Registration No. 333-____
As filed with the Securities and Exchange Commission on January 30, 1997
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. __ [ ] Post-Effective Amendment No. __
----------------------
STATE STREET RESEARCH FINANCIAL TRUST
(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111-2690
(Address of Principal Executive Offices)
(617) 482-3920
(Registrant's Telephone Number, including Area Code)
Francis J. McNamara, III, Esq.
Executive Vice President, Secretary and General Counsel
State Street Research & Management Company
One Financial Center
Boston, Massachusetts 02111-2690
(Name and Address of Agent for Service)
Copies of Communications to:
Geoffrey R.T. Kenyon, Esq.
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109-2881
----------------------
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
It is proposed that this filing will become effective March 3, 1997 pursuant to
Rule 488 under the Securities Act of 1933, as amended.
----------------------
Pursuant to Rule 24f-2(a)(1) under the Investment Company Act of 1940,
as amended, the Registrant previously has filed a declaration registering an
indefinite number of shares of beneficial interest on Form N-1A (Registration
Nos. 33-10327, 811-4911). Accordingly, no filing fee is due in connection with
this Registration Statement. A copy of the Registrant's earlier Declaration
pursuant to Rule 24f-2 is filed herewith as an exhibit. On or about December 20,
1996, the Registrant filed the notice required by Rule 24f-2 for its fiscal year
ended October 31, 1996. Pursuant to Rule 429, this Registration Statement
relates to the above-referenced Registration Statement on Form N-1A.
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<PAGE>
STATE STREET RESEARCH FINANCIAL TRUST
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following pages and documents:
Front Cover
Contents of Registration Statement
Cross-Reference Sheet
Letter to Shareholders of State Street Research International Fixed Income
Fund
Notice of Special Meeting of Shareholders of State Street Research
International Fixed Income Fund
Part A - Joint Proxy Statement/Prospectus Concerning Acquisition of the
Assets of State Street Research International Fixed Income Fund
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
(i)
<PAGE>
STATE STREET RESEARCH FINANCIAL TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 481(a)
Part A
Caption or Location in Joint
Form N-14 Item No. and Caption Proxy Statement/Prospectus
- --------------------------------------------------------------------------------
1. Beginning of Registration Statement Cover Page; Cross Reference Sheet
and Outside Front Cover Page of
Prospectus
2. Beginning and Outside Back Table of Contents
Cover Page of Prospectus
3. Synopsis and Risk Factors Summary; Risk Factors; Comparison of
Investment Objectives and Policies
4. Information about the Transaction Summary; Reasons for the
Reorganization; Information About the
Reorganization; Comparative
Information on Shareholder Rights;
Exhibit A (Agreement and Plan of
Reorganization and Liquidation)
5. Information about the Registrant Cover Page; Summary; Information
About the Reorganization; Comparison
of Investment Objectives and
Policies; Performance; Comparative
Information on Shareholder Rights;
Management; Additional Information
About The Funds; Prospectus of State
Street Research Government Income
Fund dated March 1, 1997
6. Information about the Company Summary; Information About the
Being Acquired Reorganization; Comparison of
Investment Objectives and Policies;
Comparative Information on
Shareholder Rights; Additional
Information About The Funds;
Prospectus of State Street Research
International Fixed Income Fund dated
March 1, 1997
7. Voting Information Summary; Information About the
Reorganization; Comparative
Information on Shareholder Rights;
Voting Information
8. Interest of Certain Persons Information About the Reorganization
and Experts
9. Additional Information Required Not Applicable
for Reoffering By Persons Deemed
to be Underwriters
(ii)
<PAGE>
Caption or Location in Joint
Form N-14 Item No. and Caption Proxy Statement/Prospectus
- --------------------------------------------------------------------------------
Part B
10. Cover Page Cover Page
11. Table of Contents Cover Page
12. Additional Information about the Cover Page; Statement of Additional
Registrant Information of State Street Research
Government Income Fund dated March 1,
1997
13. Additional Information about the Cover Page; Statement of Additional
Company Being Acquired Information of State Street Research
International Fixed Income Fund dated
March 1, 1997
14. Financial Statements Statement of Additional Information
of State Street Research Government
Income dated March 1, 1997; Statement
of Additional Information of State
Street Research International Fixed
Income Fund dated March 1, 1997
(iii)
<PAGE>
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
a series of
State Street Research Portfolios, Inc.
One Madison Avenue
New York, New York 10010
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders
of State Street Research International Fixed Income Fund (the "Acquired Fund" or
a "Fund"), a series of State Street Research Portfolios, Inc. (the "Company"),
to be held at One Financial Center, Boston, MA 02111 on [_____________], 1997
at [_____] local time.
At this important meeting, you will be asked to consider and approve an
Agreement and Plan of Reorganization and Liquidation between the Acquired Fund
and State Street Research Government Income Fund (the "Acquiring Fund" or a
"Fund"), a series of State Street Research Financial Trust (the "Trust").
If the proposal is approved by the shareholders of the Acquired Fund,
the Acquiring Fund would acquire substantially all of the assets and certain
liabilities of the Acquired Fund. As a result of this transaction, you would
receive, in exchange for your shares of the Acquired Fund, shares of the
corresponding class of the Acquiring Fund with an aggregate value equivalent to
the aggregate net asset value of your Acquired Fund investment at the time of
the transaction. The transaction is conditioned upon the receipt of an opinion
of counsel to the effect that the transaction would be free from Federal income
taxes to you, the Company, the Trust, and both Funds.
The Board of Directors of the Company has determined that the proposed
reorganization should provide benefits to shareholders of the Acquired Fund
because of the enhanced economies of scale and more efficient operations which
are expected to result from combining the Funds, given their investment
objectives and policies, and the similarity of the services and privileges for
the shareholders and the pricing structure of the Funds.
I thank you for your participation as a shareholder and urge you to
exercise your right to vote by completing, dating and signing the enclosed proxy
card. A self-addressed, postage-paid envelope has been enclosed for your
convenience. We look forward to receiving your vote.
IT IS VERY IMPORTANT THAT YOUR VOTING INSTRUCTIONS BE RECEIVED NO LATER
THAN _____________, 199[_].
Instructions for shares held of record in the name of a nominee, such
as a broker-dealer, may be subject to earlier cut-off dates established by such
intermediaries to facilitate a timely response.
Sincerely,
Jeffrey J. Hodgman
Chairman of the Board,
President and Chief Executive Officer
<PAGE>
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
a series of
State Street Research Portfolios, Inc.
One Madison Avenue
New York, New York 10010
---------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held On ____________, 1997
---------------------------------
A Special Meeting of Shareholders of State Street Research
International Fixed Income Fund (the "Acquired Fund"), a portfolio series of
State Street Research Portfolios, Inc. (the "Company"), a Maryland corporation,
will be held at One Financial Center, Boston, MA 02111 on ___________, 1997 at
________ local time (the "Meeting") for the following purposes:
1. To consider and act upon an Agreement and Plan of Reorganization and
Liquidation providing for the transfer of the assets of the Acquired Fund
(subject to certain of its liabilities) to State Street Research Government
Income Fund (the "Acquiring Fund") in exchange for Class A, Class B, Class C and
Class D shares of the Acquiring Fund, the distribution of such shares to
shareholders of the Acquired Fund and the subsequent liquidation and dissolution
of the Acquired Fund; and
2. To consider and act upon any matter incidental to the foregoing and
to transact such other business as may properly come before the Meeting and any
adjournments thereof.
The close of business on _____________, 1997 has been fixed as the
record date for the determination of shareholders entitled to notice of, and to
vote at, the Meeting and any adjournments thereof.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE SIZE OF YOUR HOLDINGS IN THE
ACQUIRED FUND. WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE
COMPLETE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE, WHICH NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU DESIRE
TO VOTE IN PERSON AT THE MEETING, YOU MAY REVOKE YOUR PROXY.
By Order of the Directors,
Patricia S. Worthington
Secretary
___________, 1997
<PAGE>
QUESTIONS AND ANSWERS
Q: Why is this material being sent to shareholders and what are they supposed
to do with it?
A: This material is being sent to shareholders of the International Fixed
Income Fund to ask them to vote on an important recommendation by the
Directors of the Fund that will affect their interest in the Fund. You
should read the material, mark your vote on the enclosed Proxy Form and
send it back. Call 1-800-562-0032 for help with your questions.
Q: What is the recommendation in Proposal 1?
A: Proposal 1 is asking shareholders of the International Fixed Income
Fund to, in effect, change to another mutual fund. Shares of the
International Fixed Income Fund will be exchanged for shares of the
Government Income Fund. This transaction is being proposed because, in
the current competitive environment, the International Fixed Income
Fund is too small to manage effectively; its expenses have been
subsidized since its inception, but the subsidy could be discontinued
in the future; and shareholders may benefit from the kind of portfolio
and larger asset base that the Government Income Fund has. The
Directors recommend that you vote FOR the proposal.
- -------------------------------------------------------------------------------
Important additional information about the proposal is set forth in the
accompanying Joint Proxy Statement/Prospectus. Please read it carefully.
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<PAGE>
Joint Proxy Statement/Prospectus
Concerning the Acquisition of the Assets of
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
a series of
State Street Research Portfolios, Inc.
One Madison Avenue
New York, New York 10010
(212) 578-7611
By and in Exchange for Shares of
STATE STREET RESEARCH GOVERNMENT INCOME FUND
a series of
State Street Research Financial Trust
One Financial Center
Boston, Massachusetts 02111
(800) 562-0032
This Joint Proxy Statement/Prospectus relates to the proposed transfer
of the assets and certain liabilities of State Street Research International
Fixed Income Fund (the "Acquired Fund"), a series of State Street Research
Portfolios, Inc., a Maryland corporation (the "Company"), to State Street
Research Government Income Fund (the "Acquiring Fund"), a series of State Street
Research Financial Trust, a Massachusetts business trust (the "Trust"), in
exchange for Class A, Class B, Class C and Class D shares of beneficial
interest, $.001 par value per share, of the Acquiring Fund ("Acquiring Fund
Shares"). Following such transfer, Acquiring Fund Shares will be distributed to
shareholders of the Acquired Fund in liquidation of the Acquired Fund, and the
Acquired Fund will be dissolved. As a result of the proposed transaction, each
Acquired Fund shareholder will receive in exchange for his or her shares of the
Acquired Fund shares of the corresponding class of the Acquiring Fund with an
aggregate value equal to the value of such shareholder's shares of the Acquired
Fund, calculated as of the close of business on the business day immediately
prior to the exchange.
This Joint Proxy Statement/Prospectus is furnished to the shareholders
of the Acquired Fund in connection with the solicitation of proxies by and on
behalf of the Company's Board of Directors to be used at a Special Meeting of
Shareholders of the Acquired Fund to be held at One Financial Center, Boston, MA
02111 at [_____] local time on [________], 1997 and at any adjournment thereof
(the "Meeting"). This document also serves as a Prospectus of the Acquiring Fund
and covers the proposed issuance of Acquiring Fund Shares. The Acquired Fund and
the Acquiring Fund may hereinafter be referred to collectively as the "Funds"
and individually as a "Fund." The Board of Directors of the Company may
hereinafter be referred to as the "Board of Directors," and the Board of
Trustees of the Trust may hereinafter be referred to as the "Board of Trustees."
The investment objective of the Acquiring Fund, a diversified series of
the Trust, an open-end management investment company, is to seek high current
income. In seeking to achieve its investment objective, the Acquiring Fund
invests primarily in U.S. Government securities. The Acquiring Fund may also
invest in mortgage-related securities of private entities, which are
collateralized or supported by the U.S. Government or its agencies or
instrumentalities, and in securities of foreign issuers, such as foreign
corporate, government or governmental agencies as described below.
This Joint Proxy Statement/Prospectus, which should be retained for
future reference, sets forth concisely the information that a shareholder of the
Acquired Fund should know before investing. This Joint Proxy
Statement/Prospectus is accompanied by the Prospectus of the Acquiring Fund
dated March 1, 1997, which is incorporated by reference herein. A Statement of
Additional Information dated [_________], 1997, which contains additional
information relevant to the proposed transaction, has been filed with the
Securities and Exchange Commission (the "Commission") and is incorporated by
reference into this Joint Proxy Statement/Prospectus. A copy of such Statement
of Additional Information may be obtained without charge by writing to State
Street
<PAGE>
Research Investment Services, Inc., One Financial Center, Boston, Massachusetts
02111 or by calling toll free (800) 562-0032. The Prospectus of the Acquired
Fund dated March 1, 1997 is incorporated by reference herein. A copy of the
Prospectus of the Acquired Fund, including supplements, may be obtained without
charge by writing to State Street Research Investment Services, Inc., One
Financial Center, Boston, Massachusetts 02111 or by calling toll-free (800)
562-0032.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SHARES OF THE ACQUIRING FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY, AND INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL
AMOUNT INVESTED.
________ __, 199[_]
Date of Proxy Statement/Prospectus
2
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY ..............................................................1
RISK FACTORS..........................................................6
REASONS FOR THE REORGANIZATION........................................7
INFORMATION ABOUT THE REORGANIZATION..................................7
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES.....................11
COMPARATIVE INFORMATION ON DISTRIBUTION ARRANGEMENTS.................22
COMPARATIVE INFORMATION ON SHAREHOLDER SERVICES......................23
FISCAL YEAR..........................................................24
PERFORMANCE..........................................................24
COMPARATIVE INFORMATION ON SHAREHOLDER RIGHTS........................26
MANAGEMENT...........................................................29
ADDITIONAL INFORMATION ABOUT THE FUNDS...............................29
VOTING INFORMATION...................................................30
EXPERTS .............................................................31
OTHER MATTERS........................................................31
Exhibit A: Agreement and Plan of Reorganization and Liquidation.....A-1
3
<PAGE>
SUMMARY
The following is a summary of certain information contained in or
incorporated by reference in this Joint Proxy Statement/Prospectus. This summary
is not intended to be a complete statement of all material features of the
proposed Reorganization (as hereinafter defined) and is qualified in its
entirety by reference to the full text of this Joint Proxy Statement/Prospectus
and the documents referred to or incorporated herein.
Proposed Transaction. The Agreement and Plan of Reorganization and
Liquidation (the "Plan of Reorganization") provides for the transfer of all of
the assets of the Acquired Fund to the Acquiring Fund (subject to the assumption
by the Acquiring Fund of those liabilities of the Acquired Fund reflected on a
statement of assets and liabilities of the Acquired Fund as of the close of
business on the Valuation Date, as hereinafter defined) in exchange for shares
of the Acquiring Fund at a closing to be held following the satisfaction of the
conditions to the Reorganization (the "Closing"). The aggregate net asset value
of full and fractional Acquiring Fund Shares to be issued to shareholders of the
Acquired Fund will equal the value of the aggregate net assets of the Acquired
Fund as of the close of business on the business day immediately prior to the
Closing (the "Valuation Date"). The number of Class A, Class B, Class C and
Class D shares to be issued to the Acquired Fund will be determined by dividing
(a) the aggregate net assets attributable to each class of shares of the
Acquired Fund by (b) the net asset value per Class A, Class B, Class C and Class
D share, respectively, of the Acquiring Fund, each computed as of the close of
business on the Valuation Date. Acquiring Fund Shares will be distributed to
shareholders of the Acquired Fund in liquidation of the Acquired Fund, and the
Acquired Fund will be dissolved. The proposed transaction described above is
referred to in this Proxy Statement/Prospectus as the "Reorganization."
As a result of the Reorganization, each Acquired Fund shareholder will
receive in exchange for his or her shares of the Acquired Fund shares of the
corresponding class of the Acquiring Fund with an aggregate value equal to the
value of such shareholder's shares of the Acquired Fund, calculated as of the
close of business on the Valuation Date. For example, Class A shareholders of
the Acquired Fund would receive Class A shares of the Acquiring Fund. In
addition, at or prior to the Closing, the Acquired Fund shall declare a dividend
or dividends which, together with all previous such dividends, shall have the
effect of distributing to the Acquired Fund's shareholders all of the Acquired
Fund's investment company taxable income for all taxable years ending at or
prior to the Closing (computed without regard to any deduction for dividends
paid) and all of its net capital gains realized (after reduction for any capital
loss carry-forward) in all taxable years ending at or prior to the Closing.
The Board of Directors of the Acquired Fund, including those Directors
who are not "interested persons" of the Company as defined in the Investment
Company Act of 1940, as amended (the "1940 Act"), has determined that the
interests of existing shareholders of the Acquired Fund will not be diluted as a
result of the transactions contemplated by the Reorganization and that the
Reorganization would be in the best interests of the shareholders of the
Acquired Fund. The Board of Trustees of the Trust has reached similar
conclusions with respect to the Acquiring Fund and has also approved the
Reorganization with respect to the Acquiring Fund. See "Information About the
Reorganization."
The Board of Directors of the Company recommends that the shareholders
of the Acquired Fund vote FOR approval of the Plan of Reorganization.
Approval of the Plan of Reorganization by the shareholders of the
Acquired Fund is a condition of the consummation of the Reorganization. The
affirmative vote of the holders of a majority of the shares entitled to vote of
the Acquired Fund outstanding at the close of business on the Record Date (as
hereinafter defined), voting together as a single class, is required to approve
the Plan of Reorganization on behalf of the Acquired Fund and the Company.
Tax Consequences. At the Closing, the Funds will receive an opinion of
counsel that subject to customary assumptions and representations, upon
consummation of the Reorganization and the transfer of the assets of the
Acquired Fund to the Acquiring Fund: (a) the transfer of all or substantially
all of the Acquired Fund's assets solely in exchange for the Acquiring Fund
Shares and the assumption by the Acquiring Fund of certain assumed liabilities
of the Acquired Fund, and the distribution of such shares to the shareholders of
the Acquired Fund, will constitute a "reorganization" within the meaning of
Section 368(a)(1)(C); the Acquiring Fund and the Acquired Fund will each be a
"party to a reorganization" within the meaning of Section 368(b); (b) no gain or
loss will be recognized by the Acquired Fund on the transfer of the Acquired
Fund's assets to the Acquiring Fund in exchange for the Acquiring Fund Shares
and the assumption by the Acquiring Fund of certain assumed liabilities of the
Acquired Fund or upon the distribution of the Acquiring Fund Shares to the
Acquired Fund's shareholders in exchange for their shares of the Acquired Fund;
(c) the tax basis of the Acquired Fund's assets acquired by the Acquiring Fund
will be the same to the Acquiring Fund as the tax basis of such assets to the
Acquired Fund immediately prior to the Reorganization, and the holding period of
the assets of the Acquired Fund in the hands of the Acquiring Fund will include
the period during which those assets were held by the Acquired Fund; (d) no gain
or loss will be recognized by the Acquiring Fund upon the receipt of the assets
of the Acquired Fund solely in exchange for the Acquiring Fund Shares and the
assumption by the Acquiring Fund of certain assumed liabilities of the Acquired
Fund; (e) no gain or loss will be recognized by shareholders of the Acquired
Fund upon the receipt of the Acquiring Fund Shares by such shareholders,
provided such shareholders receive solely Acquiring Fund Shares (including
fractional shares) in exchange for their Acquired Fund's shares; (f) the
aggregate tax basis of the Acquiring Fund Shares, including any fractional
shares, received by each shareholder of the Acquired Fund pursuant to the
Reorganization will be the same as the aggregate tax basis of the Acquired
Fund's shares held by such shareholder immediately prior to the Reorganization,
and the holding period of the Acquiring Fund Shares, including fractional
shares, to be received by each shareholder of the Acquired Fund will include the
period during which the Acquired Fund's shares exchanged therefor were held by
such shareholder (provided that the Acquired Fund's shares were held as a
capital asset on the date of the Reorganization).
4
<PAGE>
The receipt of such an opinion upon the Closing is a condition to the
Reorganization. See "Information About the Reorganization."
Investment Objectives and Policies. The investment objective of the
Acquired Fund is to achieve the highest possible return, consisting of income
and realized and unrealized capital gains, consistent with prudent investment
risk and preservation of capital, by investing primarily in high quality debt
securities of non-U.S. issuers, which for these purposes are those issuers
domiciled outside the United States. The investment objective of the Acquiring
Fund is to seek high current income. The Acquiring Fund primarily invests in
U.S. Government Securities, and it also may invest in mortgage-related
securities and securities of foreign issuers. In recent years the Acquiring Fund
has increased its investments in the debt securities of such foreign issuers.
Both Funds seek high income from investments in debt securities; currently both
Funds are substantially invested in debt securities issued by governments and
government-related entities.
To the extent that there are differences in the policies and
restrictions of the Funds, however, shareholders should consider such
differences. These differences are discussed below under "Comparison of
Investment Objectives and Policies." Additional information also is set forth in
the Acquiring Fund's prospectus, which is included with this Joint Proxy
Statement/Prospectus, and the Acquired Fund's prospectus, which is available
upon request, and the Statements of Additional Information for each of the
Acquiring Fund and the Acquired Fund, which also are available upon request.
Management and Other Service Providers.
Acquired Fund. Responsibility for the management and supervision of the
Company and its funds, including the Acquired Fund, rests with the Company's
Board of Directors.
The Acquired Fund's investment manager is State Street Research &
Management Company ("SSRM"), which is an indirect, wholly-owned subsidiary of
Metropolitan Life Insurance Company ("Metropolitan"). The Company has entered
into an Investment Management Agreement with SSRM pursuant to which investment
research and management and other services are provided for the Acquired Fund.
In consideration for such services, SSRM receives a monthly investment advisory
fee from the Acquired Fund based on the average daily value of the net assets of
the Acquired Fund. In turn, SSRM has entered into a Sub-Investment Management
Agreement with the Company and GFM International Investors Limited ("GFM"),
whereby GFM has assumed the overall responsibility for managing the investments
of the Acquired Fund, subject to the supervision of the Company's Board of
Directors and SSRM. GFM is an indirect subsidiary of Metropolitan. GFM receives
a monthly fee from SSRM based upon the average daily value of the net assets of
the Acquired Fund.
The above mentioned Investment Management Agreement between SSRM and
the Company was transferred in _____________, 1997 to SSRM from State Street
Research Investment Services, Inc. ("SSRIS") which is an indirect, wholly-owned
subsidiary of Metropolitan. SSRIS also serves as distributor of shares of the
Acquired Fund. The Acquired Fund has adopted a Rule 12b-1 Distribution Plan and
Agreement pursuant to which it may reimburse SSRIS for costs and expenses SSRIS
incurs in connection with the marketing and distribution of Acquired Fund
shares.
See "Management of the Funds" and "Shareholder Services" in the
Company's Prospectus, which is incorporated herein and available upon request,
for more information on the Acquired Fund's arrangements with service providers,
including State Street Bank and Trust Company ("State Street Bank").
Acquiring Fund. Responsibility for the management and supervision of
the Trust, including the Acquiring Fund, rests with the Trust's Board of
Trustees.
The Acquiring Fund's investment manager is SSRM. The Trust has
entered into an Advisory Agreement with SSRM pursuant to which investment
research and management and other services are provided for the Acquiring
5
<PAGE>
Fund. In consideration for such services, SSRM receives from the Acquiring Fund
a monthly investment advisory fee based on the average daily value of the net
assets of the Acquiring Fund.
SSRIS serves as distributor of shares of the Acquiring Fund. The
Acquiring Fund has adopted a Rule 12b-1 Distribution Plan and Agreement pursuant
to which it may reimburse SSRIS for costs and expenses the Distributor incurs in
connection with the marketing and distribution of Acquiring Fund shares.
See "Management of the Fund" and "Shareholder Services" in the Trust's
Prospectus, which is included with the Joint Proxy Statement/Prospectus, for
more information on the Acquiring Fund's arrangements with service providers,
including State Street Bank.
State Street Bank is not an affiliate of the Acquiring Fund, the
Acquired Fund, Metropolitan, SSRM, GFM, or SSRIS.
Advisory Fees and Expenses. The following tables summarize the
shareholder transaction expenses applicable to each Fund and the annual
operating expenses for the Funds on an individual basis and for the Acquiring
Fund on a pro forma basis after giving effect to the Reorganization. This table
is followed by an example illustrating the effect of these expenses on a $1,000
investment in each Fund.
Shareholder Transaction Expenses Applicable to Acquiring Fund and Acquired Fund
<TABLE>
<CAPTION>
Class A Class B Class C Class D
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses (1)
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ............ 4.5% None None None
Maximum Deferred Sales Charge (as a percentage
of net asset value at time of purchase
or redemption, whichever is lower) ............. None(2) 5% None 1%
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering price) .. None None None None
Redemption Fees (as a percentage of amount
redeemed, if applicable) ....................... None None None None
Exchange Fees ....................................... None None None None
</TABLE>
- --------------------
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
thereafter, and no contingent deferred sales charge is imposed after the
fifth year. Class D shares are subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the
sale. Long-term investors in Class A, Class B or Class D shares may, over
a period of years, pay more than the economic equivalent of the maximum
sales charge permissible under applicable rules.
(2) Purchases of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption.
Table of Expenses of Acquiring Fund (individually and on a pro forma basis)
and Acquired Fund
<TABLE>
<CAPTION>
Acquiring Fund Acquired Fund
Class A Class B Class C Class D Class A Class B Class C Class D
-------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Annual Fund Operating Expenses (as a
percentage of average net assets)
Management Fees..................... 0.65% 0.65% 0.65% 0.65% 0.75% 0.75% 0.75% 0.75%
12b-1 Fees.......................... 0.25% 1.00% None 1.00% 0.25% 1.00% None 1.00%
Other Expenses...................... 0.19% 0.19% 0.19% 0.19% 1.30% 1.30% 1.30% 1.30%
Less Voluntary Reduction............ None None None None (0.55%) (0.55%) (0.55%) (0.55%)
---- ---- ---- ---- ------ ------ ------ ------
Total Fund Operating Expenses.. 1.09% 1.84% 0.84% 1.84% 1.75% 2.50% 1.50% 2.50%
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Acquiring Fund
Class A Class B Class C Class D
------------------------------------------
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses (as a
percentage of average net assets)
Management Fees......................... 0.65% 0.65% 0.65% 0.65%
12b-1 Fees.............................. 0.25% 1.00% None 1.00%
Other Expenses.......................... 0.19% 0.19% 0.19% 0.19%
Less Voluntary Reduction................ None None None None
--------- --------- --------- ---------
Total Fund Operating Expenses...... 1.09% 1.84% 0.84% 1.84%
</TABLE>
Example:
You would pay the following expenses on a $1,000 investment including, for Class
A shares, the maximum applicable initial sales charge and assuming (a) 5% annual
return and (b) redemption of the entire investment at the end of each time
period:
Acquiring Fund Acquired Fund
1 3 5 10 1 3 5 10
Year Years Years Years Year Years Years Years
-------------------------- --------------------------
Class A shares ....... $ 56 $ 78 $102 $172 $ 62 $ 98 $136 $242
Class B shares(1) .... $ 69 $ 88 $120 $196 $ 75 $108 $153 $265
Class C shares ....... $ 9 $ 27 $ 47 $104 $ 15 $ 47 $ 82 $179
Class D shares ....... $ 29 $ 58 $100 $216 $ 35 $ 78 $133 $284
Pro Forma Acquiring Fund
1 3 5 10
Year Years Years Years
--------------------------
Class A shares ....... $ 56 $ 78 $102 $172
Class B shares(1) .... $ 69 $ 88 $120 $194
Class C shares ....... $ 9 $ 27 $ 47 $104
Class D shares ....... $ 29 $ 58 $100 $216
You would pay the following expenses on the same investment, assuming no
redemption:
Acquiring Fund Acquired Fund
1 3 5 10 1 3 5 10
Year Years Years Years Year Years Years Years
-------------------------- --------------------------
Class B(1) ........... $ 19 $ 58 $100 $196 $ 25 $ 78 $133 $265
Class D .............. $ 19 $ 58 $100 $216 $ 25 $ 78 $133 $284
Pro Forma Acquiring Fund
1 3 5 10
Year Years Years Years
--------------------------
Class B(1) ........... $ 19 $ 58 $100 $196
Class D .............. $ 19 $ 58 $100 $216
- --------------------
(1) Ten-year figures assume conversion of Class B shares to Class A shares at
the end of eight years.
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than shown.
Multiple Class Structure; Distribution Arrangements. Each Fund has
outstanding and offers four classes of shares, which may be purchased through
securities dealers which have entered into sales agreements with SSRIS at the
next determined net asset value per share plus, in the case of all classes
except the Class C shares, a sales charge which, at the election of the
investor, may be imposed (a) at the time of purchase (the Class A shares) or
(b) on a deferred basis (the Class B and Class D shares). In the proposed
Reorganization, shareholders of the Acquired Fund will receive the
corresponding class of shares of the Acquiring Fund which they currently hold
in the Acquired Fund. The Class A, Class B, Class C and Class D shares of the
Acquiring Fund have identical arrangements with respect to the imposition of
initial and contingent deferred sales charges and distribution and service
fees as the comparable class of shares of the Acquired Fund. The
Reorganization will be
7
<PAGE>
effected at net asset value without the imposition of a sales charge, and
thus, Acquiring Fund Shares acquired by shareholders of the Acquired Fund
pursuant to the proposed Reorganization would not be subject to any initial
sales charge or contingent deferred sales charge as a result of the
Reorganization. However, holders of the Acquiring Fund Shares acquired as a
result of the Reorganization would continue to be subject to a contingent
deferred sales charge upon subsequent redemption to the same extent as if
they had continued to hold their shares of the Acquired Fund. For purposes of
computing the contingent deferred sales charge that may be payable upon
disposition of any acquired Class A, Class B and Class D shares of the
Acquiring Fund, the holding period of the redeemed shares will be "tacked" to
the holding period of the Acquired Fund. See "Comparative Information on
Distribution Arrangements."
Dividends and Distributions. The Acquired Fund's policy is to declare
each quarter a dividend from net investment income, if any. Distributions by
the Acquired Fund of capital gain net income, if any, will generally be made
after the end of the fiscal year or as otherwise required for compliance with
applicable tax regulations.
The Acquiring Fund's policy is to declare a dividend each day in an
amount based on monthly projections of its future net investment income and
will pay such dividends monthly. Consequently, the amount of each daily
dividend may differ from actual net investment income as determined under
generally accepted accounting principles. Each daily dividend is payable to
shareholders of record of the Acquiring Fund at the time of its declaration
(for this purpose, including only holders of shares purchased for which
payment has been received by the transfer agent and excluding holders of
shares redeemed on that day). The Acquiring Fund generally will make on an
annual basis (or as otherwise required for compliance with applicable tax
regulations) distributions of long-term and short-term capital gains, except
to the extent that net short-term gains, if any, are included in the monthly
income dividends for the purpose of stabilizing, to the extent possible, the
amount of net monthly distributions.
After the closing of the Reorganization, Acquired Fund shareholders
who currently have dividends reinvested will continue to have dividends
reinvested in the Acquiring Fund and those shareholders who currently have
capital gains reinvested will continue to have capital gains reinvested in
the Acquiring Fund. The number of shares received in connection with any such
reinvestment will be based upon the net asset value per share of the
applicable class of shares of the Acquiring Fund in effect on the record
date. See "Comparative Information on Shareholder Services."
Exchange Rights. Each Fund currently has identical exchange
privileges. Shareholders of the Acquired Fund may exchange their shares for
shares of a corresponding class of shares, when available, of certain funds
as determined by SSRIS, at any time on the basis of the relative net asset
values of the respective shares to be exchanged, subject to compliance with
applicable securities laws. Shareholders of any other such fund may similarly
exchange their shares for shares of an available corresponding class of the
Acquired Fund. See "Comparative Information on Shareholder Services."
Redemption Procedures. Each Fund offers the same redemption features,
including the acceptance of redemption requests by mail, telephone and wire,
provided that applicable conditions are met. Any request to redeem shares of
the Acquired Fund received and processed prior to the Reorganization will be
treated as a redemption of shares of the Acquired Fund. Any request to redeem
shares received or processed after the Reorganization will be treated as a
request to redeem shares of the Acquiring Fund. See "Comparative Information
on Shareholder Services."
Minimum Account Size. Each Fund reserves the right to redeem an
account if the aggregate value of the shares in such account is less than
$1,500 for a period of 60 days after notice is mailed to the applicable
shareholder, or to impose a maintenance fee on such account after 60 days'
notice. Currently, the maintenance fee is $18 annually. The Acquiring Fund
shareholder accounts established pursuant to the Reorganization with a value
of less than $1,500 will therefore be subject to redemption upon 60 days'
prior notice or the annual
8
<PAGE>
maintenance fee. During such 60-day period, a shareholder will have the
option of avoiding such redemption or maintenance fee by increasing the value
of the account to $1,500 or more.
Certain Affiliations. To the extent that Metropolitan and its
affiliates may own 5% or more of the Acquired Fund, the Acquired Fund may be
deemed to be an "affiliated person," as defined in the 1940 Act, of
Metropolitan or its affiliates. See "Information About the Reorganization."
RISK FACTORS
While both Funds focus their investments on high quality debt
securities, the Acquired Fund invests primarily in securities of non-U.S.
issuers, that is, issuers domiciled outside the United States. See
"Comparison of Investment Objectives and Policies." Investments in securities
of foreign issuers, particularly non-governmental issuers, involve risks
which are not ordinarily associated with investments in domestic issuers.
Such risks include those resulting from fluctuations in currency exchange
rates, revaluation of currencies, future political and economic developments
and the fact that foreign issuers generally are not subject to uniform
accounting, auditing and financial reporting standards. Securities of many
foreign issuers also may be less liquid and their prices more volatile than
those of securities of comparable domestic issuers. The Acquired Fund may
also enter into various currency exchange transactions, write covered put and
call options and purchase put and call options, purchase and sell futures
contracts and options on futures contracts, purchase securities on a
"when-issued" or "forward commitment basis," invest in securities pursuant to
repurchase agreements, invest in forward foreign currency exchange contracts,
invest in synthetic non-U.S. money market positions and lend securities in
its portfolio. Such risks and such practices used by the Acquired Fund to
limit such risks are more fully described under the captions "The Funds'
Investments" and "Risk Factors" in the prospectus of the Acquired Fund dated
March 1, 1997.
The Acquiring Fund invests primarily in U.S. Government securities,
that is, securities which are issued or guaranteed by the U.S. Government, a
U.S. Government agency or instrumentality or certain mixed-ownership
Government corporations. Such securities generally do not have as high a
yield as more speculative securities or securities not supported by the U.S.
Government or its agencies or instrumentalities. The Acquiring Fund also may
invest in mortgage related securities of private entities that are
collateralized or supported by the U.S. Government or its agencies or
instrumentalities. Mortgage-related securities currently offer yields higher
than those available from other kinds of government securities, but because
of the possibility of prepayment of the underlying mortgages, they may be
less effective than other types of securities as a means of locking in
attractive long-term interest rates. This is caused by the need to reinvest
prepayments of principal generally and the possibility of significant
unscheduled payments resulting from a decline in mortgage rates. As a result,
mortgage-related securities may have less potential for capital appreciation
during periods of declining interest rates than other securities with
comparable maturities, while having a comparable risk of decline during
periods of rising interest rates. The Acquiring Fund also may invest in
securities of foreign issuers. See "Comparison of Investment Objectives and
Policies." As discussed above, investments in securities of foreign issuers
involve risks which are not ordinarily associated with investments in
domestic issuers. To limit such investment risks, the Acquiring Fund follows
certain fundamental and nonfundamental investment restrictions. See
"Comparison of Investment Objectives and Policies." Such risks are more fully
discussed under the caption "The Fund's Investments" in the Prospectus of the
Acquiring Fund enclosed with this Joint Proxy Statement/Prospectus.
REASONS FOR THE REORGANIZATION
In reaching the decision to recommend that the shareholders of the
Acquired Fund vote to approve the Reorganization, the Board of Directors,
including the Directors who are not interested persons of the Company,
concluded that the
9
<PAGE>
Reorganization would be in the best interests of the Acquired Fund and that
the interests of existing shareholders of the Acquired Fund will not be
diluted as a consequence thereof. Similarly, the Board of Trustees,
including the Trustees who are not interested persons of the Trust,
concluded that the Reorganization would be in the best interests of the
Acquiring Fund and that the interests of existing shareholders of the
Acquiring Fund will not be diluted as a consequence thereof. In making these
determinations, the Directors and the Trustees considered a number of
factors, including the efficiencies resulting from combining the operations
of a small fund with a large fund, the performance of the Acquired Fund, the
size, stability and strength of the Acquiring Fund, the facts that each Fund
uses the same distributor, and has the same multiple class and sales load
structure and that each Fund focuses its investments on high quality debt
securities.
As reflected in the capitalization table in "Information About the
Reorganization-Capitalization" set forth below, the Acquired Fund is small in
size. As a result, its gross expenses are relatively high and have been
subsidized since inception; see "Table of Expenses of Acquiring Fund
(individually and on a pro forma basis) and Acquired Fund" set forth in the
"Summary" above. The voluntary subsidization of expenses of the Acquired Fund
by its affiliates can be discontinued at any time; consequently, the Acquired
Fund's expenses could increase in the future. On the other hand, the
Acquiring Fund has substantially more assets and a lower, unsubsidized
expense ratio. By combining the assets of the two Funds, each Fund could,
over time, benefit from certain economies of scale. In particular, greater
portfolio diversification and more efficient portfolio management could
result from a larger asset base. Greater diversification from a portfolio of
securities of both U.S. and non-U.S. issuers is expected to be beneficial to
Acquired Fund shareholders because it may reduce the risk associated with a
portfolio of securities issued only by non-U.S. issuers. Because the Funds
have the same custodian and distributor, combining the Funds could, over
time, produce administrative economies of scale, resulting in net benefits to
the Funds' shareholders. The Directors also believe that the shareholders of
the Acquired Fund will benefit from the Acquiring Fund's identical privileges
and services for shareholders and pricing structure.
The Board of Directors of the Company believes that the proposed
Reorganization is in the best interests of the shareholders of the Acquired
Fund and recommends that shareholders of the Acquired Fund vote FOR the
Reorganization.
INFORMATION ABOUT THE REORGANIZATION
At meetings held on February 4, 1997, and November 6, 1996, the
Board of Directors of the Company and the Board of Trustees of the Trust,
respectively, approved the Plan of Reorganization substantially in the form
set forth as Exhibit A to this Joint Proxy Statement/Prospectus.
Plan of Reorganization. The Plan of Reorganization provides that, at
the Closing, the Acquiring Fund will acquire all of the assets of the
Acquired Fund (subject to the assumption by the Acquiring Fund of those
liabilities of the Acquired Fund reflected on an unaudited statement of
assets and liabilities) in exchange for Acquiring Fund Shares. The aggregate
net asset value of full and fractional Acquiring Fund Shares to be issued to
shareholders of the Acquired Fund will equal the value of the aggregate net
assets of the Acquired Fund as of the close of business on the Valuation
Date. The number of Class A, Class B, Class C and Class D shares to be issued
to the Acquired Fund will be determined by dividing (a) the aggregate net
assets in each class of shares of the Acquired Fund by (b) the net asset
value per Class A, Class B, Class C and Class D share, respectively, of the
Acquiring Fund, each computed as of the close of business on the Valuation
Date. Portfolio securities of the Acquired Fund and the Acquiring Fund will
be valued in accordance with the valuation practices of the Acquiring Fund
which are described under the caption "Purchase of Shares" in the Acquiring
Fund Prospectus and which are substantially identical to those of the
Acquired Fund.
10
<PAGE>
The Acquiring Fund will assume certain liabilities, including all
expenses, costs, charges and reserves reflected on an unaudited statement of
assets and liabilities of the Acquired Fund prepared as of the close of
business on the Valuation Date in accordance with generally accepted
accounting principles consistently applied from the prior audited period.
Such statement of assets and liabilities will reflect those liabilities
known to the Acquired Fund and the Acquiring Fund as of the date thereof. At
or prior to the Closing, the Acquired Fund shall declare a dividend or
dividends which, together with all prior such dividends, shall have the
effect of distributing to the Acquired Fund's shareholders all of the
Acquired Fund's investment company income for all taxable years ending at or
prior to the Closing (computed without regard to any deduction for dividends
paid) and all of its net capital gains realized (after reduction for any
capital loss carry-forward) in all taxable years ending at or prior to the
Closing.
At or as soon as practicable after the Closing, the Acquired Fund
will liquidate and distribute pro rata to its shareholders of record as of
the close of business on the Valuation Date the full and fractional Acquiring
Fund Shares received by the Acquired Fund. Such liquidation and distribution
will be accomplished by the establishment of shareholder accounts on the
share records of the Acquiring Fund in the name of each such shareholder of
the Acquired Fund, representing the respective pro rata number of full and
fractional Acquiring Fund Shares due such shareholder. All of the Acquiring
Fund's future distributions attributable to the shares issued in the
Reorganization will be paid to shareholders in cash or invested in additional
shares of the Acquiring Fund at the price in effect as described in the
Acquiring Fund's Prospectus on the respective payment dates in accordance
with instructions previously given by the shareholder to the Acquired Fund's
transfer agent. As of the Closing, each outstanding certificate which, prior
to the Closing, represented shares of the Acquired Fund will be deemed for
all purposes to evidence ownership of the number of Acquiring Fund Shares
issuable with respect thereto pursuant to the Reorganization. After the
Closing, certificates originally representing shares of Class A or Class C of
the Acquired Fund will be rendered nonnegotiable; upon special request and
surrender of such certificates to State Street Bank as transfer agent,
holders of these nonnegotiable certificates shall be entitled to receive
certificates representing the number of Acquiring Fund Shares issuable with
respect thereto. All Class B and Class D shares of the Acquiring Fund are
held of record in book entry form and no certificates for such shares will
be issued.
Notwithstanding approval by shareholders of the Acquired Fund, the
Plan of Reorganization may be terminated at any time prior to the
consummation of the Reorganization without liability on the part of either
party or its respective Directors or Trustees, officers or shareholders, by
either party on written notice to the other party if circumstances should
develop that, in the opinion of the Company or the Trust, make proceeding
with the Reorganization inadvisable. The Plan of Reorganization may be
amended, waived or supplemented in such manner as may be mutually agreed upon
by the authorized officers of the Company and the Trust; provided, however,
that following the Meeting, no such amendment, waiver or supplement may have
the effect of changing the provision for determining the number of Acquiring
Fund Shares to be issued to the Acquired Fund shareholders to the detriment
of such shareholders without their further approval. The expenses incurred in
connection with entering into and carrying out the provisions of the Plan of
Reorganization, whether or not the Reorganization is consummated, will be
shared evenly by the Acquiring Fund and the Acquired Fund.
Description of Acquiring Fund Shares. Full and fractional shares of
the Acquiring Fund will be issued to the Acquired Fund shareholders in
accordance with the procedures under the Plan of Reorganization as described
above. Each share will be fully paid and nonassessable by the Trust when
issued and transferable without restrictions and will have no preemptive or
cumulative voting rights and have only such conversion or exchange rights as
the Board of Trustees of the Trust may grant in its discretion.
Federal Income Tax Consequences. Tax Counsel to the Acquiring Fund
and Acquired Fund, Goodwin, Procter & Hoar LLP, is to opine that, subject to
customary assumptions and representations, on the basis of the existing
provisions of the Internal Revenue Code (the "Code"), the Treasury
Regulations promulgated thereunder and current administrative and judicial
interpretations thereof, for Federal income tax purposes: (a) the transfer
of all or substantially all of the Acquired Fund's assets solely in exchange
for the Acquiring Fund Shares and the assumption by the Acquiring Fund of
certain assumed liabilities of the Acquired Fund, and the distribution of
such shares to the shareholders of the Acquired Fund, will constitute a
"reorganization" within the meaning of Section 368(a)(1)(C); the Acquiring
Fund and the Acquired Fund will each be a "party to a reorganization"
within the meaning of Section 368(b); (b) no gain or loss will be recognized
by the Acquired Fund on the transfer of the Acquired Fund's assets to the
Acquiring Fund in exchange for the Acquiring Fund Shares and the assumption
by the Acquiring Fund of certain assumed liabilities of the Acquired Fund or
upon the distribution of the Acquiring Fund Shares to the Acquired Fund's
shareholders in exchange for their shares of the Acquired Fund; (c) the tax
basis of the Acquired Fund's assets acquired by the Acquiring Fund will be
the same to the Acquiring Fund as the tax basis of such assets to the
Acquired Fund immediately prior to the Reorganization, and the holding
period of the assets of the Acquired Fund in the hands of the Acquiring Fund
will include the period during which those assets were held by the Acquired
Fund; (d) no gain or loss will be recognized by the Acquiring Fund upon the
receipt of the assets of the Acquired Fund solely in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of certain
assumed liabilities of the Acquired Fund; (e) no gain or loss will be
recognized by shareholders of the Acquired Fund upon the receipt of the
Acquiring Fund Shares by such shareholders, provided such shareholders
receive solely Acquiring Fund Shares (including fractional shares) in
exchange for their Acquired Fund's shares; (f) the aggregate tax basis of
the Acquiring Fund Shares, including any fractional shares, received by each
shareholder of the Acquired Fund pursuant to the Reorganization will be the
same as the aggregate tax basis of the Acquired Fund's shares held by such
shareholder immediately prior to the Reorganization, and the holding period
of the Acquiring Fund Shares, including fractional shares, to be received by
each shareholder of the Acquired Fund will include the period during which
the Acquired Fund's shares exchanged therefor were held by such shareholder
(provided that the Acquired Fund's shares were held as a capital asset on
the date of the Reorganization).
