[STATE STREET RESEARCH logo]
GALILEO FUND
A growth fund emphasizing stock selection within a defined sector mix.
Prospectus
March 9, 1998
STATE STREET RESEARCH FUNDS
[sidebar text]
This prospectus has information you should know before you invest.
Please read it carefully and keep it with your investment records.
Although these securities have been registered with the Securities and
Exchange Commission, the commission has not judged them for investment merit and
does not guarantee the accuracy or adequacy of the information in this
prospectus. Anyone who informs you otherwise is committing a federal crime.
[end of sidebar text]
[graphic of Boston's Custom House]
<PAGE>
WHO MAY WANT TO INVEST
State Street Research Galileo Fund is designed for investors who seek
one or more of the following:
* a stock fund for long-term growth
* a stock fund that emphasizes large-size companies
* a stock fund with broad exposure across industry sectors
The fund is NOT appropriate for investors who:
* want to avoid high volatility or possible losses
* are making short-term investments
* are investing emergency reserve money
* are seeking regular income
The fund's shares will rise and fall in value. There is a risk that you
could lose money by investing in the fund.
The fund cannot be certain that it will achieve its goal.
Fund shares are not bank deposits and are not guaranteed, endorsed or
insured by any financial institution, government entity or the FDIC.
<PAGE>
1
CONTENTS
THE FUND.................................................................. 2
The fund's goal and strategy, main risks and expenses
YOUR ACCOUNT.............................................................. 6
Managing your State Street Research investments
Opening an Account........................................................ 6
Choosing a Share Class.................................................... 6
Sales Charges............................................................. 8
Policies for Buying Shares................................................ 10
Policies for Selling Shares............................................... 12
Account Policies.......................................................... 14
Distribution and Taxes.................................................... 15
Investor Services......................................................... 17
FUND DETAILS.............................................................. 18
The fund's business structure and dealer compensation,
plus additional policies
OTHER SECURITIES AND RISKS................................................ 20
Information on additional portfolio securities and practices,
and the risks associated with them
Back Cover For Additional Information
<PAGE>
2
THE FUND
[(chesspiece graphic)] GOAL AND STRATEGY
FUNDAMENTAL GOAL. The fund seeks to provide long-term growth of capital.
STRATEGY. Under normal market conditions, the fund invests at least 65%
of total assets in stocks and convertible securities of companies in the Russell
1000 Index (an index of the 1,000 largest publicly traded U.S. companies) and of
other U.S. and foreign companies of comparable size.
The fund invests in companies that appear to offer potential for
long-term growth. Rather than trying to anticipate which sectors of the market
will have the best performance, the fund intends to add value by identifying the
most promising securities within each sector. A sector is a group of industries
with shared characteristics, such as consumer staples (which includes makers of
foods and household products and drug and grocery store chains), financial
services and health care. While the fund's sector weightings are expected to
approximate those of the Russell 1000, the particular stocks owned by the fund
will not mirror the index.
In selecting stocks, the investment manager follows an approach that
emphasizes the role of its in-house research analysts. While the portfolio
manager has primary responsibility for day-to-day management of the fund,
<PAGE>
3
he delegates responsibility for stock selection to research analysts. Each
analyst is responsible for buying and selling stocks in specific industries,
subject to the portfolio manager's supervision.
The fund reserves the right to invest up to 35% of total assets in other
securities (for example, small company stocks). The fund may also use
derivatives, particularly as a way of hedging. For more information about the
fund's investments and practices, see page 20.
[traffic sign graphic] PORTFOLIO RISKS
Because the fund invests primarily in stocks, its major risks are those
of stock investing, including sudden, unpredictable drops in value and the
potential for periods of lackluster performance.
The fund's policy of remaining invested in all sectors of the Russell
1000 means that its performance will be affected by sector-wide downturns. In
some circumstances, when the stocks within a given sector move up or down in
tandem, the fund may not be able to add substantial value through its stock
selection strategy. The fund may underperform certain other stock funds (those
emphasizing small company stocks, for example) during periods when large company
stocks in general are out of favor.
The success of the fund's investment strategy depends largely on the
skill of the portfolio manager and the research analysts in assessing the
potential of the stocks the fund buys.
The fund's management approach, which may include short-term trading,
could cause the fund's portfolio turnover rate to be above-average for a stock
fund. High turnover will increase the fund's brokerage costs and may increase
your tax liability.
[column text]
Information on other securities and risks appears on page 20.
[end column text]
<PAGE>
4
THE FUND CONTINUED
[sidebar text]
[magnifying glass graphic] THE ROLE OF RESEARCH ANALYSTS
Research analysts can play a critical role in the success of a fund's
investment strategy. An enormous quantity of information is available about
publicly traded companies. For a fund with a broad-based investment program
(such as one focused on large company stocks), it would be very difficult for a
single portfolio manager to analyze all the available information.
Typically, an analyst is assigned to several industries within one or
more market sectors and has responsibility for developing a high level of
knowledge of the companies in those industries. In most mutual funds, the
analyst's expertise is then made available to the portfolio manager, who is
responsible for making investment decisions for the fund.
The relative role of research analysts can vary. In some circumstances
an analyst is responsible primarily for providing information a portfolio
manager requests, such as earnings estimates or industry outlooks. In other
situations, the analysts play a more prominent role, as in the case of this
fund, where they are given authority for the selection of portfolio investments.
By emphasizing the role of analysts, the fund has the potential to benefit most
directly from the insights of those who are closest to the relevant investment
information.
[end of sidebar text]
(Thinker graphic) INVESTMENT MANAGEMENT
The fund's investment manager is State Street Research & Management
Company. The firm traces its heritage back to 1924 and the founding of one of
America's first mutual funds. Today the firm has more than $47 billion in
assets under management (as of December 31, 1997), including more than $14
billion in mutual funds.
Thomas J. Dillman has had primary responsibility for the fund's
day-to-day portfolio management since its inception in March 1998. A senior vice
president, he has worked as an investment professional since 1980.
<PAGE>
5
INVESTOR EXPENSES
Shareholder fees are paid directly by investors.
<TABLE>
<CAPTION>
Class descriptions begin on page 6
Shareholder Fees(1) (% of offering price) Class A Class B Class C Class S
- ----------------------------------------- ------- -------- ------- -------
<S> <C> <C> <C> <C>
Maximum front-end sales charge 4.50 0.00 0.00 0.00
Maximum deferred sales charge 0.00(2) 5.00 1.00 0.00
</TABLE>
Annual fund expenses are deducted from fund assets.
<TABLE>
<CAPTION>
Annual Fund Expenses
(% of average net assets) Class A Class B(6) Class C(6) Class S
- -------------------------- ------- --------- ---------- -------
<S> <C> <C> <C> <C>
Management fee 0.65 0.65 0.65 0.65
Marketing/service (12b-1) fees(4) 0.25 1.00 1.00 0.00
Other expenses, after voluntary reduction(3) 0.35 0.35 0.35 0.35
---- ---- ---- ----
Total annual fund expenses, after
voluntary reduction(3) 1.25 2.00 2.00 1.00
==== ==== ==== ====
</TABLE>
EXAMPLE Here is what you would pay if you invested $1,000 over the years
indicated. The example is for comparison only and does not represent the fund's
actual expenses, either past or future (5).
Year Class A Class B(5) Class C(5) Class S
- ---- ------- ---------- ---------- -------
1 $57 $70/$20 $30/$20 $10
3 $83 $93/$63 $63/$63 $32
- -------------------
[footnote text]
(1) Not charged on reinvestments or exchanges.
(2) Except for investments of $1 million or more; see page 8.
(3) Because the fund is new, the percentage expense levels shown in the
table as Other expenses are based on estimates. The investment manager
and its affiliates have voluntarily undertaken to subsidize these
expenses to maintain the level of total annual fund expenses shown for
the next 12 months or until the fund's net assets reach $100 million,
whichever occurs first. However, the subsidy could be withdrawn at any
time. Total annual fund expenses are estimated to be 1.95%, 2.70%, 2.70%
and 1.70% for Class A, B, C and S shares, respectively, in the absence
of such subsidy.
(4) For share classes that have marketing/service (12b-1) fees, long-term
shareholders may pay more than the equivalent of the regulatory maximum
sales charge.
(5) Example assumes dividend reinvestment, hypothetical 5% annual return and
maximum applicable sales charges.
(6) The first number assumes you sold all your shares at the end of the
period, the second assumes you stayed in the fund.
[end of footnote text]
<PAGE>
6
YOUR ACCOUNT
[Key Graphic] OPENING AN ACCOUNT
If you are opening an account through a financial professional, he or
she can assist you with all phases of your investment.
If you are investing through a large retirement plan or other special
program, follow the instructions in your program materials.
To open an account without the help of a financial professional, please
use the instructions on these pages.
[checklist graphic] CHOOSING A SHARE CLASS
The fund offers four share classes, each with its own sales charge and
expense structure.
If you are investing a substantial amount and plan to hold your shares
for a long period, Class A shares may make the most sense for you. If you are
investing a lesser amount, you
[sidebar text, bottom of page]
CLASS -- FRONT LOAD
* Initial sales charge of 4.5% or less; schedule on page 8
* Lower sales charges for larger investments; see sidebar on facing page
and sales charge schedule
* Lower annual expenses than Class B or C shares due to lower
marketing/service (12b-1) fee of 0.25%
CLASS B -- BACK LOAD
* No initial sales charge
* Deferred sales charge of 5% or less on shares you sell within five
years; schedule on page 8
* Annual marketing/service (12b-1) fee
* Automatic conversion to Class A shares after eight years, reducing
future annual expenses
CLASS C -- LEVEL LOAD
* No initial sales charge
* Deferred sales charge of 1%, paid if you sell shares within one year of
purchase
* Lower deferred sales charge than Class B shares
* Annual marketing/service (12b-1) fee
* No conversion to Class A shares after eight years, so annual expenses do
not decrease
[end of sidebar text, bottom of page]
<PAGE>
7
may want to consider Class B shares (if investing for at least five years) or
Class C shares (if investing for less than five years). If you are investing
through a special program, such as a large employer-sponsored retirement plan or
certain programs available through brokers, you may be eligible to purchase
Class S shares.
Because all future investments in your account will be made in the share
class you designate when opening the account, you should make your decision
carefully. Your financial professional can help you choose the share class that
makes the most sense for you.
[sidebar text, bottom of page]
CLASS S -- NO LOAD
* No sales charges of any kind
* No marketing/service (12b-1) fees; annual expenses are lower than other
share classes
* Available through certain retirement accounts, advisory accounts
of the investment manager and special programs, including broker
programs with recordkeeping and other services; these programs usually
involve special conditions and separate fees (contact your financial
professional for information)
[end of sidebar text, bottom of page]
[sidebar text]
[Magnifying Glass Graphic] CLASS A SALES CHARGE REDUCTIONS AND WAIVERS
* Substantial investments receive lower sales charge rates; see
information on the following page.
* The "right of accumulation" allows you to include your existing
State Street Research investments (except Money Market Fund Class E
shares) as part of your current investment for sales charge purposes.
* A "letter of intent" allows you to count all investments in this
or other State Street Research funds over the next 13 months as if you
were making them all at once, for purposes of calculating sales charges.
To take advantage of right of accumulation or letter of intent waivers,
consult your financial professional or State Street Research.
[end of sidebar text]
<PAGE>
8
SALES CHARGES
CLASS A-FRONT LOAD
when you invest this % is deducted which equals this % of
this amount for sales charges your net investment
Up to $99,999 4.50 4.71
$100,000 - $249,999 3.50 3.63
$250,000 - $499,999 2.50 2.56
$500,000 - $999,999 2.00 2.04
$1 million or more see next column
With Class A shares, you pay a sales charge only when you buy shares.
