Supplement No. 1 dated December 15, 2000
--------------------------------------------------------------------------------
to Prospectus dated October 18, 2000
for State Street Research Concentrated Large-Cap Value Fund
A series of State Street Research Securities Trust
The following is added as the first paragraph immediately under the
caption "Your Investment--Choosing a Share Class" at page 9 of the
prospectus.
"At the present time, only Class A shares are being offered and are
available for investment."
[LOGO] STATE STREET RESEARCH CLC-3010-1200
Control Number: (exp0901)SSR-LD
<PAGE>
[LOGO] STATE STREET RESEARCH
Concentrated Large-Cap
Value Fund
[GRAPHIC OF CLOCK]
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This prospectus has information you should know before you invest. Please read
it carefully and keep it with your investment records.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
A fund with a
concentrated portfolio
of large-cap stocks.
Prospectus
October 18, 2000
<PAGE>
Contents 1
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2 The Fund
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2 Goal and Strategies
3 Principal Risks
6 Investor Expenses
8 Investment Management
9 Your Investment
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9 Opening an Account
9 Choosing a Share Class
10 Sales Charges
13 Dealer Compensation
14 Buying and Selling Shares
18 Account Policies
20 Distributions and Taxes
21 Investor Services
22 Other Information
--------------------
22 Other Securities and Risks
25 Board of Trustees
Back Cover For Additional Information
<PAGE>
2 The Fund
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[CHESS PIECE] GOAL AND STRATEGIES
GOAL The fund seeks to provide long-term growth of capital.
PRINCIPAL STRATEGIES Under normal market conditions, the fund invests at least
65% of total assets in a concentrated portfolio of larger size value stocks. The
fund intends to concentrate its investment in a smaller number of companies than
many other funds. The fund presently expects to invest in 25 to 35 companies
across a range of industries, although the number of holdings can vary. With a
concentrated portfolio, the fund's performance can be significantly affected by
the performance of a few companies.
In choosing among large-cap stocks, the fund takes a value approach, searching
for those companies that appear to be trading below their true worth. The fund
uses research to identify potential investments, examining such features as a
company's financial condition, business prospects, competitive position and
business strategy. The fund looks for companies that appear likely to come back
in favor with investors, for reasons that may range from good prospective
earnings and strong management teams to the introduction of new products and
services. The fund will invest primarily in common stocks, but may also invest
in preferred stocks and in securities convertible into stock, such as warrants.
The fund reserves the right to invest up to 35% of total assets in other
securities (for example, bonds and smaller company stocks).
For more information about the fund's investments and practices, see page 22.
<PAGE>
3
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[STOP SIGN] PRINCIPAL RISKS
Because the fund invests primarily in stocks, including foreign stocks, its
major risks are those of stock investing, including sudden and unpredictable
drops in value resulting from market fluctuations and the potential for periods
of lackluster or negative performance.
The fund is nondiversified, which means compared to a diversified fund, it
invests relatively more of its assets in fewer stocks. The fund could therefore
be more significantly affected by the performance of a small number of its
investments. For these reasons, an investment in the fund is most appropriate to
complement a well diversified portfolio.
[sidebar]
[MAGNIFYING GLASS] Who May Want To Invest
State Street Research Concentrated Large-Cap Value Fund is designed for
investors who seek one or more of the following:
o a fund that invests in a fewer number of stocks
o an aggressive stock fund for a long-term goal
o a fund to complement a portfolio of more conservative investments
o a large-cap fund that emphasizes value stocks over growth stocks
The fund is NOT appropriate for investors who:
o want to avoid high volatility and possible losses
o are seeking high income
o are making short-term investments
o are investing emergency reserve money
[end sidebar]
<PAGE>
4 The Fund continued
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There also are particular risks associated with investing in large-cap value
stocks. Generally, large-cap companies are unable to respond quickly to
competitive challenges, such as changes in technology and consumer tastes. Also,
many larger companies compete in mature product markets and cannot sustain the
high growth rates of successful smaller companies. Value investing requires the
portfolio manager to identify companies that may be experiencing market or
financial weakness but are expected to achieve aggressive goals. If the fund
acquires shares of companies that cannot achieve their goals or if the markets
do not recognize any improvement in the value of those shares, the fund may lose
money.
Because of these and other risks, the fund may underperform certain other stock
funds (those emphasizing growth stocks or smaller companies for example) during
periods when value or larger company stocks are out of favor. The success of the
fund's investment strategy depends largely on the portfolio manager's
fundamental analysis of individual companies and assessment of the economic
environment for their businesses.
Because the fund may invest in U.S. companies with some international business,
and also may invest in foreign companies, it is subject to the risks associated
with international investing.
The fund's goal, investment strategies, and most other investment policies may
be changed without shareholder approval.
The fund's shares will rise and fall in value and there is a risk that you could
lose money by investing in the fund. Also, the fund cannot be certain that it
will achieve its goal. Finally, fund shares are not bank deposits and are not
guaranteed, endorsed or insured by any financial institution, government entity
or the FDIC.
Information on other securities and risks appears on page 22.
A "snapshot" of the fund's investments may be found in the current annual or
semiannual report (see back cover).
<PAGE>
5
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[sidebar]
[MAGNIFYING GLASS] Concentrated Large-Cap Value Investing
Concentrated, large-cap value investing brings together three important
investment concepts: a concentrated portfolio, a focus on large-size companies,
and a value style in selecting stocks. A fund with a concentrated portfolio is
one that invests in a smaller number of stocks and is less diversified than many
other funds. Investment professionals believe diversification is one indication
of the potential risks and rewards of investing in a particular fund. While a
portfolio investing in a large number of stocks tends to be less susceptible to
the potential downturns of a single investment, it may benefit less from
potential upswings. A concentrated, less diversified fund seeks to outperform
the broader market by building a portfolio of fewer, carefully selected
companies across a range of industries.
Large-cap stocks tend to have the potential for capital appreciation but do not
tend to have the volatility of stocks of smaller companies, especially those
smaller companies that do not pay dividends. (A company's "cap" size, or market
capitalization, refers to the value of the company's publicly-traded stock.)
Unlike many smaller companies, large-cap companies typically occupy leading
positions in their respective markets and many are household names. As a result,
they tend to have access to financial resources that can help them preserve and
expand product markets, introduce new products, make strategic acquisitions and
grow revenues and profits.
Investments in value stocks help mitigate volatility in a fund's portfolio.
Prices of stocks that are undervalued generally are affected by investor
perceptions of the issuing company itself. Those perceptions usually do not vary
significantly from one day to the next. In contrast, prices of growth stocks
tend to be more sensitive to market movements, and thus, can be more susceptible
to market volatility.
[end sidebar]
<PAGE>
6 Investor Expenses
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<TABLE>
<CAPTION>
Class descriptions begin on page 9
----------------------------------------------------------
Shareholder Fees (% of offering price) Class A Class B(1) Class B Class C Class S
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maximum front-end sales charge (load) 5.75(a) 0.00 0.00 0.00 0.00
Maximum deferred sales charge (load) 0.00(a) 5.00 5.00 1.00 0.00
<CAPTION>
Annual Fund Operating Expenses (% of average net assets) Class A Class B(1) Class B Class C Class S
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Management fee 0.85 0.85 0.85 0.85 0.85
Service/distribution (12b-1) fees 0.30(b) 1.00 1.00 1.00 0.00
Other expenses(c) 5.00 5.00 5.00 5.00 5.00
---- ---- ---- ---- ----
Total annual fund operating expenses* 6.15 6.85 6.85 6.85 5.85
==== ==== ==== ==== ====
[footnote]
*Because the fund anticipates that its
expenses will be subsidized, actual total
operating expenses are expected to be: 1.45 2.15 2.15 2.15 1.15
The fund expects the expense subsidy to
continue through the current fiscal year,
although there is no guarantee that it will.(d)
[end footnote]
<CAPTION>
Example Year Class A Class B(1) Class B Class C Class S
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 $1,151 $1,179/$679 $1,179/$679 $779/$679 $ 583
3 $2,284 $2,299/$1,999 $2,299/$1,999 $1,999 $1,733
</TABLE>
[footnotes]
(a) Except for investments of $1 million or more; see page 10.
(b) The Trustees may increase the current fees shown for Class A shares at any
time, provided that the fees do not exceed a maximum of 0.40%.
(c) Because the fund has been newly organized, the percentage expense levels
shown in the table as other expenses are based on estimates.
(d) The distributor has voluntarily undertaken to pay certain fund expenses.
It has done this to assist the fund in achieving the actual total
operating expense ratio shown, as set by the distributor and Board of
Trustees from time to time. In the future, the distributor may seek
repayment of such expenses from the fund (as long as these payments do not
cause the fund's expenses to exceed certain limits).
[end footnotes]
<PAGE>
7
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[sidebar]
[MAGNIFYING GLASS] Understanding Investor Expenses
The information on the opposite page is designed to give you an idea of what you
should expect to pay in expenses as an investor in the fund:
o Shareholder Fees are costs that are charged to you directly. These fees
are not charged on reinvestments or exchanges.
o Annual Fund Operating Expenses are deducted from the fund's assets every
year, and are thus paid indirectly by all fund investors.
o The Example is designed to allow you to compare the costs of this fund
with those of other funds. It assumes that you invested $10,000 over the
years indicated, reinvested all distributions, earned a hypothetical 5%
annual return and paid the maximum applicable sales charges.
Where two numbers are shown separated by a slash, the first one assumes
you sold all your shares at the end of the period, while the second
assumes you stayed in the fund. Where there is only one number, the costs
would be the same either way.
The figures in the example assume full annual expenses, and would be lower
if they reflected the subsidy.
Investors should keep in mind that the example is for comparison purposes
only. The fund's actual performance and expenses may be higher or lower.
[end sidebar]
<PAGE>
8 The Fund continued
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[THINKER] INVESTMENT MANAGEMENT
The fund's investment manager is State Street Research & Management Company, One
Financial Center, Boston, Massachusetts 02111. The firm traces its heritage back
to 1924 and the founding of one of America's first mutual funds. Today the firm
has approximately $54 billion in assets under management (as of October 31,
2000), including $20 billion in mutual funds.
The investment manager is responsible for the fund's investment and business
activities, and receives the management fee (0.85% of average net assets,
annually) as compensation. The investment manager is a subsidiary of
Metropolitan Life Insurance Company.
Peter A. Zuger has been responsible for the fund's day-to-day portfolio
management since its inception. A senior vice president, he joined the firm in
1998 and has worked as an investment professional since 1976. Prior to joining
the investment manager, Mr. Zuger served as a portfolio manager with American
Century Investment Management.
<PAGE>
Your Investment 9
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[KEY] 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] CHOOSING A SHARE CLASS
The fund generally offers four share classes, each with its own sales charge and
expense structure: Class A, Class B(1), Class C and Class S. The fund also
offers Class B shares, but only to current Class B shareholders through
reinvestment of dividends and distributions or through exchanges from existing
Class B accounts of the State Street Research funds.
If you are investing a substantial amount and plan to hold your shares for a
long period, Class A shares may make the most sense for you. If you are
investing a lesser amount, you may want to consider Class B(1) shares (if
investing for at least six years) or Class C shares (if investing for less than
six years). If you are investing through a special program, such as a large
employer-sponsored retirement plan or certain programs available through
brokers, you may be eligible to purchase Class S shares.
Because all future investments in your account will be made in the share class
you designate when opening the account, you should make your decision carefully.
Your financial professional can help you choose the share class that makes the
most sense for you.
<PAGE>
10 Your Investment continued
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Class A -- Front Load
o Initial sales charge of 5.75% or less
o Lower sales charges for larger investments; see sales charge schedule at
right
o Lower annual expenses than Class B(1) or Class C shares because of lower
service/distribution (12b-1) fee of up to 0.40%
Class B(1) -- Back Load
o No initial sales charge
o Deferred sales charge of 5% or less on shares you sell within six years
o Annual service/distribution (12b-1) fee of 1.00%
o Automatic conversion to Class A shares after eight years, reducing future
annual expenses
Class B -- Back Load
o Available only to current Class B shareholders; see page 11 for details
Class C -- Level Load
o No initial sales charge
o Deferred sales charge of 1%, paid if you sell shares within one year of
purchase
o Lower deferred sales charge than Class B(1) shares
o Annual service/distribution (12b-1) fee of 1.00%
o No conversion to Class A shares after eight years, so annual expenses do
not decrease
Class S -- Special Programs
o Available only through certain retirement accounts, advisory accounts of
the investment manager and other special programs, including programs
through financial professionals with recordkeeping and other services;
these programs usually involve special conditions and separate fees
(consult your financial professional or your program materials)
o No sales charges of any kind
o No service/distribution (12b-1) fees; annual expenses are lower than other
share classes
Sales Charges
Class A -- Front Load
when you invest this % is which equals
this amount deducted this % of
for sales your net
charges investment
--------------------------------------------------------------------------------
Up to $50,000 5.75 6.10
$50,000 to $100,000 4.50 4.71
$100,000 to $250,000 3.50 3.63
$250,000 to $500,000 2.50 2.56
$500,000 to $1 million 2.00 2.04
$1 million or more see below
With Class A shares, you pay a sales charge when you buy shares.
If you are investing $1 million or more (either as a lump sum or through any
of the methods described on the application), you can purchase Class A shares
without any sales charge. However, you may be charged a "contingent deferred
sales charge" (CDSC) of up to 1% if you sell any shares within one year of
<PAGE>
11
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purchasing them. See "Other CDSC Policies" on page 12.
Class A shares are also offered with low or no sales charges through various
wrap-fee programs and other sponsored arrangements (consult your financial
professional or your program materials).
Class B(1) -- Back Load
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
--------------------------------------------------------------------------------
First year 5.00
Second year 4.00
Third year 3.00
Fourth year 3.00
Fifth year 2.00
Sixth year 1.00
Seventh or eighth year None
With Class B(1) shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for six years or less, as described in the table above. See "Other
CDSC Policies" on page 12.
Class B(1) shares automatically convert to Class A shares after eight years;
Class A shares have lower annual expenses.
Class B -- Back Load
Class B shares are available only to current shareholders through reinvestment
of dividends and distributions or through exchanges from existing Class B
accounts of the State Street Research funds. Other investments made by current
Class B shareholders will be in Class B(1) shares.
With Class B shares, you are charged a "contingent deferred sales charge" (CDSC)
when you sell shares you have held for five years or less. The CDSC is a
percentage of net asset value at the time of purchase (or of sale, if lower) and
is deducted from your proceeds. When you sell shares in the first year after you
bought them, the CDSC is 5.00%; second year, 4.00%; third year, 3.00%; fourth
year, 3.00%; fifth year, 2.00%; sixth year or later, none. See "Other CDSC
Policies" on page 12.
Class B shares automatically convert to Class A shares after eight years.
Class C -- Level Load
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
--------------------------------------------------------------------------------
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
<PAGE>
12 Your Investment continued
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described in the table above. See "Other CDSC Policies" below.
Class C shares currently have the same annual expenses as Class B(1) shares, but
never convert to Class A shares.
Class S -- Special Programs
Class S shares have no sales charges.
OTHER CDSC POLICIES
The CDSC will be based on the net asset value of the shares at the time of
purchase (or sale, if lower). Any shares acquired through reinvestment are not
subject to the CDSC. There is no CDSC on exchanges into other State Street
Research funds, and the date of your initial investment will continue to be used
as the basis for CDSC calculations when you exchange. To ensure that you pay the
lowest CDSC possible, the fund will always use the shares with the lowest CDSC
to fill your sell requests.
The CDSC is waived on shares sold for participant initiated distributions from
State Street Research prototype retirement plans. In other cases, the CDSC is
waived on shares sold for mandatory retirement distributions or for
distributions because of disability or death. Consult your financial
professional or the State Street Research Service Center for more information.
[sidebar]
[MAGNIFYING GLASS] Understanding Service/Distribution Fees
As noted in the descriptions on pages 10 through 12, all share classes except
Class S have annual service/distribution fees, also called 12b-1 fees.
Under its current 12b-1 plan, the fund may pay certain service and distribution
fees for these classes out of fund assets. Because 12b-1 fees are an ongoing
expense, they will increase the cost of your investment and, over time, could
potentially cost you more than if you had paid other types of sales charges. For
that reason, you should consider the effects of 12b-1 fees as well as sales
loads when choosing a share class.
Some of the 12b-1 fees are used to compensate those financial professionals who
sell fund shares and provide ongoing service to shareholders. The table on page
13 shows how these professionals' compensation is calculated.
The fund may continue to pay 12b-1 fees even if the fund is subsequently closed
to new investors.
[end sidebar]
<PAGE>
13
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[CHECK] DEALER COMPENSATION
Financial professionals who sell shares of State Street Research funds and
perform services for fund investors may receive sales commissions, annual fees
and other compensation. These are paid by the fund's distributor, using money
from sales charges, service/ distribution (12b-1) fees and its other resources.
Brokers and agents may charge a transaction fee on orders of fund shares placed
directly through them. The distributor may pay its affiliate MetLife Securities,
Inc. additional compensation of up to 0.25% of certain sales or assets.
<TABLE>
<CAPTION>
Dealer Commissions (%) Class A Class B(1) Class B Class C Class S
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commission see below 4.00 4.00 1.00 0.00
Investments up to $50,000 5.00 -- -- -- --
$50,000 to $100,000 4.00 -- -- -- --
$100,000 to $250,000 3.00 -- -- -- --
$250,000 to $500,000 2.00 -- -- -- --
$500,000 to $1 million 1.75 -- -- -- --
First $1 to 3 million 1.00(a) -- -- -- --
Next $2 million 0.75(a) -- -- -- --
Next $2 million 0.50(a) -- -- -- --
Next $1 and above 0.25(a) -- -- -- --
Annual fee 0.25 0.25 0.25 1.00 0.00
</TABLE>
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 the sale of shares of the State Street Research
funds by the broker.
[footnote]
(a) If your financial professional declines this commission, the one-year CDSC
on your investment is waived.
[end footnote]
<PAGE>
14 Buying and Selling Shares
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[CASH REGISTER] 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:
o $1,000 for accounts that use the Investamatic program(a)
o $2,000 for Individual Retirement Accounts(a)
o $2,500 for all other accounts
Minimum Additional Investments:
o $50 for any account
Complete the enclosed application. You can avoid future inconvenience by signing
up now for any services you might later use.
TIMING OF REQUESTS All requests received in good order by State Street Research
before the close of regular trading on the New York Stock Exchange (usually 4:00
p.m. eastern time) will be executed the same day, at that day's closing share
price. Orders received thereafter will be executed the following day, at that
day's closing share price.
WIRE TRANSACTIONS Funds may be wired between 8:00 a.m. and 4:00 p.m. eastern
time. To make a same-day wire investment, please notify State Street Research by
12:00 noon of your intention to wire funds, and make sure your wire arrives by
4:00 p.m. If the New York Stock Exchange closes before 4:00 p.m. eastern time,
you may be unable to make a same day wire investment. Your bank may charge a fee
for wiring money.
[footnote]
(a) Except $500 for Individual Retirement Accounts during special promotional
periods.
[end footnote]
<PAGE>
Instructions for Buying Shares 15
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<TABLE>
<CAPTION>
To Open an Account To Add to an Account
<S> <C> <C>
[BRIEFCASE] Through a Consult your financial Consult your financial
Professional professional or your program professional or your program
or Program materials. materials.
By Mail [MAILBOX] Make your check payable to Fill out an investment slip
"State Street Research Funds." from an account statement,
Forward the check and your or indicate the fund name and
application to State Street account number on your check.
Research. Make your check payable to
"State Street Research Funds."
Forward the check and slip to
State Street Research.
[CAPITAL BUILDING] By Federal Call to obtain an account Call State Street Research to
Funds Wire number and forward your obtain a control number.
application to State Street Instruct your bank to wire
Research. Wire funds using the funds to:
instructions at right. o State Street Bank and Trust
Company, Boston, MA
o ABA: 011000028
o BNF: fund name and share
class you want to buy
o AC: 99029761
o OBI: your name and your
account number
o Control: the number given to
you by State Street Research
By Electronic [PLUG] Verify that your bank is a Call State Street Research to
Funds Transfer member of the ACH (Automated verify that the necessary bank
(ACH) Clearing House) system. information is on file for
Forward your application to your account. If it is, you
State Street Research. Please may request a transfer by
be sure to include the telephone or Internet. If not,
appropriate bank information. please ask State Street
Call State Street Research to Research to provide you with
request a purchase. an EZ Trader application.
