STATE STREET RESEARCH
STRATEGIC PORTFOLIOS: CONSERVATIVE
STRATEGIC PORTFOLIOS: MODERATE
STRATEGIC PORTFOLIOS: AGGRESSIVE
Prospectus
February 15, 1999
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE ("Strategic
Portfolios: Conservative" or the "Fund") seeks to provide, primarily, a high
level of current income and, secondarily, long-term growth of capital,
consistent with the preservation of capital and reasonable investment risk, by
allocating assets across an actively managed diversified mix of debt and equity
securities.
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE ("Strategic Portfolios:
Moderate" or the "Fund") seeks to provide both current income and capital
appreciation, consistent with the preservation of capital and reasonable
investment risk, by allocating assets across an actively managed, diversified
mix of equity and debt securities.
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE ("Strategic Portfolios:
Aggressive" or the "Fund") seeks to provide high total return from, primarily,
growth of capital and, secondarily, current income, consistent with reasonable
investment risk, by allocating assets across an actively managed diversified
mix of equity and debt securities.
At the present time, only Class S shares are being offered and are
available for investment through certain retirement accounts and special
programs.
In seeking to achieve their respective investment objectives, Strategic
Portfolios: Conservative aims at investing 70% of its net assets in debt
securities and 30% of its net assets in equity securities; Strategic
Portfolios: Moderate aims at investing 55% of its net assets in equity
securities and 45% of its net assets in debt securities; and Strategic
Portfolios: Aggressive aims at investing 80% of its net assets in equity
securities and 20% of its net assets in debt securities.
State Street Research & Management Company (the "Investment Manager")
serves as investment adviser for the Funds. As of December 31, 1998, the
Investment Manager had assets of approximately $54 billion under management.
State Street Research Investment Services, Inc. serves as distributor (the
"Distributor") for the Funds.
Shareholders may have their shares redeemed directly by the Funds at net
asset value plus the applicable contingent deferred sales charge, if any;
redemptions processed through securities dealers may be subject to processing
charges.
There are risks in any investment program, including the risk of changing
economic and market conditions, and there is no assurance that the Funds will
achieve their investment objectives. The net asset value of a share of a Fund
will fluctuate as market conditions change.
This Prospectus sets forth concisely the information a prospective
investor ought to know about the Funds before investing. It should be retained
for future reference. A Statement of Additional Information about the Funds
dated February 15, 1999 has been filed with the Securities and Exchange
Commission and is incorporated by reference in this Prospectus. It is
available, at no charge, upon request to the Funds at the address indicated on
the back cover or by calling 1-800-562-0032.
Each Fund is a diversified series of State Street Research Financial Trust
(the "Trust"), an open-end management investment company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND
INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
<PAGE>
<TABLE>
<CAPTION>
Table of Contents Page
- --------------------------------------------------------------------------------
<S> <C>
Table of Expenses.................................................... 2
Financial Highlights................................................. 6
The Funds' Investments and Asset Allocation.......................... 9
Other Risks and Investment Practices................................. 13
Limiting Investment Risk............................................. 15
Purchase of Shares................................................... 16
Redemption of Shares................................................. 25
Shareholder Services................................................. 27
The Funds and Their Shares........................................... 31
Management of the Funds.............................................. 32
Dividends and Distributions; Taxes................................... 33
Calculation of Performance Data...................................... 34
Appendix--Description of Debt/Bond Ratings........................... 35
- --------------------------------------------------------------------------------
</TABLE>
The Funds are authorized to issue four classes of shares which may be
purchased at the next determined net asset value per share plus, in the case of
all classes except Class 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 and Class C shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5%
and (ii) an annual service fee of 0.25% of the average daily net asset value of
the Class A shares.
Class B shares are subject to (i) a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made
within five years of purchase and (ii) annual distribution and service fees of
1% of the average daily net asset value of such shares. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses) at
the end of eight years after purchase. No contingent deferred sales charge
applies after the fifth year following the purchase of Class B shares.
Class C shares are subject to (i) a contingent deferred sales charge of 1%
if redeemed within one year following purchase and (ii) annual distribution and
service fees of 1% of the average daily net asset value of such shares.
Class S shares are available through certain employee benefit plans, and
special programs with financial intermediaries, among other arrangements. No
sales charge is imposed at the time of purchase or redemption of Class S
shares. Class S shares do not pay any distribution or service fees.
Table of Expenses
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C Class S
-------------- ------------ ------------ --------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses (1)
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering price) ......... 4.5% None None None
Maximum Deferred Sales Charge (as a
percentage of net asset value at time of
purchase or redemption, whichever is lower) ........... None(2) 5% 1% None
Maximum Sales Charge Imposed on
Reinvested Dividends (as a percentage of
offering price) ....................................... None None None None
Redemption Fees (as a percentage of
amount redeemed, if applicable) ....................... None None None None
Exchange Fee ........................................... None None None None
</TABLE>
- ------------
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
thereafter and no contingent deferred sales charge is imposed after the
fifth year. Class C shares are subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the sale.
Long-term investors in Class A, Class B or Class C shares may, over a period
of years, pay more than the economic equivalent of the maximum sales charge
permissible under applicable rules. See "Purchase of
2
<PAGE>
Shares." The contingent deferred sales charge may also be imposed on shares
involuntarily redeemed for accounts which have not maintained requisite
minimum balances. See "Redemption of Shares--Additional Information."
(2) Purchases of Class A shares of $1 million or more are not subject to a sales
charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption.
See "Purchase of Shares."
<TABLE>
<CAPTION>
Strategic Portfolios: Conservative Class A Class B Class C Class S
- --------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees ........................... 0.60% 0.60% 0.60% 0.60%
12b-1 Fees ................................ 0.25% 1.00% 1.00% None
Other Expenses ............................ 0.71% 0.71% 0.71% 0.71%
Less Voluntary Reduction ................ (0.41%) (0.41%) (0.41%) (0.41%)
----- ----- ----- ------
Total Fund Operating Expenses
(after voluntary reduction) ......... 1.15% 1.90% 1.90% 0.90%
===== ===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
Strategic Portfolios: Moderate Class A Class B Class C Class S
- --------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees ........................... 0.65% 0.65% 0.65% 0.65%
12b-1 Fees ................................ 0.25% 1.00% 1.00% None
Other Expenses ............................ 1.01% 1.01% 1.01% 1.01%
Less Voluntary Reduction ................ (0.66%) (0.66%) (0.66%) (0.66%)
----- ----- ----- ------
Total Fund Operating Expenses
(after voluntary reduction) ......... 1.25% 2.00% 2.00% 1.00%
===== ===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
Strategic Portfolios: Aggressive Class A Class B Class C Class S
- --------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees ........................... 0.75% 0.75% 0.75% 0.75%
12b-1 Fees ................................ 0.25% 1.00% 1.00% None
Other Expenses ............................ 0.55% 0.55% 0.55% 0.55%
Less Voluntary Reduction ................ (0.20%) (0.20%) (0.20%) (0.20%)
----- ----- ----- ------
Total Fund Operating Expenses
(after voluntary reduction) ......... 1.35% 2.10% 2.10% 1.10%
===== ===== ===== ======
</TABLE>
3
<PAGE>
Example:
You would pay the following expenses on a $1,000 investment including, for Class
A shares, the maximum applicable initial sales charge and assuming (1) 5% annual
return and (2) redemption of the entire investment at the end of each time
period:
<TABLE>
<CAPTION>
Strategic Portfolios: Conservative
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Class A shares ............. $56 $80 $105 $178
Class B shares (1) ......... $69 $90 $123 $203
Class C shares ............. $29 $60 $103 $222
Class S shares ............. $ 9 $29 $ 50 $111
</TABLE>
<TABLE>
<CAPTION>
Strategic Portfolios: Moderate
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Class A shares ............. $57 $83 $111 $189
Class B shares (1) ......... $70 $93 $128 $213
Class C shares ............. $30 $63 $108 $233
Class S shares ............. $10 $32 $ 55 $122
</TABLE>
<TABLE>
<CAPTION>
Strategic Portfolios: Aggressive
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Class A shares ............. $58 $86 $116 $200
Class B shares (1) ......... $71 $96 $133 $224
Class C shares ............. $31 $66 $113 $243
Class S shares ............. $11 $35 $ 61 $134
</TABLE>
You would pay the following expenses on the same investment, assuming no
redemption:
<TABLE>
<CAPTION>
Strategic Portfolios: Conservative
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Class B (1) ......... $19 $60 $103 $203
Class C ............. $19 $60 $103 $222
</TABLE>
<TABLE>
<CAPTION>
Strategic Portfolios: Moderate
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Class B (1) ......... $20 $63 $108 $213
Class C ............. $20 $63 $108 $233
</TABLE>
<TABLE>
<CAPTION>
Strategic Portfolios: Aggressive
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Class B (1) ......... $21 $66 $113 $224
Class C ............. $21 $66 $113 $243
</TABLE>
- -------------------------
(1) Ten-year figures assume conversion of Class B shares to Class A shares at
the end of eight years.
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than
shown.
The purpose of the table above is to assist the investor in understanding
the various costs and expenses that an investor will bear directly or
indirectly. The percentage expense levels shown in the table above are based on
experience with expenses during the fiscal year ended October 31, 1998; actual
expense levels for the current fiscal year and future years may vary from the
amounts shown. The table does not reflect charges for optional services elected
by certain shareholders, such as the $7.50 fee for remittance of redemption
proceeds by wire. For further information on sales charges, see "Purchase of
Shares--Alternative Purchase Program"; for further information on management
fees, see "Management of the Funds"; and for further information on 12b-1 fees,
see "Purchase of Shares--Distribution Plan."
The Funds have been advised that the Distributor and its affiliates may
from time to time and in varying amounts voluntarily assume some portion of
fees or expenses relating to a Fund. However, no Fund has received any firm
commitment that such assistance will in fact be provided.
For the period ended October 31, 1998, Total Fund Operating Expenses as a
percentage of average net assets of Class S shares would have been 1.31% of the
Strategic Portfolios: Conservative; and 1.30% of the Strategic Portfolios:
Aggressive; and would
4
<PAGE>
have been 1.66% for Class S shares of the Strategic Portfolios: Moderate, in
the absence of the voluntary reduction of expenses by the Distributor and its
affiliates. Such reduction of fees or expenses, as a percentage of average net
assets, amounted to 0.41% of the Class S shares of the Strategic Portfolios:
Conservative; and 0.20% of the Class S shares of the Strategic Portfolios:
Aggressive; and 0.66% of the Class S shares of the Strategic Portfolios:
Moderate.
5
<PAGE>
Financial Highlights
The data set forth below has been audited by PricewaterhouseCoopers LLP,
independent accountants. Their report thereon and the Funds' financial
statements are included in the Funds' annual reports, which are available upon
request. Financial information is not presented for Class B and Class C shares
of Strategic Portfolios: Conservative and Strategic Portfolios: Aggressive and
for Class A, Class B and Class C shares of Strategic Portfolios: Moderate
because no shares of those classes were outstanding during the periods
presented. Financial information is not presented for Class A shares of
Strategic Portfolios: Conservative and Strategic Portfolios: Aggressive for any
period after March 27, 1997 because no Class A shares were outstanding during
any such period.
Strategic Portfolios: Conservative
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------
Year ended October 31
November 1, 1996 ------------------------------------
to March 27, 1997(1) 1996(1) 1995(1) 1994(2)
-------------------- -------- -------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ........ $ 11.03 $ 10.56 $ 9.56 $ 9.55
------- ------- ------- ---------
Net investment income* .................... .21 .42 .47 .20
Net realized and unrealized gain
(loss) on investments, foreign
currency, forward contracts and
futures contracts ........................ .08 .66 1.00 (.09)
------- ------- ------- ---------
Total from investment operations .......... .29 1.08 1.47 .11
------- ------- ------- ---------
Dividends from net investment
income ................................... (.19) (.36) (.47) (.10)
Distributions from net realized gains ..... (.55) (.25) -- --
------- -------- -------- ---------
Total distributions ....................... (.74) (.61) (.47) (.10)
------- -------- -------- ---------
Net asset value, end of year .............. $ 10.58 $ 11.03 $ 10.56 $ 9.56
======= ======== ======== =========
Total return(3) ........................... 2.67%(4) 10.55% 15.84% 1.15%(4)
Ratios/supplemental data:
Net assets at end of year (000s) .......... $ -- $ 552 $27,637 $25,014
Ratio of operating expenses to
average net assets* ...................... 1.15%(5) 1.15% 1.15% 1.15%(5)
Ratio of net investment income to
average net assets* ...................... 4.18%(5) 4.35% 4.74% 4.48%(5)
Portfolio turnover rate ................... 117.66% 126.41% 132.50% 70.35%
*Reflects voluntary reduction of
expenses per share of these
amounts .................................. $ .03 $ .07 $ .05 $ .03
<CAPTION>
Class S
------------------------------------------------------------
Year ended October 31
------------------------------------------------------------
1998(1) 1997(1) 1996(1) 1995(1) 1994(2)
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ........ $ 11.32 $ 10.93 $ 10.56 $ 9.56 $ 9.55
------- ------- ------- ------- --------
Net investment income* .................... .47 .49 .50 .52 .21
Net realized and unrealized gain
(loss) on investments, foreign
currency, forward contracts and
futures contracts ........................ .42 .95 .60 .97 (.09)
------- ------- ------- ------- --------
Total from investment operations .......... .89 1.44 1.10 1.49 .12
------- ------- ------- ------- --------
Dividends from net investment
income ................................... (.50) (.50) (.48) (.49) (.11)
Distributions from net realized gains ..... (.79) (.55) (.25) -- --
-------- -------- -------- -------- --------
Total distributions ....................... (1.29) (1.05) (.73) (.49) (.11)
-------- -------- -------- -------- --------
Net asset value, end of year .............. $ 10.92 $ 11.32 $ 10.93 $ 10.56 $ 9.56
======== ======== ======== ======== ========
Total return(3) ........................... 8.60% 14.11% 10.82% 16.11% 1.25%(4)
Ratios/supplemental data:
Net assets at end of year (000s) .......... $36,236 $38,501 $33,236 $ 1,433 $ 100
Ratio of operating expenses to
average net assets* ...................... 0.90% 0.90% 0.90% 0.90% 0.90%(5)
Ratio of net investment income to
average net assets* ...................... 4.35% 4.47% 4.50% 4.91% 4.73%(5)
Portfolio turnover rate ................... 186.03% 117.66% 126.41% 132.50% 70.35%
*Reflects voluntary reduction of
expenses per share of these
amounts .................................. $ .04 $ .05 $ .06 $ .05 $ .03
</TABLE>
(1) Per-share figures have been calculated using the average shares method.
(2) May 16, 1994 (commencement of operations) to October 31, 1994.
(3) Does not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily reduced a portion of the Fund's expenses.
(4) Not annualized.
(5) Annualized.
- --------------------------------------------------------------------------------
6
<PAGE>
Strategic Portfolios: Moderate
<TABLE>
<CAPTION>
Class S
------------------------------------------------------------
Year ended October 31
------------------------------------------------------------
1998(1) 1997(1) 1996(1) 1995(1) 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ............................ $ 12.08 $ 11.28 $ 10.26 $ 9.18 $ 9.57
------- ------- ------- ------- -------
Net investment income* ........................................ .36 .35 .35 .36 .28
Net realized and unrealized gain (loss) on investments,
foreign currency, forward contracts and futures contracts .... .34 1.53 1.07 1.01 (.45)
------- ------- ------- ------- -------
Total from investment operations .............................. .70 1.88 1.42 1.37 (.17)
------- ------- ------- ------- -------
Dividends from net investment income .......................... (.36) (.39) (.40) (.29) (.22)
Distributions from net realized gains ......................... (1.25) (.69) -- -- --
-------- -------- -------- -------- -------
Total distributions ........................................... (1.61) (1.08) (.40) (.29) (.22)
-------- -------- -------- -------- -------
Net asset value, end of year .................................. $ 11.17 $ 12.08 $ 11.28 $ 10.26 $ 9.18
======== ======== ======== ======== =======
Total return(2) ............................................... 6.53% 17.83% 14.08% 15.24% (1.81%)
Ratios/supplemental data:
Net assets at end of year (000s) .............................. $44,570 $53,498 $44,989 $39,821 $28,494
Ratio of operating expenses to average net assets* ............ 1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to average net assets* ......... 3.17% 3.03% 3.23% 3.68% 3.05%
Portfolio turnover rate ....................................... 150.05% 136.17% 127.59% 120.62% 142.86%
*Reflects voluntary reduction of expenses
per share of these amounts ................................... $ .08 $ .07 $ .05 $ .07 $ .05
</TABLE>
(1) Per-share figures have been calculated using the average shares method.