If you are investing $1 million or more (either as a lump sum or through
any of the methods described on the previous page), you can purchase Class A
shares without any sales charge. However, you may be charged a "contingent
deferred sales charge" (CDSC) if you sell any shares you have held for less than
one year. Policies regarding the calculation of the CDSC are the same as for
Class B.
Class A shares are also offered with low or no sales charges through
various wrap-fee programs and other sponsored arrangements (contact your
financial professional for information).
CLASS B -- BACK LOAD
this % of net asset value at
the time of purchase (or of
when you sell shares in this sale, if lower) is deducted
year after you bought them from your proceeds
First year 5.00
Second year 4.00
Third year 3.00
Fourth year 3.00
Fifth year 2.00
Sixth year or later None
With Class B shares, you pay no sales charge when you invest, but you
are charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for five years or less, as described in the table above. Any shares
acquired through reinvestment are not subject to the CDSC. There is no CDSC on
exchanges into other State Street Research funds, and the
<PAGE>
9
date of your initial investment will continue to be used as the basis for CDSC
calculations when you exchange. To ensure that you pay the lowest CDSC possible,
the fund will always use the shares with the lowest CDSC to fill your sell
requests.
The CDSC is waived on shares sold for mandatory retirement distributions
or because of disability or death. Consult your financial professional or the
State Street Service Center.
Class B shares automatically convert to Class A shares after eight
years, lowering your annual expenses from that time on.
CLASS C -- LEVEL LOAD
this % of net asset value at
the time of purchase (or of
when you sell shares in this amount sale, if lower) is deducted
of time after you bought them from your proceeds
First year 1.00
Second year or later None
With Class C shares, you pay no sales charge when you invest, but you
are charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for one year or less, as described in the table above.
Policies regarding the calculation of the CDSC are the same as for Class B.
Class C shares currently have the same annual expenses as Class B
shares, but never convert to Class A shares (with their lower annual expenses).
CLASS S -- NO LOAD
Class S shares have no sales charges or CDSC.
<PAGE>
10
[Cash Register Graphic] POLICIES FOR BUYING SHARES
Once you have chosen a share class, the next step is to determine the
amount you want to invest.
MINIMUM INITIAL INVESTMENTS:
* $10,000 for accounts that use the Investamatic program
* $2,000 for Individual Retirement Accounts
* $25,000 for all other accounts(1)
MINIMUM ADDITIONAL INVESTMENTS:
* $1,000 for Individual Retirement Accounts
* $50 for any account
Complete the enclosed application. You can avoid future inconvenience by
signing up now for any services you might later use.
TIMING OF REQUESTS. All requests received by State Street Research
before 4:00 p.m. eastern time will be executed the same day, at that day's
closing share price. Orders received after 4:00 p.m. will be executed the
following day, at that day's closing share price.
WIRE TRANSACTIONS. Funds may be wired between 8:00 a.m. and 4:00 p.m.
eastern time. To make a same-day wire investment, please notify State Street
Research by 12:00 noon of your intention to wire funds, and make sure your wire
arrives by 4:00 p.m. Your bank may charge a fee for wiring money.
[footnote text]
(1)$2,500 until July 1, 1998. However, the distributor reserves the right to
require the $25,000 minimum before this date, or to continue with a reduced
minimum beyond it, without further notice.
[end footnote text]
<PAGE>
11
BUYING SHARES
<TABLE>
<CAPTION>
To Open an Account To Add to an Account
<S> <C> <C>
[Graphic of Briefcase] Through a Contact your financial Contact your financial professional.
Financial Professional professional.
By mail [Graphic of mailbox] Make your check payable to Fill out the investment stub from
"State Street Research Funds." your account statement, or indicate
Forward the check and your the fund name and account number on
Application to State Street your check. Make you check payable
Research. to "State Street Research Funds."
Forward the check and stub to State
Street Research.
[Graphic of Federal Building] By Forward your application to Call State Street Research to
Federal Funds Wire State Street Research, then Cbtain a control number. Instruct
call to obtain an account your bank to wire funds to:
number. Wire funds using the * State Street Bank and Trust
instructions at right. Company, Boston MA
* ABA: 011000028
* BNF: fund name and share class
you want to buy
* AC: 99029761
* OBI: your name and your
account number
* Control: the number given to
you by State Street Research
By Electronic Funds Transfer Verify that your bank is a Call State Street Research to
(ACH) [Graphic of Electrical member of the ACH (Automated verify that the necessary bank
Plug] Clearing House) system. information is on file for your
Forward your application to account. If it is, you may request
State Street Research. Please a transfer with the same phone
be sure to include the call. If not, please ask State
appropriate bank information. Street Research to provide you with
Call State Street Research to an EZ Trader application.
request a purchase.
[Graphic of Calendar] By Forward your application, with Call State Street Research to
Investamatic all appropriate sections verify that Investamatic is in
completed, to State Street place on your account, or to
Research, along with a check request a form to add it.
for your initial investment Investments are automatic once
payable to "State Street Investamatic is in place.
Research Funds."
By Exchange [Graphic of Call State Street Research or Call State Street Research or visit
Exchange] visit our Web site. our Web site.
</TABLE>
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408
Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m.,
eastern time)
<PAGE>
12
YOUR ACCOUNT CONTINUED
[GRAPHIC OF RECEIPT] POLICIES FOR SELLING SHARES
CIRCUMSTANCES THAT REQUIRE WRITTEN REQUESTS. Please submit instructions
in writing when any of the following apply:
* you are selling more than $100,000 worth of shares
* the name or address on the account has changed within the last 30
days
* you want the proceeds to go to a name or address not on the
account registration
* you are transferring shares to an account with a different
registration or share class
* you are selling shares held in a corporate or fiduciary account;
for these accounts, additional documents are required:
corporate accounts: certified copy of a corporate
resolution
fiduciary accounts: copy of power of attorney or other
governing document
To protect your account against fraud, all signatures on these documents
must be guaranteed. You may obtain a signature guarantee at most banks and
securities dealers. A notary public cannot provide a signature guarantee.
INCOMPLETE SELL REQUESTS. State Street Research will attempt to notify
you promptly if any information necessary to process your request is missing.
TIMING OF REQUESTS. All requests received in good order by State Street
Research before 4:00 p.m. eastern time will be executed the same day, at that
day's closing share price. Requests received after 4:00 p.m. will be executed
the following day, at that day's closing share price.
WIRE TRANSACTIONS. Proceeds sent by federal funds wire must total at
least $5,000. A fee of $7.50 will be deducted from all proceeds sent by wire,
and your bank may charge an additional fee to receive wired funds.
SELLING RECENTLY PURCHASED SHARES. If you sell shares before the check
or electronic funds transfer (ACH) for those shares has been collected, you will
not receive the proceeds until your initial payment has cleared. This may take
up to 15 days after your purchase was recorded (in rare cases, longer). If you
open an account with shares purchased by wire, you cannot sell those shares
until your application has been processed.
<PAGE>
13
SELLING SHARES
<TABLE>
<CAPTION>
To Sell Some or All of Your Shares
<S> <C>
[Graphic of Briefcase]
Through a Financial Contact your financial professional.
Professional
By Mail Send a letter of instruction, an
[Graphic of Mailbox] endorsed stock power or share
certificates (if you hold certificate
shares) to State Street Research.
Specify the fund, the account number and
the dollar value or number of shares. Be
sure to include all necessary signatures
and any additional documents, as well as
signature guarantees if required (see
facing page).
[Graphic of Federal Building] Check with State Street Research to make
By Federal Funds Wire sure that a wire redemption privilege,
including a bank designation, is in place on
your account. Once this is established, you
may place your request to sell shares with
State Street Research. Proceeds will be
wired to your pre-designated bank account.
(See "Wire Transactions" on facing page.)
By Electronic Funds Check with State Street Research to make
Transfer (ACH) sure that the EZ Trader feature, including a
[Graphic of bank designation, is in place on your
Electrical Plug] account. Once this is established, you may
place your request to sell shares with State
Street Research. Proceeds will be sent to
your pre-designated bank account.
[Graphic of Telephone] As long as the transaction does not require
By Telephone a written request (see facing page), you or
your financial professional can sell shares
by calling State Street Research. A check
will be mailed to you on the following
business day.
By Exchange Read the prospectus for the fund into which
[Graphic of Exchange] you are exchanging. Call State Street
Research or visit our Web site.
[Graphic of Calendar] See plan information on page 17.
By Systematic
Withdrawal Plan
</TABLE>
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408
Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m.,
eastern time)
<PAGE>
14
YOUR ACCOUNT CONTINUED
(Graphic of Pages) ACCOUNT POLICIES
THE FUND'S BUSINESS HOURS. The fund is open the same days as the New
York Stock Exchange (generally Monday through Friday). Fund representatives are
available from 8:00 a.m. to 6:00 p.m. eastern time on these days.
CALCULATING SHARE PRICE. The fund calculates its net asset value per
share (NAV) every business day at the close of regular trading on the New York
Stock Exchange (usually at 4:00 p.m. eastern time). Each class's share price is
calculated by dividing its net assets by the number of its shares outstanding.
TELEPHONE REQUESTS. When you open an account you automatically receive
telephone privileges, allowing you to place requests on your account by
telephone. Your financial professional can also use these privileges to request
exchanges on your account and, with your written permission, redemptions. For
your protection, all telephone calls are recorded.
As long as State Street Research takes certain measures to authenticate
telephone requests on your account, you may be held responsible for unauthorized
requests. Unauthorized telephone requests are rare, but if you want to protect
yourself completely, you can decline the telephone privilege on your
application. The fund may suspend or eliminate the telephone privilege at any
time.
EXCHANGE PRIVILEGES. There is no fee to exchange shares among State
Street Research funds. Your new fund shares will be the equivalent class as your
current shares. Any contingent deferred sales charges will continue to be
calculated from the date of your initial investment.
Frequent exchanges can interfere with fund management and drive up
costs for all shareholders. Because of this, the fund currently limits each
account, or group of accounts under common ownership or control, to six
exchanges per calendar year. The fund may change or eliminate the exchange
privilege at any time, may limit or cancel any shareholder's exchange privilege
and may refuse to
<PAGE>
15
accept any exchange request, particularly those associated with "market timing"
strategies.
For Merrill Lynch customers, exchange privileges extend to Summit Cash
Reserves Fund, which is related to the fund for purposes of investment and
investor services.
ACCOUNTS WITH LOW BALANCES. If the value of your account falls below
$1,500, State Street Research may mail you a notice asking you to bring the
account back up to $1,500 or close it out. If you do not take action within 60
days, State Street Research may either sell your shares and mail the proceeds to
you at the address of record or may deduct an annual maintenance fee (currently
$18).
REINSTATING RECENTLY SOLD SHARES. For 120 days after you sell shares,
you have the right to "reinstate" your investment by putting some or all of the
proceeds into any currently available State Street Research fund at net asset
value. Any CDSC you paid on the amount you are reinstating will be credited to
your account. You may only use this privilege once in any twelve-month period
with respect to your shares of a given fund.
[Graphic of Uncle Sam] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS. The fund typically distributes
its net income and net capital gains, if any, around the end of the fund's
fiscal year, which is April 30. To comply with tax regulations, the fund may
also pay an additional capital gains distribution in December.
You may have your distributions reinvested in the fund, invested in a
different State Street Research fund, deposited in a bank account, or mailed out
by check. If you do not give State Street Research other instructions, your
distributions will automatically be reinvested in the fund.
<PAGE>
16
YOUR ACCOUNT CONTINUED
[sidebar text]
[Magnifying Glass Graphic] TAX CONSIDERATIONS
Unless your investment is in a tax deferred account, you may want to
avoid:
* investing a large amount in the fund close to the end of
its fiscal year (if the fund makes a capital gains distribution,
you will receive some of your investment back as a taxable
distribution)
* selling shares at a loss for tax purposes and investing in
a substantially identical investment within 30 days before or
after that sale (such a transaction is usually considered a "wash
sale," and you will not be allowed to claim a tax loss)
[end of sidebar text]
TAX EFFECTS OF DISTRIBUTIONS AND TRANSACTIONS. In general, any dividends
and short-term capital gain distributions you receive from the fund are taxable
as ordinary income. Distributions of other capital gains are generally taxable
as capital gains. This is true no matter how long you have owned your shares and
whether you reinvest your distributions or take them in cash.
