Supplement No. 1 dated November 22, 1996
to
Prospectus dated August 1, 1996
for
STATE STREET RESEARCH HIGH INCOME FUND
a series of State Street Research Income Trust
The Fund's Investments
The seventh paragraph under the above caption at page 6 of the Prospectus is
revised in its entirety as follows:
"The Fund may invest in securities restricted as to resale which could
become illiquid. Some restricted securities can be resold pursuant to Rule
144A under the Securities Act of 1933, which allows for the resale of
certain restricted securities among qualified institutional buyers. Because
the Rule 144A market is still developing, even restricted securities
resalable pursuant to the rule can be illiquid, however. See the Statement
of Additional Information."
Other Investment Policies
The eighth paragraph under the above caption at page 9 of the Prospectus is
revised in its entirety as follows:
"Under the nonfundamental investment restrictions, the Fund may not
invest more than 15% of its total assets in illiquid securities including
repurchase agreements extending for more than seven days. The foregoing
nonfundamental investment restriction may be changed without a shareholder
vote."
The thirteenth paragraph under the above caption at page 9 of the Prospectus
is revised in its entirety as follows:
"The Fund may purchase securities on a "when-issued," forward commitment
or delayed delivery basis and invest up to 30% of its total assets in
repurchase agreements, subject to certain limitations. See the Statement
of Additional Information."
Purchase of Shares --
Class A Shares -- Initial Sales Charges --
Sales Charges
The second paragraph under the above caption at page 13 of the Prospectus
is hereby revised in its entirety as follows:
"On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor may pay the authorized securities dealer
a commission based on the aggregate of such sales 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%"
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STATE STREET RESEARCH HIGH INCOME FUND
a series of
STATE STREET RESEARCH INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1996
(As Supplemented November 22, 1996) (a)
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS..............................2
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES.......................................5
DEBT INSTRUMENTS AND
PERMITTED CASH INVESTMENTS.........................................13
TRUSTEES AND OFFICERS.......................................................17
INVESTMENT ADVISORY SERVICES................................................22
PURCHASE AND REDEMPTION OF SHARES...........................................23
NET ASSET VALUE.............................................................25
PORTFOLIO TRANSACTIONS......................................................26
CERTAIN TAX MATTERS.........................................................29
DISTRIBUTION OF SHARES OF THE FUND..........................................32
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
High Income Fund (the "Fund") dated August 1, 1996, 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.
(a) Only pages 1, 3, 4, 5, 11 and 20 have been revised
CONTROL NUMBER: 1285G-961125(0897)SSR-LD HI-879D-1196
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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 purchase a security of any one issuer (other than
securities issued or guaranteed as to principal or interest by
the U.S. Government or its agencies or instrumentalities or
mixed-ownership Government corporations) if such purchase
would, with respect to 75% of the Fund's total assets, cause
more than 5% of the Fund's total assets to be invested in the
securities of such issuer or cause more than 10% of the voting
securities of such issuer to be held by the Fund;
(2) not to issue senior securities;
(3) not to underwrite or participate in the marketing of
securities of other issuers, except (a) the Fund may, acting
alone or in a syndicate or group, purchase or otherwise
acquire securities of other issuers for investment, either
from the issuers or from persons in a control relationship
with the issuers or from underwriters of such securities; and
(b) to the extent that, in connection with the disposition of
the Fund's securities, the Fund may be a selling shareholder
in an offering or deemed to be an underwriter under certain
federal securities laws;
(4) not to purchase or sell real estate in fee simple;
(5) not to lend money; however, the Fund may lend portfolio
securities and purchase bonds, debentures, notes, bills and
any other debt-related instruments or interests (and enter
into repurchase agreements with respect thereto);
(6) not to invest in physical commodities or physical commodity
contracts or options in excess of 10% of the Fund's total
assets, except that investments in essentially financial items
or arrangements such as, but not limited to, swap
arrangements, hybrids, currencies, currency and other forward
contracts, delayed delivery and when-issued contracts, futures
contracts and
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options on futures contracts on securities, securities
indices, interest rates and currencies, shall not be deemed
investments in commodities or commodities contracts;
(7) 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);
(8) 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 nongovernment-related issuers principally
engaged in any one industry, as described in the Fund's
Prospectus or Statement of Additional Information, as amended
from time to time; and
(9) 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:
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(1) not to invest more than 5% of its total assets in securities
of private companies including predecessors with less than
three years' continuous operations except (a) securities
guaranteed or backed by an affiliate of the issuer with three
years of continuous operations, (b) securities issued or
guaranteed as to principal or interest by the U.S. Government,
or its agencies or instrumentalities, or a mixed-ownership
Government corporation, (c) securities of issuers with debt
securities rated at least "BBB" by Standard & Poor's
Corporation or "Baa" by Moody's Investor's Service, Inc. (or
their equivalent by any other nationally recognized
statistical rating organization) or securities of issuers
considered by the Investment Manager to be equivalent, (d)
securities issued by a holding company with at least 50% of
its assets invested in companies with three years of
continuous operations including predecessors, and (e)
securities which generate income which is exempt from local,
state or federal taxes; provided that the Fund may invest up
to 15% in such issuers so long as such investments plus
investments in restricted securities (other than those which
are eligible for resale under Rule 144A, Regulation S or other
exemptive provisions) do not exceed 15% of the Fund's total
assets;
(2) not to make an investment in warrants, valued at the lower of
cost or market, which causes the Fund to own, at the time of
such investment, warrants in excess of 5% of the Fund's net
assets, provided that warrants not listed on the New York or
American Stock Exchange shall be further limited to 2% of the
Fund's net assets (warrants initially attached to securities
and acquired by the Fund upon original issuance thereof shall
be deemed to be without value);
(3) 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;
(4) 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);
(5) 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
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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;
(6) 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;
(7) 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; and
(8) 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).
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.
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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
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.
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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.
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.
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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.
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
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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.
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
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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 months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs in the U.S. Treasury
market when dealers begin to trade a new issue of bonds or notes shortly after a
Treasury financing is announced, but prior to the actual sale of the securities.
Similarly, securities to be created by a merger of companies may also be traded
prior to the actual consummation of the merger. Such transactions may involve a
risk of loss if the value of the securities falls below the price committed to
prior to actual issuance. The Trust's custodian will establish a segregated
account when the Fund purchases securities on a when-issued basis consisting of
cash or liquid securities equal to the amount of the when-issued commitments.
Securities transactions involving delayed deliveries or forward commitments are
frequently characterized as when-issued transactions and are similarly treated
by the Fund.
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
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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.
Restricted Securities
Currently, the Fund's policy is to not make an investment in Rule 144A
securities if as a result more than 25% of its total assets are invested in such
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 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.
Also, under current policy, the Fund will not invest in other
restricted securities if as a result more than 10% of its total assets are
invested in such other restricted securities. Restricted securities which are
not resalable under Rule 144A can be more subject to risks of illiquidity and
subjective valuations than Rule 144A securities.
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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
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.
Industry Classifications
In determining how much of the Fund's portfolio is invested in a given
industry, the following industry classifications are currently used. Securities
issued or guaranteed as to principal or interest by the U.S. Government or its
agencies or instrumentalities or mixed-ownership Government corporations or
sponsored enterprises (including repurchase agreements involving U.S.
Government securities to the extent excludable under relevant regulatory
interpretations) are excluded. Securities issued by foreign governments are
also excluded. Companies engaged in the business of financing will be
classified according to the industries of their parent companies or industries
that otherwise most affect such financing companies. Issuers of asset-backed
pools will be classified as separate industries based on the nature of the
underlying assets, such as mortgages, credit card receivables, etc.
"Asset-backed--Mortgages" includes private pools of nongovernment backed
mortgages.
12
<PAGE>
Aerospace
Airline
Asset-backed--Mortages
Asset-backed--Credit Card Receivables
Automotive
Automotive Parts
Bank
Building
Business Service
Cable
Capital Goods & Equipment
Chemical
Computer Software & Service
Conglomerate
Consumer Goods & Services
Container
Cosmetics
Diversified
Drug
Electric
Electrical Equipment
Electronic Components
Electronic Equipment
Entertainment
Financial Service
Food & Beverage
Forest Products
Gaming & Lodging
Gas
Gas Transmission
Grocery
Healthcare & Hospital
Management
Hospital Supply
Hotel & Restaurant
Insurance
Machinery
Media
Metal & Mining
Office Equipment
Oil Production
Oil Refining + Marketing
Oil Service
Paper Products
Personal Care
Photography
Plastics
Printing & Publishing
Railroad
Real Estate & Building
Recreation
Retail Trade
Savings & Loan
Shipping & Transportation
Technology & Communications
Telephone
Textile & Apparel
Tobacco
Truckers
Trust Certificates--Government
Related Lending
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 Federal Farm Credit
Banks, the Federal National Mortgage Association, the
Government National Mortgage Association and the Federal Home
Loan Mortgage Corporation; and
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<PAGE>
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 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.