(2) Does not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily reduced a portion of the Fund's expenses.
- --------------------------------------------------------------------------------
7
<PAGE>
Strategic Portfolios: Aggressive
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------
Year ended October 31
November 1, 1996 -------------------------------------
to March 27, 1997(1) 1996(1) 1995(1) 1994(2)
--------------------- ------- ------- ----------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 12.45 $ 10.93 $ 9.74 $ 9.55
------- ------- ------- ----------
Net investment income* ................ .10 .14 .20 .09
Net realized and unrealized gain
on investments, foreign
currency and forward contracts .41 1.79 1.19 .14
------- ------- ------- ----------
Total from investment operations....... .51 1.93 1.39 .23
------- ------- ------- ----------
Dividends from net investment
income ............................... (.13) (.17) (.20) (.04)
Distributions from net realized
gains ................................ (1.48) (.24) -- --
------- -------- -------- ----------
Total distributions ................... (1.61) (.41) (.20) (.04)
------- -------- -------- ----------
Net asset value, end of year .......... $ 11.35 $ 12.45 $ 10.93 $ 9.74
======= ======== ======== ==========
Total return(3) ....................... 4.18%(4) 18.05% 14.49% 2.41%(4)
Ratios/supplemental data:
Net assets at end of year (000s) ...... $ -- $ 623 $39,555 $50,999
Ratio of operating expenses to
average net assets* .................. 1.35 (5) 1.35% 1.35% 1.35%(5)
Ratio of net investment income to
average net assets* .................. 1.69 (5) 1.43% 1.98% 2.01%(5)
Portfolio turnover rate ............... 136.48% 145.59% 127.44% 37.75%
*Reflects voluntary reduction of
expenses per share of
these amounts ....................... $ .02 $ .01 $ .02 $ .01
<CAPTION>
Class S
-------------------------------------------------------------
Year ended October 31
-------------------------------------------------------------
1998(1) 1997(1) 1996(1) 1995(1) 1994(2)
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 13.18 $ 12.43 $ 10.94 $ 9.74 $ 9.55
------- ------- ------- ------- ------
Net investment income* ................ .21 .22 .22 .22 .10
Net realized and unrealized gain
on investments, foreign
currency and forward contracts .17 2.27 1.74 1.20 .14
------- ------- ------- ------- ------
Total from investment operations....... .38 2.49 1.96 1.42 .24
------- ------- ------- ------- ------
Dividends from net investment
income ............................... (.24) (.26) (.23) (.22) (.05)
Distributions from net realized
gains ................................ (1.88) (1.48) (.24) -- --
-------- -------- -------- -------- ------
Total distributions ................... (2.12) (1.74) (.47) (.22) (.05)
-------- -------- -------- -------- ------
Net asset value, end of year .......... $ 11.44 $ 13.18 $ 12.43 $ 10.94 $ 9.74
======== ======== ======== ======== ======
Total return(3) ....................... 3.69% 22.54% 18.37% 14.85% 2.50%(4)
Ratios/supplemental data:
Net assets at end of year (000s) ...... $55,848 $77,753 $63,272 $20,809 $ 102
Ratio of operating expenses to
average net assets* .................. 1.10% 1.10% 1.10% 1.10% 1.10%(5)
Ratio of net investment income to
average net assets* .................. 1.81% 1.79% 1.78% 2.13% 2.26%(5)
Portfolio turnover rate ............... 124.15% 136.48% 145.59% 127.44% 37.75%
*Reflects voluntary reduction of
expenses per share of
these amounts ....................... $ .02 $ .02 $ .03 $ .02 $ .01
</TABLE>
(1) Per-share figures have been calculated using the average shares method.
(2) May 16, 1994 (commencement of operations) to October 31, 1994.
(3) Does not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily reduced a portion of the Fund's expenses.
(4) Not Annualized.
(5) Annualized.
8
<PAGE>
The Funds' Investments and Asset Allocation
Each of Strategic Portfolios: Conservative, Strategic Portfolios: Moderate and
Strategic Portfolios: Aggressive has its own investment objective and policies,
as described below. Each Fund's investment objective is a fundamental policy of
that Fund and may not be changed without approval of the shareholders of that
Fund.
In seeking to achieve its investment objective, each Fund follows certain
investment strategies and policies which are described below and which may be
changed without shareholder approval.
Each Fund will generally allocate its net assets over the long term
between equity and debt securities in accordance with the percentage targets
set forth for each Fund below. Each Fund, however, may vary from its target
from time to time within the ranges specified, based on the Investment
Manager's view of economic and market conditions. In addition, each Fund may at
any given point in time hold up to 15% of its net assets in cash or cash items
for reasons of liquidity or for managing the duration of its debt securities.
In the event that, owing to market action or for other reasons, the allocation
of a Fund's net assets falls outside its specified percentage ranges for any
significant length of time, the Investment Manager will rebalance such Fund's
portfolio so that it falls within the specified ranges.
State Street Research Strategic Portfolios: Conservative
The investment objective of Strategic Portfolios: Conservative is to provide,
primarily, a high level of current income and, secondarily, long-term growth of
capital, consistent with the preservation of capital and reasonable investment
risk.
In seeking to achieve this investment objective the Fund allocates assets
across an actively managed diversified mix of debt and equity securities, which
the Fund intends, under normal conditions, to allocate, as percentages of net
assets, as follows:
<TABLE>
<CAPTION>
Security Type Target Range
- --------------- -------- ------
<S> <C> <C>
Debt 70 60-80
Equity 30 20-40
</TABLE>
The Fund will attempt to limit risk by allocating a substantial majority
of the debt portion of its portfolio to investment grade securities. The Fund
will not invest more than 5% of its net assets in non-investment grade debt
securities. Equity securities will generally be stocks of larger, well
established companies.
State Street Research Strategic Portfolios: Moderate
The investment objective of Strategic Portfolios: Moderate is to provide both
current income and capital appreciation, consistent with the preservation of
capital and reasonable investment risk.
In seeking to achieve this investment objective the Fund allocates assets
across an actively managed diversified mix of equity and debt securities, which
the Fund intends, under normal conditions, to allocate, as percentages of net
assets, as follows:
<TABLE>
<CAPTION>
Security Type Target Range
- --------------- -------- ------
<S> <C> <C>
Equity 55 45-65
Debt 45 35-55
</TABLE>
The Fund will attempt to prudently moderate risk by investing in a broad
spectrum of equity and debt securities selected primarily from established
companies and investment grade securities. The equity securities will generally
be traded on either a national securities exchange or the National Association
of Securities Dealers Automated Quotation ("NASDAQ") system.
State Street Research Strategic Portfolios: Aggressive
The investment objective of Strategic Portfolios: Aggressive is to provide high
total return from, primarily, growth of capital and secondarily, current
income, consistent with reasonable investment risk.
In seeking to achieve this investment objective the Fund allocates assets
across an actively managed diversified mix of equity and debt securities, which
the Fund intends, under normal conditions, to allocate, as percentages of net
assets, as follows:
9
<PAGE>
<TABLE>
<CAPTION>
Security Type Target Range
- --------------- -------- ------
<S> <C> <C>
Equity 80 70-90
Debt 20 10-30
</TABLE>
The Fund may invest in stocks of smaller and emerging companies and lower
quality bonds and other securities that management believes will provide higher
returns over the long-term. The equity securities will generally be traded on
either a national securities exchange or the NASDAQ system; however, emphasis
will likely be on securities traded on the NASDAQ system. Since this strategy
involves a higher degree of market risk compared to Strategic Portfolios:
Moderate and Strategic Portfolios: Conservative, this Fund may be more
appropriate for investors who have greater tolerance for market fluctuations.
Equity Securities
Each Fund's equity investments will consist of common stocks, or securities
convertible into common stocks (e.g. preferred stocks, bonds and debentures),
or which carry the right to acquire common stocks (e.g., warrants), primarily
having long-term growth potential. Each Fund invests in a broad range of
industries and a diversified list of companies whose earnings and/or assets are
expected to grow at a rate above the average of the Standard & Poor's 500 Stock
Index (the "S&P 500") over the long term. Consequently, the Investment Manager
seeks to identify those industries offering the greatest possibilitiesfor
profitable expansion. Each Fund also invests in those equity securities which
the Investment Manager believes to be selling below their intrinsic values or
equity securities of cyclical companies at low points in their cycles.
Each Fund may invest in securities of non-U.S. issuers directly or
indirectly, as for example, in American Depositary Receipts and European
Depositary Receipts. See "Investment Practices" herein.
Each Fund to a lesser or greater degree may invest in equity securities of
companies with a smaller or intermediate market capitalization and companies in
the emerging growth stage of development. Such securities generally will
constitute no more than 10% of the net assets of Strategic Portfolios:
Conservative, but may constitute in the range of 10% to 30% and 15% to 40%,
respectively, of Strategic Portfolios: Moderate and Strategic Portfolios:
Aggressive. The Investment Manager considers emerging growth companies to be
those companies which are less mature and have the potential to grow
substantially faster than the economy. Investments in these securities may
involve greater than average risks because of the possible limited
marketability of such securities and the possibility that their prices may
fluctuate more widely than the securities of larger more established companies
or than the market as a whole.
For further information regarding equity investments, see "Investment
Practices" herein and the Statement of Additional Information.
Debt Securities
Each Fund's debt investments consist of a broad range of short-term or
long-term corporate bonds and notes, and U.S. Government securities, and may
also include mortgage-related securities, including jumbo mortgage pools, and
asset-backed securities, both senior and subordinated, zero coupon securities,
pay in kind (PIK) securities, stripped securities, indexed securities, and debt
securities of foreign issuers, governments or agencies.
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. The U.S.
Government securities in which the Funds invest include, among others: direct
obligations of the U.S. Treasury, i.e., U.S. Treasury bills, notes,
certificates and bonds; 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
obligations of mixed-ownership Government corporations such as Resolution
Funding Corporation. 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
10
<PAGE>
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.
Strategic Portfolios: Conservative will invest 55% or more, and Strategic
Portfolios: Moderate will invest 25% or more, of net assets in debt securities
that are considered investment grade by either Standard & Poor's Corporation
("S&P") or Moody's Investors Service, Inc. ("Moody's" ), i.e., rated in the BBB
major rating category or higher by S&P or in the Baa major rating category or
higher by Moody's, or which are not rated but considered by the Investment
Manager to be equivalent to investment grade. Strategic Portfolios: Aggressive
may invest but is not required to invest any particular percentage of net
assets in such debt securities. Strategic Portfolios: Conservative may invest
up to 5%, and Strategic Portfolios: Moderate and Strategic Portfolios:
Aggressive may invest up to 15%, of net assets in non-investment grade debt
securities, including securities rated as low as D by S&P or C by Moody's.
For the fiscal year ended October 31, 1998, the percentage of State Street
Research Strategic Portfolios: Aggressive total investments on an average annual
basis invested in debt securities of any particular rating category or its
equivalent, as determined by the Investment Manager, were as follows: 13.2% AAA,
3.0% AA, 1.0% A, 1.6% BBB, 1.6% BB, 5.7% B and 0.3% CCC, on a dollar weighted
basis, comprising 26.4% of total investments. Similarly, for the same period,
State Street Research Strategic Portfolios: Moderate total investments were as
follows: 32.9% AAA, 5.3% AA, 3.5% A, 4.3% BBB, 1.4% BB, 3.5% B and 0.4% CCC, on
a dollar weighted basis, comprising 51.3% of total investments. Of these bonds,
all were rated by a nationally recognized statistical rating organization. The
above percentages reflect ratings as of the time of purchase and subsequent
changes, if any, including downgrades, for the period the securities were held.
In seeking debt investments for the Funds, including any in the lower
rated categories, the Investment Manager seeks to identify those securities the
returns on which are appropriate within the context of the risks involved. In
doing so, the Investment Manager will consider both its own credit analysis and
the ratings of S&P and Moody's. In the event the rating of a security held by a
Fund 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. When interest rates increase, the value of debt
securities and shares of a Fund can be expected to decline.
For debt rated within the BBB category by S&P, adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal. Bonds rated in the Baa category by Moody's lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Lower rated high yield, high risk securities (i.e.,
bonds rated within the BB category or lower by S&P or within the Ba category or
lower by Moody's or equivalent as determined by the Investment Manager)
commonly known as "junk bonds" 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. Such securities may also be
subject to greater market price fluctuations than lower yielding, higher rated
debt securities; credit ratings do not reflect this market risk. In addition,
these ratings may not reflect the effect of recent developments on an issuer's
ability to make interest and principal payments. Bonds rated in the lowest
category and in default may never resume interest payments or repay principal,
and their market value may be difficult to determine. Additional risks of such
securities include (i) limited liquidity and secondary market support,
particularly in the case of securities that are not rated or are subject to
restrictions on resale, which may limit the availability of securities for
purchase by the Funds, limit the ability of the Funds to sell portfolio
securities either to meet redemption requests or in response to changes in the
economy or the financial markets, heighten the effect of adverse publicity and
investor perceptions and make selection and valuation of portfolio securities
more subjective and dependent upon the Investment Manager's credit analysis;
(ii) substantial market price volatility and/or the potential for the
insolvency of issuers during periods of changing interest rates and economic
difficulty, particularly with respect to securities that do not pay interest
currently in cash; (iii) subordination to the prior claims of banks and
11
<PAGE>
other senior lenders; (iv) the possibility that earnings of the issuer may be
insufficient to meet its debt service; and (v) the realization of taxable
income for shareholders without the corresponding receipt of cash in connection
with investments in "zero coupon" or "pay-in-kind" securities. Growth in the
market for lower rated high yield, high risk securities has parallelled a
general expansion in certain sectors in the U.S. economy, and the effects of
adverse economic changes (including recessions) are unclear.
For further information concerning the ratings of debt securities, see the
Appendix to this Prospectus.
Strategic Portfolios: Conservative, Strategic Portfolios: Moderate and
Strategic Portfolios: Aggressive may invest up to 40%, 30% and 15%,
respectively, of total assets in mortgage-related securities which the
Investment Manager considers to be investment grade securities.
Mortgage-related securities represent interests in private pools of
mortgage loans and provide the Funds with a flow-through of interest and
principal payments as such payments are received with respect to the mortgages
in the pool. Mortgage-related securities may be issued by private entities such
as investment banking firms, insurance companies, mortgage bankers and home
builders. An issuer may offer senior or subordinated securities related to the
same pool of mortgages. The senior securities have priority to the interest
and/or principal payments on the mortgages in the pool; the subordinate
securities have less priority to such payments. The possibility of prepayment
of underlying mortgages, which might be motivated, for instance, by declining
interest rates, could lessen the potential for total return in mortgage-related
securities. Under such conditions it may not be possible to reinvest the
proceeds at the prior interest rate levels.
U.S. Government agency securities and private label mortgage-related
securities in which the Funds may invest include: collateralized mortgage
obligations which may be sequential, planned amortization class or tactical
amortization class; adjustable rate mortgages; and whole or jumbo loans which
are loans in excess of an agency's maximum mortgage size.
