[Front Cover]
[Begin Sidebar]
This prospectus has information you should know before you invest. Please read
it carefully and keep it with your investment records.
Although these securities have been registered with the Securities and Exchange
Commission, the SEC has not approved or disapproved them and does not guarantee
the accuracy or adequacy of the information in this prospectus. Anyone who
informs you otherwise is committing a federal crime.
[End Sidebar]
State Street Research IntelliQuant Portfolios:
Small-Cap Value
[STATE STREET RESEARCH LOGO]
[PHOTO OF CUSTOM HOUSE TOWER, BOSTON]
An aggressive stock fund using quantitative investment techniques to search for
undervalued small companies.
Prospectus
November 27, 1998
<PAGE>
Contents 1
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2 The Fund
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2 Goal and Strategies
3 Principal Risks
6 Investor Expenses
8 Investment Management
9 Your Investment
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9 Opening an Account
9 Choosing a Share Class
11 Sales Charges
13 Dealer Compensation
14 Buying and Selling Shares
18 Account Policies
20 Distributions and Taxes
21 Investor Services
22 Other Information
-----------------
22 Other Securities and Risks
Back Cover For Additional Information
<PAGE>
2 The Fund
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[CHESSPIECE GRAPHIC]
Goal and Strategies
Fundamental Goal The fund seeks to provide high total return, consisting
principally of capital appreciation.
Principal Strategies Under normal market conditions, the fund invests primarily
in small company value stocks. These may include common and preferred stocks,
convertible securities and warrants.
The fund generally expects that most investments will be in stocks of companies
no larger than the largest companies in the Russell 2000 Index. The fund may
continue to hold or buy additional stock in a company that has outgrown this
range if the stock remains attractive.
In managing the fund's portfolio, the investment manager uses a disciplined
quantitative investment strategy. This strategy includes a stock selection model
and a portfolio construction process, both of which are computer-based. The
stock selection model uses various types of financial criteria to assess the
relative attractiveness of stocks within a universe of small companies. While
the model relies on both value- and growth-oriented criteria, it places greater
weight on those that identify stocks that appear to be trading below their true
worth. The portfolio manager also applies a formal portfolio construction
process that is designed to manage the overall volatility of the fund.
The fund reserves the right to invest in other securities, such as growth stocks
of larger companies and corporate bonds.
The investment manager may adjust the investment model or the fund's portfolio
holdings as market conditions and economic outlooks change or as the investment
manager develops new quantitative strategies.
For more information about the fund's investments and practices, see page 22.
<PAGE>
3
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[Begin Sidebar]
[MAGNIFYING GLASS EXAMINING DOCUMENT GRAPHIC]
Who May Want To Invest
State Street Research IntelliQuant Portfolios: Small-Cap Value is designed for
investors who seek one or more of the following:
[bullet] an aggressive stock fund for a long-term goal
[bullet] a fund to complement a portfolio of more conservative investments
[bullet] a fund that emphasizes small company value stocks
The fund is not appropriate for investors who:
[bullet] want to avoid high volatility or possible losses
[bullet] are making short-term investments
[bullet] are investing emergency reserve money
[bullet] are seeking regular income
[End Sidebar]
[YIELD SIGN GRAPHIC]
Principal Risks
Because the fund invests primarily in stocks, its major risks are those of stock
investing, including sudden, unpredictable drops in value and the potential for
periods of lackluster performance.
Small company stocks -- even those that may already be low in price -- can be
particularly sensitive to market movements, because they may be thinly traded
and their market prices tend to reflect future expectations. With value
investing, the main risk is that a stock may not achieve its expected value
because the circumstances causing it to be underpriced do not change. During
times of high volatility, the fund may have difficulty finding buyers for
portfolio securities.
Because of these and other risks, the fund may underperform certain other stock
funds (those emphasizing growth stocks or large company stocks, for example)
during periods when small company value stocks are out of favor.
The success of the fund's investment strategy depends largely on the ability of
the fund's portfolio investment model to assess the potential of the stocks the
fund buys and the portfolio manager's skill in developing, using and refining
that model. The investment model, however, cannot take into account all of the
factors that may affect the market or the fund's portfolio.
<PAGE>
4 The Fund continued
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Because the fund may invest in U.S. companies with some international business,
and may also invest in foreign companies, it is subject to the risks associated
with international investing.
The fund's shares will rise and fall in value and there is a risk that you could
lose money by investing in the fund. Also, the fund cannot be certain that it
will achieve its goal. Finally, fund shares are not bank deposits and are not
guaranteed, endorsed or insured by any financial institution, government entity
or the FDIC.
Information on other securities and risks appears on page 22.
A "snapshot" of the fund's investments may be found in the current annual or
semiannual report (see back cover).
<PAGE>
5
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[Begin Sidebar]
[MAGNIFYING GLASS EXAMINING DOCUMENT GRAPHIC]
Quantitative Investing
Quantitative, or "quant," investing involves the use of various tools, such as
mathematics, statistics and computer technology, to aid the investment process.
One component of quantitative investing is the use of historical data to
test a proposed investment strategy. First, a strategy is developed based on a
set of variables which can be identified at the time of investment. The strategy
is then tested against actual market conditions to determine how it would have
performed. Finally, the strategy is refined and re-tested until it achieves the
desired trade-off between risk and return.
The other component of quantitative investing is the application of the
investment strategy to the day-to-day management of a fund. By using such an
approach in a disciplined manner, an investment manager seeks more consistent
and efficient decision-making.
Quantitative investing is not meant to remove human judgment or influence
from the investment process. In fact, human judgment is a critical component in
developing, modifying and applying the quantitative investment strategy.
Quant funds can be actively or passively managed. Unlike index funds, this
fund is actively managed.
[End Sidebar]
<PAGE>
6 Investor Expenses
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<TABLE>
<CAPTION>
Class descriptions begin on page 9
---------------------------------------------------------
Shareholder Fees Class A Class B(1) Class B Class C Class S
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Maximum front-end sales charge (load) 5.75 0.00 0.00 0.00 0.00
-------------------------------------------------------------------------------------------------------
Maximum deferred sales charge (load) 0.00(a) 5.00 5.00 1.00 0.00
-------------------------------------------------------------------------------------------------------
Annual Fund Expenses Class A Class B(1) Class B Class C Class S
- ---------------------------------------------------------------------------------------------------------------------------------
Management fee 0.80 0.80 0.80 0.80 0.80
-------------------------------------------------------------------------------------------------------
Distribution/service (12b-1) fees 0.25 1.00 1.00 1.00 0.00
-------------------------------------------------------------------------------------------------------
Other expenses(b) 0.63 0.63 0.63 0.63 0.63
---- ---- ---- ---- ----
-------------------------------------------------------------------------------------------------------
Total annual fund operating expenses* 1.68 2.43 2.43 2.43 1.43
==== ==== ==== ==== ====
-------------------------------------------------------------------------------------------------------
*Because the fund anticipates that its
expenses will be subsidized, actual total
operating expenses are expected to be: 1.40 2.15 2.15 2.15 1.15
The fund expects the expense subsidy to
continue through the current fiscal year,
although there is no guarantee that it will.
--------------------------------------------------------------------------------------------------------
Example Year Class A Class B(1) Class B Class C Class S
- ---------------------------------------------------------------------------------------------------------------------------------
1 $613 $746/$246 $746/$246 $346/$246 $146
--------------------------------------------------------------------------------------------------------
3 $956 $1,058/$758 $1,058/$758 $758 $452
--------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Except for investments of $1 million or more; see page 10.
(b) Because the fund has been newly organized, the percentage expense levels
shown in the table as other expenses are based on estimates.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
7
[Begin Sidebar] ------
[MAGNIFYING GLASS EXAMINING DOCUMENT GRAPHIC]
Understanding Investor Expenses
The information on the opposite page is designed to give you an idea of what you
should expect to pay in expenses as an investor in the fund:
[bullet] Shareholder Fees are costs that are charged to you directly. These
fees, which are shown as a percentage of the fund's offering price,
are not charged on reinvestments or exchanges.
[bullet] Annual Fund Expenses are deducted from the fund's assets every year,
and are thus paid indirectly by all fund investors. These fees are
shown as a percentage of the fund's average net assets.
[bullet] The Example is designed to allow you to compare the costs of this fund
with those of other funds. It assumes that you invested $10,000 over
the years indicated, reinvested all distributions, earned a
hypothetical 5% annual return and paid the maximum applicable sales
charges. Where two numbers are shown separated by a slash, the first
one assumes you sold all your shares at the end of the period, while
the second assumes you stayed in the fund. Where there is only one
number, the costs would be the same either way.
The figures in the Example assume full annual expenses, and would be
lower if they reflected the subsidy.
Investors should keep in mind that the example is for comparison
purposes only. The fund's actual performance and expenses may be
higher or lower.
[End Sidebar]
<PAGE>
8 The Fund continued
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[THINKER GRAPHIC]
Investment Management
The fund's investment manager is State Street Research & Management Company, One
Financial Center, Boston, Massachusetts 02111. The firm traces its heritage back
to 1924 and the founding of one of America's first mutual funds. Today the firm
has more than $51 billion in assets under management (as of September 30, 1998),
including more than $15 billion in mutual funds.
The investment manager is responsible for the fund's investment and business
activities, and receives the management fee (0.80% of fund assets, annually) as
compensation. The investment manager is a subsidiary of Metropolitan Life
Insurance Company.
E.K. Easton Ragsdale, Jr. has been responsible for the fund's day-to-day
portfolio management since its inception in November 1998. A senior vice
president, he joined the firm in 1995 as director of quantitative research.
Previously, he was a senior vice president and chief quantitative analyst at
Kidder, Peabody & Co., and he has worked as an investment professional since
1982.
<PAGE>
Your Investment 9
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[KEY GRAPHIC]
Opening an Account
If you are opening an account through a financial professional, he or she can
assist you with all phases of your investment.
If you are investing through a large retirement plan or other special program,
follow the instructions in your program materials.
To open an account without the help of a financial professional, please use the
instructions on these pages.
[CHECKLIST GRAPHIC]
Choosing a Share Class
The fund offers five share classes, each with its own sales charge and expense
structure. Class A, Class B(1), Class C and Class S shares are available to all
investors. Class B shares are available only to current Class B shareholders
through dividend reinvestment or through exchanges from existing Class B
accounts of the State Street Research funds.
If you are investing a substantial amount and plan to hold your shares for a
long period, Class A shares may make the most sense for you. If you are
investing a lesser amount, you may want to consider Class B(1) shares (if
investing for at least six years) or Class C shares (if investing for less than
six years). If you are investing through a special program, such as a large
employer-sponsored retirement plan or certain programs available through
brokers, you may be eligible to purchase Class S shares.
Because all future investments in your account will be made in the share class
you designate when opening the account, you should make your decision carefully.
Your financial professional can help you choose the share class that makes the
most sense for you.
<PAGE>
10 Your Investment continued
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Class A -- Front Load
[bullet] Initial sales charge of 5.75% or less
[bullet] Lower sales charges for larger investments; see sales charge schedule
at right
[bullet] Lower annual expenses than Class B(1) or Class C shares because of
lower distribution/ service (12b-1) fee of 0.25%
Class B(1) -- Back Load
[bullet] No initial sales charge
[bullet] Deferred sales charge of 5% or less on shares you sell within six
years
[bullet] Annual distribution/service (12b-1) fee of 1.00%
[bullet] Automatic conversion to Class A shares after eight years, reducing
future annual expenses
Class C -- Level Load
[bullet] No initial sales charge
[bullet] Deferred sales charge of 1%, paid if you sell shares within one year
of purchase
[bullet] Lower deferred sales charge than Class B shares
[bullet] Annual distribution/service (12b-1) fee of 1.00%
[bullet] No conversion to Class A shares after eight years, so annual expenses
do not decrease
Class S -- Special Programs
[bullet] Available only through certain retirement accounts, advisory accounts
of the investment manager and other special programs, including broker
programs with recordkeeping and other services; these programs usually
involve special conditions and separate fees (consult your financial
professional or your program materials)
[bullet] No sales charges of any kind
[bullet] No distribution/service (12b-1) fees; annual expenses are lower than
other share classes
<PAGE>
11
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Sales Charges
Class A -- Front Load
<TABLE>
<CAPTION>
when you invest this % is which equals
this amount deducted this % of
for sales your net
charges investment
- ------------------------------------------------------
<S> <C> <C>
Up to $50,000 5.75 6.10
- ------------------------------------------------------
$50,000 to $100,000 4.50 4.71
- ------------------------------------------------------
$100,000 to $250,000 3.50 3.63
- ------------------------------------------------------
$250,000 to $500,000 2.50 2.56
- ------------------------------------------------------
$500,000 to $1 million 2.00 2.04
- ------------------------------------------------------
$1 million or more see below
</TABLE>
With Class A shares, you pay a sales charge only when you buy shares.
If you are investing $1 million or more (either as a lump sum or through any of
the methods described on the application), you can purchase Class A shares
without any sales charge. However, you may be charged a "contingent deferred
sales charge" (CDSC) of 1% if you sell any shares within one year of purchasing
them. See "Other CDSC Policies" on page 12.
Class A shares are also offered with low or no sales charges through various
wrap-fee programs and other sponsored arrangements (consult your financial
professional or your program materials).
