of the Funds' operations; (2)
provide the Funds with administrative and clerical services, including the
maintenance of certain of the Funds' books and records; (3) arrange the periodic
updating of the Funds' prospectuses and any supplements thereto; (4) provide
proxy materials and reports to Fund shareholders and the Securities and Exchange
Commission; and (5) provide the Funds with adequate office space and all
necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. For these services, the
International Growth Opportunities Fund pays Administrator a fee that on an
annual basis is equal to the following percentages of each Fund's average daily
net assets: $0 to and including $500 million -- .07%; over $500 million to and
including $1 billion -- .06%; over $1 billion to and including $1.5 billion --
.04%; and over $1.5 billion -- .03%. The percentage of the fee paid by a
particular Fund is equal to the percentage of average aggregate daily net assets
that are attributable to that Fund. Administrator will also receive
reimbursement of expenses it incurs in connection with establishing new
investment portfolios. Further, the administration fee paid by the Investment
Company will be reduced by the sum of certain distribution related expenses, up
to certain maximum percentages, as follows: (1) 10% from January 1, 1997 to
December 31, 1997; 5% from January 1, 1998 to December 31, 1998; and (3) 0% from
January 1, 1999 thereafter.
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a time spent
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are permitted
to engage in personal securities transactions subject to restrictions and
procedures set forth in the Confidentiality Manual and Code of Ethics adopted by
the Investment Company, Administrator and Distributor. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with Securities and
Exchange Commission rules and regulations.
Distribution Services and Shareholder Servicing Arrangements. Pursuant to
the Distribution Agreement with Investment Company, 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) payments made to certain broker-dealers, investment
advisors and other third-party intermediaries; (2) the costs of prospectuses,
reports to shareholders and sales literature; (3) advertising; and (4) 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 Advisor ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Under the Service
Agreements, the Service Organizations may provide various services for such
customers including: answering inquiries regarding the Fund; assisting customers
in changing dividend options, account designations and addresses; performing
subaccounting for such customers; establishing and maintaining customer accounts
and records; processing purchase and redemption transactions; providing periodic
statements showing customers' account balances and integrating such statements
with those of other transactions and balances in the customers' other accounts
serviced by the Service Organizations; arranging for bank wires transferring
customers' funds; and such other services as the customers may request in
connection with the Fund, to the extent permitted by applicable statute, rule or
regulation. Service Organizations may receive from the Fund, for shareholder
servicing, monthly fees at a rate that shall not exceed .20% per annum of the
average daily net asset value of the Fund's shares owned by or for shareholders
with whom the Service Organization has a servicing relationship. Banks and other
financial service firms may be subject to various state laws, and may be
required to register as dealers pursuant to state law.
-19-
<PAGE>
The Investment Company has entered into Service Agreements with the
Advisor and the following entities related to the Advisor: State Street
Brokerage Services, Inc., Metropolitan Division of Commercial Banking,
Retirement Investment Services Division and State Street Solutions. The purpose
of the Service Agreements is to obtain shareholder services for Fund shares
owned by clients of each of these entities. In return for these services, the
Investment Company pays each of the entities a fee. These agreements are
reviewed annually by the Board of Trustees.
Payments to the Distributor, as well as payments to Service Organizations
from the Fund are not permitted by the Plan to exceed .25% of the Fund's average
net asset value per year. Any payments that are required to be made by the
Distribution Agreement and any Service Agreement but could not be made because
of the .25% limitation may be carried forward and paid in subsequent years so
long as the Plan is in effect. A Fund's liability for any such expenses carried
forward shall terminate at the end of two years following the year in which the
expenditure was incurred. Service Organizations will be responsible for prompt
transmission of purchase and redemption orders and may charge fees for their
services.
FUND EXPENSES
The Fund will pay all of their expenses other than those expressly
assumed by Advisor and Administrator. The principal expenses of the Fund are the
annual advisory fee payable to Advisor 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 Advisor or any of its affiliates; (11)
insurance, interest, brokerage and litigation costs; (12) extraordinary expenses
as may arise, including expenses incurred in connection with litigation
proceedings and claims and the legal obligations of Investment Company to
indemnify its Trustees, officers, employees, shareholders, distributors and
agents; and (13) other expenses properly payable by the Fund.
PERFORMANCE CALCULATIONS
From time to time the Fund may advertise its total return. The total
return of a Fund refers to the average annual compounded rates of return from a
hypothetical investment in the Fund over one-, five- and ten-year periods or for
the life of the Fund (as stated in the advertisement), assuming the reinvestment
of all dividend and capital gains distributions.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Morningstar, Lipper
Analytical Services, Inc., Wall Street Journal Score Card, MSCI EAFE Index, or
other industry publications, business periodicals, rating services and market
indices. The Fund may also advertise nonstandardized performance information
which is for periods in addition to those required to be presented.
-20-
<PAGE>
Total return and other performance figures are based on historical
earnings and are not indications of future performance.
ADDITIONAL INFORMATION
Custodian, Transfer Agent and Independent Accountants. State Street holds
all portfolio securities and cash assets of the Fund, provides portfolio
recordkeeping services and serves as the Fund's transfer agent ("Transfer
Agent") and custodian ("Custodian"). State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Fund except as investment advisor. Coopers & Lybrand L.L.P., Boston,
Massachusetts, is Investment Company's independent accountants.
Reports to Shareholders and Shareholder Inquiries. Shareholders will
receive an unaudited semiannual financial statement and an annual financial
statement audited by Investment Company's independent accountants. Shareholder
inquiries regarding the Prospectus, financial statements and shareholder reports
may be made by calling Distributor 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 International Growth Opportunities Fund is one such series.
Fund shares represent an equal proportionate interest in the Fund, have a
par value of $.001 per share and are entitled to such relative rights and
preferences and dividends and distributions earned on the assets belonging to
the Fund as may be declared by the Board of Trustees. Fund shares are fully paid
and nonassessable by Investment Company and have no preemptive rights.
Each Fund share has one vote. There are no cumulative voting rights. There
is no annual meeting of shareholders, but special meetings may be held. On any
matter that affects only a particular investment fund, only shareholders of that
fund vote unless otherwise required by the 1940 Act or the Master Trust
Agreement. The Trustees hold office for the life of the Trust. A Trustee may
resign or retire, and a Trustee may be removed at any time by a vote of
two-thirds of the Investment Company shares or by a vote of a majority of the
Trustees. The Trustees shall promptly call and give notice of a meeting of
shareholders for the purpose of voting upon removal of any Trustee when
requested to do so in writing by holders of not less than 10% of the shares then
outstanding. A vacancy on the Board of Trustees may be filled by the vote of a
majority of the remaining Trustees, provided that immediately thereafter at
least two-thirds of the Trustees have been elected by shareholders.
Investment Company does not issue share certificates for the Fund. Transfer
Agent sends Fund shareholders statements concurrent with any transaction
activity, confirming all investments in or redemptions from their accounts. Each
statement also sets forth the balance of shares held in the account.
-21-
<PAGE>
SSgA FUNDS
One International Place
Boston, Massachusetts 02110
INVESTMENT ADVISOR, CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
One International Place
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
-22-
<PAGE>
SSgA FUNDS
SSgA Money Market Fund
SSgA US Government Money Market Fund
SSgA Tax Free Money Market Fund
SSgA S&P 500 Index Fund
SSgA Small Cap Fund
SSgA Special Small Cap Fund
SSgA Matrix Equity Fund
SSgA Yield Plus Fund
SSgA Growth and Income Fund
SSgA Intermediate Fund
SSgA Active International Fund
SSgA Emerging Markets Fund
SSgA Bond Market Fund
SSgA Life Solutions Growth Fund
SSgA Life Solutions Balanced Fund
SSgA Life Solutions Income and Growth Fund
SSgA High Yield Bond Fund
SSgA International Growth Opportunities Fund
SSgA Real Estate Equity Fund
-23-
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
SSgA FUNDS
One International Place
Boston, Massachusetts 02110
(800) 647-7327
HIGH YIELD BOND FUND
SSgA Funds is a registered, open-end management investment company with
multiple portfolios, each of which is commonly referred to as a mutual fund.
This Prospectus describes and offers shares of beneficial interest in one of the
funds, the SSgA High Yield Bond Fund (the "High Yield Bond 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 High
Yield Bond Index. The Fund's shares are offered without sales commissions.
However, the Fund pays certain distribution expenses under its Rule 12b-1 plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES IN THE 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 SSgA Funds has
been filed with the Securities and Exchange Commission ("SEC") in Statements of
Additional Information ("SAI") dated April 28, 1998. The SAI is incorporated
herein by reference and is available without charge from Distributor at its
address noted below or by calling (800) 647-7327. The SEC also maintains a
website (www.sec.gov) that contains the SAI, material incorporated by reference
and other information regarding the SSgA Funds. You may also access the SSgA
Funds' website at www.ssgafunds.com.
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Advisor, Custodian
And Transfer Agent: Distributor: Administrator:
State Street Bank and Trust Company Frank Russell Investment Management
Russell Fund Distributors, Inc. Company
225 Franklin Street One International Place 909 A Street
Boston, Massachusetts 02110 Boston, Massachusetts 02110 Tacoma, Washington 98402
</TABLE>
PROSPECTUS DATED APRIL 28, 1998
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<PAGE>
TABLE OF CONTENTS
Page
----
Fund Operating Expenses............................................... 3
SSgA Funds............................................................ 4
Manner of Offering.................................................... 4
Investment Objective, Policies and Restrictions....................... 4
Certain Risk Factors..................................................10
Portfolio Turnover ...................................................10
Dividends and Distributions...........................................11
Taxes.................................................................11
Valuation of Fund Shares..............................................12
Purchase of Fund Shares...............................................13
Redemption of Fund Shares.............................................15
General Management....................................................16
Fund Expenses.........................................................19
Performance Calculations..............................................19
Additional Information................................................19
-2-
<PAGE>
FUND OPERATING EXPENSES AFTER FEE REIMBURSEMENT
SSgA HIGH YIELD BOND FUND
The following table is intended to assist the investor in understanding the
costs and expenses that an investor in the High Yield Bond Fund will incur
directly or indirectly. THE EXAMPLES PROVIDED IN THE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN. For additional information, see -- "General
Management."
Shareholder Transaction Expenses:
- ---------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses:
- -------------------------------
(as a percentage of average daily net assets)
Advisory Fees (After Fee Reimbursement)(1) .24%
12b-1 Distribution and Shareholder Servicing Fees(1),(2),(3) .07
Other Expenses(1),(2) .34
---
Total Operating Expenses (After Fee Reimbursement)(1),(4) .65%
====
Examples: 1 year 3 years
- -------- ------ -------
You would pay the following expenses on a
$1,000 investment, assuming: (i) 5%
annual return; and (ii) redemption at the
end of each time period: $7 $21
== ===
- -------------------
(1) The Advisor has agreed to reimburse the Fund for all expenses in excess of
.65% of average daily net assets on an annual basis. The total operating
expense of the Fund absent reimbursement would be .71% of average daily net
assets on an annual basis. The reimbursement agreement will remain in
effect for the current fiscal year. The gross annual Advisory fee expense
before reimbursement would be .30% of average daily net assets.
(2) The ratios for 12b-1 Distribution and Shareholder Servicing Fees and Other
Expenses are based on estimated amounts for the current fiscal year.
(3) The ratio includes .04% for 12b-1 Distribution and .03% for 12b-1
Shareholder Servicing Fees.
(4) Investors purchasing Fund shares through a financial intermediary, such as
a bank or an investment advisor, may also be required to pay additional
fees for services provided by the intermediary. Such investors should
contact the intermediary for information concerning what additional fees,
if any, will be charged.
Long-term shareholders of the Fund may pay more in Rule 12b-1 fees than the
economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc.
-3-
<PAGE>
SSgA FUNDS
SSgA Funds ("Investment Company") is an open-end management investment
company that is organized as a Massachusetts business trust. In addition, each
series of the Investment Company is diversified as defined in the Investment
Company Act of 1940, as amended ("1940 Act"). As a "series" company, Investment
Company is authorized to issue an unlimited number of shares evidencing
beneficial interests in different investment portfolios. Through this
Prospectus, Investment Company offers shares in one such portfolio, the High
Yield Bond Fund. State Street Bank and Trust Company (the "Advisor" or "State
Street") serves as the investment advisor 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 (the "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."
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The Fund's nonfundamental investment objective is to maximize total
return by investing primarily in fixed income securities, including, but not
limited to, those represented by the Lehman Brothers High Yield Bond Index. This
objective may be changed by the Fund's Board of Trustees without shareholder
approval, although shareholders will receive prior notice of any change to the
Fund's investment objective. There can be no assurance that the Fund will meet
its investment objective.
Under normal market conditions, the Fund attempts to meet its objective by
investing at least 65% of its total assets in high yield, high risk 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 or other corporate
instruments; (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 securities; (8) 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; (9) financial futures and option contracts; (10) interest rate
exchange agreements and other swap agreements; (11) supranational and sovereign
debt obligations including subdivisions and agencies; and (12) other securities
and instruments deemed by the Advisor 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.
Because the Fund will invest in fixed-income securities, 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 yields 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 a 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.
The Fund will measure its performance against the Lehman Brothers High
Yield Bond Index (the "Index"). The duration of the Index as of December 31,
1997 was 4.41 years. The Index includes fixed rate, public nonconvertible,
noninvestment-grade issues registered with the SEC that are rated Ba1 or lower
by Moody's Investors Service ("Moody's"). If a Moody's rating is unavailable,
the bonds must be rated BB+ or lower by Standard & Poor's Rating Group (S&P"),
or by Fitch's Investors Service ("Fitch") if an S&P rating is unavailable. A
small number of unrated bonds is included in the Index; to be eligible they must
have previously held a high yield rating or have been associated with a high
yield issuer, and must trade accordingly.
-4-
<PAGE>
Investment Policies
The investment policies described below reflect the Fund's current
practices, are not fundamental and may be changed by the Board of Trustees of
Investment Company without shareholder approval. 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:
High Risk, High Yield Bonds. The Fund may invest in debt securities rated
less than BBB- by S&P or Baa by Moody's, or in unrated securities judged by the
Advisor to be of comparable quality. Lower rated debt securities generally offer
a higher yield than that available from higher grade issues. However, lower
rated debt securities involve higher risks than investment-grade bonds, in that
they are especially subject to adverse changes in general economic conditions
and, in the industries in which the issuers are engaged, to changes in the
financial condition of the issuers and to price fluctuation in response to
changes in interest rates. Debt rated BB, B, CCC, CC and C by S&P, and debt
rated Ba, B, Caa, Ca and C by Moody's, is regarded as predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. For S&P, BB indicates the lowest
degree of speculation and Dthe highest. For Moody's, Ba indicates the lowest
degree of speculation and C the highest. These lower rated debt securities may
include obligations that are in default or that face the risk of default with
respect to principal or interest. Such securities are sometimes referred to as
"junk bonds." For additional risk associated with high yield bonds, please see
"Certain Risk Factors - High Yield Bonds" in this Prospectus.
Investment-Grade Bonds. The Fund may invest in corporate notes and
bonds which are rated investment-grade by a Nationally Recognized Statistical
Rating Organization ("NRSRO") or, if unrated, are determined by the Advisor to
be of comparable quality. Investment-grade securities include securities rated
Baa3 by Moody's or BBB- by S&P (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.
US Government Securities. US Government securities include US Treasury
bills, notes and bonds and other obligations issued or guaranteed as to interest
and principal by the US Government, its agencies or instrumentalities.
Obligations issued or guaranteed as to interest and principal by the US
Government, its agencies or instrumentalities include securities that are
supported by the full faith and credit of the United States Treasury, securities
that are supported by the right of the issuer to borrow from the United States
Treasury, discretionary authority of the US Government agency or
instrumentality, and securities supported solely by the creditworthiness of the
issuer.
Repurchase Agreements. The Fund may enter into repurchase agreements
with banks and other financial institutions, such as broker-dealers. In
substance, a repurchase agreement is a loan for which the Fund receives
securities as collateral. 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 limit repurchase transactions to
those member banks of the Federal Reserve System and broker-dealers whose
creditworthiness Advisor 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." In
substance, a reverse repurchase agreement is a borrowing for which the Fund
provides securities as collateral. 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.
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 securities equal in value to its when-issued commitments. Between the
trade and settlement dates, the Fund bears the risk of
-5-
<PAGE>
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.
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 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 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 Certificates ("Fannie Maes"). Mortgage 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.
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. Generally, changes in interest
rates will have a
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greater impact on the market value of a zero coupon security than on the market
value of comparable securities that pay interest periodically during the life of
the instrument.
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.
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
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
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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. For these purposes, total
assets shall include the value of all assets received as collateral for the
loan. 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 its 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 Advisor 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.
Convertible Securities. The Fund may invest in convertible securities
of foreign or domestic issuers. A convertible security is a fixed-income
security (a bond or preferred stock) which may be converted at a stated price
within a specified period of time into a certain quantity of the common stock of
the same or a different issuer. Convertible securities are senior to common
stocks in a corporation's capital structure but are usually subordinated to
similar nonconvertible securities. Convertible securities provide, through their
conversion feature, an opportunity to participate in capital appreciation
resulting from a market price advance in a convertible security's underlying
common stock. The price of a convertible security is influenced by the market
value of the underlying common stock and tends to increase as the market value
of the underlying stock rises, whereas it tends to decrease as the market value
of the underlying stock declines.
Special Situations and Illiquid Securities. The Fund and the Advisor
believe that carefully selected investments in joint ventures, cooperatives,
partnerships, private placements, unlisted securities, and other similar
vehicles (collectively, "special situations") could enhance the Fund's capital
appreciation potential. These investments are generally illiquid. The Fund will
invest no more than 15% of its net assets in all types of illiquid securities or
securities that are not readily marketable, including special situations.
Illiquid securities may be more difficult to price and trade. The absence of a
regular trading market for illiquid securities imposes additional risks on
investment in these securities. Illiquid securities may be difficult to value
and may often be disposed of only after considerable expense and delay.
Commercial Paper. Tax exempt commercial paper is a short-term
obligation with a stated maturity of 365 days or less. It is typically issued to
finance seasonal working capital needs or as short-term financing in
anticipation of longer term financing. Each instrument may be backed only by the
credit of the issuer or may be backed by some form of credit enhancement,
typically in the form of a guarantee by a commercial bank. Commercial paper
backed by guarantees of foreign banks may involve additional risk due to the
difficulty of obtaining and enforcing judgments against such banks and the
generally less restrictive regulations to which such banks are subject.
Cash Reserves. For defensive purposes, the Fund may temporarily invest 100%
of 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.
Total Rate of Return Swaps. The Fund may contract with a counterparty
to pay a stream of cash flows and receive the total return of an index or a
security for purposes of attempting to obtain a particular desired return at a
lower cost to the Fund than if the Fund had invested directly in an instrument
that yielded that desired return. The Advisor will cause the Fund to enter into
swap agreements only with counterparties that would be eligible for
consideration as repurchase agreement counterparties under the Fund's repurchase
agreement guidelines.
Purchase of Other Funds. 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 in the shares of another investment company
that has a substantially similar investment objective and policies.
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Investment Restrictions
The Fund has fundamental investment restrictions, which may be changed
only with the approval of a majority of the Fund's shareholders as defined in
the 1940 Act. A more detailed discussion of the Fund's investment restrictions
and investment policies appears in the Statement of Additional Information.
Unless otherwise noted, the fundamental restrictions apply at the time an
investment is made. The Fund may not:
1. Invest 25% or more of the value of its total assets in securities
of companies primarily engaged in any one industry (other than
the US Government, its agencies or instrumentalities).
Concentration may occur as a result of changes in the market
value of portfolio securities, but may not result from
investment.
2. Borrow money (including reverse repurchase agreements), except as
a temporary measure for extraordinary or emergency purposes or to
facilitate redemptions (not for leveraging or investment),
provided that borrowings do not exceed an amount equal to 33-1/3%
of the current value of the Fund's assets taken at market value,
less liabilities other than borrowings. If at any time the Fund's
borrowings exceed this limitation due to a decline in net assets,
such borrowings will within three days be reduced to the extent
necessary to comply with this limitation. The Fund will not
purchase additional investments if borrowed funds (including
reverse repurchase agreements) exceed 5% of total assets.
3. Pledge, mortgage, or hypothecate its assets. However, the Fund
may pledge securities having a market value at the time of the
pledge not exceeding 33-1/3% of the value of the Fund's total
assets to secure permitted borrowings.
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CERTAIN RISK FACTORS
High Yield Bonds. During periods of economic uncertainty, highly
leveraged issuers may experience financial stress which could adversely affect
their ability to make payments of principal and interest and increase the
possibility of default. In addition the growth of the market for lower rated
debt securities paralleled a long economic expansion. The market for lower rated
debt securities is generally thinner and less active than that for higher
quality securities, which would limit the Fund's ability to sell such securities
at fair value in response to changes in the economy or the financial markets.
While such debt may have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposure to adverse conditions.
The Advisor will seek to reduce the risks associated with investing in such
securities by the depth of its own credit analysis. Investors should carefully
consider their ability to assume the risks of owning shares of a mutual fund
that invests in lower-rated securities before making an investment. For
additional information, please refer to the Fund's SAI.
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.
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.
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 250%
(excluding turnover of securities having a maturity of one year or less). A high
turnover rate (over 100%) will: (1) increase transaction expenses which will
adversely affect a Fund's performance; and (2) result in increased brokerage
commissions and other transaction costs, and the possibility of realized capital
gains.
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DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare and pay dividends on shares of
the Fund quarterly from net investment income. The Board of Trustees intends to
declare distributions annually from net short- and 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 the
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 for Federal income tax
purposes 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 dividend and capital gain 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 30 days' written notice to the Transfer Agent. If it is determined that
the US Postal Service cannot properly deliver Fund mailings to an investor, the
Fund will terminate the investor's election to receive dividends and other
distributions in cash. Thereafter, subsequent dividends and other distributions
will be automatically reinvested in additional shares of the relevant Fund until
the investor notifies the SSgA Funds in writing of the correct address and
request in writing that the election to receive dividends and other
distributions in cash be reinstated.
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.
Distribution Option. Investors can choose from four different
distribution options as indicated on the account Application:
o Reinvestment Option--Income dividends and capital gains distributions
will be automatically reinvested in additional shares of the Fund. If
the investor does not indicate a choice on the Application, this
option will be automatically assigned.
o Income-Earned Option--Capital gain distributions will be automatically
reinvested, but a check or wire will be sent for each income dividend
distribution.
o Cash Option--A check or wire will be sent for each income dividend and
capital gain distribution.
o Direct Dividends Option--Dividends and capital gain distribution will
be automatically invested in another identically registered SSgA Fund.
Distributions will be sent to a pre-designated bank by the Automatic
Clearing House ("ACH") on the payable date.
TAXES
The Fund intends to qualify 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 subject to federal income taxes to the
extent it distributes its net investment income and net capital gain (long-term
capital gains in excess of short-term capital losses) to shareholders. The Board
intends to distribute each year substantially all of the Fund's net investment
income and net capital gain.
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 20% gains and 28% gains are taxable as 20% gains or 28%
gains regardless of the length of time a shareholder has held such shares and
whether paid in cash or additional shares.
Dividends and distributions may also be subject to state or local
taxes. Depending on the state tax rules pertaining to a shareholder, a portion
of the dividends paid by the Fund attributable to direct obligations of the US
Treasury and certain agencies may be exempt from state and local taxes.
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The Fund may purchase bonds at market discount (i.e., bonds with a purchase
price less than original issue price or adjusted issue price). If such bonds are
subsequently sold at a gain then a portion of that gain equal to the amount of
market discount, which should have been accrued through the sale date, will be
taxable to shareholders as ordinary income.
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 20% loss
or a 28% 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 advisor.
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.
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.
Debt obligation securities maturing within 60 days of the valuation
date are valued at amortized cost unless the Board determines that the amortized
cost method 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 and Subsequent Investments and Account Balance. The
Fund requires a minimum initial investment of $1,000, with the exception of IRA
accounts, for which the minimum initial investment is $250. Subsequent
investments must be at least $100. An investment in the Fund (other than IRA
accounts) may be subject to redemption at
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the Fund's discretion if the account balance is less than $1,000 as a result of
shareholder redemptions. The Transfer Agent will give shareholders 60 days'
notice that the account will be closed unless an investment is made to increase
the account balance to the $1,000 minimum. Failure to bring the account balance
to $1,000 may result in the Transfer Agent closing the account at the net asset
value ("NAV") next determined on the day the account is closed and mailing the
proceeds to the shareholder's address shown on the Transfer Agent's records. The
Fund reserves the right to reject any purchase order. Investors purchasing Fund
assets through a pension or other participation plan should contact their plan
administrator for further information on purchases.
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 (described below) and payments for Fund shares in
Federal funds (or converted to Federal funds) must be received by the Transfer
Agent prior to 4:00 p.m. Eastern time to be effective on the date received. The
Fund reserves the right to reject any purchase order if payment for Fund shares
has not been received by the Transfer Agent prior to 4:00 p.m. Eastern time.
Order and Payment Procedures. There are several ways to invest in the
Fund. The Fund requires a purchase order in good form, which consists of a
completed and signed Application for each new account regardless of the
investment method. For additional information, including the IRA package,
additional Applications or other forms, call the Customer Service Department at
(800) 647-7327, or write: SSgA Funds, P.O. Box 8317, Boston, MA 02266-8317.
Mail. For new accounts, please mail the completed Application and check
in the return envelope provided. Additional investments should also be made by
check. Investors must include the Fund name and account number on their checks,
or use the remittance form attached to the confirmation statement (in the return
envelope provided). All checks should be made payable to the SSgA Funds (or in
the case of a retirement account, the check should be payable to the account's
custodian or trustee). All purchase requests should be mailed to one of the
following addresses:
Regular Mail: Registered, Express or Certified Mail:
SSgA Funds SSgA Funds
P.O. Box 8317 2 Heritage Drive
Boston, MA 02266-8317 North Quincy, MA 02171
All purchases made by check should be in US dollars from a US bank. Third
party checks and checks drawn on credit card accounts will not be accepted.
Normally, checks are converted to Federal funds within two business days
following receipt of the check. A purchase cannot be effective until Federal
funds are received. When purchases are made by check or periodic account
investment, payment for redemptions may be withheld until the check or account
clears, which may take up to 15 calendar days from the date of purchase.
Telephone Exchange Privilege. Subject to the Fund's minimum investment
requirement, investors may exchange a minimum of $100 of their Fund shares
without charge for shares of any other SSgA Fund. To use this option, contact
the Customer Service Department at (800) 647-7327. Shares are exchanged on the
basis of relative net asset value per share on the business day on which the
call is placed or upon written receipt of instructions in good form by the
Transfer Agent. Exchanges may be made over the phone if the registrations of the
two accounts are identical. If the shares of the Fund were purchased by check,
the shares must have been present in an account for 15 days before the exchange
is made. The exchange privilege will only be available in states which permit
exchanges and may be modified or terminated by the Fund upon 60 days' written
notice to shareholders. For Federal income tax purposes, an exchange constitutes
a sale of shares, which may result in a capital gain or loss.
Federal Funds Wire. An investor may make initial or subsequent
investments by wiring federal funds to State Street Bank and Trust Company, as
Transfer Agent, by:
1. Telephoning the Customer Service Department at (800) 647-7327 between
the hours of 8 a.m. and 4 p.m. Eastern time, and stating: (a) the
investor's account registration number, address and social security or
tax identification number; (b) the name of the Fund in which the
investment is to be made and the account number; and (c) the amount
being wired.
2. Instructing the wiring bank to wire federal funds to:
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State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
ABA #0110-0002-8
DDA #9904-631-0
SSgA High Yield Bond Fund
Account Number and Registration
Failure to properly identify all wires, checks and transfers as
indicated above may cause the Transfer Agent to delay, reject and or incorrectly
apply the settlement of an investor's purchase.
Systematic Investment Plan. Investors can make regular investments in
the Fund with the Systematic Investment Plan by completing the appropriate
section of the Application and attaching a voided personal check. Investors may
make investments monthly, quarterly or annually by deducting $100 or more from
their bank checking accounts. An investor may change the amount or stop
systematic purchase at any time by calling the Customer Service Department at
(800) 647-7327. Investors must meet the Fund's minimum initial requirement
before establishing the Systematic Investment Plan. Shares will be purchased at
the offering price next determined following receipt of the order by the
Transfer Agent.
Systematic Exchange. The Fund offers the option of having a set amount
exchanged within the SSgA Funds for accounts with identical registrations.
Investors can choose the date, the frequency (monthly, quarterly or annually)
and the amount. Exchanges may be done among the SSgA Funds once the initial
investment per Fund has been satisfied.
Third Party Transactions. Investors purchasing Fund shares through a
program of services offered by a financial intermediary, such as a bank,
broker-dealer, investment advisor or others, may be required by the intermediary
to pay additional fees. Investors should contact the intermediary for
information concerning what additional fees, if any, may be charged.
In Kind Exchange of Securities. The Transfer Agent may, at its
discretion, permit investors to purchase shares through the exchange of
securities they hold. Any securities exchanged must meet the investment
objective, policies and limitations of the Fund, must have a readily
ascertainable market value, must be liquid and must not be subject to
restrictions on resale. The market value of any securities exchanged, plus any
cash, must be at least $10 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 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.
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 by following one of
the methods described below. Typically, payments 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. Payment for redemption of shares by check
may be withheld for up to 15 days after the date or purchase to assure that the
check is honored.
Redemption requests must be received prior to 4:00 p.m. Eastern time in
order be effective on the date received. Shareholder servicing agents with
underlying shareholders in omnibus accounts who receive redemption requests by
4:00 p.m. Eastern time may transmit the request to the Transfer Agent by 9:00
a.m. Eastern time the next business day and receive the dividend as of the day
the redemption request was originally made by the underlying shareholder.
Telephone Redemption. Shareholders may normally redeem Fund shares by
telephoning the Customer Service Department at (800) 647-7327 between 8:00 a.m.
and 4:00 p.m. Eastern time. Shareholders must complete the appropriate section
of the application and attach a voided check (if applicable) before utilizing
this feature. The Fund and the Transfer
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<PAGE>
Agent will employ reasonable procedures to confirm that instructions
communicated by telephone are properly authorized. The Fund and the Transfer
Agent will not be liable for executing instructions that are deemed to be
authorized after following reasonable procedures. These procedures include
recording telephonic instructions, mailing to the shareholder a written
confirmation of the transaction, performing a personal identity test with
private information not likely to be known by other individuals, and restricting
mailing of redemptions to the shareholder's address of record, if the address
has not been changed within 60 days of the redemption request.
By Wire. Proceeds exceeding $1,000 may be sent via wire transfer to the
investor's pre-designated bank. Proceeds may be sent, depending on the Fund, on
the same or the next day. Although the Fund does not charge a fee for this
feature, the investor's bank may charge a fee for receiving the wire. Investors
are advised to check with their bank before requesting this feature. Requests
must be received prior to 4:00 p.m. The shares will be redeemed using that day's
closing price, and the proceeds will be wired the following business day.
Check. Proceeds less than $50,000 may be mailed only to the address
shown on the Transfer Agent's registration record, provided that the address has
not been changed within 60 days of the redemption request. Shares will be
redeemed using that day's closing price (NAV). All proceeds by check will
normally be sent the following business day.
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. In certain circumstances, a shareholder will need to make a
request to sell shares in writing (please use the addresses for purchases by
mail listed under "Purchase of Fund Shares"). The shareholder may need to
include additional items with the request, as shown in the table below.
Shareholders may need to include a signature guarantee, which protects them
against fraudulent orders. A signature guarantee will be required if:
1. The shareholder's address of record has changed within the past 60 days;
2. The shareholder is redeeming more than $50,000 worth of shares; or
3. The shareholder is requesting payment other than by a check mailed to
the address of record and payable to the registered owner(s).
Signature guarantees can usually be obtained from the following
sources:
1. A broker or securities dealer, registered with a domestic stock
exchange;
2. A federal savings, cooperative or other type of bank;
3. A savings and loan or other thrift institution;
4. A credit union; or
5. A securities exchange or clearing agency.
Please check with the institution prior to signing to ensure that they
are an acceptable signature guarantor. A NOTARY PUBLIC CANNOT PROVIDE A
SIGNATURE GUARANTEE.
-15-
<PAGE>
<TABLE>
<CAPTION>
Seller Requirements for Written Requests
<S> <C> <C>
Owner of individual, joint, sole o Letter of instruction, signed by all persons authorized to sign for the
proprietorship, UGMA/UTMA (custodial account stating general titles/capacity, exactly as the account is
accounts for minors) or general partner registered; and
accounts o Signature guarantee, if applicable (see above).
Owners of corporate or association accounts o Letter of instruction signed by authorized person(s), stating capacity as
indicated by the corporate resolution;
o Corporate resolution, certified within the past 90 days; and
o Signature guarantee, if applicable (see above).
Owners or trustees of trust accounts o Letter of instruction, signed by all trustees;
o If the trustees are not named in the registration, please provide a copy of
the trust document certified within the past 60 days; and
o Signature guarantee, if applicable (see above).
Joint tenancy shareholders whose co-tenants are o Letter of instruction signed by surviving tenant(s);
deceased o Certified copy of the death certificate; and
o Signature guarantee, if applicable (see above).
</TABLE>
Please contact the Customer Service Department at (800) 647-7327 for
questions and further instructions.
The Fund may pay any portion of the redemption amount in excess of
$250,000 by a distribution in kind of readily marketable securities from the
portfolio of the Fund in lieu of cash. Investors will incur brokerage charges on
the sale of these portfolio securities. The Funds reserve the right to suspend
the right of redemption or postpone the date of payment if emergency conditions,
as specified in the 1940 Act or as determined by the Securities and Exchange
Commission, should exist.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs
of the Fund and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
Advisory Agreement. The Investment Company employs State Street, through its
division State Street Global Advisors, 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
Global Advisors is the investment management business of State Street, a 200
year old pioneer and leader in the world of financial services. State Street is
a wholly owned subsidiary of State Street Corporation, a publicly held bank
holding company. State Street, with over $458 billion (US) under management as
of April 15, 1998, provides complete global investment management services from
offices in Atlanta, Boston, Brussels, Copenhagen, Dubai, Hong Kong, London,
Minneapolis, Montpellier, Montreal, Munich, Paris, San Francisco, Sydney, Tokyo,
and Toronto.
Advisor, 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 Bruce Walbridge, Vice President. Mr. Walbridge has been
with State Street since March 1987. Before joining the Fixed Income group in
July 1993 as a credit analyst, Mr. Walbridge was an assistant portfolio manager
in the International Equity group. Prior to the launch of the SSgA High Income
Bond Fund, he managed several domestic bond portfolios including the $4 billion
Flagship Government/Corporate Bond Fund. Utilizing his credit analysis
background, Mr. Walbridge's focus over the last four and a half years has been
on corporate bond analysis and trading. There are three other portfolio managers
who assist in managing the Fund. For these services, the Fund pays Advisor 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 Advisor from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Advisor in informing its
customers of the Fund, performing investment and redemption services and
providing custodian, transfer, shareholder servicing, dividend
-16-
<PAGE>
disbursing and investment advisory services may raise issues under these
provisions. Advisor 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 Advisor from continuing to perform all or a part of
the above services for its customers and/or the Fund. If Advisor 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 Advisor that
existing shareholders would suffer any adverse financial consequences (if
another advisor with equivalent abilities is found) as a result of any of these
occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit the
use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street, who retains voting control of them. As of April 15, 1998, State Street
held of record less than 25% of the issued and outstanding shares of Investment
Company in connection with its discretionary accounts. Consequently, State
Street is not deemed to be a controlling person of Investment Company for
purposes of the 1940 Act.
Under the Advisor's Code of Ethics, the Advisor's employees in Boston
(where investment management operations are conducted) who are deemed to have
access to management information are only permitted to engage in personal
securities transactions which do not involve securities which the Advisor 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 Advisor.
Administration Agreement. Frank Russell Investment Management Company
("Administrator") serves as administrator of the Fund. Administrator currently
serves as investment manager and administrator to 32 mutual funds with assets of
$13.4 billion as of April 15, 1998, and acts as administrator to 23 mutual
funds, including the Fund, with assets of $13.6 billion as of April, 1998.
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 High
Yield Bond 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 High Yield Bond 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 certain maximum
percentages, as follows: (1) 10% from January 1, 1997 to December 31, 1997; 5%
from January 1, 1998 to December 31, 1998; and (3) 0% from January 1, 1999
thereafter.
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.
-17-
<PAGE>
Distribution Services and Shareholder Servicing. Pursuant to the
Distribution Agreement with Investment Company, 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) payments made to certain broker-dealers, investment
advisors and other third-party intermediaries; (2) the costs of prospectuses,
reports to shareholders and sales literature; (3) advertising; and (4) 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 Advisor ("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.
The Investment Company has entered into Service Agreements with the
Advisor and the following entities related to the Advisor: State Street
Brokerage Services, Inc., Metropolitan Division of Commercial Banking,
Retirement Investment Services Division and State Street Solutions. The purpose
of the Service Agreements is to obtain shareholder services for Fund shares
owned by clients of each of these entities. In return for these services, the
Investment Company pays each of the entities a fee. These agreements are
reviewed annually by the Board of Trustees.
Payments to Distributor, as well as payments to Service Organizations,
are not permitted by the Plan to exceed .25% of the Fund's average net asset
value per year. Any payments that are required to be made by the Distribution
Agreement and any Service Agreement but could not be made because of the .25%
limitation may be carried forward and paid in subsequent years so long as the
Plan is in effect. The Fund's liability for any such expenses carried forward
shall terminate at the end of two years following the year in which the
expenditure was incurred. Service Organizations will be responsible for prompt
transmission of purchase and redemption orders and may charge fees for their
services.