14
<PAGE>
Bank Money Investments. Bank money investments include but are not
limited to certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are generally short-term (i.e., less than one year),
interest-bearing negotiable certificates issued by commercial banks or savings
and loan associations against funds deposited in the issuing institution. A
banker's acceptance is a time draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods). A banker's acceptance may be
obtained from a domestic or foreign bank, including a U.S. branch or agency of a
foreign bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. The Fund will not invest
in any such bank money investment unless the investment is issued by a U.S. bank
that is a member of the Federal Deposit Insurance Corporation ("FDIC"),
including any foreign branch thereof, a U.S. branch or agency of a foreign bank,
a foreign branch of a foreign bank, or a savings bank or savings and loan
association that is a member of the FDIC and which at the date of investment has
capital, surplus and undivided profits (as of the date of its most recently
published financial statements) in excess of $50 million. The Fund will not
invest in time deposits maturing in more than seven days and will not invest
more than 10% of its total assets in time deposits maturing in two to seven
days.
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under state law. U.S. federal branches or agencies
of foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective 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
15
<PAGE>
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 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.
16
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and principal officers of the Trust, their addresses, and
their principal occupations and positions with certain affiliates of the
Investment Manager are set forth below.
*+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 55. 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 69. 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 69. 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 45. His principal occupation is Executive Vice
President, Treasurer, Chief Financial Officer 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, One Financial Center, Boston, MA 02111,
serves as Secretary and General Counsel of the Trust. He is 40. His principal
occupation is Executive Vice President, General Counsel and Secretary of State
Street Research & Management Company. During the past five years he has also
served as Senior Vice President of State Street Research & Management Company
and as Senior Vice President, General Counsel and Assistant Secretary of The
Boston Company, Inc., Boston Safe Deposit and Trust Company and The Boston
Company Advisors, Inc. Mr. McNamara's other principal business affiliations
include Senior Vice President, General Counsel and Clerk of State Street
Research Investment Services, Inc.
- -----------------
* or + See footnotes on page 19.
17
<PAGE>
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 64. 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 72. 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 58. 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
58. 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.
*+Thomas A. Shively, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 42. His principal occupation is Executive
Vice President and Director of State Street Research & Management Company.
During the past five years he has also served as Senior Vice President of State
Street Research & Management Company. Mr. Shively's other principal business
affiliation is Director of State Street Research Investment Services, Inc.
*+Ralph F. Verni, One Financial Center, Boston, MA 02111, serves as
Chairman of the Board, President, Chief Executive Officer and Trustee of the
Trust. He is 53. 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 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 71. 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.
- -----------------
* or + See footnotes on page 19.
18
<PAGE>
*+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.
+ 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: State Street Research Equity
Trust, State Street Research Financial Trust, State Street Research
Income Trust, State Street Research Money Market Trust, State Street
Research Tax-Exempt Trust, State Street Research Capital Trust, State
Street Research Exchange Trust, State Street Research Growth Trust,
State Street Research Master Investment Trust, State Street Research
Securities Trust, State Street Research Portfolios, Inc. and
Metropolitan Series Fund, Inc.
19
<PAGE>
As of April 30, 1996, 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 B Merrill Lynch 9.9
Class C State Street Bank and Trust Company 17.5
Chase Manhattan Bank 13.3
C.P.R. Parvata, Trustee 6.8
Class D Merrill Lynch 20.7
R. Duffield & C.R. Player, Jr., Co-Trustees 21.6
The full name and address of each of the above persons or entities are
as follows:
R. Duffield & C.R. Player, Jr., Co-Trustees (a)
C.P.R. Parvata, Trustee (a)
State Street Bank and Trust Company (b)
225 Franklin Street
Boston, Massachusetts 02110
Chase Manhattan Bank, N.A. (b)(c)
770 Broadway
New York, New York 10003
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.
(c) Chase Manhattan Bank holds such shares as trustee under certain
employee benefit plans serviced by Metropolitan Life Insurance Company.
As of April 30, 1996, 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
20
<PAGE>
be in control of such class of shares for purposes of voting on certain matters
submitted to a vote of shareholders, such as any Distribution Plan for a given
class.
The Trustees have been compensated as follows:
- -------------------------------------------------------------------------------
Total
Compensation
Aggregate From Trust and
Name of Compensation Complex Paid
Trustee From Trust(a) to Trustees(b)
- -------------------------------------------------------------------------------
Edward M. Lamont $ 8,985 $ 63,510
Robert A. Lawrence $ 8,985 $ 91,685
Dean O. Morton $ 9,785 $ 103,085
Thomas L. Phillips $ 8,285 $ 67,185
Toby Rosenblatt $ 8,985 $ 63,510
Michael S. Scott Morton $ 10,185 $ 109,035
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $ 9,185 $ 76,285
(a) Includes compensation from multiple Series of the Trust for the fiscal
year ended March 31, 1996. See "Distribution of Shares" for a listing
of series.
(b) Includes compensation from 30 series, including series of 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. "Total Compensation from
Trust and Complex" is for 12 months ended December 31, 1995. 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 said Exchange is open for trading, at the annual rate of 0.65% of the
net assets of the Fund. The Distributor and its affiliates have from time to
time and in varying amounts voluntarily assumed some portion of fees or expenses
relating to the Fund. For the fiscal years ended March 31, 1994, 1995 and 1996,
the investment advisory fee for the Fund was $4,022,674, $4,696,647 and
$5,199,204, respectively. For the same periods, the voluntary reduction of fees
or assumption of expenses amounted to $218,726, $0 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.
22
<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 in accordance with certain
conditions relating to an employee's position, the identity of the security, the
timing of the transaction and similar factors. 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.
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 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.
24
<PAGE>
Class C Shares - Class C shares are currently available to certain
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants (currently a minimum of 100 eligible
employees), service arrangements, or similar factors; insurance companies;
investment companies; endowment funds of nonprofit organizations with
substantial minimum assets (currently a minimum of $10,000,000); and other
similar institutional investors.
Reorganizations - In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, 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.
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
25
<PAGE>
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,
1995 and 1996 were 31.55% and 56.47%, respectively. The Investment Manager
believes the portfolio turnover rate for the fiscal year ended March 31, 1996
was significantly higher because of the liquidation of investments through calls
on debt holdings by issuers of the debt, through sales of investments based on
the Investment Manager's assessment of the changing market valuation and
creditworthiness of certain issuers, and through strategic selling in light of
changes in interest rates. The Fund reserves full freedom with respect to
portfolio turnover, as described in the Prospectus.
26
<PAGE>
Brokerage Allocation
The Investment Manager's policy is to seek for its clients, including
the Fund, what in the Investment Manager's judgment will be the best overall
execution of purchase or sale orders and the most favorable net prices in
securities transactions consistent with its judgment as to the business
qualifications of the various broker or dealer firms with whom the Investment
Manager may do business, and the Investment Manager may not necessarily choose
the broker offering the lowest available commission rate. Decisions with respect
to the market where the transaction is to be completed, to the form of
transaction (whether principal or agency), and to the allocation of orders among
brokers or dealers are made in accordance with this policy. In selecting brokers
or dealers to effect portfolio transactions, consideration is given to their
proven integrity and financial responsibility, their demonstrated execution
experience and capabilities both generally and with respect to particular
markets or securities, the competitiveness of their commission rates in agency
transactions (and their net prices in principal transactions), their willingness
to commit capital, and their clearance and settlement capability. The Investment
Manager makes every effort to keep informed of commission rate structures and
prevalent bid/ask spread characteristics of the markets and securities in which
transactions for the Fund occur. Against this background, the Investment Manager
evaluates the reasonableness of a commission or a net price with respect to a
particular transaction by considering such factors as difficulty of execution or
security positioning by the executing firm. The Investment Manager may or may
not solicit competitive bids based on its judgment of the expected benefit or
harm to the execution process for that transaction.
When it appears that a number of firms could satisfy the required
standards in respect of a particular transaction, consideration may also be
given to services other than execution services which certain of such firms have
provided in the past or may provide in the future. Negotiated commission rates
and prices, however, are based upon the Investment Manager's judgment of the
rate which reflects the execution requirements of the transaction without regard
to whether the broker provides services in addition to execution. Among such
other services are the supplying of supplemental investment research; general
economic, political and business information; analytical and statistical data;
relevant market information, quotation equipment and services; reports and
information about specific companies, industries and securities; purchase and
sale recommendations for stocks and bonds; portfolio strategy services;
historical statistical information; market data services providing information
on specific issues and prices; financial publications; proxy voting data and
analysis services; technical analysis of various aspects of the securities
markets, including technical charts; computer hardware used for brokerage and
research purposes; computer software and databases, including those used for
portfolio analysis and modelling; and portfolio evaluation services and relative
performance of accounts.
Certain nonexecution services provided by broker-dealers may in turn be
obtained by the broker-dealers from third parties who are paid for such services
by the
27
<PAGE>
broker-dealers. The Investment Manager has an investment of less than ten
percent of the outstanding equity of one such third party which provides
portfolio analysis and modelling and other research and investment
decision-making services integrated into a trading system developed and licensed
by the third party to others. The Investment Manager could be said to benefit
indirectly if in the future it allocates brokerage to a broker-dealer who in
turn pays this third party for services to be provided to the Investment
Manager.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. Some services may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Investment Manager allocates the cost
of such services to determine the appropriate proportion of the cost which is
allocable to purposes other than research or investment decision-making and is
therefore paid directly by the Investment Manager. Some research and execution
services may benefit the Investment Manager's clients as a whole, while others
may benefit a specific segment of clients. Not all such services will
necessarily be used exclusively in connection with the accounts which pay the
commissions to the broker-dealer producing the services.