11
<PAGE>
The receipt of such an opinion upon the Closing is a condition to the
consummation of the Reorganization. If the transfer of the assets of the
Acquired Fund in exchange for Acquiring Fund Shares and the assumption by
the Acquiring Fund of certain liabilities of the Acquired Fund do not
constitute a tax-free reorganization, each Acquired Fund shareholder will
recognize gain or loss equal to the difference between the value of
Acquiring Fund Shares such shareholder acquires and the tax basis of such
shareholder's Acquired Fund shares.
Shareholders of the Funds should consult their tax advisers regarding
the effect, if any, of the proposed Reorganization in light of their
individual circumstances. Since the foregoing discussion relates only to the
Federal income tax consequences of the Reorganization, shareholders of the
Funds should also consult their tax advisers as to state and local tax
consequences, if any, of the Reorganization.
Capitalization. The following table sets forth the capitalization of
the Acquired Fund and the Acquiring Fund, each as of October 31, 1996, and on
a pro forma basis as of that date giving effect to the proposed acquisition
of assets at net asset value. The pro forma data reflects an exchange ratio
of 0.6798, 0.6789, 0.6815 and 0.6781 for Class A, Class B, Class C and Class
D shares, respectively, of the Acquiring Fund issued for each Class A, Class
B, Class C and Class D share, respectively, of the Acquired Fund.
Government International Pro Forma
Income Fixed Income Government Income
Fund Fund Fund
Net assets (in millions)... $701.6 $33.5 $735.1
Net asset value per share
Class A............ $12.43 $8.45 $12.43
Class B............ $12.40 $8.42 $12.40
Class C............ $12.42 $8.46 $12.42
Class D............ $12.41 $8.41 $12.41
Shares outstanding
Class A............ 46,990,520 332,131 47,216,310
Class B............ 7,679,256 478,504 8,004,096
Class C............ 625,275 2,934,746 2,625,299
Class D............ 1,166,285 214,595 1,311,793
The table set forth above should not be relied on to reflect the
number of shares to be received in the Reorganization; the actual number of
shares to be received will depend upon the net asset value and number of
shares outstanding of each Fund at the time of the Reorganization.
The following table sets forth the number of outstanding shares of
beneficial interest of each Fund as of December 31, 1996, and the
approximate percentages of the outstanding shares of each Fund that were
beneficially owned on such date by SSRM, SSRIS and Metropolitan, their
indirect parent. Metropolitan and its affiliates have indicated that with
respect to their shares of the Acquired Fund they intend to vote for and
against the proposal in the same relative proportion as do the other
shareholders of the Acquired Fund who cast votes at the meeting. The Board of
Directors of the Company and the Board of Trustees of the Trust do not know
of any
12
<PAGE>
other person who beneficially owned 5% or more of the total outstanding
shares of either Fund as of December 31, 1996.
<TABLE>
<CAPTION>
Outstanding Shares Owned Outstanding Shares Owned Outstanding Shares Owned
by Metropolitan by SSRIS by SSRM
------------------------ ----------------------- -------------------------
Total Shares Number % of Total Number % of Total Number % of Total
Name of Fund Outstanding of Shares Outstanding of Shares Outstanding of Shares Outstanding
------------ ----------- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Acquired Fund 3,846,725 2,769,171 72.0% -- -- -- --
Acquiring Fund 55,472,778 -- -- 12,242 less than 1% -- --
</TABLE>
As of the same date, the Directors of the Company owned no shares of
the Acquired Fund and the Trustees of the Trust owned less than 1% of the
Acquiring Fund's outstanding Class A shares and owned none of the Acquiring
Fund's outstanding Class B, Class C and Class D shares.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
Information about the investment objectives and policies of the
Acquired Fund and the Acquiring Fund is summarized below. More complete
information regarding the same is set forth in the Prospectus of the
Acquiring Fund dated March 1, 1997 which is incorporated by reference herein
and enclosed herewith, the prospectus of the Acquired Fund dated March 1,
1997 which is incorporated by reference herein, and in the Statement of
Additional Information which has been filed with the Commission in
connection with the Reorganization. Shareholders should consult such
Prospectuses and the Statement of Additional Information for a more
thorough comparison.
Investment Objectives. The investment objective of the Acquired Fund
is to achieve the highest possible total return, consisting of income and
realized and unrealized capital gains, consistent with prudent investment
risk and preservation of capital, by investing primarily in high quality
debt securities of non-U.S. issuers. Non-U.S. issuers for these purposes are
those issuers domiciled outside the United States. The performance of the
Acquired Fund is measured in U.S. dollars. The type of securities in which
the Acquired Fund primarily invests, that is, fixed income securities, may
preclude it from achieving its objective of highest total return under
certain market conditions. The Acquired Fund has no policy which limits the
range of maturities of the debt obligations it purchases. The Acquired Fund
seeks the highest total return, and thus, the Acquired Fund maintains the
flexibility to invest in debt securities at all maturity levels.
To achieve its objective, the Acquired Fund, under normal
circumstances, invests at least 65% of its assets in high quality debt
securities. Under normal circumstances, the Acquired Fund has at least three
different countries represented in its portfolio. High quality debt
securities of non-U.S. issuers are those rated at least AA- or its
equivalent by a nationally recognized securities rating organization (a
"NRSRO"), or, if unrated, of comparable investment quality as determined by
GFM. See the Statement of Additional Information for a description of
certain of the debt ratings of Moody's Investor Services, Inc. ("Moody's")
and Standard & Poor's ("S&P") Ratings Group. GFM does not purchase
securities consisting of new long-term debt issues for the Acquired Fund
where those offerings are less than $100 million or its equivalent. Should
any of the Acquired Fund's securities become rerated below AA- or its
equivalent by a NRSRO, GFM has the freedom to sell the securities or to
retain the securities in the Acquired Fund's portfolio if, in GFM's view,
such investment is considered appropriate under the circumstances.
13
<PAGE>
These investment objectives and policies are not fundamental and may
be changed by the Board of Directors of the Company without shareholder
approval.
The Acquiring Fund's investment objective is to seek high current
income. The Acquiring Fund seeks to attain its investment objective by
following the investment policies described below.
The Acquiring Fund invests primarily in U.S. Government securities.
The Acquiring Fund may also invest in mortgage-related securities of private
entities which are collateralized or supported by the U.S. Government or its
agencies or instrumentalities as described below. Under normal circumstances,
the Acquiring Fund will invest at least 65% of the value of its total assets
in U.S. Government securities (not including mortgage-related securities).
U.S. Government securities are securities which are issued or guaranteed by
the U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S.
Government securities in which the Acquiring Fund invests include, among
others: (a) direct obligations of the U.S. Treasury, i.e., U.S. Treasury
bills, notes, certificates and bonds; (b) obligations of U.S. Government
agencies or instrumentalities such as the Federal Home Loan Banks, the
Farmers Home Administration, the Federal Farm Credit Banks, the Federal
National Mortgage Association, the Government National Mortgage Association
and the Federal Home Loan Mortgage Corporation; and (c) obligations of
mixed-ownership Government corporations such as Resolution Funding
Corporation.
U.S. Government securities which the Acquiring Fund may buy are
backed in a variety of ways by the U.S. Government, its agencies or
instrumentalities. Some of these obligations, such as Government National
Mortgage Association mortgage-backed securities, are backed by the full faith
and credit of the U.S. Treasury. Other obligations, such as those of the
Federal National Mortgage Association, are backed by the discretionary
authority of the U.S. Government to purchase certain obligations of agencies
or instrumentalities. Obligations such as those of the Federal Home Loan
Banks, the Federal Farm Credit Banks, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation are backed by the
credit of the agency or instrumentality issuing the obligations. Certain
obligations of Resolution Funding Corporation, a mixed-ownership Government
corporation, are backed with respect to interest payments by the U.S.
Treasury obligations held in a segregated account with a Federal Reserve
Bank. Except for certain mortgage-related securities, the Acquiring Fund will
only invest in obligations issued by mixed-ownership Government corporations
where such securities are guaranteed as to payment of principal or interest
by the U.S. Government or a U.S. Government agency or instrumentality, and
any unguaranteed principal or interest is otherwise supported by U.S.
Government obligations held in a segregated account.
In addition, the Acquiring Fund may invest in mortgage-related
securities which represent interests in pools of mortgage loans and provide
the Acquiring Fund with a flow-through of interest and principal payments as
such payments are received with respect to the mortgages in the pool.
Mortgage-related securities may be issued by U.S. Government agencies,
instrumentalities or mixed-ownership corporations, and the securities may or
may not be supported by the credit of such entities. Mortgage-related
securities may also be issued by private entities such as investment banking
firms and insurance companies. An issuer may offer senior or subordinated
securities backed by the same pool of mortgages. The senior securities have
priority to the interest and/or principal payments on the mortgages in the
pool; the subordinate securities have less priority to such payments on the
mortgages in the pool. The mortgage-related securities in which the Acquiring
Fund invests will be rated AAA by S&P or Aaa by Moody's or not rated but
considered by SSRM to be of equivalent investment quality to comparably rated
securities.
It is anticipated that substantially all of the assets acquired by
the Acquiring Fund in the Reorganization will be securities of non-U.S.
issuers. The Acquiring Fund reserves the right to invest varying amounts of
its total assets in securities of foreign issuers such as foreign corporate,
government, or government agency securities consistent with its investment
objective and policies. Under current policy, the Acquiring Fund limits such
investments to a maximum of 20% of its total assets and as of October 31,
1996 approximately 3.7% of the Acquiring
14
<PAGE>
Fund's assets were invested in foreign securities. On a pro forma basis
after giving effect to the Reorganization, at market values as of October
31, 1996, the Acquired Fund's assets would represent approximately 4.6% of
the Acquiring Fund's total assets.
The investment objective of the Acquiring Fund may be changed only
with the approval of the Acquiring Fund's shareholders. The investment
policies of the Acquiring Fund may be changed by the Board of Trustees of
the Trust without shareholder approval.
There are differences in the investment policies of the Acquired Fund
and the Acquiring Fund. Under normal circumstances, the Acquired Fund
invests at least 65% of its assets in high quality debt securities of
non-U.S. issuers; non-U.S. issuers are those issuers domiciled outside the
United States. On the other hand, the Acquiring Fund invests, under normal
circumstances, at least 65% of its total assets in U.S. Government
securities, although it may invest varying amounts in non-U.S. issuers as
well. Both Funds, however, are subject to similar investment restrictions.
Investment Restrictions. While the investment restrictions of the
Acquired Fund are similar in certain respects to those of the Acquiring
Fund, there are subtle differences. Set forth below is a summary of the
similarities of and differences between the existing investment restrictions
of the Acquired Fund and the investment restrictions of the Acquiring Fund.
The summary is qualified in its entirety by reference to, and is made
subject to, the complete text of the investment restrictions of each Fund,
which are set forth in the current Prospectus and Statement of Additional
Information of each Fund. Certain of the investment restrictions of each
Fund are deemed fundamental, which means that they may not be changed
without the approval of a majority of such Fund's outstanding voting
securities (as defined in the 1940 Act). Investment restrictions which are
not deemed fundamental may be changed by the Board of Directors of the
Company with respect to the Acquired Fund and the Board of Trustees of the
Trust with respect to the Acquiring Fund without shareholder approval.
15
<PAGE>
<TABLE>
<CAPTION>
Subject Matter
of Restriction Acquiring Fund Acquired Fund
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Diversification Fundamental restriction which prohibits the Fundamental restriction which prohibits
Acquiring Fund from purchasing a security of any the Acquired Fund from acquiring
one issuer (other than securities issued or securities if such acquisition would
guaranteed as to principal or interest by the thereupon cause more than 25% of the value
U.S. Government or its agencies or of the Acquired Fund's total assets to
instrumentalities or mixed-ownership Government consist of (1) securities (other than
corporations) if such purchase would, with securities issued or guaranteed by the
respect to 75% of the Acquiring Fund's total U.S. Government, its agencies and
assets, cause more than 5% of the Acquiring instrumentalities) which, together with
Fund's total assets to be invested in such issuer other securities of the same issuer,
or cause more than 10% of the voting securities constitute more than 5% of the value of
of such issuer to be held by the Acquiring Fund. the Acquired Fund's total assets and (2)
voting securities of issuers more than 10%
of whose outstanding voting securities are
owned by the Acquired Fund.
Unseasoned Issuers Nonfundamental restriction which prohibits the Nonfundamental restriction which
Acquiring Fund from investing more than 5% of its prohibits the Acquired Fund from purchasing
total assets in the securities of private securities of any issuer with a record of less
companies including predecessors with less than than three years continuous operations,
three years of continuous operations except including predecessors, except obligations
(a) securities guaranteed or backed by an issued or guaranteed by the U.S. Government or
affiliate of the issuer with three years of by any foreign government or their agencies or
continuous operations, (b) securities issued or instrumentalities, if such purchase would
guaranteed as to principal or interest by the cause the investments of the Acquired Fund in all
U.S. Government, or its agencies or such issuers to exceed 5% of the total assets
instrumentalities, or a mixed-ownership of the Acquired Fund taken at market value.
Government corporation, (c) securities of issuers
with debt securities rated at least "BBB" by S&P
or "Baa" by Moody's (or their equivalent by any
other NRSRO) or securities of issuers considered
by SSRM to be equivalent, (d) securities issued
by a holding company with at least 50% of its
assets invested in companies with three years of
continuous operation including predecessors, and
(e) securities which generate income which is
exempt from local, state or Federal taxes;
provided that the Acquiring Fund may invest up to
15% in such issuers so long as such investments
plus investments in restricted securities (other
than those which are eligible for resale under
Rule 144A, Regulation S or other exemptive
provisions) do not exceed 15% of the Acquiring
Fund's total assets.
16
<PAGE>
Subject Matter
of Restriction Acquiring Fund Acquired Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Senior Securities Fundamental restriction which prohibits the Fundamental restriction which prohibits
Acquiring Fund from issuing senior securities, the Acquired Fund from issuing senior
except that the Acquiring Fund may borrow money securities, except for the purposes of (a)
and engage in reverse repurchase agreements in obtaining such short-term credits as are
amounts up to 1/3 of the value of the Acquiring necessary for the clearance of portfolio
Fund's net assets including the amounts borrowed transactions, (b) temporarily borrowing up
(provided that reverse repurchase agreements are to 5% of the value of the Acquired Fund's
restricted to 5% of the Acquiring Fund's total total assets for extraordinary or
assets). emergency purposes, such as permitting
redemption requests to be honored which
might otherwise require the sale of
securities at a time when it is not in the
Acquired Fund's best interests or (c)
purchasing securities on a "when-issued"
or "forward commitment" basis. For these
purposes, writing covered call and put options
and entering into futures contracts and options
thereon to the extent permitted by the Acquired
Fund's investment policies are not deemed to
involve the issuance of senior securities.
Underwriting Fundamental restriction which prohibits the Fundamental restriction which prohibits
Acquiring Fund from underwriting any issue of the Acquired Fund from engaging in the
securities, except as the Acquiring Fund may be underwriting of securities of other
deemed to be an underwriter under the Securities issuers, except to the extent that in
Act of 1933 in connection with the sale of selling portfolio securities, it may be
securities in accordance with its investment deemed to be a "statutory" underwriter for
objective, policies and limitations. purposes of the Securities Act of 1933.
Real Estate Fundamental restriction which prohibits the Fundamental restriction which prohibits
Acquiring Fund from purchasing or selling real the Acquired Fund from purchasing or
estate, although it may invest in securities of selling real estate or real estate
companies whose business involves the purchase or interests, except that the Acquired Fund
sale of real estate or in securities which are may invest up to 10% of its total assets
secured by real estate or interests in real in: (i) readily marketable securities of
estate. issuers which deal in real estate or
mortgages; and (ii) readily marketable
securities which are secured by real
estate or interests therein, and the
Acquired Fund reserves freedom of action
to hold and to sell real estate acquired
as a result of the Acquired Fund's
ownership of such securities.
17
<PAGE>
Subject Matter
of Restriction Acquiring Fund Acquired Fund
- -----------------------------------------------------------------------------------------------------------------------------------
Commodities and Options Fundamental restriction which prohibits the Fundamental restriction which prohibits
Acquiring Fund from investing in physical the Acquired Fund from investing in
commodities or physical commodity contracts or commodities or commodity contracts, or
options in excess of 10% of the Acquiring Fund's writing call options which are not covered
total assets, except that investments in options or writing put options, except
essentially financial items or arrangements such covered put options or put options to
as, but not limited to, swap arrangements, close out option positions previously
hybrids, currencies, currency and other forward entered into. However, the Acquired Fund
contracts, futures contracts and options on may purchase stock index, interest rate,
futures contracts on securities, securities and currency futures contracts, may write
indices, interest rates and currencies shall not covered stock index, interest rate and
be deemed investments in commodities or currency futures contracts, may write
commodities contracts. covered put and call options on such
future contracts, may purchase put and
call options on such futures contracts,
and may enter into closing transactions
with respect to options on such futures
contracts.
Short Sales Fundamental restriction which prohibits the Nonfundamental restriction which
Acquiring Fund from selling securities short. prohibits the Acquired Fund from making
any short sale or participating on a
joint or joint and several basis in any
trading account in securities. The
latter policy, however, does not
prohibit combining certain orders for
portfolio securities.
18
<PAGE>
Margin Purchases Fundamental restriction which prohibits the Fundamental restriction which prohibits
Acquiring Fund from purchasing securities on the Acquired Fund from purchasing
margin other than in connection with the purchase securities on margin, provided, however,
of put options on financial futures contracts, that this restriction shall not prohibit
but the Acquiring Fund may obtain such short-term the Acquired Fund from (a) obtaining such
credits as are necessary for clearance of short-term credits as are necessary for
transactions. the clearance of portfolio transactions,
(b) temporarily borrowing up to 5% of the
value of the Acquired Fund's total assets
for extraordinary or emergency purposes,
such as for permitting redemption requests
to be honored which might otherwise
require the sale of securities at a time
when it is not in the Acquired Fund's best
interests or (c) purchasing securities on
a "when-issued" or "forward commitment"
basis. Collateral arrangements entered
into by the Acquired Fund to make margin
deposits in connection with futures
contracts, including options on futures
contracts, are not for these purposes
deemed to be the purchase of a security on
margin. The aggregate amount of
obligations identified in (a), (b) and (c)
above, when incurred, will not exceed
one-third of the amount by which the
Acquired Fund's total assets exceed its
total liabilities (excluding the
liabilities represented by such
obligations). If at any time the Acquired
Fund's obligations of such type exceed the
foregoing limitation, such obligations
will be promptly reduced to the extent
necessary to comply with the limitation.
Lending Fundamental restriction which prohibits the Fundamental restriction which prohibits
Acquiring Fund from lending money; however, the the Acquired Fund from making loans;
Acquiring Fund may lend portfolio securities and however, the Acquired Fund may (a) enter
purchase bonds, debentures, notes and similar into repurchase agreements, (b) purchase
obligations (and enter into repurchase agreements bonds, notes, debentures or other
with respect thereto). obligations of a character customarily
purchased by institutional or individual
investors (whether or not publicly
distributed) and (c) make loans of its
portfolio securities which do not
thereupon cause in excess of 20% of the
value of the Acquired Fund's total
assets to consist of loaned securities.
19
<PAGE>
Illiquid Securities Nonfundamental restriction which prohibits the Nonfundamental restriction which prohibits
and Restricted Acquiring Fund from purchasing any security or the Acquired Fund from investing in
Securities entering into a repurchase agreement if as a repurchase agreements having a maturity of
result more than 15% of its net assets would be more than seven days or any other illiquid
invested in securities that are illiquid assets if, as a result, more than 10% of
(including repurchase agreements not entitling the Acquired Fund's total assets would be
the holder to payment of principal and interest invested in illiquid assets or more than
within seven days). Nonfundamental restriction 5% of the Acquired Fund's total assets
which prohibits the Acquiring Fund from investing would be invested in restricted
more than 15% of its net assets in restricted securities. For purposes of this
securities of all types (including not more than limitation, privately placed securities
5% of its net assets in restricted securities that are not registered under the
which are not eligible for resale pursuant to Securities Act of 1933, but that can be
Rule 144A, Regulation S or other exemptive offered and sold to qualified
provisions under the Securities Act of 1933). institutional buyers under Rule 144A under
this Act are not considered restricted
securities.
Oil and Gas Fundamental restriction which prohibits the Nonfundamental restriction which prohibits
Acquiring Fund from investing in oil, gas or the Acquired Fund from investing in oil,
other mineral exploration or development gas or other mineral exploration or
programs, provided that the Acquiring Fund may development programs (although the
invest in securities issued by or which are Acquired Fund may invest in issuers which
based, directly or indirectly, on the credit of own or invest in such interests).
companies which invest in or sponsor such
programs.
Industry Fundamental restriction which prohibits the No restriction.
Concentration Acquiring Fund from making any investment which
would cause more than 25% of the value of the
Acquiring Fund's total assets to be invested in
securities of issuers principally engaged in any
one industry (for purposes of this restriction,
(a) utilities will be divided according to their
services so that, for example, gas, gas
transmission, electric and telephone companies
will each be deemed in a separate industry, (b)
oil and oil related companies will be divided by
type so that, for example, oil production
companies, oil service companies and refining and
marketing companies will each be deemed in a
separate industry, (c) finance companies will be
classified according to the industry of their
parent companies, and (d) securities issued or
guaranteed by the U.S. Government or its agencies
or instrumentalities (including repurchase
agreements collateralized by U.S. Government
securities) shall be excluded).
20
<PAGE>
Borrowing Fundamental restriction which prohibits the Fundamental restriction which prohibits
Acquiring Fund from borrowing money (through the Acquired Fund from borrowing money
reverse repurchase agreements or otherwise) except for the purposes of (a) obtaining
except for emergency purposes or to facilitate such short-term credits as are necessary
management of the portfolio by enabling the for the clearance of portfolio
Acquiring Fund to meet redemption requests when transactions, (b) temporarily borrowing up
the liquidation of portfolio accounts is to 5% of the value of the Acquired Fund's
determined to be inconvenient or disadvantageous, total assets for extraordinary or
provided that additional investments will be emergency purposes, such as for permitting
suspended during any period when borrowing redemption requests to be honored which
exceeds 5% of the Acquiring Fund's net assets, might otherwise require the sale of
and provided further that reverse repurchase securities at a time when it is not in the
agreements shall not exceed 5% of the Acquiring Acquired Fund's best interests or (c)
Fund's total assets; (during the period in which purchasing securities on a "when-issued"
any reverse repurchase agreements are or "forward commitment" basis. The
outstanding, the Acquiring Fund will restrict the aggregate amount of obligations identified
purchase of portfolio instruments to money market in (a), (b) and (c) above, when incurred,
instruments maturing on or before the expiration will not exceed one-third of the amount by
date of the reverse repurchase agreements. Such which the Acquired Fund's total assets
purchases will be made only to the extent exceed its total liabilities (excluding
necessary to assure completion of the reverse the liabilities represented by such
repurchase agreement). obligations). If at any time the Acquired
Fund's obligations of such type exceed the
foregoing limitation, such obligations
will be promptly reduced to the extent
necessary to comply with the limitation.
Issuers Held by Nonfundamental restriction which prohibits the Nonfundamental restriction which
Directors, Officers, Acquiring Fund from purchasing or retaining any prohibits the Acquired Fund from
or Affiliates security of an issuer if, to the knowledge of the purchasing or retaining securities of an
Trust, those of its officers and Trustees and issuer any of whose officers, directors,
officers and directors of its investment advisers trustees or security holders is an
who individually own more than 1/2 of 1% of the officer, director or trustee of the
securities of such issuer, when combined, own Acquired Fund or a member, officer,
more than 5% of the securities of such issuer director or trustee of the investment
taken at market. adviser of the Acquired Fund if one or
more of such individuals owns
beneficially more than 1/2 of 1% of the
outstanding shares or securities or both
(taken at market value) of such issuer
and such individuals owning more than
1/2 of 1% of such shares or securities
together own beneficially more than 5%
of such shares or securities or both.
21
<PAGE>
Pledging Fundamental restriction which prohibits the No restriction.
Acquiring Fund from hypothecating, mortgaging or
pledging any of its assets except to secure
permitted borrowings and then not in excess of
10% of the Acquiring Fund's total assets, at the
time of the borrowing; (as a matter of
interpretation which is not part of the
fundamental policy, futures, options and forward
commitments, and related escrow or custodian
receipts or letters, margin or safekeeping
accounts, or similar arrangements used in the
industry in connection with the trading of such
investments, are not deemed to involve
hypothecation, mortgage or pledge of assets).
Control No restriction. Fundamental restriction which prohibits
the Acquired Fund from acquiring
securities for the purpose of exercising
control over the management of any company.
Other Investment Nonfundamental restriction which prohibits the Nonfundamental restriction which
Companies Acquiring Fund from acquiring any security prohibits the Acquired Fund from
issued by any other investment company (the investing in securities of other
"acquired company") if immediately after such investment companies if such purchase
acquisition the Acquiring Fund and all companies would thereupon cause more than 10% of
controlled by the Acquiring Fund, if any, would the value of the total assets in the
own in the aggregate (i) more than 3% of the Acquired Fund to be invested in the
outstanding voting stock of the acquired securities of investment companies or
company, (ii) securities issued by the acquired more than 5% of such value to be
company having an aggregate value in excess of invested in the securities of any one
5% of the Acquiring Fund's total assets or (iii) investment company, or would cause the
securities issued by the acquired company and Comapny to own more than 3% of the total
all other investment companies (other than outstanding voting stock of any such
treasury stock of the Acquiring Fund) having an company (or togtther with other
aggregate value in excess of 10% of the investment companies having the same
Acquiring Fund's total assets, except to investment adviser to own more than 10%
complete a merger, consolidation or other of the total outstanding voting stock of
acquisition of assets. (In connection with this any closed end investment company).
restriction, the Acquiring Fund has undertaken Securities of investment companies may
with a state securities authority that, for so also be acquired as part of a merger,
long as its shares are required to be registered consolidation, acquisition of assets or
in such state and such investment restriction reorganization.
remains in effect, the Acquiring Fund will not
acquire any security issued by another
investment company, except by purchase in the
open market involving only customary broker's
commissions, or except when the securities are
acquired as dividends or distributions or when
the purchase is part of a plan of merger,
consolidation, reorganization or acquisition.)
</TABLE>
22
<PAGE>
COMPARATIVE INFORMATION ON DISTRIBUTION ARRANGEMENTS
Class A shares of each Fund are subject to (a) an initial sales charge
of up to 4.5% and (b) an annual service fee of 0.25% of the average daily net
asset value of the Class A shares.
Class B shares of each Fund are subject to (a) a contingent deferred
sales charge (declining from 5% to 2%), which will be imposed on most
redemptions made within five years of purchase and (b) annual distribution and
service fees of 1% of the average daily net asset value of these shares. Class B
shares automatically convert into Class A shares (which pay lower ongoing
expenses) at the end of eight years after purchase. No contingent deferred sales
charge applies after the fifth year following the purchase of Class B shares.
Class C shares of each Fund are offered only to certain employee
benefit plans and large institutions. No sales charge is imposed at the time of
purchase or redemption of Class C shares. Class C shares do not pay any
distribution or service fees.
Class D shares of each Fund are subject to (a) a contingent deferred
sales charge of 1% if redeemed within one year following purchase and (b) annual
distribution and service fees of 1% of the average daily net asset value of such
shares.
Because the Reorganization will be effected at net asset value without
the imposition of a sales charge, Acquiring Fund Shares acquired by shareholders
of the Acquired Fund pursuant to the proposed Reorganization would not be
subject to any initial sales charge or contingent deferred sales charge as a
result of the Reorganization. However, holders of the Acquiring Fund Shares
acquired as a result of the Reorganization would continue to be subject to a
contingent deferred sales charge upon subsequent redemption to the same extent
as if they had continued to hold their shares of the Acquired Fund.
Each Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1
(each, a "Distribution Plan") in accordance with the regulations promulgated
under the 1940 Act. Under the provisions of the Distribution Plan, each Fund
makes payments to SSRIS based on an annual percentage of the average daily value
of the net assets of each class of shares as follows:
Class of Shares
of Each Fund Service Fee Distribution Fee
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
Some or all of the service fees are used to pay or reimburse securities
dealers, financial institutions and others (collectively referred to herein as
securities dealers or dealers) (including dealers that are affiliates of SSRIS)
for personal services and/or the maintenance of shareholder accounts. In
addition, SSRIS generally pays an initial commission to dealers for the sale of
shares of each Fund with a portion of such commission representing payment for
personal services and/or the maintenance of shareholder accounts by such
dealers. Dealers who have sold Class A shares of each Fund are eligible for
further reimbursement commencing as of the time of such sale. Dealers who have
sold Class B and Class D shares of each Fund are eligible for further
reimbursement after the first year during which such shares have been held of
record by such dealer as nominee for its clients (or by such clients directly).
Any service fees received by SSRIS and not allocated to dealers may be applied
by SSRIS to reduce expenses incurred by it directly for personal services and/or
the maintenance of shareholder accounts.
23
<PAGE>
The distribution fees are used primarily to offset initial and ongoing
commissions paid to dealers for selling such shares. Any distribution fee
received by SSRIS and not allocated to dealers may be applied by SSRIS in
connection with sales or marketing efforts, including special promotional fees
and cash and noncash incentives based upon sales by dealers. Commissions and
other cash and noncash incentives and payments to dealers, to the extent payable
out of the general profits, revenues or other sources of SSRIS (including the
advisory fees paid by each Fund), have also been authorized pursuant to the
respective Distribution Plan.
Each Fund permits Class A shares of such Fund to be purchased without a
sales charge by certain Trustees or Directors (as the case may be), officers,
employees, their relatives and other persons directly or indirectly related to
the Fund or affiliated entities. Class A shares of each Fund may also be sold at
a reduced sales charge or without a sales charge pursuant to certain sponsored
arrangements or managed fee-based programs.
COMPARATIVE INFORMATION ON SHAREHOLDER SERVICES
Each Fund offers the same shareholder services, including the Open
Account System, reinvestment privileges, a systematic withdrawal plan, a
dividend allocation plan, telephone purchases, telephone exchanges, telephone
redemptions and access to the Investamatic Check Program, an automatic
investment program. The number of shares received in connection with any
reinvestment of dividends will be based upon the net asset value per share of
the applicable class of shares of such Fund in effect on the record date.
Each Fund currently has identical exchange privileges. Shareholders of
the Acquired Fund may exchange their shares for shares of a corresponding class
of shares, when available, of certain funds as determined by SSRIS, at any time
on the basis of the relative net asset values of the respective shares to be
exchanged, subject to compliance with applicable securities laws. Shareholders
of any other such fund may similarly exchange their shares for shares of an
available corresponding class of the Acquired Fund.
Each Fund offers the same redemption features, including the acceptance
of redemption requests by mail, telephone and wire, provided that applicable
conditions are met. Any request to redeem shares of the Acquired Fund received
and processed prior to the Reorganization will be treated as a redemption of
shares of the Acquired Fund. Any request to redeem shares received or processed
after the Reorganization will be treated as a request to redeem shares of the
Acquiring Fund.
Because each Fund currently offers the same shareholder services,
after the closing of the proposed Reorganization the same services will continue
to be available to the shareholders of the Acquired Fund only as shareholders of
the Acquiring Fund.
FISCAL YEAR
The Acquiring Fund and the Acquired Fund operate on fiscal years ending
October 31.
PERFORMANCE
The following is a discussion of the performance of the Acquiring Fund
for the fiscal year ended October 31, 1996.
24
<PAGE>
The Acquiring Fund outperformed Lipper Analytical Services, Inc.'s General U.S.
Government Funds Category for the 12 months ended October 31, 1996. The Fund's
conservative positioning helped its performance when interest rates were on the
rise during much of 1996.
The Acquiring Fund's management was very active with the portfolio. In late
1995, when interest rates were declining, the Fund emphasized Treasuries, at 41%
of the portfolio. When interest rates rose in 1996, the Acquiring Fund's
management reduced its position in Treasuries and increased its holdings in
mortgage securities. As of April 30, 1996, the Acquiring Fund had 45% of the
portfolio invested in mortgages.
As interest rates started to come down again later in 1996, the Acquiring Fund's
management reduced mortgage holdings and moved back into Treasuries, which made
up 33% of the portfolio as of October 31, 1996.
The non-dollar portions of the portfolio performed well and added value
during this time, even though their position in the portfolio was and is
relatively small.
The fluctuations in interest rates also caused movements in the Acquiring Fund's
yield during the fiscal year. The yield was at its lowest at the end of November
at 5.36%, and at its highest at the end of May at 6.25%.
Comparison of Change in Value of A $10,000 Investment in
The Merrill Lynch Blended Index,
The Merrill Lynch Government Master Index and the
State Street Research Government Income Fund
Class A Shares
Average Annual Total Return
1 Year 5 Years Life of Fund
+0.54% +6.47% +7.41%
Government ML Government
Income ML Blended Master
Fund Index Index
3/87 9550 10000 10000
10/87 9408 9935 9849
10/88 10328 11045 10807
10/89 11321 12316 12106
10/90 11948 13154 12825
10/91 13890 15171 14703
10/92 15259 16660 16223
10/93 17034 18553 18333
10/94 16424 17933 17539
10/95 18899 20669 20242
10/96 19896 21831 21263
Class B Shares
Average Annual Total Return
1 Year 5 Years Life of Fund
-0.43% +6.56% +7.62%
Government ML Government
Income ML Blended Master
Fund Index Index
3/87 10000 10000 10000
10/87 9852 9935 9849
10/88 10814 11045 10807
10/89 11855 12316 12106
10/90 12511 13154 12825
10/91 14544 15171 14703
10/92 15978 16660 16223
10/93 17770 18553 18333
10/94 16992 17933 17539
10/95 19397 20669 20242
10/96 20272 21831 21263
Class C Shares
Average Annual Total Return
1 Year 5 Years Life of Fund
+5.55% +7.62% +8.02%
Government ML Government
Income ML Blended Master
Fund Index Index
3/87 10000 10000 10000
10/87 9852 9935 9849
10/88 10814 11045 10807
10/89 11855 12316 12106
10/90 12511 13154 12825
10/91 14544 15171 14703
10/92 15978 16660 16223
10/93 17855 18553 18333
10/94 17244 17933 17539
10/95 19894 20669 20242
10/96 20997 21831 21263
Class D Shares
Average Annual Total Return
1 Year 5 Years Life of Fund
+3.52% +6.88% +7.63%
Government ML Government
Income ML Blended Master
Fund Index Index
3/87 10000 10000 10000
10/87 9852 9935 9849
10/88 10814 11045 10807
10/89 11855 12316 12106
10/90 12511 13154 12825
10/91 14544 15171 14703
10/92 15978 16660 16223
10/93 17770 18553 18333
10/94 16992 17933 17539
10/95 19411 20669 20242
10/96 20286 21831 21263
25
<PAGE>
The Merrill Lynch Government Master Index and the Merrill Lynch Blended
Index are indicators of overall U.S. bond market performance. Those indices are
unmanaged and do not take sales charges into consideration. Direct investment in
those indices is not possible and performance results are for illustrative
purposes only. Investments in the Acquiring Fund are not insured or guaranteed
by the U.S. Government or any other entity. Performance figures for the
Acquiring Fund prior to the adoption of class designations in June, 1993 assume
the application of an initial sales charge of up to 4.5% of the offering price
or a contingent deferred sales charge of up to 5% of the redemption proceeds, as
the case may be. Performance figures for Class B shares and Class D shares,
including any shares which subsequently were exchanged for such Class B and
Class D shares, assume the application of distribution fees payable in
accordance with a Plan of Distribution adopted pursuant to Rule 12b-1 under the
1940 Act in the amount of 0.25% per annum based on the average daily value of
the net assets of such shares for any period prior to June 1, 1993, and 1% per
annum based on the average daily value of the net assets of such shares for any
period on or after June 1, 1993.
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in the
Acquiring Fund will fluctuate and shares, when redeemed, may be worth more or
less than their original cost. All returns of the Acquiring Fund assume
reinvestment of capital gain distributions and income dividends.
Further information about each Fund's performance is contained in each
Fund's annual and semiannual reports, which may be obtained without charge by
writing to the Acquired Fund at One Madison Avenue, New York, New York 10010 or
the Acquiring Fund at One Financial Center, Boston, Massachusetts 02111, or
calling (800) 562-0032.
COMPARATIVE INFORMATION ON SHAREHOLDER RIGHTS
The following is a summary of certain of the provisions of the
Company's Restated Articles of Incorporation and By-laws and the Trust's First
Amended and Restated Master Trust Agreement and By-laws. Shareholders should
refer directly to the provisions of the Company's Restated Articles of
Incorporation and By-laws and the Trust's Master Trust Agreement and By-laws for
their full text.
General. The Acquired Fund is a series of the Company, which was
organized as a Maryland corporation on April 29, 1991 under the name MetLife
Portfolios, Inc. and is registered with the Commission as an open-end
diversified management company. On February 17, 1995, the Company filed an
amendment to its Charter changing its name to State Street Research Portfolios,
Inc. The Company and the Acquired Fund are governed by Restated Articles of
Incorporation, dated February 17, 1995. The above-referenced Restated Articles
of Incorporation may hereinafter be referred to as the "Restated Articles of
Incorporation." As a Maryland corporation, the Company's operations are
governed by its Restated Articles of Incorporation and applicable Federal and
Maryland law.
The Acquiring Fund is a series of the Trust, a business trust which was
established in 1986 under the laws of the Commonwealth of Massachusetts under
its former name MetLife-State Street Fixed Income Trust and is registered with
the Commission as an open-end management company. The Trust and the Acquiring
Fund are governed by a First Amended and Restated Master Trust Agreement dated
June 1, 1993, as further amended thereafter. The above-referenced Master Trust
Agreement may hereinafter be referred to as the "Master Trust Agreement." As a
Massachusetts business trust, the Trust's operations are
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governed by its Master Trust Agreement and applicable Federal and Massachusetts
laws.
Shares of the Acquired Fund and the Acquiring Fund. Interests in the
Acquired Fund are represented by shares of common stock, $.01 par value per
share. The Company's Restated Articles of Incorporation have authorized 2
billion shares of common stock, 100 million shares of which are to be issued in
the Acquired Fund. As of the date hereof, the Company has two operating series:
State Street Research International Equity Fund and the Acquired Fund. Each
share of any Company series represents an equal proportionate interest in the
assets and liabilities, excluding differences in class expenses, belonging to
that series. As such, each share is entitled to dividends and distributions out
of the surplus or other lawfully available assets belonging to that series as
declared by the Board of Directors.
Beneficial interests of the Acquiring Fund are represented by
transferable shares, par value $.001 per share. The Master Trust Agreement
permits the Trustees to issue an unlimited number of shares and to divide such
shares into an unlimited number of series. As of the date hereof, the Trust has
four operating series: the Acquiring Fund; State Street Research Strategic
Portfolios: Conservative; State Street Research Strategic Portfolios: Moderate;
and State Street Research Strategic Portfolios: Aggressive. Each share of any
Trust series represents an equal proportionate interest in the assets and
liabilities, excluding differences in class expenses, belonging to that series.
As such, each share is entitled to dividends and distributions out of the income
(after expenses) belonging to that series as declared by the Board of Trustees.
Voting Requirements. The Company's Restated Articles of Incorporation
may be amended at any time in the manner prescribed by Maryland law. On any
matter which affects only the interests of a certain series or class of shares
of the Company and with respect to which a separate series or class vote is
required by the 1940 Act or Maryland law, only the holders of shares of that
series or class, as the case may be, are entitled to vote.
Generally, the provisions of the Master Trust Agreement of the Trust
may be amended at any time, so long as such amendment does not adversely affect
the rights of any shareholder with respect to which such amendment is or
purports to be applicable and so long as such amendment is not in contravention
of applicable law, by an instrument in writing signed by a majority of the then
Trustees (or by an officer of such Trust pursuant to the vote of a majority of
such Trustees). Generally, any amendment to the Trust's Master Trust Agreement
that adversely affects the rights of shareholders of one or more series may be
adopted by a majority of the then Trustees of the Trust when authorized by
shareholders holding a majority of the shares entitled to vote.
Voting Rights. Neither the Company nor the Acquired Fund holds an
annual meeting of shareholders, and there normally is no meeting of shareholders
for the purpose of electing Directors unless and until such time as less than
a majority of the Directors holding office have been elected by shareholders. A
meeting of shareholders of the Company, for any purpose, must be called upon the
written request of shareholders holding at least 10% of the Company's
outstanding shares. On each matter submitted to a vote of the shareholders of
the Company, each shareholder is entitled to one vote for each whole share owned
and a proportionate, fractional vote for each fractional share outstanding in
the shareholder's name on the Company's books. On any matter which affects only
the interests of a certain series of shares of the Company, such as the Acquired
Fund, or any class of such series and with respect to which a separate series or
class vote is required by the 1940 Act or Maryland law, only the holders of
shares of that series or class, as the case may be, are entitled to vote.
Directors hold office until a successor is elected and qualified, and vacancies
in the Board of Directors may be filed by the Board of Directors.
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The Master Trust Agreement provides that special meetings of
shareholders for any purpose requiring action by shareholders under such Master
Trust Agreement or the Trust's By-laws shall be called upon the written request
of holders of at least 10% of the outstanding shares of the Trust or, as the
context may require, a series thereof. The Master Trust Agreement provides in
general that shareholders have the power to vote only on the following matters,
each as more fully described in such Master Trust Agreements: (a) the election
or removal of Trustees as provided in the Master Trust Agreement; (b) with
respect to certain contracts, such as contracts for investment advisory or
management services, to the extent required as provided in the Master Trust
Agreement as a whole; (c) with respect to any termination of the Trust as
provided in the Master Trust Agreement; (d) an amendment of the Master Trust
Agreement as provided in the Master Trust Agreement; (e) to the same extent as
the stockholders of a Massachusetts business corporation as to whether or not a
court action, proceeding or claim should or should not be brought or maintained
derivatively or as a class action on behalf of the Trust, any Sub-Trust thereof
or its stockholders; and (f) with respect to such additional matters relating to
the Trust as may be required by the 1940 Act, the Master Trust Agreement, the
By-laws or any registration of the Trust with the Commission (or any successor
agency) or any state, or as the Trustees may consider necessary or desirable.
Certain of the foregoing matters will involve separate votes of one or more
series of a Trust, while others will require a vote of the Trust's shareholders
as a whole.
Shareholder Liability. Under Maryland law, the Acquired Fund's
shareholders have no personal liability for the Acquired Fund's corporate acts
and obligations. The Maryland General Corporation Law does not have any
provision pertaining to shareholder responsibility for unpaid corporate
liabilities in the event of dissolution.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for the
obligations of the Trust. However, the Master Trust Agreement disclaims
shareholder liability for acts or obligations of the Trust. The Master Trust
Agreement provides for indemnification, under certain circumstances, out of
Trust property for all losses and expenses of any shareholder held personally
liable by virtue of his status as such, and not because of such shareholder's
acts or omissions or for some other reason, for the obligations of the Trust.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is considered by the Trust to be remote since it is
limited to circumstances in which a disclaimer is inoperative and the Trust
itself would be unable to meet its obligations.
Shares of the Acquiring Fund issued to the shareholders of the Acquired
Fund in the Reorganization will be fully paid and nonassessable when issued and
transferable without restrictions and will have no preemptive or conversion
rights.
Liability of Directors, Trustees and Officers. The By-Laws of the
Company provide that the Company will indemnify Directors of the Company against
liabilities and expenses incurred in connection with litigation in which they
may be involved because of their positions with the Company to the extent
permitted by Maryland law. The Company only is required under the Bylaws to
indemnify in advance expenses to any person other than a Director to the extent
specifically approved by resolution adopted by the Board of Directors. Nothing
in the Restated Articles of Incorporation or the By-laws of the Company,
however, protects or indemnifies a Director or officer against any liability to
which such person would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of such person's office, as determined by (a) a final decision on the
merits by a court or other body before whom the proceeding was brought that the
person to be indemnified was not liable by reason of disabling conduct, or (b)
in the absence of such a decision, a reasonable determination, based upon a
review of the facts, that the person to be indemnified was not liable by reason
of disabling conduct, by (i) the vote of a majority of a quorum of Directors who
are neither "interested persons" of the Company, as defined in the 1940 Act, nor
parties to the proceeding, or (ii) an independent legal counsel in a written
opinion. The Company may not advance legal expenses for the defense of a
proceeding brought by the Company or its shareholders against a Director or
officer unless, among other things, he or she furnishes an undertaking to repay
the advance unless it is ultimately determined that he or she is entitled to
indemnification.
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Under the Master Trust Agreement, Trustees and officers will be
indemnified, under certain circumstances, for all liabilities, including the
expenses of litigation, against them unless their conduct is determined to
constitute willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties, such determination to be based upon the outcome of a
court action or administrative proceeding or a reasonable determination,
following a review of the facts, by (a) a vote of a majority of a quorum of the
Trustees who are neither "interested persons" of the Trust as defined in the
1940 Act nor parties to the proceeding or (b) an independent legal counsel in a
written opinion. The Trust may also advance money for these expenses provided
that the Trustee or officer undertakes to repay the Trust if his or her conduct
is later determined to preclude indemnification and certain other conditions are
met.