FUND EXPENSES
The Fund will pay all of its expenses other than those expressly
assumed by Advisor and Administrator. The principal expenses of the Fund are the
annual advisory fee payable to Advisor 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 Advisor or any of its affiliates; (11)
insurance, interest, brokerage and litigation costs; (12) extraordinary expenses
as may arise, including expenses incurred in connection with litigation
proceedings and claims and the legal obligations of Investment Company to
indemnify its Trustees, officers, employees, shareholders, distributors and
agents; and (13) other expenses properly payable by the Fund.
-18-
<PAGE>
PERFORMANCE CALCULATIONS
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., Morningstar, Wall Street Journal Score Card, Lehman Brothers
High Yield Bond 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, total returns and other performance figures are based on
historical earnings and are not indications of future performance.
ADDITIONAL INFORMATION
Custodian, Transfer Agent and Independent Accountants. State Street
holds all portfolio securities and cash assets of the Fund, provides portfolio
recordkeeping services and serves as the Fund's transfer agent ("Transfer
Agent") and custodian ("Custodian"). State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Fund except as investment advisor. 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, financial statements or shareholder balances
may be made by calling Distributor 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 High Yield Bond 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.
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<PAGE>
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.
-20-
<PAGE>
SSgA FUNDS
One International Place
Boston, Massachusetts 02110
INVESTMENT ADVISOR, CUSTODIAN, AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
One International Place
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
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<PAGE>
SSgA FUNDS
SSgA Money Market Fund
SSgA US Government Money Market Fund
SSgA Tax Free Money Market Fund
SSgA S&P 500 Index Fund
SSgA Small Cap Fund
SSgA Special Small Cap Fund
SSgA Matrix Equity Fund
SSgA Yield Plus Fund
SSgA Growth and Income Fund
SSgA Intermediate Fund
SSgA Active International Fund
SSgA Emerging Markets Fund
SSgA Bond Market Fund
SSgA Life Solutions Growth Fund
SSgA Life Solutions Balanced Fund
SSgA Life Solutions Income and Growth Fund
SSgA International Growth Opportunities Fund
SSgA High Yield Bond Fund
SSgA Real Estate Equity Fund
-22-
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
SSgA FUNDS
One International Place
Boston, Massachusetts 02110
(800) 647-7327
REAL ESTATE EQUITY FUND
The SSgA Funds is a registered, open-end management investment company
with multiple portfolios, each of which is commonly referred to as a mutual
fund. This Prospectus describes and offers shares of beneficial interest in one
mutual fund, the SSgA Real Estate Equity Fund (the "Real Estate Equity Fund" or
the "Fund"). The Real Estate Equity Fund seeks to provide income and capital
growth by investing primarily in publicly traded securities of real estate
companies. The Fund's shares are offered without sales commissions. However, the
Fund pays certain distribution expenses under its Rule 12b-1 plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SHARES IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, STATE STREET BANK AND TRUST COMPANY, AND SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY, AND INVOLVE INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. Please read and retain this
document for future reference. Additional information about the SSgA Funds has
been filed with the Securities and Exchange Commission ("SEC") in Statements of
Additional Information ("SAI") dated April 28, 1998. The SAI is incorporated
herein by reference and is available without charge from Distributor at its
address noted below or by calling (800) 647-7327. The SEC also maintains a
website (www.sec.gov) that contains the SAI, material incorporated by reference
and other information regarding the SSgA Funds. You may also access the SSgA
Funds' website at www.ssgafunds.com.
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Advisor, Custodian Distributor: Administrator:
and Transfer Agent: Frank Russell Investment
State Street Bank and Trust Russell Fund Distributors, Inc. Management Company
Company One International Place 909 A Street
225 Franklin Street Boston, Massachusetts 02110 Tacoma, Washington 98402
Boston, Massachusetts 02110
</TABLE>
PROSPECTUS DATED APRIL 28, 1998
<PAGE>
TABLE OF CONTENTS
Page
Fund Operating Expenses.............................................. 3
The SSgA Funds....................................................... 4
Manner of Offering................................................... 4
Investment Objective, Policies and Restrictions...................... 4
Risk Factors......................................................... 8
Portfolio Turnover................................................... 8
Dividends and Distributions.......................................... 8
Taxes................................................................ 9
Valuation of Fund Shares............................................. 9
Purchase of Fund Shares.............................................. 10
Redemption of Fund Shares............................................ 12
General Management................................................... 14
Fund Expenses........................................................ 17
Performance Calculations............................................. 17
Additional Information............................................... 18
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<PAGE>
FUND OPERATING EXPENSES AFTER FEE WAIVER
SSgA REAL ESTATE EQUITY FUND
The purpose of the following table is to assist the investor in understanding
the various costs and expenses that an investor in the Real Estate Equity Fund
will incur directly or indirectly. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. For additional information, see "General Management."
Shareholder Transaction Expenses:
- ---------------------------------
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses:
- -------------------------------
(as a percentage of average daily net assets)
Advisory Fees (After Fee Waiver)(1) .39%
12b-1 Distribution and Shareholder Servicing Fees(1),(2),(3) .05
Other Expenses(1),(2) .56
---
Total Operating Expenses (After Fee Waiver)(1),(4) 1.00%
=====
Examples: 1 year 3 years
- -------- ------ -------
You would pay the following expenses on
a $1,000 investment, assuming: (i) 5%
annual return; and (ii) redemption at
the end of each time period: $10 $32
=== ===
- -------------------------
(1) The Advisor voluntarily agrees to waive up to the full amount of its
Advisory fee of .65% to the extent that total expenses exceed 1.00% on
an annual basis. The total operating expenses of the Fund absent fee
waiver would be 1.26% of average daily net assets on an annual basis.
The Advisory fee waiver will be in effect for the current fiscal year.
(2) The ratios for 12b-1 distribution and shareholder servicing fees and
other expenses are based on estimated amounts for the current fiscal
year with expected annual average net assets of $20 million.
(3) The ratio inludes .02% for 12b-1 Distribution and .03% for 12b-1
Shareholder Servicing Fees.
(4) Investors purchasing Fund shares through a financial intermediary, such
as a bank or an investment advisor, may also be required to pay
additional fees for services provided by the intermediary. Such
investors should contact the intermediary for information concerning
what additional fees, if any, will be charged.
Long-term shareholders of the Fund may pay more in Rule 12b-1 fees than the
economic equivalent of the maximum front-end sales charges permitted by the
National Association of Securities Dealers, Inc.
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<PAGE>
THE SSgA FUNDS
The SSgA Funds ("Investment Company") is an open-end management investment
company that is organized as a Massachusetts business trust. In addition, each
series of the Investment Company is diversified as defined in the Investment
Company Act of 1940, as amended ("1940 Act"). As a "series" company, Investment
Company is authorized to issue an unlimited number of shares evidencing
beneficial interests in different investment portfolios. Through this
Prospectus, Investment Company offers shares in one such portfolio, the Real
Estate Equity Fund. State Street Bank and Trust Company ("Advisor" or "State
Street") serves as the investment advisor for the Fund.
MANNER OF OFFERING
Distribution and Eligible Investors. Shares of the Fund are offered
without a sales commission by Russell Fund Distributors, Inc. (the
"Distributor"), Investment Company's distributor, to US and foreign
institutional and retail investors that invest for their own account or in a
fiduciary or agency capacity. The Fund will incur distribution expenses under
its Rule 12b-1 plan. See "General Management -- Distribution Services and
Shareholder Servicing Arrangements."
INVESTMENT OBJECTIVE, POLICIES AND RESTRICTIONS
The Fund's non-fundamental investment objective is to provide income and
capital growth by investing primarily in publicly traded securities of real
estate companies. This objective may be changed without shareholder approval.
Shareholders would, however receive at least 60 days' prior notice of any change
to the Fund's investment objective. There can be no assurance that the Fund will
meet its stated investment objective.
Under normal market conditions, the Advisor will invest at least 65% of the
Fund's total assets in equity interests in Real Estate Investment Trust ("REIT")
securities contained in the Standard & Poor's REIT Index (the "S&P REIT Index").
The Fund will attempt to meet its objective through the active selection of REIT
securities, across different types and regions. The selection of investments
will be made based on the fundamental research that the Advisor conducts through
its strategy and research analyst team. Because the Fund will concentrate 25% or
more of its total assets in the real estate and real estate related industries,
the Fund will be subject to the risks associated with the direct ownership of
real estate. For a detailed discussion, please see "Risk Factors--Real Estate
Investments."
In addition to the equity securities of REITs, the Fund may invest up to
35% of its total assets in equity securities not contained in the S&P REIT
Index, including other domestic equity securities, fixed-income instruments,
cash, cash equivalents, futures and options, and special situations. See
"Investment Policies". The Fund may temporarily for defensive purposes, without
limitation, invest in certain short-term fixed income securities. Such
securities may be used to invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. See "Investment Policies -- Cash
Reserves."
S&P REIT Index. S&P launched the S&P REIT (Real Estate Investment Trust)
Index on June 26, 1997; modeled after the other highly regarded S&P Indexes. The
S&P REIT index consists of 100 REIT's and covers more than 80% of the
securitized real estate market. Each REIT security is carefully screened to
insure proper liquidity. Issues have to be traded on major US stock exchange to
qualify and must have a market value of at least $100 million. In addition to
requiring a high level of liquidity, Standard & Poor's also insists upon
stringent financial fundamentals for REIT's chosen to be in the Index.
Specifically, in order to qualify, a REIT must demonstrate a strong level of
earnings performance and a consistent record of paying dividends. The index is
comprised of three major types of REITS: equity, mortgage and hybrid. The index
also reflects the property distribution of the REIT marketplace. Roughly 25% of
the REIT's in the index are invested in retail properties such as shopping
malls, strip malls, and outlet centers. Another 23% of the index
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is in REIT's tied to residential properties, such as apartment buildings. Almost
16% of the index in securities invested is in industrial and office complexes.
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 Equity Securities. The Fund may invest in common and preferred equity
securities publicly traded in the United States. Common stocks represent an
ownership interest in a corporation. This ownership interest often gives the
Fund the right to vote on measures affecting the company's organization and
operations. Although common stocks have a history of long-term growth in value,
their prices tend to fluctuate in the short term, particularly those of smaller
companies.
Real Estate Investment Trusts. Equity REITs are defined as REITs with 75%
or greater of their gross invested book assets invested directly or indirectly
in the equity ownership of real estate, and their value depends upon that of the
underlying properties. Mortgage REITs are defined as REITs with 75% or more of
their gross invested book assets invested directly or indirectly in mortgages.
Mortgage trusts make construction, development or long-term mortgage loans, and
are sensitive to the credit quality of the borrower. Hybrid REITs are defined as
not meeting the equity or mortgage tests. The value of real estate investment
trusts is also affected by management skill, cash flow, and tax and regulatory
requirements. Investments in equity and mortgage REITs are subject to different
risk factors. See "Risk Factors."
Real Estate-Related Industries. In addition to real estate investment
trusts, real estate industry companies may include: brokers or real estate
developers; and companies with substantial real estate holdings, such as paper
and lumber producers and hotel and entertainment companies.
US Government Securities. US Government securities include US Treasury
bills, notes, and bonds and other obligations issued or guaranteed as to
interest and principal by the US Government and its agencies or
instrumentalities. Obligations issued or guaranteed as to interest and principal
by the US Government, its agencies or instrumentalities include securities that
are supported by the full faith and credit of the United States Treasury,
securities that are supported by the right of the issuer to borrow from the
United States Treasury, discretionary authority of the US Government agency or
instrumentality, and securities supported solely by the creditworthiness of the
issuer.
Lending Portfolio Securities. The Fund may lend portfolio securities with
a value of up to 33-1/3% of its total assets. For these purposes, total assets
shall include the value of all assets received as collateral for the loan. 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 Advisor 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.
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Cash Reserves. For the purpose of investing uncommitted cash balances or
to maintain liquidity to meet shareholder redemptions, the Fund may invest
temporarily and without limitation in high quality short-term fixed income
securities. These securities include obligations issued or guaranteed as to
principal and interest by the US Government, its agencies or instrumentalities
and repurchase agreements collateralized by these obligations, commercial paper,
bank certificates of deposit, bankers' acceptances and time deposits.
Securities Warrants. The Fund may invest up to 5% of its net assets in
warrants of foreign or domestic issuers. Included in such amount, but not to
exceed 2% of the value of the Fund's total net assets, may be warrants that are
not listed on a securities exchange. A warrant typically is a long term option
issued by a corporation which generally gives the holder the privilege of buying
a specified number of shares of the underlying common stock of the issuer at a
specified exercise price at any time on or before an expiration date. Stock
index warrants entitle the holder to receive, upon exercise, an amount in cash
determined by reference to fluctuations in the level of a specified stock index.
If the Fund does not exercise or dispose of a warrant prior to its expiration,
it will expire worthless.
Repurchase Agreements. The Fund may enter into repurchase agreements
with banks and other financial institutions, such as broker-dealers. Under a
repurchase agreement, a Fund purchases securities from a financial institution
that agrees to repurchase the securities at the Fund's original purchase price
plus interest within a specified time (normally one business day). The Fund will
limit repurchase transactions to those member banks of the Federal Reserve
System and broker-dealers whose creditworthiness Advisor considers satisfactory.
Should the counterparty to a transaction fail financially, the Fund may
encounter delay and incur costs before being able to sell the securities.
Further, the amount realized upon the sale of the securities may be less than
that necessary to fully compensate the Fund.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions." Under
a reverse repurchase agreement, the Fund sells portfolio securities to a
financial institution in return for cash in an amount equal to a percentage of
the portfolio securities' market value and agrees to repurchase the securities
at a future date at a prescribed repurchase price equal to the amount of cash
originally received plus interest on such amount. The Fund retains the right to
receive interest and principal payments with respect to the securities while
they are in the possession of the financial institutions. Reverse repurchase
agreements involve the risk of default by the counterparty, which may adversely
affect the Fund's ability to reacquire the underlying securities.
Illiquid Securities. The Fund will not invest more than 15% of its net
assets in illiquid securities or securities that are not readily marketable,
including repurchase agreements and time deposits of more than seven days'
duration. The absence of a regular trading market for illiquid securities
imposes additional risks on investments in these securities. Illiquid securities
may be difficult to value and may often be disposed of only after considerable
expense and delay.
Special Situations. The Fund may invest up to 25% of its net assets in
special situations involving real estate, including investments involving joint
ventures, real estate mortgage loans, and private placements, provided that in
no case will the Fund hold fee title in real estate.
Options on Securities and Securities Indices. The Fund may write and
purchase covered put and call options on securities in which it may directly
invest. Option transactions of the Fund will be conducted so that the total
amount paid on premiums for all put and call options outstanding will not exceed
5% of the value of the Fund's total net assets. Further, the Fund will not write
a put or call option or combination thereof if, as a result, the aggregate value
of all securities or collateral used to cover its outstanding options would
exceed 25% of the value of the Fund's total assets.
The Fund may purchase or sell options on securities indices that are
comprised of securities in which it may directly invest, subject to the
limitations set forth above and provided such options are traded on a national
securities exchange or in the over-the-counter market. Options on securities
indices are similar to options on securities except there is no transfer of a
security and settlement is in cash. A call option on a
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securities index grants the purchaser of the call, for a premium paid to the
seller, the right to receive in cash an amount equal to the difference between
the closing value of the index and the exercise price of the option times a
multiplier established by the exchange upon which the option is traded.
Futures Contracts and Options on Futures. For hedging purposes, including
protecting the price or interest rate of a security the Fund intends to buy, the
Fund may enter into futures contracts that relate to securities in which it may
directly invest and indices comprised of such securities and may purchase and
write call and put options on such contracts.
A financial futures contract is a contract to buy or sell a specified
quantity of financial instruments such as US Treasury bills, notes and bonds,
commercial paper and bank certificates of deposit or the cash value of a
financial instrument index at a specified future date at a price agreed upon
when the contract is made. A stock index futures contract is a contract to buy
or sell specified units of a stock index at a specified date at a price agreed
upon when the contract is made. The value of a unit is based on the current
value of the stock index. Under such contracts, no delivery of the actual
securities making up the index takes place. Rather, upon expiration of the
contract, settlement is made by exchanging cash in an amount equal to the
difference between the contract price and the closing price of the index at
expiration, net of variation margin previously paid.
Substantially all futures contracts are closed out before settlement date
or called for cash settlement. A futures contract is closed out by buying or
selling an identical offsetting futures contract. Upon entering into a futures
contract, the Fund is required to deposit an initial margin with Custodian for
the benefit of the futures broker. The initial margin serves as a "good faith"
deposit that the Fund will honor its futures commitment. Subsequent payments
(called "variation margin") to and from the broker are made on a daily basis as
the price of the underlying investment fluctuates.
Options on futures contracts give the purchaser the right to assume a
position at a specified price in a futures contract at any time before
expiration of the option contract.
When trading futures contracts, the Fund will not commit more than 5% of
the market value of its total assets to initial margin deposits on futures and
premiums paid for options on futures.
Equity Swaps. Equity swap agreements are contracts between parties in
which one party agrees to make payments to the other party based on the change
in market value of a specified index or asset. In return, the other party agrees
to make payments to the first party based on the return of a different specified
index or asset. Although swap agreements entail the risk that a party will
default on its payment obligations, the portfolios will minimize this risk by
entering into agreements only with counterparties that the Advisor deems
creditworthy. Swap agreements also bear the risk that the portfolios will not be
able to meet their obligation to the counterparty. This risk will be mitigated
by investing the portfolios in the specific asset for which it is obligated to
pay a return.
Purchase of Other Funds. To the extent permitted under the 1940 Act and
exemptive rules and orders thereunder, the Fund may seek to achieve its
investment objective by investing solely in the shares of another investment
company that has substantially similar investment objectives and policies.
Investment Restrictions
The Fund has fundamental investment restrictions, which may be changed
only with the approval of a majority of the Fund's shareholders as defined in
the 1940 Act. A more detailed discussion of the Fund's investment restrictions
and investment policies appears in the Statement of Additional Information.
Unless otherwise noted, the investment restrictions apply at the time an
investment is made. The Fund may not:
1. Invest 25% or more of the value of its total assets in securities
of companies primarily engaged in any one industry (other than
the US Government, its agencies or instrumentalities, except
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that the Fund may invest 25% or more of its total assets in real
estate-related industries described under "Investment Policies").
Concentration may occur as a result of changes in the market
value of portfolio securities, but may not result from
investment.
2. Borrow money (including reverse repurchase agreements), except as
a temporary measure for extraordinary or emergency purposes or to
facilitate redemptions (not for leveraging or investment),
provided that borrowings do not exceed an amount equal to 33-1/3%
of the current value of the Fund's assets taken at market value,
less liabilities other than borrowings. If at any time a Fund's
borrowings exceed this limitation due to a decline in net assets,
such borrowings will within three days be reduced to the extent
necessary to comply with this limitation. A Fund will not
purchase investments once borrowed funds (including reverse
repurchase agreements) exceed 5% of its total assets.
3. Pledge, mortgage, or hypothecate its assets. However, a Fund may
pledge securities having a market value at the time of the pledge
not exceeding 33-1/3% of the value of the Fund's total assets to
secure permitted borrowings.
RISK FACTORS
Futures Contracts and Options on Futures. There are certain investment
risks in using futures contracts and options as a hedging technique. Such risks
may include: (1) the inability to close out a futures contract or option caused
by the nonexistence of a liquid secondary market; and (2) an imperfect
correlation between price movements of the futures contracts or option with
price movements of the portfolio securities or securities index subject to the
hedge. The successful use of options and futures also depends on Advisor's
ability to correctly predict price movements in the market involved in a
particular options or futures transaction.
Real Estate Investments. Real estate investments are sensitive to
conditions affecting the real estate industry, including declines in the value
of real estate, risks related to general and local economic conditions,
overbuilding and increased competition, increases in property taxes and
operating expenses, changes in neighborhood values, the appeal of properties to
tenants, rental income issues and increases in interest rates. In addition,
equity real estate investment trusts may be affected by changes in the value of
the underlying property owned by the trust, while mortgage real estate
investment trusts may be affected by the quality of any credit extended.
Moreover, the underlying portfolios of equity and mortgage real estate trusts
may not be diversified, and are therefore subject to the risk of financing a
single or a limited number of projects. Such trusts are also dependent upon
management skills and are subject to heavy cash flow dependence, defaults by
borrowers, self-liquidation and the possibility of failing to qualify for
tax-free pass-through of income under the Internal Revenue Code and to maintain
exemption from the 1940 Act. The value of securities of companies which service
the real estate industry may also be affected by these risks.
PORTFOLIO TURNOVER
The portfolio turnover rate cannot be predicted, but it is anticipated
that the Fund's annual turnover rate generally will not exceed 50%.
The Fund may effect portfolio transactions through State Street Brokerage
Services, Inc. an affiliate of the Advisor, when the Advisor determines that the
Fund will receive competitive execution, price and commissions.
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DIVIDENDS AND DISTRIBUTIONS
The Board of Trustees intends to declare and pay dividends on shares of the
Fund quarterly from net investment income. The Board of Trustees intends to
declare distributions annually from net short-term capital gains and from net
20% or 28% 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 the 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 for Federal income tax
purposes 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 dividend and capital gain 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 30 days' written notice to the Transfer Agent. If it is determined that
the US Postal Service cannot properly deliver Fund mailings to an investor, the
Fund will terminate the investor's election to receive dividends and other
distributions in cash. Thereafter, subsequent dividends and other distributions
will be automatically reinvested in additional shares of the relevant Fund until
the investor notifies the SSgA Funds in writing of the correct address and
request in writing that the election to receive dividends and other
distributions in cash be reinstated.
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.
Distribution Option. Investors can choose from four different
distribution options as indicated on the account Application:
o Reinvestment Option--Dividends and capital gains distributions will be
automatically reinvested in additional shares of the Fund. If the
investor does not indicate a choice on the Application, this option
will be automatically assigned.
o Income-Earned Option--Capital gain distributions will be automatically
reinvested, but a check or wire will be sent for each dividend
distribution.
o Cash Option--A check or wire will be sent for each dividend and
capital gain distribution.
o Direct Dividends Option--Dividends and capital gain distribution will
be automatically invested in another identically registered SSgA Fund.
Distributions will be sent to a pre-designated bank by the Automatic
Clearing House ("ACH") on the payable date.
TAXES
The Fund intends to qualify 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 subject to federal income taxes to the
extent it distributes its net investment income and net capital gain (long-term
capital gains in excess of short-term capital losses) to its shareholders. The
Board intends to distribute each year substantially all of the Fund's net
investment income and net capital gains.
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 20% gains and 28% gains are taxable as 20% gains or 28% gains regardless of
the length of time a shareholder has held such shares and whatever paid in cash
or additional shares.
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Dividends and distributions may also be subject to state or local taxes.
Depending on the state tax rules pertaining to a shareholder, a portion of the
dividends paid by the Fund attributable to direct obligations of the US Treasury
and certain agencies may be exempt from state and local taxes.
The sale of Fund shares by a shareholder is a taxable event and may result
in capital gain or loss. A capital gain or loss may be realized from an ordinary
redemption of shares or an exchange of shares between two mutual funds (or two
series of portfolios of a mutual fund). Any loss incurred on the sale or
exchange of Fund shares held for one year or more will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares.
Shareholders will be notified after each calendar year of the amounts of
income dividends and net capital gains distributions and the percentage of the
Fund's income attributable to US Treasury and agency obligations. The Fund is
required to withhold a legally determined portion of all taxable dividends,
distributions, and redemption proceeds payable to any noncorporate shareholder
that does not provide the Fund with the shareholder's correct taxpayer
identification number or certification that the shareholder is not subject to
backup withholding.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax advisor.
VALUATION OF FUND SHARES
Net Asset Value Per Share. The Fund determines net asset value once each
business day as of the close of the regular trading session of the New York
Stock Exchange (ordinarily 4 p.m. Eastern time). A business day is one on which
the New York Stock Exchange is open for business. Net asset value per share is
computed by dividing the current value of the Fund's assets, less its
liabilities, by the number of shares of the Fund outstanding and rounding to the
nearest cent.
Valuation of Fund Securities. With the exceptions noted below, the Fund
values portfolio securities at market value. This generally means that equity
and fixed income securities listed and traded principally on any national
securities exchange are valued on the basis of the last sale price or, lacking
any sales, at the closing bid price, on the primary exchange on which the
security is traded. United States equity and fixed income securities traded
principally over-the-counter and options are valued on the basis of the last
reported bid price. Futures contracts are valued on the basis of the last
reported sale price.
Because many fixed income securities do not trade each day, last sale or
bid prices are frequently not available. Fixed income securities therefore may
be valued using prices provided by a pricing service when such prices are
determined by Custodian to reflect the market value of such securities.
Debt obligation securities maturing within 60 days of the valuation date
are valued at amortized cost unless the Board determines that the amortized cost
method does not represent market value. The amortized cost valuation procedure
initially prices an instrument at its cost and thereafter assumes a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price a Fund
would receive if it sold the instrument.
The Fund values securities for which market quotations are not readily
available at fair value, as determined in good faith pursuant to procedures
established by the Board of Trustees.
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PURCHASE OF FUND SHARES
Minimum Initial and Subsequent Investments and Account Balance. The
Fund requires a minimum initial investment of $1,000, with the exception of IRA
accounts, for which the minimum initial investment is $250. Subsequent
investments must be at least $100. An investment in the Fund (other than IRA
accounts) may be subject to redemption at the Fund's discretion if the account
balance is less than $1,000 as a result of shareholder redemptions. The Transfer
Agent will give shareholders 60 days' notice that the account will be closed
unless an investment is made to increase the account balance to the $1,000
minimum. Failure to bring the account balance to $1,000 may result in the
Transfer Agent closing the account at the net asset value ("NAV") next
determined on the day the account is closed and mailing the proceeds to the
shareholder's address shown on the Transfer Agent's records. The Fund reserves
the right to reject any purchase order. Investors purchasing Fund assets through
a pension or other participation plan should contact their plan administrator
for further information on purchases.
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 (described below) and payments for Fund shares in
Federal funds (or converted to Federal funds) must be received by the Transfer
Agent prior to 4:00 p.m. Eastern time to be effective on the date received. The
Fund reserves the right to reject any purchase order if payment for Fund shares
has not been received by the Transfer Agent prior to 4:00 p.m. Eastern time.
Order and Payment Procedures. There are several ways to invest in the
Fund. The Fund requires a purchase order in good form, which consists of a
completed and signed Application for each new account regardless of the
investment method. For additional information, including the IRA package,
additional Applications or other forms, call the Customer Service Department at
(800) 647-7327, or write: SSgA Funds, P.O. Box 8317, Boston, MA 02266-8317.
Mail. For new accounts, please mail the completed Application and check
in the return envelope provided. Additional investments should also be made by
check. Investors must include the Fund name and account number on their checks,
or use the remittance form attached to the confirmation statement (in the return
envelope provided). All checks should be made payable to the SSgA Funds (or in
the case of a retirement account, the check should be payable to the account's
custodian or trustee). All purchase requests should be mailed to one of the
following addresses:
Regular Mail: Registered, Express or Certified Mail:
SSgA Funds SSgA Funds
P.O. Box 8317 2 Heritage Drive
Boston, MA 02266-8317 North Quincy, MA 02171
All purchases made by check should be in US dollars from a US bank. Third
party checks and checks drawn on credit card accounts will not be accepted.
Normally, checks are converted to Federal funds within two business days
following receipt of the check. A purchase cannot be effective until Federal
funds are received. When purchases are made by check or periodic account
investment, payment for redemptions may be withheld until the check or account
clears, which may take up to 15 calendar days from the date of purchase.
Telephone Exchange Privilege. Subject to the Fund's minimum investment
requirement, investors may exchange a minimum of $100 of their Fund shares
without charge for shares of any other SSgA Fund. To use this option, contact
the Customer Service Department at (800) 647-7327. Shares are exchanged on the
basis of relative net asset value per share on the business day on which the
call is placed or upon written receipt of instructions in good form by the
Transfer Agent. Exchanges may be made over the phone if the registrations of the
two accounts are identical. If the shares of the Fund were purchased by check,
the shares must have been present in an account for 15 days before the exchange
is made. The exchange privilege will only be available in states which permit
exchanges and may be modified or terminated by the Fund upon 60
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days' written notice to shareholders. For Federal income tax purposes, an
exchange constitutes a sale of shares, which may result in a capital gain or
loss.
Federal Funds Wire. An investor may make initial or subsequent investments
by wiring federal funds to State Street Bank and Trust Company, as Transfer
Agent, by:
1. Telephoning the Customer Service Department at (800) 647-7327 between
the hours of 8 a.m. and 4 p.m. Eastern time, and stating: (a) the
investor's account registration number, address and social security or
tax identification number; (b) the name of the Fund in which the
investment is to be made and the account number; and (c) the amount
being wired.
2. Instructing the wiring bank to wire federal funds to:
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
ABA #0110-0002-8
DDA #9904-631-0
SSgA Real Estate Equity Fund
Account Number and Registration
Failure to properly identify all wires, checks and transfers as
indicated above may cause the Transfer Agent to delay, reject and or incorrectly
apply the settlement of an investor's purchase.
Systematic Investment Plan. Investors can make regular investments in
the Fund with the Systematic Investment Plan by completing the appropriate
section of the Application and attaching a voided personal check. Investors may
make investments monthly, quarterly or annually by deducting $100 or more from
their bank checking accounts. An investor may change the amount or stop
systematic purchase at any time by calling the Customer Service Department at
(800) 647-7327. Investors must meet the Fund's minimum initial requirement
before establishing the Systematic Investment Plan. Shares will be purchased at
the offering price next determined following receipt of the order by the
Transfer Agent.
Systematic Exchange. The Fund offers the option of having a set amount
exchanged within the SSgA Funds for accounts with identical registrations.
Investors can choose the date, the frequency (monthly, quarterly or annually)
and the amount. Exchanges may be done among the SSgA Funds once the initial
investment per Fund has been satisfied.
Third Party Transactions. Investors purchasing Fund shares through a
program of services offered by a financial intermediary, such as a bank,
broker-dealer, investment advisor or others, may be required by the intermediary
to pay additional fees. Investors should contact the intermediary for
information concerning what additional fees, if any, may be charged.
In Kind Exchange of Securities. The Transfer Agent may, upon consulting
with the advisor, permit investors to purchase shares through the exchange of
securities they hold. Any securities exchanged must meet the investment
objective, policies and limitations of the Fund, must have a readily
ascertainable market value, must be liquid and must not be subject to
restrictions on resale. The market value of any securities exchanged, plus any
cash, must be at least $10 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 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.
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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 by following one of
the methods described below. Typically, payments 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. Payment for redemption of shares by check
may be withheld for up to 15 days after the date or purchase to assure that the
check is honored.
Redemption requests must be received prior to 4:00 p.m. Eastern time in
order be effective on the date received. Shareholder servicing agents with
underlying shareholders in omnibus accounts who receive redemption requests by
4:00 p.m. Eastern time may transmit the request to the Transfer Agent by 9:00
a.m. Eastern time the next business day and receive the dividend as of the day
the redemption request was originally made by the underlying shareholder.
Telephone Redemption. Shareholders may normally redeem Fund shares by
telephoning the Customer Service Department at (800) 647-7327 between 8:00 a.m.
and 4:00 p.m. Eastern time. Shareholders must complete the appropriate section
of the application and attach a voided check (if applicable) before utilizing
this feature. The Fund and the Transfer Agent will employ reasonable procedures
to confirm that instructions communicated by telephone are properly authorized.
The Fund and the Transfer Agent will not be liable for executing instructions
that are deemed to be authorized after following reasonable procedures. These
procedures include recording telephonic instructions, mailing to the shareholder
a written confirmation of the transaction, performing a personal identity test
with private information not likely to be known by other individuals, and
restricting mailing of redemptions to the shareholder's address of record, if
the address has not been changed within 60 days of the redemption request.
By Wire. Proceeds exceeding $1,000 may be sent via wire transfer to the
investor's pre-designated bank. Proceeds may be sent, depending on the Fund, on
the same or the next day. Although the Fund does not charge a fee for this
feature, the investor's bank may charge a fee for receiving the wire. Investors
are advised to check with their bank before requesting this feature. Requests
must be received prior to 4:00 p.m. The shares will be redeemed using that day's
closing price, and the proceeds will be wired the following business day.
Check. Proceeds less than $50,000 may be mailed only to the address
shown on the Transfer Agent's registration record, provided that the address has
not been changed within 60 days of the redemption request. Shares will be
redeemed using that day's closing price (NAV). All proceeds by check will
normally be sent the following business day.
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. In certain circumstances, a shareholder will need to make a
request to sell shares in writing (please use the addresses for purchases by
mail listed under "Purchase of Fund Shares"). The shareholder may need to
include additional items with the request, as shown in the table below.
Shareholders may need to include a signature guarantee, which protects them
against fraudulent orders. A signature guarantee will be required if:
1. The shareholder's address of record has changed within the past 60 days;
2. The shareholder is redeeming more than $50,000 worth of shares; or
3. The shareholder is requesting payment other than by a check mailed to
the address of record and payable to the registered owner(s).
Signature guarantees can usually be obtained from the following
sources:
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<PAGE>
1. A broker or securities dealer, registered with a domestic stock
exchange;
2. A federal savings, cooperative or other type of bank;
3. A savings and loan or other thrift institution;
4. A credit union; or
5. A securities exchange or clearing agency.
Please check with the institution prior to signing to ensure that they
are an acceptable signature guarantor. A NOTARY PUBLIC CANNOT PROVIDE A
SIGNATURE GUARANTEE.
<TABLE>
<CAPTION>
Seller Requirements for Written Requests
<S> <C> <C>
Owner of individual, joint, sole proprietorship, o Letter of instruction, signed by all persons authorized to
UGMA/UTMA (custodial accounts for minors) or sign for the account stating general titles/capacity, exactly
general partner accounts as the account is registered; and
o Signature guarantee, if applicable (see above).
Owners of corporate or association accounts o Letter of instruction signed by
authorized person(s), stating capacity
as indicated by the corporate
resolution;
o Corporate resolution, certified within the
past 90 days; and
o Signature guarantee, if applicable (see
above).
Owners or trustees of trust accounts o Letter of instruction, signed by all trustees;
o If the trustees are not named in the registration, please
provide a copy of the trust document certified within the past
60 days; and
o Signature guarantee, if applicable (see above).
Joint tenancy shareholders whose co-tenants o Letter of instruction signed by surviving tenant(s);
are deceased o Certified copy of the death certificate; and
o Signature guarantee, if applicable (see above).
</TABLE>
Please contact the Customer Service Department at (800) 647-7327 for
questions and further instructions.
The Fund may pay any portion of the redemption amount in excess of
$250,000 by a distribution in kind of readily marketable securities from the
portfolio of the Fund in lieu of cash. Investors will incur brokerage charges on
the sale of these portfolio securities. The Funds reserve the right to suspend
the right of redemption or postpone the date of payment if emergency conditions,
as specified in the 1940 Act or as determined by the Securities and Exchange
Commission, should exist.
GENERAL MANAGEMENT
The Board of Trustees supervises the management, activities and affairs of
the Fund and has approved contracts with various financial organizations to
provide, among other services, day-to-day management required by the Fund.
Advisory Agreement. The Investment Company employs State Street, through
its division State Street Global Advisors, 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
Global Advisors is the investment management business of State Street, a 200
year old pioneer and leader in the world of financial services. State Street is
a wholly owned subsidiary of State Street Corporation, a publicly held bank
holding company. State Street, with over $458 billion (US) under management as
of April 15, 1998, provides complete global investment management services from
offices in Atlanta, Boston, Brussels,
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<PAGE>
Copenhagen, Dubai, Hong Kong, London, Minneapolis, Montpellier, Montreal,
Munich, Paris, San Francisco, Sydney, Tokyo, and Toronto.
Advisor, 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 Stephen P. Burke. Mr. Burke is Vice President of State Street Global
Advisors. Mr. Burke joined the firm in 1996. He is a member of the Strategy
Committee. Mr. Burke's responsibilities include management of Trust &
Investments fixed income and real estate investment trust groups. In this role
he actively manages fixed income and REIT portfolios. He also directs the
research effort on both products. Prior to joining SSgA, Mr. Burke worked for
eight years with an investment advisor where he managed fixed income assets for
individuals, banks, bank trust departments, and pension and profit sharing
accounts. He is a graduate of Boston College with a B.S. degree in Finance.
There will be four other portfolio managers working with Mr. Burke. For these
services, the Fund pays Advisor a fee, calculated daily and paid monthly as
described on the Fund's operating expense table.
The Glass-Steagall Act prohibits a depository state chartered bank such as
Advisor from engaging in the business of issuing, underwriting, selling or
distributing certain securities. The activities of Advisor 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. Advisor
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 Advisor from continuing to perform all or a part of
the above services for its customers and/or the Funds. If Advisor were
prohibited from serving the Funds in any of its present capacities, the Board of
Trustees would seek an alternative provider(s) of such services. In such event,
changes in the operation of the Fund may occur. It is not expected by Advisor
that existing shareholders would suffer any adverse financial consequences (if
another advisor with equivalent abilities is found) as a result of any of these
occurrences.
State Street may from time to time have discretionary authority over
accounts which invest in Investment Company shares. These accounts include
accounts maintained for securities lending clients and accounts which permit the
use of Investment Company portfolios as short-term cash sweep investments.
Shares purchased for all discretionary accounts are held of record by State
Street, who retains voting control of such shares. As of April 15, 1998, State
Street held of record less than 25% of the issued and outstanding shares of
Investment Company in connection with its discretionary accounts. Consequently,
State Street is not deemed to be a controlling person of Investment Company for
purposes of the 1940 Act.
Under State Street Global Advisor's Code of Ethics, State Street Global
Advisor's employees in Boston (where investment management operations are
conducted) who are deemed to have access to management information are only
permitted to engage in personal securities transactions which do not involve
securities which the Advisor 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
Advisor.
Administration Agreement. Frank Russell Investment Management Company
("Administrator") serves as administrator of the Fund. Administrator currently
serves as investment manager and administrator to 32 mutual funds with assets
of$13.4 billion as of April 15, 1998, and acts as administrator to 23 mutual
funds, including the Fund, with assets of $13.6 billion as of April 15, 1998.