The Investment Manager has no fixed agreements or understandings with
any broker-dealer as to the amount of brokerage business which that firm may
expect to receive for services supplied to the Investment Manager or otherwise.
There may be, however, understandings with certain firms that in order for such
firms to be able to continuously supply certain services, they need to receive
allocation of a specified amount of brokerage business. These understandings are
honored to the extent possible in accordance with the policies set forth above.
It is not the Investment Manager's policy to intentionally pay a firm a
brokerage commission higher than that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided. However, the Investment Manager is aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, relies on the provisions of Section 28(e) of the
Securities Exchange Act of 1934, to the extent applicable. Brokerage commissions
paid by the Fund in secondary trading during the fiscal years ended March 31,
1994, 1995 and 1996, amounted to $50,536, $56,055 and $131,397, respectively.
The Investment Manager believes the amount of brokerage commissions paid by the
Fund during the fiscal year ended March 31, 1996 was significantly higher than
during the previous year because of increased selling based on the Investment
Manager's assessment of market valuations, credit qualities and interest rates.
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.
In the case of the purchase of fixed income securities in underwriting
transactions, the Investment Manager follows any instructions received from its
clients as to the allocation of new issue discounts, selling concessions and
designations to brokers or
28
<PAGE>
dealers which provide the client with research, performance evaluation, master
trustee and other services. In the absence of instructions from the client, the
Investment Manager may make such allocations to broker-dealers which have
provided the Investment Manager with research and brokerage services.
When more than one client of the Investment Manager is seeking to buy
or sell the same security, the sale or purchase is carried out in a manner which
is considered fair and equitable to all accounts. In allocating investments
among various clients (including in what sequence orders for trades are placed),
the Investment Manager will use its best business judgment and will take into
account such factors as the investment objectives of the clients, the amount of
investment funds available to each, the amount already committed for each client
to a specific investment and the relative risks of the investments, all in order
to provide on balance a fair and equitable result to each client over time.
Although sharing in large transactions may sometimes affect price or volume of
shares acquired or sold, overall it is believed there may be an advantage in
execution. The Investment Manager may follow the practice of grouping orders of
various clients for execution to get the benefit of lower prices or commission
rates. In certain cases where the aggregate order may be executed in a series of
transactions at various prices, the transactions are allocated as to amount and
price in a manner considered equitable to each so that each receives, to the
extent practicable, the average price of such transactions. Exceptions may be
made based on such factors as the size of the account and the size of the trade.
For example, the Investment Manager may not aggregate trades where it believes
that it is in the best interests of clients not to do so, including situations
where aggregation might result in a large number of small transactions with
consequent increased custodial and other transactional costs which may
disproportionately impact smaller accounts. Such disaggregation, depending on
the circumstances, may or may not result in such accounts receiving more or less
favorable execution relative to other clients.
CERTAIN TAX MATTERS
Federal Income Taxation of the 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
29
<PAGE>
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, distributeannually 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 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
30
<PAGE>
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
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.
31
<PAGE>
DISTRIBUTION OF SHARES OF THE FUND
State Street Research Income Trust is currently comprised of the
following series: State Street Research High Income Fund and 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, 1994, 1995 and 1996, total sales charges on Class A shares paid
to the Distributor amounted to $4,321,364, $3,774,724 and $2,741,302,
respectively. For the same periods, $513,300, $447,617 and $268,551,
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
revise the terms of or to suspend or discontinue sales pursuant to sponsored
arrangements at any time.
32
<PAGE>
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission based on the aggregate of such sales. Such
commission also is payable to authorized securities dealers upon sales of Class
A shares made pursuant to a Letter of Intent to purchase shares having a net
asset value of $1,000,000 or more. Shares sold with such commissions payable are
subject to a one-year contingent deferred sales charge of 1.00% on any portion
of such shares redeemed within one year following their sale. After a particular
purchase of Class A shares is made under the Letter of Intent, the commission
will be paid only in respect of that particular purchase of shares. If the
Letter of Intent is not completed, the commission paid will be deducted from any
discounts or commissions otherwise payable to such dealer in respect of shares
actually sold. If an investor is eligible to purchase shares at net asset value
on account of the Right of Accumulation, the commission will be paid only in
respect of the incremental purchase at net asset value.
For the 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
shares as follows:
<TABLE>
<CAPTION>
June 1, 1993
(commencement of
Fiscal Year Ended Fiscal Year Ended share class designations)
March 31, 1996 March 31, 1995 to March 31, 1994
------------------------------- ----------------------------- -----------------------------------
Contingent Contingent Contingent
Deferred Commissions Deferred Commissions Deferred Commissions
Sales Charges Paid to Dealers Sales Charges Paid to Dealers Sales Charges Paid to Dealers
------------- --------------- ----------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A $ 0 $ 2,472,751 $ 1,238 $ 3,327,107 $ 0 $ 3,808,064*
Class B $ 734,173 $ 2,802,176 $ 274,749 $ 2,315,926 $ 38,044 $ 1,675,127
Class D $ 4,449 $ 100,380 $ 2,188 $ 49,802 $ 0 $ 26,870
</TABLE>
- -------------------
* For the period April 1, 1993 through March 31, 1994.
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
33
<PAGE>
investor accounts as the Fund may, from time to time, deem advisable, and (3)
reimbursement of expenses incurred by the Distributor in connection with the
servicing of shareholder accounts including payments to securities dealers and
others in consideration of the provision of personal service to investors and/or
the maintenance or servicing of shareholder accounts and expenses associated
with the provision of personal service by the Distributor directly to investors.
In addition, the Distribution Plan is deemed to authorize the Distributor and
the Investment Manager to make payments out of general profits, revenues or
other sources to underwriters, securities dealers and others in connection with
sales of shares, to the extent, if any, that such payments may be deemed to be
within the scope of Rule 12b-1 under the 1940 Act.
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 or servicing of shareholder accounts. Proceeds
from the service fee will be used by the Distributor to compensate securities
dealers and others selling shares of the 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, 1996, 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:
34
<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 1,583,616 1,516,560 115,118
Compensation to sales personnel 0 0 0
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses: marketing; general 0 0 0
----------- ---------- --------
Total fees $1,583,616 $1,516,560 $115,118
========== ========== ========
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.
35
<PAGE>
The performance data reflects Rule 12b-1 fees and sales charges, where
applicable, 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 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 average annual total return of each class of shares of the Fund
was as follows:
Commencement of
Operations Five Years One Year
(August 25, 1986) Ended Ended
to March 31, 1996 March 31, 1996 March 31,1996
----------------- -------------- -------------
Class A 9.55% 13.98% 7.77%
Class B 9.81% 14.26% 7.06%
Class C 10.11% 15.11% 13.19%
Class D 9.80% 14.49% 11.05%
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
36
<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 1996 was as follows:
Class A 7.51%
Class B 7.15%
Class C 8.18%
Class D 7.14%
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 the
period
37
<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.
38
<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, 1996
without taking sales charges into account, were as follows:
Class A 6.00%
Class B 5.81%
Class C 6.17%
Class D 5.63%
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.
39
<PAGE>
The distribution rates of the Fund, based on the month of March 1996,
were as follows:
Class A 8.38%
Class B 8.03%
Class C 9.08%
Class D 8.03%
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 are for the Fund's fiscal year ended
March 31, 1996.
280883.c3
40
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
INVESTMENT PORTFOLIO
March 31, 1996
- --------------------------------- ---------- --------- -------------
Principal Maturity Value
Amount Date (Note 1)
- --------------------------------- ---------- --------- -------------
BONDS 80.5%
Aerospace 4.8%
BE Aerospace, Inc. Sr. Notes,
9.875%+ $ 6,300,000 2/01/2006 $ 6,363,000
K&F Industries, Inc. Sr. Sub.
Deb., 13.75% 5,743,000 8/01/2001 5,972,720
K&F Industries, Inc. Sr. Sec.
Notes, 11.875% 7,264,000 12/01/2003 7,881,440
Ladish Co., Inc. Sr. Sub. Units,
12.00%++ 181,135 12/22/2000 189,157
Sabreliner Corp. Sr. Note,
12.50%+ 1,750,000 4/15/2003 1,653,750
Talley Manufacturing and
Technology, Inc. Sr. Notes,
10.75% 7,000,000 10/15/2003 7,035,000
Talley Industries, Inc. Disc.
Deb., 0.00% to 10/14/98, 12.25%
from 10/15/98 to maturity 10,590,000 10/15/2005 8,260,200
Wyman-Gordon Co. Sr. Notes,
10.75% 3,390,000 3/15/2003 3,525,600
-----------
40,880,867
-----------
Airlines 1.3%
CHC Helicopter Corp. Sr. Sub.
Note, 11.50% 11,700,000 7/15/2002 11,115,000
-----------
Automotive 0.8%
Exide Corp. Sr. Notes, 10.75% 3,000,000 12/15/2002 3,082,500
Harvard Industries, Inc. Sr.