Jumbo mortgage pools are backed by mortgages on single family residential
homes for a dollar amount higher than mortgages underwritten by government-
backed agency mortgage programs. Investments in these pools are subject to the
additional risks entailed by the geographic and economic concentration of a
majority of the mortgages in these pools being in large metropolitan centers on
the East and West coasts and on homes owned by high income individuals and the
adverse effect of possible recessions in these areas resulting in potential
defaults in mortgage payments and consequent losses to the pool.
Each Fund may also invest in stripped securities issued by governmental or
private issuers. Stripped securities include mortgage-backed securities which
have been divided into separate interest and principal components. Holders of
the interest components will receive payments of the interest, and holders of
the principal components will receive payments of the principal, on the
mortgages. Issuers may issue combinations of interest components and principal
components. "Interest only" securities are known as IOs; "principal only"
securities are known as POs. The risks inherent in IOs and POs, or variations
thereof, stem from the effects of declining interest rates and the resultant
prepayments of the mortgages. For example, if the underlying mortgage
securities experience greater than anticipated prepayments of principal, a Fund
may fail to fully recoup its initial investment in an IO, even though the IO is
rated in the highest rating category by a nationally recognized statistical
rating organization. In the case of a PO, a Fund may have difficulty
reinvesting receipts of prepayments of principal for an attractive return. The
market for IOs and POs is new and there is no assurance it will operate
efficiently or provide liquidity in the future.
Asset-backed (other than mortgage-related) securities represent interests
in pools of consumer loans such as credit card receivables, auto loans and
leases, loans on equipment such as computers, and other financial instruments.
These securities provide a flow-through of interest and principal payments as
payments are received on the loans or leases and may be supported by letters of
credit or similar guarantees of payment by a financial institution. These
securities
12
<PAGE>
are subject to the risks of non-payment of the underlying loans as well as the
risks of pre-payment. An interest in a bank sponsored master trust which holds
the receivables for a major international credit card is an example of an
asset-backed security; an interest in a trust which holds the customer
receivables for a large consumer products company is another example.
Strategic Portfolios: Conservative, Strategic Portfolios: Moderate and
Strategic Portfolios: Aggressive may invest up to 35%, 25%, and 10%,
respectively, of total assets in stripped and asset-backed (other than
mortgage-related) securities which the Investment Manager considers to be
investment grade.
Zero or step coupon securities 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 a
Fund. The reporting of interest for PIK securities is similar to the reporting
of interest for zero coupon securities. Each Fund will be required to
distribute all or substantially all of such amounts annually to its
shareholders. These distributions may cause a 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 amount of the discount
fluctuates with the market value of such securities, which may be more volatile
than that of securities which pay interest at regular intervals. PIK debt
securities permit the issuer to pay the interest thereon either in cash or as
additional debt obligations and generally provide a higher rate of overall
return than obligations which pay interest on a regular basis although they may
experience greater market volatility than the latter. Excluding U.S. Treasury
strip securities (zero coupon securities), none of the Funds expect to invest
more than 5% of its net assets in zero or step coupon securities.
Other Risks and Investment Practices
Foreign Investments
Each 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") and European Depositary Receipts ("EDRs") or indices or
baskets of securities of foreign issuers. Under current policy, however,
Strategic Portfolios: Conservative limits such investments to a maximum of 25%,
Strategic Portfolios: Moderate to a maximum of 30%, and Strategic Portfolios:
Aggressive to a maximum of 35%, of its total assets including ADRs.
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. Generally, ADRs in registered form are designed for use
in U.S. securities markets and EDRs are designed for use in European securities
markets. The underlying securities are not always denominated in the same
currency as the ADRs or EDRs. Although investment in the form of ADRs or EDRs
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 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. A 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
13
<PAGE>
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. Investments
in foreign securities also involve the additional cost of converting foreign
currency into U.S. dollars.
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.
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. Each 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 each
Fund will consist of securities of issuers in countries with developed
economies.
For further information regarding foreign investments, see the Statement
of Additional Information.
Currency Transactions
In order to protect against the effect of uncertain future exchange rates on
securities denominated in foreign currencies, each Fund may engage in 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. Although such contracts tend to
minimize the risk of loss resulting from a correctly predicted decline in value
of hedged currency, they tend to limit any potential gain that might result
should the value of such currency increase. In entering a forward currency
transaction, the Funds are dependent upon the creditworthiness and good faith
of the counterparty. The Funds will attempt to reduce the risks of
nonperformance by a counterparty by dealing only with established, reputable
institutions with which the Investment Manager has done substantial business in
the past. For further information, see the Statement of Additional Information.
Securities Lending
A Fund may lend portfolio securities with a value of up to 33-1/3% of its total
assets. A 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 the loaned securities plus accrued interest. Collateral
received by a 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 a
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. Voting rights pass with the lending, although
a 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 to be of good financial
standing.
Other Considerations
Certain Derivative Securities
Each Fund may, subject to certain limitations, buy and sell options, futures
contracts and options on futures contracts on securities and securities
indices.
14
<PAGE>
A Fund may not establish a position in a commodity futures contract or purchase
or sell a commodity option contract for other than bona fide hedging purposes
if immediately thereafter the sum of the amount of initial margin deposits and
premiums required to establish such positions for such nonhedging purposes
would exceed 5% of the market value of its net assets; similar policies apply
to options which are not commodities. Each Fund may enter various forms of swap
arrangements, which have simultaneously the characteristics of a security and a
futures contract, although none of the Funds presently expect to invest more
than 5% of its total assets in such items. These swap arrangements include
credit protection swaps, interest rate swaps, currency swaps and index swaps.
See the Statement of Additional Information.
Other Investments
The Fund may invest in securities restricted as to resale. Restricted
securities may be subject to the risks of illiquidity and subjective valuations
because generally, there is a limited resale market for them. Some restricted
securities in which the Fund may invest may be resold pursuant to Rule 144A
under the Securities Act of 1933, as amended (the "1933 Act"), which allows the
Fund more flexibility to resell such securities, specifically to certain
qualified institutional buyers. The market for Rule 144A securities, however,
still is developing, and thus, even securities sold pursuant to the rule may be
illiquid or their current market value difficult to determine.
Each Fund may enter into repurchase agreements and purchase securities on
a "when-issued" or forward commitment basis. See the Statement of Additional
Information.
Portfolio Turnover
Each Fund reserves full freedom with respect to portfolio turnover. In periods
when there are rapid changes in economic conditions or security price levels or
when investment strategy changes significantly, portfolio turnover may be
higher than during times of economic and market price stability or when
investment strategy remains relatively constant. A higher portfolio turnover
rate may result in greater transaction costs relative to other funds, and may
have tax and other consequences as well. See the Statement of Additional
Information.
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 in this area, including the possibility that year
2000 computer problems could negatively affect communication systems,
investment markets or the economy in general.
Limiting Investment Risk
In seeking to lessen investment risk, each Fund operates under certain
investment restrictions which may not be changed except by a vote of the
shareholders of the Fund. Under these restrictions, none of the Funds may
purchase a security of any one issuer (other than securities issued or
guaranteed as to principal or interest by the U.S. Government or its agencies
or instrumentalities or mixed-ownership Government corporations) if such
purchase would, with respect to 75% of the Fund's total assets, cause more than
5% of the Fund's total assets to be invested in the securities of such issuer
or, cause more than 10% of the voting securities of such issuer to be held by
the Fund (except that for Strategic Portfolios: Conservative the 10% limit on
voting securities applies to 100% of the Fund's total assets). None of the
Funds may invest more than 25% of the Fund's total assets in securities of
issuers principally engaged in any one industry, except this restriction does
not apply to investments in U.S. Government securities. In addition, each Fund
may borrow money (through reverse repurchase agreements or otherwise) only for
extraordinary and emergency purposes, and then not in an amount in excess of
25% of the value of its total assets.
Each Fund operates under other investment restrictions which may be
changed without shareholder approval. Under these restrictions none of the
Funds may invest more than 15% of its total assets in illiquid securities
including repurchase agreements extending for more than seven days. An illiquid
portfolio may affect the ability of a Fund to sell securi-
15
<PAGE>
ties either to meet redemption requests or in response to changes in the
economy or the financial markets.
For further information on the above and other investment restrictions,
including additional investment restrictions which may be changed without a
shareholder vote, see the Statement of Additional Information.
A Fund may not lend money; however, a Fund may purchase bonds, debentures,
notes and similar obligations (and enter into repurchase agreements with
respect thereto).
Each Fund may hold up to 100% of its assets in cash or short-term debt
securities for temporary defensive purposes. A 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 a Fund may invest for such purposes include short-term
money market securities such as repurchase agreements, U.S. Government
securities, certificates of deposit, time deposits and bankers' acceptances of
certain qualified financial institutions and corporate commercial paper rated
at the time of purchase at least within the "A" category by S&P or within the
"Prime" 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 Moody's). See the Statement of Additional Information. When
a Fund adopts a temporary defensive position, its investment objective may not
be achieved.
[boxed text]
- --------------------------------------------------------------------------------
Information on the Purchase of Shares, Redemption of Shares and Shareholder
Services is set forth below on pages 16 to 31.
- --------------------------------------------------------------------------------
The Funds are available for investment by many kinds of investors including
participants investing through 401(k) or other retirement plan sponsors,
employees investing through savings plans sponsored by employers, Individual
Retirement Accounts ("IRAs"), trusts, corporations, individuals, etc. The
applicability of the general information and administrative procedures set
forth below under Purchase of Shares, Redemption of Shares and Shareholder
Services accordingly will vary depending on the investor and the
recordkeeping system established for a shareholder's investment in a Fund.
Participants in 401(k) and other plans should first consult with the
appropriate person at their employer or refer to the plan materials before
following any of the procedures below. For more information or assistance,
anyone may call 1-800-562-0032.
- --------------------------------------------------------------------------------
Purchase of Shares
Methods of Purchase
Through Dealers and Others
Shares of the Funds are continuously offered through securities dealers,
financial institutions and others (collectively referred to herein as
securities dealers or dealers) who have entered into sales agreements with the
Distributor. Purchases through dealers are confirmed at the offering price,
which is the net asset value plus the applicable sales charge, next determined
after the order is duly received by State Street Research Service Center
("Service Center"), a division of State Street Research Investment Services,
Inc., from the dealer. ("Duly received" for purposes herein means in accordance
with the conditions of the applicable method of purchase as described below.)
The dealer is responsible for transmitting the order promptly to the Service
Center in order to permit the investor to obtain the current price. See
"Purchase of Shares--Net Asset Value" herein.
16
<PAGE>
By Mail
Initial investments in a Fund may be made by mailing or delivering to the
investor's dealer a completed Application (accompanying this Prospectus),
together with a check for the total purchase price payable to the Fund. The
dealer must forward the Application and check in accordance with the
instructions on the Application.
Additional shares may be purchased by mailing to the Service Center a
check payable to a Fund in the amount of the total purchase price together with
any one of the following: (i) an Application; (ii) the stub from a
shareholder's account statement; or (iii) a letter setting forth the name of
the Fund, the class of shares and the shareholder's account name and number.
The Service Center will deliver the purchase order to the transfer agent and
dividend paying agent, State Street Bank and Trust Company (the "Transfer
Agent").
If a 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 cancelled.
By Wire
An investor may purchase shares by wiring Federal Funds of not less than $5,000
to State Street Bank and Trust Company, which also serves as the Trust's
custodian (the "Custodian"), as set forth below. Prior to making an investment
by wire, an investor must notify the Service Center at 1-800-562-0032 and
obtain a control number and instructions. Following such notification, Federal
Funds should be wired through the Federal Reserve System to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF = Name of Fund and class of shares
(A, B, C or S)
AC = 99029761
OBI = Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street
Research Service Center)
In order for a wire investment to be processed on the same day (i) the
investor must notify the Service Center of his or her intention to make such
investment by 12 noon Boston time on the day of his or her investment; and (ii)
the wire must be received by 4 P.M. Boston time that same day. If the New York
Stock Exchange closes before 4 P.M. Boston time, you may be unable to make a
same-day wire investment.
An investor making an initial investment by wire must promptly complete
the Application accompanying this Prospectus and deliver it to his or her
securities dealer, who should forward it as required. No redemptions will be
effected until the Application has been duly processed.
A Fund may in its discretion discontinue, suspend or change the practice
of accepting orders by any of the methods described above. Orders for the
purchase of shares are subject to acceptance by a Fund. Each Fund reserves the
right to suspend the sale of shares, or to reject any purchase order, including
orders in connection with exchanges, for any reason.
Minimum Investment
<TABLE>
<CAPTION>
Class of Shares
------------------------------------------
A B C S
--------- --------- --------- ------
<S> <C> <C> <C> <C>
Minimum Initial Investment
By Wire .................... $5,000 $5,000 $5,000 (a)
IRAs ....................... $2,000 $2,000 $2,000 (a)
By Investamatic ............ $1,000 $1,000 $1,000 (a)
All other .................. $2,500 $2,500 $2,500 (a)
Minimum Subsequent Investment
By Wire .................... $5,000 $5,000 $5,000 (a)
IRAs ....................... $ 50 $ 50 $ 50 (a)
By Investamatic ............ $ 50 $ 50 $ 50 (a)
All other .................. $ 50 $ 50 $ 50 (a)
</TABLE>
(a) Special conditions apply; contact the Distributor.
Each Fund reserves the right to vary the minimums for initial or
subsequent investments as in the case of, for example, exchanges and
investments under various employee benefit plans, sponsored arrangements
involving group solicitations of the members of an organization, or other
investment plans for reinvestment of dividends and distributions or for
periodic investments (e.g., Investamatic Program).
17
<PAGE>
Alternative Purchase Program
General
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 a Fund with the investment being subject thereafter to ongoing service fees
and distribution fees.
As described in greater detail below, dealers are paid differing amounts
of commission and other compensation depending on which class of shares they
sell.
18
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS S
----------------------- -------------------- ----------------- --------
<S> <C> <C> <C> <C>
Sales Charges Initial sales charge Contingent Contingent None
at time of deferred sales deferred sales
investment of up charge of 5% to charge of 1%
to 4.5% depending 2% applies to any applies to any
on amount of shares redeemed shares redeemed
investment within first five within one year
years following following their
their purchase; no purchase
contingent deferred
sales charge after
five 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
Distribution Fee None 0.75% for first 0.75% each year None
eight years; Class
B shares convert
automatically to
Class A shares
after eight years
Service Fee 0.25% each year 0.25% each year 0.25% each year None
Initial Above described 4% 1% None
Commission initial sales charge
Received by less 0.25% to
Selling 0.50% retained by
Dealers Distributor
On investments of
$1 million or
more, 0.25% to
1% paid to dealer
by Distributor
</TABLE>
19
<PAGE>
In deciding which class of shares to purchase, the investor should
consider the amount of the investment, the length of time the investment is
expected to be held, and the ongoing service fee and distribution fee, among
other factors.
Class A shares are sold at net asset value plus an initial sales charge of
up to 4.5% of the public offering price. Because of the sales charge, not all
of an investor's purchase amount is invested unless the purchase equals
$1,000,000 or more. Class B shareholders pay no initial sales charge, but a
contingent deferred sales charge of up to 5% generally applies to shares
redeemed within five years of purchase. Class C shareholders also pay no
initial sales charge, but a contingent deferred sales charge of 1% generally
applies to redemptions made within one year of purchase. For Class B and Class
C shareholders, therefore, the entire purchase amount is immediately invested
in a Fund.
An investor who qualifies for a significantly reduced initial sales
charge, or a complete waiver of the sales charge on investments of $1,000,000
or more, on the purchase of Class A shares might elect that option to take
advantage of the lower ongoing service and distribution fees that characterize
Class A shares compared with Class B or Class C shares.
Class A, Class B and Class C shares are assessed an annual service fee of
0.25% of average daily net assets. Class B shares are assessed an annual
distribution fee of 0.75% of daily net assets for an eight-year period
following the date of purchase and are then automatically converted to Class A
shares. Class C shares are assessed an annual distribution fee of 0.75% of
daily net assets for as long as the shares are held. The prospective investor
should consider these fees plus the initial or contingent deferred sales
charges in estimating the costs of investing in the various classes of a Fund's
shares.