Class B(1) -- Back Load
(currently offered)
<TABLE>
<CAPTION>
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
- -------------------------------------------------------------
<S> <C>
First year 5.00
- ----------------------------------------------
Second year 4.00
- ----------------------------------------------
Third year 3.00
- ----------------------------------------------
Fourth year 3.00
- ----------------------------------------------
Fifth year 2.00
- ----------------------------------------------
Sixth year 1.00
- ----------------------------------------------
Seventh year or eighth None
- ----------------------------------------------
</TABLE>
With Class B(1) shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for six years or less, as described in the table above. See "Other
CDSC Policies" on page 12.
<PAGE>
12 Your Investment continued
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Class B(1) shares automatically convert to Class A shares after eight years;
Class A shares have lower annual expenses.
Class B -- Back Load (previously offered)
Class B shares are available only to current shareholders through dividend
reinvestment or through exchanges from existing Class B accounts of the State
Street Research funds. Other investments made by current Class B shareholders
will be in Class B(1) shares.
With Class B shares, you are charged a "contingent deferred sales charge" (CDSC)
when you sell shares you have held for five years or less. The CDSC is a
percentage of net asset value at the time of purchase (or of sale, if lower)
and is deducted from your proceeds. When you sell shares in the first year after
you bought them, the CDSC is 5.00%; second year 4.00%; third year, 3.00%; fourth
year, 3.00%; fifth year, 2.00%; sixth year or later, none. See "Other CDSC
Policies" on page 12.
Class B shares automatically convert to Class A shares after eight years.
Class C -- Level Load
<TABLE>
<CAPTION>
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
- -------------------------------------------------------------
<S> <C>
First year 1.00
- ----------------------------------------------
Second year or later None
- ----------------------------------------------
</TABLE>
With Class C shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for one year or less, as described in the table above. See "Other
CDSC Policies" at right.
Class C shares currently have the same annual expenses as Class B(1) shares, but
never convert to Class A shares.
Class S -- Special Programs
Class S shares have no sales charges.
Other CDSC Policies
The CDSC will be based on the net asset value of the shares at the time of
purchase (or sale, if lower). Any shares acquired through reinvestment are not
subject to the CDSC. There is no CDSC on exchanges into other State Street
Research funds, and the date of your initial investment will continue to be used
as the basis for CDSC calculations when you exchange. To ensure that you pay the
lowest CDSC possible, the fund will always use the shares with the lowest CDSC
to fill your sell requests.
The CDSC is waived on shares sold for participant initiated distributions from
State Street Research prototype employee retirement plans. In other cases, the
CDSC is waived on shares sold for mandatory retirement distributions or for
distributions because of disability or death. Consult your financial
professional or the State Street Research Service Center.
<PAGE>
13
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[Begin sidebar]
[MAGNIFYING GLASS EXAMINING DOCUMENT GRAPHIC]
Understanding Distribution/Service Fees
As noted in the descriptions on page 10, all share classes except Class S have
an annual distribution/service fee, also called a 12b-1 fee.
Under its current 12b-1 plan, the fund may pay certain distribution and service
fees for these classes out of fund assets. Because 12b-1 fees are an ongoing
expense, they will increase the cost of your investment and, over time, could
potentially cost you more than if you had paid other types of sales charges. For
that reason, you should consider the effects of 12b-1 fees as well as sales
loads when choosing a share class.
Some of the 12b-1 fee is used to compensate those financial professionals who
sell fund shares and provide ongoing service to shareholders. The table on page
13 shows how these professionals' compensation is calculated.
The fund may continue to pay 12b-1 fees even if the fund is subsequently closed
to new accounts.
[end sidebar]
[CHECK (MONEY) GRAPHIC]
Dealer Compensation
Financial professionals who sell shares of State Street Research funds and
perform services for fund investors may receive sales commissions and annual
fees. These are paid by the fund's distributor, using money from sales charges,
distribution/service (12b-1) fees and its other resources.
Dealers may impose a transaction fee on the purchase or sale of shares by
shareholders. The distributor may pay its affiliate MetLife Securities, Inc.
additional compensation of up to 0.25% of certain sales or assets.
Brokers for Portfolio Trades
When placing trades for the fund's portfolio, State Street Research chooses
brokers that provide the best execution (a term defined by service as well as
price), but may also consider a broker's sales of fund shares.
<TABLE>
<CAPTION>
Maximum Dealer Compensation (%) Class A Class B(1) Class B Class C Class S
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commission See below 4.00 4.00 1.00 0.00
- -----------------------------------------------------------------------------------------------
Investments up to $50,000 5.00 -- -- -- --
- -----------------------------------------------------------------------------------------------
$50,000 to $100,000 4.00 -- -- -- --
- -----------------------------------------------------------------------------------------------
$100,000 to $250,000 3.00 -- -- -- --
- -----------------------------------------------------------------------------------------------
$250,000 to $500,000 2.00 -- -- -- --
- -----------------------------------------------------------------------------------------------
$500,000 to $1 million 1.75 -- -- -- --
- -----------------------------------------------------------------------------------------------
First $1 to 3 million 1.00(a) -- -- -- --
- -----------------------------------------------------------------------------------------------
Next $2 million 0.75(a) -- -- -- --
- -----------------------------------------------------------------------------------------------
Next $2 million 0.50(a) -- -- -- --
- -----------------------------------------------------------------------------------------------
Next $1 and above 0.25(a) -- -- -- --
- -----------------------------------------------------------------------------------------------
Annual fee 0.25 0.25 0.25 1.00 0.00
</TABLE>
- -----------------------------------------------------------------------------
(a) If your financial professional declines this commission, the one-year CDSC
on your investment is waived.
- -----------------------------------------------------------------------------
<PAGE>
14 Buying and Selling Shares
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[CASH REGISTER GRAPHIC]
Policies for Buying Shares
Once you have chosen a share class, the next step is to determine the amount you
want to invest.
Minimum Initial Investments:
[bullet] $1,000 for accounts that use the Investamatic program
[bullet] $2,000 for Individual Retirement Accounts
[bullet] $2,500 for all other accounts
Minimum Additional Investments:
[bullet] $50 for any account
Complete the enclosed application. You can avoid future inconvenience by signing
up now for any services you might later use.
Timing of Requests All requests received in good order by State Street Research
before the close of regular trading on the New York Stock Exchange (usually 4:00
p.m. eastern time) will be executed the same day, at that day's closing share
price. Orders received thereafter will be executed the following day, at that
day's closing share price.
Wire Transactions Funds may be wired between 8:00 a.m. and 4:00 p.m. eastern
time. To make a same-day wire investment, please notify State Street Research by
12:00 noon of your intention to wire funds, and make sure your wire arrives by
4:00 p.m. If the New York Stock Exchange closes before 4:00 p.m. eastern time,
you may be unable to make a same-day wire investment. Your bank may charge a fee
for wiring money.
<PAGE>
Instructions for Buying Shares 15
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<TABLE>
<CAPTION>
To Open an Account To Add to an Account
<S> <C> <C>
[BRIEFCASE GRAPHIC]
Through a Consult your financial professional or your Consult your financial professional or your
Professional program materials. program materials.
or Program
- -----------------------------------------------------------------------------------------------------------------------------------
By Mail Make your check payable to "State Street Research Fill out an investment slip from an account
[MAILBOX GRAPHIC] Funds." Forward the check and your application to statement, or indicate the fund name and account
State Street Research. number on your check. Make your check payable to
"State Street Research Funds." Forward the check
and slip to State Street Research.
- -----------------------------------------------------------------------------------------------------------------------------------
[CAPITOL GRAPHIC]
By Federal Call to obtain an account number and forward your Call State Street Research to obtain a control
Funds Wire application to State Street Research. Wire funds number. Instruct your bank to wire funds to:
using the instructions at right. * State Street Bank and Trust Company, Boston, MA
* ABA: 011000028
* BNF: fund name and share class you want to buy
* AC: 99029761
* OBI: your name and your account number
* Control: the number given to you by State Street
Research
- -----------------------------------------------------------------------------------------------------------------------------------
By Electronic Verify that your bank is a member of the ACH Call State Street Research to verify that the
Funds Transfer (Automated Clearing House) system. Forward your necessary bank information is on file for your
(ACH) application to State Street Research. Please be account. If it is, you may request a transfer with
[ELECTRIC PLUG GRAPHIC] sure to include the appropriate bank information. the same phone call. If not, please ask State Street
Call State Street Research to request a purchase. Research to provide you with an EZ Trader
application.
- -----------------------------------------------------------------------------------------------------------------------------------
[CALENDAR WITH Forward your application, with all appropriate Call State Street Research to verify that
DATE CIRCLED GRAPHIC] sections completed, to State Street Research, along Investamatic is in place on your account, or to
By Investamatic with a check for your initial investment payable to request a form to add it. Investments are automatic
"State Street Research Funds." once Investamatic is in place.
- -----------------------------------------------------------------------------------------------------------------------------------
By Exchange Call State Street Research or visit our Web site. Call State Street Research or visit our Web site.
[ARROWS POINTING IN
OPPOSITE DIRECTIONS
GRAPHIC]
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m.,
eastern time)
Internet www.ssrfunds.com
<PAGE>
16 Your Investment continued
- --------------------------------------------------------------------------------
[ADDING MACHINE GRAPHIC]
Policies for Selling Shares
Circumstances that Require Written Requests Please submit instructions in
writing when any of the following apply:
[bullet] you are selling more than $100,000 worth of shares
[bullet] the name or address on the account has changed within the last 30 days
[bullet] you want the proceeds to go to a name or address not on the account
registration
[bullet] you are transferring shares to an account with a different
registration or share class
[bullet] you are selling shares held in a corporate or fiduciary account; for
these accounts, additional documents are required:
corporate accounts: certified copy of a corporate resolution
fiduciary accounts: copy of power of attorney or other governing
document
To protect your account against fraud, all signatures on these documents must be
guaranteed. You may obtain a signature guarantee at most banks and securities
dealers. A notary public cannot provide a signature guarantee.
Incomplete Sell Requests State Street Research will attempt to notify you
promptly if any information necessary to process your request is missing.
Timing of Requests All requests received in good order by State Street Research
before the close of regular trading on the New York Stock Exchange (usually 4:00
p.m. eastern time) will be executed the same day, at that day's closing share
price. Requests received thereafter will be executed the following day, at that
day's closing share price.
Wire Transactions Proceeds sent by federal funds wire must total at least
$5,000. A fee of $7.50 will be deducted from all proceeds sent by wire, and your
bank may charge an additional fee to receive wired funds.
Selling Recently Purchased Shares If you sell shares before the check or
electronic funds transfer (ACH) for those shares has been collected, you will
not receive the proceeds until your initial payment has cleared. This may take
up to 15 days after your purchase was recorded (in rare cases, longer). If you
open an account with shares purchased by wire, you cannot sell those shares
until your application has been processed.
<PAGE>
Instructions for Selling Shares 17
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
[BRIEFCASE GRAPHIC] Through a Consult your financial professional or your program materials.
Professional
or Program
- ----------------------------------------------------------------------------------------------------
By Mail [MAILBOX GRAPHIC] Send a letter of instruction, an endorsed stock power or share
certificates (if you hold certificate shares) to State Street
Research. Specify the fund, the account number and the dollar
value or number of shares. Be sure to include all necessary
signatures and any additional documents, as well as signature
guarantees if required (see facing page).
- ----------------------------------------------------------------------------------------------------
[CAPITOL By Federal Check with State Street Research to make sure that a wire
GRAPHIC] Funds Wire redemption privilege, including a bank designation, is in place
on your account. Once this is established, you may place your
request to sell shares with State Street Research. Proceeds will
be wired to your pre-designated bank account. (See "Wire
Transactions" on facing page.)
- ----------------------------------------------------------------------------------------------------
By Electronic [ELECTRIC PLUG Check with State Street Research to make sure that the EZ Trader
Funds Transfer GRAPHIC] feature, including a bank designation, is in place on your
(ACH) account. Once this is established, you may place your request to
sell shares with State Street Research. Proceeds will be sent to
your pre-designated bank account.
- ----------------------------------------------------------------------------------------------------
[TELEPHONE GRAPHIC] By Telephone As long as the transaction does not require a written request
(see facing page), you or your financial professional can sell
shares by calling State Street Research. A check will be mailed
to your address of record on the following business day.
- ----------------------------------------------------------------------------------------------------
By Exchange [ARROWS POINTING IN Read the prospectus for the fund into which you are exchanging.
OPPOSITE DIRECTIONS Call State Street Research or visit our Web site.
GRAPHIC]
- ----------------------------------------------------------------------------------------------------
[CALENDAR WITH DATE CIRCLED By Systematic See plan information on page 21.
GRAPHIC] Withdrawal Plan
---------------------------------------------------------------------------------------------------
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408 Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m., eastern time)
</TABLE>
<PAGE>
18 Your Investment continued
- --------------------------------------------------------------------------------
[STACK OF Account Policies
PAPERS
GRAPHIC] Telephone Requests When you open an account you automatically
receive telephone privileges, allowing you to place requests for
your account by telephone. Your financial professional can also use these
privileges to request exchanges on your account and, with your written
permission, redemptions. For your protection, all telephone calls are recorded.
As long as State Street Research takes certain measures to authenticate
telephone requests on your account, you may be held responsible for unauthorized
requests. Unauthorized telephone requests are rare, but if you want to protect
yourself completely, you can decline the telephone privilege on your
application. The fund may suspend or eliminate the telephone privilege at any
time.
Exchange Privileges There is no fee to exchange shares among State Street
Research funds. Your new fund shares will be the equivalent class of your
current shares. Any contingent deferred sales charges will continue to be
calculated from the date of your initial investment.
You must hold Class A shares of any fund for at least 30 days before you can
exchange them for Class A shares of a different fund with a higher applicable
sales charge.