Every year, the fund will send you information detailing the amount of
ordinary income and capital gains distributed to you for the previous year.
The sale of shares in your account may produce a gain or loss, and is a
taxable event. For tax purposes, an exchange is the same as a sale.
Your investment in the fund could have additional tax consequences.
Please consult your tax professional for assistance.
BACKUP WITHHOLDING. By law, the fund must withhold 31% of your
distributions and proceeds if you have not provided complete, correct taxpayer
information.
<PAGE>
17
[Interlocked Hands Graphic] INVESTOR SERVICES
INVESTAMATIC PROGRAM. Use Investamatic to set up regular automatic
investments in the fund from your bank account. You determine the frequency and
amount of your investments, and you can skip an investment with three days
notice. Not available with Class S shares.
SYSTEMATIC WITHDRAWAL PLAN. This plan is designed for retirees and other
investors who want regular withdrawals from a fund account. The plan is free and
allows you to withdraw up to 8% of your fund assets a year without incurring any
contingent deferred sales charges. Certain terms and minimums apply.
DIVIDEND ALLOCATION PLAN. This plan automatically invests your
distributions from the fund into another fund of your choice, without any fees
or sales charges.
AUTOMATIC BANK CONNECTION. This plan lets you route any distributions or
Systematic Withdrawal Plan payments directly to your bank account.
State Street Research also offers a full range of prototype retirement
plans for individuals, sole proprietors, partnerships, corporations and
employees. Call 1-800-562-0032 for information on retirement plans or any of the
services described above.
<PAGE>
18
FUND DETAILS
[Graphic of Column] BUSINESS STRUCTURE
Formed in 1998, the fund is a diversified series of State Street
Research Securities Trust, an open-end management investment company that is
organized as a Massachusetts business trust. A board of trustees representing
shareholder interests oversees the fund's operations, including the hiring of
the investment manager and other service providers.
The fund does not hold regular shareholder meetings, but may call
meetings when matters arise that require shareholder approval. These may include
amendments to the investment management agreement, the election of trustees or
proposed changes in the fund's fundamental goal, which cannot be changed without
shareholder approval.
The investment manager is responsible for the fund's investment and
business activities, and receives the management fee (0.65% of fund assets,
annually) as compensation. The investment manager and the distributor are
subsidiaries of Metropolitan Life Insurance Company.
BROKERS FOR PORTFOLIO TRADES. When placing trades for the fund's
portfolio, State Street Research chooses brokers that provide the best execution
(a term defined by service as well as price), but may also consider a broker's
sales of fund shares.
Investment Manager
State Street Research & Management Company
One Financial Center, Boston, MA 02111
Distributor
State Street Research Investment Services, Inc.
One Financial Center, Boston, MA 02111
Service Center
State Street Research Service Center
P.O. Box 8408, Boston, MA 02266
Custodian
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
<PAGE>
19
[Graphic of a Check] DEALER COMPENSATION
Dealers who sell shares of the fund and perform services for fund
investors receive sales commissions and annual fees. These are paid by the
fund's distributor, using money from sales charges, marketing (12b-1) fees and
its other resources.
<TABLE>
<CAPTION>
Maximum Dealer Compensation Class A Class B Class C Class S
- --------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Initial commission (%) -- 4.00 1.00 0.00
Investments up to $100,000 (%) 4.00 -- -- --
$100,000 - $249,999 (%) 3.00 -- -- --
$250,000 - $499,999 (%) 2.00 -- -- --
$500,000 - $999,999 (%) 1.75 -- -- --
First $1-3 million (%) 1.00(1) -- -- --
Next $2 million (%) 0.50(1) -- -- --
Next $1 and above (%) 0.25(1) -- -- --
Annual fee (%) 0.25 0.25 0.90 0.00
</TABLE>
- -----------------
[footnote text]
(1) If your broker declines this commission, the one-year CDSC on your
investment is waived.
[end footnote text]
ADDITIONAL POLICIES. Please note that the fund maintains additional
policies and reserves certain rights, including:
* The fund may vary its initial or additional investments in
the case of exchanges, reinvestments, periodic investment plans,
retirement and employee benefit plans, sponsored arrangements and
other similar programs.
* All orders to purchase shares are subject to acceptance by the
fund.
* At any time, the fund may change or discontinue its sales
charge waivers and any of its order acceptance practices, and may
suspend the sale of its shares.
* To permit investors to obtain the current price, dealers
are responsible for transmitting all orders to the State Street
Research Service Center promptly.
* Dealers may impose a transaction fee on the purchase or sale of
shares by shareholders.
* The distributor may also pay its affiliate MetLife Securities,
Inc. additional compensation of up to 0.25% of certain sales or
assets.
<PAGE>
20
OTHER SECURITIES AND RISKS
[Graphic of Securities Certificates] OTHER SECURITIES AND RISKS
Each of the fund's portfolio securities and investment practices offers
certain opportunities and carries various risks. Major investments and risk
factors are outlined in the fund description starting on page 2. Below are brief
descriptions of other securities and practices, along with their associated
risks. A table of limitations follows.
RESTRICTED AND ILLIQUID SECURITIES. Any securities that are thinly
traded or whose resale is restricted can be difficult to sell at a desired time
and price. Some of these securities are new and complex, and trade only among
institutions; the markets for these securities are still developing, and may not
function as efficiently as established markets. Owning a large percentage of
restricted and illiquid securities could hamper the fund's ability to raise cash
to meet redemptions. Also, because there may not be an established market price
for these securities, the fund may have to estimate their value, which means
that their valuation (and, to a much smaller extent, the valuation of the fund)
may have a subjective element.
FOREIGN INVESTMENTS. Foreign securities are generally more volatile than
their domestic counterparts, in part because of higher political and economic
risks, lack of reliable information, and fluctuations in currency exchange
rates. These risks are usually higher in less developed countries. The fund may
use foreign currencies and related instruments to hedge its foreign investments.
<PAGE>
21
In addition, foreign securities may be more difficult to resell and the
markets for them less efficient than for comparable U.S. securities. Even where
a foreign security increases in price in its local currency, the appreciation
may be diluted by the negative effect of exchange rates when the security's
value is converted to U.S. dollars. Foreign withholding taxes also may apply and
errors and delays may occur in the settlement process for foreign securities.
DERIVATIVES. Derivatives, a category that includes options and futures,
are financial instruments whose value derives from another security or an index.
The fund may use derivatives for hedging (attempting to offset a potential loss
in one position by establishing an interest in an opposite position). The fund
may also use derivatives for speculation (investing for potential income or
capital gain).
While hedging can guard against potential risks, it adds to the fund's
expenses and can eliminate some opportunities for gains. There is also a risk
that a derivative intended as a hedge may not perform as expected.
The main risk with derivatives is that some types can amplify a gain or
loss, potentially earning or losing substantially more money than the actual
cost of the derivative.
With all derivatives, whether used for hedging or speculation, there is
also the risk that the counterparty may fail to honor its contract terms,
causing a loss for the fund.
SECURITIES LENDING. The fund may seek additional income by lending
portfolio securities to qualified institutions. By reinvesting collateral it
receives in these transactions, the fund could magnify any gain or loss it
realizes on the underlying investment. If the borrower fails to return the
securities and the collateral is insufficient to cover the loss, the fund could
lose money.
REPURCHASE AGREEMENTS. The fund may buy securities with the
understanding that the seller will buy them back with interest at a later date.
If the seller is unable to honor its commitment to repurchase the securities,
the fund could lose money.
BONDS. The value of any bonds held by the fund is likely to decline when
interest rates rise; this risk is greater
<PAGE>
22
for bonds with longer maturities. A less significant risk is that a bond issuer
could default on principal or interest payments, causing a loss for the fund.
However, junk bonds (those in rating categories below BBB/Baa) have a higher
risk of default than investment grade bonds, and their market prices can be more
volatile.
DEFENSIVE INVESTING. During unusual market conditions, the fund may
place up to 100% of total assets in cash or quality short-term debt securities.
OTHER SECURITIES AND RISKS CONTINUED
INVESTMENT LIMITATIONS
<TABLE>
<CAPTION>
Limitation at time of investment
--------------------------------
Practice % of total assets % of net assets
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Investing in securities of any given issuer
(other than the U.S. government and its agencies)(1) 5(2) --
Investing in any given industry(1) 25 --
Lending securities 33-1/3 --
Lending money(1) Prohibited --
Repurchase agreements -- 30
Swap arrangements -- 5
Security
- ---------------------------------------------------------------------------------------------------
Commodity futures contracts and options contracts
(for non-hedging purposes) -- 5(3)
Other options contracts
(for non-hedging purposes) -- 5
Illiquid securities -- 15(4)
Restricted securities 10(6) --
Foreign securities 35(5) --
</TABLE>
- ---------------
[footnote text]
(1) Fundamental policy; may not be changed without shareholder approval.
(2) Applies only to 75% of fund's total assets. The fund also is prohibited
from investing in more than 10% of an issuer's voting securities.
(3) Initial margin deposits plus premiums may not exceed 5% of the
market value of the fund's net assets in non-hedging transactions. No
limits apply when used in hedging strategies.
(4) Includes repurchase agreements extending over more than seven days.
(5) Does not include Rule 144A securities.
(6) Applies to all direct and indirect interests in securities of non-U.S.
issuers.
[end footnote text]
<PAGE>
23
NOTES
<PAGE>
24
NOTES
<PAGE>
25
NOTES
<PAGE>
FOR ADDITIONAL INFORMATION
You can obtain a free copy of the current annual/semiannual report or
SAI by contacting:
[State Street Research Logo] Service Center, P.O. Box 8408, Boston, MA
02266 Telephone: 1-800-562-0032 Internet: www.ssrfunds.com
Or you can visit the SEC Web site at: http://www.sec.gov
You can find additional information on the fund's structure and its
performance in the following documents:
ANNUAL/SEMIANNUAL REPORTS While the prospectus describes the fund's
potential investments, these reports detail the fund's actual investments as of
the report date. Reports include a discussion by fund management of recent
economic and market trends and fund performance. The annual report also includes
the report of the fund's independent accountants.
STATEMENT OF ADDITIONAL INFORMATION (SAI) A supplement to the
prospectus, the SAI contains further information about the fund and its
investment limitations and policies. It also includes the most recent annual
report and the independent accountants' report. A current SAI for this fund is
on file with the Securities and Exchange Commission and is incorporated by
reference (is legally part of this prospectus).
<PAGE>
State Street Research Galileo Fund
a Series of
State Street Research Securities Trust
STATEMENT OF ADDITIONAL INFORMATION
March 9, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
INVESTMENT POLICIES AND RESTRICTIONS ...................................... 2
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT TECHNIQUES ........... 4
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS ........................... 14
THE TRUST, THE FUND AND ITS SHARES ........................................ 17
TRUSTEES AND OFFICERS ..................................................... 18
INVESTMENT ADVISORY SERVICES .............................................. 22
PURCHASE AND REDEMPTION OF SHARES ......................................... 24
SHAREHOLDER ACCOUNTS ...................................................... 29
NET ASSET VALUE ........................................................... 33
PORTFOLIO TRANSACTIONS .................................................... 34
CERTAIN TAX MATTERS ....................................................... 37
DISTRIBUTION OF SHARES OF THE FUND ........................................ 39
CALCULATION OF PERFORMANCE DATA ........................................... 42
CUSTODIAN ................................................................. 45
INDEPENDENT ACCOUNTANTS ................................................... 45
FINANCIAL STATEMENTS ...................................................... 45
</TABLE>
The following Statement of Additional Information is not a Prospectus.
