STATEMENT OF ADDITIONAL INFORMATION
for
STATE STREET RESEARCH HEALTH SCIENCES FUND
A Series of State Street Research Financial Trust
December 12, 1999
(as supplemented January 12, 2000)
This Statement of Additional Information is divided into two
sections:
Section One contains information which is specific to the fund
identified above.
Section Two contains information which generally is shared by certain
mutual funds of the State Street Research complex, including the fund
specified above.
The Statement of Additional Information is not a Prospectus. It
should be read in conjunction with the current Prospectus of the fund specified
above. The date of the current prospectus of the fund is:
State Street Research Health Sciences Fund December 12, 1999
The Prospectus may be obtained without charge from State Street
Research Investment Services, Inc., One Financial Center, Boston, Massachusetts
02111-2690 or by calling 1-800-562-0032.
Control Number: (EXP01100) SSR-LD SSR-0
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TABLE OF CONTENTS
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Page
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SECTION I..............................................................................................I, 1-1
1. STATE STREET RESEARCH HEALTH SCIENCES FUND................................................I, 1-1
A. The Fund.........................................................................I, 1-1
B. Investment Objective.............................................................I, 1-1
C. Fundamental and Nonfundamental Restrictions......................................I, 1-1
D. Restricted Securities............................................................I, 1-4
E. Foreign Investments..............................................................I, 1-4
F. Industry Classifications.........................................................I, 1-4
G. Control Persons and Principal Holders of Securities..............................I, 1-4
H. Trustee Compensation.............................................................I, 1-5
I. Investment Advisory Fee..........................................................I, 1-6
J. Distributor's Payment of Fund Expenses...........................................I, 1-6
K. Portfolio Turnover...............................................................I, 1-6
L. Rule 12b-1 Fees..................................................................I, 1-7
SECTION II...............................................................................................II-1
A. Additional Information Concerning Investment Restrictions, Certain
Risks and Investment Techniques....................................................II-1
B. Debt Instruments and Permitted Cash Investments...................................II-13
C. The Trusts, the Trustees and Officers and Fund Shares.............................II-22
D. Investment Advisory Services......................................................II-31
E. Purchase and Redemption of Shares.................................................II-32
F. Shareholder Accounts..............................................................II-40
G. Net Asset Value...................................................................II-45
H. Portfolio Transactions............................................................II-46
I. Certain Tax Matters...............................................................II-49
J. Distribution of Fund Shares.......................................................II-53
K. Calculation of Performance Data...................................................II-56
L. Custodian.........................................................................II-59
M. Independent Accountants...........................................................II-59
N. Financial Reports.................................................................II-59
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(i)
<PAGE>
DEFINITIONS
-----------
Each of the following terms used in this Statement of Additional
Information has the meaning set forth below.
"1940 Act" means the Investment Company Act of 1940, as amended.
"Distributor" means State Street Research Investment Services, Inc., One
Financial Center, Boston, Massachusetts 02111-2690
"Investment Manager" means State Street Research & Management Company, One
Financial Center, Boston, Massachusetts 02111-2690.
"Metropolitan" means Metropolitan Life Insurance Company.
"NYSE" means the New York Stock Exchange, Inc.
"Vote of the majority of the outstanding voting securities" means the vote, at
the annual or a special meeting of security holders duly called, (i) of 67% or
more of the voting securities present at the meeting if the holders of more than
50% of the outstanding voting securities are present or represented by proxy or
(ii) of more than 50% of the outstanding voting securities, whichever is less.
(iii)
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SECTION I
1. STATE STREET RESEARCH HEALTH SCIENCES FUND
A. The Fund
The Fund was organized in 1999 as a separate series of State Street
Research Financial Trust, a Massachusetts business trust. A "series" is a
separate pool of assets of the Trust which is separately managed and may have a
different investment objective and different investment policies from the
objective and policies of another series. The Trust currently is comprised of
the following series: State Street Research Government Income Fund, State Street
Research IntelliQuant Portfolios: Small-Cap Value, State Street Research
Strategic Income Plus Fund, State Street Research Strategic Portfolios:
Aggressive, State Street Research International Equity Fund and State Street
Research Health Sciences Fund.
The Fund is an "open-end" management investment company, but it is not
a "diversified company" as those terms are defined in the 1940 Act. Among other
things, a diversified fund must, with respect to 75% of its total assets, not
invest more than 5% of its total assets in any one issuer or invest in more than
10% of the outstanding voting securities of an issuer. As a nondiversified fund,
the fund will not be subject to this limit. The Fund, therefore, could invest in
fewer issuers, which could increase the relative adverse effect on the portfolio
that one or a few poor performing investments could potentially have. However,
under the federal tax law, with respect to 50% of its total assets, the fund may
not invest more than 5% of its total assets in any single issuer.
Under the Trust's Master Trust Agreement, the Trustees may reorganize,
merge or liquidate the Fund without prior shareholder approval.
B. Investment Objective
The investment objective of State Street Research Health Sciences Fund
is a nonfundamental policy and may be changed without shareholder approval.
C. Fundamental and Nonfundamental Restrictions
The Health Sciences Fund has adopted the following investment
restrictions, and those investment restrictions are either fundamental or not
fundamental. Fundamental restrictions may not be changed by the Fund except by
the affirmative vote of a majority of the outstanding voting securities of the
Fund. Restrictions that are not fundamental may be changed without a shareholder
vote.
The fundamental and nonfundamental policies of the Fund do not apply to
any matters involving the issuance of multiple classes of shares of the Fund or
the creation or use of structures (e.g. fund of funds, master-feeder structure)
allowing the Fund to invest any or all of its assets in collective investment
vehicles or allowing the Fund to serve as such a collective investment vehicle
for other funds, to the extent permitted by law and regulatory authorities.
I. 1-1
<PAGE>
Fundamental Investment Restrictions
It is the Health Sciences Fund's policy:
(1) not to issue senior securities, as defined in the 1940 Act,
except as permitted by that Act and the rules thereunder or as
permitted by the Securities and Exchange Commission (the
creation of general liens or security interests under industry
practices for transactions in portfolio assets are not deemed
to involve the issuance of senior securities);
(2) 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 a selling shareholder
in an offering or deemed to be an underwriter under certain
federal securities laws;
(3) not to purchase fee simple interest in real estate unless
acquired as a result of ownership of securities or other
instruments, although the Fund may purchase and sell other
interests in real estate including securities which are
secured by real estate, or securities of companies which make
real estate loans or own, or invest or deal in, real estate;
(4) not to invest in physical commodities or physical commodity
contracts or options in excess of 10% of the Fund's total
assets, except that investments in essentially financial items
or arrangements such as, but not limited to, swap
arrangements, hybrids, currencies, currency and other forward
contracts, delayed delivery and when-issued contracts, futures
contracts and options on futures contracts on securities,
securities indices, interest rates and currencies shall not be
deemed investments in commodities or commodities contracts;
(5) not to lend money directly to natural persons; however, the
Fund may lend portfolio securities and purchase bonds,
debentures, notes, bills and any other debt related
instruments or interests directly from the issuer thereof or
in the open market and may enter into repurchase transactions
collateralized by
I. 1-2
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obligations of the U.S. Government or its agencies and
instrumentalities or other high quality securities;
(6) not to make any investment which would cause more than 25% of
the value of the Fund's total assets to be invested in
securities of issuers principally engaged in any one industry
(except the health science and related industries, and U.S.
Government securities as defined under the Investment Company
Act of 1940, as amended, and as interpreted from time to time
by the Securities and Exchange Commission) as described in the
Fund's Prospectus or Statement of Additional Information as
amended from time to time; and
(7) not to borrow money, including reverse repurchase agreements
in so far as such agreements may be regarded as borrowings,
except for borrowings not in an amount in excess of 33 1/3% of
the value of its total assets.
Nonfundamental Investment Restrictions
It is the Health Sciences 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);
(2) not to engage in transactions in options except in connection
with options on securities, securities indices, currencies and
interest rates, and options on futures on securities,
securities indices, currencies and interest rates;
(3) not to purchase securities on margin or make short sales of
securities or maintain a short position except for short sales
"against the box" (for the purpose of this restriction, escrow
or custodian receipts or letters, margin or safekeeping
accounts or similar arrangements used in the industry in
connection with the trading of futures, options and forward
commitments are not deemed to involve the use of margin); and
(4) not to purchase a security issued by another investment
company, except to the extent permitted under the 1940 Act or
any exemptive order from the Securities and Exchange
Commission 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.
I. 1-3
<PAGE>
D. Restricted Securities
It is the Fund's policy not to make an investment in restricted
securities, including 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.
E. Foreign Investments
The Fund reserves the right to invest without limitation in securities
of non-U.S. issuers directly, or indirectly in the form of American Depository
Receipts ("ADRs"), European Depository Receipts ("EDRs") and Global Depository
Receipts (GDRs"). Under current policy, however, the Fund limits such
investments, including ADRs, EDRs and GDRs, to a maximum of 35% of its total
assets.
F. Industry Classifications
In determining how much of the Fund's portfolio is invested in a given
industry, the following industry classifications are currently used. Securities
issued or guaranteed as to principal or interest by the U.S. Government or its
agencies or instrumentalities or mixed-ownership Government corporations or
sponsored enterprises (including repurchase agreements involving U.S. Government
securities to the extent excludable under relevant regulatory interpretations)
are excluded. Securities issued by foreign governments are also excluded.
Companies engaged in the business of financing may be classified according to
the industries of their parent or sponsor companies or industries that otherwise
most affect such financing companies. Issuers of asset-backed pools will be
classified as separate industries based on the nature of the underlying assets,
such as mortgages and credit card receivables. "Asset-backed-Mortgages" includes
private pools of nongovernment backed mortgages.
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Autos & Transportation Recreational Vehicles & Communications, Media &
- ---------------------- Boats Entertainment
Air Transport Tires & Rubber Consumer Electronics
Auto Parts Truckers Consumer Products
Automobiles Consumer Services
Miscellaneous Consumer Discretionary Household Furnishings
Transportation ---------------------- Leisure Time
Railroad Equipment Advertising Agencies Photography
Railroads Casino/Gambling, Printing & Publishing
Hotel/Motel Restaurants
Commercial Services
Retail Diversified Manufacturing Miscellaneous Producer
Shoes Engineering & Contracting Durables
Textile Apparel Serv. Office Furniture & Business
Manufacturers Fertilizers Equipment
Toys Forest Products Pollution Control and
Gold & Precious Metals Environmental Services
Consumer Staples Miscellaneous Materials & Production Technology
- ---------------- Processing Equipment
Beverages Non-Ferrous Metals Telecommunications
Drug & Grocery Store Office Supplies Equipment
Chains Paper and Forest Products
Foods Real Estate & Construction Technology
Household Products Steel ----------
Tobacco Textile Products Communications
Technology
Financial Services Other Computer Software
- ------------------ ----- Computer Technology
Banks & Savings and Loans Trust Certificates -- Electronics
Financial Data Processing Government Related Electronics: Semi-
Services & Systems Lending Conductors/Components
Insurance Asset-backed-Mortgages Miscellaneous Technology
Miscellaneous Financial Asset-backed-Credit Card
Real Estate Investment Receivables Utilities
Trusts Miscellaneous ---------
Rental & Leasing Services: Multi-Sector Companies Miscellaneous Utilities
Commercial Utilities: Cable TV & Radio
Securities Brokerage & Other Energy Utilities: Electrical
Services ------------ Utilities: Gas distribution
Gas Pipelines Utilities:Telecommunications
Health Care Miscellaneous Energy Utilities: Water
- ----------- Offshore Drilling
Drugs & Biotechnology Oil and Gas Producers
Health Care Facilities Oil Well Equipment &
Health Care Services Services
Hospital Supply
Service Miscellaneous Producer Durables
-----------------
Integrated Oils Aerospace
- --------------- Electrical Equipment &
Oil: Integrated Domestic Components
Oil: Integrated International Electronics: Industrial
Homebuilding
Materials & Processing Industrial Products
- ---------------------- Machine Tools
Agriculture Machinery
Building & Construction Miscellaneous Equipment
Chemicals
Containers & Packaging
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G. Control Persons and Principal Holders of Securities
I. 1-4
<PAGE>
As of the approximate date of this Statement of Additional Information,
the Investment Manager, the Distributor and/or Metropolitan Life Insurance
Company ("Metropolitan"), their indirect parent, were the beneficial owners of
all or a substantial amount of the outstanding Class A, Class B(1), Class B,
Class C and Class S shares of the Fund, and may be deemed to be in "control" of
such class or the Fund, as defined in the 1940 Act. Although sales of Fund
shares to other investors will reduce their percentage ownership, so long as 25%
of a class of shares is so owned, such owners will be presumed to be in control
of such class of shares for purposes of voting on certain matters submitted to a
vote of shareholders, such as any Rule 12b-1 plan for a given class.
H. Trustee Compensation
The Trustees of State Street Research Financial Trust were compensated
as follows:
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Total Total Compensation
Compensation From All State
Aggregate From All Street Research Funds
Compensation State Street and Metropolitan
From Health Research Funds Series Fund, Inc.
Name of Trustee Sciences Fund (a)(b) Paid to Trustees (c) Paid to Trustees (d)
- --------------- -------------------- -------------------- --------------------
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Bruce R. Bond $377 $ 0 $ 0
Steven A. Garban $377 $ 81,300 $ 110,300
Malcolm T. Hopkins $377 $ 69,700 $ 97,200
Dean O. Morton $377 $ 84,700 $ 110,700
Susan M. Phillips $377 $ 12,145 $ 12,145
Toby Rosenblatt $377 $ 72,600 $ 72,600
Michael S. Scott Morton $377 $ 89,500 $ 115,500
Ralph F. Verni $0 $ 0 $ 0
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(a) Estimated for the Fund's fiscal year ending February 28, 2000.
(b) The Health Sciences Fund does not provide any pension or retirement benefits
for the Trustees.
I. 1-5
<PAGE>
(c) Includes compensation on behalf of all series of 11 investment companies for
which the Investment Manager serves as sole investment adviser. The figure
in this column is for the 12 months ended December 31, 1998.
(d) Includes compensation on behalf of all series of 11 investment companies for
which the Investment Manager serves as sole investment adviser and all
series of Metropolitan Series Fund, Inc. The primary adviser to Metropolitan
Series Fund, Inc. is Metropolitan Life Insurance Company, which has retained
State Street Research & Management Company as sub-adviser to certain series
of Metropolitan Series Fund, Inc. The figure in this column includes
compensation relating to series of Metropolitan Series Fund, Inc. which are
not advised by State Street Research & Management Company. The figure is for
the 12 months ended December 31, 1998.