[CALENDAR] By Investamatic Forward your application, with Call State Street Research to
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 [ARROWS GOING IN Read the prospectus for the fund Read the prospectus for the fund
OPPOSITE DIRECTIONS] into which you are exchanging. into which you are exchanging.
Call State Street Research or Call State Street Research or
visit our Web site. visit our Web site.
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408 Internet www.statestreetresearch.com
Call toll-free: 1-87-SSR-FUNDS (1-877-773-8637) (business days 8:00 a.m. - 6:00 p.m., eastern time)
</TABLE>
<PAGE>
16 Your Investment continued
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[CASH REGISTER] POLICIES FOR SELLING SHARES
CIRCUMSTANCES THAT REQUIRE WRITTEN REQUESTS Please submit instructions in
writing when any of the following apply:
o you are selling more than $100,000 worth of shares
o the name or address on the account has changed within the last 30 days
o you want the proceeds to go to a name or address not on the account
registration
o you are transferring shares to an account with a different registration or
share class
o you are selling shares held in a corporate or fiduciary account; for these
accounts, additional documents are required:
corporate accounts: certified copy of a corporate resolution
fiduciary accounts: copy of power of attorney or other governing document
To protect your account against fraud, all signatures on these documents must be
guaranteed. You may obtain a signature guarantee at most banks and securities
dealers. A notary public cannot provide a signature guarantee.
INCOMPLETE SELL REQUESTS State Street Research will attempt to notify you
promptly if any information necessary to process your request is missing.
TIMING OF REQUESTS All requests received in good order by State Street Research
before the close of regular trading on the New York Stock Exchange (usually 4:00
p.m. eastern time) will be executed the same day, at that day's closing share
price. Requests received thereafter will be executed the following day, at that
day's closing share price.
WIRE TRANSACTIONS Proceeds sent by federal funds wire must total at least
$5,000. A fee of $7.50 will be deducted from all proceeds sent by wire, and your
bank may charge an additional fee to receive wired funds.
SELLING RECENTLY PURCHASED SHARES If you sell shares before the check or
electronic funds transfer (ACH) for those shares has been collected, you will
not receive the proceeds until your initial payment has cleared. This may take
up to 15 days after your purchase was recorded (in rare cases, longer). If you
open an account with shares purchased by wire, you cannot sell those shares
until your application has been processed.
<PAGE>
Instructions for Selling Shares 17
--------------------------------------------------------------------------------
To Sell Some or All of Your Shares
[BRIEFCASE] Through a Consult your financial professional or your
Professional program materials.
or Program
By Mail [MAILBOX] Send a letter of instruction, an endorsed
stock power or share certificates (if you hold
certificate shares) to State Street Research.
Specify the fund, the account number and the
dollar value or number of shares. Be sure to
include all necessary signatures and any
additional documents, as well as signature
guarantees if required (see facing page).
[CAPITAL BUILDING] By Federal Check with State Street Research to make sure
Funds Wire 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 [PLUG] Check with State Street Research to make sure
Funds Transfer that the EZ Trader feature, including a bank
(ACH) designation, is in place on your account. Once
this is established, you may place your
request to sell shares with State Street
Research by telephone or Internet. Proceeds
will be sent to your pre-designated bank
account.
[COMPUTER] By Internet Visit our Web site. Certain limitations may
apply.
By Telephone [TELEPHONE] As long as the transaction does not require a
written request (see facing page), you or your
financial professional can sell shares by
calling State Street Research. A check will be
mailed to your address of record on the
following business day.
[ARROWS GOING IN By Exchange Read the prospectus for the fund into which
OPPOSITE DIRECTIONS] you are exchanging. Call State Street Research
or visit our Web site.
By Systematic [CALENDAR] See plan information on page 21.
Withdrawal Plan
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408
Internet www.statestreetresearch.com
Call toll-free: 1-87-SSR-FUNDS (1-877-773-8637) (business days 8:00 a.m. - 6:00
p.m., eastern time)
<PAGE>
18 Your Investment continued
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[POLICIES] ACCOUNT POLICIES
TELEPHONE AND INTERNET REQUESTS When you open an account you automatically
receive telephone privileges, allowing you to place requests for your account by
telephone. Your financial professional can also use these privileges to request
exchanges or redemptions on your account. For your protection, all telephone
calls are recorded.
You may also use our Web site for submitting certain requests over the Internet.
As long as State Street Research takes certain measures to authenticate requests
over the telephone or Internet for 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. Similarly, you may choose not to use the Internet for your account.
The fund may suspend or eliminate the telephone or Internet privileges at any
time.
EXCHANGE PRIVILEGES There is no fee to exchange shares among State Street
Research funds. Your new fund shares will be the equivalent class of your
current shares. Any contingent deferred sales charges will continue to be
calculated from the date of your initial investment.
You must hold Class A shares of any fund for at least 30 days before you may
exchange them at net asset value for Class A shares of a different fund with a
higher applicable sales charge.
Frequent exchanges can interfere with fund management and drive up costs for all
shareholders. Because of this, the fund currently limits each account, or group
of accounts under common ownership or control, to six exchanges per calendar
year. The fund may change or eliminate the exchange privilege at any time, may
limit or cancel any shareholder's exchange privilege and may refuse to accept
any exchange request, particularly those associated with "market timing"
strategies.
For Merrill Lynch customers, exchange privileges extend to Summit Cash Reserves
Fund, which is related to the fund for purposes of investment and investor
services.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $1,500,
State Street Research may mail you a notice asking you to bring the account back
up to $1,500 or close it out. If you do not take action within 60 days, State
Street Research may either sell your shares and mail the proceeds to you at the
address of record
<PAGE>
19
-----
or, depending on the circumstances, may deduct an annual maintenance fee
(currently $18).
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 (but not later than 4:00 p.m. eastern time). NAV is calculated by
dividing the fund's net assets by the number of its shares outstanding.
In calculating its NAV, the fund uses the last reported sale price or quotation
for portfolio securities. However, in cases where these are unavailable, or when
the investment manager believes that subsequent events have rendered them
unreliable, the fund may use fair-value estimates instead.
Because foreign securities markets are sometimes open on different days from
U.S. markets, there may be instances when the value of the fund's portfolio
changes on days when you cannot buy or sell fund shares.
REINSTATING RECENTLY SOLD SHARES For 120 days after you sell shares, you have
the right to "reinstate" your investment by putting some or all of the proceeds
into any currently available State Street Research fund at net asset value. Any
CDSC you paid on the amount you are reinstating will be credited to your
account. You may only use this privilege once in any twelve-month period with
respect to your shares of a given fund.
ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserves certain rights, including:
o Requirements for initial or additional investments, reinvestments,
periodic investment plans, retirement and employee benefit plans,
sponsored arrangements and other similar programs may be changed from time
to time without further notice or supplement to this prospectus
o All orders to purchase shares are subject to acceptance by the fund
o 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
o The fund may delay sending you redemption proceeds for up to seven days,
or longer if permitted by the SEC
o The fund reserves the right to redeem in kind
o To permit investors to obtain the current price, dealers are responsible
for transmitting all orders to the State Street Research Service Center
promptly
<PAGE>
20 Your Investment continued
--------------------------------------------------------------------------------
[sidebar]
[MAGNIFYING GLASS] Tax Considerations
Unless your investment is in a tax-deferred account, you may want to avoid:
o investing a large amount in the fund close to the end of the fiscal year
or a calendar year (if the fund makes a capital gains distribution, you
will receive some of your investment back as a taxable distribution)
o selling shares at a loss for tax purposes and investing in a substantially
identical investment within 30 days before or after that sale (such a
transaction is usually considered a "wash sale," and you will not be
allowed to claim a tax loss in the current year)
[end sidebar]
["UNCLE SAM"] DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund typically distributes any net
income and net capital gains to shareholders after the end of its fiscal year,
which is April 30. To comply with tax regulations, the fund may be required to
pay an additional income dividend or 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.
TAX EFFECTS OF DISTRIBUTIONS AND TRANSACTIONS In general, any dividends and
short-term capital gains distributions you receive from the fund are taxable as
ordinary income. Distributions of long-term capital gains are generally taxable
as capital gains--in most cases, at a different rate from that which applies to
ordinary income.
The tax you pay on a given capital gains distribution generally depends on how
long the fund has held the portfolio securities it sold. It does not depend on
how long you have owned your fund shares or whether you reinvest your
distributions.
<PAGE>
21
-----
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.
[HANDS] 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.
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 12% of your fund assets a year (minimum $50 per withdrawal) without incurring
any contingent deferred sales charges. Certain terms and minimums apply.
EZTRADER This service allows you to purchase or sell fund shares by telephone or
over the Internet through the ACH (Automated Clearing House) system.
DIVIDEND ALLOCATION PLAN This plan automatically invests your distributions from
the fund into another fund of your choice, without any fees or sales charges.
AUTOMATIC BANK CONNECTION This plan lets you route any distributions or
Systematic Withdrawal Plan payments directly to your bank account.
RETIREMENT PLANS State Street Research also offers a full range of prototype
retirement plans for individuals, sole proprietors, partnerships, corporations
and employees.
Call 1-87-SSR-FUNDS (1-877-773-8637) for information on any of the services
described above.
<PAGE>
22 Other Information
--------------------------------------------------------------------------------
[POLICIES] 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.
RESTRICTED AND ILLIQUID SECURITIES Any securities that are thinly traded or
whose resale is restricted can be difficult to sell at a desired time and price.
Some of these securities are new and complex, and trade only among institutions;
the markets for these securities are still developing, and may not function as
efficiently as established markets. Owning a large percentage of restricted or
illiquid securities could hamper the fund's ability to raise cash to meet
redemptions. Also, because there may not be an established market price for
these securities, the fund may have to estimate their value, which means that
their valuation (and, to a much smaller extent, the valuation of the fund) may
have a subjective element.
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>
23
-----
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.
INTERNATIONAL EXPOSURE Many U.S. companies in which the fund may invest generate
significant revenues and earnings from abroad. As a result, these companies and
the prices of their securities may be affected by weaknesses in global and
regional economies and the relative value of foreign currencies to the U.S.
dollar. These factors, taken as a whole, could adversely affect the price of
fund shares.
DERIVATIVES Derivatives, a category that includes options and futures, are
financial instruments whose value derives from one or more securities, indices
or currencies. The fund may use certain derivatives for hedging (attempting to
offset a potential loss in one position by establishing an interest in an
opposite position). This includes the use of currency-based derivatives for
hedging its positions in foreign securities. The fund may also use certain
derivatives for speculation (investing for potential income or capital gain).
While hedging can guard against potential risks, it adds to the fund's expenses
and can eliminate some opportunities for gains. There is also a risk that a
derivative intended as a hedge may not perform as expected.
The main risk with derivatives is that some types can amplify a gain or loss,
potentially earning or losing substantially more money than the actual cost of
the derivative.
With some derivatives, whether used for hedging or speculation, there is also
the risk that the counterparty may fail to honor its contract terms, causing a
loss for the fund.
SECURITIES LENDING The fund may seek additional income or fees by lending
portfolio securities to qualified institutions. By reinvesting any cash
<PAGE>
24 Other Information continued
--------------------------------------------------------------------------------
collateral it receives in these transactions, the fund could realize additional
gains or losses. If the borrower fails to return the securities and the invested
collateral has declined in value, the fund could lose money.
WHEN-ISSUED SECURITIES The fund may invest in securities prior to their date of
issue. These securities could fall in value by the time they are actually
issued, which may be any time from a few days to over a year.
SHORT-TERM TRADING While the fund ordinarily does not trade securities for
short-term profits, it will sell any security at any time it believes best,
which may result in short-term trading. Short-term trading can increase the
fund's transaction costs and may increase your tax liability if there are
capital gains. In addition, foreign securities generally involve higher
transaction costs per share traded.
BONDS The value of any bonds held by the fund is likely to decline when interest
rates rise; this risk is greater for bonds with longer maturities. It is also
possible that a bond issuer could default on principal or interest payments,
causing a loss for the fund.
DEFENSIVE INVESTING During unusual market conditions, the fund may place up to
100% of total assets in cash or high-quality, short-term debt securities. To the
extent that the fund does this, it is not pursuing its goal.
<PAGE>
Board of Trustees 25
--------------------------------------------------------------------------------
[COLUMNS] THE BOARD OF TRUSTEES is responsible for the operation of the fund.
They establish the fund's major policies, review investments, and provide
guidance to the investment manager and others who provide services to the fund.
The Trustees have diverse backgrounds and substantial experience in business and
other areas.
Richard S. Davis
Chairman of the Board,
President, Chief Executive
Officer and Director,
State Street Research &
Management Company
Bruce R. Bond
Former Chairman of the Board,
Chief Executive Officer
and President,
PictureTel Corporation
Steve A. Garban
Former Senior Vice President for Finance
and Operations and Treasurer,
The Pennsylvania State University
Dean O. Morton
Former Executive Vice President,
Chief Operating Officer and Director,
Hewlett-Packard Company
Susan M. Phillips
Dean, School of Business and Public
Management, George Washington
University, former Member of the Board of
Governors of the Federal Reserve System
and Chairman and Commissioner of the
Commodity Futures Trading Commission
Toby Rosenblatt
President, Founders Investments Ltd.
President, The Glen Ellen Company
Michael S. Scott Morton
Jay W. Forrester Professor of
Management, Sloan School of
Management, Massachusetts
Institute of Technology
<PAGE>
For Additional Information
--------------------------------------------------------------------------------
[sidebar]
If you have questions about the fund or would like to request a free copy of the
current annual/semiannual report or SAI, contact State Street Research or your
financial professional.
[LOGO] STATE STREET RESEARCH
Service Center
P.O. Box 8408, Boston, MA 02266
Telephone: 1-87-SSRFUNDS
(1-877-773-8637)
Internet: www.statestreetresearch.com
You can also obtain information about the fund, including the SAI and certain
other fund documents, on the SEC's EDGAR database on the Internet at
www.sec.gov, by electronic request at [email protected], in person at the SEC's
Public Reference Room in Washington, DC (telephone 1-202-942-8090) or by mail by
sending your request, along with a duplicating fee, to the SEC's Public
Reference Section, Washington, DC 20549-0102.
prospectus
----------------------------
SEC File Number: 811-8322
[end sidebar]
You can find additional information on the fund's structure and its performance
in the following documents:
ANNUAL/SEMIANNUAL REPORTS While the prospectus describes the fund's potential
investments, these reports detail the fund's actual investments as of the report
date. Reports include a discussion by fund management of recent economic and
market trends and fund performance. The annual report also includes the report
of the fund's independent accountants on the fund's financial statements.
STATEMENT OF ADDITIONAL INFORMATION (SAI) A supplement to the prospectus,
the SAI contains further information about the fund and its investment
limitations and policies. A current SAI for this fund is on file with the
Securities and Exchange Commission and is incorporated by reference (is legally
part of this prospectus).
Ticker Symbols
--------------------------------------------------------------------------------
Class A (proposed) SCLAX
Class B(1) (proposed) SCLPX
Class B (proposed) SCLBX
Class C (proposed) SCNLX
Class S (proposed) SCLSX
CLC-1567-0300
Control Number: (exp0901)SSR-LD
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
for
STATE STREET RESEARCH CONCENTRATED LARGE-CAP VALUE FUND
A Series of State Street Research Securities Trust
October 18, 2000
This Statement of Additional Information is divided into two sections:
Section I contains information which is specific to the fund identified
above.
Section II contains information which generally is shared by certain
mutual funds of the State Street Research complex, including the fund specified.
The Statement of Additional Information is not a Prospectus. It should be
read in conjunction with the current Prospectus of the fund, dated October 18,
2000.
The Prospectus may be obtained without charge from State Street Research
Investment Services, Inc., One Financial Center, Boston, Massachusetts
02111-2690 or by calling 1-87-SSR-FUNDS (1-877-773-8637).
Control Number: (exp0901) SSR-LD CLC-2154-1200
<PAGE>
TABLE OF CONTENTS
Page
----
DEFINITIONS............................................................ (ii)
SECTION I.............................................................. I,1-1
1. STATE STREET RESEARCH CONCENTRATED LARGE-CAP VALUE FUND.......... I,1-1
A. The Fund.................................................... I,1-1
B. Investment Objective........................................ I,1-1
C. Fundamental and Nonfundamental Restrictions................. I,1-1
D. Restricted Securities....................................... I,1-4
E. Foreign Investments......................................... I,1-4
F. Industry Classifications.................................... I,1-4
G. Control Persons and Principal Holders of Securities......... I,1-6
H. Trustee Compensation........................................ I,1-7
I. Investment Advisory Fee..................................... I,1-8
J. Distributor's Payment of Fund Expenses...................... I,1-8
K. Portfolio Turnover.......................................... I,1-8
L. Rule 12b-1 Fees............................................. I,1-8
(i)
<PAGE>
DEFINITIONS
Each of the following terms used in this Statement of Additional
Information has the meaning set forth below.
"1940 Act" means the Investment Company Act of 1940, as amended.
"Distributor" means State Street Research Investment Services, Inc., One
Financial Center, Boston, Massachusetts 02111-2690
"Investment Manager" means State Street Research & Management Company, One
Financial Center, Boston, Massachusetts 02111-2690.
"MetLife" means Metropolitan Life Insurance Company.
"NYSE" means the New York Stock Exchange, Inc.
"Vote of the majority of the outstanding voting securities" means the vote, at
an annual or a special meeting of security holders duly called, (i) of 67% or
more of the voting securities present at the meeting if the holders of more than
50% of the outstanding voting securities are present or represented by proxy or
(ii) of more than 50% of the outstanding voting securities, whichever is less.
(ii)
<PAGE>
SECTION I
1. STATE STREET RESEARCH CONCENTRATED LARGE-CAP VALUE FUND
A. The Fund
State Street Research Concentrated Large-Cap Value Fund (the "Concentrated
Large-Cap Value Fund" or the "Fund") was organized in 2000 as a separate series
of State Street Research Securities Trust, a Massachusetts business trust (the
"Trust"). The Trust is an "open-end" management investment company as defined in
the 1940 Act. A "series" is a separate pool of assets of the Trust which is
separately managed and may have a different investment objective and different
investment policies from the objective and policies of another series. The Trust
currently is comprised of the following series: State Street Research Strategic
Income Fund, State Street Research Legacy Fund, State Street Research Galileo
Fund, State Street Research Concentrated Large-Cap Value Fund and State Street
Research Tax-Managed Small-Cap Fund.
The Fund is not "diversified" as that term is defined in the 1940 Act.
Among other things, a diversified fund must, with respect to 75% of its total
assets, not invest more than 5% of its total assets in any one issuer or invest
in more than 10% of the outstanding voting securities of an issuer. As a
nondiversified fund, the Fund will not be subject to this limit. The Fund,
therefore, could invest in fewer issuers, which could increase the relative
adverse effect on the portfolio that one or a few poor performing investments
could potentially have. However, under the federal tax law, with respect to 50%
of its total assets, the Fund may not invest more than 5% of its total assets in
any single issuer.
Under the Trust's Master Trust Agreement, the Trustees may reorganize,
merge or liquidate the Fund without prior shareholder approval.
B. Investment Objective
The investment objective of the Fund is a nonfundamental policy and may be
changed without shareholder approval.
C. Fundamental and Nonfundamental Restrictions
The Fund has adopted the following investment restrictions, and those
investment restrictions are either fundamental or not fundamental. Fundamental
restrictions may not be changed by the Fund except by the affirmative vote of a
majority of the outstanding voting securities of the Fund. Restrictions that are
not fundamental may be changed without a shareholder vote.
I,1-1
<PAGE>
The fundamental and nonfundamental policies of the Fund do not apply to
any matters involving the issuance of multiple classes of shares of the Fund or
the creation or use of structures (e.g., fund of funds, master-feeder structure)
allowing the Fund to invest any or all of its assets in collective investment
vehicles or allowing the Fund to serve as such a collective investment vehicle
for other funds, to the extent permitted by law and regulatory authorities.