It should be read in conjunction with the Prospectus of State Street Research
Galileo Fund dated March 9, 1998, which may be obtained without charge from the
offices of State Street Research Securities Trust (the "Trust") or State Street
Research Investment Services, Inc. (the "Distributor"), One Financial Center,
Boston, Massachusetts 02111-2690.
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
As set forth in part in the Fund's Prospectus, the Fund has adopted
certain investment restrictions.
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 or funds, master-feeder structure)
allowing the Fund to invest substantially all 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.
All of the Fund's fundamental investment restrictions are set forth
below. These fundamental investment restrictions may not be changed except by
the affirmative vote of a majority of the Fund's outstanding voting securities,
as defined in the Investment Company Act of 1940, as amended (the "1940 Act").
(Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at a meeting of security holders duly called, (i) of
67% or more of the voting securities present at such meeting if the holders of
more than 50% of the outstanding securities are present or represented by proxy
or (ii) of more than 50% of the outstanding voting securities, whichever is
less.) Under these restrictions, it is the Fund's policy:
(1) not to purchase a security of any one issuer (other than
securities issued or guaranteed as to principal or interest by
the U.S. Government or its agencies or instrumentalities or
mixed-ownership Government corporations or sponsored
enterprises) if such purchase would, with respect to 75% of
the Fund's total assets, cause more than 5% of the Fund's
total assets to be invested in the securities of such issuer
or cause more than 10% of the voting securities of such issuer
to be held by the Fund;
(2) not to issue senior securities, as defined in the 1940 Act,
except as permitted by that 1940 Act and the rules thereunder
or as permitted by the Securities and Exchange Commission (the
creation of general lines or security interests under industry
practices for transactions in portfolio assets are not deemed
to involve the issuance of senior securities);
(3) not to underwrite or participate in the marketing of
securities of other issuers, except (a) the Fund may, acting
alone or in syndicates or groups, purchase or otherwise
acquire securities of other issuers for investment, either
from the issuers or from persons in a control relationship
with the issuers or from underwriters of such securities, and
(b) to the extent that, in connection with the disposition of
the Fund's securities, the Fund may be a selling shareholder
in an offering or deemed to be an underwriter under certain
federal securities laws;
(4) not to purchase fee simple interest in real estate unless
acquired as a result of ownership of securities or other
instruments, although the Fund may purchase and sell other
interests in real estate including securities which are
secured by real
2
<PAGE>
estate, or securities of companies which make real estate
loans or own, or invest or deal in, real estate;
(5) not to invest in physical commodities or physical commodity
contracts or options in excess of 10% of the Fund's total
assets, except that investments in essentially financial items
or arrangements such as, but not limited to, swap
arrangements, hybrids, currencies, currency and other forward
contracts, delayed delivery and when-issued contracts, futures
contracts and options on futures contracts on securities,
securities indices, interest rates and currencies shall not be
deemed investments in commodities or commodities contracts;
(6) not to lend money directly to natural persons; however, the
Fund may lend portfolio securities and purchase bonds,
debentures, notes, bills and any other debt related
instruments or interests directly from the issuer thereof or
in the open market and may enter into repurchase transactions
collateralized by obligations of the U.S. Government or its
agencies and instrumentalities or other high quality
securities;
(7) not to make any investment which would cause more than 25% of
the value of the Fund's total assets to be invested in
securities of issuers principally engaged in any one industry,
except securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities or mixed-ownership
Government corporations or sponsored enterprises, as described
in the Fund's Prospectus or Statement of Additional
Information as amended from time to time; and
(8) not to borrow money, including reverse repurchase agreements
in so far as such agreements may be regarded as borrowings,
except for borrowings not in an amount in excess of 33-1/3% of
the value of its total assets.
The following nonfundamental investment restrictions may be changed
without shareholder approval. Under these restrictions, it is the Fund's policy:
(1) not to purchase any security or enter into a repurchase
agreement if as a result more than 15% of its net assets would
be invested in securities that are illiquid (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
3
<PAGE>
futures, options and forward commitments are not deemed to
involve the use of margin); and
(4) not to purchase a security issued by another investment
company, except to the extent permitted under the 1940 Act or
except by purchases in the open market involving only
customary brokers' commissions, or securities acquired as
dividends or distributions or in connection with a merger,
consolidation or similar transaction or other exchange.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Options and Futures Generally
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.
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 an expected decline in the market value of an asset or group of
assets asset which the Fund does not own or 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.
4
<PAGE>
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell an
underlying asset or group of assets, such as a currency, or an index of
securities, at a future time at a specified price. A contract to buy establishes
a long position while a contract to sell establishes a short position.
The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or index after paying a transaction charge and posting
margin in an amount equal to a small percentage of the value of the underlying
asset or index. The Fund will initially be required to deposit with the Trust's
custodian or the futures commission merchant effecting the futures transaction
an amount of "initial margin" in cash or securities, as permitted under
applicable regulatory policies.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will terminate
the Fund's position in the futures contract. A final determination of
maintenance margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. While futures
contracts with respect to securities do provide for the delivery and acceptance
of such securities, such delivery and acceptance are seldom made.
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
5
<PAGE>
writer the obligation to sell, the underlying asset at the exercise price during
the option period. Conversely, a put option on a security gives the purchaser
the right to sell, and the writer the obligation to buy, the underlying asset at
the exercise price during the option period.
Purchased options have defined risk, that is, the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset. In general, a purchased put increases in value
as the value of the underlying security falls and a purchased call increases in
value as the value of the underlying security rises.
The principal reason to write options is to generate extra income (the
premium paid by the buyer). Written options have varying degrees of risk. An
uncovered written call option theoretically carries unlimited risk, as the
market price of the underlying asset could rise far above the exercise price
before its expiration. This risk is tempered when the call option is covered,
that is, when the option writer owns the underlying asset. In this case, the
writer runs the risk of the lost opportunity to participate in the appreciation
in value of the asset rather than the risk of an out-of-pocket loss. A written
put option has defined risk, that is, the difference between the agreed-upon
price that the Fund must pay to the buyer upon exercise of the put and the
value, which could be zero, of the asset at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
its obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Among the options which the Fund may enter are options on securities
indices. In general, options on indices of securities are similar to options on
the securities themselves except that delivery requirements are different. For
example, a put option on an index of securities does not give the holder the
right to make actual delivery of a basket of securities but instead gives the
holder the right to receive an amount of cash upon exercise of the option if the
value of the underlying index has fallen below the exercise price. The amount of
cash received will be equal to the difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple. As with options on equity securities or futures contracts, a
Fund may offset its position in index options prior to expiration by entering
into a closing transaction on an exchange or it may let the option expire
unexercised.
A securities index assigns relative values to the securities included
in the index and the index options are based on a broad market index. In
connection with the use of such options, the Fund may cover its position by
identifying assets having a value equal to the aggregate face value of the
option position taken.
6
<PAGE>
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 nonhedging
purposes would exceed 5% of the market value of the Fund's net assets.
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.
Nonhedging strategies typically involve special risks. The
profitability of the Fund's non-hedging strategies will depend on the ability of
the Investment Manger to analyze both the applicable derivatives market and the
market for the underlying asset or group of assets. Derivatives markets are
often more volatile than corresponding securities markets and a relatively small
change in the price of the underlying asset or group of assets can have a
magnified effect upon the price of a related derivative instrument.
Derivatives markets also are often less liquid than the market for the
underlying asset or group of assets. Some positions in futures and options may
be closed out only on an exchange which provides a secondary market therefor.
There can be no assurance that a liquid secondary market will exist for any
particular futures contract or option at any specific time. 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.
Swaps
The Fund may invest up to 5% of its total assets in swaps. The Fund may
enter into various forms of swap arrangements with counterparties with respect
to interest rates, currency rates or indices, including purchase of caps, floors
and collars as described below. In an interest rate swap the Fund could agree
for a specified period to pay a bank or investment banker the floating rate of
interest on a so-called notional principal amount (i.e., an assumed figure
selected by the parties for this purpose) in exchange for agreement by the bank
or investment banker to
7
<PAGE>
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 enter into such arrangements for income purposes
to the extent permitted by the Commodities Futures Trading Commission 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.
8
<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.
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 Purchase Agreements
The Fund may enter into reverse agreements. However, the Fund may not
engage in reverse repurchase agreements in excess of 5% of the Fund's total
assets. In a reverse repurchase agreement the Fund transfers possession of a
portfolio instrument to another person, such as a
9
<PAGE>
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 Trust's custodian will establish a segregated account when the
Fund purchases securities on a when-issued basis consisting of cash or liquid
securities equal to the amount of the when-issued commitments. Securities
transactions involving delayed deliveries or forward commitments are frequently
characterized as when-issued transactions and are similarly treated by the Fund.
Restricted Securities
It is the Fund's policy not to make an investment in restricted
securities, including restricted securities sold in accordance with Rule 144A
under the Securities Act of 1933 ("Rule 144A Securities") if, as a result, more
than 35% of the Fund's total assets are invested in restricted securities,
provided not more than 10% of the Fund's total assets are invested in restricted
securities other than Rule 144A Securities.
Securities may be resold pursuant to Rule 144A under certain
circumstances only to qualified institutional buyers as defined in the rule, and
the markets and trading practices for such securities are relatively new and
still developing; depending on the development of such markets, Rule 144A
Securities may be deemed to be liquid as determined by or in accordance with
methods adopted by the Trustees. Under such methods the following factors are
considered, among others: the frequency of trades and quotes for the security,
the number of dealers and potential purchasers in the market, market making
activity, and the nature of the security and marketplace trades. Investments in
Rule 144A Securities could have the effect of increasing the level of the Fund's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing such securities. Also, the Fund may be
adversely impacted by the
10
<PAGE>
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.
Lower Quality Debt Securities ("Junk Bonds")
The Fund may invest in lower quality debt securities. Lower quality
convertible or nonconvertible debt securities generally involve more credit risk
than higher rated securities and are considered by S&P and Moody's to be
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. Risk of lower quality debt
securities, commonly known as "junk bonds," include (i) limited liquidity and
secondary market support; (ii) substantial market price volatility resulting
from changes in prevailing interest rates and/or investor perceptions; (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
period of rising interest rates and economic downturn. For further information
concerning the rating categories of debt securities, see the Appendix to this
Statement of Additional Information.
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.
Foreign Investments
The Fund reserves the right to invest without limitation in securities
of non-U.S. issuers directly, or indirectly in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Under current
policy, however, the Fund limits such investments, including ADRs and EDRs, to a
maximum of 35% of its total assets.
ADRs are receipts, typically issued by a U.S. bank or trust company,
which evidence ownership of underlying securities issued by a foreign
corporation or other entity. EDRs are receipts issued in Europe which evidence a
similar ownership arrangement. Generally, ADRs in registered form are designed
for use in U.S. securities markets and EDRs are designed for use in European
securities markets. The underlying securities are not always denominated in the
same currency as the ADRs or EDRs. Although investment in the form of ADRs or
EDRs facilitates trading in foreign securities, it does not mitigate all the
risks associated with investing in foreign securities.
ADRs are available through facilities which may be either "sponsored"
or "unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and usually agrees to
provide shareholder communications. In an unsponsored
11
<PAGE>
arrangement, the foreign issuer is not involved, and the ADR holders pay the
fees of the depository. Sponsored ADRs are generally more advantageous to the
ADR holders and the issuer than are unsponsored ADRs. More and higher fees are
generally charged in an unsponsored program compared to a sponsored facility.
Only sponsored ADRs may be listed on the New York or American Stock Exchanges.
