Item 1. Business.
OVERVIEW
American Bar Association Members/State Street Collective Trust (the "Collective Trust") was organized on August 8, 1991. The Collective Trust is maintained exclusively for the collective investment of monies administered on behalf of the American Bar Association Members Retirement Program (the "Program"). Eight separate collective investment funds (the "Funds") and three portfolios in a Structured Portfolio Service are established under the Collective Trust. The Funds are as follows: Stable Asset Return Fund, Intermediate Bond Fund, Balanced Fund, Value Equity Fund, Growth Equity Fund, Index Equity Fund, Aggressive Equity Fund and International Equity Fund. Assets contributed under the Program may also be invested in the portfolios of the Structured Portfolio Service, which offers conservative, moderate or aggressive allocations of assets among the Funds listed above. The Funds and portfolios are Investment Options under the Program, which is sponsored by the American Bar Retirement Association ("ABRA").
The Collective Trust may offer and sell an unlimited number of units of beneficial interest ("Units"), representing interests in separate fund portfolios of the Collective Trust, each Unit to be offered and sold at the per Unit net asset value of the corresponding fund portfolio.
State Street Bank and Trust Company ("State Street" or the "Trustee") serves as trustee of the Collective Trust. On January 1, 1992, State Street assumed responsibility for administering and providing the Investment Options for the Program. State Street is a trust company established under the laws of The Commonwealth of Massachusetts and is a wholly-owned subsidiary of State Street Corporation, a Massachusetts corporation and a holding company registered under the Federal Bank Holding Company Act of 1956, as amended.
State Street is responsible for certain recordkeeping and administrative services required by the Program. State Street's administrative and recordkeeping responsibilities include maintenance of individual account records or accrued benefit information for participants whose employers choose to have State Street maintain such account records. In addition, State Street also provides account and investment information to employers and participants, receives all plan contributions, effects investment and transfer transactions and distributes all benefits provided by the plans to the participants or, in the case of some individually designed plans, to the trustees of such plans.
THE PROGRAM
The American Bar Association Members Retirement Program is a comprehensive retirement program that provides eligible employers who adopt the Program with tax-qualified employee retirement plans, a variety of Investment Options and related recordkeeping and administrative services. The Program is sponsored by ABRA, which was organized by the American Bar Association (the "ABA") to sponsor retirement programs for self-employed individuals and employers who are members or associates of the ABA, most state and local bar associations or other organizations related to the practice of law, as described in the following paragraph.
Attorneys who are sole practitioners and partnerships and professional corporations engaged in the practice of law may adopt the Program for their law practices if they or at least one of their partners or shareholders is a member or associate of the ABA or of a state or local bar association that is represented in the ABA's House of Delegates. Such a bar association or an organization closely associated with the legal profession that has, as an owner or member of its governing board, a member or associate of the ABA may also be eligible to adopt the Program. The law practices, bar associations and other
organizations that are eligible to adopt the Program are referred to herein as "Eligible Employers," and those that adopt the Program are referred to in this Report as "Employers." The term "Participants" means employees (together with their beneficiaries where applicable) of Employers who have adopted the Program for their practices.
Eligible Employers who elect to participate in the Program may do so by adopting a master plan under one or both of two ABA Members Plans sponsored by ABRA. One of the ABA Members Plans is the American Bar Association Members Retirement Plan, a defined contribution master plan, and the other is the American Bar Association Members Defined Benefit Plan, a defined benefit master plan. Eligible Employers that design and maintain their own individually designed plans may also participate in some of the aspects of the Program through those individually designed plans.
DESCRIPTION OF INVESTMENT OPTIONS
State Street offers eight collective investment funds and three portfolios in a Structured Portfolio Service under the Collective Trust. The Funds and the portfolios of the Structured Portfolio Service are Investment Options under the Program. Assets invested through the ABA Members Plans are held under the American Bar Association Members Retirement Trust, and assets invested through individually designed plans are held under the American Bar Association Members Pooled Trust for Retirement Plans. State Street is the sole trustee of each of these trusts.
The following are Investment Options under the Program. The Stable Asset Return Fund invests primarily in high quality short-term instruments and investment contracts. The Intermediate Bond Fund invests primarily in debt securities of varying maturities. The Index Equity Fund invests primarily in common stocks included in the Russell 3000 Index. The Value Equity Fund, Growth Equity Fund, Aggressive Equity Fund and International Equity Fund invest primarily in equity securities. The Balanced Fund invests in both equity and debt securities. Assets contributed or held under the Program may also be invested in the portfolios of the Structured Portfolio Service, which offer three approaches to diversifying investments in the Program by giving investors the opportunity to select conservative, moderate or aggressive allocations of assets among the Program's Funds. In addition, assets contributed under the Program may be invested in publicly traded debt and equity securities and shares of numerous mutual funds through a Self-Managed Account.
Interests in the respective Funds and the portfolios of the Structured Portfolio Service are represented by Units, each of which represents an undivided pro rata share of the net assets of a Fund or a portfolio of the Structured Portfolio Service. Although the Funds and the portfolios of the Structured Portfolio Service are similar in some respects to registered open- end management investment companies (commonly referred to as "mutual funds"), the Funds and the portfolios of the Structured Portfolio Service are not registered as investment companies under the Investment Company Act and, therefore, are not subject to the requirements of the Investment Company Act. The Units representing interests in the Funds and the portfolios of the Structured Portfolio Service are held by State Street, as trustee of the American Bar Association Members Retirement Trust and the American Bar Association Pooled Trust for Retirement Plans, for the benefit of investors in the plans held under those trusts. Neither the Units nor the assets of the Funds or a portfolio of the Structured Portfolio Service, as applicable, are subject to the claims of State Street's creditors. The Units are not insured by the Federal Deposit Insurance Corp. or any governmental agency. State Street's activities as trustee of the Collective Trust are subject to the requirements of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). There are no voting rights connected with the ownership of Units.
Units in the Funds and the portfolios of the Structured Portfolio Service are not "redeemable securities" within the meaning of the Investment Company Act. However, each Unit entitles an investor to exercise rights that are substantially similar to the rights of holders of "redeemable securities" issued by a mutual fund. Units in each Fund and in each portfolio of the Structured Portfolio Service may be withdrawn on each day that the New York Stock Exchange is open for trading (a "Business Day") (subject to applicable restrictions under the terms of the Program) for cash equal to the per Unit net asset value of the Fund or the portfolio in the Structured Portfolio Service, respectively. In addition, transfers may be made among the Funds and the portfolios in the Structured Portfolio Service based on the relevant per Unit net asset values.
For purposes of the following descriptions of the Funds, investments by a Fund in collective investment funds maintained by State Street are deemed to be investments in the underlying securities held by those collective investment funds.
Stable Asset Return Fund
Investment Objective. The investment objective of the Stable Asset Return Fund is to provide current income consistent with the preservation of principal and liquidity. The Stable Asset Return Fund invests in investment contracts and high quality short-term instruments through collective investment funds maintained by State Street. There can be no assurance that the Stable Asset Return Fund will achieve its investment objective.
Strategy. The Stable Asset Return Fund invests in obligations of the United States government and its agencies and instrumentalities (referred to as "U.S. Government Obligations") and notes, bonds and similar debt instruments of corporations, commercial paper, certificates of deposit and time deposits, bankers' acceptances, supranational and sovereign debt obligations (including obligations of foreign government sub-divisions), asset-backed securities, master notes, promissory notes, funding agreements, variable and indexed interest notes and repurchase agreements (collectively, "Short-Term Investment Products"). The Stable Asset Return Fund may invest in Short-Term Investment Products so long as the average weighted days to maturity of all such investments does not exceed 120 days. The Fund also invests in investment contracts, including "Synthetic GICs" issued by insurance companies, banks or other financial institutions. Synthetic GICs are arrangements comprised of an investment in one or more underlying securities and a contract issued by an insurance company, bank or other financial institution that provides for the return of principal and an agreed upon rate of interest for purposes of permitting the Fund to be benefit responsive (that is, responsive to withdrawal, transfer and benefit payment requests). The underlying securities of Synthetic GICs generally consist of fixed income debt instruments. The average weighted maturity of the Fund's Short-Term Investment Products and investment contracts shall not exceed 1.5 years. As of December 31, 2000, approximately 32% of the Fund's assets were invested in Short-Term Investment Products and 68% of the Fund's assets were invested in investment contracts. As of December 31, 2000, the average weighted maturity of the Stable Asset Return Fund was 1.5 years. The Fund's portfolio will be structured to provide cash flow to assist liquidity management and to mitigate interest rate volatility while seeking to maximize rate of return.
Investment Guidelines and Restrictions and Risk Factors. The Fund may invest in a variety of U.S. Government Obligations, including bills and notes issued by the U.S. Treasury and securities issued by agencies of the U.S. government, such as the Farmers Home Administration, the Export Import Bank of the United States, the Small Business Administration, the Government National Mortgage Association, the General Services Administration and the Maritime Administration. Not all U.S. Government Obligations are backed by the full faith and credit of the United States. For example, securities issued by the Federal Farm Credit Bank or by the Federal National Mortgage Association are supported by the agency's right to borrow money from the U.S. Treasury under certain circumstances, and securities issued by the Federal Home Loan Bank are supported only by the credit of the issuing agency. There is no guarantee that the U.S. government will support these types of securities, and, therefore, they involve more risk than U.S. Government Obligations that are supported by the full faith and credit of the United States.
The Stable Asset Return Fund may enter into repurchase agreements with a variety of banks and broker-dealers. In a repurchase agreement transaction, the Fund acquires securities (usually U.S. Government Obligations) for cash and obtains a simultaneous commitment from the seller to repurchase the securities at an agreed upon price and date. The resale price is in excess of the acquisition price and reflects an agreed upon market rate of interest unrelated to the coupon rate on the purchased security. The difference between the sale and the repurchase price is, in effect, interest for the period of the agreement. In such transactions, the securities purchased by the Stable Asset Return Fund will have a total value at least equal to the amount of the repurchase price and will be held by State Street until repurchased. State Street will continually monitor the value of the underlying securities to verify that their value, including accrued interest, always equals or exceeds the repurchase price.
The Stable Asset Return Fund may invest in U.S. dollar-denominated instruments issued by foreign banks and foreign branches of U.S. banks, which may involve special risks. Foreign banks may not be required to maintain the same financial reserves or capital that are required of U.S. banks. Restrictions on loans to single borrowers, prohibitions on certain self- dealing transactions and other regulations designed to protect the safety and solvency of U.S. banks may not be applicable to foreign banks. Furthermore, investments in foreign banks may involve additional risks similar to those associated with investments in foreign securities described in "-- International Equity Fund--Risk Factors." Foreign branches of U.S. banks are generally subject to U.S. banking laws, but obligations issued by these branches, which are sometimes payable only by the branch, may be subject to country risks relating to actions by foreign governments that may restrict or even shut down the operations of some or all banks. The Stable Asset Return Fund may also invest in U.S. dollar-denominated instruments issued by foreign governments, their political subdivisions, governmental authorities, agencies and instrumentalities and supranational organizations. A supranational organization is an entity designated or supported by the national government of one or more countries to promote economic reconstruction or development. Examples of supranational organizations include, among others, the European Investment Bank, the International Bank for Reconstruction and Development (World Bank) and the Nordic Investment Bank. For risks associated with investments in foreign securities, see "--International Equity Fund--Risk Factors."
The Stable Asset Return Fund may commit to purchasing securities on a "when- issued" basis, such that payment for and delivery of a security will occur after the date that the Fund commits to purchase the security. The payment obligation and the interest rate that will be received on the security are each fixed at the time of the purchase commitment. Prior to payment and delivery, however, the Stable Asset Return Fund will not receive interest on the security, and will be subject to the risk of a loss if the value of the when-issued security is less than the purchase price at the time of delivery.
The Stable Asset Return Fund, as well as any other State Street collective fund through which the Fund invests, is permitted to invest in asset-backed securities (other than collateralized mortgage obligations (known as "CMOs") or other derivative mortgage-backed securities), subject to the rating and quality requirements specified with respect to the Fund. Asset-backed securities are issued by trusts and special purpose entities that securitize various types of assets, such as automobile and credit card receivables. Asset-backed securities may involve credit risks resulting primarily from the fact that asset-backed securities are issued by trusts or special purpose entities with no other assets and do not usually have the benefit of a complete security interest in the securitized assets. For example, credit card receivables generally are unsecured and the debtors are entitled to the protection of a number of state and Federal consumer credit laws, some of which may reduce the ability to obtain full payment. For information regarding risk factors with respect to the use of derivative instruments, see "-- Derivative Instruments."
Except with respect to U.S. Government Obligations, the Stable Asset Return Fund may invest in a Short-Term Investment Product only if at the time of purchase, the instrument is (i) rated in one of the two highest rating categories applicable to corporate bonds by at least two nationally recognized statistical rating organizations, at least one of which must be Standard & Poor's Corp. ("S&P") or Moody's Investors Service, Inc. ("Moody's"), (ii) rated in the highest rating category applicable to commercial paper by at least two nationally recognized statistical rating organizations, at least one of which must be S&P or Moody's, or (iii) if unrated, issued or guaranteed by an issuer that has other comparable outstanding instruments that are so rated or is itself rated in one of the two highest rating categories by at least two nationally recognized statistical rating organizations, at least one of which must be S&P or Moody's. For purposes of this restriction, an investment in a repurchase agreement will be considered to be an investment in the securities that are the subject of the repurchase agreement. Except with respect to U.S. Government Obligations backed by the full faith and credit of the United States, each instrument purchased will be subject to the risks of default by the issuer and the non-payment of interest or principal that are usually associated with unsecured borrowings.
The Stable Asset Return Fund may not invest in any investment contract unless, at the time of purchase, the investment contract or the issuer of the investment contract is rated in one of the two highest rating categories by at least two nationally recognized statistical rating organizations, at least one of which must be S&P or Moody's. Although these rating standards must be satisfied at the time an investment contract is issued, the financial condition of an issuer may change prior to maturity. The Stable Asset Return Fund will generally be unable to dispose of an investment contract prior to its maturity in the event of the deterioration of the financial condition of the issuer.
Except for investment contracts, the Fund generally does not invest more than 5% of its assets in securities of a single issuer, determined at the time of purchase, other than U.S. Government Obligations. For purposes of this 5% limitation, investments in collective investment funds maintained by State Street are considered to be investments in the underlying securities held by such collective investment funds, and investments in repurchase agreements are considered to be investments in the securities that are the subject of such repurchase agreements. Other than investment contracts, the Fund may not invest more than 10% of its net assets in illiquid securities, including repurchase agreements with maturities of greater than seven days or portfolio securities that are not readily marketable or redeemable, determined at the time of purchase. The proportion of the assets of the Fund invested in investment contracts of any one insurance company, bank or financial institution may generally not be greater than 15% of the aggregate value of investment contracts included in the Fund's portfolio, and in no event greater than 20%, in each case determined at the time of purchase. To the extent that the assets of the Stable Asset Return Fund are committed to investment contracts of a single issuer, the Fund will be subject to a greater risk that a default by that issuer will have a material adverse effect on the Fund. The Stable Asset Return Fund will not acquire warrants or make any other investment that is inconsistent with the restrictions applicable to the other Funds described under "--Investment Prohibitions Relating to the Funds." Except as explicitly set forth above and in "--Derivative Instruments," there are no other investment restrictions applicable to the Stable Asset Return Fund.
Valuation of Units. When an investor allocates assets to the Stable Asset Return Fund, the account of the investor is credited with that number of Units with an aggregate price equal to the value of the assets allocated to the Fund. Each Business Day, the net income accrued by the Stable Asset Return Fund is calculated and additional Units of the Fund with an aggregate value equal to the accrued net income of the Fund are issued in proportion to the investors' interests.
The Stable Asset Return Fund seeks to maintain a net asset value of $1.00 per Unit, although there can be no assurance that it will be able to do so. Consistent with this objective, the Short-Term Investment Products of the Stable Asset Return Fund are valued on the basis of a valuation method known as "Amortized Cost Pricing." Amortized Cost Pricing involves valuing an instrument initially at its cost and thereafter assuming 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 the overvaluation or undervaluation of a particular instrument relative to the market value of the instrument. The longer the maturity of an instrument, the greater the exposure to such risk of overvaluation or undervaluation. Investment contracts are valued at contract value (cost plus accrued interest).
If an investor were to receive a distribution from, or transfer out of, the Stable Asset Return Fund at a time when the Stable Asset Return Fund was overvalued, the investor would be overpaid (based on market price) and the value of the investments of remaining investors would be diluted. Conversely, if an investor were to receive a distribution from, or transfer out of, the Stable Asset Return Fund at a time when the Stable Asset Return Fund was undervalued, the investor would be underpaid (based on market price) and the value of the investments of remaining investors would be increased. If State Street determines that the per Unit net asset value of the Stable Asset Return Fund, to the extent the value is
determined based on Amortized Cost Pricing method, deviates from the net asset value determined by using available market quotations or market equivalents (market value) to a large enough extent that it may result in a material dilution or other unfair result to investors, State Street may adjust the per Unit net asset value of the Fund or take other action that it deems appropriate to eliminate or reduce, to the extent reasonably practicable, the dilution or other unfair result. For this purpose, only the Short-Term Investment Products are tested on a mark-to-market basis. Similar valuations for the investment contracts held in the Fund are not required by generally accepted accounting principles because of their benefit responsive structure.
Performance Information. The Stable Asset Return Fund may, from time to time, report its performance in terms of its "yield" and "effective yield." The Fund's yield is determined based upon historical earnings and is not intended to indicate future performance. The "yield" of the Fund refers to the annualized income generated by a daily investment in the Fund. The "effective yield" is calculated similarly but, when annualized, the income earned by an investment in the Fund is assumed to be reinvested. The "effective yield" will be slightly higher than the "yield" because of the compounding effect of this assumed reinvestment.
Investment Advisor. State Street is sole manager of the Stable Asset Return Fund. State Street may in the future employ investment advisors, at its discretion, to manage portions of the Fund, subject to consultation with ABRA.
Intermediate Bond Fund
Investment Objective. The investment objective of the Intermediate Bond Fund is to achieve a total return from current income and capital appreciation by investing primarily in a diversified portfolio of fixed income securities. The Intermediate Bond Fund seeks to achieve, over an extended period of time, total returns comparable to or superior to broad measures of the domestic bond market. There can be no assurance that the Intermediate Bond Fund will achieve its investment objective.
Strategy. The Intermediate Bond Fund is expected to invest its assets in fixed income securities of varying maturities with a portfolio duration generally from three to six years. The level of investments in fixed income securities will vary, depending upon many factors, including economic conditions, interest rates and other relevant considerations. In selecting securities, economic forecasting, interest rate anticipation, credit and call risk analysis, foreign currency exchange rate forecasting and other security selection techniques will be taken into account. Prior to May 31, 2000, State Street invested a portion of the Intermediate Bond Fund to replicate the Lehman Brothers Government/Corporate Bond Index. However, since May 31, 2000, State Street has invested the entire Intermediate Bond Fund using an actively managed fixed income strategy.
Duration is a measure of the expected life of a fixed income security that was developed as a more precise alternative to the concept of "term to maturity." Duration incorporates a bond's yield, coupon interest payments, final maturity and call features into one measure. Traditionally, a debt security's "term to maturity" has been used as a proxy for the sensitivity of the security's price to changes in interest rates (which is the "interest rate risk" or "volatility" of the security). However, "term to maturity" measures only the time until a debt security provides its final payment, taking no account of the pattern of the security's payment prior to maturity. Duration is a measure of the expected life of a fixed income security on a present value basis. In general, all other things being equal, the lower the stated or coupon rate of interest of a fixed income security, the longer the duration of the security; conversely, the higher the stated or coupon rate of interest of a fixed income security, the shorter the duration of the security.
The portion of the Fund's assets committed to investment in debt securities with particular characteristics (such as maturity, type and coupon rate) will vary based on the outlook for the United
States and foreign economies, the financial markets and other factors. The portfolio holdings will be concentrated in areas of the bond market (based on quality, sector, coupon or maturity) that are believed to be relatively undervalued.