Fundamental Investment Restrictions
It is the Concentrated Large-Cap Value Fund's policy:
(1) not to issue senior securities, as defined in the 1940 Act, except
as permitted by that Act and the rules thereunder or as permitted by
the Securities and Exchange Commission (the creation of general
liens or security interests under industry practices for
transactions in portfolio assets are not deemed to involve the
issuance of senior securities);
(2) not to underwrite or participate in the marketing of securities of
other issuers, except (a) the Fund may, acting alone or in
syndicates or groups, purchase or otherwise acquire securities of
other issuers for investment, either from the issuers or from
persons in a control relationship with the issuers or from
underwriters of such securities, and (b) to the extent that, in
connection with the disposition of the Fund's securities, the Fund
may be a selling shareholder in an offering or deemed to be an
underwriter under certain federal securities laws;
(3) not to purchase fee simple interests in real estate unless acquired
as a result of ownership of securities or other instruments,
although the Fund may purchase and sell other interests in real
estate including securities which are secured by real estate, or
securities of companies which make real estate loans or own, or
invest or deal in, real estate;
(4) not to invest in physical commodities or physical commodity
contracts or options in excess of 10% of the Fund's total assets,
except that investments in essentially financial items or
arrangements such as, but not limited to, swap arrangements,
hybrids, currencies, currency and other forward contracts, delayed
delivery and when-issued contracts, futures contracts and options on
futures contracts on securities, securities indices, interest rates
and currencies shall not be deemed investments in commodities or
commodities contracts;
(5) not to lend money directly to natural persons; however, the Fund may
lend portfolio securities and purchase bonds, debentures, notes,
bills and any other debt related instruments or interests directly
from the issuer thereof or in the open market and may enter into
repurchase transactions collateralized by obligations of the U.S.
Government or its agencies and instrumentalities or other high
quality securities;
I,1-2
<PAGE>
(6) not to make any investment which would cause more than 25% of the
value of the Fund's total assets to be invested in securities of
issuers principally engaged in any one industry (except U.S.
Government securities as defined under the Investment Company Act of
1940, as amended, and as interpreted from time to time by the
Securities and Exchange Commission) as described in the Fund's
Prospectus or Statement of Additional Information as amended from
time to time; and
(7) not to borrow money, including reverse repurchase agreements in so
far as such agreements may be regarded as borrowings, except for
borrowings not in an amount in excess of 33 1/3% of the value of its
total assets.
Nonfundamental Investment Restrictions
It is the Concentrated Large-Cap Value Fund's policy:
(1) not to purchase any security or enter into a repurchase agreement if
as a result more than 15% of its net assets would be invested in
securities that are illiquid (including repurchase agreements not
entitling the holder to payment of principal and interest within
seven days);
(2) not to engage in transactions in options except in connection with
options on securities, securities indices, currencies and interest
rates, and options on futures on securities, securities indices,
currencies and interest rates;
(3) not to purchase securities on margin or make short sales of
securities or maintain a short position except for short sales
"against the box" (for the purpose of this restriction, escrow or
custodian receipts or letters, margin or safekeeping accounts or
similar arrangements used in the industry in connection with the
trading of futures, options and forward commitments are not deemed
to involve the use of margin); and
(4) not to purchase a security issued by another investment company,
except to the extent permitted under the 1940 Act or any exemptive
order from the Securities and Exchange Commission or except by
purchases in the open market involving only customary brokers'
commissions, or securities acquired as dividends or distributions or
in connection with a merger, consolidation or similar transaction or
other exchange.
I,1-3
<PAGE>
D. Restricted Securities
It is the Fund's policy not to make an investment in restricted
securities, including Rule 144A Securities, if, as a result, more than 35% of
the Fund's total assets are invested in restricted securities, provided not more
than 10% of the Fund's total assets are invested in restricted securities other
than Rule 144A Securities.
E. Foreign Investments
The Fund reserves the right to invest without limitation in securities of
non-U.S. issuers directly, or indirectly in the form of American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary
Receipts (GDRs"). Under current policy, however, the Fund limits such
investments, including ADRs, EDRs and GDRs, to a maximum of 35% of its total
assets.
F. Industry Classifications
In determining how much of the Fund's portfolio is invested in a given
industry, the following industry classifications are currently used. Industry
classifications are subject to change from time to time. 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.
I,1-4
<PAGE>
Autos & Transportation Consumer Discretionary Consumer Staples
---------------------- ---------------------- ----------------
Air Transport Advertising Agencies Beverages
Auto Parts Casino/Gambling, Drug & Grocery Store
Automobiles Hotel/Motel Chains
Miscellaneous Commercial Services Foods
Transportation Communications, Media Household Products
Railroad Equipment & Entertainment Tobacco
Railroads Consumer Electronics
Recreational Vehicles & Consumer Products Financial Services
Boats Consumer Services ------------------
Tires & Rubber Household Furnishings Banks & Savings and Loans
Truckers Leisure Time Financial Data Processing
Photography Services & Systems
Printing & Publishing Insurance
Restaurants Miscellaneous Financial
Retail Real Estate Investment
Shoes Trusts
Textile Apparel Rental & Leasing Services:
Manufacturers Commercial
Toys Securities Brokerage &
Services
Health Care
-----------
Drugs & Biotechnology
Health Care Facilities
Health Care Services
Hospital Supply
Service Miscellaneous
I,1-5
<PAGE>
<TABLE>
<CAPTION>
Integrated Oils Other Energy Technology
--------------- ------------ ----------
<S> <C> <C>
Oil: Integrated Domestic Gas Pipelines Communications Technology
Oil: Integrated Miscellaneous Energy Computer Software
International Offshore Drilling Computer Technology
Oil and Gas Producers Electronics
Materials & Processing Oil Well Equipment & Electronics: Semi-
---------------------- Services Conductors/Components
Agriculture Miscellaneous Technology
Building & Construction Producer Durables
Chemicals ----------------- Utilities
Containers & Packaging Aerospace ---------
Diversified Manufacturing Electrical Equipment & Miscellaneous Utilities
Engineering & Components Utilities: Cable TV & Radio
Contracting Services Electronics: Industrial Utilities: Electrical
Fertilizers Homebuilding Utilities: Gas Distribution
Forest Products Industrial Products Utilities: Telecommunications
Gold & Precious Metals Machine Tools Utilities: Water
Miscellaneous Materials & Machinery
Processing Miscellaneous Equipment
Non-Ferrous Metals Miscellaneous Producer
Office Supplies Durables
Paper and Forest Products Office Furniture & Business
Real Estate & Equipment
Construction Pollution Control and
Steel Environmental Services
Textile Products Production Technology
Equipment
Other Telecommunications
----- Equipment
Trust Certificates --
Government Related
Lending
Asset-backed--Mortgages
Asset-backed--Credit Card
Receivables
Miscellaneous
Multi-Sector Companies
</TABLE>
G. Control Persons and Principal Holders of Securities
As of the approximate date of this Statement of Additional Information,
the Investment Manager, the Distributor and/or MetLife, their indirect parent,
were the beneficial owners of all or a substantial amount of the outstanding
Class A, Class B(1), Class B, Class C and/or Class S shares of the Fund, and may
be deemed to be in "control" of such class or the Fund, as defined in the 1940
Act. Although sales of Fund shares to other investors will reduce their
I,1-6
<PAGE>
percentage ownership, so long as 25% of a class of shares is so owned, such
owners will be presumed to be in control of such class of shares for purposes of
voting on certain matters submitted to a vote of shareholders, such as any Rule
12b-1 plan for a given class.
H. Trustee Compensation
The Trustees of State Street Research Securities Trust were compensated as
follows:
<TABLE>
<CAPTION>
Total Total Compensation
Compensation From All State
Aggregate From All Street Research Funds
Compensation From State Street and Metropolitan
Concentrated Research Funds Series Fund, Inc.
Name of Trustee Large-Cap Value Fund (a)(b) Paid to Trustees (c) Paid to Trustees (d)
--------------- --------------------------- -------------------- --------------------
<S> <C> <C> <C>
Bruce R. Bond $200 $ 55,495 $ 55,495
Richard S. Davis(e) -- -- --
Steve A. Garban $200 $ 80,150 $ 110,900
Dean O. Morton $200 $ 81,150 $ 108,900
Susan M. Phillips $200 $ 57,150 $ 57,150
Toby Rosenblatt $200 $ 67,900 $ 67,900
Michael S. Scott Morton $200 $ 85,250 $ 113,000
</TABLE>
-----------------
(a) Estimated for the Fund's fiscal year ending April 30, 2001.
(b) The Fund does not provide any pension or retirement benefits for the
Trustees.
(c) Includes compensation on behalf of all series of 11 investment companies
for which the Investment Manager has served as sole investment adviser.
The figure in this column is for the 12 months ended December 31, 1999.
(d) Includes compensation on behalf of all series of 11 investment companies
for which the Investment Manager has served as sole investment adviser and
all series of Metropolitan Series Fund, Inc. The primary adviser to
Metropolitan Series Fund, Inc. is Metropolitan Life Insurance Company,
which has retained State Street Research & Management Company as
sub-adviser to certain series of Metropolitan Series Fund, Inc. The figure
in this column includes compensation relating to series of Metropolitan
Series Fund, Inc. which are not advised by State Street Research &
Management Company. The figure is for the 12 months ended December 31,
1999.
(e) Richard S. Davis was elected a Trustee of the Trust on November 1, 2000.
For more information on the Trustees and officers of State Street Research
Securities Trust, see Section II, C of this Statement of Additional Information.
I,1-7
<PAGE>
I. Investment Advisory Fee
The advisory fee payable monthly by the Concentrated Large-Cap Value 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 NYSE on each day the NYSE is open for trading.
The annual advisory fee rate is 0.85%.
J. Distributor's Payment of Fund Expenses
The Distributor has voluntarily undertaken to pay certain expenses of the
Fund up to an amount which will enable the Fund to maintain a level of actual
total operating expenses of approximately 1.15% of net assets or as otherwise
mutually agreed from time to time by the Distributor and Trustees on behalf of
the Fund ("Expense Benchmark"). The following expenses are excluded from this
undertaking: Rule 12b-1 fees and any other class specific expenses, interest,
taxes, brokerage commissions, and extraordinary expenses such as litigation and
other expenses not incurred in the ordinary course of the Fund's business. The
Distributor may unilaterally cease to pay Fund expenses pursuant to this
undertaking at any time.
The Distributor is entitled to payment from the Fund for the amount of
expenses paid on behalf of the Fund when the Fund's actual total operating
expenses are less than the Expense Benchmark then in effect, provided that the
effect of such payment does not cause the Fund to exceed the lower of (a) the
Expense Benchmark then in effect or (b) the Expense Benchmark in effect in the
year that the expenses were originally paid. The Distributor will not be
entitled to such repayments from the Fund after the end of the fifth fiscal year
of the Fund following the year in which the expenses were originally paid.
K. Portfolio Turnover
The Fund reserves full freedom with respect to portfolio turnover. In
periods when there are rapid changes in economic conditions or security price
levels, or when the Investment Manager's investment strategy changes
significantly, portfolio turnover may be higher than during times of economic
and market price stability or when the Investment Manager's investment strategy
remains relatively constant.
L. Rule 12b-1 Fees
The Fund has adopted a plan of distribution pursuant to Rule 12b-1 under
the 1940 Act ("Distribution Plan"). Under the Distribution Plan, the Fund may
engage, directly or indirectly, in financing any activities primarily intended
to result in the sale of shares of the Fund. Under the plan, the Fund provides
the Distributor with a service fee at an annual rate of 0.25% on the average
daily net assets of Class A, Class B(1), Class B and Class C shares. The
I,1-8
<PAGE>
Fund also provides a distribution fee at an annual rate of (i) up to 0.15% on
the average daily net assets of Class A shares, and (ii) 0.75% on the average
daily net assets of Class B(1), Class B and Class C shares. The service and
distribution fees are used to cover personal services and/or the maintenance of
shareholder accounts provided by the Distributor, brokers, dealers, financial
professionals or others, and sales, promotional and marketing activities
relating to the respective classes.
Under the Distribution Plan, the Fund's payments compensate the
Distributor for services and expenditures incurred under the plan and none of
the payments are returnable to the Fund.
I,1-9
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
SECTION II
TABLE OF CONTENTS
Page
----
A. Additional Information Concerning Investment Restrictions,
Certain Risks and Investment Techniques.........................II-1
B. Debt Instruments and Permitted Cash Investments.................II-13
C. The Trusts, the Trustees and Officers and Fund Shares...........II-23
D. Investment Advisory Services....................................II-32
E. Purchase and Redemption of Shares...............................II-33
F. Shareholder Accounts............................................II-42
G. Net Asset Value.................................................II-46
H. Portfolio Transactions..........................................II-47
I. Certain Tax Matters.............................................II-51
J. Distribution of Fund Shares.....................................II-55
K. Calculation of Performance Data.................................II-58
L. Custodian.......................................................II-61
M. Independent Accountants.........................................II-62
N. Financial Reports...............................................II-62
This Section II contains general information applicable to the fund(s)
identified on the cover page of this Statement of Additional Information. (If
more than one Fund is identified, each is referred to as "the Fund.")
A. Additional Information Concerning Investment Restrictions, Certain
Risks and Investment Techniques
The Fund follows certain fundamental and nonfundamental investment
restrictions. The fundamental and nonfundamental investment restrictions for the
Fund identified on the cover page of this Statement of Additional Information
are included in Section I of this Statement of Additional Information.
In addition, the Fund may invest in the following instruments, use the
following investment techniques or be exposed to the following investment risks.
Please note that not all of the instruments, techniques and risks described in
this part apply uniformly to the Funds identified on the cover page of this
Statement of Additional Information. The extent to which a Fund may engage in
the following practices depends on its investment strategy and any limitations
set forth in its Prospectus or in Part I of its Statement of Additional
Information. Some practices are more applicable to equity investments and would
be used more by Funds with substantial equity portions. For example, American
Depository Receipts ("ADRs") generally involve the stocks of foreign issuers and
are used more by Funds which invest in foreign securities. Similarly, some
practices are more applicable to debt
II-1
<PAGE>
securities and would be used more in Funds with substantial debt positions, for
example, techniques to manage the interest rate volatility of bonds. However,
since the Fund generally reserves the flexibility to invest to some degree in
ways which are outside their primary focus, it is possible for the Fund to
engage in all the described practices.
Derivatives
The Fund may buy and sell certain types of derivatives, such as options,
futures contracts, options on futures contracts, and swaps under circumstances
in which such instruments are expected by the Investment Manager to aid in
achieving the Fund's investment objective. The Fund may also purchase
instruments with characteristics of both futures and securities (e.g., debt
instruments with interest and principal payments determined by reference to the
value of a commodity or a currency at a future time) and which, therefore,
possess the risks of both futures and securities investments.
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Fund to take both "short" positions (positions
which anticipate a decline in the market value of a particular asset or index)
and "long" positions (positions which anticipate an increase in the market value
of a particular asset or index). The Fund may also use strategies which involve
simultaneous short and long positions in response to specific market conditions,
such as where the Investment Manager anticipates unusually high or low market
volatility.
The Investment Manager may enter into derivative positions for the Fund
for either hedging or non-hedging purposes. The term hedging is applied to
defensive strategies designed to protect the Fund from an expected decline in
the market value of an asset or group of assets that the Fund owns (in the case
of a short hedge) or to protect the Fund from an expected rise in the market
value of an asset or group of assets which it intends to acquire in the future
(in the case of a long or "anticipatory" hedge). Non-hedging strategies include
strategies designed to produce incremental income (such as the option writing
strategy described below) or "speculative" strategies which are undertaken to
profit from (i) an expected decline in the market value of an asset or group of
assets which the Fund does not own or (ii) expected increases in the market
value of an asset which it does not plan to acquire. Information about specific
types of instruments is provided below.
Futures Contracts.
Futures contracts are publicly traded contracts to buy or sell an
underlying asset or group of assets, such as a currency or an index of
securities, at a future time at a specified price. A contract to buy establishes
a long position while a contract to sell establishes a short position.
The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or index after paying a transaction charge and posting
margin in an amount equal to a small
II-2
<PAGE>
percentage of the value of the underlying asset or index. The Fund will
initially be required to deposit with the Trust's custodian or the broker
effecting the futures transaction an amount of "initial margin" in cash or
securities, as permitted under applicable regulatory policies.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will terminate
the Fund's position in the futures contract. A final determination of
maintenance margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. While futures
contracts with respect to securities do provide for the delivery and acceptance
of such securities, such delivery and acceptance are seldom made.
In transactions establishing a long position in a futures contract, assets
equal to the face value of the futures contract will be identified by the Fund
to the Trust's custodian for maintenance in a separate account to insure that
the use of such futures contracts is unleveraged. Similarly, assets having a
value equal to the aggregate face value of the futures contract will be
identified with respect to each short position. The Fund will utilize such
assets and methods of cover as appropriate under applicable exchange and
regulatory policies.
Options.
The Fund may use options to implement its investment strategy. There are
two basic types of options: "puts" and "calls." Each type of option can
establish either a long or a short position, depending upon whether the Fund is
the purchaser or the writer of the option. A call option on a security, for
example, gives the purchaser of the option the right to buy, and the writer the
obligation to sell, the underlying asset at the exercise price during the option
period. Conversely, a put option on a security gives the purchaser the right to
sell, and the writer the obligation to buy, the underlying asset at the exercise
price during the option period.
Purchased options have defined risk, that is, the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset. In general, a
II-3
<PAGE>
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,
the Fund may offset its position in index options prior to expiration by
entering into a closing transaction on an exchange or it may let the option
expire unexercised.
A securities index assigns relative values to the securities included in
the index and the index options are based on a broad market index. In connection
with the use of such options, the Fund may cover its position by identifying
assets having a value equal to the aggregate face value of the option position
taken.
Options on Futures Contracts.
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
II-4
<PAGE>
Limitations and Risks of Options and Futures Activity.
The Fund may not establish a position in a commodity futures contract or
purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such non-hedging
purposes would exceed 5% of the market value of the Fund's net assets. The Fund
applies a similar policy to options that are not commodities.
As noted above, the Fund may engage in both hedging and nonhedging
strategies. Although effective hedging can generally capture the bulk of a
desired risk adjustment, no hedge is completely effective. The Fund's ability to
hedge effectively through transactions in futures and options depends on the
degree to which price movements in its holdings correlate with price movements
of the futures and options.
Non-hedging strategies typically involve special risks. The profitability
of the Fund's non-hedging strategies will depend on the ability of the
Investment Manager to analyze both the applicable derivatives market and the
market for the underlying asset or group of assets. Derivatives markets are
often more volatile than corresponding securities markets and a relatively small
change in the price of the underlying asset or group of assets can have a
magnified effect upon the price of a related derivative instrument.
Derivatives markets also are often less liquid than the market for the
underlying asset or group of assets. Some positions in futures and options may
be closed out only on an exchange which provides a secondary market therefor.
There can be no assurance that a liquid secondary market will exist for any
particular futures contract or option at any specific time. Thus, it may not be
possible to close such an option or futures position prior to maturity. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively carry out their derivative
strategies and might, in some cases, require a Fund to deposit cash to meet
applicable margin requirements. The Fund will enter into an option or futures
position only if it appears to be a liquid investment.
Short Sales Against the Box
The Fund may effect short sales, but only if such transactions are short
sale transactions known as short sales "against the box." A short sale is a
transaction in which the Fund sells a security it does not own by borrowing it
from a broker, and consequently becomes obligated to replace that security. A
short sale against the box is a short sale where the Fund owns the security sold
short or has an immediate and unconditional right to acquire that security
without additional cash consideration upon conversion, exercise or exchange of
options with respect to securities held in its portfolio. The effect of selling
a security short against the box is to insulate that security against any future
gain or loss.
II-5
<PAGE>
Swap Arrangements
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below . In an
interest rate swap, the Fund could agree for a specified period to pay a bank or
investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an assumed figure selected by the parties for this
purpose) in exchange for agreement by the bank or investment banker to pay the
Fund a fixed rate of interest on the notional principal amount. In a currency
swap, the Fund would agree with the other party to exchange cash flows based on
the relative differences in values of a notional amount of two (or more)
currencies; in an index swap, the Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices. Purchase
of a cap entitles the purchaser to receive payments from the seller on a
notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an
agreed-upon interest rate or amount. A collar combines a cap and a floor.
The Fund may enter credit protection swap arrangements involving the sale
by the Fund of a put option on a debt security which is exercisable by the buyer
upon certain events, such as a default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
Most swaps entered into by the Fund will be on a net basis; for example,
in an interest rate swap, amounts generated by application of the fixed rate and
the floating rate to the notional principal amount would first offset one
another, with the Fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, the Fund will set up a segregated custodial account to hold appropriate
liquid assets, including cash; for swaps entered into on a net basis, assets
will be segregated having a daily net asset value equal to any excess of the
Fund's accrued obligations over the accrued obligations of the other party,
while for swaps on other than a net basis assets will be segregated having a
value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a portion of the Fund's portfolio.