For more information on the Trustees and officers of State Street
Research Financial Trust, see Section II, C of this Statement of Additional
Information.
I. Investment Advisory Fee
The advisory fee payable monthly by the Health Sciences Fund to the
Investment Manager is computed as a percentage of the average of the value of
the net assets of the Health Sciences Fund as determined at the close of regular
trading on the NYSE on each day the NYSE is open for trading.
The annual percentage rate is: 0.75%
J. Distributor's Payment of Fund Expenses
The Distributor has voluntarily undertaken to pay certain expenses of
the Fund up to an amount which will enable the Fund to maintain a level of
actual total operating expenses of approximately 1.25% of net assets or as
otherwise mutually agreed from time to time by the Distributor and Trustees on
behalf of the Fund ("Expense Benchmark"). The following expenses are excluded
from this undertaking: Rule 12b-1 fees and any other class specific expenses,
interest, taxes, brokerage commissions, and extraordinary expenses such as
litigation and other expenses not incurred in the ordinary course of the Fund's
business. The Distributor may unilaterally cease to pay Fund expenses pursuant
to this undertaking at any time.
The Distributor is entitled to payment from the Fund for the amount of
expenses paid on behalf of the Fund when the Fund's actual total operating
expenses are less than the Expense Benchmark then in effect, provided that the
effect of such payment does not cause the Fund to exceed the lower of (a) the
Expense Benchmark then in effect or (b) the Expense Benchmark in effect in the
year that the expenses were originally paid. The Distributor will not be
entitled to such repayments from the Fund after the end of the fifth fiscal year
of the Fund following the year in which the expenses were originally paid.
K. Portfolio Turnover
The 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 the Investment Manager's investment strategy changes
significantly, portfolio turnover may be higher than during times of economic
and market price stability or when the Investment Manager's investment strategy
remains relatively constant.
I. 1-6
<PAGE>
L. Rule 12b-1 Fees
The Fund has adopted a plan of distribution pursuant to Rule 12b-1
under the 1940 Act ("Distribution Plan"). Under the distribution plan, the Fund
may engage, directly or indirectly, in financing any activities primarily
intended to result in the sale of shares of the Fund. Under the plan, the Fund
provides the Distributor with a service fee at an annual rate of 0.25% on the
average daily net assets of Class A, Class B(1), Class B and Class C shares. The
Fund also provides a distribution fee at an annual rate of (i) up to 0.15% on
the average daily net assets of Class A shares, and (ii) 0.75% of Class B(1),
Class B and Class C shares. The service and distribution fees are used to cover
personal services and/or the maintenance of shareholder accounts provided by the
Distributor, brokers, dealers, financial professionals or others, and sales,
promotional and marketing activities relating to the respective classes.
Under the Distribution Plan, the Fund's payments compensate the
Distributor for services and expenditures incurred under the plan and none of
the payments are returnable to the Fund.
I, 1-7
<PAGE>
SECTION II
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This Section II contains general information applicable to the fund(s)
identified on the cover page of this Statement of Additional Information. (If
more than one Fund is identified, each is referred to as "the Fund.")
A. Additional Information Concerning Investment Restrictions,
Certain Risks and Investment Techniques
The Fund follows certain fundamental and nonfundamental investment
restrictions. The fundamental and nonfundamental investment restrictions for the
Fund identified on the cover page of this Statement of Additional Information
are included in Section I of this Statement of Additional Information.
In addition, the Fund may invest in the following instruments, use the
following investment techniques or be exposed to the following investment risks.
Please note that not all of the instruments, techniques and risks described in
this part apply uniformly to the Funds identified on the cover page of this
Statement of Additional Information. The extent to which a Fund may engage in
the following practices depends on its investment strategy. Some practices are
more applicable to equity investments and would be used more by Funds with
substantial equity portions. For example, American Depository Receipts ("ADRs")
generally involve the stocks of foreign issuers and are used more by Funds which
invest in foreign securities. Similarly, some practices are more applicable to
debt securities and would be used more in Funds with substantial debt positions,
for example, techniques to manage the interest rate volatility of bonds.
However, since the Fund generally reserves the flexibility to invest to some
degree in ways which are outside their primary focus, it is possible for the
Fund to engage in all the described practices.
Derivatives
- -----------
The Fund may buy and sell certain types of derivatives, such as options
futures contracts, options on futures contracts, and swaps under circumstances
in which such instruments are expected by the Investment Manager to aid in
achieving the Fund's investment objective. The Fund may also purchase
instruments with characteristics of both futures and securities (e.g., debt
instruments with interest and principal payments determined by reference to the
value of a commodity or a currency at a future time) and which, therefore,
possess the risks of both futures and securities investments.
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Fund to take both "short" positions (positions
which anticipate a decline in the market value of a particular asset or index)
and "long" positions (positions which anticipate an increase in the market value
of a particular asset or index). The Fund may also use strategies which involve
simultaneous short and long positions in response to specific market conditions,
such as where the Investment Manager anticipates unusually high or low market
volatility.
II-1
<PAGE>
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 the Fund from an expected decline in
the market value of an asset or group of assets that the Fund owns (in the case
of a short hedge) or to protect the Fund from an expected rise in the market
value of an asset or group of assets which it intends to acquire in the future
(in the case of a long or "anticipatory" hedge). Non-hedging strategies include
strategies designed to produce incremental income (such as the option writing
strategy described below) or "speculative" strategies which are undertaken to
profit from (i) an expected decline in the market value of an asset or group of
assets which the Fund does not own or (ii) expected increases in the market
value of an asset which it does not plan to acquire. Information about specific
types of instruments is provided below.
Futures Contracts.
Futures contracts are publicly traded contracts to buy or sell an
underlying asset or group of assets, such as a currency or an index of
securities, at a future time at a specified price. A contract to buy establishes
a long position while a contract to sell establishes a short position.
The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or index after paying a transaction charge and posting
margin in an amount equal to a small percentage of the value of the underlying
asset or index. The Fund will initially be required to deposit with the Trust's
custodian or the broker effecting the futures transaction an amount of "initial
margin" in cash or securities, as permitted under applicable regulatory
policies.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will terminate
the Fund's position in the futures contract. A final determination of
maintenance margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. While
II-2
<PAGE>
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. The Fund will utilize such
assets and methods of cover as appropriate under applicable exchange and
regulatory policies.
Options.
The Fund may use options to implement its investment strategy. There
are two basic types of options: "puts" and "calls." Each type of option can
establish either a long or a short position, depending upon whether the Fund is
the purchaser or the writer of the option. A call option on a security, for
example, gives the purchaser of the option the right to buy, and the writer the
obligation to sell, the underlying asset at the exercise price during the option
period. Conversely, a put option on a security gives the purchaser the right to
sell, and the writer the obligation to buy, the underlying asset at the exercise
price during the option period.
Purchased options have defined risk, that is, the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset. In general, a purchased put increases in value
as the value of the underlying security falls and a purchased call increases in
value as the value of the underlying security rises.
The principal reason to write options is to generate extra income (the
premium paid by the buyer). Written options have varying degrees of risk. An
uncovered written call option theoretically carries unlimited risk, as the
market price of the underlying asset could rise far above the exercise price
before its expiration. This risk is tempered when the call option is covered,
that is, when the option writer owns the underlying asset. In this case, the
writer runs the risk of the lost opportunity to participate in the appreciation
in value of the asset rather than the risk of an out-of-pocket loss. A written
put option has defined risk, that is, the difference between the agreed upon
price that the Fund must pay to the buyer upon exercise of the put and the
value, which could be zero, of the asset at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
its obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Among the options which the Fund may enter are options on securities
indices. In general, options on indices of securities are similar to options on
the securities themselves
II-3
<PAGE>
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, the Fund may offset its position in
index options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
A securities index assigns relative values to the securities included
in the index and the index options are based on a broad market index. In
connection with the use of such options, the Fund may cover its position by
identifying assets having a value equal to the aggregate face value of the
option position taken.
Options on Futures Contracts.
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
Limitations and Risks of Options and Futures Activity.
The Fund may not establish a position in a commodity futures contract
or purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such non-hedging
purposes would exceed 5% of the market value of the Fund's net assets. The Fund
applies a similar policy to options that are not commodities.
As noted above, the Fund may engage in both hedging and nonhedging
strategies. Although effective hedging can generally capture the bulk of a
desired risk adjustment, no hedge is completely effective. The Fund's ability to
hedge effectively through transactions in futures and options depends on the
degree to which price movements in its holdings correlate with price movements
of the futures and options.
Non-hedging strategies typically involve special risks. The
profitability of the Fund's non-hedging strategies will depend on the ability of
the Investment Manager to analyze both the applicable derivatives market and the
market for the underlying asset or group of assets. Derivatives markets are
often more volatile than corresponding securities markets and a relatively small
change in the price of the underlying asset or group of assets can have a
magnified effect upon the price of a related derivative instrument.
II-4
<PAGE>
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 Fund's ability to effectively carry out their derivative
strategies and might, in some cases, require a Fund to deposit cash to meet
applicable margin requirements. The Fund will enter into an option or futures
position only if it appears to be a liquid investment.
Short Sales Against the Box
- ---------------------------
The Fund may effect short sales, but only if such transactions are
short sale transactions known as short sales "against the box." A short sale is
a transaction in which the Fund sells a security it does not own by borrowing it
from a broker, and consequently becomes obligated to replace that security. A
short sale against the box is a short sale where the Fund owns the security sold
short or has an immediate and unconditional right to acquire that security
without additional cash consideration upon conversion, exercise or exchange of
options with respect to securities held in its portfolio. The effect of selling
a security short against the box is to insulate that security against any future
gain or loss.
Lower Quality Fixed Income Securities
- -------------------------------------
In addition to those risks set forth in the Fund's Prospectus, lower
quality securities involve risks (i) that the limited liquidity and secondary
market support for such securities will 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) of 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) of subordination to the prior claims of banks and other
senior lenders; (iv) of the possibility that earnings of an issuer may be
insufficient to meet its debt service; and (v) of 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 this type of security has paralleled a general expansion in certain sectors
in the U.S. economy, and the effects of adverse economic changes (including a
recession) are unclear.
Swap Arrangements
- -----------------
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below, although the
Fund does not presently expect to invest more than 5% of its net assets in such
items. In an interest rate swap, the Fund could agree for a specified period to
pay a bank or investment banker the floating rate of interest on a so-called
II-5
<PAGE>
notional principal amount (i.e., an assumed figure selected by the parties for
this purpose) in exchange for agreement by the bank or investment banker to pay
the Fund a fixed rate of interest on the notional principal amount. In a
currency swap, the Fund would agree with the other party to exchange cash flows
based on the relative differences in values of a notional amount of two (or
more) currencies; in an index swap, the Fund would agree to exchange cash flows
on a notional amount based on changes in the values of the selected indices.
Purchase of a cap entitles the purchaser to receive payments from the seller on
a notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an
agreed-upon interest rate or amount. A collar combines a cap and a floor.
The Fund may enter credit protection swap arrangements involving the
sale by the Fund of a put option on a debt security which is exercisable by the
buyer upon certain events, such as a default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
Most swaps entered into by the Fund will be on a net basis; for
example, in an interest rate swap, amounts generated by application of the fixed
rate and the floating rate to the notional principal amount would first offset
one another, with the Fund either receiving or paying the difference between
such amounts. In order to be in a position to meet any obligations resulting
from swaps, the Fund will set up a segregated custodial account to hold
appropriate liquid assets, including cash; for swaps entered into on a net
basis, assets will be segregated having a daily net asset value equal to any
excess of the Fund's accrued obligations over the accrued obligations of the
other party, while for swaps on other than a net basis assets will be segregated
having a value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a portion of the Fund's portfolio.
However, the Fund may, as noted above, enter into such arrangements for income
purposes to the extent permitted by the Commodities Futures Trading Commission
(the "CFTC") for entities which are not commodity pool operators, such as the
Fund. In entering a swap arrangement, the Fund is dependent upon the
creditworthiness and good faith of the counterparty. The Fund attempts to reduce
the risks of nonperformance by the counterparty by dealing only with
established, reputable institutions. The swap market is still relatively new and
emerging; positions in swap arrangements may become illiquid to the extent that
nonstandard arrangements with one counterparty are not readily transferable to
another counterparty or if a market for the transfer of swap positions does not
develop. The use of interest rate swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Investment Manager is
incorrect in its forecasts of market values, interest rates and other applicable
factors, the investment performance of the Fund would diminish compared with
what it would have been if these investment techniques were not used. Moreover,
even if the Investment Manager is correct in its forecasts, there is a risk that
the swap position may correlate imperfectly with the price of the asset or
liability being hedged.
II-6
<PAGE>
Repurchase Agreements
- ---------------------
The Fund may enter into repurchase agreements. Repurchase agreements
occur when the Fund acquires a security and the seller, which may be either (i)
a primary dealer in U.S. Government securities or (ii) an FDIC-insured bank
having gross assets in excess of $500 million, simultaneously commits to
repurchase it at an agreed-upon price on an agreed-upon date within a specified
number of days (usually not more than seven) from the date of purchase. The
repurchase price reflects the purchase price plus an agreed-upon market rate of
interest which is unrelated to the coupon rate or maturity of the acquired
security. The Fund will only enter into repurchase agreements involving U.S.
Government securities. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
Repurchase agreements will be limited to 30% of the Fund's net assets, except
that repurchase agreements extending for more than seven days when combined with
any other illiquid securities held by the Fund will be limited to 15% of the
Fund's net assets.
Reverse Repurchase Agreements
- -----------------------------
The Fund may enter into reverse repurchase agreements. In a reverse
repurchase agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker or dealer, in return for
a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed-upon rate.
The ability to use reverse repurchase agreements may enable, but does not ensure
the ability of, the Fund to avoid selling portfolio instruments at a time when a
sale may be deemed to be disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
When-Issued Securities
- ----------------------
The Fund may purchase "when-issued" securities, which are traded on a
price or yield basis prior to actual issuance. Such purchases will be made only
to achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs when corporate securities
to be created by a merger of companies are traded prior to the actual
consummation of the merger. Such transactions may involve a risk of loss if the
value of the securities falls below the price committed to prior to actual
issuance. The custodian holding Fund assets will establish a segregated account
when the Fund purchases securities on a when-issued basis consisting of cash or
liquid securities equal to the amount of the when-issued commitments.
II-7
<PAGE>
Securities transactions involving delayed deliveries or forward commitments are
frequently characterized as when-issued transactions and are similarly treated
by the Fund.