Investment Guidelines and Restrictions. The Intermediate Bond Fund will invest primarily in the following types of securities, which may be issued by domestic or foreign entities and denominated in U.S. dollars or foreign currencies (subject to a 20% limit on foreign securities, as described below): U.S. Government Obligations; corporate debt securities; corporate commercial paper; mortgage-backed securities; asset-backed securities; variable and floating rate debt securities; bank certificates of deposit, fixed time deposits and bankers' acceptances; repurchase agreements; obligations of foreign governments or their subdivisions, agencies and instrumentalities, international agencies or supranational entities; and foreign currency denominated securities. The Intermediate Bond Fund may hold different percentages of the assets in these various types of securities.
For the purpose of achieving income, the Intermediate Bond Fund may enter into repurchase agreements, but may not invest more than 15% of its total assets in repurchase agreements maturing in more than seven days. See "-- Stable Asset Return Fund--Investment Guidelines and Restrictions and Risk Factors" for more information regarding repurchase agreements.
For information with respect to the use of derivative instruments, see "-- Derivative Instruments." In addition, the Intermediate Bond Fund is subject to the same investment restrictions that are applicable to the other Funds. See "--Investment Prohibitions Relating to the Funds."
Risk Factors with Respect to the Intermediate Bond Fund. For information regarding risk factors with respect to investing in various short-term instruments, see "--Stable Asset Return Fund--Investment Guidelines and Restrictions and Risk Factors," and, for information regarding risk factors with respect to the use of derivative instruments and mortgage-backed securities, see "--Derivative Instruments."
The Intermediate Bond Fund may purchase or sell securities on a when-issued or delayed delivery basis. For information regarding risks involved in these activities, see "--Stable Asset Return Fund--Investment Guidelines and Restrictions and Risk Factors."
The Intermediate Bond Fund will limit its foreign investments to securities of issuers based in developed countries (including newly industrialized countries, such as Taiwan, South Korea and Mexico). Investing in the securities of issuers in any foreign country involves special risks and considerations not typically associated with investing in U.S. companies. See "--International Equity Fund--Risk Factors."
Portfolio Turnover. As the level of portfolio turnover increases, transaction expenses incurred by the Fund increase, which may adversely affect the Fund's performance. Because the types and proportions of the Intermediate Bond Fund's assets may change frequently in accordance with market conditions, an annual portfolio turnover rate cannot be predicted.
Portfolio turnover was 54% for the twelve months ended December 31, 2000, 22% for the twelve months ended December 31, 1999 and 17% for the twelve months ended December 31, 1998. This turnover reflects purchases and sales of shares of the registered investment companies in which the Fund invested during these periods, rather than the turnover of the underlying portfolios of these registered investment companies. See "Investment Advisors and Initial Investments in Registered Investment Companies" below. Based on information available to State Street, the portfolio turnover for the PIMCO Total Return Fund was 223% for the twelve months ended March 31, 2000, 154% for the twelve months ended March 31, 1999 and 206% for the twelve months ended March 31, 1998.
Performance Information. The Fund's total return is based on the overall dollar or percentage change in value of a hypothetical investment in the Fund and assumes that all Fund's dividends and capital gain distributions are reinvested. The "total return" sought by the Intermediate Bond Fund will consist of interest and dividends from underlying securities, as well as capital appreciation reflected in unrealized increases in value of portfolio securities or realized from the purchase and sale of securities and futures and options. A recorded message providing current Unit values and yield for the Intermediate Bond Fund is available at (800) 826-8905. While the Intermediate Bond Fund is invested in a registered investment company or companies (as described below) the yield for the Intermediate Bond Fund will be calculated by taking the weighted average annualized yield of these registered investment companies and adjusting for the Fund's expenses. It is expected that when the Fund is no longer invested in registered investment companies, the Fund's "yield" will be calculated by dividing its net investment income per Unit earned during the specified period by its net asset value per Unit on the last day of such period and annualizing the result.
Investment Advisors and Initial Investments in Registered Investment Companies. State Street expects to select Pacific Investment Management Company ("PIMCO") to serve as Investment Advisor to provide investment advice and arrange for the execution of purchases and sales of securities for the Intermediate Bond Fund, subject to the supervision and approval of State Street.
State Street, however, based upon the advice of PIMCO, has determined that, in order to provide for efficient investment of the Intermediate Bond Fund's assets, until a minimum level of assets (approximately $150 million to $200 million) has been allocated to the Intermediate Bond Fund, PIMCO's advice will be obtained by investing the assets allocated to the Intermediate Bond Fund in the PIMCO Total Return Fund, an open-end management investment company registered under the Investment Company Act and managed by PIMCO. The PIMCO Total Return Fund invests at least 65% of its assets in a diversified portfolio of fixed income securities of varying maturities with a portfolio duration generally from three to six years. The PIMCO Total Return Fund has substantially similar investment objectives to the Intermediate Bond Fund and also invests in convertible securities; inflation-indexed bonds issued by both governments and corporations; structured notes, including hybrid or "indexed" securities, catastrophe bonds, and loan participations; delayed funding loans and revolving credit facilities; reverse repurchase agreements; and debt securities issued by states or local governments and their agencies, authorities and other instrumentalities. After the minimum level of assets referred to above is attained by the Intermediate Bond Fund, State Street expects that the Fund will be invested directly by State Street, with the advice of PIMCO in accordance with the investment objective, strategy, guidelines and restrictions described above.
State Street had expected that it would select Barclays Global Investors to serve as Investment Advisor with respect to the portion of the Fund that was invested to replicate the Lehman Brothers Government/Corporate Bond Index. Prior to May 31, 2000, this portion of the fund was invested in the Barclays Global Investors Bond Index Fund, an open-end management investment company registered under the Investment Company Act. However, State Street determined that, effective May 31, 2000, the entire Intermediate Bond Fund will be invested utilizing an actively managed fixed income strategy rather than utilizing a partly indexed strategy. As a result, all of the assets of the Fund are now invested in the PIMCO Total Return Fund.
If State Street concludes that the investment objectives or performance of the PIMCO Total Return Fund are no longer consistent with those of the Intermediate Bond Fund, State Street may transfer a portion or all of the assets of the Intermediate Bond Fund that are invested in the PIMCO Total Return Fund to other registered investment companies or collective investment funds managed by State Street, which, in light of the investment objectives of the Intermediate Bond Fund, State Street deems to be more appropriate. For additional information with respect to the Investment Advisors, see "-- Investment Advisors."
Balanced Fund
Investment Objective. The investment objective of the Balanced Fund is to achieve both current income and long-term capital appreciation. The Balanced Fund seeks to achieve, over an extended period of time, total returns comparable to or superior to an appropriate combination of broad measures of the domestic stock and bond markets. There can be no assurance that the Balanced Fund will achieve its investment objective.
Strategy. The Balanced Fund invests in publicly traded common stocks, other equity-type securities, long-term debt securities with varying maturities (including bonds, notes, debentures, equipment trust certificates, asset-backed securities and mortgage-related securities) and money market instruments. The Balanced Fund normally maintains at least 40%, but not more than 70%, of its total assets in common stocks and other equity-type instruments, including convertible securities, and at least 30%, but not more than 60%, of its total assets in nonconvertible debt securities and money market instruments. The Balanced Fund invests only in long-term debt securities of varying maturities that are rated investment grade by a nationally recognized statistical rating organization or, if unrated, determined by State Street to be of comparable quality. The Balanced Fund varies the portion of its assets invested in equity securities, debt securities and money market instruments to achieve the Fund's investment objective based upon economic conditions, the general level of common stock prices, interest rates and other relevant considerations, including the risks associated with each investment medium.
Investment Guidelines and Restrictions. The Balanced Fund invests in equity securities of the same types as those in which the Growth Equity Fund invests. See "--Growth Equity Fund." The Balanced Fund also invests in Short-Term Investment Products of the same types as those in which the Stable Asset Return Fund invests. See "--Stable Asset Return Fund--Strategy." In addition, the Balanced Fund may continue to hold current investments in the collateralized mortgage obligations (known as "CMOs") that are included in its portfolio. However, no additional investments in CMOs may be made. For information regarding risks associated with CMOs, see "--Derivative Instruments."
For temporary defensive purposes, the Balanced Fund may invest without limitation in U.S. Government Obligations, commercial paper and other short- term instruments of the types purchased by the Stable Asset Return Fund, as described in "--Stable Asset Return Fund." The Fund would invoke this right only in extraordinary circumstances, such as war, the closing of bond or equity markets, an extreme financial calamity or the threat of any such event. In the event that the Fund invokes this right, the Fund may be less likely to achieve its investment objective. Additional investment restrictions applicable to the Balanced Fund are described in "--Investment Prohibitions Relating to the Funds."
State Street directs the allocation of the Fund's assets between debt and equity securities consistent with the Fund's strategy and obtains investment advice from separate advisors for each of the debt and equity portions of the Fund. Currently, approximately 40% of the Balanced Fund's assets are allocated to debt securities (with respect to which State Street receives advice from one Investment Advisor) and approximately 60% are allocated to equity securities (with respect to which State Street receives advice from another Investment Advisor). Contributions and transfers to, and withdrawals and transfers from, the Fund are allocated so that the percentage of debt and equity securities will be as close to approximately 40% and 60%, respectively, as may be practical, taking into account the level of contributions, transfers and withdrawals and the Fund's percentage of debt and equity securities at the time of each contribution, transfer or withdrawal. Income and gains attributable to the assets allocated to each portion remain allocated to that portion, and could change the percentage of total assets of the Balanced Fund for which State Street obtains investment advice from each Investment Advisor. State Street may also, in its discretion, re-allocate assets in the Balanced Fund among equity and debt securities in order to avoid excessive deviation from the targeted allocation.
Risk Factors. For information and risk factors associated with investing in equity securities, see "-- Index Equity Fund--Risk Factors," and in short-term instruments, see "--Stable Asset Return Fund--
Investment Guidelines and Restrictions and Risk Factors." For information with respect to the use of derivative instruments and mortgage-backed securities, see "--Derivative Instruments." In addition, investments in foreign securities involve special risks. For risk factors associated with investing in foreign securities, see "--International Equity Fund--Risk Factors."
Portfolio Turnover. As the level of portfolio turnover increases, transaction expenses incurred by the Fund, such as brokerage commissions, increase, which may adversely affect the Fund's performance. Because the types and proportions of the Balanced Fund's assets may change frequently in accordance with market conditions, an annual portfolio turnover rate cannot be predicted. Portfolio turnover was 207% for the twelve months ended December 31, 2000, 229% for the twelve months ended December 31, 1999 and 209% for the twelve months ended December 31, 1998.
Investment Advisors. State Street has retained Capital Guardian Trust Company and Miller Anderson & Sherrerd to serve as Investment Advisors to provide investment advice and arrange for the execution of purchases and sales of securities for the Balanced Fund. Capital Guardian Trust Company will serve as Investment Advisor with respect to investments in equity securities and Miller Anderson & Sherrerd will serve as Investment Advisor with respect to investments in debt securities. For additional information regarding the Investment Advisors, see "--Investment Advisors."
Value Equity Fund
Investment Objective. The Value Equity Fund's investment objective is to invest in common stocks of larger companies believed to be attractively priced relative to their future earnings power with the goal of achieving long-term growth of capital and dividend income. A portion of the Value Equity Fund (approximately 25%) is invested to replicate the Russell 1000 Value Index, which is composed of those Russell 1000 stocks with a greater than average value orientation. The remainder of the Value Equity Fund will remain actively managed. The Value Equity Fund seeks to outperform, over extended periods of time, broad measures of the domestic stock market. The Value Equity Fund is broadly diversified and emphasizes sectors and securities State Street and its Investment Advisor consider undervalued. Frank Russell & Company does not sponsor the Value Equity Fund, nor is it affiliated in any way with the Value Equity Fund or with State Street. There can be no assurance that the Value Equity Fund will achieve its investment objective.
Strategy. The Fund invests primarily in common stocks of companies that in the opinion of State Street and its Investment Advisor are undervalued in the marketplace. The Value Equity Fund seeks to achieve growth of capital through investing primarily in common stocks of larger companies believed to be attractively priced relative to their future earnings power. The Fund's Investment Advisor seeks to limit the Fund's divergence from the market's performance over full market cycles to moderate levels.
Investment Guidelines and Restrictions. Although the assets of the Value Equity Fund are generally invested in common stocks and other equity-type securities, including convertible securities, the Value Equity Fund may invest in non-equity securities, including investment grade bonds and debentures and high quality short-term instruments of the same types as those in which the Stable Asset Return Fund may invest, when State Street and the Investment Advisor determine that such investments may contribute to the attainment of the Fund's investment objective. The Value Equity Fund will not invest more than 35% of its assets in non-equity securities, except for temporary defensive purposes. The Fund may invest in non-equity securities when, in light of economic conditions and the general level of stock prices, dividend rates, prices of fixed income securities and the level of interest rates, it appears that the Value Equity Fund's investment objective will not be met by buying equity securities. To the extent that the Value Equity Fund's assets are invested in non-equity securities, the Fund's net asset value may be adversely affected by a rise in interest rates.
The Value Equity Fund may invest in securities of U.S. companies or foreign companies whose stocks are traded on the U.S. stock exchanges or on the over- the-counter markets. For many foreign
securities, there are dollar-denominated American Depositary Receipts (known as "ADRs"), which are issued by domestic banks and represent an interest in the foreign security. ADRs are traded on the U.S. stock exchanges or on the U.S. over-the-counter markets. The Value Equity Fund may invest in foreign securities directly and through ADRs. The Fund may not make an investment if that investment would cause more than 15% of the Fund's assets to be invested in foreign securities, including ADRs, determined at the time of purchase.
For temporary defensive purposes, the Value Equity Fund may invest without limitation in U.S. Government Obligations, short-term commercial paper and other high quality short-term instruments of the types purchased by the Stable Asset Return Fund. See "--Stable Asset Return Fund." The Fund would invoke this right only in extraordinary circumstances, such as war, the closing of equity markets, an extreme financial calamity, or the threat of any such event. In the event that the Fund invokes this right, the Fund may be less likely to achieve its investment objective. Additional investment restrictions applicable to the Value Equity Fund are described in "--Investment Prohibitions Relating to the Funds" and "-- Derivative Instruments."
Risk Factors. For risk factors associated with investment in equity securities, see "--Index Equity Fund--Risk Factors." For information with respect to the use of derivative instruments, see "--Derivative Instruments." In addition, investments in foreign securities involve special risks. For risk factors associated with investing in foreign securities, see "--International Equity Fund--Risk Factors."
Portfolio Turnover. As the level of portfolio turnover increases, transaction expenses incurred by the Fund, such as brokerage commissions, increase, which may adversely affect the Fund's performance. The Value Equity Fund generally holds its investments for an extended period, and the average annual rate of portfolio turnover is expected to be under 50%. However, it is difficult to predict the rate of portfolio turnover in view of the potential for unexpected market conditions. Therefore, in any single year, the portfolio turnover rate may be either substantially less or substantially more than 50%. Portfolio turnover was 41% for the twelve months ended December 31, 2000, 27% for the twelve months ended December 31, 1999 and 27% for the twelve months ended December 31, 1998. With respect to the indexed portion of the Fund, this turnover reflects purchases and sales of shares of the State Street Bank and Trust Company Russell 1000 Value Index Securities Lending Fund, the collective investment fund through which the indexed portion of the Fund invests, rather than the turnover of the underlying portfolio of the collective investment fund. See "--Investment Advisors." The portfolio turnover of the actively managed portion of the Value Equity Fund was 17% for the twelve months ended December 31, 2000, 27% for the twelve months ended December 31, 1999 and 27% for the twelve months ended December 31, 1998. The portfolio turnover for the State Street Bank and Trust Company Russell 1000 Value Index Securities Lending Fund was 14% for the twelve months ended December 31, 2000, 14% for the twelve months ended December 31, 1999 and 10% for the twelve months ended December 31, 1998.
Investment Advisors. State Street has retained Alliance Capital L.P., acting through its Bernstein Investment Research and Management unit, to serve as Investment Advisor to provide investment advice and arrange for the execution of purchases and sales of securities for the actively managed portion of the Value Equity Fund. The indexed portion of the Value Equity Fund will be invested through the State Street Bank and Trust Company Russell 1000 Value Index Securities Lending Fund, a collective investment fund maintained by State Street. State Street will determine the percentage of the assets of the Value Equity Fund to be allocated to the actively managed and indexed portions of the Fund. Unless altered by State Street, 75% of the assets of the Value Equity Fund will be allocated to the actively managed portion and 25% will be allocated to the indexed portion. Income and gains attributable to the assets allocated to each portion remain allocated to that portion, and could change the percentage of total assets of the Value Equity Fund for which State Street obtains investment advice from each Investment Advisor. State Street allocates contributions and transfers to, and withdrawals and transfers
from, the Value Equity Fund among the actively managed and indexed portions of the Fund in order to achieve the targeted allocation of the Fund's assets invested on an actively managed and indexed basis. State Street may also, in its discretion, re-allocate assets in the Value Equity Fund among the actively managed and indexed portions in order to avoid excessive deviation from the targeted allocation. For additional information regarding the Investment Advisors, see "-- Investment Advisors."
Growth Equity Fund
Investment Objective. The Growth Equity Fund has a primary investment objective of achieving long-term growth of capital and a secondary investment objective of realizing income. The Growth Equity Fund seeks to achieve growth of capital through increases in the value of the securities it holds and to realize income principally from dividends. A portion of the Growth Equity Fund (approximately 25%) is invested to replicate the Russell 1000 Growth Index, which is composed of those Russell 1000 securities with a greater than average growth orientation. The remainder of the Growth Equity Fund is actively managed. The Growth Equity Fund seeks to achieve, over an extended period of time, total returns comparable to or superior to those attained by broad measures of the domestic stock market. Frank Russell & Company does not sponsor the Growth Equity Fund, nor is it affiliated in any way with the Growth Equity Fund or State Street. There can be no assurance that the Growth Equity Fund will achieve its investment objective.
Strategy. The Growth Equity Fund invests primarily in common stocks and other equity-type securities issued by large, well-established companies. The Growth Equity Fund may invest a portion of its assets in convertible securities. Convertible securities, such as preferred stocks and convertible debt instruments, contain both debt and equity features. Convertible securities may provide some protection when stock prices generally decline, but may experience less appreciation in value when stock prices generally increase.
Investment Guidelines and Restrictions. Although the assets of the Growth Equity Fund will generally be invested in equity securities, the Growth Equity Fund may invest in non-equity securities, including investment grade bonds and debentures and high quality short-term instruments of the same types as those in which the Stable Asset Return Fund may invest, when State Street determines that such investments may contribute to the attainment of the Fund's investment objective. The Growth Equity Fund will not invest more than 35% of its assets in non-equity securities, except for temporary defensive purposes. The Fund may invest in non-equity securities when, in light of economic conditions and the general level of stock prices, dividend rates, prices of fixed income securities and the level of interest rates, it appears that the Growth Equity Fund's investment objective will not be met by buying equity securities. To the extent that the Growth Equity Fund's assets are invested in non-equity securities, the Fund's net asset value may be adversely affected by a rise in interest rates.
For temporary defensive purposes, the Growth Equity Fund may invest without limitation in U.S. Government Obligations, short-term commercial paper and other high quality short-term instruments of the types purchased by the Stable Asset Return Fund. See "--Stable Asset Return Fund." The Fund would invoke this right only in extraordinary circumstances, such as war, the closing of equity markets, an extreme financial calamity, or the threat of any such event. In the event that the Fund invokes this right, the Fund may be less likely to achieve its investment objective.
Although the Growth Equity Fund invests primarily in securities of U.S. companies or foreign companies doing substantial business in the United States, the Growth Equity Fund may invest a portion of its assets in the securities of established foreign companies that do not do a substantial amount of business in the United States. The Fund may invest in foreign securities directly and through American Depositary Receipts (known as "ADRs") and may hold some foreign securities outside of the United States. State Street has directed the Investment Advisors to the Growth Equity Fund not to recommend an investment, and State Street will not cause the Growth Equity Fund to make an investment, if that
investment would cause more than 15% of the Fund's assets for which the Investment Advisor's advice is obtained to be invested in foreign securities, including ADRs, determined at the time of purchase.
Additional investment restrictions applicable to the Growth Equity Fund are described in "--Investment Prohibitions Relating to the Funds" and "-- Derivative Instruments."
