STATE STREET RESEARCH
HIGH INCOME FUND
Prospectus - August 1, 1997
STATE STREET RESEARCH HIGH INCOME FUND (the "Fund") seeks primarily, high
current income and, secondarily, capital appreciation, from investments in
fixed income securities. In selecting investments for the Fund, the investment
manager seeks to identify those fixed income securities which it believes will
not involve undue risk. Certain of the Fund's investments, however, may be
considered predominantly speculative.
State Street Research & Management Company serves as investment adviser
for the Fund (the "Investment Manager"). As of May 31, 1997, the Investment
Manager had assets of approximately $44.2 billion under management. State
Street Research Investment Services, Inc. serves as distributor (the
"Distributor") for the Fund.
Shareholders may have their shares redeemed directly by the Fund at net
asset value plus the applicable contingent deferred sales charge, if any;
redemptions processed through securities dealers may be subject to processing
charges.
There are risks in any investment program, including the risk of changing
economic and market conditions, and there is no assurance that the Fund will
achieve its investment objective. The net asset value of a share of the Fund
will fluctuate as market conditions change.
This Prospectus sets forth concisely the information a prospective
investor ought to know about the Fund before investing. It should be retained
for future reference. A Statement of Additional Information about the Fund
dated August 1, 1997 has been filed with the Securities and Exchange Commission
and is incorporated by reference in this Prospectus. It is available, at no
charge, upon request to the Fund at the address indicated on the back cover or
by calling 1-800-562-0032.
The Fund is a diversified series of State Street Research Income Trust
(the "Trust"), an open-end management investment company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND
INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
THE FUND WILL INVEST AT LEAST 65% OF ITS TOTAL ASSETS IN LOWER RATED
BONDS, COMMONLY KNOWN AS "JUNK BONDS," THAT ENTAIL GREATER RISKS, INCLUDING
DEFAULT RISKS, THAN THOSE FOUND IN HIGHER RATED SECURITIES. INVESTORS SHOULD
CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING. SEE "THE FUND'S INVESTMENTS,"
PAGES 7 AND 8 AND "APPENDIX--DESCRIPTION OF DEBT/BOND RATINGS," PAGES 29 TO 30.
Table of Contents Page
- --------------------------------------------------------------------------------
Table of Expenses ......................................................... 2
Financial Highlights ...................................................... 4
The Fund's Investments ................................................... 6
Other Investment Policies ................................................ 7
Purchase of Shares .........................................................10
Redemption of Shares ......................................................18
Shareholder Services ......................................................20
The Fund and Its Shares ...................................................24
Management of the Fund ...................................................25
Dividends and Distributions; Taxes .......................................26
Calculation of Performance Data ..........................................27
Appendix--Description of Debt/Bond Ratings .................................30
- --------------------------------------------------------------------------------
<PAGE>
The Fund offers four classes of shares which may be purchased at the next
determined net asset value per share plus, in the case of all classes except
Class C shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a deferred
basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5%
and (ii) an annual service fee of 0.25% of the average daily net asset value of
the Class A shares.
Class B shares are subject to (i) a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made
within five years of purchase and (ii) annual distribution and service fees of
1% of the average daily net asset value of such shares. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses) at
the end of eight years after purchase. No contingent deferred sales charge
applies after the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and
large institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1%
if redeemed within one year following purchase and (ii) annual distribution and
service fees of 1% of the average daily net asset value of such shares.
<TABLE>
<CAPTION>
Table of Expenses Class A Class B Class C Class D
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses (1)
Maximum Sales Charge Imposed on Purchases (as a percentage of
offering price) ................................................ 4.5% None None None
Maximum Deferred Sales Charge (as a percentage of net asset
value at time of purchase or redemption, whichever is lower) None(2) 5% None 1%
Maximum Sales Charge Imposed on Reinvested Dividends (as a
percentage of offering price) ................................. None None None None
Redemption Fees (as a percentage of amount redeemed,
if applicable) ................................................ None None None None
Exchange Fee ...................................................... None None None None
</TABLE>
- ------------
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
thereafter and no contingent deferred sales charge is imposed after the
fifth year. Class D shares are subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the
sale. Long-term investors in Class A, Class B or Class D shares may, over
a period of years, pay more than the economic equivalent of the maximum
sales charge permissible under applicable rules. See "Purchase of Shares."