Restricted Securities
- ---------------------
The Fund may invest in restricted securities, including restricted
securities sold in accordance with Rule 144A under the Securities Act of 1933
("Rule 144A Securities"). Securities may be resold pursuant to Rule 144A under
certain circumstances only to 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 for the Fund. Under such methods the
following factors are considered, among others: the frequency of trades and
quotes for the security, the number of dealers and potential purchasers in the
market, market making activity, and the nature of the security and marketplace
trades. Investments in Rule 144A Securities could have the effect of increasing
the level of the Fund's illiquidity to the extent that qualified institutional
buyers become, for a time, uninterested in purchasing such securities. Also, the
Fund may be adversely impacted by the subjective valuation of such securities in
the absence of a market for them. Restricted securities that are not resalable
under Rule 144A may be subject to risks of illiquidity and subjective valuations
to a greater degree than Rule 144A Securities.
Mortgage-Related Securities
- ---------------------------
The Fund may invest in mortgage-related securities. Mortgage-related
securities represent interests in pools of commercial or residential mortgage
loans. Some mortgage-related securities provide the Fund with a flow-through of
interest and principal payments as such payments are received with respect to
the mortgages in the pool. Mortgage-related securities may be issued by private
entities such as investment banking firms, insurance companies, mortgage bankers
and home builders. Mortgage-related securities may be issued by U.S. Government
agencies, instrumentalities or mixed-ownership corporations or sponsored
enterprises, and the securities may or may not be supported by the credit of
such entities. An issuer may offer senior or subordinated securities backed by
the same pool of mortgages. The senior securities have priority to the interest
and/or principal payments on the mortgages in the pool; the subordinate
securities have a lower priority with respect to such payments on the mortgages
in the pool. The Fund does not presently expect to invest in mortgage pool
residuals.
Mortgage-related securities also include stripped securities which have
been divided into separate interest and principal components. Holders of the
interest components of mortgage related securities will receive payments of the
interest only on the current face amount of the mortgages and holders of the
principal components will receive payments of the principal on the mortgages.
"Interest only" securities are known as IOs; "principal only" securities are
known as POs.
II-8
<PAGE>
In the case of mortgage-related securities, the possibility of
prepayment of the underlying mortgages which might be motivated, for instance,
by declining interest rates, could lessen the potential for total return in
mortgage-related securities. When prepayments of mortgages occur during periods
of declining interest rates, the Fund will have to reinvest the proceeds in
instruments with lower effective interest rates.
In the case of stripped securities, in periods of low interest rates
and rapid mortgage prepayments, the value of IOs for mortgage-related securities
can decrease significantly. The market for IOs and POs is new and there is no
assurance it will operate efficiently or provide liquidity in the future.
Stripped securities are extremely volatile in certain interest rate
environments.
Asset-Backed Securities
- -----------------------
The Fund may invest in asset-backed, which are securities that
represent interests in pools of consumer loans such as credit card receivables,
automobile loans and leases, leases 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.
Foreign Investments
- -------------------
The Fund may invest in securities of non-U.S. issuers directly, or
indirectly in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs").
ADRs are receipts, typically issued by a U.S. bank or trust company,
which evidence ownership of underlying securities issued by a foreign
corporation or other entity. EDRs are receipts issued in Europe which evidence a
similar ownership arrangement. GDRs are receipts issued in one country which
also evidence a similar ownership arrangement. Generally, ADRs in registered
form are designed for use in U.S. securities markets and EDRs are designed for
use in European securities markets. GDRs are designed for use when the issuer is
raising capital in more than one market simultaneously, such as the issuer's
local market and the U.S., and have been used to overcome local selling
restrictions to foreign investors. In addition, many GDRs are eligible for
book-entry settlement through Cedel, Euroclear and DTC. The underlying
securities are not always denominated in the same currency as the ADRs, EDRs or
GDRs. Although investment in the form of ADRs, EDRs or GDRs facilitates trading
in foreign securities, it does not mitigate all the risks associated with
investing in foreign securities.
ADRs are available through facilities which may be either "sponsored"
or "unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and usually agrees to
provide shareholder
II-9
<PAGE>
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
trading. The Fund will take these and other risk considerations into account
before making an investment in an unsponsored ADR.
The risks associated with investments in foreign securities include
those resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks of
nationalization or expropriation, the possible imposition of currency exchange
blockages, higher operating expenses, foreign withholding and other taxes which
may reduce investment return, reduced availability of public information
concerning issuers, the difficulties in obtaining and enforcing a judgment
against a foreign issuer and the fact that foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements comparable to those applicable to
domestic issuers. Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of securities of comparable
domestic issuers.
These risks are usually higher in less-developed countries. Such
countries include countries that have an emerging stock market on which trade a
small number of securities and/or countries with economies that are based on
only a few industries. The Fund may invest in the securities of issuers in
countries with less developed economies as deemed appropriate by the Investment
Manager. However, it is anticipated that a majority of the foreign investments
by the Fund will consist of securities of issuers in countries with developed
economies.
II-10
<PAGE>
Currency Transactions
- ---------------------
The Fund may engage in currency exchange transactions in order to
protect against the effect of uncertain future exchange rates on securities
denominated in foreign currencies. The Fund will conduct its currency exchange
transactions either on a spot (i.e., cash) basis at the rate prevailing in the
currency exchange market, or by entering into forward contracts to purchase or
sell currencies. The Fund's dealings in forward currency exchange contracts will
be limited to hedging involving either specific transactions or aggregate
portfolio positions. A forward currency contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are not commodities and
are entered into in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. In entering a
forward currency contract, the Fund is dependent upon the creditworthiness and
good faith of the counterparty. The Fund attempts to reduce the risks of
nonperformance by the counterparty by dealing only with established, reputable
institutions. Although spot and forward contracts will be used primarily to
protect the Fund from adverse currency movements, they also involve the risk
that anticipated currency movements will not be accurately predicted, which may
result in losses to the Fund. This method of protecting the value of the Fund's
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange that can be achieved at some future point in
time. Although such contracts tend to minimize the risk of loss due to a decline
in the value of hedged currency, they tend to limit any potential gain that
might result should the value of such currency increase.
Indexed Securities
- ------------------
The Fund may purchase securities the value of which is indexed to
interest rates, foreign currencies and various indices and financial
indications. 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
- ------------------
The Fund may lend portfolio securities with a value of up to 33 1/3% of
its total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of any loaned securities plus accrued interest. Collateral
received by the Fund will generally be held in the form tendered, although cash
may be invested in unaffiliated mutual funds with quality short-term portfolios,
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities or certain unaffiliated mutual funds, 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,
II-11
<PAGE>
therefore, results in an increase in the volatility of the Fund's outstanding
securities. Such loans may be terminated at any time.
The Fund will retain rights to dividends, interest or other
distributions, on the loaned securities. Voting rights pass with the lending,
although the Fund may call loans to vote proxies if desired. Should the borrower
of the securities fail financially, there is a risk of delay in recovery of the
securities or loss of rights in the collateral. Loans are made only to borrowers
which are deemed by the Investment Manager or its agents to be of good financial
standing.
Short-Term Trading
- ------------------
The Fund may engage in short-term trading of securities and reserves
full freedom with respect to portfolio turnover. In periods where there are
rapid changes in economic conditions and security price levels or when
reinvestment strategy changes significantly, portfolio turnover may be higher
than during times of economic and market price stability or when investment
strategy remains relatively constant. The Fund's portfolio turnover rate may
involve greater transaction costs, relative to other funds in general, and may
have tax and other consequences.
Temporary and Defensive Investments
- -----------------------------------
The Fund may hold up to 100% of its assets in cash or high-quality debt
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Investment Manager, such a
position is more likely to provide protection against adverse market conditions
than adherence to the Fund's other investment policies. The types of
high-quality instruments in which the Fund may invest for such purposes include
money market securities, such as repurchase agreements, and securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
certificates of deposit, time deposits and bankers' acceptances of certain
qualified financial institutions and corporate commercial paper, which at the
time of purchase are rated at least within the "A" major rating category by
Standard & Poor's Corporation ("S&P") or the "Prime" major rating category by
Moody's Investor's Service, Inc. ("Moody's"), or, if not rated, issued by
companies having an outstanding long-term unsecured debt issued rated at least
within the "A" category by S&P or Moody's.
Other Investment Companies
- --------------------------
The Fund may invest in securities of other investment companies,
including affiliated investment companies, such as open- or closed-end
management investment companies, hub and spoke (master/feeder) funds, pooled
accounts or other similar, collective investment vehicles. As a shareholder of
an investment company, the Fund may indirectly bear service and other fees in
addition to the fees the Fund pays its service providers. Similarly, other
investment companies may invest in the Fund. Other investment companies that
invest in the
II-12
<PAGE>
Fund may hold significant portions of the Fund and materially affect the sale
and redemption of Fund shares and the Fund's portfolio transactions.
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.
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 the problem. The Fund does not currently anticipate
that the problem will have a material adverse impact on its portfolio
investments, taken as a whole. There can be no assurances in the area, however,
including the possibility that the problem could negatively affect the
investment markets or the economy generally.
B. Debt Instruments and Permitted Cash Investments
The Fund may invest in the following long-term and short-term debt
securities and money market instruments, except as provided below.
Managing Volatility
- -------------------
In administering the Fund's investments, the Investment Manager
attempts to manage the volatility of the Fund's portfolio of debt securities by
managing the duration and weighted average maturity of those securities.
Duration is an indicator of the expected volatility of a bond
portfolio's net asset value in response to changes in interest rates. In
calculating duration, the fund measures the average time required to receive all
cash flows associated with those debt securities -- representing payments of
principal and interest -- by considering the timing, frequency and amount of
payment expected from each portfolio debt 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 the Fund's portfolio of debt securities in order to increase or decrease its
exposure to changes in interest rates. First, the Investment Manager may adjust
duration by adjusting the mix of debt securities held by the 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
II-13
<PAGE>
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 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
portfolio of debt securities, 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 the Fund's portfolio of debt
securities, 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 the Fund, weighted by the market value of
each security. Generally, the longer the weighted average maturity, the more
Fund price 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 Fund invests
include, among others:
o direct obligations of the U.S. Treasury, i.e., U.S. Treasury bills,
notes, certificates and bonds;
o 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
o obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a
variety of ways by the U.S. Government, its agencies or instrumentalities. Some
of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. Other obligations, such as those of the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government to
II-14
<PAGE>
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 Fund will only invest in obligations issued by
mixed-ownership Government corporations where such securities are guaranteed as
to payment of principal or interest by the U.S. Government or a U.S. Government
agency or instrumentality, and any unguaranteed principal or interest is
otherwise supported by U.S. Government obligations held in a segregated account.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Foreign Government Debt
- -----------------------
The obligations of foreign governmental entities have various kinds of
government support and include obligations issued or guaranteed by foreign
governmental entities with taxing powers. These obligations may or may not be
supported by the full faith and credit of a foreign government. Each Fund may
invest in foreign government securities of issuers considered stable by the
Investment Manager, based on its analysis of factors such as general political
or economic conditions relating to the government and the likelihood of
expropriation,
II-15
<PAGE>
nationalization, freezes or confiscation of private property. The Investment
Manager does not believe that the credit risk inherent in the obligations of
stable foreign governments is significantly greater than that of U.S.
Government securities.
Supranational Debt
- ------------------
Supranational debt may be denominated in U.S. dollars, a foreign
currency or a multi-national currency unit. Examples of supranational entities
include the World Bank, the European Investment Bank, the Asian Development Bank
and the Inter-American Development Bank. The governmental members, or
"stockholders", usually make initial capital contributions to the supranational
entity and in many cases are committed to make additional capital contributions
if the supranational entity is unable to repay its borrowings.
Foreign Currency Units
- ----------------------
The Fund may invest in securities denominated in a multi-national
currency unit. An illustration of a multi-national currency unit is the European
Currency Unit (the "ECU"), which is a "basket" consisting of specified amounts
of the currencies of the member states of the European Community, a Western
European economic cooperative organization that includes France, Germany, The
Netherlands and the United Kingdom. The specific amounts of currencies
comprising the ECU may be adjusted by the Council of Ministers of the European
Community to reflect changes in relative values of the underlying currencies.
The Sub-Investment Manager does not believe that such adjustments will adversely
affect holders of ECU-denominated obligations or the marketability of such
securities. European supranational entities, in particular, issue
ECU-denominated obligations. The Fund may invest in securities denominated in
the currency of one nation although issued by a governmental entity, corporation
or financial institution of another nation. For example, the Fund may invest in
a British pound sterling-denominated obligation issued by a United States
corporation. Such investments involve credit risks associated with the issuer
and currency risks associated with the currency in which the obligation is
denominated.
Synthetic Non-U.S. Money Market Positions
- -----------------------------------------
Money market securities denominated in foreign currencies are
permissible investments of the Fund. In addition to, or in lieu of direct
investment in such securities, the Fund may construct a synthetic non-U.S. money
market position by (i) purchasing a money market instrument denominated in U.S.
dollars and (ii) concurrently entering into a forward currency contract to
deliver a corresponding amount of U.S. dollars in exchange for a foreign
currency on a future date and a specified rate of exchange. Because of the
availability of a variety of highly liquid short-term U.S. dollar-denominated
money market instruments, a synthetic money market position utilizing such U.S.
dollar-denominated instruments may offer greater liquidity than direct
investment in a money market instrument denominated in a foreign currency.
II-16
<PAGE>
Bank Money Investments
- ----------------------
Bank money investments include, but are not limited to, certificates of
deposit, bankers' acceptances and time deposits. Certificates of deposit are
generally short-term (i.e., less than one year), interest-bearing negotiable
certificates issued by commercial banks or savings and loan associations against
funds deposited in the issuing institution. A banker's acceptance is a time
draft drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction (to finance the import, export, transfer or
storage of goods). A banker's acceptance may be obtained from a domestic or
foreign bank, including a U.S. branch or agency of a foreign bank. The borrower
is liable for payment as well as the bank, which unconditionally guarantees to
pay the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity. Time deposits are nonnegotiable deposits for a fixed period of time at
a stated interest rate. The Fund will not invest in any such bank money
investment unless the investment is issued by a U.S. bank that is a member of
the Federal Deposit Insurance Corporation ("FDIC"), including any foreign branch
thereof, a U.S. branch or agency of a foreign bank, a foreign branch of a
foreign bank, or a savings bank or savings and loan association that is a member
of the FDIC and which at the date of investment has capital, surplus and
undivided profits (as of the date of its most recently published financial
statements) in excess of $50 million. The Fund will not invest in time deposits
maturing in more than seven days and will not invest more than 10% of its total
assets in time deposits maturing in two to seven days.