-15-
<PAGE>
Pursuant to the Administration Agreement with the Investment Company,
the Administrator will: (1) supervise all aspects of the Funds' operations; (2)
provide the Funds with administrative and clerical services, including the
maintenance of certain of the Funds' books and records; (3) arrange the periodic
updating of the Funds' prospectuses and any supplements thereto; (4) provide
proxy materials and reports to Fund shareholders and the Securities and Exchange
Commission; and (5) provide the Funds with adequate office space and all
necessary office equipment and services, including telephone service, heat,
utilities, stationery supplies and similar items. For these services, the Real
Estate Equity Fund pays Administrator a fee that on an annual basis is equal to
the following percentages of each Fund's average daily net assets: $0 to and
including $500 million -- .06%; over $500 million to and including $1 billion --
.05%; and over $1 billion .03%. The percentage of the fee paid by a particular
Fund is equal to the percentage of average aggregate daily net assets that are
attributable to that Fund. Administrator will also receive reimbursement of
expenses it incurs in connection with establishing new investment portfolios.
Further, the administration fee paid by the Investment Company will be reduced
by the sum of certain distribution related expenses, up to certain maximum
percentages, as follows: (1) 10% from January 1, 1997 to December 31, 1997; 5%
from January 1, 1998 to December 31, 1998; and (3) 0% from January 1, 1999
thereafter.
Administrator also provides administrative services in connection with the
registration of shares of Investment Company with those states in which its
shares are offered or sold. Compensation for such services is on a time spent
basis. Investment Company will pay all registration, exemptive application,
renewal and related fees and reasonable out-of-pocket expenses.
Officers and employees of the Administrator and Distributor are
permitted to engage in personal securities transactions subject to restrictions
and procedures set forth in the Confidentiality Manual and Code of Ethics
adopted by the Investment Company, Administrator and Distributor. Such
restrictions and procedures include substantially all of the recommendations of
the Advisory Group of the Investment Company Institute and comply with
Securities and Exchange Commission rules and regulations.
Distribution Services and Shareholder Servicing Arrangements. Pursuant to
the Distribution Agreement with Investment Company, the Distributor, a wholly
owned subsidiary of Administrator, serves as distributor for all Fund shares.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the
"Plan") under the 1940 Act. The purpose of the Plan is to provide for the
payment of certain Investment Company distribution and shareholder servicing
expenses. Under the Plan, Distributor will be reimbursed in an amount up to .25%
of the Fund's annual average net assets for distribution-related and shareholder
servicing expenses. Payments under the Plan will be made to Distributor to
finance activity which is intended to result in the sale and retention of Fund
shares including: (1) payments made to certain broker-dealers, investment
advisors and other third-party intermediaries; (2) the costs of prospectuses,
reports to shareholders and sales literature; (3) advertising; and (4) 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 Advisor ("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,
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<PAGE>
for shareholder servicing, monthly fees at a rate that shall not exceed .20% per
annum of the average daily net asset value of the Fund's shares owned by or for
shareholders with whom the Service Organization has a servicing relationship.
Banks and other financial service firms may be subject to various state laws,
and may be required to register as dealers pursuant to state law.
The Investment Company has entered into Service Agreements with the
Advisor and the following entities related to the Advisor: State Street
Brokerage Services, Inc., Metropolitan Division of Commercial Banking,
Retirement Investment Services Division and State Street Solutions. The purpose
of the Service Agreements is to obtain shareholder services for Fund shares
owned by clients of each of these entities. In return for these services, the
Investment Company pays each of the entities a fee. These agreements are
reviewed annually by the Board of Trustees.
Payments to the Distributor, as well as payments to Service Organizations
from the Fund are not permitted by the Plan to exceed .25% of the Fund's average
net asset value per year. Any payments that are required to be made by the
Distribution Agreement and any Service Agreement but could not be made because
of the .25% limitation may be carried forward and paid in subsequent years so
long as the Plan is in effect. A Fund's liability for any such expenses carried
forward shall terminate at the end of two years following the year in which the
expenditure was incurred. Service Organizations will be responsible for prompt
transmission of purchase and redemption orders and may charge fees for their
services.
FUND EXPENSES
The Fund will pay all of its expenses other than those expressly assumed
by the Advisor and the Administrator. The principal expenses of the Fund are the
annual advisory fee payable to Advisor 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 Advisor or any of its affiliates; (11)
insurance, interest, brokerage and litigation costs; (12) extraordinary expenses
as may arise, including expenses incurred in connection with litigation
proceedings and claims and the legal obligations of Investment Company to
indemnify its Trustees, officers, employees, shareholders, distributors and
agents; and (13) other expenses properly payable by the Fund.
PERFORMANCE CALCULATIONS
The Fund may from time to time advertise its yield. Yield, which is based
on historical earnings and is not intended to indicate future performance, is
calculated by dividing the net investment income per share earned during the
most recent 30-day (or one-month) period by the maximum offering price per share
on the last day of the period. This income is then annualized. That is, the
amount of income generated by the investment during that 30-day period is
assumed to be generated each month over a 12-month period and is shown as a
percentage of the investment. For purposes of the yield calculation, interest
income is computed based on the yield to maturity of each debt obligation, and
dividend income is computed based upon the stated dividend rate of each security
in the Fund's portfolio. The calculation includes all recurring fees that are
charged to all shareholder accounts.
From time to time the Fund may advertise its total return. The total
return of a Fund refers to the average annual compounded rates of return from a
hypothetical investment in the Fund over one-, five- and ten-year periods or for
the life of the Fund (as stated in the advertisement), assuming the reinvestment
of all
-17-
<PAGE>
dividend and capital gains distributions and includes all recurring fees that
are charged to all shareholder accounts.
Comparative performance information may be used from time to time in
advertising or marketing Fund shares, including data from Lipper Analytical
Services, Inc., Wall Street Journal Score Card, Lipper Real Estate Funds
Average, the Consumer Price Index, or other industry publications, business
periodicals, rating services and market indices. The Fund may also advertise
nonstandardized performance information which is for periods in addition to
those required to be presented.
Quoted yields, returns and other performance figures are based on
historical earnings and are not indications of future performance.
ADDITIONAL INFORMATION
Custodian, Transfer Agent and Independent Accountants. State Street holds
all portfolio securities and cash assets of the Fund, provides portfolio
recordkeeping services and serves as the Fund's transfer agent ("Transfer
Agent") and custodian ("Custodian"). State Street is authorized to deposit
securities in securities depositories or to use the services of subcustodians.
State Street has no responsibility for the supervision and management of the
Fund except as investment advisor. Coopers & Lybrand L.L.P., Boston,
Massachusetts, is Investment Company's independent accountants.
Reports to Shareholders and Shareholder Inquiries. Shareholders will
receive an unaudited semiannual financial statement and an annual financial
statement audited by Investment Company's independent accountants. Shareholder
inquiries regarding the Prospectus, financial statements and shareholder
balances may be made by calling Distributor at (800) 647-7327.
Organization, Capitalization and Voting. Investment Company was organized
as a Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement dated October 13, 1993, as amended.
Investment Company issues shares divisible into an unlimited number of
series (or funds), each of which is a separate trust under Massachusetts law.
The Real Estate Equity Fund is one such series.
Fund shares represent an equal proportionate interest in the Fund, have a
par value of $.001 per share and are entitled to such relative rights and
preferences and dividends and distributions earned on the assets belonging to
the Fund as may be declared by the Board of Trustees. Fund shares are fully paid
and nonassessable by Investment Company and have no preemptive rights.
Each Fund share has one vote. There are no cumulative voting rights. There
is no annual meeting of shareholders, but special meetings may be held. On any
matter that affects only a particular investment fund, only shareholders of that
fund vote unless otherwise required by the 1940 Act or the Master Trust
Agreement. The Trustees hold office for the life of the Trust. A Trustee may
resign or retire, and a Trustee may be removed at any time by a vote of
two-thirds of the Investment Company shares or by a vote of a majority of the
Trustees. The Trustees shall promptly call and give notice of a meeting of
shareholders for the purpose of voting upon removal of any Trustee when
requested to do so in writing by holders of not less than 10% of the shares then
outstanding. A vacancy on the Board of Trustees may be filled by the vote of a
majority of the remaining Trustees, provided that immediately thereafter at
least two-thirds of the Trustees have been elected by shareholders.
Investment Company does not issue share certificates for the Fund. Transfer
Agent sends Fund shareholders statements concurrent with any transaction
activity, confirming all investments in or redemptions from their accounts. Each
statement also sets forth the balance of shares held in the account.
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<PAGE>
SSgA FUNDS
One International Place
Boston, Massachusetts 02110
INVESTMENT ADVISOR, CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
DISTRIBUTOR
Russell Fund Distributors, Inc.
One International Place
Boston, Massachusetts 02110
ADMINISTRATOR
Frank Russell Investment Management Company
909 A Street
Tacoma, Washington 98402
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, Massachusetts 02109
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<PAGE>
SSgA FUNDS
SSgA Money Market Fund
SSgA US Government Money Market Fund
SSgA Tax Free Money Market Fund
SSgA S&P 500 Index Fund
SSgA Small Cap Fund
SSgA Special Small Cap Fund
SSgA Matrix Equity Fund
SSgA Yield Plus Fund
SSgA Growth and Income Fund
SSgA Intermediate Fund
SSgA Active International Fund
SSgA Emerging Markets Fund
SSgA Bond Market Fund
SSgA Life Solutions Growth Fund
SSgA Life Solutions Balanced Fund
SSgA Life Solutions Income and Growth Fund
SSgA International Growth Opportunities Fund
SSgA High Yield Bond Fund
SSgA Real Estate Equity Fund
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<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
SSgA FUNDS
One International Place
Boston, Massachusetts 02110
(800) 647-7327
STATEMENT OF ADDITIONAL INFORMATION
SPECIAL SMALL CAP FUND
APRIL 28, 1998
SSgA Funds ("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 SSgA Special Small Cap Fund (the
"Fund") as contained in the Fund's Prospectus dated April 28, 1998. This
Statement is not a Prospectus and should be read in conjunction with the Fund's
Prospectus, which may be obtained by telephoning or writing Investment Company
at the number or address shown above.
<PAGE>
TABLE OF CONTENTS
Page
----
Structure and Governance............................................ 3
Organization and Business History.......................... 3
Shareholder Meetings....................................... 4
Controlling Shareholders................................... 4
Principal Shareholders..................................... 4
Trustees and Officers...................................... 4
Operation of Investment Company..................................... 6
Service Providers ........................................ 6
Advisor .................................................. 6
Administrator.............................................. 7
Distributor................................................ 7
Custodian and Transfer Agent............................... 7
Independent Accountants.................................... 7
Distribution Plan ........................................ 7
Federal Law Affecting State Street......................... 8
Valuation of Fund Shares................................... 8
Brokerage Practices........................................ 9
Portfolio Turnover Rate.................................... 10
Total Return Quotations.................................... 10
Investments......................................................... 10
Investment Restrictions.................................... 10
Investment Policies........................................ 12
Hedging Strategies and Related Investment Techniques....... 14
Certain Risk Factors....................................... 18
Taxes ........................................................... 18
Financial Statements................................................ 20
Appendix: Description of Securities Ratings........................ 21
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<PAGE>
STRUCTURE AND GOVERNANCE
Organization and Business History. Investment Company was organized as a
Massachusetts business trust on October 3, 1987, and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series, one of
which is the Fund. The Investment Company share evidences pro rata ownership
interest in a different investment portfolio, or "Fund." The Fund is one such
investment portfolio. The Trustees may create additional Funds at any time
without shareholder approval.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth below the portfolio's name:
------------------------------------------------------------------------------
SSgA Money Market Fund May 2, 1988
------------------------------------------------------------------------------
SSgA US Government Money Market Fund March 1, 1991
------------------------------------------------------------------------------
SSgA Matrix Equity Fund May 4, 1992
------------------------------------------------------------------------------
SSgA Small Cap Fund July 1, 1992
------------------------------------------------------------------------------
SSgA Yield Plus Fund November 9, 1992
------------------------------------------------------------------------------
SSgA S&P 500 Index Fund December 30, 1992
------------------------------------------------------------------------------
SSgA Growth and Income Fund September 1, 1993
------------------------------------------------------------------------------
SSgA Intermediate Fund September 1, 1993
------------------------------------------------------------------------------
SSgA US Treasury Money Market Fund December 1, 1993
------------------------------------------------------------------------------
SSgA Prime Money Market Fund February 22, 1994
------------------------------------------------------------------------------
SSgA Emerging Markets Fund March 1, 1994
------------------------------------------------------------------------------
SSgA Tax Free Money Market Fund December 1, 1994
------------------------------------------------------------------------------
SSgA Active International Fund March 7, 1995
------------------------------------------------------------------------------
SSgA Bond Market Fund February 7, 1996
------------------------------------------------------------------------------
SSgA Life Solutions Balanced Fund July 1, 1997
------------------------------------------------------------------------------
SSgA Life Solutions Growth Fund July 1, 1997
------------------------------------------------------------------------------
SSgA Life Solutions Income and Growth Fund July 1, 1997
------------------------------------------------------------------------------
SSgA Special Small Cap Fund *
------------------------------------------------------------------------------
SSgA High Yield Bond Fund *
------------------------------------------------------------------------------
SSgA International Growth Opportunities Fund *
------------------------------------------------------------------------------
SSgA Real Estate Equity Fund *
------------------------------------------------------------------------------
SSgA US Treasury Obligations Fund *
------------------------------------------------------------------------------
SSgA International Pacific Index Fund *
------------------------------------------------------------------------------
---------------
*As of the date of this Statement of Additional Information, these
portfolios have not commenced operations.
Prospectuses for these investment portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at (800)
647-7327, or at its Internet Web Site at www.ssgafunds.com.
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
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<PAGE>
conditions under which any Fund may have separate voting rights or no voting
rights. Each class of shares of a Fund is entitled to the same rights and
privileges as all other classes of the Fund, except that each class bears the
expenses associated with the distribution and shareholder servicing arrangements
of that class, as well as other expenses attributable to the class and unrelated
to the management of the Fund's portfolio securities. Shares of the Money
Market, US Government Money Market and Tax Free Money Market Funds are divided
into Classes A, B and C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved by the holders of a majority of the
shares of Investment Company or the Fund, respectively. All other amendments may
be effected by Investment Company's Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of the Fund may be held personally
liable for the obligations of the Fund. The Master Trust Agreement provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of the Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial loss
beyond their investments is limited to circumstances in which the Fund itself
would be unable to meet its obligations.
Shareholder Meetings. Investment Company will not have an annual meeting
of shareholders. Special meetings may be convened: (1) by the Board of Trustees;
(2) upon written request to the Board by the holders of at least 10% of the
outstanding shares; or (3) upon the Board's failure to honor the shareholders'
request described above, by holders of at least 10% of the outstanding shares
giving notice of the special meeting to the shareholders.
Controlling Shareholders. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding. State Street may from time to time
have discretionary authority over accounts which invest in Investment Company
shares. These accounts include accounts maintained for securities lending
clients and accounts which permit the use of Investment Company portfolios as
short-term cash sweep investments. Shares purchased for all discretionary
accounts are held of record by State Street, who retains voting control of such
shares. As of April 15, 1998, State Street held of record less than 25% of the
issued and outstanding shares of Investment Company in connection with its
discretionary accounts. Consequently, State Street is not deemed to be a
controlling person of Investment Company for purposes of the 1940 Act.
The Trustees and officers of Investment Company, as a group, own less than
1% of Investment Company's voting securities.
Frank Russell Investment Management Company ("Administrator"), Investment
Company's administrator, will be the sole shareholder of the Fund until such
time as the Fund has public shareholders and therefore may be deemed a
controlling person.
Trustees and Officers. The Board of Trustees is responsible for overseeing
generally the operation of the Fund. The officers, all of whom are employed by,
and are officers of, Administrator or its affiliates, are responsible for the
day-to-day management and administration of the Fund's operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid $55,500 each fiscal year and are reimbursed for travel and
other expenses they incur in attending Board meetings. As of the date of this
SAI, the Trustees were not paid pension or retirement benefits as part of
Investment
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<PAGE>
Company expenses. 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 SSgA Funds, 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 and President. Born
4/22/39. Trustee, President and Chief Executive Officer, Russell Insurance Funds
(investment company). Director, Chief Executive Officer and Chairman of the
Board, Russell Fund Distributors, Inc. Trustee, President and Chief Executive
Officer, Frank Russell Investment Company (investment company); Director, Chief
Executive Officer and Chairman of the Board, Frank Russell Investment Management
Company; Director, Chief Executive Officer and President, Frank Russell Trust
Company; Director and Chairman, Frank Russell Investment Company Public Limited
Company; November 1995 to February 1997, Director, Frank Russell Company;
Director and Chairman of the Board, Frank Russell Company (Delaware); Director,
Frank Russell Company; March 1989 to June 1993, Director, Frank Russell Company,
Director of Frank Russell Investments (Ireland) Limited; Director and Chairman,
Frank Russell Investment Company Public Limited Company. Until September 1994,
Director and President, The Laurel Funds, Inc. (investment company).
William L. Marshall, Trustee. Born 12/12/42. 33 West Court Street,
Doylestown, PA 18901. Chief Executive Officer and President, Wm. L. Marshall
Associates, Inc. (a registered investment advisor 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 Representative for Securities with FSC
Securities Corp., Marietta, Georgia.
*Steven J. Mastrovich, Trustee. Born 11/3/56. 350 Park Avenue, 15th Floor,
New York, NY 10022. Partner, Squire, Sanders & Dempsey (law firm). From 1994 to
1997, Partner, Brown, Rudnick, Freed & Gesmer (law firm). From 1990 to 1994,
Partner, Warner & Stackpole (law firm).
Patrick J. Riley, Trustee. Born 11/30/48. 21 Custom House Street, Boston,
MA 02110. Partner, Riley, Burke & Donahue (law firm).
Richard D. Shirk, Trustee. Born 10/31/45. 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. Born 4/25/43. 26 Round Top Road, Boxford, MA
01921. Consultant, Computer Simulation, General Electric Industrial Control
Systems. Prior to that, President, A.B. Reed, Inc. - Engineers, Architects,
Planners. Prior to that, Vice President, Instrumentation and Controls, A.B.
Reed., Inc.
Henry W. Todd, Trustee. Born 5/4/47. 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.
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J. David Griswold, Vice President and Secretary. Born 8/24/57. Assistant
Secretary and Associate General Counsel, Frank Russell Investment Management
Company, Russell Fund Distributors, Inc., Frank Russell Capital Inc., Frank
Russell Company and Russell Fiduciary Services Company; Director, Secretary and
Associate General Counsel, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
George W. Weber, Senior Vice President, Fund Treasurer and Principal
Accounting Officer. Born 6/3/51. Treasurer and Chief Accounting Officer, Russell
Insurance Funds (investment company); Director of Finance and Operations, Frank
Russell Trust Company; Director, Fund Administration and Operations of Frank
Russell Investment Management Company and Russell Fund Distributors, Inc.;
Treasurer and Chief Accounting Office, Frank Russell Investment Company
(investment company); March 1993 to January 1996, Vice President, Operations,
Funds Management, J.P. Morgan; December 1985 to March 1993, Senior Vice
President, Operations, Frank Russell Investment Company, The Laurel Funds, Inc.
and The Seven Seas Series Fund (investment companies); Director of Operations,
Frank Russell Investment Management Company and Frank Russell Trust Company;
Director, Russell Fund Distributors, Inc.
========================================================
1. Trustee 1. Total Annual
Compensation
from Investment Company
per Fiscal Year
--------------------------------------------------------
2. Lynn L. Anderson 2. $0
--------------------------------------------------------
3. William L. Marshall 3. $55,500
--------------------------------------------------------
4. Steven J. Mastrovich 4. $55,500
--------------------------------------------------------
5. Patrick J. Riley 5. $55,500
--------------------------------------------------------
6. Richard D. Shirk 6. $55,500
--------------------------------------------------------
7. Bruce D. Taber 7. $55,500
--------------------------------------------------------
8. Henry W. Todd 8. $55,500
========================================================
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 Advisor, 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.
Advisor. State Street Bank and Trust Company ("State Street" or "Advisor")
serves as the Fund's investment advisor pursuant to an Advisory Agreement dated
April 12, 1988 ("Advisory Agreement"). State Street is a wholly owned subsidiary
of State Street Corporation, a publicly held bank holding company. State
Street's address is 225 Franklin Street, Boston, MA 02110.
Under the Advisory Agreement, Advisor directs the Fund's investments in
accordance with its investment objectives, policies and limitations. For these
services, the Fund pays a fee to Advisor at the rates stated in the Prospectus.
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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 Advisor or a Fund without
penalty upon sixty days' notice and will terminate automatically upon its
assignment.
Administrator. Frank Russell Investment Management Company
("Administrator") serves as the Fund's administrator, pursuant to an
Administration Agreement dated April 12, 1988 ("Administration Agreement"). A
description of the services provided under the Administration Agreement and the
basis for computing fees for such services is provided in the Fund's Prospectus.
The Administration Agreement will continue from year to year provided that
a majority of the Trustees and a majority of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Distribution Plan described below or the Administration
Agreement approve its continuance. The Agreement may be terminated by
Administrator or any Fund without penalty upon sixty days' notice and will
terminate automatically upon its assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and its affiliates have offices in Tacoma, Winston-Salem, New
York City, Toronto, London, Tokyo, Sydney, Paris, Zurich and Auckland, and have
approximately 1,200 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 One International Place, Boston,
MA 02110.
Custodian and Transfer Agent. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For
Custodian services, State Street is paid an annual fee in accordance with the
following: custody services--a fee payable monthly on a pro rata basis, based on
the following percentages of average daily net assets of each Fund: $0 up to
$1.5 billion--0.02%, over $1.5 billion--0.015% (for purposes of calculating the
break point, the assets of all domestic Funds are aggregated); securities
transaction charges from $6.00 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 $4.00 to $16.00 per security,
depending on the type of instrument and the pricing service used; and transfer
agent services of $1.50 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. For Transfer and Dividend
Disbursing Agent services, State Street is paid the following annual account
services fees: $9.00 open account fee; $1.50 closed account fee; fund minimum
per portfolio for one to four portfolios--$36,000, five to six
portfolios--$24,000, and over six portfolios $18,000. Portfolio fees are
allocated to each fund based on the average net asset value of each fund and are
billable on a monthly basis at the rate of 1/12 of the annual fee. State Street
will apply a $5.00 fee to each telephone transaction (purchase or redemption),
which is applied against the monthly billing. State Street is reimbursed by each
Fund for supplying certain out-of-pocket expenses including postage, transfer
fees, stamp duties, taxes, wire fees, telexes, and freight.
Independent Accountants. Coopers & Lybrand L.L.P. serves as the Investment
Company's independent accountants. Coopers & Lybrand L.L.P. is responsible for
performing annual audits of the financial statements and financial highlights in
accordance with generally accepted auditing standards, a
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review of federal tax returns, and, pursuant to Rule 17f-2 of the 1940 Act,
three security counts. The mailing address of Coopers & Lybrand L.L.P. is One
Post Office Square, Boston, MA 02109.
Distribution Plan. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Fund may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Fund may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule. Accordingly, the
Fund has adopted an active distribution plan (the "Plan"), which is described in
the Fund's Prospectus.
The Plan provides that the Fund may spend annually, directly or indirectly,
up to 0.25% of the value of its average net assets for distribution and
shareholder servicing services. The Plan does not provide for the Fund to be
charged for interest, carrying or any other financing charges on any
distribution expenses carried forward to subsequent years. A quarterly report of
the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. The
Plan may not be amended without shareholder approval to increase materially the
distribution or shareholder servicing costs that the Fund may pay. The Plan and
material amendments to it must be approved annually by all of the Trustees and
by the Trustees who are neither "interested persons" (as defined in the 1940
Act) of the Fund nor have any direct or indirect financial interest in the
operation of the Plan or any related agreements.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Advisor ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Such arrangements are
more fully described in the Fund's Prospectus under "Distribution Services and
Shareholder Servicing."
Federal Law Affecting State Street. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing certain securities, and
prohibits a member bank of the Federal Reserve System from having certain
affiliations with an entity engaged principally in that business. The activities
of State Street in informing its customers of the Fund, performing investment
and redemption services, providing custodian, transfer, shareholder servicing,
dividend disbursing, agent servicing and investment advisory services, may raise
issues under these provisions. State Street has been advised by its counsel that
its activities in connection with the Fund contemplated under this arrangement
are consistent with its statutory and regulatory obligations.
Valuation of Fund Shares. Net asset value per share is calculated once each
business day for the Fund as of the close of the regular trading session on the
New York Stock Exchange (currently 4:00 p.m. Eastern time). A business day is
one on which the New York Stock Exchange is open for business. Currently, the
New York Stock Exchange is open for trading every weekday except New Year's Day,
Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Trading may occur in debt securities and in foreign securities at times
when the New York Stock Exchange is closed (including weekends and holidays or
after 4:00 p.m., Eastern time, on a regular business day). The trading of
portfolio securities at such times may significantly increase or decrease the
net asset value of the Fund's share when shareholders do not have the ability to
purchase or redeem shares. Therefore, events affecting the values of foreign
securities trading in foreign markets that occur between the time their prices
are determined and the close of the New York Stock Exchange will not be
reflected in the Fund's calculation of its net asset value unless the Board of
Trustees determines that the particular event would materially affect the Fund's
net asset value, in which case an adjustment would be made.
With the exceptions noted below, the Fund values portfolio securities at
fair market value. This generally means that equity securities and fixed income
securities listed and traded principally on any national securities exchange are
valued on the basis of the last sale price or, lacking any sales, at the
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<PAGE>
closing bid price, on the primary exchange on which the security is traded.
United States equity and fixed-income securities traded principally
over-the-counter and options are valued on the basis of the last reported bid
price. Futures contracts are valued on the basis of the last reported sales
price.
Because many fixed income securities do not trade each day, last sale or
bid prices are frequently not available. Therefore, fixed income securities may
be valued using prices provided by a pricing service when such prices are
determined by Custodian to reflect the fair market value of such securities.
International equity securities traded on a national securities exchange
are valued on the basis of the last sale price. International securities traded
over-the-counter are valued on the basis of best bid or official bid, as
determined by the relevant securities exchange. In the absence of a last sale or
best or official bid price, such securities may be valued on the basis of prices
provided by a pricing service if those prices are believed to reflect the fair
value of such securities.
The Fund values securities maturing within 60 days of the valuation date at
amortized cost unless the Board determines that the amortized cost method does
not represent fair value. This method involves valuing an instrument at its cost
and thereafter assuming a constant amortization to maturity of any discount or
premium, even though the portfolio security may increase or decrease in market
value generally in response to changes in interest rates. While this method
provides certainty in valuation, it may result in periods during which value, as
determined by amortized cost, is higher or lower than the price a Fund would
receive if it sold the instrument.
For example, in periods of declining interest rates, the daily yield on
Fund shares computed by dividing the annualized daily income on the Fund's
portfolio by the net asset value based upon the amortized cost valuation
technique may tend to be higher than a similar computation made by using a
method of valuation based upon market prices and estimates. In periods of rising
interest rates, the daily yield on Fund shares computed the same way may tend to
be lower than a similar computation made by using a method of calculation based
upon market prices and estimates.
Brokerage Practices. All portfolio transactions are placed on behalf of the
Fund by Advisor. Advisor ordinarily pays commissions when it executes
transactions on a securities exchange. In contrast, there is generally no stated
commission on 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
Advisor. The Advisory Agreement provides, in substance and subject to specific
directions from officers of Investment Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Fund. Ordinarily, securities will
be purchased from primary markets, and Advisor shall consider all factors it
deems relevant in assessing the best overall terms available for any
transaction, including the breadth of the market in the security, the price of
the security, the financial condition and execution capability of the broker or
dealer, and the reasonableness of the commission, if any, for the specific
transaction and other transactions on a continuing basis.
The Advisory Agreement authorizes Advisor 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 Advisor (or its
affiliates). Advisor 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
Advisor, as appropriate, must determine in good faith that such commission was
reasonable in relation to the value of
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<PAGE>
the brokerage and research services provided--viewed in terms of that particular
transaction or in terms of all the accounts over which Advisor exercises
investment discretion.
The Trustees periodically review Advisor'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 Advisor attributable
to a particular Fund transaction may benefit one or more other accounts for
which Advisor exercises investment discretion, or an investment portfolio other
than that for which the transaction was effected. Advisor's fees are not reduced
by Advisor'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.
Total Return Quotations. The Fund computes average annual total return by
using a standardized method of calculation required by the Securities and
Exchange Commission. Average annual total return is computed by finding the
average annual compounded rates of return on a hypothetical initial investment
of $1,000 over the one-year, five-year and ten-year periods (or life of the
funds as appropriate), that would equate the initial amount invested to the
ending redeemable value, according to the following formula:
P(1+T)(n) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a $1,000 payment made at the
beginning of the 1-year, 5-year and 10-year periods at the
end of the year or period
The calculation assumes that all dividends and distributions of the Fund
are reinvested at the price stated in the Prospectus on the dividend dates
during the period, and includes all recurring and nonrecurring fees that are
charged to all shareholder accounts.
Total returns and other performance figures are based on historical
earnings and are not indicative of future performance.
INVESTMENTS
The non-fundamental investment objective of the Fund is set forth in its
Prospectus. The investment objective may be changed with the approval of a
majority of the Fund's Board of Trustees, with at least 60 days' prior notice to
shareholders. In addition to that investment objective, the Fund also has
certain fundamental investment restrictions, which may be changed only with the
approval of a majority of the shareholders of the Fund, and certain
nonfundamental investment restrictions and policies, which may be changed by the
Fund without shareholder approval.
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<PAGE>
Investment Restrictions
The Fund is subject to the following investment restrictions. Restrictions
1 through 6 are fundamental and restrictions 7 through 9 are nonfundamental.
Unless otherwise noted, these restrictions apply at the time an investment is
made. The Fund will not:
(1) Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US Government,
its agencies and instrumentalities). Concentration may occur as a result of
changes in the market value of portfolio securities, but may not result from
investment.
(2) Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to facilitate
redemptions (not for leveraging or investment), provided that borrowings do not
exceed an amount equal to 33-1/3% of the current value of the Fund's assets
taken at market value, less liabilities other than borrowings. If at any time a
Fund's borrowings exceed this limitation due to a decline in net assets, such
borrowings will within three days be reduced to the extent necessary to comply
with this limitation. A Fund will not purchase investments once borrowed funds
(including reverse repurchase agreements) exceed 5% of its total assets.
(3) Pledge, mortgage or hypothecate its assets. However, a Fund may pledge
securities having a market value at the time of the pledge not exceeding 33-1/3%
of the value of the Fund's total assets to secure borrowings permitted by
paragraph (2) above.
(4) With respect to 75% of its total assets, invest in securities of any
one issuer (other than securities issued by the US Government, its agencies, and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Fund's holdings in the securities of such issuer
exceeds 5% of the value of the Fund's assets.
(5) Make loans to any person or firm; provided, however, that the making of
a loan shall not include (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of any corporation or
government which are publicly distributed or of a type customarily purchased by
institutional investors, or (ii) the entry into repurchase agreements or reverse
repurchase agreements. A Fund may lend its portfolio securities to
broker-dealers or other institutional investors if the aggregate value of all
securities loaned does not exceed 33-1/3% of the value of the Fund's total
assets.
(6) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
(7) 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 advisors and affiliates, except as permitted by the 1940 Act
and exemptive rules or orders thereunder.
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<PAGE>
(8) 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.
(9) Invest more than 15% of its net assets in the aggregate, on an ongoing
basis, in illiquid securities or securities that are not readily marketable,
including repurchase agreements and time deposits of more than seven days'
duration.
With respect to the industry concentration outlined in the Prospectus, the
Advisor treats US domestic banks and foreign branches of US banks as a separate
industry from foreign banks.
Investment Policies
The Fund may invest in the following instruments:
US Government Obligations. The types of US Government obligations in which
the Fund may at times invest include: (1) A variety of US Treasury obligations,
which differ only in their interest rates, maturities and times of issuance; and
(2) obligations issued or guaranteed by US Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the US Treasury, (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the US Treasury, (c)
discretionary authority of the US Government agency or instrumentality or (d)
the credit of the instrumentality (examples of agencies and instrumentalities
are: Federal Land Banks, Federal Housing Administration, Farmers Home
Administration, Export--Import Bank of the United States, Central Bank for
Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan Banks,
General Services Administration, Maritime Administration, Tennessee Development
Bank, Asian-American Development Bank, Student Loan Marketing Association,
International Bank for Reconstruction and Development and Federal National
Mortgage Association). No assurance can be given that in the future the US
Government will provide financial support to such US Government agencies or
instrumentalities described in (2)(b), (2)(c) and (2)(d), other than as set
forth above, since it is not obligated to do so by law. The Fund may purchase US
Government obligations on a forward commitment basis.
Repurchase Agreements. The Fund may enter into repurchase agreements with
financial institutions. Under repurchase agreements, these parties sell
securities to a Fund and agree to repurchase the securities at the Fund's cost
plus interest within a specified time (normally one day). The securities
purchased by each Fund have a total value in excess of the purchase price paid
by the Fund and are held by Custodian until repurchased. Repurchase agreements
assist the Fund in being invested fully while retaining "overnight" flexibility
in pursuit of investments of a longer-term nature. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness is continually monitored and found
satisfactory by Advisor.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions". Under
reverse repurchase agreements, a Fund transfers possession of portfolio
securities to financial institutions in return for cash in an amount equal to a
percentage of the portfolio securities' market value and agrees to repurchase
the securities at a future date by repaying the cash with interest. The Fund
retains the right to receive interest and principal payments from the securities
while they are in the possession of the financial institutions. Cash or liquid
high quality debt obligations from a Fund's portfolio equal in value to the
repurchase price including any accrued interest will be segregated by Custodian
on the Fund's records while a reverse repurchase agreement is in effect. Reverse
repurchase agreements involve the risk that the market value of securities sold
by the Fund may decline below the price at which it is obligated to repurchase
the securities.
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<PAGE>
Forward Commitments. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time consistent with
the Fund's ability to manage its investment portfolio, maintain a stable net
asset value and meet redemption requests. A Fund may dispose of a commitment
prior to settlement if it is appropriate to do so and realize short-term profits
or losses upon such sale. When effecting such transactions, cash or liquid high
quality debt obligations held by the Fund of a dollar amount sufficient to make
payment for the portfolio securities to be purchased will be segregated on the
Fund's records at the trade date and maintained until the transaction is
settled. Forward commitments involve a risk of loss if the value of the security
to be purchased declines prior to the settlement date, or if the other party
fails to complete the transaction.
When-Issued Transactions. New issues of securities are often offered on a
when-issued basis. This means that delivery and payment for the securities
normally will take place several days after the date the buyer commits to
purchase them. The payment obligation and the interest rate that will be
received on securities purchased on a when-issued basis are each fixed at the
time the buyer enters into the commitment.
The Fund will make commitments to purchase when-issued securities only
with the intention of actually acquiring the securities, but a Fund may sell
these securities or dispose of the commitment before the settlement date if it
is deemed advisable as a matter of investment strategy. Cash or marketable high
quality debt securities equal to the amount of the above commitments will be
segregated on the Fund's records. For the purpose of determining the adequacy of
these securities the segregated securities will be valued at market. If the
market value of such securities declines, additional cash or securities will be
segregated on the Fund's records on a daily basis so that the market value of
the account will equal the amount of such commitments by the Fund. The Fund will
not invest more than 25% of its net assets in when-issued securities.
Securities purchased on a when-issued basis and held by the Fund are
subject to changes in market value based upon the public's perception of changes
in the level of interest rates. Generally, the value of such securities will
fluctuate inversely to changes in interest rates -- i.e., they will appreciate
in value when interest rates decline and decrease in value when interest rates
rise. Therefore, if in order to achieve higher interest income a Fund remains
substantially fully invested at the same time that it has purchased securities
on a "when-issued" basis, there will be a greater possibility of fluctuation in
the Fund's net asset value.
When payment for when-issued securities is due, the Fund will meet its
obligations from then-available cash flow, the sale of segregated securities,
the sale of other securities or, and although it would not normally expect to do
so, from the sale of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). The sale of
securities to meet such obligations carries with it a greater potential for the
realization of capital gains, which are subject to federal income taxes.
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, Advisor may determine that Section 4(2) paper is liquid for the
purposes of complying with the Fund's investment restriction relating to
investments in illiquid securities.
American Depository Receipts (ADRs). The Fund may invest in ADRs under
certain circumstances as an alternative to directly investing in foreign
securities. Generally, ADRs, in registered form, are designed
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for use in the US securities markets. ADRs are receipts typically issued by a US
bank or trust company evidencing ownership of the underlying securities. ADRs
represent the right to receive securities of foreign issuers deposited in a
domestic bank or a correspondent bank. ADRs do not eliminate the risk inherent
in investing in the securities of foreign issuers. However, by investing in ADRs
rather than directly in a foreign issuer's stock, the Fund can avoid currency
risks during the settlement period for either purchases or sales. In general,
there is a large liquid market in the US for many ADRs. The information
available for ADRs is subject to the accounting, auditing and financial
reporting standards of the domestic market or exchange on which they are traded,
which standards are more uniform and more exacting than those to which many
foreign issuers are subject.
Warrants. The Fund may invest in warrants which entitle the holder to
buy equity securities at a specific price for a specific period of time.
Warrants may be considered more speculative than certain other types of
investments in that they do not entitle a holder to dividends or voting rights
with respect to the securities which may be purchased nor do they represent any
rights in the assets of the issuing company. Also, the value of the warrant does
not necessarily change with the value of the underlying securities and a warrant
ceases to have value if it is not exercised prior to the expiration date. The
Fund will not invest more than 5% of the value of its net assets in warrants, or
more than 2% in warrants which are not listed on the New York or American Stock
Exchanges.