Notes, 12.00% 2,250,000 7/15/2004 2,317,500
Penda Industries, Inc. Sr. Notes,
10.75% 1,750,000 3/01/2004 1,470,000
Venture Holdings Trust Sr. Sub.
Notes, 9.75% 250,000 4/01/2004 200,000
-----------
7,070,000
-----------
Business Service 0.6%
La Petite Holdings Co. Sr. Sec.
Notes, 9.625% 5,000,000 8/01/2001 4,750,000
-----------
Cable 4.3%
American Telecasting, Inc. Sr.
Sub. Units, 0.00% to 6/14/99,
12.50% from 6/15/99 to maturity 5,480,056 6/15/2004 4,000,441
CAI Wireless Systems, Inc. Sr.
Disc. Note, 12.25% 1,050,000 9/15/2002 1,113,000
Heartland Wireless
Communications, Inc. Units,
13.00% 8,250,000 4/15/2003 9,033,750
Insight Communications Co., L.P.
Sr. Sub. Disc. Note, 8.25% to
2/29/96, 11.25% from 3/1/96 to
maturity $ 1,525,000 3/01/2000 $ 1,563,125
Marcus Cable Operating Co. L.P.
Sr. Deb., 11.875% 3,500,000 10/01/2005 3,727,500
Marcus Cable Operating Co. L.P.
Sr. Disc. Note, 0.00% to
7/31/99, 13.50% from 8/1/99 to
maturity 9,000,000 8/01/2004 6,525,000
Telewest Communications PLC Sr.
Deb., 9.625% 4,750,000 10/01/2006 4,738,125
Wireless One, Inc. Sr. Disc.
Note, 13.00% 5,500,000 10/15/2003 5,802,500
-----------
36,503,441
-----------
Capital Goods/Equipment 2.1%
Axia Holdings Corp. Sr. Sub.
Notes, 11.00% 750,000 3/15/2001 735,000
Chatwins Group, Inc. Sr. Exch.
Note, 13.00% 6,250,000 5/01/2003 5,187,500
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 1,648,774
ICF Kaiser International, Inc.
Sr. Sub. Notes, 12.00% 4,750,000 12/31/2003 4,476,875
ICF Kaiser International, Inc.
Units, 12.00% 3,750,000 12/31/2003 3,562,500
Specialty Equipment Companies,
Inc. Sr. Sub. Note, 11.375% 1,250,000 12/01/2003 1,309,375
Waters Corp. Sr. Sub. Note,
12.75% 1,125,000 9/30/2004 1,350,000
-----------
18,270,024
-----------
Chemical 1.2%
Pioneer Americas Acquisition
Corp. Sr. Note, 13.375% 9,500,000 4/01/2005 10,188,750
-----------
Conglomerate 0.9%
Alvey Systems, Inc. Sr. Sub.
Note, 11.375%+ 7,750,000 1/31/2003 8,060,000
-----------
Consumer Goods 2.5%
Carrols Corp. Sr. Notes, 11.50% 7,200,000 8/15/2003 7,380,000
Central Rents, Inc. Sr. Notes,
12.875% 5,250,000 12/15/2003 5,276,250
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
- --------------------------------- ---------- --------- -------------
Principal Maturity Value
Amount Date (Note 1)
- --------------------------------- ---------- --------- -------------
Consumer Goods (cont'd)
Norcal Waste Systems, Inc. Sr.
Sub. Note, 12.50% to 5/14/96,
12.75% from 5/15/96 to
11/14/96, 13.00% from 11/15/96
to 5/14/97, 13.25% from 5/15/97
to 11/14/97, 13.50% from
11/15/97 to maturity+ $ 6,750,000 11/15/2005 $ 6,986,250
Town & Country Corp. Sr. Sub.
Notes, 13.00%(open diamond) 2,561,000 5/31/1998 1,562,210
-----------
21,204,710
-----------
Cosmetics 0.1%
Renaissance Cosmetics, Inc. Sr.
Notes, 13.75% 1,000,000 8/15/2001 1,005,000
-----------
Drug 0.5%
Phar-Mor, Inc. Sr. Note, 11.72% 4,725,000 9/11/2002 4,583,250
-----------
Entertainment 2.6%
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 6,666,324
Plitt Theatres, Inc. Sr. Sub.
Note, 10.875% 5,750,000 6/15/2004 5,865,000
Premier Parks, Inc. Sr. Note,
12.00% 1,750,000 8/15/2003 1,855,000
United Artists Theatre Series
1995, 9.30%+ 8,000,000 7/01/2015 7,680,000
-----------
22,066,324
-----------
Food & Beverage 4.7%
Doskocil Companies, Inc. Sr. Sub.
Red. Notes, 9.75% 11,155,000 7/15/2000 11,601,200
Fresh DelMonte Produce N.V. Note,
10.00% 6,325,000 5/01/2003 5,882,250
MAFCO Inc. Sr. Sub. Notes,
11.875% 1,500,000 11/15/2002 1,567,500
Seven-Up/RC Bottling Co. of
Southern California, Inc.
Notes, 11.50% (open box) 13,500,000 8/01/1999 8,100,000
Smittys Super Value Inc. Sr. Sub.
Notes, 12.75% 3,250,000 6/15/2004 3,542,500
Specialty Foods Corp. Sr. Note,
11.125% 4,250,000 10/01/2002 3,973,750
Specialty Foods Corp. Sr. Sub.
Notes, 11.25% 6,150,000 8/15/2003 4,981,500
-----------
39,648,700
-----------
Gaming & Lodging 5.0%
AZTAR Corp. Sr. Sub. Notes,
11.00% $ 3,000,000 10/01/2002 $ 3,030,000
Belle Casinos, Inc. First
Mortgage Notes, 12.00%+(open
box) 700,000 10/15/2000 245,000
Boomtown Inc. First Mortgage
Notes, 11.50% 3,175,000 11/01/2003 3,063,875
Grand Casinos, Inc. First
Mortgage Note, 10.125% 1,500,000 12/01/2003 1,590,000
Goldriver Hotel & Casino Corp.
Mortgage Notes, 13.375%(open
box) 8,924,000 8/31/1999 4,908,200
Great Bay Property Funding Corp.
First Mortgage Note, 10.875% 6,000,000 1/15/2004 5,340,000
Griffin Gaming & Entertainment,
Inc. Sec. Note, 0.00% 6,950,000 6/30/2000 6,496,860
Mohegan Tribal Gaming Authority
Sr. Sec. Notes, 13.50%+ 3,000,000 11/15/2002 3,570,000
Motels of America, Inc. Sr. Sub.
Notes, 12.00% 5,500,000 4/15/2004 5,335,000
President Riverboat Casinos,
Inc., Sr. Sub. Notes, 13.00% 2,000,000 9/15/2001 1,650,000
Showboat Marina Casino Financing
Corp. First Mortgage Note,
13.50%+ 3,000,000 3/15/2003 3,052,500
Treasure Bay Gaming and Resorts
Inc. First Mortgage Units,
12.25%+(open box) 1,000,000 11/15/2000 245,000
Trump Plaza Funding, Inc. First
Mortgage Notes, 10.875% 2,750,000 6/15/2001 3,052,500
Trump Taj Mahal Funding, Inc.
Mortgage Units, 11.35%(open
diamond) 745,747 11/15/1999 783,967
-----------
42,362,902
-----------
Groceries 4.0%
Almacs, Inc. Sr. Sub. Note,
11.50% 1,000 11/18/2004 100
Grand Union Co. Sr. Sub. Notes,
12.00% 7,250,000 9/01/2004 6,361,875
Jitney-Jungle Stores of America,
Inc. Sr. Note, 12.00% 8,850,000 3/01/2006 8,761,500
Ralphs Grocery Co. Sr. Note,
10.45% 12,000,000 6/15/2004 11,460,000
Ralphs Grocery Co. Sr. Sub. Note,
13.75% 2,500,000 6/15/2005 2,550,000
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
INVESTMENT PORTFOLIO (cont'd)
- --------------------------------- ---------- --------- -------------
Principal Maturity Value
Amount Date (Note 1)
- --------------------------------- ---------- --------- -------------
Groceries (cont'd)
Ralphs Supermarkets, Inc. Sr.
Sub. Note, 11.00% $ 2,000,000 6/15/2005 $ 1,800,000
Safeway Stores, Inc. Lease
Certificates, 13.50% 90,123 1/15/2009 114,795
Star Market Co., Inc. Sr. Sub
Note, 13.00% 2,500,000 11/01/2004 2,575,000
Victory Markets Inc. Sub. Deb.,
12.50%(open box) 925,000 3/15/2000 157,250
-----------
33,780,520
-----------
Media 10.3%
Adams Outdoor Advertising Ltd.
Sr. Note, 10.75%+ 6,250,000 3/15/2006 6,375,000
Allbritton Communications Inc.
Sr. Sub. Notes, 9.75%+ 5,000,000 11/30/2007 4,712,500
Affinity Group, Inc. Sr. Sub.
Deb., 11.50% 9,750,000 10/15/2003 9,993,750
Benedek Broadcasting Corp. Sr.
Notes, 11.875% 6,250,000 3/01/2005 6,593,750
EZ Communications, Inc. Sr. Sub.
Note, 9.75% 1,500,000 12/01/2005 1,485,000
Granite Broadcasting Corp. Sr.