Class S shares are available through certain employee benefit plans, and
special programs with financial intermediaries, among other arrangements.
Some of the service and distribution fees are allocated to dealers (see
"Distribution Plan" below). In addition, the Distributor will, at its expense,
provide additional cash and noncash incentives to dealers that sell shares.
Such incentives may be extended only to those dealers that have sold or may
sell significant amounts of shares and/or meet other conditions established by
the Distributor; for example, the Distributor may sponsor special promotions to
develop particular distribution channels or to reach certain investor groups.
The Distributor may also compensate those dealers with clients who maintain
their investments in a Fund over a period of years. The incentives may include
merchandise and trips to and attendance at sales seminars at resorts. The
Distributor may also pay its affiliate MetLife Securities, Inc. additional
sales compensation of up to 0.25% of certain sales or assets.
Class A Shares--Initial Sales Charges
Sales Charges
The purchase price of a Class A share of a Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar amount
of the shares purchased as set forth in the table below. A major portion of
this sales charge is reallowed by the Distributor to the dealer responsible for
the sale.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Sales Sales
Charge Charge
Paid By Paid By Dealer
Dollar Investor Investor Concession
Amount of As % of As % of As % of
Purchase Purchase Net Asset Purchase
Transaction Price Value Price
- ------------------------------------------------------------------
<S> <C> <C> <C>
Less than
$100,000 4.50% 4.71% 4.00%
- ------------------------------------------------------------------
$100,000 or
above but less
than $250,000 3.50% 3.63% 3.00%
- ------------------------------------------------------------------
$250,000 or
above but less
than $500,000 2.50% 2.56% 2.00%
- ------------------------------------------------------------------
$500,000 or
above but less
than $1 million 2.00% 2.04% 1.75%
- ------------------------------------------------------------------
See
$1 million and following
above 0% 0% discussion
- ------------------------------------------------------------------
</TABLE>
20
<PAGE>
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor may pay the authorized dealer a commission
based on the aggregate of such sales as follows:
<TABLE>
<CAPTION>
Amount of Sale Commission
- ------------------------------ -----------
<S> <C>
(a) $1 million to $3 million 1.00%
(b) Next $2 million 0.50%
(c) Amount over $5 million 0.25%
</TABLE>
On such sales of $1,000,000 or more, unless the above commission is waived
by the dealer, the investor is subject to a 1% contingent deferred sales charge
on any portion of the purchase redeemed within one year of the sale. However,
such redeemed shares will not be subject to the contingent deferred sales
charge to the extent that their value represents (1) capital appreciation or
(2) reinvestment of dividends or capital gains distributions. In addition, the
contingent deferred sales charge will be waived for certain other redemptions
as described under "Contingent Deferred Sales Charge Waivers" below (as
otherwise applicable to Class B shares).
Class A shares of a Fund that are purchased without a sales charge may be
exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption within
one year of the Class A shares which are acquired through such exchange. 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. The amount of any contingent deferred sales charge will
be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement of
Additional Information, of $100,000 or more of Class A shares of a Fund or a
combination of "Eligible Funds." "Eligible Funds" include the Funds and other
funds so designated by the Distributor from time to time. Class B, Class C and
Class S shares may also be included in the combination under certain
circumstances. Securities dealers should call the Service Center for details
concerning the other Eligible Funds and any persons who may qualify for reduced
sales charges and related information. See the Statement of Additional
Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A shares
of a Fund and any other Eligible Funds within a 13- month period. Class B,
Class C and Class S shares may also be included under certain circumstances.
Additional information on a Letter of Intent is available from dealers, or from
the Distributor, and also appears in the Statement of Additional Information.
Right of Accumulation
Investors may purchase Class A shares of a Fund or a combination of shares of
the Funds and other Eligible Funds at reduced sales charges pursuant to a Right
of Accumulation. Under the Right of Accumulation, the sales charge is
determined by combining the current purchase with the value of the Class A
shares of other Eligible Funds held at the time of purchase. Class B, Class C
and Class S shares may also be included in the combination under certain
circumstances. See the Statement of Additional Information and call the Service
Center for details concerning the Right of Accumulation.
Other Programs
Class A shares of the Funds may be sold or issued in an exchange at a reduced
sales charge or without a 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 Funds
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
21
<PAGE>
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 a Fund to the following entities and persons: (A) the
Investment Manager, Distributor, or any affiliated entities, includ-ing any
direct or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
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, minimum
investments by various groups of eligible persons and any other matters, as may
be adopted by the Distributor from time to time.
Class B Shares--Contingent Deferred Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is duly received, as defined herein.
No sales charge is imposed at the time of purchase; thus the full amount of the
investor's purchase payment will be invested in the Funds. However, a
contingent deferred sales charge may be imposed upon redemptions of Class B
shares as described below.
The Distributor will pay securities dealers at the time of sale a 4%
commission for selling Class B shares. In certain cases, a dealer may elect to
waive the 4% commission on Class B shares and receive in lieu thereof a 1%
annual fee with respect to such shares until the shares convert to Class A
shares. The proceeds of the contingent deferred sales charge and the
distribution fee are used to offset distribution expenses and thereby permit
the sale of Class B shares without an initial sales charge.
Class B shares that are redeemed within a five-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 amount of any applicable contingent deferred sales charge will be
calculated by multiplying the net asset value of such shares at the time of
redemption or at the time of purchase, whichever is lower, by the applicable
percentage shown in the table below:
<TABLE>
<CAPTION>
Contingent
Deferred Sales
Charge As
A Percentage Of
Redemption During Net Asset Value
- ------------------------------------------------ ----------------
<S> <C>
1st Year Since Purchase ........................ 5%
2nd Year Since Purchase ........................ 4
3rd Year Since Purchase ........................ 3
4th Year Since Purchase ........................ 3
5th Year Since Purchase ........................ 2
6th Year Since Purchase and Thereafter ......... None
</TABLE>
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B 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 the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of a 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 Class B shares being redeemed will be
considered to represent, as applicable, capital appreciation or dividend and
capital gains 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
22
<PAGE>
reduce the gain or increase the loss, as the case may be, on the amount
realized on redemption. The amount of any contingent deferred sales charge will
be paid to the Distributor.
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic withdrawal plan which meets certain conditions.
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 for retirement accounts or plans (e.g.,
age 70-1/2 for IRAs and Section 403(b) plans), calculated solely on the basis of
assets invested in a Fund or other Eligible Funds; and (iii) a redemption
resulting from a tax-free return of an excess contribution to an IRA. (The
foregoing waivers do not apply to a tax-free rollover or transfer of assets out
of a Fund.) The Funds may modify or terminate the waivers described above at
any time; for example, the Funds may limit the application of multiple waivers
and establish other conditions for employee benefit plans.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends or
distributions with respect to such shares, will automatically convert to Class
A shares of a Fund at the end of eight years following the issuance of the
Class B shares; consequently, they will no longer be subject to the higher
expenses borne by 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 Class B shares so converted. As noted above, holding periods
for Class B shares received in exchange for Class B shares of other Eligible
Funds will be counted toward the eight-year period.
Class C Shares--Spread Sales Charges
The purchase price of a Class C share of a Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase; thus the
full amount of the investor's purchase payment will be invested in the Funds.
Class C shares are subject to a 1% contingent deferred sales charge on any
portion of the purchase redeemed within one year of the sale. The contingent
deferred sales charge will be 1% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. The Distributor
pays dealers a 1% commission for selling Class C shares at the time of
purchase. The proceeds of the contingent deferred sales charge and the
distribution fee are used to offset distribution expenses and thereby permit
the sale of Class C shares without an initial sales charge.
Class C shares that are redeemed within one year after purchase will not
be subject to the 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. In addition, the
contingent deferred sales charge will be waived for certain other redemptions
as described under "Contingent Deferred Sales Charge Waivers" above (as
otherwise applicable to Class B shares). 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. The amount
of any contingent deferred sales charge will be paid to the Distributor.
Class S Shares--Special Programs; No Sales Charge
The purchase price of a Class S share of a Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase or
redemption. The Funds will receive the full amount of the investor's purchase
payment.
In general, Class S shares are only available for new investments by
certain large institutions, other
23
<PAGE>
advisory accounts of the Investment Manager, and employee benefit plans which
acquire shares through programs or products sponsored by Metropolitan Life
Insurance Company ("Metropolitan") and/or its affiliates, 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 overall direct and indirect costs
of a particular program, expected assets, account sizes and similar
considerations. Information on the availability of Class S shares and further
conditions and limitations is available from the Distributor.
Net Asset Value
Each Fund's per share net asset values are determined Monday through Friday as
of the close of regular trading on the New York Stock Exchange (the "NYSE")
exclusive of days on which the NYSE is closed. The NYSE ordinarily closes at 4
P.M. New York City time. Assets held by a Fund are valued on the basis of the
last reported sale price or quotation as of the close of business on the
valuation date, except that securities and assets for which market quotations
are not readily available are valued as determined in good faith by or under the
authority of the Trustees of the Trust. The Trustees reserve the right to adopt
alternative valuations based on fair value pricing in unusual circumstances
where use of other methods could otherwise have a material adverse effect on the
Fund as a whole. In determining the value of certain assets for which market
quotations are not readily available, the Funds may use one or more pricing
services. The pricing 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. 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. Further information with respect to the valuation of the
Funds' assets is included in the Statement of Additional Information.
Distribution Plan
Each Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the provisions of the
Distribution Plan, each Fund makes payments to the Distributor based on an
annual percentage of the average daily value of the net assets of each class of
shares as follows:
<TABLE>
<CAPTION>
Class Service Fee Distribution Fee
- ------- ------------- -----------------
<S> <C> <C>
A 0.25% None
B 0.25% 0.75%
C 0.25% 0.75%
S None None
</TABLE>
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 or servicing of shareholder accounts.
A portion of any initial commission paid to dealers for the sale of shares of a
Fund represents payment for personal services and/or the maintenance of
shareholder accounts by such dealers. Dealers who have sold Class A shares are
eligible for reimbursement commencing as of the time of such sale. Dealers who
have sold Class B and Class C shares are eligible for reimbursement after the
first year during which such shares have been held of record by such dealer as
nominee for its clients (or by such clients directly). Any service fees
received by the Distributor and not allocated to dealers may be applied by the
Distributor in reduction of expenses incurred by it for personal services and
the maintenance or servicing of shareholder accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to dealers for selling such shares. Any distribution fees
received by the Distributor and not allocated to dealers may be applied by the
Distributor in connection with sales or marketing efforts, including special
promotional fees and cash and noncash incentives based upon sales by dealers.
The Fund may continue to pay service and distribution fees even if the
Fund is subsequently closed to new investors. The Distributor provides
distribution services on behalf of other funds having distribution
24
<PAGE>
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.
Commissions and other cash and noncash incentives and payments to dealers,
to the extent payable out of the general profits, revenues or other sources of
the Distributor (including the advisory fees paid by the Funds), have also been
authorized pursuant to the Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which a Fund may incur under the Distribution
Plan to 1%, of which 0.75% may be used to pay distribution expenses and 0.25%
may be used to pay shareholder service fees. The NASD rule also limits the
aggregate amount which a 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
shareholder service fees. Payments to the Distributor or to dealers funded
under the Distribution Plan may be discontinued at any time by the Trustees of
the Trust.
Redemption of Shares
Shareholders may redeem all or any portion of their accounts on any day the
NYSE is open for business. Redemptions will be effective at the net asset value
per share next determined (see "Purchase of Shares-- Net Asset Value" herein)
after receipt of the redemption request, in accordance with the requirements
described below, by the Service Center and delivery of the request by the
Service Center to the Transfer Agent. To allow time for the clearance of checks
used for the purchase of any shares which are tendered for redemption shortly
after purchase, the remittance of the redemption proceeds for such shares could
be delayed for 15 days or more after the purchase. Shareholders who anticipate
a potential need for immediate access to their investments should, therefore,
purchase shares by wire. Except as noted, redemption proceeds from a Fund are
normally remitted within seven days after receipt of the redemption request by
a Fund and any necessary documents in good order.
Methods of Redemption
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed to
the shareholder or wired to a predesignated bank account (see "Proceeds By
Wire" below), by sending to State Street Research Service Center, P.O. Box
8408, Boston, Massachusetts 02266-8408: (1) a written request for redemption
signed by the registered owner(s) of the shares, exactly as the account is
registered; (2) an endorsed stock power in good order with respect to the
shares or, if issued, the share certificates for the shares endorsed for
transfer or accompanied by an endorsed stock power; (3) any required signature
guarantees (see "Redemption of Shares--Signature Guarantees" below); and (4)
any additional documents which may be required for redemption in the case of
corporations, trustees, etc., such as certified copies of corporate
resolutions, governing instruments, powers of attorney, and the like. The
Transfer Agent will not process requests for redemption until it has received
all necessary documents in good order. A shareholder will be notified promptly
if a redemption request cannot be accepted. Shareholders having any questions
about the requirements for redemption should call the Service Center toll-free
at 1-800-562-0032.
Request By Telephone
Shareholders may request redemption by telephone with proceeds to be
transmitted by check or by wire (see "Proceeds By Wire" below). A shareholder
can request a redemption for $100,000 or less to be transmitted by check. Such
check for the proceeds will be made payable to the shareholder of record and
will be mailed to the address of record. There is no fee for this service. It
is not available if the address of record has been changed within 30 days of
the redemption request. The Funds may revoke or suspend the telephone
redemption privilege at any time
25
<PAGE>
and without notice. See "Shareholder Services-- Telephone Services" for a
discussion of the conditions and risks associated with Telephone Privileges.
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder has
Telephone Privileges (see "Shareholder Services--Telephone Services" herein),
the Trust's custodian will wire redemption proceeds to the shareholder's
predesignated bank account. To make the request, the shareholder should call
1-800-562-0032 prior to 4 P.M. Boston time. A $7.50 charge against the
shareholder's account will be imposed for each wire redemption. This charge is
subject to change without notice. The shareholder's bank may also impose a
charge for receiving wires of redemption proceeds. The minimum redemption by
wire is $5,000.
Request to Dealer to Repurchase
For the convenience of shareholders, each 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 Funds 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. Payment of the repurchase proceeds is made to the dealer who
placed the order promptly upon delivery of certificates for shares in proper
form for transfer or, for Open Accounts, upon the receipt of a stock power with
signatures guaranteed as described below, and, if required, any supporting
documents. Neither the Fund nor the Distributor imposes any charge upon such a
repurchase. However, a dealer may impose a charge as agent for a shareholder in
the repurchase of his or her shares.
The Funds have reserved the right to change, modify or terminate the
services described above at any time.
Additional Information
Because of the relatively high cost of maintaining small shareholder accounts,
each Fund reserves the right to involuntarily 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 involuntary redemptions will be
subject to applicable sales charges, if any. Each 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 a Fund, and the proceeds of the
redemption will be mailed promptly 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 a 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.
A 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 value; or (3)
during such other periods as the Securities and Exchange Commission may by
order permit for the protection of investors; and (b) the payment of
26
<PAGE>
redemption proceeds may be postponed as otherwise provided under "Redemption of
Shares" herein.
Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Funds, the Investment
Manager and the Distributor from possible fraud, signature guarantees are
required for certain redemptions. Signature guarantees help the Transfer Agent
determine that the person who has authorized a redemption from the account is,
in fact, the shareholder. Signature guarantees are required for, among other
things: (1) written requests for redemptions for more than $50,000; (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
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. Please contact the Service Center at 1-800-562-0032 for specific
requirements relating to your account.
Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of each 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 shares will not be issued. Shareholders will receive
periodic statements of transactions in their accounts.
The Funds' Open Account System provides the following options:
1. Additional purchases of shares of a Fund may be made through dealers, by
wire or by mailing a check, payable to the Fund, to the Service Center
under the terms set forth above under "Purchase of Shares."