It should be noted that it has been the view of the staff of the
Commission that to the extent that any provisions such as those described above
are inconsistent with the 1940 Act, including Section 17 thereof, the provisions
of the 1940 Act preempt such inconsistent provisions.
Appraisal Rights. Under the laws of the State of Maryland,
shareholders of the Acquired Fund do not have appraisal rights in connection
with a combination or acquisition of the assets of the Acquired Fund by another
entity. Shareholders of the Acquired Fund may, however, redeem their shares at
net asset value prior to the date of the Reorganization.
Neither the Master Trust Agreement of the Trust nor Massachusetts law
grants the shareholders of the Acquiring Fund any rights in the nature of
dissenters' rights of appraisal with respect to any action upon which such
shareholders may be entitled to vote.
MANAGEMENT
Responsibility for the management and supervision of the Company and
its funds, including the Acquired Fund, rests with the Company's Board of
Directors. The investment manager for the Acquired Fund is SSRM. SSRM has
entered into a Sub-Investment Management Agreement with the Company and GFM,
whereby GFM has assumed the overall responsibility for managing the investments
of the Acquired Fund, subject to the supervision of the Company's Board of
Directors and SSRM. As of [________________], 1997, SSRM and GFM had
$[__________] and $[________] under management, respectively. The Acquired Fund
is managed by Nicholas Sanjana. Mr. Sanjana has managed the Acquired Fund since
its inception in January 1992. For the five years prior to joining GFM, he
served as Associate Director at Chase Investment Management Group which he
joined in 1989, before which he was Senior Portfolio Manager of Deutsche Bank
Capital Management (UK) Ltd.
Responsibility for the management and supervision of the Trust,
including the Acquiring Fund, rests with the Trust's Board of Trustees. The
investment manager for the Acquiring Fund is SSRM. SSRM is charged with the
overall responsibility for managing the investments and business affairs of the
Acquiring Fund, subject to the authority of the Board of Trustees. The Acquiring
Fund is managed by John H. Kallis. Mr. Kallis has managed the Acquiring Fund
since May 1987. Mr. Kallis' principal occupation currently is Senior Vice
President of SSRM. During the past five years, he has also served as portfolio
manager for SSRM.
ADDITIONAL INFORMATION ABOUT THE FUNDS
Information about the Acquiring Fund is included in its current
Prospectus dated March 1, 1997, a copy of which is included herewith and
incorporated by reference herein. Additional information about the Acquiring
Fund is included in the Fund's
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Statement of Additional Information dated March 1, 1997. That Statement of
Additional Information has been filed with the Commission and is incorporated by
reference herein. Copies of that statement may be obtained without charge by
writing to State Street Research Investment Services, Inc., One Financial
Center, Boston, Massachusetts 02111, or by calling (800) 562-0032.
Information about the Acquired Fund is included in its current
Prospectus dated March 1, 1997, which is incorporated by reference herein.
Additional information about the Acquired Fund is included in the Acquired
Fund's Statement of Additional Information dated March 1, 1997. That Statement
of Additional Information has been filed with the Commission and is incorporated
by reference herein. Copies of that Statement may be obtained without charge by
writing to State Street Research Portfolios, Inc., One Madison Avenue, New York,
New York 10010 or by calling State Street Research Investment Services, Inc. at
(800) 562-0032.
Each Fund is subject to the informational requirements of the Exchange
Act and the 1940 Act, and in accordance therewith files proxy materials, reports
and other information with the Commission. These reports can be inspected and
copied at the Public Reference Facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, as well as at the
following regional offices: New York Regional Office, 75 Park Place, Room 1228,
New York, NY 10007; and Chicago Regional Office, Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago IL 60661. Copies of such material can
also be obtained from the Public Reference Branch, Office of Consumer Affairs
and Information Services, Securities and Exchange Commission, Judiciary Plaza,
450 Fifth Street, N.W., Washington DC 20549 at prescribed rates.
VOTING INFORMATION
Any shareholder who has given a proxy has the right to revoke it at any
time prior to its exercise by attending the Meeting and voting his or her shares
in person or by submitting a written notice of revocation or a later-dated proxy
to the Company at the address of the Company set forth on the cover page of this
Joint Proxy Statement/Prospectus prior to the date of the Meeting. Shareholders
of record of the Acquired Fund at the close of business on [____________,] 1997
(the "Record Date") will be entitled to notice of, and to vote at, the Meeting
of the Acquired Fund or to vote at any adjournments thereof. This Proxy
Statement/Prospectus, proxies and accompanying Notice of Meeting were first sent
or given to shareholders of the Acquired Fund on or about [____________,] 1997.
As of the Record Date, there were approximately [_______], [______],
[_______] and [_____] issued and outstanding Class A, Class B, Class C and Class
D shares, respectively, of the Acquired Fund. Each share of such Acquired Fund
is entitled to one vote, with a proportionate vote for each fractional share.
If the enclosed proxy is properly executed and returned in time to be
voted at the Meeting, the shares represented thereby will be voted in accordance
with the instructions on the proxy. Unless instructions to the contrary are
marked thereon, the proxy will be voted for the proposal described herein and,
in the discretion of the persons named herein as proxies, to take such further
action as they may determine appropriate in connection with any other matter
which may properly come before the Meeting or any adjournments thereof. The
Company does not currently know of any matter to be considered at the Meeting
other than the proposal to approve the Plan of Reorganization.
The affirmative vote of the holders of a majority of the shares
entitled to vote of the Acquired Fund outstanding at the close of business on
the Record Date, voting together as a single class, is required to approve the
Plan of Reorganization on behalf of the Acquired Fund and the Company. Approval
of the Plan of Reorganization by the shareholders of the Acquired Fund is a
condition of the consummation of the
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Reorganization. If the Reorganization is not approved, the Directors of the
Company will continue the management of the Acquired Fund and the Trustees of
the Trust will continue the management of the Acquiring Fund, and may consider
other alternatives in the best interests of the shareholders of the Acquired and
Acquiring Funds, as the case may be.
The holders of a majority of the shares entitled to vote of the
Acquired Fund outstanding at the close of business on the Record Date present in
person or represented by proxy constitute a quorum for the Meeting; however, as
noted above, the affirmative vote of a majority of the voting shares of the
Acquired Fund, voting together as a single class (within the meaning of the 1940
Act) is required to approve the Reorganization. In the event a quorum is not
present at the Meeting or in the event a quorum is present at the Meeting but
sufficient votes to approve the Plan of Reorganization are not received, the
persons named as proxies may propose one or more adjournments without further
notice to shareholders of the Meeting to permit further solicitation of proxies
provided such persons determine, after consideration of all relevant factors,
including the nature of the proposal, the percentage of votes then cast, the
percentage of negative votes then cast, the nature of the proposed solicitation
activities and the nature of the reasons for such further solicitation, that an
adjournment and additional solicitation is reasonable and in the interests of
shareholders. For purposes of determining the presence of a quorum for
transacting business at the Meeting and for determining whether sufficient votes
have been received for approval of the proposal to be acted upon at the Meeting,
abstentions and broker "non-votes" (that is, proxies from brokers or nominees
indicating that such persons have not received instructions from the beneficial
owner or other persons entitled to vote shares on a particular matter with
respect to which the brokers or nominees do not have discretionary power) will
be treated as shares that are present at the Meeting, but which have not been
voted. For this reason, abstentions and broker non-votes will assist the
Acquired Fund in obtaining a quorum, but both have the practical effect of a
"no" vote for purposes of obtaining the requisite vote for approval of the
proposals to be acted upon at the Meeting.
The Acquiring Fund and the Acquired Fund will evenly share the costs of
preparing, printing and mailing the enclosed proxy, accompanying notice and
Joint Proxy Statement/Prospectus and all other costs in connection with
solicitation of proxies, including any additional solicitation by letter,
telephone or telegraph. In addition to solicitation of proxies by mail, officers
of the Company and officers and regular employees of SSRIS, affiliates of SSRIS,
or other representatives of the Company may also solicit proxies by telephone or
telegram or in person. The Company may also retain a proxy solicitation firm to
assist in any special, personal solicitation of proxies. The cost of retaining
such a firm is estimated to be less than $25,000.
THE DIRECTORS OF THE COMPANY, INCLUDING THE INDEPENDENT DIRECTORS OF
THE COMPANY, RECOMMEND APPROVAL OF THE PLAN OF REORGANIZATION.
EXPERTS
The financial statements of the Acquired Fund for the fiscal year ended
October 31, 1996, included in the Acquired Fund's Statement of Additional
Information dated March 1, 1997, have been incorporated herein by reference in
reliance on the reports of Deloitte & Touche LLP, independent accountants, given
on the authority of that firm as experts in accounting and auditing. The
financial statements of the Acquiring Fund for the fiscal year ended October 31,
1996, included in the Acquiring Fund's Statement of Additional Information dated
March 1, 1997, have been incorporated herein by reference in reliance on the
reports of Price Waterhouse LLP, independent accountants, given on the authority
of that firm as experts in accounting and auditing. Certain legal matters with
respect to the issuance of the shares of the Trust will be passed upon by
Goodwin, Procter & Hoar LLP.
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OTHER MATTERS
The Board of Directors does not intend to present any other business at
the Meeting, nor are they aware that any shareholder intends to do so. If,
however, any other matters are properly brought before the Meeting, the persons
named in the accompanying proxy will vote thereon in accordance with their
judgment.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE FILL IN, DATE AND
SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. NO
POSTAGE IS NECESSARY IF IT IS MAILED IN THE UNITED STATES.
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EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION dated as of
_________, 1997 by and between State Street Research Portfolios, Inc., a
Maryland corporation (the "Company"), on behalf of the State Street Research
International Fixed Income Fund, a series of the Company (the "Acquired Fund"),
and State Street Research Financial Trust, a Massachusetts business trust (the
"Trust"), on behalf of State Street Research Government Income Fund, a series of
the Trust (the "Acquiring Fund").
W I T N E S S E T H:
WHEREAS, each of the Company and the Trust is an open-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act");
WHEREAS, this Agreement is intended to be, and is adopted as, a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) of the
Internal Revenue Code of 1986, as amended, such reorganization to consist of the
transfer of all of the assets of the Acquired Fund in exchange solely for Class
A, Class B, Class C and Class D shares of beneficial interest, $.001 par value
per share, of the Acquiring Fund ("Acquiring Fund Shares") and the assumption by
the Acquiring Fund of certain liabilities of the Acquired Fund and the
distribution, after the Closing hereinafter referred to, of Acquiring Fund
Shares to the shareholders of the Acquired Fund in liquidation of the Acquired
Fund, all upon the terms and conditions hereinafter set forth in this Agreement
(collectively, the "Reorganization"); and
WHEREAS, the Directors of the Company, including a majority of the
Directors who are not interested persons, and the Trustees of the Trust,
including a majority of the Trustees who are not interested persons, have
determined that participating in the transactions contemplated by this Agreement
is in the best interests of the Acquired Fund and the Acquiring Fund,
respectively.
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties hereto agree as follows:
1. Transfer of Assets. Subject to the terms and conditions set forth
herein, at the closing provided for in Section 5 (the "Closing") the Company on
behalf of the Acquired Fund shall transfer all of the assets of the Acquired
Fund, and assign all Assumed Liabilities (as hereinafter defined) to the
Acquiring Fund, and the Trust on behalf of the Acquiring Fund shall acquire all
such assets, and shall assume all such Assumed Liabilities, upon delivery to the
Company on behalf of the Acquired Fund of Acquiring Fund Shares having a net
asset value equal to the value of the net assets of the Acquired Fund
transferred (the "New Shares"). "Assumed Liabilities" shall mean those
liabilities, including all expenses, costs, charges and reserves, reflected in
an unaudited statement of assets and liabilities of the Acquired Fund as of the
close of business on the Valuation Date (as hereinafter defined), determined in
accordance with generally accepted accounting principles consistently applied
from the prior audited
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period. The net asset value of the New Shares and the value of the net assets of
the Acquired Fund to be transferred shall be determined as of the close of
regular trading on the New York Stock Exchange on the business day next
preceding the Closing (the "Valuation Date") using the valuation procedures set
forth in the then current prospectus and statement of additional information of
the Acquiring Fund. All Assumed Liabilities of the Acquired Fund, to the extent
that they exist at or after the Closing, shall after the Closing attach to the
Acquiring Fund and may be enforced against the Acquiring Fund to the same extent
as if the same had been incurred by the Acquiring Fund.
2. Liquidation of the Acquired Fund. At or as soon as practicable after
the Closing, the Acquired Fund will be liquidated and the New Shares that have
been delivered to the Company on behalf of the Acquired Fund will be distributed
to the shareholders of the Acquired Fund, each shareholder to receive New Shares
of the corresponding class equal to the pro rata portion of shares of beneficial
interest of the Acquired Fund held by such shareholder as of the close of
business on the Valuation Date. Such liquidation and distribution will be
accompanied by the establishment of an open account on the share records of the
Acquiring Fund in the name of each shareholder of the Acquired Fund and
representing the respective pro rata number of New Shares due such shareholder.
As soon as practicable after the Closing, the Company shall file on behalf of
the Acquired Fund such instruments of dissolution, if any, as are necessary to
effect the dissolution of the Acquired Fund and shall take all other steps
necessary to effect a complete liquidation and dissolution of the Acquired Fund.
As of the Closing, each outstanding certificate which, prior to the Closing,
represented shares of the Acquired Fund will be deemed for all purposes to
evidence ownership of the number of Acquiring Fund Shares issuable with respect
thereto pursuant to the Reorganization. After the Closing, certificates
originally representing shares of Class A or Class C of the Acquired Fund will
be rendered nonnegotiable; upon special request and surrender of such
certificates to State Street Bank and Trust Company as transfer agent, holders
of these nonnegotiable certificates shall be entitled to receive certificates
representing the number of Acquiring Fund Shares issuable with respect thereto.
All Class B and Class D shares of the Acquiring Fund are held of record in book
entry form and no certificates for such shares will be issued.
3. Representations and Warranties.
(a) The Company, on behalf of the Acquired Fund, hereby
represents and warrants to the Acquiring Fund as follows:
(i) the Company is duly organized, validly existing
and in good standing under the laws of the State of Maryland and has
full power and authority to conduct its business as presently
conducted;
(ii) the Company has full power and authority to
execute, deliver and carry out the terms of this Agreement on behalf of
the Acquired Fund;
(iii) the execution and delivery of this Agreement on
behalf of the Acquired Fund and the consummation of the transactions
contemplated hereby are duly authorized and no other proceedings on the
part of the Company or the shareholders of the Acquired Fund (other
than as contemplated in Section 4(h)) are necessary to authorize this
Agreement and the transactions contemplated hereby;
(iv) this Agreement has been duly executed by the
Company on behalf of the Acquired Fund and constitutes its valid and
binding obligation, enforceable in accordance
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with its terms, subject to applicable bankruptcy, reorganization,
insolvency, moratorium and other rights affecting creditors' rights
generally, and general equitable principles;
(v) neither the execution and delivery of this
Agreement by the Company on behalf of the Acquired Fund, nor the
consummation by the Company on behalf of the Acquired Fund of the
transactions contemplated hereby will conflict with, result in a breach
or violation of or constitute (or with notice, lapse of time or both) a
breach of or default under, the Restated Articles of Incorporation or
By-Laws of the Company, as each may be amended, or any statute,
regulation, order, judgment or decree, or any instrument, contract or
other agreement to which the Company is a party or by which the Company
or any of its assets is subject or bound; and
(vi) no authorization, consent or approval of any
governmental or other public body or authority or any other party is
necessary for the execution and delivery of this Agreement by the
Company on behalf of the Acquired Fund or the consummation of any
transactions contemplated hereby by the Company, other than as shall be
obtained at or prior to the Closing.
(b) The Trust, on behalf of the Acquiring Fund, hereby
represents and warrants to the Acquired Fund as follows:
(i) The Trust is duly organized, validly existing and
in good standing under the laws of The Commonwealth of Massachusetts
and has full power and authority to conduct its business as presently
conducted;
(ii) The Trust has full power and authority to
execute, deliver and carry out the terms of this Agreement on behalf of
the Acquiring Fund;
(iii) the execution and delivery of this Agreement on
behalf of the Acquiring Fund and the consummation of the transactions
contemplated hereby are duly authorized and no other proceedings on the
part of the Trust or the shareholders of the Acquiring Fund are
necessary to authorize this Agreement and the transactions contemplated
hereby;
(iv) this Agreement has been duly executed by the
Trust on behalf of the Acquiring Fund and constitutes its valid and
binding obligation, enforceable in accordance with its terms, subject
to applicable bankruptcy, reorganization, insolvency, moratorium and
other rights affecting creditors' rights generally, and general
equitable principles;
(v) neither the execution and delivery of this
Agreement by the Trust on behalf of the Acquiring Fund, nor the
consummation by the Trust on behalf of the Acquiring Fund of the
transaction contemplated hereby will conflict with, result in a breach
or violation of or constitute (or with notice, lapse of time or both
constitute) a breach of or default under, the First Amended and
Restated Master Trust Agreement (the "Master Trust Agreement") or
By-Laws of the Trust, as each may be amended, or any statute,
regulation, order, judgment or decree, or any instrument, contract or
other agreement to which the Trust is a party or by which the Trust or
any of its assets is subject or bound; and
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(vi) no authorization, consent or approval of any
governmental or other public body or authority or any other party is
necessary for the execution and delivery of this Agreement by the Trust
on behalf of the Acquiring Fund or the consummation of any transactions
contemplated hereby by the Trust, other than as shall be obtained at or
prior to the Closing.
4. Conditions Precedent. The obligations of the Company on behalf of
the Acquired Fund and the Trust on behalf of the Acquiring Fund to effectuate
the plan of reorganization and liquidation hereunder shall be subject to the
satisfaction of the following conditions:
(a) At or immediately prior to the Closing, the Company shall
have declared and paid a dividend or dividends which, together with all previous
such dividends, shall have the effect of distributing to the shareholders of the
Acquired Fund all of such Fund's investment company taxable income for taxable
years ending at or prior to the Closing (computed without regard to any
deduction for dividends paid) and all of its net capital gain, if any, realized
in taxable years ending at or prior to the Closing (after reduction for any
capital loss carry-forward);
(b) A registration statement of the Acquiring Fund on Form
N-14 under the Securities Act of 1933, as amended (the "Securities Act"),
registering the New Shares under the Securities Act, and such amendment or
amendments thereto as are determined by the Board of Trustees of the Trust to be
necessary and appropriate to effect such registration of the New Shares (the
"Registration Statement"), shall have been filed with the Securities and
Exchange Commission (the "Commission") and the Registration Statement shall have
become effective, and no stop-order suspending the effectiveness of such
Registration Statement shall have been issued, and no proceeding for that
purpose shall have been initiated or threatened by the Commission (and not
withdrawn or terminated);
(c) The New Shares shall have been duly qualified for offering
to the public in all states in which such qualification is required for
consummation of the transactions contemplated hereunder;
(d) All representations and warranties of the Company on
behalf of the Acquired Fund contained in this Agreement shall be true and
correct in all material respects as of the date hereof and as of the Closing,
with the same force and effect as if then made, and the Trust on behalf of the
Acquiring Fund shall have received a certificate of an officer of the Company
acting on behalf of the Acquired Fund to that effect in form and substance
reasonably satisfactory to the Trust on behalf of the Acquiring Fund;
(e) All representations and warranties of the Trust on behalf
of the Acquiring Fund contained in this Agreement shall be true and correct in
all material respects as of the date hereof and as of the Closing, with the same
force and effect as if then made, and the Company on behalf of the Acquired Fund
shall have received a certificate of an officer of the Trust acting on behalf of
the Acquiring Fund to that effect in form and substance reasonably satisfactory
to the Company on behalf of the Acquired Fund;
(f) The Company on behalf of the Acquired Fund and the Trust
on behalf of the Acquiring Fund shall have received an opinion from
Goodwin, Procter & Hoar LLP regarding certain tax matters in connection with the
Reorganization;
4
<PAGE>
(g) The Trust on behalf of the Acquiring Fund shall have
certain agreed upon procedures performed by independent auditors, selected by
the Trust, on the unaudited statement of assets and liabilities described in
Section 1 of this Agreement, and shall have received a report thereon in
accordance with established accounting standards;
(h) A vote approving this Agreement and the Reorganization
contemplated hereby shall have been adopted by at least a majority of the
outstanding Class A, Class B, Class C and Class D shares of beneficial interest
of the Acquired Fund, voting together as a single class, entitled to vote at the
special meeting of shareholders of the Acquired Fund duly called for such
purpose; and
(i) The Company and the Trust shall have received from the
Commission an order approving the application pursuant to Section 17(b) of the
1940 Act for an order exempting the Reorganization from Section 17(a) of the
1940 Act.
5. Closing. The Closing shall be held at the offices of the Trust and
shall occur (a) immediately prior to the opening of business on the first Monday
following receipt of all necessary regulatory approvals and the final
adjournment of the meeting of shareholders of the Acquired Fund at which this
Agreement is considered or (b) such later time as the parties may agree. All
acts taking place at the Closing shall be deemed to take place simultaneously
unless otherwise provided. At, or as soon as may be practicable following the
Closing, the Acquiring Fund shall distribute the New Shares to the Acquired Fund
Record Holders (as herein defined) by instructing the Acquiring Fund to register
the appropriate number of New Shares in the names of the Acquired Fund's
shareholders, and the Acquiring Fund agrees promptly to comply with said
instruction. The shareholders of record of the Acquired Fund as of the close of
business on the Valuation Date shall be certified by the Company's transfer
agent (the "Acquired Fund Record Holders").
6. Expenses. The expenses incurred in connection with the transactions
contemplated by this Agreement, whether or not the transactions contemplated
hereby are consummated, will be shared evenly by the Acquired Fund and the
Acquiring Fund.
7. Termination. This Agreement and the transactions contemplated hereby
may be terminated and abandoned by resolution of the Board of Trustees of the
Trust or by resolution of the Board of Directors of the Company, at any time
prior to the Closing, if circumstances should develop that, in the opinion of
the Board of Trustees or the Board of Directors, in the sole discretion of
either, make proceeding with this Agreement inadvisable. In the event of any
such termination, there shall be no liability for damages on the part of either
the Acquired Fund or the Acquiring Fund, or their respective directors, trustees
or officers, to the other party or its directors, trustees or officers.
8. Amendments. This Agreement may be amended, waived or supplemented in
such manner as may be mutually agreed upon in writing by the authorized officers
of the Company acting on behalf of the Acquired Fund and by the authorized
officers of the Trust acting on behalf of the Acquiring Fund; provided, however,
that following the meeting of the Acquired Fund shareholders called by the
Company pursuant to Section 4(h) of this Agreement, no such amendment, waiver or
supplement may have the effect of changing the provisions for determining the
number of Acquiring Fund Shares to be issued to the Acquired Fund shareholders
under this Agreement to the detriment of such shareholders without their further
approval.
5
<PAGE>
9. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of The Commonwealth of Massachusetts, except as to
matters of conflicts of laws.
10. Further Assurances. Each of the Company and the Trust shall take
such further action, prior to, at, and after the Closing, as may be necessary or
desirable and proper to consummate the transactions contemplated hereby.
11. Limitations of Liability. The term "Trust" means and refers to the
trustees from time to time serving under the Master Trust Agreement of the
Trust, as the same may subsequently thereto have been, or subsequently hereto
be, amended. It is expressly agreed that the obligations of the Trust hereunder
shall not be binding upon any of the Trustees, shareholders, nominees, officers,
agents or employees of the Trust, personally, but bind only the assets and
property of the Acquiring Fund series of the Trust as provided in the Master
Trust Agreement of the Trust. The execution and delivery of this Agreement have
been authorized by the Trustees of the Trust and signed by an authorized officer
of the Trust, acting as such, and neither such authorization nor such execution
and delivery shall be deemed to have been made individually or to impose any
personal liability, but shall bind only the trust property of the Trust as
provided in its Master Trust Agreement. The Master Trust Agreement of the Trust
provides, and it is expressly agreed, that each Sub-Trust of the Trust shall be
charged with the liabilities in respect of that Sub-Trust and all expenses,
costs, charges or reserves belonging to that Sub-Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first set forth above by their duly authorized
representatives.
STATE STREET RESEARCH
FINANCIAL TRUST, on behalf
of State Street Research
Government Income Fund
Attest:
____________________________ By: _____________________________________
_____________________________________
ATTEST: STATE STREET RESEARCH PORTFOLIOS, INC.,
on behalf of State Street Research
International Fixed Income Fund
____________________________ By: _____________________________________
_____________________________________
320815.c2
10/23/96
6
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
a series of
State Street Research Portfolios, Inc.
One Madison Avenue
New York, New York 10010
(212) 578-7611
By and in Exchange for Shares of
STATE STREET RESEARCH GOVERNMENT INCOME FUND
a series of
State Street Research Financial Trust
One Financial Center
Boston, Massachusetts 02111
(800) 562-0032
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and certain liabilities of State Street Research
International Fixed Income Fund (the "International Fixed Income Fund"), a
series of State Street Research Portfolios, Inc., to State Street Research
Government Income Fund (the "Government Income Fund"), a series of State Street
Research Financial Trust, in exchange for Class A, Class B, Class C and Class D
shares of beneficial interest, $.01 par value per share, of the Government
Income Fund, consists of this cover page and the following described documents,
each of which is attached hereto and incorporated by reference herein:
(1) the Statement of Additional Information of the Government Income
Fund dated March 1, 1997;
(2) the Statement of Additional Information of the International Fixed
Income Fund dated March 1, 1997;
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the Joint Proxy
Statement/Prospectus of the Government Income Fund and the International Fixed
Income Fund dated [___________], 1997. A copy of the Joint Proxy
Statement/Prospectus may be obtained without charge by calling or writing the
Government Income Fund or the International Fixed Income Fund at the addresses
set forth above or by calling toll-free (800) 562-0032.
The date of this Statement of Additional Information is [___________],
1997.
B-1
<PAGE>
State Street Research Government Income Fund
a Series of
State Street Research Financial Trust
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1997
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS 2
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT TECHNIQUES 5
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS 15
TRUSTEES AND OFFICERS 18
INVESTMENT ADVISORY SERVICES 22
PURCHASE AND REDEMPTION OF SHARES 23
NET ASSET VALUE 25
PORTFOLIO TRANSACTIONS 26
CERTAIN TAX MATTERS 28
DISTRIBUTION OF SHARES OF THE FUND 31
CALCULATION OF PERFORMANCE DATA 35
CUSTODIAN 39
INDEPENDENT ACCOUNTANTS 39
FINANCIAL STATEMENTS 39
The following Statement of Additional Information is not a Prospectus. It
should be read in conjunction with the Prospectus of State Street Research
Government Income Fund (the "Fund") dated March 1, 1997, which may be obtained
without charge from the offices of State Street Research Financial Trust (the
"Trust") or State Street Research Investment Services, Inc. (the "Distributor"),
One Financial Center, Boston, Massachusetts 02111-2690.
GI-879D-295 1285F-950210(0396)SSR-LD
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under "The Fund's Investments" and "Limiting Investment Risk"
in the Fund's Prospectus, the Fund has adopted certain investment restrictions.
All of the Fund's fundamental investment restrictions are set forth below.
These fundamental restrictions may not be changed by the Fund except by the
affirmative vote of a majority of the outstanding voting securities of the Fund
as defined in the Investment Company Act of 1940, as amended (the "1940 Act").
(Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at the annual or a special meeting of security
holders duly called, (i) of 67% or more of the voting securities present at the
meeting if the holders of more than 50% of the outstanding voting securities are
present or represented by proxy or (ii) of more than 50% of the outstanding
voting securities, whichever is less.) Under these restrictions, it is the
Fund's policy:
(1) not to purchase a security of any one issuer (other than securities
issued or guaranteed as to principal or interest by the U.S.
Government or its agencies or instrumentalities or mixed-ownership
Government corporations) if such purchase would, with respect to 75%
of the Fund's total assets, cause more than 5% of the Fund's total
assets to be invested in the securities of such issuer or cause more
than 10% of the voting securities of such issuer to be held by the
Fund;
(2) not to issue senior securities, except that the Fund may borrow money
and engage in reverse repurchase agreements in amounts up to
one-third of the value of the Fund's net assets including the amounts
borrowed (provided that reverse repurchase agreements shall be
limited to 5% of the Fund's total assets);
(3) not to underwrite any issue of securities, except as it may be deemed
to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment
objective, policies and limitations;
(4) not to purchase or sell real estate, although it may invest in
securities of companies whose business involves the purchase or sale
of real estate or in securities which are secured by real estate or
interests in real estate;
(5) not to invest in physical commodities or physical commodity contracts
or options in excess of 10% of the Fund's total assets, except that
investments in essentially financial items or arrangements such as,
but not limited to, swap arrangements, hybrids, currencies, currency
and other forward contracts, futures contracts and options on futures
contracts on securities, securities
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<PAGE>
indices, interest rates and currencies shall not be deemed
investments in commodities or commodities contracts;
(6) not to lend money; however, the Fund may lend portfolio securities
and purchase bonds, debentures, notes and similar obligations (and
enter into repurchase agreements with respect thereto);
(7) not to sell securities short;
(8) not to invest in oil, gas or other mineral exploration or development
programs (provided that the Fund may invest in securities issued by
or which are based, directly or indirectly, on the credit of
companies which invest in or sponsor such programs);
(9) not to make any investment which would cause more than 25% of the
value of the Fund's total assets to be invested in securities of
issuers principally engaged in any one industry (for purposes of this
restriction, (a) utilities will be divided according to their
services so that, for example, gas, gas transmission, electric and
telephone companies will each be deemed in a separate industry, (b)
oil and oil related companies will be divided by type so that, for
example, oil production companies, oil service companies and refining
and marketing companies will each be deemed in a separate industry,
(c) finance companies will be classified according to the industry of
their parent companies, and (d) securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities (including
repurchase agreements collateralized by U.S. Government securities)
shall be excluded); and
(10) not to borrow money (through reverse repurchase agreements or
otherwise) except for emergency purposes or to facilitate management
of the portfolio by enabling the Fund to meet redemption requests
when the liquidation of portfolio accounts is determined to be
inconvenient or disadvantageous, provided that additional investments
will be suspended during any period when borrowings exceed 5% of the
Fund's net assets, and provided further that reverse repurchase
agreements shall not exceed 5% of the Fund's total assets; (during
the period in which any reverse repurchase agreements are
outstanding, the Fund will restrict the purchase of portfolio
instruments to money market instruments maturing on or before the
expiration date of the reverse repurchase agreements. Such purchases
will be made only to the extent necessary to assure completion of the
reverse repurchase agreement);
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<PAGE>
(11) not to purchase securities on margin other than in connection with
the purchase of put options on financial futures contracts, but the
fund may obtain such short-term credits as are necessary for
clearance of transactions;
(12) not to hypothecate, mortgage or pledge any of its assets except to
secure permitted borrowings and then not in excess of 10% of such
Fund's total assets, at the time of the borrowing; (as a matter of
interpretation which is not part of the fundamental policy, futures,
options and forward commitments, and related escrow or custodian
receipts or letters, margin or safekeeping accounts, or similar
arrangements used in the industry in connection with the trading of
such investments, are not deemed to involve a hypothecation, mortgage
or pledge of assets);
The following investment restrictions may be changed by a vote of a
majority of the Trustees. Under these restrictions, it is the Fund's policy:
(1) not to purchase any security or enter into a repurchase agreement if
as a result more than 15% of its net assets would be invested in
securities that are illiquid (including repurchase agreements not
entitling the holder to payment of principal and interest within
seven days); and
(2) not to invest more than 15% of its net assets in restricted
securities of all types (including not more than 5% of its net assets
in restricted securities which are not eligible for resale pursuant
to Rule 144A, Regulation S or other exemptive provisions under the
Securities Act of 1933);
(3) not to invest more than 5% of its total assets in securities of
private companies including predecessors with less than three years'
continuous operations except (a) securities guaranteed or backed by
an affiliate of the issuer with three years of continuous operations,
(b) securities issued or guaranteed as to principal or interest by
the U.S. Government, or its agencies or instrumentalities, or a
mixed-ownership Government corporation, (c) securities of issuers
with debt securities rated at least "BBB" by Standard & Poor's
Corporation or "Baa" by Moody's Investor's Service, Inc. (or their
equivalent by any other nationally recognized statistical rating
organization) or securities of issuers considered by the Investment
Manager to be equivalent, (d) securities issued by a holding company
with at least 50% of its assets invested in companies with three
years of continuous operations including predecessors, and (e)
securities which generate income which is exempt from local, state
or federal taxes; provided that the fund may invest up to 15% in
such issuers so long as such investments plus investments in
restricted securities (other than those which are eligible for
resale under Rule
4
<PAGE>
144A, Regulation S or other exemptive provisions) do not exceed 15%
of the Fund's total assets;
(4) not to acquire any security issued by any other investment company
(the "acquired company") if immediately after such acquisition the
Fund and all companies controlled by the Fund, if any, would own in
the aggregate (i) more than 3% of the outstanding voting stock of the
acquired company, (ii) securities issued by the acquired company
having an aggregate value in excess of 5% of the Fund's total assets
or (iii) securities issued by the acquired company and all other
investment companies (other than treasury stock of the Fund) having
an aggregate value in excess of 10% of the Fund's total assets,
except to complete a merger, consolidation or other acquisition of
assets; and
(5) not to purchase or retain any security of an issuer if, to the
knowledge of the Trust, those of its officers and Trustees and
officers and directors of its investment advisers who individually
own more than 1/2 of 1% of the securities of such issuer, when
combined, own more than 5% of the securities of such issuer taken at
market.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Among other investments described below, the Fund may buy and sell options,
futures contracts and options on futures contracts with respect to securities,
securities indices, currencies, and may enter into closing transactions with
respect to each of the foregoing under circumstances in which such instruments
and techniques are expected by State Street Research & Management Company (the
"Investment Manager') to aid in achieving the investment objectives of the Fund.
The Fund on occasion may also purchase instruments with characteristics of both
futures and securities (e.g., debt instruments with interest and principal
payments determined by reference to the value of a commodity or a currency at a
future time) and which, therefore, possess the risks of both future and
securities investments.
5
<PAGE>
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell underlying
assets, such as certain securities, currencies, or an index of securities, at a
future time at a specified price. A contract to buy establishes a "long"
position while a contract to sell establishes a "short" position.
The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or index after paying a transaction charge and posting
margin in an amount equal to a small percentage of the value of the underlying
asset or index. The Fund will initially be required to deposit with the Trust's
custodian or the broker effecting the futures transactions an amount of "initial
margin" in cash or U.S. Treasury obligations.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may elect
to close the position by taking an opposite position which will terminate the
Fund's position in the futures contract. A final determination of maintenance
margin is then made, additional cash is required to be paid by or released to
the Fund, and the Fund realizes a loss or a gain. While futures contracts with
respect to securities do provide for the delivery and acceptance of such
securities, such delivery and acceptance are seldom made.
Futures contracts will be executed primarily (a) to establish a short
position, and thus protect the Fund from experiencing the full impact of an
expected decline in market value of portfolio holdings without requiring the
sale of holdings, or (b) to establish a long position, and thus to participate
in an expected rise in market value of securities which the Fund intends to
purchase. In transactions establishing a long position in a futures contract,
money market instruments equal to the face value of the futures contract will be
identified by the Fund to the Trust's custodian for maintenance in a separate
account to insure that the use of such futures contracts is unleveraged.
Similarly, a representative portfolio of securities having a value equal to the
aggregate face value of the futures contract will be identified with respect to
each short position. The Fund will employ any
6
<PAGE>
other appropriate method of cover which is consistent with applicable regulatory
and exchange requirements.
Options on Securities
The Fund may use options on equity securities to implement its investment
strategy. A call option on a security, for example, gives the purchaser of the
option the right to buy, and the writer the obligation to sell, the underlying
asset at the exercise price during the option period. Conversely, a put option
on a security gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying asset at the exercise price during the option
period.
Purchased options have defined risk, i.e., the premium paid for the option,
no matter how adversely the price of the underlying asset moves, while affording
an opportunity for gain corresponding to the increase or decrease in the value
of the optioned asset.
Written options have varying degrees of risk. An uncovered written call
option theoretically carries unlimited risk, as the market price of the
underlying asset could rise far above the exercise price before its expiration.
The risk is tempered when the call option is covered, i.e., when the option
writer owns the underlying asset. In this case, the writer runs the risk of the
lost opportunity to participate in the appreciation in value of the asset rather
than the risk of an out-of-pocket loss. A written put option has defined risk,
i.e., the difference between the agreed-upon price that the Fund must pay to the
buyer upon exercise of the put and the value, which could be zero, of the asset
at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
his obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Options on Securities Indices
The Fund may engage in transactions in call and put options on securities
indices. For example, the Fund may purchase put options on indices of securities
in anticipation of or during a market decline to attempt to offset the decrease
in market value of its equity securities that might otherwise result.
Put options on indices of securities are similar to put options on the
securities themselves except that the delivery requirements are different.
Instead of giving the right
7
<PAGE>
to make delivery of a security at a specified price, a put option on an index of
securities gives the holder the right to receive an amount of cash upon exercise
of the option if the value of the underlying index has fallen below the exercise
price. The amount of cash received will be equal to the difference between the
closing price of the index and the exercise price of the option expressed in
dollars times a specified multiple. As with options on equity securities or
futures contracts, the Fund may offset its position index options prior to
expiration by entering into a closing transaction on an exchange or it may let
the option expire unexercised.
A securities index assigns relative values to the securities included in
the index and the index options are based on a broad market index. Although
there are at present few available options on indices of fixed income
securities, other than tax-exempt securities, or futures and related options
based on such indices such instruments may become available in the future. In
connection with the use of such options the Fund may cover its position by
identifying a representative portfolio of securities having a value equal to
the aggregate face value of the option position taken. However, the Fund may
employ any appropriate method to cover its positions that is consistent with
applicable regulatory and exchange requirements.
Options on Futures Contracts
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put)
at a specified exercise price at any time during the period of the option.
Options Strategy
A basic option strategy for protecting the Fund against a decline in
securities prices could involve (a) the purchase of a put -- thus "locking in"
the selling price of the underlying securities or securities indices -- or (b)
the writing of a call on securities or securities indices held by the Fund --
thereby generating income (the premium paid by the buyer) by giving the holder
of such call the option to buy the underlying asset at a fixed price. The
premium will offset, in whole or in part, a decline in portfolio value; however,
if prices of the relevant securities or securities indices rose instead of
falling, the call might be exercised thereby resulting in a potential loss of
appreciation in the underlying securities or securities indices.
A basic option strategy when a rise in securities prices is anticipated is
the purchase of a call -- thus, "locking in" the purchase price of the
underlying security or other asset. In transactions involving the purchase of
call options by the Fund, money market instruments equal to the aggregate
exercise price of the options will be identified by the Fund to the Trust's
custodian to insure that the use of such investments is unleveraged.
8
<PAGE>
The Fund may write options in connection with buy-and-write transactions;
that is, the Fund may purchase a security and concurrently write a call option
against that security. If the call option is exercised in such a transaction,
the Fund' maximum gain will be the premium received by it for writing the
option, adjusted upward or downward by the difference between the Fund's
purchase price of the security and the exercise price of the option. If the
option is not exercised and the price of the underlying security declines, the
amount of such decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund's return will be the premium received from
writing the put option minus the amount by which the market price of the
security is below the exercise price.
Limitations and Risks of Options and Futures Activity
The Fund will engage in transactions in futures contracts or options only
as a hedge against changes resulting from market conditions which produce
changes in the values of its securities or the securities which it intends to
purchase (e.g., to replace portfolio securities which will mature in the near
future) and, subject to the limitations described below, to enhance return. The
Fund will not purchase any futures contract or purchase any call option if,
immediately thereafter, more than one third of the Fund's net assets would be
represented by long futures contracts or call options. The Fund will not write a
covered call or put option if, immediately thereafter, the aggregate value of
the assets (securities in the case of written calls and cash or cash equivalents
in the case of written puts) underlying all such options, determined as of the
dates such options were written, would exceed 25% of the Fund's net assets. In
addition, the Fund may not establish a position in a commodity futures contract
or purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such nonhedging
purposes would exceed 5% of the market value of the Fund's net assets.
Although effective hedging can generally capture the bulk of a desired risk
adjustment, no hedge is completely effective. The Fund's ability to hedge
effectively through transactions in futures and options depends on the degree to
which price movements in its holdings correlate with price movements of the
futures and options.
Some positions in futures and options may be closed out only on an exchange
which provides a secondary market therefor. There can be no assurance that a
liquid secondary market will exist for any particular futures contract or option
at any specific time. Thus,
9
<PAGE>
it may not be possible to close such an option or futures position prior to
maturity. The inability to close options and futures positions also could have
an adverse impact on the Fund's ability to effectively hedge their securities
and might, in some cases, require the Fund to deposit cash to meet applicable
market requirements. The Fund will enter into an option or futures position only
if it appears to be a liquid investment.
U.S. Government Securities
In addition to direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, certificates and bonds), the types of U.S. Government
securities in which the Fund may invest generally include obligations issued or
guaranteed by U.S. Government agencies or instrumentalities or mixed ownership
Government corporations, whose securities are backed by:
- the full faith and credit of the U.S. Treasury (such as instruments of
the Government National Mortgage Association);
- the discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities (such as instruments of the
Federal National Mortgage Association);
- the credit of the agency or instrumentality issuing the obligations
(such as instruments of a Federal Home Loan Bank, Federal Farm Credit
Banks, the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation); or
- a guarantee of principal or interest by the U.S. Government or a U.S.
Government agency or instrumentality and, with respect to any
unguaranteed principal or interest, U.S. Government obligations held in
a segregated account.
Mortgage-Related Securities
Mortgage-related securities generally represent an ownership interest in a
pool of residential mortgage loans. The majority of these loans are made to
purchasers of 1-4 family homes. The terms and characteristics of the mortgage
instruments are generally uniform within a pool, but may vary among pools.
When-Issued Securities
The Fund may purchase "when-issued" securities, which are traded on a price
or yield basis prior to actual issuance. Such purchases will be made only to
achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs in the U.S.
10
<PAGE>
Treasury market when dealers begin to trade a new issue of bonds or notes
shortly after a Treasury financing is announced, but prior to the actual sale of
the securities. Similarly, securities to be created by a merger of companies may
also be traded prior to the actual consummation of the merger. Such transactions
may involve a risk of loss if the value of the securities falls below the price
committed to prior to actual issuance. The Trust's custodian will establish a
segregated account for the Fund when it purchases securities on a when-issued
basis consisting of cash or liquid securities equal to the amount of the
when-issued commitments. Securities transactions involving delayed deliveries
or forward commitments are frequently characterized as when-issued transactions
and are similarly treated by the Fund.
Repurchase Agreements
The Fund may enter into repurchase agreements. Repurchase agreements occur
when the Fund acquires a security and the seller, which may be either (i) a
primary dealer in U.S. Government securities or (ii) an FDIC-insured bank having
gross assets in excess of $500 million, simultaneously commits to repurchase it
at an agreed-upon price on an agreed-upon date within a specified number of days
(usually not more than seven) from the date of purchase. The repurchase price
reflects the purchase price plus an agreed-upon market rate of interest which is
unrelated to the coupon rate or maturity of the acquired security. Repurchase
agreements could involve certain risks in the event of default or insolvency of
the other party, including possible delays or restrictions upon the Fund's
ability to dispose of the underlying securities. Repurchase agreements will be
limited to 30% of the Fund's total assets, except that repurchase agreements
extending for more than seven days and other illiquid securities will be limited
to 10% of the Fund's total assets.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. In a reverse
repurchase agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker or dealer, in return for
a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed-upon rate.
The ability to use reverse repurchase agreements may enable, but does not ensure
the ability of, the Fund to avoid selling portfolio instruments at a time when a
sale may be deemed to be disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
11
<PAGE>
Foreign Investments
The Fund reserves the right to invest varying amounts in securities of
non-U.S. issuers. To the extent the Fund invests in securities of issuers in
less developed countries or emerging foreign markets, it will be subject to a
variety of additional risks, including risks associated with political
instability, economies based on relatively few industries, lesser market
liquidity, high rates of inflation, significant price volatility of portfolio
holdings and high levels of external debt in the relevant country.
Although the Fund may invest in securities denominated in foreign
currencies, the Fund values its securities and other assets in U.S. dollars. As
a result, the net asset value of the Fund's shares may fluctuate with U.S.
dollar exchange rates as well as with price changes of the Fund's securities in
the various local markets and currencies. Thus, an increase in the value of the
U.S. dollar compared to the currencies in which the Fund makes its investments
could reduce the effect of increases and magnify the effect of decreases in the
prices of the Fund's securities in their local markets. Conversely, a decrease
in the value of the U.S. dollar will have the opposite effect of magnifying the
effect of increases and reducing the effect of decreases in the prices of the
Fund's securities in the local markets.
Currency Transactions
The Fund may engage in currency exchange transactions in order to protect
against the effect of uncertain future exchange rates on securities denominated
in foreign currencies. The Fund will conduct its currency exchange transactions
either on a spot (i.e., cash) basis at the rate prevailing in the currency
exchange market, or by entering into forward contracts to purchase or sell
currencies. The Fund's dealings in forward currency exchange contracts will be
limited to hedging involving either specific transactions or aggregate portfolio
positions. A forward currency 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. These contracts are not commodities and are entered into
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. Although spot and forward contracts
will be used primarily to protect the Fund from adverse currency movements, they
also involve the risk that anticipated currency movements will not be accurately
predicted, which may result in losses to the Fund. This method of protecting the
value of the Fund's portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange that can be achieved at
some future point in time. Although such contracts tend to minimize the risk of
loss due to a decline in the value of hedged currency, they tend to limit any
potential gain that might result should the value of such currency increase.