Hedging Strategies and Related Investment Techniques
The Fund may seek to hedge their portfolios against movements in the
equity markets, interest rates and currency exchange rates through the use of
options, futures transactions, options on futures and forward foreign currency
exchange transactions. The Fund has authority to write (sell) covered call and
put options on their portfolio securities, purchase put and call options on
securities and engage in transactions in stock index options, stock index
futures and financial futures and related options on such futures. The Fund may
enter into such options and futures transactions either on exchanges or in the
over-the-counter ("OTC") markets. Although certain risks are involved in options
and futures transactions (as discussed in the Prospectus and below), Advisor
believes that, because the Fund will only engage in these transactions for
hedging purposes, the options and futures portfolio strategies of the Fund will
not subject the Fund to the risks frequently associated with the speculative use
of options and futures transactions. Although the use of hedging strategies by
the Fund is intended to reduce the volatility of the net asset value of the
Fund's shares, the Fund's net asset value will nevertheless fluctuate. There can
be no assurance that the Fund's hedging transactions will be effective.
Writing Covered Call Options. The Fund is authorized to write (sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to such options. Writing a call
option obligates a Fund to sell or deliver the option's underlying security, in
return for the strike price, upon exercise of the option. By writing a call
option, the Fund receives an option premium from the purchaser of the call
option. Writing covered call options is generally a profitable strategy if
prices remain the same or fall. Through receipt of the option premium, the Fund
would seek to mitigate the effects of a price decline. By writing covered call
options, however, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction.
Writing Covered Put Options. The Fund is authorized to write (sell)
covered put options on its portfolio securities and to enter into closing
transactions with respect to such options.
When a Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the Fund assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
The Fund may seek to terminate its position in a put option it writes before
exercise by closing out the option in the
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secondary market at its current price. If the secondary market is not liquid for
an option the Fund has written, however, the Fund must continue to be prepared
to pay the strike price while the option is outstanding, regardless of price
changes, and must continue to set aside assets to cover its position.
The Fund may write put options as an alternative to purchasing actual
securities. If security prices rise, the Fund would expect to profit from a
written put option, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it is likely
that the Fund will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the Fund would expect to
suffer a loss. This loss should be less than the loss the Fund would have
experienced from purchasing the underlying instrument directly, however, because
the premium received for writing the option should mitigate the effects of the
decline.
Purchasing Put Options. The Fund is authorized to purchase put options
to hedge against a decline in the market value of its portfolio securities. By
buying a put option a Fund has the right (but not the obligation) to sell the
underlying security at the exercise price, thus limiting the Fund's risk of loss
through a decline in the market value of the security until the put option
expires. The amount of any appreciation in the value of the underlying security
will be partially offset by the amount of the premium paid by the Fund for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction and profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. The Fund will not purchase put options on
securities (including stock index options discussed below) if as a result of
such purchase, the aggregate cost of all outstanding options on securities held
by the Fund would exceed 5% of the market value of the Fund's total assets.
Purchasing Call Options. The Fund is also authorized to purchase call
options. The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price (call options on futures contracts are settled by purchasing the
underlying futures contract). The Fund will purchase call options only in
connection with "closing purchase transactions."
Stock Index Options and Financial Futures. The Fund is authorized to
engage in transactions in stock index options and financial futures, and related
options. A Fund may purchase or write put and call options on stock indices to
hedge against the risks of market-wide stock price movements in the securities
in which the Fund invests. Options on indices are similar to options on
securities except that on exercise or assignment, the parties to the contract
pay or receive an amount of cash equal to the difference between the closing
value of the index and the exercise price of the option times a specified
multiple. The Fund may invest in stock index options based on a broad market
index, such as the S&P 500 Index, or on a narrow index representing an industry
or market segment. The Fund's investments in foreign stock index futures
contracts and foreign interest rate futures contracts, and related options, are
limited to only those contracts and related options that have been approved by
the Commodity Futures Trading Commission ("CFTC") for investment by United
States investors. Additionally, with respect to the Fund's investments in
foreign options, unless such options are specifically authorized for investment
by order of the CFTC, the Fund will not make such investments.
The Fund may also purchase and sell stock index futures contracts and
other financial futures contracts ("futures contracts") as a hedge against
adverse changes in the market value of its portfolio securities as described
below. A futures contract is an agreement between two parties which obligates
the purchaser of the futures contract to buy and the seller of a futures
contract to sell a security for a set price on a future date. Unlike most other
futures contracts, a stock index futures contract does not require actual
delivery of securities, but results in cash settlement based upon the difference
in value of the index between the time the contract was entered into and the
time of its settlement. The Fund may effect transactions in stock index futures
contracts in connection with equity securities in which it invests and in
financial futures contracts in connection with debt securities in which it
invests, if any. Transactions by
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the Fund in stock index futures and financial futures are subject to limitations
as described below under "Restrictions on the Use of Futures Transactions."
The Fund may sell futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When a Fund is not fully
invested in the securities markets and anticipates a significant market advance,
the Fund may purchase futures in order to gain rapid market exposure that may
partially or entirely offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, an equivalent amount of futures
contracts will be terminated by offsetting sales. It is anticipated that, in a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the long futures position, whether the long
position results from the purchase of a futures contract or the purchase of a
call option, but under unusual circumstances (e.g., the Fund experiences a
significant amount of redemptions), a long futures position may be terminated
without the corresponding purchase of securities.
The Fund also is authorized to purchase and write call and put options
on futures contracts and stock indices in connection with its hedging
activities. Generally, these strategies would be utilized under the same market
and market sector conditions (i.e., conditions relating to specific types of
investments) during which the Fund enters into futures transactions. The Fund
may purchase put options or write call options on futures contracts and stock
indices rather than selling the underlying futures contract in anticipation of a
decrease in the market value of securities. Similarly, the Fund can purchase
call options, or write put options on futures contracts and stock indices, as a
substitute for the purchase of such futures to hedge against the increased cost
resulting from an increase in the market value of securities which the Fund
intends to purchase.
The Fund is also authorized to engage in options and futures
transactions on US and foreign exchanges and in options in the OTC markets ("OTC
options"). In general, exchange traded contracts are third-party contracts
(i.e., performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) with standardized strike prices and expiration dates. OTC
options transactions are two-party contracts with price and terms negotiated by
the buyer and seller. See "Restrictions on OTC Options" below for information as
to restrictions on the use of OTC options.
The Fund is authorized to purchase or sell listed or OTC foreign
security or currency options, foreign security or currency futures and related
options as a short or long hedge against possible variations in foreign exchange
rates and market movements. Such transactions could be effected with respect to
hedges on non-US dollar denominated securities owned by a Fund, sold by a Fund
but not yet delivered, or committed or anticipated to be purchased by a Fund. As
an illustration, a Fund may use such techniques to hedge the stated value in US
dollars of an investment in a yen-denominated security. In such circumstances,
for example, the Fund can purchase a foreign currency put option enabling it to
sell a specified amount of yen for US dollars at a specified price by a future
date. To the extent the hedge is successful, a loss in the value of the yen
relative to the US dollar will tend to be offset by an increase in the value of
the put option.
Restrictions on the Use of Futures Transactions. The purchase or sale of
a futures contract differs from the purchase or sale of a security in that no
price or premium is paid or received. Instead, an amount of cash or securities
acceptable to the broker and the relevant contract market, which varies, but is
generally about 5% of the contract amount, must be deposited with the broker.
This amount is known as "initial margin" and represents a "good faith" deposit
assuring the performance of both the purchaser and seller under the futures
contract. Subsequent payments to and from the broker, called "variation margin,"
are required to be made on a daily basis as the price of the futures contract
fluctuates making the long and short positions in the futures contracts more or
less valuable, a process known as "marking to market." At any time prior to the
settlement date of the futures contract, the position may be closed out by
taking an opposite position which will operate to terminate the position in the
futures contract. A final determination of variation margin is then made,
additional cash is required to be paid to or released by the broker and the
purchaser realizes a loss or gain. In addition, a nominal commission is paid on
each completed sale transaction.
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Regulations of the CFTC applicable to the Fund require that all of the
Fund's futures and options on futures transactions constitute bona fide hedging
transactions and that the Fund not enter into such transactions if, immediately
thereafter, the sum of the amount of initial margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets.
Restrictions on OTC Options. The Fund will engage in OTC options,
including OTC stock index options, OTC foreign security and currency options and
options on foreign security and currency futures, only with member banks of the
Federal Reserve System and primary dealers in US Government securities or with
affiliates of such banks or dealers which have capital of at least $50 million
or whose obligations are guaranteed by an entity having capital of at least $50
million. The Fund will acquire only those OTC options for which Advisor believes
the Fund can receive on each business day at least two independent bids or
offers (one of which will be from an entity other than a party to the option).
The Staff of the SEC has taken the position that purchased OTC options
and the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an operating policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transaction, the sum of: (1) the market value of
outstanding OTC options held by the Fund; (2) the market value of the underlying
securities covered by outstanding OTC call options sold by the Fund; (3) margin
deposits on the Fund's existing OTC options on futures contracts; and (4) the
market value of all other assets of the Fund that are illiquid or are not
otherwise readily marketable, would exceed 10% of the net assets of the Fund,
taken at market value. However, if an OTC option is sold by the Fund to a
primary US Government securities dealer recognized by the Federal Reserve Bank
of New York and the Fund has the unconditional contractual right to repurchase
such OTC option from the dealer at a predetermined price, then the Fund will
treat as illiquid such amount of the underlying securities as is equal to the
repurchase price less the amount by which the option is "in-the-money" (current
market value of the underlying security minus the option's strike price). The
repurchase price with primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option plus the
amount by which the option is "in-the-money."
Asset Coverage for Futures and Options Positions. The Fund will not use
leverage in its options and futures strategies. Such investments will be made
for hedging purposes only. The Fund will hold securities or other options or
futures positions whose values are expected to offset its obligations under the
hedge strategies. The Fund will not enter into an option or futures position
that exposes the Fund to an obligation to another party unless it owns either:
(1) an offsetting position in securities or other options or futures contracts;
or (2) cash, receivables and short-term debt securities with a value sufficient
to cover its potential obligations. The Fund will comply with guidelines
established by the SEC with respect to coverage of options and futures
strategies by mutual funds, and if the guidelines so require will set aside cash
and high grade liquid debt securities in a segregated account with its custodian
bank in the amount prescribed. The Fund's custodian shall maintain the value of
such segregated account equal to the prescribed amount by adding or removing
additional cash or liquid securities to account for fluctuations in the value of
securities held in such account. Securities held in a segregated account cannot
be sold while the futures or option strategy is outstanding, unless they are
replaced with similar securities. As a result, there is a possibility that
segregation of a large percentage of a Fund's assets could impede portfolio
management or the Fund's ability to meeting redemption requests or other current
obligations.
Risk Factors in Options, Futures, Forward and Currency Transactions.
Utilization of options and futures transactions to hedge the Fund's portfolios
involves the risk of imperfect correlation in movements in the price of options
and futures and movements in the price of securities or currencies which are the
subject of the hedge. If the price of the options or futures moves more or less
than the price of hedged securities or currencies, the Fund will experience a
gain or loss which will not be completely offset by movements in the price of
the subject of the hedge. The successful use of options and futures also depends
on Advisor's ability to correctly predict price movements in the market involved
in a particular options or futures transaction. To compensate for imperfect
correlations, the Fund may
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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
Advisor believes the Fund can receive on each business day at least two
independent bids or offers. However, there can be no assurance that a liquid
secondary market will exist at any specific time. Thus, it may not be possible
to close an options or futures position. The inability to close options and
futures positions also could have an adverse impact on a Fund's ability to
effectively hedge its portfolio. There is also the risk of loss by a Fund of
margin deposits or collateral in the event of bankruptcy of a broker with whom
the Fund has an open position in an option, a futures contract or related
option.
The exchanges on which options on portfolio securities and currency
options are traded have generally established limitations governing the maximum
number of call or put options on the same underlying security or currency
(whether or not covered) which may be written by a single investor, whether
acting alone or in concert with others (regardless of whether such options are
written on the same or different exchanges or are held or written in one or more
accounts or through one or more brokers). "Trading limits" are imposed on the
maximum number of contracts which any person may trade on a particular trading
day.
Certain Risk Factors
Foreign Investments. Investors should consider carefully the
substantial risks involved in securities of companies and governments of foreign
nations. There may be less publicly available information about foreign
companies comparable to the reports and ratings published regarding US
companies. Foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to US companies. Many
foreign markets have substantially less volume than either the established
domestic securities exchanges or the OTC markets. Securities of some foreign
companies are less liquid and more volatile than securities of comparable US
companies. Commission rates in foreign countries, which may be fixed rather than
subject to negotiation as in the US, are likely to be higher. In many foreign
countries there is less government supervision and regulation of securities
exchanges, brokers and listed companies than in the US, and capital requirements
for brokerage firms are generally lower. Settlement of transactions in foreign
securities may, in some instances, be subject to delays and related
administrative uncertainties. Because the some of the Fund's securities may be
denominated in foreign currencies, the value of such securities to the Fund will
be affected by changes in currency exchange rates and in exchange control
regulations. A change in the value of a foreign currency against the US dollar
will result in a corresponding change in the US dollar value of the Fund's
securities. In addition, some emerging market countries may have fixed or
managed currencies which are not free-floating against the US dollar. Further,
certain emerging market currencies may not be internationally traded. Certain of
these currencies have experienced a steady devaluation relative to the US
dollar. ADRs are subject to all the above risks, except the imposition of
exchange controls and currency fluctuations during the settlement period.
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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 net capital gain (long-term capital
gains in excess of short-term capital losses) that it distributes to its
shareholders, provided that the Fund distributes annually to its shareholders at
least 90% of its net investment income and net short-term capital gain for the
taxable year ("Distribution Requirement"). For a Fund to qualify as a RIC it
must abide by all of the following requirements: (1) at least 90% of the Fund's
gross income each taxable year must be derived from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies, or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies
("Income Requirement"); (2) at the close of each quarter of the Fund's taxable
year, at least 50% of the value of its total assets must be represented by cash
and cash items, US Government securities, securities of other RICs, and other
securities, with such other securities limited, in respect of any one issuer, to
an amount that does not exceed 5% of the total assets of the Fund and that does
not represent more than 10% of the outstanding voting securities of such issuer;
and (3) 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 a 20% gain or a 28%
gain with respect to shares of a Fund and redeems or exchanges the shares
without having held the shares for more than one year, then any loss on the
redemption or exchange will be treated as a 20% loss or a 28% loss to the extent
of the respective capital gain distribution.
Issues Related to Hedging and Option Investments. A Fund's ability to make
certain investments may be limited by provisions of the Code that require
inclusion of certain unrealized gains or losses in the Fund's income for
purposes of the Income Requirement and the Distribution Requirement, and by
provisions of the Code that characterize certain income or loss as ordinary
income or loss rather than capital gain or loss. Such recognition,
characterization and timing rules will affect investments in certain futures
contracts, options, foreign currency contracts and debt securities denominated
in foreign currencies.
Foreign Income Taxes. Investment income received by the Fund from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which would entitle the Fund to a reduced rate of such taxes or
exemption from taxes on such income. It is impossible to determine the effective
rate of foreign tax for a Fund in advance since the amount of the assets to be
invested within various countries is not known.
If the Fund invests in an entity that is classified as a passive foreign
investment company ("PFIC") for federal income tax purposes, the application of
certain provisions of the Code applying to PFICs could result in the imposition
of certain federal income taxes on the Fund. The Fund can elect to
mark-to-market its PFIC holdings in lieu of paying taxes on gains or
distributions therefrom.
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Foreign shareholders should consult with their tax advisors as to if and
how the federal income tax and its withholding requirements applies to them.
State and Local Taxes. Depending upon the extent of the Fund's activities
in states and localities in which its offices are maintained, its agents or
independent contractors are located or it is otherwise deemed to be conducting
business, the Fund may be subject to the tax laws of such states or localities.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax advisor.
FINANCIAL STATEMENTS
Audited financial statements for the Fund will be available within 60 days
following the end of the Fund's then current fiscal year. When available, copies
of the financial statements can be obtained without charge by calling
Distributor at (800) 647-7327.
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APPENDIX
DESCRIPTION OF SECURITIES RATINGS
Ratings of Debt Instruments
Moody's Investors Service, Inc. ("Moody's") -- Long Term Debt Ratings.
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa -- Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
Standard & Poor's Corporation ("S&P"). The ratings are based, in varying
degrees, on the following considerations: (1) The likelihood of default --
capacity and willingness of the obligator as to the timely payment of interest
and repayment of principal in accordance with the terms of the obligation; (2)
The nature of and provisions of the obligation; and (3) The protection afforded
by, and relative position of, the obligation in 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
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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:
o 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:
o Leading market positions in well-established industries. High rates
of return on funds employed.
o Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
o Well-established access to a range of financial markets and assured
sources of alternate liquidity.
o Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but
to a lesser degree. Earnings trends and coverage ratios, while sound,
may be more subject to variation. Capitalization characteristics,
while still appropriate, may be more affected by external conditions.
Ample alternative liquidity is maintained.
o 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.
o 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.
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F-2 -- Commercial paper issues assigned this rating reflect an assurance
of timely payment only slightly less in degree than those issues rated F-1.
Duff and Phelps, Inc. Duff & Phelps' short-term ratings are consistent
with the rating criteria utilized by money market participants. The ratings
apply to all obligations with maturities of under one year, including commercial
paper, the uninsured portion of certificates of deposit, unsecured bank loans,
master notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term debt
issuers carry the highest rating, yet quality differences exist within that
tier. As a consequence, Duff & Phelps has incorporated gradations of '1+' (one
plus) and '1-' (one minus) to assist investors in recognizing those differences.
Duff 1+--Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors are
minor.
Duff 1- -- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors. Risk factors are
very small.
Good Grade. Duff 2--Good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs
may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
Satisfactory Grade. Duff 3--Satisfactory liquidity and other
protection factors qualify issue as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is
expected.
Non-Investment Grade. Duff 4--Speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
Default. Duff 5--Issuer failed to meet scheduled principal and/or
interest payments.
IBCA, Inc. In addition to conducting a careful review of an
institution's reports and published figures, IBCA's analysts regularly visit the
companies for discussions with senior management. These meetings are fundamental
to the preparation of individual reports and ratings. To keep abreast of any
changes that may affect assessments, analysts maintain contact throughout the
year with the management of the companies they cover.
IBCA's analysts speak the languages of the countries they cover, which is
essential to maximize the value of their meetings with management and to
properly analyze a company's written materials. They also have a thorough
knowledge of the laws and accounting practices that govern the operations and
reporting of companies within the various countries.
-23-
<PAGE>
Often, in order to ensure a full understanding of their position,
companies entrust IBCA with confidential data. While these data cannot be
disclosed in reports, they are taken into account when assigning our ratings.
Before dispatch to subscribers, a draft of the report is submitted to each
company to permit correction of any factual errors and to enable clarification
of issues raised.
IBCA's Rating Committees meet at regular intervals to review all ratings
and to ensure that individual ratings are assigned consistently for institutions
in all the countries covered. Following the Committee meetings, ratings are
issued directly to subscribers. At the same time, the company is informed of the
ratings as a matter of courtesy, but not for discussion.
A1+--Obligations supported by the highest capacity for timely repayment.
A1--Obligations supported by a very strong capacity for timely repayment.
A2--Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
B1--Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business, economic, or
financial conditions than for obligations in higher categories.
B2--Obligations for which the capacity for timely repayment is susceptible
to adverse changes in business, economic or financial conditions.
C1--Obligations for which there is an inadequate capacity to ensure timely
repayment.
D1--Obligations which have a high risk of default or which are currently
in default.
-24-
<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
SSgA FUNDS
One International Place
Boston, Massachusetts 02110
(800) 647-7327
STATEMENT OF ADDITIONAL INFORMATION
INTERNATIONAL GROWTH OPPORTUNITIES FUND
APRIL 28, 1998
SSgA Funds ("Investment Company") is a registered open-end investment
company organized as a Massachusetts business trust offering shares of
beneficial interest in separate investment portfolios. In addition, each series
of the Investment Company is diversified as defined in the Investment Company
Act of 1940, as amended ("1940 Act").
This Statement of Additional Information supplements or describes in
greater detail the Investment Company and the SSgA International Growth
Opportunities Fund (the "International Growth Opportunities Fund" or the "Fund")
as contained in the Fund's Prospectus dated April 28, 1998. This Statement is
not a Prospectus and should be read in conjunction with the Fund's Prospectus,
which may be obtained by telephoning or writing Investment Company at the number
or address shown above.
<PAGE>
TABLE OF CONTENTS
Page
----
Structure and Governance............................................... 3
Organization and Business History............................. 3
Shareholder Meetings.......................................... 4
Controlling Shareholders...................................... 4
Principal Shareholders........................................ 4
Trustees and Officers......................................... 4
Operation of Investment Company........................................ 6
Service Providers ........................................... 6
Advisor ................................................... 6
Administrator................................................. 7
Distributor................................................... 7
Custodian and Transfer Agent.................................. 7
Independent Accountants....................................... 8
Distribution Plan ........................................... 8
Federal Law Affecting State Street............................ 8
Valuation of Fund Shares...................................... 8
Brokerage Practices........................................... 9
Portfolio Turnover Policy..................................... 9
Total Return Quotations....................................... 10
Investments............................................................ 10
Investment Restrictions....................................... 10
Investment Policies........................................... 12
Hedging Strategies and Related Investment Techniques.......... 14
Risk Considerations.................................................... 19
Taxes .............................................................. 20
Financial Statements................................................... 21
Appendix: Description of Securities Ratings........................... 22
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<PAGE>
STRUCTURE AND GOVERNANCE
Organization and Business History. Investment Company was organized as a
Massachusetts business trust on October 3, 1987 and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series, each of
which evidences pro rata ownership interest in a different investment portfolio,
or "Fund." The International Growth Opportunities Fund is one such investment
portfolio. The Trustees may create additional Funds at any time without
shareholder approval.
Further, the Investment Company is authorized to divide shares of any
series into two or more classes of shares. The shares of each Fund may have such
rights and preferences as the Trustees may establish from time to time,
including the right of redemption (including the price, manner and terms of
redemption), special and relative rights as to dividends and distributions,
liquidation rights, sinking or purchase fund provisions and conditions under
which any Fund may have separate voting rights or no voting rights. Each class
of shares of a Fund is entitled to the same rights and privileges as all other
classes of that Fund, except that each class bears the expenses associated with
the distribution and shareholder servicing arrangements of that class, as well
as other expenses attributable to the class and unrelated to the management of
the Fund's portfolio securities.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth opposite the portfolio's name:
------------------------------------------------------------------------
SSgA Money Market Fund May 2, 1988
------------------------------------------------------------------------
SSgA US Government Money Market Fund March 1, 1991
------------------------------------------------------------------------
SSgA Matrix Equity Fund May 4, 1992
------------------------------------------------------------------------
SSgA Small Cap Fund July 1, 1992
------------------------------------------------------------------------
SSgA Yield Plus Fund November 9, 1992
------------------------------------------------------------------------
SSgA S&P 500 Index Fund December 30, 1992
------------------------------------------------------------------------
SSgA Growth and Income Fund September 1, 1993
------------------------------------------------------------------------
SSgA Intermediate Fund September 1, 1993
------------------------------------------------------------------------
SSgA US Treasury Money Market Fund December 1, 1993
------------------------------------------------------------------------
SSgA Prime Money Market Fund February 22, 1994
------------------------------------------------------------------------
SSgA Emerging Markets Fund March 1, 1994
------------------------------------------------------------------------
SSgA Tax Free Money Market Fund December 1, 1994
------------------------------------------------------------------------
SSgA Active International Fund March 7, 1995
------------------------------------------------------------------------
SSgA Bond Market Fund February 7, 1996
------------------------------------------------------------------------
SSgA Life Solutions Balanced Fund July 1, 1997
------------------------------------------------------------------------
SSgA Life Solutions Growth Fund July 1, 1997
------------------------------------------------------------------------
SSgA Life Solutions Income and Growth Fund July 1, 1997
------------------------------------------------------------------------
SSgA Special Small Cap Fund *
------------------------------------------------------------------------
SSgA High Yield Bond Fund *
------------------------------------------------------------------------
SSgA International Growth Opportunities Fund *
------------------------------------------------------------------------
SSgA Real Estate Equity Fund *
------------------------------------------------------------------------
SSgA US Treasury Obligations Fund *
------------------------------------------------------------------------
SSgA International Pacific Index Fund *
------------------------------------------------------------------------
- ----------------
*As of the date of this Statement of Additional Information, these
portfolios have not commenced operations.
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<PAGE>
Prospectuses for these Investment Portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at (800)
647-7327, or at its Internet Web Site at www.ssgafunds.com.
Shares of the Money Market, US Government Money Market and Tax Free Money
Market Funds are divided into Classes A, B and C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved by the holders of a majority of the
shares of Investment Company or the Fund, respectively. All other amendments may
be effected by Investment Company's Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of a Fund may be held personally
liable for the obligations of a Fund. The Master Trust Agreement provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of a Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial loss
beyond their investments is limited to circumstances in which the Fund itself
would be unable to meet its obligations.
Shareholder Meetings. Investment Company will not have an annual meeting
of shareholders. Special meetings may be convened: (1) by the Board of Trustees;
(2) upon written request to the Board by the holders of at least 10% of the
outstanding shares; or (3) upon the Board's failure to honor the shareholders'
request described above, by holders of at least 10% of the outstanding shares
giving notice of the special meeting to the shareholders.
Controlling Shareholders. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding.
State Street Bank and Trust Company ("State Street") may from time to time
have discretionary authority over accounts which invest in Investment Company
shares. These accounts include accounts maintained for securities lending
program and investment accounts which permit the use of Investment Company
portfolios as short-term cash sweep investments. Shares purchased for all
discretionary accounts are held of record by State Street, who retains voting
control of such shares. As of April 15, 1998, State Street held of record less
than 25% of the issued and outstanding shares of Investment Company in
connection with its discretionary accounts. Consequently, State Street is not
deemed to be a controlling person of Investment Company for purposes of the 1940
Act. State Street also acts as Investment Company's investment advisor, transfer
agent and custodian.
The Trustees and officers of Investment Company, as a group, own less than
1% of Investment Company's voting securities.
Frank Russell Investment Management Company ("Administrator"), Investment
Company's administrator, will be the sole shareholder of the Fund until such
time as the Fund has public shareholders and therefore may be deemed a
controlling person.
Trustees and Officers. The Board of Trustees is responsible for overseeing
generally the operation of the Fund. The officers, all of whom are employed by,
and are officers of, Administrator or its affiliates, are responsible for the
day-to-day management and administration of the Fund's operations.
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<PAGE>
Trustees who are not officers or employees of State Street or its
affiliates are paid $55,500 each fiscal year and are reimbursed for travel and
other expenses they incur in attending Board meetings. As of the date of this
SAI, the Trustees were not paid pension or retirement benefits as part of
Investment Company expenses. 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 SSgA Funds, 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 and President. Born
4/22/39. Trustee, President and Chief Executive Officer, Russell Insurance Funds
(investment company). Director, Chief Executive Officer and Chairman of the
Board, Russell Fund Distributors, Inc. Trustee, President and Chief Executive
Officer, Frank Russell Investment Company (investment company); Director, Chief
Executive Officer and Chairman of the Board, Frank Russell Investment Management
Company; Director, Chief Executive Officer and President, Frank Russell Trust
Company; Director and Chairman, Frank Russell Investment Company Public Limited
Company; November 1995 to February 1997, Director, Frank Russell Company;
Director and Chairman of the Board, Frank Russell Company (Delaware); Director,
Frank Russell Company; March 1989 to June 1993, Director, Frank Russell Company,
Director of Frank Russell Investments (Ireland) Limited; Director and Chairman,
Frank Russell Investment Company Public Limited Company. Until September 1994,
Director and President, The Laurel Funds, Inc. (investment company).
William L. Marshall, Trustee. Born 12/12/42. 33 West Court Street,
Doylestown, PA 18901. Chief Executive Officer and President, Wm. L. Marshall
Associates, Inc. (a registered investment advisor 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 Representative for Securities with FSC
Securities Corp., Marietta, Georgia.
*Steven J. Mastrovich, Trustee. Born 11/3/56. 350 Park Avenue, 15th Floor,
New York, NY 10022. Partner, Squire, Sanders & Dempsey (law firm). From 1994 to
1997, Partner, Brown, Rudnick, Freed & Gesmer (law firm). From 1990 to 1994,
Partner, Warner & Stackpole (law firm).
Patrick J. Riley, Trustee. Born 11/30/48. 21 Custom House Street, Boston,
MA 02110. Partner, Riley, Burke & Donahue (law firm).
Richard D. Shirk, Trustee. Born 10/31/45. 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. Born 4/25/43. 26 Round Top Road, Boxford, MA
01921. Consultant, Computer Simulation, General Electric Industrial Control
Systems. Prior to that, President, A.B. Reed, Inc. - Engineers, Architects,
Planners. Prior to that, Vice President, Instrumentation and Controls, A.B.
Reed., Inc.
-5-
<PAGE>
Henry W. Todd, Trustee. Born 5/4/47. 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. Born 8/24/57. Assistant
Secretary and Associate General Counsel, Frank Russell Investment Management
Company, Russell Fund Distributors, Inc., Frank Russell Capital Inc., Frank
Russell Company and Russell Fiduciary Services Company; Director, Secretary and
Associate General Counsel, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
George W. Weber, Senior Vice President, Fund Treasurer and Principal
Accounting Officer. Born 6/3/51. Treasurer and Chief Accounting Officer, Russell
Insurance Funds (investment company); Director of Finance and Operations, Frank
Russell Trust Company; Director, Fund Administration and Operations of Frank
Russell Investment Management Company and Russell Fund Distributors, Inc.;
Treasurer and Chief Accounting Office, Frank Russell Investment Company
(investment company); March 1993 to January 1996, Vice President, Operations,
Funds Management, J.P. Morgan; December 1985 to March 1993, Senior Vice
President, Operations, Frank Russell Investment Company, The Laurel Funds, Inc.
and The Seven Seas Series Fund (investment companies); Director of Operations,
Frank Russell Investment Management Company and Frank Russell Trust Company;
Director, Russell Fund Distributors, Inc.
========================================================
1. Trustee 1. Total Compensation
from Investment Company
per Fiscal Year
--------------------------------------------------------
2. Lynn L. Anderson 2. $0
--------------------------------------------------------
3. William L. Marshall 3. $55,500
--------------------------------------------------------
4. Steven J. Mastrovich 4. $55,500
--------------------------------------------------------
5. Patrick J. Riley 5. $55,500
--------------------------------------------------------
6. Richard D. Shirk 6. $55,500
--------------------------------------------------------
7. Bruce D. Taber 7. $55,500
--------------------------------------------------------
8. Henry W. Todd 8. $55,500
========================================================
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 Advisor, 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.
Advisor. State Street serves as the Fund's investment advisor ("Advisor")
pursuant to an Advisory Agreement dated April 12, 1988 ("Advisory Agreement").
State Street is a wholly owned subsidiary of State Street Corporation, a
publicly held bank holding company. State Street's address is 225 Franklin
Street, Boston, MA 02110.
-6-
<PAGE>
Under the Advisory Agreement, Advisor directs the Fund's investments in
accordance with its investment objective, policies and limitations.
The Advisory Agreement will continue from year to year provided that a
majority of the Trustees who are not interested persons of any Investment
Portfolio and either a majority of all Trustees or a majority of the
shareholders of each Investment Portfolio approve its continuance. The Agreement
may be terminated by Advisor or a Fund without penalty upon 60 days' notice and
will terminate automatically upon its assignment.
Administrator. Frank Russell Investment Management Company
("Administrator") serves as the Fund's administrator, pursuant to an
Administration Agreement dated April 12, 1988 ("Administration Agreement"). A
description of the services provided under the Administration Agreement and the
basis for computing fees for such services is provided in the Fund's Prospectus.
The Administration Agreement will continue from year to year provided that
a majority of the Trustees and a majority of the Trustees who are not interested
persons of any Investment Portfolio and who have no direct or indirect financial
interest in the operation of the Distribution Plan described below or the
Administration Agreement approve its continuance. The Agreement may be
terminated by Administrator or a Fund without penalty upon 60 days' notice and
will terminate automatically upon its assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and its affiliates have offices in Tacoma, Winston-Salem, New
York City, Toronto, London, Tokyo, Sydney, Paris, Zurich and Auckland, and have
approximately 1,200 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 One International Place, Boston,
MA 02110.
Custodian and Transfer Agent. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For
Custodian services, State Street is paid an annual fee in accordance with the
following: custody services--a fee payable monthly on a pro rata basis, based on
the following percentages of average daily net assets of each Fund: $0 up to
$100 million--0.05%, over $100 million to $200 million-0.03%; and over $200
million-0.02%; securities transaction charges from $25.00 to $150.00 per
transaction; Eurodollar transaction fees ranging from $110.00 to $125.00 per
transaction; monthly pricing fees of $375.00 per Investment Fund and from $4.00
to $11.00 per security, depending on the type of instrument and the pricing
service used; transfer agent services of $1.50 per shareholder transaction and a
multiple class fee of $18,000 per year for each additional class of shares; and
yield calculation fees of $350.00 per non-money market portfolio per month. As
of the date of this SAI, a yield calculation will not be calculated for the Fund
and therefore the $350.00 fee will not be charged. For Transfer and Dividend
Disbursing Agent services, State Street is paid the following annual account
services fees: $9.00 open account fee; $1.50 closed account fee; fund minimum
per portfolio for one to four portfolios--$36,000, five to six
portfolios--$24,000, and over six portfolios $18,000. Portfolio fees are
allocated to each fund based on the average net asset value of each fund and are
billable on a monthly basis at the rate of 1/12 of the annual fee. State Street
will apply a $5.00 fee to each telephone transaction (purchase or redemption),
which is applied against the monthly billing. 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.
-7-
<PAGE>
Independent Accountants. Coopers & Lybrand L.L.P. serves as the Investment
Company's independent accountants. Coopers & Lybrand L.L.P. is responsible for
performing annual audits of the financial statements and financial highlights in
accordance with generally accepted auditing standards, a review of federal tax
returns, and, pursuant to Rule 17f-2 of the 1940 Act, three security counts. The
mailing address of Coopers & Lybrand L.L.P. is One Post Office Square, Boston,
MA 02109.
Distribution Plan. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Fund may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Fund may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule. Accordingly, the
Fund has adopted an active distribution plan (the "Plan"), which is described in
the Fund's Prospectus.
The Plan provides that the Fund may spend annually, directly or
indirectly, up to 0.25 of 1% of the average daily value of the net assets for
distribution and shareholder servicing services. The Plan does not provide for
the Fund to be charged for interest, carrying or any other financing charges on
any distribution expenses carried forward to subsequent years. A quarterly
report of the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. The
Plan may not be amended without shareholder approval to increase materially the
distribution or shareholder servicing costs that the Fund may pay. The Plan and
material amendments to it must be approved annually by all of the Trustees and
by the Trustees who are neither "interested persons" (as defined in the 1940
Act) of the Fund nor have any direct or indirect financial interest in the
operation of the Plan or any related agreements.
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Advisor ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Such arrangements are
more fully described in the Fund's Prospectus under "Distribution Services and
Shareholder Servicing."
Federal Law Affecting State Street. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing certain securities, and
prohibits a member bank of the Federal Reserve System from having certain
affiliations with an entity engaged principally in that business. The activities
of State Street in informing its customers of the Fund, performing investment
and redemption services, providing custodian, transfer, shareholder servicing,
dividend disbursing, agent servicing and investment advisory services, may raise
issues under these provisions. State Street has been advised by its counsel that
its activities in connection with the Fund contemplated under this arrangement
are consistent with its statutory and regulatory obligations.
Valuation of Fund Shares. The Fund determines net asset value per share
once each "business day," as of the close of the regular trading session of the
New York Stock Exchange (currently, 4:00 p.m. Eastern time). A business day is
one on which the New York Stock Exchange is open for business. Currently, the
New York Stock Exchange is open for trading every weekday except New Year's Day,
Martin Luther King Jr. Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
The Fund's portfolio securities actively trade on foreign exchanges which
may trade on Saturdays and on days that the Fund does not offer or redeem
shares. The trading of portfolio securities on foreign exchanges on such days
may significantly increase or decrease the net asset value of Fund shares when
the shareholder is not able to purchase or redeem Fund shares. Further, because
foreign securities markets may close prior to the time the Fund determines net
asset value, events affecting the value of the portfolio securities occurring
between the time prices are determined and the time the Fund calculates net
asset value may not be reflected in the calculation of net asset value unless
Advisor determines that a particular event would materially affect the net asset
value. If such an event occurs, these securities will be valued at their fair
value following procedures approved by the Trustees.
-8-
<PAGE>
Brokerage Practices. All portfolio transactions are placed on behalf of
the Fund by Advisor. Advisor ordinarily pays commissions when it executes
transactions on a securities exchange. In contrast, there is generally no stated
commission on the purchase or sale of securities traded in the over-the-counter
markets, including most debt securities and money market instruments. Rather,
the price of such securities includes an undisclosed "commission" in the form of
a mark-up or mark-down. The cost of securities purchased from underwriters
includes an underwriting commission or concession.
The Fund contemplates purchasing most equity securities directly in the
securities markets located in emerging or developing countries or in the
over-the-counter markets. ADRs and EDRs may be listed on stock exchanges, or
traded in the over-the-counter markets in the US or Europe, as the case may be.
ADRs, like other securities traded in the US, will be subject to negotiated
commission rates.
Subject to the arrangements and provisions described below, the selection
of a broker or dealer to execute portfolio transactions is usually made by
Advisor. The Advisory Agreement provides, in substance and subject to specific
directions from officers of Investment Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Fund. Ordinarily, securities will
be purchased from primary markets, and Advisor shall consider all factors it
deems relevant in assessing the best overall terms available for any
transaction, including the breadth of the market in the security, the price of
the security, the financial condition and execution capability of the broker or
dealer, and the reasonableness of the commission, if any, for the specific
transaction and other transactions on a continuing basis.