Unsponsored ADRs may prove to be more risky due to (a) the additional costs
involved to the Fund; (b) the relative illiquidity of the issue in U.S. markets;
and (c) the possibility of higher trading costs in the over-the-counter market
as opposed to exchange based tradings. The Fund will take these and other risk
considerations into account before making an investment in an unsponsored ADR.
The risks associated with investments in foreign securities include
those resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks of
nationalization or expropriation, the possible imposition of currency exchange
blockages, higher operating expenses, foreign withholding and other taxes which
may reduce investment return, reduced availability of public information
concerning issuers, the difficulties in obtaining and enforcing a judgment
against a foreign issuer and the fact that foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements comparable to those applicable to
domestic issuers. Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of securities of comparable
domestic issuers.
These risks are usually higher in less-developed countries. Such
countries include countries that have an emerging stock market that trades 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.
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, irrevocable stand-by
letters of credit issued by a bank, or repurchase agreements, or other similar
investments. The investing of cash collateral received from loaning portfolio
securities involves leverage which magnifies the potential for gain or loss on
monies invested and, therefore, results in an increase in the volatility of the
Fund's outstanding securities. Such loans may be terminated at any time.
The Fund 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
12
<PAGE>
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.
Temporary and Defensive Investments
The Fund may hold up to 100% of its assets in cash or short-term debt
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Investment Manager, such a
position is more likely to provide protection against adverse market conditions
than adherence to the Fund's other investment policies. The types of short-term
instruments in which the Fund may invest for such purposes include short-term
money market securities, such as repurchase agreements, and securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
certificates of deposit, time deposits and bankers' acceptances of certain
qualified financial institutions and corporate commercial paper, which at the
time of purchase are rated at least within the "A" major rating category by S&P
or the "Prime" major rating category by Moody's (or, if not rated, issued by
companies having an outstanding long-term unsecured debt issued rated at least
within the "A" category by S&P or Moody's).
Industry Classifications
In determining how much of the Fund's portfolio is invested in a given
industry, the following industry classifications, grouped by sector, 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.
13
<PAGE>
<TABLE>
<S> <C> <C>
Autos & Transportation Health Care Other Energy
- ---------------------- ------------------------- --------------------------
Air Transport Drugs & Biotechnology Gas Pipelines
Auto Parts Health Care Facilities Miscellaneous Energy
Automobiles Health Care Services Offshore Drilling
Miscellaneous Transportation Hospital Supply Oil and Gas Producers
Railroad Equipment Service Miscellaneous Oil Well Equipment & Services
Railroads
Recreational Vehicles & Boats Integrated Oils Producer Durables
Tires & Rubber ------------------------- --------------------------
Truckers
Oil: Integrated Domestic Aerospace
Consumer Discretionary Oil: Integrated International Electrical Equipment & Components
- ---------------------- Electronics: Industrial
Materials & Processing Homebuilding
Advertising Agencies ------------------------- Industrial Products
Casinos/Gambling, Hotel/Motel Machine Tools
Commercial Services Agriculture Machinery
Communications, Media & Entertainment Building & Construction Miscellaneous Equipment
Consumer Electronics Chemicals Miscellaneous Producer Durables
Consumer Products Containers & Packaging Office Furniture & Business Equipment
Consumer Services Diversified Manufacturing Pollution Control and Environmental
Household Furnishings Engineering & Contracting Services Services
Leisure Time Fertilizers Production Technology Equipment
Photography Forest Products Telecommunications Equipment
Printing & Publishing Gold & Precious Metals
Restaurants Miscellaneous Materials & Processing Technology
Retail Non-Ferrous Metals --------------------------
Shoes Office Supplies
Textile Apparel Manufacturers Paper & Forest Products Communications Technology
Toys Real Estate & Construction Computer Software
Steel Computer Technology
Consumer Staples Textile Products Electronics
- ----------------------- Electronics: Semi-Conductors/
Other Components
Beverages -------------------------- Miscellaneous Technology
Drug & Grocery Store Chains
Foods Trust Certificates-- Utilities
Household Products Government Related Lending --------------------------
Tobacco Asset-backed--Mortgages
Asset-backed--Credit Card Receivables Miscellaneous Utilities
Financial Services Miscellaneous Utilities: Cable TV & Radio
- ----------------------- Multi-Sector Companies Utilities: Electrical
Utilities: Gas Distribution
Banks & Savings and Loans Utilities: Telecommunications
Financial Data Processing Services & Systems Utilities: Water
Insurance
Miscellaneous Financial
Real Estate Investment Trusts
Rental & Leasing Services; Commercial
Securities Brokerage & Services
</TABLE>
DEBT INSTRUMENTS AND
PERMITTED CASH INVESTMENTS
The Fund's may invest in long-term and short-term debt securities.
Certain debt securities and money market instruments in which the Fund may
invest are described below.
Managing Volatility. In administering the Fund's portfolio, the
Investment Manager attempts to manage volatility in part by managing the
duration and weighted average maturity of the Fund's bond position.
Duration is an indicator of the expected volatility of a bond position
in response to changes in interest rates. In calculating duration, the Fund
measures the average time required to receive all cash flows associated with
those debt securities held in the Fund's portfolio -- representing payments of
principal and interest -- by considering the timing, frequency and amount of
payment expected from each portfolio security. The higher the duration, the
greater the gains and losses when interest rates change. Duration generally is a
more accurate measure of potential volatility with a portfolio composed of
high-quality debt securities, such as U.S. government securities, municipal
securities and high-grade U.S. corporate bonds, than with lower-grade
securities.
The Investment Manager may use several methods to manage the duration
of the Fund's bond position in order to increase or decrease its exposure to
changes in interest rates. First, the Investment Manager may adjust portfolio
duration by adjusting the mix of debt securities held by 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 debt
instruments that individually have a shorter duration. Among the factors that
will affect a debt security's duration are the length of time to maturity, the
timing of interest and principal payments, and whether the terms of the security
give the issuer of the security the right to call the security prior to
maturity. Second, the Investment Manager may adjust bond portfolio duration
using derivative transactions, especially with interest rate futures and options
contracts. For example, if the Investment Manager wants to lengthen the duration
of the Fund's bond position, it could purchase interest rate futures contracts
instead of buying longer-term bonds or selling shorter-term bonds. Similarly,
during periods of lower interest rate volatility, the Investment Manager may use
a technique to extend duration in the event rates rise by writing an out-of-the-
money put option and receiving premium income with the expectation that the
option could be exercised. In managing duration, the use of such derivatives may
be faster and more efficient than trading specific portfolio securities.
Weighted average maturity is another indicator of potential volatility
used by the Investment Manager with respect to the Fund's bond portfolio,
although for certain types of debt securities, such as high quality debt
securities, it is not as accurate as duration in quantifying potential
volatility. Weighted average maturity is the average of all maturities of the
individual debt securities held by the Fund, weighted by the market value of
each security. Generally, the longer the weighted average maturity, the more
bond prices will vary in response to changes in interest rates.
U.S. Government and Related Securities. U.S. Government securities are
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S. Government
securities in which the Fund invests include, among others:
[bullet] direct obligations of the U.S. Treasury, i.e., U.S. Treasury bills,
notes, certificates and bonds;
[bullet] obligations of U.S. Government agencies or instrumentalities, such as
the Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal
National Mortgage Association, the Government National Mortgage
Association and the Federal Home Loan Mortgage Corporation; and
14
<PAGE>
[bullet] obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a
variety of ways by the U.S. Government, its agencies or instrumentalities. Some
of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. Other obligations, such as those of the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government to
purchase certain obligations of agencies or instrumentalities, although the U.S.
Government has no legal obligation to do so. Obligations such as those of the
Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation are backed
by the credit of the agency or instrumentality issuing the obligations. Certain
obligations of Resolution Funding Corporation, a mixed-ownership Government
corporation, are backed with respect to interest payments by the U.S. Treasury,
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, such as trusts which issue Government trust certificates. The assets
of such collective investment vehicles consist principally of U.S. Government
securities or other assets substantially collateralized or supported by such
securities, such as Government trust certificates.
15
<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 corporations including but not
limited to (a) domestic or foreign bank holding companies or (b) 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.
Commercial Paper Ratings. Commercial paper investments at the time of
purchase will be rated within the "A" major rating category by S&P or within the
"Prime" major rating category by Moody's, or, if not rated, issued by companies
having an outstanding long-term unsecured debt issue rated at least within the
"A" category by S&P or by Moody's. The money market investments in corporate
bonds and debentures (which must have maturities at the date of
16
<PAGE>
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.
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.
THE TRUST, THE FUND AND ITS SHARES
State Street Research Securities Trust is currently comprised of the
following series: State Street Research Intermediate Bond Fund, State Street
Research Strategic Income Fund, State Street Research Legacy Fund and State
Street Research Galileo Fund. The Trustees of the Trust have authority to issue
an unlimited number of shares of beneficial interest of separate series, $.001
par value per share. The Trustees also have authority, without the necessity of
a shareholder vote, to create any number of new series or classes or to commence
the public offering of shares of any previously established series or class. A
"series" is a separate pool of assets of the Trust which is separately managed
and has a different investment objective and different investment policies from
those of another series.
The Trustees have authorized shares of the Fund to be issued in four
classes: Class A, Class B, Class C and Class S shares.
17
<PAGE>
Each share of each class of shares represents an identical legal
interest in the same portfolio of investments of the Fund, has the same rights
and is identical in all respects, except that Class A, Class B 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.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have a material, adverse effect on
the rights of any shareholder. Under the Trust's Master Trust Agreement, the
Trustees may reorganize, merge or liquidate the Fund without prior shareholder
approval. On any matter submitted to the shareholders, the holder of a Fund
share is entitled to one vote per share (with proportionate voting for
fractional shares) regardless of the relative net asset value thereof.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there ordinarily will be no shareholder meetings
unless required by the 1940 Act. Except as otherwise provided under the 1940
Act, the Board of Trustees will be a self-perpetuating body until fewer than
two-thirds of the Trustees serving as such are Trustees who were elected by
shareholders of the Trust. In the event less than a majority of the Trustees
serving as such were elected by shareholders of the Trust, a meeting of
shareholders will be called to elect Trustees. Under the Master Trust Agreement,
any Trustee may be removed by vote of two thirds of the outstanding Trust
shares; holders of 10% or more of the outstanding shares of the Trust can
require that the Trustees call a meeting of shareholders for purposes of voting
on the removal of one or more Trustees. In connection with such meetings called
by shareholders, shareholders will be assisted in shareholder communications to
the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations for the
Trust. However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for indemnification
for all losses and expenses of any shareholder of the Fund held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund would be unable to meet its obligations. The
Investment Manager believes that, in view of the above, the risk of personal
liability to shareholders is remote.
18
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and principal officers of the Trust, their addresses, and
their principal occupations and positions with certain affiliates of the
Investment Manager are set forth below.
*+Peter C. Bennett, One Financial Center, Boston MA 02111, serves as
Vice President of the Trust. He is 59. His principal occupation is Executive
Vice President and Director of State Street Research & Management Company.
During the past five years he has also served as Senior Vice President of State
Street Research & Management Company. Mr. Bennett's other principal business
affiliations include Director, State Street Research Investment Services, Inc.
and Executive Vice President, GFM International Investors, Inc.
*+Thomas J. Dillman, One Financial Center, Boston MA 02111, serves as
Vice President of the Trust. He is 48. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as research director at Bank of New York.
+Steve A. Garban, The Pennsylvania State University, 210 Old Main,
University Park, PA 16802, serves as Trustee of the Trust. He is 60. He is
retired and was formerly Senior Vice President for Finance and Operations and
Treasurer of The Pennsylvania State University.
*+Bartlett R. Geer, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 42. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as Vice President of State Street Research & Management
Company.
+Malcolm T. Hopkins, 14 Brookside Road, Biltmore Forest, Asheville, NC
28803, serves as Trustee of the Trust. He is 69. He is engaged principally in
private investments. Previously, he was Vice Chairman of the Board and Chief
Financial Officer of St. Regis Corp.