Risk Factors. See "--Index Equity Fund--Risk Factors" for risk factors associated with investing in equity securities. For information with respect to the use of derivative instruments, see "--Derivative Instruments." In addition, investments in foreign securities involve special risks. For risk factors associated with investing in foreign securities, see "--International Equity Fund--Risk Factors."
Portfolio Turnover. As the level of portfolio turnover increases, transaction expenses incurred by the Fund, such as brokerage commissions, increase, which may adversely affect the Fund's performance. The Growth Equity Fund generally holds its investments for an extended period, and the average annual rate of portfolio turnover is expected to be under 80%. However, it is difficult to predict the rate of portfolio turnover in view of the potential for unexpected market conditions. Therefore, in any single year, the portfolio turnover rate may be either substantially less or substantially more than 80%. Portfolio turnover was 49% for the twelve months ended December 31, 2000, 46% for the twelve months ended December 31, 1999 and 46% for the twelve months ended December 31, 1998.
Investment Advisors. State Street has retained Capital Guardian Trust Company, Lincoln Capital Management Company, Dresdner RCM Global Investors LLC and Bankers Trust Company to serve as Investment Advisors to provide investment advice and arrange for the execution of purchases and sales of securities for the Growth Equity Fund. Bankers Trust Company serves as advisor to State Street with respect to the indexed portion of the Fund. Each of the four advisors to the Growth Equity Fund provides advice and arranges for the execution of transactions for a separate portion of the Fund's assets. State Street will determine the percentage of the assets of the Growth Equity Fund to be allocated to each Investment Advisor. Unless altered by State Street, the assets of the Growth Equity Fund will be allocated to four equal portions. Income and gains attributable to the assets allocated to each portion remain allocated to that portion, and could change the percentage of total assets of the Growth Equity Fund for which State Street obtains investment advice from each Investment Advisor. State Street allocates contributions and transfers to, and withdrawals and transfers from, the Growth Equity Fund among the four portions in order to achieve the targeted allocation of the assets of the Fund. State Street may also, in its discretion, re-allocate assets among the four portions in order to avoid excessive deviation from the targeted allocation. For additional information regarding the Investment Advisors, see "--Investment Advisors."
Index Equity Fund
Investment Objective. The investment objective of the Index Equity Fund is to replicate the total return of the Russell 3000 Index by investing in stocks included in the Russell 3000 Index, with the overall objective of achieving long-term growth of capital. The Russell 3000 Index represents approximately 98% of the U.S. equity market based on the market capitalization of the companies in the Russell 3000 Index. As of December 31, 2000, the largest company had a market capitalization of approximately $475 billion and the smallest company had a market capitalization of approximately $2 million. The Russell 3000 Index is reconstituted annually on June 30 based on index methodology and market capitalization rankings as of the preceding May 31. Frank Russell & Company does not sponsor the Index Equity Fund, nor is it affiliated in any way with the Index Equity Fund or with State Street. There can be no assurance that the Index Equity Fund will achieve its investment objective of replicating the total return of the Russell 3000 Index.
Strategy. The Index Equity Fund seeks to replicate the total return of the Russell 3000 Index by investing in all of the common stocks included in the Russell 3000 Index with the possible exception of the smallest companies in the Russell 3000 Index. Deviation of the Fund's performance from the
performance of the Russell 3000 Index (known as "tracking error") may result from various factors including purchases and redemptions of Units of the Index Equity Fund, as well as from the expenses borne by the Index Equity Fund. Such purchases and redemptions may necessitate the purchase and sale of securities by the Index Equity Fund and the resulting transaction costs may be substantial because of the number and the characteristics of the securities held. Tracking error may also occur due to factors such as the size of the Index Equity Fund changes made in the securities included in the Russell Index or the manner in which the performance Russell 3000 Index is calculated.
Investment Guidelines and Restrictions. The Index Equity Fund invests predominantly in common stocks of U.S. companies. However, the Index Equity Fund may invest temporarily and without limitation for defensive purposes in short-term fixed income securities. These securities may be used to invest uncommitted cash balances or to maintain liquidity to provide for investor redemptions. State Street will not cause the Index Equity Fund to make an investment if that investment would cause the Fund to purchase warrants or make any other investment that is inconsistent with the restrictions applicable to the other Funds described under " --Investment Prohibitions Relating to the Funds." The Fund concentrates in particular industries to the extent the Russell 3000 Index concentrates in those industries. The Index Equity Fund will not borrow money except as a temporary measure for extraordinary or emergency purposes or to facilitate redemptions (not for leveraging or investment).
Risk Factors. By investing primarily in the U.S. equity market, the Index Equity Fund is subject to a variety of market and financial risks that may affect its return. The Unit price of the Index Equity Fund could be volatile, and investors should be able to tolerate sudden, sometimes substantial fluctuations in the value of their investment. No assurance can be given that investors will be protected from the risks inherent in equity investing. The Fund is intended to be a long-term investment vehicle and is not designed to provide investors with the means to speculate on short-term U.S. stock market movements.
In addition, it should be noted that the small companies included in the Russell indices have limited product lines, markets, or financial resources, or may be dependent upon a small management group. Therefore, their securities may be subject to more abrupt or erratic market movements than larger, more established companies, both because their securities are typically traded in lower volume and because the issuers are typically subject to a greater degree of changes in their earnings and prospects.
For information with respect to the use of derivative instruments, see "-- Derivative Instruments."
Portfolio Turnover. Ordinarily, the Index Equity Fund will sell securities only to reflect changes in the Russell 3000 Index (including mergers or changes in the composition of the Russell 3000 Index) or to accommodate cash flows into and out of the Index Equity Fund. Accordingly, the turnover rate for the Index Equity Fund is not expected to exceed 50% on an annual basis. However, it is difficult to predict the rate of portfolio turnover in view of the potential for unexpected market conditions. Therefore, in any single year, the portfolio turnover rate may be either substantially less or substantially more than 50%. The turnover of the Fund was 217% for the twelve months ended December 31, 2000, 112% for the twelve months ended December 31, 1999 and 94% for the twelve months ended December 31, 1998. This turnover reflects purchases and sales of units of the collective investment funds through which the Fund invested during these periods rather than the turnover of the underlying portfolios of the collective investment funds. Higher than expected portfolio turnover in 2000, 1999 and 1998 reflects changes in the collective investment funds through which the Fund invests. See "Investment Advisor" below.
Index funds seek to create a portfolio which substantially replicates the total return of the applicable index. Index funds are not managed through traditional methods of fund management, which typically involve frequent changes in a portfolio of securities on the basis of economic, financial and market analyses. Therefore, brokerage costs, transfer taxes and other transaction costs for index funds may be lower than those incurred by non- index, traditionally managed funds.
Investment Advisor. State Street is sole manager and trustee of the Index Equity Fund. However, in the future State Street may employ investment advisors, at its discretion and subject to consultation with ABRA. The assets of the Fund are currently invested through the State Street Bank and Trust Company Russell 3000 Index Securities Lending Fund, a collective investment fund maintained by State Street.
Information about the Russell Indices. The criteria used by Frank Russell & Company to determine the initial list of securities eligible for inclusion in the Russell indices is total market capitalization adjusted for large private holdings and cross-ownership. Companies are not selected for inclusion in the Russell indices because they are expected to have superior stock price performance relative to the U.S. stock market in general or other stocks in particular. Frank Russell & Company makes no representation or warranty, implied or express, to any member of the public regarding the advisability of investing in the Russell 3000 Index or the ability of the Russell 3000 Index to track general market performance of large and small capitalization stocks.
"Russell 3000 Index" and "Russell Special Small Company Index" are trademarks of Frank Russell & Company. The Russell 3000 Index is not sponsored, endorsed, sold or promoted by Frank Russell & Company, nor does Frank Russell & Company guarantee the accuracy and/or completeness of the Russell 3000 Index or any data included therein. Frank Russell & Company makes no warranty, express or implied, as to the results to be obtained by the Fund, owners of the Fund, any person or any entity from the use of the Russell 3000 Index or any data included therein. Frank Russell & Company makes no express or implied warranties and expressly disclaims all such warranties of merchantability or fitness for a particular purpose for use with respect to the Russell 3000 Index or any data included therein.
Aggressive Equity Fund
Investment Objective. The investment objective of the Aggressive Equity Fund is to maximize long-term growth of capital. The Aggressive Equity Fund seeks to achieve, over an extended period of time, total returns comparable to or superior to those attained by broad measures of the domestic stock market. There can be no assurance that the Aggressive Equity Fund will achieve its investment objective.
Strategy. The Aggressive Equity Fund's investments may include securities of relatively small to medium sized companies, new companies and companies that may benefit from new technologies, new product or service developments or management changes. The Fund may also invest in newly issued securities and securities of seasoned, established companies that appear to have unusual value or appreciation potential. Industry diversification is not an objective of the Aggressive Equity Fund and the Aggressive Equity Fund may, at times, be less diversified than the other Funds.
Investment Guidelines and Restrictions. The Aggressive Equity Fund invests primarily in common stocks and other equity-type securities, including convertible securities, that are believed to have strong potential for appreciation.
Although the assets of the Aggressive Equity Fund will generally be invested in equity securities, the Aggressive Equity Fund may also invest in non-equity securities, including investment grade bonds and debentures and high quality short-term instruments of the same types as those in which the Stable Asset Return Fund may invest, when State Street determines that in light of economic conditions and the general level of stock prices, dividend rates, prices of fixed income securities and the level of interest rates, such investments may contribute to the attainment of the Fund's investment objective. See "--Stable Asset Return Fund." The Aggressive Equity Fund will not invest more than 35% of its assets in non-equity securities, except for temporary defensive purposes. To the extent that the Aggressive Equity Fund's assets are invested in non-equity securities, the Fund's net asset value may be adversely affected by a rise in interest rates.
For temporary defensive purposes, the Aggressive Equity Fund may invest without limitation in U.S. Government Obligations, short-term commercial paper and other high quality instruments of the types purchased by the Stable Asset Return Fund. See "--Stable Asset Return Fund." The Fund would invoke this right only in extraordinary circumstances, such as war, the closing of equity markets, an extreme financial calamity, or the threat of any such event. In the event that the Fund invokes this right, the Fund may be less likely to achieve its investment objective.
Although the Aggressive Equity Fund invests primarily in securities of U.S. companies or foreign companies doing substantial business in the United States, the Aggressive Equity Fund may invest a portion of its assets in the securities of established foreign companies that do not do a substantial amount of business in the United States. The Fund may invest in foreign securities directly and through American Depositary Receipts (known as "ADRs") and may hold some foreign securities outside of the United States. State Street has directed the Investment Advisors to the Aggressive Equity Fund not to recommend an investment, and State Street will not cause the Aggressive Equity Fund to make an investment, if that investment would cause more than 15% of the portion of the Fund's assets for which that Investment Advisor's advice is obtained to be invested in foreign securities, including ADRs, determined at the time of purchase. Additional investment restrictions applicable to the Aggressive Equity Fund are described in "--Investment Prohibitions Relating to the Funds" and "--Derivative Instruments."
Risk Factors. Generally, the Aggressive Equity Fund poses a greater risk to principal than the other Funds. Investors should consider their investments in the Aggressive Equity Fund as relatively long-term and involving high risk to principal commensurate with potential for substantial gains. There is no certainty regarding which companies and industries will in fact experience capital growth, and such companies and industries may lose their potential for capital growth at any time. To the extent that the assets of the Aggressive Equity Fund are invested in the securities of a single issuer or a single industry, there is a greater risk that a deterioration in the performance of that issuer or industry will have a material adverse effect on the Fund. See "--Index Equity Fund--Risk Factors" for a description of risk factors associated with investing in equity securities generally. See "--International Equity Fund--Risk Factors" for a description of the risks associated with investments in foreign securities.
A significant portion of the Aggressive Equity Fund's investments may be in securities of small to medium sized companies, which typically have greater market and financial risk than larger, more diversified companies. These companies are often dependent on one or two products in rapidly changing industries and may be more vulnerable to competition from larger companies with greater resources and to economic conditions that affect their market sector. Therefore, consistent earnings for such companies may not be as likely as they would be for more established companies. The smaller companies may not have adequate resources to react optimally to change or to exploit opportunities. Small and medium sized companies may also be more dependent on access to equity markets to raise capital than larger companies that have a greater ability to support relatively larger debt burdens. The securities of small and medium sized companies may be held primarily by insiders or institutional investors, which may have an impact on their marketability. These securities may be more volatile than the overall market. Relatively new companies and companies which have recently made an initial public offering may be perceived by the market as unproven. The Aggressive Equity Fund's focus on appreciation potential will result in an emphasis on securities of companies that may pay little or no dividends and reinvest all or a significant portion of their earnings. The low expected dividend level may also contribute to greater than average volatility.
Portfolio Turnover. As the level of portfolio turnover increases, transaction expenses incurred by the Fund, such as brokerage commissions, increase, which may adversely affect the Fund's performance. Portfolio turnover of the Aggressive Equity Fund may be high. Although it is not expected to exceed 75% per year on average, it is difficult to predict the rate of portfolio turnover in view of the potential for unexpected market conditions. Therefore, in any single year, the portfolio turnover rate may be either substantially less or substantially more than 75%. The possibility of high turnover reflects, in part,
the volatility of the securities in which the Fund invests and the probability that the circumstances prompting investment in some companies may change more rapidly than in the case of larger, more diversified companies. Portfolio turnover was 52% for the twelve months ended December 31, 2000, 59% for the twelve months ended December 31, 1999 and 55% for the twelve months ended December 31, 1998.
Investment Advisors. State Street has retained Capital Guardian Trust Company and Sit Investment Associates, Inc. to serve as Investment Advisors to provide investment advice and arrange for the execution of purchases and sales of securities for the Aggressive Equity Fund. State Street will determine the percentage of the assets in the Aggressive Equity Fund to be allocated to each Investment Advisor. Unless altered by State Street, the assets of the Aggressive Equity Fund will be allocated to two equal portions. State Street will obtain advice for one portion from Capital Guardian Trust Company and will obtain advice for the other portion from Sit Investment Associates, Inc. Income and gains attributable to the assets allocated to each portion remain allocated to that portion, and could change the percentage of total assets of the Aggressive Equity Fund for which State Street obtains investment advice from each Investment Advisor. State Street allocates contributions and transfers to, and withdrawals and transfers from, the Aggressive Equity Fund, between the two portions in order to achieve the targeted allocation of the Fund's assets. State Street may also, in its discretion, re-allocate assets in the Aggressive Equity Fund among the two portions in order to avoid excessive deviation from the targeted allocation. For additional information regarding the Investment Advisors, see "--Investment Advisors."
International Equity Fund
Investment Objective. The International Equity Fund's investment objective is to seek long-term growth of capital through investment primarily in common stocks of established non-U.S. companies. The Fund will seek to achieve growth of capital through capital appreciation, dividend income and currency gains. Common stocks of foreign companies offer a way to seek long-term growth of capital. The International Equity Fund seeks to achieve, over an extended period of time, total returns comparable to or superior to broad measures of the international (non-U.S.) stock market. There can be no assurance that the International Equity Fund will achieve its investment objective.
Investing abroad increases the opportunities available to investors. Many foreign countries may have greater potential for economic growth than the United States. Foreign investments also provide effective diversification for an all-U.S. portfolio, since historically their returns have not moved together with U.S. stocks over long time periods. Investing a portion of your portfolio in foreign stocks may enhance your diversification while providing the potential to increase long-term capital appreciation.
Strategy. The International Equity Fund intends to diversify investments broadly among developed and emerging countries and generally to have at least three different countries represented in the portfolio. It may invest in countries throughout the world. Under exceptional economic or market conditions abroad, the International Equity Fund may temporarily invest all or a major portion of its assets in U.S. Government Obligations or debt obligations of U.S. companies of the type described under "--Stable Asset Return Fund." The Fund would invoke this right only in extraordinary circumstances, such as war, the closing of equity markets, an extreme financial calamity, or the threat of any such event. In the event that the Fund invokes this right, the Fund may be less likely to achieve its investment objective.
Investment Guidelines and Restrictions. In seeking to accomplish its objective, the International Equity Fund will invest primarily in common stocks of established foreign companies that are believed to have the potential for growth of capital and in a variety of other equity-related securities, such as preferred stocks, warrants and convertible securities of such foreign companies, as well as foreign corporate and governmental debt securities (when considered consistent with its investment objective). The International Equity Fund may invest in fixed income securities when, in light of economic conditions and the general level of stock prices, dividend rates, prices of fixed income securities and
the level of interest rates, it appears that the International Equity Fund's investment objective will not be met by buying equity securities. Under normal conditions the International Equity Fund's investments in securities other than common stocks and other equity-related securities are limited to no more than 35% of total assets. Within this limitation, the Fund will also maintain a small cash reserve which will be invested in Short-Term Investment Products. See "--Stable Asset Return Fund."
The International Equity Fund will normally conduct its foreign currency exchange transactions either on a cash basis at the spot rate prevailing in the foreign currency exchange market or through entering into forward contracts to purchase or sell foreign currencies. See "--Derivative Instruments."
The International Equity Fund is subject to the same investment prohibitions and restrictions as the other Funds. See "--Investment Prohibitions Relating to the Funds" and "--Derivative Instruments."
Risk Factors. The Fund's share price can fall because of weakness in one or more of its primary equity markets, a particiular industry, or specific holdings. Stock markets can decline for many reasons, including adverse political or economic developments, changes in investor psychology, or heavy institutional selling. The prospects for an industry or company may deteriorate because of a variety of factors, including disappointing earnings or changes in the competitive environment. In addition, the investment assessment of companies held in a fund may prove incorrect, resulting in losses or poor performance even in rising markets.
Currency Risk. Currency risk refers to a decline in the value of a foreign currency versus the value of the U.S. dollar, which reduces the U.S. dollar value of securities denominated in that currency. The overall impact on the Fund's holdings can be significant and long-lasting, depending on the currencies represented in the Fund's portfolio and how each one appreciates or depreciates in relation to the U.S. dollar and whether currency positions are hedged. Under normal conditions, the Fund will not engage in extensive foreign currency hedging programs. Further, exchange rate movements are unpredictable and it is not possible to effectively hedge the currency risks of many developing countries.
Political and Economic Factors. The economic and political structures of developing nations, in most cases, do not compare favorably with the United States or other developed countries in terms of wealth and stability and their financial markets often lack liquidity. Therefore, investments in these emerging countries are riskier, and will be subject to erratic and abrupt price movements. Even investments in countries with highly developed economies are subject to risk. For example, Japanese stocks were in a steep decline for much of the 1990s. Moreover, while some countries have made progress in economic growth, liberalization, fiscal discipline and political and social stability, there is no assurance these trends will continue. Investment in these markets is, therefore, significantly riskier than investment in other markets.
Some economies of the countries in which the Fund may invest may rely heavily on particular industries and be more vulnerable to the ebb and flow of international trade, trade barriers and other protectionist or retaliatory measures. Some countries have legacies of hyperinflation and currency devaluations versus the U.S. dollar, particularly Russia, many Latin American nations, and more recently, several Asian countries. Investments in countries that have recently begun moving away from central planning and state-owned industries toward free markets should be regarded as speculative.
Some of the countries in which the Fund may invest have histories of instability and upheaval that could cause their governments to act in a detrimental or hostile manner toward private enterprise or foreign investment. Governmental actions such as capital or currency controls, nationalization of an industry or company, expropriation of assets, or imposition of high taxes could have an adverse effect on security prices and impair the International Equity Fund's ability to repatriate capital or income. Significant external risks currently affect some emerging countries. Governments in many emerging market countries participate to a significant degree in the countries' economies and securities markets.
Other Risks of Foreign Investing. Some of the countries in which the Fund may invest lack uniform accounting, auditing and financial reporting standards, have less governmental supervision of financial
markets than in the United States, do not honor legal rights enjoyed in the United States and have settlement practices, such as delays, which may subject the International Equity Fund to risks of loss not customary in U.S. markets. In addition, securities markets in some countries have substantially lower trading volumes than U.S. markets, resulting in less liquidity and more volatility than experienced in the United States.