2. The following methods of receiving dividends from investment income and
distributions from capital gains are available:
(a) All income dividends and capital gains distributions reinvested in
additional shares of the applicable Fund.
(b) All income dividends in cash; all capital gains distributions
reinvested in additional shares of the applicable Fund.
(c) All income dividends and capital gains distributions in cash.
(d) 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 automatically be coded for reinvestment of all
dividends and distributions in additional shares of the same class of the
applicable 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 Privilege
Shareholders of a Fund may exchange their shares for available shares with
corresponding characteristics of any of the other Eligible Funds, subject to any
applicable initial holding period, 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 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 a Fund
into other Eligible Funds. To effect an exchange, Class A, Class B and Class C
shares may be redeemed without the payment of any contingent deferred sales
charge that
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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 a 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. Class
A shares acquired through a new investment after January 1, 1999, are subject to
an incremental sales charge if exchanged within 30 days of acquisition for Class
A shares of a Fund with a higher applicable sales charge. For purposes of
computing the contingent deferred sales charge that may be payable upon
disposition of any acquired Class A, Class B and Class C shares, the holding
period of the redeemed shares is "tacked" to the holding period of the acquired
shares. The period any Class E shares are held is not tacked to the holding
period of any acquired shares. No exchange transaction fee is currently imposed
on any exchange.
Shares of a 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 Funds 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
a Fund, (a) no sales charge is imposed by Summit Cash Reserves, (b) no
contingent deferred sales charge is imposed by a 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 a 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 or
Class C shares of a 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.
For the convenience of the shareholders who have Telephone Privileges, the
Funds permit exchanges by telephone request from either the shareholder or his
or her dealer. Shares may be exchanged by telephone provided that the
registration of the two accounts is the same. The toll-free number for
exchanges is 1-800-562-0032. See "Telephone Services" herein for a discussion
of conditions and risks associated with Telephone Privileges.
The exchange privilege may be exercised only in those states where shares
of the relevant other Eligible Fund may legally be sold. For tax purposes, each
exchange actually represents the sale of shares of one fund and the purchase of
shares of another. Accordingly, exchanges may produce a capital gain or loss
for tax purposes. 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 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, each Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into such 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, each 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 a Fund receives or anticipates
simultaneous orders affecting significant portions of the Fund's assets. In
particular, a pattern of exchanges that
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coincides with a "market timing" strategy may be disruptive to a Fund. Each
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, the exchange usually
will occur that day. For further information regarding the exchange privilege,
shareholders should consult Shareholder Services.
Reinvestment Privilege
A shareholder of a 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 a Fund. No charge is imposed by the Funds for such
reinvestments; however, dealers may charge fees in connection with the
reinvestment privilege. The reinvestment privilege may be exercised with
respect to an Eligible Fund only in those states where shares of the relevant
other Eligible Fund may legally be sold.
Investment Plans
The Investamatic Program is available to Class A, Class B and Class C
shareholders. Under this Program, shareholders may make regular investments by
authorizing withdrawals from their bank accounts each month or quarter on the
Application available from the Service Center.
The Distributor also offers IRAs and tax-sheltered retirement plans,
including prototype and other employee benefit plans for employees, sole
proprietors, partnerships and corporations. Details of these investment plans
and their availability may be obtained from securities dealers or from the
Service Center.
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 or Class C shares with a value of $10,000 or
more, may elect, by participating in a 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 a Fund
shall be credited to participating shareholders in additional shares. Thus, the
withdrawal amounts paid can only be realized by redeeming shares of a Fund
under the Plan. To the extent such amounts paid exceed dividends and
distributions from a 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 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 Plan was initiated, whichever is higher.
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Expenses of the Plan are borne by a Fund. A participating shareholder may
withdraw from the Plan, and a Fund may terminate the Plan at any time on
written notice. Purchase of additional shares while a shareholder is receiving
payments under a Plan is ordinarily disadvantageous because of duplicative
sales charges. For this reason, a shareholder may not participate in the
Investamatic Program and the Systematic Withdrawal Plan at the same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all their
dividends and any other distributions from a 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. The number of shares purchased will be determined as of the dividend
payment date. The Dividend Allocation Plan is subject to suspension at any
time, and to such policies, limitations and restrictions, as, for instance, may
be applicable to street name or master accounts, that may be adopted from time
to time.
Automatic Bank Connection
A shareholder may elect, by participating in a Fund's Automatic Bank Connection
("ABC"), to have dividends and other distributions, including Systematic
Withdrawal Plan payments, automatically deposited in the shareholder's bank
account by electronic funds transfer. Some contingent deferred sales charges
may apply. See "Systematic Withdrawal Plan" herein.
Reports
Reports for each Fund will be sent to shareholders of record of that Fund at
least semiannually. These reports will include a list of the securities owned
by the Fund as well as the Fund's financial statements.
Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing a shareholder to make redemptions for amounts up to
$100,000 to be mailed to the shareholder's address of record is available
automatically;
(2) the privilege allowing a shareholder or his or her dealer to make
telephone exchanges is available automatically;
(3) the privilege allowing a shareholder to make telephone redemptions for
amounts over $5,000, to be remitted by wire to the shareholder's
predesignated bank account, is available by election on the Application
accompanying this Prospectus. A current shareholder who did not previously
request such telephone wire privilege on his or her original Application may
request the privilege by completing a Telephone Redemption-by-Wire Form
which may be obtained by calling 1-800-562-0032. The Telephone
Redemption-by-Wire Form requires a signature guarantee; and
(4) the privilege allowing a shareholder to make telephone purchases or
redemptions transmitted via the Automated Clearing House system, into or
from the shareholder's predesignated bank account, is available upon
completion of the requisite initial documentation. For details and forms,
call 1-800-562-0032. The documentation requires a signature guarantee.
A shareholder may decline the automatic Telephone Privileges set forth in
(1) and (2) above by so indicating on the Application accompanying this
Prospectus.
A shareholder may discontinue any Telephone Privilege at any time by
advising the Service Center that the shareholder wishes to discontinue the use
of such privileges in the future.
Unless such Telephone Privileges are declined, a shareholder 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 to
redeem, or purporting to be the shareholder or the shareholder's dealer to
exchange, shares from any account; 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. None of the Funds,
the other Eligible Funds, the Transfer Agent, the Investment Manager or the
Distributor will be liable for any loss, expense or cost arising out of any
request, including
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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.
Shareholders may redeem or exchange shares by calling toll-free
1-800-562-0032. Although it is unlikely, during periods of extraordinary market
conditions, a shareholder may have difficulty in reaching the Service Center at
such telephone number. In that event, the shareholder should contact the
Service Center at 1-800-357-7800 or otherwise at its main office at One
Financial Center, Boston, Massachusetts 02111-2690.
Shareholder Account Inquiries:
Please call 1-800-562-0032
Call this number for assistance in answering general questions on your account,
including account balance, available shareholder services, statement
information and performance of the applicable Fund. Account inquiries may also
be made in writing to State Street Research Service Center, P.O. Box 8408,
Boston, Massachusetts 02266-8408. A fee of up to $10 will be charged against an
account for providing additional account transcripts or photocopies of paid
redemption checks or for researching records in response to special requests.
Shareholder Telephone Transactions:
Please call 1-800-562-0032
Call this number for assistance in purchasing shares by wire and for telephone
redemptions or telephone exchange transactions. The Service Center will require
some form of personal identification prior to acting upon instructions received
by telephone. Written confirmation of each transaction will be provided.
The Funds and Their Shares
Strategic Portfolios: Conservative and Strategic Portfolios: Aggressive were
organized in 1994 and Strategic Portfolios: Moderate was organized in 1993, all
as series of State Street Research Financial Trust, a Massachusetts business
trust. The Trustees have authorized shares of each Fund to be issued in four
classes: Class A, Class B, Class C and Class S shares. The Trust is registered
with the Securities and Exchange Commission as an open-end management
investment company. The fiscal year end of each Fund is October 31.
Except for those differences between the classes of shares described below
and elsewhere in the Prospectus, each share of a Fund has equal dividend,
redemption and liquidation rights with other shares of the Fund and when issued
is fully paid and nonassessable. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common usage of terms which may develop in the mutual fund
industry. Any redesignation would not affect any substantive rights respecting
the shares.
Each share of each class of shares represents an identical legal interest
in the same portfolio of investments of a Fund, has the same rights and is
identical in all respects, except that Class A, 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 Funds also have different exchange privileges.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have a material adverse effect on
the rights of any shareholder. 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.
Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required.
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Thus, there will ordinarily be no shareholder meetings unless required by the
1940 Act. Except as otherwise provided under said 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 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 of 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 a 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 a 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.
As of October 31, 1998, Metropolitan was the record and/or beneficial owner
of 72.08% of the outstanding Class S shares of Strategic Portfolios:
Conservative; of 58.68% of the outstanding Class S shares of Strategic
Portfolios: Aggressive; and of 42.72% of the outstanding Class S shares of
Strategic Portfolios: Moderate. 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, such as any Distribution Plan
for a given class. Metropolitan may be deemed to be in control of those classes
of shares of which it owns more than 25%.
Management of the Funds
Under the provisions of the Trust's Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Funds
rests with the Trustees. The Funds' investment manager is State Street Research
& Management Company. The Investment Manager is charged with the overall
responsibility for managing the investments and business affairs of the Funds,
subject to the authority of the Board of Trustees.
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, which
continues to this day, 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. In managing debt securities, if any, for a portfolio, the
Investment Manager may consider yield curve positioning, sector rotation and
duration, among other factors.
The Investment Manager and the Distributor are indirect wholly-owned
subsidiaries of Metropolitan and both are located at One Financial Center,
Boston, Massachusetts 02111-2690.
The Investment Manager has entered into an Advisory Agreement with the
Trust pursuant to which investment research and management, administrative
services, office facilities and personnel are provided for each Fund in
consideration of a fee from each Fund.
Under its Advisory Agreement with the Trust, the Investment Manager
receives a monthly investment advisory fee equal to a percentage (on an annual
basis)
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of the average daily value of the net assets of each Fund as follows: Strategic
Portfolios: Conservative, 0.60%; Strategic Portfolios: Moderate, 0.65% and
Strategic Portfolios: Aggressive, 0.75%. The fee charged to Strategic
Portfolios: Aggressive is higher than that charged to most mutual funds but is
believed by the Trustees to be justified given the considerable analysis and
research necessary to manage this Fund in light of its investment objective and
policies. Each Fund bears all costs of its operation other than those incurred
by the Investment Manager under the Advisory Agreement. In particular, the
Funds pay, among other expenses, investment advisory fees, certain distribution
expenses under the Funds' Distribution Plan and the compensation and expenses
of the Trustees who are not otherwise currently affiliated with the Investment
Manager or any of its affiliates. The Investment Manager compensates Trustees
of the Trust if such persons are employees or affiliates of the Investment
Manager or its affiliates.
Peter C. Bennett is primarily responsible for the day-to-day management of
the Funds' portfolios. Mr. Bennett has managed the Funds since December 1996.
Mr. Bennett's principal occupation currently is, and during the past five years
has been, Executive Vice President and Director of State Street Research &
Management Company. Mr. Bennett also serves as Chief Investment
Officer--Equities and is a member of the Management Committee of the Investment
Manager. Mr. Bennett has investment discretion over the entire portfolio of
each Fund, makes investment decisions as to specific securities holdings,
allocates and continually adjusts such allocations of investments among equity
and fixed income securities and among different industry sectors. The portfolio
manager uses a team approach on behalf of each Fund and has delegated purchase
and sale authority for defined portions of the portfolios to other officers of
the Investment Manager. The team members focus on different investment areas
within each Fund's sectors, such as international securities, high-yield
high-risk securities, large- and small-capitalization equities, investment
grade debt, etc.
Subject to the policy of seeking best overall price and execution, sales
of shares of a Fund may be considered by the Investment Manager in the
selection of broker or dealer firms for the Funds portfolio transactions.
The Investment Manager has a Code of Ethics governing personal securities
transactions of certain of its employees; see the Statement of Additional
Information.
Dividends and Distributions; Taxes
Each Fund has qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code, although it cannot
give complete assurance that it will do so. As long as a Fund so qualifies and
satisfies certain distribution requirements, it will not be subject to federal
income tax on its taxable income (including capital gains, if any) distributed
to its shareholders. Consequently, each Fund intends to distribute annually to
its shareholders substantially all of its net investment income and any capital
gain net income (capital gains net of capital losses).
Dividends from net investment income of each Fund normally will be paid
four times each year. Distributions of capital gain net income, if any, will
generally be made after the end of the fiscal year or as otherwise required for
compliance with applicable tax regulations. Both dividends from net investment
income and distributions of capital gain net income will be declared and paid
to shareholders in additional shares of a Fund at net asset value (except in
the case of shareholders who elect a different available distribution method).
Each Fund will provide its shareholders of record with annual information
on a timely basis concerning the federal tax status of dividends and
distributions during the preceding calendar year.
Dividends paid by a Fund from taxable net investment income and
distributions of net short-term capital gains, whether paid in cash or
reinvested in additional shares, will be taxable for federal income tax
purposes to shareholders as ordinary income, and a portion may be eligible for
the 70% dividends-received deduction for corporations. The percentage of a
Fund's dividends eligible for such tax treatment may be less than 100% to the
extent that less than 100% of the Fund's gross income may be from qualifying
dividends of domestic corporations. Distribu-
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tions of other capital gains which are designated as capital gains
distributions, whether paid in cash or reinvested in additional shares, will be
taxable for federal income tax purposes to shareholders as capital gains,
regardless of how long shareholders have held their shares, and are not
eligible for the dividends-received deduction.
Dividends and other distributions and the proceeds of redemption of Fund
shares paid to individuals and other nonexempt payees will be subject to a 31%
federal backup withholding tax if the Transfer Agent is not provided with the
shareholder's correct taxpayer identification number and certification that the
shareholder is not subject to such backup withholding.
The foregoing discussion relates only to generally applicable federal
income tax provisions in effect as of the date of this Prospectus. Therefore,
prospective shareholders are urged to consult their own tax advisers regarding
tax matters, including state and local tax consequences.
Calculation of Performance Data
From time to time, in advertisements or in communications to shareholders or
prospective investors, a Fund may compare the performance of its Class A, Class
B, Class C or Class S shares to that of other mutual funds with similar
investment objectives, to certificates of deposit and/or to other financial
alternatives and/or to appropriate indices, rankings and averages such as those
compiled by Lipper Analytical Services, Inc. for the category in which such
Fund is placed, Morningstar, Inc., Money Magazine, Business Week, Forbes
Magazine, The Wall Street Journal and Investor's Daily.
Total return is computed separately for each class of shares of each Fund.
The average annual total return ("standard total return") for shares of each
Fund is computed by determining the average annual compounded rate of return
for a designated historical period as applied to a hypothetical $1,000 initial
investment, which is redeemed in total at the end of such period. In making the
calculation, all dividends and distributions are assumed to be reinvested, and
all accrued expenses and recurring charges, including management and
distribution fees, are recognized. The calculation also reflects the highest
applicable initial or contingent deferred sales charge, determined as of the
assumed date of initial investment or the assumed date of redemption, as the
case may be. Standard total return is calculated for the periods specified in
applicable regulations and may be accompanied by nonstandard total return
information for differing periods computed in the same manner, and with or
without annualizing the total return or taking sales charges into account.
A Fund's yield is computed separately for each class of shares by dividing
the net investment income, after recognition of all recurring charges, per
share earned during the most recent month or other specified thirty-day period
by the applicable maximum offering price per share on the last day of such
period and annualizing the result.
The standard total returns and yield results take sales charges into
account, if applicable, but 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 remittance of redemption
proceeds by wire. Where sales charges are not applicable and therefore not
taken into account in the calculation of standard total return and yield, the
results will be increased. Any voluntary waiver of fees or assumption of
expenses by the Funds' affiliates will also increase performance results.