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 56. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as Portfolio Manager for State Street Research &
Management Company.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791,
serves as Trustee of the Trust. He is 70. He is engaged principally in private
investments and civic affairs and is an author of business history. Previously,
he was with an affiliate of J.P. Morgan & Co. in New York.
+Robert A. Lawrence, 175 Federal Street, Boston, MA 02110, serves as
Trustee of the Trust. He is 71. His principal occupation is Associate of
Saltonstall & Co., a private investment firm. During the past five years he has
also served as Partner of that firm.
- ------------
* or +, see footnotes on page 22.
19
<PAGE>
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 46. His principal occupation is currently, and
during the past five years has been, Executive Vice President, Treasurer, Chief
Financial Officer and Director of State Street Research & Management Company.
Mr. Maus's other principal business affiliations include Executive Vice
President, Treasurer, Chief Financial Officer and Director of State Street
Research Investment Services, Inc. and Executive Vice President, Chief Financial
Officer, Administrative Officer and Director, GFM International Investors, Inc.
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111
serves as Secretary and General Counsel of the Trust. He is 42. His principal
occupation is Executive Vice President, General Counsel and Secretary of State
Street Research & Management Company. During the past five years he has also
served as Senior Vice President of State Street Research & Management Company
and as Senior Vice President, General Counsel and Assistant Secretary of The
Boston Company, Inc., Boston Safe Deposit and Trust Company and The Boston
Company Advisors, Inc. Mr. McNamara's other principal business affiliations
include Executive Vice President, Clerk and General Counsel of State Street
Research Investment Services, Inc. and Executive Vice President and General
Counsel of GFM International Investors, Inc.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 65. He is retired, and was formerly Executive
Vice President, Chief Operating Officer and Director of Hewlett-Packard Company.
*+Kim M. Peters, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. He is 44. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as Vice President of State Street Research & Management
Company.
+Thomas L. Phillips, 141 Spring Street, Lexington, MA 02173 serves as
Trustee of the Trust. He is 73. He is retired and was formerly Chairman of the
Board and Chief Executive Officer of Raytheon Company, of which he remains a
Director.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves
as Trustee of the Trust. He is 59. His principal occupations during the past
five years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
60. His principal occupation during the past five years has been Jay W.
Forrester Professor of Management at Sloan School of Management, Massachusetts
Institute of Technology.
- ------------
* or +, see footnotes on page 22.
20
<PAGE>
*+Thomas A. Shively, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 43. His principal occupation is Executive
Vice President and Director of State Street Research & Management Company.
During the past five years he also served as Senior Vice President of State
Street Research & Management Company. Mr. Shively's other business affiliations
include Director of State Street Research Investment Services, Inc.
*+Ralph F. Verni, One Financial Center, Boston, MA 02111, serves as
Chairman of the Board, President, Chief Executive Officer and Trustee of the
Trust. He is 54. His principal occupation is currently, and during the past five
years has been, Chairman of the Board, President, Chief Executive Officer and
Director of State Street Research & Management Company. Mr. Verni's other
principal business affiliations include Chairman of the Board and Director of
State Street Research Investment Services, Inc. (and until February 1996, prior
positions as President and Chief Executive Officer of that company) and Chairman
of the Board, President, Chief Executive Officer and Director of GFM
International Investors, Inc.
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 72. He is retired and was formerly Of Counsel for
the law firm Choate, Hall & Stewart. He was a partner of that firm from 1960 to
1987.
*+James M. Weiss, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. 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 President and Chief Investment Officer of IDS
Advisory Group, Inc.
- ------------
* or +, see footnotes on page 22.
21
<PAGE>
*Elizabeth M. Westvold, One Financial Center, Boston, MA 02111, serves
as Vice President of the Trust. She is 37. Her principal occupation is Senior
Vice President of State Street Research & Management Company. During the past
five years, she also has served as Vice President and as an analyst for State
Street Research & Management Company.
*+Kennard Woodworth, Jr., One Financial Center, Boston, MA 02111,
serves as Vice President of the Trust. He is 57. His principal occupation is
Senior Vice President of State Street Research & Management Company.
- ------------
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the 1940 Act because of their affiliations
with the Fund's investment adviser.
+ Serves as a Trustee/Director and/or officer of one or more of the
following investment companies, each of which has an advisory
relationship with the Investment Manager or its parent, Metropolitan
Life Insurance Company ("Metropolitan"): State Street Research Equity
Trust, State Street Research Financial Trust, State Street Research
Income Trust, State Street Research Money Market Trust, State Street
Research Tax-Exempt Trust, State Street Research Capital Trust, State
Street Research Exchange Trust, State Street Research Growth Trust,
State Street Research Master Investment Trust, State Street Research
Securities Trust, State Street Research Portfolios, Inc. and
Metropolitan Series Fund, Inc.
As of the approximate date of this Statement of Additional Information,
the Investment Manager, the Distributor and/or Metropolitan, their indirect
parent, were the beneficial owners of all or a substantial amount of the
outstanding Class A, Class B, Class C and Class S shares of the Fund, and may be
deemed to be in "control," as defined in the 1940 Act. Although sales of Fund
shares to other investors will reduce their percentage ownership, so long as 25%
of a class of shares is so owned, such owners will be presumed to be in control
of such class of shares for purposes of voting on certain matters submitted to a
vote of shareholders, such as any Distribution Plan for a given class.
22
<PAGE>
The Trustees were compensated as follows:
Total
Compensation
Aggregate From Trust and
Compensation Complex Paid
Name of Trustee From Trust(a) to Trustees(b)
Steve A. Garban $ 496 $ 75,899
Malcolm T. Hopkins $ 496 $ 78,499
Edward M. Lamont $2,750 $ 68,741
Robert A. Lawrence $2,950 $ 93,125
Dean O. Morton $3,150 $ 97,125
Thomas L. Phillips $2,950 $ 68,275
Toby Rosenblatt $2,750 $ 68,741
Michael S. Scott Morton $3,750 $103,625
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $3,350 $ 74,475
(a) For the fiscal year ended April 30, 1997. Includes compensation
received from multiple series of the Trust. See "The Trust, the Fund
and its Shares" in this Statement of Additional Information for a
listing of series.
(b) Includes compensation received on behalf of all series of 12 investment
companies for which the Investment Manager or its parent, Metropolitan,
served as investment adviser. "Total Compensation from Trust and
Complex Paid to Trustees" for the 12 months ended December 31, 1997.
The Trust does not provide any pension or retirement benefits for the
Trustees.
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The 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. In managing debt securities, if any, for a portfolio, the
Investment Manager may consider yield curve positioning, sector rotation and
duration, among other factors.
23
<PAGE>
The Advisory Agreement provides that the Investment Manager shall
furnish the Fund with an investment program, office facilities and such
investment advisory, research and administrative services as may be required
from time to time. The Investment Manager compensates all executive and clerical
personnel and Trustees of the Trust if such persons are employees of the
Investment Manager or its affiliates. The Investment Manager is an indirect
wholly-owned subsidiary of Metropolitan.
The advisory fee payable monthly by the Fund to the Investment Manager
is computed as a percentage of the average of the value of the net assets of the
Fund as determined at the close of regular trading on the New York Stock
Exchange (the "NYSE") on each day the NYSE is open for trading.
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assumed some portion of fees or expenses relating to the
Fund.
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund for a period of two years after its initial effectiveness
and will continue from year to year thereafter as long as it is approved at
least annually both (i) by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act) or by the Trustees of the
Trust, and (ii) in either event by a vote of a majority of the Trustees who are
not parties to the Advisory Agreement or "interested persons" of any party
thereto, cast in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement may be terminated on 60 days' written notice by
either party and will terminate automatically in the event of its assignment, as
defined under the 1940 Act and regulations thereunder. Such regulations provide
that a transaction which does not result in a change of actual control or
management of an adviser is not deemed an assignment.
Under the Fund's Administration Agreement between the Investment
Manager and the Distributor, the Distributor provides assistance to the
Investment Manager in performing certain fund administration services for the
Trust, such as assistance in determining the daily net asset value of shares of
series of the Trust and in preparing various reports required by regulations.
Under a Shareholders' Administrative Services Agreement between the
Trust and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Fund, and is entitled to
reimbursements of its costs for providing such services. Under certain
arrangements for Metropolitan to provide subadministration services,
Metropolitan may receive a fee for the maintenance of certain share ownership
records for participants in sponsored arrangements, such as employee benefit
plans, through or under which the Fund's shares may be purchased.
Under the Code of Ethics of the Investment Manager, investment
management personnel are only permitted to engage in personal securities
transactions in accordance with certain conditions relating to such person's
position, the identity of the security, the timing of the
24
<PAGE>
transaction, and similar factors. Such personnel must report their personal
securities transactions quarterly and supply broker confirmations of such
transactions to the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by State Street Research Investment
Services, Inc., the Distributor. The Fund offers four classes of shares which
may be purchased at the next determined net asset value per share plus, in the
case of all classes except Class S shares, a sales charge which, at the election
of the investor, may be imposed (i) at the time of purchase (the Class A shares)
or (ii) on a deferred basis (the Class B and Class C shares). General
information on how to buy shares of the Fund, as well as sales charges involved,
are set forth under "Your Account" 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 the NYSE
on the day the purchase order is received by State Street Research Shareholder
Services ("Shareholder Services") [the Distributor] provided that the order is
received prior to the close of the NYSE on that day; otherwise the net asset
value used is that determined as of the close of the NYSE on the next day it is
open for unrestricted trading. When a purchase order is placed through a dealer,
that dealer is responsible for transmitting the order promptly to Shareholder
Services in order to permit the investor to obtain the current price. Any loss
suffered by an investor which results from a dealer's failure to transmit an
order promptly is a matter for settlement between the investor and the dealer.
Class A Shares--Reduced Sales Charges. The reduced sales charges set
forth under "Your Account--Class A Sales Charge Reductions and Waivers" in the
Fund's 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.
25
<PAGE>
An investor may include toward completion of a Letter of Intent the
value (at the current public offering price) of all of his or her Class A shares
of the Fund and of any of the other Class A shares of Eligible Funds held of
record as of the date of his or her Letter of Intent, plus the value (at the
current offering price) as of such date of all of such shares held by any
"person" described herein as eligible to join with the investor in a single
purchase. Class B, Class C and Class S shares may also be included in the
combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class S shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Other Programs Related to Class A Shares. Class A shares of the Fund
may be sold or issued in an exchange at a reduced sales charge or without sales
charge pursuant to certain sponsored arrangements, which include programs under
which a company, employee benefit plan or other organization makes
recommendations to, or permits group solicitation of, its employees, members or
participants, except any organization created primarily for the purpose of
obtaining shares of the Fund at a reduced sales charge or without a sales
charge. Sales without a sales charge, or with a reduced sales charge, may also
be made through brokers, registered investment advisers, financial planners,
institutions, and others, under managed fee-based programs (e.g., "wrap fee" or
similar programs) which meet certain requirements established from time to time
by the Distributor. Information on such arrangements and further conditions and
limitations is available from the Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and person: (A) the
Investment Manager, Distributor or any affiliated entities, including any direct
or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
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
26
<PAGE>
for such relatives or individuals; and (C) employees, officers, sales
representatives or directors of dealers and other entities with a selling
agreement with the Distributor to sell shares of any aforementioned investment
company, any spouse or child of such person, or any beneficial account for any
of them. The purchase must be made for investment and the shares purchased may
not be resold except through redemption. This purchase program is subject to
such administrative policies, regarding the qualification of purchasers and any
other matters, as may be adopted by the Distributor from time to time.