Pricing. Portfolio securities may be listed on foreign exchanges that are open on days (such as Saturdays or U.S. legal holidays) when the International Equity Fund does not compute its prices. As a result, the Fund's net asset value may be significantly affected by trading on days when investors cannot make transactions in Units of the Fund.
Investing in International Stocks. Like U.S. stock investments, common stock of foreign companies offer investors a way to build capital over time. Nevertheless, the long-term rise of foreign stock prices as a group has been punctuated by periodic declines. Share prices of all companies, even the best managed and most profitable, whether U.S. or foreign, are subject to market risk, which means they can fluctuate widely. The volatility of emerging markets may be heightened by actions of a few major investors. For example, substantial increases or decreases in cash flows of mutual funds investing in these markets could significantly affect stock prices and, therefore, Fund share prices. For this reason, investors in foreign stocks should have a long- term investment horizon and be willing to wait out declining markets. The International Equity Fund should not be relied upon as a complete investment program or used as a means to speculate on short-term swings in the stock or foreign exchange markets.
The values of foreign fixed income securities fluctuate in response to changes in U.S. and foreign interest rates. Income received by the International Equity Fund from sources within foreign countries may also be reduced by withholding and other taxes imposed by those countries although tax conventions between some countries and the United States may reduce or eliminate these taxes. Any taxes paid by the International Equity Fund will reduce the net income earned by the Fund. State Street will consider available yields, net of any required taxes, in selecting foreign dividend paying securities.
In addition, short-term movements in currency exchange rates could adversely impact the availability of funds to pay for investors' redemptions of investments in the International Equity Fund. For example, if the exchange rate for a currency declines after a security has been sold to provide funds for a redemption from the Fund but before those funds are translated into U.S. dollars, it could be necessary to liquidate additional portfolio securities in order to finance the redemption.
For information with respect to the use of derivative instruments, see "-- Derivative Instruments."
Portfolio Turnover. As the level of portfolio turnover increases, transaction expenses incurred by the International Equity Fund, such as brokerage commissions, increase, which may adversely affect the Fund's overall performance. The International Equity Fund generally will hold its investments for an extended period of time, and the average annual rate of portfolio turnover is expected to be under 100%. It is difficult, however, to predict the rate of portfolio turnover in view of the potential for unexpected market conditions, and securities may be purchased and sold without regard to the length of time held when circumstances warrant. Therefore, in any given year, the portfolio turnover rate may be substantially less or substantially more than 100%. While any portion of the assets of the International Equity Fund are invested in a registered investment company such as the T. Rowe Price International Stock Fund, reported portfolio turnover for the International Equity Fund will reflect purchases and sales of shares of the registered investment company in which the Fund invests rather than the turnover of the underlying portfolio of the registered investment company. Portfolio turnover was 250% for the twelve months ended December 31, 2000, 199% for the twelve months ended December 31, 1999 and 122% for the twelve months ended December 31, 1998. Based on information available to State Street, the portfolio turnover of the T. Rowe Price International Stock Fund was 38% for the twelve months
ended October 31, 2000, 18% for the twelve months ended October 31, 1999 and 12% for the twelve months ended October 31, 1998. See "Investment Advisor and Initial Investments in Registered Investment Companies" below.
Investment Advisor and Initial Investments in Registered Investment Companies. State Street has retained Dresdner RCM Global Investors LLC to be an Investment Advisor for the International Equity Fund and to provide investment advice and arrange for the execution of purchases and sales of securities for approximately one-half of the assets in the International Equity Fund, subject to the supervision and approval of State Street to accept or reject any recommended investment. State Street expects to select T. Rowe Price International, Inc. to also serve as Investment Advisor and to provide investment advice and arrange for the execution of purchases and sales of securities for the other one-half of the assets in the International Equity Fund.
State Street, however, based upon the advice of T. Rowe Price International has determined that, in order for the International Equity Fund to meet its investment objective and to provide for efficient investment of the Fund's assets, until a sufficient level of assets in the Fund is attained, State Street will obtain T. Rowe Price International's investment advice by investing approximately one-half of the assets of the International Equity Fund in the T. Rowe Price International Stock Fund, a registered investment company that is managed by T. Rowe Price International and that has substantially the same investment objectives as the International Equity Fund. Stock selection in the T. Rowe Price International Stock Fund reflects a growth style. The T. Rowe Price International Stock Fund may purchase the stocks of companies of any size, but will focus typically on large and, to a lesser extent, medium sized companies. If State Street concludes that the investment objectives or performance of the T. Rowe Price International Stock Fund are no longer consistent with those of the International Equity Fund, State Street may transfer a portion or all of the assets of the International Equity Fund to other registered investment companies or collective investment funds maintained by State Street that, in light of the investment objectives of the International Equity Fund, State Street deems to be more appropriate.
State Street will determine the portion of the International Equity Fund's assets for which advice is obtained from each Investment Advisor. Unless altered by State Street, the assets of the International Equity Fund will be allocated to two equal portions. One portion will be invested in the T. Rowe Price International Stock Fund and the other will be invested in the collective trust portfolio for which advice is obtained from Dresdner RCM Global Investors LLC. Income and gains attributable to the assets allocated to each portion remain allocated to that portion, and could change the percentage of total assets of the International Equity Fund for which State Street obtains investment advice from each Investment Advisor. State Street allocates contributions and transfers to, and withdrawals and transfers from, the International Equity Fund between the two portions in order to achieve the targeted allocation of the Fund's assets. State Street may also, in its discretion, re-allocate assets in the International Equity Fund among the two portions in order to avoid excessive deviation from the targeted allocation. For additional information with respect to the Investment Advisor, see "-- Investment Advisors."
Transfer Restrictions. Effective August 1, 2001, the International Equity Fund will adopt an excessive transfer policy that restricts a Participant's ability to make more than one transfer into the International Equity Fund within any 45 calendar day period. There will be no restriction on a Participant's ability to make transfers out of the Fund. State Street has adopted this policy for the International Equity Fund to prevent disruptions to the Fund that could potentially affect the investment performance of the Fund. For more information regarding this policy, see "--Transfers Among Investment Options."
Investment Prohibitions Relating to the Funds
None of the Funds will:
. trade in foreign currency, except transactions incidental to the settlement of purchases or sales of securities for the Funds;
. make an investment in order to exercise control or management over a company;
. make short sales, unless the Funds have, by reason of ownership of other securities, the right to obtain securities of a kind and amount equivalent to the securities sold, which right will continue so long as a Fund is in a short position;
. trade in commodities or commodity contracts, other than options or futures contracts (including options on futures contracts) with respect to securities or securities indices, except as described under "Derivative Instruments;"
. write uncovered options;
. purchase real estate or mortgages, provided that the Funds may buy shares of real estate investment trusts listed on U.S. stock exchanges or reported on Nasdaq National Market if such purchases are consistent with the investment objective and restrictions set forth in the fund declaration for the Fund;
. except for the initial investments by the Intermediate Bond Fund and the International Equity Fund, invest in the securities of registered investment companies. See "--Intermediate Bond Fund--Investment Advisors and Initial Investments in Registered Investment Companies" and "-- International Equity Fund--Investment Advisor and Initial Investments in Registered Investment Companies;"
. invest in oil, gas or mineral leases;
. purchase any security on margin or borrow money, except for short-term credit necessary for clearance of securities transactions or, in the case of the Index Equity Fund, for redemption purposes; or
. make loans, except by (i) the purchase of marketable bonds, debentures, commercial paper and similar marketable evidences of indebtedness, (ii) engaging in repurchase agreement transactions and (iii) making loans of portfolio securities.
State Street has directed the Investment Advisors not to recommend an investment, and State Street will not cause the Funds to make an investment, if that investment would cause (1) more than 5% of the portion of the Fund's net assets allocated to the Investment Advisor to be invested in warrants generally, or more than 2% of the Fund's net assets allocated to the Investment Advisor to be invested in warrants not listed on a nationally recognized U.S. securities exchange, or (2) more than 10% of the portion of the Fund's net assets allocated to the Investment Advisor to be invested in illiquid securities, including repurchase agreements with maturities in excess of seven days or portfolio securities that are not readily marketable, in each case determined at the time of purchase. State Street has also directed the Investment Advisors not to recommend an investment, and State Street will not cause the Funds to make an investment, in an industry if that investment would cause more than 25% of the portion of the Fund's net assets allocated to the Investment Advisor to be invested in that industry, determined at the time of purchase. In addition, State Street has directed the Investment Advisors not to recommend an investment, and State Street will not cause the Funds to make an investment, in the securities of an issuer if that investment would cause more than 5% of the portion of the assets of the Fund allocated to the Investment Advisor to be invested in the securities of that issuer, determined at the time of purchase. However, with respect to the portion of the Growth Equity Fund for which advice is obtained from Dresdner RCM Global Investors LLC, Dresdner may recommend additional investments in an issuer beyond the 5% limit described above at the time of purchase and State Street may cause the Growth Equity Fund to make such investment, so long as the total investments in the issuer held by the Dresdner portion would not, at the time of purchase, represent a percentage of total assets greater than 125% of the representation of that issuer in the Russell 1000 Growth Index. The foregoing restrictions with respect to industry and issuer concentration do not apply to the Index Equity Fund or the indexed portions of the Value Equity Fund and the Growth Equity Fund to the extent that the replicated index is concentrated in a specific industry or issuer.
Except as described under "--Derivative Instruments," State Street has no present intention of causing the Funds to invest in options and financial futures contracts and other derivatives, and will not do so without prior notification to investors in the Funds.
Although none of the foregoing restrictions apply to the registered investment companies in which the Intermediate Bond Fund and the International Equity Fund currently invest, each of these registered investment companies has restrictions that are set forth in its respective prospectus and statement of additional information, which are available from the SEC.
The Funds that invest in fixed income securities may also purchase such securities for future delivery on a "to be announced" or "TBA" basis where the price and coupon are determined at the time of purchase but the collateral for such securities is not determined until immediately before the securities are delivered. Investing in TBA securities carries risks similar to investing in "when-issued" securities, see "--Stable Asset Return Fund--Investment Guidelines and Restrictions and Risk Factors."
Loans of Portfolio Securities
For the purpose of achieving income, the Funds may lend a portion of their portfolio securities to brokers, dealers, and other financial institutions, provided that these activities are conducted in accordance with the applicable requirements of ERISA, including:
. the loan is secured continuously by collateral consisting of cash, U.S. government securities or irrevocable letters of credit maintained on a daily mark-to-market basis in an amount at least equal to the current market value of the securities loaned;
. the Fund may at any time call the loan and obtain the return of the securities loaned; and
. the Fund will receive any interest or dividends paid on the loaned securities.
When a Fund lends portfolio securities, its investment performance will continue to reflect changes in the value of the securities loaned, and the Fund will also receive a fee for lending its securities (which may include interest on the collateral). State Street is expected to be selected to administer the securities lending activities of the respective Funds. However, another administrator may be selected. A portion of the income generated by securities lending activities will be paid to the administrator as a fee and the remaining income will be reinvested in the relevant Fund. In the event that State Street acts as administrator, the portion of the income from securities lending activities paid to it will be in an amount that is expected to offset its costs of administering these activities. The remaining 75% will be reinvested in the relevant Fund.
Valuation of Units
An investor's interest in a Fund is represented by the value of the Units credited to the investor's account for that Fund. The number of Units purchased with a contribution or transfer or allocation of assets to a Fund (except for the Stable Asset Return Fund, which is generally maintained at $1.00) is the quotient of the amount allocated to the Fund divided by the per Unit value of the Fund calculated as of the end of the regular trading session of the New York Stock Exchange on the Business Day the contribution is credited by State Street. Once a number of Units has been credited to an investor's account, this number will not vary because of any subsequent fluctuation in the Unit value. The value of each Unit, however, will fluctuate with the investment experience of the particular Fund, which reflects the investment income and realized and unrealized capital gains and losses of that Fund.
Unit values for the Funds are determined as of the close of the regular trading session of the New York Stock Exchange on each Business Day. The Unit value for each Fund is the value of all assets of the Fund, less all liabilities of the Fund, divided by the number of outstanding Units of the Fund. The value of each Fund is determined by State Street based on the market value of each Fund's portfolio of securities. The value of securities and other assets that do not have readily available market prices is determined in good faith by State Street. See "--Stable Asset Return Fund--Valuation of Units" for information as to the valuation of Units in the Stable Asset Return Fund.
Transfers
Transfers to and from any of the Funds, as well as transfers to and from the portfolios of the Structured Portfolio Service and the Self-Managed Accounts, may be made on any Business Day prior to 4:00 p.m. Eastern time (or, if earlier, the close of regular market trading). For additional information relating to transfers and withdrawals from the Investment Options, see "-- Transfers Among Investment Options."
Performance Information
Each Fund may, from time to time, report its performance in terms of the Fund's total return. A Fund's total return is determined based on historical results and is not intended to indicate future performance. A Fund's total return is computed by determining the average annual compounded rate of return for a specified period which, when applied to a hypothetical $1,000 investment in the Fund at the beginning of the period, would produce the redeemable value of that investment at the end of the period. Each Fund may also report a total return computed in the same manner but without annualizing the result. A recorded message providing current per Unit values for the Funds is available at (800) 826-8905.
Derivative Instruments
Generally. The Funds will not engage in investments in derivative securities, such as futures, options, swaps, caps or floor contracts or foreign currency hedging contracts, except as described in this paragraph and as set forth under "Funds Investing in Registered Investment Companies" below. The Index Equity Fund and the indexed portions of the Value Equity Fund and the Growth Equity Fund may engage in limited transactions in stock index futures and options for hedging purposes and as a substitute for comparable market positions in the securities held by such Fund (with respect to the portion of its portfolio that is held in cash items, for example pending investment or to pay for redemption requests). The International Equity Fund and, to a lesser extent, the Balanced Fund, the Value Equity Fund, the Growth Equity Fund and the Aggressive Equity Fund may enter into foreign currency hedging transactions in connection with their purchase or sale of foreign securities as described in the next paragraph. Collateralized mortgage obligations (known as "CMOs") and other mortgage-backed securities, as well as asset-backed securities, could be considered derivative securities, which are securities whose value is derived from other instruments or assets, because their value is derived from the cash flows from their underlying assets, such as the mortgages or accounts receivable. The Balanced Fund may continue to hold current investments in the CMOs that are included in its portfolio. However, no additional investments in CMOs may be made. The Stable Asset Return Fund and the Balanced Fund invest in asset-backed securities, but do not invest in CMOs or other derivative mortgage-backed securities. See "-- Stable Asset Return Fund--Investment Guidelines and Restrictions and Risk Factors."
All of the Funds that may invest in securities denominated in foreign currencies may, when they enter into, and incidental to the settlement of, a contract for the purchase or sale of a security denominated in a foreign currency, enter into forward foreign currency exchange contracts to "lock in" the U.S. dollar price of the security. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. A Fund can use such contracts to reduce its exposure to changes in the value of the currency it will deliver and increase its exposure to changes in the value of the currency into which it will be exchanged. The effect on the value of a Fund is similar to selling securities denominated in one currency and purchasing securities denominated in another. U.S. dollar- denominated American Depositary Receipts (known as "ADRs"), which are issued by domestic banks and are traded in the United States on exchanges or over- the-counter, are available with respect to many foreign securities. ADRs do not lessen the foreign exchange risk inherent in investment in the securities of foreign issuers; however, by
investing in ADRs rather than directly in the foreign issuers' stock, a Fund can avoid currency risks during the settlement period for purchases or sales without having to engage in separate foreign currency hedging transactions.
Funds Investing in Registered Investment Companies. While the assets of the Intermediate Bond Fund are invested in the PIMCO Total Return Fund and while the assets of the International Equity Fund are invested in the T. Rowe Price International Stock Fund (or in any other registered investment companies as State Street may select), investments by these registered investment companies will be subject to the derivatives policies adopted by these companies. These policies are described in the prospectuses and statements of additional information of these registered investment companies and are described in this prospectus as interpreted by State Street. These registered investment companies may enter into interest rate, index and currency exchange rate swap agreements for purposes of attempting to obtain a particular desired investment objective at a lower cost than if the investment company had invested directly in an instrument that yielded that desired return and may utilize any of the strategies referred to below, and may use forward foreign currency exchange contracts to lock in the exchange rate for a purchased security in the manner described in the preceding paragraph. Separately, while the assets of the International Equity Fund are invested in the T. Rowe Price International Stock Fund (or in any other registered investment companies as State Street may select), all of these registered investment companies may enter into contracts designed to increase or decrease their exposure to a particular currency, in an amount approximating the value of some or all of the portfolio securities denominated in the currency, if their managers believe that the currency may suffer or enjoy a substantial movement against another currency. These registered investment companies may also invest in CMOs and other mortgage-related securities, as well as asset-backed securities, which could be considered to be derivative securities. The registered investment companies in which the Intermediate Bond Fund may invest may effect short sales as part of their overall portfolio management strategies or to offset potential declines in value of long positions in similar securities as those sold short. To the extent that the registered investment companies in which the Intermediate Bond Fund may invest engage in uncovered short sales, they will maintain asset coverage in the form of liquid assets in a segregated account. The T. Rowe Price International Stock Fund may invest up to 10% of its total assets in "Hybrid Instruments." These instruments (a type of potentially high-risk derivative) can combine the characteristics of securities, futures, and options. For example, the principal amount, redemption, or conversion terms of a security could be related to the market price of some commodity, currency, or securities index. These securities may bear interest or pay dividends at below market (or even relatively nominal) rates. Under some conditions, the redemption value of this type of investment could be zero. Hybrid Instruments can have volatile prices and limited liquidity, and their use by the T. Rowe Price International Stock Fund may not be successful. In addition, investors should not view percentage investment restrictions as an accurate gauge of the potential risk of such investments. For example, in a given period, a 5% investment in Hybrid Instruments could have significantly more of an impact on the T. Rowe Price International Stock Fund's share price than its weighting in the portfolio.
All of the registered investment companies in which the Funds invest may purchase and write call and put options on securities, securities indices and on foreign currencies, and enter into futures contracts and use options on futures contracts, and may sell previously purchased options and futures contracts. These registered investment companies also may enter into swap agreements with respect to foreign currencies, interest rates and securities indices. These registered investment companies may use these techniques to hedge against changes in interest rates, foreign currency exchange rates or securities prices or as part of their overall investment strategies, to efficiently invest cash, or enhance income, and may also purchase and sell options relating to foreign currencies for purposes of increasing exposure to a foreign currency or to shift exposure to foreign currency fluctuations from one country's currency to another's.
The purchase and writing of options involves risks. During the option period, a writer of a covered call option gives up, in return for the premium on the option, the opportunity to profit from a price
increase in the underlying security above the exercise price but retains, as long as its obligations as a writer continues, the risk of loss should the price of the underlying security decline. The writer of an option traded on an option exchange in the United States has no control over the time when it may be required to fulfill the writer's obligation. Once an option writer has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option and must deliver the underlying securities at the exercise price. The writer of an uncovered option bears the risk of having to purchase the security subject to the option at a price higher than the exercise price of the option. As the price of a security could appreciate substantially, the option writer's loss could be significant. If a put or call option is not sold when it has remaining value, and if the market price of the underlying security, in the case of a put, remains equal to or greater than the exercise price or, in the case of a call, remains less than or equal to the exercise price, the investor will lose its entire investment in the option. Also, when a put or call option on a particular security is purchased to hedge against price movements in a related security, the price of the put or call option may move more or less than the price of the related security. Furthermore, there can be no assurance that a liquid market will exist when an investor seeks to close out an option position. If trading restrictions or suspensions are imposed on the options markets, an investor may be unable to close out a position.
Because swap agreements are two-party contracts and may have terms of greater than seven days, such agreements may be considered to be illiquid. Moreover, an investor bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. The swaps market is a relatively new market and is largely unregulated, and it is possible that developments in the swaps market, including potential government regulation, could adversely affect an investor's ability to terminate existing swap agreements or to realize amounts to be received under these agreements.
