STATE STREET RESEARCH
HIGH INCOME FUND
Prospectus - August 1, 1995
STATE STREET RESEARCH HIGH INCOME FUND (the "Fund") seeks primarily, high
current income and, secondarily, capital appreciation, from investments in
fixed income securities. In selecting investments for the Fund, the
investment manager seeks to identify those fixed income securities which it
believes will not involve undue risk. Certain of the Fund's investments,
however, may be considered predominantly speculative.
State Street Research & Management Company serves as investment adviser for
the Fund (the "Investment Manager"). As of May 31, 1995, the Investment
Manager had assets of approximately $25.7 billion under management. State
Street Research Investment Services, Inc. serves as distributor (the
"Distributor") for the Fund.
Shareholders may have their shares redeemed directly by the Fund at net
asset value plus the applicable contingent deferred sales charge, if any;
redemptions processed through securities dealers may be subject to processing
charges.
There are risks in any investment program, including the risk of changing
economic and market conditions, and there is no assurance that the Fund will
achieve its investment objective. The net asset value of a share of the Fund
will fluctuate as market conditions change.
This Prospectus sets forth concisely the information a prospective investor
ought to know about the Fund before investing. It should be retained for
future reference. A Statement of Additional Information about the Fund dated
August 1, 1995 has been filed with the Securities and Exchange Commission and
is incorporated by reference in this Prospectus. It is available, at no
charge, upon request to the Fund at the address indicated on the back cover
or by calling 1-800-562-0032.
The Fund is a diversified series of State Street Research Income Trust (the
"Trust"), an open-end management investment company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE FUND WILL INVEST AT LEAST 65% OF ITS TOTAL ASSETS IN LOWER RATED BONDS,
COMMONLY KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING DEFAULT
RISKS, THAN THOSE FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD
CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING. SEE "THE FUND'S
INVESTMENTS," PAGES 7 AND 8 AND "APPENDIX--DESCRIPTION OF DEBT/BOND RATINGS,"
PAGES 29 TO 30.
Table of Contents Page
Table of Expenses 2
Financial Highlights 4
The Fund's Investments 6
Other Investment Policies 7
Purchase of Shares 10
Redemption of Shares 18
Shareholder Services 20
The Fund and Its Shares 24
Management of the Fund 25
Dividends and Distributions; Taxes 26
Calculation of Performance Data 27
Appendix--Description of Debt/Bond Ratings 29
<PAGE>
The Fund offers four classes of shares which may be purchased at the next
determined net asset value per share plus, in the case of all classes except
Class C shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5% and
(ii) an annual service fee of 0.25% of the average daily net asset value of
the Class A shares.
Class B shares are subject to (i) a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made
within five years of purchase and (ii) annual distribution and service fees
of 1% of the average daily net asset value of such shares. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after purchase. No contingent deferred sales charge
applies after the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1%
if redeemed within one year following purchase and (ii) annual distribution
and service fees of 1% of the average daily net asset value of such shares.
<TABLE>
<CAPTION>
Table of Expenses Class A Class B Class C Class D
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses (1)
Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price) 4.5% None None None
Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price) None None None None
Maximum Deferred Sales Charge (as a percentage of original
purchase price or redemption proceeds, as applicable) None (2) 5% None 1%
Redemption Fees (as a percentage of amount redeemed,
if applicable) None None None None
Exchange Fees None None None None
</TABLE>
- --------
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
thereafter, and no contingent deferred sales charge is imposed after the
fifth year. Class D shares are subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the
sale. Long-term investors in a class of shares with a distribution fee
may, over a period of years, pay more than the economic equivalent of the
maximum sales charge permissible under applicable rules. See "Purchase of
Shares."
(2) Purchases of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption.
See "Purchase of Shares."
2
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C Class D
------- ------- ------- -------
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees 0.65% 0.65% 0.65% 0.65%
12b-1 Fees 0.25% 1.00% None 1.00%
Other Expenses 0.33% 0.33% 0.33% 0.33%
---- ---- ---- -----
Total Fund Operating Expenses 1.23% 1.98% 0.98% 1.98%
==== ==== ==== =====
</TABLE>
Example:
You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption of the entire investment at the end of each
time period:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Class A shares $57 $82 $110 $187
Class B shares (1) $70 $92 $127 $211
Class C shares $10 $31 $ 54 $120
Class D shares $30 $62 $107 $231
You would pay the following expenses on the same investment, assuming no
redemption:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Class B shares (1) $20 $62 $107 $211
Class D shares $20 $62 $107 $231
(1) Ten-year figures assume conversion of Class B shares to Class A shares at
the end of eight years.
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than
shown.
The purpose of the table above is to assist the investor in understanding
the various costs and expenses that an investor will bear directly or
indirectly. The percentage expense levels shown in the table above are based
on experience with expenses during the fiscal year ended March 31, 1995;
actual expense levels for the current fiscal year and future years may vary
from the amounts shown. The table does not reflect charges for optional
services elected by certain shareholders, such as the $7.50 fee for
remittance of redemption proceeds by wire. For further information on sales
charges, see "Purchase of Shares--Alternative Purchase Program"; for further
information on management fees, see "Management of the Fund"; and for further
information on 12b-1 fees, see "Purchase of Shares--Distribution Plan."
3
<PAGE>
Financial Highlights
The data set forth below has been audited by Price Waterhouse LLP,
independent accountants, and their report thereon for the latest five years
is included in the Statement of Additional Information. For further
information about the performance of the Fund, see "Financial Statements" in
the Statement of Additional Information. Past results may not be indicative
of future performance because of, among other things, changes in the Fund's
investment objective and policies in January 1994. See "Calculation of
Performance Data."
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------------------------------------------------
August 25, 1986
(Commencement
Year ended March 31 of Operations) to
-------------------------------------------------------------------------------
1995*** 1994 1993 1992 1991 1990 1989 1988 March 31, 1987
------- ------- ------- ------ ------ ------- ----- ----- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 6.43 $ 6.32 $ 5.95 $ 5.21 $ 5.88 $ 7.20 $ 7.22 $ 7.73 $ 7.40
Net investment income* .61 .66 .67 .71 .75 .88 .84 .85 .48
Net realized and
unrealized gain (loss)
on investments and
foreign currency (.58) .22 .37 .72 (.67) (1.31) (.01) (.52) .33
Dividends from net
investment income (.60) (.62) (.67) (.69) (.75) (.89) (.85) (.83) (.48)
Distributions from net
realized gains (.06) (.15) -- -- -- -- -- (.01) --
------ ------ ------ ----- ----- ------ ---- ---- ------
Net asset value, end of
year $ 5.80 $ 6.43 $ 6.32 $ 5.95 $ 5.21 $ 5.88 $ 7.20 $ 7.22 $7.73
====== ====== ====== ===== ===== ====== ==== ==== =====
Total return 1.80%+ 14.58%+ 18.70%+ 28.99%+ 2.18%+ (6.72%)+ 12.32%+ 4.79%+ 11.34%+++
Net assets at end of year
(000s) $618,462 $650,755 $496,352 $308,921 $195,739 $157,987 $88,681 $41,637 $25,809
Ratio of operating
expenses to average net
assets* 1.23% 1.16% 1.15% 1.17% 1.21% 1.24% 1.25% 1.25% 1.25%++
Ratio of net investment
income to average net
assets* 10.19% 10.41% 11.25% 12.71% 14.21% 13.46% 11.85% 11.90% 10.62%++
Portfolio turnover rate 31.55% 24.36% 79.39% 72.62% 58.15% 52.46% 110.92% 126.68% 39.75%
*Reflects voluntary
assumption of fees or
expenses per share in
each year -- $ 0.00 -- -- -- $ 0.00 $ 0.01 $ 0.02 $ 0.01
</TABLE>
++Annualized.
+Total return figures do not reflect any front-end or contingent deferred
sales charges.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges.
***Per-share figures have been calculated using the average shares method.
4
<PAGE>
<TABLE>
<CAPTION>
Class B Class C Class D
-------------------------- ------------------------- ---------------------------
Year ended Year ended Year ended
March 31, March 31, March 31,
-------------------------- ------------------------- ---------------------------
1995*** 1994** 1995*** 1994** 1995*** 1994**
----------- ------------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 6.42 $ 6.34 $ 6.42 $ 6.34 $ 6.42 $ 6.34
Net investment income* .57 .51 .64 .57 .58 .51
Net realized and unrealized gain
(loss) on investments and foreign
currency (.58) .15 (.60) .14 (.59) .15
Dividends from net investment income (.56) (.48) (.62) (.53) (.56) (.48)
Distributions from net realized
gains (.06) (.10) (.06) (.10) (.06) (.10)
--------- ------- --------- ------- ------- -------
Net asset value, end of year $ 5.79 $ 6.42 $ 5.78 $ 6.42 $ 5.79 $ 6.42
========= ====== ========= ===== ======= =======
Total return 0.89%+ 10.76%+++ 1.73%+ 11.67%+++ 0.88%+ 10.74%+++
Net assets at end of year (000s) $117,767 $67,337 $2,579 $ 851 $6,766 $2,661
Ratio of operating expenses to
average net assets* 1.98% 1.93%++ 0.98% 0.93%++ 1.98% 1.93%++
Ratio of net investment income to
average net assets* 9.65% 10.32%++ 10.85% 11.32%++ 9.81% 10.32%++
Portfolio turnover rate 31.55% 24.36% 31.55% 24.36% 31.55% 24.36%
*Reflects voluntary assumption of
fees or expenses per share in each year -- $ 0.00 -- $ 0.00 -- $ 0.00
</TABLE>
**June 1, 1993 (commencement of share class designations) to March 31, 1994.
++Annualized.
+Total return figures do not reflect any front-end or contingent deferred
sales charges.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charge.
***Per-share figures have been calculated using the average shares method.
5
<PAGE>
The Fund's Investments
The investment objective of the Fund is to seek, primarily, high current
income and, secondarily, capital appreciation, from investments in fixed
income securities. The investment objective is a fundamental policy and may
not be changed without approval of the shareholders of the Fund.
There are risks in any investment program, and there is no assurance that the
Fund will achieve its investment objective. All bonds are subject to relative
degrees of credit risk and market volatility. Credit risk relates to the
issuer's (and any guarantor's) ability to make timely payments of principal
and interest. Market volatility relates to the changes in market price that
occur as a result of variations in the level of prevailing interest rates and
yield relationships between sectors in the bond market and other market
factors. When interest rates increase, the value of debt securities and
shares of the Fund can be expected to decline. Generally, prices of lower
rated issues tend to fluctuate more than prices of higher rated issues, and,
for any given change in the level of interest rates, prices of issues with
longer maturities tend to fluctuate more than prices of issues with shorter
maturities.
In seeking to achieve this investment objective, the Fund, under normal
market conditions, invests at least 65% of its total assets in fixed income
securities, including convertible bonds and preferred stocks, rated at the
time of purchase in categories BBB through D by Standard & Poor's Corporation
("S&P") or Baa through C by Moody's Investors Service, Inc. ("Moody's"), or
which are unrated but believed by the Investment Manager to be of comparable
quality; provided that the Fund shall not invest more than 20% of its total
assets in securities which are rated CCC or lower by S&P, or Caa or lower by
Moody's. In selecting investments for the Fund, including any in the lower
rated categories, the Investment Manager seeks to identify those securities
the returns on which are appropriate within the context of the risks
involved. In doing so, the Investment Manager will consider both its own
credit analysis and the ratings of S&P and Moody's.
The Fund may invest in securities rated higher than BBB by S&P or Baa by
Moody's (or unrated securities of comparable quality) when the difference in
yields between quality classifications is relatively narrow or for temporary
defensive purposes when the Investment Manager anticipates adverse market
conditions. Investments in higher quality issues may serve to lessen a
decline in net asset value but may also affect the amount of current income
produced by the Fund, since the yields from such issues are usually lower
than those from medium and lower quality issues.
For the fiscal year ended March 31, 1995, the percentage of the Fund's total
investments on an average annual basis invested in debt securities of any
particular rating category or its equivalent, as determined by the Investment
Manager, was as follows: 5% BB, 60% B, 16% CCC and 1% D, on a dollar weighted
basis, comprising 82% of total investments. Of these bonds, 80% were rated by
a nationally recognized statistical rating organization and 20% were unrated
but considered to be equivalent, as determined by the Investment Manager, to
comparable rated securities. The above percentages reflect ratings as of the
time of purchase and subsequent changes, if any, including downgrades, for
the period the securities were held.
Fixed income securities in which the Fund may invest include debt obligations
of all kinds such as bonds, debentures and notes as well as bonds, debentures
and preferred stocks that are convertible into, or carry rights to acquire,
equity securities. Although the Fund intends to invest primarily in fixed
income debt securities as described above, it may invest up to 35% of the
market value of its total assets in dividend-paying common stocks of
established companies listed on a national securities exchange to the extent
the Investment Manager considers such investments consistent with the Fund's
investment objective.
The Fund may invest up to 15% of its net assets in illiquid securities,
including repurchase agreements extending for more than seven days. The Fund
may invest up to 15% of its net assets in restricted securities, including
not more than 5% of its net assets in restricted securities which are not
eligible for resale under Rule 144A or other exemptive provisions. Although
many illiquid securities may also be
6
<PAGE>
restricted, and vice versa, compliance with each of these policies will be
determined independently.
Risk Factors
Lower rated high yield, high risk securities (i.e., bonds rated BB or lower
by S&P or Ba or lower by Moody's or equivalent as determined by the
Investment Manager) of the type in which the Fund invests generally involve
more credit risk than higher rated securities and are considered by S&P and
Moody's to be predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation.
Such securities may also be subject to greater market price fluctuations than
lower yielding, higher rated debt securities; credit ratings do not reflect
this market risk. In addition, these ratings may not reflect the effect of
recent developments on an issuer's ability to make interest and principal
payments. Bonds rated in the lowest category and in default may never resume
interest payments or repay principal and their market value may be difficult
to determine. 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.
Additional risks of such securities include (i) limited liquidity and
secondary market support, particularly in the case of securities that are not
rated or are subject to restrictions on resale, which may limit the
availability of securities for purchase by the Fund, limit the ability of the
Fund to sell portfolio securities either to meet redemption requests or in
response to changes in the economy or the financial markets, heighten the
effect of adverse publicity and investor perceptions and make selection and
valuation of portfolio securities more subjective and dependent upon the
Investment Manager's credit analysis; (ii) substantial market price
volatility and/or the potential for the insolvency of issuers during periods
of changing interest rates and economic difficulty, particularly with respect
to securities that do not pay interest currently in cash; (iii) subordination
to the prior claims of banks and other senior lenders; (iv) the possibility
that earnings of the issuer may be insufficient to meet its debt service; and
(v) the realization of taxable income for shareholders without the
corresponding receipt of cash in connection with investments in "zero coupon"
or "pay-in-kind" securities. Growth in the market for 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 the
Appendix to this Prospectus.
Portfolio Maturity and Turnover
The Fund's holdings may include issues across the maturity spectrum.
Ordinarily the Fund will emphasize investments in medium and longer term
instruments; the weighted average maturity of portfolio holdings, however,
may be shortened or lengthened depending primarily upon the Investment
Manager's outlook for interest rates.
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 investment strategy is changed significantly, portfolio turnover may
be significantly higher than during times of economic and market price
stability or when investment strategy remains relatively constant. Increases
in the rate of portfolio turnover will result in increased transaction costs
for the Fund and may result in an increase in the realization of short-term
capital gains.
Other Investment Policies
Fixed income securities in which the Fund may invest include zero or step
coupon securities. Zero or step coupon securities may pay no interest for all
or a portion of their life but are purchased at a discount to face value at
maturity. Their return consists of the amortization of the discount between
their purchase price and their maturity value, plus, in the case of a step
coupon, any fixed rate interest income. Zero coupon securities pay no
interest to holders prior to maturity even though interest on these
securities is reported as income to the Fund. The Fund will be required to
distribute all or substantially all of such amounts annually to its
shareholders. These
7
<PAGE>
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.
The Fund may invest up to 20% of its total assets in securities of foreign
issuers such as foreign corporate or government fixed income securities
consistent with its investment objective and policies and in connection with
such investments may enter into forward currency exchange contracts to reduce
the risks of currency fluctuations. For this purpose, American Depositary
Receipts ("ADRs") are not considered to be foreign securities.
ADRs are available through facilities which may be either "sponsored" or
"unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and usually agrees to
provide shareholder communications. In an unsponsored arrangement, the
foreign issuer is not involved, and the ADR holders pay the fees of the
depository. Sponsored ADRs are generally more advantageous to the ADR holders
and the issuer than are unsponsored ADRs. More and higher fees are generally
charged in an unsponsored program compared to a sponsored facility. Only
sponsored ADRs may be listed on the New York or American Stock Exchanges.
Unsponsored ADRs may prove to be more risky due to (a) the additional costs
involved to the Fund; (b) the relative illiquidity of the issue in U.S.
markets; and (c) the possibility of higher trading costs in the over-the-
counter market as opposed to exchange-based tradings. The Fund will take
these and other risk considerations into account before making an investment
in an unsponsored ADR.
Investing in foreign securities entails certain risks, including those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, the possible
imposition of currency exchange blockages, higher operating expenses,
expropriation of the Fund's assets by a foreign government, foreign
withholding and other taxes which may reduce investment return, reduced
availability of public information concerning issuers 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. Finally, to
the extent the Fund invests in less developed countries or emerging foreign
markets, it will be subject to a variety of additional risks, including risks
associated with political instability, economies based on relatively few
industries, lesser market liquidity, high rates of inflation, significant
price volatility of portfolio holdings and high levels of external debt in
the relevant country.
In order to protect against the effect of uncertain future exchange rates on
securities denominated in foreign currencies, the Fund may engage in currency
exchange transactions either on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market or by entering into forward
contracts to purchase or sell currencies. Although such contracts tend to
minimize the risk of loss resulting from a correctly predicted decline in
value of hedged currency, they tend to limit any potential gain that might
result should the value of such currency increase. In entering a forward
currency transaction, the 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, large
institutions with which the Investment Manager has done substantial business
in the past. For further information, see the Statement of Additional
Information.
In seeking to lessen investment risk, the Fund operates under certain
investment restrictions. The restrictions in the following two paragraphs may
not be changed except by a vote of the shareholders of the Fund. The
remaining restrictions and policies are subject to change by the Trustees.
Under the restrictions, the Fund may not invest in a security if the
transaction would result in: (a) more than 5% of the Fund's total assets
being invested in any one issuer; (b) the Fund's owning more than
8
<PAGE>
10% of any class of voting securities of an issuer; (c) more than 5% of the
Fund's total assets being invested in securities of issuers (including
predecessors) with less than three years of continuous operations unless such
securities are rated BBB or higher by S&P or Baa or higher by Moody's; or (d)
more than 25% of the Fund's total assets being invested in any one industry.
These restrictions do not apply to investments in securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities.
The Fund will not make loans except that it may purchase debt obligations,
including money market instruments, directly from the issuer thereof or in
the open market and may engage in repurchase transactions collateralized by
obligations of the U.S. Government and its agencies and instrumentalities.
For further discussion of these and other investment restrictions including
nonfundamental investment restrictions which may be changed without a
shareholder vote, see the Statement of Additional Information.
Although the Fund intends to invest primarily in fixed income securities, to
aid in achieving its investment objective the Fund may, subject to certain
limitations, enter into financial futures contracts, buy put and call options
on debt securities such as U.S. Treasury bills, bonds and notes, buy put and
call options on financial futures and write covered call options against
securities held in its portfolio. The Fund may not establish a position in a
commodity futures contract or purchase or sell a commodity option contract
for other than bona fide hedging purposes if immediately thereafter the sum
of the amount of initial margin deposits and premiums required to establish
such positions for such nonhedging purposes would exceed 5% of the market
value of the Fund's net assets; similar policies apply to options which are
not commodities. The Fund may enter various forms of swap arrangements, which
have simultaneously the characteristics of a security and a futures contract,
although the Fund does not presently expect to invest more than 5% of its
total assets in such items. These swap arrangements include interest rate
swaps, currency swaps and index swaps. See the Statement of Additional
Information.
The Fund may purchase securities on a "when-issued" basis and invest up to
30% of its total assets in repurchase agreements, subject to certain
limitations. The Fund may invest in restricted securities in accordance with
Rule 144A, under the Securities Act of 1933, which allows for the resale of
such securities among certain qualified institutional buyers. Because the
market for such securities is still developing, such securities could
possibly become illiquid in particular circumstances. See the Statement of
Additional Information.
The Fund may hold up to 100% of its assets in cash or short-term securities
for temporary defensive purposes. The Fund will adopt a temporary defensive
position when, in the opinion of the Investment Manager, such a position is
more likely to provide protection against adverse market conditions than
adherence to the Fund's other investment policies. The types of short-term
instruments in which the Fund may invest for such purposes include short-term
money market securities such as repurchase agreements and securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities,
certificates of deposit, time deposits and bankers' acceptances of certain
qualified financial institutions and corporate commercial paper rated at the
time of purchase at least "A" by S&P or "Prime" by Moody's (or, if not rated,
issued by companies having outstanding long-term unsecured debt issue rated
at least "A" by S&P or Moody's). See the Statement of Additional Information.
9
<PAGE>
Information on the Purchase of Shares, Redemption of Shares and Shareholder
Services is set forth on pages 10 to 24 below.
The Fund is available for investment by many kinds of investors including
participants investing through 401(k) or other retirement plan sponsors,
employees investing through savings plans sponsored by employers, Individual
Retirement Accounts ("IRAs"), trusts, corporations, individuals, etc. The
applicability of the general information and administrative procedures set
forth below accordingly will vary depending on the investor and the
recordkeeping system established for a shareholder's investment in the Fund.
Participants in 401(k) and other plans should first consult with the
appropriate person at their employer or refer to the plan materials before
following any of the procedures below. For more information or assistance,
anyone may call 1-800-562-0032.
Purchase of Shares
Methods of Purchase
Through Dealers
Shares of the Fund are continuously offered through securities dealers who
have entered into sales agreements with the Distributor. Purchases through
dealers are confirmed at the offering price, which is the net asset value
plus the applicable sales charge, next determined after the order is duly
received by State Street Research Shareholder Services ("Shareholder
Services"), a division of State Street Research Investment Services, Inc.,
from the dealer. ("Duly received" for purposes herein means in accordance
with the conditions of the applicable method of purchase as described below.)
The dealer is responsible for transmitting the order promptly to Shareholder
Services in order to permit the investor to obtain the current price. See
"Purchase of Shares--Net Asset Value" herein.
By Mail
Initial investments in the Fund may be made by mailing or delivering to the
investor's securities dealer a completed Application (accompanying this
Prospectus), together with a check for the total purchase price payable to
the Fund. The dealer must forward the Application and check in accordance
with the instructions on the Application.
Additional shares may be purchased by mailing to Shareholder Services a check
payable to the Fund in the amount of the total purchase price together with
any one of the following: (i) an Application; (ii) the stub from a
shareholder's account statement; or (iii) a letter setting forth the name of
the Fund, the class of shares and the shareholder's account name and number.
Shareholder Services will deliver the purchase order to the transfer agent
and dividend paying agent, State Street Bank and Trust Company (the "Transfer
Agent").
If a check is not honored for its full amount, the purchaser could be subject
to additional charges to cover collection costs and any investment loss, and
the purchase may be cancelled.
By Wire
An investor may purchase shares by wiring Federal Funds of not less than
$5,000 to State Street Bank and Trust Company, which also serves as the
Trust's custodian (the "Custodian"), as set forth below. Prior to making an
investment by wire, an investor must notify Shareholder Services at
1-800-521-6548 and obtain a control number and instructions. Following such
notification, Federal Funds should be wired through the Federal Reserve
System to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF = State Street Research High Income Fund and class of shares
(A, B, C or D)
AC = 99029761
OBI = Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street
Research Shareholder Services)
10
<PAGE>
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make
such investment by 12 noon Boston time on the day of his or her investment;
and (ii) the wire must be received by 4 P.M. Boston time that same day.
An investor making an initial investment by wire must promptly complete the
Application accompanying this Prospectus and deliver it to his or her
securities dealer, who should forward it as required. No redemptions will be
effected until the Application has been duly processed.
The Fund may in its discretion discontinue, suspend or change the practice of
accepting orders by any of the methods described above. Orders for the
purchase of shares are subject to acceptance by the Fund. The Fund reserves
the right to reject any purchase order, including orders in connection with
exchanges, for any reason which the Fund in its sole discretion deems
appropriate. The Fund reserves the right to suspend the sale of shares.
Minimum Investment
<TABLE>
<CAPTION>
Class of Shares
-------------------------------
A B C D
----- ----- -- -------
<S> <C> <C> <C> <C>
Minimum Initial Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $2,000 $2,000 (a) $2,000
By Investamatic $1,000 $1,000 (a) $1,000
All Other $2,500 $2,500 (a) $2,500
Minimum Subsequent Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $ 50 $ 50 (a) $ 50
By Investamatic $ 50 $ 50 (a) $ 50
All Other $ 50 $ 50 (a) $ 50
(a) Special conditions apply; contact the Distributor.
</TABLE>
The Fund reserves the right to vary the minimums for initial or subsequent
investments from time to time as in the case of, for example, exchanges and
investments under various retirement and employee benefit plans, sponsored
arrangements involving group solicitations of the members of an organization,
or other investment plans such as for reinvestment of dividends and
distributions or for periodic investments (e.g., Investamatic Check Program).
Alternative Purchase Program
General
Alternative classes of shares permit investors to select a purchase program
which they believe will be the most advantageous for them, given the amount
of their purchase, the length of time they anticipate holding Fund shares, or
the flexibility they desire in this regard, and other relevant circumstances.
Investors will be able to determine whether in their particular circumstances
it is more advantageous to incur an initial sales charge and not be subject
to certain ongoing charges or to have their entire initial purchase price
invested in the Fund with the investment being subject thereafter to ongoing
service fees and distribution fees.
As described in greater detail below, securities dealers are paid differing
amounts of commissions and other compensation depending on which class of
shares they sell.
11
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------------------- ----------------------- -------- -----------------------
<S> <C> <C> <C> <C>
Sales Charges Initial sales Contingent deferred None Contingent deferred
charge at time of sales charge of 5% sales charge of 1%
investment of up to 2 % applies to applies to any shares
to 4.5 % depending any shares redeemed redeemed within one
on amount of within first five years year following
investment following their their purchase
purchase; no
contingent deferred
sales charge
after five years
On investments of $1
million or more, no
initial sales charge;
but contingent
deferred sales
charge
of 1 % applies to any
shares redeemed within
one year following
their purchase
Distribution Fee None 0.75 % for first None 0.75% each year
eight years;
Class B shares
convert auto-
matically to
Class A shares
after eight years
Service Fee 0.25% each year 0.25 % each year None 0.25% each year
Initial
Commission Above described 4% None 1%
Received by initial sales charge
Selling less 0.25 % to 0.50%
Securities retained by
Dealers Distributor
On investments of $1
million or more,
0.25 % to 0.70% paid
to dealer by
Distributor
</TABLE>
12
<PAGE>
In deciding which class of shares to purchase, the investor should consider
the amount of the investment, the length of time the investment is expected
to be held, and the ongoing service fee and distribution fee, among other
factors.
Class A shares are sold at net asset value plus an initial sales charge of up
to 4.5% of the public offering price. Because of the sales charge, not all of
an investor's purchase amount is invested unless the purchase equals
$1,000,000 or more. Class B shareholders pay no initial sales charge, but a
contingent deferred sales charge of up to 5% generally applies to shares
redeemed within five years of purchase. Class D shareholders also pay no
initial sales charge, but a contingent deferred sales charge of 1% generally
applies to redemptions made within one year of purchase. For Class B and
Class D shareholders, therefore, the entire purchase amount is immediately
invested in a Fund.
An investor who qualifies for a significantly reduced initial sales charge,
or a complete waiver of the sales charge on investments of $1,000,000 or
more, on the purchase of Class A shares might elect that option to take
advantage of the lower ongoing service and distribution fees that
characterize Class A shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. Class B shares are assessed an annual
distribution fee of 0.75% of daily net assets for an eight-year period
following the date of purchase and are then automatically converted to Class
A shares. Class D shares are assessed an annual distribution fee of 0.75% of
daily net assets for as long as the shares are held. The prospective investor
should consider these fees plus the initial or contingent deferred sales
charges in estimating the costs of investing in the various classes of a
Fund's shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are allocated to dealers (see
"Distribution Plan" below). In addition, the Distributor will, at its
expense, provide additional cash and noncash incentives to securities dealers
that sell shares. Such incentives may be extended only to those dealers that
have sold or may sell significant amounts of shares and/or meet other
conditions established by the Distributor; for example, the Distributor may
sponsor special promotions to develop particular distribution channels or to
reach certain investor groups. The incentives may include merchandise and
trips to and attendance at sales seminars at resorts.
Class A Shares--Initial Sales Charges
Sales Charges
The purchase price of a Class A share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar
amount of the shares purchased as set forth in the table below. A major
portion of this sales charge is reallowed by the Distributor to the
securities dealer responsible for the sale.
<TABLE>
<CAPTION>
Sales Sales
Charge Charge
Paid by Paid by Dealer
Dollar Investor Investor Concession
Amount of As % of As % of As % of
Purchase Purchase Net Asset Purchase
Transaction Price Value Price
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 or above but
less than $250,000 3.50% 3.63% 3.00%
$250,000 or above but
less than $500,000 2.50% 2.56% 2.00%
$500,000 or above but
less than
$1 million 2.00% 2.04% 1.75%
$1 million and above 0% 0% See
following
discussion
</TABLE>
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
a commission as follows:
13
<PAGE>
Amount of Sale Commission
- ---------------------------- -----------
(a) $1 million to $3 million 0.70%
(b) Next $2 million 0.50%
(c) Amount over $5 million 0.25%
On such sales of $1,000,000 or more, the investor is subject to a 1%
contingent deferred sales charge on any portion of the purchase redeemed
within one year of the sale. However, such redeemed shares will not be
subject to the contingent deferred sales charge to the extent that their
value represents (1) capital appreciation or (2) reinvestment of dividends or
capital gains distributions. In addition, the contingent deferred sales
charge will be waived for certain other redemptions as described under
"Contingent Deferred Sales Charge Waivers" below (as otherwise applicable to
Class B shares).
Class A shares of the Fund that are purchased without a sales charge may be
exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption
within one year of the Class A shares which are acquired through such
exchange. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any contingent
deferred sales charge will be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement
of Additional Information, of $100,000 or more of Class A shares of the Fund
or a combination of "Eligible Funds." "Eligible Funds" include the Fund and
other funds so designated by the Distributor from time to time. Class B,
Class C and Class D shares may also be included in the combination under
certain circumstances. Securities dealers should call Shareholder Services
for details concerning the other Eligible Funds and any persons who may
qualify for reduced sales charges and related information. See the Statement
of Additional Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A
shares of the Fund and any other Eligible Funds within a 13-month period.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances. Additional information on a Letter of Intent is
available from dealers, or from the Distributor, and also appears in the
Statement of Additional Information.
Right of Accumulation
Investors may purchase Class A shares of the Fund or a combination of shares
of the Fund and other Eligible Funds at reduced sales charges pursuant to a
Right of Accumulation. Under the Right of Accumulation, the sales charge is
determined by combining the current purchase with the value of the Class A
shares of other Eligible Funds held at the time of purchase. Class B, Class C
and Class D shares may also be included in the combination under certain
circumstances. See the Statement of Additional Information and call
Shareholder Services for details concerning the Right of Accumulation.
Other Programs
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, which include programs under which a company, employee benefit
plan or other organization makes recommendations to, or permits group
solicitation of, its employees, members or participants, except any
organization created primarily for the purpose of obtaining shares of the
Fund at a reduced sales charge or without a sales charge. Sales without a
sales charge, or with a reduced sales charge, may also be made through
brokers, financial planners, institutions, and others, under managed
fee-based programs (e.g., "wrap fee" or similar programs) which meet certain
requirements established from time to time by the Distributor, in the event
the Distributor determines to implement such arrangements. Information on
such arrangements and further conditions and limitations is available from
the Distributor.
14
<PAGE>
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; and (C) employees, officers, sales
representatives or directors of dealers and other entities with a selling
agreement with the Distributor to sell shares of any aforementioned
investment company, any spouse or child of such person, or any beneficial
account for any of them. The purchase must be made for investment and the
shares purchased may not be resold except through redemption. This purchase
program is subject to such administrative policies, regarding the
qualification of purchasers and any other matters, as may be adopted by the
Distributor from time to time.
Class B Shares--Contingent Deferred
Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is duly received, as defined herein.
No sales charge is imposed at the time of purchase; thus the full amount of
the investor's purchase payment will be invested in the Fund. However, a
contingent deferred sales charge may be imposed upon redemptions of Class B
shares as described below.
The Distributor will pay securities dealers at the time of sale a 4%
commission for selling Class B shares. The proceeds of the contingent
deferred sales charge and the distribution fee are used to offset
distribution expenses and thereby permit the sale of Class B shares without
an initial sales charge.
Class B shares that are redeemed within a five-year period after their
purchase will not be subject to a contingent deferred sales charge to the
extent that the value of such shares represents (1) capital appreciation of
Fund assets or (2) reinvestment of dividends or capital gains distributions.
The amount of any applicable contingent deferred sales charge will be
calculated by multiplying the net asset value of such shares at the time of
redemption or at the time of purchase, whichever is lower, by the applicable
percentage shown in the table below:
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
As A Percentage Of
Net Asset Value
Redemption During At Redemption
- ----------------------------------------- ---------------------
<C> <C>
1st Year Since Purchase 5%
2nd Year Since Purchase 4
3rd Year Since Purchase 3
4th Year Since Purchase 3
5th Year Since Purchase 2
6th Year Since Purchase and Thereafter None
</TABLE>
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first
of those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of 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 Class B shares being
redeemed will be considered to represent, as applicable, capital appreciation
or dividend and capital gains distribution reinvestments in such other
Eligible Fund. These determinations will result in any contingent deferred
sales charge being imposed at the lowest possible rate. For federal income
tax purposes, the amount of the contingent deferred sales charge will reduce
the gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any contingent deferred sales charge will be paid
to the Distributor.
15
<PAGE>
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic withdrawal plan which meets certain
conditions. In addition, the contingent deferred sales charge will be waived
for: (i) redemptions made within one year of the death or total disability,
as defined by the Social Security Administration, of all shareholders of an
account; (ii) redemptions made after attainment of a specific age in an
amount which represents the minimum distribution required at such age under
Section 401(a)(9) of the Internal Revenue Code for retirement accounts or
plans (e.g., age 70-1/2 for IRAs and Section 403(b) plans), calculated solely
on the basis of assets invested in the Fund or other Eligible Funds; and
(iii) a redemption resulting from a tax- free return of an excess
contribution to an IRA. (The foregoing waivers do not apply to a tax-free
rollover or transfer of assets out of the Fund.) The Fund may modify or
terminate the waivers at any time; for example, the Fund may limit the
application of multiple waivers.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends or
distributions with respect to such shares, will automatically convert to
Class A shares of the Fund at the end of eight years following the issuance
of such Class B shares; consequently, they will no longer be subject to the
higher expenses borne by Class B shares. The conversion rate will be
determined on the basis of the relative per share net asset values of the two
classes and may result in a shareholder receiving either a greater or fewer
number of Class A shares than the Class B shares so converted. As noted
above, holding periods for Class B shares received in exchange for Class B
shares of other Eligible Funds will be counted toward the eight-year period.
Class C Shares--Institutional; No Sales Charge
The purchase price of a Class C share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase or
redemption. The Fund will receive the full amount of the investor's purchase
payment.
Class C shares are only available for new investments by certain employee
benefit plans and large institutions. See the Statement of Additional
Information. Information on the availability of Class C shares and further
conditions and limitations with respect thereto is available from the
Distributor.
Class C shares may be also issued in connection with mergers and acquisitions
involving the Fund, and under certain other circumstances as described in
this Prospectus (e.g., see "Shareholder Services--Exchange Privilege").
Class C shares may have also been issued directly or through exchanges to
those shareholders of the Fund or other Eligible Funds who previously held
shares not subject to any future sales charge or service fees or distribution
fees.
Class D Shares--Spread Sales Charges
The purchase price of a Class D share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase; thus the
full amount of the investor's purchase payment will be invested in the Fund.
Class D shares are subject to a 1% contingent deferred sales charge on any
portion of the purchase redeemed within one year of the sale. The contingent
deferred sales charge will be 1% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. The Distributor
pays securities dealers a 1% commission for selling Class D shares at the
time of purchase. The proceeds of the contingent deferred sales charge and
the distribution fee are used to offset distribution expenses and thereby
permit the sale of Class D shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will not be
subject to the contingent deferred sales charge to the extent that the value
of such shares represents (1) capital appreciation of Fund assets or (2)
reinvestment of dividends or capital gains distributions. In addition, the
contingent deferred sales charge will be waived for certain other redemptions
as described under "Contingent Deferred
16
<PAGE>
Sales Charge Waivers" above (as otherwise applicable to Class B shares). For
federal income tax purposes, the amount of the contingent deferred sales
charge will reduce the gain or increase the loss, as the case may be, on the
amount realized on redemption. The amount of any contingent deferred sales
charge will be paid to the Distributor.
Net Asset Value
The Fund's per share net asset values are determined Monday through Friday as
of the close of the New York Stock Exchange (the "NYSE") exclusive of days on
which the NYSE is closed. The NYSE ordinarily closes at 4 P.M. New York City
time. The Fund uses one or more pricing services to value its portfolio
securities. The pricing services utilize information with respect to market
transactions, quotations from dealers and various relationships among
securities in determining value and may provide prices determined as of times
prior to the close of the NYSE. Assets for which quotations are readily
available are valued as of the close of business on the valuation date.
Securities for which there is no pricing service valuation or last reported
sale price are valued as determined in good faith by or under the authority
of the Trustees of the Trust. The Trustees have authorized the use of the
amortized cost method to value short-term debt instruments issued with a
maturity of one year or less and having a remaining maturity of 60 days or
less when the value obtained is fair value. Further information with respect
to the valuation of the Fund's assets is included in the Statement of
Additional Information.
Distribution Plan
The Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the provisions of the
Distribution Plan, the Fund makes payments to the Distributor based on an
annual percentage of the average daily value of the net assets of each class
of shares as follows:
<TABLE>
<CAPTION>
Class Service Fee Distribution Fee
- -------- ------------ -------------------
<S> <C> <C>
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
</TABLE>
Some or all of the service fees are used to reimburse securities dealers
(including securities dealers that are affiliates of the Distributor) 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 of
shareholder accounts by such dealers. Dealers who have sold Class A shares
are eligible for further reimbursement commencing as of the time of such
sale. Dealers who have sold Class B and Class D shares are eligible for
further reimbursement after the first year during which such shares have been
held of record by such dealer as nominee for its clients (or by such clients
directly). Any service fees received by the Distributor and not allocated to
dealers may be applied by the Distributor in reduction of expenses incurred
by it directly for personal services and the maintenance of shareholder
accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to securities dealers for selling such shares. Any
distribution fees received by the Distributor and not allocated to dealers
may be applied by the Distributor in connection with sales or marketing
efforts, including special promotional fees and cash and noncash incentives
based upon sales by securities dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs
similar expenses on behalf of, such other funds. When expenses of the
Distributor cannot be identified as relating to a specific fund, the
Distributor allocates expenses among the funds in a manner deemed fair and
equitable to each fund.
Commissions and other cash and noncash incentives and payments to dealers, to
the extent payable out of the general profits, revenues or other sources of
the Distributor (including the advisory fees
17
<PAGE>
paid by the Fund), have also been authorized pursuant to the Distribution
Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which a Fund may incur under the Distribution
Plan to 1%, of which 0.75% may be used to pay distribution expenses and 0.25%
may be used to pay shareholder service fees. The NASD rule also limits the
aggregate amount which the Fund may pay for such distribution costs to 6.25%
of gross share sales of a class since the inception of any asset-based sales
charge plus interest at the prime rate plus 1% on unpaid amounts thereof
(less any contingent deferred sales charges). Such limitation does not apply
to shareholder service fees. Payments to the Distributor or to dealers funded
under the Distribution Plan may be discontinued at any time by the Trustees
of the Trust.
Redemption of Shares
Shareholders may redeem all or any portion of their accounts on any day the
NYSE is open for business. Redemptions will be effective at the net asset
value per share next determined (see "Purchase of Shares--Net Asset Value"
herein) after receipt of the redemption request, in accordance with the
requirements described below, by Shareholder Services and delivery of the
request by Shareholder Services to the Transfer Agent. To allow time for the
clearance of checks used for the purchase of any shares which are tendered
for redemption shortly after purchase, the remittance of the redemption
proceeds for such shares could be delayed for 15 days or more after the
purchase. Shareholders who anticipate a potential need for immediate access
to their investments should, therefore, purchase shares by wire. Except as
noted, redemption proceeds from the Fund are normally remitted within seven
days after receipt of the redemption request by the Fund and any necessary
documents in good order.
Methods of Redemption
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed to
the shareholder or wired to a predesignated bank account (see "Proceeds By
Wire" below), by sending to State Street Research Shareholder Services, P.O.
Box 8408, Boston, Massachusetts 02266-8408: (1) a written request for
redemption signed by the registered owner(s) of the shares, exactly as the
account is registered; (2) an endorsed stock power in good order with respect
to the shares or, if issued, the share certificates for the shares endorsed
for transfer or accompanied by an endorsed stock power; (3) any required
signature guarantees (see "Redemption of Shares--Signature Guarantees"
below); and (4) any additional documents which may be required for redemption
in the case of corporations, trustees, etc., such as certified copies of
corporate resolutions, governing instruments, powers of attorney, and the
like. The Transfer Agent will not process requests for redemption until it
has received all necessary documents in good order. A shareholder will be
notified promptly if a redemption request cannot be accepted. Shareholders
having any questions about the requirements for redemption should call
Shareholder Services toll-free at 1-800-562-0032.
Request By Telephone
Shareholders may request redemption by telephone with proceeds to be
transmitted by check or by wire (see "Proceeds By Wire" below). A shareholder
can request a redemption for $50,000 or less to be transmitted by check. Such
check for the proceeds will be made payable to the shareholder of record and
will be mailed to the address of record. There is no fee for this service. It
is not available for shares held in certificate form or if the address of
record has been changed within 30 days of the redemption request. The Fund
may revoke or suspend the telephone redemption privilege at any time and
without notice. See "Shareholder Services--Telephone Services" for a
discussion of the conditions and risks associated with Telephone Privileges.
Request By Check (Class A Shares Only)
Shareholders of Class A shares of the Fund may redeem shares by checks drawn
on State Street Bank and Trust Company. Checks may be made payable to the
order of any person or organization designated by the shareholder and must be
for amounts of at least $500 but not more than $100,000. Shareholders will
continue to earn dividends on the shares to be
18
<PAGE>
redeemed until the check clears. There is currently no charge associated with
redemption of shares by check. Checkbooks are supplied for a $2 fee. Checks
will be sent only to the registered owner at the address of record. A $10 fee
will be charged against an account in the event a redemption check is
presented for payment and not honored pursuant to the terms and conditions
established by State Street Bank and Trust Company.
Shareholders can request the checkwriting privilege by completing the
signature card which is part of the Application. In order to arrange for
redemption-by-check after an account has been opened, a revised Application
with signature card and signatures guaranteed must be sent to Shareholder
Services. Cancelled checks will be returned to shareholders at the end of
each month.
The redemption-by-check service is subject to State Street Bank and Trust
Company's rules and regulations applicable to checking accounts (as amended
from time to time), and is governed by the Massachusetts Uniform Commercial
Code. All notices with respect to checks drawn on State Street Bank and Trust
Company must be given to State Street Bank and Trust Company. Stop payment
instructions with respect to checks must be given to State Street Bank and
Trust Company by calling 1-617-985-8543. Shareholders may not close out an
account by check.
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder has
Telephone Privileges (see "Shareholder Services--Telephone Services" herein),
the Trust's custodian will wire redemption proceeds to the shareholder's
predesignated bank account. To make the request, the shareholder should call
1-800-521-6548 prior to 4 P.M. Boston time. A $7.50 charge against the
shareholder's account will be imposed for each wire redemption. This charge
is subject to change without notice. The shareholder's bank may also impose a
charge for receiving wires of redemption proceeds. The minimum redemption by
wire is $5,000.
Request to Dealer to Repurchase
For the convenience of shareholders, the Fund has authorized the Distributor
as its agent to accept orders from dealers by wire or telephone for the
repurchase of shares by the Distributor from the dealer. The Fund may revoke
or suspend this authorization at any time. The repurchase price is the net
asset value for the applicable shares next determined following the time at
which the shares are offered for repurchase by the dealer to the Distributor.
The dealer is responsible for promptly transmitting a shareholder's order to
the Distributor. Payment of the repurchase proceeds is made to the dealer who
placed the order promptly upon delivery of certificates for shares in proper
form for transfer or, for Open Accounts, upon the receipt of a stock power
with signatures guaranteed as described below, and, if required, any
supporting documents. Neither the Fund nor the Distributor imposes any charge
upon such a repurchase. However, a dealer may impose a charge as agent for a
shareholder in the repurchase of his or her shares.
The Fund has reserved the right to change, modify or terminate the services
described above at any time.
Additional Information
Because of the relatively high cost of maintaining small shareholder
accounts, the Fund reserves the right to involuntarily redeem at its option
any shareholder account which remains below $1,500 for a period of 60 days
after notice is mailed to the applicable shareholder, or to impose a
maintenance fee on such account after 60 days notice. Such involuntary
redemptions will be subject to applicable sales charges, if any. 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
19
<PAGE>
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 value; or
(3) during such other periods as the Securities and Exchange Commission may
by order permit for the protection of investors; and (b) the payment of
redemption proceeds may be postponed as otherwise provided under "Redemption
of Shares" herein.
Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Fund, the Investment
Manager and the Distributor from possible fraud, signature guarantees are
required for certain redemptions. Signature guarantees enable the Transfer
Agent to be certain that the person who has authorized a redemption from the
account is, in fact, the shareholder. Signature guarantees are required for:
(1) all redemptions requested by mail; (2) requests to transfer the
registration of shares to another owner; and (3) 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 by the Fund in certain
instances.
Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of the Fund owned by
shareholders are credited to their accounts by the Transfer Agent, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110. Certificates representing Class B or Class D shares will not be
issued, while certificates representing Class A or Class C shares will only
be issued if specifically requested in writing and, in any case, will only be
issued for full shares, with any fractional shares to be carried on the
shareholder's account. Shareholders will receive periodic statements of
transactions in their account.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through dealers, by
wire or by mailing a check, payable to the Fund, to Shareholder Services
under the terms set forth above under "Purchase of Shares."
2. The following methods of receiving dividends from investment income and
distributions from capital gains are available:
(a) All income dividends and capital gains distributions reinvested in
additional shares of the Fund.
(b) All income dividends in cash; all capital gains distributions
reinvested in additional shares of the Fund.
(c) All income dividends and capital gains distributions in cash.
(d) All income dividends and capital gains distributions invested in any
one available Eligible Fund designated by the shareholder as described
below. See "Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
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Application, that account will automatically be coded for reinvestment of all
dividends and distributions in additional shares of the same class of the
Fund. Selections may be changed at any time by telephone or written notice to
Shareholder Services. Dividends and distributions are reinvested at net asset
value without a sales charge.
Exchange Privilege
Shareholders of the Fund may exchange their shares for available shares with
corresponding characteristics of any of the other Eligible Funds at any time
on the basis of the relative net asset values of the respective shares to be
exchanged, subject to compliance with applicable securities laws.
Shareholders of any other Eligible Fund may similarly exchange their shares
for Fund shares with corresponding characteristics. Prior to making an
exchange, shareholders should obtain the Prospectus of the Eligible Fund into
which they are exchanging. Under the Direct Program, subject to certain
conditions, shareholders may make arrangements for regular exchanges from the
Fund into other Eligible Funds. To effect an exchange, Class A, Class B and
Class D shares may be redeemed without the payment of any contingent deferred
sales charge that might otherwise be due upon an ordinary redemption of such
shares. The State Street Research Money Market Fund issues Class E shares
which are sold without any sales charge. Exchanges of State Street Research
Money Market Fund Class E shares into Class A shares of the Fund or any other
Eligible Fund are subject to the initial sales charge or contingent deferred
sales charge applicable to an initial investment in such Class A shares,
unless a prior Class A sales charge has been paid directly or indirectly with
respect to the shares redeemed. For purposes of computing the contingent
deferred sales charge that may be payable upon disposition of any acquired
Class A, Class B and Class D shares, the holding period of the redeemed
shares is "tacked" to the holding period of the acquired shares. The period
any Class E shares are held is not tacked to the holding period of any
acquired shares. No exchange transaction fee is currently imposed on any
exchange.
For the convenience of the shareholders who have Telephone Privileges, the
Fund permits exchanges by telephone request from either the shareholder or
his or her dealer. Shares may be exchanged by telephone provided that the
registration of the two accounts is the same. The toll-free number for
exchanges is 1-800-521-6548. See "Telephone Services" herein for a discussion
of conditions and risks associated with Telephone Privileges.
The exchange privilege may be exercised only in those states where shares of
the relevant other Eligible Fund may legally be sold. For tax purposes, each
exchange actually represents the sale of shares of one fund and the purchase
of shares of another. Accordingly, exchanges may produce a capital gain or
loss for tax purposes. The exchange privilege may be terminated or suspended
or its terms changed at any time, subject, if required under applicable
regulations, to 60 days' prior notice. New accounts established for
investments upon exchange from an existing account in another fund will have
the same Telephone Privileges as the existing account, unless Shareholder
Services is instructed otherwise. Related administrative policies and
procedures may also be adopted with regard to a series of exchanges, street
name accounts, sponsored arrangements and other matters.
The exchange privilege is not designed for use in connection with short-term
trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer
identification number, may be aggregated for purposes of the six exchange
limit. Notwithstanding the six exchange limit, the Fund reserves the right to
refuse exchange redemptions or purchases 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
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exchanges that coincides with a "market timing" strategy may be disruptive to
the Fund. The Fund may impose these restrictions at any time. The exchange
limit may be modified for accounts in certain institutional retirement plans
because of plan exchange limits, Department of Labor regulations or
administrative and other considerations. Subject to the foregoing, if an
exchange request in good order is received by Shareholder Services and
delivered by Shareholder Services to the Transfer Agent by 12 noon Boston
time on any business day, the exchange usually will occur that day. For
further information regarding the exchange privilege, shareholders should
contact Shareholder Services.
Reinvestment Privilege
A shareholder of the Fund who has redeemed shares or had shares repurchased
at his or her request may reinvest all or any portion of the proceeds (plus
that amount necessary to acquire a fractional share to round off his or her
reinvestment to full shares) in shares, of the same class as the shares
redeemed, of the Fund or any other Eligible Fund at net asset value and
without subjecting the reinvestment to an initial sales charge, provided such
reinvestment is made within 120 calendar days after a redemption or
repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the
amount reinvested. The redemption of shares is, for federal income tax
purposes, a sale on which the shareholder may realize a gain or loss. If a
redemption at a loss is followed by a reinvestment within 30 days, the
transaction may be a "wash sale" resulting in a denial of the loss for
federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by Shareholder
Services of such shareholder's written purchase request and delivery of the
request by Shareholder Services to the Transfer Agent. A shareholder may
exercise this reinvestment privilege only once per twelve month period with
respect to his or her shares of the Fund. No charge is imposed by the Fund
for such reinvestments; however, dealers may charge fees in connection with
the reinvestment privilege. The reinvestment privilege may be exercised with
respect to an Eligible Fund only in those states where shares of the relevant
other Eligible Fund may legally be sold.
Investment Plans
The Fund offers Class A, Class B and Class D shareholders the Investamatic
Check Program. Under this Program, shareholders may make regular investments
by authorizing withdrawals from their bank accounts each month or quarter on
the Investamatic application form available from Shareholder Services.
The Fund also offers tax-sheltered retirement plans, including prototype and
other employee benefit plans for employees, sole proprietors, partnerships
and corporations and IRAs. Details of these investment plans and their
availability may be obtained from securities dealers or from Shareholder
Services.
Systematic Withdrawal Plan
A shareholder who owns noncertificated Class A or Class C shares with a value
of $5,000 or more, or Class B or Class D shares with a value of $10,000 or
more, may elect, by participating in the Fund's Systematic Withdrawal Plan,
to have periodic checks issued for specified amounts. These amounts may not
be less than certain minimums, depending on the class of shares held. The
Plan provides that all income dividends and capital gains distributions of
the Fund shall be credited to participating shareholders in additional shares
of the Fund. Thus, the withdrawal amounts paid can only be realized by
redeeming shares of the Fund under the Plan. To the extent such amounts paid
exceed dividends and distributions from the Fund, a shareholder's investment
will decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales charges,
no such charges will be imposed on withdrawals of up to 8% annually of either
(a) the value, at the time the Plan is initiated, of the shares then in the
account, or (b) the value, at the time of a withdrawal, of the same number of
shares as in the account when the Plan was initiated, whichever is higher.
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Expenses of the Plan are borne by the Fund. A participating shareholder may
withdraw from the Plan, and the Fund may terminate the Plan at any time on
written notice. Purchase of additional shares while a shareholder is
receiving payments under a Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate
in the Investamatic Check Program and the Systematic Withdrawal Plan at the
same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all their
dividends and any other distributions from 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 investment
is made is initially funded with the requisite minimum amount. The number of
shares purchased will be determined as of the dividend payment date. The
Dividend Allocation Plan is subject to state securities law requirements, to
suspension at any time, and to such policies, limitations and restrictions,
as, for instance, may be applicable to street name or master accounts, that
may be adopted from time to time.
Automatic Bank Connection
A shareholder may elect, by participating in the Fund's Automatic Bank
Connection ("ABC"), to have dividends and other distributions, including
Systematic Withdrawal Plan payments, automatically deposited in the
shareholder's bank account by electronic funds transfer. Some contingent
deferred sales charges may apply. See "Systematic Withdrawal Plan" herein.
Reports
Reports for the Fund will be sent to shareholders of record at least
semiannually. These reports will include a list of the securities owned by
the Fund as well as the Fund's financial statements.
Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing the shareholder to make telephone redemptions for
amounts up to $50,000 to be mailed to the shareholder's address of record
is available automatically;
(2) the privilege allowing the shareholder or his or her dealer to make
telephone exchanges is available automatically; and
(3) the privilege allowing the shareholder to make telephone redemptions for
amounts over $5,000, to be remitted by wire to the shareholder's
predesignated bank account, is available by election on the Application
accompanying this Prospectus. A current shareholder who did not previously
request such telephone wire privilege on his or her original Application
may request the privilege by completing a Telephone Redemption-by-Wire
Form which may be obtained by calling 1-800-521-6548. The Telephone
Redemption-by-Wire Form requires a signature guarantee.
A shareholder may decline the automatic Telephone Privileges set forth in (1)
and (2) above by so indicating on the Application accompanying this
Prospectus.
A shareholder may discontinue any Telephone Privilege at any time by advising
Shareholder Services that the shareholder wishes to discontinue the use of
such privileges in the future.
Unless such Telephone Privileges are declined, a shareholder is deemed to
authorize Shareholder Services and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder to
redeem, or purporting to be the shareholder or the shareholder's dealer to
exchange, shares from any account for which such services have been
authorized; and (2) honor any written instructions for a change of address
regardless of whether such request is accompanied by a signature guarantee.
All telephone calls will be recorded. None of the Fund, the other Eligible
Funds, the Transfer Agent, the Investment Manager or the Distributor will be
liable for any loss, expense or cost arising out of any request, including
any fraudulent or unauthorized requests. Shareholders assume the risk
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<PAGE>
to the full extent of their accounts that telephone requests may be
unauthorized. Reasonable procedures will be followed to confirm that
instructions communicated by telephone are genuine. The shareholder will not
be liable for any losses arising from unauthorized or fraudulent instructions
if such procedures are not followed.
Shareholders may redeem or exchange shares by calling toll-free
1-800-521-6548. Although it is unlikely, during periods of extraordinary
market conditions, a shareholder may have difficulty in reaching Shareholder
Services at such telephone number. In that event, the shareholder should
contact Shareholder Services at 1-800-562-0032, 1-617-357-7805 or otherwise
at its main office at One Financial Center, Boston, Massachusetts 02111-2690.
Shareholder Account Inquiries:
Please call 1-800-562-0032
Call this number for assistance in answering general questions on your
account, including account balance, available shareholder services, statement
information and performance of the Funds. Account inquiries may also be made
in writing to State Street Research Shareholder Services, P.O. Box 8408,
Boston, Massachusetts 02266-8408. A fee of up to $10 will be charged against
an account for providing additional account transcripts or photocopies of
paid redemption checks or for researching records in response to special
requests.
Shareholder Telephone Transactions:
Please call 1-800-521-6548
Call this number for assistance in purchasing shares by wire and for
telephone redemptions or telephone exchange transactions. Shareholder
Services will require some form of personal identification prior to acting
upon instructions received by telephone. Written confirmation of each
transaction will be provided.
The Fund and Its Shares
The Fund was organized in 1985 as series of State Street Research Income
Trust, a Massachusetts business trust. The Trustees have authorized shares of
the Fund to be issued in four classes: Class A, Class B, Class C and Class D
shares. The Trust is registered with the Securities and Exchange Commission as
an open-end management investment company. The fiscal year end of the Fund is
March 31.
Except for those differences between the classes of shares described below
and elsewhere in the Prospectus, 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. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common usage of terms which may develop in the mutual fund
industry. For example, Class C shares may be redesignated as Class Y shares
and Class D shares may be redesignated as Class C shares. Any redesignations
would not affect any substantive rights respecting the shares.
Each share of each class of shares represents an identical legal interest in
the same portfolio of investments of the Fund, has the same rights and is
identical in all respects, except that Class A, Class B and Class D 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.
The rights of holders of shares may be modified by the Trustees at any time,
so long as such modifications do not have a material, adverse effect on the
rights of any shareholder. On any matter submitted to the shareholders, the
holder of each Fund share is entitled to one vote per share (with
proportionate voting for fractional shares) regardless of the relative net
asset value thereof.
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Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder
meetings unless required by the 1940 Act. Except as otherwise provided under
said Act, the Board of Trustees will be a self-perpetuating body until fewer
than two thirds of the Trustees serving as such are Trustees who were elected
by shareholders of the Trust. In the event less than a majority of the
Trustees serving as such were elected by shareholders of the Trust, a meeting
of shareholders will be called to elect Trustees. Under the Master Trust
Agreement, any Trustee may be removed by vote of two thirds of the
outstanding Trust shares; holders of 10% or more of the outstanding shares of
the Trust can require that the Trustees call a meeting of shareholders for
purposes of voting on the removal of one or more Trustees. In connection with
such meetings called by shareholders, shareholders will be assisted in
shareholder communications to the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for
indemnification for all losses and expenses of any shareholder of 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.
Management of the Fund
Under the provisions of the Trust's Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees.
The Fund's investment manager is State Street Research & Management Company.
The Investment Manager is charged with the overall responsibility for
managing the investments and business affairs of the Fund, subject to the
authority of the Board of Trustees.
The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve as investment adviser to one of the nation's first
mutual funds, presently known as State Street Research Investment Trust,
which they had formed in 1924. Their investment management philosophy
emphasized comprehensive fundamental research and analysis, including
meetings with the management of companies under consideration for investment.
The Investment Manager's portfolio management group has extensive investment
industry experience managing equity and debt securities. In managing debt
securities, if any, for a portfolio, the Investment Manager may consider
yield curve positioning, sector rotation and duration, among other factors.
The Investment Manager and the Distributor are indirect wholly-owned
subsidiaries of Metropolitan Life Insurance Company and are located at One
Financial Center, Boston, Massachusetts 02111-2690.
The Investment Manager has entered into an Advisory Agreement with the Trust
pursuant to which investment research and management, administrative
services, office facilities and personnel are provided for the Fund in
consideration of a fee from the Fund.
Under its Advisory Agreement with the Trust, the Investment Manager receives
a monthly investment advisory fee equal to 0.65% (on an annual basis) of the
average daily value of the net assets of the Fund. The Fund bears all costs
of its operation other than those incurred by the Investment Manager under
the Advisory Agreement. In particular, the Fund pays, among other expenses,
investment advisory fees, certain distribution expenses under the Fund's
Distribution Plan and the compensation and expenses of the Trustees who are
not otherwise currently affiliated with the Investment Manager or any of its
affiliates. The Investment Manager will reduce its management fee payable by
the Fund up to the amount of any expenses (excluding permissible items, such
as brokerage commissions, Rule 12b-1 payments, interest, taxes and litigation
expenses) paid or incurred in any year in excess of the most restrictive
expense limitation imposed by any state in which the Fund sells shares, if
any. The Investment Manager compensates Trustees of the Trust if such persons
are employees or affiliates of the Investment Manager or its affiliates.
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The Fund is managed by Bartlett R. Geer. Mr. Geer has managed the Fund since
early 1987. Mr. Geer's principal occupation currently is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as Vice President of State Street Research &
Management Company.
Subject to the policy of seeking best overall price and execution, sales of
shares of the Fund may be considered by the Investment Manager in the
selection of broker or dealer firms for the Fund's portfolio transactions.
The Investment Manager has a Code of Ethics governing personal securities
transactions of certain of its employees; see the Statement of Additional
Information.
Dividends and Distributions; Taxes
The Fund qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code for its most recent
fiscal year and intends to qualify as such in future fiscal years, although
it cannot give complete assurance that it will do so. As long as the Fund so
qualifies and satisfies certain distribution requirements, it will not be
subject to federal income tax on its taxable income (including capital gains,
if any) distributed to its shareholders. Consequently, the Fund intends to
distribute annually to its shareholders substantially all of its net
investment income and any capital gain net income (capital gains net of
capital losses).
Dividends from net investment income will be declared daily during each
calendar month and paid after the end of the month; distributions of
long-term and short-term capital gain net income will generally be made on an
annual basis, shortly after the end of the fiscal year in which such gains
are realized (or as otherwise required for compliance with applicable tax
regulations), except to the extent that net short-term gains, if any, are
included in the monthly income dividends for the purpose of stabilizing, to
the extent possible, the amount of net monthly distributions as described
below. Both dividends from net investment income and distributions of capital
gain net income will be paid in additional shares of the Fund at net asset
value (except in the case of shareholders who elect a different available
distribution method).
The Fund will provide its shareholders with annual information on a timely
basis concerning the federal tax status of dividends and distributions during
the preceding calendar year.
The Fund has adopted distribution procedures which differ from those which
have been customary for investment companies in general. The Fund will
declare a dividend each day in an amount based on monthly projections of its
future net investment income and will pay such dividends monthly as described
above. Consequently, the amount of each daily dividend may differ from actual
net investment income as determined under generally accepted accounting
principles. The purpose of these distribution procedures is to attempt to
eliminate, to the extent possible, fluctuations in the level of monthly
dividend payments that might result if the Fund declared dividends in the
exact amount of its daily net investment income.
Each daily dividend is payable to shareholders of record at the time of its
declaration (for this purpose, including only holders of shares purchased for
which payment has been received by the Transfer Agent and excluding holders
of shares redeemed on that day).
Although not contemplated, it is possible that total distributions in a year
could exceed the total of the Fund's current and accumulated earnings and
profits as calculated for federal income tax purposes, because of technical
accounting considerations and the distribution procedures described above,
among other reasons. This excess would first be treated as a "return of
capital" for federal income tax purposes and would reduce by its amount the
shareholder's cost or other basis in his or her shares. After the
shareholder's cost or other basis is reduced to zero, which is highly
unlikely, the distribution will be treated as gain from the sale of the Fund
shares.
Dividends paid by the Fund from taxable net investment income and
distributions of net short-term capital gains, whether they are paid in cash
or reinvested in additional shares, will be taxable for federal income tax
purposes to shareholders as ordinary income. Distributions of net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) which are designated as capital gains
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<PAGE>
distributions, whether paid in cash or reinvested in additional shares, will
be taxable for federal income tax purposes to shareholders as long-term
capital gains, regardless of how long shareholders have held their shares. If
shares of the Fund which are sold at a loss have been held six months or
less, the loss will be considered as a long-term capital loss to the extent
of any capital gains distributions received.
Dividends and other distributions and proceeds of redemption of Fund shares
paid to individuals and other nonexempt payees will be subject to a 31%
federal backup withholding tax if the Transfer Agent is not provided with the
shareholder's correct taxpayer identification number or certification that
the shareholder is not subject to such backup withholding.
The foregoing discussion relates only to generally applicable federal income
tax provisions in effect as of the date of this Prospectus. Therefore,
prospective shareholders are urged to consult their own tax advisers
regarding tax matters, including state and local tax consequences.
Calculation of Performance Data
From time to time, in advertisements or in communications to shareholders or
prospective investors, the Fund may compare the performance of its Class A,
Class B, Class C or Class D shares to that of other mutual funds with similar
investment objectives, to certificates of deposit, to other financial
alternatives and/or to appropriate indices, rankings or averages such as
those compiled by Lipper Analytical Services, Inc., Morningstar, Inc., Money
Magazine, Business Week, Forbes Magazine, Fortune Magazine, The Wall Street
Journal, Investor's Daily, or Wiesenberger Mutual Fund Investment Report. For
example, the performance of the Fund might be compared to the Lipper High
Current Yield Fund category, First Boston High Yield Index, Shearson/Lehman
Corporate Index, Salomon Brothers Mortgage PT Index, Shearson/Lehman
Government Agency Index, S&P 500, U.S. Government securities, Merrill Lynch
Treasury Index, Salomon Brothers High Yield Index and Consumer Price Index.
Total return is computed separately for each class of shares of the Fund. The
average annual total return ("standard total return") for shares of the Fund
is computed by determining the average annual compounded rate of return for a
designated period that, if applied to a hypothetical $1,000 initial
investment (less the maximum initial or contingent deferred sales charge, if
applicable), would produce the redeemable value of that investment at the end
of the period, assuming reinvestment of all dividends and distributions and
with recognition of all recurring charges. Standard total return would be
calculated for the periods specified in applicable regulations and may be
accompanied with nonstandard total return information for differing periods
computed in the same manner with or without annualizing the total return or
taking sales charges into account.
The Fund's yield is computed separately for each class of shares by dividing
the net investment income, after recognition of all recurring charges, per
share earned during the most recent month or other specified thirty-day
period by the applicable maximum offering price per share on the last day of
such period and annualizing the result.
The standard total return and yield results take sales charges into account,
if applicable, but do not take into account recurring and nonrecurring charges
for optional services which only certain shareholders elect and which involve
nominal fees, such as the $7.50 fee for remittance of redemption proceeds by
wire. Where sales charges are not applicable and therefore not taken into
account in the calculation of standard total return and yield, the results will
be increased.
The Fund's distribution rate is calculated separately for each class of
shares by annualizing the latest distribution and dividing the result by the
maximum offering price per share as of the end of the period to which the
distribution relates. The distribution rate is not computed in the same
manner as the above described yield and, therefore, can be significantly
different from it. In its supplemental sales literature, the Fund may quote
its distribution rate together with the above described standard total return
and yield information. The use of such distribution rates would be subject to
an appropriate explanation of how the components of the distribution rate
differ from the above described yield.
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Performance information may be useful in evaluating the Fund and for
providing a basis for comparison with other financial alternatives. Since the
performance of the Fund varies in response to fluctuations in economic and
market conditions, interest rates and Fund expenses, among other things, no
performance quotation should be considered a representation as to the Fund's
performance for any future period.
In evaluating the Fund's performance, consideration should be given to
changes in the Fund's investment objective and policies effected in January
1994. Prior to that time the Fund's investment objective was "to seek a high
level of current income by investing under normal conditions at least 65% of
its total assets in fixed income securities rated at the time of purchase
BBB, BB or B by S&P or Baa, Ba or B by Moody's or which are unrated but
believed by the Investment Manager to be of comparable quality." The change
in the investment objective, i.e. "to seek, primarily, high current income
and, secondarily, capital appreciation, from investments in fixed income
securities" enables the Fund's Investment Manager (i) to take into account,
as a secondary consideration in selecting portfolio securities, their
possible capital appreciation, (ii) to remove the percentage of the Fund's
portfolio which, as a minimum, must be invested in fixed income securities
included in the foregoing specific rating categories and (iii) to include
within the scope of fixed income securities convertible debt securities and
preferred stock. Further, the Fund's investment policy limiting the purchase
of illiquid securities was changed from a fundamental policy to a
nonfundamental policy and the Fund may now invest up to 15% (rather than up
to 10%) in such securities.
In addition, the net asset value of shares of the Fund will fluctuate, with
the result that shares of the Fund, when redeemed, may be worth more or less
than their original cost. Neither an investment in the Fund nor its
performance is insured or guaranteed; such lack of insurance or guarantees
should accordingly be given appropriate consideration when comparing the Fund
to financial alternatives which have such features.
Shares of the Fund had no class designations until June 1, 1993, when
designations were assigned based on the pricing and Rule 12b-1 fees
applicable to shares sold thereafter. Performance data for a specified class
includes periods prior to the adoption of class designations. Performance
data for periods prior to June 1, 1993 will not reflect additional Rule 12b-1
Distribution Plan fees, if any, of up to 1% per year depending on the class
of shares, which will adversely affect performance results for periods after
such date. Performance data or rankings for a given class of shares should be
interpreted carefully by investors who hold or may invest in a different
class of shares.
In reviewing performance for the Fund, a number of factors should be
considered. The price of lower rated, high yield, high risk securities can
rise and fall substantially. A substantial decline can dramatically increase
yields on these securities. The price declines reflect an expectation that
many issuers of these securities will experience financial difficulties,
among other things. Thus, significantly higher yields do not reflect the
income stream investors can expect but rather the risk that their investment
may lose a substantial portion of its value in a financial restructuring or
default.
28
<PAGE>
APPENDIX
Description of Debt/Bond Ratings
Standard & Poor's Corporation
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having speculative
characteristics with respect to capacity to pay interest and repay principal.
BB indicates the least degree of speculation and C the highest. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default 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 timely interest and principal payments. The
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. 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: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions
to meet timely payment of interest and repayment of principal. In the event
of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is assigned
an actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the due date even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments 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 derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high
variability in expected returns due to noncredit risks created by the terms
of the obligation, such as securities whose principal or interest return is
indexed to equities, commodities, or currencies; certain swaps and options;
and interest only (IO) and principal only (PO) mortgage securities.
29
<PAGE>
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa 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 Aa 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 A 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 Baa 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 Ba 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 B 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 Caa 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 Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C 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.
30
<PAGE>
[back cover}
STATE STREET RESEARCH
HIGH INCOME FUND
One Financial Center
Boston, MA 02111
INVESTMENT ADVISER
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
DISTRIBUTOR
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
SHAREHOLDER SERVICES
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
800-562-0032
CUSTODIAN
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
HI-612D-895IBS CONTROL NUMBER 2488-950729(0896)SSR-LD
[state street logo] State Street Research
<PAGE>
State Street Research
High Income Fund
August 1, 1995
P R O S P E C T U S
<PAGE>
STATE STREET RESEARCH
MANAGED ASSETS
Prospectus
August 1, 1995
The investment objective of State Street Research Managed Assets (the
"Fund") is to seek a high total return while attempting to limit investment
risk and preserve capital. To achieve its investment objective, the Fund
intends to allocate assets among selected investments in the following
sectors: Fixed Income Securities, Equity Securities, Inflation Responsive
Investments and Cash & Cash Equivalents (as defined herein). Total return may
include current income as well as capital appreciation. The Fund's investment
manager believes that the timely re-allocation of assets can enhance
performance and reduce portfolio volatility.
Allocation of the Fund's assets among the different investment sectors will
vary from time to time consistent with the short- and long-term investment
outlook of the Fund's investment manager. No minimum or maximum percentage
applies to the Fund's assets that may be invested in any of the investment
sectors, and from time to time all of the Fund's assets could conceivably be
invested in a single investment sector in the discretion of the Fund's
investment manager. The four investment sectors described herein are broad in
scope and to some extent may overlap. In the future, these sectors could be
redefined or other sectors added to highlight a particular area of focus, such
as foreign investments, which are included in each of the four presently
identified sectors but not specifically delineated as a separate sector.
State Street Research & Management Company serves as investment adviser for
the Fund (the "Investment Manager"). As of May 31, 1995, the Investment
Manager had assets of approximately $25.7 billion under management. State
Street Research Investment Services, Inc. serves as distributor (the
"Distributor") for the Fund.
Shareholders may have their shares redeemed directly by the Fund at net
asset value plus the applicable contingent deferred sales charge, if any;
redemptions processed through securities dealers may be subject to processing
charges.
There are risks in any investment program, including the risk of changing
economic and market conditions, and there is no assurance that the Fund will
achieve its investment objective. The net asset value of a share of the Fund
will fluctuate as market conditions change.
This Prospectus sets forth concisely the information a prospective investor
ought to know about the Fund before investing. It should be retained for
future reference. A Statement of Additional Information about the Fund dated
August 1, 1995, has been filed with the Securities and Exchange Commission and
is incorporated by reference in this Prospectus. It is available, at no
charge, upon request to the Fund at the address indicated on the back cover or
by calling 1-800-562-0032.
The Fund is a diversified series of State Street Research Income Trust (the
"Trust"), an open-end management investment company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Table of Contents Page
- -------------------------------------------------
Table of Expenses 2
Financial Highlights 4
The Fund's Asset Allocation and Investments 5
Other Investment Policies and Considerations 8
Purchase of Shares 11
Redemption of Shares 20
Shareholder Services 21
The Fund and its Shares 25
Management of the Fund 26
Dividends and Distributions; Taxes 27
Calculation of Performance Data 28
Appendix -- Description of Debt/Bond Ratings 30
- -------------------------------------------------
<PAGE>
The Fund offers four classes of shares which may be purchased at the next
determined net asset value per share plus, in the case of all classes except
Class C shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a deferred
basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5% and
(ii) an annual service fee of 0.25% of the average daily net asset value of
the Class A shares.
Class B shares are subject to (i) a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made
within five years of purchase and (ii) annual distribution and service fees of
1% of the average daily net asset value of such shares. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after purchase. No contingent deferred sales charge
applies after the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or redemption
of Class C shares. Class C shares do not pay any distribution or service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1%
if redeemed within one year following purchase and (ii) annual distribution
and service fees of 1% of the average daily net asset value of such shares.
<TABLE>
<CAPTION>
Table of Expenses
- ---------------------------------------------------------------------------------------
Class A Class B Class C Class D
------- ------- ------- -------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses (1)
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.5% None None None
Maximum Sales Charge Imposed on Reinvested
Dividends
(as a percentage of offering price) None None None None
Maximum Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, as applicable) None (2) 5% None 1%
Redemption Fees (as a percentage of amount
redeemed, if applicable) None None None None
Exchange Fees None None None None
</TABLE>
- ---------------
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
thereafter, and no contingent deferred sales charge is imposed after the
fifth year. Class D shares are subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the
sale. Long-term investors in a class of shares with a distribution fee
may, over a period of years, pay more than the economic equivalent of the
maximum sales charge permissible under applicable rules. See "Purchase of
Shares."
(2) Purchases of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption.
See "Purchase of Shares."
2
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C Class D
------- ------- ------- -------
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses (as a
percentage of average net assets)
Management Fees 0.75% 0.75% 0.75% 0.75%
12b-1 Fees 0.25% 1.00% None 1.00%
Other Expenses 0.56% 0.56% 0.56% 0.56%
Less Voluntary Reduction (0.31%) (0.31%) (0.31%) (0.31%)
------- ------- ------- -------
Total Fund Operating Expenses
(after voluntary reduction) 1.25% 2.00% 1.00% 2.00%
======= ======= ======= =======
</TABLE>
Example:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment assuming (1) 5% annual
return and (2) redemption of the entire
investment at the end of each time period:
Class A shares $57 $83 $111 $189
Class B shares (1) $70 $93 $128 $213
Class C shares $10 $32 $ 55 $122
Class D shares $30 $63 $108 $233
You would pay the following expenses on the
same investment, assuming no redemption: 1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Class B shares (1) $20 $63 $108 $213
Class D shares $20 $63 $108 $233
</TABLE>
(1) Ten-year figures assume conversion of Class B shares to Class A shares at
the end of eight years.
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than
shown.
The purpose of the table above is to assist the investor in understanding
the various costs and expenses that an investor will bear directly or
indirectly. The percentage expense levels shown in the table above are based
on experience with expenses during the fiscal year ended March 31, 1995;
actual expense levels for the current fiscal year and future years may vary
from the amounts shown. The table does not reflect charges for optional
services elected by certain shareholders, such as the $7.50 fee for remittance
of redemption proceeds by wire. For further information on sales charges, see
"Purchase of Shares -- Alternative Purchase Program"; for further information
on management fees, see "Management of the Fund"; and for further information
on 12b-1 fees, see "Purchase of Shares -- Distribution Plan."
The Fund has been advised that the Distributor and its affiliates may from
time to time and in varying amounts voluntarily assume some portion of fees or
expenses relating to the Fund. For the fiscal year ended March 31, 1995, Total
Fund Operating Expenses as a percentage of the average net assets of Class A,
Class B, Class C and Class D shares, respectively, would have been 1.56%,
2.31%, 1.31% and 2.31% in the absence of the voluntary assumption of fees or
expenses by the Distributor and its affiliates. Such assumption of fees or
expenses, as a percentage of average net assets, amounted to 0.31%, 0.31%,
0.31% and 0.31% of the Class A, Class B, Class C and Class D shares of the
Fund, respectively. The Fund expects the subsidization of fees or expenses to
continue in the current year, although it cannot give complete assurance that
such assistance will be received.
3
<PAGE>
Financial Highlights
The data set forth below has been audited by Price Waterhouse LLP,
independent accountants, and their report thereon for the latest five years
is included in the Statement of Additional Information. For further
information about the performance of the Fund, see "Financial Statements" in
the Statement of Additional Information.
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------------------------------
December 29, 1988
(Commence-
Year ended March 31 ment of
-------------------------------------------------------------- Operations) to
1995 1994 1993 1992 1991 1990 March 31, 1989
---- ---- ---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $8.94 $8.94 $8.22 $7.61 $7.81 $7.60 $7.40
Net investment income* .27 .22 .27 .37 .44 .46 .13
Net realized and unrealized gain (loss) on
investments and forward contracts (.14) .72 1.01 .62 (.14) .36 .19
Dividends from net investment income (.17) (.22) (.25) (.38) (.41) (.47) (.12)
Distributions from net realized gains (.14) (.72) (.31) -- (.09) (.14) --
-------- -------- ------- ------- ------- ------- -------
Net asset value, end of year $8.76 $8.94 $8.94 $8.22 $7.61 $7.81 $7.60
======== ======== ======= ======= ======= ======= =======
Total return 1.52%+ 10.96%+ 16.54%+ 13.29%+ 4.06%+ 10.78%+ 4.26%+++
Net assets at end of year (000s) $181,358 $166,011 $93,537 $78,483 $64,139 $56,267 $27,762
Ratio of operating expenses to average net
assets* 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%++
Ratio of net investment income to average
net assets* 3.11% 2.75% 3.26% 4.60% 5.78% 6.29% 7.37%++
Portfolio turnover rate 89.58% 105.17% 142.86% 97.76% 68.08% 71.88% 34.57%
- ---------------
*Reflects voluntary assumption of fees or
expenses per share in each year $0.03 $0.02 $0.02 $0.02 $0.02 $0.02 $0.01
</TABLE>
<TABLE>
<CAPTION>
Class B Class C Class D
----------------------- ---------------------- ------------------------
Year ended Year ended Year ended
March 31 March 31 March 31
1995 1994** 1995 1994** 1995 1994**
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $8.92 $8.78 $8.95 $8.78 $8.93 $8.78
Net investment income* .20 .16 .29 .21 .20 .16
Net realized and unrealized gain (loss) on
investments and forward contracts (.13) .39 (.14) .43 (.13) .40
Dividends from net investment income (.11) (.18) (.19) (.24) (.11) (.18)
Distributions from net realized gains (.14) (.23) (.14) (.23) (.14) (.23)
----- ----- ----- ----- ----- -----
Net asset value, end of year $8.74 $8.92 $8.77 $8.95 $8.75 $8.93
===== ===== ===== ===== ===== =====
Total return 0.82%+ 6.26%+++ 1.77%+ 7.27%+++ 0.82%+ 6.31%+++
Net assets at end of year (000s) $152,251 $83,244 $25,803 $21,434 $12,772 $7,117
Ratio of operating expenses to average net
assets* 2.00% 2.00%++ 1.00% 1.00%++ 2.00% 2.00%++
Ratio of net investment income to average
net assets* 2.38% 2.03%++ 3.37% 3.03%++ 2.39% 2.03%++
Portfolio turnover rate 89.58% 105.17% 89.58% 105.17% 89.58% 105.17%
- ---------------
* Reflects voluntary assumption of fees or
expenses per share in each year $0.03 $0.03 $0.03 $0.02 $0.03 $0.03
</TABLE>
++ Annualized.
** June 1, 1993 (commencement of share class designations) to March 31, 1994.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
4
<PAGE>
The Fund's Asset Allocation and Investments
The investment objective of the Fund is to seek a high total return while
attempting to limit investment risk and preserve capital. This investment
objective cannot be changed without approval of the Fund's shareholders.
To achieve its investment objective, the Fund intends to allocate assets
among selected investments in the following sectors: Fixed Income Securities,
Equity Securities, Inflation Responsive Investments and Cash & Cash
Equivalents (as defined herein). Total return may include current income as
well as capital appreciation. The Fund's investment policies, including the
identification of investment sectors and the components thereof, may be
changed by the Board of Trustees without shareholder approval. The Fund's
ability to concentrate its investments within particular investment sectors or
to hold all of its investments in a particular investment sector in the
discretion of the Investment Manager may increase the risks to the Fund from
adverse developments or conditions within a particular sector.
Asset Allocation
The Investment Manager believes that the timely reallocation of assets can
enhance performance and reduce portfolio volatility. The Investment Manager
will continuously monitor and change allocations of the Fund's assets based
upon an evaluation of risks and potential total return, taking into
consideration secular trends, economic cycles and market conditions, among
other factors. Accordingly, the allocation of the Fund's assets among the
different investment sectors will vary from time to time consistent with the
Investment Manager's short- and long-term investment outlook. No minimum or
maximum percentage applies to the Fund's assets that may be invested in any of
the investment sectors. From time to time, all of the Fund's assets could
conceivably be invested in a single investment sector in the discretion of the
Investment Manager.
The Fund has established specific investment sectors, i.e., Fixed Income
Securities, Equity Securities, Inflation Responsive Investments and Cash &
Cash Equivalents (as defined herein) to identify general investment areas into
which the Fund will, from time to time, allocate its assets in varying
proportions. The establishment of these sectors is not intended to isolate
mutually exclusive categories of investment instruments. For instance, the
Fixed Income Securities sector and the Equity Securities sector may both hold
debt securities convertible into equity securities, while the Inflation
Responsive Investments sector may hold instruments similar to those held in
the other sectors. However, each sector will have a central focus: interest
income and gains from debt financings for the Fixed Income Securities sector,
capital appreciation for the Equity Securities sector, inflation hedging for
the Inflation Responsive Investments sector and liquidity and defensiveness
for the Cash & Cash Equivalents sector. Redefined or additional sectors, such
as an international or global sector, may be established in the future if, in
the discretion of the Investment Manager, circumstances warrant.
Because the total return of the Fund may be comprised of varying amounts of
current income and capital appreciation over time, the dividends paid by the
Fund may vary substantially from period to period. Accordingly, the Fund
encourages shareholders who wish to receive cash payments of a fixed amount
with respect to their investments to reinvest all dividends and capital gains
distributions in shares of the Fund, and to use the Systematic Withdrawal Plan
to receive current cash payments from the Fund. See "Shareholder Services --
Systematic Withdrawal Plan." Payments under the Systematic Withdrawal Plan may
constitute, in whole or part, a return of the capital invested in the Fund.
Fixed Income Securities
The Fund may invest in fixed income or interest bearing securities of
various maturities, including bonds, debentures, notes, preferred stocks and
debt instruments convertible into common stock, issued by domestic or foreign
corporations, partnerships or similar business entities, governments or
municipalities ("Fixed Income Securities").
The Fund will generally purchase Fixed Income Securities that are
considered investment grade securities (i.e., rated at the time of purchase
AAA, AA, A or
5
<PAGE>
BBB by Standard & Poor's Corporation ("S&P") or Aaa, Aa, A or Baa by Moody's
Investors Service, Inc. ("Moody's")), or securities that are not rated but
considered by the Investment Manager to be of equivalent investment quality
to comparable rated securities. Bonds rated Baa by Moody's lack outstanding
investment characteristics and in fact have speculative characteristics as
well. The Fund, however, may also purchase lower quality debt securities
rated at the time of purchase BB or B by S&P or Ba or B by Moody's or
securities that are not rated but considered by the Investment Manager to be
of equivalent investment quality to comparable rated securities. Where an
investment is split rated, the Fund may invest on the basis of the higher
rating. Where an investment is only rated by one rating agency, the Fund may
invest on the basis of a higher rating derived from its own analysis. Fixed
Income Securities rated BB or B by S&P or Ba or B by Moody's or unrated
securities deemed by the Investment Manager to be of equivalent quality are
considered to be below investment grade, generally involve more credit risk
than higher rated securities and are considered by S&P and Moody's to be
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. Such lower quality
securities could comprise the entire allocation of assets to the Fixed Income
Securities sector at a particular point in time, but in no event will they
comprise more than 25% of the Fund's total assets at the time of purchase. In
selecting Fixed Income Securities, the Investment Manager considers both its
own credit analysis and the ratings of S&P and Moody's. Fixed Income
Securities may include both taxable and nontaxable fixed income investments.
For further information concerning the ratings of Fixed Income Securities,
see the Appendix.
For the fiscal year ended March 31, 1995, the percentage of the Fund's
total investments on an average annual basis invested in debt securities of
any particular rating category or its equivalent, as determined by the
Investment Manager, was as follows: 32% AAA, 1% AA, 2% A, 1% BBB, 1% BB, and
7% B as determined on a dollar weighted basis, comprising 44% of total
investments. Of these bonds, 95% were rated by a nationally recognized
statistical rating organization and 5% were unrated but considered to be
equivalent, as determined by the Investment Manager, to comparable rated
securities. The above percentages reflect ratings, as of the time of purchase
and subsequent changes, if any, including downgrades, for the period the
securities were held.
In 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.
Fixed Income Securities may include zero coupon securities, which pay no
cash income for all or a portion of their term but are purchased at a discount
from their value at maturity. Their return consists of the amortization of
discount between their purchase price and their maturity value, plus any fixed
rate interest income. Fixed Income Securities also include mortgage-related
securities and asset-backed securities. Mortgage-related securities represent
interests in pools of mortgage loans and 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. Asset-backed (other than mortgage-related)
securities 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. Fixed Income Securities also
include 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").
Equity Securities
The Fund may invest in domestic and foreign common stocks, preferred stocks,
debt securities and warrants convertible into or carrying the right to
acquire common stock and depositary receipts in respect of the foregoing
("Equity Securities"). The Fund may invest in the
6
<PAGE>
Equity Securities of a broad spectrum of both large and small capitalization
companies. These may include Equity Securities of companies with
above-average prospects for long-term growth and more cyclical or lesser
growing companies when these securities are considered by the Investment
Manager to be undervalued. The Fund anticipates that a majority of the Equity
Securities in which it will invest will be listed on a major securities
exchange or included on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") system. The Fund does not presently expect
unlisted securities or over-the-counter securities which are not on NASDAQ to
be a substantial portion of the Equity Securities sector, although no
limitation applies to such securities.
Inflation Responsive Investments
The Fund may invest in Equity Securities, Cash & Cash Equivalents and other
domestic and foreign investments which the Investment Manager believes may
offer appreciation potential and/or serve to hedge invested capital against
erosion of the purchasing power of the U.S. dollar ("Inflation Responsive
Investments"). Inflation Responsive Investments may include the securities of
companies engaged in the extraction and/or processing of gold and other
precious metals, raw materials and petroleum and other sources of energy;
securities which are secured by real estate or securities of companies which
own or invest or deal in real estate (including limited partnership
interests, securities issued by real estate investment trusts ("REITs") and
collateralized mortgage obligations ("CMOs")); securities denominated in
foreign currencies; securities directly or indirectly indexed in value to the
value of real assets (for example, gold or oil) or to the value of foreign
currencies, including commercial paper and short-term obligations; and
foreign currencies. Certain instruments constituting Inflation Responsive
Investments may qualify for inclusion in other investment sectors. They will
be deemed part of the Inflation Responsive Investments sector, however, when
in the view of the Investment Manager their predominant investment attribute
is the potential to hedge invested capital against erosion of the purchasing
power of the U.S. dollar. For example, the stock of a company engaged in the
extraction of gold could be included in the Inflation Responsive Investments
sector because of its potential to appreciate immediately in response to
accelerating inflation, even though it may also be a candidate for the Equity
Securities sector because of its longer term earnings potential. The Fund
will accordingly allocate investments to and from the Inflation Responsive
Investments sector as circumstances warrant.
The Fund may invest up to 10% of its total assets directly in commodities
such as precious and other metals, minerals and agricultural goods. For
example, the Fund may acquire interests in gold, silver, platinum and
palladium by buying bullion or certificates, receipts or contracts
representing ownership interests in such precious metals and gold, silver and
platinum coins or medallions. Similarly, the Fund may trade in options,
futures and related instruments based on the Commodity Research Bureau Futures
Price Index, which represents a diverse selection of commodities including,
among others, copper, oil and grains. As further described under "Other
Investment Policies and Considerations," investments in commodities and
commodity-related options, futures and instruments may involve risks not
associated with other types of instruments.
Cash & Cash Equivalents
The Fund may invest in cash, short-term debt or money market securities, such
as repurchase agreements, securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, certificates of deposit,
time deposits, bankers' acceptances, corporate commercial paper rated not
lower than A by S&P or Prime by Moody's (or unrated commercial paper issued
by a corporation having an outstanding long-term unsecured debt issue rated
at least A by S&P or Moody's) and similar domestic or foreign instruments
("Cash & Cash Equivalents"). The Fund will purchase Cash & Cash Equivalents
for defensive purposes, to maintain liquidity or to obtain total return when
other investment alternatives are relatively less attractive for the Fund as
a whole. The Fund could hold virtually all of its assets in Cash & Cash
Equivalents from time to time, subject to applicable diversification and
concentration limitations as described under "Other Investment Policies and
Considerations -- Investment Limitations and Practices."
7
<PAGE>
Other Investment Policies and Considerations
Other Investment Practices
The Fund may buy and sell domestic and foreign options, futures contracts and
options on futures contracts, on securities, securities indices and precious
metals and other commodities (if available), and enter into closing
transactions with respect to each of the foregoing under circumstances in
which such techniques are expected by the Investment Manager to aid in
achieving the investment objective of the Fund. The Fund may not establish a
position in a commodity futures contract or purchase or sell a commodity
option contract for other than bona fide hedging purposes if immediately
thereafter the sum of the amount of initial margin deposits and premiums
required to establish such positions for such nonhedging purposes would
exceed 5% of the market value of the Fund's net assets; similar policies
apply to options which are not commodities. The Fund may enter various forms
of swap arrangements, which have simultaneously the characteristics of a
security and a futures contract, although the Fund does not presently expect
to invest more than 5% of its total assets in such items. These swap
arrangements include interest rate swaps, currency swaps and index swaps. See
the Statement of Additional Information. The Fund may invest in restricted
securities in accordance with Rule 144A, under the Securities Act of 1933,
which allows for the resale of such securities among certain qualified
institutional buyers. Because the market for such securities is still
developing, such securities could possibly become illiquid in particular
circumstances. See the Statement of Additional Information. The Fund may
enter into repurchase agreements and purchase when-issued securities.
The Fund may lend portfolio securities with a value of up to 33-1/3% of its
total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of
the current market value of the loaned securities plus accrued interest.
Collateral received by the Fund will generally be held in the form tendered,
although cash may be invested in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, irrevocable stand-by letters
of credit issued by a bank, or any combination thereof. 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 most rights of ownership including 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 to be of good financial standing.