Frequent exchanges can interfere with fund management and drive up costs for all
shareholders. Because of this, the fund currently limits each account, or group
of accounts under common ownership or control, to six exchanges per calendar
year. The fund may change or eliminate the exchange privilege at any time, may
limit or cancel any shareholder's exchange privilege and may refuse to accept
any exchange request, particularly those associated with "market timing"
strategies.
For Merrill Lynch customers, exchange privileges extend to Summit Cash Reserves
Fund, which is related to the fund for purposes of investment and investor
services.
Accounts with Low Balances If the value of your account falls below $1,500,
State Street Research may mail you a notice asking you to bring the account back
up to $1,500 or close it out. If you do not take action within 60 days, State
Street Research may either sell your shares and mail the proceeds to you at the
address of record or, depending on the circumstances, may deduct an annual
maintenance fee (currently $18).
<PAGE>
19
------
The Fund's Business Hours The fund is open the same days as the New York Stock
Exchange (generally Monday through Friday). Fund representatives are available
from 8:00 a.m. to 6:00 p.m. eastern time on these days.
Calculating Share Price The fund calculates its share price every business day
at the close of regular trading on the New York Stock Exchange (usually at 4:00
p.m. eastern time). The share price is the fund's total assets minus its
liabilities (net asset value, or NAV) divided by the number of existing shares.
In calculating its NAV, the fund uses the last reported sale price or quotation
for portfolio securities. However, in cases where these are unavailable, or when
the investment manager believes that subsequent events have rendered them
unreliable, the fund may use fair-value estimates instead.
Because foreign securities markets are sometimes open on different days from
U.S. markets, there may be instances when the value of the fund's portfolio
changes on days when you cannot buy or sell fund shares.
Reinstating Recently Sold Shares
For 120 days after you sell shares, you have the right to "reinstate" your
investment by putting some or all of the proceeds into any currently available
State Street Research fund at net asset value. Any CDSC you paid on the amount
you are reinstating will be credited to your account. You may only use this
privilege once in any twelve-month period with respect to your shares of a given
fund.
Additional Policies Please note that the fund maintains additional policies and
reserves certain rights, including:
[bullet] The fund may vary its requirements for initial or additional
investments, exchanges, reinvestments, periodic investment plans,
retirement and employee benefit plans, sponsored arrangements and other
similar programs
[bullet] All orders to purchase shares are subject to acceptance by the fund
[bullet] At any time, the fund may change or discontinue its sales charge
waivers and any of its order acceptance practices, and may suspend the
sale of its shares
[bullet] To permit investors to obtain the current price, dealers are
responsible for transmitting all orders to the State Street Research
Service Center promptly
<PAGE>
20 Your Investment continued
- --------------------------------------------------------------------------------
[Begin sidebar]
[MAGNIFYING GLASS Tax Considerations
EXAMINING DOCUMENT
GRAPHIC]
Unless your investment is in a tax-deferred account, you may want to avoid:
[bullet] investing a large amount in the fund close to the end of its fiscal
year or a calendar year (if the fund makes a distribution, you will
receive some of your investment back as a taxable distribution)
[bullet] selling shares at a loss for tax purposes and investing in a
substantially identical investment within 30 days before or after that
sale (such a transaction is usually considered a "wash sale," and you
will not be allowed to claim a tax loss in the current year)
[end sidebar]
[UNCLE SAM Distributions and Taxes
GRAPHIC]
Income and Capital Gains Distributions The fund typically distributes any net
income and net capital gains around the end of its fiscal year, which is
February 28. To comply with tax regulations, the fund also may pay an additional
capital gains tax distribution in December.
You may have your distributions reinvested in the fund, invested in a different
State Street Research fund, deposited in a bank account or mailed out by check.
If you do not give State Street Research other instructions, your distributions
will automatically be reinvested in the fund.
Tax Effects of Distributions and Transactions In general, any dividends and
short-term capital gain distributions you receive from the fund are taxable as
ordinary income. Distributions of other capital gains are generally taxable as
capital gains -- in most cases, at different rates from those that apply to
ordinary income.
The tax you pay on a given capital gains distribution generally depends on how
long the fund has held the portfolio securities it sold. It does not depend on
how long you have owned your fund shares or whether you reinvest your
distributions.
<PAGE>
21
------
The sale of shares in your account may produce a gain or loss, and is a taxable
event. For tax purposes, an exchange is the same as a sale.
Your investment in the fund could have additional tax consequences. Please
consult your tax professional for assistance.
Backup Withholding By law, the fund must withhold 31% of your distributions and
proceeds if you have not provided complete, correct taxpayer information.
[HANDSHAKE Investor Services
GREETING
GRAPHIC] Investamatic Program Use Investamatic to set up regular automatic
investments in the fund from your bank account. You determine the
frequency and amount of your investments.
Systematic Withdrawal Plan This plan is designed for retirees and other
investors who want regular withdrawals from a fund account. The plan is free and
allows you to withdraw up to 8% of your fund assets a year without incurring any
contingent deferred sales charges. Certain terms and minimums apply.
EZ Trader This service allows you to purchase or sell fund shares over the
telephone through the ACH (Automated Clearing House) system.
Dividend Allocation Plan This plan automatically invests your distributions
from the fund into another fund of your choice, without any fees or sales
charges.
Automatic Bank Connection This plan lets you route any distributions or
Systematic Withdrawal Plan payments directly to your bank account.
Retirement Plans State Street Research offers a full range of prototype
retirement plans for individuals, sole proprietors, partnerships, corporations
and employees.
Call 1-800-562-0032 for information on any of the services described above.
<PAGE>
22 Other Information
- --------------------------------------------------------------------------------
[STOCK Other Securities
CERTIFICATE and Risks
GRAPHIC]
Each of the fund's portfolio securities and investment practices offers certain
opportunities and carries various risks. Major investments and risk factors are
outlined in the fund description starting on page 2. Below are brief
descriptions of other securities and practices, along with their associated
risks.
Restricted and Illiquid Securities Any securities that are thinly traded or
whose resale is restricted can be difficult to sell at a desired time and price.
Some of these securities are new and complex, and trade only among institutions;
the markets for these securities are still developing, and may not function as
efficiently as established markets. Owning a large percentage of restricted or
illiquid securities could hamper the fund's ability to raise cash to meet
redemptions. Also, because there may not be an established market price for
these securities, the fund may have to estimate their value, which means that
their valuation (and, to a much smaller extent, the valuation of the fund) may
have a subjective element.
International Exposure Many U.S. companies in which the fund may invest
generate significant revenues and earnings from abroad. As a result, these
companies and the prices of their securities may be affected by weaknesses in
global and regional economies and the relative value of foreign currencies to
the U.S. dollar. These factors, taken as a whole, could adversely affect the
price of fund shares.
Foreign Investments Foreign securities are generally more volatile than their
domestic counterparts, in part because of higher political and economic risks,
lack of reliable information and fluctuations in currency exchange rates.
These risks are usually higher in less developed countries. The fund may use
foreign currencies and related instruments to hedge its foreign investments.
In addition, foreign securities may be more difficult to resell and the markets
for them less efficient than for comparable U.S. securities. Even where a
foreign security increases in price in its local currency, the appreciation may
be diluted by the negative effect of exchange rates when the security's value is
converted to U.S. dollars. Foreign withholding taxes also may apply and errors
and delays may occur in the settlement process for foreign securities.
Derivatives Derivatives, a category that includes options and futures, are
financial instruments whose value derives from one or more securities, indices
or currencies. The fund may use certain derivatives for hedging (attempting to
offset a potential loss in one position by establishing an interest in an
opposite position). This includes the use of currency-based derivatives for
hedging its positions in foreign securities. The fund may also use certain
derivatives for speculation (investing for potential income or capital gain).
<PAGE>
23
------
While hedging can guard against potential risks, it adds to the fund's expenses
and can eliminate some opportunities for gains. There is also a risk that a
derivative intended as a hedge may not perform as expected.
The main risk with derivatives is that some types can amplify a gain or loss,
potentially earning or losing substantially more money than the actual cost of
the derivative.
With some derivatives, whether used for hedging or speculation, there is also
the risk that the counterparty may fail to honor its contract terms, causing a
loss for the fund.
Securities Lending The fund may seek additional income or fees by lending
portfolio securities to qualified institutions. By reinvesting any cash
collateral it receives in these transactions, the fund could realize additional
gains or losses. If the borrower fails to return the securities and the invested
collateral has declined in value, the fund could lose money.
When-issued Securities The fund may invest in securities prior to their date of
issue. These securities could fall in value by the time they are actually
issued, which may be any time from a few days to over a year.
Short-Term Trading While the fund ordinarily does not trade securities for
short-term profits, it will sell any security at any time it believes best,
which may result in short-term trading. Short-term trading can increase the
fund's brokerage costs and may increase your tax liability if there are capital
gains.
Bonds The value of any bonds held by the fund is likely to decline when
interest rates rise; this risk is greater for bonds with longer maturities. A
less significant risk is that a bond issuer could default on principal or
interest payments, causing a loss for the fund.
Defensive Investing During unusual market conditions, the fund may place up to
100% of total assets in cash or high-quality, short-term debt securities. To the
extent that the fund does this, it is not pursuing its goal.
Year 2000 The investment manager does not currently anticipate that computer
problems related to the year 2000 will have a material effect on the fund.
However, there can be no assurances is this area, including the possibility that
year 2000 computer problems could negatively affect communications systems,
investment markets or the economy in general.
<PAGE>
24 Notes
- --------------------------------------------------------------------------------
<PAGE>
Notes 25
- --------------------------------------------------------------------------------
<PAGE>
For Additional Information
- --------------------------------------------------------------------------------
[Begin sidebar]
If you have questions about the fund or would like to request a free copy of the
current annual/semiannual report or SAI, contact State Street Research or your
financial professional.
[logo: State Street Research] STATE STREET RESEARCH
Service Center
P.O. Box 8408, Boston, MA 02266
Telephone: 1-800-562-0032
Internet: www.ssrfunds.com
You can also obtain information about the fund, including the SAI and certain
other fund documents, on the Internet at www.sec.gov, in person at the SEC's
Public Reference Room in Washington, DC (telephone 1-800-SEC-0330) or by mail by
sending your request, along with a duplicating fee, to the SEC's Public
Reference Section, Washington, DC 20549-6009.
prospectus
- --------------------------------------------------------------------------------
SEC File Number: 811-4911
[end sidebar]
You can find additional information on the fund's structure and its performance
in the following documents:
Annual/Semiannual Reports While the prospectus describes the fund's potential
investments, these reports detail the fund's actual investments as of the
report date. Reports include a discussion by fund management of recent economic
and market trends and fund performance. The annual report also includes the
report of the fund's independent accountants.
Statement of Additional Information (SAI) A supplement to the prospectus, the
SAI contains further information about the fund and its investment limitations
and policies. A current SAI for this fund is on file with the Securities and
Exchange Commission and is incorporated by reference (is legally part of this
prospectus).
Ticker Symbols
- ----------------------------
Class A (proposed) SIVAX
- ----------------------------
Class B(1) (proposed) SIVPX
- ----------------------------
Class B (proposed) SIVBX
- ----------------------------
Class C (proposed) SIVCX
- ----------------------------
Class S (proposed) SIVSX
- ----------------------------
Control Number:
<PAGE>
State Street Research IntelliQuant Portfolios: Small-Cap Value
a series of
State Street Research Financial Trust
STATEMENT OF ADDITIONAL INFORMATION
November 27, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVE.........................................................2
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS..............................2
ADDITIONAL INFORMATION CONCERNING
CERTAIN RISKS AND INVESTMENT TECHNIQUES.............................4
DEBT INSTRUMENTS AND
PERMITTED CASH INVESTMENTS.........................................16
THE TRUST, THE FUND AND ITS SHARES..........................................20
TRUSTEES AND OFFICERS.......................................................22
MANAGEMENT OF THE FUND AND INVESTMENT ADVISORY SERVICES.....................26
PURCHASE AND REDEMPTION OF SHARES...........................................27
SHAREHOLDER ACCOUNTS........................................................32
NET ASSET VALUE.............................................................37
PORTFOLIO TRANSACTIONS......................................................38
CERTAIN TAX MATTERS.........................................................41
DISTRIBUTION OF SHARES OF THE FUND..........................................45
CALCULATION OF PERFORMANCE DATA.............................................49
CUSTODIAN...................................................................50
INDEPENDENT ACCOUNTANTS.....................................................50
FINANCIAL STATEMENTS........................................................50
</TABLE>
The following Statement of Additional Information is not a Prospectus.
It should be read in conjunction with the Prospectus of State Street Research
IntelliQuant Portfolios: Small-Cap Value (the "Fund") dated November 27, 1998,
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.
CONTROL NUMBER:
<PAGE>
INVESTMENT OBJECTIVE
As set forth under "The Fund--Goal and Strategies--Fundamental Goal" in
the Prospectus of State Street Research IntelliQuant Portfolios: Small-Cap Value
(the "Fund"), the Fund's investment goal, which is to provide high total return,
consisting principally of capital appreciation, is fundamental and 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.)
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under "The Fund--Principal Risks" and "Other
Information--Other Securities and Risks" in the Fund's Prospectus, the Fund has
adopted certain investment restrictions, and those investment restrictions are
either fundamental or not fundamental. 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. Restrictions that are not fundamental
may be changed by a vote of a majority of the Trustees of the Trust.
The fundamental and nonfundamental policies of the Fund do not apply to any
matters involving the issuance of multiple classes of shares of the Fund or the
creation or use of structures (e.g. fund of funds, master-feeder structure)
allowing the Fund to invest any or all of its assets in collective investment
vehicles or allowing the Fund to serve as such a collective investment vehicle
for other funds, to the extent permitted by law and regulatory authorities.