However, the Fund may, as noted above, enter into such arrangements for income
purposes to the extent permitted by the Commodities Futures Trading Commission
(the "CFTC") for entities which are not commodity pool operators, such as the
Fund. In entering a swap arrangement, the Fund is dependent upon the
creditworthiness and good faith of the counterparty. The Fund attempts to reduce
the risks of nonperformance by the counterparty by dealing only with
established, reputable institutions. The swap market is still relatively new and
emerging; positions in swap arrangements may become illiquid to the extent that
nonstandard arrangements with one counterparty are not readily transferable to
another counterparty or if a market for the transfer of swap positions does not
develop. The use of interest rate swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
II-6
<PAGE>
ordinary portfolio securities transactions. If the Investment Manager is
incorrect in its forecasts of market values, interest rates and other applicable
factors, the investment performance of the Fund would diminish compared with
what it would have been if these investment techniques were not used. Moreover,
even if the Investment Manager is correct in its forecasts, there is a risk that
the swap position may correlate imperfectly with the price of the asset or
liability being hedged.
Repurchase Agreements
The Fund may enter into repurchase agreements. Repurchase agreements occur
when the Fund acquires a security and the seller, which may be either (i) a
primary dealer in U.S. Government securities or (ii) an FDIC-insured bank having
gross assets in excess of $500 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. To the extent excludable under relevant regulatory interpretations,
repurchase agreements involving U.S. Government securities are not subject to
the limitations on the Fund's total assets which may be invested in one issuer
or industry.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. In a reverse
repurchase agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker or dealer, in return for
a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed-upon rate.
The ability to use reverse repurchase agreements may enable, but does not ensure
the ability of, the Fund to avoid selling portfolio instruments at a time when a
sale may be deemed to be disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
II-7
<PAGE>
When-Issued Securities
The Fund may purchase "when-issued" securities, which are traded on a
price or yield basis prior to actual issuance. Such purchases will be made only
to achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs in the U.S. Treasury
market when dealers begin to trade a new issue of bonds or notes shortly after a
Treasury financing is announced, but prior to the actual sale of the securities.
Similarly, securities to be created by a merger of companies may also be traded
prior to the actual consummation of the merger. Such transactions may involve a
risk of loss if the value of the securities falls below the price committed to
prior to actual issuance. The custodian holding Fund assets will establish a
segregated account when the Fund purchases securities on a when-issued basis
consisting of cash or liquid securities equal to the amount of the when-issued
commitments. Securities transactions involving delayed deliveries or forward
commitments are frequently characterized as when-issued transactions and are
similarly treated by the Fund.
Restricted Securities
The Fund may invest in restricted securities, including restricted
securities sold in accordance with Rule 144A under the Securities Act of 1933
("Rule 144A Securities"). Securities may be resold pursuant to Rule 144A under
certain circumstances only to qualified institutional buyers as defined in the
rule, and the markets and trading practices for such securities are relatively
new and still developing; depending on the development of such markets, Rule
144A Securities may be deemed to be liquid as determined by or in accordance
with methods adopted by the Trustees for the Fund. Under such methods the
following factors are considered, among others: the frequency of trades and
quotes for the security, the number of dealers and potential purchasers in the
market, market making activity, and the nature of the security and marketplace
trades. Investments in Rule 144A Securities could have the effect of increasing
the level of the Fund's illiquidity to the extent that qualified institutional
buyers become, for a time, uninterested in purchasing such securities. Also, the
Fund may be adversely impacted by the subjective valuation of such securities in
the absence of a market for them. Restricted securities that are not resalable
under Rule 144A may be subject to risks of illiquidity and subjective valuations
to a greater degree than Rule 144A Securities.
Mortgage-Related Securities
The Fund may invest in mortgage-related securities. Mortgage-related
securities represent interests in pools of commercial or residential mortgage
loans. Some mortgage-related securities provide the Fund with a flow-through of
interest and principal payments as such payments are received with respect to
the mortgages in the pool. Mortgage-related securities may
II-8
<PAGE>
be issued by private entities such as investment banking firms, insurance
companies, mortgage bankers and home builders. Mortgage-related securities may
be issued by U.S. Government agencies, instrumentalities or mixed-ownership
corporations or sponsored enterprises, and the securities may or may not be
supported by the credit of such entities. An issuer may offer senior or
subordinated securities backed by the same pool of mortgages. The senior
securities have priority to the interest and/or principal payments on the
mortgages in the pool; the subordinate securities have a lower priority with
respect to such payments on the mortgages in the pool. The Fund does not
presently expect to invest in mortgage pool residuals.
Mortgage-related securities also include stripped securities which have
been divided into separate interest and principal components. Holders of the
interest components of mortgage related securities will receive payments of the
interest only on the current face amount of the mortgages and holders of the
principal components will receive payments of the principal on the mortgages.
"Interest only" securities are known as IOs; "principal only" securities are
known as POs.
In the case of mortgage-related securities, the possibility of prepayment
of the underlying mortgages which might be motivated, for instance, by declining
interest rates, could lessen the potential for total return in mortgage-related
securities. When prepayments of mortgages occur during periods of declining
interest rates, the Fund will have to reinvest the proceeds in instruments with
lower effective interest rates.
In the case of stripped securities, in periods of low interest rates and
rapid mortgage prepayments, the value of IOs for mortgage-related securities can
decrease significantly. The market for IOs and POs is new and there is no
assurance it will operate efficiently or provide liquidity in the future.
Stripped securities are extremely volatile in certain interest rate
environments.
Asset-Backed Securities
The Fund may invest in asset-backed, which are securities that represent
interests in pools of consumer loans such as credit card receivables, automobile
loans and leases, leases on equipment such as computers, and other financial
instruments. These securities provide a flow-through of interest and principal
payments as payments are received on the loans or leases and may be supported by
letters of credit or similar guarantees of payment by a financial institution.
Foreign Investments
The Fund may invest in securities of non-U.S. issuers directly, or
indirectly in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs").
ADRs are receipts, typically issued by a U.S. bank or trust company, which
evidence ownership of underlying securities issued by a foreign corporation or
other entity. EDRs are
II-9
<PAGE>
receipts issued in Europe which evidence a similar ownership arrangement. GDRs
are receipts issued in one country which also evidence a similar ownership
arrangement. Generally, ADRs in registered form are designed for use in U.S.
securities markets and EDRs are designed for use in European securities markets.
GDRs are designed for use when the issuer is raising capital in more than one
market simultaneously, such as the issuer's local market and the U.S., and have
been used to overcome local selling restrictions to foreign investors. In
addition, many GDRs are eligible for book-entry settlement through Cedel,
Euroclear and DTC. The underlying securities are not always denominated in the
same currency as the ADRs, EDRs or GDRs. Although investment in the form of
ADRs, EDRs or GDRs facilitates trading in foreign securities, it does not
mitigate all the risks associated with investing in foreign securities.
ADRs are available through facilities which may be either "sponsored" or
"unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and usually agrees to
provide shareholder communications. In an unsponsored arrangement, the foreign
issuer is not involved, and the ADR holders pay the fees of the depository.
Sponsored ADRs are generally more advantageous to the ADR holders and the issuer
than are unsponsored ADRs. More and higher fees are generally charged in an
unsponsored program compared to a sponsored facility. Only sponsored ADRs may be
listed on the New York or American Stock Exchanges. Unsponsored ADRs may prove
to be more risky due to (a) the additional costs involved to the Fund; (b) the
relative illiquidity of the issue in U.S. markets; and (c) the possibility of
higher trading costs in the over-the-counter market as opposed to exchange based
trading. The Fund will take these and other risk considerations into account
before making an investment in an unsponsored ADR.
The risks associated with investments in foreign securities include those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks of
nationalization or expropriation, the possible imposition of currency exchange
blockages, higher operating expenses, foreign withholding and other taxes which
may reduce investment return, reduced availability of public information
concerning issuers, the difficulties in obtaining and enforcing a judgment
against a foreign issuer and the fact that foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements comparable to those applicable to
domestic issuers. Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of securities of comparable
domestic issuers.
These risks are usually higher in less-developed countries. Such countries
include countries that have an emerging stock market on which trade a small
number of securities and/or countries with economies that are based on only a
few industries. The Fund may invest in the securities of issuers in countries
with less developed economies as deemed appropriate by the Investment Manager.
However, it is anticipated that a majority of the foreign
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investments by the Fund will consist of securities of issuers in countries with
developed economies.
Currency Transactions
The Fund may engage in currency exchange transactions in order to protect
against the effect of uncertain future exchange rates on securities denominated
in foreign currencies. The Fund will conduct its currency exchange transactions
either on a spot (i.e., cash) basis at the rate prevailing in the currency
exchange market, or by entering into forward contracts to purchase or sell
currencies. The Fund's dealings in forward currency exchange contracts will be
limited to hedging involving either specific transactions or aggregate portfolio
positions. A forward currency contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are not commodities and are entered into
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. In entering a forward currency
contract, the Fund is dependent upon the creditworthiness and good faith of the
counterparty. The Fund attempts to reduce the risks of nonperformance by the
counterparty by dealing only with established, reputable institutions. Although
spot and forward contracts will be used primarily to protect the Fund from
adverse currency movements, they also involve the risk that anticipated currency
movements will not be accurately predicted, which may result in losses to the
Fund. This method of protecting the value of the Fund's portfolio securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange that can be achieved at some future point in time. Although such
contracts tend to minimize the risk of loss due to a decline in the value of
hedged currency, they tend to limit any potential gain that might result should
the value of such currency increase.
Indexed Securities
The Fund may purchase securities the value of which is indexed to interest
rates, foreign currencies and various indices and financial indications. These
securities are generally short- to intermediate-term debt securities. The
interest rates or values at maturity fluctuate with the index to which they are
connected and may be more volatile than such index.
Securities Lending
The Fund may receive a lending fee and 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,
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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 if desired. Should the borrower of the securities
fail financially, there is a risk of delay in recovery of the securities or loss
of rights in the collateral. Loans are made only to borrowers which are deemed
by the Investment Manager or its agents to be of good financial standing.
Short-Term Trading
The Fund may engage in short-term trading of securities and reserves full
freedom with respect to portfolio turnover. In periods where there are rapid
changes in economic conditions and security price levels or when reinvestment
strategy changes significantly, portfolio turnover may be higher than during
times of economic and market price stability or when investment strategy remains
relatively constant. The Fund's portfolio turnover rate may involve greater
transaction costs, relative to other funds in general, and may have tax and
other consequences.
Temporary and Defensive Investments
The Fund may hold up to 100% of its assets in cash or high-quality debt
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Investment Manager, such a
position is more likely to provide protection against adverse market conditions
than adherence to the Fund's other investment policies. The types of
high-quality instruments in which the Fund may invest for such purposes include
money market securities, such as repurchase agreements, and securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
certificates of deposit, time deposits and bankers' acceptances of certain
qualified financial institutions and corporate commercial paper, which at the
time of purchase are rated at least within the "A" major rating category by
Standard & Poor's Corporation ("S&P") or the "Prime" major rating category by
Moody's Investor's Service, Inc. ("Moody's"), or, if not rated, issued by
companies having an outstanding long-term unsecured debt issued rated at least
within the "A" category by S&P or Moody's.
Other Investment Companies
The Fund may invest in securities of other investment companies, including
affiliated investment companies, such as open- or closed-end management
investment companies, hub and spoke (master/feeder) funds, pooled accounts or
other similar, collective investment vehicles. As a shareholder of an investment
company, the Fund may indirectly bear service
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and other fees in addition to the fees the Fund pays its service providers.
Similarly, other investment companies may invest in the Fund. Other investment
companies that invest in the Fund may hold significant portions of the Fund and
materially affect the sale and redemption of Fund shares and the Fund's
portfolio transactions.
The Fund may invest in investment companies issuing shares which are
traded like traditional equity securities on a national stock exchange or the
NASDAQ National Market System. Many exchange-traded securities represent
ownership in a trust that has been established to accumulate and hold a
portfolio of securities that is intended to track the performance of a
securities market index. Certain indices tracked by exchange-traded funds are
highly concentrated in one or a few industries or individual securities, and
thus, may have higher price volatility than many broad-based stock indices. With
most new exchange-traded funds, there is a risk that the overall liquidity of
the secondary market for shares of those funds may fluctuate and the shares
become illiquid.
B. Debt Instruments and Permitted Cash Investments
The Fund may invest in long-term and short-term debt securities. Certain
debt securities and money market instruments in which the Fund may invest are
described below.
Managing Volatility
In administering the Fund's investments, the Investment Manager attempts
to manage the volatility of the Fund's portfolio of debt securities by managing
the duration and weighted average maturity of those securities.
Duration is an indicator of the expected volatility of a bond portfolio's
net asset value in response to changes in interest rates. In calculating
duration, the fund measures the average time required to receive all cash flows
associated with those debt securities -- representing payments of principal and
interest -- by considering the timing, frequency and amount of payment expected
from each portfolio debt security. The higher the duration, the greater the
gains and losses when interest rates change. Duration generally is a more
accurate measure of potential volatility with a portfolio composed of
high-quality debt securities, such as U.S. government securities, municipal
securities and high-grade U.S. corporate bonds, than with lower-grade
securities.
The Investment Manager may use several methods to manage the duration of
the Fund's portfolio of debt securities in order to increase or decrease its
exposure to changes in interest rates. First, the Investment Manager may adjust
duration by adjusting the mix of debt securities held by the Fund. For example,
if the Investment Manager intends to shorten duration, it may sell debt
instruments that individually have a long duration and purchase other 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
II-13
<PAGE>
the security prior to maturity. Second, the Investment Manager may adjust
duration using derivative transactions, especially with interest rate futures
and options contracts. For example, if the Investment Manager wants to lengthen
the duration of a Fund's portfolio of debt securities, it could purchase
interest rate futures contracts instead of buying longer-term bonds or selling
shorter-term bonds. Similarly, during periods of lower interest rate volatility,
the Investment Manager may use a technique to extend duration in the event rates
rise by writing an out-of-the-money put option and receiving premium income with
the expectation that the option could be exercised. In managing duration, the
use of such derivatives may be faster and more efficient than trading specific
portfolio securities.
Weighted average maturity is another indicator of potential volatility
used by the Investment Manager with respect to the Fund's portfolio of debt
securities, although for certain types of debt securities, such as high quality
debt securities, it is not as accurate as duration in quantifying potential
volatility. Weighted average maturity is the average of all maturities of the
individual debt securities held by the Fund, weighted by the market value of
each security. Generally, the longer the weighted average maturity, the more
Fund price will vary in response to changes in interest rates.
U.S. Government and Related Securities
U.S. Government securities are securities which are issued or guaranteed
as to principal or interest by the U.S. Government, a U.S. Government agency or
instrumentality, or certain mixed-ownership Government corporations as described
herein. The U.S. Government securities in which the Fund invests include, among
others:
1. direct obligations of the U.S. Treasury, i.e., U.S. Treasury bills,
notes, certificates and bonds;
2. 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
3. obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a variety
of ways by the U.S. Government, its agencies or instrumentalities. Some of these
obligations, such as Government National Mortgage Association mortgage-backed
securities, are backed by the full faith and credit of the U.S. Treasury. Other
obligations, such as those of the Federal National Mortgage Association, are
backed by the discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities, although the U.S. Government has
no legal obligation to do so. Obligations such as those of the Federal Home Loan
Bank, the Federal Farm Credit Bank, the Federal National Mortgage Association
and the Federal
II-14
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Home Loan Mortgage Corporation are backed by the credit of the agency or
instrumentality issuing the obligations. Certain obligations of Resolution
Funding Corporation, a mixed-ownership Government corporation, are backed with
respect to interest payments by the U.S. Treasury, and with respect to principal
payments by U.S. Treasury obligations held in a segregated account with a
Federal Reserve Bank. Except for certain mortgage-related securities, the Fund
will only invest in obligations issued by mixed-ownership Government
corporations where such securities are guaranteed as to payment of principal or
interest by the U.S. Government or a U.S. Government agency or instrumentality,
and any unguaranteed principal or interest is otherwise supported by U.S.
Government obligations held in a segregated account.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Foreign Government Debt
The obligations of foreign governmental entities have various kinds of
government support and include obligations issued or guaranteed by foreign
governmental entities with taxing powers. These obligations may or may not be
supported by the full faith and credit of a foreign government. Each Fund may
invest in foreign government securities of issuers considered stable by the
Investment Manager, based on its analysis of factors such as general political
or economic conditions relating to the government and the likelihood of
expropriation, nationalization, freezes or confiscation of private property. The
Investment Manager does not believe that the credit risk inherent in the
obligations of stable foreign governments is significantly greater than that of
U.S. Government securities.
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Supranational Debt
Supranational debt may be denominated in U.S. dollars, a foreign currency
or a multi-national currency unit. Examples of supranational entities include
the World Bank, the European Investment Bank, the Asian Development Bank and the
Inter-American Development Bank. The governmental members, or "stockholders,"
usually make initial capital contributions to the supranational entity and in
many cases are committed to make additional capital contributions if the
supranational entity is unable to repay its borrowings.
Foreign Currency Units
The Fund may invest in securities denominated in a multi-national currency
unit. An illustration of a multi-national currency unit is the European Currency
Unit (the "ECU"), which is a "basket" consisting of specified amounts of the
currencies of the member states of the European Community, a Western European
economic cooperative organization that includes France, Germany, The Netherlands
and the United Kingdom. The specific amounts of currencies comprising the ECU
may be adjusted by the Council of Ministers of the European Community to reflect
changes in relative values of the underlying currencies. The Sub-Investment
Manager does not believe that such adjustments will adversely affect holders of
ECU-denominated obligations or the marketability of such securities. European
supranational entities, in particular, issue ECU-denominated obligations. The
Fund may invest in securities denominated in the currency of one nation although
issued by a governmental entity, corporation or financial institution of another
nation. For example, the Fund may invest in a British pound sterling-denominated
obligation issued by a United States corporation. Such investments involve
credit risks associated with the issuer and currency risks associated with the
currency in which the obligation is denominated.
Synthetic Non-U.S. Money Market Positions
Money market securities denominated in foreign currencies are permissible
investments of the Fund. In addition to, or in lieu of direct investment in such
securities, the Fund may construct a synthetic non-U.S. money market position by
(i) purchasing a money market instrument denominated in U.S. dollars and (ii)
concurrently entering into a forward currency contract to deliver a
corresponding amount of U.S. dollars in exchange for a foreign currency on a
future date and a specified rate of exchange. Because of the availability of a
variety of highly liquid short-term U.S. dollar-denominated money market
instruments, a synthetic money market position utilizing such U.S.
dollar-denominated instruments may offer greater liquidity than direct
investment in a money market instrument denominated in a foreign currency.
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<PAGE>
Bank Money Investments
Bank money investments include, but are not limited to, certificates of
deposit, bankers' acceptances and time deposits. Certificates of deposit are
generally short-term (i.e., less than one year), interest-bearing negotiable
certificates issued by commercial banks or savings and loan associations against
funds deposited in the issuing institution. A banker's acceptance is a time
draft drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction (to finance the import, export, transfer or
storage of goods). A banker's acceptance may be obtained from a domestic or
foreign bank, including a U.S. branch or agency of a foreign bank. The borrower
is liable for payment as well as the bank, which unconditionally guarantees to
pay the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity. Time deposits are nonnegotiable deposits for a fixed period of time at
a stated interest rate. The Fund will not invest in any such bank money
investment unless the investment is issued by a U.S. bank that is a member of
the Federal Deposit Insurance Corporation ("FDIC"), including any foreign branch
thereof, a U.S. branch or agency of a foreign bank, a foreign branch of a
foreign bank, or a savings bank or savings and loan association that is a member
of the FDIC and which at the date of investment has capital, surplus and
undivided profits (as of the date of its most recently published financial
statements) in excess of $50 million. The Fund will not invest in time deposits
maturing in more than seven days and will not invest more than 10% of its total
assets in time deposits maturing in two to seven days.
U.S. branches and agencies of foreign banks are offices of foreign banks
and are not separately incorporated entities. They are chartered and regulated
either federally or under state law. U.S. federal branches or agencies of
foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such branches elect FDIC insurance. Unlike U.S. branches of foreign banks,
U.S. agencies of foreign banks may not accept deposits and thus are not eligible
for FDIC insurance. Both branches and agencies can maintain credit balances,
which are funds received by the office incidental to or arising out of the
exercise of their banking powers and can exercise other commercial functions,
such as lending activities.