(2) Purchases of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption.
See "Purchase of Shares."
2
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C Class D
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees ................................................... 0.65% 0.65% 0.65% 0.65%
12b-1 Fees ......................................................... 0.25% 1.00% None 1.00%
Other Expenses ...................................................... 0.20% 0.20% 0.20% 0.20%
------ ------ ------ ------
Total Fund Operating Expenses .................................... 1.10% 1.85% 0.85% 1.85%
====== ====== ====== ======
</TABLE>
Example:
You would pay the following expenses on a $1,000 investment assuming (1)
5% annual return and (2) redemption of the entire investment at the end of each
time period:
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
Class A shares ......... $56 $78 $103 $173
Class B shares (1) ...... $69 $88 $120 $197
Class C shares ......... $ 9 $27 $ 47 $105
Class D shares ......... $29 $58 $100 $217
You would pay the following expenses on the same investment, assuming no
redemption:
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
Class B shares (1) ...... $19 $58 $100 $197
Class D shares ......... $19 $58 $100 $217
- ------------
(1) Ten-year figures assume conversion of Class B shares to Class A shares at
the end of eight years.
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than
shown.
The purpose of the table above is to assist the investor in understanding
the various costs and expenses that an investor will bear directly or
indirectly. The percentage expense levels shown in the table above are based on
experience with expenses during the fiscal year ended March 31, 1997; actual
expense levels for the current fiscal year and future years may vary from the
amounts shown. The table does not reflect charges for optional services elected
by certain shareholders, such as the $7.50 fee for remittance of redemption
proceeds by wire. For further information on sales charges, see "Purchase of
Shares--Alternative Purchase Program"; for further information on management
fees, see "Management of the Fund"; and for further information on 12b-1 fees,
see "Purchase of Shares--Distribution Plan."
3
<PAGE>
Financial Highlights
The data set forth below has been audited by Price Waterhouse LLP,
independent accountants, and their report thereon for the latest five years is
included in the Statement of Additional Information. For further information
about the performance of the Fund, see "Financial Statements" in the Statement
of Additional Information. Past results may not be indicative of future
performance because of, among other things, changes in the Fund's investment
objective and policies in January 1994. See "Calculation of Performance Data."
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------
Year ended March 31
------------------------------------------------------------
1997*** 1996*** 1995*** 1994 1993
------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year .................. $5.95 $5.80 $6.43 $6.32 $5.95
Net investment income* ...... .59 .52 .61 .66 .67
Net realized and unrealized
gain (loss) on investments
and foreign currency ...... (.01) .20 (.58) .22 .37
----- ----- ----- ----- -----
Total from investment
operations ............... .58 .72 .03 .88 1.04
Dividends from net
investment income ......... (.52) (.56) (.60) (.62) (.67)
Distributions from net
realized gains ............ -- (.01) (.06) (.15) --
----- ----- ----- ----- -----
Total distributions ...... (.52) (.57) (.66) (.77) (.67)
Net asset value, end
of year .................. $6.01 $5.95 $5.80 $6.43 $6.32
===== ===== ===== ===== =====
Total return ............... 10.30%+ 12.85%+ 1.80%+ 14.58%+ 18.70%+
Net assets at end of year
(000s) ..................... $658,413 $646,473 $618,462 $650,755 $496,352
Ratio of operating
expenses to average
net assets* ............... 1.10% 1.17% 1.23% 1.16% 1.15%