The Fund's fundamental investment restrictions are set forth below.
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 or sponsored
enterprises) 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, as defined in the 1940 Act,
except as permitted by that Act and the rules thereunder
or as permitted by the Securities and Exchange Commission (the
creation of general liens or security interests under industry
practices for transactions in portfolio assets are not deemed
to involve the issuance of senior securities);
(3) not to underwrite or participate in the marketing of
securities of other issuers, except (a) the Fund may, acting
alone or in syndicates or groups, purchase or otherwise
acquire securities of other issuers for investment, either
from the
2
<PAGE>
issuers or from persons in a control relationship with the
issuers or from underwriters of such securities, and (b) to
the extent that, in connection with the disposition of the
Fund's securities, the Fund may be a selling shareholder in an
offering or deemed to be an underwriter under certain federal
securities laws;
(4) not to purchase fee simple interest in real estate unless
acquired as a result of ownership of securities or other
instruments, although the Fund may purchase and sell other
interests in real estate including securities which are
secured by real estate, or securities of companies which make
real estate loans or own, or invest or deal 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, delayed delivery and when-issued contracts, futures
contracts and options on futures contracts on securities,
securities indices, interest rates and currencies shall not be
deemed investments in commodities or commodities contracts;
(6) not to lend money directly to natural persons; however, the
Fund may lend portfolio securities and purchase bonds,
debentures, notes, bills and any other debt related
instruments or interests directly from the issuer thereof or
in the open market and may enter into repurchase transactions
collateralized by obligations of the U.S. Government or its
agencies and instrumentalities or other high quality
securities;
(7) 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,
except securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities or mixed-ownership
Government corporations or sponsored enterprises, as described
in the Fund's Prospectus or Statement of Additional
Information as amended from time to time; and
(8) not to borrow money, including reverse repurchase agreements
in so far as such agreements may be regarded as borrowings,
except for borrowings not in an amount in excess of 33 1/3% of
the value of its total assets.
The following investment restrictions may be changed without
shareholder approval. 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
3
<PAGE>
(including repurchase agreements not entitling the holder to
payment of principal and interest within seven days);
(2) not to engage in transactions in options except in connection
with options on securities, securities indices, currencies and
interest rates, and options on futures on securities,
securities indices, currencies and interest rates;
(3) not to purchase securities on margin or make short sales of
securities or maintain a short position except for short sales
"against the box" (for the purpose of this restriction, escrow
or custodian receipts or letters, margin or safekeeping
accounts or similar arrangements used in the industry in
connection with the trading of futures, options and forward
commitments are not deemed to involve the use of margin); and
(4) not to purchase a security issued by another investment
company, except to the extent permitted under the 1940 Act or
except by purchases in the open market involving only
customary brokers' commissions, or securities acquired as
dividends or distributions or in connection with a merger,
consolidation or similar transaction or other exchange.
ADDITIONAL INFORMATION CONCERNING
CERTAIN RISKS AND INVESTMENT TECHNIQUES
Derivatives
The Fund may buy and sell certain types of derivatives, such as
options, futures contracts, options on futures contracts, and swaps under
circumstances in which such instruments are expected by State Street Research &
Management Company, the Fund's Investment Manager (the "Investment Manager"), to
aid in achieving the Fund's investment objective. The Fund 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 futures and securities investments.
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Fund to take both "short" positions (positions
which anticipate a decline in the market value of a particular asset or index)
and "long" positions (positions which anticipate an increase in the market value
of a particular asset or index). The Fund may also use strategies which involve
simultaneous short and long positions in response to specific market conditions,
such as where the Investment Manager anticipates unusually high or low market
volatility.
The Investment Manager may enter into derivative positions for the Fund
for either hedging or non-hedging purposes. The term hedging is applied to
defensive strategies
4
<PAGE>
designed to protect the Fund from an expected decline in the market value of an
asset or group of assets that the Fund owns (in the case of a short hedge) or to
protect the Fund from an expected rise in the market value of an asset or group
of assets which it intends to acquire in the future (in the case of a long or
"anticipatory" hedge). Non-hedging strategies include strategies designed to
produce incremental income (such as the option writing strategy described below)
or "speculative" strategies which are undertaken to profit (i) from an expected
decline in the market value of an asset or group of assets which the Fund does
not own or (ii) expected increases in the market value of an asset which it does
not plan to acquire. Information about specific types of instruments is provided
below.
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell an
underlying asset or group of assets, such as a currency 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 futures commission merchant effecting the futures transaction
an amount of "initial margin" in cash or securities, as permitted under
applicable regulatory policies.
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.
5
<PAGE>
In transactions establishing a long position in a futures contract,
assets 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, assets 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 utilize such
assets and methods of cover as appropriate under applicable exchange and
regulatory policies.
Options
The Fund may use options to implement its investment strategy. There
are two basic types of options: "puts" and "calls." Each type of option can
establish either a long or a short position, depending upon whether the Fund is
the purchaser or the writer of the option. 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, that is, 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. In general, a purchased put increases in value
as the value of the underlying security falls and a purchased call increases in
value as the value of the underlying security rises.
The principal reason to write options is to generate extra income (the
premium paid by the buyer). 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. This risk is tempered when the call option is covered,
that is, 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, that is, 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
its 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.
Among the options which the Fund may enter are options on securities
indices. In general, options on indices of securities are similar to options on
the securities themselves except that delivery requirements are different. For
example, a put option on an index of securities does not give the holder the
right to make actual delivery of a basket of securities but instead gives the
holder the right to receive an amount of cash upon exercise of the option if
6
<PAGE>
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 in 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. In
connection with the use of such options, the Fund may cover its position by
identifying assets having a value equal to the aggregate face value of the
option position taken.
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.
Limitations and Risks of Options and Futures Activity
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 non-hedging
purposes would exceed 5% of the market value of the Fund's net assets. The Fund
applies to a similar policy to options that are not commodities.
As noted above, the Fund may engage in both hedging and non-hedging
strategies. 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.
Non-hedging strategies typically involve special risks. The
profitability of the Fund's non-hedging strategies will depend on the ability of
the Investment Manager to analyze both the applicable derivatives market and the
market for the underlying asset or group of assets. Derivatives markets are
often more volatile than corresponding securities markets and a relatively small
change in the price of the underlying asset or group of assets can have a
magnified effect upon the price of a related derivative instrument.
Derivatives markets also are often less liquid than the market for the
underlying asset or group of assets. 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.
7
<PAGE>
Thus, 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 carry out their
derivative strategies and might, in some cases, require a Fund to deposit cash
to meet applicable margin requirements. The Fund will enter into an option or
futures position only if it appears to be a liquid investment.
Short Sales Against the Box
The Fund may effect short sales, but only if such transactions are
short sale transactions known as short sales "against the box." A short sale is
a transaction in which the Fund sells a security it does not own by borrowing it
from a broker, and consequently becomes obligated to replace that security. A
short sale against the box is a short sale where the Fund owns the security sold
short or has an immediate and unconditional right to acquire that security
without additional cash consideration upon conversion, exercise or exchange of
options with respect to securities held in its portfolio. The effect of selling
a security short against the box is to insulate that security against any future
gain or loss.
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
8
<PAGE>
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.
The Fund may enter credit protection swap arrangements involving the
sale by the Fund of a put option on a debt security which is exercisable by the
buyer upon certain events, such as a default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
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.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a portion of the Fund's portfolio.
However, the Fund may, as noted above, enter into such arrangements for income
purposes to the extent permitted by the Commodities Futures Trading Commission
(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.
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
9
<PAGE>
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. The Fund will only enter into repurchase
agreements involving U.S. Government securities. 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 net assets, except that repurchase agreements extending for more than
seven days when combined with any other illiquid securities held by the Fund
will be limited to 15% of the Fund's net 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 record at the trade date and maintained until the
transaction is settled.
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 when corporate securities
to be created by a merger of companies are 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 when the
Fund 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.
10
<PAGE>
Restricted Securities
It is the Fund's policy not to make an investment in restricted
securities, including restricted securities sold in accordance with Rule 144A
under the Securities Act of 1933 ("Rule 144A Securities") if, as a result, more
than 35% of the Fund's total assets are invested in restricted securities,
provided not more than 10% of the Fund's total assets are invested in restricted
securities other than Rule 144A Securities.
Securities may be resold pursuant to Rule 144A under certain
circumstances only to 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, 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, market making
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 subjective valuation of such securities in the absence
of a market for them. Restricted securities that are not resalable under Rule
144A may be subject to risks of illiquidity and subjective valuations to a
greater degree than Rule 144A Securities.
Foreign Investments
The Fund reserves the right to invest without limitation in securities
of non-U.S. issuers directly, or indirectly in the form of American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary
Receipts ("GDRs"). Under current policy, however, the Fund limits such
investments, including ADRs, EDRs and GDRs, to a maximum of 35% of its total
assets.
ADRs are receipts, typically issued by a U.S. bank or trust company,
which evidence ownership of underlying securities issued by a foreign
corporation or other entity. EDRs are receipts issued in Europe which evidence a
similar ownership arrangement. GDRs are receipts issued in one country which
also evidence a similar ownership arrangement. Generally, ADRs in registered
form are designed for use in U.S. securities markets and EDRs are designed for
use in European securities markets. GDRs are designed for use when the issuer is
raising capital in more than one market simultaneously, such as the issuer's
local market and the U.S., and have been used to overcome local selling
restrictions to foreign investors. In addition, many GDRs are eligible for
book-entry settlement through Cedel, Euroclear and DTC. The underlying
securities are not always denominated in the same currency as the ADRs, EDRs or
GDRs. Although investment in the form of ADRs, EDRs or GDRs facilitates trading
in foreign securities, it does not mitigate all the risks associated with
investing in foreign securities.
ADRs are available through facilities which may be either "sponsored"
or "unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays
11
<PAGE>
some or all of the depository's fees, and usually agrees to provide shareholder
communications. In an unsponsored arrangement, the foreign issuer is not
involved, and the ADR holders pay the fees of the depository. Sponsored ADRs are
generally more advantageous to the ADR holders and the issuer than are
unsponsored ADRs. More and higher fees are generally charged in an unsponsored
program compared to a sponsored facility. Only sponsored ADRs may be listed on
the New York or American Stock Exchanges. Unsponsored ADRs may prove to be more
risky due to (a) the additional costs involved to the Fund; (b) the relative
illiquidity of the issue in U.S. markets; and (c) the possibility of higher
trading costs in the over-the-counter market as opposed to exchange based
tradings. The Fund will take these and other risk considerations into account
before making an investment in an unsponsored ADR.
The risks associated with investments in foreign securities include
those resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks of
nationalization or expropriation, the possible imposition of currency exchange
blockages, higher operating expenses, foreign withholding and other taxes which
may reduce investment return, reduced availability of public information
concerning issuers, the difficulties in obtaining and enforcing a judgment
against a foreign issuer and the fact that foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements comparable to those applicable to
domestic issuers. Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of securities of comparable
domestic issuers.
These risks are usually higher in less-developed countries. Such
countries include countries that have an emerging stock market on which trade a
small number of securities and/or countries with economies that are based on
only a few industries. The Fund may invest in the securities of issuers in
countries with less developed economies as deemed appropriate by the Investment
Manager. However, it is anticipated that a majority of the foreign investments
by the Fund will consist of securities of issuers in countries with developed
economies.
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. Under current policy, 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
12
<PAGE>
(usually large commercial banks) and their customers. In entering a forward
currency contract, 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. 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.
Securities Lending
The Fund may lend portfolio securities with a value of up to 33 1/3% of
its total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of any loaned securities plus accrued interest. Collateral
received by the Fund will generally be held in the form tendered, although cash
may be invested in unaffiliated mutual funds with quality short-term portfolios,
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, repurchase agreements or other similar investments. The
investing of cash collateral received from loaning portfolio securities involves
leverage which magnifies the potential for gain or loss on monies invested and,
therefore, results in an increase in the volatility of the Fund's outstanding
securities. Such loans may be terminated at any time.
The Fund may receive a lending fee and will retain rights to dividends,
interest or other distributions, on the loaned securities. Voting rights pass
with the lending, although the Fund may call loans to vote proxies if desired.
Should the borrower of the securities fail financially, there is a risk of delay
in recovery of the securities or loss of rights in the collateral. Loans are
made only to borrowers which are deemed by the Investment Manager or its agents
to be of good financial standing.
Short-Term Trading
The Fund may engage in short-term trading of securities and reserves
full freedom with respect to portfolio turnover. In periods where there are
rapid changes in economic conditions and security price levels or when
reinvestment strategy changes significantly, portfolio turnover may be higher
than during times of economic and market price stability or when investment
strategy remains relatively constant. The Fund's portfolio turnover rate may
involve greater transaction costs, relative to other funds in general, and may
have tax and other consequences.
13
<PAGE>
Temporary and Defensive Investments
The Fund may hold up to 100% of its assets in cash or short-term debt
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Investment Manager, such a
position is more likely to provide protection against adverse market conditions
than adherence to the Fund's other investment policies. The types of short-term
instruments in which the Fund may invest for such purposes include short-term
money market securities, such as repurchase agreements, and securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
certificates of deposit, time deposits and bankers' acceptances of certain
qualified financial institutions and corporate commercial paper, which at the
time of purchase are rated at least within the "A" major rating category by
Standard & Poor's Corporation ("S&P") or the "Prime" major rating category by
Moody's Investor's Service, Inc. ("Moody's"), or, if not rated, issued by
companies having an outstanding long-term unsecured debt issued rated at least
within the "A" category by S&P or Moody's.