Short-Term Corporate Debt Instruments
Short-term corporate debt instruments include commercial paper to finance
short-term credit needs (i.e., short-term, unsecured promissory notes) issued
by, among others, (a) corporations and (b) domestic or foreign bank holding
companies or their subsidiaries or affiliates where the debt instrument is
guaranteed by the bank holding company or an affiliated bank or where the bank
holding company or the affiliated bank is unconditionally liable for the debt
instrument. Commercial paper is usually sold on a discounted basis and has a
maturity at the time of issuance not exceeding nine months.
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Lower Rated Debt Securities
The Fund may invest in debt securities within the BB major rating category
or lower by S&P or the Ba major rating category or lower by Moody's or debt
securities that are unrated but considered by the Investment Manager to be of
equivalent investment quality to comparable rated securities. Such securities
generally involve more credit risk than higher rated securities and are
considered by S&P and Moody's to be predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligation. Further, such securities may be subject to greater market
fluctuations and risk of loss of income and principal than lower yielding,
higher rated debt securities. Risks of lower quality debt securities include (i)
limited liquidity and secondary market support, (ii) substantial market price
volatility resulting from changes in prevailing interest rates and/or investor
perception, (iii) subordination to the prior claims of banks and other senior
lenders, (iv) the operation of mandatory sinking fund or call/redemption
provisions during periods of declining interest rates when the fund may be
required to reinvest premature redemption proceeds in lower yielding portfolio
securities; (v) the possibility that earnings of the issuer may be insufficient
to meet its debt service; (vi) the issuer's low creditworthiness and potential
for insolvency during periods of rising interest rates and economic downturn;
and (vii) the realization of taxable income for shareholders without the
corresponding receipt of cash in connection with investments in "zero coupon" or
"pay-in-kind" securities. Growth in the market for this type of security has
paralleled a general expansion in certain sectors in the U.S. economy, and the
effects of adverse economic changes (including a recession) are unclear. For
further information concerning the ratings of debt securities, see "--Commercial
Paper Ratings" and "--Rating Categories of Debt Securities," below. In the event
the rating of a security is downgraded, the Investment Manager will determine
whether the security should be retained or sold depending on an assessment of
all facts and circumstances at that time.
Zero and Step Coupon Securities
Zero and step coupon securities are debt securities that may pay no
interest for all or a portion of their life but are purchased at a discount to
face value at maturity. Their return consists of the amortization of the
discount between their purchase price and their maturity value, plus in the case
of a step coupon, any fixed rate interest income. Zero and step coupon
securities pay no interest to holders prior to maturity even though interest on
these securities is reported as income to the Fund. The Fund will be required to
distribute all or substantially all of such amounts annually to its
shareholders. These distributions may cause the Fund to liquidate portfolio
assets in order to make such distributions at a time when the Fund may have
otherwise chosen not to sell such securities. The amount of the discount
fluctuates with the market value of such securities, which may be more volatile
than that of securities which pay interest at regular intervals.
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<PAGE>
Master Loan Participation Agreements
The Fund may invest in loan participations. These investments represent
interests in floating or variable rate loans to foreign countries, corporations
and other entities. Loan participations will generally be acquired by the Fund
from a lender, usually a bank or other similar financial services entity. The
underlying loans may pay interest at rates which are periodically redetermined
on the basis of a base lending rate plus a premium. These base lending rates are
generally the Prime Rate offered by a major U.S. bank, the London InterBank
Offered Rate or other base rates used by commercial lenders.
The Fund may invest in loans which are not secured by any collateral.
Uncollateralized loans pose a greater risk of nonpayment of interest or loss of
principal than do collateralized loans. Interest and principal payments on these
loan participations may be reduced, deferred, suspended or eliminated. While
loan participations generally trade at par value, the fund will also be able to
acquire loan participations that sell at a discount because of the borrower's
credit standing.
The loan participations generally are not rated by nationally recognized
statistical rating organizations. Participation interests generally are not
listed on any national securities exchange and no regular market has developed
for such interests. The loans may be subject to restrictions on resale and any
secondary purchases and sales generally are conducted in private transactions.
When acquiring a loan participation, the Fund will have a contractual
relationship only with the lender, not with the borrower. The Fund has the right
to receive payments of principal and interest only from the lender selling the
loan participation and only upon receipt by such lender of such payments from
the borrower. As a result, the Fund may assume the credit risk of both the
borrower and the lender selling the loan participation.
Certain Ratings Categories
Commercial Paper Ratings.
Commercial paper investments at the time of purchase will be rated within
the "A" major rating category by S&P or within the "Prime" major rating category
by Moody's, or, if not rated, issued by companies having an outstanding
long-term unsecured debt issue rated at least within the "A" category by S&P or
by Moody's. The money market investments in corporate bonds and debentures
(which must have maturities at the date of settlement of one year or less) must
be rated at the time of purchase at least within the "A" category by S&P or
within the "Prime" category by Moody's.
Commercial paper rated within the "A" category (highest quality) by S&P is
issued by entities which have liquidity ratios which are adequate to meet cash
requirements. Long-term
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senior debt is rated within the "A" category or better, although in some cases
credits within the "BBB" category may be allowed. The issuer has access to at
least two additional channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are unquestioned.
The relative strength or weakness of the above factors determines whether the
issuer's commercial paper is rated A-1, A-2 or A-3. (Those A-1 issues determined
to possess overwhelming safety characteristics are denoted with a plus (+) sign:
A-1+.)
The rating "Prime" is the highest commercial paper rating category
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: evaluation of the management of the issuer; economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; evaluation of the
issuer's products in relation to competition and customer acceptance; liquidity;
amount and quality of long-term debt; trend of earnings over a period of 10
years; financial management of obligations which may be present or may arise as
a result of public interest questions and preparations to meet such obligations.
These factors are all considered in determining whether the commercial paper is
rated Prime-1, Prime-2 or Prime-3.
Rating Categories of Debt Securities.
Set forth below is a description of S&P corporate bond and debenture
rating categories:
AAA: An obligation rated within the AAA category has the highest rating
assigned by S&P. Capacity to meet the financial commitment on the obligation is
extremely strong.
AA: An obligation rated within the AA category differs from the highest
rated obligation only in small degree. Capacity to meet the financial obligation
is very strong.
A: An obligation rated within the A category is somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher rated categories. However, capacity to meet the financial
commitment on the obligation is still strong.
BBB: An obligation rated within the BBB category exhibits adequate
protection parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to meet the
financial commitment on the obligation.
Obligations rated within the BB, B, CCC, CC and C categories are regarded
as having significant speculative characteristics. BB indicates the least degree
of speculation and C the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
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BB: An obligation rated within the BB category is less vulnerable to
nonpayment than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet the financial commitment on the
obligation. The BB rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BBB rating.
B: An obligation rated within the B category is more vulnerable to
nonpayment than obligations rated within the BB category, but currently has the
capacity to meet the financial commitment on the obligation. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
meet the financial commitment on the obligation. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: An obligation rated within the CCC category is vulnerable to
nonpayment and is dependent upon favorable business, financial and economic
conditions to meet the financial commitment on the obligation. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to meet the financial commitment on the obligation.
CC: An obligation rated within the CC category is currently highly
vulnerable to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed, but payments on this obligation are being continued.
D: An obligation rated within the D category is in payment default. The D
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless S&P believes
that such payments will be made during such grace period. The D rating also will
be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayments risks-such as interest only (IO) and
principal only (PO) mortgage securities; and obligations with unusually risky
terms, such as inverse floaters.
Set forth below is a description of Moody's corporate bond and debenture
rating categories:
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Aaa: Bonds which are rated within the Aaa category are judged to be of the
best quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt-edge." Interest payments are protected by a large
or by an exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated within the Aa category are judged to be of high
quality by all standards. Together with the Aaa group they comprise what are
generally known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than in Aaa securities.
A: Bonds which are rated within the A category possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa: Bonds which are rated within the Baa category are considered as
medium grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba: Bonds which are rated within the Ba category are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during other good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated within the B category generally lack
characteristics of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small.
Caa: Bonds which are rated within the Caa category are of poor standing.
Such issues may be in default or there may be present elements of danger with
respect to principal or interest.
Ca: Bonds which are rated within the Ca category represent obligations
which are speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
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C: Bonds which are rated within the C category are the lowest rated class
of bonds, and issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
1, 2 or 3: The ratings from Aa through B may be modified by the addition
of a numeral indicating a bond's rank within its rating category.
Securities Ratings Policies.
The Fund may invest in debt instruments which are split rated; for
example, rated investment grade by one rating agency, but lower than investment
grade by the other. Where an investment is split rated, the Fund may invest on
the basis of the higher rating. Where an investment is rated by only one rating
agency, the Fund may invest on the basis of the one rating or on the basis of a
higher rating derived from its own analysis. Also, the Fund may invest in debt
securities that are unrated but considered by the Investment Manager to be of
equivalent investment quality to comparable rated securities.
Ratings Downgrades.
In the event the lowering of ratings of debt instruments held by the Fund
by applicable rating agencies results in a material decline in the overall
quality of the Fund's portfolio, the Trustees of the Trust will review the
situation and take such action as they deem in the best interests of the Fund's
shareholders, including, if necessary, changing the composition of the
portfolio.
C. The Trusts, the Trustees and Officers and Fund Shares
The Trustees of a Trust have authority to issue an unlimited number of
shares of beneficial interest of separate series, $.001 par value per share. The
Trustees also have authority, without the necessity of a shareholder vote, to
create any number of new series or classes or to commence the public offering of
shares of any previously established series or classes. The Trustees have
authorized shares of each Fund to be issued in multiple classes.
Each share of each class of shares represents an identical legal interest
in the same portfolio of investments of a Fund, has the same rights and is
identical in all respects, except that Class A, Class B(1), Class B and Class C
shares bear the expenses of the deferred sales arrangement and any expenses
(including the higher service and distribution fees) resulting from such sales
arrangement, and certain other incremental expenses related to a class. Each
class will have exclusive voting rights with respect to provisions of the Rule
12b-1 distribution plan pursuant to which the service and distribution fees, if
any, are paid. Although the legal rights of holders of each class of shares are
identical, it is likely that the different expenses borne by each class will
result in different net asset values and dividends. The different classes of
shares of the Fund also have different exchange privileges. Except for those
differences between classes of shares described above, in the Fund's Prospectus
and otherwise
II-23
<PAGE>
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.
Shareholder rights granted under the Master Trust Agreement may be
modified, suspended or repealed, in whole or part, by the Trustees, except as
provided by law or under the terms of the Master Trust Agreement. The Master
Trust Agreement may not be amended by the Trustees if the amendment would (a)
repeal the limitation on personal liability of any shareholder or Trustee, or
repeal the prohibition of assessment upon shareholders, without the express
consent of each shareholder or Trustee involved or (b) adversely modify any
shareholder right without the consent of the holders of a majority of the
outstanding shares entitled to vote. On any matter submitted to the
shareholders, the holder of a Fund share is entitled to one vote per share (with
proportionate voting for fractional shares) regardless of the relative net asset
value thereof.
Under each Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there ordinarily will be no shareholder meetings
unless required by the 1940 Act. Except as otherwise provided under the 1940
Act, the Board of Trustees will be a self-perpetuating body until fewer than
two-thirds of the Trustees serving as such are Trustees who were elected by
shareholders of the Trust. In the event less than a majority of the Trustees
serving as such were elected by shareholders of the Trust, a meeting of
shareholders will be called to elect Trustees. Under the Master Trust Agreement,
any Trustee may be removed by vote of two-thirds of the outstanding Trust
shares; holders of 10% or more of the outstanding shares of the Trust can
require that the Trustees call a meeting of shareholders for purposes of voting
on the removal of one or more Trustees. In connection with such meetings called
by shareholders, shareholders will be assisted in shareholder communications to
the extent required by applicable law.
Under Massachusetts law, the shareholders of a Trust could, under certain
circumstances, be held personally liable for the obligations for the Trust.
However, each Master Trust Agreement disclaims shareholder liability for acts or
obligations of the Trust and provides for indemnification for all losses and
expenses of any shareholder of the Fund held personally liable for the
obligations of the Trust. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Fund would be unable to meet its obligations. The Investment Manager
believes that, in view of the above, the risk of personal liability to
shareholders is remote.
The Trustees and officers of each Trust are identified below, together
with biographical information.
II-24
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Master Money
STATE STREET Capital Equity Exchange Financial Growth Income Investment Market Securities Tax-Exempt
RESEARCH: Trust Trust Trust Trust Trust Trust Trust Trust Trust Trust
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
------------------------------------------------------------------------------------------------------------------------------------
TRUSTEES AND
PRINCIPAL
OFFICERS
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Bruce R. Bond Trustee Trustee Trustee Trustee Trustee Trustee Trustee Trustee Trustee Trustee
------------------------------------------------------------------------------------------------------------------------------------
John R. Borzilleri Vice
President
------------------------------------------------------------------------------------------------------------------------------------
Paul J. Clifford, Vice
Jr. President
------------------------------------------------------------------------------------------------------------------------------------
Richard S. Davis Chairman Chairman Chairman Chairman Chairman Chairman Chairman Chairman Chairman Chairman
of the of the of the of the of the of the of the of the of the of the
Board, Board, Board, Board, Board, Board, Board, Board, Board, Board,
President President President President President President President President President President
and Chief and Chief and Chief and Chief and and and and Chief and Chief and Chief
Executive Executive Executive Executive Chief Chief Chief Executive Executive Executive
Officer Officer Officer Officer Executive Executive Executive Officer Officer Officer
Officer Officer Officer
------------------------------------------------------------------------------------------------------------------------------------
Maureen Depp Vice
President
------------------------------------------------------------------------------------------------------------------------------------
Catherine Dudley Vice
President
------------------------------------------------------------------------------------------------------------------------------------
Bruce A. Ebel Vice
President
------------------------------------------------------------------------------------------------------------------------------------
Steve A. Garban Trustee Trustee Trustee Trustee Trustee Trustee Trustee Trustee Trustee Trustee
------------------------------------------------------------------------------------------------------------------------------------
Lawrence J. Vice
Haverty, Jr. President
------------------------------------------------------------------------------------------------------------------------------------
F. Gardner Vice
Jackson, Jr. President
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
II-25
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Master Money
STATE STREET Capital Equity Exchange Financial Growth Income Investment Market Securities Tax-Exempt
RESEARCH: Trust Trust Trust Trust Trust Trust Trust Trust Trust Trust
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
------------------------------------------------------------------------------------------------------------------------------------
TRUSTEES AND
PRINCIPAL
OFFICERS
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
John H. Kallis Vice Vice Vice Vice Vice
President President President President President
------------------------------------------------------------------------------------------------------------------------------------
Dyann H. Kiessling Vice
President
------------------------------------------------------------------------------------------------------------------------------------
Rudolph K. Vice
Kluiber President
------------------------------------------------------------------------------------------------------------------------------------
Francis J. Secretary Secretary Secretary Secretary Secretary Secretary Secretary Secretary Secretary Secretary
McNamara, III
------------------------------------------------------------------------------------------------------------------------------------
Gerard P. Maus Treasurer Treasurer Treasurer Treasurer Treasurer Treasurer Treasurer Treasurer Treasurer Treasurer
------------------------------------------------------------------------------------------------------------------------------------
Thomas P. Moore, Vice Vice Vice
Jr. President President President
------------------------------------------------------------------------------------------------------------------------------------
Dean O. Morton Trustee Trustee Trustee Trustee Trustee Trustee Trustee Trustee Trustee Trustee
------------------------------------------------------------------------------------------------------------------------------------
Susan M. Phillips Trustee Trustee Trustee Trustee Trustee Trustee Trustee Trustee Trustee Trustee
------------------------------------------------------------------------------------------------------------------------------------
E.K. Easton Vice
Ragsdale, Jr. President
------------------------------------------------------------------------------------------------------------------------------------
Daniel J. Rice III Vice
President
------------------------------------------------------------------------------------------------------------------------------------
Toby Rosenblatt Trustee Trustee Trustee Trustee Trustee Trustee Trustee Trustee Trustee Trustee
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
II-26
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Master Money
STATE STREET Capital Equity Exchange Financial Growth Income Investment Market Securities Tax-Exempt
RESEARCH: Trust Trust Trust Trust Trust Trust Trust Trust Trust Trust
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
------------------------------------------------------------------------------------------------------------------------------------
TRUSTEES AND
PRINCIPAL
OFFICERS
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Michael S. Scott Trustee Trustee Trustee Trustee Trustee Trustee Trustee Trustee Trustee Trustee
Morton
------------------------------------------------------------------------------------------------------------------------------------
Thomas A. Shively Vice Vice Vice Vice Vice
President President President President President
------------------------------------------------------------------------------------------------------------------------------------
Tucker Walsh Vice
President
------------------------------------------------------------------------------------------------------------------------------------
James M. Weiss Vice Vice Vice Vice Vice Vice Vice Vice
President President President President President President President President
------------------------------------------------------------------------------------------------------------------------------------
Elizabeth M. Vice
Westvold President
------------------------------------------------------------------------------------------------------------------------------------
John T. Wilson Vice Vice
President President
------------------------------------------------------------------------------------------------------------------------------------
Kennard Vice Vice Vice Vice
Woodworth, Jr. President President President President
------------------------------------------------------------------------------------------------------------------------------------
Peter A. Zuger Vice Vice
President President
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
II-27
<PAGE>
Additional information on the Trustees, Directors and principal officers
of the State Street Research Funds is provided below. The address for each
person is One Financial Center, Boston, Massachusetts 02111.
Bruce R. Bond: He is 54. During the past five years, Mr. Bond has also
served as Chairman of the Board, Chief Executive Officer and President of
PictureTel Corporation, Chief Executive Officer of ANS Communications (a
communications networking company) and as managing director of British
Telecommunications PLC.
*John R. Borzilleri, MD: He is 42 and his principal occupation is Senior
Vice President of the Investment Manager. During the past five years he has also
served as a Vice President of the Investment Manager, as a Vice President of
Montgomery Securities and as an equity analyst at Dean Witter.
*Paul J. Clifford, Jr.: He is 38 and his principal occupation is Senior
Vice President of the Investment Manager. During the past five years he has also
served as Vice President of the Investment Manager.
*Richard S. Davis: He is 55 and his principal occupation is Chairman of
the Board, President and Chief Executive Officer of the Investment Manager.
During the past five years he has also served as Senior Vice President, Fixed
Income Investments for Metropolitan Life Insurance Company and as Managing
Director for J.P. Morgan Investment Management. Mr. Davis's other principal
business affiliations include Chairman of the Board, President and Chief
Executive Officer of State Street Research Investment Services, Inc.
*Maureen Depp: She is 46 and her principal occupation is Vice President of
State Street Research & Management Company. During the past five years she has
also served as an analyst at Wellington Management.
*Catherine Dudley: She is 40 and her principal occupation is senior Vice
President of the Investment Manager. During the past five years she has also
served as a senior portfolio manager at Chancellor Capital Management and as a
portfolio manager at Phoenix Investment Council.
*Bruce A. Ebel: He is 44 and his principal occupation is Senior Vice
President of the Investment Manager. During the past five years he has also
served as a Vice President and portfolio manager at Loomis, Sayles & Company,
L.P.
+Steve A. Garban: He is 62 and he is retired and was formerly Senior Vice
President for Finance and Operations and Treasurer of The Pennsylvania State
University. Mr. Garban is also a Director of Metropolitan Series Fund, Inc. (an
investment company).
*Lawrence J. Haverty, Jr.: He is 56 and his principal occupation is
currently, and during the past five years has been, Senior Vice President of the
Investment Manager.
II-28
<PAGE>
*F. Gardner Jackson, Jr.: He is 57 and his principal occupation is
currently, and during the past five years has been Senior Vice President of the
Investment Manager.
*John H. Kallis: He is 60 and his principal occupation is currently, and
during the past five years has been, Senior Vice President of the Investment
Manager.
*Dyann H. Kiessling: She is 37 and her principal occupation is Vice
President of the Investment Manager. During the past five years she has also
served as a fixed income trader for the Investment Manager.
*Rudolph K. Kluiber: He is 40 and his principal occupation currently is
Senior Vice President of the Investment Manager. During the past five years he
has also served as a Vice President of the Investment Manager.