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under state law. U.S. federal branches or agencies
of foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such branches elect FDIC insurance. Unlike U.S. branches of foreign banks,
U.S. agencies of foreign banks may not accept deposits and thus are not eligible
for FDIC insurance. Both branches and agencies can maintain credit balances,
which are funds received by the office incidental to or arising out of the
exercise of their banking powers and can exercise other commercial functions,
such as lending activities.
Short-Term Corporate Debt Instruments
- -------------------------------------
Short-term corporate debt instruments include commercial paper to
finance short-term credit needs (i.e., short-term, unsecured promissory notes)
issued by, among others, (a) corporations and (b) domestic or foreign bank
holding companies or their subsidiaries or affiliates where the debt instrument
is guaranteed by the bank holding company or an affiliated bank or where the
bank holding company or the affiliated bank is unconditionally liable for the
debt instrument. Commercial paper is usually sold on a discounted basis and has
a maturity at the time of issuance not exceeding nine months.
II-17
<PAGE>
Lower Rated Debt Securities
- ---------------------------
The Fund may invest in 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 an/or investor
perception, (iii) subordination to the prior claims of banks and other senior
lenders, (iv) the operation of mandatory sinking fund or call/redemption
provisions during periods of declining interest rates when the fund may be
required to reinvest premature redemption proceeds in lower yielding portfolio
securities; (v) the possibility that earnings of the issuer may be insufficient
to meet its debt service; and (vi) the issuer's low creditworthiness and
potential for insolvency during periods of rising interest rates and economic
downturn. For further information concerning the ratings of debt securities, see
"--Commercial Paper Ratings" and "--Rating Categories of Debt Securities,"
below. In the event the rating of a security is downgraded, the Investment
Manager will determine whether the security should be retained or sold depending
on an assessment of all facts and circumstances at that time.
Zero and Step Coupon Securities
- -------------------------------
Zero and step coupon securities are debt securities that may pay no
interest for all or a portion of their life but are purchased at a discount to
face value at maturity. Their return consists of the amortization of the
discount between their purchase price and their maturity value, plus in the case
of a step coupon, any fixed rate interest income. Zero and step 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 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.
Certain Ratings Categories
- --------------------------
Commercial Paper Ratings.
Commercial paper investments at the time of purchase will be rated
within the "A" major rating category by S&P or within the "Prime" major rating
category by Moody's, or, if not rated, issued by companies having an outstanding
long-term unsecured debt issue rated at
II-18
<PAGE>
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 category
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: evaluation of the management of the issuer; economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; evaluation of the
issuer's products in relation to competition and customer acceptance; liquidity;
amount and quality of long-term debt; trend of earnings over a period of 10
years; financial management of obligations which may be present or may arise as
a result of public interest questions and preparations to meet such obligations.
These factors are all considered in determining whether the commercial paper is
rated Prime-1, Prime-2 or Prime-3.
Rating Categories of Debt Securities.
Set forth below is a description of S&P corporate bond and debenture
rating categories:
AAA: An obligation rated within the AAA category has the highest rating
assigned by S&P. Capacity to meet the financial commitment on the 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 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 weakened capacity to meet the
financial commitment on the obligation.
II-19
<PAGE>
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 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 within the CC category 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
date due 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.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
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 prepayments risks-such as interest only (IO) and
II-20
<PAGE>
principal only (PO) mortgage securities; and obligations with unusually risky
terms, such as inverse floaters.
Set forth below is a description of Moody's corporate bond and
debenture rating categories:
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.
II-21
<PAGE>
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 B may be modified by the
addition of a numeral indicating a bond's rank within its rating category.
Ratings Downgrades.
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.
C. The Trusts, the Trustees and Officers and Fund Shares
The Trustees of a Trust have authority to issue an unlimited number of
shares of beneficial interest of separate series, $.001 par value per share. The
Trustees also have authority, without the necessity of a shareholder vote, to
create any number of new series or classes or to commence the public offering of
shares of any previously established series or classes. The Trustees have
authorized shares of each Fund to be issued in multiple classes.
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(1), Class B and Class
C shares bear the expenses of the deferred sales arrangement and any expenses
(including the higher service and distribution fees) resulting from such sales
arrangement, and certain other incremental expenses related to a class. Each
class will have exclusive voting rights with respect to provisions of the Rule
12b-1 distribution plan pursuant to which the service and distribution fees, if
any, are paid. Although the legal rights of holders of each class of shares are
identical, it is likely that the different expenses borne by each class will
result in different net asset values and dividends. The different classes of
shares of the Fund also have different exchange privileges. Except for those
differences between classes of shares described above, in the Fund's Prospectus
and otherwise this Statement of Additional Information, each share of the Fund
has equal dividend, redemption and liquidation rights with other shares of the
Fund, and when issued, is fully paid and nonassessable by the Fund.
II-22
<PAGE>
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have an 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 each Trust's Master Trust Agreement, no annual or regular meeting
of shareholders is required. Thus, there ordinarily will be no shareholder
meetings unless required by the 1940 Act. Except as otherwise provided under the
1940 Act, the Board of Trustees will be a self-perpetuating body until fewer
than two-thirds of the Trustees serving as such are Trustees who were elected by
shareholders of the Trust. In the event less than a majority of the Trustees
serving as such were elected by shareholders of the Trust, a meeting of
shareholders will be called to elect Trustees. Under the Master Trust Agreement,
any Trustee may be removed by vote of two-thirds of the outstanding Trust
shares; holders of 10% or more of the outstanding shares of the Trust can
require that the Trustees call a meeting of shareholders for purposes of voting
on the removal of one or more Trustees. In connection with such meetings called
by shareholders, shareholders will be assisted in shareholder communications to
the extent required by applicable law.
Under Massachusetts law, the shareholders of a Trust could, under
certain circumstances, be held personally liable for the obligations for the
Trust. However, each Master Trust Agreement disclaims shareholder liability for
acts or obligations of the Trust and provides for indemnification for all losses
and expenses of any shareholder of the Fund held personally liable for the
obligations of the Trust. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Fund would be unable to meet its obligations. The Investment Manager
believes that, in view of the above, the risk of personal liability to
shareholders is remote.
The Trustees and officers of each Trust are identified below, together
with biographical information.
II-23
<PAGE>
<TABLE>
<CAPTION>
STATE STREET Capital Equity Exchange Financial Growth Income
RESEARCH: Trust Trust Trust Trust Trust Trust
------- ------ ------- -------- ----- ------
TRUSTEES AND
PRINCIPAL
OFFICERS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Peter C. Bennett Vice Vice Vice Vice Vice Vice
President President President President President President
- ------------------------------------------------------------------------------------------------------
Bruce R. Bond Trustee Trustee Trustee Trustee Trustee Trustee
- ------------------------------------------------------------------------------------------------------
John R. Borzilleri Vice
President
- ------------------------------------------------------------------------------------------------------
Paul J. Clifford, Jr.
- ------------------------------------------------------------------------------------------------------
Thomas J. Dillman
- ------------------------------------------------------------------------------------------------------
Catherine Dudley Vice
President
- ------------------------------------------------------------------------------------------------------
Steve A. Garban Trustee Trustee Trustee Trustee Trustee Trustee
- ------------------------------------------------------------------------------------------------------
Bartlett R. Geer Vice Vice
President President
- ------------------------------------------------------------------------------------------------------
Lawrence J. Haverty, Jr. Vice
President
- ------------------------------------------------------------------------------------------------------
Malcolm T. Hopkins Trustee Trustee Trustee Trustee Trustee Trustee
- ------------------------------------------------------------------------------------------------------
F. Gardner Jackson, Jr. Vice
President
- ------------------------------------------------------------------------------------------------------
John H. Kallis Vice Vice
President President
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Master Money
STATE STREET Investment Market Portfolios, Securities Tax-Exempt
RESEARCH: Trust Trust Inc. Trust Trust
---------- ----- ----------- ---------- ----------
TRUSTEES AND
PRINCIPAL
OFFICERS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Peter C. Bennett Vice President Vice President Vice President
- --------------------------------------------------------------------------------------------------------------------------
Bruce R. Bond Trustee Trustee Trustee Trustee
- --------------------------------------------------------------------------------------------------------------------------
Jesus A. Cabrera
- --------------------------------------------------------------------------------------------------------------------------
Paul J. Clifford, Jr. Vice President
- --------------------------------------------------------------------------------------------------------------------------
Thomas J. Dillman Vice President
- --------------------------------------------------------------------------------------------------------------------------
Steve A. Garban Trustee Trustee Director Trustee Trustee
- --------------------------------------------------------------------------------------------------------------------------
Bartlett R. Geer Vice President
- --------------------------------------------------------------------------------------------------------------------------
Lawrence J. Haverty, Jr.
- --------------------------------------------------------------------------------------------------------------------------
Malcolm T. Hopkins Trustee Trustee Director Trustee Trustee
- --------------------------------------------------------------------------------------------------------------------------
F. Gardner Jackson, Jr.
- --------------------------------------------------------------------------------------------------------------------------
Richard J. Jodka
- --------------------------------------------------------------------------------------------------------------------------
John H. Kallis Vice President Vice President Vice President
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
II-24
<PAGE>
<TABLE>
<CAPTION>
STATE STREET Capital Equity Exchange Financial Growth Income
RESEARCH: Trust Trust Trust Trust Trust Trust
------- ------ ------- --------- ------- -------
TRUSTEES AND
PRINCIPAL
OFFICERS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Dyann H. Kiessling
- ------------------------------------------------------------------------------------------------------
Rudoph K. Kluiber Vice
President
- ------------------------------------------------------------------------------------------------------
Francis J. McNamara, III Secretary Secretary Secretary Secretary Secretary Secretary
- ------------------------------------------------------------------------------------------------------
Gerard P. Maus Treasurer Treasurer Treasurer Treasurer Treasurer Treasurer
- ------------------------------------------------------------------------------------------------------
Thomas P. Moore, Jr. Vice Vice
President President
- ------------------------------------------------------------------------------------------------------
Dean O. Morton Trustee Trustee Trustee Trustee Trustee Trustee
- ------------------------------------------------------------------------------------------------------
Christopher P. Nicholas
- ------------------------------------------------------------------------------------------------------
Brian P. O'Dell Vice
President
- ------------------------------------------------------------------------------------------------------
Kim M. Peters
- ------------------------------------------------------------------------------------------------------
Susan M. Phillips Trustee Trustee Trustee Trustee Trustee
- ------------------------------------------------------------------------------------------------------
E.K. Easton Ragsdale, Jr. Vice
President
- ------------------------------------------------------------------------------------------------------
Daniel J. Rice III Vice
President
- ------------------------------------------------------------------------------------------------------
Toby Rosenblatt Trustee Trustee Trustee Trustee Trustee Trustee
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Master Money
STATE STREET Investment Market Portfolios, Securities Tax-Exempt
RESEARCH: Trust Trust Inc. Trust Trust
--------- ------ ---------- ---------- ----------
TRUSTEES AND
PRINCIPAL
OFFICERS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dyann H. Kiessling Vice
President
- --------------------------------------------------------------------------------------------------------------------------
Rudoph K. Kluiber
- --------------------------------------------------------------------------------------------------------------------------
Francis J. McNamara, III Secretary Secretary Secretary Secretary Secretary
- --------------------------------------------------------------------------------------------------------------------------
Gerard P. Maus Treasurer Treasurer Treasurer Treasurer Treasurer
- --------------------------------------------------------------------------------------------------------------------------
Thomas P. Moore, Jr. Vice President
- --------------------------------------------------------------------------------------------------------------------------
Dean O. Morton Trustee Trustee Director Trustee Trustee
- --------------------------------------------------------------------------------------------------------------------------
Christopher P. Nicholas Assistant
Secretary
- --------------------------------------------------------------------------------------------------------------------------
Brian P. O'Dell
- --------------------------------------------------------------------------------------------------------------------------
Kim M. Peters Vice President
- --------------------------------------------------------------------------------------------------------------------------
Susan M. Phillips Trustee Trustee Trustee Trustee
- --------------------------------------------------------------------------------------------------------------------------
E.K. Easton Ragsdale, Jr.
- --------------------------------------------------------------------------------------------------------------------------
Daniel J. Rice III
- --------------------------------------------------------------------------------------------------------------------------
Toby Rosenblatt Trustee Trustee Director Trustee Trustee
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
II-25
<PAGE>
<TABLE>
<CAPTION>
STATE STREET Capital Equity Exchange Financial Growth Income
RESEARCH: Trust Trust Trust Trust Trust Trust
------- ------ -------- --------- ------ ------
TRUSTEES AND
PRINCIPAL
OFFICERS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Scott Morton Trustee Trustee Trustee Trustee Trustee Trustee
- ------------------------------------------------------------------------------------------------------
Thomas A. Shively Vice Vice
President President
- ------------------------------------------------------------------------------------------------------
Ralph F. Verni Trustee, Trustee, Trustee, Trustee, Trustee, Trustee,
Chairman Chairman Chairman Chairman of Chairman of Chairman of
of the of the of the the Board, the Board, the Board,
Board, Board, Board, President President President
President President President and Chief and Chief and Chief
and Chief and Chief and Chief Executive Executive Executive
Executive Executive Executive Officer Officer Officer
Officer Officer Officer
- ------------------------------------------------------------------------------------------------------
Tucker Walsh Vice
President
- ------------------------------------------------------------------------------------------------------
James M. Weiss Vice Vice Vice Vice Vice Vice
President President President President President President
- ------------------------------------------------------------------------------------------------------
Elizabeth M. Westvold
- ------------------------------------------------------------------------------------------------------
John T. Wilson Vice
President
- ------------------------------------------------------------------------------------------------------
Kennard P. Woodworth, Jr. Vice Vice
President President
- ------------------------------------------------------------------------------------------------------
Peter A. Zuger Vice
President
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Master Money
STATE STREET Investment Market Portfolios, Securities Tax-Exempt
RESEARCH: Trust Trust Inc. Trust Trust
---------- ----- ---------- ---------- ----------
TRUSTEES AND
PRINCIPAL
OFFICERS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Michael S. Scott Morton Trustee Trustee Director Trustee Trustee
- --------------------------------------------------------------------------------------------------------------------------
Thomas A. Shively Vice President Vice President Vice President
- --------------------------------------------------------------------------------------------------------------------------
Ralph F. Verni Trustee, Trustee, Director, Trustee, Trustee,
Chairman of the Chairman of the Chairman of the Chairman of the Chairman of the
Board, President Board, President Board, President Board, President Board, President
and Chief and Chief and Chief and Chief and Chief
Executive Officer Executive Officer Executive Officer Executive Officer Executive Officer
- --------------------------------------------------------------------------------------------------------------------------
James M. Weiss Vice President Vice President Vice President
- --------------------------------------------------------------------------------------------------------------------------
Elizabeth M. Westvold Vice President
- --------------------------------------------------------------------------------------------------------------------------
John T. Wilson Vice President
- --------------------------------------------------------------------------------------------------------------------------
Kennard P. Woodworth, Jr. Vice President
- --------------------------------------------------------------------------------------------------------------------------
Peter A. Zuger
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
II-26
<PAGE>
Additional information on the Trustees, Directors and principal
officers of the State Street Research Funds is provided below. (Unless otherwise
indicated, the address for each person is One Financial Center, Boston,
Massachusetts 02111.)