Risk Factors and Special Considerations
Value of Shares and Assets
The value of the Fund's investments (and accordingly the net asset value of
its shares) will be subject to fluctuation in response to a variety of
economic, political and other factors. For example, the Fund's holdings of
Inflation Responsive Investments such as gold stocks and gold (to which the
value of some of the Fund's investments may be indexed) could be adversely
affected by circumstances such as currency revaluations, economic conditions,
social conditions within a country (particularly South Africa, the world's
largest producer of gold), trade imbalances and trade and currency
restrictions. The prices of oil stocks and the price of oil (to which the
value of some of the Fund's investments may be indexed) may be similarly
affected by unpredictable circumstances such as social, political or military
disturbances in or near oil producing countries or oil shipping or pipeline
routes, the policies of various governments and the Organization of Petroleum
Exporting Countries ("OPEC"), an organization of major oil producing
countries, the discovery of new reserves and the development of new
techniques for producing, refining and transporting oil, gas and related
products, energy conservation and the development of alternative energy
sources.
Foreign Investments
The Fund reserves the right to invest without limitation in securities of
non-U.S. issuers directly or in the form
8
<PAGE>
of American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs") or similar securities representing interests in the securities of
foreign issuers.
ADRs are receipts, typically issued by a U.S. bank or trust company, which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs are receipts issued in Europe which evidence a similar ownership
arrangement. Generally, ADRs, in registered form, are designed for use in U.S.
securities markets, and EDRs are designed for use in European securities
markets. The underlying securities are not always denominated in the same
currency as the ADRs or EDRs. Although investment in the form of ADRs or EDRs
facilitates trading in foreign securities, it does not mitigate 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. Investments in foreign securities also involve the
additional cost of converting the foreign currency into U.S. dollars. Finally,
to the extent the Fund invests in securities of issuers in less developed
countries or emerging foreign markets, it will be subject to a variety of
additional risks, including risks associated with political instability,
economies based on relatively few industries, lesser market liquidity, high
rates of inflation, significant price volatility of portfolio holdings and
high levels of external debt in the relevant country.
Although the Fund may invest in securities denominated in foreign
currencies, the Fund values its securities and other assets in U.S. dollars.
As a result, the net asset value of the Fund's shares may fluctuate with U.S.
dollar exchange rates as well as with price changes of the Fund's securities
in the various local markets and currencies. Thus, an increase in the value of
the U.S. dollar compared to the currencies in which the Fund makes its
investments could reduce the effect of increases and magnify the effect of
decreases in the prices of the Fund's securities in their local markets.
Conversely, a decrease in the value of the U.S. dollar will have the opposite
effect of magnifying the effect of increases and reducing the effect of
decreases in the prices of the Fund's securities in their local markets.
Currency Transactions
In order to protect against the effects of uncertain future exchange rates on
securities denominated in foreign currencies, the Fund may engage in currency
exchange transactions either on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market, or by entering into forward
contracts to purchase or sell currencies. 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
9
<PAGE>
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, large institutions, with
whom the Investment Manager has done substantial business in the past.
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 value of hedged currency, they tend to limit any potential
gain that might result should the value of such currency increase.
Equity Securities
Although the Fund anticipates that a substantial portion of the Equity
Securities in which it will invest will be listed on a major securities
exchange, it reserves the right to invest without limitation in Equity
Securities that are unlisted or traded over-the-counter. The issuers of such
Equity Securities may be limited in product lines, markets and financial
resources and may be dependent on entrepreneurial management. The Equity
Securities of less seasoned companies may have limited marketability and may
be subject to more abrupt or erratic market movements over time, both up and
down, than securities of larger, more seasoned companies or the market as a
whole. Smaller, growing companies also typically reinvest most of their net
income in the enterprise and typically do not pay dividends.
Fixed Income Securities
Lower rated high yield, high risk securities (i.e., bonds rated BB or lower
by S&P or Ba or lower by Moody's or equivalent as determined by the
Investment Manager), commonly known as "junk bonds," of the type in which the
Fund invests may be subject to greater market price fluctuations than lower
yielding, higher rated debt securities. Credit ratings do not reflect this
market risk and may not reflect the effect of recent developments on an
issuer's ability to make interest and principal payments. Additional risks of
such securities include limited liquidity and secondary market support,
particularly in the case of securities that are not rated or are subject to
restrictions on resale, which may limit the availability of securities for
purchase by the Fund and limit the ability of the Fund to sell portfolio
securities either to meet redemption requests or in response to changes in
the economy or the financial markets. See "Additional Information Concerning
Investment Sectors -- Risk Factors of Lower Quality Fixed Income Securities" in
the Statement of Additional Information.
Commodities
By making investments in commodities and commodity-related options, futures
and indices as described herein, the Fund may risk failing to qualify in a
particular year as a regulated investment company under the Internal Revenue
Code, although the Investment Manager intends to manage the portfolio with a
view to minimizing such risk. By the same token, the Fund's intention to
qualify as a regulated investment company could limit the extent of the
Fund's investments in commodities and commodity-related options, futures and
indices. See the Statement of Additional Information. In the event the Fund
failed to qualify as a regulated investment company under the Internal
Revenue Code in any year, it would lose the beneficial tax treatment accorded
regulated investment companies under Subchapter M of the Internal Revenue
Code. The primary effects of losing this tax status would be that the Fund
would then owe taxes on its net income for that year, and the shareholders,
if they received a dividend, might receive a return of capital that would
reduce the basis of their shares of the Fund.
Investment Limitations and Practices
In seeking to lessen investment risk, the Fund operates under certain
fundamental investment restrictions. Under these restrictions, the Fund may
not invest in a security if the transaction would result in (a) more than
10
<PAGE>
5% of the Fund's total assets being invested in any one issuer; (b) the Fund
owning more than 10% of the outstanding voting securities of an issuer; (c)
more than 5% of the Fund's total assets being invested in securities of
issuers (including predecessors) with less than three years of continuous
operations except in the case of debt securities rated BBB or higher by S&P
or Baa or higher by Moody's; or (d) more than 25% of the Fund's total assets
being invested in any one industry (except that restrictions (a) through (d)
do not apply to investments in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities). In addition, the Fund may
not invest more than 10% of its total assets in illiquid assets, including
securities restricted as to resale (limited as a matter of nonfundamental
policy to 5% of total assets), repurchase agreements extending for more than
seven days, options not listed and traded on any national securities exchange
or registered commodities exchange and other securities and assets which are
not readily marketable. The fundamental investment restrictions set forth in
this paragraph may not be changed except by vote of the holders of a majority
of the outstanding voting securities of the Fund. For further information on
these and other investment restrictions, including other nonfundamental
investment restrictions which may be changed without a shareholder vote, see
the Statement of Additional Information.
The Fund may invest up to 10% of its total assets in shares of other
investment companies, including limited partnerships, REITs, issuers of CMOs
and unit investment trusts that issue shares representing separate rights to
capital appreciation and dividends in respect of common stock of various
issuers. Such investments may involve the payment of duplicative management or
other fees. To mitigate such duplication, however, the Investment Manager has
agreed to waive up to the full amount of its investment advisory fee with
respect to investments, if any, in other open-end investment companies; the
amount of such waived fee will be deemed a reduction of fees or assumption of
Fund expenses for purposes of the voluntary arrangement described under "Table
of Expenses."
During periods when the Investment Manager deems it advisable, the Fund may
engage in active trading of portfolio investments. Increases in the rate of
portfolio turnover will result in increased transaction costs for the Fund and
may result in an increase in the realization of short-term capital gains.
The Investment Manager also manages the assets of other funds which, in
seeking to achieve their investment objectives, may hold similar investments
to those held by the Fund and trade in the same markets as the Fund. It is
also possible that a particular investment may be held by more than one fund
when the Investment Manager determines that holding such investment is in the
best interests of each fund and the investment meets the differing investment
objectives of each fund.
Information on the Purchase of Shares, Redemption of Shares and Shareholder
Services is set forth on pages 11 to 25 below.
The Fund is available for investment by many kinds of investors including
participants investing through 401(k) or other retirement plan sponsors,
employees investing through savings plans sponsored by employers, Individual
Retirement Accounts ("IRAs"), trusts, corporations, individuals, etc. The
applicability of the general information and administrative procedures set
forth below accordingly will vary depending on the investor and the
recordkeeping system established for a shareholder's investment in the Fund.
Participants in 401(k) and other plans should first consult with the
appropriate person at their employer or refer to the plan materials before
following any of the procedures below. For more information or assistance,
anyone may call 1-800-562-0032.
Purchase of Shares
Methods of Purchase
Through Dealers
Shares of the Fund are continuously offered through securities dealers who
have entered into sales agreements with the Distributor. Purchases through
dealers
11
<PAGE>
are confirmed at the offering price, which is the net asset value plus the
applicable sales charge, next determined after the order is duly received by
State Street Research Shareholder Services ("Shareholder Services"), a
division of State Street Research Investment Services, Inc., from the dealer.
("Duly received" for purposes herein means in accordance with the conditions
of the applicable method of purchase as described below.) The dealer is
responsible for transmitting the order promptly to Shareholder Services in
order to permit the investor to obtain the current price. See "Purchase of
Shares -- Net Asset Value" herein.
By Mail
Initial investments in the Fund may be made by mailing or delivering to the
investor's securities dealer a completed Application (accompanying this
Prospectus), together with a check for the total purchase price payable to
the Fund. The dealer must forward the Application and check in accordance
with the instructions on the Application.
Additional shares may be purchased by mailing to Shareholder Services a
check payable to the Fund in the amount of the total purchase price together
with any one of the following: (i) an Application; (ii) the stub from a
shareholder's account statement; or (iii) a letter setting forth the name of
the Fund, the class of shares and the shareholder's account name and number.
Shareholder Services will deliver the purchase order to the transfer agent and
dividend paying agent, State Street Bank and Trust Company (the "Transfer
Agent").
If a check is not honored for its full amount, the purchaser could be
subject to additional charges to cover collection costs and any investment
loss, and the purchase may be cancelled.
By Wire
An investor may purchase shares by wiring Federal Funds of not less than
$5,000 to State Street Bank and Trust Company, which also serves as the
Trust's custodian (the "Custodian"), as set forth below. Prior to making an
investment by wire, an investor must notify Shareholder Services at
1-800-521-6548 and obtain a control number and instructions. Following such
notification, Federal Funds should be wired through the Federal Reserve
System to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF = State Street Research Managed Assets
and class of shares (A, B, C or D)
AC = 99029761
OBI = Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street
Research Shareholder Services)
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make such
investment by 12 noon Boston time on the day of his or her investment; and
(ii) the wire must be received by 4 P.M. Boston time that same day.
An investor making an initial investment by wire must promptly complete the
Application accompanying this Prospectus and deliver it to his or her
securities dealer, who should forward it as required. No redemptions will be
effected until the Application has been duly processed.
The Fund may in its discretion discontinue, suspend or change the practice
of accepting orders by any of the methods described above. Orders for the
purchase of shares are subject to acceptance by the Fund. The Fund reserves
the right to reject any purchase order, including orders in connection with
exchanges, for any reason which the Fund in its sole discretion deems
appropriate. The Fund reserves the right to suspend the sale of shares.
Minimum Investment
Class of Shares
------------------------------
A B C D
------ ------ --- ------
Minimum Initial Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $2,000 $2,000 (a) $2,000
By Investamatic $1,000 $1,000 (a) $1,000
All Other $2,500 $2,500 (a) $2,500
Minimum Subsequent Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $ 50 $ 50 (a) $ 50
By Investamatic $ 50 $ 50 (a) $ 50
All Other $ 50 $ 50 (a) $ 50
(a) Special conditions apply; contact the Distributor.
12
<PAGE>
The Fund reserves the right to vary the minimums for initial or subsequent
investments from time to time as in the case of, for example, exchanges and
investments under various retirement and employee benefit plans, sponsored
arrangements involving group solicitations of the members of an organization,
or other investment plans such as for reinvestment of dividends and
distributions or for periodic investments (e.g., Investamatic Check Program).
Alternative Purchase Program
General
Alternative classes of shares permit investors to select a purchase program
which they believe will be the most advantageous for them, given the amount
of their purchase, the length of time they anticipate holding Fund shares or
the flexibility they desire in this regard, and other relevant circumstances.
Investors will be able to determine whether in their particular circumstances
it is more advantageous to incur an initial sales charge and not be subject
to certain ongoing charges or to have their entire initial purchase price
invested in the Fund with the investment being subject thereafter to ongoing
service fees and distribution fees.
As described in greater detail below, securities dealers are paid differing
amounts of commission and other compensation depending on which class of
shares they sell.
13
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales Initial sales charge Contingent deferred None Contingent deferred
Charges at time of investment sales charge of 5% to sales charge of 1%
of up to 4.5% 2% applies to any applies to any shares
depending on amount of shares redeemed within redeemed within one year
investment first five years following their purchase
following their
purchase; no
contingent deferred
sales charge after
five years
On investments of $1
million or more, no
initial sales charge;
but contingent
deferred sales charge
of 1% applies to any
shares redeemed within
one year following
their purchase
Distribution None 0.75% for first eight None 0.75% each year
Fee years; Class B shares
convert automatically
to Class A shares
after eight years
Service 0.25% each year 0.25% each year None 0.25% each year
Fee
Initial Above described 4% None 1%
Commission initial sales charge
Received less 0.25% to 0.50%
by retained by
Selling Distributor
Securities On investments of $1
Dealer million or more, 0.25%
to 1% paid to dealer
by Distributor
</TABLE>
14
<PAGE>
In deciding which class of shares to purchase, the investor should consider
the amount of the investment, the length of time the investment is expected to
be held, and the ongoing service fee and distribution fee, among other
factors.
Class A shares are sold at net asset value plus an initial sales charge of
up to 4.5% of the public offering price. Because of the sales charge, not all
of an investor's purchase amount is invested unless the purchase equals
$1,000,000 or more. Class B shareholders pay no initial sales charge, but a
contingent deferred sales charge of up to 5% generally applies to shares
redeemed within five years of purchase. Class D shareholders also pay no
initial sales charge, but a contingent deferred sales charge of 1% generally
applies to redemptions made within one year of purchase. For Class B and Class
D shareholders, therefore, the entire purchase amount is immediately invested
in the Fund.
An investor who qualifies for a significantly reduced initial sales charge,
or a complete waiver of the sales charge on investments of $1,000,000 or more,
on the purchase of Class A shares might elect that option to take advantage of
the lower ongoing service and distribution fees that characterize Class A
shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. Class B shares are assessed an annual
distribution fee of 0.75% of daily net assets for an eight-year period
following the date of purchase and are then automatically converted to Class A
shares. Class D shares are assessed an annual distribution fee of 0.75% of
daily net assets for as long as the shares are held. The prospective investor
should consider these fees plus the initial or contingent deferred sales
charges in estimating the costs of investing in the various classes of the
Fund's shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are allocated to dealers (see
"Distribution Plan" below). In addition, the Distributor will, at its expense,
provide additional cash and noncash incentives to securities dealers that sell
shares. Such incentives may be extended only to those dealers that have sold
or may sell significant amounts of shares and/or meet other conditions
established by the Distributor; for example, the Distributor may sponsor
special promotions to develop particular distribution channels or to reach
certain investor groups. The incentives may include merchandise and trips to
and attendance at sales seminars at resorts.
Class A Shares -- Initial Sales Charges
Sales Charges
The purchase price of a Class A share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar
amount of the shares purchased as set forth in the table below. A major
portion of this sales charge is reallowed by the Distributor to the
securities dealer responsible for the sale.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Sales Sales
Charge Charge
Paid by Paid by Dealer
Investor Investor Concession
Dollar Amount As % of As % of As % of
of Purchase Purchase Net Asset Purchase
Transaction Price Value Price
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
- ---------------------------------------------------------------------------------------
$100,000 or above but less than $250,000 3.50% 3.63% 3.00%
- ---------------------------------------------------------------------------------------
$250,000 or above but less than $500,000 2.50% 2.56% 2.00%
- ---------------------------------------------------------------------------------------
$500,000 or above but less than $1 million 2.00% 2.04% 1.75%
- ---------------------------------------------------------------------------------------
$1 million and See following
above 0% 0% discussion
- ---------------------------------------------------------------------------------------
</TABLE>
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor
15
<PAGE>
will pay the authorized securities dealer a commission as follows:
Amount of Sale Commission
- -------------- ----------
(a) $1 million to $3 million 1.00%
(b) Next $2 million 0.50%
(c) Amount over $5 million 0.25%
On such sales of $1,000,000 or more, the investor is subject to a 1%
contingent deferred sales charge on any portion of the purchase redeemed
within one year of the sale. However, such redeemed shares will not be subject
to the contingent deferred sales charge to the extent that their value
represents (1) capital appreciation or (2) reinvestment of dividends or
capital gains distributions. In addition, the contingent deferred sales charge
will be waived for certain other redemptions as described under "Contingent
Deferred Sales Charge Waivers" below (as otherwise applicable to Class B
shares).
Class A shares of the Fund that are purchased without a sales charge may be
exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption
within one year of the Class A shares which are acquired through such
exchange. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any contingent
deferred sales charge will be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement
of Additional Information, of $100,000 or more of Class A shares of the Fund
or a combination of "Eligible Funds." "Eligible Funds" include the Fund and
other funds so designated by the Distributor from time to time. Class B,
Class C and Class D shares may also be included in the combination under
certain circumstances. Securities dealers should call Shareholder Services
for details concerning the other Eligible Funds and any persons who may
qualify for reduced sales charges and related information. See the Statement
of Additional Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A
shares of the Fund and any other Eligible Funds within a 13-month period.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances. Additional information on a Letter of Intent is
available from dealers, or from the Distributor, and also appears in the
Statement of Additional Information.
Right of Accumulation
Investors may purchase Class A shares of the Fund or a combination of shares
of the Fund and other Eligible Funds at reduced sales charges pursuant to a
Right of Accumulation. Under the Right of Accumulation, the sales charge is
determined by combining the current purchase with the value of the Class A
shares of other Eligible Funds held at the time of purchase. Class B, Class C
and Class D shares may also be included in the combination under certain
circumstances. See the Statement of Additional Information and call
Shareholder Services for details concerning the Right of Accumulation.
Other Programs
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, which include programs under which a company, employee benefit
plan or other organization makes recommendations to, or permits group
solicitation of, its employees, members or participants, except any
organization created primarily for the purpose of obtaining shares of the
Fund at a reduced sales charge or without a sales charge. Sales without a
sales charge, or with a reduced sales charge, may also be made through
brokers, financial planners, institutions, and others, under managed
fee-based programs (e.g., "wrap fee" or similar programs) which meet certain
requirements established from time to time by the Distributor, in the event
the Distributor determines to implement such arrangements.
16
<PAGE>
Information on such arrangements and further conditions and limitations is
available from the Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and persons: (A) the
Investment Manager, the 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; and (C) employees, officers, sales
representatives or directors of dealers and other entities with a selling
agreement with the Distributor to sell shares of any aforementioned investment
company, any spouse or child of such person, or any beneficial account for any
of them. The purchase must be made for investment and the shares purchased may
not be resold except through redemption. This purchase program is subject to
such administrative policies, regarding the qualification of purchasers and
any other matters, as may be adopted by the Distributor from time to time.
Class B Shares -- Contingent Deferred
Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is duly received, as defined herein.
No sales charge is imposed at the time of purchase; thus the full amount of
the investor's purchase payment will be invested in the Fund. However, a
contingent deferred sales charge may be imposed upon certain redemptions of
Class B shares as described below.
The Distributor will pay securities dealers at the time of sale a 4%
commission for selling Class B shares. The proceeds of the contingent deferred
sales charge and the distribution fee are used to offset distribution expenses
and thereby permit the sale of Class B shares without an initial sales charge.
Class B shares that are redeemed within a five-year period after their
purchase will not be subject to a contingent deferred sales charge to the
extent that the value of such shares represents (1) capital appreciation of
Fund assets or (2) reinvestment of dividends or capital gains distributions.
The amount of any applicable contingent deferred sales charge will be
calculated by multiplying the net asset value of such shares at the time of
redemption or at the time of purchase, whichever is lower, by the applicable
percentage shown in the table below:
<TABLE>
<CAPTION>
Contingent Deferred Sales
Charge As A Percentage Of
Redemption During Net Asset Value At Redemption
----------------- -----------------------------
<S> <C>
1st Year Since Purchase 5%
2nd Year Since Purchase 4
3rd Year Since Purchase 3
4th Year Since Purchase 3
5th Year Since Purchase 2
6th Year Since Purchase
and Thereafter None
</TABLE>
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first
of those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of 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 Class B shares being redeemed will be
considered to represent, as applicable, capital appreciation or dividend and
capital gains distribution reinvestments in such other Eligible Fund. These
determinations will result in any contingent deferred sales charge being
imposed at the lowest possible rate. For federal income tax purposes, the
amount of the contingent deferred sales charge will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption.
The amount of any contingent deferred sales charge will be paid to the
Distributor.
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic
17
<PAGE>
withdrawal plan which meets certain conditions. In addition, the contingent
deferred sales charge will be waived for: (i) redemptions made within one
year of the death or total disability, as defined by the Social Security
Administration, of all shareholders of an account; (ii) redemptions made
after attainment of a specific age in an amount which represents the minimum
distribution at such age under Section 401(a)(9) of the Internal Revenue Code
for retirement accounts or plans (e.g., age 70-1/2 for IRAs and Section
403(b) plans), calculated solely on the basis of assets invested in the Fund
or other Eligible Funds; and (iii) a redemption resulting from a tax-free
return of an excess contribution to an IRA. (The foregoing waivers do not
apply to a tax-free rollover or transfer of assets out of the Fund.) The Fund
may modify or terminate the waivers at any time; for example, the Fund may
limit the application of multiple waivers.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends or
distributions with respect to such shares, will automatically convert to
Class A shares of the Fund at the end of eight years following the issuance
of such Class B shares; consequently, they will no longer be subject to the
higher expenses borne by Class B shares. The conversion rate will be
determined on the basis of the relative per share net asset values of the two
classes and may result in a shareholder receiving either a greater or fewer
number of Class A shares than the Class B shares so converted. As noted
above, holding periods for Class B shares received in exchange for Class B
shares of other Eligible Funds will be counted toward the eight-year period.
Class C Shares -- Institutional; No Sales Charge
The purchase price of a Class C share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase or
redemption. The Fund will receive the full amount of the investor's purchase
payment.
Class C shares are only available for new investments by certain employee
benefit plans and large institutions. See the Statement of Additional
Information. Information on the availability of Class C shares and further
conditions and limitations with respect thereto is available from the
Distributor.
Class C shares may be also issued in connection with mergers and
acquisitions involving the Fund, and under certain other circumstances as
described in this Prospectus (e.g., see "Shareholder Services -- Exchange
Privilege").
Class C shares may have also been issued directly or through exchanges to
those shareholders of the Fund or other Eligible Funds who previously held
shares not subject to any future sales charge or service fees or distribution
fees.
Class D Shares -- Spread Sales Charges
The purchase price of a Class D share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase; thus the
full amount of the investor's purchase payment will be invested in the Fund.
Class D shares are subject to a 1% contingent deferred sales charge on any
portion of the purchase redeemed within one year of the sale. The contingent
deferred sales charge will be 1% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. The Distributor
pays securities dealers a 1% commission for selling Class D shares at the
time of purchase. The proceeds of the contingent deferred sales charge and
the distribution fee are used to offset distribution expenses and thereby
permit the sale of Class D shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will not be
subject to the contingent deferred sales charge to the extent that the value
of such shares represents (1) capital appreciation of Fund assets or (2)
reinvestment of dividends or capital gains distributions. In addition, the
contingent deferred sales charge will be waived for certain other redemptions
as described under "Contingent Deferred Sales Charge Waivers" above (as
otherwise applicable to Class B shares). For federal income tax purposes, the
amount of the contingent deferred sales charge will reduce the gain or
increase the loss, as
18
<PAGE>
the case may be, on the amount realized on redemption. The amount of any
contingent deferred sales charge will be paid to the Distributor.
Net Asset Value
The Fund's per share net asset values are determined Monday through Friday as
of the close of the New York Stock Exchange (the "NYSE") exclusive of days on
which the NYSE is closed. The NYSE ordinarily closes at 4 P.M. New York City
time. Assets held by the Fund are valued on the basis of the last reported
sale price or quotations as of the close of business on the valuation date,
except that securities and assets for which market quotations are not readily
available are valued as determined in good faith by or under the authority of
the Trustees of the Trust. In determining the value of certain assets for
which market quotations are not readily available, the Fund may use one or
more pricing services. The pricing services utilize information with respect
to market transactions, quotations from dealers and various relationships
among securities in determining value and may provide prices determined as of
times prior to the close of the NYSE. The Trustees have authorized the use of
the amortized cost method to value short-term debt instruments issued with a
maturity of one year or less and having a remaining maturity of 60 days or
less when the value obtained is fair value. Further information with respect
to the valuation of the Fund's assets is included in the Statement of
Additional Information.
Distribution Plan
The Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the provisions of the
Distribution Plan, the Fund makes payments to the Distributor based on an
annual percentage of the average daily value of the net assets of each class
of shares as follows:
Class Service Fee Distribution Fee
- ----- ----------- ----------------
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
Some or all of the service fees are used to reimburse securities dealers
(including securities dealers that are affiliates of the Distributor) for
personal service 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 of shareholder
accounts by such dealers. Dealers who have sold Class A shares are eligible
for further reimbursement commencing as of the time of such sale. Dealers who
have sold Class B and Class D shares are eligible for further reimbursement
after the first year during which such shares have been held of record by such
dealer as nominee for its clients (or by such clients directly). Any service
fees received by the Distributor and not allocated to dealers may be applied
by the Distributor in reduction of expenses incurred by it directly for
personal services and the maintenance of shareholder accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to securities dealers for selling such shares. Any
distribution fees received by the Distributor and not allocated to dealers may
be applied by the Distributor in connection with sales or marketing efforts,
including special promotional fees and cash and noncash incentives based upon
sales by securities dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs
similar expenses on behalf of, such other funds. When expenses of the
Distributor cannot be identified as relating to a specific fund, the
Distributor allocates expenses among the funds in a manner deemed fair and
equitable to each fund.
Commissions and other cash and noncash incentives and payments to dealers,
to the extent payable out of the general profits, revenues or other sources of
the Distributor (including the advisory fees paid by the Fund), have also been
authorized pursuant to the Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which the Fund may incur under the Distribution
Plan to 1%, of which 0.75% may be used to pay distribution
19
<PAGE>
expenses and 0.25% may be used to pay shareholder service fees. The NASD Rule
also limits the aggregate amount which the Fund may pay for such distribution
costs to 6.25% of gross share sales of a class since the inception of any
asset-based sales charge plus interest at the prime rate plus 1% on unpaid
amounts thereof (less any contingent deferred sales charges). Such limitation
does not apply to shareholder service fees. Payments to the Distributor or to
dealers funded under the Distribution Plan may be discontinued at any time by
the Trustees of the Trust.
Redemption of Shares
Shareholders may redeem all or any portion of their accounts on any day the
NYSE is open for business. Redemptions will be effective at the net asset
value per share next determined (see "Purchase of Shares -- Net Asset Value"
herein) after receipt of the redemption request, in accordance with the
requirements described below, by Shareholder Services and delivery of the
request by Shareholder Services to the Transfer Agent. To allow time for the
clearance of checks used for the purchase of any shares which are tendered
for redemption shortly after purchase, the remittance of the redemption
proceeds for such shares could be delayed for 15 days or more after the
purchase. Shareholders who anticipate a potential need for immediate access
to their investments should, therefore, purchase shares by wire. Except as
noted, redemption proceeds from the Fund are normally remitted within seven
days after receipt of the redemption request by the Fund and any necessary
documents in good order.
Methods of Redemption
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed to
the shareholder or wired to a predesignated bank account (see "Proceeds By
Wire" below) by sending to State Street Research Shareholder Services, P.O.
Box 8408, Boston, Massachusetts 02266-8408: (1) a written request for
redemption signed by the registered owner(s) of the shares, exactly as the
account is registered; (2) an endorsed stock power in good order with respect
to the shares or, if issued, the share certificates for the shares endorsed
for transfer or accompanied by an endorsed stock power; (3) any required
signature guarantees (see "Redemption of Shares -- Signature Guarantees"
below); and (4) any additional documents which may be required for redemption
in the case of corporations, trustees, etc., such as certified copies of
corporate resolutions, governing instruments, powers of attorney, and the
like. The Transfer Agent will not process requests for redemption until it
has received all necessary documents in good order. A shareholder will be
notified promptly if a redemption request cannot be accepted. Shareholders
having any questions about the requirements for redemption should call
Shareholder Services toll-free at 1-800-562-0032.
Request By Telephone
Shareholders may request redemption by telephone with proceeds to be
transmitted by check or by wire (see "Proceeds By Wire" below). A shareholder
can request a redemption for $50,000 or less to be transmitted by check. Such
check for the proceeds will be made payable to the shareholder of record and
will be mailed to the address of record. There is no fee for this service. It
is not available for shares held in certificate form or if the address of
record has been changed within 30 days of the redemption request. The Fund
may revoke or suspend the telephone redemption privilege at any time and
without notice. See "Shareholder Services -- Telephone Services" for a
discussion of the conditions and possible risks associated with Telephone
Privileges.
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder has
Telephone Privileges (see "Shareholder Services -- Telephone Services"
herein), the Trust's custodian will wire redemption proceeds to the
shareholder's predesignated bank account. To make the request, the
shareholder should call 1-800-521-6548 prior to 4 P.M. Boston time. A $7.50
charge against the shareholder's account will be imposed for each wire
redemption. This charge is subject to change without notice. The
shareholder's bank may also impose a charge for receiving wires of redemption
proceeds. The minimum redemption by wire is $5,000.
Request to Dealer to Repurchase
For the convenience of shareholders, the Fund has authorized the Distributor
as its agent to accept
20
<PAGE>
orders from dealers by wire or telephone for the repurchase of shares by the
Distributor from the dealer. The Fund may revoke or suspend this
authorization at any time. The repurchase price is the net asset value for
the applicable shares next determined following the time at which the shares
are offered for repurchase by the dealer to the Distributor. The dealer is
responsible for promptly transmitting a shareholder's order to the
Distributor. Payment of the repurchase proceeds is made to the dealer who
placed the order promptly upon delivery of certificates for shares in proper
form for transfer or, for Open Accounts, upon the receipt of a stock power
with signatures guaranteed as described below, and, if required, any
supporting documents. Neither the Fund nor the Distributor imposes any charge
upon such a repurchase. However, a dealer may impose a charge as agent for a
shareholder in the repurchase of his or her shares.
The Fund has reserved the right to change, modify or terminate the services
described above at any time.
Additional Information
Because of the relatively high cost of maintaining small shareholder
accounts, the Fund reserves the right to involuntarily redeem at its option
any shareholder account which remains below $1,500 for a period of 60 days
after notice is mailed to the applicable shareholder, or to impose a
maintenance fee on such account after 60 days notice. Such involuntary
redemptions will be subject to applicable sales charges, if any. 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 of $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 value; or
(3) during such other periods as the Securities and Exchange Commission may by
order permit for the protection of investors; and (b) the payment of
redemption proceeds may be postponed as otherwise provided under "Redemption
of Shares" herein.
Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Fund, the Investment
Manager and the Distributor from possible fraud, signature guarantees are
required for certain redemptions. Signature guarantees enable the Transfer
Agent to be certain that the person who has authorized a redemption from the
account is, in fact, the shareholder. Signature guarantees are required for:
(1) all redemptions requested by mail and (2) requests to transfer the
registration of shares to another owner. Signatures must be guaranteed by a
bank, a member firm of a national stock exchange, or other eligible guarantor
institution. The Transfer Agent will not accept guarantees (or notarizations)
from notaries public. The above requirements may be waived by the Fund in
certain instances.
Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of the Fund owned by
shareholders are credited to their accounts by the Transfer Agent, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110. Certificates represent-
21
<PAGE>
ing Class B or Class D shares will not be issued. Certificates representing
Class A or Class C shares will not be issued unless specifically requested in
writing and in any case will only be issued for full shares, with any
fractional shares to be carried on the shareholder's account. Shareholders
will receive periodic statements of transactions in their account.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through dealers,
by wire or by mailing a check payable to the Fund to Shareholder
Services under the terms set forth above under "Purchase of Shares."
2. The following methods of receiving dividends from investment income and
distributions from capital gains are available:
(a) All income dividends and capital gains distributions reinvested in
additional shares of the Fund.
(b) All income dividends in cash; all capital gains distributions
reinvested in additional shares of the Fund.
(c) All income dividends and capital gains distributions in cash.
(d) All income dividends and capital gains distributions invested in
any one available Eligible Fund designated by the shareholder as
described below. See "Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will be automatically coded for reinvestment of all
dividends and distributions in additional shares of the same class of the
Fund. Selections may be changed at any time by telephone or written notice to
Shareholder Services. Dividends and distributions are reinvested at net asset
value without a sales charge.
Exchange Privilege
Shareholders of the Fund may exchange their shares for available shares with
corresponding characteristics of the other Eligible Funds at any time on the
basis of the relative net asset values of the respective shares to be
exchanged, subject to compliance with applicable securities laws.
Shareholders of any other Eligible Fund may similarly exchange their shares
for shares of the Fund with corresponding characteristics. Prior to making an
exchange, shareholders should obtain the Prospectus of the Eligible Fund into
which they are exchanging. Under the Direct Program, subject to certain
conditions, shareholders may make arrangements for regular exchanges from the
Fund into other Eligible Funds. To effect an exchange, Class A, Class B and
Class D shares may be redeemed without the payment of any contingent deferred
sales charge that might otherwise be due upon an ordinary redemption of such
shares. The State Street Research Money Market Fund issues Class E shares
which are sold without any sales charge. Exchanges of State Street Research
Money Market Fund Class E shares into Class A shares of the Fund or any other
Eligible Fund are subject to the initial sales charge or contingent deferred
sales charge applicable to an initial investment in such Class A shares,
unless a prior Class A sales charge has been paid directly or indirectly with
respect to the shares redeemed. For purposes of computing the contingent
deferred sales charge that may be payable upon disposition of any acquired
Class A, Class B and Class D shares, the holding period of the redeemed
shares is "tacked" to the holding period of the acquired shares. The period
any Class E shares are held is not tacked to the holding period of any
acquired shares. No exchange transaction fee is currently imposed on any
exchange.
For the convenience of the shareholders who have Telephone Privileges, the
Fund permits exchanges by telephone request from either the shareholder or his
or her dealer. Shares may be exchanged by telephone provided that the
registration of the two accounts is the same. The toll-free number for
exchanges is 1-800-521-6548. See "Telephone Services" herein for a discussion
of conditions and risks associated with Telephone Privileges.
The exchange privilege may be exercised only in those states where shares
of the relevant other Eligible Fund may legally be sold. For tax purposes,
each
22
<PAGE>
exchange actually represents the sale of shares of one fund and the purchase
of shares of another. Accordingly, exchanges may produce a capital gain or
loss for tax purposes. The exchange privilege may be terminated or suspended
or its terms changed at any time, subject, if required under applicable
regulations, to 60 days prior notice. New accounts established for
investments upon exchange from an existing account in another fund will have
the same Telephone Privileges as the existing account, unless Shareholder
Services is instructed otherwise. Related administrative policies and
procedures may also be adopted with regard to a series of exchanges, street
name accounts, sponsored arrangements and other matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer identification
number, may be aggregated for purposes of the six exchange limit.
Notwithstanding the six exchange limit, the Fund reserves the right to refuse
exchange redemptions or purchases by any person or group if, in the Investment
Manager's judgment, the Fund would be unable to invest effectively in
accordance with its investment objective and policies, or would otherwise
potentially be adversely affected. Exchanges may be restricted or refused if
the fund receives or anticipates simultaneous orders affecting significant
portions of the Fund's assets. In particular, a pattern of exchanges that
coincides with a "market timing" strategy may be disruptive to the Fund. The
Fund may impose these restrictions at any time. The exchange limit may be
modified for accounts in certain institutional retirement plans because of
plan exchange limits, Department of Labor regulations or administrative and
other considerations. Subject to the foregoing, if an exchange request in good
order is received by Shareholder Services and delivered by Shareholder
Services to the Transfer Agent by 12 noon Boston time on any business day, the
exchange usually will occur that day. For further information regarding the
exchange privilege, shareholders should contact Shareholder Services.
Reinvestment Privilege
A shareholder of the Fund who has redeemed shares or had shares repurchased
at his or her request may reinvest any portion or all of the proceeds (plus
that amount necessary to acquire a fractional share to round off his or her
reinvestment to full shares) in shares, of the same class as the shares
redeemed, of the Fund or any other Eligible Fund at net asset value and
without subjecting the reinvestment to an initial sales charge, provided such
reinvestment is made within 120 calendar days after a redemption or
repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the
amount reinvested. The redemption of shares is, for federal income tax
purposes, a sale on which the shareholder may realize a gain or loss. If a
redemption at a loss is followed by a reinvestment within 30 days, the
transaction may be a "wash sale" resulting in a denial of the loss for
federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by Shareholder
Services of such shareholder's written purchase request and delivery of the
request by Shareholder Services to the Transfer Agent. A shareholder may
exercise this reinvestment privilege only once per twelve month period with
respect to his or her shares of the Fund. No charge is imposed by the Fund for
such reinvestments; however, dealers may charge fees in connection with the
reinvestment privilege. The reinvestment privilege may be exercised with
respect to an Eligible Fund only in those states where shares of the relevant
other Eligible Fund may legally be sold.
Investment Plans
The Fund offers Class A, Class B and Class D shareholders the Investamatic
Check Program. Under this Program, shareholders may make regular investments
by authorizing withdrawals from their bank accounts each month or quarter on
the Investamatic application form available from Shareholder Services.
23
<PAGE>
The Fund also offers tax-sheltered retirement plans, including prototype
and other employee benefit plans for employees, sole proprietors, partnerships
and corporations and IRAs. Details of these investment plans and their
availability may be obtained from securities dealers or from Shareholder
Services.
Systematic Withdrawal Plan
A shareholder who owns noncertificated Class A or Class C shares with a value
of $5,000 or more, or Class B or Class D 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 minimums, depending on the class of shares held. The Plan
provides that all income dividends and capital gains distributions of the
Fund shall be credited to participating shareholders in additional shares of
the Fund. Thus, the withdrawal amounts paid can only be realized by redeeming
shares of the Fund under the Plan. To the extent such amounts paid exceed
dividends and distributions from the Fund, a shareholder's investment will
decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually
of either (a) the value, at the time the Plan is initiated, of the shares then
in the account or (b) the value, at the time of a withdrawal, of the same
number of shares as in the account when the Plan was initiated, whichever is
higher.
Expenses of the Plan are borne by the Fund. A participating shareholder may
withdraw from the Plan, and the Fund may terminate the Plan at any time on
written notice. Purchase of additional shares while a shareholder is receiving
payments under a Plan is ordinarily disadvantageous because of duplicative
sales charges. For this reason, a shareholder may not participate in the
Investamatic Check Program and the Systematic Withdrawal Plan at the same
time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all their
dividends and any other distributions from 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 investment
is made is initially funded with the requisite minimum amount. The number of
shares purchased will be determined as of the dividend payment date. The
Dividend Allocation Plan is subject to state securities law requirements, to
suspension at any time, and to such policies, limitations and restrictions,
such as may be applicable to street name or master accounts, that may be
adopted from time to time.
Automatic Bank Connection
A shareholder may elect, by participating in the Fund's Automatic Bank
Connection ("ABC"), to have dividends and other distributions, including
Systematic Withdrawal Plan payments, automatically deposited in the
shareholder's bank account by electronic funds transfer. Some contingent
deferred sales charges may apply. See "Systematic Withdrawal Plan" herein.
Reports
Reports for the Fund will be sent to shareholders of record at least
semiannually. These reports will include a list of the securities owned by
the Fund as well as the Fund's financial statements.
Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing the shareholder to make telephone redemptions
for amounts up to $50,000 to be mailed to the shareholder's address of
record is available automatically;
(2) the privilege allowing the shareholder or his or her dealer to make
telephone exchanges is available automatically; and
(3) the privilege allowing the shareholder to make telephone redemptions
for amounts over $5,000, to be remitted by wire to the shareholder's
predesignated bank account, is available by election on the
Application accompa-
24
<PAGE>
nying this Prospectus. A current shareholder who did not previously
request such telephone wire privilege on his or her original
Application may request the privilege by completing a Telephone
Redemption-by-Wire Form which may be obtained by calling
1-800-521-6548. The Telephone Redemption-by-Wire Form requires a
signature guarantee.
A shareholder may decline the automatic Telephone Privileges set forth in
(1) and (2) above by so indicating on the Application accompanying this
Prospectus.
A shareholder may discontinue any Telephone Privilege at any time by
advising Shareholder Services that the shareholder wishes to discontinue the
use of such privileges in the future.
Unless such Telephone Privileges are declined, a shareholder is deemed to
authorize Shareholder Services and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder to
redeem, or purporting to be the shareholder or the shareholder's dealer to
exchange, shares from any account for which such services have been
authorized; and (2) honor any written instructions for a change of address
regardless of whether such request is accompanied by a signature guarantee.
All telephone calls will be recorded. None of the Fund, the other Eligible
Funds, the Transfer Agent, the Investment Manager or the Distributor will be
liable for any loss, expense or cost arising out of any request, including any
fraudulent or unauthorized requests. Shareholders assume the risk to the full
extent of their accounts that telephone requests may be unauthorized.
Reasonable procedures will be followed to confirm that instructions
communicated by telephone are genuine. The shareholder will not be liable for
any losses arising from unauthorized or fraudulent instructions if such
procedures are not followed.
Shareholders may redeem or exchange shares by calling toll-free
1-800-521-6548. Although it is unlikely, during periods of extraordinary
market conditions, a shareholder may have difficulty in reaching Shareholder
Services at such telephone number. In that event, the shareholder should
contact Shareholder Services at 1-800-562-0032, 1-617-357-7805 or otherwise at
its main office at One Financial Center, Boston, Massachusetts 02111-2690.
Shareholder Account Inquiries:
Please call 1-800-562-0032
Call this number for assistance in answering general questions on your
account, including account balance, available shareholder services, statement
information and performance of the Fund. Account inquiries may also be made
in writing to State Street Research Shareholder Services, P.O. Box 8408,
Boston, Massachusetts 02266-8408. A fee of up to $10 will be charged against
an account for providing additional account transcripts or photocopies of
paid redemption checks or for researching records in response to special
requests.
Shareholder Telephone Transactions:
Please call 1-800-521-6548
Call this number for assistance in purchasing shares by wire and for
telephone redemptions or telephone exchange transactions. Shareholder
Services will require some form of personal identification prior to acting
upon instructions received by telephone. Written confirmation of each
transaction will be provided.
The Fund and its Shares
The Fund was organized in 1988 as an additional series of State Street
Research Income Trust, a Massachusetts business trust. The Trustees have
authorized shares of the Fund to be issued in four classes: Class A, Class B,
Class C and Class D shares. The Trust is registered with the Securities and
Exchange Commission as an open-end management investment company. The fiscal
year end of the Fund is March 31.
Except for those differences between the classes of shares described below
and elsewhere in the Prospectus, each share of a Fund has equal dividend,
redemption and liquidation rights with other shares of the Fund and when
issued is fully paid and nonassessable. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common
25
<PAGE>
usage of terms which may develop in the mutual fund industry. For example,
Class C shares may be redesignated as Class Y shares and Class D shares may
be redesignated as Class C shares. Any redesignation would not affect any
substantive rights respecting the shares.
Each share of each class of shares represents an identical legal interest
in the same portfolio of investments of the Fund, has the same rights and is
identical in all respects, except that Class A, Class B and Class D 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.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have a material, adverse effect on
the rights of any shareholder. On any matter submitted to the shareholders,
the holder of shares of the Fund is entitled to one vote per share (with
proportionate voting for fractional shares) regardless of the relative net
asset value thereof.
Shares of the Fund have equal dividend, redemption and liquidation rights
and when issued are fully paid and nonassessable by the Trust. Each share has
one vote (with proportionate voting for fractional shares) irrespective of net
asset value.
Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder
meetings unless required by the 1940 Act. Except as otherwise provided under
said Act, the Board of Trustees will be a self-perpetuating body until fewer
than two-thirds of the Trustees serving as such are Trustees who were elected
by shareholders of the Trust. In the event less than a majority of the
Trustees serving as such were elected by shareholders of the Trust, a meeting
of shareholders will be called to elect Trustees. Under the Master Trust
Agreement, any Trustee may be removed by vote of two-thirds of the outstanding
Trust shares; holders of 10% or more of the outstanding shares of the Trust
can require that the Trustees call a meeting of shareholders for purposes of
voting on the removal of one or more Trustees. In connection with such
meetings called by shareholders, shareholders will be assisted in shareholder
communications to the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for
indemnification for all losses and expenses of any shareholder of 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.
Management of the Fund
Under the provisions of the Trust's Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees.
The Fund's investment manager is State Street Research & Management
Company. The Investment Manager is charged with the overall responsibility for
managing the investments and business affairs of the Fund, subject to the
authority of the Board of Trustees.
The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve as investment adviser to one of the nation's first
mutual funds, presently known as State Street Research Investment Trust, which
they had formed in 1924. Their investment management philosophy
26
<PAGE>
emphasized comprehensive fundamental research and analysis, including
meetings with the management of companies under consideration for investment.
The Investment Manager's portfolio management group has extensive investment
industry experience managing equity and debt securities. In managing debt
securities, if any, for a portfolio, the Investment Manager may consider
yield curve positioning, sector rotation and duration, among other factors.
The Investment Manager and the Distributor are indirect wholly-owned
subsidiaries of Metropolitan Life Insurance Company and are located at One
Financial Center, Boston, Massachusetts 02111-2690.
The Investment Manager has entered into an Advisory Agreement with the Trust
pursuant to which investment research and management, administrative
services, office facilities and personnel are provided for the Fund in
consideration of a fee from the Fund.