Sub. Deb., 12.75% 5,119,000 9/01/2002 5,682,090
Heritage Media Corp. Notes, 8.75% 500,000 2/15/2006 476,250
Hollinger International, Inc. Sr.
Sub. Notes, 9.25% 2,250,000 2/01/2006 2,182,500
K-III Communications Corp. Sr.
Note, 8.50%+ 2,750,000 2/01/2006 2,612,500
Lamar Advertising Co. Sr. Sec.
Notes, 11.00% 750,000 5/15/2003 791,250
New City Communications Inc. Sr.
Sub. Note, 11.375% 1,000,000 11/01/2003 1,012,500
PageMart, Inc. Sr. Disc. Note,
0.00% to 10/31/98, 12.25% from
11/1/98 to maturity 7,400,000 11/01/2003 5,513,000
PageMart Nationwide, Inc. Sr.
Disc. Note, 0.00% to
1/31/2000, 15.00% from 2/1/2000
to maturity 13,250,000 2/01/2005 8,745,000
Telemundo Group, Inc. Sr. Note,
7.00% to 2/14/99, 10.50% from
2/15/99 to maturity 10,600,000 2/15/2006 9,434,000
Universal Outdoor Holdings, Inc.
Sr. Sec. Disc. Note, 0.00% to
6/30/99, 14.00% from 7/1/99 to
maturity 9,700,000 7/01/2004 6,887,000
Media (cont'd)
U.S.A. Mobile Communications,
Inc. Sr. Notes, 9.50% $ 8,620,000 2/01/2004 $ 8,361,400
U.S.A. Mobile Communications,
Inc. Sr. Notes, 14.00% 5,500,000 11/01/2004 6,435,000
-----------
87,292,490
-----------
Metal & Mining 6.0%
Bar Technologies, Inc. Sr. Sec.
Notes, 13.50%+ 4,250,000 4/01/2001 4,196,875
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% 2,500,000 9/01/2003 2,687,500
Crown Resources Corp. Cv. Sub.
Deb., 5.75% 220,000 8/27/2001 182,600
GS Technologies Operating Co. Sr.
Notes, 12.00% 5,250,000 9/01/2004 5,289,375
Haynes International, Inc. Sr.
Sec. Notes, 11.25% 10,025,000 6/15/1998 10,025,000
Haynes International, Inc. Sr.
Sub. Notes, 13.50% 3,525,000 8/15/1999 3,348,750
Kaiser Aluminum & Chemical Corp.
Sr. Sub. Note, 12.75% 2,250,000 2/01/2003 2,385,000
NS Group, Inc. Units, 13.50% 6,500,000 7/15/2003 5,963,750
Sheffield Steel Corp. First
Mortgage Notes, 12.00% 11,750,000 11/01/2001 10,222,500
UCAR Global Enterprises, Inc. Sr.
Sub. Notes, 12.00% 935,000 1/15/2005 1,075,250
-----------
50,876,600
-----------
Oil & Gas 4.4%
Clark U.S.A., Inc. Sr. Note,
10.875%+ 3,500,000 12/01/2005 3,657,500
Dual Drilling Co. Sr. Sub. Notes,
9.875% 6,100,000 1/15/2004 6,557,500
Empire Gas Corp. Sr. Sec. Notes,
7.00% to 7/14/99, 12.875% from
7/15/99 to maturity 5,750,000 7/15/2004 5,146,250
Moran Energy, Inc., Cv. Sub.
Deb., 8.75% 2,420,000 1/15/2008 2,057,000
Presidio Oil Co. Sr. Sec. Notes,
11.50%(open box) 8,102,950 9/15/2000 8,305,524
Presidio Oil Co. Sr. Sub. Gas
Indexed Notes, 13.30%(open box) 6,000,000 7/15/2002 4,560,000
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
- --------------------------------- ---------- --------- -------------
Principal Maturity Value
Amount Date (Note 1)
- --------------------------------- ---------- --------- -------------
Oil & Gas (cont'd)
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 $ 225,000
Tuboscope Vetco International
Inc. Sr. Sub. Deb., 10.75% 2,000,000 4/15/2003 2,090,000
United Meridian Corp. Sr. Sub.
Note, 10.375% 4,750,000 10/15/2005 4,987,500
-----------
37,586,274
-----------
Paper 1.8%
Crown Packaging Holdings Ltd. Sr.
Sec. Notes, 10.75% 3,300,000 11/01/2000 3,069,000
Crown Packaging Holdings Ltd. Sr.
Sub. Notes, 0.00% to
10/31/2000, 12.25% from
11/1/2000 to maturity 16,500,000 11/01/2003 7,095,000
Equitable Bag Co., Inc. Sr.
Notes, 11.00%(open box) 6,738,000 12/16/2004 3,369,000
Mail-Well Envelope Corp. Sr. Sub.
Note, 10.50% 2,250,000 2/15/2004 2,188,125
-----------
15,721,125
-----------
Plastics 1.1%
Plastics Specialty & Technology
Sr. Note, 11.25% 9,750,000 12/01/2003 9,750,000
-----------
Publishing 0.2%
Bell & Howell Co. Series B Sr.
Disc. Deb., 0.00% to 2/28/2000,
11.50% from 3/1/2000 to
maturity 2,500,000 3/01/2005 1,625,000
-----------
Real Estate/Building 3.2%
Dal-Tile International Inc. Sr.
Sec. Notes, 0.00% 10,500,000 7/15/1998 8,400,000
Miles Home Services, Inc. Sr.
Note, 12.00% 4,250,000 4/01/2001 3,230,000
Overhead Door Corp., 12.25% 3,250,000 2/01/2000 3,185,000
JM Peters, Inc. Sr. Note, 12.75% 3,375,000 5/01/2002 3,206,250
Waxman Industries, Inc. Sr. Sec.
Notes, 12.25% 5,000,000 9/01/1998 5,112,500
Waxman Industries, Inc. Sr. Sec.
Notes, 0.00% to
5/31/99, 12.75% from 6/1/99 to
maturity 7,424,000 6/01/2004 3,712,000
-----------
26,845,750
-----------
Retail Trade 4.1%
Finlay Enterprises, Inc. Sr.
Disc. Deb., 0.00% to 4/30/98,
12.00% from 5/1/98 to maturity $10,570,000 5/01/2005 $ 7,346,150
Finlay Fine Jewelry Corp. Sr.
Note, 10.625% 5,250,000 5/01/2003 5,105,625
Loehmann's Holdings, Inc. Sr.
Sub. Notes, 13.75% 1,500,000 2/15/1999 1,395,000
Mothers Work, Inc. Sr. Note,
12.625% 2,500,000 8/01/2005 2,606,250
Penn Traffic Co. Sr. Sub. Notes,
8.625% 5,000,000 12/15/2003 4,550,000
Penn Traffic Co. Sr. Sub. Notes,
9.625% 16,500,000 4/15/2005 14,066,250
-----------
35,069,275
-----------
Shipping/Transportation 0.6%
Tiphook Finance Corp. Notes,
7.125% 5,333,000 5/01/1998 3,893,090
Tiphook Finance Corp. Notes,
8.00% 595,000 3/15/2000 438,813
Tiphook Finance Corp. Notes,
10.75% 711,000 11/01/2002 533,250
-----------
4,865,153
-----------
Technology 12.7%
American Communications Services,
Inc. Sr. Disc. Note, 13.00%+ 9,500,000 11/01/2005 5,343,750
Anacomp, Inc. Sr. Sub. Notes,
15.00%(open box) 13,929,000 11/01/2000 12,257,520
Anacomp, Inc. Cv. Deb.,
13.875%(open box) 120,000 1/15/2002 8,400
Anacomp International N.V. Cv.
Sub. Deb., 9.00%(open box) 3,100,000 1/15/1997 217,000
Brooks Fiber Properties, Inc. Sr.
Disc. Note, 0.00% to 3/1/2001,
10.875% from 3/2/2001 to
maturity+ 5,500,000 3/01/2006 3,190,000
Celcaribe S.A. Units, 0.00% to
3/14/98, 13.50% from 3/15/98 to
maturity+ 581,000 3/15/2004 5,606,650
Clearnet Communications, Inc.
Units, 0.00% to 12/14/2000,
14.75% from 12/15/2000 to
maturity 253,500 12/15/2005 14,576,250
Computervision Corp. Sr. Sub.
Notes, 11.375% 6,000,000 8/15/1999 6,300,000
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
INVESTMENT PORTFOLIO (cont'd)
- --------------------------------- ---------- --------- -------------
Principal Maturity Value
Amount Date (Note 1)
- --------------------------------- ---------- --------- -------------
Technology (cont'd)
Dial Call Communications Inc. Sr.
Disc. Notes, 12.25% $ 1,250,000 4/15/2004 $ 787,500
Echostar Communications Satellite
Broadcast Co. Sr. Sec. Disc.
Note, 0.00% to 3/14/2000,
13.125% from 3/15/2000 to
maturity+ 13,250,000 3/15/2004 7,983,125
Echostar Communications Co. Sr.
Sec. Disc. Note, 0.00% to
5/31/99, 12.875% from 6/1/99 to
maturity 8,750,000 6/01/2004 6,343,750
Fonorola, Inc. Sr. Sec. Note,
12.50% 5,750,000 8/15/2002 6,267,500
GenRad Inc. Cv. Sub. Deb., 7.25% 608,000 5/01/2011 604,960
IntelCom Group, Inc. Sr. Disc.