A Fund's distribution rate is calculated separately for each class of
shares by annualizing the latest distribution and dividing the result by the
maximum offering price per share as of the end of the period to which the
distribution relates. The distribution rate is not computed in the same manner
as the above described yield, and, therefore, can be significantly different
from it. In its supplemental sales literature, each Fund may quote its
distribution rate together with the above described standard total return and
yield information. The use of such distribution rates would be subject to an
appropriate explanation of how the components of the distribution rate differ
from the above described yield.
Performance information may be useful in evaluating a Fund and for
providing a basis for comparison
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with other financial alternatives. Since the performance of a Fund varies in
response to fluctuations in economic and market conditions, interest rates and
Fund expenses, among other things, no performance quotation should be
considered a representation as to the Fund's performance for any future period.
In addition, the net asset value of shares of a Fund will fluctuate, with the
result that shares of a Fund, when redeemed, may be worth more or less than
their original cost. Neither an investment in a Fund nor its performance is
insured or guaranteed; such lack of insurance or guarantees should accordingly
be given appropriate consideration when comparing a Fund to financial
alternatives which have such features. Performance data or rankings for a given
class of shares should be interpreted carefully by investors who hold or may
invest in a different class of shares.
Appendix
Description of Debt/Bond Ratings
Standard & Poor's Corporation
AAA: An obligation rated within the AAA category has the highest rating
assigned by S&P. Capacity to meet the financial obligation is extremely strong.
AA: An obligation rated within the AA category differs from the highest
rated obligation only in small degree. Capacity to meet the financial
commitment on the obligation is very strong.
A: An obligation rated within the A category is somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher rated categories. However, capacity to meet the financial
commitment on the obligation is still strong.
BBB: An obligation rated within the BBB category exhibits adequate
protection parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakend capacity to meet the
financial commitment on the obligation.
Obligations rated within the BB, B, CCC, CC and C categories are regarded
as having significant speculative characteristics. BB indicates the least
degree of speculation and C the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
BB: An obligation rated within the BB category is less vulnerable to
nonpayment than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet the financial commitment on the
obligation. The BB rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BBB- rating.
B: An obligation rated within the B category is more vulnerable to
nonpayment than obligations rated within the BB category, but currently has the
capacity to meet the financial commitment on the obligation. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
meet the financial commitment on the obligation. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: An obligation rated within the CCC category is currently vulnerable
to nonpayment, and is dependent upon favorable business, financial and economic
conditions to meet the financial commitment on the obligation. In the event of
adverse business, financial or economic conditions, it is not likely to have
the capacity to meet the financial commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed, but payments on this obligation are being continued.
D: An obligation rated within the D category is in payment default. The D
rating category is used when payments on an obligation are not made on the due
date even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
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Plus (+) or Minus (-): The ratings from AA to BBB may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risks--such as interest only (IO) and
principal only (PO) mortgage securities; and obligations with unusually risky
terms, such as inverse floaters.
Moody's Investors Service, Inc.
Aaa: Bonds which are rated within the Aaa category are judged to be of the
best quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
Aa: Bonds which are rated within the Aa category are judged to be of high
quality by all standards. Together with the Aaa group they comprise what are
generally known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than in Aaa securities.
A: Bonds which are rated within the A category possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa: Bonds which are rated within the Baa category are considered as
medium grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba: Bonds which are rated within the Ba category are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during other good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated within the B category generally lack
characteristics of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the contract over any
long period of time may be small.
Caa: Bonds which are rated within the Caa category are of poor standing.
Such issues may be in default or there may be present elements of danger with
respect to principal or interest.
Ca: Bonds which are rated within the Ca category represent obligations
which are speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C: Bonds which are rated within the C category are the lowest rated class
of bonds, and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
1, 2 or 3: The ratings from Aa through Baa may be modified by the addition
of a numeral indicating a bond's rank within its rating category.
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STATE STREET RESEARCH
STRATEGIC PORTFOLIOS:
Conservative
Moderate
Aggressive
One Financial Center
Boston, MA 02111
INVESTMENT ADVISER
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
DISTRIBUTOR
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
SERVICE CENTER
State Street Research
Service Center
P.O. Box 8408
Boston, MA 02266-8408
1-800-562-0032
CUSTODIAN
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
160 Federal Street
Boston, MA 02110
[logo] STATE STREET RESEARCH
State Street Research
Strategic Portfolios:
Conservative, Moderate, Aggressive
February 15, 1999
PROSPECTUS
SP-007E-0299 CONTROL NUMBER: (exp. 0300)SSR-LD
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
SERIES OF STATE STREET RESEARCH FINANCIAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
February 15, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS..............2
ADDITIONAL INFORMATION CONCERNING
CERTAIN RISKS AND INVESTMENT TECHNIQUES...........4
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS.............14
TRUSTEES AND OFFICERS.......................................20
INVESTMENT ADVISORY SERVICES................................25
PURCHASE AND REDEMPTION OF SHARES...........................26
NET ASSET VALUE.............................................29
PORTFOLIO TRANSACTIONS......................................30
CERTAIN TAX MATTERS.........................................34
DISTRIBUTION OF SHARES OF THE FUNDS.........................38
CALCULATION OF PERFORMANCE DATA.............................41
CUSTODIAN .................................................45
INDEPENDENT ACCOUNTANTS.....................................45
FINANCIAL STATEMENTS........................................46
</TABLE>
The following Statement of Additional Information is not a
Prospectus. It should be read in conjunction with the Prospectus of State Street
Research Strategic Portfolios: Conservative ("Strategic Portfolios:
Conservative"), State Street Research Strategic Portfolios: Moderate ("Strategic
Portfolios: Moderate") and State Street Research Strategic Portfolios:
Aggressive ("Strategic Portfolios: Aggressive") (individually, a "Fund" and
collectively, the "Funds"), dated February 15, 1999, 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.
The Fund's financial statements for the fiscal year ended October 31,
1998, which are included in the Fund's Annual Report to Shareholders for that
year, are incorporated by reference. The Annual Report is available, without
charge, upon request by calling 1-800-562-0032.
CONTROL NUMBER: (EXP0300)SSR-LD SP-389E-299
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth in part under "The Funds' Investments and Asset
Allocation," "Investment Practices" and "Limiting Investment Risk" in the Funds'
Prospectus, the Funds have adopted certain investment restrictions.
The fundamental and nonfundamental policies of the Funds do not apply
to any matters involving the issuance of multiple classes of shares of the Funds
or the creation of a structure allowing the Funds to invest substantially all
its assets in a related collective investment vehicle for similar funds or
allowing the Funds to serve as such a collective investment vehicle for other
similar funds, to the extent permitted by law and regulatory authorities.
All of the Funds' fundamental investment restrictions are set forth
below. These fundamental investment restrictions may not be changed except by
the affirmative vote of a majority of the Funds' outstanding voting securities
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 a meeting of security holders duly called, (i) of
67% or more of the voting securities present at a meeting if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy or (ii) of more than 50% of the outstanding voting securities whichever is
less.) Under these restrictions, it is each Fund's policy:
(1) not to purchase a security of any one issuer (other than
securities issued or guaranteed as to principal or interest
by the U.S. Government or its agencies or instrumentalities
or mixed-ownership Government corporations) if such
purchase would, with respect to 75% of the Fund's total
assets, cause more than 5% of the Fund's total assets to be
invested in the securities of such issuer or cause more
than 10% of the voting securities of such issuer to be held
by the Fund except that for Strategic Portfolios:
Conservative, the 10% limit on voting securities applies to
100% of the Fund's total assets);
(2) not to issue senior securities as defined in the 1940 Act,
except as permitted by Section 18(f)(2) of that Act and the
rules thereunder or as permitted by an order of the
Securities and Exchange Commission;
(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 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 deemed to be an underwriter under certain
federal securities laws;
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(4) not to purchase or sell fee simple interests in real
estate, 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
own or invest or deal in real estate;
(5) not to invest in commodities or commodity contracts in
excess of 10% of the Fund's total assets, except that
investments in swap arrangements, currencies, futures
contracts and options on futures contracts on securities,
securities indices and currencies shall not be deemed an
investment in commodities or commodities contracts;
(6) not to make loans, except that the Fund may lend portfolio
securities and purchase bonds, debentures, notes and
similar obligations (and enter into repurchase agreements
with respect thereto);
(7) not to make any investment which would cause more than 25%
of the value of the Fund's total assets to be invested in
securities of issuers principally engaged in any one
industry [for purposes of this restriction, (a) utilities
may be divided according to their services so that, for
example, gas, gas transmission, electric and telephone
companies may each be deemed in a separate industry, (b)
oil and oil related companies may be divided by type so
that, for example, oil production companies, oil service
companies and refining and marketing companies may each be
deemed in a separate industry, (c) finance companies may be
classified according to the industries of their parent
companies, and (d) securities issued or guaranteed as to
principal or interest by the U.S. Government or its
agencies or instrumentalities (including repurchase
agreements involving such U.S. Government securities to the
extent excludable under relevant regulatory
interpretations) may be excluded]; and
(8) not to borrow money except for borrowings from banks for
extraordinary and emergency purposes, such as permitting
redemption requests to be honored, and then not in an
amount in excess of 25% of the value of its total assets,
and except insofar as reverse repurchase agreements may be
regarded as borrowing.
The following nonfundamental investment restrictions may be changed
without shareholder approval. Under these restrictions, it is each Fund's
policy:
(1) not to purchase any security or enter into a repurchase
agreement if as a result more than 15% of its net assets
would be invested in securities that are illiquid
(including repurchase agreements not entitling the holder
to payment of principal and interest within seven days);
3
<PAGE>
(2) not to engage in transactions in options except in
connection with options on securities, securities indices
and currencies, and options on futures on securities,
securities indices and currencies;
(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";
(4) not to hypothecate, mortgage or pledge any of its assets
except as may be necessary in connection with permitted
borrowings (for the purpose of this restriction, futures,
options and forward commitments, and related escrow or
custodian receipts or letters, margin or safekeeping
accounts, or similar arrangements used in the industry in
connection with the trading of such investments, are not
deemed to involve a hypothecation, mortgage or pledge of
assets);
(5) 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; and
(6) not to invest in companies for the purpose of exercising
control over their management, although the Fund may from
time to time present its views on various matters to the
management of issuers in which it holds investments.
ADDITIONAL INFORMATION CONCERNING
CERTAIN RISKS AND INVESTMENT TECHNIQUES
Derivatives
Each 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 and techniques are expected by State
Street Research & Management Company (the "Investment Manager") to aid in
achieving the investment objective of a Fund. Each Fund on occasion may also
purchase instruments with characteristics of both futures and securities (e.g.,
debt instruments with interest and principal payments determined by reference to
the value of a commodity or a currency at a future time) and which, therefore,
possess the risks of both futures and securities investments.
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Funds 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
4
<PAGE>
increase in the market value of a particular asset or index). The Funds 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 designed to protect a 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 a 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 from (i) an expected decline in the market value of an asset or group of
assets which a 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. Each 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 a 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 a 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.
5
<PAGE>
At any time prior to expiration of the futures contract, a 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.
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. Each Fund will utilize such
assets and methods of cover as appropriate under applicable exchange and
regulatory policies.
Options
Each 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
6
<PAGE>
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 a 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 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, a
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, a 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
A 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 Funds
apply a similar policy to options that are not commodities.
As noted above, the Funds 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. Each 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 a 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.
7
<PAGE>
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. 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 Funds' ability to effectively carry out its derivative strategies
and might in some cases require a Fund to deposit cash to meet applicable margin
requirements. Each Fund will enter into an option or futures position only if it
appears to be a liquid investment.
Short Sales Against the Box
Each 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 a 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 a 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
subsequent gain or loss.
Swap Arrangements
Each 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, a 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 such
Fund a fixed rate of interest on the notional principal amount. In a currency
swap, a 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, a Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices. Purchase
of a cap entitles the purchaser to receive payments from the seller on a
notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an
agreed-upon interest rate or amount. A collar combines a cap and a floor.
8
<PAGE>
A 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 a 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 a Fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, a 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 a
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 a Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a portion of a Fund's portfolio.
However, a 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, a Fund is dependent upon the
creditworthiness and good faith of the counterparty. Each 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
non-standard 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 a 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 Funds may enter into repurchase agreements. Repurchase agreements
occur when a Fund acquires a security and the seller, which may be either (i) a
primary dealer in U.S. Government securities or (ii) an FDIC-insured bank having
gross assets in excess of $500 million, simultaneously commits to repurchase it
at an agreed-upon price on an agreed-upon date within a specified number of days
(usually not more than seven) from the date of purchase. The repurchase price
reflects the purchase price plus an agreed-upon market rate of
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interest which is unrelated to the coupon rate or maturity of the acquired
security. While repurchase agreements involve the purchase and sale of the
subject securities legally, the economic effect may be similar to loans by a
Fund collateralized by the underlying securities. The Funds 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 a Fund's ability
to dispose of the underlying securities. Other risks include possible litigation
over the rights of the respective parties in the subject securities and the
uncertainties and costs with respect thereto. Repurchase agreements will be
limited to 30% of a Fund's net assets, except that repurchase agreements
extending for more than seven days when combined with other illiquid securities
will be limited to 15% of a Fund's net assets. None of the Funds presently
intend to engage in repurchase agreements in excess of 5% of its net assets.
Reverse Repurchase Agreements
The Funds may enter into reverse repurchase agreements. However, none
of the Funds presently intend to engage in reverse repurchase agreements in
excess of 5% of each Fund's total assets. In a reverse repurchase agreement a
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 it 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, a 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 a Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on its records at the trade date and maintained until the transaction
is settled.
When-Issued Securities
Each Fund may purchase "when-issued" securities, which are traded on
a price or yield basis prior to actual issuance. However, none of the Funds
presently intend to purchase when- issued securities in an amount in excess of
5% of its total assets. Such purchases will be made only to achieve a Fund's
investment objectives 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. No income
accrues to a Fund prior to the time it takes delivery. A frequent form of
when-issued trading occurs in the U.S. Treasury market when dealers begin to
trade a new issue of bonds or notes shortly after a Treasury financing is
announced, but prior to the actual sale of the securities. Similarly, corporate
securities to be created by a merger of companies may be traded prior to the
actual consummation of the merger. Such transactions may involve a risk of loss
if the value of the securities fall below the price committed to prior to the
actual issuance. The Trust's custodian will establish a segregated account for
each Fund when it purchases securities on a when-issued
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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 a Fund.
Restricted Securities
It is each 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 a Fund's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing such securities. Also, a 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
To the extent a Fund invests in securities of issuers in less
developed countries or emerging foreign markets, it will be subject to a variety
of additional risks, including risks associated with political instability,
economies based on relatively few industries, lesser market liquidity, high
rates of inflation, significant price volatility of portfolio holdings and high
levels of external debt in the relevant country.
Although the Funds may invest in securities denominated in foreign
currencies, each Fund values its securities and other assets in U.S. dollars. As
a result, the net asset value of a Fund's shares may fluctuate with U.S. dollar
exchange rates as well as with price changes of the Fund's securities in the
various local markets and currencies. Thus, an increase in the value of the U.S.
dollar compared to the currencies in which a Fund makes its investments could
reduce the effect of increases and magnify the effect of decreases in the prices
of the Fund's securities in their local markets. Conversely, a decrease in the
value of the U.S. dollar will have the opposite effect of magnifying the effect
of increases and reducing the effect of decreases in the prices of a Fund's
securities in the local markets.
11
<PAGE>
Currency Transactions
The Funds may engage in currency exchange transactions in order to
protect against the effect of uncertain future exchange rates on securities
denominated in foreign currencies. Each 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. Each Fund's dealings in forward currency exchange contracts
will be limited to hedging involving either specific transactions or aggregate
portfolio positions. A forward currency contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are not commodities and
are entered into in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. 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 a 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 such Fund. This method of protecting the value of a 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.