Under its Advisory Agreement with the Trust, the Investment Manager
receives a monthly investment advisory fee equal to 0.75% (on an annual basis)
of the average daily value of the net assets of the Fund. Such fee is higher
than advisory fees paid by many other investment companies but is believed by
the Trustees to be justified given the considerable analysis and research
necessary to manage the Fund in light of its investment objective and
policies. The Fund bears all costs of its operation other than those incurred
by the Investment Manager under the Advisory Agreement. In particular, the
Fund pays, among other expenses, investment advisory fees, certain
distribution expenses under the Fund's Distribution Plan and the compensation
and expenses of the Trustees who are not otherwise currently affiliated with
the Investment Manager or any of its affiliates. The Investment Manager will
reduce its management fee payable by the Fund up to the amount of any expenses
(excluding permissible items, such as brokerage commissions, Rule 12b-1
payments, interest, taxes and litigation expenses) paid or incurred in any
year in excess of the most restrictive expense limitation imposed by any state
in which the Fund sells shares, if any. The Investment Manager compensates
Trustees of the Trust if such persons are employees or affiliates of the
Investment Manager or its affiliates.
Michael R. Yogg is primarily responsible for the day-to-day management of
the Fund's portfolio. Mr. Yogg has investment discretion over the entire
portfolio of the Fund, makes investment decisions as to specific securities
holdings, allocates and continually adjusts such allocations of investments
among equities and fixed income securities, and among different industry or
other sectors, and may delegate purchase and sale authority for defined
portions of the portfolio to others. Mr. Yogg has managed the Fund since April
1991 and is a Vice President of the Trust. His principal occupation currently
is Senior Vice President of State Street Research & Management Company. During
the past five years he has also served as Vice President of State Street
Research & Management Company.
Subject to the policy of seeking best overall price and execution, sales of
shares of the Fund may be considered by the Investment Manager in the
selection of broker or dealer firms for the Fund's portfolio transactions.
The Investment Manager has a Code of Ethics governing personal securities
transactions of certain of its employees; see the Statement of Additional
Information.
Dividends and Distributions; Taxes
The Fund qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code for its most recent
fiscal year and intends to qualify as such in future years, although it
cannot give complete assurance that it will do so. As long as it so qualifies
and satisfies certain distribution requirements, it will not be subject to
federal income tax on its taxable income (including capital gains, if any)
distributed to its shareholders. Consequently, the Fund intends to distribute
annually to its shareholders substantially all of its net investment income
and any capital gain net income (capital gains net of capital losses).
The Fund declares dividends from net investment income quarterly and pays
such dividends, if any, four times each year; distributions of long-term and
short-term capital gain net income will generally be made on an annual basis,
shortly after the end of the fiscal year in which such gains are realized (or
as otherwise required for compliance with applicable tax regulations). Both
dividends from net investment
27
<PAGE>
income and distributions of capital gain net income will be declared and paid
in additional shares of the Fund at net asset value (except in the case of
shareholders who elect a different available distribution method). The Fund
will provide its shareholders of record with annual information on a timely
basis concerning the federal tax status of dividends and distributions during
the preceding calendar year.
Dividends paid by the Fund from taxable net investment income and
distributions of net short-term capital gains, whether paid in cash or
reinvested in additional shares, will be taxable for federal income tax
purposes to shareholders as ordinary income. Distributions of net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) which are designated as capital gains distributions, whether paid in
cash or reinvested in additional shares, will be taxable for federal income
tax purposes to shareholders as long-term capital gains, regardless of how
long shareholders have held their shares. If shares of the Fund which are sold
at a loss have been held six months or less, the loss will be considered as a
long-term capital loss to the extent of any capital gains distributions
received.
Dividends and other distributions and proceeds of redemption of Fund shares
paid to individuals and other nonexempt payees will be subject to a 31%
federal backup withholding tax if the Transfer Agent is not provided with the
shareholder's correct taxpayer identification number and certification that
the shareholder is not subject to such backup withholding.
The foregoing discussion relates only to generally applicable federal
income tax provisions in effect as of the date of this Prospectus. Therefore,
prospective shareholders are urged to consult their own tax advisers regarding
tax matters, including state and local tax consequences.
Calculation of Performance Data
From time to time, in advertisements or in communications to shareholders or
prospective investors, the Fund may compare the performance of its Class A,
Class B, Class C or Class D shares to that of other mutual funds with similar
investment objectives, to certificates of deposit, to other financial
alternatives and/or to appropriate indices, rankings or averages such as
those compiled by Lipper Analytical Services, Inc. for the Flexible Portfolio
Funds category, Morningstar, Inc., Money Magazine, Business Week, Forbes
Magazine, The Wall Street Journal, Fortune Magazine, Investor's Daily or
Wiesenberger Mutual Funds Investment Report.
Total return is computed separately for each class of shares of the Fund.
The average annual total return ("standard total return") for shares of the
Fund is computed by determining the average annual compounded rate of return
for a designated period that, if applied to a hypothetical $1,000 initial
investment (less the maximum initial or contingent deferred sales charge, if
applicable), would produce the redeemable value of that investment at the end
of the period, assuming reinvestment of all dividends and distributions and
with recognition of all recurring charges. Standard total return would be
calculated for the periods specified in applicable regulations and may be
accompanied by nonstandard total return information for differing periods
computed in the same manner with or without annualizing the total return or
taking sales charges into account.
The Fund's yield is computed separately for each class of shares by
dividing the net investment income, after recognition of all recurring
charges, per share earned during the most recent month or other specified
thirty-day period by the maximum offering price per share on the last day of
such period and annualizing the result.
The standard total return and yield results take sales charges into
account, if applicable, but do not take into account recurring and
nonrecurring charges for optional services which only certain shareholders
elect and which involve nominal fees, such as the $7.50 fee for remittance of
redemption proceeds by wire. Where sales charges are not applicable and
therefore not taken into account in the calculation of standard total return
and yield, the results will be increased.
The Fund's distribution rate is calculated separately for each class of
shares by annualizing the latest distribution and dividing the result by the
maxi-
28
<PAGE>
mum offering price per share as of the end of the period to which the
distribution relates. The distribution rate is not computed in the same
manner as the above described yield, and therefore can be significantly
different from it. In its supplemental sales literature, the Fund may quote
its distribution rate together with the above described standard total return
and yield information. The use of such distribution rates would be subject to
an appropriate explanation of how the components of the distribution rate
differ from the above described yield.
Performance information may be useful in evaluating the Fund and for
providing a basis for comparison with other financial alternatives. Since the
performance of the Fund changes in response to fluctuations in economic and
market conditions, interest rates and Fund expenses, among other things, no
performance quotation should be considered a representation as to the Fund's
performance for any future period. In addition, the net asset value of shares
of the Fund will fluctuate, with the result that shares of the Fund, when
redeemed, may be worth more or less than their original cost. Neither an
investment in the Fund nor its performance is insured or guaranteed; such lack
of insurance or guarantees should accordingly be given appropriate
consideration when comparing the Fund to financial alternatives which have
such features.
Shares of the Fund had no class designations until June 1, 1993, when
designations were assigned based on the pricing and Rule 12b-1 fees applicable
to shares sold thereafter. Performance data for periods prior to June 1, 1993
will not reflect additional Rule 12b-1 Distribution Plan fees, if any, of up
to 1% per year depending on the class of shares, which will adversely affect
performance results for periods after such date. Performance data or rankings
for a given class of shares should be interpreted carefully by investors who
hold or may invest in a different class of shares.
29
<PAGE>
APPENDIX
Description of Debt/Bond Ratings
Standard & Poor's Corporation
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having speculative
characteristics with respect to capacity to pay interest and repay principal.
BB indicates the least degree of speculation and C the highest. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default 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 timely interest and principal payments. The rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied BBB-rating.
B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. 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: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B-rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC-debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the due date even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments 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 derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high
variability in expected returns due to noncredit risks created by the terms of
the obligation, such as securities whose principal or interest return is
indexed to equities, commodities, or currencies; certain swaps and options;
and interest only (IO) and principal only (PO) mortgage securities.
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa 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
30
<PAGE>
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 Aa 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 A 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 Baa 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 Ba 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 B 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 Caa 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 Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C 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.
31
<PAGE>
[BACK COVER]
STATE STREET RESEARCH
MANAGED ASSETS
One Financial Center
Boston, MA 02111
INVESTMENT ADVISER
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
DISTRIBUTOR
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
SHAREHOLDER SERVICES
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266
800-562-0032
CUSTODIAN
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
MA-613D-895IBS CONTROL NUMBER: 2489-950728(0895)SSR-LD
[FRONT COVER]
[State Street Research logo] State Street Research
Managed Assets
August 1, 1995
P R O S P E C T U S
<PAGE>
State Street Research High Income Fund
a series of
State Street Research Income Trust
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1995
TABLE OF CONTENTS
Page
----
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS .......................... 2
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES ....................................... 5
DEBT INSTRUMENTS AND
PERMITTED CASH INVESTMENTS .......................................... 12
TRUSTEES AND OFFICERS .................................................... 16
INVESTMENT ADVISORY SERVICES ............................................. 20
PURCHASE AND REDEMPTION OF SHARES ........................................ 21
NET ASSET VALUE .......................................................... 23
PORTFOLIO TRANSACTIONS ................................................... 24
CERTAIN TAX MATTERS ...................................................... 26
DISTRIBUTION OF SHARES OF THE FUND ....................................... 29
CALCULATION OF PERFORMANCE DATA .......................................... 32
CUSTODIAN ................................................................ 37
INDEPENDENT ACCOUNTANTS .................................................. 37
FINANCIAL STATEMENTS...................................................... 37
The following Statement of Additional Information is not a Prospectus. It
should be read in conjunction with the Prospectus of State Street Research High
Income Fund (the "Fund") dated August 1, 1995, which may be obtained without
charge from the offices of State Street Research Income Trust ("the Trust") or
State Street Research Investment Services, Inc. (the "Distributor"), One
Financial Center, Boston, Massachusetts 02111-2690.
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under "The Fund's Investments" and "Other Investment
Policies" in the Fund's Prospectus, the Fund has adopted certain investment
restrictions.
All of the Fund's fundamental investment restrictions are set forth
below. These 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 as defined in the Investment Company Act of 1940, as amended (the "1940
Act"). (Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at the annual or a special meeting of security
holders duly called, (i) of 67% or more of the voting securities present at a
meeting if the holders of more than 50% of the outstanding voting securities are
present or represented by proxy or (ii) of more than 50% of the outstanding
voting securities, whichever is less.) Under these restrictions, it is, except
as noted, the Fund's policy:
(1) not to invest in a security if the transaction would result in more
than 5% of the Fund's total assets being invested in any one issuer,
except that this restriction does not apply to investments in
securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities;
(2) not to invest in a security if the transaction would result in the
Fund's owning more than 10% of any class of voting securities of an
issuer, except that this restriction does not apply to investments in
securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities;
(3) not to invest in a security if the transaction would result in more
than 5% of the Fund's total assets being invested in securities of
issuers (including predecessors) with less than three years of
continuous operations unless such securities are rated BBB or higher
by Standard & Poor's Corporation ("S&P") or Baa or higher by Moody's
Investors Service, Inc. ("Moody's"), except that this restriction does
not apply to investments in securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities;
(4) not to issue senior securities;
(5) not to underwrite or participate in the marketing of securities of
other issuers, although the Fund may, acting alone or in syndicates or
groups, if determined by the Trust's Board of Trustees, 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;
(6) not to purchase or sell real estate in fee simple;
(7) not to invest in commodities or commodity contracts, except that the
Fund may make investments in financial futures, options on financial
futures and forward currency exchange contracts to the extent set
2
<PAGE>
forth in the Trust's Prospectus and Statement of Additional
Information;
(8) not to make loans, except that the Fund may purchase bonds,
debentures, notes and similar obligations (including repurchase
agreements with respect thereto) in accordance with applicable
investment policies and objectives;
(9) not to conduct arbitrage transactions (provided that investments in
futures and options for hedging purposes as provided herein and in the
Trust's Prospectus shall not be deemed arbitrage transactions) or
purchase warrants;
(10) not to invest in oil, gas or other mineral exploration programs
(provided that the Fund may invest in securities which are based,
directly or indirectly, on the credit of companies which invest in or
sponsor such programs);
(11) not to make any investment which would cause more than 25% of the
value of the Fund's total assets to be invested in securities of
issuers principally engaged in any one industry (for purposes of this
restriction, (a) utilities will be divided according to their services
so that, for example, gas, gas transmission, electric and telephone
companies will each be deemed in a separate industry, (b) oil and oil
related companies will be divided by type so that, for example, oil
production companies, oil service companies and refining and marketing
companies will each be deemed in a separate industry and (c)
securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities shall be excluded); and
(12) not to borrow money (through reverse repurchase agreements or
otherwise) except for extraordinary and emergency purposes, such as
permitting redemption requests to be honored, and then not in an
amount in excess of 10% of the value of its total assets, provided
that reverse repurchase agreements shall not exceed 5% of its total
assets, and provided further that additional investments will be
suspended during any period when borrowing exceeds 5% of total assets.
Reverse repurchase agreements occur when the Fund sells money market
securities and agrees to repurchase such securities at an agreed-upon
price, date and interest payment. The Fund would use the proceeds from
the transaction to buy other money market securities, which are either
maturing or under the terms of a resale agreement, on the same day as
(or day prior to) the expiration of the reverse repurchase agreement,
and would employ a reverse repurchase agreement when interest income
from investing the proceeds of the transaction is greater than the
interest expense of the reverse repurchase transaction.
The following investment restrictions may be changed with respect to the
Fund by a vote of a majority of the Trustees. Under these restrictions, it is,
except as noted, the Fund's policy:
3
<PAGE>
(1) not to purchase securities on margin, make a short sale of any
securities or purchase or deal in puts, calls, straddles or spreads
with respect to any security, except in connection with the purchase
or writing of options, including options on financial futures, and
futures contracts to the extent set forth in the Trust's Prospectus
and Statement of Additional Information;
(2) not to hypothecate, mortgage or pledge any of its assets except as may
be necessary in connection with permitted borrowings and then not in
excess of 15% of the Fund's total assets, taken at cost (for the
purpose of this restriction financial futures, options on financial
futures and forward currency exchange contracts are not deemed to
involve a pledge of assets);
(3) not to purchase a security issued by another investment company if,
immediately after such purchase, the Fund would own, in the aggregate,
(i) more than 3% of the total outstanding voting stock of such other
investment company; (ii) securities issued by such other investment
company having an aggregate value in excess of 5% of the value of the
Fund's total assets; or (iii) securities issued by such other
investment company and all other investment companies (other than
treasury stock of the Fund) having an aggregate value in excess of 10%
of the value of the Fund's total assets; provided, however, that the
Fund may purchase investment company securities without limit for the
purpose of completing a merger, consolidation or other acquisition of
assets;
(4) not to purchase for or retain any security of an issuer if, to the
knowledge of the Trust, those of its officers and Trustees and
officers and directors of its investment advisers who individually own
more than 1/2 of 1% of the securities of such issuer, when combined,
own more than 5% of the securities of such issuer taken at market;
(5) not to invest in companies for the purpose of exercising control over
their management, although the Trust may from time to time present its
views on various matters to the management of issuers in which it
holds investments;
(6) 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); and
(7) not to invest more than 15% of its net assets in restricted securities
of all types (including not more than 5% of its net assets in
restricted securities which are not eligible for resale pursuant to
Rule 144A, Regulation S or other exemptive provisions under the
Securities Act of 1933).
Compliance with the above nonfundamental investment restrictions (6) and
(7) will be determined independently.
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ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Among other investments described below, the Fund may buy and sell
options, futures contracts, and options on futures contracts with respect to
securities and securities indices and may enter into closing transactions with
respect to each of the foregoing under circumstances in which such instruments
and techniques are expected by State Street Research & Management Company (the
"Investment Manager") to aid in achieving the investment objective of the Fund.
The Fund on occasion may also purchase instruments with characteristics of both
futures and securities (e.g., debt instruments with interest and principal
payments determined by reference to the value of a commodity at a future time)
and which, therefore, possess the risks of both futures and securities
investments.
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell underlying
assets, such as certain securities 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 securities or an index of
securities normally enables a buyer to participate in the market movement of the
underlying asset or index after paying a transaction charge and posting margin
in an amount equal to a small percentage of the value of the underlying asset or
index. The Fund will initially be required to deposit with the Trust's custodian
or the broker effecting the futures transaction an amount of "initial margin" in
cash or U.S. Treasury obligations.
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 that 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
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contracts with respect to securities do provide for the delivery and acceptance
of securities, such delivery and acceptance are seldom made.
Futures contracts will be executed primarily (a) to establish a short
position, and thus to protect the Fund from experiencing the full impact of an
expected decline in market value of portfolio holdings without requiring the
sale of holdings, or (b) to establish a long position, and thus to participate
in an unexpected rise in market value of securities which the Fund intends to
purchase. In transactions establishing a long position in a futures contract,
money market instruments 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, a representative portfolio of securities 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 employ any other appropriate method of cover
which is consistent with applicable regulatory and exchange requirements.
Options on Securities
The Fund may use options on securities to implement its investment
strategy. 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 debt 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, i.e., 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.
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, i.e., 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,
i.e., 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
his 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.
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Options on Securities Indices
The Fund may engage in transactions in call and put options on securities
indices. For example, the Fund may purchase put options on indices of securities
in anticipation of or during a market decline to attempt to offset the decrease
in market value of its securities that might otherwise result.
Put options on indices of securities are similar to put options on the
securities themselves except that the delivery requirements are different.
Instead of giving the right to make delivery of a security at a specified price,
a put option on an index of securities 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 securities or future 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. Although
there are at present few available options on indices of fixed income
securities, other than tax-exempt securities, or futures and related options
based on such indices, such instruments may become available in the future. In
connection with the use of such options, the Fund may cover its position by
identifying a representative portfolio of securities having a value equal to the
aggregate face value of the option position taken. However, the Fund may employ
any appropriate method to cover its position that is consistent with applicable
regulatory and exchange requirements.
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.
Options Strategy
A basic option strategy for protecting the Fund against a decline in
securities prices could involve (a) the purchase of a put -- thus "locking in"
the selling price of the underlying securities or securities indices -- or (b)
the writing of a call on securities or securities indices held by the Fund --
thereby generating income (the premium paid by the buyer) by giving the holder
of such call the option to buy the underlying asset at a fixed price. The
premium will offset, in whole or in part, a decline in portfolio value; however,
if prices of the relevant securities or securities indices rose instead of
falling, the call might be exercised, thereby resulting in a potential loss of
appreciation in the underlying securities or securities indices.
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A basic option strategy when a rise in securities prices is anticipated
is the purchase of a call -- thus "locking in" the purchase price of the
underlying security or other asset. In transactions involving the purchase of
call options by the Fund, money market instruments equal to the aggregate
exercise price of the options will be identified by the Fund to the Trust's
custodian to insure that the use of such investments is unleveraged.
The Fund may write options in connection with buy-and-write transactions;
that is, the Fund may purchase a security and concurrently write a call option
against that security. If the call option is exercised in such a transaction,
the Fund's maximum gain will be the premium received by it for writing the
option, adjusted upward or downward by the difference between the Fund's
purchase price of the security and the exercise price of the option. If the
option is not exercised and the price of the underlying security declines, the
amount of such decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund's return will be the premium received from
writing the put option minus the amount by which the market price of the
security is below the exercise price.
Limitations and Risks of Options and Futures Activity
The Fund will engage in transactions in futures contracts or options only
as a hedge against changes resulting from market conditions which produce
changes in the values of their securities or the securities which they intend to
purchase (e.g., to replace portfolio securities which will mature in the near
future) and, subject to the limitations described below, to enhance return. The
Fund will not purchase any futures contract or purchase any call option if,
immediately thereafter, more than one third of the Fund's net assets would be
represented by long futures contracts or call options. The Fund will not write a
covered call or put option if, immediately thereafter, the aggregate value of
the assets (securities in the case of written calls and cash or cash equivalents
in the case of written puts) underlying all such options, determined as of the
dates such options were written, would exceed 25% of the Fund's net assets. In
addition, the Fund may not establish a position in a commodity futures contract
or purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such nonhedging
purposes would exceed 5% of the market value of the Fund's net assets.
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.
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Some positions in financial 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 effectively to hedge its securities and might, in some cases, require
the 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.
Repurchase Agreements
The Fund may enter into repurchase agreements. Repurchase agreements
occur when a Fund acquires a security and the seller, which may be either (i) a
primary dealer in U.S. Government securities or (ii) an FDIC-insured bank having
gross assets in excess of $500 million, simultaneously commits to repurchase it
at an agreed-upon price on an agreed-upon date within a specified number of days
(usually not more than seven) from the date of purchase. The repurchase price
reflects the purchase price plus an agreed-upon market rate of 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 total 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 10% of the Fund's
total assets.
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 up to a month 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 Trust's custodian will establish a segregated account when
the Fund purchases securities on a when-issued basis consisting of cash or
liquid securities equal to the amount of the when-issued commitments.
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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.
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 right offset one
another, with a fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, 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 part of the Fund's portfolio.
However, the Fund may enter into such arrangements for income purposes to the
extent permitted by 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 for the counterparty. The
Fund attempts to reduce the risks of nonperformance by the counterparty by
dealing only with the 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 of if a market for the transfer
of swap positions does not develop. The use of interest rate swaps is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Investment Manager is incorrect in its forecasts of market values, interest
rates and other applicable factors, the investment performance of the Fund would
diminish compared with what it would have been if these investment techniques
were not used. Moreover, even if the Investment Manager is correct in its
forecasts, there is a risk that the swap position may correlate imperfectly with
the price of the asset or liability being hedged.
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Rule 144A Securities
Subject to the limitations on illiquid and restricted securities noted
above, the Fund may buy or sell restricted securities 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, such Rule 144A Securities may be deemed to
be liquid as determined by or in accordance with methods adopted by the
Trustees. Under such methods the following factors are considered, among others:
the frequency of trades and quotes for the security, the number of dealers and
potential purchasers in the market, marketmaking 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 possible
illiquidity and subjective valuation of such securities in the absence of a
market for them.
Foreign Investments
To the extent the Fund invests in securities of issuers in less developed
countries or emerging foreign markets, it will be subject to a variety of
additional risks, including risks associated with political instability,
economies based on relatively few industries, lesser market liquidity, high
rates of inflation, significant price volatility of portfolio holdings and high
levels of external debt in the relevant country.
Although the Fund may invest in securities denominated in foreign
currencies, the Fund values its securities and other assets in U.S. dollars. As
a result, the net asset value of the Fund's shares may fluctuate with U.S.
dollar exchange rates as well as with price changes of the Fund's securities in
the various local markets and currencies. Thus, an increase in the value of the
U.S. dollar compared to the currencies in which the Fund makes its investments
could reduce the effect of increases and magnify the effect of decreases in the
prices of the Fund's securities in their local markets. Conversely, a decrease
in the value of the U.S. dollar will have the opposite effect of magnifying the
effect of increases and reducing the effect of decreases in the prices of the
Fund's securities in the local markets.
Currency Transactions
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. Although spot and forward contracts
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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.
DEBT INSTRUMENTS AND
PERMITTED CASH INVESTMENTS
As indicated in the Fund's Prospectus, the Fund may invest in cash and
short-term securities for temporary defensive purposes when, in the opinion of
the Investment Manager, such a position is more likely to provide protection
against unfavorable market conditions than adherence to other investment
policies. Certain debt securities and money market instruments in which the Fund
may invest are described below.
U.S. Government and Related Securities. U.S. Government securities are
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S. Government
securities in which the Fund invests include, among others:
o direct obligations of the U.S. Treasury, i.e., U.S. Treasury bills,
notes, certificates and bonds;
o obligations of U.S. Government agencies or instrumentalities such as
the Federal Home Loan Banks, the Farmers Home Administration, the
Federal Farm Credit Banks, the Federal National Mortgage Association,
the Government National Mortgage Association and the Federal Home Loan
Mortgage Corporation; and
o obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a variety
of ways by the U.S. Government, its agencies or instrumentalities. Some of these
obligations, such as Government National Mortgage Association mortgage-backed
securities, are backed by the full faith and credit of the U.S. Treasury. Other
obligations, such as those of the Federal National Mortgage Association, are
backed by the discretionary authority of the U.S. Government to 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
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Banks, the Federal Farm Credit Banks, the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation are backed by the credit of the
agency or instrumentality issuing the obligations. Certain obligations of
Resolution Funding Corporation, a mixed-ownership Government corporation, are
backed with respect to interest payments by the U.S. Treasury, and with respect
to principal payments by U.S. Treasury obligations held in a segregated account
with a Federal Reserve Bank. Except for certain mortgage-related securities, the
Fund will only invest in obligations issued by mixed-ownership Government
corporations where such securities are guaranteed as to payment of principal or
interest by the U.S. Government or a U.S. Government agency or instrumentality,
and any unguaranteed principal or interest is otherwise supported by U.S.
Government obligations held in a segregated account.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and
may not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Bank Money Investments. Bank money investments include but are not
limited to certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are generally short-term (i.e., less than one year),
interest-bearing negotiable certificates issued by commercial banks or savings
and loan associations against funds deposited in the issuing institution. A
banker's acceptance is a time draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods). A banker's acceptance may be
obtained from a domestic or foreign bank, including a U.S. branch or agency of a
foreign bank. The borrower is liable for payment as well as the bank, which
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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 status or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such branches elect FDIC insurance. Unlike U.S. branches of foreign banks,
U.S. agencies of foreign banks may not accept deposits and thus are not eligible
for FDIC insurance. Both branches and agencies can maintain credit balances,
which are funds received by the office incidental to or arising out of the
exercise of their banking powers and can exercise other commercial functions,
such as lending activities.
Short-Term Corporate Debt Instruments. Short-term corporate debt
instruments include commercial paper to finance short-term credit needs (i.e.,
short-term, unsecured promissory notes) issued by corporations including but not
limited to (a) domestic or foreign bank holding companies or (b) their
subsidiaries or affiliates where the debt instrument is guaranteed by the bank
holding company or an affiliated bank or where the bank holding company or the
affiliated bank is unconditionally liable for the debt instrument. Commercial
paper is usually sold on a discounted basis and has a maturity at the time of
issuance not exceeding nine months.
Commercial Paper Ratings. Commercial paper investments at the time of
purchase will be rated A by S&P or Prime by Moody's, or, if not rated, issued by
companies having an outstanding long-term unsecured debt issue rated at least A
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 A by S&P or by Moody's.
Commercial paper rated A (highest quality) by S&P is issued by entities
which have liquidity ratios which are adequate to meet cash requirements.
Long-term senior debt is rated A or better, although in some cases BBB credits
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
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for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. The relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1, A-2
or A-3. (Those A-1 issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.
Information concerning corporate bond and debenture ratings of S&P and
Moody's appears in the Appendix to the Fund's Prospectus. In the event
applicable rating agencies lower the ratings of debt instruments held by the
Fund, resulting in a material decline in the overall quality of the Fund's
portfolio, the situation will be reviewed and necessary action, if any, will be
taken, including changes in the composition of the portfolio.
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TRUSTEES AND OFFICERS
The Trustees and officers of the Trust, their addresses, and their
principal occupations and positions with certain affiliates of the Investment
Manager are set forth below.
*+Bartlett R. Geer, One Financial Center, Boston, MA 02111 serves as Vice
President of the Trust. He is 40. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as Vice President of State Street Research & Management
Company.
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. He is 54. Mr. Kallis's principal occupation is Senior
Vice President of State Street Research & Management Company. During the past
five years he has also served as portfolio manager for State Street Research &
Management Company.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791, serves
as Trustee of the Trust. He is 68. He is engaged principally in private
investments and civic affairs, and is an author of business history. Previously,
he was with Morgan Guaranty Trust Company of New York.
+Robert A. Lawrence, Saltonstall & Co., 50 Congress Street, Boston, MA
02109 serves as Trustee of the Trust. He is 68. His principal occupation during
the past five years has been Partner, Saltonstall & Co., a private investment
firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 44. His principal occupation is Executive Vice
President, Treasurer and Director of State Street Research & Management Company.
During the past five years he has also served as Executive Vice President and
Chief Financial Officer of New England Investment Companies and Senior Vice
President and Vice President of New England Mutual Life Insurance Company. Mr.
Maus's other principal business affiliations include Executive Vice President,
Treasurer, Chief Financial Officer and Director of State Street Research
Investment Services, Inc.
*+Francis J. McNamara, III has served as Secretary and General Counsel of
the Trust since May, 1995. He is 39. His principal occupation is Senior Vice
President, Secretary and General Counsel of the Investment Manager. During the
past five years he has also served as Senior Vice President, General Counsel and
Assistant Secretary of The Boston Company, Inc., Boston Safe Deposit and Trust
Company and The Boston Company Advisors, Inc. Mr. McNamara's other principal
business affiliations include Senior Vice President, Clerk and General Counsel
of State Street Research Investment Services, Inc.
- -----------------
* or + See footnotes on page 17.
16
<PAGE>
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 63. He is retired, having served during the past
five years, until October 1992, as Executive Vice President, Chief Operating
Officer and Director of Hewlett-Packard Company.
+Thomas L. Phillips, 141 Spring Street, Lexington, MA 02173 serves as
Trustee of the Trust. He is 71. He is retired and was formerly Chairman of the
Board and Chief Executive Officer of Raytheon Company, of which he remains a
Director.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves as
Trustee of the Trust. He is 57. His principal occupations during the past five
years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
57. 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.
*+Ralph F. Verni, One Financial Center, Boston, MA 02111, serves as
Chairman of the Board, President, Chief Executive Officer and Trustee of the
Trust. He is 52. His principal occupation is Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research & Management
Company. During the past five years he also served as President and Chief
Executive Officer of New England Investment Companies and Chief Investment
Officer and Director of New England Mutual Life Insurance Company. Mr. Verni's
other principal business affiliations include Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research Investment
Services, Inc.
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 70. He is retired and was formerly Of Counsel for
the law firm Choate, Hall & Stewart. He was a partner of that firm from 1960 to
1987.
*+Michael R. Yogg, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. He is 49. 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, State Street Research & Management
Company.
- ----------
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the 1940 Act because of their affiliations with
the Fund's investment adviser.
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<PAGE>
+ Serves as a Trustee and/or officer of one or more of the following
investment companies, each of which has an advisory relationship with the
Investment Manager or its affiliates: MetLife - State Street Equity Trust,
MetLife - State Street Financial Trust, State Street Research Income Trust,
State Street Research Money Market Trust, State Street Research Tax-Exempt
Trust, State Street Research Capital Trust, State Street Research Exchange
Trust, State Street Research Growth Trust, State Street Research Master
Investment Trust, State Street Research Securities Trust, State Street
Research Portfolios, Inc. and Metropolitan Series Fund, Inc.
18
<PAGE>
As of June 30, 1995, the following persons or entities were the record
and/or beneficial owners of the approximate amounts of each class of shares of
the Fund as set forth beside their names:
Shareholder %
----------- -
Class C State Street Bank and Trust Company 23.9
M.M. Daly & D.F. Daly, Trustees 5.0
Class D Merrill Lynch 12.6
R. Duffield & C.R. Player, Jr., Co-Trustees 24.3
The full name and address of each of the above persons or entities are
as follows:
M.M. Daly & D.F. Daly, Trustees (a)
R. Duffield & C.R. Player, Jr., Co-Trustees (a)
State Street Bank and Trust Company (b)
225 Franklin Street
Boston, Massachusetts 02110
Merrill Lynch, Pierce, Fenner & Smith, Inc. (b)
One Liberty Plaza
165 Broadway
New York, New York 10080
- ------------------
(a) The address for each of the above persons is:
c/o State Street Research Shareholder Services
One Financial Center
Boston, Massachusetts 02111
(b) The Fund believes that such entity does not have beneficial ownership of
such shares.
As of June 30, 1995, the Trustees and officers of the Fund as a group
owned less than 1% of the Fund's outstanding Class A shares, and owned no shares
of the Fund's outstanding Class B, Class C or Class D shares.
Ownership of 25% or more of a voting security is deemed "control" as
defined in the 1940 Act. So long as 25% of a class of shares is so owned, such
owners will be presumed to be in control of such class of shares for purposes of
voting on certain matters submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
During the last fiscal year of the Trust, the Trustees were compensated
as follows:
- --------------------------------------------------------------------------------
Total
Compensation
Aggregate From Trust and
Name of Compensation Complex Paid
Trustee From Trust(a) to Trustees(b)
- --------------------------------------------------------------------------------
Edward M. Lamont $ 9,900 $ 55,411
Robert A. Lawrence $ 9,900 $ 82,775
Dean O. Morton $ 10,900 $ 93,625
Thomas L. Phillips $ 9,600 $ 65,525
Toby Rosenblatt $ 9,900 $ 55,411
Michael S. Scott Morton $ 10,900 $ 90,375
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $ 9,900 $ 65,475
(a) Includes compensation from multiple Series of the Trust. See "Distribution
of Shares" for a listing of series.
(b) Includes compensation from Metropolitan Series Fund, Inc., for which the
Investment Manager serves as sub-investment adviser, State Street Research
Portfolios, Inc., for which State Street Research Investment Services, Inc.
serves as distributor, and all investment companies for which the
Investment Manager serves as primary investment adviser, comprising a total
of 30 series. The Trust does not provide any pension or retirement benefits
for the Trustees.
19
<PAGE>
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Advisory
Agreement provides that the Investment Manager shall furnish the Fund with an
investment program, office facilities and such investment advisory, research and
administrative services as may be required from time to time. The Investment
Manager compensates all executive and clerical personnel and Trustees of the
Trust if such persons are employees of the Investment Manager or its affiliates.
The Investment Manager is an indirect wholly-owned subsidiary of Metropolitan
Life Insurance Company.
The advisory fee payable monthly by the Fund to the Investment Manager is
computed as a percentage of the average of the value of the net assets of the
Fund as determined at the close of the New York Stock Exchange (the "NYSE") on
each day said Exchange is open for trading, at the annual rate of 0.65% of the
net assets of the Fund. The Fund has been advised that the Distributor and its
affiliates may from time to time and in varying amounts voluntarily assume some
portion of fees or expenses relating to the Fund. For the fiscal years ended
March 31, 1993, 1994 and 1995, the investment advisory fee for the Fund was
$2,551,577, $4,022,674 and $4,696,647, respectively. For the same periods, the
voluntary reduction of fees or assumption of expenses amounted to $0, $218,726
and $0, respectively.
Further, to the extent required under applicable state regulatory
requirements, the Investment Manager will reduce its management fee for the Fund
up to the amount of any expenses (excluding permissible items, such as Rule
12b-1 Distribution Plan payments, brokerage commissions, interest, taxes and
litigation expenses) paid or incurred by the Fund in any fiscal year which
exceed specified percentages of the average daily net assets of such Fund for
such fiscal year. The most restrictive of such percentage limitations is
currently 2.5% of the first $30 million of average net assets, 2.0% of the next
$70 million of average net assets and 1.5% of the remaining average net assets.
These commitments may be amended or rescinded in response to changes in the
requirements of the various states by the Trustees without shareholder approval.
The Advisory Agreement provides that it will continue in effect with
respect to the Fund from year to year 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.
20
<PAGE>
Under a Funds Administration Agreement between the Investment Manager and
the Distributor, the Distributor provides assistance to the Investment Manager
in performing certain fund administration services for the Trust, such as
assistance in determining the daily net asset value of shares of series of the
Trust and in preparing various reports required by regulations.
Under a Shareholders' Administrative Services Agreement between the Trust
and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Fund, and is entitled to
reimbursements of its costs for providing such services. Under certain
arrangements for Metropolitan to provide subadministration services,
Metropolitan may receive a fee for the maintenance of certain share ownership
records for participants in sponsored arrangements, such as employee benefit
plans, through or under which Fund shares may be purchased.
Under the Code of Ethics of the Investment Manager, its employees in
Boston, where investment management operations are conducted, are only permitted
to engage in personal securities transactions which do not involve securities
which the Investment Manager has recommended for purchase or sale, or purchased
or sold, on behalf of its clients. Such employees must report their personal
securities transactions quarterly and supply broker confirmations of such
transactions to the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by the Distributor. The Fund offers
four classes of shares which may be purchased at the next determined net asset
value per share plus, in the case of all classes except Class C shares, a sales
charge which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B and Class
D shares). General information on how to buy shares of the Funds, as well as
sales charges involved, are set forth under "Purchase of Shares" in the
Prospectus. The following supplements that information.
Public Offering Price - The public offering price for each class of
shares is based on their net asset value determined as of the close of the NYSE
on the day the purchase order is received by State Street Research Shareholder
Services provided that the order is received prior to the close of the NYSE on
that day; otherwise the net asset value used is that determined as of the close
of the NYSE on the next day it is open for unrestricted trading. When a purchase
order is placed through a dealer, that dealer is responsible for transmitting
the order promptly to State Street Research Shareholder Services in order to
permit the investor to obtain the current price. Any loss suffered by an
investor which results from a dealer's failure to transmit an order promptly is
a matter for settlement between the investor and the dealer.
21
<PAGE>
Reduced Sales Charges - For purposes of determining whether a purchase of
Class A shares qualifies for reduced sales charges, the term "person" includes:
(i) an individual, or an individual combining with his or her spouse and their
children and purchasing for his, her or their own account; (ii) a "company" as
defined in Section 2(a)(8) of the 1940 Act; (iii) a trustee or other fiduciary
purchasing for a single trust estate or single fiduciary account (including a
pension, profit sharing or other employee benefit trust created pursuant to a
plan qualified under Section 401 of the Internal Revenue Code); (iv) a
tax-exempt organization under Section 501(c)(3) or (13) of the Internal Revenue
Code; and (v) an employee benefit plan of a single employer or of affiliated
employers.
Investors may purchase Class A shares of the 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" as
designated by the Distributor 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, Class C and Class D shares may also be included under certain
circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D 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.
22
<PAGE>
Class C Shares - Class C shares are currently available to benefit plans
such as qualified retirement plans, other than individual retirement accounts
and self-employed retirement plans, which meet certain criteria relating to
minimum assets, minimum participants, service agreements, or similar factors;
banks and insurance companies; endowment funds of nonprofit organizations with
substantial minimum assets; and other similar institutional investors.
Reorganizations - In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, the Fund may issue its shares at net asset value (or
more) to such entities or to their security holders.
Redemptions - The Fund reserves the right to pay redemptions in kind with
portfolio securities in lieu of cash. In accordance with its election pursuant
to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of redemption
proceeds paid in cash. Although it has no present intention to do so, the Fund
may, under unusual circumstances, limit redemptions in cash with respect to each
shareholder during any ninety-day period to the lesser of (i) $250,000 or (ii)
1% of the net asset value of the Fund at the beginning of such period. In
connection with any redemptions paid in kind with portfolio securities,
brokerage and other costs may be incurred by the redeeming shareholder in the
sale of the securities received.
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily as
of the close of the NYSE, ordinarily 4 P.M. New York City time, Monday through
Friday, on each day during which the NYSE is open for unrestricted trading. The
NYSE is currently closed on New Year's Day, Presidents Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is computed by dividing the sum
of the value of the securities held by the Fund plus any cash or other assets
minus all liabilities by the total number of outstanding shares of the Fund at
such time. Any expenses, except for extraordinary or nonrecurring expenses,
borne by the Fund, including the investment management fee payable to the
Investment Manager, are accrued daily.
In determining the values of portfolio assets, the Trustees may 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 may provide
prices determined as of times prior to the close of the NYSE.
23
<PAGE>
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 and for which
quotations are available on the National Association of Securities Dealers'
NASDAQ System, or other system, are valued at the closing price supplied through
such system for that day at the close of the NYSE. Other securities are, in
general, valued at the mean of the bid and asked quotations last quoted prior to
the close of the NYSE if there are market quotations readily available, or in
the absence of such market quotations, then at the fair value thereof as
determined by or under authority of the Trustees of the Trust utilizing such
pricing services as may be deemed appropriate as described above. Securities
deemed restricted as to resale are valued at the fair value thereof as
determined by or in accordance with methods adopted by the Trustees of the
Trust.
Short-term debt instruments issued with a maturity of one year or less
which have a remaining maturity of 60 days or less are valued using the
amortized cost method, 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. The amortized cost method is used
when the value obtained reflects fair value. Under the amortized cost method of
valuation, the security is initially valued at cost on the date of purchase (or
in the case of short-term debt instruments purchased with more than 60 days
remaining to maturity, the market value on the 61st day prior to maturity), and
thereafter a constant amortization to maturity of any discount or premium is
assumed regardless of the impact of fluctuating interest rates on the market
value of the security.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
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). The portfolio turnover rates for the fiscal years ended March 31,
1994 and 1995 were 24.36% and 31.55%, respectively. The Fund reserves full
freedom with respect to portfolio turnover, as described in the Prospectus.
Brokerage Allocation
The Fund and the Investment Manager seek the best overall execution of
purchase or sale orders and the most favorable net price in securities
transactions consistent with their judgment as to the business qualifications of
the various broker or dealer firms with which the Fund may do business.
24
<PAGE>
Decisions with respect to the market where the transaction is to be completed,
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 the performance, integrity and financial
responsibility of the various firms as well as to their demonstrated execution
experience and capability generally and in regard to particular markets or
securities and, in agency transactions, to the competitiveness of the commission
rates (or in principal transactions of the net prices) they charge. The
Investment Manager keeps current as to the range of rates or prices charged by
various firms and against this background evaluates the reasonableness of a
commission or price charged with respect to a particular transaction by
considering such factors as difficulty of execution or security positioning by
the executing firm.
When it appears that a number of firms can satisfy the required standards
in respect of a particular transaction, consideration may also be given to
services other than execution services which such firms have provided in the
past or may provide in the future. Among such other services are the supplying
of supplemental investment research, general economic and political information,
analytical and statistical data, relevant market information and daily market
quotations for computation of net asset value. In this connection it should be
noted that a substantial portion of brokerage commissions paid, or principal
transactions entered, by the Fund may be with brokers and investment banking
firms which, in the normal course of business, publish statistical, research and
other material which is received by the Investment Manager and which may or may
not prove useful to the Investment Manager, the Fund or other clients of the
Investment Manager.
Neither the Fund nor the Investment Manager has any definitive agreements
with any firm as to the amount of business which that firm may expect to receive
for services supplied or otherwise. There may be, however, understandings with
certain firms that in order for such firms to be able to continuously supply
certain services, they need to receive allocation of a specified amount of
business. These understandings are honored to the extent possible in accordance
with the policy set forth above. Neither the Fund nor the Investment Manager
intend to pay a firm in excess of that which another would charge for handling
the same transaction in recognition of services (other than execution services)
provided. However, the Fund and the Investment Manager are aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, rely on the provisions of Section 28(e) of the
Securities Exchange Act of 1934, to the extent applicable. During the fiscal
years ended March 31, 1993, 1994 and 1995, the Fund paid $23,286, $50,536 and
$56,055, respectively, in brokerage commissions. During and at the end of its
most recent fiscal year, the Fund held in its portfolio no securities of any
entity that might be deemed to be a regular broker-dealer of the Fund as defined
under the 1940 Act.
Occasions may arise when the Investment Manager determines that an
investment in a particular security, or the disposition of a particular
security, is simultaneously a proper investment decision for the Fund as well as
25
<PAGE>
for the portfolio of one or more of its other clients. In this event, a purchase
or sale, as the case may be, of any such security on any given day will be
normally averaged as to price and allocated as to amount among the several
clients in a manner deemed equitable to each client.
On occasions when the Investment Manager deems the purchase or sale of a
security to be in the best interests of the Fund, as well as other clients of
the Investment Manager, the Investment Manager, to the extent permitted by
applicable laws and regulations, may aggregate such securities to be sold or
purchased for the Fund with those to be sold or purchased for other customers in
order to obtain best execution and lower brokerage commissions, if any. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Investment Manager in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to all such customers, including the Fund. In some instances, this
procedure may affect the price and size of the positions obtainable for the
Fund.
CERTAIN TAX MATTERS
Federal Income Taxation of the Funds -- 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 do so. Accordingly, the Fund must, among other things, (a) derive
at least 90% of its gross income in each taxable year from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of the
following held for less than three months (the "30% test"): (i) stock or
securities, (ii) options, futures, or forward contracts (other than options,
futures or forward contracts on foreign currencies), or (iii) foreign currencies
(or options, futures, or forward contracts on foreign currencies) but only if
such currencies (or options, futures, or forward contracts) are not directly
related to the Fund's principal business of investing in stocks or securities
(or options and futures with respect to stocks or securities); (c) satisfy
certain diversification requirements; and (d) in order to be entitled to utilize
the dividends paid deduction, distribute annually at least 90% of its investment
company taxable income (determined without regard to the deduction for dividends
paid).
The 30% test will limit the extent to which the Fund may sell securities
held for less than three months, write options which expire in less than three
months, and effect closing transactions with respect to call or put options that
have been written or purchased within the preceding three months. (If the Fund
purchases a put option for the purpose of hedging an underlying portfolio
security, the acquisition of the option is treated as a short sale of the
26
<PAGE>
underlying security unless, for purposes only of the 30% test, the option and
the security are acquired on the same date.) Finally, as discussed below, this
requirement may also limit investments by the Fund in options on stock indices,
listed options on nonconvertible debt securities, futures contracts, options on
interest rate futures contracts and certain foreign currency contracts.
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of such Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of the
Fund.
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. The Fund intends to make sufficient distributions to avoid this 4% excise
tax.
Federal Income Taxation of the Fund's Investments
Original Issue Discount. For federal income tax purposes, debt securities
purchased by the Fund may be treated as having original issue discount. Original
issue discount represents interest for federal income tax purposes and can
generally be defined as the excess of the stated redemption price at maturity of
a debt obligation over the issue price. Original issue discount is treated for
federal income tax purposes as income earned by the Fund, whether or not any
income is actually received, and therefore is subject to the distribution
requirements of the Code. Generally, the amount of original issue discount is
determined on the basis of a constant yield 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 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
income 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
27
<PAGE>
deduct currently, part or all of any direct interest expense incurred to
purchase or carry any debt security having market discount, unless a Fund makes
the election to include market discount currently. Because the Fund must include
original issue discount in income, it will be more difficult for the Fund to
make the distributions required for the Fund to maintain its status as a
regulated investment company under Subchapter M of the Code or to avoid the 4%
excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may
be subject to provisions of the Code that (i) require inclusion of unrealized
gains or losses in the Fund's income for purposes of the 90% test, the 30% test,
the excise tax and the distribution requirements applicable to regulated
investment companies; (ii) defer recognition of realized losses; and (iii)
characterize both realized and unrealized gain or loss as short-term or
long-term gain or loss. Such provisions generally apply to, among other
investments, options on debt securities, indices on securities and futures
contracts.