*Gerard P. Maus: He is 49 and his principal occupation is currently, and
during the past five years has been, Executive Vice President, Treasurer, Chief
Financial Officer, Chief Administrative Officer and Director of the Investment
Manager. He also served as Interim Chief Operating Officer of the Investment
Manager for the period May 2000 through October 2000. Mr. Maus's other principal
business affiliations include Executive Vice President, Chief Financial Officer,
Chief Administrative Officer, Treasurer and Director of State Street Research
Investment Services, Inc.; Treasurer and Chief Financial Officer of SSRM
Holdings, Inc.; and Director of SSR Realty Advisors, Inc.
*Francis J. McNamara, III: He is 45 and his principal occupation is
Executive Vice President, General Counsel and Secretary of the Investment
Manager. During the past five years he has also served as Senior Vice President
of the Investment Manager. Mr. McNamara's other principal business affiliations
include Executive Vice President, General Counsel and Clerk of State Street
Research Investment Services, Inc.; and Secretary and General Counsel of SSRM
Holdings, Inc.
*Thomas P. Moore, Jr.: He is 62 and his principal occupation is currently,
and during the past five years has been, Senior Vice President of the Investment
Manager.
+Dean O. Morton: He is 68 and he is retired and was formerly Executive
Vice President, Chief Operating Officer and Director of Hewlett-Packard Company.
Mr. Morton is also a Director of Metropolitan Series Fund, Inc. (an investment
company).
Susan M. Phillips: She is 56 and her principal occupation is currently
Dean of the School of Business and Public Management at George Washington
University and Professor of Finance. Previously, she was a member of the Board
of Governors of the Federal Reserve System and Chairman and Commissioner of the
Commodity Futures Trading Commission.
II-29
<PAGE>
*E.K. Easton Ragsdale, Jr.: He is 48 and his principal occupation is
Senior Vice President of the Investment Manager. During the past five years he
has also served as Vice President of the Investment Manager.
*Daniel J. Rice III: He is 49 and his principal occupation is currently,
and during the past five years has been, Senior Vice President of the Investment
Manager.
Toby Rosenblatt: He is 62 and his principal occupations during the past
five years have been President of Founders Investments Ltd. and President of The
Glen Ellen Company, a private investment company.
+Michael S. Scott Morton: He is 63 and his principal occupation during
the past five years has been Jay W. Forrester Professor of Management at Sloan
School of Management, Massachusetts Institute of Technology. Dr. Scott Morton is
also a Director of Metropolitan Series Fund, Inc. (an investment company).
*Thomas A. Shively: He is 46 and his principal occupation is currently,
and during the past five years has been, Executive Vice President of the
Investment Manager. Mr. Shively is also a Director of the Investment Manager.
Mr. Shively's other principal business affiliations include Director of State
Street Research Investment Services, Inc.
*Tucker Walsh: He is 31 and his principal occupation is Vice President of
the Investment Manager. During the past five years he has also served as an
analyst for the Investment Manager and for Chilton Investment Partners and Cowen
Asset Management.
*James M. Weiss: He is 54 and his principal occupation is Executive Vice
President and Director of the Investment Manager. During the past five years he
has also served as Senior Vice President of the Investment Manager and as
President and Chief Investment Officer of IDS Equity Advisors.
*Elizabeth M. Westvold: She is 40 and her principal occupation is Senior
Vice President of the Investment Manager. During the past five years she has
also served as Vice President for the Investment Manager.
*John T. Wilson: He is 37 and his principal occupation is Senior Vice
President of the Investment Manager. During the past five years he has also
served as a Vice President of the Investment Manager, as an analyst and
portfolio manager at Phoenix Home Life Mutual Insurance Company and as a Vice
President of Phoenix Investment Counsel Inc.
*Kennard Woodworth, Jr.: He is 62 and his principal occupation is
currently, and during the past five years has been, Senior Vice President of the
Investment Manager.
II-30
<PAGE>
*Peter A. Zuger: He is 52. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as Vice President of American Century Investment
Management Company.
----------
* These Trustees and/or Officers are deemed to be "interested persons" of
the Trust under the 1940 Act because of their affiliations with the Fund's
investment adviser.
+ Serves as a Director of Metropolitan Series Fund, Inc., which has an
advisory relationship with the Investment Manager or its parent,
Metropolitan Life Insurance Company.
II-31
<PAGE>
D. Investment Advisory Services
Under the provisions of each Trust's Master Trust Agreement and the laws
of Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees.
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Investment
Manager was founded by Paul Cabot, Richard Saltonstall and Richard Paine to
serve as investment adviser to one of the nation's first mutual funds, presently
known as State Street Research Investment Trust, which they had formed in 1924.
Their investment management philosophy emphasized comprehensive fundamental
research and analysis, including meetings with the management of companies under
consideration for investment. The Investment Manager's portfolio management
group has extensive investment industry experience managing equity and debt
securities.
The Investment Manager is charged with the overall responsibility for
managing the investments and business affairs of each Fund, subject to the
authority of the Board of Trustees. Each Advisory Agreement provides that the
Investment Manager shall furnish the applicable Funds with an investment
program, office facilities and such investment advisory, research and
administrative services as may be required from time to time. The Investment
Manager compensates all executive and clerical personnel and Trustees of each
Trust if such persons are employees of the Investment Manager or its affiliates.
The Investment Manager is an indirect wholly owned subsidiary of MetLife.
Each Advisory Agreement provides that it shall continue in effect with
respect to a Fund for a period of two years after its initial effectiveness and
will continue from year to year thereafter as long as it is approved at least
annually both (i) by a vote of a majority of the outstanding voting securities
of the Fund (as defined in the 1940 Act) or by the Trustees of the Trust, and
(ii) in either event by a vote of a majority of the Trustees who are not parties
to the Advisory Agreement or "interested persons" of any party thereto, cast in
person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated on 60 days' written notice by either party
and will terminate automatically in the event of its assignment, as defined
under the 1940 Act and regulations thereunder. Such regulations provide that a
transaction which does not result in a change of actual control or management of
an adviser is not deemed an assignment.
Information about rates at which fees are calculated under the Advisory
Agreement with respect to the Funds identified on the cover page of the
Statement of Additional Information, as well as the fees paid to the Investment
Manager in previous years, if applicable, is included in Section I of this
Statement of Additional Information.
The Fund, the Investment Manager, and the Distributor have adopted a Code
of Ethics pursuant to the requirements of the 1940 Act. Under the Code of
Ethics, personnel are only
II-32
<PAGE>
permitted to engage in personal securities transactions in accordance with
certain conditions relating to such person's position, the identity of the
security, the timing of the transaction, and similar factors. Transactions in
securities that may be held by the Fund are permitted, subject to compliance
with applicable provisions of the Code. Personal securities transactions must be
reported quarterly and broker confirmations of such transactions must be
provided for review.
E. Purchase and Redemption of Shares
Shares of each Fund are distributed by State Street Research Investment
Services, Inc., the Distributor. Class A, Class B(1), Class B, Class C and Class
S shares of the Fund may be purchased at the next determined net asset value per
share plus, in the case of all classes except Class S shares, a sales charge
which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B(1), Class
B and Class C shares). Class B shares are available only to current Class B
shareholders through reinvestment of dividends and capital gains distributions
or through exchanges from existing Class B accounts of the State Street Research
Funds. General information on how to buy shares of the Fund, as well as sales
charges involved, are set forth under "Your Investment" in the Prospectus. The
following supplements that information.
Public Offering Price. The public offering price for each class of shares
is based on their net asset value determined as of the close of regular trading
on the NYSE, but not later than 4 p.m. eastern time, on the day the purchase
order is received by State Street Research Service Center (the "Service
Center"), provided that the order is received prior to the close of regular
trading on the NYSE on that day; otherwise the net asset value used is that
determined as of the close of the NYSE on the next day it is open for
unrestricted trading. When a purchase order is placed through a broker-dealer,
that broker-dealer is responsible for transmitting the order promptly to the
Service Center in order to permit the investor to obtain the current price. Any
loss suffered by an investor which results from a broker-dealer's failure to
transmit an order promptly is a matter for settlement between the investor and
the broker-dealer. Under certain pre-established operational arrangements, the
price may be determined as of the time the order is received by the
broker-dealer or its designee.
Alternative Purchase Program. Alternative classes of shares permit
investors to select a purchase program which they believe will be the most
advantageous for them, given the amount of their purchase, the length of time
they anticipate holding Fund shares, or the flexibility they desire in this
regard, and other relevant circumstances. Investors will be able to determine
whether in their particular circumstances it is more advantageous to incur an
initial sales charge and not be subject to certain ongoing charges or to have
their entire purchase price invested in the Fund with the investment being
subject thereafter to ongoing service fees and distribution fees.
II-33
<PAGE>
As described in greater detail below, financial professionals are paid
differing amounts of compensation depending on which class of shares they sell.
II-34
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
Class A Class B(1) Class B Class C Class S
------- ---------- ------- ------- -------
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales Charges Paid by Initial sales Contingent deferred Contingent Contingent None
Investor to Distributor charge at time of sales charge of 5% deferred sales deferred sales
investment of up to to 1% applies to any charge of 5% to 2% charge of 1%
5.75%* depending on shares redeemed applies to any applies to any
amount of investment within first six shares redeemed shares redeemed
years following within first five within one year
their purchase; no years following following their
contingent deferred their purchase; no purchase
sales charge after contingent
six years deferred sales
charge after five
years
------------------------------------------------------------------------------------------------------------------------------
On investments of
$1 million or
more, no initial
sales charge; but
contingent
deferred sales
charge of up to
1% may apply to
any shares
redeemed within
one year following
their purchase
------------------------------------------------------------------------------------------------------------------------------
Initial Commission Above described 4% 4% 1% None
Paid by Distributor to initial sales
Financial Professional charge less 0.25%
to 0.75% retained
by distributor
On investments of
$1 million or more,
0.25% to 1% paid
to dealer by
Distributor
------------------------------------------------------------------------------------------------------------------------------
Rule 12b-1 Service Fee
------------------------------------------------------------------------------------------------------------------------------
Paid by Fund to 0.25% each year 0.25% each year 0.25% each year 0.25% each year None
Distributor
------------------------------------------------------------------------------------------------------------------------------
Paid by 0.25% each year 0.25% each year 0.25% each year 0.25% each year None
Distributor to commencing after one commencing after commencing after
Financial year following one year following one year
Professional purchase purchase following purchase
------------------------------------------------------------------------------------------------------------------------------
Rule 12b-1
Distribution Fee
------------------------------------------------------------------------------------------------------------------------------
Paid by Fund to Up to 0.15% each 0.75% for first 0.75% for first 0.75% each year None
Distributor year eight years; Class eight years; Class
B(1) shares convert B shares convert
automatically to automatically to
Class A shares Class A shares
after eight years after eight years
------------------------------------------------------------------------------------------------------------------------------
Paid by Up to 0.15% each None None 0.75% each year None
Distributor to year commencing after
Financial one year
Professional following purchase
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
----------
* or up to 4.50% for State Street Research Government Income Fund, State
Street Research High Income Fund, State Street Research Strategic Income
Fund, State Street Research Tax-Exempt Fund and State Street Research New
York Tax Free Fund.
II-35
<PAGE>
Class A Shares--Reduced Sales Charges. The reduced sales charges set forth
under "Your Investment--Choosing a Share Class" in the Prospectus apply to
purchases made at any one time by any "person," which includes: (i) an
individual, or an individual combining with his or her spouse and their children
and purchasing for his, her or their own account; (ii) a "company" as defined in
Section 2(a)(8) of the 1940 Act; (iii) a trustee or other fiduciary purchasing
for a single trust estate or single fiduciary account (including a pension,
profit sharing or other employee benefit trust created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code); (iv) a tax-exempt
organization under Section 501(c)(3) or (13) of the Internal Revenue Code; and
(v) an employee benefit plan of a single employer or of affiliated employers.
Investors may purchase Class A shares of the Fund at reduced sales charges
by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds"
(which include the Fund and other funds as designated by the Distributor from
time to time) within a 13-month period. The sales charge applicable to each
purchase made pursuant to a Letter of Intent will be that which would apply if
the total dollar amount set forth in the Letter of Intent were being bought in a
single transaction. Purchases made within a 90-day period prior to the execution
of a Letter of Intent may be included therein; in such case the date of the
earliest of such purchases marks the commencement of the 13-month period.
An investor may include toward completion of a Letter of Intent the value
(at the current public offering price) of all of his or her Class A shares of
the Fund and of any of the other Class A shares of Eligible Funds held of record
as of the date of his or her Letter of Intent, plus the value (at the current
offering price) as of such date of all of such shares held by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B(1), Class B, Class C and Class S shares may also be included in the
combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described
II-36
<PAGE>
herein as eligible to join with the investor in a single purchase. Class B(1),
Class B, Class C and Class S shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Other Programs Related to Class A Shares. Class A shares of the Fund may
be sold, or issued in an exchange, at a reduced sales charge or without a sales
charge pursuant to certain sponsored arrangements for designated classes of
investors. These arrangements include programs sponsored by the Distributor or
others under which, for example, a company, employee benefit plan or other
organization makes recommendations to, or permits group solicitation of, its
employees, members or participants to purchase Fund shares. (These arrangements
are not available to any organization created primarily for the purpose of
obtaining shares of the Fund at a reduced sales charge or without a sales
charge.) Sponsored arrangements may be established for non-profit organizations,
holders of individual retirement accounts or participants in limited promotional
campaigns, such as a special offering to shareholders of funds in other
complexes that may be liquidating. Sales without a sales charge, or with a
reduced sales charge, may also be made through brokers, registered investment
advisers, financial planners, institutions, and others, under managed fee-based
programs (e.g., "wrap fee" or similar programs) which meet certain requirements
established by the Distributor. Information on such arrangements and further
conditions and limitations is available from the Distributor.
The entire sales charge on Class A shares may be reallowed to financial
professionals who sell shares during certain special promotional periods which
may be instituted from time to time. The Fund reserves the right to have such
promotions without further supplement to the Prospectus or Statement of
Additional Information. The financial professionals who receive the entire sales
charge may be deemed to be underwriters of the Fund's shares under the
Securities Act of 1933 during such promotions.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and persons: (A) the
Investment Manager, Distributor or any affiliated entities, including any direct
or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated Companies,
any relatives of any such individuals whose relationship is directly verified by
such individuals to the Distributor, or any beneficial account for such
relatives or individuals; (C) employees, officers, sales representatives or
directors of dealers and other entities with a selling agreement with the
Distributor to sell shares of any aforementioned investment company, any spouse
or child of such person, or any beneficial account for any of them; and (D)
others who because of their business relationship with the Fund, the Distributor
or its affiliates, and because of their knowledge of the Fund, do not require
any significant sales effort or expense to educate them about the Fund. The
purchase must be made for investment and the shares purchased may not be resold
except through redemption. This purchase program is subject to such
II-37
<PAGE>
administrative policies, regarding the qualification of purchasers, minimum
investments by various groups and any other matters, as may be adopted by the
Distributor from time to time.
Conversion of Class B(1) and Class B Shares to Class A Shares. A
shareholder's Class B(1) and Class B shares of the Fund, including all shares
received as dividends or distributions with respect to such shares, will
automatically convert to Class A shares of the Fund at the end of eight years
following the issuance of such Class B(1) or Class B shares; consequently, they
will no longer be subject to the higher expenses borne by Class B(1) and Class B
shares. The conversion rate will be determined on the basis of the relative per
share net asset values of the two classes and may result in a shareholder
receiving either a greater or fewer number of Class A shares than the Class B(1)
or Class B shares so converted. As noted above, holding periods for Class B(1)
shares received in exchange for Class B(1) shares of other Eligible Funds and
for Class B shares received in exchange for Class B shares of other Eligible
Funds, will be counted toward the eight-year period.
Contingent Deferred Sales Charges. The amount of any contingent deferred
sales charge paid on Class A shares (on sales of $1 million or more and which do
not involve an initial sales charge) or on Class B(1), Class B or Class C shares
of the Fund will be paid to the Distributor. The Distributor will pay dealers at
the time of sale a 4% commission for selling Class B(1) and Class B shares and a
1% commission for selling Class C shares. In certain cases, a dealer may elect
to waive the 4% commission on Class B(1) and Class B shares and receive in lieu
thereof an annual fee, usually 1%, with respect to such outstanding shares. The
proceeds of the contingent deferred sales charges and the distribution fees are
used to offset distribution expenses and thereby permit the sale of Class B(1),
Class B and Class C shares without an initial sales charge.
In determining the applicability and rate of any contingent deferred sales
charge of Class B(1), Class B or Class C shares, it will be assumed that a
redemption of the shares is made first of those shares having the greatest
capital appreciation, next of shares representing reinvestment of dividends and
capital gains distributions and finally of remaining shares held by shareholder
for the longest period of time. Class B(1) shares that are redeemed within a
six-year period after purchase, Class B shares that are redeemed within a
five-year period after their purchase, and Class C shares that are redeemed
within a one-year period after their purchase, will not be subject to a
contingent deferred sales charge to the extent that the value of such shares
represents (1) capital appreciation of Fund assets or (2) reinvestment of
dividends or capital gains distributions. The holding period for purposes of
applying a contingent deferred sales charge for a particular class of shares of
the Fund acquired through an exchange from another Eligible Fund will be
measured from the date that such shares were initially acquired in the other
Eligible Fund, and shares of the same class being redeemed will be considered to
represent, as applicable, capital appreciation or dividend and capital gains
distribution reinvestments in such other Eligible Fund. These determinations
will result in any contingent deferred sales charge being imposed at the lowest
possible rate. For federal
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income tax purposes, the amount of the contingent deferred sales charge will
reduce the gain or increase the loss, as the case may be, on the amount realized
on redemption.
Contingent Deferred Sales Charge Waivers. With respect to Class A shares
(on sales of $1 million or more and which do not involve an initial sales
charge), and Class B(1), Class B and Class C shares of the Fund, the contingent
deferred sales charge does not apply to exchanges or to redemptions under a
systematic withdrawal plan which meets certain conditions. The contingent
deferred sales charge will be waived for participant initiated distributions
from State Street Research prototype employee retirement plans. In addition, the
contingent deferred sales charge will be waived for: (i) redemptions made within
one year of the death or total disability, as defined by the Social Security
Administration, of all shareholders of an account; (ii) redemptions made after
attainment of a specific age in an amount which represents the minimum
distribution required at such age under Section 401(a)(9) of the Internal
Revenue Code of 1986, as amended, for retirement accounts or plans (e.g., age 70
1/2 for Individual Retirement Accounts and Section 403(b) plans), calculated
solely on the basis of assets invested in the Fund or other Eligible Funds; and
(iii) a redemption resulting from a tax-free return of an excess contribution to
an Individual Retirement Account. (The foregoing waivers do not apply to a
tax-free rollover or transfer of assets out of the Fund). The Fund may waive the
contingent deferred sales charge on any class, or modify or terminate any
waivers, at any time. The Fund may limit the application of multiple waivers and
establish other conditions for employee benefit plans. Certain employee benefit
plans sponsored by a financial professional may be subject to other conditions
for waivers under which the plans may initially invest in Class B(1) or Class B
shares and then Class A shares of certain funds upon meeting specific criteria.
No contingent deferred sales charges apply to shares held by MetLife, the
Investment Manager or the Distributor.
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
MetLife, 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. For
information on different conditions that may apply to certain Funds, see Section
I for the relevant Fund.
In the discretion of the Distributor, Class S shares may be made available
to (a) current and former employees, officers and directors of the Investment
Manager and Distributor; (b) current and former directors or trustees of the
investment companies for
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which the Investment Manager serves as the primary investment adviser; and (c)
relatives of any such individuals, provided that the relationship is directly
verified by such individuals to the Distributor, and any beneficial account for
such relatives or individuals. Class A shares acquired by such individuals and
relatives may, in the discretion of the Distributor, be converted into Class S
shares. 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.
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.
In-Kind Purchase Option. In the discretion of the Investment Manager,
shares of the Fund may be offered for purchase partly or entirely in exchange
for securities. This option is available only in very limited circumstances. The
Investment Manager will not approve the acceptance of any securities in exchange
for Fund shares unless it believes the securities are appropriate investments
for the Fund.
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.
Systematic Withdrawal Plan. A shareholder who owns noncertificated Class A
or Class S shares with a value of $5,000 or more, or Class B(1), Class B or
Class C shares with a value of $10,000 or more, may elect, by participating in
the Fund's Systematic Withdrawal Plan, to have periodic checks issued for
specified amounts. These amounts may not be less than certain minimums,
depending on the class of shares held. The Plan provides that all income
dividends and capital gains distributions of the Fund shall be credited to
participating shareholders in additional shares of the Fund. Thus, the
withdrawal amounts paid can only be realized by redeeming shares of the Fund
under the Plan. To the extent such amounts paid exceed dividends and
distributions from the Fund, a shareholder's investment will decrease and may
eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 12% annually
(minimum $50 per withdrawal) of either (a) the value, at the time the Systematic
Withdrawal Plan is initiated, of the shares then in the account or (b) the
value, at the time of a withdrawal, of the same
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number of shares as in the account when the Systematic Withdrawal Plan was
initiated, whichever is higher.