The Advisory Agreement authorizes Advisor 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 Advisor (or its
affiliates). Advisor 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
Advisor, 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 Advisor exercises investment discretion.
The Trustees periodically review Advisor'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 Advisor attributable
to a particular Fund transaction may benefit one or more other accounts for
which Advisor exercises investment discretion or an Investment Portfolio other
than such Fund. Advisor's fees are not reduced by Advisor's receipt of such
brokerage and research services.
Portfolio Turnover Policy. Generally, securities are purchased for the
Fund for investment income and/or capital appreciation and not for short-term
trading profits. The Advisor's sell discipline for the Fund's investment in
securities of foreign issuers is based on the premise of a long-term investment
horizon, however, sudden changes in valuation levels arising from, for example,
new macroeconomic policies, political developments, and industry conditions
could change the assumed time horizon. Some countries impose restrictions on
repatriation of capital and/or dividends which would lengthen the Advisor's
assumed time horizon in those countries. Liquidity, volatility, and overall risk
of a position are other factors considered by the Advisor in determining the
appropriate investment horizon. Therefore, the Fund may dispose of securities
without regard to the time they have been held when such action, for defensive
or other purposes, appears advisable. The Fund will limit investments in
illiquid securities to 15% of net assets.
The portfolio turnover rate for the Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the particular year, by
the monthly average value of the portfolio securities owned by
-9-
<PAGE>
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.
Total Return Quotations. The Fund computes average annual total return by
using a standardized method of calculation required by the Securities and
Exchange Commission. Average annual total return is computed by finding the
average annual compounded rates of return on a hypothetical initial investment
of $1,000 over the one-, five- and ten-year periods (or life of the funds as
appropriate), that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1+T)(n) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a $1,000 payment made at the
beginning of the 1-, 5- and 10-year periods at the end of
the year or period
The calculation assumes that all dividends and distributions of the Fund
are reinvested at the price stated in the Prospectus on the dividend dates
during the period, and includes all recurring and nonrecurring fees that are
charged to all shareholder accounts.
Total return and other performance figures are based on historical
earnings and are not indicative of future performance.
INVESTMENTS
The nonfundamental investment objective of the Fund is set forth in the
Prospectus. The investment objective may be changed with the approval of a
majority of the Fund's Board of Trustees, with at least 60 days' prior notice to
shareholders. However, to meet certain state requirements, it may be determined
that the objective will only be changed with the approval of a majority of the
Fund's shareholders, as defined by the 1940 Act.
In addition to that investment objective, the Fund also has certain
fundamental investment restrictions, which may be changed only with the approval
of a majority of the shareholders of the Fund, and certain nonfundamental
investment restrictions and policies, which may be changed by the Fund without
shareholder approval.
Investment Restrictions
The Fund is subject to the following investment restrictions. Restrictions
1 through 6 are fundamental, and restriction 7 is nonfundamental. Unless
otherwise noted, these restrictions apply at the time an investment is made. The
Fund will not:
(1) Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US Government,
its agencies and instrumentalities). Concentration may occur as a result of
changes in the market value of portfolio securities, but may not result from
investment.
(2) Borrow money, except as a temporary measure for extraordinary or
emergency purposes or to facilitate redemptions (not for leveraging or
investment), provided that borrowings do not exceed an amount equal to 33-1/3%
of the current value of the Fund's assets taken at market value, less
liabilities other than borrowings. If at any time a Fund's borrowings exceed
this limitation due to a decline in net assets, such borrowings will within
three days be reduced to the extent necessary to comply with this limitation. A
Fund will not purchase investments once borrowed funds exceed 5% of its total
assets.
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(3) Pledge, mortgage, or hypothecate its assets. However, the Fund may
pledge securities having a market value (on a daily marked-to-market basis) at
the time of the pledge not exceeding 33-1/3% of the value of the Fund's total
assets to secure borrowings permitted by paragraph (2) above.
(4) With respect to 75% of its total assets, invest in securities of any
one issuer (other than securities issued by the US Government, its agencies and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Fund's holdings in the securities of such issuer
exceeds 5% of the value of the Fund's assets.
(5) Make loans to any person or firm; provided, however, that the making
of a loan shall not include (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of any corporation or
government which are publicly distributed or of a type customarily purchased by
institutional investors, or (ii) the entry into "repurchase agreements" or
"reverse repurchase agreements." A Fund may lend its portfolio securities to
broker-dealers or other institutional investors if the aggregate value of all
securities loaned does not exceed 33-1/3% of the value of the Fund's total
assets. Portfolio securities may be loaned if collateral values are continuously
maintained at no less than 100% by "marking to market" daily.
(6) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
This restriction shall not be deemed to prohibit the Fund from (i) making any
permitted borrowings, mortgages or pledges, or (ii) entering into repurchase
transactions.
(7) Invest more than 15% of its net assets in the aggregate, on an ongoing
basis, in illiquid securities or securities that are not readily marketable,
including repurchase agreements and time deposits of more than seven days'
duration.
To the extent these restrictions reflect matters of operating policy which
may be changed without shareholder vote, these restrictions may be amended upon
approval by the Board of Trustees and notice to shareholders. The Fund currently
does not intend to invest in the securities of any issuer that would qualify as
a real estate investment trust under federal tax law.
With respect to the industry concentration outlined in the Prospectus, the
Advisor treats US domestic banks and foreign branches of US banks as a separate
industry from foreign banks.
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Except with respect to Investment Restriction Nos. 2 and 13, if a
percentage restriction is adhered to at the time of investment, a subsequent
increase or decrease in a percentage resulting from a change in the values of
assets will not constitute a violation of that restriction, except as otherwise
noted.
Investment Policies
To the extent permitted under the 1940 Act and exemptive rules and orders
thereunder, the Fund may seek to achieve its investment objective by investing
solely in the shares of another investment company that has substantially
similar investment objectives and policies. To the extent consistent with its
investment objective and restrictions, the Fund may invest in the following
instruments and utilize the following investment techniques:
Equity Securities. The Fund may invest in common and preferred equity
securities publicly traded in the United States or in foreign countries on
developed or emerging markets. The Fund's equity securities may be denominated
in foreign currencies and may be held outside the United States. Certain
emerging markets are closed in whole or part to the direct purchase of equity
securities by foreigners. In these markets, the Fund may be able to invest in
equity securities solely or primarily through foreign government authorized
pooled investment vehicles.
US Government Obligations. The types of US Government obligations in which
the Fund may at times invest include: (1) a variety of US Treasury obligations,
which differ only in their interest rates, maturities and times of issuance; and
(2) obligations issued or guaranteed by US Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the US Treasury, (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the US Treasury, (c)
discretionary authority of the US Government agency or instrumentality or (d)
the credit of the instrumentality (examples of agencies and instrumentalities
are: Federal Land Banks, Federal Housing Administration, Farmers Home
Administration, Export--Import Bank of the United States, Central Bank for
Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan Banks,
General Services Administration, Maritime Administration, Tennessee Development
Bank, Asian-American Development Bank, Student Loan Marketing Association,
International Bank for Reconstruction and Development and Federal National
Mortgage Association). No assurance can be given that in the future the US
Government will provide financial support to such US Government agencies or
instrumentalities described in (2)(b), (2)(c) and (2)(d), other than as set
forth above, since it is not obligated to do so by law. The Fund may purchase US
Government obligations on a forward commitment basis.
Debt Securities. The Fund may also invest in debt securities, including
instruments issued by emerging market companies, governments and their agencies.
The Fund is likely to purchase debt securities which are not investment grade
debt, since much of the emerging market debt falls in this category. These
securities are subject to market and credit risk. These lower rated debt
securities may include obligations that are in default or that face the risk of
default with respect to principal or interest. Such securities are sometimes
referred to as "junk bonds." Please see the Appendix for a description of
securities ratings.
Asset-Backed Securities. Asset-backed securities represent undivided
fractional interests in pools of instruments, such as consumer loans, and are
similar in structure to mortgage-related pass-through securities. Payments of
principal and interest are passed through to holders of the securities and are
typically supported by some form of credit enhancement, such as a letter of
credit, surety bond, limited guarantee by another entity or by priority to
certain of the borrower's other securities. The degree of credit-enhancement
varies, generally applying only until exhausted and covering only a fraction of
the security's par value.
The value of asset-backed securities is affected by changes in the
market's perception of the asset backing the security, changes in the
creditworthiness of the servicing agent for the instrument pool, the originator
of the instruments or the financial institution providing any credit enhancement
and the expenditure of any portion of any credit enhancement. The risks of
investing in asset-backed securities are
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ultimately dependent upon payment of
the underlying instruments by the obligors, and a Fund would generally have no
recourse against the obligee of the instruments in the event of default by an
obligor. The underlying instruments are subject to prepayments which shorten the
weighted average life of asset-backed securities and may lower their return, in
the same manner as described below for prepayments of pools of mortgage loans
underlying mortgage-backed securities. Use of asset-backed securities will
represent less than 5% of the Fund's total assets.
Section 4(2) Commercial Paper. The Fund may invest in commercial paper
issued in reliance on the so-called "private placement" exemption from
registration afforded by Section 4(2) of the Securities Act of 1933 ("Section
4(2) paper"). Section 4(2) paper is restricted as to disposition under the
federal securities laws, and generally is sold to 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, Advisor may determine that Section 4(2) paper is liquid for the
purposes of complying with the Fund's investment restriction relating to
investments in illiquid securities.
Eurodollar Certificates of Deposit (ECDs), Eurodollar Time Deposits (ETDs)
and Yankee Certificates of Deposit (YCDs). ECDs are US dollar denominated
certificates of deposit issued by foreign branches of domestic banks. ETDs are
US dollar denominated deposits in foreign banks or foreign branches of US banks.
YCDs are US dollar denominated certificates of deposit issued by US branches of
foreign banks.
Different risks than those associated with the obligations of domestic
banks may exist for ECDs, ETDs and YCDs because the banks issuing these
instruments, or their domestic or foreign branches, are not necessarily subject
to the same regulatory requirements that apply to domestic banks, such as loan
limitations, examinations and reserve, accounting, auditing, recordkeeping and
public reporting requirements.
Repurchase Agreements. The Fund may enter into repurchase agreements with
financial institutions. Under repurchase agreements, these parties sell
securities to the Fund and agree to repurchase the securities at the Fund's cost
plus interest within a specified time (normally one day). The securities
purchased by the Fund have a total value in excess of the purchase price paid by
the Fund and are held by Custodian until repurchased. Repurchase agreements
assist the Fund in being invested fully while retaining "overnight" flexibility
in pursuit of investments of a longer-term nature. The Fund will limit
repurchase transactions to those member banks of the Federal Reserve System and
broker-dealers whose creditworthiness is continually monitored and found
satisfactory by Advisor.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreements under the circumstances described in "Investment Restrictions." Under
reverse repurchase agreements, a Fund transfers possession of portfolio
securities to financial institutions in return for cash in an amount equal to a
percentage of the portfolio securities' market value and agrees to repurchase
the securities at a future date by repaying the cash with interest. The Fund
retains the right to receive interest and principal payments from the securities
while they are in the possession of the financial institutions. Cash or liquid
high quality debt obligations from a Fund's portfolio equal in value to the
repurchase price including any accrued interest will be segregated by Custodian
on the Fund's records while a reverse repurchase agreement is in effect. Reverse
repurchase agreements involve the risk of default by the counterparty, which may
adversely affect the Fund's ability to reacquire the underlying security.
When-Issued Transactions. New issues of securities are often offered on a
when-issued basis. This means that delivery and payment for the securities
normally will take 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.
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The Fund will make commitments to purchase when-issued securities only
with the intention of actually acquiring the securities, but the Fund may sell
these securities or dispose of the commitment before the settlement date if it
is deemed advisable as a matter of investment strategy. Cash or marketable high
quality debt securities equal to the amount of the above commitments will be
segregated on the Fund's records. For the purpose of determining the adequacy of
these securities the segregated securities will be valued at market. If the
market value of such securities declines, additional cash or securities will be
segregated on the Fund's records on a daily basis so that the market value of
the account will equal the amount of such commitments by the Fund. The Fund will
invest no more than 5% of its net assets in when-issued securities.
Securities purchased on a when-issued basis and held by the Fund are
subject to changes in market value based upon the public's perception of changes
in the level of interest rates. Generally, the value of such securities will
fluctuate inversely to changes in interest rates -- i.e., they will appreciate
in value when interest rates decline and decrease in value when interest rates
rise. Therefore, if in order to achieve higher interest income the Fund remains
substantially fully invested at the same time that it has purchased securities
on a "when-issued" basis, there will be a greater possibility of fluctuation in
the Fund's net asset value.
When payment for when-issued securities is due, the Fund will meet its
obligations from then-available cash flow, the sale of segregated securities,
the sale of other securities or, and although it would not normally expect to do
so, from the sale of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). The sale of
securities to meet such obligations carries with it a greater potential for the
realization of capital gains, which are subject to federal income taxes.
Special Situations and Illiquid Securities. The Fund and the Advisor
believe that carefully selected investments in joint ventures, cooperatives,
partnerships, private placements, unlisted securities, and other similar
vehicles (collectively, "special situations") could enhance the Fund's capital
appreciation potential. These investments are generally illiquid. The Fund
currently does not intend to invest more than 5% of its net assets in all types
of illiquid securities or securities that are not readily marketable, including
special situations. In no case will the Fund invest more than 15% of its net
assets in illiquid securities. Due to foreign ownership restrictions, the Fund
may invest periodically in illiquid securities which are or become illiquid due
to restrictions on foreign ownership imposed by foreign governments. Said
securities may be more difficult to price and trade. The absence of a regular
trading market for illiquid securities imposes additional risks on investment in
these securities. Illiquid securities may be difficult to value and may often be
disposed of only after considerable expense and delay.
Forward Commitments. The Fund may contract to purchase securities for a
fixed price at a future date beyond customary settlement time consistent with
the Fund's ability to manage its investment portfolio, maintain a stable net
asset value and meet redemption requests. The Fund may dispose of a commitment
prior to settlement if it is appropriate to do so and realize short-term profits
or losses upon such sale. When effecting such transactions, cash or liquid high
quality debt obligations held by the Fund of a dollar amount sufficient to make
payment for the portfolio securities to be purchased will be segregated on the
Fund's records at the trade date and maintained until the transaction is
settled. Forward commitments involve a risk of loss if the value of the security
to be purchased declines prior to the settlement date, or if the other party
fails to complete the transaction.
Variable and Floating Rate 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.
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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 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.
Hedging Strategies and Related Investment Techniques
The Fund may seek to hedge its portfolios against movements in the equity
markets, interest rates and currency exchange rates through the use of options,
futures transactions, options on futures and forward foreign currency exchange
transactions. The Fund has authority to write (sell) covered call and put
options on its portfolio securities, purchase put and call options on securities
and engage in transactions in stock index options, stock index futures and
financial futures and related options on such futures. The Fund may enter into
such options and futures transactions either on exchanges or in the
over-the-counter ("OTC") markets. Although certain risks are involved in options
and futures transactions (as discussed in the Prospectus and below), Advisor
believes that, because the Fund will only engage in these transactions for
hedging purposes, the options and futures portfolio strategies of the Fund will
not subject the Fund to the risks frequently associated with the speculative use
of options and futures transactions. Although the use of hedging strategies by
the Fund is intended to reduce the volatility of the net asset value of the
Fund's shares, the Fund's net asset value will nevertheless fluctuate. There can
be no assurance that the Fund's hedging transactions will be effective.
Writing Covered Call Options. The Fund is authorized to write (sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to such options. Writing a call
option obligates the Fund to sell or deliver the option's underlying security,
in return for the strike price, upon exercise of the option. By writing a call
option, the Fund receives an option premium from the purchaser of the call
option. Writing covered call options is generally a profitable strategy if
prices remain the same or fall. Through receipt of the option premium, the Fund
would seek to mitigate the effects of a price decline. By writing covered call
options, however, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction.
Writing Covered Put Options. The Fund is authorized to write (sell)
covered put options on its portfolio securities and to enter into closing
transactions with respect to such options.
When the Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the Fund assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
The Fund may seek to terminate its position in a put option it writes before
exercise by closing out the option in the secondary market at its current price.
If the secondary market is not liquid for an option the Fund has written,
however, the Fund must continue to be prepared to pay the strike price while the
option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position.
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The Fund may write put options as an alternative to purchasing actual
securities. If security prices rise, the Fund would expect to profit from a
written put option, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it is likely
that the Fund will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the Fund would expect to
suffer a loss. This loss should be less than the loss the Fund would have
experienced from purchasing the underlying instrument directly, however, because
the premium received for writing the option should mitigate the effects of the
decline.
Purchasing Put Options. The Fund is authorized to purchase put options
to hedge against a decline in the market value of its portfolio securities. By
buying a put option the Fund has the right (but not the obligation) to sell the
underlying security at the exercise price, thus limiting the Fund's risk of loss
through a decline in the market value of the security until the put option
expires. The amount of any appreciation in the value of the underlying security
will be partially offset by the amount of the premium paid by the Fund for the
put option and any related transaction costs. Prior to its expiration, a put
option may be sold in a closing sale transaction and profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. The Fund will not purchase put options on
securities (including stock index options discussed below) if as a result of
such purchase, the aggregate cost of all outstanding options on securities held
by the Fund would exceed 5% of the market value of the Fund's total assets.
Purchasing Call Options. The Fund is also authorized to purchase call
options. The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price (call options on futures contracts are settled by purchasing the
underlying futures contract). The Fund will purchase call options only in
connection with "closing purchase transactions."
Stock Index Options and Financial Futures. The Fund is authorized to
engage in transactions in stock index options and financial futures, and related
options. The Fund may purchase or write put and call options on stock indices to
hedge against the risks of market-wide stock price movements in the securities
in which the Fund invests. Options on indices are similar to options on
securities except that on exercise or assignment, the parties to the contract
pay or receive an amount of cash equal to the difference between the closing
value of the index and the exercise price of the option times a specified
multiple. The Fund may invest in stock index options based on a broad market
index, such as the S&P 500 Index, or on a narrow index representing an industry
or market segment. The Fund's investments in foreign stock index futures
contracts and foreign interest rate futures contracts, and related options, are
limited to only those contracts and related options that have been approved by
the Commodity Futures Trading Commission ("CFTC") for investment by United
States investors. Additionally, with respect to the Fund's investments in
foreign options, unless such options are specifically authorized for investment
by order of the CFTC, the Fund will not make such investments.
The Fund may also purchase and sell stock index futures contracts and
other financial futures contracts ("futures contracts") as a hedge against
adverse changes in the market value of its portfolio securities as described
below and to obtain exposure to foreign markets. A futures contract is an
agreement between two parties which obligates the purchaser of the futures
contract to buy and the seller of a futures contract to sell a security for a
set price on a future date. Unlike most other futures contracts, a stock index
futures contract does not require actual delivery of securities, but results in
cash settlement based upon the difference in value of the index between the time
the contract was entered into and the time of its settlement. The Fund may
effect transactions in stock index futures contracts in connection with equity
securities in which it invests and in financial futures contracts in connection
with debt securities in which it invests, if any. Transactions by the Fund in
stock index futures and financial futures are subject to limitations as
described below under "Restrictions on the Use of Futures Transactions."
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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 a Fund is not fully
invested in the securities markets and anticipates a significant market advance,
the Fund may purchase futures in order to gain rapid market exposure that may
partially or entirely offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, an equivalent amount of futures
contracts will be terminated by offsetting sales. It is anticipated that, in a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the long futures position, whether the long
position results from the purchase of a futures contract or the purchase of a
call option, but under unusual circumstances (e.g., the Fund experiences a
significant amount of redemptions), a long futures position may be terminated
without the corresponding purchase of securities.
The Fund also is authorized to purchase and write call and put options
on futures contracts and stock indices in connection with its hedging
activities. Generally, these strategies would be utilized under the same market
and market sector conditions (i.e., conditions relating to specific types of
investments) during which the Fund enters into futures transactions. The Fund
may purchase put options or write call options on futures contracts and stock
indices rather than selling the underlying futures contract in anticipation of a
decrease in the market value of securities. Similarly, the Fund can purchase
call options, or write put options on futures contracts and stock indices, as a
substitute for the purchase of such futures to hedge against the increased cost
resulting from an increase in the market value of securities which the Fund
intends to purchase.
The Fund is also authorized to engage in options and futures
transactions on US and foreign exchanges and in options in the OTC markets ("OTC
options"). In general, exchange traded contracts are third-party contracts
(i.e., performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) with standardized strike prices and expiration dates. OTC
options transactions are two-party contracts with price and terms negotiated by
the buyer and seller. See "Restrictions on OTC Options" below for information as
to restrictions on the use of OTC options.
The Fund is authorized to purchase or sell listed or OTC foreign
security or currency options, foreign security or currency futures and related
options as a short or long hedge against possible variations in foreign exchange
rates and market movements. Such transactions could be effected with respect to
hedges on non-US dollar denominated securities owned by a Fund, sold by a Fund
but not yet delivered, or committed or anticipated to be purchased by a Fund. As
an illustration, a Fund may use such techniques to hedge the stated value in US
dollars of an investment in a yen-denominated security. In such circumstances,
for example, the Fund can purchase a foreign currency put option enabling it to
sell a specified amount of yen for US dollars at a specified price by a future
date. To the extent the hedge is successful, a loss in the value of the yen
relative to the US dollar will tend to be offset by an increase in the value of
the put option.
Restrictions on the Use of Futures Transactions. The purchase or sale of
a futures contract differs from the purchase or sale of a security in that no
price or premium is paid or received. Instead, an amount of cash or securities
acceptable to the broker and the relevant contract market, which varies, but is
generally about 5% of the contract amount, must be deposited with the broker.
This amount is known as "initial margin" and represents a "good faith" deposit
assuring the performance of both the purchaser and seller under the futures
contract. Subsequent payments to and from the broker, called "variation margin,"
are required to be made on a daily basis as the price of the futures contract
fluctuates making the long and short positions in the futures contracts more or
less valuable, a process known as "marking to market." At any time prior to the
settlement date of the futures 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
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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 Advisor believes
the Fund can receive on each business day at least two independent bids or
offers (one of which will be from an entity other than a party to the option).
The Staff of the SEC has taken the position that purchased OTC options
and the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an operating policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transaction, the sum of: (1) the market value of
outstanding OTC options held by the Fund; (2) the market value of the underlying
securities covered by outstanding OTC call options sold by the Fund; (3) margin
deposits on the Fund's existing OTC options on futures contracts; and (4) the
market value of all other assets of the Fund that are illiquid or are not
otherwise readily marketable, would exceed 10% of the net assets of the Fund,
taken at market value. However, if an OTC option is sold by the Fund to a
primary US Government securities dealer recognized by the Federal Reserve Bank
of New York and the Fund has the unconditional contractual right to repurchase
such OTC option from the dealer at a predetermined price, then the Fund will
treat as illiquid such amount of the underlying securities as is equal to the
repurchase price less the amount by which the option is "in-the-money" (current
market value of the underlying security minus the option's strike price). The
repurchase price with primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option plus the
amount by which the option is "in-the-money."
Asset Coverage for Futures and Options Positions. The Fund will not use
leverage in its options and futures strategies. Such investments will be made
for hedging purposes only. The Fund will hold securities or other options or
futures positions whose values are expected to offset its obligations under the
hedge strategies. The Fund will not enter into an option or futures position
that exposes the Fund to an obligation to another party unless it owns either:
(1) an offsetting position in securities or other options or futures contracts;
or (2) cash, receivables and short-term debt securities with a value sufficient
to cover its potential obligations. The Fund will comply with guidelines
established by the SEC with respect to coverage of options and futures
strategies by mutual funds, and if the guidelines so require, will set aside
cash and high grade liquid debt securities in a segregated account with its
custodian bank in the amount prescribed. The Fund's custodian shall maintain the
value of such segregated account equal to the prescribed amount by adding or
removing additional cash or liquid securities to account for fluctuations in the
value of securities held in such account. Securities held in a segregated
account cannot be sold while the futures or option strategy is outstanding,
unless they are replaced with similar securities. As a result, there is a
possibility that segregation of a large percentage of a Fund's assets could
impede portfolio management or the Fund's ability to meeting redemption requests
or other current obligations.
Risk Factors in Options, Futures, Forward and Currency Transactions.
Utilization of options and futures transactions to hedge the Fund's portfolios
involves the risk of imperfect correlation in movements in the price of options
and futures and movements in the price of securities or currencies which are the
subject of the hedge. If the price of the options or futures moves more or less
than the price of hedged securities or currencies, the Fund will experience a
gain or loss which will not be completely offset by movements in the price of
the subject of the hedge. The successful use of options and futures also depends
on Advisor's ability to correctly predict price movements in the market involved
in a particular options or futures transaction. To compensate for imperfect
correlations, the Fund may purchase or sell stock index options or futures
contracts in a greater dollar amount than the hedged securities if the
volatility of the hedged securities is historically greater than the volatility
of the stock index options or futures contracts. Conversely, the Fund may
purchase or sell fewer stock index options or futures contracts, if the
historical price volatility of the hedged securities is less than that of the
stock index options or futures
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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
Advisor believes the Fund can receive on each business day at least two
independent bids or offers. However, there can be no assurance that a liquid
secondary market will exist at any specific time. Thus, it may not be possible
to close an options or futures position. The inability to close options and
futures positions also could have an adverse impact on a Fund's ability to
effectively hedge its portfolio. There is also the risk of loss by a Fund of
margin deposits or collateral in the event of bankruptcy of a broker with whom
the Fund has an open position in an option, a futures contract or related
option.
The exchanges on which options on portfolio securities and currency
options are traded have generally established limitations governing the maximum
number of call or put options on the same underlying security or currency
(whether or not covered) which may be written by a single investor, whether
acting alone or in concert with others (regardless of whether such options are
written on the same or different exchanges or are held or written in one or more
accounts or through one or more brokers). "Trading limits" are imposed on the
maximum number of contracts which any person may trade on a particular trading
day.
RISK CONSIDERATIONS
Investors should consider carefully the substantial risks involved in
securities of companies and governments of foreign nations, which are in
addition to the usual risks inherent in domestic investments. There may be less
publicly available information about foreign companies comparable to the reports
and ratings published regarding US companies. Foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to US companies. Many foreign markets have substantially less
volume than either the established domestic securities exchanges or the OTC
markets. Securities of some foreign companies are less liquid and more volatile
than securities of comparable US companies. Commission rates in foreign
countries, which may be fixed rather than subject to negotiation as in the US,
are likely to be higher. In many foreign countries there is less government
supervision and regulation of securities exchanges, brokers and listed companies
than in the US, and capital requirements for brokerage firms are generally
lower. Settlement of transactions in foreign securities may, in some instances,
be subject to delays and related administrative uncertainties.
Investments in companies domiciled in emerging market countries may be
subject to additional risks than investment in the US and in other developed
countries. These risks include: (1) Volatile social, political and economic
conditions can cause investments in emerging or developing markets exposure to
economic structures that are generally less diverse and mature. Emerging market
countries can have political systems which can be expected to have less
stability than those of more developed countries. The possibility may exist that
recent favorable economic developments in certain emerging market countries may
be suddenly slowed or reversed by unanticipated political or social events in
such countries. Moreover, the economies of individual emerging market countries
may differ favorably or unfavorably from the US economy in such respects as the
rate of growth in gross domestic product, the rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position. (2)
The small current size of the markets for such securities and the currently low
or nonexistent volume of trading can result in a lack of liquidity and in
greater price volatility. Until recently, there has been an absence of a capital
market structure or market-oriented economy in certain emerging market
countries. Because the Fund's securities will generally be denominated in
foreign currencies, the value of such securities to the Fund will be affected by
changes in currency exchange rates and in exchange control regulations. A change
in the value of a
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foreign currency against the US dollar will result in a corresponding change in
the US dollar value of the Fund's securities. In addition, some emerging market
countries may have fixed or managed currencies which are not free-floating
against the US dollar. Further, certain emerging market currencies may not be
internationally traded. Certain of these currencies have experienced a steady
devaluation relative to the US dollar. Many emerging markets countries have
experienced substantial, and in some periods extremely high, rates of inflation
for many years. Inflation and rapid fluctuations in inflation rates have had,
and may continue to have, negative effects on the economies and securities
markets of certain emerging market countries. (3) The existence of national
policies may restrict the Fund's investment opportunities and may include
restrictions on investment in issuers or industries deemed sensitive to national
interests. (4) Some emerging markets countries may not have developed structures
governing private or foreign investment and may not allow for judicial redress
for injury to private property.
The Fund endeavors to buy and sell foreign currencies on favorable terms.
Such price spread on currency exchange (to cover service charges) may be
incurred, particularly when the Fund changes investments from one country to
another or when proceeds from the sale of shares in US dollars are used for the
purchase of securities in foreign countries. Also, some countries may adopt
policies which would prevent the Fund from repatriating invested capital and
dividends, withhold portions of interest and dividends at the source, or impose
other taxes, with respect to the Fund's investments in securities of issuers of
that country. There also is the possibility of expropriation, nationalization,
confiscatory or other taxation, foreign exchange controls (which may include
suspension of the ability to transfer currency from a given country), default in
foreign government securities, political or social instability, or diplomatic
developments that could adversely affect investments in securities of issuers in
those nations.
The Fund may be affected either favorably or unfavorably by fluctuations
in the relative rates of exchange between the currencies of differentiations,
exchange control regulations and indigenous economic and political developments.
TAXES
The Fund intends to qualify for treatment as a regulated investment
company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as
amended ("the Code"). As a RIC, the Fund will not be liable for federal income
taxes on taxable net investment income and net capital gain (long-term capital
gains in excess of short-term capital losses) that it distributes to its
shareholders, provided that the Fund distributes annually to its shareholders at
least 90% of its net investment income and net short-term capital gain for the
taxable year ("Distribution Requirement"). For a Fund to qualify as a RIC it
must abide by all of the following requirements: (1) at least 90% of the Fund's
gross income each taxable year must be derived from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies, or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies
("Income Requirement"); (2) at the close of each quarter of the Fund's taxable
year, at least 50% of the value of its total assets must be represented by cash
and cash items, US government securities, securities of other RICs, and other
securities, with such other securities limited, in respect of any one issuer, to
an amount that does not exceed 5% of the total assets of the Fund and that does
not represent more than 10% of the outstanding voting securities of such issuer;
and (3) 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.
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If a shareholder receives a distribution taxable as a 20% gain or a 28%
gain with respect to shares of a Fund and redeems or exchanges the shares
without having held the shares for more than one year, then any loss on the
redemption or exchange will be treated as a 20% loss or a 28% loss to the extent
of the respective 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 and the Distribution Requirement, and by
provisions of the Code that characterize certain income or loss as ordinary
income or loss rather than capital gain or loss. Such recognition,
characterization and timing rules will affect investments in certain futures
contracts, options, foreign currency contracts and debt securities denominated
in foreign currencies.
State and Local Taxes. Depending upon the extent of the Fund's activities
in states and localities in which its offices are maintained, its agents or
independent contractors are located or it is otherwise deemed to be conducting
business, the Fund may be subject to the tax laws of such states or localities.
Foreign Income Taxes. Investment income received by the Fund from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which would entitle the Fund to a reduced rate of such taxes or
exemption from taxes on such income. It is impossible to determine the effective
rate of foreign tax for the Fund in advance since the amount of the assets to be
invested within various countries is not known.
If the Fund invests in an entity that is classified as a "passive foreign
investment company" ("PFIC") for federal income tax purposes, the application of
certain provisions of the Code applying to PFICs could result in the imposition
of certain federal income taxes on the Fund. The Fund can elect to
mark-to-market its PFIC holdings in lieu of paying taxes on gains or
distributions therefrom. It is anticipated that any taxes on a Fund with respect
to investments in PFICs would be insignificant.
Foreign shareholders should consult with their tax advisors as to if and
how the federal income tax and its withholding requirements applies to them.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Fund and its shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Fund with the investor's tax advisor.
FINANCIAL STATEMENTS
Audited financial statements for the Fund will be available within 60 days
following the end of the Fund's then current fiscal year. When available, copies
of the financial statements can be obtained without charge by calling
Distributor at (800) 647-7327.
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APPENDIX
DESCRIPTION OF SECURITIES RATINGS
Ratings of Debt Instruments
Moody's Investors Service, Inc. ("Moody's") -- Long Term Debt Ratings.
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa -- Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
Standard & Poor's Corporation ("S&P"). The ratings are based, in varying
degrees, on the following considerations: (1) The likelihood of default --
capacity and willingness of the obligator as to the timely payment of interest
and repayment of principal in accordance with the terms of the obligation; (2)
The nature of and provisions of the obligation; and (3) The protection afforded
by, and relative position of, the obligation in 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
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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:
o 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:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
o Well-established access to a range of financial markets and assured
sources of alternate liquidity.
o Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
o 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.
o 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.
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F-2 -- Commercial paper issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than those issues rated F-1.
Duff and Phelps, Inc. Duff & Phelps' short-term ratings are consistent with
the rating criteria utilized by money market participants. The ratings apply to
all obligations with maturities of under one year, including commercial paper,
the uninsured portion of certificates of deposit, unsecured bank loans, master
notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term debt
issuers carry the highest rating, yet quality differences exist within that
tier. As a consequence, Duff & Phelps has incorporated gradations of '1+' (one
plus) and '1-' (one minus) to assist investors in recognizing those differences.
Duff 1+--Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free US Treasury short-term
obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors are
minor.
Duff 1- -- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.
Good Grade. Duff 2--Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding needs may enlarge total
financing requirements, access to capital markets is good. Risk factors are
small.
Satisfactory Grade. Duff 3--Satisfactory liquidity and other protection
factors qualify issue as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is expected.
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
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when assigning our ratings. Before dispatch to subscribers, a draft of the
report is submitted to each company to permit correction of any factual errors
and to enable clarification of issues raised.
IBCA's Rating Committees meet at regular intervals to review all ratings
and to ensure that individual ratings are assigned consistently for institutions
in all the countries covered. Following the Committee meetings, ratings are
issued directly to subscribers. At the same time, the company is informed of the
ratings as a matter of courtesy, but not for discussion.
A1+--Obligations supported by the highest capacity for timely repayment.
A1--Obligations supported by a very strong capacity for timely repayment.
A2--Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
B1--Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business, economic, or
financial conditions than for obligations in higher categories.
B2--Obligations for which the capacity for timely repayment is susceptible
to adverse changes in business, economic or financial conditions.
C1--Obligations for which there is an inadequate capacity to ensure timely
repayment.
D1--Obligations which have a high risk of default or which are currently in
default.
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<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
SSgA FUNDS
One International Place
Boston, Massachusetts 02110
(800) 647-7327
STATEMENT OF ADDITIONAL INFORMATION
HIGH YIELD BOND FUND
APRIL 28, 1998
SSgA Funds ("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 SSgA High Yield Bond Fund (the
"High Yield Bond Fund" or the "Fund") as contained in the Fund's Prospectus
dated April 28, 1998. This Statement is not a Prospectus and should be read in
conjunction with the Fund's Prospectus, which may be obtained by telephoning or
writing Investment Company at the number or address shown above.
<PAGE>
TABLE OF CONTENTS
Page
----
Structure and Governance............................................. 3
Organization and Business History........................... 3
Shareholder Meetings........................................ 4
Controlling Shareholders.................................... 4
Principal Shareholders...................................... 4
Trustees and Officers....................................... 4
Operation of Investment Company...................................... 6
Service Providers ......................................... 6
Advisor..................................................... 6
Administrator............................................... 6
Distributor................................................. 7
Custodian and Transfer Agent................................ 7
Independent Accountants..................................... 7
Distribution Plan ......................................... 7
Federal Law Affecting State Street.......................... 8
Valuation of Fund Shares.................................... 8
Brokerage Practices......................................... 9
Portfolio Turnover Rate..................................... 9
Yield and Total Return Quotations........................... 9
Investments.......................................................... 10
Investment Restrictions..................................... 10
Investment Policies......................................... 12
Risk Factors - Lower Rated Debt Securities.................. 15
Hedging Strategies and Related Investment Techniques........ 16
Taxes................................................................ 20
Financial Statements................................................. 22
Appendix: Description of Securities Ratings......................... 23
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STRUCTURE AND GOVERNANCE
Organization and Business History. Investment Company was organized as a
Massachusetts business trust on October 3, 1987 and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series, each of
which evidences pro rata ownership interest in a different investment portfolio,
or "Fund." The High Yield Bond 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:
-----------------------------------------------------------------------
SSgA Money Market Fund May 2, 1988
-----------------------------------------------------------------------
SSgA US Government Money Market Fund March 1, 1991
-----------------------------------------------------------------------
SSgA Matrix Equity Fund May 4, 1992
-----------------------------------------------------------------------
SSgA Small Cap Fund July 1, 1992
-----------------------------------------------------------------------
SSgA Yield Plus Fund November 9, 1992
-----------------------------------------------------------------------
SSgA S&P 500 Index Fund December 30, 1992
-----------------------------------------------------------------------
SSgA Growth and Income Fund September 1, 1993
-----------------------------------------------------------------------
SSgA Intermediate Fund September 1, 1993
-----------------------------------------------------------------------
SSgA US Treasury Money Market Fund December 1, 1993
-----------------------------------------------------------------------
SSgA Prime Money Market Fund February 22, 1994
-----------------------------------------------------------------------
SSgA Emerging Markets Fund March 1, 1994
-----------------------------------------------------------------------
SSgA Tax Free Money Market Fund December 1, 1994
-----------------------------------------------------------------------
SSgA Active International Fund March 7, 1995
-----------------------------------------------------------------------
SSgA Bond Market Fund February 7, 1996
-----------------------------------------------------------------------
SSgA Life Solutions Balanced Fund July 1, 1997
-----------------------------------------------------------------------
SSgA Life Solutions Growth Fund July 1, 1997
-----------------------------------------------------------------------
SSgA Life Solutions Income and Growth Fund July 1, 1997
-----------------------------------------------------------------------
SSgA Special Small Cap Fund *
-----------------------------------------------------------------------
SSgA High Yield Bond Fund *
-----------------------------------------------------------------------
SSgA International Growth Opportunities Fund *
-----------------------------------------------------------------------
SSgA Real Estate Equity Fund *
-----------------------------------------------------------------------
SSgA US Treasury Obligations Fund *
-----------------------------------------------------------------------
SSgA International Pacific Index Fund *
-----------------------------------------------------------------------
---------------
*As of the date of this Statement of Additional Information, these
portfolios have not commenced operations.