*Peter C. Bennett: He is 61 and his principal occupation is currently,
and during the past five years has been, Executive Vice President of the
Investment Manager. Mr. Bennett is also a Director of the Investment Manager.
Mr. Bennett's other principal business affiliations include Director, State
Street Research Investment Services, Inc.
Bruce R. Bond (100 Minuteman Road, Andover, MA 01810): He is 53. During
the past five years, Mr. Bond has also served as Chairman of the Board, Chief
Executive Officer and President of PictureTel Corporation, Chief Executive
Officer of ANS Communications (a communications networking company) and as
managing director of British Telecommunications PLC.
*John R. Borzilleri, MD: He is 40 and his principal occupation is
Senior Vice President of the Investment Manager. During the past five years he
has also served as a Vice President of the Investment Manager, as a Vice
President of Montgomery Securities and as an equity analyst at Dean Witter.
*Paul J. Clifford, Jr.: He is 37 and his principal occupation is Senior
Vice President of the Investment Manager. During the past five years he has also
served as Vice President of the Investment Manager.
*Thomas J. Dillman: He is 50 and his principal occupation is Senior
Vice President of the Investment Manager. During the past five years he has also
served as research director at Bank of New York.
*Catherine Dudley: She is 39 and her principal occupation is Senior
Vice President of the Investment Manager. During the past five years she has
also served as a senior portfolio manager at Chancellor Capital Management and
as a portfolio manager at Phoenix Investment Council.
+Steve A. Garban (The Pennsylvania State University, 210 Old Main,
University Park, PA 16802): He is 62 and he is retired and was formerly Senior
Vice President for Finance and Operations and Treasurer of The Pennsylvania
State University. Mr. Garban is also a Director of Metropolitan Series Fund,
Inc. (an investment company).
*Bartlett R. Geer: He is 44 and his principal occupation is currently,
and during the past five years has been, Senior Vice President of the Investment
Manager.
*Lawrence J. Haverty, Jr.: He is 55 and his principal occupation is
currently, and during the past five years has been, Senior Vice President of the
Investment Manager.
II-27
<PAGE>
*F. Gardner Jackson, Jr.: He is 56 and his principal occupation is
currently, and during the past five years has been Senior Vice President of the
Investment Manager.
+Malcolm T. Hopkins (14 Brookside Road, Biltmore Forest, Asheville, NC
28803): He is 71 and he is engaged principally in private investments.
Previously, he was Vice Chairman of the Board and Chief Financial Officer of St.
Regis Corp. Mr. Hopkins is also a Director of Metropolitan Series Fund, Inc. (an
investment company).
*John H. Kallis: He is 58 and his principal occupation is currently,
and during the past five years has been, Senior Vice President of the Investment
Manager.
*Dyann H. Kiessling: She is 36 and her principal occupation is Vice
President of the Investment Manager. During the past five years she has also
served as a fixed income trader for the Investment Manager.
*Rudolph K. Kluiber: He is 40 and his principal occupation currently is
Senior Vice President of the Investment Manager. During the past five years he
has also served as a Vice President of the Investment Manager.
*Gerard P. Maus: He is 48 and his principal occupation is Executive
Vice President, Treasurer, Chief Financial Officer, Chief Administrative
Officer, and Director of the Investment Manager. Mr. Maus's other principal
business affiliations include Executive Vice President, Chief Financial Officer,
Chief Administrative Officer, Treasurer and Director of State Street Research
Investment Services, Inc.; Treasurer and Chief Financial Officer of SSRM
Holdings, Inc.; and Director of SSR Realty Advisors, Inc.
*Francis J. McNamara, III: He is 44 and his principal occupation is
Executive Vice President, General Counsel and Secretary of the Investment
Manager. During the past five years he has also served as Senior Vice President
of the Investment Manager and as Senior Vice President and General Counsel 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, General Counsel and Clerk of State Street
Research Investment Services, Inc.; and Secretary and General Counsel of SSRM
Holdings, Inc.
*Thomas P. Moore, Jr.: He is 61 and his principal occupation is
currently, and during the past five years has been, Senior Vice President of the
Investment Manager.
+Dean O. Morton (3200 Hillview Avenue, Palo Alto, CA 94304): He is 67
and he is retired and was formerly Executive Vice President, Chief Operating
Officer and Director of
II-28
<PAGE>
Hewlett-Packard Company. Mr. Morton is also a Director of Metropolitan Series
Fund, Inc. (an investment company).
Brian O'Dell: He is 34 and his principal occupation is currently
Assistant Portfolio Manager for the Investment Manager. During the past five
years he has also served as a portfolio manager and analyst at Freedom Capital
Management Corporation.
*Kim M. Peters: He is 46 and his principal occupation is Senior Vice
President of the Investment Manager. During the past five years he has also
served as Vice President of the Investment Manager.
Susan M. Phillips (The George Washington University, 710 21st Street,
Suite 206, Washington, DC 20052): She is 54 and her principal occupation is
currently Dean of the School of Business and Public Management at George
Washington University and Professor of Finance. 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.: He is 48 and his principal occupation is
Senior Vice President of the Investment Manager. During the past five years he
has also served as Vice President of the Investment Manager and as Senior Vice
President and Chief Quantitative Analyst for Kidder Peabody & Co.
*Daniel J. Rice III: He is 48 and his principal occupation is currently
Senior Vice President of the Investment Manager. During the past five years he
has also served as Vice President of the Investment Manager.
Toby Rosenblatt (3409 Pacific Avenue, San Francisco, CA 94118): He is
61 and his principal occupations during the past five years have been President
of Founders Investments Ltd. and President of The Glen Ellen Company, a private
investment company.
+Michael S. Scott Morton (Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139): He is 62 and 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.
Dr. Scott Morton is also a Director of Metropolitan Series Fund, Inc. (an
investment company).
*Thomas A. Shively: He is 45 and his principal occupation is currently,
and during the past five years has been, Executive Vice President of the
Investment Manager. Mr. Shively is also a Director of the Investment Manager.
Mr. Shively's other principal business affiliations include Director of State
Street Research Investment Services, Inc.
*Ralph F. Verni: He is 56 and 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
II-29
<PAGE>
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).
*Tucker Walsh: He is 30 and his principal occupation is Vice President
of the Investment Manager. During the past five years he has been an analyst of
the Investment Manager and also at Chilton Investment Partners. Prior to that
he was employed at Merrill Lynch and Cowen Asset Management.
*James M. Weiss: He is 53 and his principal occupation is Executive
Vice President of the Investment Manager. During the past five years he has also
served as Senior Vice President of the Investment Manager and as President and
Chief Investment Officer of IDS Equity Advisors.
*Elizabeth M. Westvold: She is 39 and her principal occupation is
Senior Vice President of the Investment Manager. During the past five years she
has also served as Vice President and as an analyst for the Investment Manager.
*John T. Wilson: He is 36 and his principal occupation is Senior Vice
President of the Investment Manager. During the past five years he has also
served as a Vice President of the Investment Manager, as an analyst and
portfolio manager at Phoenix Home Life Mutual Insurance Company and as a Vice
President of Phoenix Investment Counsel Inc.
*Kennard Woodworth, Jr.: He is 61 and his principal occupation is
currently, and during the past five years has been, Senior Vice President of the
Investment Manager.
*Peter A. Zuger (One Financial Center, Boston, MA 02111): He is 51. His
principal occupation is Senior Vice President of State Street Research &
Management Company. During the past five years he has also served as Vice
President of American Century Investment Management Company.
- -----------------
* These Trustees and/or Officers are deemed to be "interested persons" of the
Trust under the 1940 Act because of their affiliations with the Fund's
investment adviser.
+ Serves as a Director of Metropolitan Series Fund, Inc., which has an advisory
relationship with the Investment Manager or its parent, Metropolitan Life
Insurance Company ("Metropolitan")
II-30
<PAGE>
D. Investment Advisory Services
Under the provisions of each Trust's Master Trust Agreement and the
laws of Massachusetts, responsibility for the management and supervision of the
Fund rests with the Trustees.
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Investment
Manager was founded by Paul Cabot, Richard Saltonstall and Richard Paine to
serve as investment adviser to one of the nation's first mutual funds, presently
known as State Street Research Investment Trust, which they had formed in 1924.
Their investment management philosophy emphasized comprehensive fundamental
research and analysis, including meetings with the management of companies under
consideration for investment. The Investment Manager's portfolio management
group has extensive investment industry experience managing equity and debt
securities.
The Investment Manager is charged with the overall responsibility for
managing the investments and business affairs of each Fund, subject to the
authority of the Board of Trustees. Each Advisory Agreement provides that the
Investment Manager shall furnish the applicable Funds with an investment
program, office facilities and such investment advisory, research and
administrative services as may be required from time to time. The Investment
Manager compensates all executive and clerical personnel and Trustees of each
Trust if such persons are employees of the Investment Manager or its affiliates.
The Investment Manager is an indirect wholly owned subsidiary of Metropolitan.
Each Advisory Agreement provides that it shall continue in effect with
respect to a Fund for a period of two years after its initial effectiveness and
will continue from year to year thereafter as long as it is approved at least
annually both (i) by a vote of a majority of the outstanding voting securities
of the Fund (as defined in the 1940 Act) or by the Trustees of the Trust, and
(ii) in either event by a vote of a majority of the Trustees who are not parties
to the Advisory Agreement or "interested persons" of any party thereto, cast in
person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated on 60 days' written notice by either party
and will terminate automatically in the event of its assignment, as defined
under the 1940 Act and regulations thereunder. Such regulations provide that a
transaction which does not result in a change of actual control or management of
an adviser is not deemed an assignment.
Under the Code of Ethics of the Investment Manager, 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.
II-31
<PAGE>
Information about rates at which fees are calculated under the Advisory
Agreement with respect to the Funds identified on the cover page of the
Statement of Additional Information, as well as the fees paid to the Investment
Manager in previous years, is included in Section II of this Statement of
Additional Information.
E. Purchase and Redemption of Shares
Shares of each Fund are distributed by State Street Research Investment
Services, Inc., the Distributor. Class A, Class B(1), Class B, Class C and Class
S shares of the Fund may be purchased at the next determined net asset value per
share plus, in the case of 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(1), Class
B and Class C shares). Class B shares are available only to current Class B
shareholders through reinvestment of dividends and capital gains distributions
or through exchanges from existing Class B accounts of the State Street Research
Funds. General information on how to buy shares of the Fund, as well as sales
charges involved, are set forth under "Your Investment" in the Prospectus. The
following supplements that information.
Public Offering Price. The public offering price for each class of
shares is based on their net asset value determined as of the close of regular
trading on the NYSE, but not later than 4 p.m. eastern time, on the day
the purchase order is received by State Street Research Service Center (the
"Service Center"), provided that the order is received prior to the close of
regular trading on the NYSE on that day; otherwise the net asset value used is
that determined as of the close of the NYSE on the next day it is open for
unrestricted trading. When a purchase order is placed through a dealer, that
dealer is responsible for transmitting the order promptly to the Service Center
in order to permit the investor to obtain the current price. Any loss suffered
by an investor which results from a dealer's failure to transmit an order
promptly is a matter for settlement between the investor and the dealer.
Alternative Purchase Program. Alternative classes of shares permit
investors to select a purchase program which they believe will be the most
advantageous for them, given the amount of their purchase, the length of time
they anticipate holding Fund shares, or the flexibility they desire in this
regard, and other relevant circumstances. Investors will be able to determine
whether in their particular circumstances it is more advantageous to incur an
initial sales charge and not be subject to certain ongoing charges or to have
their entire purchase price invested in the Fund with the investment being
subject thereafter to ongoing service fees and distribution fees.
As described in greater detail below, financial professionals are paid
differing amounts of compensation depending on which class of shares they sell.
[REST OF PAGE INTENTIONALLY OMITTED]
II-32
<PAGE>
The major differences among the various classes of shares are as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Class A Class B(1) Class B Class C Class S
------- ---------- ------- ------- -------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales Charges Paid by Initial sales charge at Contingent deferred Contingent deferred Contingent None
Investor to Distributor time of investment sales charge of 5% to sales charge of 5% deferred sales
of up to 5.75%* 1% applies to any to 2% applies to any charge of 1%
depending on shares redeemed shares redeemed applies to any
amount of within first six years within first five shares redeemed
investment following their years following their within one year
purchase; no purchase; no following their
contingent deferred contingent deferred purchase
sales charge after six sales charge after
years five years
- ------------------------------------------------------------------------------------------------------------------------------------
On investments of
$1 million or more,
no initial sales
charge; but
contingent deferred
sales charge of up to
1% may apply to
any shares redeemed
within one year
following their
purchase
- ------------------------------------------------------------------------------------------------------------------------------------
Initial Commission Above described 4% 4% 1% None
Paid by Distributor to initial sales charge
Financial Professional less 0.25% to 0.75%
retained by
distributor
On investments of
$1 million or more,
0.25% to 1% paid to
dealer by Distributor
- ------------------------------------------------------------------------------------------------------------------------------------
Rule 12b-1 Service Fee
- ------------------------------------------------------------------------------------------------------------------------------------
Paid by Fund to 0.25% each year 0.25% each year 0.25% each year 0.25% each year None
Distributor
- ------------------------------------------------------------------------------------------------------------------------------------
Paid by 0.25% each year 0.25% each year 0.25% each year 0.25% each year None
Distributor to commencing after one commencing after commencing after
Financial year following one year following one year following
Professional purchase purchase purchase
- ------------------------------------------------------------------------------------------------------------------------------------
Rule 12b-1 Distribution
Fee
- ------------------------------------------------------------------------------------------------------------------------------------
Paid by Fund to None 0.75% for first eight 0.75% for first eight 0.75% each year None
Distributor years; Class B(1) years; Class B
shares convert shares convert
automatically to Class automatically to
A shares after eight Class A shares after
years eight years
- ------------------------------------------------------------------------------------------------------------------------------------
Paid by None None None 0.75% each year None
Distributor to commencing after
Financial one year following
Professional purchase
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
II-33
<PAGE>
* or up to 4.50% for State Street Research Government Income Fund, State Street
Research High Income Fund, State Street Research Strategic Income Fund, State
Street Research Tax-Exempt Fund and State Street Research New York Tax Free
Fund.