There are several risks associated with the use of futures and futures options. Futures and options contracts may not always be successful hedges and their prices can be highly volatile. Using these contracts could lower a fund's total return and the potential loss from their use can exceed a fund's initial investment in these contracts. There can be no guarantee that there will be a correlation between price movements in the hedging vehicle and in the portfolio securities being hedged. An incorrect correlation could result in a loss on both the hedged securities and the hedging vehicle so that the portfolio return might have been greater had hedging not been attempted. There can be no assurance that a liquid market will exist at a time when an investor seeks to close out a futures contract or a futures option position. Most futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single day; once the daily limit has been reached on a particular contract, no trades may be made that day at a price beyond that limit. In addition, some of these instruments are relatively new and without significant trading history. As a result, there is no assurance that an active secondary market will develop or continue to exist. Lack of a liquid market for any reason may prevent an investor from liquidating an unfavorable position even though the investor would remain obligated to meet margin requirements until the position is closed.
All of the registered investment companies in which the Funds invest may, if their managers believe that the currency of a particular foreign country may suffer or enjoy a substantial movement against another currency, enter into a forward contract to sell or buy the former foreign currency (or another currency that acts as a proxy for that currency). There can be no assurance, however, that this strategy will be successful as currency movement can be difficult to predict. There are some markets where it is not possible to engage in effective foreign currency hedging. This may be true, for example, for the currencies of various Latin American countries and other emerging markets where the foreign exchange markets are not sufficiently developed to permit hedging activity to take place.
Mortgage-related securities include securities that directly or indirectly represent a participation in, or are secured by and payable from, mortgage loans on real property, such as collateralized mortgage obligation residuals or stripped mortgage-backed securities, and may be structured in classes with rights
to receive varying proportions of principal and interest. The yield to maturity on an interest only class is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on an investor's yield to maturity from these securities. Early repayment of principal on some mortgage-related securities (arising from prepayments of principal due to the sale of the underlying property, refinancing or foreclosure, net of fees and costs which may be incurred) may expose the Fund to a lower rate of return upon reinvestment of principal.
Investment Advisors
State Street has retained the services of various Investment Advisors to advise it with respect to its investment responsibility with respect to several Funds. Each Investment Advisor recommends to State Street investments and reinvestments of the assets allocated to it in accordance with the investment policies of the respective Funds. State Street exercises discretion with respect to the selection and retention of the Investment Advisors and may remove an Investment Advisor at any time upon consultation with ABRA. State Street may also change at any time the allocation of assets among Investment Advisors to a single Fund, subject to consultation with ABRA.
The current Investment Advisors are:
Alliance Capital Management L.P. Advisor to the Value Equity Fund, Alliance Capital Management L.P. ("Alliance Capital") is a registered investment adviser founded in 1962. Investment management recommendations for the Value Equity Fund will be made by the investment professionals of Alliance Capital's Bernstein Investment Research and Management Unit ("Bernstein"). Bernstein, located at 767 Fifth Avenue, New York, New York 10153, continues and services the former investment research and management business of Sanford C. Bernstein & Co., Inc., a registered investment adviser and broker-dealer acquired by Alliance Capital in October 2000 that managed value oriented investment portfolios since 1967. Alliance Capital is a leading global investment adviser supervising client accounts with assets as of December 31, 2000 totaling approximately $454 billion.
Bankers Trust Company. Advisor to the index portion of the Growth Equity Fund, Bankers Trust Company, a New York banking corporation with principal offices at 130 Liberty Street, New York, New York 10006 is a wholly-owned subsidiary of Deutsche Bank AG ("Deutsche Bank"). Deutsche Bank is a banking company with limited liability organized under the laws of the Federal Republic of Germany. Deutsche Bank is the parent company of a group consisting of banks, capital markets companies, fund management companies, mortgage banks, a property finance company, installment financing and leasing companies, insurance companies, research and consultancy companies and other domestic and foreign companies. As of December 31, 2000, Bankers Trust Company had $241 billion in discretionary assets under management.
Capital Guardian Trust Company. Advisor to the equity portion of the Balanced Fund, and to the Growth Equity Fund and the Aggressive Equity Fund, Capital Guardian Trust Company, a wholly-owned subsidiary of The Capital Group Companies, Inc., is a California state chartered trust company incorporated in 1968. Its principal place of business is 333 South Hope Street, Los Angeles, California 90071. Capital Guardian Trust Company provides investment management, trust and other fiduciary services to corporate and public employee benefit accounts, nonprofit organizations and a number of personal clients. As of December 31, 2000, it had approximately $121.7 billion in assets under its management.
Dresdner RCM Global Investors LLC. Advisor to the Growth Equity Fund and the International Equity Fund, Dresdner RCM Global Investors is the institutional investment management arm of the Dresdner Bank Group outside of Germany. Dresdner RCM Global Investors established a global identity based on the integration of RCM Capital Management based in San Francisco, Thornton and Co. based
in London and Hong Kong, the asset management business of Kleinwort Benson Management based in London and Tokyo, and BIP Gestion in Paris. The firm's U.S. affiliate is located at Four Embarcadero Center, San Francisco, CA 94111, with investment management, client servicing, and operations in the world's primary financial centers. As of December 31, 2000, Dresdner RCM Global Investors had approximately $81 billion of assets under management and advice and Dresdner RCM Global Investors LLC, the U.S. operation of Dresdner RCM Global Investors, had approximately $46 billion of assets under management.
Lincoln Capital Management Company. Advisor to the Growth Equity Fund, Lincoln Capital Management Company is an Illinois sub-chapter S corporation. Its principal place of business is 200 South Wacker Drive, Chicago, Illinois 60606. As of December 31, 2000, the firm had approximately $65 billion of assets under management.
Miller Anderson & Sherrerd. Advisor to the debt portion of the Balanced Fund, Miller Anderson & Sherrerd was established in 1969 and was acquired by Morgan Stanley Group on January 3, 1996. Its principal place of business is One Tower Bridge, West Conshohocken, Pennsylvania 19428. As of December 31, 2000, Miller Anderson & Sherrerd had approximately $75.5 billion of assets under management, primarily for tax-exempt pension funds and profit-sharing plans, Taft-Hartley plans, foundations and endowments.
Pacific Investment Management Company. Anticipated future advisor to the Intermediate Bond Fund, Pacific Investment Management Company ("PIMCO") is an investment management company founded in 1971, and had approximately $216 billion in assets under management as of December 31, 2000. PIMCO Advisors L.P., the parent company of PIMCO, is 70% owned by Allianz A.G. Pacific Life Insurance Company is the only minority shareholder of PIMCO Advisors L.P., and holds the remaining 30% interest. PIMCO's address is 840 Newport Center Drive, Suite 300, Newport Beach, California 92660. PIMCO is registered as an investment advisor with the Securities and Exchange Commission and as a commodity trading advisor with the Commodity Futures Trading Commission.
Sit Investment Associates, Inc. Advisor to the Aggressive Equity Fund, Sit Investment Associates is a Minnesota corporation formed in 1981. Its principal place of business is 4600 Norwest Center, 90 South Seventh Street, Suite 4600, Minneapolis, Minnesota 55402. Sit Investment Associates provides investment advice, management and related services to mutual funds, tax exempt investors, taxable investors and individual investors. As of December 31, 2000, Sit Investment Associates had approximately $9.6 billion in assets under management. Eugene C. Sit is the controlling shareholder of Sit Investment Associates.
T. Rowe Price International, Inc. Anticipated future advisor to the International Equity Fund, T. Rowe Price International, Inc. ("TRPI") is a wholly-owned subsidiary of T. Rowe Price Associates. TRPI is the successor to Rowe Price-Fleming International ("Price-Fleming"), a joint venture established in 1979 between T. Rowe Price Associates and Robert Fleming Holdings ("Fleming"). In 2000, T. Rowe Price became the sole owner of Rowe Price-Fleming and renamed the company T. Rowe Price International. As of December 31, 2000, TRPI managed approximately $32.7 billion in assets. The U.S. office of T. Rowe Price International is located at 100 East Pratt Street, Baltimore, Maryland 21202. Offices are also located in London, Tokyo, Singapore, Hong Kong, Buenos Aires, and Paris.
Recommendations to buy and sell securities for the Funds are made by each Investment Advisor in accordance with the investment policies and restrictions of the Funds and subject to monitoring and approval by State Street. Investment recommendations for the Funds are made independently from those of other investment accounts managed by the Investment Advisors. Occasions may arise, however, when the same investment recommendation is made for more than one client's account. It is the practice of each Investment Advisor to allocate these purchases or sales to be executed in connection
with these recommendations insofar as feasible among its several clients in a manner it deems equitable. The principal factors which the Investment Advisors consider in making these allocations are the relative investment objectives of the clients, the relative size of the portfolio holdings of the same or comparable securities and the then availability in the particular account of funds for investment. Portfolio securities held by one client of an Investment Advisor may also be held by one or more of its other clients. When two or more of its clients are engaged in the simultaneous sale or purchase of securities, transactions are allocated as to amount in accordance with formulas deemed to be equitable as to each client. There may be circumstances when purchases or sales of portfolio securities for one or more clients will have an adverse effect on other clients.
Transactions on stock exchanges on behalf of the Funds involve the payment of negotiated brokerage commissions. There is generally no stated commission in the case of securities traded in the over-the-counter markets, but the price of those securities includes an undisclosed commission or mark-up. The cost of securities purchased from underwriters includes an underwriting commission or concession, and the prices at which securities are purchased from and sold to dealers include a dealer's mark-up or mark-down.
In executing portfolio transactions, the Investment Advisors seek the most favorable execution available. The agreements between State Street and the Investment Advisors provide that, in assessing the best overall terms available for any transaction, the Investment Advisor may consider factors it deems relevant, including the brokerage and research services, as those terms are defined in section 28(e) of the Securities Exchange Act, provided to the Funds, viewed in terms of either that particular transaction or the broker or dealer's overall responsibilities to the Fund.
State Street will periodically review the brokerage commissions paid by the Funds to determine if the commissions paid over representative periods of time were reasonable in relation to the benefits inuring to each Fund. It is possible that some of the services received from a broker or dealer in connection with the execution of transactions will primarily benefit one or more other accounts for which the Investment Advisor exercises discretion, or a Fund other than that for which the transaction was executed. Conversely, any given Fund may be the primary beneficiary of the service received as a result of portfolio transactions effected for those other accounts or Funds. The fees of the Investment Advisors are not reduced by reason of receipt of brokerage and research services.
Structured Portfolio Service
Investment Objective. The Structured Portfolio Service provides investment diversification by utilizing the Funds available to the Program. The Conservative, Moderate and Aggressive portfolios offer three distinct approaches to diversifying investments in the Program. Each portfolio has a different investment strategy and represents different risk and reward characteristics that reflect an investor's tolerance for investment risk. There can be no assurance that any of the portfolios of the Structured Portfolio Service will achieve their investment objective. The portfolios utilize seven of the Program's Funds: the Stable Asset Return Fund, the Intermediate Bond Fund, the Value Equity Fund, the Growth Equity Fund, the Index Equity Fund, the Aggressive Equity Fund and the International Equity Fund. For information regarding the investment objectives, guidelines and restrictions of each of the above Funds, refer to the description of those Funds in this Report.
Strategy. While there can be no guarantee, the overall volatility of the three portfolios may be reduced by spreading investments over several types of assets. However, the volatility of the Aggressive Portfolio may be greater than that of the other two portfolios. As prices of stocks and bonds may respond differently to changes in economic conditions and interest rate levels, a rise in bond prices, for example, could help offset a fall in stock prices. Short-term securities, which are held in varying percentages by all the Funds, have a stabilizing influence in comparison to stocks since their price
fluctuations are expected to be small. In addition, the income provided by bonds and money market securities is expected to contribute positively to a portfolio's total return, cushioning the impact of price declines or enhancing the effect of price increases.
The Conservative Portfolio emphasizes shorter-term and fixed income securities and is intended for investors with lower risk tolerance who seek returns based primarily on higher current investment income. Funds in the Conservative Portfolio are allocated as follows:
The Moderate Portfolio takes a more balanced approach (in comparison to the Conservative Portfolio) and is intended for investors who seek returns based upon relatively stable investment income but who also desire an increased potential for growth. Its investments are allocated as follows:
The Aggressive Portfolio emphasizes stocks and is intended for investors who have a higher degree of risk tolerance and seek capital appreciation. Its investments are allocated as follows:
Allocations of investor funds to the portfolios of the Structured Portfolio Service are readjusted by State Street on the first Business Day of each month to maintain the percentage allocations indicated above.
Risk Factors. For information and risk factors associated with each of the Funds utilized in the Structured Portfolio Service, refer to the descriptions in this Report for each particular Fund.
Valuation of Units. Units in the portfolios of the Structured Portfolio Service are valued based upon the collective values of the Units of the included Funds credited to an investor's account in the Structured Portfolio Service.
Liquidity and Transfers. Transfers to or from any of the three portfolios may be made on any Business Day prior to 4:00 p.m. Eastern time (or, if earlier, the close of regular market trading). See "--Transfers Among Investment Options."
Performance Information. A recorded message providing current values for Units in each portfolio in the Structured Portfolio Service is available at (800) 826-8905. The Structured Portfolio Service may, from time to time, report the performance of each of the portfolios in terms of total return. This reported performance will be determined based on historical results and will not be intended to indicate future performance.
Self-Managed Accounts
Self-Managed Accounts are not included in the Collective Trust and are not registered under the Securities Exchange Act. They are described in this Report for information purposes only.
As an additional Investment Option under the Program, State Street makes available a Self- Managed Account. The Self-Managed Account is available for all plans unless the Employer elects not to make it available for its plan. State Street permits investors whose plan includes the Self-Managed Account as an Investment Option to authorize a third party "investment manager," as defined in Section 3(38) of ERISA, to trade that investor's Self-Managed Account. Contributions may not be allocated directly to the Self-Managed Account, but must first be allocated to one or more of the other available Investment Options and then transferred to the Self-Managed Account. Assets transferred from one of the core Investment Options to a Self-Managed Account may be invested in a wide variety of publicly traded debt and equity securities and mutual funds through a self-managed brokerage account. Some types of investments, such as options, futures, commodities, foreign securities (other than American Depositary Receipts), initial public offerings ("IPOs"), bulletin board stocks, privately traded limited partnerships, commercial paper, bank investments and insurance investments, cannot be made in a Self-Managed Account. Margin trading and short selling are not permitted in Self-Managed Accounts. For more information regarding the Self-Managed Account, please call (800) 348-2272.
Equitable Real Estate Account
Interests in the Equitable Real Estate Account are not registered under the Securities Exchange Act, and are described in this Report for information purposes only.
Some of the assets contributed to the Program prior to January 1, 1992 are held by The Equitable Life Assurance Society of the United States ("Equitable Life") in the Equitable Real Estate Account. The Equitable Real Estate Account is a separate account that invests primarily in real estate and is managed by Lend Lease Real Estate Investments, Inc. under a contract with Equitable Life. Equitable Life will continue to hold and invest assets allocated to the Equitable Real Estate Account until they are withdrawn from the Program or transferred to another Investment Option available under the Program. Restrictions apply to withdrawals and transfers from the Equitable Real Estate Account that may delay a withdrawal or transfer for a significant period of time following a withdrawal or transfer request. No transfers or contributions to the Equitable Real Estate Account are permitted.
State Street has no control over the management of assets held by Equitable Life and is not responsible for the investment of these assets or the performance by Equitable Life and Lend Lease Real Estate Investments of their obligations under the Program with respect to these assets. State Street, however, maintains the recordkeeping on the sale of this account and provides notice to investors, when appropriate. Information relating to assets held in the Equitable Real Estate Account may be obtained by writing or calling State Street. See "--Additional Information."
Contributions to the Investment Options
Contributions may be allocated to the Funds or to any of the portfolios of the Structured Portfolio Service on a daily basis and are credited on the day of receipt if accompanied or preceded by proper allocation instructions. Contributions are used to purchase Units of the Funds and the portfolios of the Structured Portfolio Service based on the relevant per Unit net asset value of each Fund or the portfolios of the Structured Portfolio Service, as applicable. Contributions may not be allocated directly to the Self-Managed Account, but must first be allocated to one or more of the other available Investment Options and then transferred to the Self-Managed Account.
Transfers Among Investment Options
Transfers may be made among the Funds, the portfolios of the Structured Portfolio Service and Self-Managed Accounts generally on any Business Day based on the relevant per Unit net asset value of each Fund or each portfolio of the Structured Portfolio Service, as applicable.
Effective August 1, 2001, the International Equity Fund will adopt an excessive transfer policy that may restrict a Participant's ability to make transfers into the International Equity Fund. Under the policy, Participants may make not more than one transfer into the International Equity Fund within any 45 calendar day period. There will be no restriction on a Participant's ability to make transfers out of the Fund. State Street has adopted this policy for the International Equity Fund to prevent disruptions to the Fund that could potentially affect the investment performance of the Fund.
No transfers may be made to the Equitable Real Estate Account.
There is no charge for transfers.
Benefits and Distributions
A Participant's eligibility for benefits depends on the terms of the applicable plan through which he or she participates. For information regarding the terms of a plan, a Participant should contact his or her Employer.
Participant Advisor Service
State Street expects to contract with Financial Engines, Inc. to make available to Participants no earlier than July 1, 2001 the Financial Engines asset allocation investment advisor service, an Internet and intranet based personalized defined contribution plan advisor service. Additional information regarding this service may be obtained from State Street at the phone number provided below and from the prospectus relating to the Program.
Additional Information
Persons who are already Employers or who are responsible for allocating assets under a particular plan may obtain administrative, investment allocation and transfer forms or additional information by:
. calling State Street at (800) 348-2272 between 9:00 a.m. and 8:00 p.m. Eastern time;
. calling our FaxBack line at (877) 202-3930; or
. accessing our Web site at http://www.abaretirement.com
A Participant may also obtain forms from his or her Employer, or by using one of the methods outlined above.
For information regarding enrollment in the Program, Eligible Employers may call State Street at (800) 826-8901 between 9:00 a.m. and 5:00 p.m. Eastern time or write to State Street Bank and Trust Company, P.O. Box 2236, Boston, Massachusetts 02209-2236.
For Unit values for the current Investment Options, and for the daily rate of the Stable Asset Return Fund and the 30-day yield of the Intermediate Bond Fund, call State Street at (800) 826-8905.
For a recorded message providing current account information, call State Street at (800) 348-2272.
ADOPTION OF PROGRAM
Sole practitioners, partnerships and professional corporations engaged in the practice of law may adopt the Program if they or at least one of their partners or shareholders, as the case may be, is a member or associate of the ABA or of a state or local bar association that is represented in the ABA's House of Delegates. These bar associations may also adopt the Program for their own employees subject to limitations imposed by the Internal Revenue Code. An organization that is not engaged in the practice of law may also be eligible to adopt the Program if it is closely associated with the legal profession, receives the approval of ABRA, and has, as an owner or a member of its governing board, a member or associate of the ABA. State Street's retirement program specialists are available to help individuals and organizations determine whether they are eligible to adopt the Program.
Eligible Employers who elect to participate in the Program may do so either through their own individually designed plans or by adopting one or both of the two ABA Members Plans sponsored by ABRA. The ABA Members Plans are master plans designed to qualify under section 401(a) of the Internal Revenue Code.
Under the American Bar Association Members Retirement Plan, an Eligible Employer may adopt a profit sharing plan, a money purchase pension plan or a target benefit plan. The Internal Revenue Service has determined that the available forms of the ABA Members Plans are qualified under section 401(a) of the Internal Revenue Code for use by employers for the benefit of their employees.
Assets contributed under master plans are held by State Street as trustee of the American Bar Association Members Retirement Trust. Assets invested through individually designed plans are held under the American Bar Association Members Pooled Trust for Retirement Plans. Assets contributed to each of these trusts are invested in the Investment Options available under the Program in accordance with the instructions of the person or entity vested with responsibility for determining the investment allocation of the assets of each plan. In accordance with the plans, assets of the trusts are held for the benefit of the Participants. The Internal Revenue Service has determined each of the American Bar Association Members Retirement Trust and the American Bar Association Members Pooled Trust for Retirement Plans to be tax-exempt trusts under section 501(a) of the Internal Revenue Code.