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 may be classified according to
the industries of their parent or sponsor 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 and credit card receivables. "Asset-backed-Mortgages"
includes private pools of nongovernment backed mortgages.
14
<PAGE>
<TABLE>
<CAPTION>
Autos & Transportation Health Care Other Energy
- ---------------------- ----------- ------------
<S> <C> <C>
Air Transport Drugs & Biotechnology Gas Pipelines
Auto Parts Health Care Facilities Miscellaneous Energy
Automobiles Health Care Services Offshore Drilling
Miscellaneous Transportation Hospital Supply Oil and Gas Producers
Railroad Equipment Service Miscellaneous Oil Well Equipment & Services
Railroads
Recreational Vehicles & Boats Integrated Oils Producer Durables
Tires & Rubber --------------- -----------------
Truckers Oil: Integrated Domestic Aerospace
Oil: Integrated International Electrical Equipment & Components
Consumer Discretionary Electronics: Industrial
- ---------------------- Materials & Processing Homebuilding
Advertising Agencies ---------------------- Industrial Products
Casinos/Gambling, Hotel/Motel Agriculture Machine Tools
Commercial Services Building & Construction Machinery
Communications, Media & Chemicals Miscellaneous Equipment
Entertainment Containers & Packaging Miscellaneous Producer Durables
Consumer Electronics Diversified Manufacturing Office Furniture & Business Equipment
Consumer Products Engineering & Contracting Serv. Pollution Control and Environmental
Consumer Services Fertilizers Services
Household Furnishings Forest Products Production Technology Equipment
Leisure Time Gold & Precious Metals Telecommunications Equipment
Photography Miscellaneous Materials &
Printing & Publishing Processing Technology
Restaurants Non-Ferrous Metals ----------
Retail Office Supplies Communications Technology
Shoes Paper & Forest Products Computer Software
Textile Apparel Manufacturers Real Estate & Construction Computer Technology
Toys Steel Electronics
Textile Products Electronics: Semi-Conductors
Consumer Staples /Components
- ---------------- Other Miscellaneous Technology
Beverages -----
Drug & Grocery Store Chains Trust Certificates-- Utilities
Foods Government Related Lending ---------
Household Products Asset-backed-Mortgages Miscellaneous Utilities
Tobacco Asset-backed-Credit Card Utilities: Cable TV & Radio
Receivables Utilities: Electrical
Financial Services Miscellaneous Utilities: Gas Distribution
- ------------------ Multi-Sector Companies Utilities: Telecommunications
Banks & Savings and Loans Utilities: Water
Financial Data Processing
Services & Systems
Insurance
Miscellaneous Financial
Real Estate Investment Trusts
Rental & Leasing Services: Commercial
Securities Brokerage & Services
</TABLE>
Computer-Related Risks
Many mutual funds and other companies that issue securities, as well as
government entities upon whom those mutual funds and companies depend, may be
adversely affected by computer systems (whether their own systems or systems of
their service providers) that do not properly process dates beginning with
January 1, 2000 and information related to those dates. In addition, many funds
and other companies, especially those funds and companies that do business in
one or more national currencies of the countries in the European Union (the
"EU"), may be adversely affected by computer systems that cannot accommodate
concurrent references to two currencies, the national currency and the euro (the
proposed currency unit of the EU). Beginning on January 1, 1999 and for the
three years thereafter, businesses and governments in most EU countries
generally must be prepared to conduct their businesses in their national
currency and the euro. After such three-year period, they must conduct their
businesses only in the euro.
The euro conversion presents additional risks for the Fund to the
extent that it invests in securities denominated in a national currency that
eventually will be replaced by the euro. For example, trading, accounting and
other administrative systems must be able to reflect exchange rates between a
national currency of an EU member and the euro and to redenominate
15
<PAGE>
outstanding tradeable debt securities into the euro in accordance with specific
technical requirements.
The Investment Manager currently is in the process of reviewing its
internal computer systems as they relate to the Fund, as well as the computer
systems of those service providers upon which the Fund relies, in order to
obtain reasonable assurances that the Fund will not experience a material
adverse impact related to either problem. The Fund does not currently anticipate
that either problem will have a material adverse impact on its portfolio
investments, taken as a whole. There can be no assurances in either area,
however, including the possibility that either or both problems could negatively
affect the investment markets or the economy generally.
DEBT INSTRUMENTS AND
PERMITTED CASH INVESTMENTS
The Fund may invest in long-term and short-term debt securities.
Certain debt securities and money market instruments in which the Fund may
invest are described below.
U.S. Government and Related Securities
U.S. Government securities are securities which are issued or
guaranteed as to principal or interest 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 Fund invests
include, among others:
[bullet] direct obligations of the U.S. Treasury, i.e., U.S. Treasury
bills, notes, certificates and bonds;
[bullet] obligations of U.S. Government agencies or instrumentalities
such as the Federal Home Loan Banks, the Federal Farm Credit
Banks, the Federal National Mortgage Association, the
Government National Mortgage Association and the Federal Home
Loan Mortgage Corporation; and
[bullet] obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the 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, although the U.S.
Government has no legal obligation to do so. Obligations such as those of the
Federal Home Loan Bank, the Federal Farm Credit Bank, the Federal National
Mortgage Association and the Federal
16
<PAGE>
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, and with respect to principal
payments by U.S. Treasury obligations held in a segregated account with a
Federal Reserve Bank. Except for certain mortgage-related securities, the 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.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
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
17
<PAGE>
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, among others, (a) corporations and (b) domestic or foreign bank
holding companies or their subsidiaries or affiliates where the debt instrument
is 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.
Lower Rated Debt Securities
The Fund may invest in lower quality debt securities rated within the
BB major rating category or lower by S&P or the Ba major rating category or
lower by Moody's or debt securities that are unrated but considered by the
Investment Manager to be of equivalent investment quality to comparable rated
securities. Such securities generally involve more credit risk than higher rated
securities and are considered by S&P and Moody's to be predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. Further, such securities may be subject to greater
market fluctuations and risk of loss of income and principal than lower
yielding, higher rated debt securities. Risks of lower quality debt securities
include (i) limited liquidity and secondary market support, (ii) substantial
market price volatility resulting from changes in
18
<PAGE>
prevailing interest rates an/or investor perception, (iii) subordination to the
prior claims of banks and other senior lenders, (iv) the operation of mandatory
sinking fund or call/redemption provisions during periods of declining interest
rates when the fund may be required to reinvest premature redemption proceeds in
lower yielding portfolio securities; (v) the possibility that earnings of the
issuer may be insufficient to meet its debt service; and (vi) the issuer's low
creditworthiness and potential for insolvency during periods of rising interest
rates and economic downturn. In the event the rating of a security is
downgraded, the Investment Manager will determine whether the security should be
retained or sold depending on an assessment of all facts and circumstances at
that time.
Zero and Step Coupon Securities
Zero and step coupon securities are debt securities that may pay no
interest for all or a portion of their life but are purchased at a discount to
face value at maturity. Their return consists of the amortization of the
discount between their purchase price and their maturity value, plus in the case
of a step coupon, any fixed rate interest income. Zero coupon securities pay no
interest to holders prior to maturity even though interest on these securities
is reported as income to the Fund. The Fund will be required to distribute all
or substantially all of such amounts annually to its shareholders. These
distributions may cause the Fund to liquidate portfolio assets in order to make
such distributions at a time when the Fund may have otherwise chosen not to sell
such securities. The market value of such securities may be more volatile than
that of securities which pay interest at regular intervals.
Commercial Paper Ratings
Commercial paper investments at the time of purchase will be rated
within the "A" major rating category by S&P or within the "Prime" major rating
category by Moody's, or, if not rated, issued by companies having an outstanding
long-term unsecured debt issue rated at least within the "A" category 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 within the "A" category by S&P or
within the "Prime" category by Moody's.
Commercial paper rated within the "A" category (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 within "A" category or better,
although in some cases credits within the "BBB" category 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 category
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.
19
<PAGE>
THE TRUST, THE FUND AND ITS SHARES
The Fund was organized in 1998 as a separate series of State Street
Research Financial Trust, a Massachusetts business trust. A "series" is a
separate pool of assets of the Trust which is separately managed and may have a
different investment objective and different investment policies from the
objective and policies of another series. The Trust currently is comprised of
the following series: State Street Research Government Income Fund, State Street
Research IntelliQuant Portfolios: Small-Cap Value, 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 authority to issue an unlimited number of shares of
beneficial interest of separate series, $.001 par value per share. The Trustees
also 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 classes.
The Trustees have authorized shares of the Fund to be issued in five
classes: Class A, Class B(1), Class B, Class C and Class S shares.
20
<PAGE>
Each share of each class of shares represents an identical legal
interest in the same portfolio of investments of the Fund, has the same rights
and is identical in all respects, except that Class A, Class B(1), Class B and
Class C shares bear the expenses of the deferred sales arrangement and any
expenses (including the higher service and distribution fees) resulting from
such sales arrangement, and certain other incremental expenses related to a
class. Each class will have exclusive voting rights with respect to provisions
of the Rule 12b-1 distribution plan pursuant to which the service and
distribution fees, if any, are paid. Although the legal rights of holders of
each class of shares are identical, it is likely that the different expenses
borne by each class will result in different net asset values and dividends. The
different classes of shares of the Fund also have different exchange privileges.
Except for those differences between classes of shares described above, in the
Fund's Prospectus and otherwise this Statement of Additional Information, each
share of the Fund has equal dividend, redemption and liquidation rights with
other shares of the Fund, and when issued, is fully paid and nonassessable by
the Fund.
Shareholders rights granted under the Master Trust Agreement may be
modified by the Trustees, provided, however, that the Master Trust Agreement may
not be amended if such amendment (a) repeals the limitations on personal
liability of any shareholder, or repeals the prohibition of assessment upon the
shareholders, without the express consent of each shareholder involved or (b)
adversely modifies any shareholder right without the consent of the holders of a
majority of the outstanding shares entitled to vote. Under the Master Trust
Agreement, the Trustees may reorganize, merge or liquidate the Fund without
shareholder approval. On any matter submitted to the shareholders, the holder of
a Fund share is entitled to one vote per share (with proportionate voting for
fractional shares) regardless of the relative net asset value thereof. Except as
provided by law, the Trustees may otherwise modify the rights of shareholders at
any time.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there ordinarily will be no shareholder meetings
unless required by the 1940 Act. Except as otherwise provided under the 1940
Act, the Board of Trustees will be a self-perpetuating body until fewer than
two-thirds of the Trustees serving as such are Trustees who were elected by
shareholders of the Trust. In the event less than a majority of the Trustees
serving as such were elected by shareholders of the Trust, a meeting of
shareholders will be called to elect Trustees. Under the Master Trust Agreement,
any Trustee may be removed by vote of two thirds of the outstanding Trust
shares; holders of 10% or more of the outstanding shares of the Trust can
require that the Trustees call a meeting of shareholders for purposes of voting
on the removal of one or more Trustees. In connection with such meetings called
by shareholders, shareholders will be assisted in shareholder communications to
the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations for the
Trust. However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for indemnification
for all losses and expenses of any shareholder of the Fund held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund would be unable to meet its obligations. The
Investment Manager believes that, in view of the above, the risk of personal
liability to shareholders is remote.
The Fund is a "diversified" series of an "open-end" management
investment company as defined in the 1940 Act. Among other things, a diversified
fund must, with respect to 75% of its total assets, not invest more than 5% of
its total assets in any one issuer.
21
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and principal officers of the Trust, their addresses, and
their principal occupations and positions with certain affiliates of the
Investment Manager are set forth below.
*+Peter C. Bennett, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 60. His principal occupation is currently,
and during the past five years has been, Executive Vice President of State
Street Research & Management Company. Mr. Bennett is also a Director of State
Street Research & Management Company. Mr. Bennett's other principal business
affiliations include Director, State Street Research Investment Services, Inc.
+Steve A. Garban, The Pennsylvania State University, 210 Old Main,
University Park, PA 16802, serves as Trustee of the Trust. He is 61. He is
retired and was formerly Senior Vice President for Finance and Operations and
Treasurer of The Pennsylvania State University.
+Malcolm T. Hopkins, 14 Brookside Road, Biltmore Forest, Asheville, NC
28803, serves as Trustee of the Trust. He is 70. He is engaged principally in
private investments. Previously, he was Vice Chairman of the Board and Chief
Financial Officer of St. Regis Corp.
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 57. 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 71. He is engaged principally in private
investments and civic affairs, and is an author of business history. Previously,
he was with an affiliate of J.P. Morgan & Co. in New York.
+Robert A. Lawrence, 175 Federal Street, Boston, MA 02110, serves as
Trustee of the Trust. He is 72. He is retired and was formerly a Partner in
Saltonstall & Co., a private investment firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 46. His principal occupation is currently, and
during the past five years has been, Executive Vice President, Treasurer, Chief
Financial Officer and Director of State Street Research & Management 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.
- ----------------
* or + see footnotes on page 25
22
<PAGE>
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111,
serves as Secretary and General Counsel of the Trust. He is 43. His principal
occupation is Executive Vice President, General Counsel and Secretary 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 Executive 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 66. He is retired, and was formerly Executive Vice
President, Chief Operating Officer and Director of Hewlett-Packard Company.