Expenses of the Systematic Withdrawal Plan are borne by the Fund. A
participating shareholder may withdraw from the Systematic Withdrawal Plan, and
the Fund may terminate the Systematic Withdrawal Plan at any time on written
notice. Purchase of additional shares while a shareholder is receiving payments
under a Systematic Withdrawal Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate in
the Investamatic Program (see "Your Investment--Investor Services--Investamatic
Program" in the Fund's Prospectus) and the Systematic Withdrawal Plan at the
same time.
Request to Dealer to Repurchase. For the convenience of shareholders, the
Fund has authorized the Distributor as its agent to accept orders from
broker-dealers by wire or telephone for the repurchase of shares by the
Distributor from the broker-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 broker-dealer to the Distributor. The
broker-dealer is responsible for promptly transmitting a shareholder's order to
the Distributor. Under certain pre-established operational arrangements, the
price may be determined as of the time the order is received by the
broker-dealer or its designee.
Signature Guarantees. Signature guarantees are required for, among other
things: (1) written requests for redemptions for more than $100,000; (2) written
requests for redemptions for any amount if the proceeds are transmitted to other
than the current address of record (unchanged in the past 30 days); (3) written
requests for redemptions for any amount submitted by corporations and certain
fiduciaries and other intermediaries; (4) requests to transfer the registration
of shares to another owner; and (5) if checkwriting is available for the
account, authorizations to establish the checkwriting privilege. Signatures must
be guaranteed by a bank, a member firm of a national stock exchange, or other
eligible guarantor institution. The Transfer Agent will not accept guarantees
(or notarizations) from notaries public. The above requirements may be waived in
certain instances.
Dishonored Checks. If a purchaser's check is not honored for its full
amount, the purchaser could be subject to additional charges to cover collection
costs and any investment loss, and the purchase may be canceled.
Processing Charges. Purchases and redemptions processed through securities
dealers may be subject to processing charges imposed by the securities dealer in
addition to sales charges that may be imposed by the Fund or the Distributor.
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F. Shareholder Accounts
General information on shareholder accounts is included in the Fund's
Prospectus under "Your Investment." The following supplements that information.
Maintenance Fees and Involuntary Redemption. Because of the relatively
high cost of maintaining small shareholder accounts, the Fund reserves the right
to redeem at its option any shareholder account which remains below $1,500 for a
period of 60 days after notice is mailed to the applicable shareholder, or to
impose a maintenance fee on such account after 60 days' notice. Such
involuntarily redemptions will be subject to applicable sales charges, if any.
The Fund may increase such minimum account value above such amount in the future
after notice to affected shareholders. Involuntarily redeemed shares will be
priced at the net asset value on the date fixed for redemption by the Fund, and
the proceeds of the redemption will be mailed to the affected shareholder at the
address of record. Currently, the maintenance fee is $18 annually, which is paid
to the Transfer Agent. The fee does not apply to certain retirement accounts or
if the shareholder has more than an aggregate $50,000 invested in the Fund and
other Eligible Funds combined. Imposition of a maintenance fee on a small
account could, over time, exhaust the assets of such account.
To cover the cost of additional compliance administration, a $20 fee will
be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date of
payment of redemption proceeds for more than seven days, except that (a) it may
elect to suspend the redemption of shares or postpone the date of payment of
redemption proceeds: (1) during any period that the NYSE is closed (other than
customary weekend and holiday closings) or trading on the NYSE is restricted;
(2) during any period in which an emergency exists as a result of which disposal
of portfolio securities is not reasonably practicable or it is not reasonably
practicable to fairly determine the Fund's net asset values; or (3) during such
other periods as 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. Share certificates will not be issued. Shareholders
will receive periodic statements of transactions in their accounts.
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The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through
dealers, by wire or by mailing a check payable to "State Street
Research Funds" under the terms set forth above under "Purchase and
Redemption of Shares" in this Statement of Additional Information.
2. The following methods of receiving dividends from investment income
and distributions from capital gains generally are available:
(a) All income dividends and capital gains distributions
reinvested in additional shares of the Fund.
(b) All income dividends and capital gains distributions in cash.
(c) All income dividends and capital gains distributions invested
in any one available Eligible Fund designated by the
shareholder as described below. See "--Dividend Allocation
Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will be automatically coded for reinvestment of all
dividends and distributions in additional shares of the same class of the Fund.
Selections may be changed at any time by telephone or written notice to the
Service Center. Dividends and distributions are reinvested at net asset value
without a sales charge.
Exchange Privileges. Shareholders of the Fund may exchange their shares
for available shares with corresponding characteristics of any of the other
Eligible Funds on the basis of the relative net asset values of the respective
shares to be exchanged, and subject to compliance with applicable securities
laws. Shareholders of any other Eligible Fund may similarly exchange their
shares for Fund shares with corresponding characteristics. Prior to making an
exchange, shareholders should obtain the Prospectus of the Eligible Fund into
which they are exchanging. Under the Direct Program, subject to certain
conditions, shareholders may make arrangements for regular exchanges from the
Fund into other Eligible Funds. To effect an exchange, Class A, Class B(1),
Class B and Class C shares may be redeemed without the payment of any contingent
deferred sales charge that might otherwise be due upon an ordinary redemption of
such shares. The State Street Research Money Market Fund issues Class E shares
which are sold without any sales charge. Exchanges of State Street Research
Money Market Fund Class E shares into Class A shares of the Fund or any other
Eligible Fund are subject to the initial sales charge or contingent deferred
sales charge applicable to an initial investment in such Class A shares, unless
a prior Class A sales charge has been paid directly or indirectly with respect
to the shares redeemed. Class A shares acquired through a new investment after
January 1, 1999, are subject to an incremental sales charge if exchanged within
30 days of acquisition for Class A shares of a Fund with a
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higher applicable sales charge. For purposes of computing the contingent
deferred sales charge that may be payable upon disposition of any acquired Class
A, Class B(1), Class B and Class C shares, the holding period of the redeemed
shares is "tacked" to the holding period of any acquired shares. No exchange
transaction fee is currently imposed on any exchange.
Shares of the Fund may also be acquired or redeemed in exchange for shares
of the Summit Cash Reserves Fund ("Summit Cash Reserves") by customers of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (subject to completion of
steps necessary to implement the program). The Fund and Summit Cash Reserves are
related mutual funds for purposes of investment and investor services. Upon the
acquisition of shares of Summit Cash Reserves by exchange for redeemed shares of
the Fund, (a) no sales charge is imposed by Summit Cash Reserves, (b) no
contingent deferred sales charge is imposed by the Fund on the Fund shares
redeemed, and (c) any applicable holding period of the Fund shares redeemed is
"tolled," that is, the holding period clock stops running pending further
transactions. Upon the acquisition of shares of the Fund by exchange for
redeemed shares of Summit Cash Reserves, (a) the acquisition of Class A shares
shall be subject to the initial sales charges or contingent deferred sales
charges applicable to an initial investment in such Class A shares, unless a
prior Class A sales charge has been paid indirectly, and (b) the acquisition of
Class B(1), Class B or Class C shares of the Fund shall restart any holding
period previously tolled, or shall be subject to the contingent deferred sales
charge applicable to an initial investment in such shares.
The exchange privilege may be terminated or suspended or its terms changed
at any time, subject, if required under applicable regulations, to 60 days'
prior notice. New accounts established for investments upon exchange from an
existing account in another fund will have the same telephone privileges with
respect to the Fund (see "Your Investment--Account Policies--Telephone Requests"
in the Fund's Prospectus and "--Telephone Privileges," below) as the existing
account unless the Service Center is instructed otherwise. Related
administrative policies and procedures may also be adopted with regard to a
series of exchanges, street name accounts, sponsored arrangements and other
matters.
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
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disruptive to the Fund. The Fund may impose these restrictions at any time. The
exchange limit may be modified for accounts in certain institutional retirement
plans because of plan exchange limits, Department of Labor regulations or
administrative and other considerations. The exchange limit may also be modified
under certain exchange arrangements for selected brokers with substantial asset
allocation programs. Subject to the foregoing, if an exchange request in good
order is received by the Service Center and delivered by the Service Center to
the Transfer Agent by 12 noon Boston time on any business day, the exchange
usually will occur that day. For further information regarding the exchange
privilege, shareholders should contact the Service Center.
Reinvestment Privilege. A shareholder of the Fund who has redeemed shares
or had shares repurchased at his or her request may reinvest all or any portion
of the proceeds (plus that amount necessary to acquire a fractional share to
round off his or her reinvestment to full shares) in shares, of the same class
as the shares redeemed, of the Fund or any other Eligible Fund at net asset
value and without subjecting the reinvestment to an initial sales charge,
provided such reinvestment is made within 120 calendar days after a redemption
or repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the amount
reinvested. The redemption of shares is, for federal income tax purposes, a sale
on which the shareholder may realize a gain or loss. If a redemption at a loss
is followed by a reinvestment within 30 days, the transaction may be a "wash
sale" resulting in a denial of the loss for federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by the Service
Center of such shareholder's written purchase request and delivery of the
request by the Service Center to the Transfer Agent. A shareholder may exercise
this reinvestment privilege only once per 12-month period with respect to his or
her shares of the Fund.
Dividend Allocation Plan. The Dividend Allocation Plan allows shareholders
to elect to have all their dividends and any other distributions from the Fund
or any Eligible Fund 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 and Internet Privileges. The following privileges are available:
o Telephone Exchange and Redemption Privilege
o Shareholders automatically receive this privilege unless
declined.
o This privilege allows a shareholder or any person claiming to
act as the shareholder's representative to request exchanges
into other State Street Research funds or make redemptions.
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o Internet Privilege for Shareholder
o Shareholders may access the Fund's Web site to enter
transactions and for other purposes, subject to acceptance of
the important conditions set forth on the Web site.
A shareholder with the above privileges is deemed to authorize the Fund's
agents to: (1) act upon the telephone instructions of any person purporting to
be any of the shareholders of an account or a shareholder's financial
professional; (2) act upon the Internet instructions of any person purporting to
be any of the shareholders of an account; and (3) honor any telephone or
Internet instructions for a change of address. All telephone calls will be
recorded. Neither the Fund, any other State Street Research Fund, the Investment
Manager, the Distributor, nor any of their agents 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 or Internet requests may be unauthorized. Reasonable
procedures will be followed to confirm that instructions communicated by
telephone or Internet are genuine. The shareholder will not be liable for any
losses arising from unauthorized or fraudulent instructions if such procedures
are not followed.
Alternative Means of Contacting a Fund. It is unlikely, during periods of
extraordinary market conditions, that a shareholder may have difficulty in
reaching the Service Center. In that event, however, the shareholder should
contact the Service Center at 1-800-562-0032, 1-617-357-7800 or otherwise at its
main office at One Financial Center, Boston, Massachusetts 02111-2690.
G. Net Asset Value
The net asset value of the shares of each Fund is determined once daily as
of the close of regular trading on the NYSE, but not later than 4 P.M. eastern
time, Monday through Friday, on each day during which the NYSE is open for
unrestricted trading. The NYSE is currently closed on New Year's Day, Martin
Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of each Fund is computed by dividing the sum
of the value of the securities held by the Fund plus any cash or other assets
minus all liabilities by the total number of outstanding shares of the Fund at
such time. Any expenses, except for extraordinary or nonrecurring expenses,
borne by the Fund, including the investment management fee payable to the
Investment Manager, are accrued daily.
In determining the values of portfolio assets as provided below, the
Trustees utilize one or more pricing services in lieu of market quotations for
certain securities which are not readily available on a daily basis. Such
services utilize information with respect to market
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transactions, quotations from dealers and various relationships among securities
in determining value and may provide prices determined as of times prior to the
close of the NYSE.
In general, securities are valued as follows. Securities which are listed
or traded on the New York or American Stock Exchange are valued at the price of
the last quoted sale on the respective exchange for that day. Securities which
are listed or traded on a national securities exchange or exchanges, but not on
the New York or American Stock Exchange, are valued at the price of the last
quoted sale on the exchange for that day prior to the close of the NYSE.
Securities not listed on any national securities exchange which are traded "over
the counter" and for which quotations are available on the National Association
of Securities Dealers, Inc.'s (the "NASD") NASDAQ System are valued at the
closing price supplied through such system for that day at the close of the
NYSE. Other securities are, in general, valued at the mean of the bid and asked
quotations last quoted prior to the close of the NYSE if there are market
quotations readily available, or in the absence of such market quotations, then
at the fair value thereof as determined by or under authority of the Trustees of
the Trust with the use of such pricing services as may be deemed appropriate or
methodologies authorized by the Trustees. The Trustees also reserve the right to
adopt other valuations based on fair value in pricing in unusual circumstances
where use of other methods as discussed in part above, could otherwise have a
material adverse effect on the Fund as a whole.
The Trustees have authorized the use of the amortized cost method to value
short-term debt instruments issued with a maturity of one year or less and
having a remaining maturity of 60 days or less when the value obtained is fair
value, provided that during any period in which more than 25% of the Fund's
total assets is invested in short-term debt securities the current market value
of such securities will be used in calculating net asset value per share in lieu
of the amortized cost method. Under the amortized cost method of valuation, the
security is initially valued at cost on the date of purchase (or in the case of
short-term debt instruments purchased with more than 60 days remaining to
maturity, the market value on the 61st day prior to maturity), and thereafter a
constant amortization to maturity of any discount or premium is assumed
regardless of the impact of fluctuating interest rates on the market value of
the security.
H. Portfolio Transactions
The Fund's portfolio turnover rate is determined by dividing the lesser of
securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less).
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Brokerage Allocation
The Investment Manager's policy is to seek for its clients, including the
Fund, what in the Investment Manager's judgment will be the best overall
execution of purchase or sale orders and the most favorable net prices in
securities transactions consistent with its judgment as to the business
qualifications of the various broker or dealer firms with whom the Investment
Manager may do business, and the Investment Manager may not necessarily choose
the broker offering the lowest available commission rate. Decisions with respect
to the market where the transaction is to be completed, to the form of
transaction (whether principal or agency), and to the allocation of orders among
brokers or dealers are made in accordance with this policy. In selecting brokers
or dealers to effect portfolio transactions, consideration is given to their
proven integrity and financial responsibility, their demonstrated execution
experience and capabilities both generally and with respect to particular
markets or securities, the competitiveness of their commission rates in agency
transactions (and their net prices in principal transactions), their willingness
to commit capital, and their clearance and settlement capability. The Investment
Manager makes every effort to keep informed of commission rate structures and
prevalent bid/ask spread characteristics of the markets and securities in which
transactions for the Fund occur. Against this background, the Investment Manager
evaluates the reasonableness of a commission or a net price with respect to a
particular transaction by considering such factors as difficulty of execution or
security positioning by the executing firm. The Investment Manager may or may
not solicit competitive bids based on its judgment of the expected benefit or
harm to the execution process for that transaction.
When it appears that a number of firms could satisfy the required
standards in respect of a particular transaction, consideration may also be
given by the Investment Manager to services other than execution services which
certain of such firms have provided in the past or may provide in the future.
Negotiated commission rates and prices, however, are based upon the Investment
Manager's judgment of the rate which reflects the execution requirements of the
transaction without regard to whether the broker provides services in addition
to execution. Among such other services are the supplying of supplemental
investment research; general economic, political and business information;
analytical and statistical data; relevant market information, quotation
equipment and services; reports and information about specific companies,
industries and securities; purchase and sale recommendations for stocks and
bonds; portfolio strategy services; historical statistical information; market
data services providing information on specific issues and prices; financial
publications; proxy voting data and analysis services; technical analysis of
various aspects of the securities markets, including technical charts; computer
hardware used for brokerage and research purposes; computer software and
databases (including those contained in certain trading systems and used for
portfolio analysis and modeling and also including software providing investment
personnel with efficient access to current and historical data from a variety of
internal and external sources) and portfolio evaluation services and relative
performance of accounts.
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In the case of the Fund and other registered investment companies advised
by the Investment Manager or its affiliates, the above services may include data
relating to performance, expenses and fees of those investment companies and
other investment companies. This information is used by the Trustees or
Directors of the investment companies to fulfill their responsibility to oversee
the quality of the Investment Manager's advisory contracts between the
investment companies and the Investment Manager. The Investment Manager
considers these investment company services only in connection with the
execution of transactions on behalf of its investment company clients and not
its other clients. Certain of the nonexecution services provided by
broker-dealers may in turn be obtained by the broker-dealers from third parties
who are paid for such services by the broker-dealers.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. The Investment Manager's investment management
personnel seek to evaluate the quality of the research and other services
provided by various broker-dealer firms, and the results of these efforts are
made available to the equity trading department, which uses this information as
consideration to the extent described above in the selection of brokers to
execute portfolio transactions.
Some services furnished by broker-dealers may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Investment Manager allocates the cost
of the services to determine the proportion which is allocable to research or
investment decision-making and the proportion allocable to other purposes. The
Investment Manager pays directly from its own funds for that portion allocable
to uses other than research or investment decision-making. Some research and
execution services may benefit the Investment Manager's clients as a whole,
while others may benefit a specific segment of clients. Not all such services
will necessarily be used exclusively in connection with the accounts which pay
the commissions to the broker-dealer providing the services.
The Investment Manager has no fixed agreements or understandings with any
broker-dealer as to the amount of brokerage business which the firm may expect
to receive for services supplied to the Investment Manager or otherwise. There
may be, however, understandings with certain firms that in order for such firms
to be able to continuously supply certain services, they need to receive an
allocation of a specified amount of brokerage business. These understandings are
honored to the extent possible in accordance with the policies set forth above.
It is not the Investment Manager's policy to intentionally pay a firm a
brokerage commission higher than that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided. However, the Investment Manager is aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, the Investment Manager relies on the provisions of
Section 28(e) of the Securities Exchange Act of 1934.
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In the case of the purchase of fixed income securities in underwriting
transactions, the Investment Manager follows any instructions received from its
clients as to the allocation of new issue discounts, selling commissions and
designations to brokers or dealers which provide the client with research,
performance evaluation, master trustee and other services. In the absence of
instructions from the client, the Investment Manager may make such allocations
to broker-dealers which have provided the Investment Manager with research and
brokerage services.
In some instances, certain clients of the Investment Manager request it to
place all or part of the orders for their account with certain brokers or
dealers, which in some cases provide services to those clients. The Investment
Manager generally agrees to honor these requests to the extent practicable.
Clients may request that the Investment Manager only effect transactions with
the specified broker-dealers if the broker-dealers are competitive as to price
and execution. Where the request is not so conditioned, the Investment Manager
may be unable to negotiate commissions or obtain volume discounts or best
execution. In cases where the Investment Manager is requested to use a
particular broker-dealer, different commissions may be charged to clients making
the requests. A client who requests the use of a particular broker-dealer should
understand that it may lose the possible advantage which non-requesting clients
derive from aggregation of orders for several clients as a single transaction
for the purchase or sale of a particular security. Among other reasons why best
execution may not be achieved with directed brokerage is that, in an effort to
achieve orderly execution of transactions, execution of orders that have
designated particular brokers may, at the discretion of the trading desk, be
delayed until execution of other non-designated orders has been completed.
When more than one client of the Investment Manager is seeking to buy or
sell the same security, the sale or purchase is carried out in a manner which is
considered fair and equitable to all accounts. In allocating investments among
various clients (including in what sequence orders for trades are placed), the
Investment Manager will use its best business judgment and will take into
account such factors as the investment objectives of the clients, the amount of
investment funds available to each, the size of the order, the relative sizes of
the accounts, 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.
In addition, when the Investment Manager is seeking to buy or sell the
same security on behalf of more than one client at approximately the same time,
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.
Although sharing large transactions may sometimes affect price or volume of
shares acquired or sold, the Investment Manager believes that grouping orders
generally provide an advantage in execution. Where an aggregate order is
executed in a series of transactions at various prices on a given day, each
participating account's proportionate share of such order will reflect the
average price paid or received with respect to the total order. The Investment
Manager may decide not to group orders,
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however, 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 interest 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 overall execution (including transactions costs) relative
to other clients.