Units, 0.00% to 9/14/2000,
13.50% from 9/15/2000 to
maturity 11,000,000 9/15/2005 7,040,000
Intercel, Inc. Units, 0.00% to
1/31/2001, 12.00% from 2/1/2001
to maturity 25,000 2/01/2006 1,512,500
Intermedia Communications, Inc.
Sr. Note, 13.50% 1,500,000 6/01/2005 1,740,000
MFS Communications Sr. Disc.
Note, 0.00% to 1/14/99, 9.375%
from 1/15/99 to maturity 16,750,000 1/15/2004 12,730,000
Nextel Communications, Inc. Sr.
Disc. Note, 0.00% to 2/15/99,
9.75% from 2/16/99 to maturity 2,500,000 8/15/2004 1,462,500
Protection One Alarm Monitoring,
Inc. Units, 0.00% to 6/29/98,
13.375% from 6/30/98 to
maturity 4,000,000 6/30/2005 3,380,000
Viatel, Inc. Sr. Disc. Note,
0.00% to 1/14/2000, 15.00% from
1/15/2000 to maturity 4,500,000 1/15/2005 2,385,000
Winstar Communications, Inc. Sr.
Sub. Cv. Note, 0.00% to
10/14/2000, 14.00% from
10/15/2000 to maturity 4,960,000 10/15/2005 3,025,600
Winstar Communications, Inc. Sr.
Disc. Note, 14.00% 9,920,000 10/15/2005 5,629,600
-----------
108,391,605
-----------
Textile & Apparel 0.5%
Interface, Inc. Sr. Sub. Note,
9.50% $ 4,500,000 11/15/2005 $ 4,522,500
-----------
Utility 0.2%
El Paso Electric Co. First
Mortgage Notes, 8.90% 1,250,000 2/01/2006 1,265,625
-----------
Total Bonds (Cost $697,380,012) 685,300,885
-----------
Shares
- --------------------------------------------- ------ -------------
PREFERRED STOCKS 11.0%
Aerospace 0.6%
Panamsat Corp. Sr. Exch. Pfd.(open diamond) 4,934 5,513,745
-----------
Automotive 1.2%
Harvard Industries, Inc. 14.25% Exch.
Pfd.(open diamond) 370,933 9,922,458
-----------
Banking 0.3%
Riverbank American Pfd.* 110,000 2,722,500
-----------
Business Service 1.2%
Anacomp, Inc. Cv. Pfd. 10,000 5,000
La Petite Holdings Co. Cum. Red. Exch. Pfd.* 361,000 10,469,000
-----------
10,474,000
-----------
Drug 0.5%
Fox Meyer Health Corp. Pfd. Series A(open
diamond) 129,293 4,266,669
-----------
Electric 0.1%
Consolidated Hydro, Inc. Cv. Pfd.* 2,000 700,000
-----------
Financial Service 0.6%
Gentra, Inc. Series G Pfd.* 100,100 1,211,332
Gentra, Inc. Series J Pfd.* 264,102 3,292,801
Gentra, Inc. Series Q Pfd.* 70,300 663,816
-----------
5,167,949
-----------
Forest Product 0.4%
S.D. Warren Co. Series B Sr. Exchange Pfd.* 108,000 3,348,000
-----------
Hotel & Restaurant 0.2%
Station Casinos, Inc. Cv. Pfd. 30,000 1,500,000
-----------
Media 2.2%
Cablevision Systems Corp. Series B Pfd.(open
diamond)+ 32,500 3,217,662
K-III Communications Corp. Series C Pfd. 80,000 8,280,000
K-III Communications Corp. Series B Exch.
Pfd.(open diamond) 65,529 6,782,301
-----------
18,279,963
-----------
Metal & Mining 0.1%
Kaiser Aluminum Corp. Cv. Pfd. 82,700 1,147,463
-----------
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
<TABLE>
<CAPTION>
------------------------------------------------------------ -------- -------------
Value
Shares (Note 1)
- ------------------------------------------------------------ -------- -------------
<S> <C> <C>
Recreation 2.1%
Granite Broadcasting Corp. Cv. Exch. Pfd.(open diamond) 253,000 $15,701,813
Live Entertainment Inc. Series B Cv. Pfd. 285,000 1,941,563
Sante Fe Gaming Corp. Cv. Exch. Pfd. 434,147 244,208
-----------
17,887,584
-----------
Retail Trade 1.4%
Loehmanns Holdings, Inc. Series A Pfd.(open diamond) 895,340 402,903
Supermarkets General Holding Corp. Exch. Pfd.*(open diamond) 453,540 11,338,500
-----------
11,741,403
-----------
Textile & Apparel 0.1%
JPS Textile Group, Inc. Series A Sr. Pfd.(open diamond) 52,666 789,990
Town & Country Corp. Exch. Pfd.(open diamond)++ 95,803 119,754
-----------
909,744
-----------
Total Preferred Stocks (Cost $83,156,597) 93,581,478
-----------
COMMON STOCKS & OTHER 3.4%
American Communications Services, Inc. Wts.*+ 9,500 555,750
American Telecasting, Inc. Wts.* 41,130 215,932
Atlantic Richfield Co. 514,600 14,794,750
Axia Holdings Corp. Com.* 2,250 67,500
Belle Casinos, Inc. Wts.*+ 1,400 14
Boomtown, Inc. Wts.* 7,250 362
CHC Helicopter Corp. Wts.* 46,000 23,000
Central Rents, Inc. Wts.* 5,250 315,000
Chattem, Inc. Wts.* 2,000 5,000
Chatwins Group Inc. Wts.*+ 7,000 3,500
County Seat Holdings, Inc. Wts.* 2,000 100
Crown Packaging Holdings Ltd. Wts.*+ 20,750 166,000
Dr. Pepper Bottling Co. Cl. A Com.* 50,000 237,500
Empire Gas Corp. Wts.* 2,760 5,520
Equitable Bag, Inc. Cl. A Com.* 640,117 6,401
Federated Department Stores, Inc.
Series C Wts.* 46,435 574,633
Federated Department Stores, Inc.
Series D Wts.* 46,435 557,220
Finlay Enterprises, Inc. Cl. A Com.* 12,760 181,830
Fitzgerald Gaming Corp. Wts.*+ 3,000 30,000
Food 4 Less Holdings, Inc. Wts.*++ 24,223 1,265,652
Goldriver Hotel & Casino Corp. Cl. B Com.* 52,500 6,562
COMMON STOCKS & OTHER (cont'd)
Goldriver Hotel & Casino Corp. Liquidation Trust Units*++ 5,250,000 $ 66,675
Grand Union Co. Com.* 100,000 600,000
Harvard Industries, Inc. Cl. B Com.* 25,000 559,375
Heartland Wireless Communications, Inc. Wts.* 37,500 281,250
ICF Kaiser International, Inc. Wts.* 22,800 17,100
INDSPEC Chemical Corp. Wts.*++ 506 634,165
Insight Communications Co., L.P. Wts.* 25,000 56,250
IntelCom Group, Inc. Wts.*+ 21,450 214,500
Intermedia Communications Inc. Wts.*+ 1,500 37,500
Jewel Recovery L.P. Units* 82,595 826
Kaiser Aluminum Corp. Com.* 70,000 1,076,250
Ladish Company, Inc. Wts.*++ 520,000 156,000
Little Switzerland, Inc. Com.* 94,263 377,052
LTX Corp. Com.* 250,000 2,031,250
Mail-Well Holdings, Inc. Com.*+ 14,205 115,416
Miles Homes, Inc. Wts.* 51,000 12,750
Motels of America, Inc. Com.*+ 5,500 440,000
Nextel Communications, Inc. Wts.* 1,250 1,250
PageMart, Inc. Wts.*+ 21,850 131,100
PageMart Nationwide, Inc. Com.*+ 18,375 172,266
Pegasus Media & Communications, Inc. Cl. B Com.*+ 375 121,875
Petro PSC Properties, Inc. Wts.* 2,000 68,000
Protection One, Inc. Wts.* 10,400 83,200
PST Holdings, Inc. Com.* 45,300 45,300
Renaissance Cosmetics, Inc. Wts.*+ 2,000 45,000
Sabreliner Corp. Wts.* 1,750 8,750
S.D.W. Holdings Corp. Wts.*+ 108,000 324,000
Sheffield Steel Corp. Wts.* 38,750 58,125
Smittys Supermarkets, Inc. Cl. B Com.* 3,250 32,500
Terex Corp. Rts.* 6,300 1,575
Total Renal Care, Inc. Cl. B Com.* 10,500 326,813
Town & Country Corp. Cl. A Com.* 371,830 232,394
TransAmerican Refining Corp. Wts.* 12,626 28,409
Universal Outdoor Holdings, Inc. Wts.* 9,700 388,000
Vestar/LPA Investment Corp. Com.*+ 14,250 171,000
Viatel, Inc. Com.*+ 162,450 649,800
Waxman Industries, Inc. Wts.*+ 236,000 236,000
Wireless One, Inc. Wts.* 16,500 115,500
-----------
Total Common Stocks & Other (Cost $31,589,061) 28,929,442
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
INVESTMENT PORTFOLIO (cont'd)
<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
- ------------------------------ --------- -------- -------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS 0.1%
State Street Bank and Trust
Company, dated 3/29/96,
repurchase proceeds
$470,078, collateralized by
$490,000 U.S. Treasury Bill,
5.625%, due 6/27/96
Market Value $483,691 $ 470,000 4/01/1996 $ 470,000
-----------------------------
Total Repurchase Agreements (Cost $470,000) 470,000
-----------------------------
COMMERCIAL PAPER 3.9%
Deere & Co., 5.35% 3,597,000 4/04/1996 3,597,000
Ford Motor Credit Co., 5.37% 13,000,000 4/01/1996 13,000,000
General Electric Capital
Corp., 5.36% 6,666,000 4/10/1996 6,666,000
Norwest Financial, Inc., 5.36% 10,000,000 4/04/1996 10,000,000
-----------------------------
Total Commercial Paper (Cost $33,263,000) 33,263,000
-----------------------------
Total Investments (Cost $845,858,670)--98.9% 841,544,805
Cash and Other Assets, Less Liabilities--1.1% 9,765,858
-----------------------------
Net Assets--100.0% $851,310,663
=============================
</TABLE>
Federal Income Tax Information (Note 1):
At March 31, 1996, the net unrealized
depreciation of investments based on cost
for Federal income tax purposes of
$846,054,181 was as follows:
Aggregate gross unrealized appreciation for
all investments in which there is an
excess of value over tax cost $ 48,605,257
Aggregate gross unrealized depreciation for
all investments in which there is an
excess of tax cost over value (53,114,633)
-----------
$ (4,509,376)
===========
* Nonincome-producing securities
(open diamond) Payments of income may be made in cash or in the form of
additional securities.