Federal Income Taxation of Shareholders
Distributions by the Fund can result in a reduction in the fair market
value of such Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless would be
taxable to the shareholder as ordinary income or long-term capital gain, even
though, from an investment standpoint, it may constitute a partial return of
capital. In particular, investors should be careful to consider the tax
implications of buying shares just prior to a taxable distribution. The price of
shares purchased at that time includes the amount of any forthcoming
distribution. Those investors purchasing shares just prior to a taxable
distribution will then receive a return of investment upon distribution which
will nevertheless be taxable to them.
28
<PAGE>
DISTRIBUTION OF SHARES OF THE FUND
State Street Research Income Trust (formerly MetLife - State Street
Income Trust) is currently comprised of the following series: State Street
Research High Income Fund (formerly MetLife - State Street Research High Income
Fund) and State Street Research Managed Assets (formerly MetLife - State Street
Research Managed Assets). The Trustees have authorized the Fund to issue four
classes of shares: Class A, Class B, Class C and Class D shares. The Trustees of
the Trust have authority to issue an unlimited number of shares of beneficial
interest of separate series, $.001 par value per share. A "series" is a separate
pool of assets of the Trust which is separately managed and has a different
investment objective and different investment policies from those of another
series. The Trustees have authority, without the necessity of a shareholder
vote, to create any number of new series or classes or to commence the public
offering of shares of any previously established series or class.
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (Class B and Class D shares). The Distributor may allow all or
portions of such sales charges as concessions to dealers. For the fiscal years
ended March 31, 1993, 1994 and 1995, total sales charges on Class A shares paid
to the Distributor amounted to $7,849,938, $4,321,364 and $3,774,724,
respectively. For the same periods, $906,577, $513,300 and $447,617,
respectively, was retained by the Distributor after reallowance of concessions
to dealers.
The differences in the price at which the Fund's Class A shares are
offered due to scheduled variations in sales charges, as described in the Fund's
Prospectus, result from cost savings inherent in economies of scale. Management
believes that the cost of sales efforts of the Distributor and broker-dealers
tends to decrease as the size of purchases increases, or does not involve any
incremental sales expenses as in the case of, for example, exchanges,
reinvestments or dividend investments at net asset value. Similarly, no
significant sales effort is necessary for sales of shares at net asset value to
certain Directors, Trustees, officers, employees, their relatives and other
persons directly or indirectly related to the Fund or associated entities. Where
shares of the Fund are offered at a reduced sales charge or without a sales
charge pursuant to sponsored arrangements and managed fee-based programs, the
amount of the sales charge reduction will similarly reflect the anticipated
reduction in sales expenses associated with such arrangements. The reduction in
sales expenses, and therefore the reduction in sales charge, will vary depending
on factors such as the size and other characteristics of the organization or
program, and the nature of its membership or the participants. The Fund reserves
the right to make variations in, or eliminate, sales charges at any time or to
29
<PAGE>
revise the terms of or to suspend or discontinue sales pursuant to sponsored
arrangements at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission on the shares sold. Such commission also is
payable to authorized securities dealers upon sales of Class A shares made
pursuant to a Letter of Intent to purchase shares having a net asset value of
$1,000,000 or more. Shares sold with such commissions payable are subject to a
one-year contingent deferred sales charge of 1.00% on any portion of such shares
redeemed within one year following their sale. After a particular purchase of
Class A shares is made under the Letter of Intent, the commission will be paid
only in respect of that particular purchase of shares. If the Letter of Intent
is not completed, the commission paid will be deducted from any discounts or
commissions otherwise payable to such dealer in respect of shares actually sold.
If an investor is eligible to purchase shares at net asset value on account of
the Right of Accumulation, the commission will be paid only in respect of the
incremental purchase at net asset value.
For the periods shown below, the Distributor received contingent deferred
sales charges upon redemption of Class A, Class B and Class D shares of the
Funds and paid initial commissions to securities dealers for sales of such
Class A, Class B and Class D shares as follows:
June 1, 1993
(commencement of
Fiscal Year Ended share class designations)
March 31, 1995 to March 31, 1994
-------------------------------- ----------------------------------
Contingent Contingent
Deferred Commissions Deferred Commissions
Sales Charges Paid to Dealers Sales Charges Paid to Dealers
Class A $ 1,238 $ 0 $ 0 $ 0
Class B $274,749 $2,315,926 $38,044 $1,675,127
Class D $ 2,188 $ 49,802 $ 0 $ 26,870
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1" (the
"Distribution Plan") under which the Fund may engage, directly or indirectly, in
financing any activities primarily intended to result in the sale of Class A,
Class B and Class D shares, including, but not limited to, (1) the payment of
commissions and/or reimbursement to underwriters, securities dealers and others
engaged in the sale of shares, including payments to the Distributor to be used
to pay commissions and/or reimbursement to securities dealers (which securities
dealers may be affiliates of the Distributor) engaged in the distribution and
marketing of shares and furnishing ongoing assistance to investors, (2)
reimbursement of direct out-of-pocket expenditures incurred by the Distributor
in connection with the distribution and marketing of shares and the servicing of
investor accounts including expenses relating to the formulation and
implementation of marketing strategies and promotional activities such as direct
mail promotions and television, radio, newspaper, magazine and other mass media
30
<PAGE>
advertising, the preparation, printing and distribution of Prospectuses of the
Fund and reports for recipients other than existing shareholders of the Fund,
and obtaining such information, analyses and reports with respect to marketing
and promotional activities and investor accounts as the Fund may, from time to
time, deem advisable, and (3) reimbursement of expenses incurred by the
Distributor in connection with the servicing of shareholder accounts including
payments to securities dealers and others in consideration of the provision of
personal service to investors and/or the maintenance of shareholder accounts and
expenses associated with the provision of personal service by the Distributor
directly to investors. In addition, the Distribution Plan is deemed to authorize
the Distributor and the Investment Manager to make payments out of general
profits, revenues or other sources to underwriters, securities dealers and
others in connection with sales of shares, to the extent, if any, that such
payments may be deemed to be within the scope of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class D shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class D
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class D shares (as the case may be) to make payments for personal
service and/or the maintenance of shareholder accounts. Proceeds from the
service fee will be used by the Distributor to compensate securities dealers and
others selling shares of the Fund for rendering service to shareholders on an
ongoing basis. Such amounts are based on the net asset value of shares of the
Fund held by such dealers as nominee for their customers or which are owned
directly by such customers for so long as such shares are outstanding and the
Distribution Plan remains in effect with respect to the Fund. Any amounts
received by the Distributor and not so allocated may be applied by the
Distributor as reimbursement for expenses incurred in connection with the
servicing of investor accounts. The distribution and servicing expenses of a
particular class will be borne solely by that class.
During the fiscal year ended March 31, 1995, the Fund paid the
Distributor fees under the Distribution Plan and the Distributor used all of
such payments for expenses incurred on behalf of the Fund as follows:
31
<PAGE>
Class A Class B Class D
---------- -------- -------
Advertising $ 0 $ 0 $ 0
Printing and mailing of prospectuses
to other than current shareholders 0 0 0
Compensation to dealers 1,563,183 911,610 45,186
Compensation to sales personnel 0 0 0
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses: marketing 0 0 0
---------- -------- -------
Total fees $1,563,183 $911,610 $45,186
========== ======== =======
The Distributor may have also used additional resources of its own for further
expenses on behalf of the Fund.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Fund will attempt to make
alternative arrangements for such services for shareholders who acquired shares
through such institutions.
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") and yield of
the Class A, Class B, Class C and Class D shares of the Funds will be calculated
as set forth below. Total return and yield are computed separately for each
class of shares of the Fund. Performance data for a specified class includes
periods prior to the adoption of class designations. Shares of the Fund had no
class designations until June 1, 1993, when designations were assigned based on
the pricing and Rule 12b-1 fees applicable to shares sold thereafter.
32
<PAGE>
The performance data reflects Rule 12b-1 fees and sales charges as set
forth below:
<TABLE>
<CAPTION>
Rule 12b-1 Fees Sales Charges
---------------------------------------------- -----------------------------------------
Current
Class Amount Period
- ----- ------ ------
<C> <C> <C> <C>
A 0.25% Since commencement of Maximum 4.5% sales charge reflected
operations to present
B 1.00% 0.25% until June 1, 1993; 1- and 5-year periods reflect a 5% and a
1% June 1, 1993 to present; 2% contingent deferred sales charge,
fee will reduce performance respectively
for periods after June 1, 1993
C None 0.25% until June 1, 1993; None
0% thereafter
D 1.00% 0.25% until June 1, 1993; 1-year period reflects a 1% contingent
1% June 1, 1993 to present; deferred sales charge
fee will reduce performance
for periods after June 1, 1993
</TABLE>
All calculations of performance data in this section reflect the
voluntary measures by the Fund's affiliates to reduce expenses relating to the
Fund; see "Accrued Expenses" later in this section.
Total Return
The Fund's average annual total returns ("standard total return") of each
class of shares were as follows:
Commencements of
Operations Five Years One Year
(August 25, 1986) Ended Ended
Fund to March 31, 1995 March 31, 1995 March 31,1995
- ---- ----------------- -------------- -------------
High Income Fund
Class A 9.18% 11.74% -2.78%
Class B 9.55% 12.17% -3.62%
Class C 9.76% 12.77% 1.73%
Class D 9.55% 12.40% -0.02%
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
33
<PAGE>
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 maximum
initial or contingent deferred sales charge applicable to the investment 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
The annualized yield of each class of shares of the Fund based on the
month of March 1995 was as follows:
Class A 10.69%
Class B 10.47%
Class C 11.53%
Class D 10.46%
Yield for each of the Fund's Class A, Class B, Class C and Class D
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 + 1)^6 -1]
---
cd
Where a = dividends and interest earned during the period
b = expenses accrued for the period (net of voluntary expense
reductions by the Investment Manager)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of period
34
<PAGE>
To calculate interest earned (for the purpose of "a" above) on debt
obligations, the Fund computes the yield to effective maturity of each
obligation held by the Fund based on the market value of the obligation
(including actual accrued interest) at the close of the last business day of the
preceding period, or, with respect to obligations purchased during the period,
the purchase price (plus actual accrued interest). The yield to effective
maturity is then divided by 360 and the quotient is multiplied by the market
value of the obligation (including actual accrued interest) to determine the
interest income on the obligation for each day of the period that the obligation
is in the portfolio. Dividend income is recognized daily based on published
rates.
With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("paydowns"), the Fund accounts for gain or
loss attributable to actual monthly paydowns as a realized capital gain or loss
during the period. The Fund has elected not to amortize discount or premium on
such securities.
Undeclared earned income, computed in accordance with generally
accepted accounting principles, may be subtracted from the maximum offering
price. Undeclared earned income is the net investment income which, at the end
of the base period, has not been declared as a dividend, but is reasonably
expected to be declared as a dividend shortly thereafter. The maximum offering
price includes, as applicable, a maximum sales charge of 4.5%.
All accrued expenses are taken into account as described later herein.
Yield information is useful in reviewing the Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in the Fund's shares with bank deposits, savings accounts and
similar investment alternatives which often are insured and/or provide an agreed
or guaranteed fixed yield for a stated period of time. 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
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return and yield results take sales charges, if applicable, into
account, although the results do not take into account recurring and
nonrecurring charges for optional services which only certain shareholders elect
and which involve nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by
affiliates of fees or expenses during the subject period. In the absence of such
subsidization, the performance of the Fund would have been lower.
35
<PAGE>
Nonstandardized Total Return
The Fund may provide the above described standard total return results
for Class A, Class B, Class C and Class D shares for periods which end no
earlier than the most recent calendar quarter end and which begin twelve months
before and at the time of commencement of the Fund's operations. In addition,
the Fund may provide nonstandardized total return results for differing periods,
such as for the most recent six months, and/or without taking sales charges into
account. Such nonstandardized total return is computed as otherwise described
under "Total Return" except the result may or may not be annualized, and as
noted any applicable sales charge may not be taken into account and therefore
not deducted from the hypothetical initial payment of $1,000. For example, the
Fund's nonstandardized total returns for the six months ended March 31, 1995
without taking sales charges into account, were as follows:
Class A 2.35%
Class B 1.98%
Class C 2.31%
Class D 1.80%
Distribution Rates
The 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.
The distribution rates of the Fund, based on the month of March
1995, were as follows:
36
<PAGE>
Class A 9.87%
Class B 9.60%
Class C 10.63%
Class D 9.60%
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as the Trust's independent accountants, providing professional services
including (1) audits of the Funds' annual financial statements, (2) assistance
and consultation in connection with Securities and Exchange Commission filings
and (3) review of the annual income tax returns filed on behalf of the Funds.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a
semiannual basis, other supplementary financial reports may be made available
from time to time and holders of record may request a copy of a current
supplementary report, if any, by calling State Street Research Shareholder
Services.
The following financial statements of MetLife - State Street Research
High Income Fund are for the fiscal year ended March 31, 1995. MetLife - State
Street Research High Income Fund changed its name to "State Street Research High
Income Fund" on August 1, 1995.
37
<PAGE>
METLIFE-STATE STREET RESEARCH HIGH INCOME FUND
Investment Portfolio
March 31, 1995
Principal Maturity Value
Amount Date (Note 1)
BONDS 79.5%
Aerospace 2.6%
Alliant TechSystems, Inc.
Sr. Sub. Notes, 11.75%+ $6,250,000 3/01/2003 $ 6,375,000
K&F Industries, Inc. Sr.
Secured Notes, 13.75% 1,700,000 8/01/2001 1,691,500
K&F Industries, Inc. Sr.
Secured Notes, 11.875% 6,000,000 12/01/2003 6,030,000
Talley Mfg. & Technology,
Inc. Sr. Notes, 10.75% 1,250,000 10/15/2003 1,162,500
Tracor Inc. Sr. Sub. Notes,
10.875% 1,000,000 8/15/2001 1,005,000
Wyman-Gordon Co. Sr. Notes,
10.75% 3,050,000 3/15/2003 2,867,000
19,131,000
Airlines 1.4%
CHC Helicopter Corp. Sr.
Sub. Note, 11.50% 4,750,000 7/15/2002 3,918,750
GPA Delaware, Inc. Deb.,
8.75% 8,000,000 12/15/1998 6,340,000
10,258,750
Automotive 0.5%
Harvard Industries, Inc.
Sr. Notes, 12.00% 2,250,000 7/15/2004 2,311,875
Penda Industries, Inc. Sr.
Notes, 10.75% 1,750,000 3/01/2004 1,540,000
Venture Holdings Trust Sr.
Sub. Notes, 9.75% 250,000 4/01/2004 217,500
4,069,375
Cable 1.4%
American Telecasting, Inc.
Sr. Sub. Units, 0.00% to
6/14/99, 12.50% from
6/15/99 to maturity 5,750,000 6/15/2004 2,587,500
Insight Communications Co.,
L.P. Sr. Sub. Disc. Note,
8.25% 1,525,000 3/01/2000 1,475,438
Marcus Cable Operating Co.
L.P. Sr. Disc. Note, 0.00%
to 7/30/99, 13-1/2% from
8/1/99 to maturity 5,500,000 8/01/2004 3,135,000
Scott Cable Communications,
Inc. Sub. Deb., 12.25% 2,275,000 4/15/2001 1,820,000
Videotron Group LTD. Sub.
Deb. 10.625% 1,500,000 2/15/2005 1,522,500
10,540,438
Capital Goods/Equipment 5.0%
Acme Holdings Inc. Sr.
Notes, 11.75%## $3,000,000 6/01/2000 $ 1,080,000
Axia Holdings Corp. Sr.
Sub. Notes, 11.00% 750,000 3/15/2001 690,000
Chatwins Group, Inc. Sr.
Exch. Note, 13.00% 5,000,000 5/01/2003 4,125,000
Consolidated Hydro Inc. Sr.
Disc. Note, 0.00% to
1/14/99, 12.00% from
1/15/99 to maturity 2,525,000 7/15/2003 1,679,024
Fairfield Manufacturing
Inc. Sr. Sub. Notes,
11.375% 485,000 7/01/2001 458,325
Genmar Holdings, Inc. Sr.
Sub. Notes, 13.50% 3,250,000 7/15/2001 3,168,750
ICF Kaiser International,
Inc. Sr. Sub. Notes,
12.00% 4,750,000 12/31/2003 4,263,125
Interlake Corp. Sr. Sub.
Deb., 12.125% 3,000,000 3/01/2002 2,925,000
Kenetech Corp. Sr. Sec.
Notes, 12.75% 4,858,000 12/15/2002 5,040,175
Specialty Equipment
Companies, Inc. Sr. Sub.
Note, 11.375% 1,250,000 12/01/2003 1,231,250
Terex Corp. Sr. Sec. Notes,
13.00%+ 3,767,000 8/01/1996 3,663,408
Terex Corp. Sr. Units, 13%+ 350,000 8/01/1996 341,250
Terex Corp. Sr. Sub. Notes,
13.50% 5,950,000 7/01/1997 5,593,000
Truck Components, Inc. Sr.
Notes, 12.25% 1,500,000 6/30/2001 1,552,500
Waters Corp. Sr. Sub. Note,
12.75% 1,500,000 9/30/2004 1,526,250
37,337,057
Chemical 0.7%
Harris Chemical of North
America Inc. Sr. Disc.
Notes, 0.00% to 1/14/96,
10.25% from 1/15/96 to
maturity 3,500,000 7/15/2001 3,027,500
UCC Investors Inc. Sub.
Disc. Notes, 0.00% to
4/30/98, 12.00% from
5/01/98 to maturity 3,000,000 5/01/2005 2,115,000
5,142,500
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Conglomerate 0.2%
Dyncorp, Inc. Jr. Sub.
Deb., 16.00%*** $ 1,360,022 6/30/2003 $ 1,305,621
IMO Industries, Inc. Sr.
Sub. Deb., 12.00% 500,000 11/01/2001 510,000
1,815,621
Consumer Goods 3.0%
Allied Waste Industries,
Inc. Sr. Sub. Notes,
10.75% to 1/31/95, 12.00%
from 2/01/95 to maturity 1,250,000 2/01/2004 1,256,250
Carrols Corp. Sr. Notes,
11.50% 3,750,000 8/15/2003 3,450,000
Central Rents, Inc. Sr.
Units, 12.875% 8,000,000 12/15/2003 7,280,000
Envirotest Systems Corp.
Sr. Notes, 9.125% 2,000,000 3/15/2001 1,600,000
Roadmaster Industries Inc.
Sr. Sub. Notes, 11.75% 2,750,000 7/15/2002 2,646,875
Thermoscan, Inc. Sr. Sub.
Units, 11.50%+ 2,750,000 8/15/2001 2,750,000
Town & Country Corp. Sr.
Sub. Notes, 13.00%*** 2,404,695 5/31/1998 1,442,815
U.S. Leather, Inc. Sr.
Notes, 10.25% 2,000,000 7/31/2003 1,660,000
22,085,940
Cosmetics 0.4%
Chattem, Inc. Sr. Sub.
Note, 12.75% 2,000,000 6/15/2004 1,830,000
Renaissance Cosmetics, Inc.
Sr. Notes, 13.75% 1,000,000 8/15/2001 945,000
2,775,000
Drug 0.8%
General Medical Corp. Sub.
Deb., 12.125%*** 6,202,709 8/15/2005 6,125,175
Electronic 0.3%
LTX Corp. Cv. Sub. Deb.,
13.50% 1,840,000 4/15/2011 1,895,200
Entertainment 1.0%
Live Entertainment Inc. Sr.
Sub. Notes, 10.00% to
3/22/96, 12.00% from
3/23/96 to maturity 7,936,100 3/23/1999 5,317,187
Entertainment (cont'd)
Spectravision, Inc. Sr.
Notes, 0.00% to 9/30/96,
11.50% from 10/1/96 to
maturity $ 5,500,000 10/01/2001 $ 2,475,000
7,792,187
Food & Beverage 4.3%
Beatrice Foods, Inc. Sr.
Sub. Note, 12.00% 3,800,000 12/01/2001 3,648,000
Doskocil Companies, Inc.
Sr. Sub. Red. Notes, 9.75% 8,430,000 7/15/2000 7,755,600
Flagstar Corp. Sr. Sub.
Notes, 11.25% 4,250,000 11/01/2004 3,570,000
MAFCO Inc. Sr. Sub. Notes,
11.875% 2,500,000 11/15/2002 2,412,500
Seven-Up/RC Bottling Co. of
Southern California, Inc.,
11.50% 12,500,000 8/01/1999 10,812,500
Smittys Super Value Inc.
Sr. Sub. Notes, 12.75% 3,250,000 6/15/2004 3,055,000
Specialty Foods Corp. Sr.
Sub. Notes, 11.25% 1,000,000 8/15/2003 965,000
32,218,600
Gaming & Lodging 6.8%
AZTAR Corp. Sr. Sub. Notes,
13.75% 1,000,000 10/01/2004 1,077,500
Belle Casinos, Inc. First
Mortgage Notes, 12.00%+## 700,000 10/15/2000 206,500
Boomtown Inc. First
Mortgage Notes, 11.50% 8,750,000 11/01/2003 8,312,500
Fitzgeralds Gaming Corp.
Sr. Sec. Units, 13.75% to
6/14/95, 14.00% from
6/15/95 to 9/14/95, 14.25%
from 9/15/95 to 12/14/95,
14.50% to maturity+ 750,000 3/15/1996 397,500
Goldriver Hotel & Casino
Corp. Mortgage Notes,
13.375% 8,924,000 8/31/1999 4,908,200
Great Bay Property Funding
Corp. First Mortgage Note,
10.875% 3,000,000 1/15/2004 2,527,500
HWCC-Tunica, Inc. First
Mortgage Note, 13.50%+ 2,000,000 9/30/1998 2,080,000
Harrah's Jazz First
Mortgage Note, 14.25% 1,000,000 11/15/2001 1,070,000
Motels of America, Inc. Sr.
Sub. Notes, 12.00% 5,500,000 9/15/2001 5,582,500
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
Gaming & Lodging (cont'd)
President Riverboat
Casinos, Inc., Sr. Sub.
Notes, 13.00%+ $ 2,000,000 9/15/2001 $ 1,885,000
Resorts International, Inc.
Notes, 0.00% 1,950,000 6/30/2000 1,622,400
Sahara Finance Corp. Notes,
12.125% 1,985,670 8/31/1996 1,826,817
Santa Fe Hotel, Inc. First
Mortgage Units, 11.00% 1,000,000 12/15/2000 970,000
Santa Fe Hotel, Inc. First
Mortgage Notes, 11.00% 6,370,000 12/15/2000 6,178,900
Treasure Bay Gaming and
Resorts Inc. First
Mortgage Notes, 12.25%+## 1,000,000 11/15/1998 200,000
Trump's Castle Funding,
Inc. First Mortgage Notes,
11.75% 7,268,750 11/15/2003 4,397,594
Trump Plaza Funding, Inc.
First Mortgage Notes,
10.875% 7,500,000 6/15/2001 6,075,000
Trump Taj Mahal Funding,
Inc. Series A Mortgage
Bonds, 11.35%*** 2,202,253 11/15/1999 1,668,207
50,986,118
Groceries 5.3%
Almacs Inc. Sr. Sec. Notes,
11.50%## 1,840,000 11/18/2004 506,000
Farm Fresh Inc. Sr. Notes,
12.25% 5,500,000 10/01/2000 5,115,000
Farm Fresh Inc. Cv. Sub.
Deb., 7.50% 100,000 3/01/2010 66,250
Food 4 Less Supermarkets,
Inc. Sr. Notes, 10.45% 1,000,000 4/15/2000 990,000
Food 4 Less Supermarkets,
Inc. Sr. Sub. Notes,
13.75% 2,500,000 6/15/2001 2,687,500
Food 4 Less Supermarkets,
Inc. Sr. Disc. Notes,
0.00% to 12/14/97, 15.25%
from 12/15/97 to maturity 19,720,000 12/15/2004 15,578,800
Grand Union Co. Sr. Sub.
Notes, 12.25%## 8,750,000 7/15/2002 2,975,000
Kash N Karry Food Stores
Inc. Sr. Note, 11.50% 1,250,000 2/01/2003 1,206,250
Pathmark Stores, Inc. Sub.
Notes, 11.625% 3,000,000 6/15/2002 3,030,000
Groceries (cont'd)
Pathmark Stores, Inc. Jr.
Sub. Notes, 0.00% to
10/31/99, 10.75% from
11/1/99 to maturity $ 8,000,000 11/01/2003 $ 4,280,000
Penn Traffic Co. Sr. Sub.
Notes, 9.625% 3,000,000 4/15/2005 2,771,250
Safeway Stores, Inc. Lease
Certificates, 13.50% 95,000 1/15/2009 113,644
Victory Markets Inc. Sub.
Deb., 12.50% 925,000 3/15/2000 397,750
39,717,444
Health Care & Hospital Management 2.1%
Amerisource Distribution
Corp. Sr. Deb., 11.25% 10,277,497 7/15/2005 11,099,697
Continental Medical
Systems, Inc. Sr. Sub.
Notes, 10.875% 1,000,000 8/15/2002 940,000
Continental Medical
Systems, Inc. Sr. Sub.
Notes, 10.375% 2,500,000 4/01/2003 2,287,500
Total Renal Care, Inc. Sr.
Sub. Disc. Units, 0.00% to
8/14/97, 12.00% from
8/15/97 to maturity 1,750,000 8/15/2004 1,522,500
15,849,697
Media 7.2%
Affinity Group, Inc. Sr.
Sub. Deb., 11.50% 8,000,000 10/15/2003 7,840,000
Granite Broadcasting Corp.,
12.75% 9,619,000 9/01/2002 9,907,570
Heritage Media Corp. Notes,
11.00% 6,250,000 10/01/2002 6,406,250
Lamar Advertising Co. Sr.
Sec. Notes, 11.00% 750,000 5/15/2003 731,250
New City Communications
Inc. Sr. Sub. Note,
11.375% 1,000,000 11/01/2003 930,000
Outlet Broadcasting, Inc.
Sr. Sub. Note, 10.875% 750,000 7/15/2003 750,000
PageMart, Inc. Sr. Disc.
Note, 0.00% to 10/31/98,
12.25% from 11/01/98 to
maturity 4,750,000 11/01/2003 2,897,500
SFX Broadcasting Co. Sr.
Sub. Notes, 11.375% 4,500,000 10/01/2000 4,590,000
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
Media (cont'd)
Universal Outdoor Holdings,
Inc. Units, 0.00% to
6/30/99, 14.00% from
7/01/99 to maturity $ 9,700,000 7/01/2004 $ 4,995,500
U.S.A. Mobile
Communications, Inc. Sr.
Notes, 9.50% 10,270,000 2/01/2004 8,729,500
U.S.A. Mobile
Communications, Inc. Sr.
Notes, 14.00% 5,500,000 11/01/2004 5,775,000
53,552,570
Metal & Mining 10.0%
Bayou Steel Corp. First
Mortgage Notes, 10.25% 6,250,000 3/01/2001 5,500,000
Carbide/Graphite Group,
Inc. Sr. Notes, 11.50% 2,750,000 9/01/2003 2,860,000
GS Technologies Operating
Co. Sr. Notes, 12.00% 5,250,000 9/01/2004 5,269,688
Geneva Steel Co. Sr. Notes,
11.125% 750,000 3/15/2001 680,625
Geneva Steel Co. Sr. Notes,
9.50% 7,500,000 1/15/2004 6,075,000
Haynes International, Inc.
Sr. Sec. Notes, 11.25% 6,050,000 6/15/1998 5,626,500
Haynes International, Inc. 5,297,500
Sr. Sub. Notes, 13.50% 8,150,000 8/15/1999
Horsehead Industries, Inc.
Sr. Sub. Ext. Notes,
15.75% 9,946,000 6/01/1997 10,144,920
Horsehead Industries, Inc.
Sub. Notes, 14.00% 11,712,000 6/01/1999 11,975,520
Kaiser Aluminum & Chemical
Corp. Sr. Notes, 9.875% 3,050,000 2/15/2002 2,859,375
Kaiser Aluminum & Chemical
Corp. Sr. Sub. Note,
12.75% 3,250,000 2/01/2003 3,363,750
Renco Metals Inc. Sr.
Notes, 12.00% 1,500,000 7/15/2000 1,490,625
Sheffield Steel Corp. First
Mortgage Units, 12.00% 6,750,000 11/01/2001 6,615,000
Sheffield Steel Corp. First
Mortgage Notes, 12.00% 5,000,000 11/01/2001 4,750,000
UCAR Global Enterprises Sr.
Sub. Notes, 12.00%+ 1,750,000 1/15/2005 1,837,500
74,346,003
Oil & Gas 5.6%
Dual Drilling Co. Sr. Sub.
Notes, 9.875% 5,500,000 1/15/2004 4,510,000
Oil & Gas (cont'd)
Empire Gas Corp. Sr. Sec.
Notes, 7.00% to 7/14/99,
12.875% from 7/15/99 to
maturity $ 2,000,000 7/15/2004 $ 1,460,000
Global Marine Inc. Sr. Sec.
Notes, 12.75% 2,000,000 12/15/1999 2,157,500
Mesa Capital Corp. Sec.
Disc. Note, 0.00% to
6/29/95, 12.75% from
6/30/95 to maturity 2,031,000 6/30/1998 1,959,915
Moran Energy, Inc. Cv. Sub.
Deb., 8.75% 2,420,000 1/15/2008 1,566,950
Moran Energy International
N.V. Cv. Sub. Deb., 8.00% 6,067,000 11/01/1995 5,847,071
Presidio Oil Co. Sr. Sec.
Notes, 11.50% 5,346,950 9/15/2000 4,504,805
Presidio Oil Co. Sr. Sub.
Gas Indexed Notes, 13.30% 5,500,000 7/15/2002 3,203,750
Presidio Oil Co. Cv. Sub.
Deb., 9.00% 2,000,000 3/15/2015 460,000
Rowan Drilling Co., 11.875% 5,154,000 12/01/2001 5,385,930
TransAmerican Refining
Corp. Sr. Sec. Notes,
16.50% to 8/14/98, 16.00%
from 8/15/98 to maturity 250,000 2/15/2002 251,875
Tuboscope Vetco
International Inc. Sr.
Sub. Deb., 10.75% 2,000,000 4/15/2003 2,010,000
Wilrig A.S. Sr. Sec. Notes,
11.25% 8,430,000 3/15/2004 8,092,800
41,410,596
Paper 4.5%
Crown Packaging Holdings
Ltd. Sr. Sec. Notes,
10.75% 2,300,000 11/01/2000 2,277,000
Crown Packaging Holdings
Ltd. Sr. Sub. Notes, 0.00%
to 10/31/2000, 12.25% from
11/1/2000 to maturity 13,000,000 11/01/2003 6,240,000
Equitable Bag Co., Inc. Sr.
Notes, 11.00%## 6,738,000 12/16/2004 4,851,360
Fort Howard Paper Co. Jr.
Sub. Disc. Deb., 0.00% to
10/31/94, 14.125% from
11/1/94 to maturity 4,900,000 11/01/2004 4,924,500
Fort Howard Paper Co. Sr.
Sub. Notes, 9.00% 1,000,000 2/01/2006 875,000
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
Investment Portfolio (cont'd)
Paper (cont'd)
Gaylord Container Corp. Sr.
Note, 11.50% $ 750,000 5/15/2001 $ 787,500
Mail-Well Holdings, Inc.
Sr. Notes, 0.00% to
2/14/2000, 11.75% from
2/15/2000 to maturity 1,000,000 2/15/2006 460,000
P.T. Indah Kiat Pulp &
Paper Co. Gtd. Note,
12.50% 2,500,000 6/15/2006 2,425,000
Southwest Forest
Industries, Inc. Sub.
Deb., 12.125% 8,250,000 9/15/2001 8,291,250
Stone Container Corp. Sr.
Notes, 9.875% 2,500,000 2/01/2001 2,425,000
33,556,610
Plastics 0.6%
Foamex L.P. Sr. Notes,
11.25% 4,500,000 10/01/2002 4,477,500
Publishing 2.9%
Bell & Howell Co. Series A
Sr. Disc. Deb., 0.00% to
2/28/2000, 11.50% from
3/01/2000 to maturity 2,500,000 3/01/2005 1,337,500
General Media Inc. Sr. Sec.
Notes, 10.625% 2,500,000 12/31/2000 2,075,000
Sullivan Graphics, Inc. Sr.
Sub. Notes, 15.00% 17,150,000 2/01/2000 18,179,000
21,591,500
Real Estate/Building 3.1%
Associated Materials Inc.
Sr. Sub. Notes, 11.50% 3,000,000 8/15/2003 2,895,000
Dal-Tile International Inc.
Sr. Sec. Notes, 0.00% 10,500,000 7/15/1998 6,903,750
Miles Home Services, Inc.
Sr. Note, 12.00% 4,250,000 4/01/2001 2,975,000
Overhead Door Corp., 12.25% 2,500,000 2/01/2000 2,562,500
Waxman Industries, Inc. Sr.
Sec. Notes, 12.25% 5,000,000 9/01/1998 4,700,000
Waxman Industries, Inc. Sr.
Sec. Units, 0.00% to
5/31/99, 12.75% from
6/01/99 to maturity 7,424,000 6/01/2004 3,043,840
23,080,090
Retail Trade 2.7%
Color Tile Inc. Sr. Notes,
10.75% $ 5,000,000 12/15/2001 $ 4,000,000
County Seat Stores, Inc.
Sr. Sub. Units, 12.00% 2,000,000 10/01/2001 2,020,000
Finlay Enterprises, Inc.
Sr. Disc. Deb., 0.00% to
4/30/98, 12.00% from
5/01/98 to maturity 9,570,000 5/01/2005 5,933,400
Loehmann's Holdings, Inc.
Sr. Sub. Notes, 13.75% 3,000,000 2/15/1999 2,917,500
Pamida, Inc. Sr. Sub.
Notes, 11.75% 250,000 3/15/2003 237,500
Petro PSC Properties, Inc.
Units, 12.50% 2,000,000 6/01/2002 2,050,000
Rickel Home Centers, Inc.
Units, 13.50% 3,500,000 12/15/2001 3,255,000
20,413,400
Shipping/Transportation 1.1%
Tiphook Finance Corp.
Notes, 7.125% 6,083,000 5/01/1998 4,714,325
Tiphook Finance Corp.
Notes, 8.00% 595,000 3/15/2000 452,200
Tiphook Finance Corp.
Notes, 10.75% 711,000 11/01/2002 568,800
Trans Ocean Container Corp.
Sr. Sub. Note, 12.25% 2,250,000 7/01/2004 2,160,000
7,895,325
Technology 5.8%
Anacomp, Inc. Sr. Sub.
Notes, 15.00% 9,179,000 11/01/2000 9,087,210
Anacomp, Inc. Cv. Deb.,
13.875% 120,000 1/15/2002 116,439
Anacomp International N.V.
Cv. Sub. Deb., 9.00% 3,100,000 1/15/1996 3,084,500
Celcaribe S.A. Units, 0.00%
to 3/14/98, 13.50% from
3/15/98 to maturity+ 581,000 3/15/2004 4,735,150
Comdata Network, Inc. Sr.
Sub. Notes, 12.50% 3,000,000 12/15/1999 3,206,250
Comdata Network, Inc. Sr.
Sub. Deb., 13.25% 2,000,000 12/15/2002 2,180,000
Computervision Corp. Sr.
Notes, 10.875% 3,380,000 8/15/1997 3,278,600
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
Technology (cont'd)
Computervision Corp. Sr.
Sub. Notes, 11.375% $8,000,000 8/15/1999 $ 7,320,000
Dial Call Communications
Inc. Sr. Disc. Notes,
12.25% 3,250,000 4/15/2004 1,218,750
GenRad Inc. Cv. Sub. Deb.,
7.25% 608,000 5/01/2011 443,840
Mobile Telecommunications
Inc. Sr. Sub. Notes, 13.5% 5,500,000 12/15/2002 5,713,125
Nextel Communications Inc.
Sr. Disc. Notes, 0.00% 750,000 8/15/2004 307,500
Viatel, Inc. Sr. Disc.
Units, 0.00% to 1/14/2000,
15.00% from 1/15/2000 to
maturity + 450,000 1/15/2005 2,880,000
43,571,364
Textile & Apparel 0.2%
Ithaca Industries, Inc. Sr.
Sub. Notes, 11.125% 1,250,000 12/15/2002 1,137,500
Total Bonds (Cost $644,994,082) 592,772,560
Value
Shares (Note 1)
Preferred Stocks 11.3%
Automotive 1.4%
Harvard Industries, Inc. 14.25% Exch.
Pfd.*** 374,513 $ 10,252,293
Banking 1.4%
First City Bancorporation of Texas, Inc.
Sr. Incr. Rate Pfd. Series A*++ 60,250 8,194,000
Riverbank American Pfd.* 110,000 2,420,000
10,614,000
Business Service 1.3%
Anacomp, Inc. Cv. Pfd. 25,000 900,000
La Petite Holdings Co. Cum. Red. Exch.
Pfd.* 361,000 9,025,000
9,925,000
Drug 0.2%
Fox Meyer Health Corp. Pfd. Series A*** 33,962 1,192,915
Electric 0.1%
Consolidated Hydro, Inc. Cv. Pfd.* 2,000 1,040,000
Machinery 0.8%
Navistar International Series G Cv. Pfd. 114,700 6,007,413
Metal & Mining 0.6%
Algoma Finance Corp. Cum. Pfd.* 11,100 $ 174,541
Geneva Steel Co. Series B Red. Exch.
Pfd. 22,500 2,520,000
Kaiser Aluminum Corp. Cv. Pfd. 93,100 977,550
Stelco Inc. Series C Cv. Pfd. 69,600 1,050,194
4,722,285
Printing & Publishing 0.2%
K-III Communications Corp. Series B
Exch. Pfd.*** 12,531 1,215,550
Recreation 3.2%
Granite Broadcasting Corp. Cv. Exch.
Pfd.* 272,000 10,540,000
Lewis Galoob Toys, Inc. Cv. Exch. Pfd.* 352,000 5,280,000
Live Entertainment Inc. Series B Cv.
Pfd. 351,700 1,593,641
Pyramid Communications, Inc. Series C
Exch. Pfd.*+ 260,092 6,112,177
Sahara Gaming Corp. Exch. Pfd.**** 401,394 351,220
23,877,038
Retail Trade 1.9%
Color Tile Inc. Pfd.* 50,000 1,150,000
Color Tile Inc. Pfd.*+ 120,000 2,760,000
Loehmanns Holdings, Inc. Series A
Pfd.*** 852,705 366,663
Supermarkets General Holding Corp. Exch.
Pfd.**** 420,137 10,083,288
14,359,951
Textile & Apparel 0.2%
JPS Textile Group, Inc. Series A Sr.
Pfd.*** 49,618 1,240,450
Town & Country Corp. Exch. Pfd.***++ 94,263 117,829
1,358,279
Total Preferred Stocks (Cost
$80,172,406) 84,564,724
Common Stocks & Other 3.7%
American Telecasting, Inc. Wts.* 28,750 28,750
Atlantic Richfield Co. 380,000 9,500,000
Axia Holdings Corp. Com.*+ 2,250 64,125
Belle Casinos, Inc. Wts.*+ 1,400 14
Boomtown, Inc. Wts.* 7,250 3,625
CHC Helicopter Corp. Wts.* 38,000 38,000
Central Rents, Inc. Wts.* 8,000 220,000
Chattem, Inc. Wts.* 2,000 9,000
Chatwins Group Inc. Wts.* 5,000 5,000
Crown Packaging Holdings Ltd. Wts.*+ 17,250 517,500
Dimac Corp. Com.* 24,174 332,393
Dr. Pepper Bottling Co. Cl. A Com.* 50,000 175,000
Empire Gas Corp. Wts.* 2,760 2,760
Equitable Bag, Inc. Cl. A Com.* 640,117 960,176
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
Common Stocks & Other (cont'd)
Federated Department Stores, Inc. Com.* 69,713 $ 1,542,400
Federated Department Stores, Inc. Series
C Wts.* 46,435 255,393
Federated Department Stores, Inc. Ser. D
Wts.* 46,435 261,197
Finlay Enterprises, Inc. Cl. A Com.* 12,760 140,360
Food 4 Less Holdings, Inc. Wts.*++ 24,223 2,159,238
Gaylord Container Corp. Wts.* 50,000 525,000
General Media Inc. Wts.*+ 2,500 28,125
Geneva Steel Co. Wts.*+ 91,975 597,838
Goldriver Hotel & Casino Corp. Cl. B
Com.* 52,500 52,500
Goldriver Hotel & Casino Corp.
Liquidation Trust Units*++ 5,250,000 66,675
Harvard Industries, Inc. Cl. B Com.* 40,000 695,000
ICF Kaiser International, Inc. Wts.* 22,800 5,700
INDSPEC Chemical Corp. Wts.*++ 506 147,985
Insight Communications Co., L.P. Wts.* 25,000 21,250
Jewel Recovery L.P. Units* 82,594 826
Ladish Company, Inc. Com.* 520,000 390,000
Little Switzerland, Inc. Com.* 94,263 471,315
Mail-Well Holdings, Inc. Com.*+ 5,000 35,000
Miles Homes, Inc. Wts.* 51,000 25,500
Motels of America, Inc. Com.*+ 5,500 440,000
Northeast Utilities Wts.* 23,693 23,693
PageMart, Inc. Wts.*+ 21,850 71,013
Peebles Inc. Com.*++ 57,984 1,108,654
PST Holdings, Inc. Wts.* 45,300 45,300
Pyramid Communications, Inc. Cl. B
Com.*+ 8,225 368,989
Renaissance Cosmetics, Inc. Wts.*+ 2,000 30,000
S.D. Warren Holdings Corp. Units*+ 108,000 3,294,000
Santa Fe Hotel Inc. Wts.* 637,000 617,890
Sheffield Steel Corp. Wts.* 5,000 30,000
Smittys Supermarkets, Inc. Cl. B Com.* 3,250 32,500
Terex Corp. Rts.* 5,250 3,938
Town & Country Corp. Cl. A Com.* 371,830 232,394
COMMON STOCKS & OTHER (cont'd)
TransAmerican Refinancing Corp. Wts.* 12,626 $ 34,722
Universal Outdoor Holdings, Inc. Wts.* 9,700 388,000
Vestar/LPA Investment Corp. Com.+* 14,250 199,500
Waxman Industries, Inc. Wts.*+ 236,000 29,500
Zale Corp. Com.* 78,086 917,511
Total Common Stocks & Other
(Cost $26,753,075) 27,145,249
Principal Maturity Value
Amount Date (Note 1)
Commercial Paper 4.0%
Commercial Credit Co.,
5.93% $10,472,000 4/11/1995 $ 10,472,000
Ford Motor Credit Co.,
5.77% 602,000 4/04/1995 602,000
General Electric Capital
Corp., 5.85% 10,166,000 4/04/1995 10,166,000
SmithKline Beecham Corp.,
6.24% 8,810,000 4/03/1995 8,806,917
Total Commercial Paper (Cost $30,046,917) 30,046,917
Total Investments (Cost $781,966,479)--98.5% 734,529,450
Cash and Other Assets, Less Liabilities--1.5% 11,045,157
Net Assets--100.0% $745,574,607
Federal Income Tax Information (Note 1):
At March 31, 1995, the net unrealized depreciation of
investments based on cost for Federal income tax purposes
of $784,358,501 was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost $ 27,466,294
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value (77,295,345)
$(49,829,051)
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
* Nonincome-producing securities
*** Payments of income may be made in cash or in the form of additional
securities.
## Security is in default.
++ Security valued under consistently applied procedures established by the
Trustees. Security restricted as to public resale. At March 31, 1995, there
were no outstanding unrestricted securities of the same class as those
held. The total cost and market value of restricted securities owned at
March 31, 1995 were $7,905,324 and $11,794,381 (1.58% of net assets),
respectively.
+ Security restricted in accordance with Rule 144A under the Securities Act
of 1933, which allows for the resale of such securities among certain
qualified institutional buyers. The total cost and market value of Rule
144A securities owned at March 31, 1995 were $43,420,415 and $41,899,089
(5.62% of net assets), respectively.
ASSET COMPOSITION TABLE
March 31, 1995
(Unaudited)
Percentage of
Ratings+++ Net Assets
BB 3.6%
B 48.7
CCC and below 12.4
Unrated 15.8
Equities 14.6
Other 4.9
TOTAL 100.0%
+++ As rated by Standard & Poor's Corp. and/or
equivalent rating by Moody's Investors Service, Inc.