To adopt either the American Bar Association Members Defined Benefit Plan or the American Bar Association Members Retirement Plan, an Eligible Employer must complete and execute a participation agreement. The participation agreement contains the basic features that must be considered in designing an appropriate master plan under the Program and effects the Eligible Employer's adoption of the American Bar Association Members Retirement Trust to hold assets of the master plan. State Street's retirement program specialists will assist Eligible Employers in the preparation of a participation agreement. However, State Street is not authorized to give tax or legal advice and Eligible Employers should consult with their tax advisor prior to executing a participation agreement. Depending on the form of participation agreement adopted by an Eligible Employer and the other retirement plans, if any, maintained by the Eligible Employer, it may be necessary to apply to the Internal Revenue Service for a determination of the qualified status of the master plan as adopted by the Eligible Employer.
An Eligible Employer that maintains an individually designed plan that is qualified under section 401(a) of the Internal Revenue Code may also participate in the Program and make use of the Investment Options available under the Program by causing a participation agreement for the American Bar Association Members Pooled Trust for Retirement Plans to be executed by the trustee of the individually designed plan. The trustee must demonstrate to State Street that the participating trust is exempt from tax under section 501(a) of the Internal Revenue Code and that the related individually designed plan is qualified under section 401(a) of the Internal Revenue Code. State Street's retirement program specialists will assist in preparation of a participation agreement. However, State Street is not authorized to give tax or legal advice and Eligible Employers and the trustees of an individually designed
plan should consult with their tax advisor prior to executing a participation agreement. Only plans qualified under Section 401(a) of the Internal Revenue Code may participate in the Program. Eligible Employers should note that the Internal Revenue Code and related regulations place limits on the amount of assets that may be contributed to the plans, as well as on withdrawals from the plans.
For copies of the appropriate participation agreements and further information concerning the steps to be taken to adopt the Program, call State Street at (800) 826-8901 between 9:00 a.m. and 5:00 p.m. Eastern time or write to State Street Bank and Trust Company, P.O. Box 2236, Boston, Massachusetts 02209-2236.
STATE STREET
State Street provides administrative and recordkeeping services required by the Program. As trustee of the Collective Trust, State Street is responsible for the operation and management of Funds under the Collective Trust. State Street also acts as the sole trustee of each of the ABA Members Trusts.
State Street's principal offices are located at 225 Franklin Street, Boston, Massachusetts 02110. State Street is a wholly-owned subsidiary of State Street Corp., a Massachusetts corporation and a holding company registered under the Federal Bank Holding Company Act of 1956. State Street is a highly capitalized Massachusetts trust company, and as of the year ending December 31, 2000, State Street and its affiliates had a total risk-based capital ratio of 13.5%, which is far in excess of applicable regulatory requirements. As of December 31, 2000, State Street together with its affiliates had over $6.1 trillion of assets under custody and had $711 billion of assets under management. State Street together with its affiliates is the largest mutual fund custodian in the world, the largest master trust custodian bank and the largest custodian of international/global assets for U.S. pension funds.
Effective as of April 1, 2000, State Street and Citigroup, Inc. formed a jointly owned Delaware limited liability company called CitiStreet LLC. CitiStreet provides recordkeeping and other administrative services to clients of State Street and Citigroup, Inc. Insofar as State Street provides recordkeeping and other administrative services to the Program, these services may be provided by CitiStreet on behalf of State Street pursuant to a service agreement entered into between State Street and CitiStreet.
AMERICAN BAR RETIREMENT ASSOCIATION
ABRA is an Illinois not-for-profit corporation organized by the American Bar Association (the "ABA") to sponsor retirement programs for self-employed individuals and employers who are members or associates of the ABA or certain affiliated organizations. The Program is a comprehensive retirement program that provides employers who adopt the Program with tax-qualified employee retirement plans, a variety of Investment Options and related recordkeeping and administrative services. As sponsor of the Program, ABRA is responsible for the design of the Program, the maintenance of the American Bar Association Members Defined Benefit Plan, the American Bar Association Members Retirement Plan, the American Bar Association Members Retirement Trust and the American Bar Association Members Pooled Trust for Retirement Plans, and the designation of Investment Options to be made available under the Program. Pursuant to an agreement between ABRA and State Street, as of January 1, 1999, ABRA has engaged State Street to provide administrative and investment services and to make the Investment Options available under the Program for a four-year term. ABRA may terminate its agreement with State Street prior to the end of its term upon six months written notice. State Street may terminate its agreement with ABRA prior to the close of business on December 31, 2002 in certain circumstances, including the offering to Employers by ABRA of any investment product that is not offered pursuant to the terms of the agreement. State Street may terminate its agreement with ABRA at the end of any quarter after the close of business on or after December 31, 2002 upon twelve months written notice. ABRA has also appointed State Street as trustee of each of the ABA Members Trusts.
DEDUCTIONS AND FEES
Program Expense Fee
A fee is paid to State Street and ABRA for their services in connection with the Program. For all Investment Options other than the Self-Managed Account, the fee is paid directly from the assets of the Funds and the Equitable Real Estate Account.
For the calendar year ending December 31, 2000, the program expense fee payable to State Street was $8,928,398. This amount equals the sum of monthly payments each equal to one-twelfth the sum of (i) $750,000 plus (ii) $191 multiplied by the number of participants in the Program other than active participants without account balances as of the last Business Day of the immediately preceding month, plus (iii) $191 multiplied by the excess, if any, of the number of active participants of the Program without account balances over the number of such participants as of December 31, 1998. This fee was accrued daily and paid monthly.
State Street expects to make a participant advisor service available no earlier than July 1, 2001. Starting at that time, State Street will calculate the program expense fee as follows: the monthly fee will be one-twelfth of the sum of (i) $750,000 plus (ii) $201 multiplied by the number of participants in the Program other than active participants without account balances as of the last Business Day of the immediately preceding month, plus (iii) $201 multiplied by the excess, if any, of the number of active participants of the Program without account balances over the number of such participants as of December 31, 1998. This fee is accrued daily and is paid monthly. The $201 amount in the above calculation includes $10 per Participant for the participant advisor service.
Benefit payments under the Program generally are made by check. Within five Business Days before the check is payable, funds for the payment of benefits are transferred to a non-interest bearing account with State Street. There is no separate fee charged for benefit payments; rather, State Street retains any earnings attributable to outstanding benefit checks, which has been taken into account in setting State Street's fees under the Program. The program expense fee set forth above reflects a $300,000 reduction for earnings attributable to outstanding benefit checks.
The program expense fee payable to State Street is subject to reduction based on the amount of retirement plan assets held by State Street on behalf of law firm and law-related clients identified by State Street and ABRA that do not participate in the Program. For the year ended December 31, 2000 the amount of this reduction was $74,438.
The program expense fee payable to ABRA is based on the total assets in the Program (other than assets in Self-Managed Accounts) at the following annual rates:
The fee is accrued daily and is paid to ABRA monthly based on the level of assets in the Program as of the end of the last Business Day of the preceding month. The fee schedule set forth above may be increased only by written notification of such increase to all Employers, and shall become effective after a minimum of 60 days from such notice.
Trustee, Management and Administration Fees
A fee is paid to State Street for its management, administration and custody of the assets in the Investment Options (other than Self-Managed Accounts and Equitable Real Estate Accounts). This fee is accrued on a daily basis and paid monthly from the assets of the Funds. The trustee, management
and administrative fees attributable to the Funds held by the Structured Portfolio Service are also accrued and paid from the Funds. Fees are payable at the following annual rates:
Self-Managed Account Fees
Transaction fees for the purchase or sale of securities for the account of an Eligible Investor are charged in accordance with the schedule of rates communicated from time to time to Eligible Investors with Self-Managed Accounts.
Actuarial Services and Fees
State Street has retained a third-party actuarial firm to provide actuarial services for each Employer that adopts or has adopted the American Bar Association Members Defined Benefit Plan or other plan requiring actuarial services. The fees and expenses of the actuarial firm will be charged based on the amount of actuarial services provided by the firm. If this fee is not paid directly by the Employer, such fee will be deducted from the Plan's assets.
Investment Advisor Fee
A fee is paid to each Investment Advisor based on the value of the assets allocated to that Investment Advisor, as set forth below. These fees are accrued on a daily basis and paid monthly from the assets of the Funds.
------- * While Dresdner RCM Global Investors LLC serves as an Investment Advisor to both the Growth Equity Fund and the International Equity Fund, the Investment Advisor fee payable to Dresdner RCM Global Investors LLC with respect to the International Equity Fund shall be calculated using the schedule shown for the International Equity Fund commencing at the tier determined by the aggregate value of assets in the Growth Equity Fund and International Equity Fund allocated to Dresdner RCM Global Investors LLC. As of December 31, 2000, approximately $430 million of the Growth Equity Fund's assets were allocated to Dresdner RCM Global Investors LLC. ** Investment Advisor fees payable to Capital Guardian Trust Company are subject to a fee reduction equal to 5% of the aggregate Investment Advisor fee payable to Capital Guardian Trust Company.
To the extent that the assets of the Intermediate Bond Fund and the International Equity Fund are invested in shares of registered investment companies, no separate investment advisory fees will be paid by the applicable Funds. These Funds, however, will indirectly bear their proportionate share of the investment advisory fees and annual operating expenses payable by these registered investment companies. See "Description of Investment Options-- Intermediate Bond Fund--Investment Advisors and Initial Investments in Registered Investment Companies," and "Description of Investment Options-- International Equity Fund--Investment Advisor and Initial Investments in Registered Investment Companies." In the most recent periods for which information is available, the PIMCO Total Return Fund paid total asset management and administration fees of .43%, and the T. Rowe Price International Stock Fund paid total asset management and administration fees of .85%.
These fees vary with the amount of assets held in the registered investment companies and as a result of changes in the underlying fee structure of the registered investment companies. Program expense fees and trustee, management and administrative fees are paid by the Funds during the time that the Funds are invested in these registered investment companies.
T. Rowe Price International has separately agreed that in return for administrative services provided by State Street with respect to the International Equity Fund, T. Rowe Price International shall pay State Street a .10% administrative service credit, which is credited to the International Equity Fund.
Operational and Offering Costs
Recurring expenses incurred in connection with operating the Collective Trust, such as printing, legal, registration, consulting and auditing expenses, are considered operational expenses and are accrued throughout the year. A fee in the amount of $556,000 for the registration of $2 billion of Units with the SEC was paid in December 1998 and was considered an offering cost. This expense was allocated to the Funds based on net asset value, was capitalized by each Fund and was amortized over the period from December 1998 through December 2000. A fee in the amount of $250,000 for the registration of $1 billion of units with the SEC was paid in March 2001 and will be an ongoing operational cost. This expense will be allocated to the Funds based on net asset value and accrued over the period from January 2001 through December 2001.
Fee Recipients
The following information with respect to fees is based on the approximate assets of the Program on December 31, 2000, which was $3,717,000,000, and on the number of participants for whom State Street was responsible for recordkeeping as of December 31, 2000, which was 44,396. The total assets as of December 31, 2000 includes $721,000,000 for the Stable Asset Return Fund, $144,000,000 for the Intermediate Bond Fund, $456,000,000 for the Balanced Fund, $188,000,000 for the Value Equity Fund, $1,384,000,000 for the Growth Equity Fund, $284,000,000 for the Index Equity Fund, $422,000,000 for the Aggressive Equity Fund, $114,000,000 for the International Equity Fund, and $4,000,000 for the Equitable Real Estate Account. State, Street, in its capacity as administrator of the program and manager of the Funds, would receive fees of $12,446,000 on an annual basis (after fee discounts of $300,000 for outstanding benefits checks and $76,000 for law firm and law- related client assets not invested in the Program). ABRA would receive fees of $1,634,000 on an annual basis in its capacity as sponsor of the Program.
As of December 31, 2000, the Investment Advisors provided investment advice and transaction execution with respect to the following approximate asset amounts: Capital Guardian Trust Company -- $812,000,000 (including $366,000,000 invested in the Growth Equity Fund, $179,000,000 invested in the Aggressive Equity Fund and $267,000,000 invested in the Balanced Fund); Bankers Trust Company -- $297,000,000; Lincoln Capital Management Company -- $291,000,000; Miller Anderson & Sherrerd -- $189,000,000; Dresdner RCM Global Investors LLC -- $483,000,000 (including $430,000,000 invested in the Growth Equity Fund and $53,000,000 invested in the International Equity Fund); Sit Investment Associates, Inc. -- $243,000,000; and Alliance Capital L.P. acting through its Bernstein Investment Research and Management unit -- $141,000,000. Also, as of December 31, 2000, $144,000,000 was invested in the PIMCO Total Return Fund and $61,000,000 was invested in the T. Rowe Price International Stock Fund.
Assuming the allocation of the assets of the Funds among the Investment Advisors is as set forth above, the following advisory fees would have been payable: Capital Guardian Trust Company -- $1,824,000 (after an applicable fee discount of $96,000); Bankers Trust Company -- $122,000; Lincoln Capital Management Company -- 901,000; Miller Anderson & Sherrerd -- $421,000; Dresdner RCM Global Investors LLC -- $1,457,000; Sit Investment Associates, Inc. -- $1,508,000; and Alliance Capital L.P. acting through its Bernstein Investment Research and Management unit -- $448,000. In addition, based on published fee schedules, the following anticipated Investment Advisors would have received the following fees from
registered investment companies into which finds were invested: PIMCO -- $619,000; T. Rowe Price International, Inc.-- $506,000 (before credit of a $61,000 administrative fee paid to the International Equity Fund by T. Rowe Price International, Inc.).
Item 2.
Item 2. Properties.
Not Applicable. The Collective Trust does not have any physical properties as contemplated by this Item.
Item 3.
Item 3. Legal Proceedings.
Not Applicable.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) Market Information.
Units of beneficial interest in the Funds are not transferable and, therefore, are not traded on any market. Participants in certain employer plans receive distributions of benefits upon retirement or disability, or upon termination of employment with a vested benefit. A participant may withdraw the contributions and earnings thereon at any age from the plans, subject to the withdrawal restrictions applicable therein. Participants in the individually designed plans receive distributions based upon the terms and provisions of the respective employer plan. Prior to distribution, assets in the various plans may be transferred among the Funds and the portfolios of the Structured Portfolio Service, subject to the restrictions that apply to each Fund or portfolio of the Structured Portfolio Service, by the person or entity vested with the responsibility for determining the investment allocation of the assets of the plan.
(b) Holders.
Eligible employers who elect to participate in the Program may do so by adopting a master plan under one or both of the ABA Members Plans. The ABA Members Plans consist of the American Bar Association Members Retirement Plan, a defined contribution master plan, and the American Bar Association Members Defined Benefit Plan, a defined benefit master plan. Employers that maintain individually designed plans may also participate in some of the aspects of the Program through those individually designed plans. Assets contributed under the Program are held by State Street as trustee of the American Bar Association Members Retirement Trust and the American Bar Association Members Retirement Pooled Trust for Retirement Plans. Assets contributed under the Program are allocated among the Investment Options available under the Program in accordance with the instructions of the person or entity vested with responsibility for determining the investment allocation of the assets of a Plan held in the American Bar Association Members Retirement Trust or the American Bar Association Members Pooled Trust for Retirement Plans. Under the Program, certain participants, employers or plan trustees may also direct State Street to purchase and sell a wide variety of publicly traded debt and equity securities and shares of numerous mutual funds for the participant's, employer's or plan trustee's Self-Managed Account. The Self-Managed Account is available only to participants in the American Bar Association Members Retirement Plan and to employers with respect to the American Bar Association Members Defined Benefit Plan, provided that in either case the employer has designated the Self-Managed Account as an Investment Option for its plan. The Self-Managed Account is also available for participants, employers and trustees of certain individually designed plans. Assets contributed to the plans are allocated among the Funds and the portfolios in accordance with the instructions of the person or entity vested with the responsibility for determining the investment allocation of the assets of the plans held in the American Bar Association Members Retirement Trust and the American Bar Association Members Pooled Trust for Retirement Plans.
(c) Dividends.
Income or gains on contributions are automatically reinvested in the respective Funds.
Item 6.
Item 6. Selected Financial Data.
The selected financial data below provide information with respect to income, expenses and capital changes for each Fund attributable to each Unit outstanding for the periods indicated. The selected financial data for each of the periods ended December 31 have been derived from financial statements audited by PricewaterhouseCoopers LLP, independent accountants of the Collective Trust. The selected financial data should be read in conjunction with the financial statements of the Funds, including the related Notes thereto, which appear in response to Item 8 of this Report. Per Unit calculations have been prepared using the monthly average number of Units outstanding during the period.
Stable Asset Return Fund:*
Intermediate Bond Fund:
- ------- * As of September 5, 1995, the Blended Rate Fund was merged into the Enhanced Short Term Investment Fund ("ESTIF") and ESTIF's name was changed to the Stable Asset Return Fund. The financial statements of the Fund reflect a combination of the assets and liabilities of ESTIF and the Blended Rate Fund as of the effective date of the merger. ** Commencement of operations. *** The registered investment companies in which the Fund invests pay asset management and administration fees to their investment advisors. These fees are not included in per Unit expenses or the ratio of expenses to average net assets. **** Ratios annualized. + Reflects purchases and sales of shares of the registered investment companies in which the Fund invests rather than the turnover of the underlying portfolios of such registered investment companies. ++ Not annualized. # Reflects a reduction in the Program Expense Fee payable to State Street. If the fee had not been reduced, the annualized ratio of net expenses to average net assets for the Stable Asset Return Fund would have been .38% and .37% for the years ended December 31, 1999 and 2000, respectively, and the annualized ratio of net expenses to average net assets for the Intermediate Bond Fund would have been .37% and .36% for the years ended December 31, 1999 and 2000, respectively. See Note 3 of the Notes to Financial Statements.
Balanced Fund:
Value Equity Fund:
- ------- * Commencement of operations. ** Ratios annualized. *** Not annualized. # Reflects a reduction in the Program Expense Fee payable to State Street. If the fee had not been reduced, the annualized ratio of net expenses to average net assets for the Balanced Fund would have been .60% and .59% for the years ended December 31, 1999 and 2000, respectively, and the annualized ratio of net expenses to average net assets for the Value Equity Fund would have been .68% and .63% for the years ended December 31, 1999 and 2000, respectively. See Note 3 of the Notes to Financial Statements.
Growth Equity Fund:*
Index Equity Fund:+
- ------- * State Street approved a 10-for-1 split of the units of the Growth Equity Fund, which was effective February 2, 2001. The per-unit data have been restated to reflect the split. ** Commencement of operations. *** Ratios annualized. **** Not annualized. + Commencing September 5, 1995, the Index Equity Fund was invested to replicate the Russell 3000 Index. Prior to that date, the Fund was invested to replicate the Standard & Poor's 500 Composite Index. ++ Reflects purchases and sales of units of the collective investment funds in which the Fund invests rather than the turnover of the underlying portfolios of such collective investment funds. # Reflects a reduction in the Program Expense Fee payable to State Street. If the fee had not been reduced, the annualized ratio of net expenses to average net assets for the Growth Equity Fund would have been .59% and .58% for the years ended December 31, 1999 and 2000, respectively, and the annualized ratio of net expenses to average net assets for the Index Equity Fund would have been .37% and .37% for the years ended December 31, 1999 and 2000, respectively. See Note 3 of the Notes to Financial Statements.
Aggressive Equity Fund:
International Equity Fund:
- -------- * Commencement of operations. ** Ratios annualized. *** Not annualized. + The registered investment company in which the Fund invests pays asset management and administration fees to its investment advisor. This fee is not included in per Unit expenses or the ratio of expenses to average net assets. ++ Reflects purchases and sales of shares of the registered investment company in which the Fund invests rather than turnover of the underlying portfolio of the registered investment company. # Reflects a reduction in the Program Expense Fee payable to State Street. If the fee had not been reduced, the annualized ratio of net expenses to average net assets for the Aggressive Equity Fund would have been .81% and .81% for the years ended December 31, 1999 and 2000, respectively. See Note 3 of the Notes to Financial Statements. ## Reflects a reduction in the Progam Expense Fee payable to State Street and the administrative service credit from T. Rowe Price International. If the fees had not been reduced and the credit had not been made, the annualized ratio of net expenses to average net assets would have been .54, .48%, .37%, and .49% for the years ended December 31, 1997, 1998, 1999 and 2000 respectively.
Structured Portfolio Service--Conservative Portfolio:
- -------- * Commencement of operations. ** Ratios annualized. *** Reflects purchases and sales of units of the Funds in which the portfolios invest rather than the turnover of such underlying Funds. **** Not annualized.