Ratio of net investment
income to average net
assets* .................. 9.70% 8.88% 10.19% 10.41% 11.25%
Portfolio turnover rate ... 81.75% 56.47% 31.55% 24.36% 79.39%
Average commission rate@ $0.0152 -- -- -- --
- ------------
*Reflects voluntary
assumption of fees
or expenses per share in
each year .................. -- -- -- $0.00 --
<CAPTION>
1992 1991 1990 1989 1988
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year ...................... $5.21 $5.88 $7.20 $7.22 $7.73
Net investment income* ........ .71 .75 .88 .84 .85
Net realized and unrealized
gain (loss) on investments
and foreign currency.......... .72 (.67) (1.31) (.01) (.52)
----- ----- ----- ----- -----
Total from investment
operations................... 1.43 .08 (.43) .83 .33
Dividends from net
investment income............. (.69) (.75) (.89) (.85) (.83)
Distributions from net
realized gains................ -- -- -- -- (.01)
----- ----- ----- ----- -----
Total distributions .......... (.69) (.75) (.89) (.85) (.84)
Net asset value, end
of year ...................... $5.95 $5.21 $5.88 $7.20 $7.22
===== ===== ===== ===== =====
Total return .................. 28.99%+ 2.18%+ (6.72%)+ 12.32%+ 4.79%+
Net assets at end of year
(000s) ....................... $308,921 $195,739 $157,987 $88,681 $41,637
Ratio of operating
expenses to average
net assets* .................. 1.17% 1.21% 1.24% 1.25% 1.25%
Ratio of net investment
income to average net
assets*....................... 12.71% 14.21% 13.46% 11.85% 11.90%
Portfolio turnover rate ....... 72.62% 58.15% 52.46% 110.92% 126.68%
Average commission rate@ ...... -- -- -- -- --
*Reflects voluntary
assumption of fees
or expenses per share in
each year ..................... -- -- $0.00 $0.01 $0.02
</TABLE>
*** Per-share figures have been calculated using the average shares method.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges.
@ Average commission rate per share paid for security trades for fiscal years
beginning on or after April 1, 1996.
- --------------------------------------------------------------------------------
4
<PAGE>
Class B
--------------------------------------
Year ended March 31
---------------------------------
1997*** 1996*** 1995***
----- ----- -----
Net asset value,
beginning of
year ............ $5.93 $5.79 $6.42
Net investment
income* ......... .55 .46 .57
Net realized and
unrealized gain
(loss)
on investments
and foreign
currency ......... (.02) .21 (.58)
----- ----- -----
Total from
investment
operations ...... .53 .67 (.01)
Dividends from net
investment
income ............ (.48) (.52) (.56)
Distributions from
net realized
gains ............ -- (.01) (.06)
----- ----- -----
Total
distributions ..... (.48) (.53) (.62)
Net asset value,
end of year ...... $5.98 $5.93 $5.79
===== ===== =====
Total return ...... 9.35%+ 12.06%+ 0.89%+
Net assets at end
of year (000s) ... $259,077 $185,735 $117,767
Ratio of operating
expenses to
average net
assets* ......... 1.85% 1.92% 1.98%
Ratio of net
investment
income to
average net
assets* ......... 9.01% 7.95% 9.65%
Portfolio turnover
rate ............ 81.75% 56.47% 31.55%
Average
commission
rate@ ............ $0.0152 -- --
- ------------
*Reflects voluntary
assumption of
fees or expenses
per share in each
year ............... -- -- --
<TABLE>
<CAPTION>
Class C Class D
------------------------------------------------------ -------------------
Year ended March 31 Year ended March 31
------------------------------------------------------ -------------------
1994** 1997*** 1996*** 1995*** 1994** 1997***
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
year ............ $6.34 $5.92 $5.78 $6.42 $6.34 $5.93
Net investment
income* ......... .51 .61 .53 .64 .57 .54
Net realized and
unrealized gain
(loss) on investments
and foreign
currency ......... .15 (.01) .20 (.60) .14 (.00)
----- ----- ----- ----- ----- -----
Total from
investment
operations ...... .66 .60 .73 .04 .71 .54
Dividends from net
investment
income ............ (.48) (.54) (.58) (.62) (.53) (.48)