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
Statement of Assets and Liabilities
March 31, 1995
Statement of Operations
For the year ended March 31, 1995
Assets
Investments, at value (Cost $781,966,479) (Note 1) $734,529,450
Cash 5,143
Interest and dividends receivable 16,888,315
Receivable for securities sold 3,491,483
Receivable for fund shares sold 961,591
Other assets 29,253
755,905,235
Liabilities
Payable for securities purchased 6,353,845
Dividends payable 2,319,539
Payable for fund shares redeemed 542,705
Accrued management fee (Note 2) 407,202
Accrued transfer agent and shareholder services
(Note 2) 299,767
Accrued distribution fee (Note 4) 233,062
Accrued trustees' fees (Note 2) 6,109
Other accrued expenses 168,399
10,330,628
Net Assets $745,574,607
Net Assets consist of:
Undistributed net investment income $ 1,789,475
Unrealized depreciation of investments and foreign
currency (47,430,074)
Accumulated net realized loss (11,473,395)
Shares of beneficial interest 802,688,601
$745,574,607
Net Asset Value and redemption price per share of
Class A shares ($618,462,348 / 106,544,027 shares of
beneficial interest) $5.80
Maximum Offering Price per share of Class A shares
($5.80 / .955) $6.07
Net Asset Value and offering price per share of Class
B shares ($117,767,451 / 20,351,219 shares of
beneficial interest)* $5.79
Net Asset Value, offering price and redemption price
per share of Class C shares ($2,578,646 / 445,864
shares of beneficial interest) $5.78
Net Asset Value and offering price per share of Class
D shares ($6,766,162 / 1,167,801 shares of
beneficial interest)* $5.79
* Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
Investment Income
Interest $ 77,025,308
Dividends, net of foreign taxes of $52,552 5,660,507
82,685,815
Expenses
Management fee (Note 2) 4,696,647
Transfer agent and shareholder services (Note 2) 1,717,854
Custodian fee 269,911
Reports to shareholders 106,460
Registration fees 93,113
Audit fee 72,555
Distribution fee--Class A (Note 4) 1,563,183
Distribution fee--Class B (Note 4) 911,610
Distribution fee--Class D (Note 4) 45,186
Legal fees 30,093
Trustees' fees (Note 2) 29,540
Miscellaneous 37,781
9,573,933
Net investment income 73,111,882
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Net realized loss on investments (Notes 1 and 3) (10,256,401)
Net unrealized depreciation of investments (51,724,952)
Net unrealized appreciation of foreign currency 6,956
Total net unrealized depreciation (51,717,996)
Net loss on investments and foreign currency (61,974,397)
Net increase in net assets resulting from operations $ 11,137,485
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
Statement of Changes in Net Assets
Year ended March 31
1995 1994
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 73,111,882 $ 64,391,566
Net realized gain (loss) on
investments* (10,256,401) 16,907,763
Net unrealized appreciation
(depreciation) of investments
and foreign currency (51,717,996) 574,548
Net increase resulting from
operations 11,137,485 81,873,877
Dividends from net investment
income:
Class A (68,341,894) (56,631,474)
Class B (9,517,499) (2,589,605)
Class C (185,611) (37,348)
Class D (474,138) (89,456)
(78,519,142) (59,347,883)
Distributions from net realized
gains:
Class A (5,956,632) (13,829,751)
Class B (701,101) (716,569)
Class C (10,576) (8,941)
Class D (29,366) (25,700)
(6,697,675) (14,580,961)
Net increase from fund share
transactions (Note 5) 98,050,321 217,306,233
Total increase in net assets 23,970,989 225,251,266
Net Assets
Beginning of year 721,603,618 496,352,352
End of year (including
undistributed net investment
income of $1,789,475 and
$6,010,539, respectively) $ 745,574,607 $ 721,603,618
* Net realized gain for Federal
income tax purposes
(Note 1) $ 1,433,108 $ 16,907,844
The accompanying notes are an integral part of the financial statements.
Notes to Financial Statements
March 31, 1995
Note 1
MetLife-State Street Research High Income Fund, formerly MetLife-State Street
High Income Fund (the "Fund") is a series of MetLife-State Street Income Trust
(the "Trust"), which was organized as a Massachusetts business trust on
December 23, 1985 and is registered under the Investment Company Act of 1940,
as amended, as an open-end management investment company. The Trust commenced
operations in August, 1986. The Trust consists of three separate funds:
MetLife-State Street Research High Income Fund, MetLife-State Street Research
Government Securities Fund and MetLife-State Street Research Managed Assets.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and an annual service fee of 0.25% of
average daily net assets. Investments of $1 million or more in Class A shares,
which are not subject to any initial sales charge, are subject to a 1.00%
contingent deferred sales charge if redeemed within one year of purchase. Class
B shares are subject to a contingent deferred sales charge on certain
redemptions made within five years of purchase and pay annual distribution and
service fees of 1.00%. Class B shares automatically convert into Class A shares
(which pay lower ongoing expenses) at the end of eight years after the issuance
of the Class B shares. Class C shares are only offered to certain employee
benefit plans and large institutions. No sales charge is imposed at the time of
purchase or redemption of Class C shares. Class C shares do not pay any
distribution or service fees. Class D shares are subject to a contingent
deferred sales charge of 1.00% on any shares redeemed within one year of their
purchase. Class D shares also pay annual distribution and service fees of
1.00%. The Fund's expenses are borne pro-rata by each class, except that each
class bears expenses, and has exclusive voting rights with respect to
provisions of the Plan of Distribution, related specifically to that class. The
Trustees declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by the
Fund in preparing its financial statements, and such policies are in conformity
with generally accepted accounting principles for investment companies.
A. Investment Valuation
Fixed income securities are valued by a pricing service, which utilizes market
transactions, quotations from dealers, and various relationships among
securities in determining value. If not valued by a pricing service, such
securities are valued at prices obtained from independent brokers. Values for
listed equity securities reflect final sales on national securities exchanges
quoted prior to the close of the New York Stock Exchange. Over-the-counter
securities quoted on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") system are valued at closing prices supplied through such
system. If not quoted on the NASDAQ system, such securities are valued at
prices obtained from independent brokers. In the absence of recorded sales,
valuations are at the mean of the closing bid and asked quotations. Short-term
securities maturing within sixty days are valued at amortized cost. Other
securities,
12
<PAGE>
if any, are valued at their fair value as determined in good faith under
consistently applied procedures established by and under the supervision of the
Trustees.
Securities quoted in foreign currencies are translated into U.S. dollars at the
current exchange rate. Gains and losses that arise from changes in exchange
rates are not segregated from gains and losses that arise from changes in
market prices of investments.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis of
identified cost of securities delivered.
C. Net Investment Income
Net investment income is determined daily and consists of interest and
dividends accrued and discount earned, less the estimated daily expenses of the
Fund. Interest income is accrued daily as earned. Dividend income is accrued on
the ex-dividend date. Discount on debt obligations is amortized under the
effective yield method. Certain fixed income and preferred securities held by
the Fund pay interest or dividends in the form of additional securities
(payment-in-kind securities). Interest income on payment-in-kind fixed income
securities is recorded using the effective-interest method. Dividend income on
payment-in-kind preferred securities is recorded at the market value of
securities received. The Fund is charged for expenses directly attributable to
it, while indirect expenses are allocated among all funds in the Trust.
D. Dividends
Dividends are declared daily based upon projected net investment income and
paid or reinvested monthly. Net realized capital gains, if any, are distributed
annually, unless additional distributions are required for compliance with
applicable tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing treatment
of accrued interest on defaulted bonds.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund has elected
to qualify under Subchapter M of the Internal Revenue Code and its policy is to
distribute all of its taxable income, including net realized capital gains,
within the prescribed time periods.
In order to meet certain excise tax distribution requirements under Section
4982 of the Internal Revenue Code, the Fund is required to measure and
distribute annually, if necessary, net capital gains realized during a
twelve-month period ending October 31. In this connection, the Fund is
permitted to defer into its next fiscal year any net capital losses incurred
between each November 1 and the end of its fiscal year. From November 1, 1994
through March 31, 1995, the Fund incurred net capital losses of approximately
$9,300,000 and intends to defer and treat such losses as arising in the fiscal
year ending March 31, 1996.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly-owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser earns
monthly fees at an annual rate of 0.65% of the Fund's average daily net assets.
In consideration of these fees, the Adviser furnishes the Fund with management,
investment advisory, statistical and research facilities and services. The
Adviser also pays all salaries, rent and certain other expenses of management.
During the year ended March 31, 1995, the fees pursuant to such agreement
amounted to $4,696,647.
State Street Research Shareholder Services, a division of State Street Research
Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly-owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. During the year ended March 31, 1995, the amount of such
expenses was $369,932.
The fees of the Trustees not currently affiliated with the Adviser amounted to
$29,540 during the year ended March 31, 1995.
Note 3
For the year ended March 31, 1995, purchases and sales of securities, exclusive
of short-term investments, aggregated $276,104,221 and $219,397,330,
respectively.
Note 4
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940. Under the Plan, the Fund pays
annual service fees to the Distributor at a rate of 0.25% of average daily net
assets for Class A, Class B and Class D shares. In addition, the Fund pays
annual distribution fees of 0.75% of average daily net assets for Class B and
Class D shares. The Distributor uses such payments for personal service and/or
the maintenance of shareholder accounts, to reimburse securities dealers for
distribution and marketing services, to furnish ongoing assistance to investors
and to defray a portion of its distribution and marketing expenses. For the
year ended March 31, 1995, fees pursuant to such plan amounted to $1,563,183,
$911,610 and $45,186 for Class A, Class B and Class D shares, respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc., a
wholly-owned subsidiary of Metropolitan, earned initial sales charges
aggregating $447,617 and $3,074,444, respectively, on sales of Class A shares
of the Fund during the year ended March 31, 1995, and that MetLife Securities,
Inc. earned commissions aggregating $1,900,150 on sales of Class B shares, and
that the Distributor collected contingent deferred sales charges aggregating
$1,238, $274,749 and $2,188 on redemptions of Class A, Class B and Class D
shares, respectively, during the same period.
13
<PAGE>
Note 5
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share.
At March 31, 1995, Metropolitan owned 161 Class C shares and 80,884 Class D
shares and the Distributor owned 7,018 Class A shares of the Fund.
Share transactions were as follows:
Year ended March 31
1995 1994
Class A Shares Amount Shares Amount
Shares sold 21,246,001 $128,017,213 32,495,584 $ 210,084,064
Issued upon
reinvestment
of:
Dividends from
net investment
income 7,531,344 44,748,968 6,172,634 39,889,890
Distributions
from net
realized gains 721,885 4,490,064 1,715,679 11,077,389
Shares
repurchased (24,109,224) (144,623,371) (17,791,152) (115,421,759)
Net increase 5,390,006 $ 32,632,874 22,592,745 $ 145,629,584
June 1, 1993
(Commencement of
Share Class Designations)
to March 31, 1994
Class B Shares Amount Shares Amount
Shares sold 11,897,541 $ 71,267,750 11,214,389 $ 72,828,188
Issued upon
reinvestment
of:
Dividends from
net investment
income 978,091 5,757,785 236,230 1,537,046
Distributions
from net
realized gains 85,923 533,729 93,345 607,668
Shares
repurchased (3,103,165) (18,503,010) (1,051,135) (6,853,424)
Net increase 9,858,390 $ 59,056,254 10,492,829 $ 68,119,478
Class C Shares Amount Shares Amount
Shares sold 425,482 $ 2,530,906 155,693 $ 1,010,768
Issued upon
reinvestment
of:
Dividends from
net investment
income 19,434 114,077 4,127 26,652
Distributions
from net
realized gains 1,182 7,338 1,127 7,339
Shares
repurchased (132,914) (791,910) (28,267) (184,726)
Net increase 313,184 $ 1,860,411 132,680 $ 860,033
Class D Shares Amount Shares Amount
Shares sold 1,263,734 $ 7,538,932 491,529 $ 3,205,001
Issued upon
reinvestment
of:
Dividends from
net investment
income 35,765 209,720 2,443 15,956
Distributions
from net
realized gains 3,762 23,361 4,616 30,091
Shares
repurchased (549,698) (3,271,231) (84,350) (553,910)
Net increase 753,563 $ 4,500,782 414,238 $ 2,697,138
14
<PAGE>
Financial Highlights
For a share outstanding throughout each year.
<TABLE>
<CAPTION>
Class A
Year ended March 31
1995*** 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 6.43 $ 6.32 $ 5.95 $ 5.21 $ 5.88
Net investment income* .61 .66 .67 .71 .75
Net realized and
unrealized gain (loss)
on investments and
foreign currency (.58) .22 .37 .72 (.67)
Dividends from net
investment income (.60) (.62) (.67) (.69) (.75)
Distributions from net
realized gains (.06) (.15) -- -- --
Net asset value, end of
year $5.80 $6.43 $6.32 $5.95 $5.21
Total return 1.80%+ 14.58%+ 18.70%+ 28.99%+ 2.18%+
Net assets at end of year
(000s) $618,462 $650,755 $496,352 $308,921 $195,739
Ratio of operating
expenses to average net
assets* 1.23% 1.16% 1.15% 1.17% 1.21%
Ratio of net investment
income to average net
assets* 10.19% 10.41% 11.25% 12.71% 14.21%
Portfolio turnover rate 31.55% 24.36% 79.39% 72.62% 58.15%
*Reflects voluntary
assumption of fees or
expenses per share in
each year. -- $ .00 -- -- --
</TABLE>
<TABLE>
<CAPTION>
Class B Class C Class D
Year ended Year ended Year ended
March 31, March 31, March 31,
1995*** 1994** 1995*** 1994** 1995*** 1994**
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 6.42 $ 6.34 $ 6.42 $ 6.34 $ 6.42 $ 6.34
Net investment income* .57 .51 .64 .57 .58 .51
Net realized and
unrealized gain (loss)
on investments and
foreign currency (.58) .15 (.60) .14 (.59) .15
Dividends from net
investment income (.56) (.48) (.62) (.53) (.56) (.48)
Distributions from net
realized gains (.06) (.10) (.06) (.10) (.06) (.10)
Net asset value, end of
year $5.79 $6.42 $5.78 $6.42 $5.79 $6.42
Total return 0.89%+ 10.76%+++ 1.73%+ 11.67%+++ 0.88%+ 10.74%+++
Net assets at end of year
(000s) $117,767 $67,337 $2,579 $ 851 $6,766 $2,661
Ratio of operating
expenses to average net
assets* 1.98% 1.93%++ 0.98% 0.93%++ 1.98% 1.93%++
Ratio of net investment
income to average net
assets* 9.65% 10.32%++ 10.85% 11.32%++ 9.81% 10.32%++
Portfolio turnover rate 31.55% 24.36% 31.55% 24.36% 31.55% 24.36%
*Reflects voluntary
assumption of fees or
expenses per share in
each year. -- $ .00 -- $ .00 -- $ .00
</TABLE>
** June 1, 1993 (commencement of share class designations) to March 31, 1994.
++ Annualized
+ Total return figures do not reflect any front-end or contingent deferred
sales charges.
+++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges.
*** Per-share figures have been calculated using the average shares method.
15
<PAGE>
Report of Independent Accountants
To the Trustees of MetLife-State Street Income Trust and the
Shareholders of MetLife-State Street Research High Income Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MetLife-State Street Research High
Income Fund (formerly MetLife-State Street High Income Fund) (a series of
MetLife-State Street Income Trust, hereafter referred to as the "Trust") at
March 31, 1995, and the results of its operations, the changes in its net
assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities owned at March 31, 1995
by correspondence with the custodian and brokers and the application of
alternative procedures where confirmations from brokers were not received,
provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
May 12, 1995
16
<PAGE>
Management's Discussion of Fund Performance
High Income Fund outperformed the average for Lipper's High Current Yield
category for the 12 months ended March 31, 1995.
During 1994, the portfolio's "B" rated bonds were less sensitive than
higher-quality bonds to the Fed's interest rate hikes. Plus, the Fund's high
level of income helped balance price weakness to some extent. Performance
suffered during the last few months of 1994, however, because of some defaults
in the portfolio and weakness in the high-yield market.
In the first three months of 1995, the Fund benefited from a favorable
supply-demand relationship. Supply was low--issuers were hesitant after 1994's
difficulties--and demand was very strong.
High Income Fund's portfolio continues to emphasize high-yield bonds, at about
80% of the portfolio. Preferred stocks, common stocks and warrants represent
approximately 15% of the portfolio. The portfolio is diversified in more than
150 different securities.
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in the
Fund will fluctuate and shares, when redeemed, may be worth more or less than
their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. In January 1994, the Fund changed its
investment objective to include capital appreciation as a secondary
consideration in selecting portfolio securities, to eliminate requirements that
a percentage of the Fund be invested in certain rating categories, and to allow
greater use of convertible and preferred securities. Previously, the Fund was
required to invest at least 65% in securities rated BBB, BB or B. Shares of the
Fund had no class designations until June 1, 1993, when designations were
assigned based on the pricing and 12b-1 fees applicable to shares sold
thereafter. Performance data for a specified class include periods prior to the
adoption of class designations. "A" share returns for each of the periods
reflect the maximum 4.5% sales charge. "B" share returns for the 1- and 5-year
periods reflect a 5% and a 2% contingent deferred sales charge, respectively.
"C" shares, offered without a sales charge, are available only to certain
employee benefit plans and large institutions. "D" share return for the 1-year
period reflects a 1% contingent deferred sales charge. Performance for "B" and
"D" shares prior to June 1, 1993, reflects annual 12b-1 fees of .25% and
performance thereafter reflects annual 12b-1 fees of 1%, which will reduce
subsequent performance. The First Boston High Yield Index is a commonly-used
measure of high-yield bond performance. The index is unmanaged and does not
take sales charges into consideration. Direct investment in the index is not
possible; results are for illustrative purposes only.
Comparison of Change In Value Of A $10,000
Investment in High Income Fund and
The First Boston High Yield Index
Class A Shares [Line chart]
Average Annual Total Return
1 Year 5 Year Life of Fund
-2.78% +11.74% +9.18%
86 9,550 10,000
87 10,631 10,888
88 11,136 11,555
89 12,509 12,642
90 11,670 12,152
91 11,926 13,841
92 15,378 18,163
93 18,252 20,951
94 20,912 23,037
95 21,289 24,144
Class B Shares [Line chart]
Average Annual Total Return
1 Year 5 Year Life of Fund
-3.62 +12.17% +9.55%
86 10,000 10,000
87 11,132 10,888
88 11,661 11,555
89 13,099 12,642
90 12,220 12,152
91 12,488 13,841
92 16,102 18,163
93 19,113 20,951
94 21,736 23,037
95 21,930 24,144
Class C Shares [Line chart]
Average Annual Total Return
1 Year 5 Year Life of Fund
+1.73% +12.77% +9.76%
86 10,000 10,000
87 11,132 10,888
88 11,661 11,555
89 13,099 12,642
90 12,220 12,152
91 12,488 13,841
92 16,102 18,163
93 19,113 20,951
94 21,913 20,037
95 22,292 24,144
Class D Shares [Line chart]
Average Annual Total Return
1 Year 5 Year Life of Fund
-0.02% +12.40% +9.55%
86 10,000 10,000
87 11,132 10,888
88 11,661 11,555
89 13,099 12,642
90 12,220 12,152
91 12,488 13,841
92 16,102 18,163
93 19,113 20,951
94 21,731 23,037
95 21,922 24,144
17
<PAGE>
State Street Research Managed Assets
a series of
State Street Research Income Trust
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1995
TABLE OF CONTENTS
Page
----
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS ...................... 2
ADDITIONAL INFORMATION CONCERNING
INVESTMENT SECTORS ................................................. 5
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES ...................................... 9
TRUSTEES AND OFFICERS ................................................ 18
INVESTMENT ADVISORY SERVICES ......................................... 22
PURCHASE AND REDEMPTION OF SHARES .................................... 23
NET ASSET VALUE ...................................................... 25
PORTFOLIO TRANSACTIONS ............................................... 26
CERTAIN TAX MATTERS .................................................. 28
DISTRIBUTION OF SHARES OF THE FUND ................................... 31
CALCULATION OF PERFORMANCE DATA ...................................... 35
CUSTODIAN ............................................................ 40
INDEPENDENT ACCOUNTANTS .............................................. 40
FINANCIAL STATEMENTS ................................................. 40
The following Statement of Additional Information is not a Prospectus.
It should be read in conjunction with the Prospectus of State Street Research
Managed Assets (the "Fund") dated August 1, 1995, which may be obtained without
charge from the offices of State Street Research Income Trust (the "Trust") or
State Street Research Investment Services, Inc. (the "Distributor"), One
Financial Center, Boston, Massachusetts 02111-2690.
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under "Other Investment Policies and Considerations -
Investment Limitations and Practices" in the Fund's Prospectus, the Fund has
adopted certain investment restrictions.
All of the Fund's fundamental investment restrictions are set forth
below. These fundamental restrictions may not be changed except by the
affirmative vote of a majority of the Fund's outstanding voting securities as
defined in the Investment Company Act of 1940, as amended (the "1940 Act").
(Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at a meeting of security holders duly called, (i) of
67% or more of the voting securities present at a meeting if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy or (ii) of more than 50% of the outstanding voting securities, whichever
is less.) Under these restrictions, it is the Fund's policy:
(1) not to invest in a security if the transaction would result in more
than 5% of the Fund's total assets being invested in any one issuer,
except that this restriction does not apply to investments in
securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities;
(2) not to invest in a security if the transaction would result in the
Fund owning more than 10% of the outstanding voting securities of an
issuer, except that this restriction does not apply to investments
in securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities;
(3) not to invest in a security if the transaction would result in more
than 5% of the Fund's total assets being invested in securities of
issuers (including predecessors) with less than three years of
continuous operations except in the case of debt securities rated
BBB or higher by Standard & Poor's Corporation ("S&P") or Baa or
higher by Moody's Investors Service, Inc. ("Moody's"), and except
that this restriction does not apply to investments in securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities;
(4) not to issue senior securities;
(5) 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, if determined by the Trust's Board of
Trustees, purchase or otherwise acquire securities of other issuers
for investment, either from the issuers or from persons in a control
relationship with the issuers or from underwriters of such
securities; and (b) to the extent that, in connection with the
disposition of the Fund's securities, the Fund may be deemed to be
an underwriter under certain federal securities laws;
2
<PAGE>
(6) not to purchase or sell fee simple interests in real estate,
although the Fund may purchase and sell other interests in real
estate including securities which are secured by real estate, or
securities of companies which own or invest or deal in real estate;
(7) not to invest in commodities or commodity contracts in excess of 10%
of the Fund's total assets, except that (i) investments in futures
contracts and options on futures contracts on securities or
securities indices and (ii) investments made in accordance with
applicable regulatory limitations in the securities of any related
or unrelated entity which holds precious metals or other
commodities, shall not be deemed an investment in commodities or
commodities contracts;
(8) not to make loans, except that the Fund may lend portfolio
securities and purchase bonds, debentures, notes and similar
obligations (including repurchase agreements with respect thereto);
(9) not to invest more than 10% of its total assets in illiquid assets,
including securities restricted as to resale, repurchase agreements
extending for more than seven days, options not listed and traded on
any national securities exchange or registered commodities exchange
and other securities and assets which are not readily marketable;
(10) not to conduct arbitrage transactions (provided that investments in
futures and options shall not be deemed arbitrage transactions);
(11) not to invest in oil, gas or other mineral exploration or
development programs (provided that the Fund may invest in
securities issued by companies which invest in or sponsor such
programs and in securities indexed to the price of oil, gas or other
minerals);
(12) not to make any investment which would cause more than 25% of the
value of the Fund's total assets to be invested in securities of
issuers principally engaged in any one industry (for purposes of
this restriction, (a) utilities will be divided according to their
services so that, for example, gas, gas transmission, electric and
telephone companies will each be deemed in a separate industry, (b)
oil and oil related companies will be divided by type so that, for
example, oil production companies, oil service companies and
refining and marketing companies will each be deemed in a separate
industry, (c) finance companies will be classified according to the
industries of their parent companies, and (d) securities issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities (including repurchase agreements collateralized by
U.S. Government securities) shall be excluded); and
3
<PAGE>
(13) not to borrow money except for borrowings from banks for
extraordinary and emergency purposes, such as permitting redemption
requests to be honored, and then not in an amount in excess of 25%
of the value of its total assets, and except insofar as reverse
repurchase agreements may be regarded as borrowing. As a matter of
current operating, but not fundamental, policy, the Fund will not
purchase additional portfolio securities at any time when it has
outstanding money borrowings in excess of 5% of the Fund's total
assets (taken at current value).
The following investment restrictions may be changed by a vote of a
majority of the Trustees. Under these restrictions, it is the Fund's policy:
(1) not to engage in transactions in options except in connection with
options on securities, securities indices and commodities, and
options on futures on securities, securities indices and
commodities;
(2) not to purchase securities on margin or make short sales of
securities or maintain a short position except for short sales
"against the box" (as a matter of current operating, but not
fundamental policy, the Fund will not make short sales or maintain a
short position unless not more than 5% of the Fund's net assets
(taken at current value) is held as collateral for such sales at any
time);
(3) not to hypothecate, mortgage or pledge any of its assets except as
may be necessary in connection with permitted borrowings (for the
purpose of this restriction, futures and options, and related escrow
or custodian receipts or letters, margin or safekeeping accounts, or
similar arrangements used in the industry in connection with the
trading of futures and options, are not deemed to involve a
hypothecation, mortgage or pledge of assets);
(4) not to purchase a security issued by another investment company
including any real estate investment trust, any issuer of
collateralized mortgage obligations or any unit investment trust to
the extent such entity is deemed an "investment company" for
purposes of the Investment Company Act of 1940 if, immediately after
such purchase, the Fund would own, in the aggregate, (i) more than
3% of the total outstanding voting stock of such other investment
company; (ii) securities issued by such other investment company
having an aggregate value in excess of 5% of the value of the Fund's
total assets; or (iii) securities issued by such other investment
company and all other investment companies (other than treasury
stock of the Fund) having an aggregate value in excess of 10% of the
value of the Fund's total assets; provided, however, that the Fund
may purchase investment company securities without limit for the
purpose of completing a merger, consolidation or other acquisition
of assets;
4
<PAGE>
(5) not to purchase or retain any security of an issuer if, to the
knowledge of the Trust, those of its officers and Trustees and
officers and directors of its investment advisers who individually
own more than 1/2 of 1% of the securities of such issuer, when
combined, own more than 5% of the securities of such issuer taken at
market;
(6) not to invest in warrants more than 5% of the value of its total
assets and not to invest in warrants that are not publicly traded
more than 2% of its total assets, in each case, taken at the lower
of cost or market value (warrants initially attached to securities
and acquired by the Fund upon original issuance thereof shall be
deemed to be without value);
(7) not to invest in companies for the purpose of exercising control
over their management, although the Fund may from time to time
present its views on various matters to the management of issuers in
which it holds investments; and
(8) not to invest more than 5% of its total assets in securities
restricted as to resale.
ADDITIONAL INFORMATION CONCERNING
INVESTMENT SECTORS
Certain Fixed Income Securities
Fixed income securities acquired by the Fund may include the following:
U.S. Government and Related Securities. U.S. Government securities are
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S. Government
securities in which the Fund invests include, among others:
o direct obligations of the U.S. Treasury, i.e., Treasury bills,
notes, certificates and bonds;
o obligations of U.S. Government agencies or instrumentalities such as
the Federal Home Loan Banks, the Farmers Home Administration, the
Federal Farm Credit Banks, the Federal National Mortgage
Association, the Government National Mortgage Association and the
Federal Home Loan Mortgage Corporation; and
o obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
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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. Obligations such as those of the
Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation are backed
by the credit of the agency or instrumentality issuing the obligations. Certain
obligations of Resolution Funding Corporation, a mixed-ownership Government
corporation, are backed with respect to interest payments by the U.S. Treasury,
and with respect to principal payments by U.S. Treasury obligations held in a
segregated account with a Federal Reserve Bank. Except for certain
mortgage-related securities, the Fund will only invest in obligations issued by
mixed-ownership Government corporations where such securities are guaranteed as
to payment of principal or interest by the U.S. Government or a U.S. Government
agency or instrumentality, and any unguaranteed principal or interest is
otherwise supported by U.S. Government obligations held in a segregated account.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, 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.
Risk Factors of Lower Quality Fixed Income Securities
In addition to those risks set forth in the Prospectus, lower quality
securities involve risks (i) that the limited liquidity and secondary market
support for such securities will
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heighten the effect of adverse publicity and investor perceptions and make
selection and valuation of portfolio securities more subjective and dependent
upon the Investment Manager's credit analysis; (ii) of substantial market price
volatility and/or the potential for the insolvency of issuers during periods of
changing interest rates and economic difficulty, particularly with respect to
securities that do not pay interest currently in cash; (iii) of subordination to
the prior claims of banks and other senior lenders; (iv) of the possibility that
earnings of an issuer may be insufficient to meet its debt service; and (v) of
realization of taxable income for shareholders without the corresponding receipt
of cash in connection with investments in "zero coupon" or "pay-in-kind"
securities. Growth in the market for this type of security has paralleled a
general expansion in certain sectors in the U.S. economy, and the effects of
adverse economic changes (including a recession) are unclear.
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.
Cash & Cash Equivalent Investments
Cash & Cash Equivalent Investments may include the following:
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
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the Comptroller of the Currency, while state branches and agencies are chartered
and regulated by authorities of the respective states or the District of
Columbia. U.S. branches of foreign banks may accept deposits and thus are
eligible for FDIC insurance; however, not all such branches elect FDIC
insurance. Unlike U.S. branches of foreign banks, U.S. agencies of foreign banks
may not accept deposits and thus are not eligible for FDIC insurance. Both
branches and agencies can maintain credit balances, which are funds received by
the office incidental to or arising out of the exercise of their banking powers
and can exercise other commercial functions, such as lending activities.
Short-Term Corporate Debt Instruments. Short-term corporate debt
instruments include commercial paper to finance short-term credit needs (i.e.,
short-term, unsecured promissory notes) issued by corporations including but not
limited to (a) domestic or foreign bank holding companies or (b) their
subsidiaries or affiliates where the debt instrument is guaranteed by the bank
holding company or an affiliated bank or where the bank holding company or the
affiliated bank is unconditionally liable for the debt instrument. Commercial
paper is usually sold on a discounted basis and has a maturity at the time of
issuance not exceeding nine months.
Commercial Paper Ratings. Commercial paper investments at the time of
purchase will be rated A by Standard & Poor's Corporation ("S&P") or Prime by
Moody's Investors Service Inc. ("Moody's"), or, if not rated, issued by
companies having an outstanding long-term unsecured debt issue rated at least A
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 A by S&P or by Moody's.
Commercial paper rated A (highest quality) by S&P is issued by entities
which have liquidity ratios which are adequate to meet cash requirements.
Long-term senior debt is rated A or better, although in some cases BBB credits
may be allowed. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. The relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1, A-2
or A-3. (Those A-1 issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and
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preparations to meet such obligations. These factors are all considered in
determining whether the commercial paper is rated Prime-1, Prime-2 or Prime-3.
In the event applicable rating agencies lower the ratings of debt
instruments held by the Fund, resulting in a material decline in the overall
quality of the Fund's portfolio, the situation will be reviewed and necessary
action, if any, will be taken, including changes in the composition of the
portfolio.
Cash & Cash Equivalents may also include securities of the U.S. Government
and its agencies and instrumentalities and custodial receipts in respect thereof
as described above under "Certain Fixed Income Securities" from time to time.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Among other investments described below, the Fund may buy and sell
domestic and foreign options on securities, securities indices and precious
metals and other commodities, futures contracts, and options on futures
contracts, and may enter into closing transactions with respect to each of the
foregoing under circumstances in which such techniques are expected by State
Street Research & Management Company (the "Investment Manager") to aid in
achieving the investment objective of the Fund.
The Fund on occasion may also purchase instruments with characteristics of
both futures and securities (e.g., debt instruments with interest and principal
payments determined by reference to the value of a commodity or a currency at a
future time) and which, therefore, possess the risks of both futures and
securities investments.
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell certain
underlying assets, such as precious metals or other commodities, securities 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 precious metals and other
commodities, securities or an index of securities normally enables a buyer to
participate in the market movement of the underlying commodity, security or
index after paying a transaction charge and posting margin in an amount equal to
a small percentage of the value of the underlying commodity, security or index.
The Fund will initially be required to deposit with the Trust's custodian
or the broker effecting the transaction an amount of "initial margin" in cash or
U.S. Treasury obligations.
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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 asset 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
its 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 securities,
such delivery and acceptance are seldom made.
Futures contracts will be executed primarily (a) to establish a short
position, and thus protect the Fund from experiencing the full impact of an
expected decline in market value of portfolio holdings without requiring the
sale of holdings, or (b) to establish a long position, and thus to participate
in an expected rise in market value of securities or commodities which the Fund
intends to purchase. In transactions establishing a long position in a futures
contract, money market instruments 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, a representative portfolio of securities 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 employ any other appropriate
method of cover which is consistent with applicable regulatory and exchange
requirements.
Options on Securities and Commodities
The Fund may use options on equity or fixed income securities and
commodities to implement its investment strategy. 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, i.e., 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.
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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, i.e., 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,
i.e., 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
his 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.
Options on Securities Indices
The Fund may engage in transactions in call and put options on securities
indices. For example, the Fund may purchase put options on indices of equity or
fixed income securities in anticipation of or during a market decline to attempt
to offset the decrease in market value of its securities that might otherwise
result.
Put options on indices of securities are similar to put options on the
securities themselves except that the delivery requirements are different.
Instead of giving the right to make delivery of a security at a specified price,
a put option on an index of securities 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 or fixed income securities, futures contracts or commodities, the Fund
may offset its position in index option 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 such as the
Standard & Poor's 500 Stock Index or the New York Stock Exchange Composite
Index, or a narrower market index such as the Standard & Poor's 100 Stock Index.
Securities indices are also based on industry or market segments such as the
American Stock Exchange Oil and Gas Index or the Computer and Business Equipment
Index.
Although there are at present few available options on indices of fixed
income securities, other than tax-exempt securities, or futures and related
options based on such indices, such instruments may become available in the
future. In connection with the use of such options, the Fund may cover its
position by identifying a representative portfolio of
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securities having a value equal to the aggregate face value of the option
position taken. However, the Fund may employ any appropriate method to cover its
positions that is consistent with applicable regulatory and exchange
requirements.
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.
Options Strategy
A basic option strategy for protecting the Fund against a decline in
securities prices could involve (a) the purchase of a put -- thus "locking in"
the selling price of the underlying securities or securities indices -- or (b)
the writing of a call on securities or securities indices held by the Fund --
thereby generating income (the premium paid by the buyer) by giving the holder
of such call the option to buy the underlying asset at a fixed price. The
premium will offset, in whole or in part, a decline in portfolio value; however,
if prices of the relevant securities or securities indices rose instead of
falling, the call might be exercised, thereby resulting in a potential loss of
appreciation in the underlying securities or securities indices.
A basic option strategy when a rise in securities prices is anticipated is
the purchase of a call -- thus "locking in" the purchase price of the underlying
security or other asset. In transactions involving the purchase of call options
by the Fund, money market instruments equal to the aggregate exercise price of
the options will be identified by the Fund to the Trust's custodian to insure
that the use of such investments is unleveraged.
The Fund may write options in connection with buy-and-write transactions;
that is, the Fund may purchase a security or other asset and concurrently write
a call option against that security or other asset. If the call option is
exercised in such a transaction, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upward or downward by the
difference between the Fund's purchase price of the security or other asset and
the exercise price of the option. If the option is not exercised and the price
of the underlying security or other asset declines, the amount of such decline
will be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security or other asset rises or otherwise is above the exercise
price, the put option will expire worthless and the Fund's gain will be limited
to the premium received. If the market price of the underlying security or other
asset declines or otherwise is below the exercise price, the Fund's return will
be the premium received from writing the put option minus the amount by which
the market price of the security or other asset is below the exercise price.
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Limitations and Risks of Options and Futures Activity
The Fund will engage in transactions in futures contracts or options only
as a hedge against changes resulting from market conditions which produce
changes in the values of its securities or the securities which it intends to
purchase (e.g., to replace portfolio securities which will mature in the near
future) and, subject to the limitations described below, to enhance return. The
Fund will not purchase any futures contract or purchase any call option if,
immediately thereafter, more than one-third of the Fund's net assets would be
represented by long futures contracts or call options. The Fund will not write a
covered call option if, immediately thereafter, the aggregate value of the
assets (securities in the case of written calls and cash or cash equivalents in
the case of written puts) underlying all such options, determined as of the
dates such options were written, would exceed 25% of the Fund's net assets. In
addition, the Fund may not establish a position in a commodity futures contract
or purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such nonhedging
purposes would exceed 5% of the market value of the Fund's net assets.
Although effective hedging can generally capture the bulk of a desired
risk adjustment, no hedge is completely effective. Moreover, the use of options,
futures and options on futures may involve risks not associated with other types
of investments which the Fund intends to purchase. Most of the hedging
anticipated for the Fund will be against the risk characteristics of its
portfolio and not against the risk characteristics of specific investments. The
Fund's ability to hedge effectively through transactions in futures or options
depends on the degree to which price movements in its holdings correlate with
price movements of the futures and options. The prices of the assets being
hedged may not move in the same amount as the hedging instrument, which would
result in an ineffective hedge and a loss to the Fund.
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
effectively to hedge its securities and might, in some cases, require the 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.
The Fund may engage in transactions in unlisted options. A position in an
unlisted option may be closed out only with the other party to the transaction.
The lack of an established secondary market may lead the Fund to encounter more
difficulties in effecting closing purchase or sale transactions with respect to
unlisted options than in the case of listed options. If the Fund as a covered
call option writer is unable to effect a closing purchase transaction, it will
not be able to sell the underlying assets until the option expires. When the
Fund purchases or writes an option listed on a domestic securities exchange, it
is afforded the
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protections offered by the Options Clearing Corporation. If any member of the
Options Clearing Corporation fails to perform any of its obligations in a
transaction involving the purchase or sale of options, then the Options Clearing
corporation will perform the obligations of that member. The Options Clearing
Corporation also maintains Clearing Funds to ensure that it can do so. This
protection is not available with respect to transactions in unlisted options.
The Fund, however, will enter into unlisted options transactions only with
persons which the Investment Manager believes to be of high credit standing.
Transactions in Precious Metals
The Fund will invest in precious metals only through banks (both United
States and foreign), brokers or dealers who are members of (or affiliated with
members of) a regulated North American commodities, commodities futures or
securities exchange or a foreign commodities, commodities futures or securities
exchange, or other institutions that meet certain standards of creditworthiness
established by the Trustees from time to time. Bullion and coins do not usually
generate income, offering only the potential of capital appreciation, and, in
these transactions, the Fund may encounter higher custody and transaction costs
than those normally associated with the ownership of securities, as well as
insurance and shipping costs. In addition, investments in bullion and coins
could adversely affect the Fund's ability to qualify as a regulated investment
company under the Internal Revenue Code. See "Certain Tax Matters" herein.
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 total assets, except that
repurchase agreements extending for more than seven days when combined with any
other illiquid assets held by the Fund will be limited to 10% of the Fund's
total assets.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. In a reverse
repurchase agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker or dealer, in return for
a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the
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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.
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.
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 up to a month 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 Trust's custodian will establish a segregated account when
the Fund purchases securities on a when-issued basis consisting of cash or
liquid securities equal to the amount of the when-issued commitments.
Rule 144A Securities
The Fund may buy or sell restricted securities 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, such Rule 144A Securities may be deemed to
be liquid as determined by or in accordance with methods adopted by the
Trustees.
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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, marketmaking 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 possible
illiquidity and subjective valuation of such securities in the absence of a
market for them.
Securities Lending
The Fund may lend portfolio securities with a value of up to 33 1/3% of
its total assets . The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of the loaned security plus accrued interest. Collateral
received by the Fund will generally be held in the form tendered, although cash
may be invested in securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, irrevocable stand-by letters of credit issued by
a bank, or any combination thereof. 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 most rights of ownership on the
loaned securities including 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 securities
fail financially, there is a risk of delay in recovery of the securities or loss
of rights in the collateral. Loans are made only to borrowers which are deemed
by the Investment Manager to be of good financial standing.
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.
16
<PAGE>
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 part of the Fund's portfolio.
However, the Fund may enter into such arrangements for income purposes to the
extent permitted by 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 for the counterparty. The
Fund attempts to reduce the risks of nonperformance by the counterparty by
dealing only with the 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 of if a market for the transfer
of swap positions does not develop. The use of interest rate swaps is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Investment Manager is incorrect in its forecasts of market values, interest
rates and other applicable factors, the investment performance of the Fund would
diminish compared with what it would have been if these investment techniques
were not used. Moreover, even if the Investment Manager is correct in its
forecasts, there is a risk that the swap position may correlate imperfectly with
the price of the asset or liability being hedged.
Other Investment Limitations
The Fund has undertaken with a state securities authority that it will not
purchase real estate limited partnerships or make investments in oil, gas or
mineral leases for so long as Fund shares are offered in that state.
17
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust, their addresses, and their
principal occupations and positions with certain affiliates of the Investment
Manager are set forth below.
*+Bartlett R. Geer, One Financial Center, Boston, MA 02111 serves as Vice
President of the Trust. He is 40. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as Vice President of State Street Research & Management
Company.
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. He is 54. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as portfolio manager for State Street Research &
Management Company.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791, serves
as Trustee of the Trust. He is 68. He is engaged principally in private
investments and civic affairs, and is an author of business history. Previously,
he was with Morgan Guaranty Trust Company of New York.
+Robert A. Lawrence, Saltonstall & Co., 50 Congress Street, Boston, MA
02109, serves as Trustee of the Trust. He is 68. His principal occupation during
the past five years has been Partner, Saltonstall & Co., a private investment
firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. His principal occupation is Executive Vice President,
Treasurer and Director of State Street Research & Management Company. He is 44.
During the past five years he has also served as Executive Vice President and
Chief Financial Officer of New England Investment Companies and as Senior Vice
President and Vice President of New England Mutual Life Insurance Company. Mr.
Maus's other principal business affiliations include Executive Vice President,
Treasurer, Chief Financial Officer and Director of State Street Research
Investment Services, Inc.
*+Francis J. McNamara, III has served as Secretary and General Counsel of
the Trust since May, 1995. He is 39. His principal occupation is Senior Vice
President, Secretary and General Counsel of the Investment Manager. During the
past five years he has also served as Senior Vice President, General Counsel and
Assistant Secretary of The Boston Company, Inc., Boston Safe Deposit and Trust
Company and The Boston Company Advisors, Inc. Mr. McNamara's other principal
business affiliations include Senior Vice President, Clerk and General Counsel
of State Street Research Investment Services, Inc.
- ---------------
* or + See footnotes on page 19.
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<PAGE>
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 63. He is retired, having served during the past
five years, until October 1992, as Executive Vice President, Chief Operating
Officer and Director of Hewlett-Packard Company.
+Thomas L. Phillips, 141 Spring Street, Lexington, MA 02173 serves as
Trustee of the Trust. He is 71. He is retired and was formerly Chairman of the
Board and Chief Executive Officer of Raytheon Company, of which he remains a
Director.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves as
Trustee of the Trust. He is 57. His principal occupations during the past five
years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
57. 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.
*+Ralph F. Verni, One Financial Center, Boston, MA 02111, serves as
Chairman of the Board, President, Chief Executive Officer and Trustee of the
Trust. He is 52. His principal occupation is Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research & Management
Company. During the past five years he also served as President and Chief
Executive Officer of New England Investment Companies and as Chief Investment
Officer and Director of New England Mutual Life Insurance Company. Mr. Verni's
other principal business affiliations include Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research Investment
Services, Inc.
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 70. He is retired and was formerly Of Counsel for
the law firm Choate, Hall & Stewart. He was a partner of that firm from 1960 to
1987.
*+Michael R. Yogg, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. He is 49. 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, State Street Research & Management
Company.
- ---------------
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the 1940 Act because of their affiliations or
past affiliations with the Fund's investment adviser.
+ Serves as a Trustee and/or officer of one or more of the following
investment companies, each of which has an advisory relationship with the
Investment Manager or
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<PAGE>
its affiliates: MetLife - State Street Equity Trust, MetLife - State
Street Financial Trust, State Street Research Income Trust, State Street
Research Money Market Trust, State Street Research Tax-Exempt Trust, State
Street Research Capital Trust, State Street Research Exchange Trust, State
Street Research Growth Trust, State Street Research Master Investment
Trust, State Street Research Securities Trust, State Street Research
Portfolios, Inc. and Metropolitan Series Fund, Inc.
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<PAGE>
As of June 30, 1995, the following persons or entities were the record
and/or beneficial owners of the approximate amounts of each class of shares
of the Fund as set forth beside their names:
Shareholder %
----------- -
Class C United States Trust Company 94.0
Class D Merrill Lynch 21.2
The full name and address of each of the above persons or entities are
as follows:
United States Trust Company
770 Broadway
New York, New York 10003
Merrill Lynch, Pierce, Fenner & Smith, Inc.
One Liberty Plaza
165 Broadway
New York, New York 10080
The Fund believes that neither of the above entities has beneficial
ownership of such shares.
As of June 30, 1995, the Trustees and officers of the Fund as a group
owned 1.7% of the Fund's outstanding Class A shares, and owned no shares of the
Fund's outstanding Class B, Class C or Class D shares.
Ownership of 25% or more of a voting security is deemed "control" as
defined in the 1940 Act. So long as 25% of a class of shares is so owned, such
owners will be presumed to be in control of such class of shares for purposes of
voting on certain matters submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
During the last fiscal year of the Trust, the Trustees were compensated as
follows:
- --------------------------------------------------------------------------------
Total
Compensation
Aggregate From Trust and
Name of Compensation Complex Paid
Trustee From Trust(a) to Trustees(b)
- --------------------------------------------------------------------------------
Edward M. Lamont $ 9,900 $ 55,411
Robert A. Lawrence $ 9,900 $ 82,775
Dean O. Morton $ 10,900 $ 93,625
Thomas L. Phillips $ 9,600 $ 65,525
Toby Rosenblatt $ 9,900 $ 55,411
Michael S. Scott Morton $ 10,900 $ 90,375
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $ 9,900 $ 65,475
(a) Includes compensation from multiple series of the Trust. See "Distribution
of Shares" for a listing of series.
(b) Includes compensation from Metropolitan Series Fund, Inc., for which the
Investment Manager serves as sub-investment adviser, State Street Research
Portfolios, Inc., for which State Street Research Investment Services,
Inc. serves as distributor, and all investment companies for which the
Investment Manager serves as primary investment adviser, comprising a
total of 30 series. The Trust does not provide any pension or retirement
benefits for the Trustees.
21
<PAGE>
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Advisory
Agreement provides that the Investment Manager shall furnish the Fund with an
investment program, office facilities and such investment advisory, research and
administrative services as may be required from time to time. The Investment
Manager compensates all executive and clerical personnel and Trustees of the
Trust if such persons are employees of the Investment Manager or its affiliates.
The Investment Manager is an indirect wholly-owned subsidiary of Metropolitan
Life Insurance Company.
The advisory fee payable monthly by the Fund to the Investment Manager is
computed as a percentage of the average of the value of the net assets of the
Fund as determined at the close of the New York Stock Exchange (the "NYSE") on
each day the NYSE is open for trading, at the annual rate of 0.75% of the net
assets of the Fund. The Fund has been advised that the Distributor and its
affiliates may from time to time and in varying amounts voluntarily assume some
portion of fees or expenses relating to the Fund. For the fiscal years ended
March 31, 1993, 1994 and 1995, the investment advisory fee for the Fund was
$683,023, $1,195,270 and $2,564,590, respectively. For the same periods, the
voluntary reduction of fees or assumption of expenses amounted to $171,540,
$380,527 and $1,062,971, respectively.