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<PAGE>
Prospectuses for these investment portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at (800)
647-7327, or at its Internet Website at www.ssgafunds.com.
Investment Company is authorized to divide shares of any series into two or
more classes of shares. The shares of each Fund may have such rights and
preferences as the Trustees may establish from time to time, including the right
of redemption (including the price, manner and terms of redemption), special and
relative rights as to dividends and distributions, liquidation rights, sinking
or purchase fund provisions and conditions under which any Fund may have
separate voting rights or no voting rights. Each class of shares of a Fund is
entitled to the same rights and privileges as all other classes of that Fund,
except that each class bears the expenses associated with the distribution and
shareholder servicing arrangements of that class, as well as other expenses
attributable to the class and unrelated to the management of the Fund's
portfolio securities. Shares of the Money Market, US Government Money Market and
Tax Free Money Market Funds are divided into Classes A, B and C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved 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
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<PAGE>
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 April 15, 1998, State
Street held beneficially and of record less than 25% of Investment Company's
shares in connection with various lending portfolios and, consequently, is not
deemed to be a controlling person of Investment Company for purposes of the 1940
Act. State Street also acts as Investment Company's investment advisor, transfer
agent and custodian.
The Trustees and officers of the Investment Company, as a group, own less
than 1% of Investment Company's voting securities.
Frank Russell Investment Management Company ("Administrator"), Investment
Company's administrator, will be the sole shareholder of the Fund until such
time as the Fund has public shareholders and therefore may be deemed a
controlling person.
Trustees and Officers. The Board of Trustees is responsible for overseeing
generally the operation of the Fund. The officers, all of whom are employed by,
and are officers of, Administrator or its affiliates, are responsible for the
day-to-day management and administration of the Fund's operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid $55,500 each fiscal year and are reimbursed for travel and
other expenses they incur in attending Board meetings. As of the date of this
SAI, the Trustees were not paid pension or retirement benefits as part of
Investment Company expenses. 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 SSgA Funds, 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 and President. Born
4/22/39. Trustee, President and Chief Executive Officer, Russell Insurance
Funds. Director, Chief Executive Officer and Chairman of the Board, Russell Fund
Distributors, Inc. Trustee, President and Chief Executive Officer, Frank Russell
Investment Company (investment company); Director, Chief Executive Officer and
Chairman of the Board, Frank Russell Investment Management Company; Director,
Chief Executive Officer and President,
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<PAGE>
Frank Russell Trust Company; Director and Chairman, Frank Russell Investment
Company Public Limited Company; November 1995 to February 1997, Director, Frank
Russell Company; Director and Chairman of the Board, Frank Russell Company
(Delaware); Director, Frank Russell Company; March 1989 to June 1993, Director,
Frank Russell Company, Director of Frank Russell Investments (Ireland) Limited;
Director and Chairman, Frank Russell Investment Company Public Limited Company.
Until September 1994, Director and President, The Laurel Funds, Inc. (investment
company).
William L. Marshall, Trustee. Born 12/12/42. 33 West Court Street,
Doylestown, PA 18901. Chief Executive Officer and President, Wm. L. Marshall
Associates, Inc. (a registered investment advisor 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 Representative for Securities with FSC
Securities Corp., Marietta, Georgia.
*Steven J. Mastrovich, Trustee. Born 11/3/56. 350 Park Avenue, 15th Floor,
New York, NY 10022. Partner, Squire, Sanders & Dempsey (law firm). From 1994 to
1997, Partner, Brown, Rudnick, Freed & Gesmer (law firm). From 1990 to 1994,
Partner, Warner & Stackpole (law firm).
Patrick J. Riley, Trustee. Born 11/30/48. 21 Custom House Street, Boston,
MA 02110. Partner, Riley, Burke & Donahue (law firm).
Richard D. Shirk, Trustee. Born 10/31/45. 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. Born 4/25/43. 26 Round Top Road, Boxford, MA
01921. Consultant, Computer Simulation, General Electric Industrial Control
Systems. Prior to that, President, A.B. Reed, Inc. - Engineers, Architects,
Planners. Prior to that, Vice President, Instrumentation and Controls, A.B.
Reed, Inc.
Henry W. Todd, Trustee. Born 5/4/47. 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. Born 8/24/57. Assistant
Secretary and Associate General Counsel, Frank Russell Investment Management
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Company, Russell Fund Distributors, Inc., Frank Russell Capital Inc., Frank
Russell Company and Russell Fiduciary Services Company; Director, Secretary and
Associate General Counsel, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
George W. Weber, Senior Vice President, Fund Treasurer and Principal
Accounting Officer. Born 6/3/51. Treasurer and Chief Accounting Officer, Russell
Insurance Funds (investment company); Director of Finance and Operations, Frank
Russell Trust Company; Director, Fund Administration and Operations of Frank
Russell Investment Management Company and Russell Fund Distributors, Inc.;
Treasurer and Chief Accounting Office, Frank Russell Investment Company
(investment company); March 1993 to January 1996, Vice President, Operations,
Funds Management, J.P. Morgan; December 1985 to March 1993, Senior Vice
President, Operations, Frank Russell Investment Company, The Laurel Funds, Inc.
and The Seven Seas Series Fund (investment companies); Director of Operations,
Frank Russell Investment Management Company and Frank Russell Trust Company;
Director, Russell Fund Distributors, Inc.
========================================================
1. Trustee 1. Total Compensation
from Investment Company
per Fiscal Year
--------------------------------------------------------
2. Lynn L. Anderson 2. $0
--------------------------------------------------------
3. William L. Marshall 3. $55,500
--------------------------------------------------------
4. Steven J. Mastrovich 4. $55,500
--------------------------------------------------------
5. Patrick J. Riley 5. $55,500
--------------------------------------------------------
6. Richard D. Shirk 6. $55,500
--------------------------------------------------------
7. Bruce D. Taber 7. $55,500
--------------------------------------------------------
8. Henry W. Todd 8. $55,500
========================================================
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 Advisor, 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.
Advisor. State Street Bank and Trust Company ("State Street" or "Advisor")
serves as the Fund's investment advisor pursuant to an Advisory Agreement dated
April 12, 1988 ("Advisory Agreement"). State Street is a wholly owned subsidiary
of State Street
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Corporation, a publicly held bank holding company. State Street's address is 225
Franklin Street, Boston, MA 02110.
Under the Advisory Agreement, Advisor directs the Fund's investments in
accordance with its investment objectives, policies and limitations. For these
services, the Fund pays a fee to Advisor 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 Advisor or the Fund without
penalty upon sixty days' notice and will terminate automatically upon its
assignment.
Administrator. Frank Russell Investment Management Company
("Administrator") serves as the Fund's administrator, pursuant to an
Administration Agreement dated April 12, 1988 ("Administration Agreement"). A
description of the services provided under the Administration Agreement and the
basis for computing fees for such services is provided in the Fund's Prospectus.
The Administration Agreement will continue from year to year provided that
a majority of the Trustees and a majority of the Trustees who are not interested
persons of the Fund and who have no direct or indirect financial interest in the
operation of the Distribution Plan described below or the Administration
Agreement approve its continuance. The Agreement may be terminated by
Administrator or the Fund without penalty upon sixty days' notice and will
terminate automatically upon its assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and its affiliates have offices in Tacoma, Winston-Salem, New
York City, Toronto, London, Tokyo, Sydney, Zurich, Paris and Auckland, and have
approximately 1,200 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 One International Place, Boston,
MA 02110.
Custodian and Transfer Agent. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For these
services, State Street is paid an annual fee in accordance with the following:
custody services--a fee payable monthly on
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<PAGE>
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 $6.00 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
$4.00 to $16.00 per security, depending on the type of instrument and the
pricing service used; transfer agent services of $1.50 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. For Transfer and Dividend Disbursing Agent services, State
Street is paid the following annual account services fees: $9.00 open account
fee; $1.50 closed account fee; fund minimum per portfolio for one to four
portfolios--$36,000, five to six portfolios--$24,000, and over six portfolios
$18,000. Portfolio fees are allocated to each fund based on the average net
asset value of each fund and are billable on a monthly basis at the rate of 1/12
of the annual fee. State Street will apply a $5.00 fee to each telephone
transaction (purchase or redemption), that is applied against the monthly
billing. State Street is reimbursed by the Fund for supplying certain
out-of-pocket expenses including postage, transfer fees, stamp duties, taxes,
wire fees, telexes, and freight.
Independent Accountants. Coopers & Lybrand L.L.P. serves as the Investment
Company's independent accountants. Coopers & Lybrand L.L.P. is responsible for
performing annual audits of the financial statements and financial highlights in
accordance with generally accepted auditing standards, a review of federal tax
returns, and, pursuant to Rule 17f-2 of the 1940 Act, three security counts. The
mailing address of Coopers & Lybrand L.L.P. is One Post Office Square, Boston,
MA 02109.
Distribution Plan. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Fund may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Fund may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule. Accordingly, the
Fund has adopted an active distribution plan (the "Plan"), which is described in
the Fund's Prospectus.
The Plan provides that the Fund may spend annually, directly or indirectly,
up to 0.25% of the value of its average net assets for distribution and
shareholder servicing services. The Plan does not provide for the Fund to be
charged for interest, carrying or any other financing charges on any
distribution expenses carried forward to subsequent years. A quarterly report of
the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. The
Plan may not be amended without shareholder approval to increase materially the
distribution or shareholder servicing costs that the Fund may pay. The Plan and
material amendments to it must be approved annually by all of the Trustees and
by the Trustees who are neither "interested persons" (as defined in the 1940
Act) of the Fund nor have any direct or indirect financial interest in the
operation of the Plan or any related agreements.
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<PAGE>
Under the Plan, the Fund may also enter into agreements ("Service
Agreements") with financial institutions, which may include Advisor ("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 High Yield Bond 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, Martin Luther King Jr. 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, at the closing
bid price, on the primary exchange on which the security is traded. United
States equity and fixed-income securities traded
-10-
<PAGE>
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 the amortized cost method
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 Advisor. Advisor ordinarily pays commissions when it executes
transactions on a securities exchange. In contrast, there is generally no stated
commission on 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
bid/offer spread. 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
Advisor. 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
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<PAGE>
Fund. Advisor shall consider all factors it deems relevant in assessing the best
overall terms available for any transaction, including the breadth of the market
in the security, the price of the security, the financial condition and
execution capability of the broker or dealer, and the reasonableness of the
commission, if any, for the specific transaction and other transactions on a
continuing basis.
The Advisory Agreement authorizes Advisor 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 Advisor (or its
affiliates). Advisor 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
Advisor, 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 Advisor exercises investment discretion.
The Trustees periodically review Advisor'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 Advisor attributable
to a particular Fund transaction may benefit one or more other accounts for
which Advisor exercises investment discretion, or an investment portfolio other
than that for which the transaction was effected. Advisor's fees are not reduced
by Advisor'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.
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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<PAGE>
P(1+T)(n) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a $1,000 payment made at the
beginning of the 1-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
YIELD = 2[(---+1)(6)-1]
cd
Where: a = dividends and interests earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = average daily number of shares outstanding during the
period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of
the period.
The yield quoted is not indicative of future results. Yields will depend on
the type, quality, maturity and interest rate of instruments held by the Fund.
Total return and other performance figures are based on historical earnings and
are not indicative of future performance.
INVESTMENTS
The investment objective of the Fund is set forth in its Prospectus. In
addition to the investment objective, the Fund also has certain "fundamental"
investment restrictions, which may be changed only with the approval of a
majority of the shareholders of the Fund, and certain nonfundamental investment
restrictions and policies, which may be changed by the Fund without shareholder
approval.
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<PAGE>
Investment Restrictions
The Fund is subject to the following investment restrictions, restrictions
1 through 7 are fundamental and restrictions 8 and 9 are nonfundamental. Unless
otherwise noted, these restrictions apply at the time an investment is made. The
Fund will not:
(1) Invest 25% or more of the value of its total assets in securities of
companies primarily engaged in any one industry (other than the US Government,
its agencies and instrumentalities). Concentration may occur as a result of
changes in the market value of portfolio securities, but may not result from
investment.
(2) Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to facilitate
redemptions (not for leveraging or investment), provided that borrowings do not
exceed an amount equal to 33-1/3% of the current value of the Fund's assets
taken at market value, less liabilities other than borrowings. If at any time
the Fund's borrowings exceed this limitation due to a decline in net assets,
such 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) 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.
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<PAGE>
(7) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
(8) 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.
(9) Invest more than 15% of its net assets in the aggregate, on an ongoing
basis, in illiquid securities or securities that are not readily marketable,
including repurchase agreements and time deposits of more than seven days'
duration.
With respect to the industry concentration outlined in the Prospectus, the
Advisor treats US domestic banks and foreign branches of US banks as a separate
industry from foreign banks.
Investment Policies
The Fund may invest in the following instruments:
High Risk, High Yield Bonds. The Fund will invest in high risk, high yield
bonds. Securities rated below BBB by S&P or Baa by Moody's may involve greater
risks than securities in higher rating categories.
Bonds rated below BBB by S&P (BB, B, CCC, CC and C) are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and D the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
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<PAGE>
Securities possessing Moody's Baa rating are considered medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security is judged adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such securities lack outstanding
investment characteristics and in fact may have speculative characteristics as
well. Please see "Risk Factors - Lower Rated Debt Securities" in this SAI.
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 Advisor.
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.
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<PAGE>
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.
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, Advisor 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.
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<PAGE>
Variable and Floating Rate 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. The value of asset-backed securities is affected
by changes in the market's perception of the asset backing the security, changes
in the creditworthiness of the servicing agent for the instrument pool, the
originator of the instruments or the financial institution providing any credit
enhancement and the expenditure of any portion of any credit enhancement. The
risks of investing in asset-backed securities are ultimately dependent upon
payment of the underlying instruments by the obligors, and a Fund would
generally have no recourse against the obligee of the instruments in the event
of default by an obligor. The underlying instruments are subject to prepayments
which shorten the weighted average life of asset-backed securities and may lower
their return, in the same manner as described below for prepayments of pools of
mortgage loans underlying mortgage-backed securities.
Mortgage-Related 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
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Veterans Administration. Ginnie Maes entitle the holder to receive all payments
(including prepayments) of principal and interest owed by the individual
mortgagors, net of fees paid to GNMA and to the issuer which assembles the loan
pool and passes through the monthly mortgage payments to the certificate holders
(typically, a mortgage banking firm), regardless of whether the individual
mortgagor actually makes the payment. Because payments are made to certificate
holders regardless of whether payments are actually received on the underlying
loans, Ginnie Maes are of the "modified pass-through" mortgage certificate type.
GNMA is authorized to guarantee the timely payment of principal and interest on
the Ginnie Maes as securities backed by an eligible pool of mortgage loans. The
GNMA guaranty is backed by the full faith and credit of the United States, and
GNMA has unlimited authority to borrow funds from the US Treasury to make
payments under the guaranty. The market for Ginnie Maes is highly liquid because
of the size of the market and the active participation in the secondary market
by securities dealers and a variety of investors.
(2) FHLMC Mortgage Participation Certificates ("Freddie Macs"). Freddie
Macs represent interests in groups of specified first lien residential
conventional mortgage loans underwritten and owned by FHLMC. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by FHLMC.
FHLMC guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. In cases where FHLMC has not
guaranteed timely payment of principal, FHLMC may remit the amount due on
account of its guarantee of ultimate payment of principal at any time after
default on an underlying loan, but in no event later than one year after it
becomes payable. Freddie Macs are not guaranteed by the United States or by any
of the Federal Home Loan Banks and do not constitute a debt or obligation of the
United States or of any Federal Home Loan Bank. The secondary market for Freddie
Macs is highly liquid because of the size of the market and the active
participation in the secondary market by FHLMC, securities dealers and a variety
of investors.
(3) FNMA Guaranteed Mortgage Pass-Through Certificates ("Fannie Maes").
Fannie Maes represent an undivided interest in a pool of conventional mortgage
loans secured by first mortgages or deeds of trust, on one-family to four-family
residential properties. FNMA is obligated to distribute scheduled monthly
installments of principal and interest on the loans in the pool, whether or not
received, plus full principal of any foreclosed or otherwise liquidated loans.
The obligation of FNMA under its guaranty is solely the obligation of FNMA and
is not backed by, nor entitled to, the full faith and credit of the United
States.
The market value of mortgage-related securities depends on, among other
things, the level of interest rates, the certificates' coupon rates and the
payment history of the underlying borrowers.
Although the mortgage loans in a pool underlying a mortgage pass-through
certificate will have maturities of up to 30 years, the average life of a
mortgage pass-through certificate will be substantially less because the loans
will be subject to normal
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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 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.
Equity Swaps. Equity swap agreements are contracts between parties in
which one party agrees to make payments to the other party based on the change
in market value of a specified index or asset. In return, the other party agrees
to make payments to the first party based on the return of a different specified
index or asset. Although swap agreements entail the risk that a party will
default on its payment obligations, the portfolios will minimize this risk by
entering into agreements only with counterparties that the Advisor deems
creditworthy. Swap agreements also bear the risk that the portfolios will not be
able to meet their obligation to the counterparty. This risk will be mitigated
by investing the portfolios in the specific asset for which it is obligated to
pay a return.
Risk Factors - Lower Rated Debt Securities
The growth of the market for lower rated debt securities has paralleled
a long period of economic expansion. Lower rated debt securities may be more
susceptible to
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real or perceived adverse economic and competitive industry conditions than
investment grade securities. The prices of low rated debt securities may be less
sensitive to interest rate changes than investment grade securities, but more
sensitive to economic downturns, individual corporate developments, and price
fluctuations. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a sharper decline in the prices of low
rated debt securities because the advent of a recession could lessen the ability
of a highly leveraged company to make principal and interest payments on its
debt securities. If the issuer of low rated debt securities defaults, a Fund may
incur additional expenses to seek financial recovery.
In addition, the markets in which low rated debt securities are traded
are more limited than those for higher rated securities. The existence of
limited markets for particular securities may diminish the Fund's ability to
sell the securities at fair value either to meet redemption requests or to
respond to changes in the economy or in the financial markets and could
adversely affect and cause fluctuations in the daily net asset value of the
Fund's shares.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the value and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated securities may be more complex than for
issuers of other investment grade securities, and the ability of the Fund to
achieve its investment objectives may be more dependent on credit analysis than
would be the case if the Fund was investing only in investment grade securities.
The Fund's Advisor may use ratings to assist in investment decisions.
Ratings of debt securities represent a rating agency's opinion regarding their
quality and are not a guarantee of quality. Rating agencies attempt to evaluate
the safety of principal and interest payments and do not evaluate the risks of
fluctuations in market value. Also, rating agencies may fail to make timely
changes in credit ratings in response to subsequent events, so that an issuer's
current financial condition may be better or worse than a rating indicates.
Please see the Appendix for a description of securities ratings.
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, 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
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and futures transactions (as discussed in the Prospectus and below), Advisor
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 Advisor. 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
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value of securities denominated in such currency that the Fund has committed to
purchase or anticipates purchasing; or (2) in the case of securities that have
been sold by the Fund but not yet delivered, the proceeds thereof in their
denominated currency. The Fund will not incur potential net liabilities of more
than 25% of its total assets from foreign security or currency options, futures
or related options.
Writing Covered Call Options. The Fund is authorized to write (sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to such options. Writing a call
option obligates the Fund to sell or deliver the option's underlying security,
in return for the strike price, upon exercise of the option. By writing a call
option, the Fund receives an option premium from the purchaser of the call
option. Writing covered call options is generally a profitable strategy if
prices remain the same or fall. Through receipt of the option premium, the Fund
would seek to mitigate the effects of a price decline. By writing covered call
options, however, the Fund gives up the opportunity, while the option is in
effect, to profit from any price increase in the underlying security above the
option exercise price. In addition, the Fund's ability to sell the underlying
security will be limited while the option is in effect unless the Fund effects a
closing purchase transaction.
Writing Covered Put Options. The Fund is authorized to write (sell)
covered put options on its portfolio securities and to enter into closing
transactions with respect to such options.
When the Fund writes a put option, it takes the opposite side of the
transaction from the option's purchaser. In return for receipt of the premium,
the Fund assumes the obligation to pay the strike price for the option's
underlying instrument if the other party to the option chooses to exercise it.
The Fund may seek to terminate its position in a put option it writes before
exercise by closing out the option in the secondary market at its current price.
If the secondary market is not liquid for an option the Fund has written,
however, the Fund must continue to be prepared to pay the strike price while the
option is outstanding, regardless of price changes, and must continue to set
aside assets to cover its position.
The Fund may write put options as an alternative to purchasing actual
securities. If security prices rise, the Fund would expect to profit from a
written put option, although its gain would be limited to the amount of the
premium it received. If security prices remain the same over time, it is likely
that the Fund will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the Fund would expect to
suffer a loss. This loss should be less than the loss the Fund would have
experienced from purchasing the underlying instrument directly, however, because
the premium received for writing the option should mitigate the effects of the
decline.
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
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price, thus limiting the Fund's risk of loss through a decline in the market
value of the security until the put option expires. The amount of any
appreciation in the value of the underlying security will be partially offset by
the amount of the premium paid by the Fund for the put option and any related
transaction costs. Prior to its expiration, a put option may be sold in a
closing sale transaction and profit or loss from the sale will depend on whether
the amount received is more or less than the premium paid for the put option
plus the related transaction costs. A closing sale transaction cancels out the
Fund's position as the purchaser of an option by means of an offsetting sale of
an identical option prior to the expiration of the option it has purchased. The
Fund will not purchase put options on securities (including stock index options
discussed below) if as a result of such purchase, the aggregate cost of all
outstanding options on securities held by the Fund would exceed 5% of the market
value of the Fund's total assets.
Purchasing Call Options. The Fund is also authorized to purchase call
options. The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price (call options on futures contracts are settled by purchasing the
underlying futures contract). The Fund will purchase call options only in
connection with "closing purchase transactions."
Securities Index Options and Financial Futures. The Fund is authorized
to engage in transactions in securities index options and financial futures, and
related options. The Fund may purchase or write put and call options on
securities 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 securities index options
based on a broad market index or on a narrow index representing an industry or
market segment. The Fund's investments in foreign stock index futures contracts
and foreign interest rate futures contracts, and related options, are limited to
only those contracts and related options that have been approved by the
Commodity Futures Trading Commission ("CFTC") for investment by United States
investors. Additionally, with respect to the Fund's investments in foreign
options, unless such options are specifically authorized for investment by order
of the CFTC, the Fund will not make such investments.
The Fund may also purchase and sell stock index futures contracts and
other financial futures contracts ("futures contracts") as a hedge against
adverse changes in the market value of its portfolio securities as described
below. A futures contract is an agreement between two parties which obligates
the purchaser of the futures contract to buy and the seller of a futures
contract to sell a security for a set price on a future date. Unlike most other
futures contracts, a stock index futures contract does not require actual
delivery of securities, but results in cash settlement based upon the difference
in value of the index between the time the contract was entered into and the
time of its settlement. The Fund may effect transactions in stock index futures
contracts in connection with debt
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securities in which it invests and in financial futures contracts in connection
with equity securities in which it invests, if any. Transactions by the Fund in
stock index futures and financial futures are subject to limitations as
described below under "Restrictions on the Use of Futures Transactions."
The Fund may sell futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When 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 securities 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
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put option enabling it to sell a specified amount of yen for US dollars at a
specified price by a future date. To the extent the hedge is successful, a loss
in the value of the yen relative to the US dollar will tend to be offset by an
increase in the value of the put option.
Restrictions on the Use of Futures Transactions. The purchase or sale of
a futures contract differs from the purchase or sale of a security in that no
price or premium is paid or received. Instead, an amount of cash or securities
acceptable to the broker and the relevant contract market, which varies, but is
generally about 5% of the contract amount, must be deposited with the broker.
This amount is known as "initial margin" and represents a "good faith" deposit
assuring the performance of both the purchaser and seller under the futures
contract. Subsequent payments to and from the broker, called "variation margin,"
are required to be made on a daily basis as the price of the futures contract
fluctuates making the long and short positions in the futures contracts more or
less valuable, a process known as "marking to market." At any time prior to the
settlement date of the futures 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 Advisor 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
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not otherwise readily marketable, would exceed 10% of the net assets of the
Fund, taken at market value. However, if an OTC option is sold by the Fund to a
primary US Government securities dealer recognized by the Federal Reserve Bank
of New York and the Fund has the unconditional contractual right to repurchase
such OTC option from the dealer at a predetermined price, then the Fund will
treat as illiquid such amount of the underlying securities as is equal to the
repurchase price less the amount by which the option is "in-the-money" (current
market value of the underlying security minus the option's strike price). The
repurchase price with primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option plus the
amount by which the option is "in-the-money."
Asset Coverage for Futures and Options Positions. The Fund will not use
leverage in its options and futures strategies. Such investments will be made
for hedging purposes only. The Fund will hold securities or other options or
futures positions whose values are expected to offset its obligations under the
hedge strategies. The Fund will not enter into an option or futures position
that exposes the Fund to an obligation to another party unless it owns either:
(1) an offsetting position in securities or other options or futures contracts;
or (2) cash, receivables and short-term debt securities with a value sufficient
to cover its potential obligations. The Fund will comply with guidelines
established by the SEC with respect to coverage of options and futures
strategies by mutual funds, and if the guidelines so require will set aside cash
and high grade liquid debt securities in a segregated account with its custodian
bank in the amount prescribed. The Fund's custodian shall maintain the value of
such segregated account equal to the prescribed amount by adding or removing
additional cash or liquid securities to account for fluctuations in the value of
securities held in such account. Securities held in a segregated account cannot
be sold while the futures or option strategy is outstanding, unless they are
replaced with similar securities. As a result, there is a possibility that
segregation of a large percentage of 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
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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
Advisor believes the Fund can receive on each business day at least two
independent bids or offers. However, there can be no assurance that a liquid
secondary market will exist at any specific time. Thus, it may not be possible
to close an options or futures position. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
effectively hedge its portfolio. There is also the risk of loss by the Fund of
margin deposits or collateral in the event of bankruptcy of a broker with whom
the Fund has an open position in an option, a futures contract or related
option.
The exchanges on which options on portfolio securities and currency
options are traded have generally established limitations governing the maximum
number of call or put options on the same underlying security or currency
(whether or not covered) which may be written by a single investor, whether
acting alone or in concert with others (regardless of whether such options are
written on the same or different exchanges or are held or written in one or more
accounts or through one or more brokers). "Trading limits" are imposed on the
maximum number of contracts which any person may trade on a particular trading
day.
To the extent permitted under the 1940 Act and exemptive rules and orders
thereunder, the Fund may seek to achieve its investment objective by investing
solely in the shares of another investment company that has substantially
similar investment objectives and policies.
TAXES
The Fund intends to qualify for treatment as a regulated investment
company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as
amended ("the Code"). As a RIC, the Fund will not be liable for federal income
taxes on taxable net investment income and net capital gain (long-term capital
gains in excess of short-term 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
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currencies ("Income Requirement"); (2) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, US Government securities, securities of
other RICs, and other securities, with such other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the total assets of
the Fund and that does not represent more than 10% of the outstanding voting
securities of such issuer; and (3) 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 a 20% gain or a 28%
gain with respect to shares of a Fund and redeems or exchanges the shares
without having held the shares for more than one year, then any loss on the
redemption or exchange will be treated as a 20% loss or a 28% loss to the extent
of the respective 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 and the Distribution Requirement, and by
provisions of the Code that characterize certain income or loss as ordinary
income or loss rather than capital gain or loss. Such recognition,
characterization and timing rules will affect investments in certain futures
contracts, options, foreign currency contracts and debt securities denominated
in foreign currencies.
State and Local Taxes. Depending upon the extent of the Fund's activities
in states and localities in which its offices are maintained, its agents or
independent contractors are located or it is otherwise deemed to be conducting
business, the Fund may be subject to the tax laws of such states or localities.
Foreign Income Taxes. Investment income received by the Fund from sources
within foreign countries may be subject to foreign income taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which would entitle the Funds to a reduced rate of such taxes or
exemption from taxes on such income.
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<PAGE>
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. 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 advisors as to if and
how the federal income tax and its withholding requirements applies to them.
The foregoing discussion is only a summary of certain federal 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 advisor.
FINANCIAL STATEMENTS
Audited financial statements for the Fund will be available within 60 days
following the end of the Fund's then current fiscal year. When available, copies
of the financial statements can be obtained without charge by calling
Distributor at (800) 647-7327.
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APPENDIX
DESCRIPTION OF SECURITIES RATINGS
Ratings of Debt Instruments
Moody's Investors Service, Inc. ("Moody's") -- Long Term Debt Ratings.
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa -- Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
and interest.
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Ca -- Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
Standard & Poor's Corporation ("S&P"). The ratings are based, in varying
degrees, on the following considerations: (1) The likelihood of default --
capacity and willingness of the obligator as to the timely payment of interest
and repayment of principal in accordance with the terms of the obligation; (2)
The nature of and provisions of the obligation; and (3) The protection afforded
by, and relative position of, the obligation in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
AAA -- Debt rated AAA has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA -- Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A -- Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB -- Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C -- Bonds rated BB, B, CCC, CC and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and C the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
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BB -- Bonds rated BB have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual implied BBB- rating.
B -- Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC -- Bonds rated CCC have a currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not likely
to have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied B or B- rating.
CC -- The rating CC is typically applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C -- The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC debt rating. The C rating has
been used to cover a situation where a bankruptcy petition has been filed but
debt service payments are continued.
C1 -- The rating C1 is reserved for income bonds on which no interest is
being paid.
D -- Bonds rated D are in payment default. The D rating is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes such payments will
be made during such grace period. The D rating also will be used upon the filing
of a bankruptcy petition if debt service payments are jeopardized.
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
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designations, all judged to be investment grade, to indicate the relative
repayment ability of rated issuers:
o 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:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
o Well-established access to a range of financial markets and assured sources
of alternate liquidity.
o Issuers rated Prime-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternative
liquidity is maintained.
o 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.
o 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.
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<PAGE>
F-1 -- This designation indicates that the commercial paper is regarded as
having the strongest degree of assurance for timely payment.
F-2 -- Commercial paper issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than those issues rated F-1.
Duff and Phelps, Inc. Duff & Phelps' short-term ratings are consistent with
the rating criteria utilized by money market participants. The ratings apply to
all obligations with maturities of under one year, including commercial paper,
the uninsured portion of certificates of deposit, unsecured bank loans, master
notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term debt
issuers carry the highest rating, yet quality differences exist within that
tier. As a consequence, Duff & Phelps has incorporated gradations of '1+' (one
plus) and '1-' (one minus) to assist investors in recognizing those differences.
Duff 1+--Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free US Treasury short-term
obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors are
minor.
Duff 1- -- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.
Good Grade. Duff 2--Good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs
may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
Satisfactory Grade. Duff 3--Satisfactory liquidity and other
protection factors qualify issue as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is
expected.
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<PAGE>
Non-Investment Grade. Duff 4--Speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
Default. Duff 5--Issuer failed to meet scheduled principal and/or
interest payments.
IBCA, Inc. In addition to conducting a careful review of an institution's
reports and published figures, IBCA's analysts regularly visit the companies for
discussions with senior management. These meetings are fundamental to the
preparation of individual reports and ratings. To keep abreast of any changes
that may affect assessments, analysts maintain contact throughout the year with
the management of the companies they cover.
IBCA's analysts speak the languages of the countries they cover, which is
essential to maximize the value of their meetings with management and to
properly analyze a company's written materials. They also have a thorough
knowledge of the laws and accounting practices that govern the operations and
reporting of companies within the various countries.
Often, in order to ensure a full understanding of their position,
companies entrust IBCA with confidential data. While these data cannot be
disclosed in reports, they are taken into account when assigning our ratings.
Before dispatch to subscribers, a draft of the report is submitted to each
company to permit correction of any factual errors and to enable clarification
of issues raised.
IBCA's Rating Committees meet at regular intervals to review all ratings
and to ensure that individual ratings are assigned consistently for institutions
in all the countries covered. Following the Committee meetings, ratings are
issued directly to subscribers. At the same time, the company is informed of the
ratings as a matter of courtesy, but not for discussion.
A1+--Obligations supported by the highest capacity for timely repayment.
A1--Obligations supported by a very strong capacity for timely repayment.
A2--Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
B1--Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business, economic, or
financial conditions than for obligations in higher categories.
B2--Obligations for which the capacity for timely repayment is susceptible
to adverse changes in business, economic or financial conditions.
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<PAGE>
C1--Obligations for which there is an inadequate capacity to ensure timely
repayment.
D1--Obligations which have a high risk of default or which are currently
in default.
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<PAGE>
Filed pursuant to Rule 485(b)
File Nos. 33-19229; 811-5430
SSgA FUNDS
One International Place
Boston, Massachusetts 02110
(800) 647-7327
STATEMENT OF ADDITIONAL INFORMATION
REAL ESTATE EQUITY FUND
APRIL 28, 1998
SSgA Funds ("Investment Company") is a registered open-end investment
company organized as a Massachusetts business trust offering shares of
beneficial interest in separate investment portfolios. In addition, each series
of the Investment Company is diversified as defined in the Investment Company
Act of 1940, as amended ("1940 Act").
This Statement of Additional Information supplements or describes in
greater detail the Investment Company and the SSgA Real Estate Equity Fund (the
"Real Estate Equity Fund" or the "Fund") as contained in the Fund's Prospectus
dated April 28, 1998. This Statement is not a Prospectus and should be read in
conjunction with the Fund's Prospectus, which may be obtained by telephoning or
writing Investment Company at the number or address shown above.
<PAGE>
TABLE OF CONTENTS
Page
----
Structure and Governance.............................................. 3
Organization and Business History............................ 3
Shareholder Meetings......................................... 4
Controlling Shareholders..................................... 4
Principal Shareholders....................................... 4
Trustees and Officers........................................ 5
Operation of Investment Company....................................... 6
Service Providers............................................ 6
Advisor...................................................... 7
Administrator................................................ 7
Distributor.................................................. 7
Custodian and Transfer Agent................................. 7
Independent Accountants...................................... 8
Distribution Plan .......................................... 8
Federal Law Affecting State Street........................... 8
Valuation of Fund Shares..................................... 8
Brokerage Practices.......................................... 9
Portfolio Turnover Policy.................................... 10
Yield and Total Return Quotations............................ 10
Investments........................................................... 11
Investment Restrictions...................................... 11
Investment Policies.......................................... 12
Hedging Strategies and Related Investment Techniques......... 13
Taxes................................................................. 17
Financial Statements.................................................. 18
Appendix: Description of Securities Ratings.......................... 19
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STRUCTURE AND GOVERNANCE
Organization and Business History. Investment Company was organized as a
Massachusetts business trust on October 3, 1987 and operates under a First
Amended and Restated Master Trust Agreement, dated October 13, 1993, as amended.
Investment Company is authorized to issue shares of beneficial interest, par
value $.001 per share, which may be divided into one or more series, each of
which evidences pro rata ownership interest in a different investment portfolio,
or "Fund." The Real Estate Equity Fund is one such investment portfolio. The
Trustees may create additional Funds at any time without shareholder approval.
Further, the Investment Company is authorized to divide shares of any
series into two or more classes of shares. The shares of each Fund may have such
rights and preferences as the Trustees may establish from time to time,
including the right of redemption (including the price, manner and terms of
redemption), special and relative rights as to dividends and distributions,
liquidation rights, sinking or purchase fund provisions and conditions under
which any Fund may have separate voting rights or no voting rights. Each class
of shares of a Fund is entitled to the same rights and privileges as all other
classes of that Fund, except that each class bears the expenses associated with
the distribution and shareholder servicing arrangements of that class, as well
as other expenses attributable to the class and unrelated to the management of
the Fund's portfolio securities.
As of the date of this Statement of Additional Information, Investment
Company is comprised of the following investment portfolios, each of which
commenced operations on the date set forth opposite the portfolio's name:
--------------------------------------------------------------------------
SSgA Money Market Fund May 2, 1988
--------------------------------------------------------------------------
SSgA US Government Money Market Fund March 1, 1991
--------------------------------------------------------------------------
SSgA Matrix Equity Fund May 4, 1992
--------------------------------------------------------------------------
SSgA Small Cap Fund July 1, 1992
--------------------------------------------------------------------------
SSgA Yield Plus Fund November 9, 1992
--------------------------------------------------------------------------
SSgA S&P 500 Index Fund December 30, 1992
--------------------------------------------------------------------------
SSgA Growth and Income Fund September 1, 1993
--------------------------------------------------------------------------
SSgA Intermediate Fund September 1, 1993
--------------------------------------------------------------------------
SSgA US Treasury Money Market Fund December 1, 1993
--------------------------------------------------------------------------
SSgA Prime Money Market Fund February 22, 1994
--------------------------------------------------------------------------
SSgA Emerging Markets Fund March 1, 1994
--------------------------------------------------------------------------
SSgA Tax Free Money Market Fund December 1, 1994
--------------------------------------------------------------------------
SSgA Active International Fund March 7, 1995
--------------------------------------------------------------------------
SSgA Bond Market Fund February 7, 1996
--------------------------------------------------------------------------
SSgA Life Solutions Balanced Fund July 1, 1997
--------------------------------------------------------------------------
SSgA Life Solutions Growth Fund July 1, 1997
--------------------------------------------------------------------------
SSgA Life Solutions Income and Growth Fund July 1, 1997
--------------------------------------------------------------------------
SSgA Real Estate Equity Fund *
--------------------------------------------------------------------------
SSgA US Treasury Obligations Fund *
--------------------------------------------------------------------------
SSgA International Pacific Index Fund *
--------------------------------------------------------------------------
SSgA High Yield Bond Fund *
--------------------------------------------------------------------------
SSgA Special Small Cap Fund *
--------------------------------------------------------------------------
SSgA International Growth Opportunity Fund *
--------------------------------------------------------------------------
- ----------
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<PAGE>
*As of the date of this Statement of Additional Information, these portfolios
have not commenced operations.