Distributions from
net realized
gains ............ (.10) -- (.01) (.06) (.10) --
----- ----- ----- ----- ----- -----
Total
distributions ..... (.58) (.54) (.59) (.68) (.63) (.48)
Net asset value,
end of year ...... $6.42 $5.98 $5.92 $5.78 $6.42 $5.99
===== ===== ===== ===== ===== =====
Total return ...... 10.76%++ 10.63%+ 13.19%+ 1.73%+ 11.67%++ 9.52%+
Net assets at end
of year (000s) ... $67,337 $6,255 $3,840 $2,579 $851 $28,488
Ratio of operating
expenses to
average net
assets* ......... 1.93%[dbldag] 0.85% 0.92% 0.98% 0.93%[dbldag] 1.85%
Ratio of net
investment income to
average net
assets* ......... 10.32%[dbldag] 10.04% 8.97% 10.85% 11.32%[dbldag] 9.09%
Portfolio turnover
rate ............ 24.36% 81.75% 56.47% 31.55% 24.36% 81.75%
Average commission
rate@ ............ -- $0.0152 -- -- -- $0.0152
- ------------
*Reflects voluntary
assumption of
fees or expenses
per share in each
year ............... $0.00 -- -- -- $0.00 --
</TABLE>
Year ended March 31
-----------------------------------------
1996*** 1995*** 1994**
------------ ------------ --------------
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
----- ----- -----
Total from
investment
operations ...... .67 (.01) .66
Dividends from net
investment
income ............ (.52) (.56) (.48)
Distributions from
net realized
gains ............ (.01) (.06) (.10)
----- ----- -----
Total
distributions . (.53) (.62) (.58)
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%[dbldag]
Ratio of net
investment
income to
average net
assets* ......... 7.91% 9.81% 10.32%[dbldag]
Portfolio turnover
rate ............ 56.47% 31.55% 24.36%
Average
commission
rate@ ............ -- -- --
- ------------
*Reflects voluntary
assumption of
fees or expenses
per share in each
year ............... -- -- $0.00
** June 1, 1993 (commencement of share class designations) to March 31,
1994.
*** Per-share figures have been calculated using the average shares method.
[dbldag] Annualized.
+ Total return figures do not reflect any front-end or contingent
deferred sales charges.
++ Represents aggregate return for the period without annualization and
does not reflect any front-end or contingent deferred sales charge.
@ Average commission rate per share paid for security trades for fiscal
years beginning on or after April 1, 1996.
- --------------------------------------------------------------------------------
5
<PAGE>
The Fund's Investments
The investment objective of the Fund is to seek, primarily, high current income
and, secondarily, capital appreciation, from investments in fixed income
securities. The investment objective is a fundamental policy and may not be
changed without approval of the shareholders of the Fund.
There are risks in any investment program, and there is no assurance that
the Fund will achieve its investment objective. All bonds are subject to
relative degrees of credit risk and market volatility. Credit risk relates to
the issuer's (and any guarantor's) ability to make timely payments of principal
and interest. Market volatility relates to the changes in market price that
occur as a result of variations in the level of prevailing interest rates and
yield relationships between sectors in the bond market and other market
factors. When interest rates increase, the value of debt securities and shares
of the Fund can be expected to decline. Generally, prices of lower rated issues
tend to fluctuate more than prices of higher rated issues, and, for any given
change in the level of interest rates, prices of issues with longer maturities
tend to fluctuate more than prices of issues with shorter maturities.
In seeking to achieve this investment objective, the Fund, under normal
market conditions, invests at least 65% of its total assets in fixed income
securities, including convertible bonds and preferred stocks, rated at the time
of purchase within the major rating categories BBB through D by Standard &
Poor's Corporation ("S&P") or Baa through C by Moody's Investors Service, Inc.