Further, to the extent required under applicable state regulatory
requirements, the Investment Manager will reduce its management fee up to the
amount of any expenses (excluding permissible items, such as Rule 12b-1
Distribution Plan payments, brokerage commissions, interest, taxes and
litigation expenses) paid or incurred by the Fund in any fiscal year which
exceed specified percentages of the average daily net assets of such Fund for
such fiscal year. The most restrictive of such percentage limitations is
currently 2.5% of the first $30 million of average net assets, 2% of the next
$70 million of average net assets and 1.5% of the remaining average net assets.
These commitments may be amended or rescinded in response to changes in the
requirements of the various states by the Trustees without shareholder approval.
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund from year to year 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.
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<PAGE>
Under a Funds Administration Agreement between the Investment Manager and
the Distributor, the Distributor provides assistance to the Investment Manager
in performing certain fund administration services for the Trust, such as
assistance in determining the daily net asset value of shares of series of the
Trust and in preparing various reports required by regulations.
Under a Shareholders' Administrative Services Agreement between the Trust
and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Fund, and is entitled to
reimbursements of its costs for providing such services. Under certain
arrangements for Metropolitan to provide subadministration services,
Metropolitan may receive a fee for the maintenance of certain share ownership
records for participants in sponsored arrangements, such as employee benefit
plans, through or under which Fund shares may be purchased.
Under the Code of Ethics of the Investment Manager, its employees in
Boston, where investment management operations are conducted, are only permitted
to engage in personal securities transactions which do not involve securities
which the Investment Manager has recommended for purchase or sale, or purchased
or sold, on behalf of its clients. Such employees must report their personal
securities transactions quarterly and supply broker confirmations to the
Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by the Distributor. The Fund offers
four classes of shares which may be purchased at the next determined net asset
value per share plus, in the case of all classes except Class C shares, a sales
charge which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B and Class
D shares). General information on how to buy shares of the Fund, as well as
sales charges involved, are set forth under "Purchase of Shares" in the
Prospectus. The following supplements that information.
Public Offering Price - The public offering price for each class of shares
of the Fund is based on their net asset value determined as of the close of the
NYSE on the day the purchase order is received by State Street Research
Shareholder Services provided that the order is received prior to the close of
the NYSE on that day; otherwise the net asset value used is that determined as
of the close of the NYSE on the next day it is open for unrestricted trading.
When a purchase order is placed through a dealer, that dealer is responsible for
transmitting the order promptly to State Street Research Shareholder Services in
order to permit the investor to obtain the current price. Any loss suffered by
an investor which results from a dealer's failure to transmit an order promptly
is a matter for settlement between the investor and the dealer.
23
<PAGE>
Reduced Sales Charges - For purposes of determining whether a purchase of
Class A shares qualifies for reduced sales charges, the term "person" includes:
(i) an individual, or an individual combining with his or her spouse and their
children and purchasing for his, her or their own account; (ii) a "company" as
defined in Section 2(a)(8) of the 1940 Act; (iii) a trustee or other fiduciary
purchasing for a single trust estate or single fiduciary account (including a
pension, profit sharing or other employee benefit trust created pursuant to a
plan qualified under Section 401 of the Internal Revenue Code); (iv) a
tax-exempt organization under Section 501(c)(3) or (13) of the Internal Revenue
Code; and (v) an employee benefit plan of a single employer or of affiliated
employers.
Investors may purchase Class A shares of the 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" as
designated by the Distributor 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, Class C and Class D 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 escrow 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 the Right of Accumulation.
The applicable sales charge under this right is determined on the amount arrived
at by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C, and Class D shares may also be included in the combination
under certain circumstances. Investors must
24
<PAGE>
submit to the Distributor sufficient information to show that they qualify for
this Right of Accumulation.
Class C Shares - Class C shares are currently available to benefit plans
such as qualified retirement plans, other than individual retirement accounts
and self-employed retirement plans, which meet certain criteria relating to
minimum assets, minimum participants, service agreements, or similar factors;
banks and insurance companies; endowment funds of nonprofit organizations with
substantial minimum assets; and other similar institutional investors.
Reorganizations - In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, the Fund may issue its shares at net asset value (or
more) to such entities or to their security holders.
Redemptions - The Fund reserves the right to pay redemptions in kind with
portfolio securities in lieu of cash. In accordance with its election pursuant
to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of redemption
proceeds paid in cash. Although it has no present intention to do so, the Fund
may, under unusual circumstances, limit redemptions in cash with respect to each
shareholder during any ninety-day period to the lesser of (i) $250,000, or (ii)
1% of the net asset value of the Fund at the beginning of such period. In
connection with any redemptions paid in kind with portfolio securities,
brokerage and other costs may be incurred by the redeeming shareholder in the
sale of the securities received.
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily as
of the close of the NYSE, ordinarily 4 P.M. New York City time, Monday through
Friday, on each day during which the NYSE is open for trading. The NYSE is
currently closed on New Year's Day, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is computed by dividing the sum
of the value of the securities held by the Fund plus any cash or other assets
minus all liabilities by the total number of outstanding shares of the Fund at
such time. Any expenses, except for extraordinary or nonrecurring expenses,
borne by the Fund, including the investment management fee payable to the
Investment Manager, are accrued daily.
25
<PAGE>
In determining the values of portfolio assets as provided below, the
Trustees may 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 may provide prices determined as of times prior to the close of the New
York Stock Exchange.
In general, securities are valued as follows. Securities which are listed
or traded on the New York or American Stock Exchange are valued at the price of
the last quoted sale on the respective exchange for that day. Securities which
are listed or traded on a national securities exchange or exchanges, but not on
the New York or American Stock Exchange, are valued at the price of the last
quoted sale on the exchange for that day prior to the close of the NYSE.
Securities not listed on any national securities exchange which are traded "over
the counter" and for which quotations are available on the National Association
of Securities Dealers' NASDAQ System, or other system, are valued at the closing
price supplied through such system for that day at the close of the NYSE. Other
securities are, in general, valued at the mean of the bid and asked quotations
last quoted prior to the close of the NYSE if there are market quotations
readily available, or in the absence of such market quotations, then at the fair
value thereof as determined by or under authority of the Trustees of the Trust
utilizing such pricing services as may be deemed appropriate. Securities deemed
restricted as to resale are valued at the fair value thereof as determined by or
in accordance with methods adopted by the Trustees of the Trust.
Short-term debt instruments issued with a maturity of one year or less
which have a remaining maturity of 60 days or less are valued using the
amortized cost method, 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. The amortized cost method is used
when the value obtained reflects fair value. Under the amortized cost method of
valuation, the security is initially valued at cost on the date of purchase (or
in the case of short-term debt instruments purchased with more than 60 days
remaining to maturity, the market value on the 61st day prior to maturity), and
thereafter a constant amortization to maturity of any discount or premium is
assumed regardless of the impact of fluctuating interest rates on the market
value of the security.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
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). The Fund reserves full freedom with respect to portfolio
turnover, as described in the Prospectus. The portfolio turnover rates for the
fiscal years ended March 31, 1994 and 1995 were 105.17% and 89.58%,
respectively.
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<PAGE>
Brokerage Allocation
The Fund and the Investment Manager seek the best overall execution of
purchase or sale orders and the most favorable net price in securities
transactions consistent with their judgment as to the business qualifications of
the various broker or dealer firms with which the Fund may do business.
Decisions with respect to the market in which the transaction is to be
completed, 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 the performance, integrity and financial
responsibility of the various firms as well as to their demonstrated execution
experience and capability generally and in regard to particular markets or
securities and, in agency transactions, to the competitiveness of the commission
rates (or in principal transactions of the net prices) they charge. The
Investment Manager keeps current as to the range of rates or prices charged by
various firms and against this background evaluates the reasonableness of a
commission or price charged with respect to a particular transaction by
considering such factors as difficulty of execution or security positioning by
the executing firm.
When it appears that a number of firms can satisfy the required standards
in respect of a particular transaction, consideration may also be given to
services other than execution services which such firms have provided in the
past or may provide in the future. Among such other services are the supplying
of supplemental investment research, general economic and political information,
analytical and statistical data, relevant market information and daily market
quotations for computation of net asset value. In this connection it should be
noted that a substantial portion of brokerage commissions paid, or principal
transactions entered, by the Fund may be with brokers and investment banking
firms which, in the normal course of business, publish statistical, research and
other material which is received by the Investment Manager and which may or may
not prove useful to the Investment Manager, the Fund or other clients under the
management of the Investment Manager.
Neither the Fund nor the Investment Manager has any definite agreements
with any firm as to the amount of business which that firm may expect to receive
for services supplied or otherwise. There may be, however, understandings with
certain firms that in order for such firms to be able to continuously supply
certain services, they need to receive allocation of a specified amount of
business. These understandings are honored to the extent possible in accordance
with the policy set forth above. Neither the Fund nor the Investment Manager
intends to pay a firm in excess of that which another would charge for handling
the same transaction in recognition of services (other than execution services)
provided. However, the Fund and the Investment Manager are aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, rely on the provisions of Section 28(e) of the
Securities Exchange Act of 1934, to the extent applicable. During the fiscal
years ended March 31, 1993, 1994 and 1995, the Fund paid $120,683, $330,251
and $546,075, respectively, in brokerage commissions. The Investment Manager
believes that the increase in brokerage commissions for the most recent fiscal
year as compared to the prior fiscal year is because the Fund increased in size,
generating additional
27
<PAGE>
cash which was invested shortly after being received and, additionally, because
the Fund had a greater proportion of its assets invested in foreign securities,
which have higher transaction costs.
During and at the end of its most recent fiscal year, the Fund held in its
portfolio no securities of any entity that might be deemed to be a regular
broker dealer of the Fund as defined under the 1940 Act.
Occasions may arise when the Investment Manager determines that an
investment in a particular security, or the disposition of a particular
security, is simultaneously a proper investment decision for the Fund as well as
for the portfolio of one or more of its other clients. In this event, a purchase
or sale, as the case may be, of any such security on any given day will be
normally averaged as to price and allocated as to amount among the several
clients in a manner deemed equitable to each client.
On occasions when the Investment Manager deems the purchase or sale of a
security to be in the best interests of the Fund, as well as other clients of
the Investment Manager, the Investment Manager, to the extent permitted by
applicable laws and regulations, may aggregate such securities to be sold or
purchased for the Fund with those to be sold or purchased for other customers in
order to obtain best execution and lower brokerage commissions, if any. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Investment Manager in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to all such customers, including the Fund. In some instances, this
procedure may affect the price and size of the positions obtainable for the
Fund.
CERTAIN TAX MATTERS
Federal Income Taxation of the Fund -- In General
The Fund intends to qualify and elect to be treated each taxable year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), although it cannot give complete assurance
that it will do so. Accordingly, the Fund must, among other things, (a) derive
at least 90% of its gross income in each taxable year from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of the
following held for less than three months (the "30% test"): (i) stock or
securities; (ii) options, futures or forward contracts (other than options,
futures or forward contracts on foreign currencies), or (iii) foreign currencies
(or options, futures or forward contracts on foreign currencies) but only if
such currencies (or options, futures or forward contracts) are
28
<PAGE>
not directly related to the Fund's principal business of investing in stock or
securities (or options and futures with respect to stocks or securities); (c)
satisfy certain diversification requirements; and (d) in order to be entitled to
utilize the dividends paid deduction, distribute annually at least 90% of its
investment company taxable income (determined without regard to the deduction
for dividend paid).
If in any year the Fund derived 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.
The 30% test will limit the extent to which the Fund may sell securities
held for less than three months, write options which expire in less than three
months, and effect closing transactions with respect to call or put options that
have been written or purchased within the preceding three months. (If the Fund
purchases a put option for the purpose of hedging an underlying portfolio
security, the acquisition of the option is treated as a short sale of the
underlying security unless, for purposes only of the 30% test, the option and
the security are acquired on the same date.) Finally, as discussed below, this
requirement may also limit investments by the Fund in options on stock indices,
listed options on nonconvertible debt securities, futures contracts, options on
interest rate futures contracts and certain foreign currency contracts.
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income 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.
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. The Fund intends to make sufficient distributions to avoid this 4% excise
tax.
29
<PAGE>
Federal Income Taxation of the Fund's Investments
Original Issue Discount. For federal income tax purposes, debt securities
purchased by the Fund may be treated as having original issue discount. Original
issue discount represents interest for federal income tax purposes and can
generally be defined as the excess of the stated redemption price at maturity of
a debt obligation over the issue price. Original issue discount is treated for
federal income tax purposes as income earned by the Fund, whether or not any
income is actually received, and therefore is subject to the distribution
requirements of the Code. Generally, the amount of original issue discount is
determined on the basis of a constant yield to maturity which takes into account
the compounding of accrued interest. Under section 1286 of the Code, an
investment in a stripped bond or stripped coupon may result in original issue
discount.
Debt securities may be purchased by the Fund at a discount that exceeds
the original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for 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
income 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 to
purchase or carry any debt security having market discount, unless the Fund
makes the election to include market discount currently. Because the Fund must
include original issue discount in income, it will be more difficult for the
Fund to make the distributions required for the Fund to maintain its status as a
regulated investment company under Subchapter M of the Code or to avoid the 4%
excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may be
subject to provisions of the Code that (i) require inclusion of unrealized gains
or losses in the Fund's income for purposes of the 90% test, the 30% test, the
excise tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and (iii) characterize
both realized and unrealized gain or loss as short-term or long-term gain or
loss. Such provisions generally apply to, among other investments, options on
debt securities, indices on securities and futures contracts.
Foreign Currency Transactions. Under section 988 of the Code, special
rules are provided for certain foreign currency transactions. Foreign currency
gains or losses from foreign currency contracts (whether or not traded in the
interbank market), from futures contracts that are not "regulated futures
contracts," and from unlisted options are treated as ordinary income or loss
under section 988. The Fund may elect to have foreign currency-related regulated
futures contracts and listed options subject to ordinary income or loss
treatment under section 988. In addition, in certain circumstances, the Fund may
elect capital
30
<PAGE>
gain or loss for foreign currency transactions. The rules under section 988 may
also affect the timing of income recognized by the Fund.
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 and December and made
payable to shareholders of record in any such month is treated as received by
such shareholders 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 would be
taxable to the shareholder as ordinary income or long-term capital gain, even
though, from an investment standpoint, it may constitute a partial return of
capital. In particular, investors should be careful to consider the tax
implications of buying shares just prior to a taxable distribution. The price of
shares purchased at that time includes the amount of any forthcoming
distribution. Those investors purchasing shares just prior to a taxable
distribution will then receive a return of investment upon distribution which
will nevertheless be taxable to them.
DISTRIBUTION OF SHARES OF THE FUND
State Street Research Income Trust (formerly MetLife - State Street Income
Trust) is currently comprised of the following series: State Street Research
High Income Fund (formerly Metlife - State Street Research High Income Fund) and
State Street Research Managed Assets (formerly MetLife - State Street Research
Managed Assets). The Trustees have authorized the Fund to issue four classes of
shares: Class A, Class B, Class C and Class D shares. The Trustees of the Trust
have authority to issue an unlimited number of shares of beneficial interest of
separate series, $.001 par value per share. A "series" is a separate pool of
assets of the Trust which is separately managed and has a different investment
objective and different investment policies from those of another series. The
Trustees have authority, without the necessity of a shareholder vote, to create
any number of new series or classes or to commence the public offering of shares
of any previously established series or class.
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
31
<PAGE>
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (Class B and Class D shares). The Distributor may reallow all or
a portion of such sales charges as concessions to dealers. For the fiscal years
ended March 31, 1993, 1994 and 1995, total sales charges on Class A shares paid
to the Distributor amounted to $1,450,027, $1,683,053 and $1,652,827,
respectively. For the same periods, $174,015, $197,005 and $198,230,
respectively, was retained by the Distributor after reallowance of concessions
to dealers.
The difference in the price at which the Fund's Class A shares are offered
due to scheduled variations in sales charges, as described in the Fund's
Prospectus, result from cost savings inherent in economies of scale. Management
believes that the cost of sales efforts of the Distributor and broker-dealers
tends to decrease as the size of purchases increases, or does not involve any
incremental sales expenses as in the case of, for example, exchanges,
reinvestments or dividend investments at net asset value. Similarly, no
significant sales effort is necessary for sales of shares at net asset value to
certain Directors, Trustees, officers, employees, their relatives and other
persons directly or indirectly related to the Fund or associated entities. Where
shares of the Fund are offered at a reduced sales charge or without a sales
charge pursuant to sponsored arrangements, and managed fee-based programs, the
amount of the sales charge reduction will similarly reflect the anticipated
reduction in sales expenses associated with such arrangements. The reduction in
sales expenses, and therefore the reduction in sales charge, will vary depending
on factors such as the size and other characteristics of the organization or
program, and the nature of its membership or the participants. The 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 at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission on the shares sold. Such commission also is
payable to authorized securities dealers upon sales of Class A shares made
pursuant to a Letter of Intent to purchase shares having a net asset value of
$1,000,000 or more. Shares sold with such commissions payable are subject to a
one-year contingent deferred sales charge of 1.00% on any portion of such shares
redeemed within one year following their sale. After a particular purchase of
Class A shares is made under the Letter of Intent, the commission will be paid
only in respect of that particular purchase of shares. If the Letter of Intent
is not completed, the commission paid will be deducted from any discounts or
commissions otherwise payable to such dealer in respect of shares actually sold.
If an investor is eligible to purchase shares at net asset value on account of
the Right of Accumulation, the commission will be paid only in respect of the
incremental purchase at net asset value.
For the periods shown below, the Distributor received contingent deferred
sales charges upon redemption of Class A, Class B and Class D shares of the Fund
and paid initial commissions to securities dealers for sales of Class A, Class B
and Class D shares as follows:
32
<PAGE>
<TABLE>
<CAPTION>
June 1, 1993
(commencement
of share class
Fiscal Year Ended designations) to
March 31, 1995 March 31, 1994
------------------------------- ---------------------------------
Contingent Commissions Contingent Commissions
Deferred Paid to Deferred Paid to
Sales Charges Dealers Sales Charges Dealers
------------- ------- ------------- -------
<S> <C> <C> <C> <C>
Class A $ 657 $ 0 $ 0 $ 0
Class B $451,301 $3,334,444 $37,903 $2,156,424
Class D $ 7,564 $ 71,301 $ 630 $ 69,505
</TABLE>
For information on the amount of distribution fees paid by the Fund to the
Distributor, see below.
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1" (the
"Distribution Plan") under which the Fund may engage, directly or indirectly, in
financing any activities primarily intended to result in the sale of Class A,
Class B and Class D shares, including, but not limited to, (1) the payment of
commissions and/or reimbursement to underwriters, securities dealers and others
engaged in the sale of shares, including payments to the Distributor to be used
to pay commissions and/or reimbursement to securities dealers (which securities
dealers may be affiliates of the Distributor) engaged in the distribution and
marketing of shares and furnishing ongoing assistance to investors, (2)
reimbursement of direct out-of-pocket expenditures incurred by the Distributor
in connection with the distribution and marketing of shares and the servicing of
investor accounts including expenses relating to the formulation and
implementation of marketing strategies and promotional activities such as direct
mail promotions and television, radio, newspaper, magazine and other mass media
advertising, the preparation, printing and distribution of Prospectuses of the
Fund and reports for recipients other than existing shareholders of the Fund,
and obtaining such information, analyses and reports with respect to marketing
and promotional activities and investor accounts as the Fund may, from time to
time, deem advisable, and (3) reimbursement of expenses incurred by the
Distributor in connection with the servicing of shareholder accounts including
payments to securities dealers and others in consideration of the provision of
personal services to investors and/or the maintenance of shareholder accounts
and expenses associated with the provision of personal services by the
Distributor directly to investors. In addition, the Distribution Plan is deemed
to authorize the Distributor and the Investment Manager to make payments out of
general profits, revenues or other sources to underwriters, securities dealers
and others in connection with sales of shares, to the extent, if any, that such
payments may be deemed to be within the scope of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets
33
<PAGE>
represented by such Class A shares, and (ii) with respect to Class B and Class D
shares, an annual rate of 0.75% of the average daily value of the net assets
represented by such Class B or Class D shares (as the case may be) to finance
sales or promotion expenses and an annual rate of 0.25% of the average daily
value of the net assets represented by such Class B or Class D shares (as the
case may be) to make payments for personal services and/or the maintenance of
shareholder accounts. Proceeds from the service fee will be used by the
Distributor to compensate securities dealers and others selling shares of the
Fund for rendering service to shareholders on an ongoing basis. Such amounts are
based on the net asset value of shares of the Fund held by such dealers as
nominee for their customers or which are owned directly by such customers for so
long as such shares are outstanding and the Distribution Plan remains in effect
with respect to the Fund. Any amounts received by the Distributor and not so
allocated may be applied by the Distributor as reimbursement for expenses
incurred in connection with the servicing of investor accounts. The distribution
and servicing expenses of a particular class will be borne solely by that class.
During the fiscal year ended March 31, 1995, the Fund paid the Distributor
fees under the Distribution Plan and the Distributor used all of such payments
for expenses incurred on behalf of the Fund as follows:
Class A Class B Class D
------- ------- -------
Advertising $ 0 $ 0 $ 6,597
Printing and mailing of
prospectuses to other
than current shareholders 0 0 1,829
Compensation to dealers 477,030 1,277,012 73,712
Compensation to sales
personnel 0 0 15,289
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses: marketing 0 0 12,512
--------------------------------------
Total Fees $447,030 $1,277,012 $109,939
======================================
The Distributor may have also used additional resources of its own for further
expenses on behalf of the Fund.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
34
<PAGE>
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Fund will attempt to make
alternative arrangements for such services for shareholders who acquired shares
through such institutions.
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") and yield of the
Class A, Class B, Class C and Class D shares of the Fund will be calculated as
set forth below. Total return and yield are computed separately for each class
of shares of the Fund. Shares of the Fund had no class designations until June
1, 1993, when designations were assigned based on the pricing and Rule 12b-1
fees applicable to shares sold thereafter. Performance data for a specified
class includes periods prior to the adoption of class designations.
All calculations of performance data in this section reflect the voluntary
measures by the Fund's affiliates to reduce expenses relating to the Fund; see
"Accrued Expenses" later in this section.
The performance data reflects Rule 12b-1 fees and sales charges as set
forth below:
<TABLE>
<CAPTION>
Rule 12b-1 Fees Sales Charges
----------------------------------------------------------- ----------------------------------
Current
Class Amount Period
----- ------ ------
<S> <C> <C> <C>
A 0.25% Since commencement of operations to present Maximum 4.5% sales charge
reflected
B 1.00% 0.25% until June 1, 1993; 1.00% June 1, 1- and 5-year periods reflect a 5%
1993 to present; fee will reduce performance and a 2% contingent deferred sales
for periods after June 1, 1993 charge, respectively
C None 0.25% until June 1, 1993; 0% thereafter None
D 1.00% 0.25% until June 1, 1993; 1.00% June 1, 1993 1-year period reflects a 1% contin-
to present; fee will reduce performance for gent deferred sales charge
periods after June 1, 1993
</TABLE>
All calculations of performance data in this section reflect the voluntary
measures, if any, by the Fund's affiliates to reduce fees or expenses relating
to the Fund; see "Accrued Expenses" later in this section.
35
<PAGE>
Total Return
The Fund's average annual total return ("standard total return") of each
class of shares was as follows:
Commencement of
Operations Five Years One Year
(December 29, 1988) Ended Ended
to December 31, 1995 March 31, 1995 December 31, 1994
-------------------- -------------- -----------------
Class A 8.92% 8.13% -3.05%
Class B 9.49% 8.55% -4.08%
Class C 9.82% 9.25% 1.77%
Class D 9.50% 8.85% -0.16%
Standard total return is computed 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 maximum
initial or contingent deferred sales charge applicable to the investment 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
The annualized yield of each class of shares of the Fund based on the
month of March 1995 was as follows:
36
<PAGE>
Class A 2.76%
Class B 2.17%
Class C 3.13%
Class D 2.16%
Yield for each of the Fund's Class A, Class B, Class C and Class D shares
is computed by dividing the net investment income per share earned during a
recent month or other specified 30-day period by the applicable maximum offering
price per share on the last day of the period and annualizing the result,
according to the following formula:
YIELD = 2[( a-b + 1)^6 -1]
---
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of voluntary expense
reductions by the Investment Manager)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
To calculate interest earned (for the purpose of "a" above) on debt
obligations, the Fund computes the yield to 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 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
37
<PAGE>
maximum offering price includes, as applicable, a maximum sales charge of 4.5%
with respect to Class A shares.
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 are insured and/or often 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
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return and yield results take sales charges, if applicable, into
account, although the results do not take into account recurring and
nonrecurring charges for optional services which only certain shareholders elect
and which involve nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by affiliates
of fees or expenses during the subject period. In the absence of such
subsidization, the performance of the Fund would have been lower.
Nonstandardized Total Return
The Fund may provide the above described standard total return results for
Class A, Class B, Class C and Class D shares for periods which end no earlier
than the most recent calendar quarter end and which begin twelve months before
and at the time of commencement of the Fund's operations. In addition, the Fund
may provide nonstandardized total return results for differing periods, such as
for the most recent six months, and/or without taking sales charges into
account. Such nonstandardized total return is computed as otherwise described
under "Total Return" except the result may or may not be annualized, and as
noted any applicable sales charge, if any, may not be taken into account and
therefore not deducted from the hypothetical initial payment of $1,000. For
example, the Fund's nonstandardized total returns for the six months ended March
31, 1995, without taking sales charges into account were as follows:
Class A 1.74%
Class B 1.38%
Class C 1.87%
Class D 1.38%
38
<PAGE>
Distribution Rates
The Fund may also quote its distribution rate for each class of shares.
The distribution rate is calculated by annualizing the latest per-share
distribution from ordinary income and dividing the result by the maximum
offering price per share as of the end of the period 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 non-recurring, 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.
The distribution rates of the Fund, based on the month of March 1995, were
as follows:
Class A 2.18%
Class B 1.60%
Class C 2.51%
Class D 1.60%
39
<PAGE>
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as the Trust's independent accountants, providing professional services
including (1) an audit of the Fund's annual financial statements, (2) assistance
and consultation in connection with Securities and Exchange Commission filings
and (3) review of the annual income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a semiannual
basis, other supplementary financial reports may be made available from time to
time and holders of record may request a copy of a current supplementary report,
if any, by calling State Street Research Shareholder Services.
The following financial statements of MetLife - State Street Research
Managed Assets are for the fiscal year ended March 31, 1995. MetLife - State
Street Research Managed Assets changed its name to "State Street Research
Managed Assets" on August 1, 1995.
40
<PAGE>
Investment Portfolio
March 31, 1995
Principal Maturity Value
Amount Date (Note 1)
Fixed Income Securities 35.0%
U.S. Treasury 8.5%
U.S. Treasury Bond, 8.125% $11,650,000 8/15/2021 $ 12,372,649
U.S. Treasury Note, 8.50% 4,800,000 5/15/1997 4,955,232
U.S. Treasury Note, 5.875% 4,100,000 3/31/1999 3,937,927
U.S. Treasury Note, 7.125% 3,825,000 9/30/1999 3,832,764
U.S. Treasury Note, 7.50% 3,250,000 11/15/2001 3,306,875
U.S. Treasury Note, 6.375% 1,275,000 8/15/2002 1,215,432
U.S. Treasury Note, 5.75% 2,275,000 8/15/2003 2,063,857
31,684,736
U.S. Agency Mortgage 6.9%
Federal Home Loan Mortgage
Corp., 7.50% 194,482 4/01/2002 191,442
Federal Home Loan Mortgage
Corp., 6.50% 942,774 5/01/2009 895,927
Federal Home Loan Mortgage
Corp., 8.50% 574 7/01/2009 581
Federal Home Loan Mortgage
Corp., 6.60% 850,000 2/15/2022 780,665
Federal Home Loan Mortgage
Corp., 6.50% 655,829 4/01/2009 623,240
Federal Home Loan Mortgage
Corp., 6.50% 225,615 7/01/2009 214,404
Federal Home Loan Mortgage
Corp., 7.50% 2,175,441 1/01/2025 2,106,762
Federal Home Loan Mortgage
Corp., 7.50% 1,412,289 8/01/2024 1,367,703
Federal Home Loan Mortgage
Corp., 8.00% 1,493,049 8/01/2024 1,479,045
Federal Home Loan Mortgage
Corp. TBA, 7.00% 4,375,000 4/19/2025 4,126,172
Federal National Mortgage
Association, 5.41% 1,300,000 6/25/1998 1,237,197
Federal National Mortgage
Association, 8.00% 352,163 4/01/2008 350,053
Federal National Mortgage
Association, 8.00% 454,986 6/01/2008 452,261
Federal National Mortgage
Association, 8.50% 411,930 2/01/2009 424,543
Federal National Mortgage
Association, 9.00% 94,157 5/01/2009 96,818
Federal National Mortgage
Association, 7.00% 1,743,095 2/01/2024 1,641,769
Federal National Mortgage
Association, 7.00% 502,224 4/01/2024 473,029
U.S. Agency Mortgage (cont.)
Federal National Mortgage
Association, 7.00% $ 281,615 5/01/2024 $ 265,245
Federal National Mortgage
Association, 7.00% 1,492,500 11/01/2024 1,405,741
Federal National Mortgage
Association REMIC Series
93-138-HA PAC, 6.75% 825,000 12/25/2021 763,381
Government National Mortgage
Association, 9.00% 560,133 6/15/2016 580,707
Government National Mortgage
Association, 8.00% 359,448 9/15/2022 356,076
Government National Mortgage
Association, 6.50% 272,992 1/15/2024 246,459
Government National Mortgage
Association, 8.00% 873,285 1/15/2024 865,093
Government National Mortgage
Association, 8.00% 917,672 2/15/2024 909,064
Government National Mortgage
Association, 6.50% 2,284,218 7/15/2024 2,062,214
Government National Mortgage
Association, 8.00% 399,036 7/15/2024 395,293
Government National Mortgage
Association, 7.00% 1,417,372 1/15/2025 1,325,682
25,636,566
Trust Certificates 0.4%
Cooperative Utility Trust
Certificates, 10.70% 350,000 9/15/2017 389,701
Cooperative Utility Trust
Certificates, 10.125% 225,000 3/15/2019 246,942
Cooperative Trust
Certificates, 10.11% 900,000 12/15/2017 988,686
1,625,329
Foreign 1.0%
Bell Canada Deb., 13.375% 600,000 10/15/2010 650,664
Carter Holt Harvey Ltd. Deb.,
9.50% 400,000 12/01/2024 434,572
Hydro Quebec Deb., 13.25% 600,000 12/15/2013 727,080
Hydro Quebec Deb., 9.40% 750,000 2/01/2021 812,115
Province of Manitoba, 9.25% 475,000 4/01/2020 526,276
Province of Quebec, 7.50% 675,000 7/15/2023 596,565
3,747,272
Foreign Government 6.8%
Commonwealth of Australia, Australian
9.50% Dollar
7,300,000 8/15/2003 5,260,783
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
Foreign Government (cont'd)
Federal Republic of Germany, Deutsche
6.625% Mark
4,950,000 7/09/2003 $ 3,470,214
United Kingdom Treasury Stock, Pound
9.75% Sterling
1,450,000 8/27/2002 2,491,747
Canadian
Dollar
Government of Canada, 9.75% 1,100,000 12/01/2001 838,763
Government of Canada, 7.50% 1,500,000 12/01/2003 1,003,063
Danish
Krone
Kingdom of Denmark, 8.00% 2,500,000 5/15/2003 436,399
Kingdom of Denmark, 7.00% 39,300,000 12/15/2004 6,333,590
Italian
Lira
Republic of Italy, 8.50% 3,500,000,000 4/01/1999 1,786,923
Republic of Italy, 10.00% 1,750,000,000 8/01/2003 875,257
... Spanish
Peseta
Government of Spain, 11.45% 120,000,000 8/30/1998 936,389
Government of Spain, 8.30% 170,000,000 12/15/1998 1,202,291
Government of Spain, 11.30% 30,000,000 1/15/2002 226,464
Government of Spain, 10.90% 65,000,000 8/30/2003 475,930
25,337,813
Corporate 7.7%
Acme Boot, Inc. Sr. Notes,
11.50%*** $250,000 12/15/2000 100,000
Affinity Group, Inc. Sr. Sub.
Deb., 11.50% 250,000 10/15/2003 245,000
Allied Waste Industries, Inc.
Sr. Sub. Notes, 12.00% 250,000 2/01/2004 251,250
Almacs Inc. Sr. Sec. Notes,
11.50%** 27,000 11/18/2004 7,425
American Home Products Note,
7.70% 850,000 2/15/2000 855,933
American Telecasting Co. Sr.
Sub. Units, 0.00% to
6/14/99, 12.50% from 6/15/99
to maturity 250,000 6/15/2004 112,500
Amerisource Distribution Corp.
Sr. Deb., 11.25%** 293,420 7/15/2005 316,894
Anacomp, Inc. Cv. Deb.,
13.875% 395,000 1/15/2002 383,278
Anacomp International N.V. Cv.
Sub. Deb., 9.00% 250,000 1/15/1996 248,750
Axia Holdings Corp. Sr. Sub.
Note, 11.00% 250,000 3/15/2001 230,000
Bayou Steel Corp. First
Mortgage Note, 10.25% 500,000 3/01/2001 440,000
Corporate (cont'd)
Bell & Howell Co. Series B Sr.
Disc. Deb., 0.00% to
2/28/2000, 11.50% from
3/01/2000 to maturity $ 250,000 3/01/2005 $ 133,750
Belle Casinos, Inc. First
Mortgage Note, 12.00%+*** 125,000 10/15/2000 36,875
Boomtown, Inc. First Mortgage
Note, 11.50% 500,000 11/01/2003 475,000
CHC Helicopter Corp. Sr. Sub.
Note, 11.50% 250,000 7/15/2002 206,250
Carrols Corp. Sr. Notes,
11.50% 250,000 8/15/2003 230,000
Celcaribe S.A. Units, 0.00% to
3/14/98, 13.50% from 3/15/98
to maturity+ 183,000 3/15/2004 1,491,450
Central Rents, Inc. Sr. Units,
12.875% 750,000 12/15/2003 682,500
Chatwins Group Inc. Sr. Exch.
Note, 13.00% 500,000 5/01/2003 412,500
Chevron Corp. Note, 8.11% 750,000 12/01/2004 767,183
Color Tile, Inc. Sr. Note,
10.75% 250,000 12/15/2001 200,000
Computervision Corp. Sr.
Notes, 10.875% 480,000 8/15/1997 465,600
Computervision Corp. Sr.
Notes, 11.375% 250,000 8/15/1999 228,750
Consolidated Hydro Inc. Sr.
Disc. Notes, 0.00% 500,000 7/15/2003 332,480
Crown Packaging Holdings Ltd.,
0.00% to 10/31/2000, 12.25%
from 11/1/2000 to maturity 1,250,000 11/01/2003 600,000
Doskocil Companies Inc. Sr.
Sub. Red. Notes, 9.75% 250,000 7/15/2000 230,000
Dual Drilling Co. Sr. Sub.
Notes, 9.875% 250,000 1/15/2004 205,000
Equitable Bag Co. Inc. Sr.
Notes, 11.00%*** 238,000 12/16/2004 171,360
Finlay Enterprises, Inc. Sr.
Disc. Deb., 0.00% to 4/30/98,
12.00% from 5/01/98 to
maturity 1,000,000 5/01/2005 620,000
Fitzgeralds Gaming Corp. Sr.
Sec. Units, 13.75% to
6/14/95, 14.00% from 6/15/95
to 9/14/95, 14.25% from
9/15/95 to 12/14/95, 14.50%
from 12/15/95 to maturity+ 250,000 3/15/1996 132,500
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
Corporate (cont'd)
Flagstar Corp. Sr. Sub. Deb.,
11.25% $ 250,000 11/01/2004 $210,000
Food 4 Less Supermarkets, Inc.
Sr. Disc. Notes, 0.00% to
12/14/97, 15.25% from
12/15/97 to maturity 250,000 12/15/2004 197,500
General Media Inc. Sr. Sec.
Note, 10.625% 250,000 12/31/2000 207,500
General Medical Corp. Sub.
Deb., 12.125%** 294,491 8/15/2005 290,810
Genmar Holdings, Inc. Sr. Sub.
Notes, 13.50% 250,000 7/15/2001 243,750
Goldriver Hotel & Casino Corp.
Mortgage Notes, 13.375% 317,000 8/31/1999 174,350
Grand Union Co. Sr. Sub.
Notes, 12.25%*** 500,000 7/15/2002 170,000
Granite Broadcasting Corp. Sr.
Sub. Deb., 12.75% 500,000 9/01/2002 515,000
HWCC-Tunica, Inc. Note,
13.50%+ 250,000 9/30/1998 260,000
Harvard Industries, Inc. Sr.
Notes, 12.00% 250,000 7/15/2004 256,875
Haynes International Inc. Sr.
Sec. Notes, 11.25% 500,000 6/15/1998 465,000
Haynes International Inc. Sr.
Sub. Notes, 13.50% 250,000 8/15/1999 162,500
Horsehead Industries, Inc.
Sub. Note, 14.00% 750,000 6/01/1999 766,875
ICF Kaiser International, Inc.
Sr. Sub. Units, 12.00% 250,000 12/31/2003 226,875
John Q. Hammons Hotels Notes,
8.875% 250,000 2/15/2004 233,125
Kaiser Aluminum and Chemical
Corp. Sr. Notes, 9.875% 250,000 2/15/2002 234,375
Loews Corp. Sr. Notes, 7.00% 450,000 10/15/2023 372,555
Mail-Well Holdings, Inc. Sr.
Notes, 0.00% to 2/14/2000,
11.75% from 2/15/2000 to
maturity 1,000,000 2/15/2006 460,000
Marcus Cable Capital Co. Sr.
Disc. Note, 0.00% to 7/31/99,
13.50% from 8/1/99 to
maturity 500,000 8/01/2004 285,000
Merrill Lynch & Co., Inc.
Equity Partnership, 0.00% 1,015,000 1/31/2000 851,331
Miles Home Services, Inc. Sr.
Units, 12.00% 250,000 4/01/2001 175,000
Corporate (cont'd)
Moran Energy International,
Inc. Cv. Sub. Deb., 8.00% $ 250,000 11/01/1995 $240,938
Motels of America, Inc. Sr. 507,500
Sub. Notes, 12.00% 500,000 4/15/2004
PageMart, Inc. Sr. Disc. Exch.
Note, 0.00% to 10/31/98,
12.25% from 11/01/98 to
maturity 500,000 11/01/2003 305,000
Penda Industries, Inc. Sr.
Notes, 10.75% 250,000 3/01/2004 220,000
Presidio Oil Co. Sr. Sec.
Notes, 11.50% 500,000 9/15/2000 421,250
Presidio Oil Co. Sr. Sub. Gas
Indexed Notes, 13.30% 200,000 7/15/2002 116,500
P.T. Indah Kiat Pulp & Paper
Note, 12.50% 250,000 6/15/2006 239,375
Rohr Industries, Inc. Cv. Sub.
Note, 7.75% 450,000 5/15/2004 515,250
SPI Holdings Inc. Sr. Notes,
0.00% to 9/30/96, 11.50% from
10/1/96 to maturity 300,000 10/01/2001 135,000
Sam Houston Race Park Ltd. Sr.
Sec. Note, 11.75%*** 250,000 7/15/1999 37,500
Santa Fe Hotel Inc. First
Mortgage Note, 11.00% 500,000 12/15/2000 485,000
Seven-Up/RC Bottling Co. of
Southern California Notes,
11.50% 750,000 8/01/1999 648,750
Sheffield Steel Corp. First
Mortgage Units, 12.00% 250,000 11/01/2001 237,500
Southwest Forest Industries,
Inc. Sub. Deb., 12.125% 250,000 9/15/2001 251,250
Sullivan Graphics, Inc. Sr.
Sub. Notes, 15.00% 500,000 2/01/2000 530,000
Talley Manufacturing and
Technology Inc. Sr.
Note, 10.75% 250,000 10/15/2003 232,500
Terex Corp. Sr. Sec. Notes,
13.00%+ 203,000 8/01/1996 197,417
Terex Corp. Sr. Sub. Notes,
13.50% 250,000 7/01/1997 235,000
Thermoscan, Inc. Sr. Sub.
Units, 11.50%+ 250,000 8/15/2001 250,000
Tiphook Finance Corp. Notes,
7.125% 148,000 5/01/1998 114,700
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
Corporate (cont'd)
Total Renal Care, Inc. Sr.
Sub. Disc. Units, 0.00% to
8/14/97, 12.00% from 8/15/97
to maturity $ 500,000 8/15/2004 $ 435,000
Trans Ocean Container Corp.
Sr. Sub. Notes, 12.25% 250,000 7/01/2004 240,000
Treasure Bay Gaming & Resorts,
Inc. First Mortgage Units,
12.25%+*** 250,000 11/15/1998 50,000
Truck Components, Inc. Sr.
Notes, 12.25% 250,000 6/30/2001 258,750
Trump Plaza Funding, Inc.
First Mortgage Notes, 10.875% 500,000 6/15/2001 405,000
UCAR Global Enterprises, Inc.
Sr. Sub. Notes, 12.00%+ 250,000 1/15/2005 262,500
UCC Investors Inc. Sub. Disc.
Notes, 0.00% to 4/30/98,
12.00% from 5/01/98 to
maturity 500,000 5/01/2005 352,500
Universal Outdoor Holdings,
Inc. Units, 0.00% to 6/30/99,
14.00% from 7/01/99 to
maturity 1,000,000 7/01/2004 515,000
U.S.A. Mobile Communications,
Inc. Sr. Notes, 14.00% 250,000 11/01/2004 262,500
U.S.A. Mobile Communications,
Inc. Sr. Notes, 9.50% 500,000 2/01/2004 425,000
Waxman Industries, Inc. Sr.
Sec. Notes, 12.25% 500,000 9/01/1998 470,000
Waxman Industries, Inc. Sr.
Sec. Units, 0.00% to
5/31/99, 12.75% from 6/01/99
to maturity 928,000 6/01/2004 380,480
Wilrig A.S. Sr. Sec. Notes,
11.25% 750,000 3/15/2004 720,000
Wyman-Gordon Co. Sr. Notes,
10.75% 250,000 3/15/2003 235,000
28,502,809
Finance/Mortgage 3.7%
Ambac Inc. Deb., 9.375% 250,000 8/01/2011 275,010
American General Finance Corp.
Notes, 8.00% 600,000 2/15/2000 608,034
American Southwest Financial
Services Corp., 8.00% 541,041 8/25/2010 543,678
Finance/Mortgage (cont'd)
Beneficial Corp. Note, 9.125% $ 425,000 2/15/1998 $ 442,047
Beneficial Corp. Note, 8.17% 200,000 11/09/1999 203,790
Caterpillar Financial Services
Co. Note, 6.03% 200,000 11/16/1995 198,994
Countrywide Mortgage Series
1994-2 Class A-7, 6.50% 650,000 3/25/2008 629,889
Countrywide Mortgage Series
1993-E Class A-1, 6.50% 524,041 1/25/2024 512,578
Finova Capital Corp.
Global Notes, 9.125% 750,000 2/27/2002 794,085
First Chicago Credit Master
Trust Series 1991-D, 8.40% 350,000 6/15/1998 354,921
Fleet Mortgage Group, Inc.
Note, 7.25% 400,000 1/15/1998 397,116
Fleet Mortgage Group, Inc.
Note, 6.50% 600,000 9/15/1999 571,302
Ford Motor Credit Co. Notes,
8.45% 850,000 12/30/1998 873,604
General Electric Capital Corp.
Note, 7.625% 1,000,000 7/24/1996 1,007,940
General Motors Acceptance
Corp., 7.85% 675,000 11/17/1997 679,448
General Motors Acceptance
Corp., 8.625% 1,000,000 6/15/1999 1,031,290
Prudential Home Mortgage
Series 93-29 A-6, 6.75% 1,490,110 8/25/2008 1,448,655
Prudential Home Mortgage
Series 93-54 A-21, 5.50% 425,000 1/25/2024 393,656
Residential Funding Corp.
Series 93-S25 A-1, 6.50% 254,334 7/25/2008 245,272
Residential Funding Corp.
Series 93-S49 A-1, 6.00% 671,531 12/25/2008 659,564
Sears Roebuck & Co. Master
Trust Series 95-2, 8.10% 650,000 6/15/2004 667,875
Standard Credit Card Master
Trust Series 1993-3A, 5.50% 950,000 2/07/2000 891,214
Tandy Master Trust Series
1991-A, 8.25% 443,892 4/15/1999 446,804
13,876,766
Total Fixed Income Securities (Cost $132,896,323) 130,411,291
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
Value
Shares (Note 1)
Equity Securities 51.9%
Basic Industries 11.1%
Chemical 3.1%
Atlantic Richfield Co. 57,400 $ 1,435,000
Cookson Group PLC* 170,000 571,533
Cookson Group PLC Rts.* 34,000 114,031
Daicel Chemical Industries,
Inc.* 160,000 865,861
E.I. duPont de Nemours & Co. 54,400 3,291,200
FMC Corp.* 16,300 986,150
Mississippi Chemical Corp.*++ 16,800 306,600
Mitsui Petrochemical Co.* 100,000 868,164
Potash Corp. of Saskatchewan,
Inc. 29,400 1,308,300
P.T. Tri Polyta Indonesia ADR* 25,000 550,000
Rohm & Haas Co. 4,500 265,500
Seagram Ltd. 30,000 952,500
11,514,839
Diversified 2.2%
Axia Holdings Corp.*+ 750 21,375
Coltec Industries, Inc.* 45,500 784,875
Corning Inc. 155,600 5,601,600
Johnson Controls, Inc. 26,300 1,338,013
Mark IV Industries, Inc. 32,100 658,050
PST Holdings, Inc.* 7,500 7,500
8,411,413
Electrical Equipment 0.1%
Union Switch & Signal, Inc.* 13,900 180,700
Forest Product 1.2%
Boise Cascade Corp. 9,600 333,600
Bowater, Inc. 30,000 1,072,500
Champion International Corp. 9,500 410,875
Crown Packaging Holdings Ltd.