(open box) Security is in default.
++ Security valued under consistently applied procedures
established by the Trustees. Security restricted as to public
resale. At March 31, 1996, 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, 1996 were $2,786,861 and $2,431,403 (0.29% 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, 1996 were $87,618,783 and $88,164,783 (10.36% of
net assets), respectively.
ASSET COMPOSITION TABLE
March 31, 1996 (Unaudited)
Percentage of
Ratings+++ Net Assets*
-------------- -------------
BB 4.6%
B 66.3
CCC and below 9.6
Equities 14.4
Other 5.1
-----------
TOTAL 100.0%
===========
+++As rated by Standard & Poor's Corp. and/or
equivalent rating by Moody's Investors Service,
Inc.
*Unrated bonds were included among relevant rating
categories as determined by the Fund's manager.
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1996
Assets
Investments, at value (Cost $845,858,670) (Note 1) $841,544,805
Cash 4,843
Interest and dividends receivable 15,578,864
Receivable for securities sold 11,040,352
Receivable for fund shares sold 1,225,434
Other assets 987
-----------
869,395,285
Liabilities
Payable for securities purchased 13,545,428
Dividends payable 2,314,527
Payable for fund shares redeemed 687,568
Accrued transfer agent and shareholder services
(Note 2) 547,238
Accrued management fee (Note 2) 465,451
Accrued distribution and service fees (Note 4) 303,353
Accrued trustees' fees (Note 2) 14,000
Other accrued expenses 207,057
-----------
18,084,622
-----------
Net Assets $851,310,663
===========
Net Assets consist of:
Undistributed net investment income $ 635,185
Unrealized depreciation of investments (4,313,865)
Accumulated net realized loss (27,698,367)
Shares of beneficial interest 882,687,710
-----------
$851,310,663
===========
Net Asset Value and redemption price per share of
Class A shares ($646,473,424 / 108,658,175
shares of beneficial interest) $5.95
===========
Maximum Offering Price per share of Class A shares
($5.95 / .955) $6.23
===========
Net Asset Value and offering price per share of
Class B shares ($185,735,283 / 31,338,216 shares
of beneficial interest)* $5.93
===========
Net Asset Value, offering price and redemption
price per share of Class C shares ($3,840,028 /
648,256 shares of beneficial interest) $5.92
===========
Net Asset Value and offering price per share of
Class D shares ($15,261,928 / 2,572,133 shares
of beneficial interest)* $5.93
===========
* 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, 1996
Investment Income
Interest, net of foreign taxes of $14,099 $ 73,810,134
Dividends, net of foreign taxes of $7,460 5,949,927
-----------
79,760,061
Expenses
Management fee (Note 2) 5,199,204
Transfer agent and shareholder services (Note 2) 1,531,433
Custodian fee 236,935
Reports to shareholders 122,307
Service fee--Class A (Note 4) 1,583,616
Distribution and service fees--Class B (Note 4) 1,516,560
Distribution and service fees--Class D (Note 4) 115,118
Registration fees 106,193
Audit fee 61,622
Trustees' fees (Note 2) 30,991
Legal fees 12,297
Miscellaneous 42,440
-----------
10,558,716
-----------
Net investment income 69,201,345
-----------
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency
Net realized loss on investments (Notes 1 and 3) (16,029,655)
-----------
Net unrealized appreciation of investments 43,123,164
Net unrealized depreciation of foreign currency (6,955)
-----------
Total net unrealized appreciation 43,116,209
-----------
Net gain on investments and foreign currency 27,086,554
-----------
Net increase in net assets resulting from
operations $ 96,287,899
===========
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
Year ended March 31
-----------------------------
1996 1995
- ----------------------------- ------------ -------------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 69,201,345 $ 73,111,882
Net realized loss on
investments* (16,029,655) (10,256,401)
Net unrealized appreciation
(depreciation) of
investments and foreign
currency 43,116,209 (51,717,996)
---------- -----------
Net increase resulting from
operations 96,287,899 11,137,485
---------- -----------
Dividends from net investment
income:
Class A (60,859,257) (68,341,894)
Class B (13,275,143) (9,517,499)
Class C (319,668) (185,611)
Class D (1,000,485) (474,138)
---------- -----------
(75,454,553) (78,519,142)
---------- -----------
Distributions from net realized
gains:
Class A (804,838) (5,956,632)
Class B (159,995) (701,101)
Class C (3,577) (10,576)
Class D (10,572) (29,366)
---------- -----------
(978,982) (6,697,675)
---------- -----------
Net increase from fund share
transactions (Note 5) 85,881,692 98,050,321
---------- -----------
Total increase in net assets 105,736,056 23,970,989
Net Assets
Beginning of year 745,574,607 721,603,618
---------- -----------
End of year (including
undistributed net
investment income of
$635,185 and $1,789,475,
respectively) $851,310,663 $745,574,607
========== ===========
* Net realized gain (loss)
for Federal income tax
purposes (Note 1) $(27,502,856) $ 1,433,108
========== ===========
NOTES TO FINANCIAL STATEMENTS
March 31, 1996
Note 1
State Street Research High Income Fund, formerly MetLife-State Street
Research High Income Fund (the "Fund") is a series of State Street Research
Income Trust, formerly 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 two separate funds: State Street Research
High Income Fund and State Street Research Managed Assets.
The investment objective of the Fund is to seek, 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.
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. 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
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
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, 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 between both 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. At March 31, 1996, the
Fund had a capital loss carryforward of $27,502,856 available, to the extent
provided in regulations, to offset future capital gains, if any, which
expires on March 31, 2004.
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 $9,299,301
and has deferred and treated such losses as arising in the fiscal year ended
March 31, 1996.
F. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
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, 1996, the fees pursuant to
such agreement amounted to $5,199,204.
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, 1996, the amount of such
expenses was $316,413.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $30,991 during the year ended March 31, 1996.
Note 3
For the year ended March 31, 1996, purchases and sales of securities,
exclusive of short-term investments, aggregated $631,080,925 and
$434,573,379, 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, 1996, fees pursuant to
such plan amounted to $1,583,616, $1,516,560, and $115,118 for Class A, Class
B and Class D shares, respectively.
12
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
NOTES (cont'd)
Note 4 (cont'd)
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly owned subsidiary of Metropolitan, earned initial sales charges
aggregating $268,551 and $2,059,915 respectively, on sales of Class A shares
of the Fund during the year ended March 31, 1996, and that MetLife
Securities, Inc. earned commissions aggregating $1,560,082 on sales of Class
B shares, and that the Distributor collected contingent deferred sales
charges aggregating $734,173 and $4,449 on redemptions of Class B and Class D
shares, respectively, during the same period.