12
<PAGE>
Rule 144A Securities
Subject to the restrictions on illiquid and restricted securities noted
above, the Fund may buy or sell restricted securities in accordance with Rule
144A under the Securities Act of 1933 ("Rule 144A Securities"). Securities may
be resold pursuant to Rule 144A under certain circumstances only to be qualified
institutional buyers as defined in the rule, and the markets and trading
practices for such securities are relatively new and still developing; depending
on the development of such markets, such Rule 144A Securities may be deemed to
be liquid as determined by or in accordance with methods adopted by the
Trustees. Under such methods the following factors are considered, among others:
the frequency of trades and quotes for the security, the number of dealers and
potential purchasers in the market, marketmaking activity, and the nature of
the security and marketplace trades. Investments in Rule 144A Securities could
have the effect of increasing the level of the Fund's illiquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing such securities. Also, the Fund may be adversely impacted by the
possible illiquidity and subjective valuation of such securities in the absence
of a market for them.
Swap Arrangements
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below. In an
interest rate swap, the Fund could agree for a specified period to pay a bank or
investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an assumed figure selected by the parties for this
purpose) in exchange for agreement by the bank or investment banker to pay the
Fund a fixed rate of interest on the notional principal amount. In a currency
swap, the Fund would agree with the other party to exchange cash flows based on
the relative differences in values of a notional amount of two (or more)
currencies; in an index swap, the Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices. Purchase
of a cap entitles the purchaser to receive payments from the seller on a
notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an
agreed-upon interest rate or amount. A collar combines a cap and a floor.
Most swaps entered into by the Fund will be on a net basis; for example, in
an interest rate swap, amounts generated by application of the fixed rate and
the floating rate to the notional principal amount would first offset one
another, with the Fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, the Fund will set up a segregated custodial account to hold appropriate
liquid assets, including cash; for swaps entered into on a net basis, assets
will be segregated having a daily net asset value equal to any excess of the
Fund's accrued obligations over the accrued obligations of the other party,
while for swaps on other than a net basis assets will be segregated having a
value equal to the total amount of the Fund's obligations.
13
<PAGE>
These arrangements will be made primarily for hedging purposes, to preserve
the return on an investment or on a part of the Fund's portfolio. However, the
Fund may enter into such arrangements for income purposes to the extent
permitted by the CFTC for entities which are not commodity pool operators, such
as the Fund. In entering a swap arrangement, the Fund is dependent upon the
creditworthiness and good faith of the counterparty. The Fund attempts to reduce
the risks of nonperformance by the counterparty by dealing only with
established, reputable institutions. The swap market is still relatively new and
emerging; positions in swap arrangements may become illiquid to the extent that
nonstandard arrangements with one counterparty are not readily transferable to
another counterparty or if a market for the transfer of swap positions does not
develop. The use of interest rate swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Investment Manager is
incorrect in its forecasts of market values, interest rates and other applicable
factors, the investment performance of the Fund would diminish compared with
what it would have been if these investment techniques were not used. Moreover,
even if the Investment Manager is correct in its forecasts, there is a risk that
the swap position may correlate imperfectly with the price of the asset or
liability being hedged.
Industry Classifications
In determining how much of the Fund's portfolio is invested in a given
industry, the following industry classifications are currently used. Securities
issued or guaranteed as to principal or interest by the U.S. Government or its
agencies or instrumentalities or mixed-ownership Government corporations or
sponsored enterprises (including repurchase agreements involving U.S. Government
securities to the extent excludable under relevant regulatory interpretations)
are excluded. Securities issued by foreign governments are also excluded.
Companies engaged in the business of financing will be classified according to
the industries of their parent companies or industries that otherwise most
affect such financing companies. Issuers of asset-backed pools will be
classified as separate industries based on the nature of the underlying assets,
such as mortgages, credit card receivables, etc. "Asset-backed -- Mortgages"
includes private pools of nongovernment backed mortgages.
<TABLE>
<S> <C> <C>
Aerospace Electronic Components Oil Service
Airline Electronic Equipment Paper Products
Asset-backed -- Mortgages Entertainment Personal Care
Asset-backed -- Credit Card Financial Service Photography
Receivables Food & Beverage Plastics
Automotive Forest Products Printing & Publishing
Automotive Parts Gaming & Lodging Railroad
Bank Gas Real Estate & Building
Building Gas Transmission Recreation
Business Service Grocery Retail Trade
Cable Healthcare & Hospital Savings & Loan
Capital Goods & Equipment Management Shipping & Transportation
Chemical Hospital Supply Technology & Communications
Computer Software & Service Hotel & Restaurant Telephone
Conglomerate Insurance Textile & Apparel
Consumer Goods & Services Machinery Tobacco
Container Media Truckers
Cosmetics Metal & Mining Trust Certificates--
Diversified Office Equipment Government Related Lending
Drug Oil Production
Electric Oil Refining & Marketing
Electric Equipment
</TABLE>
14
<PAGE>
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
As indicated in the Fund's Prospectus, the Fund may invest in long-term
and short-term debt securities. The Fund may invest in cash and short-term
securities for temporary defensive purposes when, in the opinion of Investment
Manager, such a position is more likely to provide protection against
unfavorable market conditions than adherence to other investment policies.
Certain debt securities and money market instruments in which the Fund may
invest are described below.
U.S. Government Securities. U.S. Government securities consist of
various types of marketable securities issued by the U.S. Treasury, i.e.,
bills, notes and bonds. Such securities are direct obligations of the U.S.
Government and differ mainly in the lengths of their maturities. Treasury
bills, the most frequently issued marketable government security, have a
maturity of up to one year and are issued on a discount basis. U.S.
Government securities also include securities issued under the U.S.
Department of Treasury's STRIPS program, which is described in the Fund's
Prospectus. Government agency securities are also U.S. Government
securities. Government agency securities consist of fixed income securities
issued or guaranteed by agencies and instrumentalities of the U.S.
Government, including the various types of instruments currently outstanding
or which may be offered in the future. See prior discussion of U.S.
Government Securities.
15
<PAGE>
Custodial Receipts. Custodial receipts evidencing the ownership of future
interest payments, principal payments or both on U.S. Treasury notes or bonds
may be purchased in the form of "Treasury Receipts" ("TRs"), "Treasury
Investment Growth Receipts" ("TIGRs") and "Certificates of Accrual on Treasury
Securities" ("CATS") and in connection with similar programs as
described in the Fund's Prospectus.
Bank Money Investments. Bank money investments include but are not limited
to certificates of deposit, bankers' acceptances and time deposits. Certificates
of deposit are generally short-term (i.e., less than one year), interest-bearing
negotiable certificates issued by commercial banks or savings and loan
associations against funds deposited in the issuing institution. A banker's
acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods). A banker's acceptance may be obtained
from a domestic or foreign bank including a U.S. branch or agency of a foreign
bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. The Fund will not invest
in any such bank money investment unless the investment is issued by a U.S. bank
that is a member of the Federal Deposit Insurance Corporation ("FDIC"),
including any foreign branch thereof, a U.S. branch or agency of a foreign bank,
a foreign branch of a foreign bank or a savings bank or savings and loan
association that is a member of the FDIC and which at the date of investment has
capital, surplus and undivided profits (as of the date of its most recently
published financial statements) in excess of $50 million. The Fund will not
invest in time deposits maturing in more than seven days and will not invest
more than 10% of its total assets in time deposits maturing in two to seven
days.
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under state law. U.S. federal branches or
agencies of foreign banks are chartered and regulated by the Comptroller of
the Currency, while state branches and agencies are chartered and regulated
by authorities of the respective states or the District of Columbia. U.S.
branches of foreign banks may accept deposits and thus are eligible for FDIC
insurance; however, not all such branches elect FDIC insurance. Unlike U.S.
branches of foreign banks, U.S. agencies of foreign banks may not accept
deposits and thus are not eligible for FDIC insurance. Both branches and
agencies can maintain credit balances, which are funds received by the office
incidental to or arising out of the exercise of their banking powers and can
exercise other commercial functions, such as lending activities.
Short-Term Corporate Debt Instruments. Short-term corporate debt
instruments include commercial paper to finance short-term credit needs (i.e.,
short-term, unsecured promissory notes) issued by corporations including but not
limited to (a) domestic or foreign bank holding companies or (b) their
subsidiaries or affiliates where the debt instrument is
16
<PAGE>
guaranteed by the bank holding company or an affiliated bank or where the bank
holding company or the affiliated bank is unconditionally liable for the debt
instrument. Commercial paper is usually sold on a discounted basis and has a
maturity at the time of issuance not exceeding nine months.
Commercial Paper Ratings. Commercial paper investments at the time of
purchase will be rated A by Standard & Poor's Corporation ("S&P") or Prime by
Moody's Investors Service, Inc. ("Moody's"), or, if not rated, issued by
companies having an outstanding long-term unsecured debt issue rated at least A
by S&P or by Moody's. The money market investments in corporate bonds and
debentures (which must have maturities at the date of settlement of one year or
less) must be rated at the time of purchase at least A by S&P or by Moody's.
Commercial paper rated A (highest quality) by S&P is issued by entities
which have liquidity ratios which are adequate to meet cash requirements.
Long-term senior debt is rated A or better, although in some cases BBB credits
may be allowed. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. The relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1, A-2
or A-3. (Those A-1 issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.
17
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and principal officers of the Trust, their addresses, and
their principal occupations and positions with certain affiliates of Investment
Manager are set forth below.
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. He is 56. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as portfolio manager for State Street Research &
Management Company.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791,
serves as Trustee of the Trust. He is 70. He is engaged principally in
private investments and civic affairs, and is an author of business history.
Previously, he was with Morgan Guaranty Trust Company of New York.
+Robert A. Lawrence, Saltonstall & Co., 50 Congress Street, Boston, MA
02109 serves as Trustee of the Trust. He is 70. His principal occupation during
the past five years has been Partner, Saltonstall & Co., a private investment
firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 45. His principal occupation is Executive Vice
President, Treasurer, Chief Financial Officer and Director of State Street
Research & Management Company. During the past five years he has also served as
Executive Vice President and Chief Financial Officer of New England Investment
Companies and as Senior Vice President and Vice President of New England Mutual
Life Insurance Company. Mr. Maus's other principal business affiliations include
Executive Vice President, Treasurer, Chief Financial Officer and Director of
State Street Research Investment Services, Inc.
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111, has
served as Secretary and General Counsel of the Trust. He is 41.
His principal occupation is Executive Vice President, Secretary and General
Counsel of State Street Research & Management Company. During the past five
years he has also served as Senior Vice President of State Street Research &
Management Company and as Senior Vice President, General Counsel and Assistant
Secretary of The Boston Company, Inc., Boston Safe Deposit and Trust Company and
The Boston Company Advisors, Inc. Mr. McNamara's other principal business
affiliations include Senior Vice President, Clerk and General Counsel of State
Street Research Investment Services, Inc.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 64. He is retired, having served during the past
five years, until October 1992, as Executive Vice President, Chief Operating
Officer and Director of Hewlett-Packard Company.
- ------------------------
* or +, See footnotes on page 20.
18
<PAGE>
+Thomas L. Phillips, 141 Spring Street, Lexington, MA 02173, serves as
Trustee of the Trust. He is 72. He is retired and was formerly Chairman of the
Board and Chief Executive Officer of Raytheon Company, of which he remains a
Director.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves as
Trustee of the Trust. He is 58. His principal occupations during the past five
years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology,
77 Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the
Trust. He is 59. His principal occupation during the past five years has
been Jay W. Forrester Professor of Management at Sloan School of Management,
Massachusetts Institute of Technology.
*+Thomas A. Shively, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 42. His principal occupation is Executive
Vice President and Director of State Street Research & Management Company.
During the past five years he has also served as Senior Vice President of State
Street Research & Management Company. Mr. Shively's other principal business
affiliations include Director of State Street Research Investment Services, Inc.
*+Ralph F. Verni, One Financial Center, Boston, MA 02111, serves as
Chairman of the Board, President, Chief Executive Officer and Trustee of the
Trust. He is 54. His principal occupation is Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research & Management
Company. During the past five years he also served as President and Chief
Executive Officer of New England Investment Companies and as Chief Investment
Officer of New England Mutual Life Insurance Company. Mr. Verni's other
principal business affiliations include Chairman of the Board and Director of
State Street Research Investment Services, Inc., and, until February 1996,
prior positions as President and Chief Executive Officer.
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 72. He is retired and was formerly Of Counsel for
the law firm Choate, Hall & Stewart. He was a partner of that firm from 1960 to
1987.
- ------------------------
* or +, See footnotes on page 20.
19
<PAGE>
As of January 31, 1997, the Trustees and principal officers of the Trust as
a group owned less than 1% of the Fund's outstanding Class A shares and owned
none of the Fund's outstanding Class B, Class C and Class D shares.
As of January 31, 1997, the following persons or entities were the record
and/or beneficial owners of the approximate amounts of each class of shares of
the Fund as set forth beside their names:
Shareholder %
----------- ---
Class A Merrill Lynch --
Class B Merrill Lynch --
Class C State Street Bank --
Amalgamated Bank --
Class D Merrill Lynch --
The full name and address of each of the above persons or entities are as
follows:
Merrill Lynch, Pierce, Fenner & Smith, Inc. (a)
One Liberty Plaza, 165 Broadway, New York, NY 10080
State Street Bank and Trust Company (a) (b)
225 Franklin Street, Boston, MA 02111
Amalgamated Bank of New York (a) (c)
P.O. Box 370, Cooper Station, New York, NY 10003
(a) The Fund believes that each above-named record holder does not have
beneficial ownership of such shares.
- ------------------------
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the Investment Company Act of 1940 because of
their affiliations with the Fund's investment adviser.
+ Serves as a Trustee and/or officer of one or more of the following
investment companies, each of which has an advisory or distribution
relationship with the Investment Manager or its affiliates: State Street
Research Equity Trust, State Street Research Financial Trust, State Street
Research Income Trust, State Street Research Money Market Trust, State
Street Research Tax-Exempt Trust, State Street Research Capital Trust,
State Street Research Exchange Trust, State Street Research Growth Trust,
State Street Research Master Investment Trust, State Street Research
Securities Trust, State Street Research Portfolios, Inc. and Metropolitan
Series Fund, Inc.
20
<PAGE>
(b) State Street Bank and Trust Company holds such shares as custodian for
individual retirement accounts.
(c) Amalgamated Bank holds such shares as custodian for various retirement
accounts.
Ownership of 25% or more of a voting security is deemed "control" as
defined in the 1940 Act. So long as 25% of a class of shares is so owned, such
owners will be presumed to be in control of such class of shares for purposes of
voting on certain matters submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
The Trustees have been compensated as follows:
- --------------------------------------------------------------------------------
(1) (2) (3)
Name of Aggregate Total
Trustee Compensation Compensation
From Trust (a) From Trust and
Complex Paid
to Trustees(b)
- --------------------------------------------------------------------------------
Edward M. Lamont $ $ 59,375
Robert A. Lawrence $ $ 92,125
Dean O. Morton $ $ 96,125
Thomas L. Phillips $ $ 59,375
Toby Rosenblatt $ $ 59,375
Michael S. Scott Morton $ $100,325
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $ $ 63,375
(a) For the fiscal year ended October 31, 1996. Includes compensation from
multiple series of the Trust. See "Distribution of Shares" for a listing
of series.
(b) Includes compensation on behalf of 31 funds representing all series of
investment companies for which the Investment Manager serves as primary
investment adviser, series of Metropolitan Series Fund, Inc., for which the
Investment Manager serves as sub-investment adviser, and series of State
Street Research Portfolios, Inc., for which State Street Research
Investment Services, Inc. serves as distributor. "Total Compensation from
Trust and Complex Paid to Trustees" is for the 12 months ended December 31,
1996. The Trust does not provide any pension or retirement benefits for the
Trustees.
21
<PAGE>
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Advisory
Agreement provides that the Investment Manager shall furnish the Fund with an
investment program, office facilities and such investment advisory, research and
administrative services as may be required from time to time. The Investment
Manager compensates all executive and clerical personnel and Trustees of the
Trust if such persons are employees of the Investment Manager or its affiliates.
The Investment Manager is an indirect wholly-owned subsidiary of Metropolitan
Life Insurance Company ("Metropolitan").
The advisory fee payable monthly by the Fund to the Investment Manager is
computed as a percentage of the average of the value of the net assets of the
Fund as determined at the close of the New York Stock Exchange (the "NYSE") on
each day the NYSE is open for trading, at the annual rate of 0.65% of the net
assets of the Fund. For the fiscal years ended October 31, 1996, 1995 and 1994,
the Trust paid the Investment Manager investment advisory fees of $4,723,842,
$4,651,813, and $5,266,797, respectively.
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund from year to year as long as it is approved at least
annually both (i) by a vote of a majority of the outstanding voting securities
of the Fund (as defined in the Investment Company Act of 1940) or by the
Trustees of the Trust, and (ii) in either event by a vote of a majority of the
Trustees who are not parties to the Advisory Agreement or "interested persons"
of any party thereto, cast in person at a meeting called for the purpose of
voting on such approval. The Advisory Agreement may be terminated on 60 days'
written notice. The Advisory Agreement terminates automatically in the event of
its assignment, as defined under the 1940 Act and regulations thereunder. Such
regulations provide that a transaction which does not result in a change of
actual control or management of an adviser is not deemed to be an assignment.
22
<PAGE>
Under a Funds Administration Agreement between the Investment Manager and
the Distributor, the Distributor provides assistance to the Investment Manager
in performing certain fund administration services for the Trust, such as
assistance in determining the daily net asset value of shares of series of the
Trust and in preparing various reports required by regulations.
Under a Shareholders' Administrative Services Agreement between the Trust
and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Fund, and is entitled to
reimbursements of its costs for providing such services. Under certain
arrangements for Metropolitan to provide subadministration services,
Metropolitan may receive a fee for the maintenance of certain share ownership
records for participants in sponsored arrangements, employee benefit plans, and
similar programs or plans, through or under which Fund shares may be purchased.
Under the Code of Ethics of the Investment Manager, its employees in
Boston, where investment management operations are conducted, are only permitted
to engage in personal securities transactions in accordance with certain
conditions relating to an employee's position, the identity of the security, the
timing of the transaction, and similar factors. Such employees must report their
personal securities transactions quarterly and supply broker confirmations of
such transactions to the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by the Distributor. The Fund offers four
classes of shares which may be purchased at the next determined net asset value
per share plus, in the case of all classes except Class C shares, a sales charge
which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B and Class
D shares). General information on how to buy shares of the Fund, as well as
sales charges involved, is set forth under "Purchase of Shares" in the
Prospectus. The following supplements that information.
Public Offering Price - The public offering price for each class of shares
of the Fund is based on their net asset value determined as of the close of
regular trading of the NYSE on the day the purchase order is received by State
Street Research Shareholder Services provided that the order is received prior
to the close of the NYSE on that day; otherwise the net asset value used is that
determined as of the close of the NYSE on the next day it is open for
unrestricted trading. When a purchase order is placed through a dealer, that
dealer is responsible for transmitting the order promptly to State Street
Research Shareholder Services in order to permit the investor to obtain the
current price. Any loss suffered by an investor which results from a dealer's
failure to transmit an order promptly is a matter for settlement between the
investor and the dealer.
23
<PAGE>
Reduced Sales Charges - For purposes of determining whether a purchase of
Class A shares qualifies for reduced sales charges, the term "person" includes:
(i) an individual, or an individual combining with his or her spouse and their
children and purchasing for his, her or their own account; (ii) a "company" as
defined in Section 2(a)(8) of the 1940 Act; (iii) a trustee or other fiduciary
purchasing for a single trust estate or single fiduciary account (including a
pension, profit sharing or other employee benefit trust created pursuant to a
plan qualified under Section 401 of the Internal Revenue Code); (iv) a
tax-exempt organization under Section 501(c)(3) or (13) of the Internal Revenue
Code; and (v) an employee benefit plan of a single employer or of affiliated
employers.
Investors may purchase Class A shares of the Fund at reduced sales charges
by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds" as
designated by the Distributor within a 13-month period. The sales charge
applicable to each purchase made pursuant to a Letter of Intent will be that
which would apply if the total dollar amount set forth in the Letter of Intent
were being bought in a single transaction. Purchases made within a 90-day period
prior to the execution of a Letter of Intent may be included therein; in such
case the date of the earliest of such purchases marks the commencement of the
13-month period.
An investor may include toward completion of a Letter of Intent the value
(at the current public offering price) of all of his or her Class A shares of
the Fund and of any of the other Class A shares of Eligible Funds held of record
as of the date of his or her Letter of Intent, plus the value (at the current
offering price) as of such date of all of such shares held by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D
24
<PAGE>
shares may also be included in the combination under certain circumstances.
Investors must submit to the Distributor sufficient information to show that
they qualify for this Right of Accumulation.
Class C Shares - Class C shares are currently available to certain employee
benefit plans such as qualified retirement plans which meet criteria relating to
number of participants (currently a minimum of 100 eligible employees), service
arrangements, or similar factors; insurance companies; investment companies;
endowment funds of nonprofit organizations with substantial minimum assets
(currently a minimum of $10,000,000); and other similar institutional investors.
Reorganizations - In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined 1940 Act, as amended, the Fund may issue its shares at net asset
value (or more) to such entities or to their security holders.
Redemptions - The Fund reserves the right to pay redemptions in kind with
portfolio securities in lieu of cash. In accordance with its election pursuant
to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of redemption
proceeds paid in cash. Although it has no present intention to do so, the Fund
may, under unusual circumstances, limit redemptions in cash with respect to each
shareholder during any ninety-day period to the lesser of (i) $250,000 or (ii)
1% of the net asset value of the Fund at the beginning of such period. In
connection with any redemptions paid in kind with portfolio securities,
brokerage and other costs may be incurred by the redeeming shareholder in the
sale of the securities received.
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily as
of the close of the NYSE, ordinarily 4 P.M. New York City time, Monday through
Friday, on each day during which the NYSE is open for unrestricted trading. The
NYSE is currently closed on New Year's Day, Presidents Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is computed by dividing the sum
of the value of the securities held by the Fund plus any cash or other assets
minus all liabilities by the total number of outstanding shares of the Fund at
such time. Any expenses, except for extraordinary or nonrecurring expenses,
borne by the Fund, including the investment management fee payable to the
Investment Manager, are accrued daily.
In determining the values of portfolio assets, the Trustees may utilize one
or more pricing services to value certain securities for which market quotations
are not readily available on a daily basis. Most debt securities are valued on
the basis of data provided by
25
<PAGE>
such pricing services. Since the Fund is comprised substantially of debt
securities under normal circumstances, most of the Fund's assets are therefore
valued on the basis of such data from the pricing services. The pricing services
may provide prices determined as of times prior to the close of the NYSE.
In general, securities are valued as follows. Securities which are listed
or traded on the New York or American Stock Exchange are valued at the price of
the last quoted sale on the respective exchange for that day. Securities which
are listed or traded on a national securities exchange or exchanges, but not on
the New York or American Stock Exchange, are valued at the price of the last
quoted sale on the exchange for that day prior to the close of the NYSE.
Securities not listed on any national securities exchange which are traded "over
the counter" and for which quotations are available on the National Association
of Securities Dealers' NASDAQ System, or other system, are valued at the closing
price supplied through such system for that day at the close of the NYSE. Other
securities are, in general, valued at the mean of the bid and asked quotations
last quoted prior to the close of the NYSE if there are market quotations
readily available, or in the absence of such market quotations, then at the fair
value thereof as determined by or under authority of the Trustees of the Trust
with the use of such pricing services as may be deemed appropriate or
methodologies approved by the Trustees. Securities deemed restricted as to
resale are valued at the fair value thereof as determined by or in accordance
with methods adopted by the Trustees of the Trust.
Short-term debt instruments issued with a maturity of one year or less
which have a remaining maturity of 60 days or less are valued using the
amortized cost method, provided that during any period in which more than 25% of
the Fund's total assets is invested in short-term debt securities the current
market value of such securities will be used in calculating net asset value per
share in lieu of the amortized cost method. The amortized cost method is used
when the value obtained is fair value. Under the amortized cost method of
valuation, the security is initially valued at cost on the date of purchase (or
in the case of short-term debt instruments purchased with more than 60 days
remaining to maturity, the market value on the 61st day prior to maturity), and
thereafter a constant amortization to maturity of any discount or premium is
assumed regardless of the impact of fluctuating interest rates on the market
value of the security.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
The Fund's portfolio turnover rate is determined by dividing the lesser of
securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The portfolio turnover rates for the fiscal years ended October
31, 1995 and 1996 were 105.57% and 88.79%, respectively. The
26
<PAGE>
Investment Manager believes the portfolio turnover rate for the fiscal year
ended October 31, 1996 was significantly lower than that for the previous fiscal
year because of fluctuating interest rates during the year, leading to
re-structuring of the Fund's portfolio. Earlier in the year, the Investment
Manager reduced the number of long-term Treasury notes held and increased
investments in mortgage securities. Later in the year, as interest rates began
to decline again, the Investment Manager once again began to increase the Fund's
investments in longer-term Treasuries. The Fund reserves full freedom with
respect to portfolio turnover, as described in the Prospectus.
Brokerage Allocation
The Investment Manager's policy is to seek for its clients, including the
Fund, what in the Investment Manager's judgment will be the best overall
execution of purchase or sale orders and the most favorable net prices in
securities transactions consistent with its judgment as to the business
qualifications of the various broker or dealer firms with whom the Investment
Manager may do business, and the Investment Manager may not necessarily choose
the broker offering the lowest available commission rate. Decisions with respect
to the market where the transaction is to be completed, to the form of
transaction (whether principal or agency), and to the allocation of orders among
brokers or dealers are made in accordance with this policy. In selecting brokers
or dealers to effect portfolio transactions, consideration is given to their
proven integrity and financial responsibility, their demonstrated execution
experience and capabilities both generally and with respect to particular
markets or securities, the competitiveness of their commission rates in agency
transactions (and their net prices in principal transactions), their willingness
to commit capital, and their clearance and settlement capability. The Investment
Manager makes every effort to keep informed of commission rate structures and
prevalent bid/ask spread characteristics of the markets and securities in which
transactions for the Fund occur. Against this background, the Investment Manager
evaluates the reasonableness of a commission or a net price with respect to a
particular transaction by considering such factors as difficulty of execution or
security positioning by the executing firm. The Investment Manager may or may
not solicit competitive bids based on its judgment of the expected benefit or
harm to the execution process for that transaction.
When it appears that a number of firms could satisfy the required standards
in respect of a particular transaction, consideration may also be given to
services other than execution services which certain of such firms have provided
in the past or may provide in the future. Negotiated commission rates and
prices, however, are based upon the Investment Manager's judgment of the rate
which reflects the execution requirements of the transaction without regard to
whether the broker provides services in addition to execution. Among such other
services are the supplying of supplemental investment research; general
economic, political and business information; analytical and statistical data;
relevant market information, quotation equipment and services; reports and
information about specific companies, industries and securities; purchase and
sale recommendations for stocks and bonds; portfolio strategy services;
historical statistical information; market data services providing information
on specific issues and prices; financial publications; proxy voting data and
analysis services; technical analysis of various aspects of the securities
markets, including technical charts; computer hardware used for brokerage and
research purposes; computer software and databases, including those used for
portfolio analysis and modelling; and portfolio evaluation services and relative
performance of accounts.
Certain nonexecution services provided by broker-dealers may in turn be
obtained by the broker-dealers from third parties who are paid for such
services by the broker-dealers. The Investment Manager has an investment of less
than ten percent of the outstanding equity of one such third party which
provides portfolio analysis and modelling and other research and investment
decision-making services integrated into a trading system developed and licensed
by the third party to others. The Investment Manager could be said to benefit
indirectly if in the future it allocates brokerage to a broker-dealer who in
turn pays this third party for services to be provided to the Investment
Manager.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. Some services may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Investment Manager allocates the cost
of such services to determine the appropriate proportion of the cost which is
allocable to purposes other than research or investment decision-making and is
therefore paid directly by the Investment Manager. Some research and execution
services may benefit the Investment Manager's clients as a whole, while others
may benefit a specific segment of clients. Not all such services will
necessarily be used exclusively in connection with the accounts which pay the
commissions to the broker-dealer producing the services.
The Investment Manager has no fixed agreements or understandings with any
broker-dealer as to the amount of brokerage business which that firm may expect
to receive for services supplied to the Investment Manager or otherwise. There
may be, however, understandings with certain firms that in order for such firms
to be able to continuously supply certain services, they need to receive
allocation of a specified amount of brokerage business. These understandings are
honored to the extent possible in accordance with the policies set forth above.
It is not the Investment Manager's policy to intentionally pay a firm a
brokerage commission higher than that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided.
27
<PAGE>
However, the Fund and the Investment Manager are aware that this is an area
where differences of opinion as to fact and circumstances may exist, and in such
circumstances, if any, rely on the provisions of Section 28(e) of the Securities
Exchange Act of 1934, to the extent applicable. For the fiscal years ended
October 31, 1996, 1995 and 1994, the Fund paid no brokerage commissions in
secondary trading.
During and at the end of its most recent fiscal year, the Fund held in its
portfolio no securities of any entity that might be deemed to be a regular
broker-dealer of the Fund as defined under the 1940 Act.
In the case of the purchase of fixed income securities in underwriting
transactions, the Investment Manager follows any instructions received from its
clients as to the allocation of new issue discounts, selling concessions and
designations to brokers or dealers which provide the client with research,
performance evaluation, master trustee and other services. In the absence of
instructions from the client, the Investment Manager may make such allocations
to broker-dealers which have provided the Investment Manager with research and
brokerage services.
When more than one client of the Investment Manager is seeking to buy or
sell the same security, the sale or purchase is carried out in a manner which is
considered fair and equitable to all accounts. In allocating investments among
various clients (including in what sequence orders for trades are placed), the
Investment Manager will use its best business judgment and will take into
account such factors as the investment objectives of the clients, the amount of
investment funds available to each, the amount already committed for each client
to a specific investment and the relative risks of the investments, all in order
to provide on balance a fair and equitable result to each client over time.
Although sharing in large transactions may sometimes affect price or volume of
shares acquired or sold, overall it is believed there may be an advantage in
execution. The Investment Manager may follow the practice of grouping orders of
various clients for execution to get the benefit of lower prices or commission
rates. In certain cases where the aggregate order may be executed in a series of
transactions at various prices, the transactions are allocated as to amount and
price in a manner considered equitable to each so that each receives, to the
extent practicable, the average price of such transactions. Exceptions may be
made based on such factors as the size of the account and the size of the trade.
For example, the Investment Manager may not aggregate trades where it believes
that it is in the best interests of clients not to do so, including situations
where aggregation might result in a large number of small transactions with
consequent increased custodial and other transactional costs which may
disproportionately impact smaller accounts. Such disaggregation, depending on
the circumstances, may or may not result in such accounts receiving more or less
favorable execution relative to other clients.
CERTAIN TAX MATTERS
Federal Income Taxation of the Fund -- In General
As stated in the Prospectus, the Fund intends to qualify and elect to be
treated each taxable year as a "regulated investment company" under Subchapter M
of the Internal Revenue Code of 1986, as amended (the "Code"), although it
cannot give complete assurance that it will do so. Accordingly, the Fund must,
among other things, (a) derive at least 90% of its gross income in each taxable
year from dividends, interest, payments with respect to securities loans, gains
from the sale or other disposition of stock, securities or foreign currencies,
or other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "90% test"); (b) derive less than 30% of
its gross income in each taxable year from the sale or other disposition of any
of the following held for less than three months (the "30% test"): (i) stock or
securities; (ii) options, futures, or forward contracts (other than options,
futures, or forward contracts on foreign currencies), or (iii) foreign
currencies (or options, futures, or forward contracts on foreign currencies) but
only if such currencies (or options, futures, or
28
<PAGE>
forward contracts) are not directly related to the Fund's principal business of
investing in stocks or securities (or options and futures with respect to stocks
or securities); (c) satisfy certain diversification requirements; and (d) in
order to be entitled to utilize the dividends paid deduction, distribute
annually at least 90% of its investment company taxable income (determined
without regard to the deduction for dividends paid).
The 30% test will limit the extent to which the Fund may sell securities
held for less than three months, write options which expire in less than three
months, and effect closing transactions with respect to call or put options that
have been written or purchased within the preceding three months. (If the Fund
purchases a put option for the purpose of hedging an underlying portfolio
security, the acquisition of the option is treated as a short sale of the
underlying security unless, for purposes only of the 30% test, the option and
the security are acquired on the same date.) Finally, as discussed below, this
requirement may also limit investments by the Fund in options on stock indices,
listed options on nonconvertible debt securities, futures contracts, options on
interest rate futures contracts and certain foreign currency contracts.
If the Fund should fail to qualify as a regulated investment company in any
year, it would lose the beneficial tax treatment accorded regulated investment
companies under Subchapter M of the Code and all of its taxable income would be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income or accumulated earnings and profits. Also, the
shareholders, if they received a distribution in excess of current or
accumulated earnings and profits, would receive a return of capital that would
reduce the basis of their shares of the Fund.
The Fund will be liable for a nondeductible 4% excise tax on amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement. To avoid the tax, during each calendar year the Fund must
distribute an amount equal to at least 98% of the sum of its ordinary income
(not taking into account any capital gains or losses) for the calendar year, and
its capital gain net income for the 12-month period ending on October 31, in
addition to any undistributed portion of the respective balances from the prior
year. The Fund intends to make sufficient distributions to avoid this 4% excise
tax.
Federal Income Taxation of the Fund's Investments
Original Issue Discount. For federal income tax purposes, debt securities
purchased by the Fund may be treated as having original issue discount. Original
issue discount represents interest for federal income tax purposes and can
generally be defined as the excess of the stated redemption price at maturity of
a debt obligation over the issue price. Original issue discount is treated for
federal income tax purposes as income earned by the Fund, whether or not any
income is actually received, and therefore is subject to the distribution
requirements of the Code. Generally, the amount of original issue discount is
determined on the basis of a
29
<PAGE>
constant yield to maturity which takes into account the compounding of accrued
interest. Under section 1286 of the Code, an investment in a stripped bond or
stripped coupon may result in original issue discount.
Debt securities may be purchased by the Fund at a discount that exceeds the
original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for income tax
purposes. In the case of any debt security issued after July 18, 1984, having a
fixed maturity date of more than one year from the date of issue and having
market discount, the gain realized on disposition will be treated as interest
income to the extent it does not exceed the accrued market discount on the
security (unless the Fund elects to include such accrued market discount in
income in the tax year to which it is attributable). Generally, market discount
is accrued on a daily basis. The Fund may be required to capitalize, rather than
deduct currently, part or all of any direct interest expense incurred to
purchase or carry any debt security having market discount, unless the Fund
makes the election to include market discount currently. Because the Fund must
include original issue discount in income, it will be more difficult for the
Fund to make the distributions required for the Fund to maintain its status as a
regulated investment company under Subchapter M of the Code and to avoid the 4%
excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may be
subject to provisions of the Code that (i) require inclusion of unrealized gains
or losses in the Fund's income for purposes of the 90% test, the 30% test, the
excise tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and (iii) characterize
both realized and unrealized gain or loss as short-term or long-term gain or
loss. Such provisions generally apply to, among other investments, options on
debt securities, indices on securities and futures contracts.
Federal Income Taxation of Shareholders
Distributions generally are taxable to shareholders for the taxable year in
which they are received. However, dividends declared by the Fund in October,
November or December and made payable to shareholders of record on a specified
date in such a month are treated as received by such shareholders on December
31, provided that the Fund pays the dividend during January of the following
calendar year.
Distributions, if any, by the Fund can result in a reduction in the fair
market value of the Fund's shares. Should a distribution reduce the fair market
value below a shareholder's cost basis, such distribution nevertheless may be
taxable to the shareholder as ordinary income or long-term capital gain, even
though, from an investment standpoint, it may constitute a partial return of
capital. In particular, investors should be careful to consider the tax
implications of buying shares just prior to a distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a
30
<PAGE>
taxable distribution will then receive a return of investment upon distribution
which will nevertheless be taxable to them.
DISTRIBUTION OF SHARES OF THE FUND
State Street Research Financial Trust is currently comprised of the
following series: State Street Research Government Income Fund, State Street
Research Strategic Portfolios: Conservative, State Street Research Strategic
Portfolios: Moderate and State Street Research Strategic Portfolios: Aggressive.
The Trustees of the Trust have authorized the Fund to issue four classes of
shares: Class A, Class B, Class C and Class D shares. The Trustees of the Trust
have authority to issue an unlimited number of shares of beneficial interest of
separate series, $.001 par value per share. A "series" is a separate pool of
assets of the Trust which is separately managed and has a different investment
objective and different investment policies from those of any other series. The
Trustees have authority, without the necessity of a shareholder vote, to create
any number of new series or classes or to commence the public offering of shares
of any previously established series or class.
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (Class B and Class D shares). The Distributor may reallow all or
portions of such sales charges as concessions to dealers. For the fiscal years
ended October 31, 1994, 1995 and 1996, total sales charges on Class A shares
paid to the Distributor amounted to $1,134,461, $572,439 and $724,878,
respectively. For the same periods, $172,266, $70,689 and $89,615, respectively,
was retained by the Distributor after reallowance of concessions to dealers.
The differences in the price at which the Fund's Class A shares are offered
due to scheduled variations in sales charges, as described in the Fund's
Prospectus, result from cost savings inherent in economies of scale. Management
believes that the cost of sales efforts of the Distributor and broker-dealers
tends to decrease as the size of purchases increases, or does not involve any
incremental sales expenses as in the case of, for example, exchanges,
reinvestments or dividend investments at net asset value. Similarly, no
significant sales effort is necessary for sales of shares at net asset value to
certain Directors, Trustees, officers, employees, their relatives and other
persons directly or indirectly related to the Fund or associated entities. Where
shares of the Fund are offered at a reduced sales charge or without a sales
charge pursuant to sponsored arrangements and managed fee-based programs, the
31
<PAGE>
amount of the sales charge reduction will similarly reflect the anticipated
reduction in sales expenses associated with such arrangements. The reduction in
sales expenses, and therefore the reduction in sales charge, will vary depending
on factors such as the size and other characteristics of the organization or
program, and the nature of its membership or the participants. The Fund reserves
the right to make variations in, or eliminate, sales charges at any time or to
revise the terms of or to suspend or discontinue sales pursuant to sponsored
arrangements at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission based on the aggregate of such sales. Such
commission also is payable to authorized securities dealers upon sales of Class
A shares made pursuant to a Letter of Intent to purchase shares having a net
asset value of $1,000,000 or more. Shares sold with such commissions payable are
subject to a one-year contingent deferred sales charge of 1.00% on any portion
of such shares redeemed within one year following their sale. After a particular
purchase of Class A shares is made under the Letter of Intent, the commission
will be paid only in respect of that particular purchase of shares. If the
Letter of Intent is not completed, the commission paid will be deducted from any
discounts or commissions otherwise payable to such dealer in respect of shares
actually sold. If an investor is eligible to purchase shares at net asset value
on account of the Right of Accumulation, the commission will be paid only in
respect of the incremental purchase at net asset value.
For the periods shown below, the Distributor received contingent deferred
sales charges upon redemption of Class A, Class B and Class D shares of the Fund
and paid initial commissions to securities dealers for sales of such shares as
follows:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
October 31, 1996 October 31, 1995 October 31, 1994
---------------- ---------------- ----------------
Contingent Commissions Contingent Commissions Contingent Commissions
Deferred Paid to Deferred Paid to Deferred Paid to
Sales Charges Dealers Sales Charges Dealers Sales Charges Dealers
------------- ------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Class A $ 0 $635,263 $ 180 $501,750 $ 0 $962,195
Class B $372,729 $973,303 $262,267 $423,866 $155,134 $905,438
Class D $ 1,828 $ 55,368 $ 1,189 $ 0 $ 3,754 $ 480
</TABLE>
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1" (the
"Distribution Plan") under which the Fund may engage, directly or indirectly, in
financing any activities primarily intended to result in the sale of Class A,
Class B and Class D shares, including, but not limited to, (1) the payment of
commissions and/or reimbursement to
32
<PAGE>
underwriters, securities dealers and others engaged in the sale of shares,
including payments to the Distributor to be used to pay commissions and/or
reimbursement to securities dealers (which securities dealers may be affiliates
of the Distributor) engaged in the distribution and marketing of shares and
furnishing ongoing assistance to investors, (2) reimbursement of direct
out-of-pocket expenditures incurred by the Distributor in connection with the
distribution and marketing of shares and the servicing of investor accounts
including special promotional fees and cash and noncash incentives based upon
sales by securities dealers, expenses relating to the formulation and
implementation of marketing strategies and promotional activities such as direct
mail promotions and television, radio, newspaper, magazine and other mass media
advertising, the preparation, printing and distribution of Prospectuses of the
Fund and reports for recipients other than existing shareholders of the Fund,
and obtaining such information, analyses and reports with respect to marketing
and promotional activities and investor accounts as the Fund may, from time to
time, deem advisable, and (3) reimbursement of expenses incurred by the
Distributor in connection with the maintenance or servicing of shareholder
accounts including payments to securities dealers and others in consideration of
the provision of personal services to investors and/or the maintenance of
shareholder accounts and expenses associated with the provision of personal
services by the Distributor directly to investors. In addition, the Distribution
Plan is deemed to authorize the Distributor and the Investment Manager to make
payments out of general profits, revenues or other sources to underwriters,
securities dealers and others in connection with sales of shares, to the extent,
if any, that such payments may be deemed to be within the scope of Rule 12b-1
under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class D shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class D
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class D shares (as the case may be) to make payments for personal
service and/or the maintenance or servicing of shareholder accounts. Proceeds
from the service fee will be used by the Distributor to compensate securities
dealers and others selling shares of the Fund for rendering service to
shareholders on an ongoing basis. Such amounts are based on the net asset value
of shares of the Fund held by such dealers as nominee for their customers or
which are owned directly by such customers for so long as such shares are
outstanding and the Distribution Plan remains in effect with respect to the
Fund. Any amounts received by the Distributor and not so allocated may be
applied by the Distributor as reimbursement for expenses incurred in connection
with the servicing of investor accounts. The distribution and servicing expenses
of a particular class will be borne solely by that class.
33
<PAGE>
During the fiscal year ended October 31, 1996, the Fund paid the
Distributor fees under the Distribution Plan and the Distributor used all of
such payments for expenses incurred on behalf of the Fund as follows:
Class A Class B Class D
------- ------- -------
Advertising $ 0 $ 0 $ 989
Printing and mailing
of prospectuses to
other than current
shareholders 0 0 357
Compensation to dealers 1,536,412 923,020 129,336
Compensation to sales
personnel 0 0 4,712
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses:
marketing; general 0 0 2,281
---------- -------- --------
Total fees $1,536,412 $923,020 $137,675
========== ======== ========
The Distributor may have also used additional resources of its own for further
expenses on behalf of the Fund.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Fund will attempt to make
alternative arrangements for such services for shareholders who acquired shares
through such institutions.
34
<PAGE>
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") and yield of the
Class A, Class B, Class C and Class D shares of the Fund will be calculated as
set forth below. Total return and yield are computed separately for each class
of shares of the Fund. Performance data for a specified class includes periods
prior to the adoption of class designations. Shares of the Fund had no class
designations until June 1, 1993 when designations were assigned based on the
pricing and 12b-1 fees applicable to shares sold thereafter. Performance data
for a specified class includes periods prior to the adoption of class
designations.
The performance data below reflects Rule 12b-1 fees and, where applicable,
sales charges as follows:
<TABLE>
<CAPTION>
Rule 12b-1 Fees Sales Charges
--------------- -------------
Current
Class Amount Period
- ----- ------ ------
<S> <C> <C> <C>
A 0.25% Since commencement of Maximum 4.5% sales charge reflected
operations to present
B 1.00% 0.25% until June 1, 1993; 1- and 5-year periods reflect a 5% and a
1.00% June 1, 1993 to present; 2% contingent deferred sales charge,
fee will reduce performance respectively
for periods after June 1, 1993
C None 0.25% until June 1, 1993; None
0% thereafter
D 1.00% 0.25% until June 1, 1993; 1-year period reflects a 1% contingent
1.00% June 1, 1993 to present; deferred sales charge
fee will reduce performance
for periods after June 1, 1993
</TABLE>
Total Return
The average annual total returns ("standard total return") of each class
of the Fund's shares were as follows:
35
<PAGE>
Commencement of
Operations Five Years One Year
(March 23, 1987) Ended Ended
Fund to October 31, 1996 October 31, 1996 October 31, 1996
- ---- ------------------- ---------------- ----------------
Class A 7.41% 6.47% 0.54%
Class B 7.62% 6.56% -0.43%
Class C 8.02% 7.62% 5.55%
Class D 7.63% 6.88% 3.52%
Standard total return is computed separately for each class of shares by
determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value, in accordance with the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the
designated period assuming a hypothetical $1,000
payment made at the beginning of the designated
period
The calculation is based on the further assumptions that the maximum
initial or contingent deferred sales charge applicable to the investment is
deducted, and that all dividends and distributions by the Fund are reinvested at
net asset value on the reinvestment dates during the periods. All accrued
expenses and recurring charges are also taken into account as described later
herein.