Indexed Securities
Each Fund may purchase securities the value of which is indexed to
interest rates, foreign currencies and various indices and financial
indications, although none of the Funds presently intends to invest more than 5%
of its assets in such securities. These securities are generally short-to
intermediate-term debt securities. The interest rates or values at maturity
fluctuate with the index to which they are connected and may be more volatile
than such index.
Securities Lending
Collateral received by a Fund will generally 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,
irrevocable stand-by letters of credit issued by a bank, or repurchase
agreements or other similar investments. The collateral will be reflected as an
asset, with an offsetting liability to the counterparty, on the records of each
Fund.
12
<PAGE>
Industry Classifications
In determining how much of a 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 excludable. 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 pools of nongovernment backed mortgages.
<TABLE>
<S> <C> <C>
Aerospace Electronic Components Oil Service
Airline Electronic Equipment Paper Products
Asset-backed -- Mortgages Entertainment Personal Care
Asset-backed -- Credit Card Financial Service Photography
Receivables Food & Beverage Plastics
Automotive Forest Products Printing & Publishing
Automotive Parts Gaming & Lodging Railroad
Bank Gas Real Estate & Building
Building Gas Transmission Recreation
Business Service Grocery Retail Trade
Cable Healthcare & Hospital Savings & Loan
Capital Goods & Equipment Management Shipping & Transportation
Chemical Hospital Supply Technology & Communications
Computer Software & Service Hotel & Restaurant Telephone
Conglomerate Insurance Textile & Apparel
Consumer Goods & Services Machinery Tobacco
Container Media Truckers
Cosmetics Metal & Mining Trust Certificates -
Diversified Office Equipment Government Related Lending
Drug Oil Production
Electric Oil Refining & Marketing
Electric Equipment
</TABLE>
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
13
<PAGE>
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 conversation 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 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
As indicated in the Funds' Prospectus, the Funds may invest in
long-term and short-term debt securities. The Funds may invest in cash and
short-term securities for temporary defensive purposes when, in the opinion of
the Investment Manager, such a position is more likely to provide protection
against unfavorable market conditions than adherence to other investment
policies. Certain debt securities and money market instruments in which the
Funds may invest are described below.
Managing Volatility In administering a Fund's portfolio, the
Investment Manager attempts to manage volatility in part by managing the
duration and weighted average maturity of the Fund's bond position.
Duration is an indicator of the expected volatility of a bond
position in response to changes in interest rates. In calculating duration, a
Fund measures the average time required
14
<PAGE>
to receive all cash flows associated with those debt securities held in the
Fund's portfolio -- representing payments of principal and interest -- by
considering the timing, frequency and amount of payment expected from each
portfolio security. The higher the duration, the greater the gains and losses
when interest rates change. Duration generally is a more accurate measure of
potential volatility with a portfolio composed of high-quality debt securities,
such as U.S. Government securities, municipal securities and high-grade U.S.
corporate bonds, than with lower-grade securities.
The Investment Manager may use several methods to manage the duration of a
Fund's bond position in order to increase or decrease its exposure to changes in
interest rates. First, the Investment Manager may adjust portfolio duration by
adjusting the mix of debt securities held by a Fund. For example, if the
Investment Manager intends to shorten duration, it may sell debt instruments
that individually have a long duration and purchase other debt instruments that
individually have a shorter duration. Among the factors that will affect a debt
security's duration are the length of time to maturity, the timing of interest
and principal payments, and whether the terms of the security give the issuer of
the security the right to call the security prior to maturity. Second, the
Investment Manager may adjust bond portfolio duration using derivative
transactions, especially with interest rate futures and options contracts. For
example, if the Investment Manager wants to lengthen the duration of a Fund's
bond position, it could purchase interest rate futures contracts instead of
buying longer-term bonds or selling shorter-term bonds. Similarly, during
periods of lower interest rate volatility, the Investment Manager may use a
technique to extend duration in the event rates rise by writing an out-of- the-
money put option and receiving premium income with the expectation that the
option could be exercised. In managing duration, the use of such derivatives may
be faster and more efficient than trading specific portfolio securities.
Weighted average maturity is another indicator of potential
volatility used by the Investment Manager with respect to a Fund's bond
portfolio, although for certain types of debt securities, such as high-quality
debt securities, it is not as accurate as duration in quantifying potential
volatility. Weighted average maturity is the average of all maturities of the
individual debt securities held by a Fund, weighted by the market value of each
security. Generally, the longer the weighted average maturity, the more bond
prices will vary in response to changes in interest rates.
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 Funds invest include, among others:
(bullet) direct obligations of the U.S. Treasury, i.e., U.S.
Treasury bills, notes, certificates and bonds;
15
<PAGE>
(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 Funds 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 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 Funds 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 Funds 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 Funds 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.
16
<PAGE>
The Funds 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 fixed period of time at a stated interest rate. The Funds 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 Funds 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
17
<PAGE>
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 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 prevailing interest rates
and/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. For further information concerning the ratings of
debt securities, see "--Commercial Paper Ratings" below. In the event the
lowering of ratings of debt instruments held by the Fund by applicable rating
agencies results in a material decline in the overall quality of the Fund's
portfolio, the Trustees of the Trust will review the situation and take such
action as they deem in the best interests of the Fund's shareholders, including,
if necessary, changing the composition of the portfolio.
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.
18
<PAGE>
Certain Securities Ratings
Commercial Paper Ratings Commercial paper investments at the time of
purchase will be rated A 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 the "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 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.
In the event the lowering of ratings of debt instruments held by a
Fund by applicable rating agencies results in a material decline in the overall
quality of the Fund's portfolio, the Trustees of the Trust will review the
situation and take such action as they deem in the best interests of the Fund's
shareholders, including, if necessary, changing the composition of the
portfolio.
19
<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 and Director
of State Street Research & Management Company. Mr. Bennett's other principal
business affiliation is 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 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 58. 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 72. 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 47. His principal occupation is currently, and
during the past five years has been, Executive Vice President, Treasurer, Chief
Financial Officer, Chief Administrative 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 22.
20
<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. Dr. Phillips other principal business affiliations include Director
of Cantor Fitzgerald Futures Exchange, Inc. and State Farm Life Insurance
Company. 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.
*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. Previously,
he has also served as Vice President for State Street Research & Management
Company and was a Senior Vice President and Chief Quantitative Analyst for
Kidder, Peabody & Company, Inc.
+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.
- ------------------------
* or + See footnotes on page 22.
21
<PAGE>
*+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.
*+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 56. His principal occupation is 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. (and until February 1996, prior
positions as President and Chief Executive Officer of that company).
- -------------------------
* 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 Funds' 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 ("Metropolitan"): 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.
22
<PAGE>
As of September 30, 1998, the Trustees and principal officers of the
Trust as a group owned none of the outstanding shares of the Funds.
As of September 30, 1998, the following persons or entities were the
record and/or beneficial owners of the approximate amounts of the Funds' Class S
shares as set forth beside their names:
<TABLE>
<CAPTION>
Strategic Portfolios: Aggressive Strategic Portfolios: Moderate Strategic Portfolios: Conservative
-------------------------------- ------------------------------ ----------------------------------
Holder % of Class Holder % of Class Holder % of Class
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
Metropolitan Life 58.68 Metropolitan Life 42.72 Metropolitan Life 72.08
Chase Manhattan 41.32 Chase Manhattan 43.02 Chase Manhattan 27.92
Bank, N.A. Bank, N.A. Bank, N.A.
State Street Bank 13.65
</TABLE>
The full name and address of the above persons and entities are as
follows:
Metropolitan Life Insurance Company (a)
One Madison Avenue
New York, NY 10010
Chase Manhattan Bank, N.A. (b)(c)
770 Broadway
New York, NY 10003
State Street Bank and Trust Company (c)
225 Franklin Street
Boston, MA 02110
- ------------------
(a) Metropolitan, a New York corporation, was the record and/or
beneficial owner, directly or indirectly through its subsidiaries or
affiliates, of such shares.
(b) Chase Manhattan Bank, N.A. holds such shares as trustee under certain
employee benefits plans serviced by Metropolitan.
(c) The respective Funds believe that each named recordholder does not
have beneficial ownership of such shares.
23
<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
owner will be presumed to be in control of such class of shares for purposes of
voting on certain matters submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
The Trustees have been compensated as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
(1) (2) (3)
Name of Aggregate Total
Trustee Compensation Compensation
From Each Fund(a) From Fund and
Fund Complex
Paid to
Trustees(b)
<S> <C> <C>
Steve A. Garban $ 2,400 $110,300
Malcolm T. Hopkins $ 1,900 $ 97,200
Edward M. Lamont $ 1,800 $ 66,000
Robert A. Lawrence $ 1,900 $ 96,700
Dean O. Morton $ 2,500 $110,700
Susan M. Phillips $ 225 $ 12,145
Toby Rosenblatt $ 2,100 $ 72,600
Michael S. Scott Morton $ 2,700 $115,500
Ralph F. Verni $ 0 $ 0
</TABLE>
(a) For the Funds' fiscal year ended October 31, 1998.
(b) Includes compensation received 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" is for the 12 months ended
December 31, 1998. The Trust does not provide any pension or
retirement benefits for the Trustees.
24
<PAGE>
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Funds. The Advisory
Agreement provides that the Investment Manager shall furnish the Funds with an
investment program, suitable office space and 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 or affiliates of the
Investment Manager or its affiliates. The Investment Manager is an indirect
wholly-owned subsidiary of Metropolitan.
The advisory fee payable monthly by each Fund to the Investment
Manager is computed as a percentage of the average of the value of the net
assets of such Fund as determined at the close of regular trading of the New
York Stock Exchange (the "NYSE") on each day the NYSE is open for trading, at
the annual rate of 0.60% of the net assets of Strategic Portfolios:
Conservative, 0.65% of the net assets of Strategic Portfolios: Moderate and
0.75% of the net assets of Strategic Portfolios: Aggressive. The Distributor and
its affiliates have from time to time and in varying amounts voluntarily assumed
some portion of fees or expenses relating to each Fund.
The advisory fees paid by each Fund to the Investment Manager for the
periods shown below, prior to the assumption of fees or expenses, were as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended October 31
------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Strategic Portfolios: Moderate $324,438 $315,798 $302,408
Strategic Portfolios: Conservative $223,748 $213,881 $201,690
Strategic Portfolios: Aggressive $483,814 $521,687 $526,134
</TABLE>
For the same period, the voluntary reduction of fees or assumption of expenses
were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended October 31
------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Strategic Portfolios: Moderate $330,694 $298,215 $234,376
Strategic Portfolios: Conservative $152,851 $172,748 $197,940
Strategic Portfolios: Aggressive $128,643 $122,711 $142,848
</TABLE>
The Advisory Agreement provides that it shall continue in effect with
respect to each 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
25
<PAGE>
outstanding voting securities of such 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 a Funds Administration Agreement between the Investment Manager
and the Distributor, the Distributor provides assistance to the Investment
Manager in performing certain fund administrative services for the Trust, such
as assistance in determining the daily net asset value of shares of the Funds
and in preparing various reports required by regulations.
Under a Shareholders' Administrative Services Agreement between the
Trust and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Funds, and is entitled
to reimbursements of its costs for providing such services. Under certain
arrangements for Metropolitan to provide subadministration services,
Metropolitan may receive a fee for the maintenance of certain share ownership
records for participants in sponsored arrangements, employee benefit plans, and
similar programs or plans through or under which a Fund's shares may be
purchased.
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.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Funds are distributed by State Street Research
Investment Services, Inc. The Funds offer four classes of shares which may be
purchased at the next determined net asset value per share plus, in the case of
all classes except Class 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 and Class C shares). General information
on how to buy shares of the Funds, as well as sales charges involved, are set
forth under "Purchase of Shares" in the Prospectus. The following supplements
that information.
26
<PAGE>
Public Offering Price
The public offering price for each class of shares of the Funds is
based on their net asset value determined as of the close of regular trading of
the NYSE on the day the purchase order is received by the 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.
Reduced Sales Charges - For purposes of determining whether a
purchase of Class A shares qualifies for reduced sales charges, the term
"person" includes: (i) an individual, or an individual combining with his or her
spouse and their children and purchasing for his, her or their own account; (ii)
a "company" as defined in Section 2(a)(8) of the 1940 Act; (iii) a trustee or
other fiduciary purchasing for a single trust estate or single fiduciary account
(including a pension, profit sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code);
(iv) a tax-exempt organization under Section 501(c)(3) or (13) of the Internal
Revenue Code; and (v) an employee benefit plan of a single employer or of
affiliated employers.
Investors may purchase Class A shares of the Funds at reduced sales
charges by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Funds 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.
An investor may include toward completion of a Letter of Intent the
value (at the current public offering price) of all of his or her Class A shares
of the Funds and of any of the other Class A shares of Eligible Funds held of
record as of the date of his or her Letter of Intent, plus the value (at the
current offering price) as of such date of all of such shares held by any
"person" described herein as eligible to join with the investor in a single
purchase. 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
27
<PAGE>
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 Funds or a combination
of Eligible Funds at reduced sales charges pursuant to a Right of Accumulation.
The applicable sales charge under the right is determined on the amount arrived
at by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class 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.
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 $10,000,000); and other similar institutional
investors.
Reorganizations - In the event of mergers or reorganizations with
other public or private collective investment entities, including investment
companies as defined in the 1940 Act each Fund may issue its shares at net asset
value (or more) to such entities or to their security holders.
Redemptions - The Funds reserve 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, a Fund may limit the amount of
redemption proceeds paid in cash. Although it has no present intention to do so,
a Fund may, under unusual circumstances, limit redemptions in cash with respect
to each shareholder during any ninety-day period to the lesser of (i) $250,000,
or (ii) 1% of the net asset value of such Fund at the beginning of such period.
In connection with any redemptions paid in kind with portfolio securities,
brokerage and other costs may be incurred by the redeeming shareholder in the
sale of the securities received. If the Trustees determine that it is in the
best interests of a Fund to pay a redemption, or any portion thereof, in kind,
the portfolio securities used to make such payment will be selected in such
manner as the Trustees deem fair and equitable and valued in the manner
described under the heading "Net Asset Value" herein.
28
<PAGE>
NET ASSET VALUE
The net asset values of the shares of each Fund are 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 a Fund is computed by dividing the
sum of the value of the securities held by a Fund plus any cash or other assets
minus all liabilities by the total number of outstanding shares of a Fund at
such time. Any expenses, except for extraordinary or nonrecurring expenses,
borne by a Fund, including the investment management fee payable to the
Investment Manager, are accrued daily.
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.
In determining the values of portfolio assets, 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. Most debt securities are
valued on the basis of data provided by such pricing services. Since Strategic
Portfolios: Conservative and Strategic Portfolios: Moderate are significantly
comprised of debt securities under normal circumstances; most of these Funds'
assets are therefore valued on the basis of such data from the pricing services.
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.
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 a Fund's total
assets is invested in short-term
29
<PAGE>
debt securities the current market value of such securities will be used in
calculating net asset value per share in lieu of the amortized cost method. The
amortized cost method is used when the value obtained is fair value. Under the
amortized cost method of valuation, the security is initially valued at cost on
the date of purchase (or in the case of short-term debt instruments purchased
with more than 60 days remaining to maturity, the market value on the 61st day
prior to maturity), and thereafter a constant amortization to maturity of any
discount or premium is assumed regardless of the impact of fluctuating interest
rates on the market value of the security.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
A Fund's portfolio turnover rate is determined by dividing the lesser
of securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The Funds reserve full freedom with respect to portfolio
turnover, as described in the Prospectus.
The Funds' portfolio turnover rates for the periods shown below were
as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended October 31
----------------------------
1997 1998
---- ----
<S> <C> <C> <C>
Strategic Portfolios: Moderate 136.17% 150.05%
Strategic Portfolios: Conservative 117.66% 186.03%
Strategic Portfolios: Aggressive 136.48% 124.15%
</TABLE>
The portfolio turnover rate for State Street Research Strategic
Portfolios: Conservative for the most recent fiscal year end was significantly
higher than the portfolio turnover rate for the previous fiscal year because of
steps taken throughout the fiscal year ended October 31, 1998 to reposition the
portfolio in light of the volatile markets for equities, which the Fund reduced.