+Susan M. Phillips, The George Washington University, 710 21st Street,
Suite 206, Washington, DC 20052, serves as Trustee of the Trust. She is 55. Her
principal occupation is currently Dean and Professor of Finance and
Administration, School of Business and Public Management, The George Washington
University. Previously, she was a member of the Board of Governors of the
Federal Reserve System and Chairman and Commissioner of the Commodity Futures
Trading Commission.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves
as Trustee of the Trust. He is 60. 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
61. 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.
*E.K. Easton Ragsdale, Jr., One Financial Center, Boston, MA 02111,
serves as Vice President of the Trust. He is 48. His principal occupation is
Senior Vice President of State Street Research & Management Company. During the
past five years he has also served as Vice President of State Street Research &
Management Company and as Senior Vice President and Chief Quantitive Analyst
for Kidder, Peabody & Co.
*+ Thomas A. Shively, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 44. His principal occupation is Executive
Vice President, Director and Chief Investment Officer--Fixed Income 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.
- ----------------
* or + see footnotes on page 24
23
<PAGE>
*+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 55. His principal occupation currently, and during the past five
years, has been Chairman of the Board, President, Chief Executive Officer and
Director of State Street Research & Management Company. Mr. Verni's other
principal business affiliations include Chairman of the Board and Director of
State Street Research Investment Services, Inc.
- --------------------
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the 1940 Act because of their affiliations
with the Fund's investment adviser.
+ 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 parent, Metropolitan
Life Insurance Company: 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.
24
<PAGE>
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.
As of the approximate date of this Statement of Additional Information,
the Investment Manager, the Distributor and/or Metropolitan Life Insurance
Company ("Metropolitan"), their indirect parent, were the beneficial owners of
all or a substantial amount of the outstanding Class A, Class B(1), Class B,
Class C and Class S shares of the Fund, and may be deemed to be in "control," as
defined in the 1940 Act. Although sales of Fund shares to other investors will
reduce their percentage ownership, 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 were compensated as follows:
<TABLE>
<CAPTION>
Total
Compensation
Aggregate From Fund and
Compensation Fund Complex Paid
Name of Trustee From Fund (a) to Trustees(b)
--------------- ------------ -----------------
<S> <C> <C>
Steve A. Garban $700 $ 75,899
Malcolm T. Hopkins $600 $ 78,499
Edward M. Lamont $500 $ 68,741
Robert A. Lawrence $500 $ 93,125
Dean O. Morton $700 $ 97,125
Susan M. Phillips $500 $ 0
Toby Rosenblatt $600 $ 68,741
Michael S. Scott Morton $700 $103,625
Ralph F. Verni $ 0 $ 0
</TABLE>
- ----------------
(a) Estimated for the Fund's fiscal year ending February 28, 1999.
(b) Includes compensation on behalf of all series of 12 investment
companies for which the Investment Manager or its parent, Metropolitan,
served as investment adviser. "Total Compensation from Fund and Fund
Complex Paid to Trustees" for the 12 months ended December 31, 1997.
The Trust does not provide any pension or retirement benefits for the
Trustees.
25
<PAGE>
MANAGEMENT OF THE FUND AND INVESTMENT ADVISORY SERVICES
Under the provisions of the Trust's Master Trust Agreement and the laws
of Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees.
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 Investment
Manager was founded by Paul Cabot, Richard Saltonstall and Richard Paine to
serve as investment adviser to one of the nation's first mutual funds, presently
known as State Street Research Investment Trust, which they had formed in 1924.
Their investment management philosophy emphasized comprehensive
fundamental research and analysis, including meetings with the management of
companies under consideration for investment. The Investment Manager's portfolio
management group has extensive investment industry experience managing equity
and debt securities. The Investment Manager is charged with the overall
responsibility for managing the investments and business affairs of the Fund,
subject to the authority of the Board of Trustees.
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.
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 regular trading on the New York Stock
Exchange (the "NYSE") on each day the NYSE is open for trading.
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund for a period of two years after its initial effectiveness
and will continue from year to year thereafter 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 1940 Act) 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 by
either party and will terminate 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 an assignment.
Under the Code of Ethics of the Investment Manager, investment
management personnel are only permitted to engage in personal securities
transactions in accordance with certain conditions relating to such person's
position, the identity of the security, the timing of the transaction, and
similar factors. Such personnel must report their personal securities
transactions quarterly and supply broker confirmations of such transactions to
the Investment Manager.
26
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by State Street Research Investment
Services, Inc. The Fund offers five classes of shares. Class A, Class B(1),
Class C and Class S shares are available to all eligible investors. Class B
shares are available only to current Class B shareholders through dividend
reinvestment or through exchanges from existing Class B accounts of the State
Street Research Funds. Class A, Class B(1), Class C and Class S shares of the
Fund may be purchased at the next determined net asset value per share plus, in
the case of such classes except Class S 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(1) and Class C shares).
General information on how to buy shares of the Fund, as well as sales charges
involved, is set forth under "Your Investment" in the Prospectus. The following
supplements that information.
Public Offering Price. The public offering price for each class of
shares is based on their net asset value determined as of the close of regular
trading on the NYSE on the day the purchase order is received by State Street
Research Service Center (the "Service Center"), provided that the order is
received prior to the close of regular trading on 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 the Service Center 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.
Alternative Purchase Program. Alternative classes of shares permit
investors to select a purchase program which they believe will be the most
advantageous for them, given the amount of their purchase, the length of time
they anticipate holding Fund shares, or the flexibility they desire in this
regard, and other relevant circumstances. Investors will be able to determine
whether in their particular circumstances it is more advantageous to incur an
initial sales charge and not be subject to certain ongoing charges or to have
their entire initial purchase price invested in the Fund with the investment
being subject thereafter to ongoing service fees and distribution fees.
As described in greater detail below, financial professionals are paid
differing amounts of compensation depending on which class of shares they sell.
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
Class B(1) Class B
Class A (currently offered) (formerly offered)
------- ------------------- ------------------
<S> <C> <C> <C>
Sales Charges Initial sales charge Contingent deferred Contingent deferred
paid by at time of sales charge of 5% to sales charge of 5% to 2%
investor investment of up 1% applies to any applies to any shares
to Distributor to 5.75% depending shares redeemed redeemed within first
on amount of investment within first six years five years following
following their their purchase; no
purchase; no contingent deferred sales
contingent deferred charge after five years
sales charge
after six years
On investments of $1
million or more, no
initial sales charge;
but contingent deferred
sales charge of 1%
applies to any shares
redeemed within
one year following
their purchase
Initial Commission Above described 4% 4%
paid by Distributor initial sales charge
to Financial Professional less 0.25% to 0.75%
retained by Distributor
On investments of $1
million or more,
0.25% to 1% paid
to dealer by Distributor
- -------------------------------------------------------------------------------------------------------------------------------
Rule 12b-1
Service Fee
Paid by Fund 0.25% each year 0.25% each year 0.25% each year
to Distributor
Paid by 0.25% each year 0.25% each year 0.25% each year
Distributor to commencing after commencing after one
Financial Professional one year following year following purchase
purchase
- -------------------------------------------------------------------------------------------------------------------------------
Rule 12b-1
Distribution Fee
Paid by Fund to None 0.75% for first 0.75% for first eight
Distributor eight years; years; Class B shares
Class B(1) shares convert automatically
convert auto- to Class A shares after
matically to eight years
Class A shares
after eight years
Paid by Distributor to None None None
Financial Professional
</TABLE>
<TABLE>
<CAPTION>
Class C Class S
- ------- -------
<S> <C>
Contingent deferred None
sales charge of 1%
applies to any shares
redeemed within one
year following their
purchase
1% None
- -------------------------------------
0.25% each year None
0.25% each year None
commencing after one year
following purchase
- -------------------------------------
0.75% each year None
0.75% each year None
commencing after one year
following purchase
</TABLE>
Class A Shares--Reduced Sales Charges. The reduced sales charges set
forth under "Your Investment--Choosing a Share Class" in the Prospectus apply to
purchases made at any one time by any "person," which 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"
(which include the Fund and other funds as designated by the Distributor from
time to time) 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.
27
<PAGE>
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(1), Class B, Class C and Class S 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(1), Class B, Class C and Class S 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.
Other Programs Related to Class A Shares. Class A shares of the Fund
may be sold or issued in an exchange at a reduced sales charge or without sales
charge pursuant to certain sponsored arrangements, which include programs under
which a company, employee benefit plan or other organization makes
recommendations to, or permits group solicitation of, its employees, members or
participants, except any organization created primarily for the purpose of
obtaining shares of the Fund at a reduced sales charge or without a sales
charge. Sales without a sales charge, or with a reduced sales charge, may also
be made through brokers, registered investment advisers, financial planners,
institutions, and others, under managed fee-based programs (e.g., "wrap fee" or
similar programs) which meet certain requirements established from time to time
by the Distributor. Information on such arrangements and further conditions and
limitations is available from the Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and person: (A) the
Investment Manager, Distributor or any affiliated entities, including any direct
or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
28
<PAGE>
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated Companies,
any relatives of any such individuals whose relationship is directly verified by
such individuals to the Distributor, or any beneficial account for such
relatives or individuals; and (C) employees, officers, sales representatives or
directors of dealers and other entities with a selling agreement with the
Distributor to sell shares of any aforementioned investment company, any spouse
or child of such person, or any beneficial account for any of them. The purchase
must be made for investment and the shares purchased may not be resold except
through redemption. This purchase program is subject to such administrative
policies, regarding the qualification of purchasers and any other matters, as
may be adopted by the Distributor from time to time.
Conversion of Class B(1) and Class B Shares to Class A Shares. A
shareholder's Class B(1) and Class B shares of the Fund, including all shares
received as dividends or distributions with respect to such shares, will
automatically convert to Class A shares of the Fund at the end of eight years
following the issuance of such shares; consequently, they will no longer be
subject to the higher expenses borne by Class B(1) and Class B shares. The
conversion rate will be determined on the basis of the relative per share net
asset values of the two classes and may result in a shareholder receiving either
a greater or fewer number of Class A shares than the shares so converted. As
noted above, holding periods for Class B(1) shares received in exchange for
Class B(1) shares of other Eligible Funds and for Class B shares received in
exchange for Class B shares of other Eligible Funds, will be counted toward the
eight-year period.
Contingent Deferred Sales Charges. The amount of any contingent
deferred sales charge paid on Class A shares (on sales of $1 million or more and
which do not involve an initial sales charge) or on Class B(1), Class B or Class
C shares of the Fund will be paid to the Distributor. The Distributor will pay
dealers at the time of sale a 4% commission for selling Class B(1) shares and a
1% commission for selling Class C shares. In certain cases, a dealer may elect
to waive the 4% commission on Class B(1) shares and receive in lieu thereof an
annual fee, usually 1%, with respect to such outstanding shares. The proceeds of
the contingent deferred sales charges and the distribution fees are used to
offset distribution expenses and thereby permit the sale of Class B(1), Class B
and Class C shares without an initial sales charge.
In determining the applicability and rate of any contingent deferred
sales charge of Class B(1), Class B or Class C shares, it will be assumed that a
redemption of the shares is made first of those shares having the greatest
capital appreciation, next of shares representing reinvestment of dividends and
capital gains distributions and finally of remaining shares held by a
shareholder for the longest period of time. Class B(1) shares that are redeemed
within a six-year period after purchase, Class B shares that are redeemed within
a five-year period after their purchase, and Class C shares that are redeemed
within a one-year period after their purchase, will not be subject to a
contingent deferred sales charge to the extent that the value of such shares
represents (1) capital appreciation of Fund assets or (2) reinvestment of
dividends or capital gains distributions. The holding period for purposes of
applying a contingent deferred sales charge for a particular class of shares of
the Fund acquired through an exchange from another Eligible Fund will be
measured from the date that such shares were initially acquired in the other
Eligible Fund, and shares of the same class being redeemed will be considered to
represent, as applicable, capital appreciation or dividend and capital gains
29
<PAGE>
distribution reinvestments in such other Eligible Fund. These determinations
will result in any contingent deferred sales charge being imposed at the lowest
possible rate. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case may
be, on the amount realized on redemption.
Contingent Deferred Sales Charge Waivers. With respect to Class A
shares (on sales of $1 million or more and which do not involve an initial sales
charge), and Class B(1), Class B and Class C shares of the Fund, the contingent
deferred sales charge does not apply to exchanges or to redemptions under a
systematic withdrawal plan which meets certain conditions. The contingent
deferred sales charge will be waived for participant initiated distributions
from State Street Research prototype employee retirement plans. In addition, the
contingent deferred sales charge will be waived for: (i) redemptions made within
one year of the death or total disability, as defined by the Social Security
Administration, of all shareholders of an account; (ii) redemptions made after
attainment of a specific age in an amount which represents the minimum
distribution required at such age under Section 401(a)(9) of the Internal
Revenue Code of 1986, as amended, for retirement accounts or plans (e.g., age 70
1/2 for Individual Retirement Accounts and Section 403(b) plans), calculated
solely on the basis of assets invested in the Fund or other Eligible Funds; and
(iii) a redemption resulting from a tax-free return of an excess contribution to
an Individual Retirement Account. (The foregoing waivers do not apply to a
tax-free rollover or transfer of assets out of the Fund). The Fund may modify or
terminate the waivers at any time; for example, the Fund may limit the
application of multiple waivers and establish other conditions for employee
benefit plans. Certain employee benefit plans sponsored by a financial
professional may be subject to other conditions under which the plans may
initially invest in Class B(1) shares and subsequently invest in Class A shares
upon meeting certain criteria.