Yield
The annualized yield of each class of shares of the Fund based on the
month of October 1996 was as follows:
Class A 5.62%
Class B 5.16%
Class C 6.15%
Class D 5.16%
Yield for each of the Fund's Class A, Class B, Class C and Class D shares
is computed by dividing the net investment income per share earned during a
recent month or other specified 30-day period by the maximum offering price per
share on the last day of the period and annualizing the result in accordance
with the following formula:
36
<PAGE>
YIELD = 2[( a-b + 1)6 -1]
---
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net
of voluntary expense reductions by the Investment
Manager, if any)
c = the average daily number of shares
outstanding during the period that were entitled
to receive dividends
d = the maximum offering price per share
on the last day of the period
To calculate interest earned (for the purpose of "a" above) on debt
obligations, the Fund computes the yield to maturity of each obligation held by
the Fund based on the market value of the obligation (including actual accrued
interest) at the close of the last business day of the preceding period, or,
with respect to obligations purchased during the period, the purchase price
(plus actual accrued interest). The yield to maturity is then divided by 360 and
the quotient is multiplied by the market value of the obligation (including
actual accrued interest) to determine the interest income on the obligation for
each day of the period that the obligation is in the portfolio. Dividend income
is recognized daily based on published rates.
With respect to the treatment of discount and premium on mortgage or other
receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("paydowns"), the Fund accounts for gain or
loss attributable to actual monthly paydowns as a realized capital gain or loss
during the period. The Fund has elected not to amortize discount or premium on
such securities.
Undeclared earned income, computed in accordance with generally accepted
accounting principles, may be subtracted from the maximum offering price.
Undeclared earned income is the net investment income which, at the end of the
base period, has not been declared as a dividend, but is reasonably expected to
be declared as a dividend shortly thereafter. The maximum offering price
includes, as applicable, a maximum sales charge of 4.5%.
All accrued expenses are taken into account as described later herein.
Yield information is useful in reviewing the Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in the Fund's shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is a function of the kind and quality of the instruments in the Fund's
portfolio, portfolio maturity and operating expenses and market conditions.
Accrued Expenses
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return and yield results take sales charges, if applicable, into
account, although the results do not take into account recurring and
nonrecurring
37
<PAGE>
charges for optional services which only certain shareholders elect
and which involve nominal fees, such as the $7.50 fee for wire orders.
Nonstandardized Total Return
The Fund may provide the above described standard total return results for
Class A, Class B, Class C and Class D shares for periods which end no earlier
than the most recent calendar quarter end and which begin twelve months before,
five years before and at the time of commencement of the Fund's operations. In
addition, the Fund may provide nonstandardized total return results for
differing periods, such as for the most recent six months, and/or without taking
sales charges into account. Such nonstandardized total return is computed as
otherwise described under "Total Return" except the result may or may not be
annualized and as noted, any applicable sales charge, if any, may not be taken
into account and therefore not deducted from the hypothetical initial payment of
$1,000. For example, the Fund's nonstandardized total returns for the six months
ended October 31, 1996, without taking sales charges into account, were as
follows:
Class A 4.64%
Class B 4.35%
Class C 4.78%
Class D 4.35%
Distribution Rates
The Fund may also quote its distribution rate for each class of shares.
The distribution rate is calculated by annualizing the latest per-share
distribution from ordinary income and dividing the result by the maximum
offering price per share as of the end of the period. A distribution can include
gross investment income from debt obligations purchased at a premium and in
effect include a portion of the premium paid. A distribution can also include
nonrecurring, gross short-term capital gains without recognition of any
unrealized capital losses. Further, a distribution can include income from the
sale of options by the Fund even though such option income is not considered
investment income under generally accepted accounting principles.
Because a distribution can include such premiums, capital gains and option
income, the amount of the distribution may be susceptible to control by the
Investment Manager through transactions designed to increase the amount of such
items. Also, because the distribution rate is calculated in part by dividing the
latest distribution by the offering price, which is based on net asset value
plus any applicable sales charge, the distribution rate will increase as the net
asset value declines. A distribution rate can be greater than the yield rate
calculated as described above.
The distribution rates of the Fund, based on the month ended October 31,
1996, were as follows:
Class A 6.22%
Class B 5.78%
Class C 6.77%
Class D 5.77%
38
<PAGE>
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as the Trust's independent accountants, providing professional services
including (1) an audit of the Fund's annual financial statements, (2) assistance
and consultation in connection with Securities and Exchange Commission filings
and (3) review of the annual income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a semiannual
basis, other supplementary financial reports may be made available from time to
time and holders of record may request a copy of the current supplementary
report, if any, by calling State Street Research Shareholder Services.
39
<PAGE>
The following financial statements are for the Fund's fiscal year ended
October 31, 1996:
40
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
INVESTMENT PORTFOLIO
October 31, 1996
<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
-------------------------------- ------------------------------- ---------------
<S> <C> <C> <C>
U.S. GOVERNMENT SECURITIES 75.3%
U.S. Treasury 33.2%
U.S. Treasury Bond, 13.75% $10,000,000 8/15/2004 $ 14,523,400
U.S. Treasury Bond, 10.75% 14,100,000 8/15/2005 18,213,252
U.S. Treasury Bond, 12.00% 4,000,000 8/15/2013 5,758,760
U.S. Treasury Bond, 9.25% 29,500,000 2/15/2016 37,575,625
U.S. Treasury Bond, 8.13% 26,300,000 8/15/2021 30,594,264
U.S. Treasury Bond, 7.50% 20,000,000 11/15/2024 21,937,400
U.S. Treasury Note, 9.00% 52,000,000 5/15/1998 54,518,880
U.S. Treasury Note, 5.13% 5,525,000 6/30/1998 5,476,656
U.S. Treasury Note, 6.63% 7,075,000 7/31/2001 7,224,212
U.S. Treasury Note, 5.75% 38,500,000 8/15/2003 37,495,535
---------------
233,317,984
---------------
U.S. Agency 5.4%
Federal Home Loan Mortgage Corp.
Deb., 7.24% 10,020,000 5/15/2002 10,106,072
Federal National Mortgage
Association STRIPS, 0.00% 15,000,000 11/22/2001 14,974,200
Guaranteed Export Trust Notes
Series 95-A, 6.28% 8,470,588 6/15/2004 8,430,692
Guaranteed Export Trust Notes
Series 96-A, 6.55% 4,282,353 6/15/2004 4,316,783
---------------
37,827,747
---------------
U.S. Agency Mortgage 36.7%
Federal Home Loan Mortgage Corp.
FHA-VA, 9.00% 6,380,465 12/01/2009 6,761,315
Federal Home Loan Mortgage Corp.
Gold, 7.00% 19,442,488 12/01/2024 19,223,760
Federal Home Loan Mortgage Corp.
Gold, 7.50% 15,539,494 1/01/2025 15,663,188
Federal Home Loan Mortgage Corp.
Series 29-H PAC, 6.50% 5,525,000 3/25/2023 5,381,682
Federal Housing Administration
Court Yard Project, 10.75% 6,493,547 8/01/2032 7,150,005
Federal Housing Administration
East Bay Manor Project, 10.00% 6,767,250 3/01/2033 7,324,491
Federal Housing Administration
Charles River Project, 9.63% 9,483,615 12/01/2033 10,217,113
Federal National Mortgage
Association, 7.50% 13,251,633 6/01/2010 13,496,788
Federal National Mortgage
Association, 7.00% 43,897 2/01/2024 43,294
Federal National Mortgage
Association FHA-VA, 8.00% 4,931,289 4/01/2008 5,134,853
U.S. Agency Mortgage (cont'd)
Federal National Mortgage
Association FHA-VA, 8.00% $ 6,275,948 6/01/2008 $ 6,527,362
Federal National Mortgage
Association FHA-VA, 8.50% 9,144,145 2/01/2009 9,706,784
Federal National Mortgage
Association FHA-VA, 9.00% 15,347,081 5/01/2009 16,258,237
Federal National Mortgage
Association FHA-VA, 9.00% 540,084 4/01/2016 572,149
Government National Mortgage
Association, 6.50% 12,022,695 5/15/2009 11,911,845
Government National Mortgage
Association, 9.50% 3,352,791 9/15/2009 3,641,937
Government National Mortgage
Association, 9.50% 6,113,777 10/15/2009 6,641,028
Government National Mortgage
Association, 9.50% 2,755,827 11/15/2009 2,993,490
Government National Mortgage
Association, 9.00% 2,053,186 4/15/2017 2,201,385
Government National Mortgage
Association, 8.00% 1,981,223 10/15/2017 2,063,068
Government National Mortgage
Association, 8.00% 3,879,519 11/15/2017 4,039,782
Government National Mortgage
Association, 9.50% 1,269,806 11/15/2017 1,378,730
Government National Mortgage
Association, 9.50% 251,838 9/15/2019 273,203
Government National Mortgage
Association, 7.50% 3,063,323 9/15/2021 3,098,153
Government National Mortgage
Association, 8.00% 423,236 5/15/2022 434,871
Government National Mortgage
Association, 8.00% 2,712,413 6/15/2022 2,783,587
Government National Mortgage
Association, 8.00% 2,891,233 7/15/2022 2,968,079
Government National Mortgage
Association, 8.00% 60,743 8/15/2022 62,337
Government National Mortgage
Association, 8.00% 7,890,136 12/15/2022 8,104,604
Government National Mortgage
Association, 7.50% 1,425,293 1/15/2023 1,436,866
Government National Mortgage
Association, 7.50% 12,910,593 6/15/2023 13,003,291
Government National Mortgage
Association, 10.00% 17,010,077 6/15/2023 18,232,591
Government National Mortgage
Association, 7.50% 835,717 8/15/2023 841,717
The accompanying notes are an integral part of the financial statements.
41
<PAGE>
Principal Maturity Value
Amount Date (Note 1)
-------------------------------- ------------------------------- ---------------
U.S. Agency Mortgage (cont'd)
Government National Mortgage
Association, 7.50% $ 850,107 10/15/2023 $ 857,010
Government National Mortgage
Association, 7.50% 601,181 12/15/2023 605,497
Government National Mortgage
Association, 7.50% 817,217 1/15/2024 823,085
Government National Mortgage
Association, 7.50% 10,092,908 4/15/2024 10,169,870
Government National Mortgage
Association, 8.00% 19,482,380 9/15/2026 19,920,733
Government National Mortgage
Association TBA, 7.50% 12,375,000 11/29/2008 12,626,367
Government National Mortgage
Association TBA, 8.00% 2,625,000 12/18/2026 2,688,985
---------------
257,263,132
---------------
Total U.S. Government Securities (Cost $515,301,325) 528,408,863
---------------
OTHER INVESTMENTS 19.8%
Foreign Government 3.7%
Australian Dollar
Government of Australia, 7.50% 7,850,000 7/15/2005 6,294,436
Canadian Dollar
Government of Canada, 7.50% 7,250,000 12/01/2003 5,839,544
Danish Krone
Kingdom of Denmark, 8.00% 25,475,000 11/15/2001 4,799,326
Kingdom of Denmark, 8.00% 25,700,000 3/15/2006 4,758,588
European Currency Unit
Government of France, 8.00% 3,225,000 4/25/2003 4,546,964
---------------
26,238,858
---------------
Trust Certificates 13.3%
Cooperative Utility Trust
Certificates, 9.50% $25,499,000 2/15/2017 27,659,275
Cooperative Utility Trust
Certificates, 9.52% 24,525,000 3/15/2019 26,652,789
Government Backed Trust Class
T-2, 9.40% 107,919 11/15/1996 108,004
Government Backed Trust Class
T-3, 9.63% 10,000,000 5/15/2002 10,729,500
Trust Certificates (cont'd)
Government Trust Certificates
Class 2-D, 9.25% $ 2,086,373 11/15/1996 $ 2,087,959
Government Trust Certificates
Class 2-E, 9.40% 24,000,000 5/15/2002 25,820,400
---------------
93,057,927
---------------
Finance/Mortgage 2.8%
Prudential Home Mortgage
Securities Co. Series 93-29 A-6
PAC, 6.75% 10,118,504 8/25/2008 10,178,507
Residential Funding Corp. Series
93-S25 A-1, 6.50% 9,364,517 7/25/2008 9,379,126
---------------
19,557,633
---------------
Total Other Investments (Cost $136,334,969) 138,854,418
---------------
SHORT-TERM OBLIGATIONS 5.3%
Federal Home Loan Bank, 5.22% 12,000,000 11/29/1996 11,951,467
Federal Home Loan Mortgage
Corp., 5.18% 9,795,000 11/01/1996 9,795,000
Federal Home Loan Mortgage
Corp., 5.50% 15,493,000 11/01/1996 15,493,000
---------------
Total Short-Term Obligations (Cost $37,239,467) 37,239,467
---------------
Total Investments (Cost $688,875,761)--100.4% 704,502,748
Cash and Other Assets, Less Liabilities--(0.4)% (2,730,819)
---------------
Net Assets--100.0% $701,771,929
===============
Federal Income Tax Information:
At October 31, 1996, the net unrealized appreciation of
investments based on cost for Federal income tax purposes of
$688,875,761 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost $ 20,181,429
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value (4,554,442)
---------------
$ 15,626,987
===============
</TABLE>
TBA Represents "TBA" (to be announced) purchase commitment to purchase
securities for a fixed unit price at a future date beyond customary
settlement time. Although the unit price has been established, the
principal value has not been finalized and may vary by no more than 1%.
The accompanying notes are an integral part of the financial statements.
42
<PAGE>
Forward currency exchange contracts outstanding at October 31, 1996, are as
follows:
<TABLE>
<CAPTION>
Unrealized
Appreciation
Total Value Contract Price (Depreciation) Delivery Date
- -------------------------------------------- ----------------------------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Buy Australian dollars, Sell U.S. dollars 3,590,000 AUD .79004 AUD $ 1,923 1/24/97
Buy Australian dollars, Sell U.S. dollars 570,000 AUD .79055 AUD 15 1/24/97
Sell Australian dollars, Buy U.S. dollars 1,025,000 AUD .77425 AUD (18,400) 11/14/96
Sell Australian dollars, Buy U.S. dollars 6,075,000 AUD .77450 AUD (107,533) 11/14/96
Sell Australian dollars, Buy U.S. dollars 570,000 AUD .79340 AUD 1,610 1/24/97
Sell Australian dollars, Buy U.S. dollars 3,590,900 AUD .79360 AUD 10,857 1/24/97
Sell Canadian dollars, Buy U.S. dollars 2,470,000 CAD .73099 CAD (38,979) 11/14/96
Sell Canadian dollars, Buy U.S. dollars 4,050,000 CAD .74702 CAD (12,436) 1/24/97
Sell Danish krone, Buy U.S. dollars 49,514,000 DKK .17584 DKK 181,977 11/14/96
Sell Danish krone, Buy U.S. dollars 2,030,000 DKK .17111 DKK (2,141) 11/14/96
Sell Danish krone, Buy U.S. dollars 833,000 DKK .17110 DKK (1,407) 1/24/97
Sell European currency units,
Buy U.S. dollars 3,311,000 ECU 1.27480 ECU 25,231 11/14/96
---------------
$ 40,717
===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
43
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments, at value (Cost $688,875,761) (Note 1) $704,502,748
Cash 3,184
Interest receivable 11,281,362
Receivable for securities sold 5,340,072
Receivable for fund shares sold 1,533,994
Receivable for open forward contracts 221,613
Other assets 23,161
---------------
722,906,134
Liabilities
Payable for securities purchased 15,334,878
Payable for fund shares redeemed 2,390,682
Dividends payable 2,277,552
Accrued management fee (Note 2) 384,992
Accrued distribution and service fees (Note 3) 215,047
Accrued transfer agent and shareholder services (Note 2) 213,526
Payable for open forward contracts 180,896
Accrued trustees' fees (Note 2) 10,352
Other accrued expenses 126,280
---------------
21,134,205
---------------
Net Assets $701,771,929
===============
Net Assets consist of:
Undistributed net investment income $ 3,771,439
Unrealized appreciation of investments 15,626,987
Unrealized appreciation of forward contracts and foreign
currency 45,123
Accumulated net realized loss (86,648,683)
Shares of beneficial interest 768,977,063
---------------
$701,771,929
===============
Net Asset Value and redemption price per share of Class A
shares ($584,313,469 / 46,990,520 shares of beneficial
interest) $12.43
===============
Maximum Offering Price per share of Class A shares ($12.43
/ .955) $13.02
===============
Net Asset Value and offering price per share of Class B
shares ($95,218,110 / 7,679,256 shares of beneficial
interest)* $12.40
===============
Net Asset Value, offering price and redemption price per
share of Class C shares ($7,767,449 / 625,275 shares of
beneficial interest) $12.42
===============
Net Asset Value and offering price per share of Class D
shares ($14,472,901 / 1,166,285 shares of beneficial
interest)* $12.41
===============
</TABLE>
* Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
STATEMENT OF OPERATIONS
For the year ended October 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Investment Income
Interest $55,174,545
Expenses
Management fee (Note 2) 4,723,842
Transfer agent and shareholder services (Note 2) 786,300
Custodian fee 250,860
Reports to shareholders 160,433
Service fee--Class A (Note 3) 1,536,412
Distribution and service fees--Class B (Note 3) 923,020
Distribution and service fees--Class D (Note 3) 137,675
Audit fee 56,273
Registration fees 53,807
Trustees' fees (Note 2) 33,363
Miscellaneous 29,917
--------------
8,691,902
--------------
Net investment income 46,482,643
--------------
Realized and Unrealized Gain (Loss) on Investments,
Forward Contracts and Foreign Currency
Net realized loss on investments (Notes 1 and 4) (3,528,385)
Net realized loss on forward contracts and foreign
currency (Note 1) (23,619)
--------------
Total net realized loss (3,552,004)
--------------
Net unrealized depreciation of investments (Note 5) (7,443,474)
Net unrealized appreciation of forward contracts and
foreign currency 1,038,389
--------------
Total net unrealized depreciation (6,405,085)
--------------
Net loss on investments, forward contracts and foreign
currency (9,957,089)
--------------
Net increase in net assets resulting from operations $36,525,554
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
44
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year ended October 31
-------------------------------
1996 1995
------------------------------- --------------- ---------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 46,482,643 $ 48,226,230
Net realized gain (loss) on
investments, forward contracts
and foreign currency* (3,552,004) 2,583,992
Net unrealized appreciation
(depreciation) of investments,
forward contracts and foreign
currency (6,405,085) 48,001,271
--------------- ---------------
Net increase resulting from
operations 36,525,554 98,811,493
--------------- ---------------
Dividends from net investment
income:
Class A (39,055,243) (42,302,801)
Class B (5,188,785) (3,875,565)
Class C (404,930) (166,657)
Class D (773,463) (735,022)
--------------- ---------------
(45,422,421) (47,080,045)
--------------- ---------------
Net increase (decrease) from
fund share transactions
(Note 6) (50,352,743) 4,925,189
--------------- ---------------
Total increase (decrease) in
net assets (59,249,610) 56,656,637
Net Assets
Beginning of year 761,021,539 704,364,902
--------------- ---------------
End of year (including
undistributed net investment
income of $3,771,439 and
$2,696,356, respectively) $701,771,929 $761,021,539
=============== ===============
*Net realized gain (loss) for
Federal income tax purposes
(Note 1) $ (4,139,815) $ 2,398,429
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
October 31, 1996
Note 1
State Street Research Government Income Fund (the "Fund") is a series of
State Street Research Financial Trust (the "Trust"), which was organized as a
Massachusetts business trust in November, 1986 and is registered under the
Investment Company Act of 1940, as amended, as an open-end management
investment company. The Fund commenced operations in March, 1987. The Trust
consists presently of four separate funds: State Street Research Government
Income Fund, State Street Research Strategic Portfolios: Moderate, State
Street Research Strategic Portfolios: Conservative and State Street Research
Strategic Portfolios: Aggressive.
The investment objective of the Fund is to seek high current income. In
seeking to achieve its investment objective, the Fund invests primarily in
U.S. Government securities.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and annual service fees of 0.25% of
average daily net assets. Class B shares are subject to a contingent deferred
sales charge on certain redemptions made within five years of purchase and
pay annual distribution and service fees of 1.00%. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after the issuance of the Class B shares. Class C
shares are only offered to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro-rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by
the Fund in preparing its financial statements, and such policies are in
conformity with generally accepted accounting principles for investment
companies.
A. Investment Valuation
Securities are valued by a pricing service, which utilizes market
transactions, quotations from dealers, and various relationships among
securities in determining value. Securities for which there is no such
valuation, if any, are valued at their fair value as determined in accordance
with established methods consistently applied. Short-term securities
maturing within sixty days are valued at amortized cost. Securities quoted in
foreign currencies are translated into U.S. dollars at the current exchange
rate.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported
45
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
on the basis of identified cost of securities delivered. Gains and losses
that arise from changes in exchange rates are not segregated from gains and
losses that arise from changes in market prices of investments.
C. Net Investment Income
Net investment income is determined daily and consists of interest accrued
and discount earned, less the estimated daily expenses of the Fund. Interest
income is accrued daily as earned. Accretion of discount is computed under
the effective yield method. The Fund is charged for expenses directly
attributable to it, while indirect expenses are allocated among all funds in
the Trust.
D. Dividends
Dividends are declared daily based upon projected net investment income and
are paid or reinvested monthly. Net realized capital gains, if any, are
distributed annually, unless additional distributions are required for
compliance with applicable tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing
treatments for foreign currency transactions.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund has
elected to qualify under Subchapter M of the Internal Revenue Code and its
policy is to distribute all of its taxable income, including net realized
capital gains, if any, within the prescribed time periods. At October 31,
1996, the Fund had a capital loss carryforward of $86,648,683 available, to
the extent provided in regulations, to offset future capital gains, if any,
of which $46,959,196, $18,353,379, $17,196,293 and $4,139,815 expires on
October 31, 1997, 1998, 2002 and 2004, respectively. The Fund had a capital
loss carryforward of $29,348,263 expire on October 31, 1996. In addition, as
part of a merger that occurred on May 12, 1995, the Fund acquired from
MetLife-State Street Research Government Securities Fund a capital loss
carryforward of $5,100,777, of which $3,074,207 and $2,026,570 expires on
October 31, 2001 and 2002, respectively. The Fund's use of such capital loss
carryforward may be limited under current tax laws.
F. Forward Contracts and Foreign Currencies The Fund enters into forward
foreign currency exchange contracts in order to hedge its exposure to changes
in foreign currency exchange rates on its foreign portfolio holdings and to
hedge certain purchase and sale commitments denominated in foreign
currencies. A forward foreign currency exchange contract is an obligation by
the Fund to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the origination date of the contract.
Forward foreign currency exchange contracts establish an exchange rate at a
future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks)
and their customers. Risks may arise from the potential inability of a
counterparty to meet the terms of a contract and from unanticipated movements
in the value of foreign currencies relative to the U.S. dollar. The aggregate
principal amount of forward currency exchange contracts is recorded in the
Fund's accounts. All commitments are marked-to-market at the applicable
transaction rates resulting in unrealized gains or losses. The Fund records
realized gains or losses at the time the forward contracts are extinguished
by entry into a closing contract or by delivery of the currency. Neither spot
transactions nor forward currency exchange contracts eliminate fluctuations
in the prices of the Fund's portfolio securities or in foreign exchange
rates, or prevent loss if the price of these securities should decline.
G. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser
earns monthly fees at an annual rate of 0.65% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. During the year ended October 31, 1996, the fees pursuant to
such agreement amounted to $4,723,842.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. During the year ended October 31, 1996, the amount of
such expenses was $259,577.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $33,363 during the year ended October 31, 1996.
Note 3
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940. Under the Plan, the Fund
pays annual service fees to the Distributor at a rate of 0.25% of average
daily net assets for Class A, Class B and Class D shares. In addition, the
Fund pays annual distribution fees of 0.75% of average daily net assets for
Class B and Class D shares. The Distributor uses such payments for personal
service and/or the maintenance or servicing of shareholder accounts, to
reimburse securities dealers for distribution and marketing services, to
furnish ongoing assistance to investors and to defray a portion of its
distribution and marketing expenses. For the year ended October 31, 1996,
fees pursuant to such plan amounted to $1,536,412, $923,020 and $137,675 for
Class A, Class B and Class D shares, respectively.
46
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
NOTES (cont'd)
Note 3 (cont'd)
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly owned subsidiary of Metropolitan, earned initial sales charges
aggregating $89,615 and $495,180, respectively, on sales of Class A shares of
the Fund during the year ended October 31, 1996, and that MetLife Securities,
Inc. earned commissions aggregating $536,913 on sales of Class B shares, and
that the Distributor collected contingent deferred sales charges aggregating
$372,729 and $1,828 on redemptions of Class B and Class D shares,
respectively, during the same period.
Note 4
For the year ended October 31, 1996, purchases and sales of securities,
exclusive of short-term obligations, aggregated $609,470,532 and $688,024,321
(including $503,419,486 and $551,059,425 of U.S. Government obligations),
respectively.
Note 5
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At October 31, 1996, the
Distributor owned 12,241 Class A shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended October 31
-----------------------------------------------------------------
1996 1995
------------------------------- --------------------------------
Class A Shares Amount Shares Amount
------------------------------------------------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 2,386,852 $ 29,601,645 8,692,870 $ 106,770,703
Issued upon reinvestment of dividends 1,707,616 21,188,423 1,902,247 23,135,012
Shares repurchased (9,183,464) (113,908,052) (13,184,315) (159,163,704)
-------------- ---------------- --------------- ----------------
Net decrease (5,088,996) $ (63,117,984) (2,589,198) $ (29,257,989)
============== ================ =============== ================
Class B Shares Amount Shares Amount
------------------------------------------------------- ---------------- --------------- ----------------
Shares sold 2,341,362 $ 29,026,329 3,527,941 $ 42,934,470
Issued upon reinvestment of dividends 275,775 3,412,679 209,008 2,591,060
Shares repurchased (1,940,555) (24,024,991) (1,222,045) (14,751,417)
-------------- ---------------- --------------- ----------------
Net increase 676,582 $ 8,414,017 2,514,904 $ 30,774,113
============== ================ =============== ================
Class C Shares Amount Shares Amount
------------------------------------------------------- ---------------- --------------- ----------------
Shares sold 518,980 $ 6,381,030 435,479 $ 5,346,473
Issued upon reinvestment of dividends 30,667 379,365 12,362 153,460
Shares repurchased (324,941) (4,001,721) (64,617) (809,530)
-------------- ---------------- --------------- ----------------
Net increase 224,706 $ 2,758,674 383,224 $ 4,690,403
============== ================ =============== ================
Class D Shares Amount Shares Amount
------------------------------------------------------- ---------------- --------------- ----------------
Shares sold 520,289 $ 6,453,505 433,690 $ 5,281,361
Issued upon reinvestment of dividends 43,660 539,841 43,377 526,125
Shares repurchased (435,567) (5,400,796) (590,308) (7,088,824)
-------------- ---------------- --------------- ----------------
Net increase (decrease) 128,382 $ 1,592,550 (113,241) $ (1,281,338)
============== ================ =============== ================
</TABLE>
47
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Class B
------------------------------------------------ -----------------------------------------
Year ended October 31 Year ended October 31
------------------------------------------------ -----------------------------------------
1996* 1995* 1994* 1993 1992 1996* 1995* 1994* 1993**
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.58 $11.68 $12.92 $12.38 $12.14 $12.55 $11.66 $12.91 $12.67
Net investment income 0.81 0.83 0.81 0.84 0.90 0.71 0.73 0.72 0.30
Net realized and unrealized gain
(loss) on investments, forward
contracts and foreign currency (0.17) 0.88 (1.26) 0.56 0.26 (0.16) 0.87 (1.27) 0.24
Dividends from net investment
income (0.79) (0.81) (0.79) (0.84) (0.91) (0.70) (0.71) (0.70) (0.30)
Distributions from net realized
gains -- -- -- (0.02) (0.01) -- -- -- --
-------- -------- -------- -------- --------- -------- -------- --------- -----------
Net asset value, end of year $12.43 $12.58 $11.68 $12.92 $12.38 $12.40 $12.55 $11.6 $12.91
======== ======== ======== ======== ========= ======== ======== ========= ==========
Total return 5.28%+ 15.07%+ (3.58)%+ 11.63%+ 9.86%+ 4.51%+ 14.15%+ (4.38)%+ 4.32%+++
Net assets at end of year (000s) $584,313 $655,045 $638,418 $868,556 $798,705 $95,218 $87,908 $52,319 $26,578
Ratio of operating expenses to
average net assets 1.09% 1.10% 1.07% 1.05% 1.05% .84% 1.85% 1.82% 1.81%++
Ratio of net investment income to
average net assets 6.50% 6.83% 6.54% 6.59% 7.25% 5.75% 6.01% 5.86% 5.67%++
Portfolio turnover rate 88.79% 105.57% 134.41% 103.49% 97.33% 88.79% 105.57% 134.41% 103.49%
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
------------------------------------------ -------------------------------------------
Year ended October 31 Year ended October 31
------------------------------------------ -------------------------------------------
1996* 1995* 1994* 1993** 1996* 1995* 1994* 1993**
----------------------------------- -------- --------- ----------- --------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.57 $ 11.67 $ 12.92 $ 12.67 $ 12.56 $ 11.66 $ 12.91 $ 12.67
Net investment income 0.84 0.90 0.84 0.19 0.71 0.74 0.72 0.30
Net realized and unrealized gain
(loss) on
investments, forward contracts
and foreign currency (0.17) 0.84 (1.27) 0.42 (0.16) 0.87 (1.27) 0.24
Dividends from net investment
income (0.82) (0.84) (0.82) (0.36) (0.70) (0.71) (0.70) (0.30)
-------- --------- ----------- --------- --------- --------- ----------- ----------
Net asset value, end of year $12.42 $ 12.57 $ 11.67 $ 12.92 $ 12.41 $ 12.56 $ 11.66 $ 12.91
======== ========= =========== ========= ========= ========= =========== ==========
Total return 5.55%+ 15.37%+ (3.42)%+ 4.82%+++ 4.51%+ 14.24%+ (4.38)%+ 4.32%+++
Net assets at end of year (000s) $7,767 $ 5,036 $ 203 $ 36 $14,473 $13,033 $13,425 $12,101
Ratio of operating expenses to
average net assets 0.84% 0.85% 0.82% 0.80%++ 1.84% 1.85% 1.82% 1.88%++
Ratio of net investment income to
average net assets 6.78% 6.79% 8.01% 6.59%++ 5.76% 6.08% 5.84% 5.59%++
Portfolio turnover rate 88.79% 105.57% 134.41% 103.49% 88.79% 105.57% 134.41% 103.49%
</TABLE>
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges.
+++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges.
* Per-share figures have been calculated using the average shares method.
** June 1, 1993 (commencement of share class designations) to October 31,
1993.
48
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of State Street Research
Financial Trust and the Shareholders of
State Street Research Government Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of State Street Research
Government Income Fund (a series of State Street Research Financial Trust,
hereafter referred to as the "Trust") at October 31, 1996, and the results of
its operations, the changes in its net assets and the financial highlights
for the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (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 generally accepted auditing standards which
require that we plan and perform the audit to obtain reason- able 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 October 31, 1996 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 11, 1996
49
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
Government Income Fund outperformed Lipper Analytical Service's General U.S.
Government Funds Category for the 12 months ended October 31, 1996. The
Fund's conservative positioning helped its performance when interest rates
were on the rise during much of 1996.
Government Income Fund's management was very active with the portfolio. Last
year at this time, when interest rates were declining, the Fund emphasized
Treasuries, at 41% of the portfolio. When interest rates rose in 1996, Fund
management reduced the Fund's position in Treasuries and increased its
holdings in mortgage securities. As of April 30, 1996, the Fund had 45% of
the portfolio invested in mortgages.
More recently, as interest rates have started to come down again, Fund
management reduced mortgage holdings and moved back into Treasuries, which
make up 33% of the portfolio as of October 31, 1996.
The non-dollar portions of the portfolio performed well and added value
during this time, even though their position in the portfolio was and is
relatively small.
The fluctuations in interest rates also caused movements in the Fund's yield.
The yield was at its lowest at the end of November at 5.36%, and at its
highest at the end of May at 6.25%.
October 31, 1996
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate, and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. Investments in the Fund are not insured
or guaranteed by the U.S. government or any other entity. Performance for a
class includes periods prior to the adoption of class designations. "C"
shares, offered without a sales charge, are available only to certain
employee benefit plans and large institutions. Performance for "B" and "D"
shares prior to class designations in 1993 reflects annual 12b-1 fees of
.25%, and performance thereafter reflects annual 12b-1 fees of 1%, which will
reduce subsequent performance. Performance reflects maximum 4.5% "A" share
front-end sales charge or 5% "B" share or 1% "D" share contingent deferred
sales charges, where applicable. The Merrill Lynch Government Master and
Blended Indices are commonly used measures of bond market performance. The
indices are unmanaged and do not take sales charges into consideration.
Direct investment in the indices is not possible; results are for
illustrative purposes only.
Change In Value Of $10,000 Based On
The Merrill Lynch Blended Index And
The Merrill Lynch Government Master Index
Compared To Change In Value Of $10,000 Invested
In Government Income Fund
[Data for Line Charts]
Class A Shares
Average Annual Total Return
- --------------------------------
1 Year 5 Years Life of Fund
- --------------------------------
+0.54% +6.47% +7.41%
- --------------------------------
$25,000 20,000 15,000 10,000
$19,896 $21,831 $21,263
3/87 9550 10000 10000
10/87 9408 9935 9849
10/88 10328 11045 10807
10/89 11321 12316 12106
10/90 11948 13154 12825
10/91 13890 15171 14703
10/92 15259 16660 16223
10/93 17034 18553 18333
10/94 16424 17933 17539
10/95 18899 20669 20242
10/96 19896 21831 21263
Government ML ML
Income Blended Government
Fund Index Master
Index
Class B Shares
Average Annual Total Return
- --------------------------------
1 Year 5 Years Life of Fund
- --------------------------------
- -0.43% +6.56% +7.62%
- --------------------------------
$25,000 20,000 15,000 10,000
$20,272 $21,831 $21,263
3/87 10000 10000 10000
10/87 9852 9935 9849
10/88 10814 11045 10807
10/89 11855 12316 12106
10/90 12511 13154 12825
10/91 14544 15171 14703
10/92 15978 16660 16223
10/93 17770 18553 18333
10/94 16992 17933 17539
10/95 19397 20669 20242
10/96 20272 21831 21263
Government ML ML
Income Blended Government
Fund Index Master
Index
Class C Shares
Average Annual Total Return
- --------------------------------
1 Year 5 Years Life of Fund
- --------------------------------
+5.55% +7.62% +8.02%
- --------------------------------
$25,000 20,000 15,000 10,000
$20,997 $21,831 $21,263
3/87 10000 10000 10000
10/87 9852 9935 9849
10/88 10814 11045 10807
10/89 11855 12316 12106
10/90 12511 13154 12825
10/91 14544 15171 14703
10/92 15978 16660 16223
10/93 17855 18553 18333
10/94 17244 17933 17539
10/95 19894 20669 20242
10/96 20997 21831 21263
Government ML ML
Income Blended Government
Fund Index Master
Index
Class D Shares
Average Annual Total Return
- --------------------------------
1 Year 5 Years Life of Fund
- --------------------------------
+3.52% +6.88% +7.63%
- --------------------------------
$25,000 20,000 15,000 10,000
$20,286 $21,831 $21,263
3/87 10000 10000 10000
10/87 9852 9935 9849
10/88 10814 11045 10807
10/89 11855 12316 12106
10/90 12511 13154 12825
10/91 14544 15171 14703
10/92 15978 16660 16223
10/93 17769 18553 18333
10/94 16991 17933 17539
10/95 19411 20669 20242
10/96 20286 21831 21263
Government ML ML
Income Blended Government
Fund Index Master
Index
50
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
REPORT ON SPECIAL MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of the State Street Research Government
Income Fund ("Fund"), along with shareholders of other series of State Street
Research Financial Trust ("Meeting"), was convened on February 14, 1996, and
continued thereafter. The results of the Meeting are set forth below.
<TABLE>
<CAPTION>
Votes (millions of Shares)
--------------------------
For Withheld
-----------------
<S> <C> <C>
1. The following persons were elected as Trustees:
Edward M. Lamont 43.4 3.0
Robert A. Lawrence 43.4 3.0
Dean O. Morton 43.4 3.0
Thomas L. Phillips 43.4 3.0
Toby Rosenblatt 43.4 3.0
Michael S. Scott Morton 43.8 2.6
Ralph F. Verni 43.8 2.7
Jeptha H. Wade 43.8 2.6
</TABLE>
<TABLE>
<CAPTION>
Votes (millions of Shares)
--------------------------
For Against Abstain
---- ---------------
<S> <C> <C> <C>
2. The Fund's following investment policies were reclassified from fundamental to
nonfundamental:
a. The policy regarding investments in securities of companies with less than three (3)
years' continuous operation 26.5 3.8 2.9
b. The policy regarding investments in illiquid securities 26.1 4.0 3.1
3. The Fund's fundamental policy regarding investments in commodities and commodity
contracts was amended 25.7 4.5 3.1
4. The Fund's fundamental policy on lending was amended to clarify the permissibility of
securities lending 26.0 4.2 3.0
5. The Fund's fundamental policies regarding diversification of investments were amended 27.3 3.0 2.9
6. The Master Trust Agreement was amended to permit the Trustees to reorganize, merge or
liquidate a fund without prior shareholder approval 33.1 7.3 4.2
7. The Master Trust Agreement was amended to eliminate specified time permitted between the
record date and any shareholders meeting 34.4 5.7 4.4
</TABLE>
51
<PAGE>
STATEMENT OF ADDITIONAL
INFORMATION FOR
STATE STREET RESEARCH
PORTFOLIOS, INC.
March 1, 1997
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus of State Street Research International Equity
Fund and State Street Research International Fixed Income Fund dated March 1,
1997. A copy of the Prospectus may be obtained without charge from the offices
of State Street Research Portfolios, Inc. ("Portfolios") or State Street
Research Investment Services, Inc. (the "Distributor"), One Financial Center,
Boston, Massachusetts 02111.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Investment Practices and Policies......................................... B-1
Money Market Instruments................................................ B-1
Description of Certain Corporate Bond and Debenture Ratings of Moody's
Investors Service, Inc................................................. B-4
Description of Certain Corporate Bond and Debenture Ratings of Standard
and Poor's Ratings Group............................................... B-4
Description of Commercial Paper
Ratings................................................................ B-4
Certain Investment Limitations............................................ B-5
Certain Investment Practices.............................................. B-7
Lending of Portfolio Securities......................................... B-7
Options and Futures..................................................... B-7
Limitations on the Use of Futures Contracts and Options Thereon and Op-
tions on Indices....................................................... B-14
Forward Foreign Currency Exchange Contracts............................. B-14
Directors and Officers.................................................... B-16
Control Persons........................................................... B-17
Investment Management Arrangements........................................ B-18
Investment Management Agreements and Sub-Investment Management Agree-
ments.................................................................. B-18
TABLE OF CONTENTS (CONT'D)
- --------------------------------------------------------------------------------
Allocation of Portfolio Brokerage....................................... B-20
Purchase of Shares........................................................ B-21
Redemption In Kind........................................................ B-22
Net Asset Value........................................................... B-22
Portfolio Transactions.................................................... B-23
Portfolio Turnover...................................................... B-23
Certain Tax Matters....................................................... B-24
Taxation of the Funds--in General....................................... B-24
Taxation of the Funds' Investments...................................... B-25
Taxation of the Funds' Shareholders..................................... B-26
Distribution of Shares of the Funds....................................... B-27
Calculation of Performance Data........................................... B-30
Total Return............................................................ B-30
Yield................................................................... B-31
Accrued Expenses........................................................ B-31
Nonstandardized Total Return............................................ B-32
Distribution Rates...................................................... B-32
Custodian................................................................. B-32
Independent Accountants................................................... B-33
Financial Statements...................................................... B-33
INVESTMENT PRACTICES AND POLICIES
MONEY MARKET INSTRUMENTS:
Certain money market instruments are described below. The International Equity
and International Fixed Income Funds may invest in such instruments to the ex-
tent otherwise consistent with their investment objectives.
United States Treasury Securities: These consist of various types of market-
able securities issued by the United States Treasury: i.e. bills, notes and
bonds. Such securities are direct obligations of the United States Government
and differ mainly in the length of their maturity. Treasury bills, the most
frequently issued marketable government security, have a maturity of up to one
year and are issued on a discount basis.
B-1
<PAGE>
Government Agency Securities:
These consist of debt securities issued by agencies and instrumentalities of
the United States Government, including the various types of instruments cur-
rently outstanding or which may be offered in the future. Agencies include,
among others, the Federal Housing Administration, Government National Mortgage
Association, Farmers Home Administration, Export-Import Bank of the United
States, Maritime Administration, General Services Administration and Tennessee
Valley Authority. Instrumentalities include, for example, the National Bank of
Cooperatives, each of the Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation, Farm Credit Banks, Federal National Mortgage Association and the
United States Postal Service. Such securities are backed by the full faith and
credit of the United States (e.g., U.S. Treasury Bills), guaranteed by the
United States Treasury (e.g. Government National Mortgage Association mortgage-
backed securities), supported by the issuing agency's or instrumentality's
right to borrow from the United States Treasury (e.g. Federal National Mortgage
Association Discount Notes) or supported by the issuing agency's or
instrumentality's credit.
Bank Money Market Instruments:
These include certificates of deposit and bankers' acceptances. Certificates
of deposit are generally short-term, interest-bearing negotiable certificates
issued by commercial banks or savings and loan associations against funds de-
posited in the issuing institution. A banker's acceptance is a time draft drawn
on a commercial bank by a borrower, usually in connection with an international
commercial transaction (to finance the import, export, transfer or storage of
goods). The borrower is liable for payment as well as the bank, which uncondi-
tionally guarantees to pay the draft at its face amount on the maturity date.
Most acceptances have maturities of six months or less and are traded in sec-
ondary markets prior to maturity. A Fund will not invest in any security issued
by a commercial bank or a savings and loan association unless the bank or asso-
ciation is organized and located in the United States, has total assets of at
least $1 billion and is a member of the Federal Deposit Insurance Corporation;
provided that this limitation shall not prohibit investments in foreign branches
of banks or agencies which meet the foregoing requirements. Negotiable time
deposits with maturities of thirty days or less may be purchased for each Fund
without limit. There is no limit on the amount of non-negotiable time deposits
maturing in seven days or less. Non-negotiable time deposits with maturities
exceeding seven days may be purchased for each Fund, subject to each Fund's 10%
limit on its aggregate holdings of illiquid securities.
Short-Term Corporate Debt Instruments:
These include commercial paper (including variable amount master demand
notes): i.e., short-term, unsecured promissory notes issued by corporations to
finance short-term credit needs. Commercial paper is usually sold on a discount
basis and has a maturity at the time of issuance not exceeding nine months.
Variable amount master demand notes are obligations of companies that permit the
Funds to invest fluctuating amounts at varying rates of interest pursuant to
arrangements between the Funds as lenders, and the companies, as borrowers. The
Funds will have the right, at any time, to increase the amount lent up to the
full amount provided by a note or to decrease the amount. The borrower will have
the right, at any time, to prepay up to the full amount of the amount borrowed
without penalty. Because the notes are direct lending obligations between the
Funds and borrowers, they are generally not traded and there is no secondary
market. However, the Funds will have the right to redeem a note at any time and
receive face value plus accrued interest. Consequently, the Funds' ability to
receive repayment will depend upon the borrower's ability to pay principal and
interest on the Funds' demand. The Funds will invest only in either notes that
have the ratings described below for commercial paper, or (because notes are not
typically rated by credit rating agencies) unrated notes that are issued by
companies that have the ratings described below for issuers of commercial
paper. State Street Research International Limited ("SSR International" or
"Sub-Investment Manager") does not expect that the notes will be backed by
bank letters of credit. The Funds' Investment Manager and Sub-Investment Manager
will value the notes held by the Funds taking into account such factors as the
issuer's earning power, cash flows and other liquidity ratios.
B-2
<PAGE>
Also included are non-convertible corporate debt securities (e.g. bonds and
debentures) with no more than two years remaining to maturity at the date of
settlement. Corporate debt securities with a remaining maturity of less than
one year are liquid (and tend to become more liquid as their maturities lessen)
and are traded as money market securities. Issues with between one and two
years remaining to maturity tend to have greater liquidity and considerably
less market value fluctuation than longer term issues.
Repurchase Agreements:
Under these arrangements, a Fund invests in securities subject to repurchase
agreements with a bank or dealer. A repurchase agreement is an instrument under
which the purchaser (i.e., the Fund) acquires ownership of an obligation (debt
security) and the seller agrees, at the time of the sale, to repurchase the ob-
ligation at a mutually agreed upon time and price, thereby determining the
yield during the purchaser's holding period. This results in a fixed rate of
return insulated from market fluctuations during such period, unless the seller
defaults on its repurchase obligations.