Prospectuses for these Investment Portfolios may be obtained by calling
Investment Company's distributor, Russell Fund Distributors, Inc., at (800)
647-7327 or at its Internet Web Site at www.ssgafunds.com.
Investment Company is authorized to divide shares of any series into two
or more classes of shares. The shares of each Fund may have such rights and
preferences as the Trustees may establish from time to time, including the right
of redemption (including the price, manner and terms of redemption), special and
relative rights as to dividends and distributions, liquidation rights, sinking
or purchase fund provisions and conditions under which any Fund may have
separate voting rights or no voting rights. Each class of shares of a Fund is
entitled to the same rights and privileges as all other classes of that Fund,
except that each class bears the expenses associated with the distribution and
shareholder servicing arrangements of that class, as well as other expenses
attributable to the class and unrelated to the management of the Fund's
portfolio securities. Shares of the Money Market, US Government Money Market and
Tax Free Money Market Funds are divided into Classes A, B and C.
Any amendment to the Master Trust Agreement that would materially and
adversely affect shareholders of Investment Company as a whole, or shareholders
of a particular Fund, must be approved by the holders of a majority of the
shares of Investment Company or the Fund, respectively. All other amendments may
be effected by Investment Company's Board of Trustees.
Under certain unlikely circumstances, and as is the case with any
Massachusetts business trust, a shareholder of a Fund may be held personally
liable for the obligations of a Fund. The Master Trust Agreement provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of a Fund and that every written agreement, obligation, or other
undertaking of the Fund shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Master Trust Agreement
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, the risk to shareholders of incurring financial loss
beyond their investments is limited to circumstances in which the Fund itself
would be unable to meet its obligations.
Shareholder Meetings. Investment Company will not have an annual meeting
of shareholders. Special meetings may be convened: (1) by the Board of Trustees;
(2) upon written request to the Board by the holders of at least 10% of the
outstanding shares; or (3) upon the Board's failure to honor the shareholders'
request described above, by holders of at least 10% of the outstanding shares
giving notice of the special meeting to the shareholders.
Controlling Shareholders. The Trustees have the authority and
responsibility to manage the business of Investment Company. Trustees hold
office until they resign or are removed by, in substance, a vote of two-thirds
of Investment Company shares outstanding.
State Street Bank and Trust Company ("State Street") may from time to time
have discretionary authority over accounts that invest in Investment Company
shares. These accounts include accounts maintained for securities lending
program and investment accounts which permit the use of Investment Company
portfolios as short-term cash sweep investments. Shares purchased for all
discretionary accounts are held of record by State Street, who retains voting
control of such shares. As of April 15, 1998, State Street held of record less
than 25% of the issued and outstanding shares of Investment Company in
connection with its discretionary accounts. Consequently, State Street is not
deemed to be a controlling person of Investment Company for purposes of the 1940
Act. State Street also acts as Investment Company's investment advisor, transfer
agent and custodian.
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<PAGE>
Frank Russell Investment Management Company, Investment Company's
administrator ("Administrator"), will be the initial sole shareholder of the
Fund until such time as the Fund has public shareholders and therefore
Administrator may be deemed to be a controlling person for the purposes of the
1940 Act.
Principal Shareholders. As of the date of this Statement of Additional
Information, Administrator is the Fund's sole shareholder.
The Trustees and officers of Investment Company, as a group, own less than
1% of Investment Company's voting securities.
Trustees and Officers. The Board of Trustees is responsible for overseeing
generally the operation of the Fund. The officers, all of whom are employed by,
and are officers of, Administrator or its affiliates, are responsible for the
day-to-day management and administration of the Fund's operations.
Trustees who are not officers or employees of State Street or its
affiliates are paid $55,500 each fiscal year and are reimbursed for travel and
other expenses they incur in attending Board meetings. As of the date of this
SAI, the Trustees were not paid pension or retirement benefits as part of
Investment Company expenses. 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 SSgA Funds, 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 and President. Born
4/22/39. Trustee, President and Chief Executive Officer, Russell Insurance Funds
(investment company). Director, Chief Executive Officer and Chairman of the
Board, Russell Fund Distributors, Inc. Trustee, President and Chief Executive
Officer, Frank Russell Investment Company (investment company); Director, Chief
Executive Officer and Chairman of the Board, Frank Russell Investment Management
Company; Director, Chief Executive Officer and President, Frank Russell Trust
Company; Director and Chairman, Frank Russell Investment Company Public Limited
Company; November 1995 to February 1997, Director, Frank Russell Company;
Director and Chairman of the Board, Frank Russell Company (Delaware); Director,
Frank Russell Company; March 1989 to June 1993, Director, Frank Russell Company,
Director of Frank Russell Investments (Ireland) Limited; Director and Chairman,
Frank Russell Investment Company Public Limited Company. Until September 1994,
Director and President, The Laurel Funds, Inc. (investment company).
William L. Marshall, Trustee. Born 12/12/42. 33 West Court Street,
Doylestown, PA 18901. Chief Executive Officer and President, Wm. L. Marshall
Associates, Inc. (a registered investment advisor 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 Representative for Securities with FSC
Securities Corp., Marietta, Georgia.
*Steven J. Mastrovich, Trustee. Born 11/3/56. 350 Park Avenue, 15th Floor,
New York, NY 10022. Partner, Squire, Sanders & Dempsey (law firm). From 1994 to
1997, Partner, Brown, Rudnick, Freed & Gesmer (law firm). From 1990 to 1994,
Partner, Warner & Stackpole (law firm).
Patrick J. Riley, Trustee. Born 11/30/48. 21 Custom House Street, Boston,
MA 02110. Partner, Riley, Burke & Donahue (law firm).
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<PAGE>
Richard D. Shirk, Trustee. Born 10/31/45. 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. Born 4/25/43. 26 Round Top Road, Boxford, MA
01921. Consultant, Computer Simulation, General Electric Industrial Control
Systems. Prior to that, President, A.B. Reed, Inc. - Engineers, Architects,
Planners. Prior to that, Vice President, Instrumentation and Controls, A.B.
Reed., Inc.
Henry W. Todd, Trustee. Born 5/4/47. 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. Born 8/24/57. Assistant
Secretary and Associate General Counsel, Frank Russell Investment Management
Company, Russell Fund Distributors, Inc., Frank Russell Capital Inc., Frank
Russell Company and Russell Fiduciary Services Company; Director, Secretary and
Associate General Counsel, Frank Russell Securities, Inc.; Secretary, Frank
Russell Canada Limited/Limitee.
George W. Weber, Senior Vice President, Fund Treasurer and Principal
Accounting Officer. Born 6/3/51. Treasurer and Chief Accounting Officer, Russell
Insurance Funds (investment company); Director of Finance and Operations, Frank
Russell Trust Company; Director, Fund Administration and Operations of Frank
Russell Investment Management Company and Russell Fund Distributors, Inc.;
Treasurer and Chief Accounting Office, Frank Russell Investment Company
(investment company); March 1993 to January 1996, Vice President, Operations,
Funds Management, J.P. Morgan; December 1985 to March 1993, Senior Vice
President, Operations, Frank Russell Investment Company, The Laurel Funds, Inc.
and The Seven Seas Series Fund (investment companies); Director of Operations,
Frank Russell Investment Management Company and Frank Russell Trust Company;
Director, Russell Fund Distributors, Inc.
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1. Trustee 1. Total Compensation
from Investment Company
per Fiscal Year
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2. Lynn L. Anderson 2. $0
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3. William L. Marshall 3. $55,500
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4. Steven J. Mastrovich 4. $55,500
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5. Patrick J. Riley 5. $55,500
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6. Richard D. Shirk 6. $55,500
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7. Bruce D. Taber 7. $55,500
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8. Henry W. Todd 8. $55,500
========================================================
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:
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Investment Advisor, 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.
Advisor. State Street serves as the Fund's investment advisor ("Advisor")
pursuant to an Advisory Agreement dated April 12, 1988. State Street is a wholly
owned subsidiary of State Street Corporation, a publicly held bank holding
company. State Street's address is 225 Franklin Street, Boston, MA 02110.
Under the Advisory Agreement, Advisor directs the Fund's investments in
accordance with its investment objective, policies and limitations. For these
services, the Fund pays a fee to Advisor at the rate stated in the Prospectus.
The Advisory Agreement will continue from year to year provided that a majority
of the Trustees who are not interested persons of any Investment Portfolio and
either a majority of all Trustees or a majority of the shareholders of each
Investment Portfolio approve its continuance. The Agreement may be terminated by
Advisor or a Fund without penalty upon 60 days' notice and will terminate
automatically upon its assignment.
Administrator. Frank Russell Investment Management Company
("Administrator") serves as the Fund's administrator, pursuant to an
Administration Agreement dated April 12, 1988. A description of the services
provided under the Administration Agreement and the basis for computing fees for
such services is provided in the Fund's Prospectus. The Administration Agreement
will continue from year to year provided that a majority of the Trustees and a
majority of the Trustees who are not interested persons of any Investment
Portfolio and who have no direct or indirect financial interest in the operation
of the Distribution Plan described below or the Administration Agreement approve
its continuance. The Agreement may be terminated by Administrator or a Fund
without penalty upon 60 days' notice and will terminate automatically upon its
assignment.
Administrator is a wholly owned subsidiary of Frank Russell Company. Frank
Russell Company was founded in 1936 and has provided comprehensive asset
management consulting services since 1969 for institutional pools of investment
assets, principally those of large corporate employee benefit plans. Frank
Russell Company and its affiliates have offices in Tacoma, Winston-Salem, New
York City, Toronto, London, Tokyo, Sydney, Paris, Zurich and Auckland, and have
approximately 1,200 officers and employees. Administrator's and Frank Russell
Company's mailing address is 909 A Street, Tacoma, WA 98402.
Distributor. Russell Fund Distributors, Inc. ("Distributor") serves as the
distributor of Fund shares pursuant to a Distribution Agreement dated April 12,
1988. Distributor is a wholly owned subsidiary of Administrator. Distributor's
mailing address is One International Place, Boston, MA 02110.
Custodian and Transfer Agent. State Street serves as the custodian
("Custodian") and transfer agent ("Transfer Agent") for Investment Company.
State Street also provides the basic portfolio recordkeeping required by
Investment Company for regulatory and financial reporting purposes. For
Custodian services, State Street is paid an annual fee in accordance with the
following: custody services--a fee payable monthly on a pro rata basis, based on
the following percentages of average daily net assets of each Fund: $0 up to
$1.5 billion--0.02%, over $1.5 billion-0.015% (for purposes of calculating the
breakpoint, the assets of all domestic Funds are aggregated); securities
transaction charges from $6.00 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 $4.00 to $16.00 per security,
depending on the type of instrument and the pricing service used; transfer agent
services of $1.50 per shareholder transaction and a multiple class fee of
$18,000 per year for each additional class of shares; and yield calculation fees
of $350.00 per non-money market portfolio per month. As of the date of this SAI,
a yield calculation will not be calculated for the Fund and therefore the
$350.00 fee will not be charged. For
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Transfer and Dividend Disbursing Agent services, State Street is paid the
following annual account services fees: $9.00 open account fee; $1.50 closed
account fee; fund minimum per portfolio for one to four portfolios--$36,000,
five to six portfolios--$24,000, and over six portfolios $18,000. Portfolio fees
are allocated to each fund based on the average net asset value of each fund and
are billable on a monthly basis at the rate of 1/12 of the annual fee. State
Street will apply a $5.00 fee to each telephone transaction (purchase or
redemption), which is applied against the monthly billing. State Street is
reimbursed by the Fund for supplying certain out-of-pocket expenses including
postage, transfer fees, stamp duties, taxes, wire fees, telexes, and freight.
Independent Accountants. Coopers & Lybrand L.L.P. serves as the Investment
Company's independent accountants. Coopers & Lybrand L.L.P. is responsible for
performing annual audits of the financial statements and financial highlights in
accordance with generally accepted auditing standards, a review of federal tax
returns, and, pursuant to Rule 17f-2 of the 1940 Act, three security counts. The
mailing address of Coopers & Lybrand L.L.P. is One Post Office Square, Boston,
MA 02109.
Distribution Plan. Under the 1940 Act, the Securities and Exchange
Commission has adopted Rule 12b-1, which regulates the circumstances under which
the Fund may, directly or indirectly, bear distribution and shareholder
servicing expenses. The Rule provides that the Fund may pay for such expenses
only pursuant to a plan adopted in accordance with the Rule. Accordingly, the
Fund has adopted an active distribution plan (the "Plan"), which is described in
the Fund's Prospectus.
The Plan provides that the Fund may spend annually, directly or indirectly,
up to 0.25 of 1% of the average daily value of the net assets for distribution
and shareholder servicing services. The Plan does not provide for the Fund to be
charged for interest, carrying or any other financing charges on any
distribution expenses carried forward to subsequent years. A quarterly report of
the amounts expended under the Plan, and the purposes for which such
expenditures were incurred, must be made to the Trustees for their review. The
Plan may not be amended without shareholder approval to increase materially the
distribution or shareholder servicing costs that the Fund may pay. The Plan and
material amendments to it must be approved annually by all of the Trustees and
by the Trustees who are neither "interested persons" (as defined in the 1940
Act) of the 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 Advisor ("Service
Organizations"), to provide shareholder servicing with respect to Fund shares
held by or for the customers of the Service Organizations. Such arrangements are
more fully described in the Fund's Prospectus under "Distribution Services and
Shareholder Servicing."
Federal Law Affecting State Street. The Glass-Steagall Act of 1933
prohibits state chartered banks such as State Street from engaging in the
business of underwriting, selling or distributing certain securities, and
prohibits a member bank of the Federal Reserve System from having certain
affiliations with an entity engaged principally in that business. The activities
of State Street in informing its customers of the Fund, performing investment
and redemption services, providing custodian, transfer, shareholder servicing,
dividend disbursing, agent servicing and investment advisory services, may raise
issues under these provisions. State Street has been advised by its counsel that
its activities in connection with the Fund contemplated under this arrangement
are consistent with its statutory and regulatory obligations.
Valuation of Fund Shares. The Fund determines net asset value per share
once each "business day," as of the close of the regular trading session of the
New York Stock Exchange (currently, 4:00 p.m. Eastern time). A business day is
one on which the New York Stock Exchange is open for business. Currently, the
New York Stock Exchange is open for trading every weekday except New Year's Day,
Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
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The Fund's portfolio securities actively trade on foreign exchanges which
may trade on days that the Fund does not offer or redeem shares. The trading of
portfolio securities on foreign exchanges on such days may significantly
increase or decrease the net asset value of Fund shares when the shareholder is
not able to purchase or redeem Fund shares. Further, because foreign securities
markets may close prior to the time the Fund determines net asset value, events
affecting the value of the portfolio securities occurring between the time
prices are determined and the time the Fund calculates net asset value may not
be reflected in the calculation of net asset value unless Advisor determines
that a particular event would materially affect the net asset value.
The Fund values securities maturing within 60 days of the valuation date at
amortized cost unless the Board determines that the amortized cost method 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 Advisor. Advisor ordinarily pays commissions when it executes
transactions on a securities exchange. In contrast, there is generally no stated
commission on 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
Advisor. The Advisory Agreement provides, in substance and subject to specific
directions from officers of Investment Company, that in executing portfolio
transactions and selecting brokers or dealers, the principal objective is to
seek the best overall terms available to the Fund. Ordinarily, securities will
be purchased from primary markets, and Advisor shall consider all factors it
deems relevant in assessing the best overall terms available for any
transaction, including the breadth of the market in the security, the price of
the security, the financial condition and execution capability of the broker or
dealer, and the reasonableness of the commission, if any, for the specific
transaction and other transactions on a continuing basis.
The Advisory Agreement authorizes Advisor 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 Advisor (or its
affiliates). Advisor 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
Advisor, 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 Advisor exercises investment discretion.
The Trustees periodically review Advisor'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
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representative periods of time to determine if such prices are reasonable in
relation to the benefits provided to the Fund. Certain services received by
Advisor attributable to a particular Fund transaction may benefit one or more
other accounts for which Advisor exercises investment discretion or an
Investment Portfolio other than such Fund. Advisor's fees are not reduced by
Advisor's receipt of such brokerage and research services.
Portfolio Turnover Policy. Generally, securities are purchased for the Fund
for investment income and/or capital appreciation and not for short-term trading
profits.
The portfolio turnover rate for the Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the particular year, by
the monthly average value of the portfolio securities owned by the Fund during
the year. For purposes of determining the rate, all short-term securities,
including options, futures, forward contracts, and repurchase agreements, are
excluded.
Yield and Total Return Quotations. The Fund computes average annual total
return by using a standardized method of calculation required by the Securities
and Exchange Commission. Average annual total return is computed by finding the
average annual compounded rates of return on a hypothetical initial investment
of $1,000 over the one-, five- and ten-year periods (or life of the funds as
appropriate), that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1+T)(n) = ERV
where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a $1,000 payment made
at the beginning of the 1-, 5- and 10-year periods
at the end of the year or period
The calculation assumes that all dividends and distributions of the Fund
are reinvested at the price stated in the Prospectus on the dividend dates
during the period, and includes all recurring and nonrecurring fees that are
charged to all shareholder accounts.
Total returns and other performance figures are based on historical
earnings and are not indicative of future performance.
Yields are computed by using standardized methods of calculation required
by the Securities and Exchange Commission. Yields are calculated by dividing the
net investment income per share earned during a 30-day (or one-month) period by
the maximum offering price per share on the last day of the period, according to
the following formula:
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a-b
YIELD = 2[(---+1)(6)-1]
cd
Where: a = dividends and interests earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = average daily number of shares outstanding during the
period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of
the period.
The yield quoted is not indicative of future results. Yields will depend
on the type, quality, maturity and interest rate of instruments held by the
Fund.
INVESTMENTS
The investment objective of the Fund is set forth in the Prospectus. The
investment objective may be changed with the approval of a majority of the
Fund's Board of Trustees, with at least 60 days' prior notice to shareholders.
In addition to that investment objective, the Fund also has certain
fundamental investment restrictions, which may be changed only with the approval
of a majority of the shareholders of the Fund, and certain nonfundamental
investment restrictions and policies, which may be changed by the Fund without
shareholder approval.
Investment Restrictions
The Fund is subject to the following investment restrictions. Restrictions
1 through 7 are fundamental, and restrictions 8 through 10 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, and securities of companies directly or
indirectly engaged in the real estate industry).
(2) Borrow money (including reverse repurchase agreements), except as a
temporary measure for extraordinary or emergency purposes or to facilitate
redemptions (not for leveraging or investment), provided that borrowings do not
exceed an amount equal to 33-1/3% of the current value of the Fund's assets
taken at market value, less liabilities other than borrowings. If at any time a
Fund's borrowings exceed this limitation due to a decline in net assets, such
borrowings will within three days be reduced to the extent necessary to comply
with this limitation. A Fund will not purchase investments once borrowed funds
(including reverse repurchase agreements) exceed 5% of its total assets.
(3) Pledge, mortgage, or hypothecate its assets. However, the Fund may
pledge securities having a market value at the time of the pledge not exceeding
33-1/3% of the value of the Fund's total assets to secure borrowings permitted
by paragraph (2) above.
(4) With respect to 75% of its total assets, invest in securities of any
one issuer (other than securities issued by the US Government, its agencies and
instrumentalities), if immediately after and as a result of such investment the
current market value of the Fund's holdings in the securities of such issuer
exceeds 5% of the value of the Fund's assets.
(5) Make loans to any person or firm; provided, however, that the making of
a loan shall not include (i) the acquisition for investment of bonds,
debentures, notes or other evidences of indebtedness of a type permitted by the
Fund's investment policies, or (ii) the entry into repurchase agreements or
reverse
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repurchase agreements. A Fund may lend its portfolio securities to
broker-dealers or other institutional investors if the aggregate value of all
securities loaned does not exceed 33-1/3% of the value of the Fund's total
assets.
(6) Engage in the business of underwriting securities issued by others,
except that the Fund will not be deemed to be an underwriter or to be
underwriting on account of the purchase of securities subject to legal or
contractual restrictions on disposition.
(7) Issue senior securities, except as permitted by its investment
objective, policies and restrictions, and except as permitted by the 1940 Act.
This restriction shall not be deemed to prohibit the Fund from (i) making any
permitted borrowings, mortgages or pledges, or (ii) entering into repurchase
transactions.
(8) Invest more than 15% of its net assets in the aggregate, on an ongoing
basis, in illiquid securities or securities that are not readily marketable,
including repurchase agreements and time deposits of more than seven days'
duration.
(9) 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.
(10) 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.
With respect to the industry concentration outlined in the Prospectus, the
Advisor treats US domestic banks and foreign branches of US banks as a separate
industry from foreign banks.
To the extent these restrictions reflect matters of operating policy which
may be changed without shareholder vote, these restrictions may be amended upon
approval by the Board of Trustees and notice to shareholders.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
Investment Policies
To the extent consistent with its investment objective restrictions, the
Fund may invest in the following instruments and utilize the following
investment techniques:
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US Government Obligations. The types of US Government obligations in which
the Fund may at times invest include: (1) a variety of US Treasury obligations,
which differ only in their interest rates, maturities and times of issuance; and
(2) obligations issued or guaranteed by US Government agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the US Treasury, (b) the right of the issuer to borrow an
amount limited to a specific line of credit from the US Treasury, (c)
discretionary authority of the US Government agency or instrumentality or (d)
the credit of the instrumentality (examples of agencies and instrumentalities
are: Federal Land Banks, Federal Housing Administration, Farmers Home
Administration, Export--Import Bank of the United States, Central Bank for
Cooperatives, Federal Intermediate Credit Banks, Federal Home Loan Banks,
General Services Administration, Maritime Administration, Tennessee Development
Bank, Asian-American Development Bank, Student Loan Marketing Association,
International Bank for Reconstruction and Development and Federal National
Mortgage Association). No assurance can be given that in the future the US
Government will provide financial support to such US Government agencies or
instrumentalities described in (2)(b), (2)(c) and (2)(d), other than as set
forth above, since it is not obligated to do so by law. The Fund may purchase US
Government obligations on a forward commitment basis.
Debt Securities. The Fund may also invest temporarily in investment grade
debt securities for defensive purposes. The Fund will primarily invest in equity
securities as defined under the Securities Exchange Act of 1934 (including
convertible debt securities). Please see the Appendix for a description of
securities ratings.
Asset-Backed Securities. Asset-backed securities represent undivided
fractional interests in pools of instruments, such as consumer loans, and are
similar in structure to mortgage-related pass-through securities described
below. Payments of principal and interest are passed through to holders of the
securities and are typically supported by some form of credit enhancement, such
as a letter of credit, surety bond, limited guarantee by another entity or by
priority to certain of the borrower's other securities. The degree of
credit-enhancement varies, generally applying only until exhausted and covering
only a fraction of the security's par value.
The value of asset-backed securities is affected by changes in the
market's perception of the asset backing the security, changes in the
creditworthiness of the servicing agent for the instrument pool, the originator
of the instruments or the financial institution providing any credit enhancement
and the expenditure of any portion of any credit enhancement. The risks of
investing in asset-backed securities are ultimately dependent upon payment of
the underlying instruments by the obligors, and a Fund would generally have no
recourse against the obligee of the instruments in the event of default by an
obligor. The underlying instruments are subject to prepayments which shorten the
weighted average life of asset-backed securities and may lower their return.
Hedging Strategies and Related Investment Techniques
The Fund may seek to hedge its portfolios against movements in the
equity markets and interest rates through the use of options, futures
transactions and options on futures. The Fund has authority to write (sell)
covered call and put options on its portfolio securities, purchase put and call
options on securities and engage in transactions in stock index options, stock
index futures and financial futures and related options on such futures. The
Fund may enter into such options and futures transactions either on exchanges or
in the over-the-counter ("OTC") markets. Although certain risks are involved in
options and futures transactions (as discussed in the Prospectus and below),
Advisor believes that, because the Fund will only engage in these transactions
for hedging purposes, the options and futures portfolio strategies of the Fund
will not subject the Fund to the risks frequently associated with the
speculative use of options and futures transactions. Although the use of hedging
strategies by the Fund is intended to reduce the volatility of the net asset
value of the Fund's shares, the Fund's net asset value will nevertheless
fluctuate. There can be no assurance that the Fund's hedging transactions will
be effective.
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Writing Covered Call Options. The Fund is authorized to write (sell)
covered call options on the securities in which it may invest and to enter into
closing purchase transactions with respect to such options. Writing a call
option obligates 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 and profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the put option plus the related transaction costs. A closing sale
transaction cancels out the Fund's position as the purchaser of an option by
means of an offsetting sale of an identical option prior to the expiration of
the option it has purchased. The Fund will not purchase put options on
securities (including stock index options discussed below) if as a result of
such purchase, the aggregate premiums of all outstanding options on securities
held by the Fund would exceed 5% of the market value of the Fund's total assets.
Purchasing Call Options. The Fund is also authorized to purchase call
options. The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's strike
price (call options on futures contracts are settled by purchasing the
underlying futures contract). The Fund will purchase call options only in
connection with "closing purchase transactions."
Stock Index Options and Financial Futures. The Fund is authorized to
engage in transactions in stock index options and financial futures, and related
options. The Fund may purchase or write put and call options on stock indices to
hedge against the risks of market-wide stock price movements in the securities
in which the Fund invests. Options on indices are similar to options on
securities except that on exercise or assignment, the parties to the contract
pay or receive an amount of cash equal to the difference between the
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closing value of the index and the exercise price of the option times a
specified multiple. The Fund may invest in stock index options based on a broad
market index, such as the S&P 500 Index, or on a narrow index representing an
industry or market segment.
The Fund may also purchase and sell stock index futures contracts and
other financial futures contracts ("futures contracts") as a hedge against
adverse changes in the market value of its portfolio securities as described
below. A futures contract is an agreement between two parties which obligates
the purchaser of the futures contract to buy and the seller of a futures
contract to sell a security for a set price on a future date. Unlike most other
futures contracts, a stock index futures contract does not require actual
delivery of securities, but results in cash settlement based upon the difference
in value of the index between the time the contract was entered into and the
time of its settlement. The Fund may effect transactions in stock index futures
contracts in connection with equity securities in which it invests and in
financial futures contracts in connection with debt securities in which it
invests, if any. Transactions by the Fund in stock index futures and financial
futures are subject to limitations as described below under "Restrictions on the
Use of Futures Transactions."
The Fund may sell futures contracts in anticipation of or during a
market decline to attempt to offset the decrease in market value of the Fund's
securities portfolio that might otherwise result. When a Fund is not fully
invested in the securities markets and anticipates a significant market advance,
the Fund may purchase futures in order to gain rapid market exposure that may
partially or entirely offset increases in the cost of securities that the Fund
intends to purchase. As such purchases are made, an equivalent amount of futures
contracts will be terminated by offsetting sales. It is anticipated that, in a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the long futures position, whether the long
position results from the purchase of a futures contract or the purchase of a
call option, but under unusual circumstances (e.g., the Fund experiences a
significant amount of redemptions), a long futures position may be terminated
without the corresponding purchase of securities.
The Fund also is authorized to purchase and write call and put options
on futures contracts and stock indices in connection with its hedging
activities. Generally, these strategies would be utilized under the same market
and market sector conditions (i.e., conditions relating to specific types of
investments) during which the Fund enters into futures transactions. The Fund
may purchase put options or write call options on futures contracts and stock
indices rather than selling the underlying futures contract in anticipation of a
decrease in the market value of securities. Similarly, the Fund can purchase
call options, or write put options on futures contracts and stock indices, as a
substitute for the purchase of such futures to hedge against the increased cost
resulting from an increase in the market value of securities which the Fund
intends to purchase.
The Fund is also authorized to engage in options and futures
transactions on US and foreign exchanges and in options in the OTC markets ("OTC
options"). In general, exchange traded contracts are third-party contracts
(i.e., performance of the parties' obligations is guaranteed by an exchange or
clearing corporation) with standardized strike prices and expiration dates. OTC
options transactions are two-party contracts with price and terms negotiated by
the buyer and seller. See "Restrictions on OTC Options" below for information as
to restrictions on the use of OTC options.
Restrictions on the Use of Futures Transactions. The purchase or sale of
a futures contract differs from the purchase or sale of a security in that no
price or premium is paid or received. Instead, an amount of cash or securities
acceptable to the broker and the relevant contract market, which varies, but is
generally about 5% of the contract amount, must be deposited with the broker.
This amount is known as "initial margin" and represents a "good faith" deposit
assuring the performance of both the purchaser and seller under the futures
contract. Subsequent payments to and from the broker, called "variation margin,"
are required to be made on a daily basis as the price of the futures contract
fluctuates making the long and short positions in the futures contracts more or
less valuable, a process known as "marking to market." At any time prior to the
settlement date of the futures 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
-15-
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purchaser realizes a loss or gain. In addition, a nominal commission is paid on
each completed sale transaction.
Regulations of the Commodity Futures Trading Commission ("CFTC")
applicable to the Fund requires that all of the Fund's futures and options on
futures transactions constitute bona fide hedging transactions and that the Fund
not enter into such transactions if, immediately thereafter, the sum of the
amount of initial margin deposits on the Fund's existing futures positions and
premiums paid for related options would exceed 5% of the market value of the
Fund's total assets.
Restrictions on OTC Options. The Fund will engage in OTC options,
including OTC stock index options only with member banks of the Federal Reserve
System and primary dealers in US Government securities or with affiliates of
such banks or dealers which have capital of at least $50 million or whose
obligations are guaranteed by an entity having capital of at least $50 million.
The Fund will acquire only those OTC options for which Advisor believes the Fund
can receive on each business day at least two independent bids or offers (one of
which will be from an entity other than a party to the option).
The Staff of the SEC has taken the position that purchased OTC options
and the assets used as cover for written OTC options are illiquid securities.
Therefore, the Fund has adopted an operating policy pursuant to which it will
not purchase or sell OTC options (including OTC options on futures contracts)
if, as a result of such transaction, the sum of: (1) the market value of
outstanding OTC options held by the Fund; (2) the market value of the underlying
securities covered by outstanding OTC call options sold by the Fund; (3) margin
deposits on the Fund's existing OTC options on futures contracts; and (4) the
market value of all other assets of the Fund that are illiquid or are not
otherwise readily marketable, would exceed 10% of the net assets of the Fund,
taken at market value. However, if an OTC option is sold by the Fund to a
primary US Government securities dealer recognized by the Federal Reserve Bank
of New York and the Fund has the unconditional contractual right to repurchase
such OTC option from the dealer at a predetermined price, then the Fund will
treat as illiquid such amount of the underlying securities as is equal to the
repurchase price less the amount by which the option is "in-the-money" (current
market value of the underlying security minus the option's strike price). The
repurchase price with primary dealers is typically a formula price which is
generally based on a multiple of the premium received for the option plus the
amount by which the option is "in-the-money."
Asset Coverage for Futures and Options Positions. The Fund will not use
leverage in its options and futures strategies. Such investments will be made
for hedging purposes only. The Fund will hold securities or other options or
futures positions whose values are expected to offset its obligations under the
hedge strategies. The Fund will not enter into an option or futures position
that exposes the Fund to an obligation to another party unless it owns either:
(1) an offsetting position in securities or other options or futures contracts;
or (2) cash, receivables and short-term debt securities with a value sufficient
to cover its potential obligations. The Fund will comply with guidelines
established by the SEC with respect to coverage of options and futures
strategies by mutual funds, and if the guidelines so require, will set aside
cash and high grade liquid debt securities in a segregated account with its
custodian bank in the amount prescribed. The Fund's custodian shall maintain the
value of such segregated account equal to the prescribed amount by adding or
removing additional cash or liquid securities to account for fluctuations in the
value of securities held in such account. Securities held in a segregated
account cannot be sold while the futures or option strategy is outstanding,
unless they are replaced with similar securities. As a result, there is a
possibility that segregation of a large percentage of a Fund's assets could
impede portfolio management or the Fund's ability to meeting redemption requests
or other current obligations.
Risk Factors in Options and Futures. Utilization of options and futures
transactions to hedge the Fund's portfolios involves the risk of imperfect
correlation in movements in the price of options and futures and movements in
the price of securities which are the subject of the hedge. If the price of the
options or futures moves more or less than the price of hedged securities, the
Fund will experience a gain or loss which will not be completely offset by
movements in the price of the subject of the hedge. The successful use of
options and futures also depends on Advisor's ability to correctly predict price
movements in the market involved in a particular options or futures transaction.
To compensate for imperfect correlations, the Fund
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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
Advisor believes the Fund can receive on each business day at least two
independent bids or offers. However, there can be no assurance that a liquid
secondary market will exist at any specific time. Thus, it may not be possible
to close an options or futures position. The inability to close options and
futures positions also could have an adverse impact on a Fund's ability to
effectively hedge its portfolio. There is also the risk of loss by a Fund of
margin deposits or collateral in the event of bankruptcy of a broker with whom
the Fund has an open position in an option, a futures contract or related
option.
The exchanges on which options on portfolio securities are traded have
generally established limitations governing the maximum number of call or put
options on the same underlying security or currency (whether or not covered)
which may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written in one or more accounts or through
one or more brokers). "Trading limits" are imposed on the maximum number of
contracts which any person may trade on a particular trading day.
TAXES
The Fund intends to qualify for treatment as a regulated investment company
("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended
("the Code"). As a RIC, the Fund will not be liable for federal income taxes on
taxable net investment income and net capital gain (long-term capital gains in
excess of short-term capital losses) that it distributes to its shareholders,
provided that the Fund distributes annually to its shareholders at least 90% of
its net investment income and net short-term capital gain for the taxable year
("Distribution Requirement"). For a Fund to qualify as a RIC it must abide by
all of the following requirements: (1) at least 90% of the Fund's gross income
each taxable year must be derived from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock
or securities or other income (including gains from options or futures
contracts) derived with respect to its business of investing in such stock or
securities ("Income Requirement"); (2) at the close of each quarter of the
Fund's taxable year, at least 50% of the value of its total assets must be
represented by cash and cash items, US government securities, securities of
other RICs, and other securities, with such other securities limited, in respect
of any one issuer, to an amount that does not exceed 5% of the total assets of
the Fund and that does not represent more than 10% of the outstanding voting
securities of such issuer; and (3) 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.
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If a shareholder receives a distribution taxable as a 20% gain or a 28%
gain with respect to shares of a Fund and redeems or exchanges the shares
without having held the shares for more than one year, then any loss on the
redemption or exchange will be treated as a 20% loss or a 28% loss to the extent
of the respective capital gain distribution.
Dividends-Received Deduction. The portion of the dividends received from
the Fund by its corporate shareholders which qualifies for the 70%
dividends-received deduction will be reduced to the extent that the Fund holds
dividend-paying stock for less than 45 days (91 days for certain preferred
stocks). In addition, distributions that the Fund receives from a REIT will not
constitute "dividends" for purposes of the dividends-received deduction.
Accordingly, only a small percentage of dividends from the Fund are expected to
qualify for the dividends-received deduction. Shareholders should consult their
tax advisor regarding dividends-received deductions and their allowance.
Issues Related to Hedging and Option Investments. The Fund's ability to
make certain investments may be limited by provisions of the Code that require
inclusion of certain unrealized gains or losses in the Fund's income for
purposes of the Income Requirement, and the Distribution Requirement, and by
provisions of the Code that characterize certain income or loss as ordinary
income or loss rather than capital gain or loss. Such recognition,
characterization and timing rules will affect investments in certain futures and
option contracts.
State and Local Taxes. Depending upon the extent of the Fund's activities
in states and localities in which its offices are maintained, its agents or
independent contractors are located or it is otherwise deemed to be conducting
business, the Fund may be subject to the tax laws of such states or localities.
The foregoing discussion is only a summary of certain federal income tax
issues generally affecting the Funds and their shareholders. Circumstances among
investors may vary and each investor is encouraged to discuss investment in the
Funds with the investor's tax advisor.
FINANCIAL STATEMENTS
Audited financial statements for the Fund will be available within 60 days
following the end of the Fund's then current fiscal year. When available, copies
of the financial statements can be obtained without charge by calling
Distributor at (800) 647-7327.
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APPENDIX
DESCRIPTION OF SECURITIES RATINGS
Ratings of Debt Instruments
Moody's Investors Service, Inc. ("Moody's") -- Long Term Debt Ratings.
Aaa -- Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa -- Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
Standard & Poor's Corporation ("S&P"). The ratings are based, in varying
degrees, on the following considerations: (1) The likelihood of default --
capacity and willingness of the obligator as to the timely payment of interest
and repayment of principal in accordance with the terms of the obligation; (2)
The nature of and provisions of the obligation; and (3) The protection afforded
by, and relative position of, the obligation in 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.
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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:
o 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:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on debt
and ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
o Well-established access to a range of financial markets and assured
sources of alternate liquidity.
o Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to
a lesser degree. Earnings trends and coverage ratios, while sound, may
be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
o 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.
o 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.
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F-1 -- This designation indicates that the commercial paper is regarded as
having the strongest degree of assurance for timely payment.
F-2 -- Commercial paper issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than those issues rated F-1.
Duff and Phelps, Inc. Duff & Phelps' short-term ratings are consistent with
the rating criteria utilized by money market participants. The ratings apply to
all obligations with maturities of under one year, including commercial paper,
the uninsured portion of certificates of deposit, unsecured bank loans, master
notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is the
level of an obligor's reliance on short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps' short-term ratings is the
refinement of the traditional '1' category. The majority of short-term debt
issuers carry the highest rating, yet quality differences exist within that
tier. As a consequence, Duff & Phelps has incorporated gradations of '1+' (one
plus) and '1-' (one minus) to assist investors in recognizing those differences.
Duff 1+--Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S. Treasury
short-term obligations.
Duff 1--Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk factors are
minor.
Duff 1- -- High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are very
small.