("Moody's"), or which are unrated but believed by the Investment Manager to be
of comparable quality; provided that the Fund shall not invest more than 20% of
its total assets in securities which are within the major rating categories CCC
or lower by S&P, or Caa or lower by Moody's. Where an investment is split
rated, the Fund may invest on the basis of the higher rating. Where an
investment is only rated by one rating agency, the Fund may invest on the basis
of a higher rating derived from its own analysis. In selecting investments for
the Fund, including any in the lower rated categories, the Investment Manager
seeks to identify those securities the returns on which are appropriate within
the context of the risks involved. In doing so, the Investment Manager will
consider both its own credit analysis and the ratings of S&P and Moody's.
The Fund may invest in securities rated higher than the BBB category by
S&P or Baa by Moody's (or unrated securities of comparable quality) when the
difference in yields between quality classifications is relatively narrow or
for temporary defensive purposes when the Investment Manager anticipates
adverse market conditions. Investments in higher quality issues may serve to
lessen a decline in net asset value but may also affect the amount of current
income produced by the Fund, since the yields from such issues are usually
lower than those from medium and lower quality issues.
For the fiscal year ended March 31, 1997, the percentage of the Fund's
total investments on an average annual basis invested in debt securities of any
particular rating category or its equivalent, as determined by the Investment
Manager, was as follows: 5% BB, 65% B and 11% CCC, on a dollar weighted basis,
comprising 81% of total investments. Of these bonds, 83% were rated by a
nationally recognized statistical rating organization and 17% were unrated but
considered to be equivalent, as determined by the Investment Manager, to
comparable rated securities. The above percentages reflect ratings as of the
time of purchase and subsequent changes, if any, including downgrades, for the
period the securities were held.
Fixed income securities in which the Fund may invest include debt
obligations of all kinds such as bonds, debentures and notes as well as bonds,
debentures and preferred stocks that are convertible into, or carry rights to
acquire, equity securities. Although the Fund intends to invest primarily in
fixed income debt securities as described above, it may invest up to 35% of the
market value of its total assets in dividend-paying common stocks of
established companies listed on a national securities exchange to the extent
the Investment Manager considers such investments consistent with the Fund's
investment objective.
The Fund may invest in securities restricted as to resale which could
become illiquid. Some restricted
6
<PAGE>
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 market for Rule 144A securities is
still developing, even restricted securities resalable pursuant to the rule can
be illiquid, however. See the Statement of Additional Information.
Risk Factors
Lower rated high yield, high risk securities (i.e., bonds rated within the BB
category or lower by S&P or Ba or lower by Moody's or equivalent as determined
by the Investment Manager) of the type in which the Fund invests generally
involve more credit risk than higher rated securities and are considered by S&P
and Moody's to be predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation.
Such securities may also be subject to greater market price fluctuations than
lower yielding, higher rated debt securities; credit ratings do not reflect
this market risk. In addition, these ratings may not reflect the effect of
recent developments on an issuer's ability to make interest and principal
payments. Bonds rated in the lowest category and in default may never resume
interest payments or repay principal and their market value may be difficult to
determine. In the event the rating of a security is downgraded, the Investment
Manager will determine whether the security should be retained or sold
depending on an assessment of all facts and circumstances at that time.
Additional risks of such securities include (i) limited liquidity and
secondary market support, particularly in the case of securities that are not
rated or are subject to restrictions on resale, which may limit the
availability of securities for purchase by the Fund, limit the ability of the
Fund to sell portfolio securities either to meet redemption requests or in
response to changes in the economy or the financial markets, heighten the
effect of adverse publicity and investor perceptions and make selection and
valuation of portfolio securities more subjective and dependent upon the
Investment Manager's credit analysis; (ii) substantial market price volatility
and/or the potential for the insolvency of issuers during periods of changing
interest rates and economic difficulty, particularly with respect to securities
that do not pay interest currently in cash; (iii) subordination to the prior
claims of banks and other senior lenders; (iv) the possibility that earnings of
the issuer may be insufficient to meet its debt service; and (v) the
realization of taxable income for shareholders without the corresponding
receipt of cash in connection with investments in "zero coupon" or
"pay-in-kind" securities. Growth in the market for this type of security has
paralleled a general expansion in certain sectors in the U.S. economy, and the
effects of adverse economic changes (including a recession) are unclear.