The underlying securities will consist only of U.S. Government or government
agency securities, certificates of deposit, commercial paper or banker's ac-
ceptances. Repurchase agreements will be collateralized by the purchased secu-
rities, and, during the term of a repurchase agreement, the seller will be re-
quired to provide such additional collateral as is necessary to maintain the
value of all of the collateral at a level at least equal to the repurchase
price. Repurchase agreements usually are for short periods, such as under one
week. Repurchase agreements will be entered into with primary dealers for peri-
ods not to exceed 30 days and only with respect to underlying money market se-
curities in which a Fund may otherwise invest as described above. Repurchase
agreements will not be entered into for a duration of more than seven days if,
as a result, more than 10% of the value of a Fund's total assets would be in-
vested in such agreements or other illiquid securities.
Repurchase agreements could be viewed as a form of loan made by a Fund to the
seller of the agreement, with the security subject to repurchase, in effect,
serving as "collateral" for the loan. A Fund will in all cases seek to assure
that the amount of collateral with respect to any repurchase agreement is ade-
quate. As with a true extension of credit, however, there is risk of delay in
recovery or inadequacy of the "collateral", should the seller of the repurchase
agreement fail financially. Also, a Fund could incur disposition costs in con-
nection with disposition of the collateral if the seller defaults. The Funds
will enter into repurchase agreements only with sellers deemed to be credit-
worthy and only when the economic benefit to the Funds is believed to justify
the attendant risks. Portfolios has adopted standards for the sellers with whom
it will enter into repurchase agreements which it believes are reasonably de-
signed to assure that such a party presents no serious risk of becoming in-
volved in bankruptcy proceedings within the time frame contemplated by the re-
purchase agreement.
Zero Coupon Bonds
Zero coupon bonds do not require the periodic payment of interest and are is-
sued at a significant discount from face value. The discount approximates the
total amount of interest the bonds will accrue and compound over the period un-
til maturity at a rate of interest reflecting the market rate of the security
at the time of issuance. Such investments benefit the issuer by mitigating its
need for cash to meet debt service, but also require a higher rate of return to
attract investors who are willing to defer receipt of such cash. Such invest-
ments may experience greater volatility in market value than debt obligations
which make regular payments of interest. The Funds will accrue income on such
investments for tax and accounting purposes, which is distributable to share-
holders. When distributed to shareholders, any such income resulting from zero
coupon bonds will be paid from a Fund's cash assets, or, if necessary to pay
the distribution, from the proceeds of sales of portfolio securities held by a
Fund. Furthermore, a Fund will be unable to purchase additional portfolio secu-
rities with any cash used to make such distributions and its current income may
be reduced.
B-3
<PAGE>
Debt Instrument Ratings
The ratings of certain debt instruments in which the Funds may invest are de-
scribed below.
DESCRIPTION OF CERTAIN CORPORATE BOND AND DEBENTURE RATINGS OF MOODY'S
INVESTORS SERVICE, INC.:
Aaa-Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all stan-
dards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protec-
tive elements may be of greater amplitude or there may be other elements pres-
ent which make the long term risks appear somewhat greater than in Aaa securi-
ties.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position charac-
terizes bonds in this class.
B--Bonds which are rated B generally lack characteristics of the desirable in-
vestment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
DESCRIPTION OF CERTAIN CORPORATE BOND AND DEBENTURE RATINGS OF STANDARD &
POOR'S RATINGS GROUP:
AAA--This is the highest rating assigned by Standard & Poor's to a debt obliga-
tion and indicates an extremely strong capacity to pay principal and interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest, al-
though they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection parame-
ters, adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal for debt in
this category than in higher rated categories.
BB or B--Bonds rated BB or B are regarded, on balance, as predominantly specu-
lative with respect to capacity to pay interest and repay principal in accor-
dance with the terms of the obligation. BB indicates the lowest degree of spec-
ulation and B a relatively higher degree of speculation. While such bonds will
likely have some quality and protective characteristics, these are outweighted
by large uncertainties or major risk exposures to adverse conditions.
DESCRIPTION OF COMMERCIAL PAPER RATINGS:
Commercial paper rated A (highest quality) by Standard & Poor's has the follow-
ing characteristics: Liquidity ratios are adequate to meet cash requirements.
Long-term senior debt is rated A or better, although in some cases BBB credits
may
B-4
<PAGE>
be allowed. The issuer has access to at least two additional channels of bor-
rowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. The relative strength or weakness of
the above factors determine whether the issuer's commercial paper is rated A-1,
A-2 or A-3. (Those A-1 issues determined to possess overwhelming safety charac-
teristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
evaluation of the management of the issuer; economic evaluation of the issuer's
industry or industries and an appraisal of speculative-type risks which may be
inherent in certain areas; evaluation of the issuer's products in relation to
competition and customer acceptance; liquidity; amount and quality of long-term
debt; trend of earnings over a period of 10 years; financial strength of any
parent company and the relationships which exist with the issuer; and recogni-
tion by the management of obligations which may be present or may arise as a
result of public interest questions and preparations to meet such obligations.
These factors are all considered in determining whether the commercial paper is
rated Prime-1, Prime-2 or Prime-3.
CERTAIN INVESTMENT LIMITATIONS
The investment limitations not described in the Prospectus and generally common
to the Funds are described below. The following four fundamental policies may
not be changed without approval of holders of a majority of the outstanding
voting shares of each Fund affected (which for this purpose and under the In-
vestment Company Act of 1940, as amended (the "1940 Act") means the lesser of
(i) 67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented or (ii) more than 50% of the outstanding
shares).
No Fund may:
1. borrow money or purchase securities on margin, provided, however, that
this restriction shall not prohibit a Fund from (a) obtaining such short-
term credits as are necessary for the clearance of portfolio transactions,
(b) temporarily borrowing up to 5% of the value of a Fund's total assets
for extraordinary or emergency purposes, such as for permitting redemption
requests to be honored which might otherwise require the sale of securi-
ties at a time when it is not in the Fund's best interests or (c) purchas-
ing securities on a "when-issued" or "forward commitment" basis. Collat-
eral arrangements entered into by the Fund to make margin deposits in con-
nection with futures contracts, including options on futures contracts,
are not for these purposes deemed to be the purchase of a security on mar-
gin. The aggregate amount of obligations identified in (a), (b) and (c)
above, when incurred, will not exceed one-third of the amount by which the
Fund's total assets exceed its total liabilities (excluding the liabili-
ties represented by such obligations). If at any time a Fund's obligations
of such type exceed the foregoing limitation, such obligations will be
promptly reduced to the extent necessary to comply with the limitation.
The Funds will not issue senior securities, other than those which repre-
sent obligations under (a), (b) and (c). For purposes hereof, writing cov-
ered call and put options and entering into futures contracts and options
thereon to the extent permitted by the investment policies described in
the Prospectus shall not be deemed to involve the issuance of senior secu-
rities or borrowings;
2. engage in the underwriting of securities of other issuers, except to the
extent that in selling portfolio securities, it may be deemed to be a
"statutory" underwriter for purposes of the Securities Act of 1933; or
3. purchase or sell real estate or real estate interests (except that the
Fund may invest up to 10% of its total assets in: (i) readily marketable
securities of issuers which deal in real estate or mortgages; and (ii)
readily marketable securities which are secured by real estate or inter-
ests therein, and the Fund reserves freedom of action to hold and to sell
real estate
B-5
<PAGE>
acquired as a result of the Fund's ownership of such securities.
4. acquire securities for the purpose of exercising control over the manage-
ment of any company or if such acquisition would thereupon cause more than
25% of the value of the Fund's total assets to consist of (1) securities
(other than securities issued or guaranteed by the United States govern-
ment, its agencies and instrumentalities) which, together with other secu-
rities of the same issuer, constitute more than 5% of the value of the
Fund's total assets and (2) voting securities of issuers more than 10% of
whose outstanding voting securities are owned by Portfolios.
The International Equity Fund may not:
1. make any investment which would thereupon cause more than 25% of the value
of the total assets of the Fund to be invested in securities issued by
companies principally engaged in any one industry, provided, however, that
(a) utilities will be divided according to their services so that, for
example, gas, gas transmission, electric and telephone will each be deemed
a separate industry, (b) oil and oil related companies will be divided by
type so that, for example, domestic crude oil and gas producers, domestic
integrated oil companies, international oil companies and oil service
companies will each be deemed a separate industry, and (c) savings and
loan associations and finance companies will each be deemed a separate
industry. To the extent that 25% of the total assets of the Fund may
become invested in the four oil related industries listed above in the
aggregate, such fact will be disclosed. For purposes of this limitation,
all debt securities issued by foreign governments, their agencies or
instrumentalities will be treated as foreign government debt and all debt
securities issued by supranational organizations will be treated as
supranational debt.
The following investment restrictions may be changed without approval of
shareholders.
1. No Fund will purchase securities of other investment companies if such
purchase would thereupon cause more than 10% of the value of the total as-
sets in the Fund to be invested in the securities of investment companies
or more than 5% of such value to be invested in the securities of any one
investment company, or would cause Portfolios to own more than 3% of the
total outstanding voting stock of any such company (or together with other
investment companies having the same investment adviser to own more than
10% of the total outstanding voting stock of any closed-end investment
company). Securities of investment companies may also be acquired as part
of a merger, consolidation, acquisition of assets or reorganization.
2. No Fund will make any investment in repur-chase agreements having a matu-
rity of more than seven days or any other illiquid assets if, as a result,
more than 10% of the Fund's total assets would be invested in illiquid as-
sets or more than 5% of the Fund's total assets would be invested in re-
stricted securities. For purposes of this limitation, privately placed se-
curities that are not registered under the Securities Act of 1933, but
that can be offered and sold to qualified institutional buyers under Rule
144A under that Act are not considered restricted securities.
3. Portfolios will not make any short sale or participate on a joint or joint
and several basis in any trading account in securities. The latter policy,
however, does not prohibit combining orders for portfolio securities as
described in "Investment Management Agreements and Sub-Investment Manage-
ment Agreements," on page B-18.
4. No Fund will invest in oil, gas or other mineral exploration or develop-
ment programs (although it may invest in issuers which own or invest in
such interests).
5. No Fund will purchase securities of any issuer with a record of less than
three years continuous operations, including predecessors, except obliga-
tions issued or guaranteed by the U.S. Government or by any foreign gov-
ernment or
B-6
<PAGE>
their agencies or instrumentalities, if such purchase would cause the in-
vestments of the Fund in all such issuers to exceed 5% of the total assets
of the Fund taken at market value.
6. No Fund will purchase or retain securities of an issuer any of whose offi-
cers, directors, trustees or security holders is an officer, director or
trustee of the Fund or a member, officer, director or trustee of the in-
vestment adviser of the Fund if one or more of such individuals owns bene-
ficially more than one-half of one percent ( 1/2%) of the outstanding
shares or securities or both (taken at market value) of such issuer and
such individuals owning more than one-half of one percent ( 1/2%) of such
shares or securities together own beneficially more than 5% of such shares
or securities or both.
The investment restrictions set forth in the Prospectus contain an exception
that permits the Funds to purchase securities pursuant to the exercise of sub-
scription rights, subject to the condition that such purchase will not result
in a Fund ceasing to be a diversified investment company. Japanese and European
corporations frequently issue additional capital stock by means of subscription
rights offerings to existing shareholders at a price substantially below the
market price of the shares.
The failure to exercise such rights would result in a Fund's interest in the
issuing company being diluted. The market for such rights is not well developed
and, accordingly, a Fund may not always realize full value of the sale of
rights. Therefore, the exception applies in cases where the limits set forth in
the investment restrictions in the Prospectus would otherwise be exceeded by
exercising rights or have already been exceeded as a result of fluctuations in
the market value of a Fund's portfolio securities with the result that a Fund
would otherwise be forced either to sell securities at a time when it might not
otherwise have done so, or to forego exercising the rights.
CERTAIN INVESTMENT PRACTICES
LENDING OF PORTFOLIO SECURITIES:
Subject to Portfolios' fundamental investment restrictions, each Fund from time
to time may lend some of its securities to brokers, dealers and financial in-
stitutions and receive as collateral cash or United States Treasury securities
which at all times while the loan is outstanding will be maintained by the bor-
rower in amounts equal to at least 100% of the current market value of the
loaned securities. Any cash collateral will be invested in short-term high-
grade securities, which can increase the current income of the Fund lending its
securities, since the Fund continues to receive interest and dividends on the
loaned securities during the period of the loan. Any gain or loss in the market
value of loaned securities or securities in which cash collateral is invested
during the term of the loan would also inure to the Fund.
Loans of portfolio securities will not have terms longer than 30 days and will
be terminable at any time. The Funds will have the right to retain record own-
ership of loaned securities to exercise beneficial rights such as voting
rights, subscription rights and rights to dividends, interest or other distri-
butions. Portfolios on behalf of the Funds may pay reasonable finders, adminis-
trative and custodial fees to persons unaffiliated with the Funds for services
in connection with such loans.
The dividends, interest, and other distributions received by a Fund on loaned
securities may, for tax purposes, be treated as income other than qualified in-
come for the 90% test discussed under "Certain Tax Matters," on page B-24. The
Funds intend to lend portfolio securities only to the extent that such activity
does not jeopardize the Funds' qualification as regulated investment companies
under the Internal Revenue Code of 1986, as amended (the "Code").
If the borrower fails to maintain the requisite amount of collateral, the loan
automatically terminates, and the Fund could use the collateral to replace the
securities, while holding the borrower liable for any excess of the replacement
cost over the amount of collateral. As with any extension of credit, there are
risks of delay in recovery, and in some cases even loss of rights in the col-
lateral, should the borrower of the securities fail financially. However, loans
of portfolio securities will be made only to firms deemed to be creditworthy
and only when the economic benefit to the Funds is believed to justify the at-
tendant risks. On termination of a loan, the borrower is required to return the
loaned securities to the Fund.
B-7
<PAGE>
OPTIONS AND FUTURES:
Options on Portfolio Securities and Currencies: Subject to the fundamental in-
vestment restrictions, all the Funds may write (sell) covered call options and
may purchase put options with respect to securities in their portfolio. The
Funds may also purchase call options and may write covered put options on secu-
rities or currencies.
A call option gives the purchaser of such option, in exchange for the option
premium, the right to buy (and obligates the writer to sell) the underlying se-
curity or currency at the price specified in the option (the "exercise price")
at any time until the option expires, generally within three to nine months.
The exercise price, plus the option premium paid, will always be greater than
the market price of the underlying security or currency at the time the option
is written. A put option gives the purchaser of such option, in exchange for
the option premium, the right to sell (and obligates the writer to purchase)
the underlying security or currency at the exercise price at any time before
the option expires.
If a covered call or put option written by a Fund expires unexercised, the
Fund will realize as income, in the form of a short-term capital gain, the pre-
mium it received for the sale of the option, less the brokerage commission it
paid i.e., the "net premium." If a call option written by a Fund is exercised, a
decision over which the Fund has no control, the Fund must sell the under- lying
security or currency to the option holder at the exercise price. By writ- ing a
covered call option, the Fund foregoes, in exchange for the net premium, the
opportunity to profit from any increase in the value of the underlying se-
curity or currency above the exercise price plus the premium paid. Therefore,
call options may be written when SSR International believes that the security or
currency should be held, but no increase in price or only a moderate increase
within the option period is expected.
By writing a covered put option, a Fund receives premium income but obligates
itself to purchase from the option holder, at the price specified in the op-
tion, the particular security or currency underlying the option at any time
prior to the expiration of the option period, regardless of the market value of
the security or currency during the option period. Therefore, put options will
be written when SSR International believes that the security's or currency's
price will rise during the exercise period and, consequently, the option will
not be exercised.
If an option purchased by a Fund expires unexercised, the Fund will experience
a loss in the amount of the premium paid for the option. The Fund will gener-
ally decide to exercise a put option if the market price of the underlying se-
curity or currency falls below the exercise price plus the premium paid; it
will generally decide to exercise a call option if the market price of the un-
derlying security or currency exceeds the exercise price plus the premium paid.
Therefore, options may be purchased when SSR International believes that, in the
case of a put, the security or currency should be held but its market price may
fall, or, in the case of a call, the security or currency should be purchased in
the future and its market price may rise.
In order to reduce the risk of loss, the Funds will not purchase options un-
less SSR International believes the market is sufficiently developed. The Funds
will not sell the securities or currencies against which options have been
written until after the option period has expired, a closing purchase
transaction, if available, has been executed, a corresponding put or call
option has been purchased or the written option is otherwise covered.
Options are traded or on certain recognized securities exchanges including the
following United States and foreign exchanges: the Chicago Board Options Ex-
change, American Stock Exchange, New York Stock Exchange, Pacific Stock Ex-
change and Philadelphia Stock Exchange, the Toronto Stock Exchange, Montreal
Stock Exchange, European Options Exchange (in the Netherlands) and London Stock
Exchange.
A Fund may terminate its obligation as the writer of an option by purchasing
an option with the same exercise price and expiration date as the option previ-
ously written (a "closing purchase transaction"). If a Fund cannot enter into a
closing purchase transaction (for example, because no such options are avail-
able for purchase), the Fund will continue to bear the risk of loss of the ap-
preciation, if any, in the price of the underlying security or currency during
the remaining term of the option, if it has written a call option, or the Fund
will continue to be obligated to purchase the specified securities or curren-
cies at the exercise price, regardless of the market value or exchange rate, if
it has written a put option.
B-8
<PAGE>
Both sales and purchases of options require the Funds to pay brokerage commis-
sions. To the extent that an option sold by the Funds is exercised, the Funds
may incur brokerage commissions or other transaction costs in reinvesting the
proceeds received upon such exercise. Also, writing covered call options can
increase a Fund's turnover rate.
When a Fund sells a covered call or put option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of the deferred credit subsequently will be marked-
to-market to reflect the current value of the option written. If an option ex-
pires on its stipulated expiration date or if the Fund enters into a closing
purchase transaction, the Fund will realize a gain (or loss, if the cost of a
closing purchase transaction exceeds the net premium received when the option
was sold), and the deferred credit related to such option will be eliminated.
If a call option sold by the Fund is exercised, the Fund will realize a long-
term or short-term gain or loss from the sale of the underlying security or
currency, and the proceeds of the sale will be increased by the premium previ-
ously received on the option. The writing of such call options will not affect
the holding period of the underlying security. If a put option sold by the Fund
is exercised, the Fund's cost for the security or currency purchased will be
reduced by the premium previously received on the option written.
Options on Indices:
The Funds intend to utilize options on stock indices. Options on stock indi-
ces are similar to options on stock, except that all settlements are made in
cash rather than by delivery of the stock, and gains or losses depend on price
movements in the stock market generally (or in a particular industry or segment
of the market represented by the index) rather than price movements in individ-
ual stocks.
Upon payment of a specified premium at the time an option on a stock index is
entered into, the purchaser of a call option on a stock index obtains the right
to receive, upon exercise of the option, a sum of money equal to a multiple of
any excess of the value of the specified stock index, on the exercise date,
over the exercise or "strike" price specified by the option. The purchaser of a
put option on a stock index obtains the right to receive, upon exercise of the
option, a sum of money equal to a multiple of any excess of the strike price
over the value of the stock index.
The writer of a stock index option has obligations which correspond to the
purchaser's rights. Thus, for example, the writer of a call option on a stock
index, in consideration of the option premium received, has the obligation to
pay, upon exercise, a dollar amount equal to a multiple of any excess of the
value of the specified stock index on the date of exercise over the strike
price specified in the option. The writer of a put option on a stock index, in
consideration of the option premium received, has the obligation to pay, upon
exercise, a dollar amount equal to a multiple of any excess of the value of the
strike price specified in the option over the value of the specified stock in-
dex on the date of exercise.
The Funds will cover call options on a stock index written by, for example,
holding in a segregated account, with the custodian for Portfolios, portfolio
securities that substantially replicate the movement of the particular index
upon which the call option was written or sufficient cash or liquid assets to
cover the outstanding position. In addition, the Funds may also choose to cover
call options written by holding a separate call option permitting the purchase
of the same stock index at the same strike price. The Funds will cover put op-
tions on a stock index written by, for example, holding in a segregated ac-
count, with the custodian for Portfolios, cash or liquid assets equal to the
strike price of the put option or by holding a separate put option permitting
the purchase of the same stock index at the same strike price.
The Funds intend to write covered call and put options on a stock index for
the same purposes as they might write covered call and put options on their
portfolio securities.
A securities index fluctuates with changes in the market values of the securi-
ties included in the index. For example, some options on securities indices are
based on a broad market index such as the Nikkei Index of 225 Japanese stocks
traded on the Singapore International Monetary Exchange
B-9
<PAGE>
("Nikkei Index") or the Standard & Poor's 500 Index, or a narrower market index
such as the Standard & Poor's 100 or the Osaka Index of 50 Japanese Stocks
traded on the Osaka Exchange. Indices may also be based on an industry or mar-
ket segment such as the AMEX Oil and Gas Index or the Computer and Business
Equipment Index. Options on stock indices are currently traded on the following
exchanges, among others: the London Traded Options Market, The Chicago Board
Options Exchange; New York Stock Exchange; and American Stock Exchange. Options
on other types of securities indices, which do not currently exist, may be in-
troduced and traded on exchanges in the future.
Options on indices relating to certain debt securities, referred to as inter-
est rate indices, may be introduced in the future. In the event that a liquid
market develops for options on an interest rate index, and the Board of Direc-
tors of Portfolios authorizes a particular Fund to use such an option, the Fund
may do so. Where permitted, each Fund intends to utilize options on interest
rate indices in a manner similar to that described above with respect to op-
tions on stock indices.
The Funds' purchase and sale of options on indices will be subject to the same
risks as those applicable to options on individual securities. In addition, the
distinctive characteristics of options on indices create certain risks that are
not present with options on individual securities. For example, index prices
may be distorted if trading of certain securities included in the index is in-
terrupted. Trading in the index options also may be interrupted in certain cir-
cumstances, such as, for example, if trading were halted in a substantial num-
ber of securities included in the index. If this occurred, the Fund would not
be able to close out options which it had purchased or written and, if restric-
tions on exercise were imposed, would be unable to exercise an option it holds,
which could result in substantial losses to the Fund. The Funds intend to pur-
chase or write options only on indices which include a sufficient number of se-
curities to minimize the likelihood of a trading halt in such options. In addi-
tion, the ability to establish and close out positions on options on indices
will be subject to the development and maintenance of a liquid secondary market
for such options. The Funds will not purchase or sell any option on an index
unless and until, in the opinion of SSR International, the market for such
options has developed sufficiently that the risk in connection with such
transactions is acceptable.
The effectiveness of hedging through the purchase of options on indices will
depend upon the extent to which price movements in the portion of the securi-
ties portfolio being hedged correlate with price movements in the selected in-
dex. Perfect correlation is not possible because the securities held or to be
acquired by a Fund will not exactly match the composition of the indices on
which options are written. In the purchase of options on indices, the principal
risk is that the premium and transaction costs paid by a Fund in purchasing an
option will be lost as a result of unanticipated movements in the price of the
securities comprising the index for which the option has been purchased. In
writing call options on indices, the principal risks are the inability to ef-
fect closing transactions at favorable prices and the inability to participate
in the appreciation of the underlying securities. In writing put options on in-
dices, the principal risks are the inability to effect closing transactions at
favorable prices and the obligation to make a cash settlement relating to the
stock index at prices which may not reflect current market values.
Futures Transactions:
A futures contract is an agreement to buy or sell a security or currency (or
deliver a final cash settlement price, in the case of a contract relating to an
index or otherwise not calling for physical delivery at the end of trading in
the contract) for a set price in the future. Trading in futures is regulated
under the Commodity Exchange Act by the Commodity Futures Trading Commission
("CFTC"). Futures contracts trade on certain regulated contract markets through
an open outcry auction on the exchange floor. The Funds, as described more
fully below, may purchase or sell futures contracts to effect hedging transac-
tions. A hedge, as defined by the CFTC, is a transaction in which the Funds
utilize futures contracts in order to protect the value of underlying portfolio
securities or the currencies in which they are denominated from adverse fluctu-
ations in the financial markets.
B-10
<PAGE>
Positions taken in the futures markets are not normally held until delivery or
cash settlement is required, but instead are liquidated through offsetting
transactions that may result in a gain or a loss. While futures positions taken
by a Fund will usually be liquidated in this manner, the Fund may instead make
or take delivery of underlying securities or currencies whenever it appears ec-
onomically advantageous for the Fund to do so. A clearing organization associ-
ated with the exchange on which futures are traded assumes responsibility for
closing out transactions and guarantees that, as between the clearing members
of an exchange, the sale and purchase obligations will be performed with regard
to all positions that remain open at the termination of the contract.
Upon entering into a futures contract, a Fund is required to deposit with a
futures commission merchant or in a segregated custodial account a certain per-
centage (presently less than ten percent) of the futures contract's market
value as "initial margin." Initial margin is in the nature of a performance
bond or good faith deposit on the contract which is returned upon termination
of the futures contract if all contractual obligations have been satisfied. The
initial margin in most cases consists of cash or U.S. Government securities.
Subsequent cash payments, called "variation margin," may be required as a re-
sult of marking the contracts to market on a daily basis as the contract value
fluctuates.
The use of futures contracts entails certain risks in addition to those stated
below, including but not limited to; possible reduction in the Fund's income
due to the use of hedging; possible reduction in value of both securities or
currencies hedged and the futures contract; and potential losses in excess of
the amount initially invested in the futures contracts themselves. The use of
futures contracts requires special skills in addition to those needed to select
portfolio securities or currencies.
Stock Index Futures Contracts:
The Funds, consistent with their investment objectives and policies, may at-
tempt to reduce the risk of investments in equity securities by hedging por-
tions of its underlying portfolio through the use of standardized stock index
futures contracts. These contracts currently are actively traded on the Chicago
Board of Trade, the Chicago Mercantile Exchange, the New York Futures Exchange
and the Kansas City Board of Trade. Foreign stock index futures traded outside
the United States include the Nikkei Index traded on the Singapore Interna-
tional Monetary Exchange, Osaka Index traded on the Osaka Exchange, Financial
Times Stock Exchange Index of the 100 largest stocks on the London Stock Ex-
change traded on the London International Financial Futures Exchange, the All
Ordinaries Share Price Index of 307 stocks on the Sydney, Melbourne Exchanges,
Hang Seng Index of 33 stocks on the Hong Kong Stock Exchange, Barclays Share
Price Index of 40 stocks on the New Zealand Stock Exchange and Toronto Index of
35 stocks on the Toronto Stock Exchange. Futures and futures options on the
Nikkei Index are traded on the Chicago Mercantile Exchange. U.S. commodity ex-
changes may develop futures and futures options on other indices of foreign se-
curities; futures and options on a U.S. devised index of foreign stocks are
also being developed. A stock index futures contract is an agreement in which
the seller of the contract agrees to deliver to the buyer an amount of cash
equal to a specific dollar amount times the difference between the value of a
specific stock index at the close of the last trading day of the contract and
the price at which the agreement is made. No physical delivery of the under-
lying stocks in the index is made.
The Funds intend to engage in stock index futures transactions as a hedge
against market risk resulting from market conditions and over-all economic
prospects with respect to the value of portfolio securities held by the Funds
or which the Funds intend to purchase, as distinguished from stock-specific
risk resulting from the market's evaluation of the merits of a particular secu-
rity. For example, a Fund might sell stock index futures contracts to hedge
against a decline in the value of securities held in that Fund. Alternatively,
a Fund might buy stock index futures contracts to hedge against a rise in the
value of securities the Fund intends to acquire.
A Fund's successful use of stock index futures contracts depends upon the
ability of SSR International to ac-
B-11
<PAGE>
curately assess the direction of the stock market and is subject to various ad-
ditional risks. The correlation between movement in the price of the stock in-
dex futures contract and the price of the securities being hedged is imperfect
and the risk from imperfect correlation increases as the composition of the Fund
portfolio diverges from the composition of the relevant index. In addition,
the ability of a Fund to close out a futures position depends on a liquid
secondary market. There is no assurance that liquid secondary markets will
exist for any particular futures contract at any particular time. See also the
risks noted above under "Futures Transactions."
Interest Rate Futures Contracts:
Each of the Funds, consistent with its investment objective and policies, may
buy and sell futures contracts on interest-bearing securities (such as U.S.
Treasury Bonds, U.S. Treasury Notes, three-month U.S. Treasury Bills, Eurodol-
lar Certificates of Deposit and GNMA Certificates) for hedging purposes.
Futures contracts on interest-bearing securities are actively traded on the
Chicago Board of Trade, London International Financial Futures Exchange, Tokyo
Stock Exchange, Paris Stock Exchange and International Monetary Market at the
Chicago Merchantile Exchange. Further, in the event that a liquid market devel-
ops for futures contracts based on an interest rate index, and the Board of Di-
rectors of Portfolios authorizes a particular Fund to use such futures con-
tracts, the Fund may do so. Futures contracts on interest-bearing securities
and interest rate indices are referred to collectively as "interest rate
futures contracts." The Funds will engage in transactions in only those inter-
est rate futures contracts that are traded on a commodities exchange or a board
of trade and are standardized as to maturity date and the underlying financial
instrument.
For example, a Fund might sell an interest rate futures contract to hedge
against a decline in the market value of debt securities the Fund owns. A Fund
might also purchase an interest rate futures contract to hedge against an an-
ticipated increase in the value of debt securities the Fund intends to acquire.
The risks of interest rate futures contracts are briefly described above in
connection with the proposed use of stock index futures contracts and in the
general description of "Futures Transactions." In addition, a Fund's successful
use of interest rate futures contracts depends upon the ability of SSR
International to accurately assess interest rate moves. Further, because there
are a limited number of types of interest rate futures contracts, it is likely
that the financial futures contracts available to a Fund will not exactly match
the debt securities the Fund intends to hedge or acquire. To compensate for
differences in historical volatility between securities a Fund intends to hedge
or acquire and the interest rate futures contracts available to it, the Fund
could purchase or sell futures contracts with a greater or lesser value than the
debt securities it wished to hedge or intended to purchase. This imperfect
correlation between the interest rate futures contract and the debt securities
being hedged is another risk.
Currency Futures Contracts:
The Funds may buy and sell futures contracts on currencies. The Funds will en-
gage in transactions in only those currency futures contracts that are traded
on a national or foreign commodities exchange or a board of trade and are stan-
dardized as to maturity date and the underlying financial instrument.
Currency futures contracts may be used on currencies as a hedge against
changes in prevailing currency exchange rates in order to establish more defin-
itively the return on foreign securities held or intended to be acquired by the
Funds. In this regard, the Funds could sell currency futures contracts to off-
set the effect of expected decreases in currency exchange rates and purchase
such contracts to offset the effect of expected increases in currency exchange
rates. Although techniques other than the sale and purchase of currency futures
contracts could be used for these purposes, currency futures contracts may be
an effective and relatively low cost means of implementing these strategies.
Options on Futures:
The Funds may purchase put and call options on stock index futures contracts,
write (i.e., sell) covered call options on stock index futures con-
B-12
<PAGE>
tracts and enter into closing transactions with respect to such options. The
Funds may also write covered put options on stock index futures options or cur-
rency futures contracts and may enter into closing transactions with respect to
such options. In addition, the Funds are permitted to purchase or write covered
put and call options on interest rate futures with respect to such options.
Such transactions will only be for bona fide hedging purposes, as defined by
the CFTC. A call option on a futures contract gives the purchaser the right, in
return for the premium paid, to purchase a futures contract (assume a "long"
position) at a specified exercise price at any time before the option expires.
A put option gives the purchaser the right, in return for the premium paid, to
sell a futures contract (assume a "short" position), for a specified exercise
price, at any time before the option expires. Upon the exercise of a call, the
writer of the option is obligated to sell the futures contract (to deliver a
"long" position to the option holder) at the option exercise price, which will
presumably be lower than the current market price of the contract in the
futures market. Upon exercise of a put, the writer of the option is obligated
to purchase the futures contract (to deliver a "short" position to the option
holder) at the option exercise price, which will presumably be higher than the
current market price of the contract in the futures market.
When a Fund as a purchaser of an option on a futures contract exercises such
option and assumes a long futures position in the case of a call, or a short
futures position in the case of a put, its gain will be credited to its futures
margin account. Any loss suffered by the writer of the option on a futures con-
tract will be debited to its futures variation margin account. However, as with
the trading of futures, most participants in the options markets do not seek to
realize their gains or losses by exercise of their option rights. Instead, the
holder of an option will usually realize a gain or loss by buying or selling an
offsetting option (i.e., entering into a closing transaction) at a market price
that will reflect an increase or a decrease from the premium originally paid as
a purchaser or required as a writer.
Options on futures contracts can be used by a Fund to hedge the same risks as
might be addressed by the direct purchase or sale of the underlying futures
contracts themselves. Depending on the pricing of the option, compared to ei-
ther the futures contract upon which it is based or upon the price of the un-
derlying securities or currencies themselves, it may or may not be less risky
than direct ownership of the futures contract or the underlying securities or
currencies.
In contrast to a futures transaction, in which only transaction costs are in-
volved, benefits received by a Fund as a purchaser in an option transaction
will be reduced by the amount of the premium paid as well as by transaction
costs. In the event of an adverse market movement, however, a Fund which pur-
chased an option will not be subject to a risk of loss on the option transac-
tion beyond the price of the premium it paid plus its transaction costs. Pur-
chasers of options who do not exercise their options prior to the expiration
date will suffer a loss of the entire premium.
If a Fund writes covered call or put options on futures contracts, the Fund
will receive a premium but will assume a risk of adverse movement in the price
of the underlying futures contract comparable to that involved in holding a
futures position. If the option is not exercised, the Fund will realize a gain
in the amount of the premium, which may partially offset unfavorable changes in
the value of securities held in the Fund or to be acquired for the Fund. If the
option is exercised, the Fund will incur a loss in the option transaction,
which will be reduced by the amount of the premium it has received, but which
may also partially offset favorable changes in the value of its securities or
currencies. For example, the writing of a call option on a futures contract
constitutes a partial hedge against declining prices of the underlying securi-
ties or currencies. If the futures price at expiration is below the exercise
price, the Fund will retain the full amount of the option premium, which pro-
vides a partial hedge against any decline that may have occurred in the value
of the Fund's holdings of securities or currencies.
While the purchaser or writer of an option on a futures contract may normally
terminate its position by selling or purchasing an offsetting option of the
same series, a Fund's ability to establish and close out options at fairly es-
tablished prices will be
B-13
<PAGE>
subject to the existence of a liquid market. The Funds will not purchase or
write options on futures contracts unless, in the opinion of SSR International,
the market for such options has sufficient liquidity that the risks associated
with such options transactions are not unacceptable.
LIMITATIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS THEREON AND OPTIONS ON
INDICES:
Regulations of the CFTC currently require certain limits to be placed on the
use of futures contracts and options thereon. To ensure that the transactions
constitute bona fide hedges, in instances involving the purchase or sale of a
futures contract or the writing of covered call options on futures contracts,
each Fund will be required to either (i) segregate sufficient cash or liquid
assets to cover the outstanding position or (ii) cover the futures contract or
option written on such contract by owning the instruments or currency under-
lying the futures contract or option thereon or by holding a separate option
permitting it to purchase or sell the same futures contract or option at the
same strike price or better. In instances involving the writing of covered put
options on futures contracts, the Funds will be required to (i) segregate suf-
ficient cash or liquid assets equal to the strike price of the put options
written or (ii) purchase a put option on the same futures contract at the same
strike price as that written by the Funds. Where such positions are covered by
the segregation of sufficient cash, cash equivalents or underlying securities,
such amounts will be held in a segregated account with Portfolios' custodian to
collateralize the position, thereby insuring that the use of such futures con-
tracts and options thereon is unleveraged. A Fund may not establish a position
in a futures contract or purchase an option thereon if immediately thereafter
the sum of the amount of initial margin deposits on all open futures contracts
and premiums paid for unexpired options on futures contracts would exceed 5% of
the market value of that Fund's total assets; provided however, that in the
case of an option that is "in-the-money" at the time of the purchase, the "in-
the-money" amount may be excluded in calculating the 5% limitation. In addi-
tion, shares of the Funds may not be sold or advertised as a participation in a
commodity pool or other vehicle for trading in the commodity futures or options
markets. Finally, the Funds must agree to submit information to the CFTC, as
requested, to demonstrate compliance with applicable regulations and to assist
the CFTC in collecting data and refining its hedging standards.
With respect to options on indices, in order to insure that call options writ-
ten by the Funds on indices are covered and, therefore, unleveraged, the Funds
would be required to: (i) hold in a segregated account, with Portfolios' custo-
dian, portfolio securities that substantially replicate the movement of the
particular index upon which the call option was written or sufficient cash or
liquid assets to cover the outstanding position, or (ii) hold a separate option
permitting the purchase or sale of the same stock index at the same strike
price or better. With respect to put options written on stock indices, the
Funds will (i) segregate sufficient cash or liquid assets equal to the strike
price of the put option written or (ii) purchase a put option on the same index
at the same strike price as that written by the Funds.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS:
Each Fund may use forward foreign currency exchange contracts ("forward cur-
rency contracts") to hedge the currency risk relating to the non-U.S. dollar-
denominated securities purchased, sold, or held by that Fund.
A forward currency contract involves an obligation to purchase or sell a spe-
cific currency at a future date, which may be any fixed number of days from the
date of the contract as agreed by the parties, at a price set at the time of
the contract. In the case of a cancelable forward currency contract, the holder
has the unilateral right to cancel the contract at maturity by paying a speci-
fied fee. Forward currency contracts are traded in the interbank market con-
ducted directly between currency traders (usually large commercial banks) and
their customers. They generally have no deposit requirement, and no commissions
are charged at any stage for trades. Although foreign exchange traders do not
charge a fee for currency conversion, they do realize a profit based on the
difference (the "spread") between prices at which they are buying and selling
various currencies.
B-14
<PAGE>
Thus, a trader may offer to sell a foreign currency to a Fund at one rate,
while offering a lower rate of exchange should the Fund desire to resell that
currency to the trader.
At the maturity of a forward currency contract, a Fund may either accept or
make delivery of the currency specified in the contract, or at or prior to ma-
turity, a Fund may enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
currency contracts are usually effected with the currency trader that is a
party to the original forward contract.
As described in the Prospectus, each Fund may enter into a forward currency
contract under two circumstances. First, when a Fund has entered into a con-
tract to purchase or sell a non-U.S. security, it may protect itself against a
possible loss between the trade date and the settlement date resulting from an
adverse change in the relationship between the U.S. dollar and the foreign
currency in which such security is denominated by entering into a forward cur-
rency contract in U.S. dollars for the purchase or sale of the amount of the
foreign currency involved in the underlying security transaction. Second, when
management of a Fund believes a particular foreign currency may suffer or enjoy
a substantial movement against the U.S. dollar, the Fund may enter into a for-
ward currency contract to sell or buy an amount of such currency (or another
currency in a cross hedging transaction) approximating the value of some or all
of the Fund's securities denominated in such foreign currency. However, the
precise matching of the amounts of forward currency contracts and the value of
the portfolio securities being hedged will not generally be possible, because
the future value of such securities in foreign currencies will change as a con-
sequence of movements in the market value of those securities between the dates
the forward currency contracts are entered into and the dates they mature.
Since it is impossible to forecast with precision the market value of portfo-
lio securities at the expiration or maturity of a forward currency contract, it
may be necessary for a Fund to purchase additional foreign currency on the spot
(i.e. cash) market (and bear the expense of such purchase) if the market value
of the securities being hedged is less than the amount of foreign currency the
Fund would be obligated to deliver upon the sale of such securities. Converse-
ly, it may be necessary for the Fund to sell some of the foreign currency re-
ceived upon the sale of portfolio securities on the spot market if the market
value of such securities exceeds the amount of foreign currency the Fund is ob-
ligated to deliver.
Each Fund may enter into forward currency contracts or maintain a net exposure
on such contracts only if (i) the consummation of the contracts would not obli-
gate the Fund to deliver an amount of foreign currency in excess of the value
of the Fund's securities or other assets denominated in that currency or (ii)
the Fund maintains with its custodian cash, U.S. government securities, or liq-
uid cash in a segregated account in an amount not less than the value of the
Fund's total assets committed to the consummation of the contracts.
The use of forward currency contracts involves various risks. A Fund may not
always be able to enter into a forward currency contract when management deems
it advantageous to do so, for instance, if the Fund is unable to find a
counterparty to the transaction at an attractive price. Furthermore, a Fund may
not be able to purchase forward currency contracts with respect to all of the
foreign currencies in which its portfolio securities may be denominated. In
those circumstances, and in a cross hedging forward currency contract, the cor-
relation between the movements in the exchange rates of the subject currency
and the currency in which the portfolio security is denominated may not be pre-
cise. Forward currency contracts are not guaranteed by a third party and, ac-
cordingly, each party to a forward currency contract is dependent upon the
creditworthiness and good faith of the other party. A default on the contract
would deprive a Fund of unrealized profits or force the Fund to cover its com-
mitments for purchase or sale of currency, if any, at the current market price.
Finally, the cost of purchasing forward currency contracts in a particular cur-
rency will reflect, in part, the rate of return available on instruments denom-
inated in that currency. The cost of purchasing forward currencies that gener-
ally yield high rates of return may thus tend to reduce the rate of return to-
ward the rate of return that would be earned on assets denominated in U.S. dol-
lars.
B-15
<PAGE>
DIRECTORS AND OFFICERS
The directors and principal officers of Portfolios and their principal
occupations for at least the last five years are set forth below. Unless
otherwise noted, the address of each executive officer and director is One
Madison Avenue, New York, New York 10010.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, (AGE) AND ADDRESS POSITION(S) DURING PAST 5 YEARS
----------------------- ----------- ------------------------
<C> <S> <C>
Steve A. Garban (59)+....... Director Retired, formerly Senior Vice-
The Pennsylvania State Uni- President Finance and Operations and
versity Treasurer Emeritus, The Pennsylvania
208 Old Main State University
University Park, PA 16802
Jeffrey J. Hodgman (53)(*)+. Chairman of the Board, Executive Vice-President, Metropolitan
President, Chief Life Insurance Company
Executive Officer and ("Metropolitan Life") since 1996; prior
Director thereto, Senior Vice-President
Malcolm T. Hopkins (68)+.... Director Former Vice-Chairman of the Board
14 Brookside Road and Chief Financial Officer, St.
Biltmore Forest Regis Corp.
Asheville, NC 28803
Robert A. Lawrence (70)+.... Director Partner, Saltonstall & Co. (private
50 Congress Street investment firm)
Boston, MA 02109
Dean O. Morton (64)+........ Director Retired; formerly Executive Vice-
3200 Hillview Avenue President, Chief Operating Officer
Palo Alto, CA 94304 and Director, Hewlett--Packard
Company
Michael S. Scott Morton Director Jay W. Forrester Professor of
(59)+....................... Management at Sloan School of
Massachusetts Institute of Management, MIT
Technology ("MIT")
77 Massachusetts Avenue
Cambridge, MA 02139
John H. Tweedie (51)(*)+.... Director Executive Vice President,
Metropolitan Life since 1993;
President and Chief Executive
Officer of Metropolitan Life's
Canadian Operations 1990-1993; prior
thereto, Senior Vice President and
Chief Actuary
Gary Lineberry (46)......... Vice President Vice-President, Metropolitan since
1994; prior thereto National
Director, 1992-1994; prior thereto
Vice President, Mutual of New York
Ronald Zito (38)............ Controller Director-Accounting and Financial
Controls-Pensions, Metropolitan Life
since 1995; Director-Retirement
Savings Center, 1993-1994; prior
thereto, Manager
Christopher P. Nicholas Vice-President and Associate General Counsel,
(47)+....................... Assistant Secretary Metropolitan Life
Elliot Reiter (45).......... Treasurer Vice-President, Metropolitan Life
Elaine Stevenson (38)....... Vice-President and Vice-President, Metropolitan Life
Chief Operating Officer since 1996; Assistant Vice-President
1993-1996; prior thereto, Director -
Retirement and Savings Center
Patricia S. Worthington
(40)+ ..................... Secretary Associate Counsel, Metropolitan Life
since 1992; prior thereto, Attorney
</TABLE>
- --------
(*) Interested Person, as defined in the Investment Company Act of 1940 ("1940
Act"), of the Funds.
(+) Serves as a trustee, director and/or officer of one or more of the
following investment companies, each of which has an advisory relationship
with the Investment Manager or its affiliates: State Street Research
Financial Trust, State Street Research Income Trust, State Street Research
Money Market Trust, State Street Research Tax-Exempt Trust, State Street
Research Capital Trust, State Street Research Master Investment Trust, State
Street Research Equity Trust, State Street Research Securities Trust, State
Street Research Growth Trust, State Street Research Exchange Trust and
Metropolitan Series Fund, Inc.
B-16
<PAGE>
The Directors have been compensated as follows:
- --------------------------------------------------------------------------------
(5)
(3) TOTAL
PENSION OR COMPENSATION
RETIREMENT (4) FROM
(2) BENEFITS ESTIMATED PORTFOLIOS
AGGREGATE ACCRUED AS ANNUAL AND FUND
(1) COMPENSATION PART OF BENEFITS COMPLEX PAID
NAME OF FROM PORTFOLIOS UPON TO DIRECTORS
DIRECTOR PORTFOLIOS(a)(c) EXPENSE RETIREMENT (b)
- --------------------------------------------------------------------------------
Jeffrey J. Hodgman............. 0 0 0 0
Steve A. Garban................ $ 0 0 $
Malcolm T. Hopkins............. $ 0 0 $
Robert A. Lawrence............. $ 0 0 $ 92,125
Dean O. Morton................. $ 0 0 $ 96,125
Michael S. Scott Morton........ $ 0 0 $100,325
John H. Tweedie................ 0 0 0 0
- --------
(a) For the fiscal year ended October 31, 1996.