Class S Shares. Class S shares are currently available to certain
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants, service arrangements, or similar factors;
insurance companies; investment companies; advisory accounts of the Investment
Manager; endowment funds of nonprofit organizations with substantial minimum
assets (currently a minimum of $10 million); and other similar institutional
investors. Class S shares may be acquired through programs or products sponsored
by Metropolitan, its affiliates, or both for which Class S shares have been
designated. In addition, Class S shares are available through programs under
which, for example, investors pay an asset-based fee and/or a transaction fee to
intermediaries. Class S share availability is determined by the Distributor and
intermediaries based on the overall direct and indirect costs of a particular
program, expected assets, account sizes and similar considerations.
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, 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
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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.
Systematic Withdrawal Plan. A shareholder who owns noncertificated
Class A or Class S shares with a value of $5,000 or more, or Class B(1), Class B
or Class C shares with a value of $10,000 or more, may elect, by participating
in the Fund's Systematic Withdrawal Plan, to have periodic checks issued for
specified amounts. These amounts may not be less than certain minimums,
depending on the class of shares held. The Plan provides that all income
dividends and capital gains distributions of the Fund shall be credited to
participating shareholders in additional shares of the Fund. Thus, the
withdrawal amounts paid can only be realized by redeeming shares of the Fund
under the Plan. To the extent such amounts paid exceed dividends and
distributions from the Fund, a shareholder's investment will decrease and may
eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually of
either (a) the value, at the time the Systematic Withdrawal Plan is initiated,
of the shares then in the account or (b) the value, at the time of a withdrawal,
of the same number of shares as in the account when the Systematic Withdrawal
Plan was initiated, whichever is higher.
Expenses of the Systematic Withdrawal Plan are borne by the Fund. A
participating shareholder may withdraw from the Systematic Withdrawal Plan, and
the Fund may terminate the Systematic Withdrawal Plan at any time on written
notice. Purchase of additional shares while a shareholder is receiving payments
under a Systematic Withdrawal Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate in
the Investamatic Program (see "Your Investment--Investor Services--Investamatic
Program" in the Fund's Prospectus) and the Systematic Withdrawal Plan at the
same time.
Request to Dealer to Repurchase. For the convenience of shareholders,
the Fund has authorized the Distributor as its agent to accept orders from
dealers by wire or telephone for the repurchase of shares by the Distributor
from the dealer. The Fund may revoke or suspend this authorization at any time.
The repurchase price is the net asset value for the applicable shares next
determined following the time at which the shares are offered for repurchase by
the dealer to the Distributor. The dealer is responsible for promptly
transmitting a shareholder's order to the Distributor.
Signature Guarantees. Signature guarantees are required for, among
other things: (1) written requests for redemptions for more than $100,000; (2)
written requests for redemptions for any amount if the proceeds are transmitted
to other than the current address of record (unchanged in the past 30 days); (3)
written requests for redemptions for any amount submitted by corporations and
certain fiduciaries and other intermediaries; and (4) requests to transfer the
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registration of shares to another owner. Signatures must be guaranteed by a
bank, a member firm of a national stock exchange, or other eligible guarantor
institution. The Transfer Agent will not accept guarantees (or notarizations)
from notaries public. The above requirements may be waived in certain instances.
Dishonored Checks. If a purchaser's check is not honored for its full
amount, the purchaser could be subject to additional charges to cover collection
costs and any investment loss, and the purchase may be canceled.
Processing Charges. Purchases and redemptions processed through
securities dealers may be subject to processing charges imposed by the
securities dealer in addition to sales charges that may be imposed by the Fund
or the Distributor.
SHAREHOLDER ACCOUNTS
General information on shareholder accounts is included in the Fund's
Prospectus under "Your Investment." The following supplements that information.
Maintenance Fees and Involuntary Redemption. Because of the relatively
high cost of maintaining small shareholder accounts, the Fund reserves the right
to redeem at its option any shareholder account which remains below $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. Such
involuntarily redemptions will be subject to applicable sales charges, if any.
The Fund may increase such minimum account value above such amount in the future
after notice to affected shareholders. Involuntarily redeemed shares will be
priced at the net asset value on the date fixed for redemption by the Fund, and
the proceeds of the redemption will be mailed to the affected shareholder at the
address of record. Currently, the maintenance fee is $18 annually, which is paid
to the Transfer Agent. The fee does not apply to certain retirement accounts or
if the shareholder has more than an aggregate $50,000 invested in the Fund and
other Eligible Funds combined. Imposition of a maintenance fee on a small
account could, over time, exhaust the assets of such account.
To cover the cost of additional compliance administration, a $20 fee
will be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date
of payment of redemption proceeds for more than seven days, except that (a) it
may elect to suspend the redemption of shares or postpone the date of payment of
redemption proceeds: (1) during any period that the NYSE is closed (other than
customary weekend and holiday closings) or trading on the NYSE is restricted;
(2) during any period in which an emergency exists as a result of which disposal
of portfolio securities is not reasonably practicable or it is not reasonably
practicable to fairly determine the Fund's net asset values; or (3) during such
other periods as
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the Securities and Exchange Commission (the "SEC") may by order permit for the
protection of investors; and (b) the payment of redemption proceeds may be
postponed as otherwise provided under "Purchase and Redemption of Shares" in
this Statement of Additional Information.
The Open Account System. Under the Open Account System full and
fractional shares of the Fund owned by shareholders are credited to their
accounts by the Transfer Agent, State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110. Certificates representing Class
B(1), Class B or Class C shares will not be issued, while certificates
representing Class A or Class S shares will only be issued if specifically
requested in writing and, in any case, will only be issued for full shares, with
any fractional shares to be carried on the shareholder's account. Shareholders
will receive periodic statements of transactions in their accounts.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through
dealers, by wire or by mailing a check payable to "State
Street Research Funds" under the terms set forth above under
"Purchase and Redemption of Shares" in this Statement of
Additional Information.
2. The following methods of receiving dividends from investment
income and distributions from capital gains generally are
available:
(a) All income dividends and capital gains distributions reinvested
in additional shares of the Fund.
(b) All income dividends and capital gains distributions in cash.
(c) All income dividends and capital gains distributions invested in
any one available Eligible Fund designated by the shareholder as
described below. See "--Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will be automatically coded for reinvestment of all
dividends and distributions in additional shares of the same class of the Fund.
Selections may be changed at any time by telephone or written notice to the
Service Center. Dividends and distributions are reinvested at net asset value
without a sales charge.
Exchange Privileges. Shareholders of the Fund may exchange their shares
for available shares with corresponding characteristics of any of the other
Eligible Funds 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 Eligible Fund may
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similarly exchange their shares for Fund shares with corresponding
characteristics. Prior to making an exchange, shareholders should obtain the
Prospectus of the Eligible Fund into which they are exchanging. Under the Direct
Program, subject to certain conditions, shareholders may make arrangements for
regular exchanges from the Fund into other Eligible Funds. To effect an
exchange, Class A, Class B(1), Class B and Class C shares may be redeemed
without the payment of any contingent deferred sales charge that might otherwise
be due upon an ordinary redemption of such shares. The State Street Research
Money Market Fund issues Class E shares which are sold without any sales charge.
Exchanges of State Street Research Money Market Fund Class E shares into Class A
shares of the Fund or any other Eligible Fund are subject to the initial sales
charge or contingent deferred sales charge applicable to an initial investment
in such Class A shares, unless a prior Class A sales charge has been paid
directly or indirectly with respect to the shares redeemed. For purposes of
computing the contingent deferred sales charge that may be payable upon
disposition of any acquired Class A, Class B(1), Class B and Class C shares, the
holding period of the redeemed shares is "tacked" to the holding period of any
acquired shares. No exchange transaction fee is currently imposed on any
exchange.
Shares of the Fund may also be acquired or redeemed in exchange for
shares of the Summit Cash Reserves Fund ("Summit Cash Reserves") by customers of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (subject to completion of
steps necessary to implement the program). The Fund and Summit Cash Reserves are
related mutual funds for purposes of investment and investor services. Upon the
acquisition of shares of Summit Cash Reserves by exchange for redeemed shares of
the Fund, (a) no sales charge is imposed by Summit Cash Reserves, (b) no
contingent deferred sales charge is imposed by the Fund on the Fund shares
redeemed, and (c) any applicable holding period of the Fund shares redeemed is
"tolled," that is, the holding period clock stops running pending further
transactions. Upon the acquisition of shares of the Fund by exchange for
redeemed shares of Summit Cash Reserves, (a) the acquisition of Class A shares
shall be subject to the initial sales charges or contingent deferred sales
charges applicable to an initial investment in such Class A shares, unless a
prior Class A sales charge has been paid indirectly, and (b) the acquisition of
Class B(1), Class B or Class C shares of the Fund shall restart any holding
period previously tolled, or shall be subject to the contingent deferred sales
charge applicable to an initial investment in such shares.
The exchange privilege may be terminated or suspended or its terms
changed at any time, subject, if required under applicable regulations, to 60
days' prior notice. New accounts established for investments upon exchange from
an existing account in another fund will have the same telephone privileges with
respect to the Fund (see "Your Investment--Account Policies--Telephone Requests"
in the Fund's Prospectus and "--Telephone Privileges," below) as the existing
account unless the Service Center is instructed otherwise. Related
administrative policies and procedures may also be adopted with regard to a
series of exchanges, street name accounts, sponsored arrangements and other
matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund
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reserves the right to temporarily or permanently terminate the exchange
privilege for any person who makes more than six exchanges out of or into the
Fund per calendar year. Accounts under common ownership or control, including
accounts with the same taxpayer identification number, may be aggregated for
purposes of the six exchange limit. Notwithstanding the six exchange limit, the
Fund reserves the right to refuse exchanges by any person or group if, in the
Investment Manager's judgment, the Fund would be unable to invest effectively in
accordance with its investment objective and policies, or would otherwise
potentially be adversely affected. Exchanges may be restricted or refused if the
Fund receives or anticipates simultaneous orders affecting significant portions
of the Fund's assets. In particular, a pattern of exchanges that coincides with
a "market timing" strategy may be disruptive to the Fund. The Fund may impose
these restrictions at any time. The exchange limit may be modified for accounts
in certain institutional retirement plans because of plan exchange limits,
Department of Labor regulations or administrative and other considerations.
Subject to the foregoing, if an exchange request in good order is received by
the Service Center and delivered by the Service Center to the Transfer Agent by
12 noon Boston time on any business day with normal trading conditions, the
exchange usually will occur that day. For further information regarding the
exchange privilege, shareholders should contact the Service Center.
Reinvestment Privilege. A shareholder of the Fund who has redeemed
shares or had shares repurchased at his or her request may reinvest all or any
portion of the proceeds (plus that amount necessary to acquire a fractional
share to round off his or her reinvestment to full shares) in shares, of the
same class as the shares redeemed, of the Fund or any other Eligible Fund at net
asset value and without subjecting the reinvestment to an initial sales charge,
provided such reinvestment is made within 120 calendar days after a redemption
or repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the amount
reinvested. The redemption of shares is, for federal income tax purposes, a sale
on which the shareholder may realize a gain or loss. If a redemption at a loss
is followed by a reinvestment within 30 days, the transaction may be a "wash
sale" resulting in a denial of the loss for federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject
to any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by the Service
Center of such shareholder's written purchase request and delivery of the
request by the Service Center to the Transfer Agent. A shareholder may exercise
this reinvestment privilege only once per 12-month period with respect to his or
her shares of the Fund.
Dividend Allocation Plan. The Dividend Allocation Plan allows
shareholders to elect to have all their dividends and any other distributions
from the Fund or any Eligible Fund automatically invested at net asset value in
one other such Eligible Fund designated by the shareholder, provided the account
into which the dividends and distributions are directed is initially funded with
the requisite minimum amount.
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Telephone Privileges. The following telephone privileges are
available:
[bullet] Telephone Exchange Privilege for Shareholder and Shareholder's
Financial Professional
[bullet] Shareholders automatically receive this privilege
unless declined.
[bullet] This privilege allows the shareholder or the
shareholder's financial professional to request
exchanges into other State Street Research funds.
[bullet] Telephone Redemption Privilege for Shareholder
[bullet] Shareholders automatically receive this privilege
unless declined.
[bullet] This privilege allows the shareholder to phone
requests to sell shares, with the proceeds sent to
the address of record.
[bullet] Telephone Redemption Privilege for Shareholder's Financial
Professional (This privilege is not automatic; a shareholder
must specifically elect it)
[bullet] This privilege allows the shareholder's financial
professional to phone requests to sell shares, with
the proceeds to be sent to the address of record on
the account.
A shareholder with the above telephone privileges is deemed to
authorize the Service Center and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder or the
shareholder's financial professional; and (2) honor any written instructions for
a change of address regardless of whether such request is accompanied by a
signature guarantee. All telephone calls will be recorded. Neither the Fund, the
other Eligible Funds, the Transfer Agent, the Investment Manager nor the
Distributor will be liable for any loss, expense or cost arising out of any
request, including any fraudulent or unauthorized requests. Shareholders assume
the risk to the full extent of their accounts that telephone requests may be
unauthorized. Reasonable procedures will be followed to confirm that
instructions communicated by telephone are genuine. The shareholder will not be
liable for any losses arising from unauthorized or fraudulent instructions if
such procedures are not followed.
Alternative Means of Contacting the Fund. It is unlikely, during
periods of extraordinary market conditions, that a shareholder may have
difficulty in reaching the Service Center. In that event, however, the
shareholder should contact the Service Center at 1-800-562-0032, 1-617-357-7800
or otherwise at its main office at One Financial Center, Boston, Massachusetts
02111-2690.