Structured Portfolio Service--Aggressive Portfolio:
- -------- * Commencement of operations. ** Ratios annualized. *** Reflects purchases and sales of units of the Funds in which the portfolios invest rather than turnover of such underlying Funds. **** Not annualized.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The year 2000 was marked by the setback suffered by the technology sector. The returns for the domestic equity markets differed depending on market sector. Small capitalization outpaced the large capitalization stocks by a larger margin than in the previous year. Value stocks showed moderate positive returns while growth stocks posted large losses. Health care, financial services, consumer staples and the energy sector posted strong returns. Along with the technology sector, consumer discretionary and utilities performed the worst during the period. For the first time in several years the domestic bond market outperformed the domestic equity market due in part to a flight to safety, as economic growth appeared to slow down. The international markets finished with both the established and emerging markets experiencing negative returns, in part due to the Euro's weakness along with a decline in telecommunications and technology stocks.
Aggressive Equity Fund
The Aggressive Equity Fund invests primarily in common stocks and equity- type securities. It may also invest in preferred stocks and convertible debt instruments and non-equity securities, including investment grade bonds, debentures and high quality money market instruments of the same types as
those in which the Stable Asset Return Fund may invest, when deemed appropriate by State Street in light of economic and market conditions. The Aggressive Equity Fund seeks to achieve, over an extended period of time, total returns that are comparable to or superior to those attained by broad measures of the domestic stock market. For the year ended December 31, 2000, the Aggressive Equity Fund experienced a total return, net of expenses (including a trust management fee, a program expense fee, investment advisory fees, organizational fees and maintenance fees, collectively "Expenses"), of (11.59)%. By comparison, the Russell 2000 Index produced a total return of (3.02)% for the same period. The Russell 2000 Index does not include any allowance for the fees that an investor would pay for investing in the stocks that comprise the index.
The most heavily weighted sectors in the Aggressive Equity Fund were technology, consumer basics and finance. Securities representing the largest holdings based on market value in the Aggressive Equity Fund at December 31, 2000 included Applied Micro Circuits Corp., Ace Ltd., JDS Uniphase Corp., Check Point Software Technologies Ltd. and Alza Corp.
Balanced Fund
The Balanced Fund invests in publicly traded common stocks, other equity-type securities, long-term debt securities and money market instruments. The Balanced Fund seeks to achieve, over an extended period of time, total returns comparable to or superior to an appropriate combination of broad measures of the domestic stock and bond markets. For the year ended December 31, 2000, the Balanced Fund experienced a total return, net of Expenses, of 4.99%. For the same period, a combination of the Russell 1000 Index and the Lehman Brothers Aggregate Bond Index weighted 60/40%, respectively, produced a total return of 0.07%. The Russell 1000 Index and the Lehman Brothers Aggregate Bond Index do not include an allowance for the fees that an investor would pay for investing in the securities that comprise the indices.
The most heavily weighted sectors in the equity portion of the Balanced Fund were consumer basics, finance and technology. Securities representing the largest holdings based on market value in the Balanced Fund at December 31, 2000 included USA Education Inc., Astrazeneca PLC, Pfizer Inc., XL Capital Ltd. and Nokia Corp. The fixed income portion was heavily invested in government agency and mortgage related issues.
Growth Equity Fund
The Growth Equity Fund invests primarily in common stocks and other equity- type securities issued by large, well-established companies. The Growth Equity Fund seeks to achieve long-term growth of capital through increases in the value of the securities it holds and to realize income principally from dividends on such securities. A portion of the Growth Equity Fund (approximately 25%) is invested to replicate the Russell 1000 Growth Index, which is composed of those Russell 1000 securities with a greater than average growth orientation. The remainder of the Growth Equity Fund is actively managed. The Growth Equity Fund seeks to achieve, over an extended period of time, total returns that are comparable to or superior to those attained by broad measures of the domestic stock market.
For the year ended December 31, 2000, the Growth Equity Fund experienced a total return, net of Expenses, of (15.23)%. By comparison, the Russell 1000 Growth Index produced a return of (22.42)% for the same period. The Russell 1000 Growth Index does not include an allowance for the fees that an investor would pay for investing in the securities that comprise the index.
The most heavily weighted sectors in the Growth Equity Fund were technology, consumer basics and general business. Securities representing the largest holdings based on market value in the Growth Equity Fund at December 31, 2000 included Pfizer Inc., General Electric Company, Cisco Systems Inc., EMC Corporation and Microsoft Corp.
Index Equity Fund
The Index Equity Fund invests in common stocks of U.S. companies that are included in the Russell 3000 Index, with the overall objective of achieving long-term growth of capital. The Russell 3000 Index represents approximately 98% of the U.S. equity market based on the market capitalization of the companies in the Russell 3000 Index. The Fund produced a total return, net of Expenses, of (9.01)% for the year ended December 31, 2000. By comparison, the Russell 3000 Index produced a return of (7.46)% for the same period. The Russell 3000 Index does not include any allowance for the fees that an investor would pay for investing in the stocks that comprise the index.
Intermediate Bond Fund
The Intermediate Bond Fund's investment objective is to achieve a total return from current income and capital appreciation by investing primarily in a diversified portfolio of fixed income securities. Contributions to the Fund are invested in the PIMCO Total Return Fund, a diversified fixed income open- end management investment company with a portfolio duration generally from three to six years. Prior to May 31, 2000, a portion of the Intermediate Bond Fund (approximately one-third) was invested to replicate the Lehman Brothers Government/Corporate Bond Index, which is composed of approximately 5,000 issues of fixed income securities, including U.S. government obligations and investment grade corporate bonds, each with an outstanding market value of at least $25 million and remaining maturity of greater than one year.
For the year ended December 31, 2000, the Intermediate Bond Fund experienced a total return, net of Expenses, of 11.61%. As a comparison, the Lehman Brothers Aggregate Bond Index produced a return of (11.85)% for the same period. The Lehman Brothers Aggregate Bond Index does not include an allowance for the fees that an investor would pay for investing in the securities that comprise the index.
International Equity Fund
The International Equity Fund's investment objective is to seek long-term growth of capital through investing primarily in common stocks of established non-U.S. companies. The Fund intends to diversify investments broadly among countries of the Far East and Europe, as well as in South Africa, Australia, Canada and other areas. The International Equity Fund will seek to achieve, over an extended period of time, total returns comparable to or superior to broad measures of the international (non-U.S.) stock market.
Approximately half of the assets of the International Equity Fund are invested in a separate collective trust portfolio managed by State Street. The remainder of the International Equity Fund is invested in the T. Rowe Price International Stock Fund.
For the year ended December 31, 2000, the International Equity Fund experienced a total return, net of Expenses, of (18.75)%. For the same period, the total return of the Morgan Stanley Capital International All-Country World Ex-U.S. Free Index (the "MSCI AC World Ex-U.S. Index") was (15.30)%. The MSCI AC World Ex-U.S. Index does not include an allowance for the fees that an investor would pay for investing in the securities that comprise the index.
As of December 31, 2000, the most heavily weighted countries in the T. Rowe Price International Stock Fund were the United Kingdom, Japan, and France. The securities representing the largest holdings based on market value were GlaxoSmithKline PLC, Nokia Corp., Royal Bank of Scotland Group PLC, Vodafone Group PLC and TotalFinaElf SA.
As of December 31, 2000, the most heavily weighted countries in the separately managed portion of the International Equity Fund were United Kingdom, Japan, and Switzerland. The securities
representing the largest holdings based on market value were Nokia Corp., Vodafone Group PLC, Munich Reinsurance and Tesco Corp.
Stable Asset Return Fund
The Stable Asset Return Fund invests primarily in investment contracts issued by insurance companies, banks or other financial institutions. The Stable Asset Return Fund also invests in high quality money market instruments, including obligations of the United States government, notes, bonds and similar debt instruments of corporations, commercial paper, certificates of deposit and time deposits, bankers' acceptances, variable and indexed interest notes and repurchase agreements.
For the year ended December 31, 2000, the Stable Asset Return Fund produced an annualized return, net of Expenses, of 6.27%. By comparison, the MFR Money Market Fund "Tier One" Average (the "MFR Average") for the year was 5.80%. The Fund's strong performance relative to the MFR Average is partly attributable to the longer average maturity of the Fund's portfolio.
Value Equity Fund
The Value Equity Fund seeks to outperform, over extended periods of time, broad measures of the domestic stock market. The Value Equity Fund invests primarily in common stocks of companies that State Street and its investment advisor consider undervalued. A portion of the Value Equity Fund (approximately 25%) is invested to replicate the Russell 1000 Value Index, which is composed of those Russell 1000 stocks with a greater than average value orientation. The remainder of the Value Equity Fund will remain actively managed.
For the year ended December 31, 2000, the Value Equity Fund experienced a total return, net of Expenses, of 3.92%. By comparison, the Russell 1000 Value Index produced a return of 7.01% for the same period. The Russell 1000 Value Index does not include an allowance for the fees that an investor would pay for investing in the securities that comprise the index.
The most heavily weighted sectors in the separately managed portion of the Value Equity Fund were finance, technology and consumer basics. Securities representing the largest holdings in the seperately managed portion of the Fund based on market value at December 31, 2000 included General Electric Company, Exxon Mobil Corp., Phillip Morris Inc., Cisco Systems Inc., and Citigroup Inc.
Structured Portfolio Service
The portfolios of the Structured Portfolio Service invest in the funds described above according to conservative, moderate and aggressive portfolio allocations. Funds in the Conservative Portfolio are allocated as follows: Stable Asset Return Fund, 30%; Intermediate Bond Fund, 35%; Value Equity Fund, 7%; Growth Equity Fund, 7%; Index Equity Fund, 14%; and International Equity Fund, 7%. Funds in the Moderate Portfolio are allocated as follows: Stable Asset Return Fund, 10%; Intermediate Bond Fund, 30%; Value Equity Fund, 11%; Growth Equity Fund, 11%; Index Equity Fund, 23%; and International Equity Fund, 15%. Funds in the Aggressive Portfolio are allocated as follows: Intermediate Bond Fund, 15%; Value Equity Fund, 15%; Growth Equity Fund, 15%; Index Equity Fund, 30%; Aggressive Equity Fund, 5%; and International Equity Fund, 20%.
For the year ended December 31, 2000, the Structured Portfolio Service experienced a total return, net of Expenses, of 2.47% for the Conservative Portfolio, (2.22)% for the Moderate Portfolio, and (6.88)% for the Aggressive Portfolio.
Item 8.
Item 8. Financial Statements and Supplementary Data.
See page.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
James S. Phalen. Mr. Phalen is the President and Chief Executive Officer of the Collective Trust, an Executive Vice President of State Street and Chairman and Chief Executive Officer of CitiStreet LLC, an affiliate of State Street. From June 1989 to August 1992, Mr. Phalen, age 50, served as the President of Boston Financial Data Services, a subsidiary of State Street.
Beth M. Halberstadt. Ms. Halberstadt is the Vice President and Chief Financial Officer of the Collective Trust and a Vice President of State Street. From September 1996 to January 1999, Ms. Halberstadt, age 36, was Vice President and Client Service Manager in Retirement Investment Services, a part of State Street Global Advisors, a division of State Street. From 1988 to 1996, Ms. Halberstadt was employed by Watson Wyatt as a defined contribution consultant advising on 401(k), ESOP, non-qualified and stock purchase plan issues.
Susan C. Daniels. Ms. Daniels is the Treasurer and Chief Accounting Officer of the Collective Trust and a Vice President of State Street. Prior to joining State Street, Ms. Daniels, age 43, was Vice President of Internal Control and Compliance at First Data Investor Services Group. From March 1990 to November 1993, Ms. Daniels was Director of Internal Audit at Boston Financial Data Services, a subsidiary of State Street.
Item 11.
Item 11. Executive Compensation.
The executive officers of the Collective Trust receive no direct remuneration from the Collective Trust, but do receive remuneration from State Street Bank and Trust Company, the trustee of the Collective Trust. For a description of fees received by State Street and others, see "Business-- Deductions and Fees."
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
State Street, as sole trustee of each of the American Bar Association Members Retirement Trust and the American Bar Association Members Pooled Trust for Retirement Plans, is the holder of record of all units of beneficial interests of each of the Funds. Neither State Street nor any executive officer of the Collective Trust beneficially owns any securities of the Collective Trust.
Item 13.
Item 13. Certain Relationships and Related Transactions.
See "Business--The Program" and "--Deductions and Fees" for information regarding certain relationships and transactions.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements.
See page for an index to the Financial Statements included in this report.
2. Financial Statement Schedules.
A Schedule of Investments for each of the Aggressive Equity Fund, the Balanced Fund, the Growth Equity Fund, the Stable Asset Return Fund and the Value Equity Fund is included in Item 8 of this report.
Item 14(b) Reports on Form 8-K.
Not Applicable.
Item 14(c) Exhibits.
- -------- * Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Boston, Commonwealth of Massachusetts, on March 30, 2001.
AMERICAN BAR ASSOCIATION MEMBERS/ STATE STREET COLLECTIVE TRUST By: /s/ James S. Phalen
----------------------------------- Name: James S. Phalen Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 30, 2001.
Signature Title
* Director of State Street Bank and Trust - ------------------------------------- Company Tenley E. Albright, M.D.
* Director of State Street Bank and Trust - ------------------------------------- Company I. MacAllister Booth
* Director of State Street Bank and Trust - ------------------------------------- Company James I. Cash, Jr.
* Director of State Street Bank and Trust - ------------------------------------- Company Truman S. Casner
* Director of State Street Bank and Trust - ------------------------------------- Company Nader F. Darehshori
* Director of State Street Bank and Trust - ------------------------------------- Company Arthur L. Goldstein
* Director of State Street Bank and Trust - ------------------------------------- Company David P. Gruber
Director of State Street Bank and Trust - ------------------------------------- Company Linda A. Hill
American Bar Association Members/State Street Collective Trust
Report of Independent Accountants
To the Trustee and Unitholders of the American Bar Association Members/ State Street Collective Trust
In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the selected per-unit data and ratios present fairly, in all material respects, the financial position of the Aggressive Equity Fund, Balanced Fund, Growth Equity Fund, Index Equity Fund, Intermediate Bond Fund, International Equity Fund, Stable Asset Return Fund, Value Equity Fund, Conservative Structured Portfolio Service, Moderate Structured Portfolio Service and Aggressive Structured Portfolio Service constituting the American Bar Association Members/State Street Collective Trust (hereafter referred to as the "Trust") at December 31, 2000, and the results of each of their operations, the changes in each of their net assets and the selected per-unit data and ratios for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and selected per-unit data and ratios (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP Boston, Massachusetts March 15, 2001
American Bar Association Members/State Street Collective Trust
Aggressive Equity Fund
Statement of Assets and Liabilities
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Equity Fund
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Equity Fund
Statements of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Equity Fund
Selected Per-Unit Data and Ratios
(For a unit outstanding throughout the period)
- ------- * Calculations prepared using the monthly average number of units outstanding during the period. ** Not annualized. *** Ratios annualized. + After reduction of expenses paid to State Street Bank as described in Note 3 of the accompanying financial statements. Had State Street Bank not undertaken such action, the annualized ratio of net expenses to average net assets would have been .81% for the years ended December 31, 1999 and 2000.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Equity Fund
Schedule of Investments
December 31, 2000
*Non-income producing security. **Collective investment fund advised by State Street Global Advisors. ADR An American Depositary Receipt (ADR) is a certificate issued by a U.S. bank representing the right to receive securities of the foreign issuer described. The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Statement of Assets and Liabilities
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Selected Per-Unit Data and Ratios
(For a unit outstanding throughout the period)
- ------- * Calculations prepared using the monthly average number of units outstanding during the period. ** Not annualized. *** Ratios annualized. + After reduction of expenses paid to State Street Bank as described in Note 3 of the accompanying financial statements. Had State Street Bank not undertaken such action, the annualized ratio of net expenses to average net assets would have been .60% and .59% for the years ended December 31, 1999 and 2000, respectively.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Balanced Fund
Schedule of Investments
December 31, 2000
(A)Valuable rate security. The rate shown reflects currently in effect.
ADR An American Depositary Receipt (ADR) is a certificate issued by a U.S. bank representing the right to receive securities of the foreign issuer described.
TBA To be announced (TBA) securities are purchased (sold) on a forward commitment basis with an approximate principal amount and no definite maturity. The actual principal amount and maturity date will be determined upon settlement.
*Non-income producing security.
**Collective investment fund advised by State Street Global Advisers.
*** Security is exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional investors. The total cost and market value of Rule 144A securities owned at December 31, 2000 were $14,738,937 and $13,177,308, respectively. The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Statement of Assets and Liabilities
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Selected Per-Unit Data and Ratios
(For a unit outstanding throughout the period)
- ------- * Calculations prepared using the monthly average number of units outstanding during the period. ** Not annualized. *** Ratio annualized. + After reduction of expenses paid to State Street Bank as described in Note 3 of the accompanying financial statements. Had State Street Bank not undertaken such action, the annualized ratio of net expenses to average net assets would have been .59% and .58% for the years ended December 31, 1999 and 2000, respectively.