(b) Complex is comprised of 10 trusts and two corporations with a total of 31
funds and/or series. "Total Compensation from Portfolios and Fund Complex
Paid to Directors" is for the twelve months ended December 31, 1996.
(c) Directors and officers who are affiliated with the Investment Manager or
Sub-Investment Manager or their affiliates ("interested persons" as defined
under the Investment Company Act of 1940) do not receive any compensation
for services rendered to Portfolios in addition to their compensation for
services rendered to Metropolitan Life or such affiliated companies. The
Directors who are not affiliated with the Investment Manager or Sub-
Investment Manager or their affiliates are paid a fee of $4,000 for each
full calendar year during which services are rendered to Portfolios. In
addition, they are paid a fee of $750 for attending each of the directors'
meetings and $250 for attending each audit committee meeting and are
reimbursed for out-of-pocket expenses.
As of January 31, 1997, the directors and officers of Portfolios as a group
owned approximately __% of the outstanding Class A shares of the International
Equity Fund and owned no shares of the International Fixed Income Fund.
CONTROL PERSONS
As of January 31, 1997, the following persons or entities were the record
and/or beneficial owners of the approximate amount of each Class of shares of
each Fund as set forth beside their names:
PERCENTAGE
SHAREHOLDER ADDRESS OWNERSHIP
----------- ------- ----------
INTERNATIONAL
EQUITY FUND
-------------
Class A....... Merrill Lynch Pierce 4800 Deer Lake Drive -- %
Fenner & Smith, Inc.(b) East
Jacksonville, FL 32246-
6484
Class B....... Merrill Lynch Pierce 4800 Deer Lake Drive -- %
Fenner & Smith, Inc.(b) East
Jacksonville, FL 32246-
6484
Class C....... Chase Manhattan 770 Broadway -- %
Bank, N.A.(c) New York, NY 10003
Class D....... Wachovia Bank of North 301 N. Main Street -- %
Carolina(b) Winston Salem, NC 27150
Merrill Lynch Pierce 4800 Deer Lake Drive -- %
Fenner & Smith, Inc.(b) East
Jacksonville, FL 32246-
6484
B-17
<PAGE>
PERCENTAGE
SHAREHOLDER ADDRESS OWNERSHIP
INTERNATIONAL ----------- ------- ----------
FIXED INCOME
FUND
-------------
Class A....... State Street Bank and 225 Franklin Street -- %
Trust Company(d) Boston, MA 02110
Metropolitan Life(a) One Madison Avenue -- %
New York, NY 10010
First Southwest 1700 Pacific Avenue, -- %
Company(b) Suite 500
Dallas, TX 75201-4627
Class B....... State Street Bank and 225 Franklin Street -- %
Trust Company(d) Boston, MA 02110
Metropolitan Life(a) One Madison Avenue -- %
New York, NY 10010
Merrill Lynch Pierce 4800 Deer Lake Drive -- %
Fenner & Smith, Inc.(b) East
3rd Floor
Jacksonville, FL 32246-
6484
A. Field & B. Zimmerman, c/o State Street -- %
Trustees Research Shareholder
Services
One Financial Center
Boston, MA 02111
Class C....... Metropolitan Life(a) One Madison Avenue -- %
New York, NY 10010
Class D....... Metropolitan Life(a) One Madison Avenue -- %
New York, NY 10010
Merrill Lynch Pierce 4800 Deer Lake Drive -- %
Fenner & Smith, Inc.(b) East
Jacksonville, FL 32246-
6484
H. Flammang c/o State Street -- %
Research Shareholder
Services
One Financial Center
Boston, MA 02111
- --------
(a) Metropolitan Life was the record and/or beneficial owner, directly or
indirectly through its subsidiaries or affiliates, of such shares.
(b) Portfolios believes that the entity does not have beneficial ownership of
such shares.
(c) Chase Manhattan Bank, N.A. holds the shares as trustee for various employee
benefit plans and Portfolios believes that United States Trust does not have
beneficial ownership of such shares.
(d) State Street Bank and Trust Company holds such shares as custodian for
individual retirement accounts and Portfolios believes that State Street Bank
does not have beneficial ownership of such shares.
Ownership of 25% or more of a voting security is deemed "control" as defined
in the 1940 Act. So long as 25% of a class of a Fund's shares is so owned, such
owners will be presumed to be in control of such class of shares for purposes
of voting on certain matters submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
INVESTMENT MANAGEMENT AGREEMENTS AND SUB-INVESTMENT MANAGEMENT AGREEMENTS:
Portfolios has entered into separate Investment Management Agreements with the
Investment Manager (State Street Research & Management Company, One Financial
Center, Boston, MA 02111) with respect to each Fund and separate Sub-In-
vestment Management Agreements with the Investment Manager and SSR
International, the Sub-Investment Manager, with respect to each Fund. SSR
International has overall responsibility for the investment management, and
provides the portfolio managers for the Funds. The portfolio managers consider
analyses from various sources, make the necessary investment decisions and
effect transactions accordingly. State Street Research & Management Company is
an indirect wholly-owned Metropolitan Life subsidiary and is the investment
manager of the other State Street Research mutual funds.
Securities held by any Fund may also be held by other accounts managed by the
Investment Manager, by Metropolitan Life, and by SSR International, including
Metropolitan Life's general and separate accounts, the other Funds of
Portfolios, Metropolitan Life advisory clients, the advisory clients of the
Investment Manager and the advisory clients of SSR International. When selecting
securities for purchase
B-18
<PAGE>
or sale for a Fund, the Investment Manager and SSR International may at the same
time be purchasing or selling the same securities for one or more of such
other accounts. It is the policy of the Investment Manager and SSR International
not to favor any one account over the other, and any purchase or sale orders
executed contemporaneously are allocated at the average price and as nearly as
practicable on a pro-rata basis in proportion to the amounts desired to be
purchased or sold by each account. While it is conceivable that in certain
instances this procedure could adversely affect the price or number of shares
involved in a Fund's transactions, it is believed that the procedure generally
contributes to better overall execution of portfolio transactions. The Board
of Directors has adopted guidelines governing the procedure and will monitor the
procedure to determine that the guidelines are being followed and that the
procedure continues to be in the best interests of the Funds and their
shareholders.
Portfolios compensates the Investment Manager at the annual rate of 0.95% of
the average daily value of the net assets of the International Equity Fund and
0.75% of the average daily value of the net assets of the International Fixed
Income Fund, respectively. For providing sub-investment management services for
the International Equity and International Fixed Income Funds, SSR International
receives from the Investment Manager a monthly fee equal to 0.75% (on an annual
basis) of the average daily value of the net assets of the International Equity
Fund and 0.55% (on an annual basis) of the average daily value of the net assets
of the International Fixed Income Fund. Portfolios has no responsibility for the
payment of fees to SSR International. For fiscal years ending October 31, 1994,
1995 and 1996, the investment advisory fees for the International Equity Fund
were $597,501, $830,476 and $921,649, respectively. For fiscal years ending
October 31, 1994, 1995 and 1996, the investment advisory fees for the
International Fixed Income Fund were $188,723, $210,657 and $246,122,
respectively. For the same periods, the voluntary reduction of management fees
and assumption of expenses by the Investment Manager/Distributor or its
affiliates amounted to $386,279, $529,341 and $452,847 for the International
Equity Fund and $85,904, $149,825 and $179,424 for the International Fixed
Income Fund. For fiscal years ending October 31, 1994, 1995 and 1996,
sub-investment management fees for the International Equity and International
Fixed Income Funds were $471,711, $655,639 and $727,618 and $138,397, $154,482
and $180,489, respectively.
The Investment Management Agreements relating to the International Equity and
International Fixed Income Funds and the Sub-Investment Management Agreements
relating to the Funds were approved by the shareholders of the Funds at the
first annual meeting of shareholders held on April 28, 1993. Unless earlier
terminated, each Agreement will continue in effect from year to year with re-
spect to each Fund, if approved annually (a) by the Board of Directors of Port-
folios or by a majority of the outstanding shares of that Fund (as determined
pursuant to the 1940 Act), and (b) by a majority of the Board of Directors who
are not "interested persons" (within the meaning of the 1940 Act) of any party
of such Agreement. The Agreements are not assignable and may be terminated
without penalty on 60 days' written notice at the option of either party or,
with respect to any Fund, by the requisite vote of the shareholders of that
Fund.
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<PAGE>
No person other than Portfolios and the Investment Manager pays any of the
fees, expenses or costs of the Funds. Under a Shareholders' Administrative
Services Agreement between Portfolios and the Investment Manager, the Invest-
ment Manager provides shareholders' administrative services, such as responding
to inquiries and instructions from shareholders respecting the purchase and re-
demption of shares of the Funds, and is entitled to reimbursement of its costs
for providing such services subject to the limitations described below. Under a
Sub-Administration Agreement between the Funds' transfer agent and dividend
disbursing agent, State Street Bank and Trust Company and Metropolitan Life,
Metropolitan Life receives a fee for the maintenance of certain share
ownership records for participants in sponsored arrangements, such as employee
benefit plans, through or under which a Fund's shares may be purchased. The
Funds' liability for all of the fees and costs payable by the Funds for services
provided by the Funds' transfer agent and dividend disbursing agent, the fees
for shareholders' administrative services, paid by the Funds, and any other fees
or costs under any sub-administration agreements entered on behalf of the Funds
in the aggregate, is limited to 0.30% of the average daily net assets of the
Funds. Any excess is a liability of the Investment Manager as provided under the
Shareholders' Administrative Services Agreement, which may be terminated by
Portfolios upon 60 days notice and by the Investment Manager upon six months
notice.
ALLOCATION OF PORTFOLIO BROKERAGE:
Under the Investment Management Agreements, the Investment Manager has ultimate
responsibility for selecting broker-dealers through which investments are to be
purchased and sold for Portfolios. Under the Sub-Investment Management Agree-
ments, SSR International has day-to-day responsibility for selecting
broker-dealers through which securities or other investments are to be purchased
and sold for the Funds.
In selecting brokers or dealers to effect portfolio transactions for the Funds,
SSR International seeks the best available combination of execution and over-all
price (which includes the cost of the transaction). SSR International will
utilize brokers which provide it solely with brokerage services, as well as
brokers which provide SSR International with such research services as economic,
political and social trend analysis and reports on the equity and credit markets
and analyses of industries and individual companies. SSR International is
authorized, pursuant to the Sub-Investment Management Agreement with respect
to the Funds, to cause Portfolios on behalf of the Funds to pay to the brokers
that furnish brokerage and research services (as such services are defined under
Section 28(e) of the 1934 Act) a brokerage commission in excess of that which
another broker might have charged for effecting the same transaction, in
recognition of the value of research services provided by the broker. However,
such higher commissions must be deemed by SSR International to be reasonable in
relation to the brokerage and research services provided by the broker-dealer,
viewed in terms of either that particular transaction or the overall
decision-making responsibilities of SSR International with respect to the Funds
or other accounts, if any, as to which it exercises investment discretion (as
such term is defined under Section 3(a)(35) of the 1934 Act).
In all transactions, SSR International seeks on behalf of the Funds brokerage
commissions at least as reasonable as those generally secured by those advisers
that generate annually comparable amounts of commissions paid to brokers that
provide brokerage and research services to those advisers.
Research services rendered to SSR International by brokers selected to execute
transactions for the Funds may be used in providing service to all of SSR
International's clients. Also all research services may not be utilized by SSR
International in connection with the client accounts which paid commissions to
the broker providing such services.
On the basis of the best service provided for the benefit of the Funds in
terms of execution capability, execution cost, and research, SSR International
will allocate business proportionally among a number of brokers and will
regularly review such allocations. During the fiscal years ending October 31,
1994, 1995 and 1996, the dollar amount of brokerage commissions paid by the
International Equity Fund was $391,200, $400,465 and $569,761, respectively.
The International
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<PAGE>
Fixed Income Fund did not incur any brokerage commissions for the same periods.
Substantially all commissions were paid to firms which provided research and
statistical services either to Metropolitan Life, the Investment Manager or
SSR International.
Subject to the policy of seeking best overall price and execution, sales of
shares of the Funds may be considered in the selection of broker or dealer
firms for the Funds' portfolio transactions.
PURCHASE OF SHARES
Shares of the Funds are distributed by the Distributor. The Funds offer four
classes of shares which may be purchased at the next determined net asset value
per share plus, in the case of all classes except Class C shares, a sales
charge which, at the election of the investor, may be imposed (i) at the time
of purchase (the Class A shares) or (ii) on a deferred basis (the Class B and
Class D shares). General information on how to buy shares of the Funds, as well
as sales charges involved, are set forth under "Purchase of Shares" in the Pro-
spectus. The following supplements that information.
Public Offering Price--The public offering price for each class of shares of
the Funds is based on their net asset value determined as of the close of the
New York Stock Exchange ("NYSE") on the day the purchase order is received by
State Street Research Shareholder Services provided that the order is received
prior to the close of the NYSE on that day; otherwise the net asset value used
is that determined as of the close of the NYSE on the next day it is open for
unrestricted trading. When a purchase order is placed through a dealer, that
dealer is responsible for transmitting the order promptly to State Street Re-
search Shareholder Services in order to permit the investor to obtain the cur-
rent price. Any loss suffered by an investor which results from a dealer's
failure to transmit an order promptly is a matter for settlement between the
investor and the dealer.
Reduced Sales Charges--For purposes of determining whether a purchase of Class
A shares qualifies for reduced sales charges, the term "person" includes: (i)
an individual, or an individual combining with his or her spouse and their
children and purchasing for his, her or their own account; (ii) a "company" as
defined in Section 2(a)(8) of the 1940 Act; (iii) a trustee or other fiduciary
purchasing for a single trust estate or single fiduciary account (including a
pension, profit sharing or other employee benefit trust created pursuant to a
plan qualified under Section 401 of the Internal Revenue Code); (iv) a tax-ex-
empt organization under Section 501(c)(3) or (13) of the Internal Revenue Code;
and (v) an employee benefit plan of a single employer or of affiliated employ-
ers.
Investors may purchase Class A shares of the Funds at reduced sales charges by
executing a Letter of Intent to purchase no less than an aggregate of $100,000
of a Fund or any combination of Class A shares of Eligible Funds as designated
by the Distributor within a 13-month period. The sales charge applicable to
each purchase made pursuant to a Letter of Intent will be that which would ap-
ply if the total dollar amount set forth in the Letter of Intent were being
bought in a single transaction. Purchases made within a 90-day period prior to
the execution of a Letter of Intent may be included therein; in such case the
date of the earliest of such purchases marks the commencement of the 13-month
period.
An investor may include toward completion of a Letter of Intent the value (at
the current public offering price) of all of his or her Class A shares of the
Funds and of any of the other Class A shares of Eligible Funds held of record
as of the date of his or her Letter of Intent, plus the value (at the current
offering price) as of such date of all of such shares held by any "person" de-
scribed herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D shares may also be included in the combination un-
der certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher
B-21
<PAGE>
sales charge which would apply if the total purchase is not completed within
the allotted time. The escrowed shares will be released when the Letter of In-
tent is completed or, if it is not completed, when the balance of the higher
sales charge is, upon notice, remitted by the investor. All dividends and capi-
tal gains distributions with respect to the escrowed shares will be credited to
the investor's account.
Investors may purchase Class A shares of the Funds or a combination of Eligi-
ble Funds at reduced sales charges pursuant to a Right of Accumulation. The ap-
plicable sales charge under the Right is determined on the amount arrived at by
combining the dollar amount of the purchase with the value (at the current pub-
lic offering price) of all Class A shares of the other Eligible Funds owned as
of the purchase date by the investor plus the value (at the current public of-
fering price) of all such shares owned as of such date by any "person" de-
scribed herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D shares may also be included in the combination un-
der certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Class C Shares--Class C shares are currently available to certain employee
benefit plans such as qualified retirement plans which meet criteria relating to
number of participants (currently a minimum of 100 eligible employees), service
arrangements, or similar factors; insurance companies; endowment funds of
nonprofit organizations with substantial minimum assets (currently a minimum of
$10,000,000); and other similar institutional investors.
Reorganizations--In the event of mergers or reorganizations with other public
or private collective investment entities, including investment companies as
defined in the 1940 Act, as amended, a Fund may issue its shares at net asset
value (or more) to such entities or to their security holders.
REDEMPTION IN KIND
Portfolios reserves the right to pay redemptions in kind with portfolio secu-
rities in lieu of cash. In accordance with its election pursuant to Rule 18f-1
under the 1940 Act, a Fund may limit the amount of redemption proceeds paid in
cash. Although it has no present intention to do so, a Fund may, under unusual
circumstances, limit redemptions in cash with respect to each shareholder dur-
ing any ninety-day period to the lesser of (i) $250,000 or (ii) 1% of the net
asset value of such Fund at the beginning of such period. In connection with
any redemptions paid in kind with portfolio securities, brokerage and other
costs may be incurred by the redeeming shareholder in the sale of the securi-
ties received.
NET ASSET VALUE
The net asset value of the shares of each Fund is determined once daily as of
the close of regular trading on the NYSE, ordinarily 4 P.M. New York City time,
Monday through Friday, on each day during which the NYSE is open for unre-
stricted trading. The NYSE is currently closed on New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
The net asset value per share of a Fund is computed by dividing the sum of the
value of the securities held by the Fund plus any cash or other assets minus
all liabilities by the total number of outstanding shares of the Fund at such
time. Any expenses, except for extraordinary or nonrecurring expenses, borne by
a Fund, including the investment management fee payable to the Investment Man-
ager, are accrued daily.
Securities held by each Fund will be valued as follows. Portfolio securities
which are traded on domestic stock exchanges are valued at the last sale price
as of the close of business on the day the securities are being valued, or,
lacking any sales, at the mean between closing bid and asked prices. Portfolio
securities which are traded on NASDAQ, or other system, are valued at the last
reported sales price. Each portfolio security which is primarily traded on non-
domestic securities exchanges is generally valued at the preceding closing
value of such
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<PAGE>
security on the exchange where it is primarily traded. A security that is
listed or traded on more than one exchange is valued at the quotation on the
exchange determined to be the primary market for such security by the Board of
Directors or its delegates. If no closing price is available, then such secu-
rity is valued first by using the mean between the last current bid and asked
prices or, second, by using the last available closing price. Domestic securi-
ties traded in the over-the-counter market are valued at the mean between the
bid and asked prices or yield equivalent as obtained from two or more dealers
which make markets in the securities. All non-U.S. securities traded in the
over-the-counter securities market are valued at the last sale quote, if market
quotations are available, or the last closing bid price, if there is no active
trading in a particular security for a given day. Where market quotations are
not readily available for such non-domestic over-the-counter securities, then
such securities will be valued in good faith by a method that the Board of Di-
rectors, or its delegates, believe accurately reflects fair value. Portfolio
securities which are traded both in the over-the-counter market and on a secu-
rities exchange are valued according to the broadest and most representative
market, and it is expected that for debt securities this ordinarily will be the
over-the-counter market. Securities and assets for which market quotations are
not readily available, e.g. certain long-term bonds and notes, are valued at
fair value as determined in good faith by or under the direction of the Board
of Directors of Portfolios.
In determining the values of portfolio assets as provided below, the Directors
utilize one or more pricing services in lieu of market quotations for certain
securities which are not readily available on a daily basis. Such services may
provide prices determined as of times prior to the close of the NYSE.
The Directors have determined that unless the particular circumstances other-
wise indicate, the fair value of short-term instruments with a remaining matu-
rity of sixty days or less is their amortized cost value. If for any reason the
fair value of any security is not fairly reflected by such method, such secu-
rity will be valued by the same methods as securities having a maturity of more
than sixty days.
Options, whether on securities, indices, or futures contracts, are valued at
the last sales price available as of the close of business on the day of valua-
tion or, if no sale, at the mean between the bid and asked prices. Options on
currencies are valued at the spot price each day. As a general matter, futures
contracts are marked-to-market daily. The value of futures contracts will be
the sum of the margin deposit plus or minus the difference between the value of
the futures contract on each day the net asset value is calculated and the
value on the date the futures contract originated, value being that established
on a recognized commodity exchange, or by reference to other customary sources,
with gain or loss being recognized when the futures contract closes or expires.
Generally, trading in foreign securities, as well as corporate bonds, United
States Government securities and money market instruments, is substantially
completed each day at various times prior to the close of regular trading on
the NYSE. The values of such securities used in computing the net asset value
of the Funds' shares are determined as of such times. Foreign currency exchange
rates are also generally determined prior to the close of regular trading on
the NYSE. Occasionally, events affecting the values of such securities and such
exchange rates may occur between the times at which they are determined and the
close of regular trading on the NYSE which will not be reflected in the compu-
tation of the Funds' net asset value. If events materially affecting the value
of such securities occur during such period, then these securities will be val-
ued at their fair value as determined in good faith by the Directors.
PORTFOLIO TRANSACTIONS
PORTFOLIO TURNOVER:
A Fund's turnover rate is determined by dividing the lesser of securities pur-
chases or sales for a year by the monthly average value of securities held by
the Fund (excluding securities whose maturities or expiration date at the time
of their acquisition were one year or less).
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<PAGE>
The International Equity Fund's turnover rates for the fiscal years ending
October 31, 1995 and 1996, were 100.68% and 132.36%, respectively. The
International Fixed Income Fund's turnover rates for the same periods were
23.31% and 45.84%. Each Fund reserves full freedom with respect to portfolio
turnover. In periods when there are rapid changes in economic conditions or se-
curity price levels, portfolio turnover may be significantly higher than during
times of economic and market price stability or when investment strategy re-
mains relatively constant. A high rate of portfolio turnover will result in in-
creased transaction costs for the Fund.
CERTAIN TAX MATTERS
TAXATION OF THE FUNDS--IN GENERAL:
Each Fund intends to qualify and elect to be treated each taxable year as a
"regulated invest-ment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), although they cannot give complete assurance
that they will qualify to do so. Accordingly, a Fund must, among other things,
(a) derive at least 90% of its gross income in each taxable year from divi-
dends, interest, payments with respect to securities loans, gains from the sale
or other disposition of stock, securities or foreign currencies, or other in-
come (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock, se-
curities or currencies (the "90% test"); (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of the
following held for less than three months (the "30% test"): (i) stock or secu-
rities; (ii) options, futures or forward contracts (other than options, futures
or forward contracts on foreign currencies) or (iii) foreign currencies (or op-
tions, futures or forward contracts on foreign currencies) but only if such
currencies (or options, futures or forward contracts) are not directly related
to the Fund's principal business of investing in stocks or securities (or op-
tions and futures with respect to stocks or securities); and (c) satisfy cer-
tain diversification requirements.
The 30% test will limit the extent to which a Fund may sell securities held
for less than three months; write options which expire in less than three
months; and effect closing transactions with respect to call or put options
that have been written or purchased within the preceding three months. (If a
Fund purchases a put option for the purpose of hedging an underlying portfolio
security, the acquisition of the option is treated as a short sale of the un-
derlying security unless, for purposes only of the 30% test, the option and the
security are acquired on the same date.) Finally, as discussed below, this re-
quirement may also limit investments by a Fund in options on stock indices,
listed options on nonconvertible debt securities, futures contracts, options on
interest rate futures contracts and certain foreign currency contracts.
If a Fund should fail to qualify as a regulated investment company in any
year, it would lose the beneficial tax treatment accorded regulated investment
companies under Subchapter M of the Code and all of its taxable income would be
subject to tax at regular corporate rates without any deduction for distribu-
tions to shareholders, and such distributions will be taxable to shareholders
as ordinary income to the extent of such Fund's current or accumulated earnings
and profits. Also, the shareholders, if they received a distribution in excess
of current or accumulated earnings and profits, would receive a return of capi-
tal that would reduce the basis of their shares of such Fund to the extent
thereof. Any distribution in excess of a shareholder's basis in the sharehold-
er's shares would be taxable as gain realized from the sale of such shares.
A Fund will be liable for a nondeductible 4% excise tax on amounts not dis-
tributed on a timely basis in accordance with a calendar year distribution re-
quirement. To avoid the tax, during each calendar year a Fund must distribute
an amount equal to at least 98% of the sum of its ordinary income (not taking
into account any capital gains or losses) for the calendar year, and its capi-
tal gain net income for the 12-month period ending on October 31, in addition
to any undistributed portion of the respective balances from the prior year.
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<PAGE>
Each Fund intends to make sufficient distributions to avoid this 4% excise tax.
TAXATION OF THE FUNDS' INVESTMENTS:
Original Issue Discount; Market Discount:
For federal income tax purposes, debt securities purchased by a Fund may be
treated as having original issue discount. Original issue discount represents
interest for federal income tax purposes and can generally be defined as the
excess of the stated redemption price at maturity of a debt obligation over the
issue price. Original issue discount is treated for federal income tax purposes
as income earned by a Fund, whether or not any income is actually received, and
therefore is subject to the distribution requirements of the Code. Generally,
the amount of original issue discount is determined on the basis of a constant
yield to maturity which takes into account the compounding of accrued interest.
Under section 1286 of the Code, an investment in a stripped bond or stripped
coupon may result in original issue discount.
Debt securities may be purchased by a Fund at a discount that exceeds the
original issue discount, if any, at the time a Fund purchases the securities.
This additional discount represents market discount for income tax purposes. In
the case of any debt security having a fixed maturity date of more than one
year from the date of issue and having market discount, the gain realized on
disposition will be treated as interest to the extent it does not exceed the
accrued market discount on the security (unless a Fund elects to include such
accrued market discount in income in the tax year to which it is attributable).
For debt securities acquired before May 1, 1993, this rule applies only if the
debt security was issued after July 18, 1984. Generally, market discount is ac-
crued on a daily basis. A Fund may be required to capitalize, rather than de-
duct currently, part or all of any direct interest expense incurred to purchase
or carry any debt security having market discount, unless a Fund makes the
election to include market discount in income currently. Because each Fund must
include original issue discount in income, it will be more difficult for such
Fund to make the distributions required for such Fund to maintain its status as
a regulated investment company under Subchapter M of the Code or to avoid the
4% excise tax described above.
Options and Futures Transactions:
Certain of a Fund's investments may be subject to provisions of the Code that
(i) require inclusion of unrealized gains or losses in a Fund's income for pur-
poses of the 90% test, the 30% test, the excise tax and the distribution re-
quirements applicable to regulated investment companies; (ii) defer recognition
of realized losses; and (iii) characterize both realized and unrealized gain or
loss as short-term or long-term gain or loss. Such provisions generally apply
to, among other investments, options on debt securities, indices on securities
and futures contracts. Each Fund will monitor its transactions and may make
certain tax elections available to it in order to mitigate the impact of these
rules and prevent disqualification of the Fund as a regulated investment compa-
ny. The ability of a Fund to engage in option and futures transactions may be
limited by the 30% test.
Gains or losses attributable to foreign currency contracts or fluctuations in
exchange rates that occur between the time a Fund accrues income or expenses
denominated in a foreign currency and the time the Fund actually collects such
income or pays such expenses are treated as ordinary income or loss. The por-
tion of any gain or loss on the disposition of a debt security denominated in a
foreign currency that is attributable to fluctuations in the value of the for-
eign currency during the holding period of the debt security will likewise be
treated as ordinary income or loss. Such ordinary income or loss will increase
or decrease the amount of the Fund's net investment income.
If a Fund invests in the stock of certain "passive foreign investment compa-
nies" ("PFICs"), income of such companies may become taxable to the Fund prior
to its distribution to the Fund or, alternatively, ordinary income taxes and
interest
B-25
<PAGE>
charges may be imposed on the Fund on "excess distributions" received by the
Fund or on gain from the disposition of such investments by the Fund. Neither
Fund intends to invest in PFICs. Because of the broad scope of the PFIC rules,
however, there can be no assurance that they can avoid doing so.
TAXATION OF THE FUNDS' SHAREHOLDERS:
A Fund may be subject to foreign taxes, including foreign income taxes. If so,
each Fund intends to meet the requirements of the Code for passing through to
its shareholders the tax benefit of foreign income taxes paid, although there
is no assurance that it will be able to do so. Under this provision, if more
than half of the value of the total assets of a Fund at the close of its tax-
able year consists of stock or securities of foreign corporations, the Fund
will be eligible and intends to elect to pass through to its shareholders the
amount of foreign taxes it paid if such amounts are material. Pursuant to this
election, a United States shareholder will, in general, be required to (i) in-
clude in gross income, in addition to taxable distributions actually received,
his or her pro rata share of the foreign taxes paid by the Fund, (ii) treat
that share of taxes as having been paid directly by him or her, and (iii) ei-
ther deduct such share of taxes or treat such share of taxes as a credit
against United States income tax liability. A tax exempt shareholder will or-
dinarily not benefit from this election.
Generally, a credit for foreign taxes paid by the Funds may not exceed a
shareholder's United States income tax attributable to the shareholder's for-
eign source income. This limitation applies separately to different categories
of income, one of which is foreign-source passive income, which is likely to
include all of the foreign-source income of a Fund. As a result of these limi-
tations, some shareholders may not be able to utilize fully any foreign tax
credits generated by an investment in a Fund. Each Fund will provide its share-
holders with information about the source of its income and the foreign taxes
it has paid for use in preparing the shareholder's United States income tax re-
turn.
Dividends from domestic corporations are not expected to comprise a substan-
tial part of the income of either Fund. If such dividends are earned by a Fund,
then a portion of the dividends paid by that Fund may qualify for the 70% de-
duction for dividends received which is available to corporate shareholders of
the Fund. Shareholders will be informed of any portion of the dividends paid by
a Fund which qualifies for this deduction. The dividends-received deduction is
reduced to the extent the dividends received are treated as debt-financed, un-
der the Code, and is eliminated if the stock is held for less than 46 days.
Any dividend declared in October, November or December and made payable to
shareholders of record in any such month is treated as received by such share-
holder on December 31, provided that such Fund pays the dividend during January
of the following calendar year.
Distributions by a Fund result in a reduction in the fair market value of such
Fund's shares. Should a distribution reduce the fair market value below a
shareholder's cost basis, such distribution nevertheless may be taxable to the
shareholder as ordinary income or long-term capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In par-
ticular, investors should be careful to consider the tax implications of buying
shares just prior to a taxable distribution. The price of shares purchased at
that time includes the amount of any forthcoming distribution. Those investors
purchasing shares just prior to a taxable distribution will then receive a re-
turn of investment upon distribution which will nevertheless be taxable to
them.
The foregoing discussion of United States federal income tax law relates
solely to the application of that law to United States persons, that is, United
States citizens and residents and United States corporations, partnerships,
trusts and estates. Each shareholder who is not a United States person should
consider the United States and foreign tax consequences of ownership of shares
of the Funds, including the possibility that such a shareholder may be subject
to United States with-
B-26
<PAGE>
holding at a rate of 30% (or at a lower rate under an applicable treaty) on
amounts constituting ordinary income received by him or her, where such
amounts are treated as income from United States sources under the Code.
Shareholders should consult their tax advisers about the application of the
provisions of tax law described in this Statement of Additional Information in
light of their particular tax situations.
DISTRIBUTION OF SHARES OF THE FUNDS:
Portfolios is currently comprised of the following series: International Eq-
uity Fund and International Fixed Income Fund. The Directors of Portfolios
have authorized shares of the Funds to be issued in four classes: Class A,
Class B, Class C and Class D shares. The Directors of Portfolios have author-
ity to issue an unlimited number of shares of each series, $.01 par value per
share. A "series" is a separate pool of assets of Portfolios which is sepa-
rately managed and has a different investment objective and different invest-
ment policies from those of another series. The Directors have authority,
without the necessity of a shareholder vote, to create any number of new se-
ries or classes or to commence the public offering of shares of any previously
established series or class.
The Funds have entered into a Distribution Agreement with State Street Re-
search Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Funds. Shares of the Funds are
sold through dealers who have entered into sales agreements with the Distribu-
tor. The Distributor distributes shares of the Funds on a continuous basis at an
offering price which is based on the net asset value per share of the ap-
plicable Fund plus (subject to certain exceptions) a sales charge which, at the
election of the investor, may be imposed (i) at the time of purchase (the Class
A shares) or (ii) on a deferred basis (the Class B or Class D shares). The
Distributor may reallow all or portions of such sales charges as concessions
to dealers. For the period November 1, 1993 through February 28, 1994, total
sales charges amounted to $215,107 for the International Equity Fund and $10,346
for the International Fixed Income Fund. For the same period, $24,764 was
retained by the Distributor after reallowance of concessions to dealers for
the International Equity Fund and $1,306 for the International Fixed Income
Fund. For the period March 1, 1994 (commencement of share class designation)
through October 31, 1994, and the fiscal years ending October 31, 1995 and 1996,
total sales charges for the Class A shares amounted to $411,711, $255,655 and
$157,855, respectively, for the International Equity Fund and $9,827, $25,177
and $32,117, respectively, for the International Fixed Income Fund. For the same
periods, $91,079, $29,729 and $19,830, respectively, was retained by the
Distributor after reallowance of concessions to dealers for the International
Equity Fund and $4,121, $3,148 and $3,914, respectively, for the
International Fixed Income Fund. No information is presented for Class A,
Class B and Class D shares for the fiscal year ended October 31, 1993, and the
period ended November 1, 1993 through February 28, 1994, because no shares of
those classes were outstanding during those periods.
For the periods shown below, the Distributor received contingent deferred
sales charges upon redemption of Class A, Class B and Class D shares of the
Funds and paid initial commissions to securities dealers for sales of such
shares as follows:
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
PERIOD MARCH 1, 1994
(COMMENCEMENT OF SHARE
FISCAL YEAR FISCAL YEAR CLASS DESIGNATION)
ENDING ENDING THROUGH
OCTOBER 31, 1996 OCTOBER 31, 1995 OCTOBER 31, 1994
---------------------- ---------------------- ----------------------
CONTINGENT CONTINGENT CONTINGENT
DEFERRED COMMISSIONS DEFERRED COMMISSIONS DEFERRED COMMISSIONS
SALES PAID TO SALES PAID TO SALES PAID TO
CHARGES DEALERS CHARGES DEALERS CHARGES DEALERS
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Class A................... $ 0 $138,025 $ 0 $225,926 $ 0 $320,632
Class B................... $139,376 $413,917 $81,190 $558,930 $ 0 $617,850
Class D................... $ 4,578 $ 30,126 $ 2,446 $ 45,585 $ 0 $ 15,663
</TABLE>
B-27
<PAGE>
INTERNATIONAL FIXED FUND
<TABLE>
<CAPTION>
PERIOD MARCH 1, 1994
(COMMENCEMENT OF SHARE
FISCAL YEAR FISCAL YEAR CLASS DESIGNATION)
ENDING ENDING THROUGH
OCTOBER 31, 1996 OCTOBER 31, 1995 OCTOBER 31, 1994
---------------------- ---------------------- ----------------------
CONTINGENT CONTINGENT CONTINGENT
DEFERRED COMMISSIONS DEFERRED COMMISSIONS DEFERRED COMMISSIONS
SALES PAID TO SALES PAID TO SALES PAID TO
CHARGES DEALERS CHARGES DEALERS CHARGES DEALERS
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Class A........................... $ 0 $28,203 $ 0 $22,029 $ 0 $ 5,706
Class B........................... $8,598 $90,567 $3,822 $44,683 $ 0 $30,667
Class D........................... $ 867 $12,735 $ 430 $ 5,961 $ 0 $ 163
</TABLE>
Differences in the price at which the Funds' Class A shares are offered due to
scheduled variations in sales charges, as described in the Funds' Prospectus,
result from cost savings inherent in economies of scale. Management believes
that the cost of sales efforts of the Distributor and broker-dealers tends to
decrease as the size of purchases increases, or does not involve any incremen-
tal sales expenses as in the case of, for example, exchanges, reinvestments or
dividend investments at net asset value. Similarly, no significant sales effort
will be necessary for sales of shares at net asset value to certain Directors,
officers, employees, their relatives and other persons directly or indirectly
related to the Funds or associated entities. Where shares of the Funds are of-
fered at a reduced sales charge or without a sales charge pursuant to sponsored
arrangements and managed fee-based programs, the amount of the sales charge re-
duction will similarly reflect the anticipated reduction in sales expenses as-
sociated with such arrangements. The reduction in sales expenses, and therefore
the reduction in sales charge, will vary depending on factors such as the size
and other characteristics of the organization or program, and the nature of its
membership or the participants. Portfolios reserves the right to make varia-
tions in, or eliminate, sales charges at any time or to revise the terms of or
to suspend or discontinue sales pursuant to sponsored arrangements at any time.
On any sale of Class A shares of $1,000,000 or more, the Distributor will pay
the authorized securities dealer making such sale commission on the shares
sold. Such commission also is payable to authorized securities dealers upon
sales of Class A shares made pursuant to a Letter of Intent to purchase shares
having a net asset value of $1,000,000 or more. Shares sold with such commis-
sions payable are subject to a one-year contingent deferred sales charge of
1.00% on any portion (excluding capital appreciation and dividends) of such
shares redeemed within one year following their sale. After a particular pur-
chase of Class A shares is made under the Letter of Intent, the commission will
be paid only in respect of that particular purchase of shares. If the Letter of
Intent is not completed, the commission paid will be deducted from any dis-
counts or commissions otherwise payable to such dealer in respect of shares ac-
tually sold. If an investor is eligible to purchase shares at net asset value
on account of the Right of Accumulation, the commission will be paid only in
respect of the incremental purchase at net asset value.
Portfolios has adopted a "Plan of Distribution Pursuant to Rule 12b-1" (the
"Distribution Plan") under which the Funds may engage, directly or indirectly,
in financing any activities primarily intended to result in the sale of Class
A, Class B and Class D shares, including, but not limited to, (1) the payment
of commissions and/or reimbursement of expenses to underwriters, securities
dealers and others engaged in the sale of shares, including payments to the
Distributor to be used to pay commissions and/or reimbursement of expenses to
securities dealers (which securities dealers may be affiliates of the Distribu-
tor) engaged in the distribution and marketing of shares and furnishing ongoing
assistance to investors, (2) reimbursement of direct out-of-pocket expenditures
incurred by the Distributor in connection with the distribution and marketing
of shares and the servicing of investor accounts including expenses relating to
the formulation and implementation of marketing strategies and promotional ac-
tivities such as direct mail promotions and television, radio, newspaper, maga-
zine and other mass media advertising, the preparation, printing and distribu-
tion of Prospectuses of the Funds and reports for recipients other than exist-
ing shareholders of the Funds, and obtaining such information, analyses and re-
ports with respect to marketing and promotional activities and investor ac-
counts as the Funds may, from time to time, deem advisable, and (3) reimburse-
ment of expenses incurred by the Distributor in connection
B-28
<PAGE>
with the servicing of shareholder accounts including payments to securities
dealers and others in consideration of the provision of personal services to
investors and/or the maintenance of shareholder accounts and expenses associ-
ated with the provision of personal services by the Distributor directly to in-
vestors. In addition, the Distribution Plan is deemed to authorize the Distrib-
utor/ Investment Manager to make payments out of general profits, revenues or
other sources to underwriters, securities dealers and others in connection with
sales of shares, to the extent, if any, that such payments may be deemed to be
within the scope of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not exceed
(i) with respect to Class A shares, an annual rate of 0.25% of the average
daily value of net assets represented by such Class A shares, and (ii) with re-
spect to Class B and Class D shares, an annual rate of 0.75% of the average
daily value of the net assets represented by such Class B or Class D shares (as
the case may be) to finance sales or promotion expenses and an annual rate of
0.25% of the average daily value of the net assets represented by such Class B
or Class D shares (as the case may be) to make payments for personal services
and/or the maintenance of shareholder accounts. Proceeds from the service fee
will be used by the Distributor to compensate securities dealers and others
selling shares of the Funds for rendering service to shareholders on an ongoing
basis. Such amounts are based on the net asset value of shares of the Funds
held by such dealers as nominee for their customers or which are owned directly
by such customers for so long as such shares are outstanding and the Distribu-
tion Plan remains in effect with respect to the Funds. Any amounts received by
the Distributor and not so allocated may be applied by the Distributor as reim-
bursement for expenses incurred in connection with the servicing of investor
accounts. The distribution and servicing expenses of a particular class will be
borne solely by that class.
During the fiscal year ended October 31, 1996, the Funds paid the Distributor
fees under the Distribution Plan and the Distributor used all of such payments
for expenses incurred on behalf of the Fund as follows:
CLASS A CLASS B CLASS D
------- -------- -------
INTERNATIONAL EQUITY FUND
Advertising........................................... $ 0 $ 0 $ 3,150
Printing and mailing of prospectuses to other than
current shareholders................................. 0 0 1,136
Compensation to dealers............................... 61,863 329,552 45,493
Compensation to sales personnel....................... 0 0 15,094
Interest.............................................. 0 0 0
Carrying or other financing charges................... 0 0 0
Other expenses: marketing; general.................... 0 0 7,270
------- -------- -------
Total fees............................................ $61,863 $329,552 $72,143
======= ======== =======
CLASS A CLASS B CLASS D
------- ------- -------
INTERNATIONAL FIXED INCOME FUND
Advertising............................................ $ 0 $ 314 $ 414
Printing and mailing of prospectuses to other than
current shareholders.................................. 0 113 149
Compensation to dealers................................ 6,258 35,660 12,955
Compensation to sales personnel........................ 0 1,503 1,988
Interest............................................... 0 0 0
Carrying or other financing charges.................... 0 0 0
Other expenses: marketing; general..................... 0 723 956
------ ------- -------
Total fees............................................. $6,258 $38,313 $16,462
====== ======= =======
The Distributor may also use additional resources of its own for further ex-
penses on behalf of the Funds.
No interested Director of Portfolios has any direct or indirect financial in-
terest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as prohibiting
banks and other depository institutions from being paid for performing services
under the Distribution Plan, the Funds will make alternative arrangements for
such services for shareholders who acquired shares through such institutions.
B-29
<PAGE>
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") and yield of the
Class A, Class B, Class C and Class D shares of the Funds will be calculated as
set forth below. Total return and yield are computed separately for each class
of shares of the Funds. Performance data for a specified class includes periods
prior to the adoption of class designations. Shares of the Funds had no class
designations until March 1, 1994, when designations were assigned based on the
pricing and Rule 12b-1 fees applicable to shares sold thereafter.
The performance data reflects Rule 12b-1 fees and sales charges as set forth
below:
RULE 12b-1 FEES
---------------------------------------------------
CLASS AMOUNT PERIOD SALES CHARGES
- ------ ------ -------------- ---------------
A 0.25% March 1, 1994 Maximum 4.5%
to present; sales charge
fee will reflected
reduce
performance
for periods
after March 1,
1994
B 1.00% March 1, 1994 1- and 5-year
to present; periods reflect
fee will a 5% and a 2%
reduce contingent
performance deferred sales
for periods charge,
after March 1, respectively
1994
C 0.00% Since None
commencement
of operations
to present
D 1.00% March 1, 1994 1-year period
to present; reflects a 1%
fee will contingent
reduce deferred sales
performance charge
for periods
after March 1,
1994
All calculations of performance data in this section reflect the voluntary
measures by the Funds' affiliates to reduce fees or expenses relating to the
Funds; see "Accrued Expenses" later in this section. Without such measures,
performance would be lower. Performance data is based on historical figures;
past performance is not a guarantee of future returns.
TOTAL RETURN:
The average annual total returns ("standard total return") of each class of
each Fund's shares were as follows:
COMMENCEMENT OF
OPERATIONS
(JANUARY 22, 1992) ONE YEAR ENDED
TO OCTOBER 31, 1996 OCTOBER 31, 1996
---------------------- -----------------
WITH WITHOUT WITH WITHOUT
FUND SUBSIDY SUBSIDY SUBSIDY SUBSIDY
---- ---------- --------- -------- --------
International Equity Fund
Class A.............................. 6.41% 5.48% -5.73% -6.31%
Class B.............................. 6.68% 5.73% -6.85% -7.47%
Class C.............................. 7.61% 6.66% -1.06% -1.67%
Class D.............................. 6.98% 6.04% -3.04% -3.66%
International Fixed Income Fund
Class A.............................. 7.08% 6.55% -3.25% -3.70%
Class B.............................. 7.37% 6.81% -4.19% -4.67%
Class C.............................. 8.26% 7.70% 1.54% 1.06%
Class D.............................. 7.65% 7.12% -0.56% -1.04%
Standard total return is computed by determining the average annual compounded
rates of return over the designated periods that, if applied to the initial
amount invested would produce the ending redeemable value, according to the
following formula:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated period as-
suming a hypothetical $1,000 payment made at the beginning of the
designated period
The calculation is based on the further assumptions that the maximum initial
or contingent deferred sales charge applicable to the investment is deducted
and that all dividends and distributions by a Fund are reinvested at net asset
value on the reinvestment dates during the periods. All accrued expenses are
also taken into account as described later herein.