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NET ASSET VALUE
The net asset value of the shares of the 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
unrestricted trading. The NYSE is currently closed on New Year's Day,
Martin Luther King, Jr. 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 as provided below, the
Trustees 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 utilize information with respect to market transactions, quotations
from dealers and various relationships among securities in determining value and
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, Inc.'s (the "NASD") 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. The
Trustees also reserve the right to adopt valuations based on fair value
pricing in unusual circumstances where use of other methods as described in part
above could otherwise have a material adverse effect on the Fund as a whole.
The Trustees have authorized the use of the amortized cost method to
value short-term debt instruments issued with a maturity of one year or less and
having a remaining maturity of 60 days or less when the value obtained is fair
value, 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. 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.
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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).
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 by the Investment Manager 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
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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 contained in certain trading systems used for portfolio analysis and
modeling and also software providing investment personnel with efficient access
to current and historical data from a variety of internal and external sources);
and portfolio evaluation services and relative performance of accounts.
In the case of the Fund and other registered investment companies
advised by the Investment Manager or its affiliates, the above services may
include data relating to performance, expenses and fees of those investment
companies and other investment companies; this information is used by the
Trustees or Directors of the investment companies to fulfill their
responsibility to oversee the quality of the Investment Manager's advisory
contracts between the investment companies and the Investment Manager. The
Investment Manager considers these investment company services only in
connection with the execution of transactions on behalf of its investment
company clients and not its other clients. Certain of the 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 regularly reviews and evaluates the services
furnished by broker-dealers. The Investment Manager's investment management
personnel conducts internal surveys and uses other methods to evaluate the
quality of the research and other services provided by various broker-dealer
firms, and the results of these efforts are made available to the equity trading
department, which uses this information as a consideration to the extent
described above in the selection of brokers to execute portfolio transactions.
Some services furnished by broker-dealers 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 the services to determine the proportion which is allocable to research or
investment decision-making and the proportion allocable to other purposes. The
Investment Manager pays directly from its own funds for that portion that is
allocable to uses other than research or investment decision-making. 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 providing the services.
The Investment Manager has no fixed agreements or understandings with
any broker-dealer as to the amount of brokerage business which the 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
an allocation of a specified amount of brokerage business. These understandings
are honored to the extent possible in accordance with the policies set forth
above.
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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. However, the Investment Manager is aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, the Investment Manager relies on the provisions of
Section 28(e) of the Securities Exchange Act of 1934.
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 commissions 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.
In some instances, certain clients of the Investment Manager request it
to place all or part of the orders for their account with certain brokers or
dealers, which in some cases provide services to those clients. The Investment
Manager generally agrees to honor these requests to the extent practicable.
Clients may condition their requests by requiring the Investment Manager only
effect transactions with the specified broker-dealers if the broker-dealers are
competitive as to price and execution. In other cases, the Investment Manager
may be unable to negotiate commissions or obtain volume discounts or best
execution. In addition, a disparity may exist among the commissions charged to
clients who request the Investment Manager to use particular brokers or dealers,
and also between those clients and those who do not make such requests. A client
who requests the use of a particular broker-dealer should understand that it may
lose the possible advantage which non-requesting clients derive from aggregation
of orders for several clients as a single transaction for the purchase or sale
of a particular security. Among other reasons why best execution may not be
achieved with directed brokerage is that, in an effort to achieve orderly
execution of transactions, execution of orders that have designated particular
brokers may, at the discretion of the trading desk, be delayed until execution
of other non-designated orders have been completed.
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 size of the order, 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
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<PAGE>
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
Taxation Of The Fund--In General
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 qualify to 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"); and (b) satisfy certain
diversification requirements on a quarterly basis.
If in any year the Fund derives more than 10% of its gross income (as
defined in the Code, which disregards losses for that purpose) from investments
made directly in commodities, including precious metal investments, or
commodity-related options, futures or indices, the Fund in such year may fail to
qualify as a regulated investment company under the Code. The Investment Manager
intends to manage the Fund's portfolio so as to minimize the risk of such
disqualification.
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 to the extent of the 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 capital that would reduce the basis of their shares of the
Fund to the extent thereof. Any distribution in excess of a shareholder's basis
in the shareholder's shares would be taxable as gain realized from the sale of
such shares.
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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, or be deemed to have distributed, an amount equal to the sum of
(1) at least 98% of its ordinary income (not taking into account any capital
gains or losses) for the calendar year, (2) at least 98% of its capital gains in
excess of its capital losses (adjusted for certain ordinary losses) for the
12-month period ending on October 31 of the calendar year and (3) all ordinary
income and capital gains for previous years that were not distributed during
such years. For this purpose, any income or gain retained by the Fund that is
subject to corporate tax will be considered to have been distributed by
year-end. The Fund intends to make sufficient distributions to avoid this 4%
excise tax.
Taxation Of The Fund's Investments
Original Issue Discount; Market 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 cash 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 the Fund at a discount that exceeds
the original issue discount, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for federal
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 the 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 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 in income
currently. Because the Fund must include original issue discount in income, it
may need to liquidate securities to generate cash needed to make the
distributions required for the 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 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 excise
tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and
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(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. The 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 company.
Gains or losses attributable to fluctuations in exchange rates that
occur between the time the 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 portion 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 foreign currency during
the holding period of the debt security may 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 the Fund invests in the stock of certain "passive foreign investment
companies" ("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 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. The Fund does not intend to invest in PFICs. Because of the broad scope of
the PFIC rules, however, there can be no assurance that the Fund can avoid doing
so.
Taxation Of The Fund's Shareholders
The Fund may be subject to foreign taxes, including foreign income
taxes. If so, the 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 the Fund at the
close of its taxable 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) include 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) either 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 ordinarily not benefit from this election.
Generally, a credit for foreign taxes paid by the Fund may not exceed a
shareholder's United States income tax attributable to the shareholder's foreign
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 the Fund. As a result of these
limitations, some shareholders may not be able to utilize fully any foreign tax
credits generated by an investment in the Fund. The Fund will provide its
shareholders with
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<PAGE>
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 return.
Dividends from domestic corporations are not expected to comprise a
substantial part of the income of the Fund. If such dividends are earned by the
Fund, then a portion of the dividends paid by the Fund may qualify for the 70%
deduction for dividends received which is available to corporate shareholders of
the Fund. Shareholders will be informed of any portion of the dividends paid by
the Fund which qualifies for this deduction. The dividends-received deduction is
reduced to the extent the dividends received are treated as debt-financed, under
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
shareholder on December 31, provided that the Fund pays the dividend during
January of the following calendar year.
Distributions 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 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 return 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 Fund, including the possibility that such a
shareholder may be subject to United States withholding tax at a rate of up to
30% (or at a lower rate under an applicable treaty) on distributions from the
Fund.
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.
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DISTRIBUTION OF SHARES OF THE FUND
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(1) and Class C shares). The Distributor may reallow all
or portions of such sales charges as concessions to dealers. The Distributor may
also pay its affiliate MetLife Securities, Inc. additional sales compensation of
up to 0.25% of certain sales or assets.
The differences in the price at which the Fund's Class A shares are
offered due to scheduled variations in sales charges, or Class S shares are
offered, as described in the Fund's Prospectus, result from cost savings
inherent in economies of scale, among other factors. 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, managed fee-based programs and so-called "mutual fund
supermarkets," among other special programs, the amount of the sales charge
reduction will similarly reflect the anticipated reduction in sales expenses
associated with such arrangements. The reductions in sales expenses, and
therefore the reduction in sales charges, 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
or similar programs 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.
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The Fund has adopted a Rule 12b-1 Plan (the "Distribution Plan") under
which the Fund shall pay the Distributor (a) a service fee at the end of each
month at the annual rate of 0.25% of average daily net assets attributable to
the Class A, Class B(1), Class B and Class C shares to compensate the
Distributor and any securities firms or other third parties who render personal
services to and/or maintain shareholder accounts for the shareholders of the
respective class and (b) a distribution fee under the Distribution Plan at the
end of each month at the annual rate of 0.75% of average daily net assets
attributable to the Class B, Class B(1) and Class C Shares to compensate the
Distributor for services provided and expenses incurred by it in connection with
sales, promotional and marketing activities relating to the respective class.
Any amounts not used in this manner may be retained by the Distributor as
compensation. To the extent that any payments made by the Fund to the
Distributor or the Investment Manager, including payment of investment
management fees, should be deemed to be an indirect financing of any activity
primarily resulting in the sale of shares of the Fund within the scope of Rule
12b-1 under the 1940 Act, then such payments shall be deemed to be authorized by
the Distribution Plan. Payments to the Distributor or to dealers funded under
the Distribution Plan may be discontinued at any time.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits annual expenditures to 0.75% for distribution expenses and 0.25% for
service fees. The NASD Rule also limits the aggregate amount that the Fund may
pay for such distribution costs to 6.25% of gross share sales of a class since
the inception of any asset-based sales charge plus interest at the prime rate
plus 1% on unpaid amounts thereof (less any contingent deferred sales charges).
Such limitation does not apply to service fees.
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<PAGE>
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) or others for
personal services and/or the maintenance of shareholder accounts. A portion of
any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance or servicing of
shareholder accounts by such dealers. Dealers who have sold Class A shares are
eligible for further reimbursement commencing as of the time of such sale.
Dealers who have sold Class B(1), Class B and Class C shares 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).
The distribution fees are used primarily to offset initial and ongoing
commissions paid to dealers for selling such shares and for other sales and
marketing expenditures.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs similar
expenses on behalf of, such other funds. When expenses of the Distributor cannot
be identified as relating to a specific fund, the Distributor allocates expenses
among the funds in a manner deemed fair and equitable to each fund.
The payment of service and distribution fees may continue even if the
Fund ceases, temporarily or permanently, to sell one or more classes of shares
to new accounts. During the period the Fund is closed to new accounts, the
distribution fee will not be used for promotion expenses. The service and
distribution fees are used during a closed period to cover services provided to
current shareholders and to cover the compensation of financial professionals in
connection with the prior sale of Fund shares, among other non-promotional
distribution expenditures.
The Distributor may pay certain dealers and other intermediaries
additional compensation for sales and administrative services. The Distributor
may provide cash and noncash incentives to intermediaries who, for example, sell
significant amounts of shares or develop particular distribution channels. The
Distributor may compensate dealers with clients who maintain their investments
in the Fund over a period of years. The incentives can include merchandise and
trips to, and attendance at, sales seminars at resorts. The Distributor may pay
for administrative services, such as technological and computer systems support
for the maintenance of pension plan participant records, for subaccounting, and
for distribution through mutual fund supermarkets or similar arrangements.
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 make alternative
arrangements for such services for shareholders who acquired shares through such
institutions.
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CALCULATION OF PERFORMANCE DATA
From time to time, in advertisements or in communications to
shareholders or prospective investors, the Fund may compare the performance of
its Class A, Class B(1), Class B, Class C or Class S shares to the performance
of other mutual funds with similar investment objectives, to certificates of
deposit and/or to other financial alternatives. The Fund may also compare its
performance to appropriate indices, such as Standard & Poor's 500 Index,
Consumer Price Index and Dow Jones Industrial Average and/or to appropriate
rankings and averages such as those compiled by Lipper Analytical Services,
Inc., Morningstar, Inc., Money Magazine, Business Week, Forbes Magazine, The
Wall Street Journal and Investor's Daily. For example, the performance of the
Fund might be compared to the Lipper Capital Appreciation Funds Index.
The average annual total return ("standard total return") of the Class
A, Class B(1), Class B, Class C and Class S shares of the Fund will be
calculated as set forth below. Total return is computed separately for each
class of shares of the Fund.
The performance data below reflect Rule 12b-1 fees and, where
applicable, sales charges as follows:
<TABLE>
<CAPTION>
Class 12b-1 Fee Sales Charges
----- --------- -----------------------------------------------
<S> <C> <C>
A 0.25% Maximum 5.75% sales charge reflected
B(1) 1.00% 1- and 5-year periods reflect a 5% and a 2%
contingent deferred sales charge, respectively
B 1.00% 1- and 5-year periods reflect a
5% and a 2% contingent deferred sales
charge, respectively
C 1.00% 1-year period reflects a 1% contingent deferred
sales charge
S None None
</TABLE>
All calculations of performance data in this section reflect the
voluntary measures, if any, by the Fund's affiliates to reduce fees or expenses
relating to the Fund; see "Accrued Expenses and Recurring Charges" later in this
section.
Total Return
The Fund's standard average annual total return ("standard total
return") of each class of shares 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:
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n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value 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 highest
applicable initial or contingent deferred sales charge 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.
Accrued Expenses and Recurring Charges
Accrued expenses include all recurring charges that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return 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 $7.50 fee for wire orders.
Accrued expenses are determined without giving effect to the
subsidization, if any, by affiliates of fees or expenses during the subject
period. In calculating performance, the accrued expenses are reduced by the
amount of any subsidy. In the absence of such subsidization, the performance of
the Fund would be lower.
Nonstandardized Total Return
The Fund may provide the above described standard total return results
for Class A, Class B(1), Class B, Class C and Class S 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 may not be taken
into account and therefore not deducted from the hypothetical initial payment of
$1,000.
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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
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts
02110, serves as the Trust's independent accountants, providing professional
services including (1) audits of the Fund's annual financial statements, (2)
assistance and consultation in connection with SEC 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 through electronic or other media. Shareholders with
substantial holdings in one or more State Street Research Funds may also receive
reports and other information which reflect or analyze their positions in a
consolidated manner. Shareholder reports are available without charge upon
request. For more information, call The State Street Research Service Center at
(800) 562-0032.
DOCSC\658063.2
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