Conversion of Class B Shares to Class A Shares. A shareholder's 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 shares. The conversion rate will be determined on the basis of the
relative per share net asset values of the two classes and may result in a
shareholder receiving either a greater or fewer number of Class A shares than
the Class B shares so converted. As noted above, holding periods for Class B
shares received in exchange for Class B shares of other Eligible Funds will be
counted toward the eight-year period.
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
on which a commission has been paid by the Distributor but no initial sales
charge has been paid by the shareholder) or on 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 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 shares and receive in lieu thereof a 1% annual fee with
respect to such shares until the shares convert to Class A shares. The proceeds
of the contingent deferred sales charges and the distribution fees are used to
offset distribution expenses and thereby permit the sale of 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 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 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
27
<PAGE>
contingent deferred sales charge will reduce the gain or increase the loss, as
the case may be, on the amount realized on redemption.
Contingent Deferred Sales Charge Waivers. With respect to Class A
shares (on sales of $1 million or more and on which a commission has been paid
by the Distributor but no initial sales charge has been paid by the
shareholder), and 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. 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
702 for Individual Retirement Accounts and Section 403(b) plans), calculated
solely on the basis of assets invested in the Fund or other Eligible Funds; and
(iii) a redemption resulting from a tax-free return of an excess contribution to
an Individual Retirement Account. (The foregoing waivers do not apply to a
tax-free rollover or transfer of assets out of the Fund). The Fund may modify or
terminate the waivers at any time; for example, the Fund may limit the
application of multiple waivers and establish other conditions for employee
benefit plans.
Class S Shares. Class S shares are currently available to certain
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants, service arrangements, or similar factors;
insurance companies; investment companies; advisory accounts of the Investment
Manager; endowment funds of nonprofit organizations with substantial minimum
assets (currently a minimum of $10 million); and other similar institutional
investors. Class S shares may be acquired through programs or products sponsored
by Metropolitan, its affiliates, or both for which Class S shares have been
designated. In addition, Class S shares are available through programs under
which, for example, investors pay an asset-based fee and/or a transaction fee to
intermediaries. Class S share availability is determined by the Distributor and
intermediaries based on the overall direct and indirect costs of a particular
program, expected assets, account sizes and similar considerations.
Reorganizations. In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, the Fund may issue its shares at net asset value (or
more) to such entities or to their security holders.
Redemptions. The Fund reserves the right to pay redemptions in kind
with portfolio securities in lieu of cash. In accordance with its election
pursuant to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of
redemption proceeds paid in cash. Although it has no present intention to do so,
the Fund may, under unusual circumstances, limit 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.
28
<PAGE>
Systematic Withdrawal Plan. A shareholder who owns noncertificated
Class A or Class S shares with a value of $5,000 or more, or Class B or Class C
shares with a value of $10,000 or more, may elect, by participating in the
Fund's Systematic Withdrawal Plan, to have periodic checks issued for specified
amounts. These amounts may not be less than certain minimums, depending on the
class of shares held. The Plan provides that all income dividends and capital
gains distributions of the Fund shall be credited to participating shareholders
in additional shares of the Fund. Thus, the withdrawal amounts paid can only be
realized by redeeming shares of the Fund under the Plan. To the extent such
amounts paid exceed dividends and distributions from the Fund, a shareholder's
investment will decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually of
either (a) the value, at the time the Systematic Withdrawal Plan is initiated,
of the shares then in the account or (b) the value, at the time of a withdrawal,
of the same number of shares as in the account when the Systematic Withdrawal
Plan was initiated, whichever is higher.
Expenses of the Systematic Withdrawal Plan are borne by the Fund. A
participating shareholder may withdraw from the Systematic Withdrawal Plan, and
the Fund may terminate the Systematic Withdrawal Plan at any time on written
notice. Purchase of additional shares while a shareholder is receiving payments
under a Systematic Withdrawal Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate in
the Investamatic Program (see "Your Account--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 $50,000; (2)
written requests for redemptions for any amount if the proceeds are transmitted
to other than the current address of record (unchanged in the past 30 days); (3)
written requests for redemptions for any amount submitted by corporations and
certain fiduciaries and other intermediaries; and (4) requests to transfer the
registration of shares to another owner. Signatures must be guaranteed by a
bank, a member firm of a national stock exchange, or other eligible guarantor
institution. The Transfer Agent will not accept guarantees (or notarizations)
from notaries public. The above requirements may be waived in certain instances.
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.
29
<PAGE>
Processing Charges. Purchases and redemptions processed through
securities dealers may be subject to processing charges imposed by the
securities dealer in addition to sales charges that may be imposed by the Fund
or the Distributor.
SHAREHOLDER ACCOUNTS
General information on shareholder accounts is included in the Fund's
Prospectus under "Your Account." 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 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
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
30
<PAGE>
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 the Fund to
Shareholder Services 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
Shareholder Services. Dividends and distributions are reinvested at net asset
value without a sales charge.
Exchange Privileges. Shareholders of the Fund may exchange their shares
for available shares with corresponding characteristics of any of the other
Eligible Funds at any time on the basis of the relative net asset values of the
respective shares to be exchanged, subject to compliance with applicable
securities laws. Shareholders of any other Eligible Fund may 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 and
Class C shares may be redeemed without the payment of any contingent deferred
sales charge that might otherwise be due upon an ordinary redemption of such
shares. The State Street Research Money Market Fund issues Class E shares which
are sold without any sales charge. Exchanges of State Street Research Money
Market Fund Class E shares into Class A shares of the Fund or any other Eligible
Fund are subject to the initial sales charge or contingent deferred sales charge
applicable to an initial investment in such Class A shares, unless a prior Class
A sales charge has been paid directly or indirectly with respect to the shares
redeemed. For purposes of computing the contingent deferred sales charge that
may be
31
<PAGE>
payable upon disposition of any acquired Class A, Class B and Class C shares,
the holding period of the redeemed shares is "tacked" to the holding period of
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 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 Account--Account Policies--Telephone Requests" in
the Fund's Prospectus and "--Telephone Privileges," below) as the existing
account unless Shareholder Services is instructed otherwise. Related
administrative policies and procedures may also be adopted with regard to a
series of exchanges, street name accounts, sponsored arrangements and other
matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer identification
number, may be aggregated for purposes of the six exchange limit.
Notwithstanding the six exchange limit, the Fund reserves the right to refuse
exchanges by any person or group if, in the Investment Manager's judgment, the
Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
Exchanges may be restricted or refused if the Fund receives or anticipates
simultaneous orders affecting significant portions of the Fund's assets. In
particular, a pattern of exchanges that coincides with a "market timing"
strategy may be disruptive to the Fund. The Fund may impose these restrictions
at any time. The exchange limit may be modified for accounts in certain
institutional retirement plans because of plan exchange limits, Department of
Labor regulations or administrative and other considerations. Subject to the
foregoing, if an exchange request in good order is received by Shareholder
Services and delivered by Shareholder Services to the
32
<PAGE>
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 Shareholder Services.
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 Shareholder
Services of such shareholder's written purchase request and delivery of the
request by Shareholder Services to the Transfer Agent. A shareholder may
exercise this reinvestment privilege only once per 12-month period with respect
to his or her shares of the Fund.
Dividend Allocation Plan. The Dividend Allocation Plan allows
shareholders to elect to have all their dividends and any other distributions
from the Fund or any Eligible Fund automatically invested at net asset value in
one other such Eligible Fund designated by the shareholder, provided the account
into which the dividends and distributions are directed is initially funded with
the requisite minimum amount.
Telephone Privileges. Unless a shareholder declines telephone
privileges that are offered with his or her Account, (see "Your Account--Account
Policies--Telephone Requests"), he or she is deemed to authorize Shareholder
Services and the Transfer Agent to: (1) act upon the telephone instructions of
any person purporting to be the shareholder to redeem, or purporting to be the
shareholder or the shareholder's dealer to exchange, shares from any account;
and (2) honor any written instructions for a change of address regardless of
whether such request is accompanied by a signature guarantee. All telephone
calls will be recorded. 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.
33
<PAGE>
Alternative Means of Contacting the Fund. It is unlikely, during
periods of extraordinary market conditions, that a shareholder may have
difficulty in reaching Shareholder Services. In that event, however, the
shareholder should contact Shareholder Services at 1-800-562-0032,
1-617-357-7800 or otherwise at its main office at One Financial Center, Boston,
Massachusetts 02111-2690.
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily
as of the close of regular trading on the NYSE, ordinarily 4 P.M. New York City
time, Monday through Friday, on each day during which the NYSE is open for
unrestricted trading. The NYSE is currently closed on New Year's Day, Martin
Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is computed by dividing the
sum of the value of the securities held by the Fund plus any cash or other
assets minus all liabilities by the total number of outstanding shares of the
Fund at such time. Any expenses, except for extraordinary or nonrecurring
expenses, borne by the Fund, including the investment management fee payable to
the Investment Manager, are accrued daily.
In determining the values of portfolio assets as provided below, the
Trustees utilize one or more pricing services in lieu of market quotations for
certain securities which are not readily available on a daily basis. Such
services utilize information with respect to market transactions, quotations
from dealers and various relationships among securities in determining value and
may provide prices determined as of times prior to the close of the NYSE.
In general, securities are valued as follows. Securities which are
listed or traded on the New York or American Stock Exchange are valued at the
price of the last quoted sale on the respective exchange for that day.
Securities which are listed or traded on a national securities exchange or
exchanges, but not on the New York or American Stock Exchange, are valued at the
price of the last quoted sale on the exchange for that day prior to the close of
the NYSE. Securities not listed on any national securities exchange which are
traded "over the counter" and for which quotations are available on the National
Association of Securities Dealers' NASDAQ System are valued at the closing price
supplied through such system for that day at the close of trading on the NYSE.
Other securities are, in general, valued at the mean of the bid and asked
quotations last quoted prior to the close of the NYSE if there are market
quotations readily available, or in the absence of such market quotations, then
at the fair value thereof as determined by or under authority of the Trustees of
the Trust with the use of such pricing services as may be deemed appropriate or
methodologies approved by the Trustees.
The Trustees 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
34
<PAGE>
value of such securities will be used in calculating net asset value per share
in lieu of the amortized cost method. Under the amortized cost method of
valuation, the security is initially valued at cost on the date of purchase (or
in the case of short-term debt instruments purchased with more than 60 days
remaining to maturity, the market value on the 61st day prior to maturity), and
thereafter a constant amortization to maturity of any discount or premium is
assumed regardless of the impact of fluctuating interest rates on the market
value of the security.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
The Fund anticipates that its portfolio turnover rate will not exceed
125% under normal conditions. The Fund, however, 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 that
during times of economic and market price stability or when the Investment
Manager's investment strategy remains relatively constant.
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
35
<PAGE>
bids based on its judgment of the expected benefit or harm to the execution
process for that transaction.
When it appears that a number of firms could satisfy the required
standards in respect of a particular transaction, consideration may also be
given to services other than execution services which certain of such firms have
provided in the past or may provide in the future. Negotiated commission rates
and prices, however, are based upon the Investment Manager's judgment of the
rate which reflects the execution requirements of the transaction without regard
to whether the broker provides services in addition to execution. Among such
other services are the supplying of supplemental investment research; general
economic, political and business information; analytical and statistical data;
relevant market information, quotation equipment and services; reports and
information about specific companies, industries and securities; purchase and
sale recommendations for stocks and bonds; portfolio strategy services;
historical statistical information; market data services providing information
on specific issues and prices; financial publications; proxy voting data and
analysis services; technical analysis of various aspects of the securities
markets, including technical charts; computer hardware used for brokerage and
research purposes; computer software and databases (including those used for
portfolio analysis and modeling and 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 has an investment in less
than ten percent of the outstanding equity of one such third party which is
engaged in the development and licensing of trading systems which include
portfolio analysis and modeling and other research and investment
decision-making capabilities. The Investment Manager may allocate brokerage to
broker-dealers who in turn pay this third party for the portion of the third
party's trading system provided to the Investment Manager, which is estimated by
the Investment Manager to provide appropriate assistance in the investment
decision-making process. Because of its minority interest in the third party,
the Investment Manager could be said to benefit indirectly from such brokerage
allocation.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. Among other measures, the Investment Manager's
investment management personnel seek to evaluate the quality of research and
other services received, and the results of
36
<PAGE>
this effort are made available to the equity trading department, which sometimes
uses this information as consideration 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 such services to determine the appropriate proportion of the cost which is
allocable to purposes other than research or investment decision-making and the
Investment Manager pays for that portion directly from its own funds. Some
research and execution services may benefit the Investment Manager's clients as
a whole, while others may benefit a specific segment of clients. Not all such
services will necessarily be used exclusively in connection with the accounts
which pay the commissions to the broker-dealer producing the services.