II-34
<PAGE>
Class A Shares--Reduced Sales Charges. The reduced sales charges set
forth under "Your Investment--Choosing a Share Class" in the Prospectus apply to
purchases made at any one time by any "person," which includes: (i) an
individual, or an individual combining with his or her spouse and their children
and purchasing for his, her or their own account; (ii) a "company" as defined in
Section 2(a)(8) of the 1940 Act; (iii) a trustee or other fiduciary purchasing
for a single trust estate or single fiduciary account (including a pension,
profit sharing or other employee benefit trust created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code); (iv) a tax-exempt
organization under Section 501(c)(3) or (13) of the Internal Revenue Code; and
(v) an employee benefit plan of a single employer or of affiliated employers.
Investors may purchase Class A shares of the Fund at reduced sales
charges by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds"
(which include the Fund and other funds as designated by the Distributor from
time to time) within a 13-month period. The sales charge applicable to each
purchase made pursuant to a Letter of Intent will be that which would apply if
the total dollar amount set forth in the Letter of Intent were being bought in a
single transaction. Purchases made within a 90-day period prior to the execution
of a Letter of Intent may be included therein; in such case the date of the
earliest of such purchases marks the commencement of the 13-month period.
An investor may include toward completion of a Letter of Intent the
value (at the current public offering price) of all of his or her Class A shares
of the Fund and of any of the other Class A shares of Eligible Funds held of
record as of the date of his or her Letter of Intent, plus the value (at the
current offering price) as of such date of all of such shares held by any
"person" described herein as eligible to join with the investor in a single
purchase. Class B(1), Class B, Class C and Class S shares may also be included
in the combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described
II-35
<PAGE>
herein as eligible to join with the investor in a single purchase. Class B(1),
Class B, Class C and Class S shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Other Programs Related to Class A Shares. Class A shares of the Fund
may be sold, or issued in an exchange, at a reduced sales charge or without a
sales charge pursuant to certain sponsored arrangements for designated classes
of investors. These arrangements include programs sponsored by the Distributor
or others under which, for example, a company, employee benefit plan or other
organization makes recommendations to, or permits group solicitation of, its
employees, members or participants to purchase Fund shares. (These arrangements
are not available to any organization created primarily for the purpose of
obtaining shares of the Fund at a reduced sales charge or without a sales
charge.) Sponsored arrangements may be established for non-profit organizations,
holders of individual retirement accounts or participants in limited promotional
campaigns, such as a special offering to shareholders of funds in other
complexes that may be liquidating. Sales without a sales charge, or with a
reduced sales charge, may also be made through brokers, registered investment
advisers, financial planners, institutions, and others, under managed fee-based
programs (e.g., "wrap fee" or similar programs) which meet certain requirements
established by the Distributor. Information on such arrangements and further
conditions and limitations is available from the Distributor.
The entire sales charge on Class A shares may be reallowed to financial
professionals who sell shares during certain special promotional periods which
may be instituted from time to time. The Fund reserves the right to have such
promotions without further supplement to the Prospectus or Statement of
Additional Information. The financial professionals who receive the entire sales
charge may be deemed to be underwriters of the Fund's shares under the
Securities Act of 1933 during such promotions.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and persons: (A) the
Investment Manager, Distributor or any affiliated entities, including any direct
or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
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; (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; and (D)
others who because of their business relationship with the Fund, the Distributor
or its affiliates, and because of their knowledge of the Fund, do not require
any significant sales effort or expense to educate them about the Fund. 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
II-36
<PAGE>
policies, regarding the qualification of purchasers and any other matters, as
may be adopted by the Distributor from time to time.
Conversion of Class B(1) and Class B Shares to Class A Shares. A
shareholder's Class B(1) and Class B shares of the Fund, including all shares
received as dividends or distributions with respect to such shares, will
automatically convert to Class A shares of the Fund at the end of eight years
following the issuance of such Class B shares; consequently, they will no longer
be subject to the higher expenses borne by Class B(1) and Class B shares. The
conversion rate will be determined on the basis of the relative per share net
asset values of the two classes and may result in a shareholder receiving either
a greater or fewer number of Class A shares than the Class B shares so
converted. As noted above, holding periods for Class B(1) shares received in
exchange for Class B(1) shares of other Eligible Funds and for Class B shares
received in exchange for Class B shares of other Eligible Funds, will be counted
toward the eight-year period.
Contingent Deferred Sales Charges. The amount of any contingent
deferred sales charge paid on Class A shares (on sales of $1 million or more and
which do not involve an initial sales charge) or on Class B(1), Class B or Class
C shares of the Fund will be paid to the Distributor. The Distributor will pay
dealers at the time of sale a 4% commission for selling Class B(1) and Class B
shares and a 1% commission for selling Class C shares. In certain cases, a
dealer may elect to waive the 4% commission on Class B(1) and Class B shares and
receive in lieu thereof an annual fee, usually 1%, with respect to such
outstanding shares. The proceeds of the contingent deferred sales charges and
the distribution fees are used to offset distribution expenses and thereby
permit the sale of Class B(1), Class B and Class C shares without an initial
sales charge.
In determining the applicability and rate of any contingent deferred
sales charge of Class B(1), Class B or Class C shares, it will be assumed that a
redemption of the shares is made first of those shares having the greatest
capital appreciation, next of shares representing reinvestment of dividends and
capital gains distributions and finally of remaining shares held by shareholder
for the longest period of time. Class B(1) shares that are redeemed within a
six-year period after purchase, Class B shares that are redeemed within a
five-year period after their purchase, and Class C shares that are redeemed
within a one-year period after their purchase, will not be subject to a
contingent deferred sales charge to the extent that the value of such shares
represents (1) capital appreciation of Fund assets or (2) reinvestment of
dividends or capital gains distributions. The holding period for purposes of
applying a contingent deferred sales charge for a particular class of shares of
the Fund acquired through an exchange from another Eligible Fund will be
measured from the date that such shares were initially acquired in the other
Eligible Fund, and shares of the same class being redeemed will be considered to
represent, as applicable, capital appreciation or dividend and capital gains
distribution reinvestments in such other Eligible Fund. These determinations
will result in any contingent deferred sales charge being imposed at the lowest
possible rate. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case may
be, on the amount realized on redemption.
II-37
<PAGE>
Contingent Deferred Sales Charge Waivers. With respect to Class A
shares (on sales of $1 million or more and which do not involve an initial sales
charge), and Class B(1), Class B and Class C shares of the Fund, the contingent
deferred sales charge does not apply to exchanges or to redemptions under a
systematic withdrawal plan which meets certain conditions. The contingent
deferred sales charge will be waived for participant initiated distributions
from State Street Research prototype employee retirement plans. In addition, the
contingent deferred sales charge will be waived for: (i) redemptions made within
one year of the death or total disability, as defined by the Social Security
Administration, of all shareholders of an account; (ii) redemptions made after
attainment of a specific age in an amount which represents the minimum
distribution required at such age under Section 401(a)(9) of the Internal
Revenue Code of 1986, as amended, for retirement accounts or plans (e.g., age 70
1/2 for Individual Retirement Accounts and Section 403(b) plans), calculated
solely on the basis of assets invested in the Fund or other Eligible Funds; and
(iii) a redemption resulting from a tax-free return of an excess contribution to
an Individual Retirement Account. (The foregoing waivers do not apply to a
tax-free rollover or transfer of assets out of the Fund). The contingent
deferred sales charge may also be waived on Class A shares under certain
exchange arrangements for selected brokers with substantial asset allocation
programs. The Fund may modify or terminate the waivers at any time; for example,
the Fund may limit the application of multiple waivers and establish other
conditions for employee benefit plans. Certain employee benefit plans sponsored
by a financial professional may be subject to other conditions for waivers under
which the plans may initially invest in Class B(1) or Class B shares and then
Class A shares of certain funds upon meeting specific criteria.
Class S Shares. Class S shares are currently available to certain
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants, service arrangements, or similar factors;
insurance companies; investment companies; advisory accounts of the Investment
Manager; endowment funds of nonprofit organizations with substantial minimum
assets (currently a minimum of $10 million); and other similar institutional
investors. Class S shares may be acquired through programs or products sponsored
by Metropolitan, its affiliates, or both for which Class S shares have been
designated. In addition, Class S shares are available through programs under
which, for example, investors pay an asset-based fee and/or a transaction fee to
intermediaries. Class S share availability is determined by the Distributor and
intermediaries based on the overall direct and indirect costs of a particular
program, expected assets, account sizes and similar considerations.
Reorganizations. In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, the Fund may issue its shares at net asset value (or
more) to such entities or to their security holders.
Redemptions. The Fund reserves the right to pay redemptions in kind
with portfolio securities in lieu of cash. In accordance with its election
pursuant to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of
redemption proceeds paid in cash. Although it
II-38
<PAGE>
has no present intention to do so, the Fund may, under unusual circumstances,
limit redemptions in cash with respect to each shareholder during any ninety-day
period to the lesser of (i) $250,000 or (ii) 1% of the net asset value of the
Fund at the beginning of such period. In connection with any redemptions paid in
kind with portfolio securities, brokerage and other costs may be incurred by the
redeeming shareholder in the sale of the securities received.
Systematic Withdrawal Plan. A shareholder who owns noncertificated
Class A or Class S shares with a value of $5,000 or more, or Class B(1), Class B
or Class C shares with a value of $10,000 or more, may elect, by participating
in the Fund's Systematic Withdrawal Plan, to have periodic checks issued for
specified amounts. These amounts may not be less than certain minimums,
depending on the class of shares held. The Plan provides that all income
dividends and capital gains distributions of the Fund shall be credited to
participating shareholders in additional shares of the Fund. Thus, the
withdrawal amounts paid can only be realized by redeeming shares of the Fund
under the Plan. To the extent such amounts paid exceed dividends and
distributions from the Fund, a shareholder's investment will decrease and may
eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 12% annually
(minimum $50 per withdrawal) of either (a) the value, at the time the Systematic
Withdrawal Plan is initiated, of the shares then in the account or (b) the
value, at the time of a withdrawal, of the same number of shares as in the
account when the Systematic Withdrawal Plan was initiated, whichever is higher.
Expenses of the Systematic Withdrawal Plan are borne by the Fund. A
participating shareholder may withdraw from the Systematic Withdrawal Plan, and
the Fund may terminate the Systematic Withdrawal Plan at any time on written
notice. Purchase of additional shares while a shareholder is receiving payments
under a Systematic Withdrawal Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate in
the Investamatic Program (see "Your Investment--Investor Services--Investamatic
Program" in the Fund's Prospectus) and the Systematic Withdrawal Plan at the
same time.
Request to Dealer to Repurchase. For the convenience of shareholders,
the Fund has authorized the Distributor as its agent to accept orders from
dealers by wire or telephone for the repurchase of shares by the Distributor
from the dealer. The Fund may revoke or suspend this authorization at any time.
The repurchase price is the net asset value for the applicable shares next
determined following the time at which the shares are offered for repurchase by
the dealer to the Distributor. The dealer is responsible for promptly
transmitting a shareholder's order to the Distributor.
Signature Guarantees. Signature guarantees are required for, among
other things: (1) written requests for redemptions for more than $100,000; (2)
written requests for redemptions for any amount if the proceeds are transmitted
to other than the current address of record (unchanged in the past 30 days); (3)
written requests for redemptions for any amount submitted
II-39
<PAGE>
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.
Dishonored Checks. If a purchaser's check is not honored for its full
amount, the purchaser could be subject to additional charges to cover collection
costs and any investment loss, and the purchase may be canceled.
Processing Charges. Purchases and redemptions processed through
securities dealers may be subject to processing charges imposed by the
securities dealer in addition to sales charges that may be imposed by the Fund
or the Distributor.
F. Shareholder Accounts
General information on shareholder accounts is included in the Fund's
Prospectus under "Your Investment." The following supplements that information.
Maintenance Fees and Involuntary Redemption. Because of the relatively
high cost of maintaining small shareholder accounts, the Fund reserves the right
to redeem at its option any shareholder account which remains below $1,500 for a
period of 60 days after notice is mailed to the applicable shareholder, or to
impose a maintenance fee on such account after 60 days' notice. Such
involuntarily redemptions will be subject to applicable sales charges, if any.
The Fund may increase such minimum account value above such amount in the future
after notice to affected shareholders. Involuntarily redeemed shares will be
priced at the net asset value on the date fixed for redemption by the Fund, and
the proceeds of the redemption will be mailed to the affected shareholder at the
address of record. Currently, the maintenance fee is $18 annually, which is paid
to the Transfer Agent. The fee does not apply to certain retirement accounts or
if the shareholder has more than an aggregate $50,000 invested in the Fund and
other Eligible Funds combined. Imposition of a maintenance fee on a small
account could, over time, exhaust the assets of such account.
To cover the cost of additional compliance administration, a $20 fee
will be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date
of payment of redemption proceeds for more than seven days, except that (a) it
may elect to suspend the redemption of shares or postpone the date of payment of
redemption proceeds: (1) during any period that the NYSE is closed (other than
customary weekend and holiday closings) or trading on the NYSE is restricted;
(2) during any period in which an emergency exists as a result of which disposal
of portfolio securities is not reasonably practicable or it is not reasonably
practicable to fairly determine the Fund's net asset values; or (3) during such
other periods as
II-40
<PAGE>
the Securities and Exchange Commission (the "SEC") may by order permit for the
protection of investors; and (b) the payment of redemption proceeds may be
postponed as otherwise provided under "Purchase and Redemption of Shares" in
this Statement of Additional Information.
The Open Account System. Under the Open Account System full and
fractional shares of the Fund owned by shareholders are credited to their
accounts by the Transfer Agent, State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110. Certificates representing Class
B(1), Class B or Class C shares will not be issued, while certificates
representing Class A or Class S shares will only be issued if specifically
requested in writing and, in any case, will only be issued for full shares, with
any fractional shares to be carried on the shareholder's account. Shareholders
will receive periodic statements of transactions in their accounts.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through
dealers, by wire or by mailing a check payable to "State
Street Research Funds" under the terms set forth above under
"Purchase and Redemption of Shares" in this Statement of
Additional Information.
2. The following methods of receiving dividends from investment
income and distributions from capital gains generally are
available:
(a) All income dividends and capital gains distributions
reinvested in additional shares of the Fund.
(b) All income dividends and capital gains distributions
in cash.
(c) All income dividends and capital gains distributions
invested in any one available Eligible Fund
designated by the shareholder as described below. See
"--Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will be automatically coded for reinvestment of all
dividends and distributions in additional shares of the same class of the Fund.
Selections may be changed at any time by telephone or written notice to the
Service Center. Dividends and distributions are reinvested at net asset value
without a sales charge.