Good Grade. Duff 2--Good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs
may enlarge total financing requirements, access to capital markets is
good. Risk factors are small.
Satisfactory Grade. Duff 3--Satisfactory liquidity and other
protection factors qualify issue as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely payment is
expected.
Non-Investment Grade. Duff 4--Speculative investment characteristics.
Liquidity is not sufficient to ensure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
Default. Duff 5--Issuer failed to meet scheduled principal and/or
interest payments.
IBCA, Inc. In addition to conducting a careful review of an institution's
reports and published figures, IBCA's analysts regularly visit the companies for
discussions with senior management. These meetings are fundamental to the
preparation of individual reports and ratings. To keep abreast of any changes
that may affect assessments, analysts maintain contact throughout the year with
the management of the companies they cover.
IBCA's analysts speak the languages of the countries they cover, which is
essential to maximize the value of their meetings with management and to
properly analyze a company's written materials. They also
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have a thorough knowledge of the laws and accounting practices that govern the
operations and reporting of companies within the various countries.
Often, in order to ensure a full understanding of their position, companies
entrust IBCA with confidential data. While these data cannot be disclosed in
reports, they are taken into account when assigning our ratings. Before dispatch
to subscribers, a draft of the report is submitted to each company to permit
correction of any factual errors and to enable clarification of issues raised.
IBCA's Rating Committees meet at regular intervals to review all ratings
and to ensure that individual ratings are assigned consistently for institutions
in all the countries covered. Following the Committee meetings, ratings are
issued directly to subscribers. At the same time, the company is informed of the
ratings as a matter of courtesy, but not for discussion.
A1+--Obligations supported by the highest capacity for timely repayment.
A1--Obligations supported by a very strong capacity for timely repayment.
A2--Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.
B1--Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business, economic, or
financial conditions than for obligations in higher categories.
B2--Obligations for which the capacity for timely repayment is susceptible
to adverse changes in business, economic or financial conditions.
C1--Obligations for which there is an inadequate capacity to ensure timely
repayment.
D1--Obligations which have a high risk of default or which are currently in
default.
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PART C: OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Part A -- None.
Part B -- None.
(b) Exhibits
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
NAME OF EXHIBIT OR EXHIBIT NUMBER
<S> <C> <C>
1. First Amended and Restated
Master Trust Agreement Post-Effective Amendment #35
(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
(h) Amendment No. 8 Post-Effective Amendment #35
(i) Amendment No. 9 Post-Effective Amendment #40
(j) Amendment No. 10 Post-Effective Amendment #43
2. Bylaws Post-Effective Amendment #42
3. Voting Trust Amendment None
4. Specimen Security None
5(a) Investment Advisory Agreement Post-Effective Amendment #35
(b) Letter agreement incorporating the Yield Plus and Bond Post-Effective Amendment #35
Market Funds within the Investment Advisory Agreement
(c) Letter agreement incorporating the US Treasury Money Post-Effective Amendment #35
Market and US Treasury Obligations Funds within the
Investment Advisory Agreement
(d) Letter agreement incorporating the Growth and Income and Post-Effective Amendment #35
Intermediate Funds within the Investment Advisory
Agreement
(e) Letter agreement incorporating the Emerging markets Fund Post-Effective Amendment #35
and the Prime Money Market Fund within the Investment
Advisory Agreement
(f) Letter agreement incorporating the Tax Free Money Market Post-Effective Amendment #35
Fund within the Investment Advisory Agreement
(g) Letter agreement incorporating the Small Cap, Active Post-Effective Amendment #35
International and Real Estate Equity Funds within the
Investment Advisory Agreement
(h) Letter agreement incorporating the Life Solutions Growth, Post-Effective Amendment #41
Balanced and Income and Growth Funds within the
Investment Advisory Agreement
(i) Letter agreement incorporating the SSgA Special Small Exhibit 5(i)
Cap, International Growth Opportunities and High Yield
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
Bond Funds within the Investment Advisory Agreement
6. Distribution Agreements
(a) Distribution Agreement (Class A Shares) Post-Effective Amendment #35
(a)(i) Letter agreement incorporating the Yield Plus and Bond Post-Effective Amendment #35
Market Funds within the Distribution Agreement
(a)(ii) Letter agreement incorporating the US Treasury Money Post-Effective Amendment #35
Market and US Treasury Obligations Funds within the
Distribution Agreement
(a)(iii) Letter agreement incorporating the Growth and Income and Post-Effective Amendment #35
Intermediate Funds within the Distribution Agreement
(a)(iv) Letter agreement incorporating the Emerging Markets and Post-Effective Amendment #35
Prime Money Market Funds within the Distribution
Agreement
(a)(v) Letter agreement incorporating the Class A shares of the Post-Effective Amendment #35
Tax Free Money Market Fund within the Distribution
Agreement
(a)(vi) Letter agreement incorporating the Small Cap, Active Post-Effective Amendment #35
International and Real Estate Equity Funds within the
Distribution Agreement
(a)(vii) Letter agreement incorporating the Life Solutions Growth, Post-Effective Amendment #41
Balanced and Income and Growth Funds within the
Distribution Agreement
(a)(viii) Letter agreement incorporating the Special Small Cap, Exhibit 6(a)(viii)
International Growth Opportunities and High Yield Bond
Funds within the Distribution Agreement
(b) Distribution Agreement (regarding Class B Shares of the Post-Effective Amendment #42
Money Market and US Government Money Market Funds)
(b)(i) Letter agreement incorporating the Class B Shares of the To be filed by amendment
Tax Free Money Market Fund within the Distribution
Agreement
(c) Distribution Agreement (regarding Class C Shares of the Post-Effective Amendment #42
Money Market and US Government Money Market Funds)
(c)(i) Letter Agreement incorporating the Class C Shares of the To be filed by amendment
Tax Free Money Market Fund within the Distribution
Agreement
7. Bonus, profit sharing, or pension plans None
8.(a) Custodian Contract Post-Effective Amendment #35
(b) Letter agreement incorporating the Yield Plus and Bond Post-Effective Amendment #35
Market Fund into the Custodian Contract
(c) Letter agreement incorporating the US Treasury Money Post-Effective Amendment #35
Market and Us Treasury Obligations Funds into the
Custodian Contract
(d) Letter agreement incorporating the Growth and Income and Post-Effective Amendment #35
Intermediate Funds into the Custodian Contract
(e) Letter agreement incorporating the Emerging Markets and Post-Effective Amendment #35
Prime Money Market Funds into the Custodian Contract
(f) Fee Schedule, dated February 17, 1994, to Custodian Post-Effective Amendment #35
Contract
(g) Letter agreement incorporating the Tax Free Money Post-Effective Amendment #35
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
Market Fund into the Custodian Contract
(h) Letter agreement incorporating the Small Cap, Active Post-Effective Amendment #35
International and Real Estate Equity Funds into the
Custodian Contract
(i) Letter agreement incorporating the Life Solutions Growth, Post-Effective Amendment #41
Balanced and Income and Growth Funds into the Custodian
Contract
(j) Letter agreement incorporating the Special Small Cap, Exhibit 8(j)
International Growth Opportunities and High Yield Bond
Funds into the Custodian Contract
9(a)(i) Transfer Agency and Service Agreement Post-Effective Amendment #35
(a)(ii) Letter agreement incorporating the Yield Plus and Bond Post-Effective Amendment #35
Market Funds within the Transfer Agency and Service
Agreement
(a)(iii) Letter agreement incorporating the Us Treasury Money Post-Effective Amendment #35
Market and US Treasury Obligations Funds within the
Transfer Agency and Service Agreement
(a)(iv) Letter agreement incorporating the Growth and Income and Post-Effective Amendment #35
Intermediate Funds within the Transfer Agency and Service
Agreement
(a)(v) Letter agreement incorporating the Emerging markets and Post-Effective Amendment #35
Prime Money Market Funds within the Transfer Agency and
Service Agreement
(a)(vi) Letter agreement incorporating the Tax Free Money Market Post-Effective Amendment #35
Fund within the Transfer Agency and Service Agreement
(a)(vii) Letter agreement incorporating the Small Cap, Active Post-Effective Amendment #35
International and Real Estate Equity Funds within the
Transfer Agency and Service Agreement
(a)(viii) Letter agreement incorporating the Life Solutions Growth, Post-Effective Amendment #41
Balanced and Income and Growth Funds within the Transfer
Agency and Service Agreement
(a)(ix) Letter agreement incorporating the Special Small Cap , Exhibit 9(a)(ix)
International Growth Opportunities and High Yield Bond
Funds within the Transfer Agency and Service Agreement
(b)(i) Administration Agreement Post-Effective Amendment #35
(b)(ii) Letter agreement incorporating the Yield Plus and Bond Post-Effective Amendment #35
Market Funds within the Administration Agreement
(b)(iii) Letter agreement incorporating the Us Treasury Money Post-Effective Amendment #35
Market and US Treasury Obligations Funds within the
Administration Agreement
(b)(iv) Letter agreement incorporating the Growth and Income and Post-Effective Amendment #35
Intermediate Funds within the Administration Agreement
(b)(v) Letter agreement incorporating the Emerging Markets and Post-Effective Amendment #35
Prime Money Market Funds within the Administration
Agreement
(b)(vi) Letter agreement incorporating the Tax Free Money Market Post-Effective Amendment #35
Fund within the Administration Agreement
(b)(vii) Letter agreement incorporating the Small Cap, Active Post-Effective Amendment #35
International and Real Estate Equity Funds within the
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Administration Agreement
(b)(viii) Letter agreement incorporating the Life Solutions Growth, Post-Effective Amendment #35
Balanced and Income and Growth Funds within the
Administration Agreement
(b)(ix) Amendment No. 4 to the Administration Agreement between Post-Effective Amendment #41
Frank Russell Investment Management Company and SSgA Funds
(b)(x) Letter agreement incorporating the Special Small Cap, Exhibit 9(b)(x)
International Growth Opportunities and High Yield Bond
Funds within the Administration Agreement
10. Opinion of Counsel
(a) Relating to The Seven Seas Series Money Market Fund Post-Effective Amendment #42
(b) Relating to The Seven Seas Series US Government Money Post-Effective Amendment #42
Market Fund
(c) Relating to The Seven Seas Series S&P 500 Index, S&P Post-Effective Amendment #42
Midcap Index, Matrix Equity, International European
Index, International Pacific Index and Short Term
Government Securities Funds
(d) Relating to The Seven Seas Series Yield Plus and Bond Post-Effective Amendment #42
Market Funds
(e) Relating to The Seven Seas Series US Treasury Money Post-Effective Amendment #42
Market and Treasury Obligations Funds
(f) Relating to The Seven Seas Series Growth and Income and Post-Effective Amendment #42
Intermediate Funds
(g) Relating to The Seven Seas Series Emerging Markets and Post-Effective Amendment #42
Prime Money Market Funds
(h) Relating to Class A, Class B and Class C Shares of The Post-Effective Amendment #42
Seven Seas Series Money Market and US Government Money
Market Funds
(i) Relating to Class A, Class B and Class C Shares of The Post-Effective Amendment #42
Seven Seas Series Tax Free Money Market Funds
(j) Relating to The Seven Seas Series Real Estate Equity Fund Post-Effective Amendment #42
(k) Relating to the SSgA Life Solutions Growth, Balanced and Post-Effective Amendment #41
Income and Growth Funds
(l) Relating to the Special Small Cap, International Growth Exhibit 10(l)
Opportunities and High Yield Bond Funds
11. Other Opinions: Consent of Independent Accountants None
12. Financial Statements Omitted from Item 23 None
13. Letter of Investment Intent
(a) The Seven Seas Series Money Market Fund Post-Effective Amendment #42
(b) The Seven Seas Series US Government Money Market Fund Post-Effective Amendment #42
(c) The Seven Seas Series Government Securities, Index, Post-Effective Amendment #42
Midcap Index, Matrix, European Index and Pacific Index
Funds
(d) The Seven Seas Series Yield Plus and Bond Market Funds Post-Effective Amendment #42
(e) The Seven Seas Series US Treasury Money Market and Post-Effective Amendment #42
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Treasury Obligations Funds
(f) The Seven Seas Series Growth and Income and Intermediate Post-Effective Amendment #42
Funds
(g) The Seven Seas Series Emerging Markets and Prime Money Post-Effective Amendment #42
Market Funds
(h) Class B and C Shares of The Seven Seas Series Money Post-Effective Amendment #42
Market and US Government Money Market Funds
(i) The Seven Seas Series Tax Free Money Market Fund (Class Post-Effective Amendment #42
A, B and C Shares)
(j) The Seven Seas Series Active International Fund Post-Effective Amendment #42
(k) SSgA Life Solutions Growth, Balanced and Income and Post-Effective Amendment #41
Growth Funds
(l) SSgA Special Small Cap, International Growth Exhibit 13(l)
Opportunities, Real Estate Equity and High Yield Bond
Funds
14. Prototype Retirement Plan None
15. Distribution Plans pursuant to Rule 12b-1
(a) Plan of Distribution for the government Securities, Post-Effective Amendment #35
Index, Midcap Index, Matrix, European Index and Pacific
Index Funds as approved by the Board of Trustees
(a)(i) Addendum to the Plan of Distribution incorporating the Post-Effective Amendment #35
Yield Plus and Bond Market Funds into the Plan
(a)(ii) Addendum to the Plan of Distribution incorporating the Post-Effective Amendment #35
Money Market and US Government Money Market Funds into
the Plan (Class A Shares)
(a)(iii) Addendum to the Plan of Distribution incorporating the Us Post-Effective Amendment #35
Treasury Money Market and US Treasury Obligations Funds
into the Plan
(a)(iv) Addendum to the Plan of Distribution incorporating the Post-Effective Amendment #35
Growth and Income and Intermediate Funds into the Plan
(a)(v) Addendum to the Plan of Distribution incorporating the Post-Effective Amendment #35
Emerging Markets and Prime Money Market Funds into the
Plan
(a)(vi) Addendum to the Plan of Distribution incorporating the Post-Effective Amendment #35
Class A Shares of the Tax Free Money Market Fund into the
Plan
(a)(vii) Addendum to the Plan of Distribution incorporating the Post-Effective Amendment #35
Small Cap, Active International and Real Estate Equity
Funds into the Plan
(a)(viii) Addendum to the Plan of Distribution incorporating the Post-Effective Amendment #41
Life Solutions Growth, Balanced and Income and Growth
Funds into the Plan
(a)(ix) Addendum to the Plan of Distribution incorporating the Exhibit 15(a)(ix)
Special Small Cap, International Growth Opportunities and
High Yield Bond Funds into the Plan
(b) Plan of Distribution for the Money Market and US Post-Effective Amendment #42
Government Money Market Funds (Class B Shares) as
approved by the Board of Trustees
(b)(i) Addendum to the Plan of Distribution incorporating the To be filed by amendment
Class B Shares of the Tax Free Money Market Fund
(c) Plan of Distribution for the Money Market and US Post-Effective Amendment #42
Government Money Market Funds (Class C Shares) as
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
approved by the Board of Trustees
(c)(i) Addendum to the Plan of Distribution incorporating the To be filed by amendment
Class C Shares of the Tax Free money Market Fund
(d) Shareholder Servicing Agreement, by and between SSgA Post-Effective Amendment #42
Funds and State Street Bank and Trust Company
(d)(i) Shareholder Servicing Agreement, by and between SSgA Post-Effective Amendment #39
Funds and State Street Brokerage Services, Inc.
(d)(ii) Shareholder Servicing Agreement, by and between SSgA Post-Effective Amendment #39
Funds and State Street Bank and Trust Company,
Metropolitan Division of Commercial Banking Services
(d)(iii) Shareholder Servicing Agreement, by and between SSgA Post-Effective Amendment #42
Funds and State Street Bank and Trust Company Retirement
Investment Services Division
(d)(iv) Shareholder Servicing Agreement, by and between SSgA Post-Effective Amendment #42
Funds and State Street Solutions
(e) Form of Agreement Pursuant to Rule 12b-1 Plan (relating To be filed by amendment
to Class B Shares) as approved by the Board of Trustees
(f) Form of Agreement Pursuant to Rule 12b-1 Plan (relating To be filed by amendment
to Class C Shares) as approved by the Board of Trustees
16. Computation of Fund Performance Quotation Post-Effective Amendment #42
17. Financial Data Schedule Post-Effective Amendment #42
</TABLE>
Item 25. Persons Controlled by or Under Common Control with Registrant
None
Item 26. Number of Holders of Securities
NUMBER OF RECORD
HOLDERS AS OF
TITLE OF CLASS: MARCH 30, 1998
Shares of beneficial interest
Par Value $0.001
SSgA Funds--
Money Market Fund
Class A Shares 2,276
Class B Shares 1
Class C Shares 1
US Government Money Market Fund 289
Class A Shares
Class B Shares 1
Class C Shares 1
Matrix Equity Fund 969
Small Cap Fund 4,274
S&P 500 Index Fund 3,779
Active International Fund 1,084
<PAGE>
International Pacific Index Fund 1
Yield Plus Fund 373
Bond Market Fund 439
Growth and Income Fund 684
Intermediate Fund 225
US Treasury Money Market Fund 19
US Treasury Obligations Fund 1
Prime Money Market Fund 146
Emerging Markets Fund 3,057
Tax Free Money Market Fund
Class A Shares 54
Class B Shares 1
Class C Shares 1
Real Estate Equity Fund 1
Life Solutions Growth Fund 8
Life Solutions Balanced Fund 8
Life Solutions Income and Growth Fund 3
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,
<PAGE>
or (iii) a reasonable determination, based upon a review of the facts, that the
indemnitee was not liable by reason of Disabling Conduct by (a) a vote of a
majority of a quorum of Trustees who are neither "interested persons" of the
Trust as defined in section 2(a)(19) of the 1940 Act nor parties to the
proceeding, or (b) an independent legal counsel in a written opinion. Expenses,
including accountants' and counsel fees so incurred by any such Covered Person
(but excluding amounts paid in satisfaction of judgments, in compromise or as
fines or penalties), may be paid from time to time by the Sub-Trust in question
in advance of the final disposition of any such action, suit or proceeding,
provided that the Covered Person shall have undertaken to repay the amounts so
paid to the Sub-Trust in question if it is ultimately determined that
indemnification of such expenses is not authorized under this Article VI and (i)
the Covered Person shall have provided security for such undertaking, (ii) the
Trust shall be insured against losses arising by reason of any lawful advances,
or (iii) a majority of a quorum of the disinterested Trustees who are not a
party to the proceeding, or an independent legal counsel in a written opinion,
shall have determined, based on a review of readily available facts (as opposed
to a full trial-type inquiry), that there is reason to believe that the Covered
Person ultimately will be found entitled to indemnification."
The Investment Advisory Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of obligations or
duties under the Investment Advisory Agreement or on the part of the Adviser, or
for a loss resulting from a breach of fiduciary duty with respect to the receipt
of compensation for services, the Adviser shall not be subject to liability to
the Registrant or to any shareholder of the Registrant for any error of
judgment, mistake of law or any other act or omission in the course of, or
connected with, rendering services under the Investment Advisory Agreement or
for any losses that may be sustained in the purchase, holding or sale of any
security.
The Distribution Agreements relating to Class A, Class B and Class C Shares
provide that in the absence of willful misfeasance, bad faith, gross negligence,
or reckless disregard of obligations or duties under the Distribution Agreement,
the Distributor, its officers, directors and any controlling person (within the
meaning of Section 15 of the 1933 Act) ("Distributor") shall be indemnified by
the Registrant from and against any and all claims, demands, liabilities and
expenses (including the cost of investigating or defending such claims, demands
or liabilities and any counsel fees incurred in connection therewith) which
Distributor may incur under the 1933 Act or under common law or otherwise
arising out of or based upon any alleged untrue statement of a material fact
contained in the Registration Statement, Prospectus or Statement of Additional
Information or arising out of or based upon any alleged omission to state a
material fact required to be stated in said documents or necessary to make the
statements not misleading.
Registrant provides the following undertaking:
"Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to Trustees, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for 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."
<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:
<TABLE>
<CAPTION>
NAME CAPACITY WITH ADVISOR BUSINESS NAME AND ADDRESS
<S> <C> <C>
Tenley E. Albright, MD Director Chairman, Western Resources, Inc.
Two Commonwealth Avenue
Boston, MA 02116-3134
Joseph A. Baute Director Former Chairman and CEO,
Markem Corporation
515 East Surry Road
Surry, NH 03431
I. MacAlister Booth Director Retired Chairman, President and CEO,
Polaroid Corporation
P.O. Box 428 - 68 Barnes Hill Road
Concord, MA 01742
Marshall N. Carter Chairman and CEO State Street Bank and Trust Company
225 Franklin Street - P.O. Box 351
Boston, MA 02110
James I. Cash, Jr. Director The James E. Robison Professor of
Business Administration, Harvard
Business School (on sabbatical)
c/o Stanford Graduate School of Business
518 Memorial Way
Stanford University
Stanford, CA 94305-5015
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Truman S. Casner Director Partner, Ropes & Gray
One International Place - 37th Floor
Boston, MA 02110
Nader F. Darehshori Director Chairman, President and CEO, Houghton
Mifflin Company
222 Berkeley - 5th Floor
Boston, MA 02116-3764
Arthur L. Goldstein Director Chairman and CEO, Ionics, Inc.
65 Grove Street
P.O. Box 9131
Watertown, MA 02272-9131
David P. Gruber Director President and CEO, Wyman-Gordon Company
244 Worchester Street
N. Grafton, MA 01536-8001
Charles F. Kaye Director President, Transportation Investments,
Inc.
101 Federal Street - Suite 1900
Boston, MA 02110
John M. Kucharski Director Chairman and CEO, EG&G, Inc.
45 William Street
Wellesley, MA 02181
Charles R. LaMantia Director President and CEO, Arthur D. Little,
Inc.
25 Acorn Park
Cambridge, MA 02140
David B. Perini Director Chairman and President, Perini
Corporation
73 Mt. Wayte Avenue
Framingham, MA 01701
Dennis J. Picard Director Chairman and CEO, Raytheon Company
141 Spring Street
Lexington, MA 02173
Alfred Poe Director Former President, Meal Enhancement
Group, Campbell Soup Company
Nine Hickory Drive
Chester, NJ 07930
Bernard W. Reznicek Director President, Premier Group;
Retired Chairman and CEO, Boston Edison
Company
1212 N. 96th Street
Omaha, NE 68114-2274
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
David A. Spina President and Chief Operating State Street Corporation
Officer 225 Franklin Street - P.O. Box 351
Boston, MA 02110
Diana Chapman Walsh Director President, Wellesley College
106 Central Street
Wellesley, MA 02181
Robert E. Weissman Director Chairman and CEO, Cognizant Corporation
200 Nyala Farms Road
Westport, CT 06880
</TABLE>
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:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL BUSINESS
ADDRESS* POSITION AND OFFICES WITH UNDERWRITER POSITION WITH REGISTRANT
<S> <C> <C>
Carla L. Anderson Assistant Secretary Assistant Secretary
Lynn L. Anderson Director and CEO Trustee, Chairman of the Board,
and President
Karl J. Ege Secretary and General Counsel None
J. David Griswold Associate General Counsel Secretary
and Assistant Secretary
Mary E. Hughs Assistant Secretary None
John C. James Assistant Secretary None
Randall P. Lert Director None
Gregory J. Lyons Assistant Secretary None
Eric A. Russell Director and President None
George W. Weber Director, Fund Administration and Senior Vice President and Fund
Operations Treasurer
</TABLE>
*Address of all individuals: 909 A Street, Tacoma, Washington 98402
<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) The Registrant hereby undertakes to file an amendment to the
registration statement with certified financial statements which
need not be certified within four to six months from the
commencement date of each Fund.
(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.
<PAGE>
SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, The Registrant, the SSgA Funds, has duly caused this
Post-Effective Amendment No. 45 to its Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and had 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 28th
day of April, 1998.
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 April 28, 1998.
Signature Title
/s/ Lynn L. Anderson Trustee, President, Treasurer and
-------------------- Chairman of the Board
Lynn L. Anderson
/s/ George W. Weber Senior Vice President and
------------------- Fund Treasurer
George W. Weber
/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
<PAGE>
EXHIBIT INDEX
NAME OF EXHIBIT EXHIBIT NUMBER
Letter agreement incorporating the SSgA Special Small Exhibit 5(i)
Cap, International Growth Opportunities and High Yield
Bond Funds within the Investment Advisory Agreement
Letter agreement incorporating the SSgA Special Small Exhibit 6(a)(viii)
Cap, International Growth Opportunities and High Yield
Bond Funds within the Distribution Agreement
Letter agreement incorporating the SSgA Special Small Exhibit 8(j)
Cap, International Growth Opportunities and High Yield
Bond Funds into the Custodian Contract
Letter agreement incorporating the SSgA Special Small Exhibit 9(a)(ix)
Cap, International Growth Opportunities and High Yield
Bond Funds within the Transfer Agency and Service
Agreement
Letter agreement incorporating the SSgA Special Small Exhibit 9(b)(x)
Cap, International Growth Opportunities and High Yield
Bond Funds within the Administration Agreement
Opinion of Counsel relating to the Special Small, Cap Exhibit 10(1)
International Growth Opportunities and High Yield Bond
Funds
Letter of Investment Intent relating to SSgA Special Exhibit 13(l)
Small Cap, International Growth Opportunities, Real
Estate Equity and High Yield Bond Funds
Addendum to the Plan of Distribution incorporating the Exhibit 15(a)(ix)
Special Small Cap, International Growth Opportunities and
High Yield Bond Funds into the Plan
Exhibit 5(i)
LETTER AGREEMENT
SSgA Special Small Cap Fund
SSgA International Growth Opportunities Fund
SSgA High Yield Bond Fund
Investment Advisory Agreement
April 28, 1998
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Ladies and Gentlemen:
Pursuant to Paragraph 1(b) of the Investment Advisory Agreement between the SSgA
Funds and State Street Bank and Trust Company, dated April 12, 1988, the SSgA
Funds advise you that it is creating three new series to be named SSgA Special
Small Cap Fund, SSgA International Growth Opportunities Fund, and SSgA High
Yield Bond Fund (collectively, the "Funds"), and that the SSgA Funds desire
State Street Bank and Trust Company to serve as investment advisor with respect
to the Funds pursuant to the terms and conditions of the Investment Advisory
Agreement. The Funds will be charged a fee by the Advisor for its investment
advisory services, as reflected in the attached Exhibit A.
Notwithstanding anything to the contrary in Paragraph 10(a), the initial term of
the Investment Advisory Agreement with respect to the Funds shall be until April
12, 1998.
Please acknowledge your acceptance of acting as advisor to the Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
SSgA FUNDS
By: /s/ Lynn L. Anderson
---------------------
Lynn L. Anderson
President
ACKNOWLEDGED AND ACCEPTED
- -------------------------
State Street Bank and Trust Company
By: /s/
---------------------------
Its:
--------------------------
<PAGE>
AMENDED
EXHIBIT "A"
April 28, 1998
As consideration for the Advisor's services to the following Funds, the Advisor
shall receive from each of these Funds an annual advisory fee, accrued daily at
the rate of 1/365th of the applicable advisory fee rate and payable monthly on
the first business day of each month, of the following annual percentages of
each Portfolio's average daily net assets during the month:
SSgA Money Market Fund 0.25%
SSgA US Government Money Market Fund 0.25%
SSgA S&P 500 Index Fund 0.10%
SSgA Matrix Equity Fund 0.75%
SSgA International Pacific Index Fund 0.50%
SSgA Bond Market Fund 0.30%
SSgA Yield Plus Fund 0.25%
SSgA US Treasury Money Market Fund 0.25%
SSgA US Treasury Obligations Fund 0.25%
SSgA Growth and Income Fund 0.85%
SSgA Intermediate Fund 0.80%
SSgA Prime Money Market Portfolio 0.15%
SSgA Emerging Markets Fund 0.75%
SSgA Tax Free Money Market Fund 0.25%
SSgA Real Estate Equity Fund 0.65%
SSgA Small Cap Fund 0.75%
SSgA Active International Fund 0.75%
SSgA Life Solutions Income and Growth Fund 0.00%
SSgA Life Solutions Balanced Fund 0.00%
SSgA Life Solutions Growth Fund 0.00%
SSgA Special Small Cap Fund 0.75%
SSgA International Growth Opportunities Fund 0.75%
SSgA High Yield Bond Fund 0.30%
Exhibit 6(a)(viii)
LETTER AGREEMENT
SSgA Special Small Cap Fund
SSgA International Growth Opportunities Fund
SSgA High Yield Bond Fund
Distribution Agreement
April 28, 1998
Russell Fund Distributors, Inc.
909 A Street
Tacoma, WA 98402
Ladies and Gentlemen:
Pursuant to Paragraph 1 of the Distribution Agreement between The SSgA Funds and
Russell Fund Distributors, Inc., dated April 12, 1988, as amended, the SSgA
Funds advise you that it is creating three new series to be named SSgA Special
Small Cap Fund, SSgA International Growth Opportunities Fund, and SSgA High
Yield Bond Fund (collectively, the "Funds"), and that the SSgA Funds desire
Russell Fund Distributors, Inc. to serve as Distributor with respect to the
Funds pursuant to the terms and conditions of the Distribution Agreement. The
fee to be charged by Distributor to the Funds in return for its services will be
as set forth in the Distribution Agreement.
Notwithstanding anything to the contrary in Paragraph 14, the initial term of
the Distribution Agreement with respect to the Funds shall be until April 12,
1998.
Please acknowledge your acceptance of acting as Distributor to the Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
SSgA FUNDS
By: /s/ Lynn L. Anderson
--------------------
Lynn L. Anderson
President
ACKNOWLEDGED AND ACCEPTED
- -------------------------
Russell Fund Distributors, Inc.
By: /s/J. David Griswold
--------------------
J. David Griswold
Associate General Counsel and
Assistant Secretary
Exhibit 8(j)
LETTER AGREEMENT
SSgA Special Small Cap Fund
SSgA International Growth Opportunities Fund
SSgA High Yield Bond Fund
Custodian Contract
April 28, 1998
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
<
Ladies and Gentlemen:
Pursuant to Paragraph 12 of the Custodian Contract between the SSgA Funds and
State Street Bank and Trust Company, dated as of April 11, 1988, the SSgA Funds
advise you that that it is creating three new series to be named SSgA Special
Small Cap Fund, SSgA International Growth Opportunities Fund, and SSgA High
Yield Bond Fund (collectively, the "Funds"), and that the SSgA Funds desire
State Street Bank and Trust Company to serve as custodian with respect to the
Funds pursuant to the terms and conditions of the Custodian Contract. Custodian
fees to be assessed for transactions on behalf of the Funds shall be as set
forth in the Custodian Contract.
Notwithstanding anything to the contrary in Paragraph 9, the initial term of the
Custodian Contract with respect to the Funds shall be until April 12, 1998.
Please acknowledge your acceptance of acting as Custodian to the Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
SSgA FUNDS
By: /s/ Lynn L. Anderson
--------------------
Lynn L. Anderson
President
ACKNOWLEDGED AND ACCEPTED
- -------------------------
State Street Bank and Trust Company
By: /s/
-------------------------------
Its:
------------------------------
Exhibit 9(a)(ix)
LETTER AGREEMENT
SSgA Special Small Cap Fund
SSgA International Growth Opportunities Fund
SSgA High Yield Bond Fund
Transfer Agency and Service Agreement
April 28, 1998
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Ladies and Gentlemen:
Pursuant to Article 8 of the Transfer Agency and Service Agreement between the
SSgA Funds and State Street Bank and Trust Company, dated as of April 11, 1988,
as amended, the SSgA Funds advise you that it is creating three new series to be
named SSgA Special Small Cap Fund, SSgA International Growth Opportunities Fund,
and SSgA High Yield Bond Fund (collectively, the "Funds"), and that the SSgA
Funds desires State Street Bank and Trust Company to serve as Transfer Agent
with respect to the Funds pursuant to the terms and conditions of the Transfer
Agency and Service Agreement.
Notwithstanding anything to the contrary in Article 7, the initial term of the
Transfer Agency and Service Agreement with respect to the Funds shall be until
April 12, 1998.
Please acknowledge your acceptance of acting as Transfer Agent to the Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
SSgA FUNDS
By: /s/ Lynn L. Anderson
--------------------
Lynn L. Anderson
President
ACKNOWLEDGED AND ACCEPTED
- -------------------------
State Street Bank and Trust Company
By: /s/
-------------------------------
Its:
------------------------------
Exhibit 9(b)(x)
LETTER AGREEMENT
SSgA Special Small Cap Fund
SSgA International Growth Opportunities Fund
SSgA High Yield Bond Fund
Administration Agreement
April 28, 1998
Frank Russell Investment Management Company
909 A Street
Tacoma, WA 98402
Ladies and Gentlemen:
Pursuant to Paragraph 1 of the Administration Agreement between the SSgA Funds
and Frank Russell Investment Management Company, dated April 12, 1988, as
amended, the SSgA Funds advise you that it is creating three new series to be
named SSgA Special Small Cap Fund, SSgA International Growth Opportunities Fund,
and SSgA High Yield Bond Fund (collectively, the "Funds"), and that the SSgA
Funds desire Frank Russell Investment Management Company to serve as
Administrator with respect to the Funds pursuant to the terms and conditions of
the Administration Agreement. The Administrator to the Funds will charge a fee
for its services to the Funds as determined by the currently effective
Administration Agreement.
Notwithstanding anything to the contrary in Paragraph 11(b), the initial term of
the Administration Agreement with respect to the Funds shall be until April 12,
1998.
Please acknowledge your acceptance of acting as Administrator to the Funds by
executing this letter agreement in the space provided below and then returning
it to the undersigned.
Sincerely,
SSgA FUNDS
By: /s/ Lynn L. Anderson
--------------------
Lynn L. Anderson
President
ACKNOWLEDGED AND ACCEPTED
- -------------------------
Frank Russell Investment Management Company
By: /s/ J. David Griswold
---------------------
J. David Griswold
Associate General Counsel
and Assistant Secretary
Exhibit 10(l)
April 23, 1998
The SSgA Funds
909 A Street
Tacoma, WA 98402
Ladies and Gentlemen:
As counsel to the SSgA Funds (the "Trust"), a Massachusetts business trust, we
have been asked to render our opinion with respect to the issuance of an
indefinite number of shares of beneficial interest, $.001 par value, of the
Trust (the "Shares") representing interests in the SSgA Special Small Cap,
International Growth Opportunities, and High Yield Bond Funds, as more fully
described in each Prospectus and the Statement of Additional Information
contained in Post-Effective Amendment No. 45 (the "Amendment") to the Trust's
Registration Statement on Form N-1A (Registration No.
33-19229) filed with the Securities and Exchange Commission.
We have examined the First Amended and Restated Master Trust Agreement of the
Trust dated October 13, 1993, as amended, the By-laws of the Trust, the records
of certain meetings of the Trustees, the Prospectus and Statement of Additional
Information contained in the Amendment, and such other documents, records and
certificates as we have deemed necessary for the purposes of this opinion.
Based upon the foregoing, we are of the opinion that the Shares, when sold in
accordance with the terms of the Prospectus and Statement of Additional
Information in effect at the time of sale, will be legally issued, fully paid
and non-assessable by the Trust.
We hereby consent to the filing of this opinion as an exhibit to the Amendment
and to the reference to this firm as legal counsel for the Trust in the
Prospectus contained in the Amendment.
Very truly yours,
/s/Goodwin, Procter & Hoar
- --------------------------
Goodwin, Procter & Hoar
Exhibit 13(l)
SUBSCRIPTION
SSgA Special Small Cap Fund
SSgA International Growth Opportunities Fund
SSgA Real Estate Equity Fund
SSgA High Yield Bond Fund
April 28, 1998
To: The Board of Trustees of the SSgA Funds
909 A Street
Tacoma, WA 98402
Gentlemen:
The undersigned hereby subscribes to 10 shares each of the SSgA Special Small
Cap Fund, the SSgA International Growth Opportunities Fund, the SSgA Real Estate
Equity Fund and the SSgA High Yield Bond Fund, having a par value of $0.001 per
share, at a price of $10.00 per share.
In consideration for your acceptance of the foregoing subscription, we hereby
deliver to you $400.00 in full and complete payment.
FRANK RUSSELL INVESTMENT
MANAGEMENT COMPANY
By: /s/ J. David Griswold
---------------------
J. David Griswold
Associate General Counsel and
Assistant Secretary
ACKNOWLEDGED AND ACCEPTED
- -------------------------
SSgA Funds
By: /s/ Lynn L. Anderson
--------------------
Lynn L. Anderson
President
Exhibit 15(a)(ix)
ADDENDUM ADDING
SSgA SPECIAL SMALL CAP FUND,
SSgA INTERNATIONAL GROWTH OPPORTUNITIES FUND
AND SSgA HIGH YIELD BOND FUND
TO THE SSgA FUNDS
PLAN OF DISTRIBUTION
PURSUANT TO RULE 12b-1
Pursuant to Paragraph 4(b) of the SSgA Funds' Plan of Distribution Pursuant to
Rule 12b-1 ("Rule 12b-1 Plan"), the undersigned parties agree that the SSgA
Special Small Cap Fund, SSgA International Growth Opportunities Fund and the
SSgA High Yield Bond Fund (collectively, the "Funds") be added each as "Funds"
under the Rule 12b-1 Plan and further agree to be bound by the terms and
conditions of the Rule 12b-1 Plan with respect to the Funds.
Notwithstanding anything to the contrary in Section 4 of the Rule 12b-1 Plan,
the initial term of the Rule 12b-1 Plan with respect to the Funds shall be until
April 12, 1998.
Dated: April 28, 1998
ATTEST: SSgA FUNDS
By: /s/ Deedra S. Walkey By: /s/ Lynn L. Anderson
------------------- --------------------
Lynn L. Anderson
President
ATTEST: RUSSELL FUND DISTRIBUTORS, INC.
By: /s/ Carla L. Anderson By: /s/ J. David Griswold
--------------------- ---------------------
J. David Griswold
Associate General Counsel and
Assistant Secretary