The Investment Manager has no fixed agreements or understandings with
any broker-dealer as to the amount of brokerage business which the firm may
expect to receive for services supplied to the Investment Manager or otherwise.
There may be, however, understandings with certain firms that in order for such
firms to be able to continuously supply certain services, they need to receive
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, to the extent applicable.
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.
When more than one client of the Investment Manager is seeking to buy
or sell the same security, the sale or purchase is carried out in a manner which
is considered fair and equitable to all accounts. In allocating investments
among various clients (including in what sequence orders for trades are placed),
the Investment Manager will use its best business judgment and will take into
account such factors as the investment objectives of the clients, the amount of
investment funds available to each, the amount already committed for each client
to a specific investment and the relative risks of the investments, all in order
to provide on balance a fair and equitable result to each client over time.
Although sharing in large transactions may sometimes affect price or volume of
shares acquired or sold, overall it is believed there may be an advantage in
37
<PAGE>
execution. The Investment Manager may follow the practice of grouping orders of
various clients for execution to get the benefit of lower prices or commission
rates. In certain cases where the aggregate order may be executed in a series of
transactions at various prices, the transactions are allocated as to amount and
price in a manner considered equitable to each so that each receives, to the
extent practicable, the average price of such transactions. Exceptions may be
made based on such factors as the size of the account and the size of the trade.
For example, the Investment Manager may not aggregate trades where it believes
that it is in the best interests of clients not to do so, including situations
where aggregation might result in a large number of small transactions with
consequent increased custodial and other transactional costs which may
disproportionately impact smaller accounts. Such disaggregation, depending on
the circumstances, may or may not result in such accounts receiving more or less
favorable execution relative to other clients.
CERTAIN TAX MATTERS
Federal Income Taxation of the Fund -- In General
The Fund intends to qualify and elect to be treated each taxable year
as a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), although it cannot give complete
assurance that it will do so. Accordingly, the Fund must, among other things,
(a) derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) satisfy certain diversification
requirements; and (c) in order to be entitled to utilize the dividends paid
deduction, distribute annually at least 90% of its investment company taxable
income (determined without regard to the deduction for dividends paid).
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of the Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of the
Fund to the extent thereof. Any distribution in excess of a shareholder's basis
in the shareholder's shares would be taxable as gain realized from the sale of
such shares.
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
38
<PAGE>
undistributed portion of the respective balances from the prior year. The Fund
intends to make sufficient distributions to avoid this 4% excise tax.
Federal Income Taxation of the Fund's Investments
Original Issue Discount. For federal income tax purposes, debt
securities purchased by the Fund may be treated as having original issue
discount. Original issue discount represents interest for federal income tax
purposes and can generally be defined as the excess of the stated redemption
price at maturity of a debt obligation over the issue price. Original issue
discount is treated for federal income tax purposes as income earned by the
Fund, whether or not any income is actually received, and therefore is subject
to the distribution requirements of the Code. Generally, the amount of original
issue discount is determined on the basis of a 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.
Options and Futures Transactions. Certain of the Fund's investments may
be subject to provisions of the Code that (i) require inclusion of unrealized
gains or losses in the Fund's income for purposes of the 90% test, the excise
tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and (iii) characterize
both realized and unrealized gain or loss as short-term or long-term gain or
loss. Such provisions generally apply to, among other investments, options on
debt securities, indices on securities and futures contracts.
Federal Income Taxation of Shareholders
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
39
<PAGE>
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.
Distributions by the Fund can result in a reduction in the fair market
value of the Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as ordinary income or long-term capital gain, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
DISTRIBUTION OF SHARES OF THE FUND
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (Class B and Class C shares). The Distributor may reallow all or
portions of such sales charges as concessions to dealers.
The differences in the price at which the Fund's shares are offered due
to scheduled variations in sales charges, as described in the Fund's Prospectus,
result from cost savings inherent in economies of scale. Management believes
that the cost of sales efforts of the Distributor and broker-dealers tends to
decrease as the size of purchases increases, or does not involve any incremental
sales expenses as in the case of, for example, exchanges, reinvestments or
dividend investments at net asset value. Similarly, no significant sales effort
is necessary for sales of shares at net asset value to certain Directors,
Trustees, officers, employees, their relatives and other persons directly or
indirectly related to the Fund or associated entities. Where shares of the Fund
are offered at a reduced sales charge or without a sales charge pursuant to
sponsored arrangements, managed fee-based programs and so-called "mutual fund
supermarkets," among other programs, the amount of the sales charge reduction
will similarly reflect the anticipated reduction in sales expenses associated
with such arrangements. The reductions in sales expenses, and therefore the
reduction in sales 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.
40
<PAGE>
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor may pay the authorized securities dealer
making such sale a commission based on the aggregate of such sales unless the
commission is waived by the dealer. Such commission also is payable to
authorized securities dealers upon sales of Class A shares made pursuant to a
Letter of Intent to purchase shares having a net asset value of $1,000,000 or
more. Shares sold with such commissions payable are subject to a one-year
contingent deferred sales charge of 1.00% on any portion of such shares redeemed
within one year following their sale. After a particular purchase of Class A
shares is made under the Letter of Intent, the commission will be paid only in
respect of that particular purchase of shares. If the Letter of Intent is not
completed, the commission paid will be deducted from any discounts or
commissions otherwise payable to such dealer in respect of shares actually sold.
If an investor is eligible to purchase shares at net asset value on account of
the Right of Accumulation, the commission will be paid only in respect of the
incremental purchase at net asset value.
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "Distribution Plan") under which the Fund may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of Class A, Class B and Class C shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to underwriters, securities dealers
and others engaged in the sale of shares, including payments to the Distributor
to be used to pay commissions and/or reimbursement to securities dealers (which
securities dealers may be affiliates of the Distributor) engaged in the
distribution and marketing of shares and furnishing ongoing assistance to
investors, (2) reimbursement of direct out-of-pocket expenditures incurred by
the Distributor in connection with the distribution and marketing of shares and
the servicing of investor accounts including expenses relating to the
formulation and implementation of marketing strategies and promotional
activities such as direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising, the preparation, printing and
distribution of Prospectuses of the Fund and reports for recipients other than
existing shareholders of the Fund, and obtaining such information, analyses and
reports with respect to marketing and promotional activities and investor
accounts as the Fund may, from time to time, deem advisable, and (3)
reimbursement of expenses incurred by the Distributor in connection with the
servicing of shareholder accounts including payments to securities dealers and
others in consideration of the provision of personal service to investors and/or
the maintenance or servicing of shareholder accounts and expenses associated
with the provision of personal service by the Distributor directly to investors.
In addition, the Distribution Plan is deemed to authorize the Distributor and
the Investment Manager to make payments out of general profits, revenues or
other sources to underwriters, securities dealers and others in connection with
sales of shares, to the extent, if any, that such payments may be deemed to be
within the scope of Rule 12b-1 under the 1940 Act.
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) or others for
personal services and/or the maintenance of shareholder accounts. A portion of
any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance or servicing of
shareholder accounts by such dealers. Dealers who have sold Class A shares are
eligible for further reimbursement commencing as of the time of such sale.
Dealers who have sold Class B
41
<PAGE>
and Class C shares are eligible for further reimbursement after the first year
during which such shares have been held of record by such dealer as nominee for
its clients (or by such clients directly). Any service fees received by the
Distributor and not allocated to dealers may be applied by the Distributor in
reduction of expenses incurred by it directly for personal services and the
maintenance or servicing of shareholder accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to dealers for selling such shares. Any distribution fees
received by the Distributor and not allocated to dealers may be applied by the
Distributor in connection with sales or marketing efforts, including special
promotional fees and cash and noncash incentives based upon sales by dealers.
The 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.
Commissions and other cash and noncash incentives and payments to
dealers, to the extent payable out of the general profits, revenues or other
sources of the Distributor (including the advisory fees paid by the Fund), have
also been authorized pursuant to the Distribution Plan.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class C shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class C
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class C shares (as the case may be) to make payments for personal
services and/or the maintenance or servicing of shareholder accounts. The
distribution and servicing expenses of a particular class will be borne solely
by that class. In addition, a rule of the National Association of Securities
Dealers, Inc. ("NASD") limits annual expenditures that the Fund may incur under
the Distribution Plan to 1%, of which 0.75% may be used to pay distribution
expenses and 0.25% may be used to pay shareholder service fees. The NASD Rule
also limits the aggregate amount 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 shareholder service fees. Payments to the Distributor or to
dealers funded under the Distribution Plan may be discontinued at any time.
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
42
<PAGE>
to, and attendance at, sales seminars at resorts. The Distributor may pay for
administrative services, such as technological and computer systems support for
the maintenance of pension plan participant records, for subaccounting, and for
distribution through mutual fund supermarkets or similar arrangements.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Fund will make alternative
arrangements for such services for shareholders who acquired shares through such
institutions.
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, 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., CDC/Wisenberger, Investment Companies Service, Frank
Russell Company, Money Magazine, Business Week, Forbes Magazine, The Wall Street
Journal and Investor's Daily. For example, the performance of the Fund might be
compared to the Lipper Growth Funds category or the Russell 1000 Index.
The average annual total return ("standard total return") of the Class
A, Class B, Class C and Class S shares of the Fund will be calculated as set
forth below. Total return and yield are computed separately for each class of
shares of the Fund.
All calculations of performance data in this section would reflect the
voluntary measures, if any, by the Fund's affiliates to reduce fees or expenses
relating to the Fund; see "--Accrued Expenses and Recurring Charges" later in
this section.
Total Return
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:
43
<PAGE>
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated
period assuming a hypothetical $1,000 payment made at
the beginning of the designated period
The calculation is based on the further assumptions that the highest
applicable initial or contingent deferred sales charge is deducted, and that all
dividends and distributions by the Fund are reinvested at net asset value on the
reinvestment dates during the periods. All accrued expenses and recurring
charges are also taken into account as described later herein.
44
<PAGE>
Accrued Expenses and Recurring Charges
Accrued expenses include all recurring charges that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return 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 will have been lower.
Nonstandardized Total Return
The Fund may provide the above described standard total return results
for Class A, Class B, Class C and Class S shares for periods which end no
earlier than the most recent calendar quarter end and which begin twelve months
before, five years before and ten years before. In addition, the Fund may
provide nonstandardized total return results for differing periods, such as for
the most recent six months, and/or without taking sales charges into account.
Such nonstandardized total return is computed as otherwise described under
"--Total Return" except the result may or may not be annualized, and as noted
any applicable sales charge may not be taken into account and therefore not
deducted from the hypothetical initial payment of $1,000.
45
<PAGE>
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as the Trust's independent accountants, providing professional
services including (1) audits of the Fund's annual financial statements, (2)
assistance and consultation in connection with SEC filings and (3) review of the
annual income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a
semiannual basis, other supplementary financial reports may be made available
from time to time through electronic or other media. Shareholders with
substantial holdings in one or more State Street Research Funds
46
<PAGE>
may also receive reports and other information which reflect or analyze their
positions in a consolidated manner. For more information, call the State Street
Research Service Center.
47