Brokerage Allocation
The Investment Manager's policy is to seek for its clients, including
each 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
30
<PAGE>
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 Funds 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 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 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 Funds 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 a broker-dealer 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
31
<PAGE>
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 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 that firm may
expect to receive for services supplied to the Investment Manager or otherwise.
There may be, however, understandings with certain firms that in order for such
firms to be able to continuously supply certain services, they need to receive
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.
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 Funds and the Investment Manager are aware that
this is an area where differences of opinion as to fact and circumstances may
exist, and in such circumstances, if any, the Investment Manager relies on the
provisions of Section 28(e) of the Securities Exchange Act of 1934, to the
extent applicable. Brokerage commissions paid by the Funds for the periods shown
below were as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended October 31
-----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Strategic Portfolios: Moderate $ 73,000 $ 71,000 $ 93,000
Strategic Portfolios: Conservative $ 29,000 $ 26,000 $ 38,000
Strategic Portfolios: Aggressive $134,000 $145,000 $204,000
</TABLE>
32
<PAGE>
During and at the end of its most recent fiscal year, no Fund held in
its portfolio securities of any entity that might be deemed to be a regular
broker-dealer of such Fund as defined under the 1940 Act.
In the case of the purchase of fixed income securities in
underwriting transactions, the Investment Manager follows any instructions
received from its clients as to the allocation of new issue discounts, selling
concessions and designations to brokers or dealers which provide the client with
research, performance evaluation, master trustee and other services. In the
absence of instructions from the client, the Investment Manager may make such
allocations to broker-dealers which have provided the Investment Manager with
research and brokerage services.
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 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 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
33
<PAGE>
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 Funds -- In General
Each 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, a Fund must, among other
things, (a) derive at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) and satisfy certain
diversification requirements on a quarterly basis.
If in any year a 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 a Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of such Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of such
Fund to the extent thereof. Any distribution in excess of a shareholder's basis
in the shareholder's shares would be taxable as gain realized from the sale of
such shares.
A Fund will be liable for a nondeductible 4% excise tax on amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement. To avoid the tax, during each calendar year, a Fund
must distribute (or be deemed to have distributed) an
34
<PAGE>
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 that purpose, any income or gain retained
by a Fund that is subject to corporate tax will be considered to have been
distributed by year end. Each 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 a Fund may be treated as having original
issue discount. Original issue discount represents interest for federal income
tax purposes and can generally be defined as the excess of the stated redemption
price at maturity of a debt obligation over the issue price. Original issue
discount is treated for federal income tax purposes as income earned by a Fund,
whether or not any 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 a Fund at a discount that exceeds
the original issue discount, if any, at the time a Fund purchases the
securities. This additional discount represents market discount for federal
income tax purposes. In the case of any debt security issued after July 18,
1984, having a fixed maturity date of more than one year from the date of issue
and having market discount, the gain realized on disposition will be treated as
interest to the extent it does not exceed the accrued market discount on the
security (unless a Fund elects to include such accrued market discount in income
in the tax year to which it is attributable). For debt securities acquired
before May 1, 1993, this rule applies only if the debt security was issued after
July 18, 1984. Generally, market discount is accrued on a daily basis. A 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 a Fund makes the election to include market discount in
income currently. Because each Fund must include original issue discount in
income, it will be more difficult for a Fund to make the distributions required
for such Fund to maintain its status as a regulated investment company under
Subchapter M of the Code or to avoid the 4% excise tax described above.
Options and Futures Transactions. Certain of a Fund's investments may
be subject to provisions of the Code that (i) require inclusion of unrealized
gains or losses in a Fund's income for purposes of the 90% test, the excise tax
and the distribution requirements applicable to regulated investment companies;
(ii) defer recognition of realized losses; and (iii) characterize both realized
and unrealized gain or loss as short-term, medium-term or long-term gain or
loss. Such provisions generally apply to, among other investments, options on
35
<PAGE>
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 will likewise be treated as ordinary
income or loss. Such ordinary income or loss will increase or decrease the
amount of the Fund's net investment income.
If 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
36
<PAGE>
provide its shareholders with information about the source of its income and the
foreign taxes it has paid for use in preparing the shareholder's United States
income tax 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 a Fund can result in a reduction in the fair market
value of such Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as ordinary income or long-term capital gain, even though,
from an investment standpoint, it may constitute a partial return of capital. In
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.
DISTRIBUTION OF SHARES OF THE FUNDS
State Street Research Financial Trust is currently comprised of the
following series: State Street Research Government Income Fund, State Street
Research Strategic Portfolios:
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<PAGE>
Conservative, State Street Research Strategic Portfolios: Moderate and State
Street Research Strategic Portfolios: Aggressive. The Trustees have authorized
shares of the Funds to be issued in four classes: Class A, Class B, Class C and
Class S shares. The Trustees of the Trust have authority to issue an unlimited
number of shares of beneficial interest of separate series, $.001 par value per
share. A "series" is a separate pool of assets of the Trust which is separately
managed and has a different investment objective and different investment
policies from those of another series. The Trustees have authority, without the
necessity of a shareholder vote, to create any number of new series or classes
or to commence the public offering of shares of any previously established
series or class.
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Funds. Shares of the Funds 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 applicable Fund plus (subject to certain exceptions) a sales charge which,
at the election of the investor, may be imposed (i) at the time of purchase (the
Class A shares) or (ii) on a deferred basis (Class B and Class C shares). The
Distributor may reallow all or portions of such sales charges as concessions to
dealers. For the fiscal years ended October 31, 1998, 1997 and 1996, no sales
charges on Class A shares of any of the Funds were paid to the Distributor. 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 Funds' Class A shares are
offered due to scheduled variations in sales charges, as described in the Funds'
Prospectus, result from cost savings inherent in economies of scale. Management
believes that the cost of sales efforts of the Distributor and broker-dealers
tends to decrease as the size of purchases increases, or does not involve any
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 Funds or associated entities.
Where shares of the Funds 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 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 charge, will vary depending on factors such
as the size and other characteristics of the organization or program, and the
nature of its membership or the participants. The Funds reserve 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.
38
<PAGE>
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission based on the aggregate of such sales. Such
commission also is payable to authorized securities dealers upon sales of Class
A shares made pursuant to a Letter of Intent to purchase shares having a net
asset value of $1,000,000 or more. Shares sold with such commissions payable are
subject to a one-year contingent deferred sales charge of 1.00% on any portion
of such shares redeemed within one year following their sale. After a particular
purchase of Class A shares is made under the Letter of Intent, the commission
will be paid only in respect of that particular purchase of shares. If the
Letter of Intent is not completed, the commission paid will be deducted from any
discounts or commissions otherwise payable to such dealer in respect of shares
actually sold. If an investor is eligible to purchase shares at net asset value
on account of the Right of Accumulation, the commission will be paid only in
respect of the incremental purchase at net asset value.
For the fiscal years ended October 31, 1998, 1997 and 1996, the
Distributor received no contingent deferred sales charges upon redemption of
Class A, Class B and Class C shares of any of the Funds and paid no initial
commissions to securities dealers for sales of such shares.
Each Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "Distribution Plan") under which the Funds may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of Class A, Class B and Class C shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to underwriters, securities dealers
and others engaged in the sale of shares, including payments to the Distributor
to be used to pay commissions and/or reimbursement to securities dealers (which
securities dealers may be affiliates of the Distributor) engaged in the
distribution and marketing of shares and furnishing ongoing assistance to
investors, (2) reimbursement of direct out-of-pocket expenditures incurred by
the Distributor in connection with the distribution and marketing of shares and
the servicing of investor accounts including expenses relating to the
formulation and implementation of marketing strategies and promotional
activities such as direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising, the preparation, printing and
distribution of Prospectuses of the Funds and reports for recipients other than
existing shareholders of the Fund, and obtaining such information, analyses and
reports with respect to marketing and promotional activities and investor
accounts as the Funds may, from time to time, deem advisable, and (3)
reimbursement of expenses incurred by the Distributor in connection with the
maintenance or servicing of shareholder accounts including payments to
securities dealers and others in consideration of the provision of personal
service to investors and/or the maintenance of shareholder accounts and expenses
associated with the provision of personal services by the Distributor directly
to investors. In addition, the Distribution Plan is deemed to authorize the
Distributor and the Investment Manager to make payments out of general profits,
revenues or other sources to underwriters, securities dealers and others in
connection with sales of shares, to the extent, if any, that such payments may
be deemed to be within the scope of Rule 12b-1 under the 1940 Act.
39
<PAGE>
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class C shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class C
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class C shares (as the case may be) to make payments for personal
services and/or the maintenance or servicing of shareholder accounts. Proceeds
from the service fee will be used by the Distributor to compensate securities
dealers and others selling shares of the Funds for rendering service to
shareholders on an ongoing basis. Such amounts are based on the net asset value
of shares of the Funds held by such dealers as nominee for their customers or
which are owned directly by such customers for so long as such shares are
outstanding and the Distribution Plan remains in effect with respect to the
Funds. Any amounts received by the Distributor and not so allocated may be
applied by the Distributor as reimbursement for expenses incurred in connection
with the servicing of investor accounts. The distribution and servicing expenses
of a particular class will be borne solely by that class.
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.
During the fiscal year ended October 31, 1998, none of the Funds paid
any fees to the Distributor under the Distribution Plan.
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<PAGE>
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 Funds will make alternative
arrangements for such services for shareholders who acquired shares through such
institutions.
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") and yield
of the Class A, Class B, Class C and Class S shares of the Funds will be
calculated as set forth below. Total return and yield are computed separately
for each class of shares of the Funds.
The Funds' performance is shown below, and where noted, reflects the
voluntary measures by the Funds' affiliates to reduce fees or expenses relating
to the Funds; see "Accrued Expenses" later in this section.
Total Return
The total return ("standard total return") of each Fund's Class S
shares was as follows:
<TABLE>
<CAPTION>
Commencement
of Operations One Year
(September 28, 1993) Ended
to October 31, 1998 October 31, 1998
----------------------- ----------------
<S> <C> <C> <C>
Strategic Portfolios: Moderate 9.98% 6.53%
<CAPTION>
Commencement
of Operations One Year
(May 16, 1994) Ended
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
to October 31, 1998 October 31, 1998
----------------------- ----------------
<S> <C> <C> <C>
Strategic Portfolios: Conservative 11.32% 8.60%
Strategic Portfolios: Aggressive 13.65% 3.69%
</TABLE>
Standard total return is computed separately for each class of shares
by determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value in accordance with the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated
period assuming a hypothetical $1,000 payment made at
the beginning of the designated period
The calculation is based on the further assumptions that the highest
applicable initial or contingent deferred sales charge is deducted, and that all
dividends and distributions by the Funds are reinvested at net asset value on
the reinvestment dates during the periods. All accrued expenses are also taken
into account as described later herein.
Yield
The annualized yield of each Fund's Class S shares, based on the
month of October 1998, was as follows:
<TABLE>
<S> <C> <C>
Strategic Portfolios: Conservative 3.96%
Strategic Portfolios: Moderate 3.09%
Strategic Portfolios: Aggressive 2.14%
</TABLE>
Yield is computed separately for each class of shares by dividing the
net investment income per share earned during a recent month or other specified
30-day period by the maximum offering price per share on the last day of the
period and annualizing the result in accordance with the following formula:
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<PAGE>
YIELD = 2 [ (a -- b + 1)6 -- 1]
------
c d
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of voluntary expense
reductions by the Investment Manager)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
To calculate interest earned (for the purpose of "a" above) on debt
obligations, a Fund computes the yield to maturity of each obligation held by
such Fund based on the market value of the obligation (including actual accrued
interest) at the close of the last business day of the preceding period, or,
with respect to obligations purchased during the period, the purchase price
(plus actual accrued interest). The yield to maturity is then divided by 360 and
the quotient is multiplied by the market value of the obligation (including
actual accrued interest) to determine the interest income on the obligation for
each day of the period that the obligation is in the portfolio. Dividend income
is recognized daily based on published rates.
With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("paydowns"), each Fund accounts for gain or
loss attributable to actual monthly paydowns as realized capital gain or loss
during the period. Each Fund has elected not to amortize discount or premium on
such securities.
Undeclared earned income, computed in accordance with generally
accepted accounting principles, may be subtracted from the maximum offering
price. Undeclared earned income is the net investment income which, at the end
of the base period, has not been declared as a dividend, but is reasonably
expected to be declared as a dividend shortly thereafter. The maximum offering
price includes, as applicable, a maximum sales charge of 4.5%.
All accrued expenses are taken into account as described later
herein.
Yield information is useful in reviewing a Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in a Fund's shares with bank deposits, savings accounts and
similar investment alternatives which often are insured and/or provide an agreed
or guaranteed fixed yield for a stated period of time. Shareholders should
remember that yield is a function of the kind and quality of the instruments in
the Fund's portfolio, portfolio maturity and operating expenses and market
conditions.
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<PAGE>
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 and yield results take sales charges, if applicable, into
account, although the results do not take into account recurring and
nonrecurring charges for optional services which only certain shareholders elect
and which involve nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by
affiliates of fees or expenses during the subject period. In the absence of such
subsidization, the performance of the Funds would have been lower.
Nonstandardized Total Return
A Fund may provide the above described standard total return results
for Class A, 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 and at the time of commencement of such Fund's operations. In addition,
the Funds 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 or ending
value. For example, the nonstandard total return of each Fund's Class S shares
for the six months ended October 31, 1998, without taking sales charges into
account, were as follows:
<TABLE>
<S> <C>
Strategic Portfolios: Moderate -3.60%
Strategic Portfolios: Conservative 1.37%
Strategic Portfolios: Aggressive -9.09%
</TABLE>
Distribution Rates
A Fund may also quote its distribution rate for each class of shares.
The distribution rate is calculated by annualizing the latest per-share
distribution from ordinary income and dividing the result by the maximum
offering price per share as of the end of the period. A distribution can include
gross investment income from debt obligations purchased at a premium and in
effect include a portion of the premium paid. A distribution can also include
nonrecurring, gross short-term capital gains without recognition of any
unrealized capital losses. Further, a distribution can include income from the
sale of options by a Fund even though such option income is not considered
investment income under generally accepted accounting principles.
44
<PAGE>
Because a distribution can include such premiums, capital gains and
option income, the amount of the distribution may be susceptible to control by
the Investment Manager through transactions designed to increase the amount of
such items. Also, because the distribution rate is calculated in part by
dividing the latest distribution by the offering price, which is based on net
asset value plus any applicable sales charge, the distribution rate will
increase as the net asset value declines. A distribution rate can be greater
than the yield rate calculated as described above.
The distribution rate of each Fund's Class S shares, based on the
month ended October 31, 1998, was as follows:
<TABLE>
<S> <C>
Strategic Portfolios: Conservative 3.66%
Strategic Portfolios: Moderate 2.51%
Strategic Portfolios: Aggressive 1.40%
</TABLE>
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 Funds' cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Funds' investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or any of 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 Funds' annual financial statements, (2)
assistance and consultation in connection with Securities and Exchange
Commission filings and (3) review of the annual income tax returns filed on
behalf of the Funds.
45
<PAGE>
FINANCIAL STATEMENTS
The Fund's financial statements for the fiscal year ended October 31,
1998, including the Investment Portfolio, Statement of Assets and Liabilities,
Statement of Operations, Statement of Changes in Net Assets, Notes to Financial
Statements, Financial Highlights, Report of Independent Accountants and
Management's Discussion of Fund Performance are hereby incorporated by reference
from the Fund's Annual Report, filed with the Commission (EDGAR accession number
0000950156-99-000023).
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 Service Center at 1-800-562-0032.
DOCSC\357797.8
46