Exchange Privileges. Shareholders of the Fund may exchange their shares
for available shares with corresponding characteristics of any of the other
Eligible Funds on the basis of the relative net asset values of the respective
shares to be exchanged, and subject to compliance with applicable securities
laws. Shareholders of any other Eligible Fund may
II-41
<PAGE>
similarly exchange their shares for Fund shares with corresponding
characteristics. Prior to making an exchange, shareholders should obtain the
Prospectus of the Eligible Fund into which they are exchanging. Under the Direct
Program, subject to certain conditions, shareholders may make arrangements for
regular exchanges from the Fund into other Eligible Funds. To effect an
exchange, Class A, Class B(1), Class B and Class C shares may be redeemed
without the payment of any contingent deferred sales charge that might otherwise
be due upon an ordinary redemption of such shares. The State Street Research
Money Market Fund issues Class E shares which are sold without any sales charge.
Exchanges of State Street Research Money Market Fund Class E shares into Class A
shares of the Fund or any other Eligible Fund are subject to the initial sales
charge or contingent deferred sales charge applicable to an initial investment
in such Class A shares, unless a prior Class A sales charge has been paid
directly or indirectly with respect to the shares redeemed. 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(1), Class B and Class C shares, the
holding period of the redeemed shares is "tacked" to the holding period of any
acquired shares. No exchange transaction fee is currently imposed on any
exchange.
Shares of the Fund may also be acquired or redeemed in exchange for
shares of the Summit Cash Reserves Fund ("Summit Cash Reserves") by customers of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (subject to completion of
steps necessary to implement the program). The Fund and Summit Cash Reserves are
related mutual funds for purposes of investment and investor services. Upon the
acquisition of shares of Summit Cash Reserves by exchange for redeemed shares of
the Fund, (a) no sales charge is imposed by Summit Cash Reserves, (b) no
contingent deferred sales charge is imposed by the Fund on the Fund shares
redeemed, and (c) any applicable holding period of the Fund shares redeemed is
"tolled," that is, the holding period clock stops running pending further
transactions. Upon the acquisition of shares of the Fund by exchange for
redeemed shares of Summit Cash Reserves, (a) the acquisition of Class A shares
shall be subject to the initial sales charges or contingent deferred sales
charges applicable to an initial investment in such Class A shares, unless a
prior Class A sales charge has been paid indirectly, and (b) the acquisition of
Class B(1), Class B or Class C shares of the Fund shall restart any holding
period previously tolled, or shall be subject to the contingent deferred sales
charge applicable to an initial investment in such shares.
The exchange privilege may be terminated or suspended or its terms
changed at any time, subject, if required under applicable regulations, to 60
days' prior notice. New accounts established for investments upon exchange from
an existing account in another fund will have the same telephone privileges with
respect to the Fund (see "Your Investment--Account Policies--Telephone Requests"
in the Fund's Prospectus and "--Telephone Privileges," below) as the existing
account unless the Service Center is instructed otherwise. Related
administrative policies and procedures may also be adopted with regard to a
series of exchanges, street name accounts, sponsored arrangements and other
matters.
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<PAGE>
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer identification
number, may be aggregated for purposes of the six exchange limit.
Notwithstanding the six exchange limit, the Fund reserves the right to refuse
exchanges by any person or group if, in the Investment Manager's judgment, the
Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
Exchanges may be restricted or refused if the Fund receives or anticipates
simultaneous orders affecting significant portions of the Fund's assets. In
particular, a pattern of exchanges that coincides with a "market timing"
strategy may be disruptive to the Fund. The Fund may impose these restrictions
at any time. The exchange limit may be modified for accounts in certain
institutional retirement plans because of plan exchange limits, Department of
Labor regulations or administrative and other considerations. The exchange limit
may also be modified under certain exchange arrangements for selected brokers
with substantial asset allocation programs. 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 contact the Service
Center.
Reinvestment Privilege. A shareholder of the Fund who has redeemed
shares or had shares repurchased at his or her request may reinvest all or any
portion of the proceeds (plus that amount necessary to acquire a fractional
share to round off his or her reinvestment to full shares) in shares, of the
same class as the shares redeemed, of the Fund or any other Eligible Fund at net
asset value and without subjecting the reinvestment to an initial sales charge,
provided such reinvestment is made within 120 calendar days after a redemption
or repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the amount
reinvested. The redemption of shares is, for federal income tax purposes, a sale
on which the shareholder may realize a gain or loss. If a redemption at a loss
is followed by a reinvestment within 30 days, the transaction may be a "wash
sale" resulting in a denial of the loss for federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject
to any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by the Service
Center of such shareholder's written purchase request and delivery of the
request by the Service Center to the Transfer Agent. A shareholder may exercise
this reinvestment privilege only once per 12-month period with respect to his or
her shares of the Fund.
Dividend Allocation Plan. The Dividend Allocation Plan allows
shareholders to elect to have all their dividends and any other distributions
from the Fund or any Eligible Fund
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<PAGE>
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.
Telephone Privileges. The following telephone privileges are available:
o Telephone Exchange Privilege for Shareholder and Shareholder's
Financial Professional
o Shareholders automatically receive this privilege
unless declined.
o This privilege allows a shareholder or a
shareholder's financial professional to request
exchanges into other State Street Research funds.
o Telephone Redemption Privilege for Shareholder
o Shareholders automatically receive this privilege
unless declined.
o This privilege allows a shareholder to phone requests
to sell shares, with the proceeds sent to the address
of record.
o Telephone Redemption Privilege for Shareholder's Financial
Professional (This privilege is not automatic; a shareholder
must specifically elect it)
o This privilege allows a shareholder's financial
professional to phone requests to sell shares, with
the proceeds sent to the address of record on the
account.
A shareholder with the above telephone privileges is deemed to
authorize the Service Center and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be any of the shareholders of
an account or a shareholder's financial professional; and (2) honor any written
instructions for a change of address regardless of whether such request is
accompanied by a signature guarantee. All telephone calls will be recorded.
Neither the Fund, the other Eligible Funds, the Transfer Agent, the Investment
Manager nor the Distributor will be liable for any loss, expense or cost arising
out of any request, including any fraudulent or unauthorized requests.
Shareholders assume the risk to the full extent of their accounts that telephone
requests may be unauthorized. Reasonable procedures will be followed to confirm
that instructions communicated by telephone are genuine. The shareholder will
not be liable for any losses arising from unauthorized or fraudulent
instructions if such procedures are not followed.
Alternative Means of Contacting a Fund. It is unlikely, during periods
of extraordinary market conditions, that a shareholder may have difficulty in
reaching the Service Center. In that event, however, the shareholder should
contact the Service Center at 1-800-562-0032, 1-617-357-7800 or otherwise at its
main office at One Financial Center, Boston, Massachusetts 02111-2690.
II-44
<PAGE>
G. Net Asset Value
The net asset value of the shares of each Fund is determined once daily
as of the close of regular trading on the NYSE, but not later than 4 P.M.
eastern 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 each Fund is computed by dividing the
sum of the value of the securities held by the Fund plus any cash or other
assets minus all liabilities by the total number of outstanding shares of the
Fund at such time. Any expenses, except for extraordinary or nonrecurring
expenses, borne by the Fund, including the investment management fee payable to
the Investment Manager, are accrued daily.
In determining the values of portfolio assets as provided below, the
Trustees utilize one or more pricing services in lieu of market quotations for
certain securities which are not readily available on a daily basis. Such
services utilize information with respect to market transactions, quotations
from dealers and various relationships among securities in determining value and
may provide prices determined as of times prior to the close of the NYSE.
In general, securities are valued as follows. Securities which are
listed or traded on the New York or American Stock Exchange are valued at the
price of the last quoted sale on the respective exchange for that day.
Securities which are listed or traded on a national securities exchange or
exchanges, but not on the New York or American Stock Exchange, are valued at the
price of the last quoted sale on the exchange for that day prior to the close of
the NYSE. Securities not listed on any national securities exchange which are
traded "over the counter" and for which quotations are available on the National
Association of Securities Dealers, Inc.'s (the "NASD") NASDAQ System 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 authorized by the Trustees. The Trustees also reserve the right to
adopt other valuations based on fair value in pricing in unusual circumstances
where use of other methods as discussed in part above, could otherwise have a
material adverse effect on the Fund as a whole.
The Trustees have authorized the use of the amortized cost method to
value short-term debt instruments issued with a maturity of one year or less and
having a remaining maturity of 60 days or less when the value obtained is fair
value, provided that during any period in which more than 25% of the Fund's
total assets is invested in short-term debt securities the current market value
of such securities will be used in calculating net asset value per share in lieu
of the amortized cost method. Under the amortized cost method of valuation, the
security is
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<PAGE>
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.
H. Portfolio Transactions
The Fund's portfolio turnover rate is determined by dividing the lesser
of securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less).
Brokerage Allocation
- --------------------
The Investment Manager's policy is to seek for its clients, including
the Fund, what in the Investment Manager's judgment will be the best overall
execution of purchase or sale orders and the most favorable net prices in
securities transactions consistent with its judgment as to the business
qualifications of the various broker or dealer firms with whom the Investment
Manager may do business, and the Investment Manager may not necessarily choose
the broker offering the lowest available commission rate. Decisions with respect
to the market where the transaction is to be completed, to the form of
transaction (whether principal or agency), and to the allocation of orders among
brokers or dealers are made in accordance with this policy. In selecting brokers
or dealers to effect portfolio transactions, consideration is given to their
proven integrity and financial responsibility, their demonstrated execution
experience and capabilities both generally and with respect to particular
markets or securities, the competitiveness of their commission rates in agency
transactions (and their net prices in principal transactions), their willingness
to commit capital, and their clearance and settlement capability. The Investment
Manager makes every effort to keep informed of commission rate structures and
prevalent bid/ask spread characteristics of the markets and securities in which
transactions for the Fund occur. Against this background, the Investment Manager
evaluates the reasonableness of a commission or a net price with respect to a
particular transaction by considering such factors as difficulty of execution or
security positioning by the executing firm. The Investment Manager may or may
not solicit competitive bids based on its judgment of the expected benefit or
harm to the execution process for that transaction.
When it appears that a number of firms could satisfy the required
standards in respect of a particular transaction, consideration may also be
given by the Investment Manager to services other than execution services which
certain of such firms have provided in the past or may provide in the future.
Negotiated commission rates and prices, however, are based upon the Investment
Manager's judgment of the rate which reflects the execution requirements of the
transaction without regard to whether the broker provides services in addition
to execution. Among such other services are the supplying of supplemental
investment research; general economic, political and business information;
analytical and statistical data; relevant market
II-46
<PAGE>
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 and used for portfolio analysis and modeling and also including software
providing investment personnel with efficient access to current and historical
data from a variety of internal and external sources) and portfolio evaluation
services and relative performance of accounts.
In the case of the Fund and other registered investment companies
advised by the Investment Manager or its affiliates, the above services may
include data relating to performance, expenses and fees of those investment
companies and other investment companies. This information is used by the
Trustees or Directors of the investment companies to fulfill their
responsibility to oversee the quality of the Investment Manager's advisory
contracts between the investment companies and the Investment Manager. The
Investment Manager considers these investment company services only in
connection with the execution of transactions on behalf of its investment
company clients and not its other clients. Certain of the nonexecution services
provided by broker-dealers may in turn be obtained by the broker-dealers from
third parties who are paid for such services by the broker-dealers.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. The Investment Manager's investment management
personnel seek 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 allocable
to uses other than research or investment decision-making. Some research and
execution services may benefit the Investment Manager's clients as a whole,
while others may benefit a specific segment of clients. Not all such services
will necessarily be used exclusively in connection with the accounts which pay
the commissions to the broker-dealer providing the services.
The Investment Manager has no fixed agreements or understandings with
any broker-dealer as to the amount of brokerage business which the firm may
expect to receive for services supplied to the Investment Manager or otherwise.
There may be, however, understandings with certain firms that in order for such
firms to be able to continuously supply
II-47
<PAGE>
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 Investment Manager is aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, the Investment Manager relies on the provisions of
Section 28(e) of the Securities Exchange Act of 1934.
In the case of the purchase of fixed income securities in underwriting
transactions, the Investment Manager follows any instructions received from its
clients as to the allocation of new issue discounts, selling commissions and
designations to brokers or dealers which provide the client with research,
performance evaluation, master trustee and other services. In the absence of
instructions from the client, the Investment Manager may make such allocations
to broker-dealers which have provided the Investment Manager with research and
brokerage services.
In some instances, certain clients of the Investment Manager request it
to place all or part of the orders for their account with certain brokers or
dealers, which in some cases provide services to those clients. The Investment
Manager generally agrees to honor these requests to the extent practicable.
Clients may request that the Investment Manager only effect transactions with
the specified broker-dealers if the broker-dealers are competitive as to price
and execution. Where the request is not so conditioned, the Investment Manager
may be unable to negotiate commissions or obtain volume discounts or best
execution. In cases where the Investment Manager is requested to use a
particular broker-dealer, different commissions may be charged to clients making
the 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 has been completed.
When more than one client of the Investment Manager is seeking to buy
or sell the same security, the sale or purchase is carried out in a manner which
is considered fair and equitable to all accounts. In allocating investments
among various clients (including in what sequence orders for trades are placed),
the Investment Manager will use its best business judgment and will take into
account such factors as the investment objectives of the clients, the amount of
investment funds available to each, the size of the order, the amount already
committed for each client to a specific investment and the relative risks of the
investments, all in order to provide on balance a fair and equitable result to
each client over time. Although
II-48
<PAGE>
sharing in large transactions may sometimes affect price or volume of shares
acquired or sold, overall it is believed there may be an advantage in execution.
The Investment Manager may follow the practice of grouping orders of various
clients for execution to get the benefit of lower prices or commission rates. In
certain cases where the aggregate order may be executed in a series of
transactions at various prices, the transactions are allocated as to amount and
price in a manner considered equitable to each so that each receives, to the
extent practicable, the average price of such transactions. Exceptions may be
made based on such factors as the size of the account and the size of the trade.
For example, the Investment Manager may not aggregate trades where it believes
that it is in the best interests of clients not to do so, including situations
where aggregation might result in a large number of small transactions with
consequent increased custodial and other transactional costs which may
disproportionately impact smaller accounts. Such disaggregation, depending on
the circumstances, may or may not result in such accounts receiving more or less
favorable execution relative to other clients.
Information about portfolio turnover rates and certain brokerage
commissions paid by the Funds identified on the cover page of this Statement of
Additional Information is included in Section II of this Statement of Additional
Information.