For further information concerning the ratings of debt securities, see the
Appendix to this Prospectus.
Portfolio Maturity and Turnover
The Fund's holdings may include issues across the maturity spectrum. Ordinarily
the Fund will emphasize investments in medium and longer term instruments; the
weighted average maturity of portfolio holdings, however, may be shortened or
lengthened depending primarily upon the Investment Manager's outlook for
interest rates.
The Fund reserves full freedom with respect to portfolio turnover. In
periods when there are rapid changes in economic conditions or security price
levels or when investment strategy is changed significantly, portfolio turnover
may be significantly higher than during times of economic and market price
stability or when investment strategy remains relatively constant. Increases in
the rate of portfolio turnover will result in increased transaction costs for
the Fund and may result in an increase in the realization of short-term capital
gains.
Other Investment Policies
Fixed income securities in which the Fund may invest include zero or step
coupon securities. Zero or step coupon securities may pay no interest for all
or a portion of their life but are purchased at a discount to face value at
maturity. Their return consists of the amortization of the discount between
their purchase price and their maturity value, plus, in the case of a step
coupon, any fixed rate interest income. Zero
7
<PAGE>
coupon securities pay no interest to holders prior to maturity even though
interest on these securities is reported as income to the Fund. The Fund will
be required to distribute all or substantially all of such amounts annually to
its shareholders. These distributions may cause the Fund to liquidate portfolio
assets in order to make such distributions at a time when the Fund may have
otherwise chosen not to sell such securities. The amount of the discount
fluctuates with the market value of such securities, which may be more volatile
than that of securities which pay interest at regular intervals.
The Fund may invest up to 20% of its total assets in securities of foreign
issuers such as foreign corporate or government fixed income securities
consistent with its investment objective and policies and in connection with
such investments may enter into forward currency exchange contracts to reduce
the risks of currency fluctuations. For this purpose, American Depositary
Receipts ("ADRs") are not considered to be foreign securities.
ADRs are available through facilities which may be either "sponsored" or
"unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and usually agrees to
provide shareholder communications. In an unsponsored arrangement, the foreign
issuer is not involved, and the ADR holders pay the fees of the depository.
Sponsored ADRs are generally more advantageous to the ADR holders and the
issuer than are unsponsored ADRs. More and higher fees are generally charged in
an unsponsored program compared to a sponsored facility. Only sponsored ADRs
may be listed on the New York or American Stock Exchanges. Unsponsored ADRs may
prove to be more risky due to (a) the additional costs involved to the Fund;
(b) the relative illiquidity of the issue in U.S. markets; and (c) the
possibility of higher trading costs in the over-the-
counter market as opposed to exchange-based tradings. The Fund will take these
and other risk considerations into account before making an investment in an
unsponsored ADR.
Investing in foreign securities entails certain risks, including those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, the possible imposition
of currency exchange blockages, higher operating expenses, expropriation of the
Fund's assets by a foreign government, foreign withholding and other taxes
which may reduce investment return, reduced availability of public information
concerning issuers and the fact that foreign issuers are not generally subject
to uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to
domestic issuers. Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of securities of comparable
domestic issuers. Finally, to the extent the Fund invests in less developed
countries or emerging foreign markets, it will be subject to a variety of
additional risks, including risks associated with political instability,
economies based on relatively few industries, lesser market liquidity, high
rates of inflation, significant price volatility of portfolio holdings and high
levels of external debt in the relevant country.