B-30
<PAGE>
YIELD:
The annualized yield for the International Fixed Income Fund's Class A, Class
B, Class C and Class D based on the month of October 1996 was as follows:
WITH WITHOUT
SUBSIDY SUBSIDY
------- -------
Class A......................................................... 2.30% 0.99%
Class B......................................................... 1.68% 0.32%
Class C......................................................... 2.65% 1.28%
Class D......................................................... 1.68% 0.31%
Yield for the International Fixed Income Fund's Class A, Class B, Class C and
Class D shares is computed by dividing the net investment income per share
earned during a recent month or other specified 30-day period by the maximum
offering price per share on the last day of the period and annualizing the re-
sult, according to the following formula:
YIELD = 2[(a-b+1)/6/- 1]
---
cd
Where: a= dividends and interest earned during the period
b= expenses accrued for the period (net of voluntary expense reduc-
tions by the Investment Manager)
c= the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d= the maximum offering price per share on the last day of the peri-
od.
To calculate interest earned (for the purpose of "a" above) on debt obliga-
tions, a Fund computes the yield to maturity of each obligation held by such
Fund based on the market value of the obligation (including actual accrued in-
terest) at the close of the last business day of the preceding period, or, with
respect to obligations purchased during the period, the purchase price (plus
actual accrued interest). The yield to maturity is then divided by 360 and the
quotient is multiplied by the market value of the obligation (including actual
accrued interest) to determine the interest income on the obligation for each
day of the period that the obligation is in the portfolio. Dividend income is
recognized daily based on published rates.
Undeclared earned income, computed in accordance with generally accepted ac-
counting principles, may be subtracted from the maximum offering price. Unde-
clared earned income is the net investment income which, at the end of the base
period, has not been declared as a dividend, but is reasonably expected to be
declared as a dividend shortly thereafter. The maximum offering price includes
a maximum sales charge of 4.5% with respect to Class A shares.
All accrued expenses are taken into account as described later herein.
Yield information is useful in reviewing a Fund's performance, but because
yields fluctuate, such information cannot necessarily be used to compare an in-
vestment in a Fund's shares with bank deposits, savings accounts and similar
investment alternatives which often are insured and/or provide an agreed or
guaranteed fixed yield for a stated period of time. Shareholders should remem-
ber that yield is a function of the kind and quality of the instruments in a
Fund's portfolio, portfolio maturity and operating expenses and
marketconditions.
ACCRUED EXPENSES:
Accrued expenses include all recurring expenses that are charged to all share-
holder accounts in proportion to the length of the base period. The standard
total return and yield results take sales charges, if applicable, into account,
although the results do not take into account recurring and nonrecurring
charges for optional services which only certain shareholders elect and which
involve nominal fees, such as the $5 fee for certain reinvestments, the $7.50
fee for wire orders, the $15 annual fee for administration of an IRA account,
the $15 annual fee for a participant in a prototype pension plan, the $10 fee
for special requests or photocopies of paid checks and the $20 fee applied to a
shareholder account that has been determined to be escheatable under applicable
state laws.
B-31
<PAGE>
Accrued expenses reflect the Investment Manager's/Distributor's or its affili-
ates' voluntary reduction of management fees and assumption of a portion of ex-
penses relating to a Fund during the subject period. Such reductions in manage-
ment fees and assumption of expenses by the Investment Manager/Distributor or
its affiliates amounted to $240,442, $386,279 and $529,341 for the Interna-
tional Equity Fund and $100,743, $85,904 and $149,825 for the International
Fixed Income Fund for fiscal years ending October 31, 1993, October 31, 1994
and October 31, 1995 respectively. These reductions were $54,510 for the Inter-
national Equity Fund and $7,543 for the International Fixed Income Fund for the
month of October 1995.
Each Fund will be responsible for payment of expenses directly attributable to
it, while indirect expenses are allocated among all Funds in Portfolios.
NONSTANDARDIZED TOTAL RETURN:
A Fund may provide the above described standard total return results for Class
A, Class B, Class C and Class D shares for periods which end no earlier than
the most recent calendar quarter end and which begin twelve months before and
at the time of commencement of such Fund's operations. In addition, a Fund may
provide nonstandardized total return results for differing periods, such as for
the most recent six months, and/or without taking sales charges into account.
Such nonstandardized total return is computed as otherwise described under "To-
tal Return" except that the result may or may not be annualized, and as noted
any applicable sales charge may not be taken into account and therefore not de-
ducted from the hypothetical initial payment of $1,000. The International Eq-
uity Fund's and International Fixed Income Fund's nonstandardized total return
for Class A, Class B, Class C and Class D shares for the six months ended Octo-
ber 31, 1996 were as follows:
WITH WITHOUT
INTERNATIONAL EQUITY FUND SUBSIDY SUBSIDY
- ------------------------- ------- -------
Class A.................................................... -7.43% -7.72%
Class B.................................................... -7.76% -8.05%
Class C.................................................... -7.38% -7.67%
Class D.................................................... -7.86% -8.15%
WITH WITHOUT
INTERNATIONAL FIXED INCOME FUND SUBSIDY SUBSIDY
- ------------------------------- ------- -------
Class A.................................................... 3.29% 3.05%
Class B.................................................... 2.94% 2.70%
Class C.................................................... 3.28% 3.03%
Class D.................................................... 2.84% 2.59%
DISTRIBUTION RATES:
A Fund may also quote its distribution rate for each class of shares. The dis-
tribution rate is calculated by annualizing the latest per-share distribution
from ordinary income and dividing the result by the maximum offering price per
share as of the end of the period to which the distribution relates. A distri-
bution can include gross investment income from debt obligations purchased at a
premium and in effect include a portion of the premium paid. A distribution can
also include nonrecurring, gross short-term capital gains without recognition
of any unrealized capital losses. Further, a distribution can include income
from the sale of options by a Fund even though such option income is not con-
sidered investment income under generally accepted accounting principles.
Because a distribution can include such premiums, capital gains and option in-
come, the amount of the distribution may be susceptible to control by the In-
vestment Manager through transactions designed to increase the amount of such
items. Also, because the distribution rate is calculated in part by dividing
the latest distribution by the offering price, which is based on net asset
value plus a sales charge, the distribution rate will increase as the net asset
value declines. A distribution rate can be greater than the yield rate calcu-
lated as described above.
The distribution rates for Class A, Class B, Class C and Class D shares based
on the quarter ended October 31, 1996 for the International Fixed Income Fund
were 3.42%, 2.85%, 3.78% and 2.85%, respectively.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110, is Portfolios' custodian. As custodian, State Street Bank
B-32
<PAGE>
and Trust Company is responsible for, among other things, safeguarding and con-
trolling the Funds' cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Funds' investments.
State Street Bank and Trust Company is not an affiliate of the Investment Man-
ager or its affiliates.
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP, 125 Summer Street, Boston, Massachusetts 02110, are
Portfolios' independent accountants, providing professional services including
(1) audit of the Funds' annual statements, (2) assistance and consultation in
connection with Securities and Exchange Commission filings and (3) review of
the annual income tax returns filed on behalf of the Funds.
FINANCIAL STATEMENTS
The following financial statements of the International Equity Fund and the In-
ternational Fixed Income Fund are for the fiscal year ending October 31, 1996.
[Note: only financial statements of the International Fixed Income Fund are
included in the N-14 Registration Statement.]
B-33
<PAGE>
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
INVESTMENT PORTFOLIO
October 31, 1996
<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
- -------------------------------------------- ------------------------ ----------------- --------------
<S> <C> <C> <C>
FIXED INCOME SECURITIES 87.0%
Australia 3.6% Australian Dollar
Government of Australia, 7.50% 1,500,000 7/15/2005 $ 1,202,758
--------------
Austria 1.8% Pound Sterling
Oest Kontrollbank AG, 9.25% 350,000 7/15/2002 613,457
--------------
Belgium 1.4% Belgian Franc
Kingdom of Belgium, 9.00% 12,000,000 6/27/2001 448,721
--------------
Canada 3.5% Canadian Dollar
Government of Canada, 7.00% 1,500,000 12/01/2006 1,163,893
--------------
Denmark 5.1% Danish Krone
Kingdom of Denmark, 9.00% 3,000,000 11/15/2000 583,246
Kingdom of Denmark, 8.00% 6,000,000 11/15/2001 1,130,361
--------------
1,713,607
--------------
France 12.2% Deutsche Mark
Credit Foncier de France, 7.25% 1,500,000 2/24/2003 1,058,835
Japanese Yen
Credit Local de France, 6.00% 100,000,000 10/31/2001 1,048,483
French Franc
Government of France, 8.50% 4,500,000 11/25/2002 1,026,484
Government of France, 6.75% 4,500,000 10/25/2003 945,330
--------------
4,079,132
--------------
Germany 17.0% Pound Sterling
Bayerische Landesbank Girozentrale, 7.88% 750,000 12/07/2006 1,223,755
Deutsche Mark
Federal Republic of Germany, 6.50% 1,500,000 7/15/2003 1,039,422
KFW International Finance, 6.25% 2,000,000 10/15/2003 1,358,452
LKB Baden Wurttemb, 6.63% 1,500,000 8/20/2003 1,040,016
Sudwest Landesbank, 6.75% 1,500,000 8/26/2003 1,040,946
--------------
5,702,591
--------------
Italy 5.2% Italian Lira
Republic of Italy, 10.50% 1,000,000,000 4/01/2005 750,626
Republic of Italy, 9.50% 1,400,000,000 2/01/1999 969,479
--------------
1,720,105
--------------
Japan 10.3% Japanese Yen
Asian Development Bank, 5.63% 100,000,000 2/18/2002 1,040,798
Export Import Bank, 4.38% 180,000,000 10/01/2003 1,790,435
Japan Development Bank, 6.50% 23,000,000 9/20/2001 246,580
Pound Sterling
Tokyo Electric Power Co. Inc., 11.00% 200,000 6/05/2001 $ 367,432
--------------
3,445,245
--------------
Netherlands 5.2% Guilder
Government of Netherlands, 6.50% 2,800,000 4/15/2003 1,745,978
--------------
Spain 2.0% Spanish Peseta
Government of Spain, 8.00% 85,000,000 5/30/2004 682,358
--------------
Sweden 2.3% Swedish Krona
Kingdom of Sweden, 13.00% 4,000,000 6/15/2001 764,056
--------------
United Kingdom 5.1% Pound Sterling
United Kingdom Treasury, 6.75% 1,100,000 11/26/2004 1,710,357
--------------
Supranational 12.3% Deutsche Mark
European Economic Community, 6.50% 1,500,000 3/10/2000 1,050,416
Japanese Yen
European Investment Bank, 6.63% 100,000,000 3/15/2000 1,033,112
Inter-American Development Bank, 6.75% 100,000,000 2/20/2001 1,064,402
International Bank for Reconstruction &
Development, 4.50% 100,000,000 6/20/2000 977,669
--------------
4,125,599
--------------
Total Fixed Income Securities and Investments
(Cost $26,621,548)--87.0% 29,117,857
Cash and Other Assets, Less Liabilities--13.0% 4,362,788
--------------
Net Assets--100.0% $33,480,645
==============
Federal Income Tax Information:
At October 31, 1996 the net unrealized appreciation of investments based on cost for
Federal income tax purposes of $26,621,548 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an excess
of value over tax cost $ 2,658,545
Aggregate gross unrealized depreciation for all investments in which there is an excess
of tax cost over value (162,236)
--------------
$ 2,496,309
==============
</TABLE>
The principal amount of each security is stated in the currency in which the
security is denominated.
The accompanying notes are an integral part of the financial statements.
B-34
<PAGE>
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
Assets
Investments, at value (Cost $26,621,548) (Note 1) $ 29,117,857
Foreign currency, at value (Cost $5,894,892) 5,798,618
Cash 357,519
Interest receivable 817,804
Receivable from investment manager (Note 3) 38,332
Foreign tax receivable 10,406
Receivable for fund shares sold 838
Deferred organization costs and other assets (Note 1) 13,483
--------------
36,154,857
Liabilities
Payable for securities purchased 2,484,901
Accrued management fee (Note 2) 21,216
Accrued transfer agent and shareholder services (Note 2) 20,196
Accrued directors' fees (Note 2) 14,297
Accrued distribution and service fees (Note 5) 5,577
Payable for fund shares redeemed 2,298
Other accrued expenses 125,727
--------------
2,674,212
--------------
$33,480,645
==============
Net Assets
Net Assets consist of:
Undistributed net investment income $ 293,705
Unrealized appreciation of investments
and foreign currency 2,401,275
Accumulated net realized gain on investments
and foreign currency 277,438
Shares of beneficial interest 30,508,227
--------------
$ 33,480,645
==============
Net Asset Value and redemption price per share of Class A shares
($2,806,572 / 332,131 shares of beneficial interest) $8.45
==============
Maximum Offering Price per share of Class A shares
($8.45 / .955) $8.85
==============
Net Asset Value and offering price per share of Class B shares
($4,028,022 / 478,504 shares of beneficial interest)* $8.42
==============
Net Asset Value, offering price and redemption price per share
of Class C shares ($24,840,299 / 2,934,746 shares of
beneficial interest) $8.46
==============
Net Asset Value and offering price per share of Class D shares
($1,805,752 / 214,595 shares of beneficial interest)* $8.41
==============
*Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
STATEMENT OF OPERATIONS
For the year ended October 31, 1996
Investment Income
Interest, net of foreign taxes of $17,063 $ 1,644,032
Expenses
Management fee (Note 2) 246,122
Custodian fee 147,686
Transfer agent and shareholder services (Note 2) 104,744
Audit fee 64,035
Registration fees 35,448
Reports to shareholders 24,799
Amortization of organization costs (Note 1) 17,297
Directors' fees (Note 2) 14,297
Legal fees 11,861
Service fee--Class A (Note 5) 6,258
Distribution and service fees--Class B (Note 5) 38,313
Distribution and service fees--Class D (Note 5) 16,462
Miscellaneous 6,438
--------------
733,760
Expenses borne by the investment manager (Note 3) (179,424)
--------------
554,336
--------------
Net investment income 1,089,696
--------------
Realized and Unrealized Gain (Loss) on Investments and
Foreign Currency
Net realized gain on investments (Notes 1 and 4) 290,826
Net realized gain on foreign currency (Note 1) 30,346
--------------
Total net realized gain 321,172
--------------
Net unrealized depreciation of investments (639,506)
Net unrealized depreciation of foreign currency (307,408)
--------------
Total net unrealized depreciation (946,914)
--------------
Net loss on investments and foreign currency (625,742)
--------------
Net increase in net assets resulting from operations $ 463,954
==============
The accompanying notes are an integral part of the financial statements.
B-35
<PAGE>
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
Year ended October 31
--------------------------------
1996 1995
- ------------------------------------------ --------------- ----------------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 1,089,696 $ 1,405,292
Net realized gain on investments and
foreign currency* 321,172 684,995
Net unrealized appreciation (depreciation)
of investments and foreign currency (946,914) 1,568,923
--------------- ----------------
Net increase resulting from operations 463,954 3,659,210
--------------- ----------------
Dividends from net investment income:
Class A (113,884) (88,114)
Class B (143,579) (113,623)
Class C (1,216,944) (1,691,435)
Class D (59,902) (41,936)
--------------- ----------------
(1,534,309) (1,935,108)
--------------- ----------------
Distributions from net realized gains:
Class A (14,778) (5,975)
Class B (20,669) (8,086)
Class C (155,630) (123,136)
Class D (7,956) (2,986)
--------------- ----------------
(199,033) (140,183)
--------------- ----------------
Net increase from fund share transactions
(Note 6) 4,103,576 2,690,071
--------------- ----------------
Total increase in net assets 2,834,188 4,273,990
Net Assets
Beginning of year 30,646,457 26,372,467
--------------- ----------------
End of year (including undistributed net
investment income of $293,705 and
$696,597, respectively) $ 33,480,645 $ 30,646,457
=============== ================
* Net realized gain for Federal income tax
purposes (Note 1) $ 279,451 $ 197,316
=============== ================
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
October 31, 1996
Note 1
State Street Research International Fixed Income Fund (the "Fund"), is a
diversified series of State Street Research Portfolios, Inc. ("Portfolios"),
which was organized as a Maryland corporation in April, 1991 and is registered
under the Investment Company Act of 1940, as amended, as an open-end management
investment company. The Fund commenced operations in January, 1992. Portfolios
consists presently of two separate funds: State Street Research International
Fixed Income Fund and State Street Research International Equity Fund.
The investment objective of the fund is to achieve the highest possible total
return, consisting of income and realized and unrealized capital gains,
consistent with prudent investment risk and preservation of capital, by
investing primarily in high quality debt securities of non-U.S. issuers.
The Fund offers four classes of shares. Class A shares are subject to an initial
sales charge of up to 4.50% and annual service fees of 0.25% of average daily
net assets. Class B shares are subject to a contingent deferred sales charge on
certain redemptions made within five years of purchase and pay annual
distribution and service fees of 1.00%. Class B shares automatically convert
into Class A shares (which pay lower ongoing expenses) at the end of eight years
after the issuance of the Class B shares. Class C shares are only offered to
certain employee benefit plans and large institutions. No sales charge is
imposed at the time of purchase or redemption of Class C shares. Class C shares
do not pay any distribution or service fees. Class D shares are subject to a
contingent deferred sales charge of 1.00% on any shares redeemed within one year
of their purchase. Class D shares also pay annual distribution and service fees
of 1.00%. The Fund's expenses are borne pro-rata by each class, except that each
class bears expenses, and has exclusive voting rights with respect to provisions
of the Plan of Distribution, related specifically to that class. The Directors
declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by the
Fund in preparing its financial statements, and such policies are in conformity
with generally accepted accounting principles for investment companies.
A. Investment Valuation
Securities traded on domestic stock exchanges are valued at the last sale price
as of the close of business on the day the securities are being valued, or,
lacking any sales, at the mean between closing bid and asked prices. Securities
traded on the National Association of Securities Dealers Automated Quotation
("NASDAQ") system are valued at the last reported sales price. Each security
traded primarily on non-domestic securities exchanges is generally valued at the
preceding closing value of such security on the exchange where it is primarily
traded. A security that is listed or traded on more than one exchange is valued
at the quotation on the exchange determined to be the primary market for such
security by the Board of Directors or its delegates. If no closing price is
available, then such security is valued at the mean between the last current bid
and asked prices or by using the last available closing price. Domestic
securities traded in
B-36
<PAGE>
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
the over-the-counter market are valued at the mean between the bid and asked
prices or yield equivalent as obtained from two or more dealers that make
markets in the securities. All non-U.S. securities traded in the
over-the-counter market are valued at the last sale quote or the last closing
bid price, if there is no active trading in a particular security for a given
day. Portfolio securities traded both in the over-the-counter market and on a
securities exchange are valued according to the broadest and most representative
market. Securities for which market quotations are not readily available are
valued as determined in good faith by or under the authority of the Directors.
Short-term securities maturing within sixty days are valued at amortized cost.
Securities quoted in foreign currencies are translated into U.S. dollars at the
current exchange rate.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered. Gains and losses that arise from
changes in exchange rates are not segregated from gains and losses that arise
from changes in market prices of investments.
C. Net Investment Income
Investment income is accrued daily as earned. The Fund is charged for
expenses directly attributable to it, while indirect expenses are allocated
between both funds in the Portfolios.
D. Dividends
Dividends from net investment income are declared and paid or reinvested
quarterly. Net realized capital gains, if any, are distributed annually,
unless additional distributions are required for compliance with applicable
tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing treatments
for foreign currency transactions.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund has
elected to qualify under Subchapter M of the Internal Revenue Code and its
policy is to distribute all of its taxable income, including net realized
capital gains, within the prescribed time periods.
F. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and are being amortized under the straight-line method over a period
of five years.
G. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
Note 2
The Fund and State Street Research Investment Services, Inc., the Fund's
investment manager and principal underwriter (the "Investment Manager" and
"Distributor"), a wholly owned indirect subsidiary of Metropolitan Life
Insurance Company ("Metropolitan"), have entered into an agreement under which
the Investment Manager receives monthly fees at an annual rate of 0.75% of the
Fund's average daily net assets. The Investment Manager has entered into a
Sub-Investment Management Agreement with GFM International Investors Limited
(the "Sub-Investment Manager"), a substantially wholly owned, indirect
subsidiary of Metropolitan, pursuant to which the Sub-Investment Manager has
assumed the overall responsibility for managing the investments of the Fund.
During the year ended October 31, 1996, the Fund paid the Investment Manager
$246,122 in management fees. The Fund has no responsibility for the payment of
fees to the Sub-Investment Manager.
State Street Research Shareholder Services, a division of the Distributor,
provides certain shareholder services to the Fund such as responding to
inquiries and instructions from investors with respect to the purchase and
redemption of shares of the Fund. In addition, Metropolitan receives a fee for
maintenance of the accounts of certain shareholders who are participants in
sponsored arrangements, employee benefit plans and similar programs or plans,
through or under which shares of the Fund may be purchased. During the year
ended October 31, 1996, the amount of such expenses was $21,704.
The fees of the Directors not currently affiliated with the Invest-
ment Manager amounted to $14,297 during the year ended October 31, 1996.
Note 3
The Investment Manager or affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended October 31, 1996, the amount of such assumed
expenses was $179,424.
Note 4
For the year ended October 31, 1996, purchases and sales of securities,
exclusive of short-term obligations, aggregated $18,021,481 and $11,266,940,
respectively.
Note 5
Portfolios has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940, as amended. Under the Plan,
the Fund pays annual service fees to the Distributor at a rate of 0.25% of
average daily net assets for Class A, Class B and Class D shares. In addition,
the Fund pays annual distribution fees of 0.75% of average daily net assets for
Class B and Class D shares. The Distributor uses such payments for personal
services and/or the maintenance or servicing of shareholder accounts, to
reimburse securities dealers for distribution and marketing services, to furnish
ongoing assistance to investors and to defray a portion of its distribution and
marketing expenses. For the year ended October 31, 1996, fees pursuant to such
plan amounted to $6,258, $38,313 and $16,462 for Class A, Class B and Class D,
respectively.
B-37
<PAGE>
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
NOTES (cont'd)
Note 5 (cont'd)
The Fund has been informed that the Distributor and MetLife Securities, Inc., a
wholly owned subsidiary of Metropolitan, earned initial sales charges
aggregating $3,914 and $7,073, respectively, on sales of Class A shares of the
Fund during the year ended October 31, 1996, and that MetLife Securities, Inc.
earned commissions aggregating $11,721 on sales of Class B shares, and that the
Distributor collected contingent deferred sales charges of $8,598 and $867 on
redemptions of Class B and Class D shares, respectively, during the same period.
Note 6
The authorized capital stock of the Fund currently consists of 100,000,000
shares, $.01 par value per share. The Fund reserves the right to issue
additional classes of shares. At October 31, 1996, Metropolitan owned 2,745,384
Class C shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended October 31
------------------------------------------------------------
1996 1995
----------------------------- -----------------------------
Class A Shares Amount Shares Amount
-------------------------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Shares sold 239,978 $ 2,018,281 154,393 $1,349,055
Issued upon reinvestment of:
Distributions from net realized gains 1,644 14,223 737 5,712
Dividends from net investment income 10,609 89,660 5,748 47,607
Shares repurchased (159,405) (1,342,020) (51,420) (442,983)
-------------- -------------- -------------- --------------
Net increase 92,826 $ 780,144 109,458 $ 959,391
============== ============== ============== ==============
Class B Shares Amount Shares Amount
-------------------------------------------------------- -------------- -------------- --------------
Shares sold 332,479 $ 2,810,842 189,985 $1,645,022
Issued upon reinvestment of:
Distributions from net realized gains 2,095 18,040 931 7,205
Dividends from net investment income 11,765 99,331 6,879 57,359
Shares repurchased (192,808) (1,619,138) (46,537) (393,423)
-------------- -------------- -------------- --------------
Net increase 153,531 $ 1,309,075 151,258 $1,316,163
============== ============== ============== ==============
Class C Shares Amount Shares Amount
-------------------------------------------------------- -------------- -------------- --------------
Shares sold 356,166 $ 3,010,729 34,745 $ 311,510
Issued upon reinvestment of:
Distributions from net realized gains 17,927 154,527 15,646 121,415
Dividends from net investment income 11,325 96,005 16,717 137,775
Shares repurchased (232,104) (1,931,942) (88,669) (760,263)
-------------- -------------- -------------- --------------
Net increase (decrease) 153,314 $ 1,329,319 (21,561) $ (189,563)
============== ============== ============== ==============
Class D Shares Amount Shares Amount
-------------------------------------------------------- -------------- -------------- --------------
Shares sold 189,105 $ 1,599,158 73,243 $ 639,413
Issued upon reinvestment of:
Distributions from net realized gains 889 7,646 385 2,985
Dividends from net investment income 4,851 40,579 894 7,531
Shares repurchased (113,909) (962,345) (5,482) (45,849)
-------------- -------------- -------------- --------------
Net increase 80,936 $ 685,038 69,040 $ 604,080
============== ============== ============== ==============
</TABLE>
B-38
<PAGE>
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Class B
------------------------------- -------------------------------
Year ended October 31 Year ended October 31
------------------------------- -------------------------------
1996*** 1995*** 1994** 1996*** 1995*** 1994**
------------------------------------------ --------- --------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 8.80 $ 8.31 $ 7.99 $ 8.77 $ 8.28 $ 7.99
Net investment income* 0.27 0.40 0.30 0.21 0.34 0.27
Net realized and unrealized gain (loss) on
investments and foreign currency (0.16) 0.72 0.27 (0.16) 0.72 0.26
Dividends from net investment income (0.40) (0.59) (0.25) (0.34) (0.53) (0.24)
Distributions from net realized gains (0.06) (0.04) -- (0.06) (0.04) --
--------- --------- --------- --------- -------------------
Net asset value, end of year $ 8.45 $ 8.80 $ 8.31 $ 8.42 $ 8.77 $ 8.28
========= ========= ========= ========= ===================
Total return 1.31%+ 14.26%+ 7.33%+++ 0.61%+ 13.53%+ 6.73%+++
Net assets at end of year (000s) $2,807 $2,106 $1,079 $4,028 $2,851 $1,439
Ratio of operating expenses to average net
assets* 1.75% 1.74% 1.69%++ 2.50% 2.49% 2.43%++
Ratio of net investment income to average
net assets* 3.25% 4.71% 5.79%++ 2.50% 3.94% 5.06%++
Portfolio turnover rate 45.84% 23.31% 38.84% 45.84% 23.31% 38.84%
*Reflects voluntary assumption of fees or
expenses per share in each year (Note 3) $ 0.05 $ 0.06 $ 0.01 $ 0.05 $ 0.06 $ 0.02
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
------------------------------------------------------------ -------------------------------
January 22, 1992
(Commencement of
Year ended October 31 Operations) to Year ended October 31
------------------------------------------ -------------------------------
1996*** 1995*** 1994 1993 October 31, 1992 1996*** 1995*** 1994**
- ------------------ --------- --------- --------- --------- ----------------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 8.81 $ 8.32 $ 8.24 $ 7.85 $ 7.40 $ 8.78 $ 8.29 $ 7.99
Net investment income* 0.30 0.44 0.14 0.41 0.32 0.21 0.34 0.27
Net realized and
unrealized gain (loss)
on investments and
foreign currency (0.17) 0.70 0.46 0.34 0.13 (0.17) 0.72 0.26
Dividends from net
investment income (0.42) (0.61) (0.49) (0.36) -- (0.35) (0.53) (0.23)
Distributions from
net realized gains (0.06) (0.04) (0.03) -- -- (0.06) (0.04) --
--------- --------- --------- --------- ----------------- --------- --------- ----------
Net asset value,
end of year $ 8.46 $ 8.81 $ 8.32 $ 8.24 $ 7.85 $ 8.41 $ 8.78 $ 8.29
========= ========= ========= ========= ================= ========= ========= ==========
Total return 1.54%+ 14.51%+ 7.72%+ 9.98%+ 6.08%+++ 0.39%+ 13.49%+ 6.81%+++
Net assets at end
of year (000s) $24,840 $24,516 $23,319 $24,965 $22,299 $1,806 $1,173 $ 536
Ratio of operating
expenses to average
net assets* 1.50% 1.49% 1.47% 1.50% 1.50%++ 2.50% 2.49% 2.45%++
Ratio of net investment
income to average net
assets* 3.50% 5.14% 5.62% 5.48% 5.63%++ 2.50% 3.94% 4.98%++
Portfolio turnover rate 45.84% 23.31% 38.84% 20.44% 56.31% 45.84% 23.31% 38.84%
*Reflects voluntary
assumption of fees or
expenses per share in
each year (Note 3) $ 0.05 $ 0.06 $ 0.03 $ 0.03 $ 0.04 $ 0.05 $ 0.06 $ 0.01
</TABLE>
** March 1, 1994 (commencement of share class designations) to October 31,
1994.
*** Per-share figures have been calculated using the average shares method.
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Investment Manager and
its affiliates had not voluntarily assumed a portion of the Fund's
expenses.
+++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Investment Manager and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
B-39
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of State Street
Research Portfolios, Inc. and the Shareholders of
State Street Research International Fixed Income Fund
We have audited the accompanying statement of assets and liabilities, including
the investment portfolio, of State Street Research International Fixed Income
Fund (a series of State Street Research Portfolios, Inc.), as of October 31,
1996, and the related statement of operations for the year then ended, the
statement of changes in net assets for the two years then ended and the
financial highlights for each of the years in the five year period ended October
31, 1996. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on the financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1996, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of State Street
Research International Fixed Income Fund (a series of State Street Research
Portfolios, Inc.) at October 31, 1996, the results of its operations, the
changes in its net assets, and its financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
December 16, 1996
B-40
<PAGE>
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
International Fixed Income Fund had a disappointing year. The Fund
underperformed the average total return of the 42 funds in Lipper Analytical
Services' International Income category.
Despite what Fund management perceived as evidence that economic activity in
Europe and Japan had begun to recover in 1996, underlying activity remained
sluggish. Additionally, inflation pressures remained subdued. This was apparent
in the U.S. In the absence of inflationary pressures, central banks allowed
monetary policy to remain easy. Many central banks continued to ease monetary
policy. Against this background, global bond markets rallied.
The Fund underperformed in three key areas. First, Fund management wasn't very
optimistic on the outlook for the U.S. dollar at the beginning of the period, so
the Fund wasn't focused on U.S. dollar or dollar-block (Canada and Australia)
assets and/or currencies. The dollar wound up stronger than expected, which hurt
Fund performance relative to other funds that had more exposure there. Second,
The Fund was underweighted in the bonds of the peripheral European markets
(Italy, Sweden and Spain), which offered strong performance. Third, the Fund was
positioned more defensively than many of its peers, which caused it to miss the
markets' rallies. Fund management took an overall bearish position on the global
bond markets and held as much as 25% of the Fund's exposure in cash.
The Salomon Brothers Non-U.S. Dollar World Bond Index is a commonly used measure
of overseas bond market performance. The index is unmanaged and does not take
sales charges into consideration. Direct investment in the index is not
possible; results are for illustrative purposes only. All returns represent past
performance, which is no guarantee of future results. The investment return and
principal value of an investment made in the Fund will fluctuate, and shares,
when redeemed, may be worth more or less than their original cost. All returns
assume reinvestment of capital gain distributions and income dividends. Shares
of the Fund had no class designations until March 1, 1994, when designations
were assigned based on the pricing and 12b-1 fees applicable to shares sold
thereafter. Performance for a class includes periods prior to the adoption of
class designations. Performance prior to March 1, 1994 does not reflect annual
12b-1 fees of .25% for "A" shares and 1% for "B" and "D" shares, which will
reduce subsequent performance. "C" shares, offered without a sales charge, are
available only to certain employee benefit plans and large institutions.
Performance reflects maximum 4.5% "A" share front-end sales charge or 5% "B"
share or 1% "D" share contingent deferred sales charges, where applicable.
Performance results for the Fund are increased by the investment manager's
voluntary reduction of fees and expenses related to the Fund. The first figure
reflects expense reduction; the second shows what results would have been
without subsidization.
Change In Value Of $10,000
Based On The Salomon Brothers
Non-U.S. Dollar World Bond Index Compared
To Change In Value Of $10,000 Invested In
International Fixed Income Fund
[LINE CHARTS]
Class A Shares
Average Annual Total Return
- -------------------------------
1 Year Life of Fund
- -------------------------------
- -3.25%/-3.70% +7.08%/+6.55%
$17,000
16,000
15,000
14,000
13,000
12,000
11,000
10,000
$16,154 $13,868
1/22/92 10/31/92 10/31/93 10/31/94 10/31/95 10/31/96
1/22/92 9550 10000
10/31/92 10131 10990
10/31/93 11142 12222
10/31/94 11979 13299
10/31/95 13688 15319
10/31/96 13868 16154
Class B Shares
Average Annual Total Return
- -------------------------------
1 Year Life of Fund
- -------------------------------
- -4.19%/-4.67% +7.37%/+6.81%
$17,000
16,000
15,000
14,000
13,000
12,000
11,000
10,000
$16,154 $14,048
1/22/92 10/31/92 10/31/93 10/31/94 10/31/95 10/31/96
1/22/92 10000 10000
10/31/92 10608 10990
10/31/93 11667 12222
10/31/94 12473 13299
10/31/95 14161 15319
10/31/96 14048 16154
Class C Shares
Average Annual Total Return
- -------------------------------
1 Year Life of Fund
- -------------------------------
+1.54%/+1.06% +8.26%/+7.70%
$17,000
16,000
15,000
14,000
13,000
12,000
11,000
10,000
$16,154 $14,613
1/22/92 10/31/92 10/31/93 10/31/94 10/31/95 10/31/96
1/22/92 10000 10000
10/31/92 10608 10990
10/31/93 11667 12222
10/31/94 12567 13299
10/31/95 14391 15319
10/31/96 14613 16154
Class D Shares
Average Annual Total Return
- -------------------------------
1 Year Life of Fund
- -------------------------------
- -0.56%/-1.04% +7.65%/+7.12%
$17,000
16,000
15,000
14,000
13,000
12,000
11,000
10,000
$16,154 $14,223
1/22/92 10/31/92 10/31/93 10/31/94 10/31/95 10/31/96
1/22/92 10000 10000
10/31/92 10608 10990
10/31/93 11667 12222
10/31/94 12483 13299
10/31/95 14167 15319
10/31/96 14223 16154
LEGEND:
Solid Line: International Fixed Income Fund
Dashed Line: Salomon Brothers Non-U.S. Dollar World Bond Index
B-41
<PAGE>
STATE STREET RESEARCH FINANCIAL TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification
The response to this item is incorporated by reference to Part A of the
Joint Proxy Statement/Prospectus in this Registration Statement under the
caption "Comparative Information on Shareholder Rights--Liabilities of
Directors, Trustees and Officers."
Item 16: Exhibits
(1)(a) First Amended and Restated Master Trust Agreement and Amendment No. 1
and Amendment No. 2 to the First Amended and Restated Master Trust
Agreement (15)
(1)(b) Form of Amendment No. 3 to First Amended and Restated Master Trust
Agreement (15)
(2)(a) By-laws of the Registrant (1)
(2)(b) Amendment No. 1 to the By-Laws effective September 30, 1992 (8)
(3) Not applicable
(4) Agreement and Plan of Reorganization and Liquidation (Included as
Exhibit A to the Joint Proxy Statement/Prospectus contained in Part A
of this Registration Statement)
(5) Not applicable
(6)(a) Advisory Agreement with State Street Research Investment Services,
Inc. (2)*
(6)(b) Transfer and Assumption of Responsibilities and Rights relating to
the Advisory Agreement (8)
(7)(a) Distribution Agreement with MetLife - State Street Research
Investment Services, Inc. (2)*
(7)(b) Form of Selected Dealer Agreement (15)
(7)(c) Form of Bank and Bank Affiliated Broker-Dealer Agreement (13)
(8) Not applicable
(9)(a) Custodian Contract with State Street Bank and Trust Company (2)
(9)(b) Amendment to the Custodian Contract with State Street Bank and Trust
Company (5)
(10) Amended and Restated Plan of Distribution Pursuant to Rule 12b-1 (10)
(11) Opinion and Consent of Goodwin, Procter & Hoar LLP with respect to
legality of shares being issued (to be filed by pre-effective
amendment)
(12) Opinion and Consent of Goodwin, Procter & Hoar LLP with respect to
tax matters relating to acquisition of State Street Research
International Fixed Income Fund (to be filed by pre-effective
amendment)
(13) Not applicable
(14) Consent of Independent Accountants (to be filed by pre-effective
amendment)
(15) Not applicable
(16)(a) Powers of Attorney
(16)(b) Certificate of Board Resolution Respecting Powers of Attorney
(17)(a) Form of Proxy Card for State Street Research International Fixed
Income Fund
(17)(b) Registrant's Declaration pursuant to Rule 24f-2 is incorporated by
reference to its Initial Registration Statement of November 21, 1986.
- --------------
* MetLife - State Street Investment Services, Inc. changed its name to
State Street Financial Services, Inc. effective as of June 18, 1992,
and subsequently changed its name to State Street Research Investment
Services, Inc. effective October 28, 1992. Documents in this listing
of Exhibits which were effective prior to the most recent name change
accordingly also refer to MetLife - State Street Investment Services,
Inc. or State Street Financial Services, Inc.
C-1
<PAGE>
** The series of the Registrant have changed their names at various
times. Documents in this listing of Exhibits which were effective
prior to the most recent name change accordingly refer to a former
name of such series.
Filed as part of the Registration Statement as noted below and
incorporated herein by reference:
Footnote Securities Act of 1933
Reference Registration/Amendment Date Filed
1 Initial Registration Statement on Form N-1A November 21, 1986
2 Pre-Effective Amendment No. 1 February 13, 1987
3 Post-Effective Amendment No. 1 August 27, 1987
4 Post-Effective Amendment No. 2 June 3, 1988
5 Post-Effective Amendment No. 3 February 22, 1989
6 Post-Effective Amendment No. 4 February 28, 1990
7 Post-Effective Amendment No. 5 February 26, 1991
8 Post-Effective Amendment No. 7 February 26, 1993
9 Post-Effective Amendment No. 8 April 2, 1993
10 Post-Effective Amendment No. 9 July 8, 1993
11 Post-Effective Amendment No. 10 February 9, 1994
12 Post-Effective Amendment No. 11 February 18, 1994
13 Post-Effective Amendment No. 13 November 30, 1994
14 Post-Effective Amendment No. 14 January 31, 1995
15 Post-Effective Amendment No. 15 December 28, 1995
Item 17. Undertakings
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus which is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
the reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new registration statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
C-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement on Form N-14 to be signed
on its behalf by the undersigned, thereto duly authorized, in the City of Boston
and the Commonwealth of Massachusetts on the 30th day of January, 1997.
STATE STREET RESEARCH FINANCIAL TRUST
*
By: __________________
Ralph F. Verni
Chief Executive Officer and President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on the above date by the following
persons in the capacities indicated:
* Trustee, Chairman of the Board and Chief
________________________ Executive Officer (principal executive officer)
Ralph F. Verni
* Treasurer (principal financial and accounting
________________________ officer)
Gerard P. Maus
*
________________________ Trustee
Edward M. Lamont
*
________________________ Trustee
Robert A. Lawrence
*
________________________ Trustee
Dean O. Morton
*
________________________ Trustee
Thomas L. Phillips
*
________________________ Trustee
Toby Rosenblatt
*
________________________ Trustee
Michael S. Scott Morton
C-3
<PAGE>
*
________________________ Trustee
Jeptha H. Wade
*By: /s/ Francis J. McNamara, III
-----------------------------
Francis J. McNamara, III,
Attorney-in-Fact under Powers of
Attorney dated January 30, 1997
filed herein.
C-4
<PAGE>
Index To Exhibits
(16)(a) Powers of Attorney
(16)(b) Certificate of Board Resolution Respecting Powers of Attorney
(17)(a) Form of Proxy Card for State Street Research International
Fixed Income Fund
C-5
316502.c10
Exh. (16)(a)
POWERS OF ATTORNEY
We, the undersigned State Street Research Financial Trust (the
"Trust"), a Massachusetts business trust, its trustees, its principal executive
officer and its principal financial and accounting officer, hereby severally
constitute and appoint Francis J. McNamara, III and Darman A. Wing, as our true
and lawful attorneys, with full power to each of them alone to sign for us, and
in our names and in the capacities indicated below, any Registration Statement,
including any Registration Statement on Form N-14, and any and all amendments
thereto, of the Trust filed with the Securities and Exchange Commission and
generally do all such things in our names and in the indicated capacities as are
required to enable the Trust to comply with provisions of the Securities Act of
1933, as amended, and/or the Investment Company Act of 1940, as amended, and all
requirements and regulations of the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they have been and may be signed by
our said attorneys to said Registration Statements, and any and all amendments
thereto.
IN WITNESS WHEREOF, we have hereunto set our hands, on this 30th day
of January, 1997.
SIGNATURES
STATE STREET RESEARCH FINANCIAL TRUST
/s/ Ralph F. Verni /s/ Thomas L. Phillips
---------------------------------- ----------------------------------
Ralph F. Verni, Trustee and Thomas L. Phillips, Trustee
principal executive officer
/s/ Gerard P. Maus /s/ Toby Rosenblatt
---------------------------------- ----------------------------------
Gerard P. Maus, Principal financial Toby Rosenblatt, Trustee
and accounting officer
/s/ Edward M. Lamont /s/ Michael S. Scott Morton
---------------------------------- ----------------------------------
Edward M. Lamont, Trustee Michael S. Scott Morton, Trustee
/s/ Robert A. Lawrence /s/ Jeptha H. Wade
---------------------------------- ----------------------------------
Robert A. Lawrence, Trustee Jeptha H. Wade, Trustee
/s/ Dean O. Morton
----------------------------------
Dean O. Morton, Trustee
Exh. (16)(b)
STATE STREET RESEARCH FINANCIAL TRUST
Certificate of Resolution
I, the undersigned Amy L. Simmons, hereby certify that I am Assistant
Secretary of State Street Research Financial Trust (the "Trust"), a
Massachusetts business trust duly authorized and validly existing under
Massachusetts law, and that the following is a true, correct and complete
statement of a vote duly adopted by the Trustees of said Trust on November 6,
1996:
"VOTED: That Francis J. McNamara, III and Darman A. Wing
be, and each hereby is, authorized and empowered,
for and on behalf of the Investment Company, its
principal financial and accounting officer, and in
their name, to execute, and file a Power of Attorney
relating to, the Investment Company's Registration
Statements under the Investment Company Act of 1940
and/or the Securities Act of 1933, including any N-14
Registration Statement, and amendments thereto,
the execution and delivery of such Power of Attorney,
Registration Statements and amendments thereto, to
constitute conclusive proof of such authorization."
I further certify that said vote has not been amended or revoked and
that the same is now in full force and effect.
IN WITNESS WHEREOF, I have hereunto set my hand this 30th day of
January, 1997.
/s/ Amy L. Simmons
------------------------
Assistant Secretary
Exh.(17)(a)
STATE STREET RESEARCH INTERNATIONAL FIXED INCOME FUND
a series of
State Street Research Portfolios, Inc.
PROXY
Special Meeting of Shareholders - ___________________, 1997
The undersigned hereby appoints Ralph F. Verni, Darman A. Wing and
Christopher P. Nicholas, and each of them, as proxies with full power of
substitution to act for and vote on behalf of the undersigned all shares of
State Street Research International Fixed Income Fund (the "International Fixed
Income Fund"), a portfolio series of State Street Research Portfolios, Inc. (the
"Company"), which the undersigned would be entitled to vote if personally
present at the Special Meeting of Shareholders to be held at________________,
_______________, ___________________________,
_____________________________________, at p.m. on ______________________, 1997,
or at any adjournments thereof, on the following item as set forth in the Notice
of Special Meeting of Shareholders and the accompanying Proxy Statement.
If a choice is specified for a proposal, this proxy will be voted as
indicated. IF NO CHOICE IS SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSAL.
In their discretion the proxies are authorized to vote upon such other business
as may properly come before the Meeting. The Board of Trustees recommends a vote
FOR all proposals.
The undersigned acknowledges receipt of the Notice of Special Meeting
of Shareholders and the accompanying Proxy Statement dated _________________,
1997. PLEASE INDICATE ANY CHANGE OF ADDRESS BELOW. This proxy may be revoked at
any time prior to the exercise of the powers conferred thereby.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
- --------------------------------------------------------------------------------
SEE REVERSE SIDE
- --------------------------------------------------------------------------------
<PAGE>
With respect to the International Fixed Income Fund:
1. To approve an Agreement and Plan of Reorganization and Liquidation
providing for the transfer of the assets of the International Fixed
Income Fund (subject to certain of its liabilities) to the State
Street Research Government Income Fund (the "Government Income
Fund") in exchange for Class A, Class B, Class C and Class D shares
of the Government Income Fund, the distribution of such shares to
shareholders of the International Fixed Income Fund and the
subsequent liquidation and dissolution of the International Fixed
Income Fund.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
YES NO
I plan to attend the meeting: [ ] [ ]
IT IS IMPORTANT THAT THIS PROXY BE
SIGNED AND RETURNED IN THE ENCLOSED
ENVELOPE.
NOTE: Please date and sign exactly as name or
names appear hereon and return in the
enclosed envelope, which requires no
postage. When signing as attorney,
executor, trustee, guardian or officer
of a corporation, please give title as such.
Signature: _________________________ Date: _______________
Signature: _________________________ Date: _______________
w:\prosp\ifprxcrd,doc