Note: State Street Bank approved a 10-for-1 split of the units of the Growth Equity Fund, which was effective February 2, 2001. Selected per-unit data have been restated to reflect the split.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Growth Equity Fund
Schedule of Investments
December 31, 2000
- -------- * Non-income producing security. ** Collective investment fund advised by State Street Global Advisors. # Collateral for margin requirements on open futures contracts. ADR An American Depositary Receipt (ADR) is a certificate issued by a U.S. bank representing the right to receive securities of the foreign issuer described. The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Index Equity Fund
Statement of Assets and Liabilities
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Index Equity Fund
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Index Equity Fund
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Index Equity Fund
Selected Per-Unit Data and Ratios
(For a unit outstanding throughout the period)
- -------- * Calculations prepared using the monthly average number of units outstanding during the period. ** Zero amounts round to less than .005 per unit. *** Reflects purchases and sales of units of the collective investment funds in which the Fund invests rather than the turnover of the underlying portfolios of such collective investments funds. + Not annualized. ++ After reduction of expenses paid to State Street Bank as described in Note 3 of the accompanying financial statements. Had State Street Bank not undertaken such action, the annualized ratio of net expenses to average net assets would have been .37% for the years ended December 31, 1999 and 2000. +++ Ratios annualized.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Intermediate Bond Fund
Statement of Assets and Liabilities
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Intermediate Bond Fund
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Intermediate Bond Fund
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Intermediate Bond Fund
Selected Per-Unit Data and Ratios
(For a unit outstanding throughout the period)
- -------- * Calculations prepared using the monthly average number of units outstanding during the period. ** Ratios annualized. *** Reflects purchases and sales of shares of the registered investment companies in which the Fund invests rather then the turnover of the underlying portfolios of such registered investment companies. + Not annualized. ++ The registered investment companies in which the Fund invests pay asset management and administration fees to their investment advisors. These fees are not included in per-unit net expenses or the ratio of net expenses to average net assets. +++ After reduction of expenses paid to State Street Bank as described in Note 3 of the accompanying financial statements. Had State Street Bank not undertaken such action, the annualized ratio of net expenses to average net assets would have been .37% and .36% for the years ended December 31, 1999 and 2000, respectively.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
International Equity Fund
Statement of Assets and Liabilities
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
International Equity Fund
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
International Equity Fund
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
International Equity Fund
Selected Per-Unit Data and Ratios
(For a unit outstanding throughout the period)
- -------- * Calculations prepared using the monthly average number of units outstanding during the period. ** Ratios annualized. *** Prior to January 1, 2000, reflects purchase and sale of the registered investment company in which the fund invested rather than the turnover of the underlying portfolio of the registered investment company. + Not annualized. ++ The registered investment company in which the Fund invests pays asset management and administration fees to its advisor. This fee is not included in per-unit net expenses or the ratio of net expenses to average net assets. +++ After reduction of expenses paid to State Street Bank and an administrative service credit from T. Rowe Price International as described in Note 3 of the accompanying financial statements. Had State Street Bank and T. Rowe Price International not undertaken such action, the annualized ratio of net expenses to average net assets would have been .54%, .48%, .37% and .49% for the years ended December 31, 1997, 1998, 1999 and 2000, respectively.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
International Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
International Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
International Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
International Equity Fund
Schedule of Investments
December 31, 2000
- -------- * Non-income producing security. ** Collective investment fund advised by State Street Global Advisors. ADR An American Depositary Receipt (ADR) is a certificate issued by a U.S bank representing the right to receive securities of the foreign issuer described. The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Statement of Assets and Liabilities
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Selected Per-Unit Data and Ratios
(For a unit outstanding throughout the period)
- ------- * After reduction of expenses paid to State Street Bank as described in Note 3 of the accompanying financial statements. Had State Street Bank not undertaken such action, the annualized ratio of net expenses to average net assets would have been .38% and .37% for the years ended December 31, 1999 and 2000, respectively.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2000
- -------- (a) Stable Asset Return Fund holds 99.18% of SAFT which holds the following investments:
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Stable Asset Return Fund
Schedule of Investments
December 31, 2000 - -------- * Synthetic investment contracts represent individual assets placed in a trust with ownership by the fund. A third party issues a wrapper contract that guarantees owners can, and must execute transactions at contract value. Individual assets of the synthetic contracts are valued at representative quoted market prices. The wrapper is valued as the difference between the fair value of the assets and contract value of the investment contract. ** Collective investment fund advised by State Street Global Advisors. + Represents evergreen contract with periodic resets of crediting rate with no stated book value maturity. The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Value Equity Fund
Statement of Assets and Liabilities
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Value Equity Fund
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Value Equity Fund
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Value Equity Fund
Selected Per-Unit Data and Ratios
(For a unit outstanding throughout the period)
- -------- * Calculations prepared using the monthly average number of units outstanding during the period. ** Ratios annualized. *** Not annualized. + After reduction of expenses paid to State Street Bank as described in Note 3 of the accompanying financial statements. Had State Street Bank not undertaken such action, the annualized ratio of net expenses to average net assets would have been .68% and .63% for the years ended December 31, 1999 and 2000, respectively. ++ With respect to the portion of the Fund's assets invested in a collective investment fund in 2000, reflects purchases and sales of units of the collective investment fund rather than the turnover of the underlying portfolio of such collective investment fund.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Value Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Value Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Value Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Value Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Value Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Value Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Value Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Value Equity Fund
Schedule of Investments
December 31, 2000
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Value Equity Fund
Schedule of Investments
December 31, 2000
- -------- * Non-income producing security ** Collective investment fund advised by State Street Global Advisors. ADR An American Depositary Receipt (ADR) is a certificate issued by a U.S bank representing the right to receive securities of the foreign issuer described. The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Conservative Structured Portfolio Service
Statement of Assets and Liabilities
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Conservative Structured Portfolio Service
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Conservative Structured Portfolio Service
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Conservative Structured Portfolio Service
Selected Per-Unit Data and Ratios
(For a unit outstanding throughout the period)
- -------- * Calculations prepared using the monthly average number of units outstanding during the period. ** Ratios annualized. *** Reflects purchases and sales of units of the funds in which the Portfolio invests rather than turnover of such underlying funds. + Not annualized.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Moderate Structured Portfolio Service
Statement of Assets and Liabilities
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Moderate Structured Portfolio Service
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Moderate Structured Portfolio Service
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Moderate Structured Portfolio Service
Selected Per-Unit Data and Ratios
(For a unit outstanding throughout the period)
- -------- * Calculations prepared using the monthly average number of units outstanding during the period. ** Ratios annualized. *** Reflects purchases and sales of units of the funds in which the Portfolio invests rather than turnover of such underlying funds. + Not annualized.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Structured Portfolio Service
Statement of Assets and Liabilities
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Structured Portfolio Service
Statement of Operations
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Structured Portfolio Service
Statement of Changes in Net Assets
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Aggressive Structured Portfolio Service
Selected Per-Unit Data and Ratios
(For a unit outstanding throughout the period)
- -------- * Calculations prepared using the monthly average number of units outstanding during the period. ** Ratios annualized. *** Reflects purchases and sales of units of the funds in which the Portfolio invests rather than turnover of such underlying funds. + Not annualized.
The accompanying notes are an integral part of these financial statements.
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements
1. Description of the Trust
American Bar Association Members/State Street Collective Trust (the "Trust") was organized on August 8, 1991 under a Declaration of Trust, as amended and restated on December 5, 1991 and as amended thereafter. State Street Bank and Trust Company ("State Street Bank") acts as trustee for the Trust. The Trust is maintained exclusively for the collective investment monies administered on behalf of participants in the American Bar Association Members Retirement Program. Eight separate collective investment Funds (the "Funds") and the Structured Portfolio Service (the "Portfolios") are established under the Trust. The Structured Portfolio Service offers three approaches to diversifying investments by selecting various allocations among the Funds. The Funds and Portfolios are investment options under the American Bar Association Members Retirement Program (the "Program") which is sponsored by the American Bar Retirement Association ("ABRA"). The objectives and principal strategies of the Funds and Portfolios are as follows:
Aggressive Equity Fund--long term growth of capital through investment in common stocks of small to medium sized companies believed to have strong appreciation potential.
Balanced Fund--current income and long-term capital appreciation through investment in common stocks, other equity-type securities and debt securities.
Growth Equity Fund--long term growth of capital and some dividend income through investment in common stocks and equity-type securities of large, well established companies.
Index Equity Fund--replication of the total return of the Russell 3000 Index. Currently invests in the State Street Bank Russell 3000 Index Securities Lending Fund (the "Russell Fund"), a separate State Street Bank collective investment fund. The Russell Fund invests in securities contained in the Russell 3000 Index. Prior to May 18, 2000, the Fund invested in the State Street Bank Russell 3000 Non-Lending Fund.
Intermediate Bond Fund--total return from current income and capital appreciation through investment in debt securities. Currently invests in the PIMCO Total Return Fund (the "Total Return Fund"), a registered investment company. The Total Return Fund invests primarily in intermediate-term investment grade bonds. Prior to May 31, 2000, the Fund invested in both the Total Return Fund and the Barclay's Global Investors Bond Index Fund (the "Bond Index Fund"), a registered investment company. The Bond Index Fund invests in high-grade bonds denominated in U.S. dollars replicating the Lehman Brothers Government/Composite Bond Index.
International Equity Fund--long term growth of capital through investment in common stocks and other equity securities of established non-U.S. companies. Currently invests in international equities and the T. Rowe Price International Stock Fund, a registered investment company, which invests worldwide primarily in well-established, non-U.S. companies. Prior to May 31, 2000, the Fund invested solely in the T. Rowe Price International Stock Fund.
Stable Asset Return Fund ("SARF")--current income consistent with preserving principal and maintaining liquidity through investment in high quality money market instruments and investment contracts of insurance companies, banks and financial institutions. Currently invests in the State Street Bank ABA Members/Pooled Stable Asset Fund Trust ("SAFT"), a separate State Street Bank collective investment fund. SAFT invests in investment contracts of insurance companies, banks and financial institutions and in the State Street Bank Yield Enhanced Short Term Investment Fund, a separate State Street Bank collective investment fund.
Value Equity Fund--long term growth of capital and dividend income through investment in common stocks, primarily of large capitalization companies believed to be undervalued. Currently invests in common stocks and, effective May 31, 2000, the State Street Bank and Trust Company
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements--(Continued) Russell 1000 Value Index Securities Lending Fund, (the "Value Fund") a separate State Street Bank collective investment fund. The Value Fund invests in securities contained in the Russell 1000 Index.
Structured Portfolio Service
Conservative--higher current investment income and some capital appreciation.
Moderate--high current investment income and greater capital appreciation.
Aggressive--long term growth of capital and lower current investment income.
Each Structured Portfolio Service achieves its objective through a pre- determined investment allocation in the Funds. See the Statement of Assets and Liabilities of each portfolio for Fund allocation at December 31, 2000.
The Trust may offer and sell an unlimited number of units representing interests in separate Funds and Portfolios of the Trust, each unit to be offered and sold at the per unit net asset value of the corresponding Fund or Portfolio.
State Street Bank serves as trustee of the Trust and has assumed responsibility for administering and providing investment options for the Program. State Street Bank is a trust company established under the laws of The Commonwealth of Massachusetts and is a wholly-owned subsidiary of State Street Corporation, a Massachusetts corporation and a holding company registered under the Federal Bank Holding Company Act of 1956, as amended.
State Street Bank is responsible for certain recordkeeping and administrative services required by the Program. In addition, State Street Bank provides account and investment information to employers and participants, receives all plan contributions, effects investment and transfer transactions and distributes all benefits provided by the plans to the participants or, in the case of some individually designed plans, to the trustees of such plans.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies consistently followed by the Trust in the preparation of its financial statements. The policies are in accordance with accounting principles generally accepted in the United States of America and provisions of the Trust agreement:
A. Security Valuation
Stable Asset Return Fund: It is the Trust's policy to attempt to maintain a constant price of $1.00 per unit for SARF. SARF invests in a State Street Bank collective investment fund (SAFT) whose investments include insurance company, bank and financial institution investment contracts and short-term investments. Consistent with this objective, the short-term portfolio instruments of the collective investment fund are valued on the basis of amortized cost, which approximates fair value. Amortized cost involves valuing an instrument initially at its cost and thereafter assuming 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. The insurance company, bank and financial institution investment contracts are maintained at contract value (cost plus accrued interest) which approximates fair value. The values of investments in collective investment funds are based on the net asset value of the respective collective investment fund.
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements--(Continued)
Other Funds: Stocks listed on national securities exchanges and certain over-the-counter issues traded on the Nasdaq National Market (NASDAQ) are valued at the last sale price, or, if no sale, at the latest available bid price. Other unlisted stocks reported on the NASDAQ system are valued at quoted bid prices.
Foreign securities not traded directly or in American Depositary Receipt (ADR) form in the United States are valued in the local currency at the last sale price on the respective exchange. Foreign currency is converted into its U.S. dollar equivalent at current exchange rates.
United States Treasury securities and other obligations issued or guaranteed by the United States Government, its agencies or instrumentalities are valued at representative quoted prices.
Long-term publicly traded corporate bonds are valued at prices obtained from a bond pricing service of a major dealer in bonds when such prices are available. If not valued by a pricing service, such securities are valued at prices obtained from independent brokers. Convertible bonds and unlisted convertible preferred stocks are valued at bid prices obtained from one or more major dealers in such securities; where there is a discrepancy between dealers, values may be adjusted based on recent discount spreads to the underlying common stock.
Investments with prices that cannot be readily obtained, if any, are carried at fair value as determined in good faith under consistently applied procedures established by and under the supervision of the Trustee.
The values of investments in collective investment funds and registered investment companies are based on the net asset value of the respective collective investment fund or registered investment company.
Futures contracts are valued at the last settlement price at the end of each day on the board of trade or exchange upon which they are traded.
The accounting records of the International Equity Fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income and expenses are translated into U.S. dollars at the prevailing exchange rate on the respective dates of the transactions.
Reported net realized gains and losses on foreign currency transactions represent net gains and losses from disposition of foreign currencies, currency gains and losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of net investment income accrued and the U.S. dollar amount actually received. The effects of changes in foreign currency exchange rates on investments in securities are not segregated in the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investments in securities.
B. Security Transactions and Related Investment Income
Security transactions are accounted for on the trade date (date the order to buy or sell is executed). Interest income is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Interest income is increased by accretion of discount and reduced by amortization of premium. Realized gains and losses are reported on the basis of identified cost of securities delivered.
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements--(Continued) A Fund's portfolio of investments may include securities purchased on a when issued basis, which may be settled in the month after the issue date. Interest income is not accrued until the settlement date.
C. Income Taxes
State Street Bank, on behalf of the Trust, has received a favorable determination letter dated March 9, 1992, from the Internal Revenue Service, which concluded that the Trust is a trust arrangement described in Rev. Rule. 81-100, 1981, C.B. 326 and exempt from federal income tax pursuant to Section 501(a) of the Internal Revenue Code. Accordingly, no provision for Federal income taxes is required.
D. Distributions to Participants
Stable Asset Return Fund: As of the close of business on each daily valuation date, all net investment income is allocated among the unitholders in proportion to the number of units held by each unitholder in the fund and is reinvested on behalf of each such unitholder in new units.
All Other Funds: Pursuant to the Declaration of Trust, the funds are not required to distribute their net investment income or gains from the sale of portfolio investments.
E. Sales and Redemptions of Units of Participation
The units offered represent interests in the Funds and Portfolios established under the Trust. The Trust may offer and sell an unlimited number of registered units, each unit to be offered and sold daily at the respective Fund's and Portfolio's net asset value.
F. TBA Commitments and Roll Transactions
The Balanced Fund may enter into TBA (to be announced) commitments to purchase securities for a fixed unit price at a future date beyond customary settlement time. Although the unit price for a TBA has been established, the principal value has not been finalized. However, the amount of the TBA commitment will not fluctuate more than 1.0% from the principal amount. The Balanced Fund holds, and maintains until the settlement date, cash or liquid securities in an amount sufficient to meet the purchase price. TBA commitments may be considered securities in themselves, and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of the Balanced Fund's other assets. Risks may also arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts. Unsettled TBA commitments are valued at the current market value of the underlying securities, generally according to the procedures under "Security Valuation" above. The Balanced Fund may dispose of a commitment prior to settlement if the Balanced Fund's advisor deems it appropriate to do so. Upon settlement date, the Balanced Fund may take delivery of the securities or defer (roll) the delivery to the next month.
G. Futures Contracts
A portion of the Growth Equity Fund (approximately 25%) is invested to replicate the Russell 1000 Growth Index. The index portion of the Growth Equity Fund may use, on a limited basis, futures contracts to manage exposure to the equity market and as a substitute for comparable market positions in the securities held by the Fund (with respect to the portion of its portfolio that is held in cash items).
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements--(Continued) Buying futures tends to increase a fund's exposure to the underlying instrument. Selling futures tends to decrease a fund's exposure to the underlying instrument, or hedge other investments. Futures contracts involve, to varying degrees, credit and market risks.
The Fund enters into futures contracts only on exchanges or boards of trades where the exchange or board of trade acts as the counterparty to the transaction. Thus, credit risk on such transactions is limited to the failure of the exchange or board of trade. Losses in value may arise from changes in the value of the underlying instruments or if there is an illiquid secondary market for the contracts. In addition, there is the risk that there may not be an exact correlation between a futures contract and the underlying index.
Upon entering into a futures contract, the Fund is required to deposit either in cash or securities an amount ("initial margin") equal to a certain percentage of the nominal value of the contract. Subsequent payments are made or received by the Fund periodically, depending on the daily fluctuation in the value of the underlying securities, and are recorded as unrealized gains or losses by the Fund. A gain or loss is realized when the contract is closed or expires.
A summary of obligations under these financial instruments at December 31, 2000 is as follows:
At December 31, 2000, the Growth Equity Fund had assigned a U.S. Treasury Bill to Banker's Trust to cover margin requirements on any open futures contracts.
H. Use of Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
3. Investment Advisory, Investment Management and Related Party Transactions
State Street Bank has retained the services of Capital Guardian Trust Company, a wholly-owned subsidiary of The Capital Group Companies, Inc., Dresdner RCM Global Investors LLC, the institutional investment management area of Dresdner Bank Group, Sit Investment Associates, Inc., Miller Anderson & Sherrerd, a wholly owned subsidiary of Morgan Stanley Asset Management Holdings, Inc., Lincoln Capital Management Company, Alliance Capital Management L.P.'s Bernstein Investment Research and Management Unit, and Bankers Trust Company, a wholly-owned subsidiary of Deutsche Bank AG, to advise it with respect to its investment responsibility and has allocated the assets of certain of the Funds among the investment advisors. Each investment advisor recommends to State Street Bank investments and reinvestments of the assets allocated to it in accordance with the investment policies of the respective Fund as described above. State Street Bank exercises discretion with respect to the selection and retention of the investment advisors and may remove, upon consultation with ABRA, an investment advisor at any time.
A fee is paid to each investment advisor for certain of the funds based on the value of the assets allocated to that investment advisor and the respective breakpoints agreed to in the contract. These fees are accrued on a daily basis and paid monthly from the assets. Fee rate ranges based on the respective breakpoints are as follows:
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements--(Continued)
-------- * Subject to a 5% fee reduction based on aggregate fees. ** Minimum fee of $75,000.
T. Rowe Price International, manager of the T. Rowe Price International Stock Fund, pays a .10% administrative service credit based on investment value to the International Equity Fund. The International Equity Fund received $80,083 relating to this fee for the year ended December 31, 2000.
A separate program fee ("Program fee") is paid to each of State Street Bank and ABRA. These fees are allocated to each Fund based on net asset value and is accrued on a daily basis and paid monthly from the assets of the Funds. The ABRA Program fee is based on the value of Program assets based on the following annual rates:
ABRA received Program fees of $1,709,757 for the year ended December 31, 2000.
The State Street Program fee is calculated monthly as one-twelfth of the sum of (a) $750,000 plus (b) $191 multiplied by the number of participants in the Program, as further defined in the agreement. A portion of the State Street Bank Program fee is reduced each year based on the amount of retirement plan assets held by State Street Bank on behalf of law firm and law-related clients identified by State Street Bank and ABRA that do not participate in the Program. The amount of the reduction is equal to .02% of the first $50 million of assets in such plans during the preceding year and .01% of any assets in excess of $50 million. The reduction for the year ended December 31, 2000 totaled $76,210 and is allocated to each Fund based on net asset value.
A fee is paid to State Street Bank for its trustee, management and administration of the assets in the Funds. This fee is accrued on a daily basis and paid monthly from the assets of the Funds at the following annual rates:
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements--(Continued) State Street Bank received trustee, management and administration fees which aggregated $2,856,538 for the year ended December 31, 2000. These fees are allocated to each Fund based on net asset value.
The Portfolios are not charged a separate annual fee.
4. Purchases and Sales of Securities
The aggregate cost of purchases and proceeds from sales of securities excluding U.S. Government and short-term investments were as follows:
The aggregate cost of purchases and proceeds from sales of U.S. Government securities were as follows:
5. Offering Costs
Registration fees of $556,000 were incurred in December 1998 for the registration for sale of additional units. These fees have been allocated between the Funds based on net asset value and were amortized over the expected period of sale of the units (two years). Registration fee expense for the year ended December 31, 2000 includes amortization of prior years deferred registration fees and current year registration fees paid. There were no registration fees allocated to the Portfolios.
6. Geographic and Industry Concentration
American Depositary Receipts ("ADR's") represent ownership of foreign securities on deposit with a domestic custodian bank. Certain Funds maintain investments in ADRs, which involve special risks. These securities may be subject to foreign government taxes that reduce their attractiveness. Other risks of investing in such securities include political or economic instability in the country involved the difficulty of predicting international trade patterns and the possibility of the imposition of exchange controls. Foreign issuers generally are not subject to uniform accounting, auditing and financial reporting standards comparable to those applicable to domestic issuers. There is generally less
American Bar Association Members/State Street Collective Trust
Notes to Financial Statements--(Continued) regulation of stock exchanges, brokers, banks and companies abroad than in the United States. With respect to certain foreign countries, there is a possibility of expropriation or diplomatic developments, which could adversely affect investment in these countries. ADRs do not lessen the risk of investing in foreign issuers; however, by investing in ADRs rather than directly in foreign issuers' stock, the Funds will avoid currency risks during the settlement period for purchases or sales. In addition, the domestic market for ADRs may be more liquid than the foreign market for the underlying securities.
A significant portion of the Aggressive Equity Fund's investments are in securities of small to medium-sized companies, which typically have greater market and financial risk than larger, more diversified companies. These companies are often dependent on one or two products in rapidly changing industries and may be more vulnerable to competition from larger companies with greater resources and to economic conditions that affect their market sector.
SARF invests in a collective investment fund that maintains investments in contracts issued by insurance companies. The issuing institution's ability to meet its contractual obligations under the respective contracts may be affected by future economic and regulatory developments in the insurance industry.
7. Growth Equity Fund Split
State Street Bank approved a 10-for-1 split of the units of the Growth Equity Fund, which was effective February 2, 2001. Selected per-unit data, shares outstanding, and unit activity have been restated to reflect the split.
EXHIBIT INDEX
- -------- * Filed herewith