In order to protect against the effect of uncertain future exchange rates
on securities denominated in foreign currencies, the Fund may engage in
currency exchange transactions either on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market or by entering into forward
contracts to purchase or sell currencies. Although such contracts tend to
minimize the risk of loss resulting from a correctly predicted decline in value
of hedged currency, they tend to limit any potential gain that might result
should the value of such currency increase. In entering a forward currency
transaction, the Fund is dependent upon the creditworthiness and good faith of
the counterparty. The Fund attempts to reduce the risks of nonperformance by
the counterparty by dealing only with established, large institutions with
which the Investment Manager has done substantial business in the past. For
further information, see the Statement of Additional Information.
In seeking to lessen investment risk, the Fund operates under certain
fundamental and nonfundamental investment restrictions.
Under the fundamental investment restrictions, the Fund may not (a)
purchase a security of any one issuer (other than securities issued or
guaranteed as
8
<PAGE>
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 or (b) invest more than 25% of the Fund's total assets in securities of
issuers principally engaged in any one industry. The foregoing fundamental
investment restrictions may not be changed except by vote of the holders of a
majority of the outstanding voting securities of the Fund.
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.
For further information on the above and other fundamental and
nonfundamental investment restriction, see the Statement of Additional
Information.
The Fund may lend portfolio securities with a value of up to 331/3% of its
total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of the loaned securities plus accrued interest. Collateral
received by the Fund will generally be invested in quality short-term
unaffiliated mutual funds, securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, irrevocable stand-by letters of
credit issued by a bank or repurchase agreements, among similar investments. The
investing of cash collateral received from loaning portfolio securities involves
leverage which magnifies the potential for gain or loss on monies invested and,
therefore, results in an increase in the volatility of the Fund's outstanding
securities. Such loans may be terminated at any time.
The Fund will retain most rights of ownership including rights to
dividends, interest or other distributions on the loaned securities. Voting
rights pass with the lending, although the Fund may call loans to vote proxies
if desired. Should the borrower of the securities fail financially, there is a
risk of delay in recovery of the securities or loss of rights in the
collateral. Loans are made only to borrowers which are deemed by the Investment
Manager to be of good financial standing.
The Fund may buy and sell options, futures contracts and options on
futures contracts on securities, securities indices and currencies, and enter
into closing transactions with respect thereto. The Fund may not establish a
position in a commodity futures contract or purchase or sell a commodity option
contract for other than bona fide hedging purposes if immediately thereafter
the sum of the amount of initial margin deposits and premiums required to
establish such positions for such nonhedging purposes would exceed 5% of the
market value of the Fund's net assets; similar policies apply to options which
are not commodities. The Fund may enter various forms of swap arrangements,
which have simultaneously the characteristics of a security and a futures
contract, although the Fund does not presently expect to invest more than 5% of
its total assets in such items. These swap arrangements include interest rate
swaps, currency swaps and index swaps. See the Statement of Additional
Information.
The Fund may purchase securities on a "when- issued," 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.
9
<PAGE>
The Fund may hold up to 100% of its assets in cash or short-term
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Investment Manager, such a
position is more likely to provide protection against adverse market conditions
than adherence to the Fund's other investment policies. The types of short-term
instruments in which the Fund may invest for such purposes include short-term
money market securities such as repurchase agreements and securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
certificates of deposit, time deposits and bankers' acceptances of certain
qualified financial institutions and corporate commercial paper rated at the
time of purchase at least "A" by S&P or "Prime" by Moody's (or, if not rated,
issued by companies having outstanding long-term unsecured debt issue rated at
least "A" by S&P or Moody's). See the Statement of Additional Information.
- --------------------------------------------------------------------------------
Information on the Purchase of Shares, Redemption of Shares and
Shareholder Services is set forth on pages 10 to 24 below.