The Investment Manager has developed certain internal policies governing
its short sale trading activities, including prior notification in certain
circumstances to portfolio managers of accounts holding long positions in the
same security. Generally, however, sales of long positions will take precedence
over short sales, regardless of the order in which the trade orders are
received.
Subject to the policy of seeking best overall price and execution as
stated above, sales of shares of investment companies under the Investment
Manager's management may be considered by the Investment Manager in the
selection of broker or dealer firms to execute portfolio transactions for
investment companies under its management.
I. Certain Tax Matters
Federal Income Taxation of the Fund--In General
The Fund intends to qualify and elects to be treated each taxable year as
a "regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), although it cannot give complete assurance
that it will qualify to do so. Accordingly, the Fund must, among other things,
(a) derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); and (b) satisfy certain
diversification requirements on a quarterly basis.
If in any year the Fund derives more than 10% of its gross income (as
defined in the Code, which disregards losses for that purpose) from investments
made directly in commodities, including precious metal investments, or
commodity-related options, futures or indices, the Fund in such year may fail to
qualify as a regulated investment company under the Code. The Investment Manager
intends to manage the Fund's portfolio so as to minimize the risk of such a
disqualification.
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions
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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 undistributed portion of the respective balances from the prior
year. For that purpose, any income or gain retained by the Fund that is subject
to corporate tax will be considered to have been distributed by year-end. The
Fund intends to make sufficient distributions to avoid this 4% excise tax.
Taxation of the Fund's Investments
Original Issue Discount; Market Discount. For federal income tax purposes,
debt securities purchased by the Fund may be treated as having original issue
discount. Original issue discount represents interest for federal income tax
purposes and can generally be defined as the excess of the stated redemption
price at maturity of a debt obligation over the issue price. Original issue
discount is treated for federal income tax purposes as income earned by the
Fund, whether or not any income is actually received, and therefore is subject
to the distribution requirements of the Code. Generally, the amount of original
issue discount is determined on the basis of a constant yield to maturity which
takes into account the compounding of accrued interest. Under section 1286 of
the Code, an investment in a stripped bond or stripped coupon may result in
original issue discount.
Debt securities may be purchased by the Fund at a discount that exceeds
the original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for federal
income tax purposes. In the case of any debt security issued after July 18,
1984, having a fixed maturity date of more than one year from the date of issue
and having market discount, the gain realized on disposition will be treated as
interest to the extent it does not exceed the accrued market discount on the
security (unless the Fund elects to include such accrued market discount in
income in the tax year to which it is attributable). Generally, market discount
is accrued on a daily basis. The Fund may be required to capitalize, rather than
deduct currently, part or all of any direct interest expense incurred or
continued to purchase or carry any debt security having market discount, unless
the Fund makes the election to include market discount currently. Because the
Fund must include original issue discount in income, it will be more difficult
for the Fund to make the
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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, and require
inclusion of unrealized gains in the Fund's income for the purposes of the
excise tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and (iii) characterize
both realized and unrealized gain or loss as short-term and long-term gain,
irrespective of the holding period of the investment. Such provisions generally
apply to, among other investments, options on debt securities, indices on
securities and futures contracts. The Fund will monitor its transactions and may
make certain tax elections available to it in order to mitigate the impact of
these rules and prevent disqualification of the Fund as a regulated investment
company.
Gains or losses attributable to foreign currency contracts or fluctuations
in exchange rates that occur between the time the Fund accrues income or
expenses denominated in a foreign currency and the time the Fund actually
collects such income or pays such expenses are treated as ordinary income or
loss. The portion of any gain or loss on the disposition of a debt security
denominated in a foreign currency that is attributable to fluctuations in the
value of the foreign currency during the holding period of the debt security
will likewise be treated as ordinary income or loss. Such ordinary income or
loss will increase or decrease the amount of the Fund's net investment income.
If the Fund invests in the stock of certain "passive foreign investment
companies" ("PFICs"), the income of such companies may become taxable to the
Fund prior to its distribution to the Fund or, alternatively, ordinary income
taxes and interest charges may be imposed on the Fund on "excess distributions"
received by the Fund or on gain from the disposition of such investments by the
Fund. Alternatively, if the stock of a PFIC is marketable, the Fund may elect to
mark the stock of the PFIC to market annually, and to recognize gain or loss of
the appreciation or depreciation in the stock. Any gain so recognized would be
treated as ordinary income, and a loss would be recognized and treated as an
ordinary deduction to the extent of any prior, unreversed amounts of gain
recognized with respect to that stock. The Fund does not intend to invest in
PFICs. Because of the broad scope of the PFIC rules, however, there can be no
assurance that the Fund can avoid doing so.
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Federal Income Taxation of Shareholders
Dividends paid by the Fund may be eligible for the 70% dividends-received
deduction for corporations. The percentage of the Fund's dividends eligible for
such tax treatment may be less than 100% to the extent that less than 100% of
the Fund's gross income may be from qualifying dividends of domestic
corporations. Any dividend declared in October, November or December and made
payable to shareholders of record in any such month is treated as received by
such shareholder on December 31, provided that the Fund pays the dividend during
January of the following calendar year.
Distributions by the Fund can result in a reduction in the fair market
value of the Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as ordinary income or capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
The Fund may be subject to foreign taxes, including foreign income taxes.
If so, the Fund intends to meet the requirements of the Code for passing through
to its shareholders the tax benefit of foreign income taxes paid, although there
is no assurance that it will be able to do so. Under this provision, if more
than half of the value of the total assets of the Fund at the close of its
taxable year consists of stock or securities of foreign corporations, the fund
will be eligible and intends to elect to pass through to its shareholders the
amount of foreign taxes it paid if such amounts are material. Pursuant to this
election, a United States shareholder will, in general, be required to (i)
include in gross income, in addition to taxable distributions actually received,
his or her pro rata share of the foreign taxes paid by the Fund, (ii) treat that
share of taxes as having been paid directly by him or her, and (iii) either
deduct such share of taxes or treat such share of taxes as a credit against
United State income tax liability. A tax-exempt shareholder will ordinarily not
benefit from this election.
Generally, a credit for foreign taxes paid by the Fund may not exceed a
shareholder's United States income tax attributable to the shareholder's foreign
source income. This limitation applies separately to different categories of
income, one of which is a foreign-source passive income, which is likely to
include all of the foreign-source income of the Fund. As a result of these
limitations, some shareholders may not be able to utilize fully any foreign tax
credits generated by an investment in the Fund. In addition, holding period
requirements apply so that, generally, the shareholder will be unable to take a
tax credit for any foreign withholding tax on a dividend payment unless (a) the
Fund held the stock in the foreign corporation for more than 15 days during the
30-day period beginning on the date that the stock becomes ex-dividend with
respect to the dividend on which the withholding tax is paid and (b) the
shareholder held his or her shares in the Fund during the same period. In the
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case of certain preference dividends on foreign stock, the 15-day and 30-day
periods are extended to 45 days and 90 days, respectively. Shareholders also
will be unable to claim a credit for foreign withholding taxes on dividends if
the Fund has entered into certain hedging transactions with respect to the stock
of the foreign corporation. Shareholders may take a deduction to the extent of
any tax credits disallowed under the holding period and hedging rules. The Fund
will provide its shareholders with information about the source of its income
and the foreign taxes it has paid for use in preparing the shareholder's United
States income tax returns, including information about withholding taxes for
which a tax credit could be denied to the Fund under the holding period and
hedging rules described above.
The foregoing discussion of United States federal income tax law relates
solely to the application of that law to United States persons, that is, United
States citizens and residents and United States corporations, partnerships,
trusts and estates. Each shareholder who is not a United States person should
consider the United States and foreign tax consequences of ownership of shares
of the Fund, including the possibility that such a shareholder may be subject to
United States withholding tax at a rate of up to 30% (or at a lower rate under
applicable treaty) on distributions from the Fund.
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this Statement of Additional Information
in light of their particular tax situations.
J. Distribution of Fund Shares
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through broker-dealers who have entered into sales agreements with the
Distributor. The Fund has authorized certain broker-dealers to receive on its
behalf purchase and redemption orders, and such broker-dealers are authorized to
designate other intermediaries to receive orders on the Fund's behalf. The Fund
will be deemed to have received a purchase or redemption order when such
broker-dealer, or, if applicable, the broker-dealer's designee, receives the
order. In such case, orders will be priced at the Fund's net asset value next
computed after the orders are received by an authorized broker-dealer or its
designee. The Distributor distributes shares of the Fund on a continuous basis
at an offering price which is based on the net asset value per share of the Fund
plus (subject to certain exceptions) a sales charge which, at the election of
the investor, may be imposed (i) at the time of purchase (the Class A shares) or
(ii) on a deferred basis (Class B(1), Class B and Class C shares). The
Distributor may reallow all or portions of such sales charges as concessions to
broker-dealers. The Distributor may also pay its affiliate MetLife Securities,
Inc. additional sales compensation of up to 0.25% of certain sales or assets.
The differences in the price at which the Fund's Class A shares are
offered due to scheduled variations in sales charges, or Class S shares are
offered, as described in the
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Fund's Prospectus, result from cost savings inherent in economies of scale,
among other factors. Management believes that the cost of sales efforts of the
Distributor and broker-dealers tends to decrease as the size of purchases
increases, or does not involve any incremental sales expenses as in the case of,
for example, exchanges, reinvestments or dividend investments at net asset
value. Similarly, no significant sales effort is necessary for sales of shares
at net asset value to certain Directors, Trustees, officers, employees, their
relatives and other persons directly or indirectly related to the Fund or
associated entities. Where shares of the Fund are offered at a reduced sales
charge or without a sales charge pursuant to sponsored arrangements, managed
fee-based programs and so-called "mutual fund supermarkets," among other special
programs, the amount of the sales charge reduction will similarly reflect the
anticipated reduction in sales expenses associated with such arrangements. The
reductions in sales expenses, and therefore the reduction in sales charges, will
vary depending on factors such as the size and other characteristics of the
organization or program, and the nature of its membership or the participants.
The Fund reserves the right to make variations in, or eliminate, sales charges
at any time or to revise the terms of or to suspend or discontinue sales
pursuant to sponsored arrangements or similar programs at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor may pay the authorized securities dealer
making such sale a commission based on the aggregate of such sales. Such
commission may also be paid to authorized securities dealers upon sales of Class
A shares made pursuant to a Letter of Intent to purchase shares having a net
asset value of $1,000,000 or more. Shares sold with such commissions payable are
subject to a one-year contingent deferred sales charge of up to 1.00% on any
portion of such shares redeemed within one year following their sale. After a
particular purchase of Class A shares is made under the Letter of Intent, the
commission will be paid only in respect of that particular purchase of shares.
If the Letter of Intent is not completed, the commission paid will be deducted
from any discounts or commissions otherwise payable to such dealer in respect of
shares actually sold. If an investor is eligible to purchase shares at net asset
value on account of the Right of Accumulation, the commission will be paid only
in respect of the incremental purchase at net asset value.
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Plan(s) of Distribution Pursuant to Rule 12b-1
The Fund may have one or more Distribution Plans under Rule 12b-1, as set
forth in Section I of this Statement of Additional Information for the Fund.
Under the Fund's Distribution Plans, the Fund may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of shares, including, but not limited to, (1) the payment of commissions to
underwriters, securities dealers and others engaged in the sale of shares,
including payments to the Distributor to be used to pay commissions to
securities dealers (which securities dealers may be affiliates of the
Distributor), (2) expenditures incurred by the Distributor in connection with
the distribution and marketing of shares and the servicing of investor accounts,
and (3) expenses incurred by the Distributor in connection with the servicing of
shareholder accounts including payments to securities dealers and others for the
provision of personal service to investors and/or the maintenance or servicing
of shareholder accounts. In addition, the Distribution Plans authorize the
Distributor and the Investment Manager to make payments out of management fees,
general profits, revenues or other sources to underwriters, securities dealers
and others in connection with sales of shares, to the extent, if any, that such
payments may be deemed to be an indirect financing of any activity primarily
resulting in the sale of shares of the Fund within the scope of Rule 12b-1 under
the 1940 Act. Payments by the Fund under the Distribution Plan may be
discontinued at any time. The Distributor may also voluntarily waive receipt of
payments from the Fund from time to time.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits annual expenditures that the Fund may incur to 0.75% for distribution
expenses and 0.25% for service fees. The NASD Rule also limits the aggregate
amount that the Fund may pay for such distribution costs to 6.25% of gross share
sales of a class since the inception of any asset-based sales charge plus
interest at the prime rate plus 1% on unpaid amounts thereof (less any
contingent deferred sales charges). Such limitation does not apply to the
service fees.
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) or others for
personal services and/or the maintenance of shareholder accounts. A portion of
any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance or servicing of
shareholder accounts by such dealers. The distribution fees are used primarily
to offset initial and ongoing commissions paid to dealers for selling such
shares and for other sales and marketing expenditures. Dealers who have sold
Class A shares are eligible for ongoing payments commencing as of the time of
such sale. Dealers who have sold Class B(1), Class B and Class C shares are
eligible for ongoing payments after the first year during which such shares have
been held of record by such dealer as nominee for its clients (or by such
clients directly).
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs similar
expenses on behalf
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of, such other funds. When expenses of the Distributor cannot be identified as
relating to a specific fund, the Distributor allocates expenses among the funds
in a manner deemed fair and equitable to each fund.
The payment of service and distribution fees may continue even if the Fund
ceases, temporarily or permanently, to sell one or more classes of shares to new
accounts. During the period the Fund is closed to new accounts, the distribution
fee will not be used for promotion expenses. The service and distribution fees
are used during a closed period to cover services provided to current
shareholders and to cover the compensation of financial professionals in
connection with the prior sale of Fund shares, among other non-promotional
distribution expenditures.
The Distributor may pay certain dealers and other intermediaries
additional compensation for sales and administrative services. The Distributor
may provide cash and noncash incentives to intermediaries who, for example, sell
significant amounts of shares or develop particular distribution channels. The
Distributor may compensate dealers with clients who maintain their investments
in the Fund over a period of years. The incentives can include merchandise and
trips to, and attendance at, sales seminars at resorts. The Distributor may pay
for administrative services, such as technological and computer systems support
for the maintenance of pension plan participant records, for subaccounting and
for distribution through mutual fund supermarkets or similar arrangements.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plans. The Distributor's interest
in the Distribution Plans is described above.
K. Calculation of Performance Data
From time to time, in advertisements or in communications to shareholders
or prospective investors, the Fund may compare the performance of its Class A,
Class B(1), Class B, Class C or Class S shares to the performance of other
mutual funds with similar investment objectives, to certificates of deposit
and/or to other financial alternatives. The Fund may also compare its
performance to appropriate indices, such as Standard & Poor's 500 Index,
Consumer Price Index and Dow Jones Industrial Average and/or to appropriate
rankings and averages such as those compiled by Lipper Analytical Services,
Inc., Morningstar, Inc., Money Magazine, Business Week, Forbes Magazine, The
Wall Street Journal and Investor's Daily.
The average annual total return ("standard total return") of the Class A,
Class B(1), Class B, Class C and Class S shares of each Fund will be calculated
as set forth below. Total return is computed separately for each class of shares
of the Fund.
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Total Return
Standard total return is computed separately for each class of shares by
determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value in accordance with the following formula:
P(1+T)^n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the
designated period assuming a hypothetical $1,000
payment made at the beginning of the designated
period
The calculation is based on the further assumptions that the highest
applicable initial or contingent deferred sales charge is deducted, and that all
dividends and distributions by the Fund are reinvested at net asset value on the
reinvestment dates during the periods. All accrued expenses and recurring
charges are also taken into account as described later herein.
Yield
Yield for each class of the Fund's shares is computed by dividing the net
investment income per share earned during a recent month or other specified
30-day period by the maximum offering price per share on the last day of the
period and annualizing the result in accordance with the following formula:
YIELD = 2[((a-b)/cd + 1)^6 -1]
Where a= dividends and interest earned during the period
b= expenses accrued for the period (net of voluntary expense
reductions by the Investment Manager)
c= the average daily number of shares outstanding during the
period that were entitled to receive dividends
d= the maximum offering price per share on the last day of the
period
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To calculate interest earned (for the purpose of "a" above) on debt
obligations, the Fund computes the yield to effective maturity of each
obligation held by the Fund based on the market value of the obligation
(including actual accrued interest) at the close of the last business day of the
preceding period, or, with respect to obligations purchased during the period,
the purchase price (plus actual accrued interest). The yield to effective
maturity is then divided by 360 and the quotient is multiplied by the market
value of the obligation (including actual accrued interest) to determine the
interest income on the obligation for each day of the period that the obligation
is in the portfolio. Dividend income is recognized daily based on published
rates.
With respect to the treatment of discount and premium on mortgage or other
receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("paydowns"), the Fund accounts for gain or
loss attributable to actual monthly paydowns as a realized capital gain or loss
during the period. The Fund has elected not to amortize discount or premium on
such securities.
Undeclared earned income, computed in accordance with generally accepted
accounting principles, may be subtracted from the maximum offering price.
Undeclared earned income is the net investment income which, at the end of the
base period, has not been declared as a dividend, but is reasonably expected to
be declared as a dividend shortly thereafter. The maximum offering price
includes the maximum applicable sales charge.
All accrued expenses are taken into account as described later herein.
Yield information is useful in reviewing the Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in the Fund's shares with bank deposits, savings accounts and
similar investment alternatives which often are insured and/or provide an agreed
or guaranteed fixed yield for a stated period of time. Shareholders should
remember that yield is a function of the kind and quality of the instruments in
the Fund's portfolio, portfolio maturity and operating expenses and market
conditions.
Accrued Expenses and Recurring Charges
Accrued expenses include all recurring charges that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return and yield results take sales charges, if applicable, into
account, although the results do not take into account recurring and
nonrecurring charges for optional services which only certain shareholders elect
and which involve nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by affiliates
of fees or expenses during the subject period. Subsidization can include the
Investment Manager's waiver of a portion of its advisory fee, the Distributor's
waiver of a portion of its Rule 12b-1
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fee, or the assumption of a portion of the Fund's expenses by either of them or
their affiliates. In the absence of such subsidization, the performance of the
Fund would have been lower.
Nonstandardized Total Return
Each Fund may provide the above described standard total return results
for Class A, Class B(1), Class B, Class C and Class S shares for periods which
end no earlier than the most recent calendar quarter end and which begin twelve
months before, five years before and ten years before (or the commencement of
the Fund's operations, whichever is earlier). In addition, the Fund may provide
nonstandardized total return results for differing periods, such as for the most
recent six months, and/or without taking sales charges into account. Such
nonstandardized total return is computed as otherwise described under "Total
Return" except the result may or may not be annualized, and as noted any
applicable sales charge, if any, may not be taken into account and therefore not
deducted from the hypothetical initial payment of $1,000.
Distribution Rates
Each Fund may also quote its distribution rate for each class of shares.
The distribution rate is calculated by annualizing the latest per-share
distribution from ordinary income and dividing the result by the offering price
per share as of the end of the period to which the distribution relates. A
distribution can include gross investment income from debt obligations purchased
at a premium and in effect include a portion of the premium paid. A distribution
can also include nonrecurring, gross short-term capital gains without
recognition of any unrealized capital losses. Further, a distribution can
include income from the sale of options by the Fund even though such option
income is not considered investment income under generally accepted accounting
principles.
Because a distribution can include such premiums, capital gains and option
income, the amount of the distribution may be susceptible to control by the
Investment Manager through transactions designed to increase the amount of such
items. Also, because the distribution rate is calculated in part by dividing the
latest distribution by the offering price, which is based on net asset value
plus any applicable sales charge, the distribution rate will increase as the net
asset value declines. A distribution rate can be greater than the yield rate
calculated as described above.
L. Custodian
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian for Fund assets. As custodian State Street
Bank and Trust Company is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on each Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
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M. Independent Accountants
PricewaterhouseCoopers LLP, 160 Federal Street, Boston, Massachusetts
02110, serves as the Trusts' independent accountants, providing professional
services including (1) audits of each Fund's annual financial statements, (2)
assistance and consultation in connection with SEC filings and (3) review of the
annual income tax returns filed on behalf of each Fund.
N. Financial Reports
In addition to the reports provided to holders of record on a semiannual
basis, other supplementary financial reports may be made available from time to
time through electronic or other media. Shareholders with substantial holdings
in one or more State Street Research Funds may also receive reports and other
information which reflect or analyze their positions in a consolidated manner.
For more information, call State Street Research Service Center.
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