I. Certain Tax Matters
Federal Income Taxation of the Fund--In General
- -----------------------------------------------
The Fund intends to qualify and elects to be treated each taxable year
as a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), although it cannot give complete
assurance that it will qualify to do so. Accordingly, the Fund must, among other
things, (a) derive at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); and (b) satisfy certain
diversification requirements on a quarterly basis.
If in any year the Fund derives more than 10% of its gross income (as
defined in the Code, which disregards losses for that purpose) from investments
made directly in commodities, including precious metal investments, or
commodity-related options, futures or indices, the Fund in such year may fail to
qualify as a regulated investment company under the Code. The Investment Manager
intends to manage the Fund's portfolio so as to minimize the risk of such a
disqualification.
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of the Fund's current or
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<PAGE>
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of the
Fund to the extent thereof. Any distribution in excess of a shareholder's basis
in the shareholder's shares would be taxable as gain realized from the sale of
such shares.
The Fund will be liable for a nondeductible 4% excise tax on amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement. To avoid the tax, during each calendar year the Fund
must distribute an amount equal to at least 98% of the sum of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, and its capital gain net income for the 12-month period ending on October
31, in addition to any undistributed portion of the respective balances from the
prior year. For that purpose, any income or gain retained by the Fund that is
subject to corporate tax will be considered to have been distributed by
year-end. The Fund intends to make sufficient distributions to avoid this 4%
excise tax.
Taxation of the Fund's Investments
- ----------------------------------
Original Issue Discount; Market Discount. For federal income tax
purposes, debt securities purchased by the Fund may be treated as having
original issue discount. Original issue discount represents interest for federal
income tax purposes and can generally be defined as the excess of the stated
redemption price at maturity of a debt obligation over the issue price. Original
issue discount is treated for federal income tax purposes as income earned by
the Fund, whether or not any income is actually received, and therefore is
subject to the distribution requirements of the Code. Generally, the amount of
original issue discount is determined on the basis of a constant yield to
maturity which takes into account the compounding of accrued interest. Under
section 1286 of the Code, an investment in a stripped bond or stripped coupon
may result in original issue discount.
Debt securities may be purchased by the Fund at a discount that exceeds
the original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for 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 the Fund elects to include such accrued market discount in
income in the tax year to which it is attributable). Generally, market discount
is accrued on a daily basis. The Fund may be required to capitalize, rather than
deduct currently, part or all of any direct interest expense incurred or
continued to purchase or carry any debt security having market discount, unless
the Fund makes the election to include market discount currently. Because the
Fund must include original issue discount in income, it will be more difficult
for the Fund to make the distributions required for the Fund to maintain its
status as a regulated investment company under Subchapter M of the Code or to
avoid the 4% excise tax described above.
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<PAGE>
Options and Futures Transactions. Certain of the Fund's investments may
be subject to provisions of the Code that (i) require inclusion of unrealized
gains or losses in the Fund's income for purposes of the 90% test, and require
inclusion of unrealized gains in the Fund's income for the purposes of 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 and long-term gain,
irrespective of the holding period of the investment. Such provisions generally
apply to, among other investments, options on debt securities, indices on
securities and futures contracts. The Fund will monitor its transactions and may
make certain tax elections available to it in order to mitigate the impact of
these rules and prevent disqualification of the Fund as a regulated investment
company.
Gains or losses attributable to foreign currency contracts or
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"), the 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. Alternatively, if the stock of a PFIC is marketable, the Fund may elect to
mark the stock of the PFIC to market annually, and to recognize gain or loss of
the appreciation or depreciation in the stock. Any gain so recognized would be
treated as ordinary income, and a loss would be recognized and treated as an
ordinary deduction to the extent of any prior, unreversed amounts of gain
recognized with respect to that stock. 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.
Federal Income Taxation of Shareholders
- ---------------------------------------
Dividends paid by the Fund may be eligible for the 70%
dividends-received deduction for corporations. The percentage of the 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. 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.
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<PAGE>
Distributions by the Fund can result in a reduction in the fair market
value of the Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as ordinary income or 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 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 State 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 a 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. In addition, holding period
requirements apply so that, generally, the shareholder will be unable to take a
tax credit for any foreign withholding tax on a dividend payment unless (a) the
Fund held the stock in the foreign corporation for more than 15 days during the
30-day period beginning on the date that the stock becomes ex-dividend with
respect to the dividend on which the withholding tax is paid and (b) the
shareholder held his or her shares in the Fund during the same period. In the
case of certain preference dividends on foreign stock, the 15-day and 30-day
periods are extended to 45 days and 90 days, respectively. Shareholders also
will be unable to claim a credit for foreign withholding taxes on dividends if
the Fund has entered into certain hedging transactions with respect to the stock
of the foreign corporation. Shareholders may take a deduction to the extent of
any tax credits disallowed under the holding period and hedging rules. The Fund
will 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 returns, including information about withholding taxes for
which a tax credit could be denied to the Fund under the holding period and
hedging rules described above.
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<PAGE>
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 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.
J. Distribution of Fund Shares
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (Class B(1), Class B and Class C shares). The Distributor may
reallow all or portions of such sales charges as concessions to dealers. The
Distributor may also pay its affiliate MetLife Securities, Inc. additional sales
compensation of up to 0.25% of certain sales or assets.
The differences in the price at which the Fund's Class A shares are
offered due to scheduled variations in sales charges, or Class S shares are
offered, as described in the Fund's Prospectus, result from cost savings
inherent in economies of scale, among other factors. Management believes that
the cost of sales efforts of the Distributor and broker-dealers tends to
decrease as the size of purchases increases, or does not involve any incremental
sales expenses as in the case of, for example, exchanges, reinvestments or
dividend investments at net asset value. Similarly, no significant sales effort
is necessary for sales of shares at net asset value to certain Directors,
Trustees, officers, employees, their relatives and other persons directly or
indirectly related to the Fund or associated entities. Where shares of the Fund
are offered at a reduced sales charge or without a sales charge pursuant to
sponsored arrangements, managed fee-based programs and so-called "mutual fund
supermarkets," among other special programs, the amount of the sales charge
reduction will similarly reflect the anticipated reduction in sales expenses
associated with such arrangements. The reductions in sales expenses, and
therefore the reduction in sales charges, will vary depending on factors such as
the size and other characteristics of the organization or program, and the
nature of its membership or the participants. The Fund reserves the right to
make variations in, or eliminate, sales charges at any time or to revise the
terms of or to suspend or discontinue sales pursuant to sponsored arrangements
or similar programs at any time.
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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 securities dealer
making such sale a commission based on the aggregate of such sales. Such
commission may also be paid 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 up to 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.
Plan(s) of Distribution Pursuant to Rule 12b-1
- ----------------------------------------------
The Fund may have one or more Distribution Plans under Rule 12b-1, as
set forth in Section II of this Statement of Additional Information for the
Fund. Under the Fund's Distribution Plans, the Fund may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of shares, including, but not limited to, (1) the payment of commissions to
underwriters, securities dealers and others engaged in the sale of shares,
including payments to the Distributor to be used to pay commissions to
securities dealers (which securities dealers may be affiliates of the
Distributor), (2) expenditures incurred by the Distributor in connection with
the distribution and marketing of shares and the servicing of investor accounts,
and (3) expenses incurred by the Distributor in connection with the servicing of
shareholder accounts including payments to securities dealers and others for the
provision of personal service to investors and/or the maintenance or servicing
of shareholder accounts. In addition, the Distribution Plans authorize the
Distributor and the Investment Manager to make payments out of management fees,
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 an indirect financing of any activity primarily
resulting in the sale of shares of the Fund within the scope of Rule 12b-1 under
the 1940 Act. Payments under the Distribution Plan may be discontinued at any
time.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits annual expenditures that the Fund may incur to 0.75% for distribution
expenses and 0.25% for service fees. The NASD Rule also limits the aggregate
amount that the Fund may pay for such distribution costs to 6.25% of gross share
sales of a class since the inception of any asset-based sales charge plus
interest at the prime rate plus 1% on unpaid amounts thereof (less any
contingent deferred sales charges). Such limitation does not apply to the
service fees.
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) or others for
personal services and/or the maintenance of shareholder accounts. A portion of
any initial commission paid to dealers for the sale of shares
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of the Fund represents payment for personal services and/or the maintenance or
servicing of shareholder accounts by such dealers. The distribution fees are
used primarily to offset initial and ongoing commissions paid to dealers for
selling such shares and for other sales and marketing expenditures. Dealers who
have sold Class A shares are eligible for ongoing payments commencing as of the
time of such sale. Dealers who have sold Class B(1), Class B and Class C shares
are eligible for ongoing payments after the first year during which such shares
have been held of record by such dealer as nominee for its clients (or by such
clients directly).
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs similar
expenses on behalf of, such other funds. When expenses of the Distributor cannot
be identified as relating to a specific fund, the Distributor allocates expenses
among the funds in a manner deemed fair and equitable to each fund.
The payment of service and distribution fees may continue even if the
Fund ceases, temporarily or permanently, to sell one or more classes of shares
to new accounts. During the period the Fund is closed to new accounts, the
distribution fee will not be used for promotion expenses. The service and
distribution fees are used during a closed period to cover services provided to
current shareholders and to cover the compensation of financial professionals in
connection with the prior sale of Fund shares, among other non-promotional
distribution expenditures.
The Distributor may pay certain dealers and other intermediaries
additional compensation for sales and administrative services. The Distributor
may provide cash and noncash incentives to intermediaries who, for example, sell
significant amounts of shares or develop particular distribution channels. The
Distributor may compensate dealers with clients who maintain their investments
in the Fund over a period of years. The incentives can include merchandise and
trips to, and attendance at, sales seminars at resorts. The Distributor may pay
for administrative services, such as technological and computer systems support
for the maintenance of pension plan participant records, for subaccounting and
for distribution through mutual fund supermarkets or similar arrangements.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the General Distribution Plan, Special Distribution
Plan or Distribution Plan or any related agreements thereunder. The
Distributor's interest in the plans 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 plans described above, the Fund will
make alternative arrangements for such services for shareholders who acquired
shares through such institutions.
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<PAGE>
K. Calculation of Performance Data
From time to time, in advertisements or in communications to
shareholders or prospective investors, the Fund may compare the performance of
its Class A, Class B(1), Class B, Class C or Class S shares to the performance
of other mutual funds with similar investment objectives, to certificates of
deposit and/or to other financial alternatives. The Fund may also compare its
performance to appropriate indices, such as Standard & Poor's 500 Index,
Consumer Price Index and Dow Jones Industrial Average and/or to appropriate
rankings and averages such as those compiled by Lipper Analytical Services,
Inc., Morningstar, Inc., Money Magazine, Business Week, Forbes Magazine, The
Wall Street Journal and Investor's Daily.
The average annual total return ("standard total return") of the Class
A, Class B(1), Class B, Class C and Class S shares of each Fund will be
calculated as set forth below. Total return is computed separately for each
class of shares of the Fund.
Total Return
- ------------
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 Fund are reinvested at net asset value on the
reinvestment dates during the periods. All accrued expenses and recurring
charges are also taken into account as described later herein.
Yield
- -----
Yield for each class of the Fund's shares is computed by dividing the
net investment income per share earned during a recent month or other specified
30-day period by the
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maximum offering price per share on the last day of the period and annualizing
the result in accordance with the following formula:
6
YIELD = 2[(a-b + 1) -1]
---
cd
Where a = dividends and interest earned during the period
b = expenses accrued for the period (net of voluntary expense
reductions by the Investment Manager)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
To calculate interest earned (for the purpose of "a" above) on debt
obligations, the Fund computes the yield to effective maturity of each
obligation held by the Fund based on the market value of the obligation
(including actual accrued interest) at the close of the last business day of the
preceding period, or, with respect to obligations purchased during the period,
the purchase price (plus actual accrued interest). The yield to effective
maturity is then divided by 360 and the quotient is multiplied by the market
value of the obligation (including actual accrued interest) to determine the
interest income on the obligation for each day of the period that the obligation
is in the portfolio. Dividend income is recognized daily based on published
rates.
With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("paydowns"), the Fund accounts for gain or
loss attributable to actual monthly paydowns as a realized capital gain or loss
during the period. The Fund has elected not to amortize discount or premium on
such securities.
Undeclared earned income, computed in accordance with generally
accepted accounting principles, may be subtracted from the maximum offering
price. Undeclared earned income is the net investment income which, at the end
of the base period, has not been declared as a dividend, but is reasonably
expected to be declared as a dividend shortly thereafter. The maximum offering
price includes, as applicable, a maximum sales charge of 4.5%.
All accrued expenses are taken into account as described later herein.
Yield information is useful in reviewing the Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in the Fund's shares with bank deposits, savings accounts and
similar investment alternatives which often are insured and/or provide an agreed
or guaranteed fixed yield for a stated period of time.
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<PAGE>
Shareholders should remember that yield is a function of the kind and quality of
the instruments in the Fund's portfolio, portfolio maturity and operating
expenses and market conditions.
Accrued Expenses 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 Fund would have been lower.
Nonstandardized Total Return
- ----------------------------
Each Fund may provide the above described standard total return results
for Class A, Class B(1), Class B, Class C and Class S shares for periods which
end no earlier than the most recent calendar quarter end and which begin twelve
months before, five years before and ten years before (or the commencement of
the Fund's operations, whichever is earlier). In addition, the Fund may provide
nonstandardized total return results for differing periods, such as for the most
recent six months, and/or without taking sales charges into account. Such
nonstandardized total return is computed as otherwise described under "Total
Return" except the result may or may not be annualized, and as noted any
applicable sales charge, if any, may not be taken into account and therefore not
deducted from the hypothetical initial payment of $1,000.
Distribution Rates
- ------------------
Each 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 offering price
per share as of the end of the period to which the distribution relates. A
distribution can include gross investment income from debt obligations purchased
at a premium and in effect include a portion of the premium paid. A distribution
can also include nonrecurring, gross short-term capital gains without
recognition of any unrealized capital losses. Further, a distribution can
include income from the sale of options by the Fund even though such option
income is not considered investment income under generally accepted accounting
principles.
Because a distribution can include such premiums, capital gains and
option income, the amount of the distribution may be susceptible to control by
the Investment Manager through transactions designed to increase the amount of
such items. Also, because the distribution rate
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<PAGE>
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.
L. Custodian
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian for Fund assets. As custodian State Street
Bank and Trust Company is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on each Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
M. Independent Accountants
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts
02110, serves as the Trusts' independent accountants, providing professional
services including (1) audits of each Fund's annual financial statements, (2)
assistance and consultation in connection with SEC filings and (3) review of the
annual income tax returns filed on behalf of each Fund.
N. Financial Reports
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. For more information, call State Street Research Service
Center.
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