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, 1996, the Distributor owned 7,018 Class A shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended March 31
------------------------------------------------------------
1996 1995
--------------------------- -----------------------------
Class A Shares Amount Shares Amount
- -------------------------------------- ----------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
Shares sold 18,288,203 $ 107,141,811 21,246,001 $ 128,017,213
Issued upon reinvestment of:
Dividends from net investment income 6,699,217 39,227,013 7,531,344 44,748,968
Distributions from net realized gains 110,651 647,284 721,885 4,490,064
Shares repurchased (22,983,923) (134,676,806) (24,109,224) (144,623,371)
--------- ---------- --------- ------------
Net increase 2,114,148 $ 12,339,302 5,390,006 $ 32,632,874
========= ========== ========= ============
Class B Shares Amount Shares Amount
- -------------------------------------- --------- ---------- --------- ------------
Shares sold 14,268,713 $ 83,337,086 11,897,541 $ 71,267,750
Issued upon reinvestment of:
Dividends from net investment income 1,319,995 7,702,343 978,091 5,757,785
Distributions from net realized gains 21,578 125,811 85,923 533,729
Shares repurchased (4,623,289) (27,005,817) (3,103,165) (18,503,010)
--------- ---------- --------- ------------
Net increase 10,986,997 $ 64,159,423 9,858,390 $ 59,056,254
========= ========== ========= ============
Class C Shares Amount Shares Amount
- -------------------------------------- --------- ---------- --------- ------------
Shares sold 458,494 $ 2,676,110 425,482 $ 2,530,906
Issued upon reinvestment of:
Dividends from net investment income 42,106 245,608 19,434 114,077
Distributions from net realized gains 486 2,834 1,182 7,338
Shares repurchased (298,694) (1,741,339) (132,914) (791,910)
--------- ---------- --------- ------------
Net increase 202,392 $ 1,183,213 313,184 $ 1,860,411
========= ========== ========= ============
Class D Shares Amount Shares Amount
- -------------------------------------- --------- ---------- --------- ------------
Shares sold 1,922,890 $ 11,234,354 1,263,734 $ 7,538,932
Issued upon reinvestment of:
Dividends from net investment income 76,557 447,554 35,765 209,720
Distributions from net realized gains 1,314 7,661 3,762 23,361
Shares repurchased (596,429) (3,489,815) (549,698) (3,271,231)
--------- ---------- --------- ------------
Net increase 1,404,332 $ 8,199,754 753,563 $ 4,500,782
========= ========== ========= ============
</TABLE>
13
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------------
Year ended March 31
--------------------------------------------------------------
1996* 1995* 1994 1993 1992
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $5.80 $6.43 $6.32 $5.95 $5.21
Net investment income .52 .61 .66 .67 .71
Net realized and unrealized gain
(loss) on investments and
foreign currency .20 (.58) .22 .37 .72
Dividends from net investment
income (.56) (.60) (.62) (.67) (.69)
Distributions from net realized
gains (.01) (.06) (.15) -- --
-------- -------- -------- ----- -------
Net asset value, end of year $5.95 $5.80 $6.43 $6.32 $5.95
======== ======== ======== ===== =======
Total return 12.85%+ 1.80%+ 14.58%+ 18.70%+ 28.99%+
Net assets at end of year (000s) $646,473 $618,462 $650,755 $496,352 $308,921
Ratio of operating expenses to
average net assets 1.17% 1.23% 1.16% 1.15% 1.17%
Ratio of net investment income to
average net assets 8.88% 10.19% 10.41% 11.25% 12.71%
Portfolio turnover rate 56.47% 31.55% 24.36% 79.39% 72.62%
</TABLE>
<TABLE>
<CAPTION>
Class B Class C
---------------------------------- ------------------------------------
Year ended March 31 Year ended March 31
---------------------------------- ------------------------------------
1996* 1995* 1994** 1996* 1995* 1994**
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $5.79 $6.42 $6.34 $5.78 $6.42 $6.34
Net investment income .46 .57 .51 .53 .64 .57
Net realized and unrealized gain
(loss) on investments and
foreign currency .21 (.58) .15 .20 (.60) .14
Dividends from net investment
income (.52) (.56) (.48) (.58) (.62) (.53)
Distributions from net realized
gains (.01) (.06) (.10) (.01) (.06) (.10)
------- ------- ------- ------- ------- ---------
Net asset value, end of year $5.93 $5.79 $6.42 $5.92 $5.78 $6.42
======= ======= ======= ======= ======= =========
Total return 12.06%+ 0.89%+ 10.76%+++ 13.19%+ 1.73%+ 11.67%+++
Net assets at end of year (000s) $185,735 $117,767 $67,337 $3,840 $2,579 $851
Ratio of operating expenses to
average net assets 1.92% 1.98% 1.93%++ 0.92% 0.98% 0.93%++
Ratio of net investment income to
average net assets 7.95% 9.65% 10.32%++ 8.97% 10.85% 11.32%++
Portfolio turnover rate 56.47% 31.55% 24.36% 56.47% 31.55% 24.36%
</TABLE>
<TABLE>
<CAPTION>
Class D
-----------------------------
Year ended March 31
-----------------------------
1996* 1995* 1994**
- -------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of
year $5.79 $6.42 $6.34
Net investment income .46 .58 .51
Net realized and unrealized gain
(loss) on investments and
foreign currency .21 (.59) .15
Dividends from net investment
income (.52) (.56) (.48)
Distributions from net realized
gains (.01) (.06) (.10)
----- ----- -----
Net asset value, end of year $5.93 $5.79 $6.42
===== ===== =====
Total return 12.05%+ 0.88%+ 10.74%+++
Net assets at end of year (000s) $15,262 $6,766 $2,661
Ratio of operating expenses to
average net assets 1.92% 1.98% 1.93%++
Ratio of net investment income to
average net assets 7.91% 9.81% 10.32%++
Portfolio turnover rate 56.47% 31.55% 24.36%
- -------------------------------------------------------------------
</TABLE>
* Per-share figures have been calculated using the average shares method.
** 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.
14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of State Street Research Income Trust and
the Shareholders of 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 State Street Research High
Income Fund (formerly MetLife - State Street Research High Income Fund) (a
series of State Street Research Income Trust, hereafter referred to as the
"Trust") at March 31, 1996, 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 at March 31, 1996 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.
/s/ Price Waterhouse LLP
- ----------------------------------
Price Waterhouse LLP
Boston, Massachusetts
May 10, 1996
15
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
A healthy bond market and a weak economy had the greatest influence on High
Income Fund's performance over the past 12 months. Returns were good from a
historical standpoint, but the Fund didn't do well versus its peers. A
"flight to quality" in the bond market occurred because investors believed
companies issuing lower-rated bonds would do poorly. The B-rated bonds in
High Income Fund's portfolio weren't as attractive to the market, so they
underperformed.
The decline in interest rates in 1995 drove bond prices up, helping the
Fund's return. Higher bond prices resulted in lower yields, however, and the
Fund had to lower its yield slightly in January. The yield was 7.51% on March
31, 1996, for Class A shares.
The Fund maintained its emphasis on B-rated bonds. In 1995, B-rated bonds
were out of the market's favor. The Fund's adviser didn't see this as a
long-term trend, however, so didn't change approaches. In the first quarter
of 1996, B-rated bonds came back into market favor and performed well.
The Fund built a position in paging and sold most of it when it reached the
price target. High Income Fund also invested in wireless communications and
maintained a substantial amount in that area, but reduced its position in
industries sensitive to economic cycles, such as paper and metals.
March 31, 1996
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.
Performance for a class includes periods prior to the adoption of class
designations in 1993. Performance reflects maximum 4.5% "A" share front-end,
or 5% "B" share or 1% "D" share contingent deferred, sales charges. "C"
shares, offered without a sales charge, are available only to certain
employee benefit plans and institutions. "B" and "D" share performance prior
to adoption of multiple class shares reflects annual 12b-1 fees of .25% and
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
Average Annual Total Return
-------------------------------------------------------
1 Year 5 Years Life of Fund
-------------------------------------------------------
+7.77% +13.98% +9.55%
-------------------------------------------------------
High First Boston
Income High Yield
Fund Index
8/86 9550 10000
3/87 10631 10930
3/88 11136 11599
3/89 12509 12690
3/90 11670 12199
3/91 11926 13894
3/92 15378 18233
3/93 18252 21031
3/94 20912 23125
3/95 21289 24236
3/96 24023 27758
Class B Shares
Average Annual Total Return
-------------------------------------------------------
1 Year 5 Years Life of Fund
-------------------------------------------------------
+7.06% +14.26% +9.81%
-------------------------------------------------------
High First Boston
Income High Yield
Fund Index
8/86 10000 10000
3/87 11132 10930
3/88 11661 11599
3/89 13099 12690
3/90 12220 12199
3/91 12488 13894
3/92 16102 18233
3/93 19113 21031
3/94 21736 23125
3/95 21930 24236
3/96 24575 27758
Class C Shares
Average Annual Total Return
-------------------------------------------------------
1 Year 5 Years Life of Fund
-------------------------------------------------------
+13.19% +15.11% +10.11%
-------------------------------------------------------
High First Boston
Income High Yield
Fund Index
8/86 10000 10000
3/87 11132 10930
3/88 11661 11599
3/89 13099 12690
3/90 12220 12199
3/91 12488 13894
3/92 16102 18233
3/93 19113 21031
3/94 21913 23125
3/95 22292 24236
3/96 25233 27758
Class D Shares
Average Annual Total Return
-------------------------------------------------------
1 Year 5 Years Life of Fund
-------------------------------------------------------
+11.05% +14.49% +9.80%
-------------------------------------------------------
High First Boston
Income High Yield
Fund Index
8/86 10000 10000
3/87 11132 10930
3/88 11661 11599
3/89 13099 12690
3/90 12220 12199
3/91 12488 13894
3/92 16102 18233
3/93 19113 21031
3/94 21731 23125
3/95 21922 24236
3/96 24564 27758
16