Wts.*+ 3,750 112,500
Equitable Bag, Inc. Cl.A* 22,619 33,928
International Paper Co. 3,500 262,938
James River Corp. of Virginia 13,800 358,800
MacMillan Bloedel Ltd. 33,000 418,687
Mail-Well Holdings, Inc.*+ 5,000 35,000
S.D. Warren Co.+ 18,000 549,000
Westvaco Corp. 21,200 879,800
4,467,628
Machinery 2.8%
Black & Decker Corp. 24,400 704,550
CBI Industries, Inc. 52,900 1,355,563
Caterpillar Inc. 33,600 1,869,000
Chatwins Group, Inc. Wts.* 500 500
Cincinnati Milacron Inc. 40,400 924,150
Cooper Industries, Inc. 3,400 131,750
Machinery (cont'd)
Fluor Corp. 35,000 $ 1,688,750
Harsco Corp. 4,500 198,000
Millipore Corp. 33,900 1,889,925
Specialty Equipment Companies,
Inc.* 30,000 363,750
Sundstrand Corp. 23,800 1,198,925
Terex Corp. Rts. 750 563
10,325,426
Metal & Mining 1.1%
Algoma Finance Corp. Pfd.* 1,600 25,159
Alumax, Inc.* 35,100 943,312
Bohler Uddeholm 12,000 680,760
Geneva Steel Co. Wts.*+ 7,075 45,987
Geneva Steel Co. Series B Exch.
Pfd.* 2,500 280,000
Hylsamex S.A. Series B+ 357,400 557,544
Kaiser Aluminum Corp. Cv. Pfd. 6,400 67,200
Mitsubishi Materials 180,000 870,466
Sheffield Steel Corp. Wts.* 1,250 7,500
Stelco, Inc. Series C Cv. Pfd. 6,400 96,570
Timken Co. 14,700 521,850
4,096,348
Railroad 0.5%
CSX Corp. 17,000 1,338,750
Southern Pacific Rail Corp. 25,600 448,000
1,786,750
Truckers 0.1%
Arkansas Best Corp. 40,800 433,500
Total Basic Industries 41,216,604
Consumer Cyclical 11.9%
Airline 0.1%
Air Express International
Corp.* 18,450 470,475
CHC Helicopter Corp. Wts.* 2,000 2,000
472,475
Automotive 1.4%
Douglas & Lomason Co. 20,000 330,000
General Motors Corp. 16,000 708,000
Harvard Industries, Inc. Cl. B* 1,000 17,375
Harvard Industries, Inc. 14.25%
Exch. Pfd.** 10,192 279,006
Lear Seating Corp.* 124,730 2,245,140
Renault Group* 44,000 1,536,203
5,115,724
Building 0.7%
Cameron Ashley, Inc.* 8,700 139,200
Waxman Industries, Inc. Wts.*+ 29,500 3,687
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
Building (cont'd)
Cementos Paz Del Rio SA ADR+ 15,000 $ 270,000
Fleetwood Enterprises Inc. 55,500 1,311,187
Hanson PLC ADR 27,900 526,613
Lafarge Corp. 14,000 262,500
Miles Homes Services, Inc.
Wts.* 3,000 1,500
2,514,687
Hotel & Restaurant 2.0%
Apple South, Inc. 16,500 257,813
Au Bon Pain Company, Inc.* 19,700 268,412
IHOP Corp* 24,300 715,331
Mirage Resorts, Inc.* 84,950 2,378,600
Motels of America, Inc.+ 500 40,000
Outback Steakhouse, Inc.* 13,500 342,563
Primadonna Resorts, Inc.* 15,200 380,000
Promus Companies, Inc.* 64,200 2,407,500
Station Casinos, Inc.* 63,400 729,100
7,519,319
Recreation 3.5%
Acclaim Entertainment, Inc.* 20,200 350,975
American Telecasting, Inc.
Wts.* 1,250 1,250
Boomtown, Inc. Wts.* 500 250
Brunswick Corp. 42,400 853,300
Comcast Corp. Cl. A 57,800 899,513
Comcast Corp. Cl. A Special 90,100 1,407,813
Walt Disney Co. 51,300 2,738,138
Gaylord Entertainment Co. Cl. A 11,700 307,125
Goldriver Hotel & Casino Corp.
Cl. B* 20,000 20,000
Goldriver Hotel & Casino Corp.
Liquidation Trust Units*# 500,000 6,350
Infinity Broadcasting Corp. Cl.
A* 20,225 844,394
Lewis Galoob Toys Inc. Cv.
Pfd.* 40,000 600,000
Pyramid Communications, Inc.
Cl. B*+ 700 31,404
Pyramid Communications, Inc.
Series C Exch. Pfd.*+ 22,597 531,032
Radica Games Ltd.* 10,500 38,063
Renaissance Communications
Corp.* 16,900 545,025
Taj Mahal Holdings Corp. Cl. A* 3,821 30,568
Viacom, Inc. Cl. B* 85,283 3,816,414
13,021,614
Retail Trade 3.7%
Central Rents, Inc. Wts.* 750 20,625
Color Tile, Inc. Pfd.* 5,000 115,000
Color Tile, Inc. Pfd.*+ 15,000 345,000
Department 56, Inc.* 17,900 713,763
Discount Auto Parts, Inc.* 8,400 201,600
Ethan Allen Interiors Inc.* 16,700 348,613
Retail Trade (cont'd)
Federated Department Stores,
Inc.* 42,800 $ 946,950
Finlay Enterprises, Inc. Cl. A* 1,333 14,663
Food 4 Less Holdings, Inc.
Wts.*# 584 52,058
Gymboree Corp.* 27,800 705,425
May Department Stores Co. 15,900 588,300
Peebles, Inc.*# 8,000 152,960
Penn Traffic Co.* 37,600 1,287,800
J.C. Penney, Inc. 33,800 1,516,775
Safety 1st, Inc.* 15,700 402,312
Sears Roebuck & Co. 9,700 517,738
Stop & Shop Companies, Inc.* 27,000 648,000
Supermarkets General Holding
Corp.
Exch. Pfd.* 14,198 340,752
Tandy Corp. 72,800 3,476,200
Woolworth Corp. 81,000 1,488,375
13,882,909
Textile & Apparel 0.5%
Authentic Fitness Corp.* 43,500 696,000
Norton McNaughton, Inc.* 21,000 372,750
Warnaco Group, Inc. Cl. A 49,000 875,875
1,944,625
Total Consumer Cyclical 44,471,353
Consumer Staple 6.7%
Business Service 0.4%
Acme Boot Co.+ 250 250
Franklin Quest Co.* 12,000 378,000
La Petite Holdings Corp. Red.
Exch. Pfd.* 22,000 550,000
PageMart, Inc. Wts.*+ 2,300 7,475
Universal Outdoor Holdings,
Inc. Wts.* 1,000 40,000
Vestar/LPA Investment Corp.*+ 1,375 19,250
Viking Office Products, Inc.* 13,200 409,200
1,404,175
Container 0.2%
Ball Corp. 9,800 336,875
Owens-Illinois, Inc. 23,900 268,875
605,750
Drug 0.3%
Arris Pharmaceutical Corp.* 25,700 179,900
Cyto Therapeutic, Inc.* 19,900 136,812
Rexall Sundown, Inc.* 14,300 146,575
Yamanouchi Pharmaceutical Co. 30,000 656,304
1,119,591
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
Food & Beverage 0.8%
Coca-Cola Enterprises, Inc. 21,100 $ 440,463
Dr. Pepper Bottling Co. Cl. A* 56,000 196,000
LVMH Moet Hennessy Louis
Vuitton* 4,400 862,799
Pepsi Co, Inc. 42,300 1,649,700
3,148,962
Hospital Supply 3.8%
Abbott Laboratories 65,800 2,344,125
Advocat, Inc.* 14,200 181,050
Community Health Systems, Inc. 26,300 828,450
Genesis Health Ventures, Inc.* 13,500 421,875
Grancare, Inc.* 19,900 338,300
Healthcare Compare Corp.* 19,900 661,675
Healthsource Inc.* 9,900 469,013
Heart Technology, Inc.* 8,900 166,875
I-Stat Corp.* 5,100 127,500
IDEXX Laboratories, Inc.* 4,400 182,600
Mariner Health Group, Inc.* 23,300 451,437
Maxicare Health Plans, Inc.* 30,400 528,200
Multicare Companies, Inc.* 17,400 374,100
Owens & Miner, Inc. 25,500 331,500
Pyxis Corp. 17,700 367,275
Rightchoice Managed Care, Inc.
Cl. A* 9,500 171,000
Rotech Medical Corp.* 2,800 87,500
Sierra Health Services, Inc.* 22,900 752,838
United Healthcare Corp. 74,300 3,473,525
Vencor, Inc.* 28,350 1,009,969
Vivra, Inc.* 21,100 680,475
Wellcare Management Group,
Inc.* 2,900 99,325
14,048,607
Personal Care 0.4%
Procter & Gamble Co. 24,900 1,649,625
Printing & Publishing 0.8%
British Sky Broadcasting Group
ADR 2,800 68,950
Dimac Corp.* 2,774 38,142
General Media Inc. Wts.*+ 500 5,625
K-III Communications Corp.
Series B Exch. Pfd.** 3,133 303,901
News Corp. Ltd. ADR 136,800 2,616,300
Sullivan Holdings, Inc.* 148 53,467
3,086,385
Total Consumer Staple 25,063,095
Energy 3.7%
Oil 3.3%
Anadarko Petroleum Corp.++ 62,900 2,751,875
Ashland Oil, Inc. 9,300 331,313
Imperial Oil Ltd. 25,700 915,562
Oil (cont'd)
Louisiana Land & Exploration
Co.++ 59,400 $ 2,220,075
Mitchell Energy & Development
Corp. Cl. B 19,300 340,163
Phillips Petroleum Co. 67,900 2,486,838
Tosco Corp. 35,000 1,085,000
Total S.A. 12,600 751,441
Ultramar Corp. 9,900 257,400
Unocal Corp. 38,400 1,104,000
12,243,667
Oil Service 0.4%
Coflexip ADR* 24,500 1,350,073
Total Energy 13,593,740
Finance 6.0%
Bank 2.0%
H.F. Ahmanson & Co. 29,700 534,600
BankAmerica Corp. 39,900 1,925,175
Baybanks, Inc. 4,000 258,000
Chase Manhattan Corp. 20,300 723,187
Citicorp* 46,300 1,967,750
Mellon Bank Corp. 6,300 256,725
NationsBank Corp. 14,200 720,650
Riverbank American Non-cum.
Pfd. 20,000 440,000
West One Bancorp 23,600 643,100
7,469,187
Financial Service 0.8%
Federal Home Loan Mortgage
Corp. 24,500 1,482,250
Federal National Mortgage
Association 7,800 634,725
Money Store, Inc. 24,300 610,538
United Companies Financial
Corp. 4,960 173,600
2,901,113
Insurance 3.2%
Ace Ltd.* 28,900 729,725
AMBAC, Inc. 16,100 654,063
American Re Corp.* 32,800 1,148,000
Chubb Corp. 38,600 3,049,400
Equitable Companies, Inc. 64,700 1,423,400
General Re Corp. 15,800 2,085,600
Horace Mann Educators Corp. 3,300 73,012
Mutual Risk Management Ltd. 12,400 345,650
NAC Re Corp. 11,400 344,850
National Re Corp. 15,400 450,450
Progressive Corp. of Ohio 4,600 186,875
Safeco Corp. 22,400 1,226,400
20th Century Industries, Inc. 26,600 312,550
12,029,975
Total Finance 22,400,275
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
Science & Technology 9.3%
Aerospace 0.7%
Boeing Co. 29,700 $ 1,600,088
Ladish Company, Inc.* 52,000 39,000
Sequa Corp.* 30,000 877,500
2,516,588
Computer Software & Service 2.3%
Atlantec Corp.* 9,000 402,750
Computervision Corp.* 400,000 2,000,000
FTP Software, Inc.* 25,500 809,625
General Motors Corp. Cl. E 20,200 785,275
Hyperion Software Corp.* 20,800 972,400
ITI Technologies, Inc.* 18,500 467,125
Intersolv, Inc.* 21,000 336,000
Keane, Inc.* 19,100 463,175
Mattson Technologies, Inc.* 10,100 229,775
Progress Software Corp.* 6,100 317,200
Softkey Software Products,
Inc.* 14,100 384,225
Symantec Corp.* 41,500 954,500
TGV Software, Inc.* 10,200 229,500
Wonderware Corp. 7,200 228,600
8,580,150
Electronic 5.3%
AMP, Inc. 35,200 1,267,200
Credence Systems Corp.* 8,600 268,750
Electroglas, Inc.* 21,900 958,125
L.M. Ericsson Telephone Co. Cl.
B ADR* 43,100 2,664,119
L.M. Ericsson Telephone Co. 20,000 1,241,723
FSI International, Inc.* 11,600 468,350
Intel Corp.* 37,300 3,165,838
Itron, Inc.* 19,300 453,550
Motorola, Inc. 21,000 1,147,125
Nokia Corp. Pfd. 9,600 1,409,252
Perkin-Elmer Corp. 150,400 4,380,400
Planar Systems, Inc.* 17,700 371,700
Tektronix, Inc.* 34,400 1,376,000
Tencor Instruments 9,300 551,025
19,723,157
Office Equipment 1.0%
Sequent Computer Systems, Inc. 20,700 341,550
Syquest Technology, Inc.* 19,800 240,075
Xerox Corp. 26,000 3,051,750
3,633,375
Total Science & Technology 34,453,270
Utility 3.2%
Electric 0.4%
Central Costanera S.A. de C.V.* 200,000 $ 589,941
Empresa Nacional de
Electricidad S.A. ADR 20,000 853,418
1,443,359
Natural Gas 1.0%
Broken Hill Proprietary Ltd.
ADR 68,000 891,182
Coastal Corp. 44,000 1,265,000
Transportadora de Gas del Sur
S.A. ADR 887,500 1,686,081
3,842,263
Telephone 1.8%
ALC Communications Corp.* 12,300 419,737
Air Touch Communications, Inc.* 63,800 1,738,550
Allen Group, Inc. 29,400 727,650
Cidco Inc.* 12,400 373,550
Cointel Prides* 20,000 995,000
Southern New England Telecom
Corp. 19,600 654,150
Sprint Corp.* 20,500 684,188
Tele Danmark AS Cl. B ADR 9,750 515,418
Vodafone Group PLC 200,000 643,227
6,751,470
Total Utility 12,037,092
Total Equity Securities (Cost
$174,706,733) 193,235,429
Equity Securities--Inflation Responsive Investments 10.3%
Basic Industries 3.7%
Chemical 0.3%
Cominco Fertilizers Ltd.* 40,000 1,118,576
Forest Product 0.2%
St. Laurent Paperboard, Inc.*@ 45,000 675,434
Metal & Mining 3.2%
Aber Resources Ltd.* 60,000 326,250
Birmingham Steel Co. 30,000 607,500
Coeur d'Alene Mines Corp. 20,000 370,000
Crown Resources Corp.* 75,000 328,125
Cyprus Amax Minerals Co.@ 108,900 3,090,038
Dia Met Minerals Ltd. Cl. A* 2,000 14,116
Dia Met Minerals Ltd. Cl. B* 20,000 157,244
Echo Bay Mines Ltd. 50,000 518,750
Falconbridge Ltd.* 40,000 671,860
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
Metal and Mining (cont'd)
Freeport-McMoRan, Inc. 50,000 $ 906,250
Gibralter Mines Ltd. 30,000 144,736
Great Lakes Minerals, Inc.* 250,000 321,635
Kinross Gold Corp.* 100,000 562,500
Magma Copper Co. Cl. B* 100,000 1,737,500
Novicourt, Inc.* 50,000 153,670
Nucor Corp. 10,000 562,500
Rio Algom Ltd. 40,000 717,500
Santa Fe Pacific Gold Corp.* 20,000 252,500
Southernera Resources Ltd.* 100,000 115,789
TVX Gold, Inc.* 70,000 463,750
12,022,213
Total Basic Industries 13,816,223
Consumer Cyclical 0.2%
Building 0.2%
Giant Cement Holdings, Inc.* 67,000 770,500
Total Consumer Cyclical 770,500
Energy 5.1%
Oil 4.1%
Arakis Energy Corp.* 10,900 78,344
Barrett Resources Corp.* 30,000 648,750
Basin Exploration, Inc.* 20,000 176,250
Box Energy Corp. Cl. B* 24,000 213,000
Tom Brown Inc.*@ 74,600 1,156,300
CS Resources Ltd.* 100,000 616,468
Coda Energy, Inc.* 45,400 266,725
Crystal Oil Co.* 10,000 312,500
Discovery West Corp.* 50,000 146,523
Forest Oil Corp.* 60,000 138,750
Fortune Energy, Inc.* 21,975 9,738
Garnet Resources Corp.* 25,000 71,875
Gerrity Oil & Gas Corp.* 70,000 271,250
Global Natural Resources, Inc.* 165,000 1,278,750
Intensity Resources Ltd.* 161,300 332,031
Inverness Petroleum Ltd.* 30,000 176,899
Morgan Hydrocarbons, Inc.* 250,000 643,271
Nuevo Energy Co.*@ 28,100 554,975
Optima Petroleum Corp.* 33,300 74,925
Oil (cont'd)
Pan East Petroleum, Inc.* 50,000 $ 107,212
Phoenix Resource Cos., Inc.* 120,000 2,610,000
Plains Resources Inc.* 104,800 812,200
Ranchmens Resources Ltd.* 35,000 143,842
Ranger Oil Ltd.*@ 316,600 2,097,475
Stampeder Exploration Ltd. 30,000 128,654
Summit Resources Ltd. 50,000 330,570
Swift Energy Co.* 31,850 302,575
Tatham Offshore, Inc.* 20,000 130,000
Tipperary Corp. 15,300 95,625
Ulster Petroleum Ltd. 175,000 562,862
Ultra Petroleum Corp.* 50,000 66,114
United Meridian 13,500 189,000
Wascana Energy, Inc.* 65,000 551,694
Clayton Williams Energy, Inc. 30,000 135,000
15,430,147
Oil Service 1.0%
BJ Services Co.* 8,000 164,000
Energy Ventures, Inc.* 30,000 393,750
Grant Geophysical, Inc.* 30,000 84,375
Input/Output, Inc.* 14,400 379,800
Landmark Graphics Corp.* 18,200 341,250
J. Ray McDermott S.A. 6,500 175,500
Noble Drilling Corp.* 160,500 983,063
Nowsco Well Service Ltd.@ 72,400 805,450
Scientific Software-Intercomp
Inc.* 40,000 240,000
3,567,188
Total Energy 18,997,335
Utility 1.3%
Natural Gas 1.3%
ENSERCH Corp.@ 167,700 2,494,538
TransTexas Gas Corp.* 188,400 2,119,500
4,614,038
Total Utility 4,614,038
Total Equity
Securities--Inflation
Responsive Investments (Cost
$41,808,013) 38,198,096
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
Principal Maturity Value
Amount Date (Note 1)
Cash Equivalents 7.5%
American Express Credit Corp.,
5.90% $ 532,000 4/6/1995 $ 532,000
Chevron Oil Finance Co., 5.85% 3,922,000 4/5/1995 3,922,000
Ford Motor Credit Co., 5.89% 6,780,000 4/3/1995 6,780,000
Ford Motor Credit Co., 5.96% 8,814,000 4/6/1995 8,814,000
Household Finance Corp., 5.95% 7,812,000 4/4/1995 7,812,000
Total Cash Equivalents (Cost $27,860,000) 27,860,000
Total Investments (Cost $377,271,069)--104.7% 389,704,816
Cash and Other Assets, Less Liabilities--(4.7)% (17,521,643)
Net Assets--100.0% $372,183,173
Federal Income Tax Information:
At March 31, 1995, the
net unrealized
appreciation of
investments based on
cost for Federal
income tax purposes
of $377,958,048 was
as follows:
Aggregate gross
unrealized
appreciation for all
investments in which
there is an excess of
value over tax cost $ 25,902,446
Aggregate gross
unrealized
depreciation for all
investments in which
there is an excess of
tax cost over value (14,155,678)
$ 11,746,768
ADR stands for American Depositary Receipt, representing ownership of foreign
securities.
* Nonincome-producing securities.
** Payments of income may be made in cash or in the form of additional
securities.
*** Security is in default.
# Security valued under consistently applied procedures established by the
Trustees. Security restricted as to public resale. The total cost and
market value of restricted securities owned at March 31, 1995 were $108,762
and $211,368 (0.06% of net assets), respectively.
+ Security restricted in accordance with Rule 144A under the Securities Act
of 1933, which allows for the resale of such securities among certain
qualified institutional buyers. The total cost and market value of Rule
144A securities owned at March 31, 1995 were $6,376,601 and $5,255,871
(1.41% of net assets), respectively.
++ 5,000 shares of Anadarko Petroleum Corp., 25,000 shares of Louisiana Land &
Exploration Co., 8,200 shares of Mississippi Chemical Corp. are considered
by the Adviser to be part of Inflation Responsive Investments.
@ 14,600 shares of Tom Brown, Inc., 48,900 shares of Cyprus Amax Minerals
Co., 2,300 shares of Nuevo Energy Co., 67,700 shares of ENSERCH Corp.,
17,400 shares of Nowsco Well Service Ltd., 66,600 shares of Ranger Oil Ltd.
and 20,000 shares of St. Laurent Paperboard, Inc. are considered by the
Adviser to be part of Equity Securities.
TBA Represents "TBA" (to be announced) purchase commitment to purchase
securities for a fixed unit price at a future date beyond customary
settlement time. Although the unit price has been established, the
principal value has not been finalized.
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
Forward currency exchange contracts outstanding at March 31, 1995 are as
follows:
<TABLE>
<CAPTION>
Unrealized
Contract Appreciation Delivery
Total Value Price (Depreciation) Date
<S> <C> <C> <C> <C>
Sell Australian dollars, buy U.S. dollars 2,000,000 AUD .74200 AUD $ 17,650 4/13/95
Sell Australian dollars, buy U.S. dollars 3,242,306 AUD .74490 AUD 36,096 5/16/95
Sell Australian dollars, buy U.S. dollars 1,087,701 AUD .73610 AUD 2,356 5/24/95
Sell Canadian dollars, buy U.S. dollars 535,926 CAD .70572 CAD (3,136) 4/24/95
Sell Canadian dollars, buy U.S. dollars 953,000 CAD .70646 CAD (6,111) 5/16/95
Sell Canadian dollars, buy U.S. dollars 836,588 CAD .71141 CAD (1,223) 5/16/95
Sell Danish krone, buy U.S. dollars 3,460,000 DKK .16480 DKK (64,351) 4/24/95
Sell Danish krone, buy U.S. dollars 19,993,300 DKK .17630 DKK (139,279) 5/16/95
Sell Danish krone, buy U.S. dollars 7,127,750 DKK .16745 DKK (112,781) 5/16/95
Sell Danish krone, buy U.S. dollars 4,324,150 DKK .17149 DKK (50,768) 5/24/95
Sell Deutsche marks, buy U.S. dollars 4,757,700 DEM .71721 DEM (52,229) 5/24/95
Sell Italian lira, buy U.S. dollars 606,626,890 ITL .00059 ITL 3,820 5/16/95
Sell Italian lira, buy U.S. dollars 935,635,680 ITL .00062 ITL 30,810 5/16/95
Sell Italian lira, buy U.S. dollars 683,900,000 ITL .00062 ITL 22,533 5/16/95
Sell Italian lira, buy U.S. dollars 1,470,000,000 ITL .00059 ITL 3,095 5/16/95
Sell Italian lira, buy U.S. dollars 864,900,000 ITL .00061 ITL 23,617 5/24/95
Sell Pound sterling, buy U.S. dollars 914,100 GBP 1.56800 GBP (47,159) 4/24/95
Sell Pound sterling, buy U.S. dollars 578,000 GBP 1.58110 GBP (21,395) 5/24/95
Sell Spanish peseta, buy U.S. dollars 23,250,000 ESP .00767 ESP (4,560) 5/16/95
Sell Spanish peseta, buy U.S. dollars 21,215,000 ESP .00762 ESP (5,191) 5/16/95
Sell Spanish peseta, buy U.S. dollars 62,350,000 ESP .00764 ESP (14,275) 5/16/95
Sell Spanish peseta, buy U.S. dollars 140,000,000 ESP .00768 ESP (26,797) 5/16/95
Sell Spanish peseta, buy U.S. dollars 108,400,000 ESP .00769 ESP (18,421) 5/24/95
$(427,699)
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
Statements of Assets and Liabilities
March 31, 1995
Assets
Investments, at value (Cost $377,271,069) (Note 1) $389,704,816
Cash 5,286
Receivable for securities sold 6,900,119
Interest and dividends receivable 2,544,170
Receivable for fund shares sold 377,630
Receivable from Distributor (Note 3) 140,644
Receivable for open forward contracts 139,977
Other assets 66,873
399,879,515
Liabilities
Payable for securities purchased 26,024,148
Payable for open forward contracts 567,676
Payable for fund shares redeemed 282,814
Accrued management fee (Note 2) 232,656
Accrued distribution fee (Note 5) 173,777
Accrued transfer agent and shareholder services
(Note 2) 150,099
Dividends payable 107,510
Accrued trustees' fees (Note 2) 7,856
Other accrued expenses 149,806
27,696,342
Net Assets $372,183,173
Net Assets consist of:
Undistributed net investment income $ 1,018,118
Unrealized appreciation of investments 12,433,747
Unrealized depreciation of forward contracts
and foreign currency (424,954)
Accumulated net realized loss (12,755,387)
Shares of beneficial interest 371,911,649
$372,183,173
Net Asset Value and redemption price per share of
Class A shares ($181,357,717 / 20,697,855 shares of
beneficial interest) $8.76
Maximum Offering Price per share of Class A shares
($8.76 / .955) $9.17
Net Asset Value and offering price per share of Class
B shares ($152,250,575 / 17,423,324 shares of
beneficial interest)* $8.74
Net Asset Value, offering price and redemption price
per share of Class C shares ($25,802,975 / 2,943,770
shares of beneficial interest) $8.77
Net Asset Value and offering price per share of Class
D shares ($12,771,906 / 1,460,284 shares of
beneficial interest)* $8.75
* Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
Statement of Operations
For the year ended March 31, 1995
Investment Income
Interest, net of foreign taxes of $45,736 $ 11,837,812
Dividends, net of foreign taxes of $71,207 3,099,275
14,937,087
Expenses
Management fee (Note 2) 2,564,590
Transfer agent and shareholder services (Note 2) 1,171,091
Custodian fee 335,810
Registration fees 191,236
Reports to shareholders 115,209
Distribution fee--Class A (Note 5) 447,030
Distribution fee--Class B (Note 5) 1,277,012
Distribution fee--Class D (Note 5) 109,939
Audit fee 54,424
Trustees' fees (Note 2) 25,102
Legal fees 18,208
Miscellaneous 7,105
6,316,756
Expenses borne by the Distributor (Note 3) (1,062,971)
5,253,785
Net investment income 9,683,302
Realized and Unrealized Gain (Loss)
on Investments, Foreign Currency
and Forward Contracts
Net realized loss on investments (Notes 1 and 4) (12,175,757)
Net realized loss on forward contracts and foreign
currency (Note 1) (2,622,262)
Total net realized loss (14,798,019)
Net unrealized appreciation of investments 10,287,612
Net unrealized depreciation of forward contracts
and foreign currency (99,349)
Total net unrealized appreciation 10,188,263
Net loss on investments, foreign currency and forward
contracts (4,609,756)
Net increase in net assets resulting from operations $ 5,073,546
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
Statement of Changes in Net Assets
March 31, 1995
Year ended March 31
1995 1994
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 9,683,302 $ 4,198,909
Net realized gain (loss) on
investments, foreign currency
and forward contracts* (14,798,019) 8,956,207
Net unrealized appreciation
(depreciation) of investments,
foreign currency and forward
contracts 10,188,263 (4,601,368)
Net increase resulting from
operations 5,073,546 8,553,748
Dividends from net investment income:
Class A (3,550,468) (3,076,231)
Class B (1,701,801) (673,462)
Class C (551,533) (425,534)
Class D (145,276) (54,466)
(5,949,078) (4,229,693)
Distributions from net realized gains:
Class A (2,686,125) (8,710,939)
Class B (1,571,333) (988,753)
Class C (352,065) (411,515)
Class D (134,219) (67,101)
(4,743,742) (10,178,308)
Net increase from fund share
transactions
(Note 6) 99,996,131 190,123,317
Total increase in net assets 94,376,857 184,269,064
Net Assets
Beginning of period 277,806,316 93,537,252
End of period (including
undistributed
(overdistributed) net
investment income of
$1,018,118 and $(381,760),
respectively) $372,183,173 $277,806,316
* Net realized gain (loss) for
Federal income tax purposes
(Note 1) $ (2,823,098) $ 9,536,372
The accompanying notes are an integral part of the financial statements.
Notes to Financial Statements
Note 1
MetLife-State Street Research Managed Assets, formerly MetLife-State Street
Managed Assets (the "Fund") is a series of MetLife-State Street Income Trust
(the "Trust"), which was organized as a Massachusetts business trust in
December, 1985 and is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company. The Fund commenced
operations in December, 1988. The Trust consists presently of three separate
funds: MetLife-State Street Research Managed Assets, MetLife-State Street
Research High Income Fund and MetLife-State Street Research Government
Securities Fund.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and an annual service fee of 0.25% of
average daily net assets. Investments of $1 million or more in Class A shares,
which are not subject to any initial sales charge, are subject to a 1%
contingent deferred sales charge if redeemed within one year of purchase. Class
B shares are subject to a contingent deferred sales charge on certain
redemptions made within five years of purchase and pay annual distribution and
service fees of 1.00%. Class B shares automatically convert into Class A shares
(which pay lower ongoing expenses) at the end of eight years after the issuance
of the Class B shares. Class C shares are only offered to certain employee
benefit plans and large institutions. No sales charge is imposed at the time of
purchase or redemption of Class C shares. Class C shares do not pay any
distribution or service fees. Class D shares are subject to a contingent
deferred sales charge of 1.00% on any shares redeemed within one year of their
purchase. Class D shares also pay annual distribution and service fees of
1.00%. The Fund's expenses are borne pro-rata by each class, except that each
class bears expenses, and has exclusive voting rights with respect to
provisions of the Plan of Distribution, related specifically to that class. The
Trustees declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by the
Fund in preparing its financial statements, and such policies are in conformity
with generally accepted accounting principles for investment companies.
A. Investment Valuation
Values for listed equity securities reflect final sales on national securities
exchanges quoted prior to the close of the New York Stock Exchange.
Over-the-counter securities quoted on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") system are valued at closing prices
supplied through such system. If not quoted on the NASDAQ system, such
securities are valued at prices obtained from independent brokers. In the
absence of recorded sales, valuations are at the mean of the closing bid and
asked quotations. Fixed income securities are valued by a pricing service,
which utilizes market transactions, quotations from dealers, and various
relationships among securities in determining value. Short-term securities
maturing within sixty days are valued at amortized cost. Other securities, if
any, are valued at their fair value as determined in good faith under
consistently applied procedures established by and under the supervision of the
Trustees.
15
<PAGE>
B. Forward Contracts and Foreign Currencies
The fund enters into forward foreign currency exchange contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its foreign
portfolio holdings and to hedge certain purchase and sale commitments
denominated in foreign currencies. A forward foreign currency exchange contract
is an obligation by the Fund to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the origination date of
the contract. Forward foreign currency exchange contracts establish an exchange
rate at a future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks)
and their customers. Risks may arise from the potential inability of a
counterparty to meet the terms of a contract and from unanticipated movements
in the value of foreign currencies relative to the U.S. dollar. The aggregate
principal amount of forward currency exchange contracts is recorded in the
Fund's accounts. All commitments are marked-to-market at the applicable
transaction rates resulting in unrealized gains or losses. The Fund records
realized gains or losses at the time the forward contracts are extinguished by
entry into a closing contract or by delivery of the currency. Neither spot
transactions nor forward currency exchange contracts eliminate fluctuations in
the prices of the Fund's portfolio securities or in foreign exchange rates, or
prevent loss if the price of these securities should decline.
Securities quoted in foreign currencies are translated into U.S. dollars at the
current exchange rate. Gains and losses that arise from changes in exchange
rates are not segregated from gains and losses that arise from changes in
market prices of investments.
C. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis of
identified cost of securities delivered.
D. Net Investment Income
Net investment income is determined daily and consists of interest and
dividends accrued and discount earned, less the estimated daily expenses of the
Fund. Interest income is accrued daily as earned. Dividend income is accrued on
the ex-dividend date. Discount on debt obligations is amortized under the
effective yield method. Certain fixed income securities held by the Fund pay
interest or dividends in the form of additional securities (payment-in-kind
securities). Interest income on payment-in-kind fixed income securities is
recorded using the effective-interest method. Dividend income on
payment-in-kind preferred securities is recorded at the market value of
securities received. The Fund is charged for expenses directly attributable to
it, while indirect expenses are allocated among all funds in the Trust.
E. Dividends
Dividends from net investment income are declared and paid or reinvested
quarterly. Net realized capital gains, if any, are distributed annually, unless
additional distributions are required for compliance with applicable tax
regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing treatments
for foreign currency transactions, paydown gains and losses and wash sale
deferrals.
F. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund has elected
to qualify under Subchapter M of the Internal Revenue Code and its policy is to
distribute all of its taxable income, including net realized capital gains,
within the prescribed time periods. At March 31, 1995, the Fund had a capital
loss carryforward of $2,823,098 available, to the extent provided in
regulations, to offset future capital gains, if any, which expires on March 31,
2003.
In order to meet certain excise tax distribution requirements under Section
4982 of the Internal Revenue Code, the Fund is required to measure and
distribute annually, if necessary, net capital gains realized during a
twelve-month period ending October 31. In this connection, the Fund is
permitted to defer into its next fiscal year any net capital losses incurred
between each November 1 and the end of its fiscal year. From November 1, 1994
through March 31, 1995, the Fund incurred net capital losses of approximately
$9,217,000 and intends to defer and treat such losses as arising in the fiscal
year ending March 31, 1996.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly-owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser earns
monthly fees at an annual rate of 0.75% of the Fund's average daily net assets.
In consideration of these fees, the Adviser furnishes the Fund with management,
investment advisory, statistical and research facilities and services. The
Adviser also pays all salaries, rent and certain other expenses of management.
During the year ended March 31, 1995, the fees pursuant to such agreement
amounted to $2,564,590.
State Street Research Shareholder Services, a division of State Street Research
Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly-owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. In addition, Metropolitan receives a fee for maintenance of
the accounts of certain shareholders who are participants in sponsored
arrangements, such as employee benefit plans, through or under which shares of
the Fund may be purchased. During the year ended March 31, 1995, the amount of
such expenses was $310,318.
The fees of the Trustees not currently affiliated with the Adviser amounted to
$25,102 during the year ended March 31, 1995.
Note 3
The Distributor and its affiliates may from time to time and in varying amounts
voluntarily assume some portion of fees or expenses relating to the Fund.
During the year ended March 31, 1995, the amount of such expenses assumed by
the Distributor and its affiliates was $1,062,971.
Note 4
For the year ended March 31, 1995, purchases and sales of securities, exclusive
of short-term obligations and forward foreign currency
16
<PAGE>
exchange contracts, aggregated $396,468,986 and $290,491,526 (including
$122,338,288 and $102,896,631 of U.S. Government obligations), respectively.
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940. Under the Plan, the Fund pays
annual service fees to the Distributor at a rate of 0.25% of average daily net
assets for Class A, Class B and Class D shares. In addition, the Fund pays
annual distribution fees of 0.75% of average daily net assets for Class B and
Class D shares. The Distributor uses such payments for personal services and/or
the maintenance of shareholder accounts, to reimburse securities dealers for
distribution and marketing services, to furnish ongoing assistance to investors
and to defray a portion of its distribution and marketing expenses. For the
year ended March 31, 1995, fees pursuant to such plan amounted to $447,030,
$1,277,012 and $109,939 for Class A, Class B and Class D shares, respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc., a
wholly-owned subsidiary of Metropolitan, earned initial sales charges
aggregating $198,230 and $1,353,232, respectively, on sales of Class A shares
of the Fund during the year ended March 31, 1995, and that MetLife Securities,
Inc. earned commissions aggregating $2,430,895 and $53 on sales of Class B and
Class D shares, respectively, and the Distributor collected contingent deferred
sales charges aggregating $657, $451,301 and $7,564 on redemptions of Class A,
Class B and Class D shares, respectively during the same period.
Note 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share.
At March 31, 1995, Metropolitan owned 23,306 Class A shares and 59,315 Class D
shares of the Fund and the Distributor owned one Class A share of the Fund.
Share transactions were as follows:
Year ended March 31
1995 1994
Class A Shares Amount Shares Amount
Shares sold 6,602,965 $ 57,372,536 10,442,962 $ 96,214,351
Issued upon
reinvestment
of:
Dividends from
net investment
income 392,651 3,377,080 322,498 2,915,135
Distributions
from net
realized gains 297,451 2,584,847 958,393 8,393,862
Shares
repurchased (5,156,516) (44,295,455) (3,619,570) (32,581,833)
Net increase 2,136,551 $ 19,039,008 8,104,283 $ 74,941,515
June 1, 1993
(Commencement of
Share Class Designations) to
March 31, 1994
Class B Shares Amount Shares Amount
Shares sold 10,279,851 $88,909,733 9,419,196 $87,131,459
Issued upon
reinvestment
of:
Dividends from
net investment
income 189,138 1,630,253 69,475 626,074
Distributions
from net
realized gains 176,093 1,524,943 105,681 959,585
Shares
repurchased (2,549,340) (21,785,748) (266,770) (2,450,176)
Net increase 8,095,742 $ 70,279,181 9,327,582 $86,266,942
Class C Shares Amount Shares Amount
Shares sold 1,583,387 $ 13,778,442 2,718,736 $24,514,943
Issued upon
reinvestment
of:
Dividends from
net investment
income 63,889 549,690 47,360 425,534
Distributions
from net
realized gains 40,418 351,228 45,129 411,515
Shares
repurchased (1,139,442) (9,788,334) (415,707) (3,810,851)
Net increase 548,252 $ 4,891,026 2,395,518 $21,541,141
Class D Shares Amount Shares Amount
Shares sold 844,434 $ 7,326,800 826,147 $ 7,652,126
Dividends from
net investment
income 14,873 128,335 1,771 15,830
Distributions
from net
realized gains 14,278 123,793 7,306 66,416
Shares
repurchased (209,961) (1,792,012) (38,564) (360,653)
Net increase 663,624 $ 5,786,916 796,660 $ 7,373,719
17
<PAGE>
Financial Highlights
For a share outstanding throughout each year.
<TABLE>
<CAPTION>
Class A
Year ended March 31
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 8.94 $ 8.94 $ 8.22 $ 7.61 $ 7.81
Net investment income* .27 .22 .27 .37 .44
Net realized and
unrealized gain (loss)
on investments and
forward contracts (.14) .72 1.01 .62 (.14)
Dividends from net
investment income (.17) (.22) (.25) (.38) (.41)
Distributions from net
realized gains (.14) (.72) (.31) -- (.09)
Net asset value, end of
year $ 8.76 $ 8.94 $ 8.94 $ 8.22 $ 7.61
Total return 1.52%+ 10.96%+ 16.54%+ 13.29%+ 4.06%+
Net assets at end of year
(000s) $181,358 $166,011 $93,537 $78,483 $64,139
Ratio of operating
expenses to average net
assets* 1.25% 1.25% 1.25% 1.25% 1.25%
Ratio of net investment
income to average net
assets* 3.11% 2.75% 3.26% 4.60% 5.78%
Portfolio turnover rate 89.58% 105.17% 142.86% 97.76% 68.08%
*Reflects voluntary
assumption of fees or
expenses per share in
each year (Note 3) $ .03 $ .02 $ .02 $ .02 $ .02
</TABLE>
<TABLE>
<CAPTION>
Class B Class C Class D
Year ended Year ended Year ended
March 31, March 31, March 31,
1995 1994** 1995 1994** 1995 1994**
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 8.92 $ 8.78 $ 8.95 $ 8.78 $ 8.93 $ 8.78
Net investment income* .20 .16 .29 .21 .20 .16
Net realized and
unrealized gain (loss)
on investments and
forward contracts (.13) .39 (.14) .43 (.13) .40
Dividends from net
investment income (.11) (.18) (.19) (.24) (.11) (.18)
Distributions from net
realized gains (.14) (.23) (.14) (.23) (.14) (.23)
Net asset value, end of
year $ 8.74 $ 8.92 $ 8.77 $ 8.95 $ 8.75 $ 8.93
Total return 0.82%+ 6.26%++ 1.77%+ 7.27%++ 0.82%+ 6.31%++
Net assets at end of year
(000s) $152,251 $83,244 $25,803 $21,434 $12,772 $ 7,117
Ratio of operating
expenses to average net
assets* 2.00% 2.00%# 1.00% 1.00%# 2.00% 2.00#
Ratio of net investment
income to average net
assets* 2.38% 2.03%# 3.37% 3.03%# 2.39% 2.03%#
Portfolio turnover rate 89.58% 105.17% 89.58% 105.17% 89.58% 105.17%
* Reflects voluntary
assumption of fees or
expenses per share in
each year (Note 3) $ .03 $ .03 $ .03 $ .02 $ .03 $ .03
</TABLE>
# Annualized.
** June 1, 1993 (commencement of share class designations) to March 31, 1994.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
18
<PAGE>
Report of Independent Accountants
To the Trustees of MetLife-State Street
Income Trust and the Shareholders of
MetLife-State Street Research Managed Assets
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of MetLife-State Street Research
Managed Assets (formerly MetLife-State Street Managed Assets) (a series of
MetLife-State Street Income Trust, hereafter referred to as the "Trust") at
March 31, 1995, and the results of its operations, the changes in its net
assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits which included confirmation of securities owned at March 31, 1995,
by correspondence with the custodian and brokers and the application of
alternative procedures where confirmations from brokers were not received,
provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
May 12, 1995
19
<PAGE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
As of March 31, 1995, Managed Assets was more heavily weighted in stocks, at
52% of the portfolio, than bonds, at 35% of the portfolio. Inflation-
responsive securities represented 10% and cash the final 3% of the portfolio.
The portfolio's structure is not significantly different from 12 months ago
except for a slight decrease in the percentage of bonds and an increase in the
percentage of inflation-responsive securities.
Stocks
Our stock holdings provided positive performance over the past 12 months.
Large-capitalization stocks--both growth and value--performed best,
particularly in the first three months of 1995. The portfolio's small-
capitalization and international stock holdings performed poorly.
Bonds
Our holdings in high-grade and high-yield bonds fell less than average in 1994,
and recovered strongly--along with the bond market--through March 1995.
International bonds continued to disappoint.
Inflation-Reponsive
Inflation-reponsive securities had the best performance for Managed Assets over
the past 12 months. In 1994, our strategy with this sector focused on the
securities of companies in the commodities industries. In 1995, we have
targeted energy stocks, particularly in natural gas.
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in the
Fund will fluctuate and shares, when redeemed, may be worth more or less than
their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. Shares of the Fund had no class
designations until June 1, 1993, when designations were assigned based on the
pricing and 12b-1 fees applicable to shares sold thereafter. Performance data
for a specified class include periods prior to the adoption of class
designations. "A" share returns for each of the periods reflect the maximum
4.5% sales charge. "B" share returns for the 1- and 5-year periods reflect a 5%
and a 2% contingent deferred sales charge, respectively. "C" shares, offered
without a sales charge, are available only to certain employee benefit plans
and large institutions. "D" share return for the 1-year period reflects a 1%
contingent deferred sales charge. Performance for "B" and "D" shares prior to
June 1, 1993, reflects annual 12b-1 fees of .25% and performance thereafter
reflects annual 12b-1 fees of 1%, which will reduce subsequent performance. The
Standard & Poor's 500 Composite Index (S&P 500) includes 500 widely-traded
common stocks and is a commonly-used measure of U.S. stock market performance.
Lehman Brothers Government/ Corporate Index is a commonly-used index of bond
market performance. Indices are unmanaged and do not take sales charges into
consideration. Direct investment in the indices are not possible; results are
for illustrative purposes only.
Comparison Of Change In Value Of A $10,000
Investment In Managed Assets, The S&P 500 And
The Lehman Brothers Government/Corporate Index
[Four line charts]
Class A Shares
Average Annual Total Return
1 Year 5 Year Life of Fund
-3.05% +8.13% +8.92%
Managed LB Gov't/
Assets Corp Index S&P 500
88 10,000 10,000 10,000
89 10,426 10,111 10,708
90 11,550 11,293 12,767
91 12,019 12,703 14,603
92 13,616 14,149 16,212
93 15,868 16,172 18,678
94 17,504 16,621 18,951
95 17,070 17,381 21,896
Class B Shares
Average Annual Total Return
1 Year 5 Year Life of Fund
-4.08% +9.55% +9.49%
Managed LB Gov't/
Assets Corp Index S&P 500
88 10,000 10,000 10,000
89 10,426 10,111 10,708
90 11,550 11,293 12,767
91 12,019 12,703 14,603
92 13,616 14,149 16,212
93 15,868 16,172 18,678
94 17,495 16,621 18,951
95 17,638 17,381 21,896
Class C Shares
Average Annual Total Return
1 Year 5 Year Life of Fund
+1.77% +8.25% +9.82%
Managed LB Gov't/
Assets Corp Index S&P 500
88 10,000 10,000 10,000
89 10,426 10,111 10,708
90 11,550 11,293 12,767
91 12,019 12,703 14,603
92 13,616 14,149 16,212
93 15,868 16,172 18,678
94 17,661 16,621 18,951
95 17,974 17,381 21,896
Class D Shares
Average Annual Total Return
1 Year 5 Year Life of Fund
-0.16% +8.85% +9.50%
Managed LB Gov't/
Assets Corp Index S&P 500
88 10,000 10,000 10,000
89 10,426 10,111 10,708
90 11,550 11,293 12,767
91 12,019 12,703 14,603
92 13,616 14,149 16,212
93 15,868 16,172 18,678
94 17,504 16,621 18,951
95 17,647 17,381 21,896
20