- --------------------------------------------------------------------------------
The Fund is available for investment by many kinds of investors including
participants investing through 401(k) or other retirement plan sponsors,
employees investing through savings plans sponsored by employers,
Individual Retirement Accounts ("IRAs"), trusts, corporations,
individuals, etc. The applicability of the general information and
administrative procedures set forth below accordingly will vary depending
on the investor and the recordkeeping system established for a
shareholder's investment in the Fund. Participants in 401(k) and other
plans should first consult with the appropriate person at their employer
or refer to the plan materials before following any of the procedures
below. For more information or assistance, anyone may call 1-800-562-0032.
- --------------------------------------------------------------------------------
Purchase of Shares
Methods of Purchase
Through Dealers and Others
Shares of the Fund are continuously offered through securities dealers,
financial institutions and others (collectively referred to herein as
securities dealers or dealers) who have entered into sales agreements with the
Distributor. Purchases through dealers are confirmed at the offering price,
which is the net asset value plus the applicable sales charge, next determined
after the order is duly received by State Street Research Shareholder Services
("Shareholder Services"), a division of State Street Research Investment
Services, Inc., from the dealer. ("Duly received" for purposes herein means in
accordance with the conditions of the applicable method of purchase as
described below.) The dealer is responsible for transmitting the order promptly
to Shareholder Services in order to permit the investor to obtain the current
price. See "Purchase of Shares--Net Asset Value" herein.
By Mail
Initial investments in the Fund may be made by mailing or delivering to the
investor's dealer a completed Application (accompanying this Prospectus),
together with a check for the total purchase price payable to the Fund. The
dealer must forward the Application and check in accordance with the
instructions on the Application.
Additional shares may be purchased by mailing to Shareholder Services a
check payable to the Fund in the amount of the total purchase price together
with any one of the following: (i) an Application; (ii) the stub from a
shareholder's account statement; or (iii) a letter setting forth the name of
the Fund, the class of shares and the shareholder's account name and number.
Shareholder Services will deliver the purchase order to the transfer agent and
dividend paying agent, State Street Bank and Trust Company (the "Transfer
Agent").
If a check is not honored for its full amount, the purchaser could be
subject to additional charges to cover collection costs and any investment
loss, and the purchase may be cancelled.
10
<PAGE>
By Wire
An investor may purchase shares by wiring Federal Funds of not less than $5,000
to State Street Bank and Trust Company, which also serves as the Trust's
custodian (the "Custodian"), as set forth below. Prior to making an investment
by wire, an investor must notify Shareholder Services at 1-800-562-0032 and
obtain a control number and instructions. Following such notification, Federal
Funds should be wired through the Federal Reserve System to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF = State Street Research High Income Fund and class of shares
(A, B, C or D)
AC = 99029761
OBI = Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street
Research Shareholder Services)
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make such
investment by 12 noon Boston time on the day of his or her investment; and (ii)
the wire must be received by 4 P.M. Boston time that same day.
An investor making an initial investment by wire must promptly complete
the Application accompanying this Prospectus and deliver it to his or her
dealer, who should forward it as required. No redemptions will be effected
until the Application has been duly processed.
The Fund may in its discretion discontinue, suspend or change the practice
of accepting orders by any of the methods described above. Orders for the
purchase of shares are subject to acceptance by the Fund. The Fund reserves the
right to suspend the sale of shares, or to reject any purchase order, including
orders in connection with exchanges, for any reason.
Minimum Investment
Class of Shares
-------------------------------------
A B C D
------ ------ --- ------
Minimum Initial Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $2,000 $2,000 (a) $2,000
By Investamatic $1,000 $1,000 (a) $1,000
All Other $2,500 $2,500 (a) $2,500
Minimum Subsequent Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $ 50 $ 50 (a) $ 50
By Investamatic $ 50 $ 50 (a) $ 50
All Other $ 50 $ 50 (a) $ 50
(a) Special conditions apply; contact the Distributor.
The Fund reserves the right to vary the minimums for initial or subsequent
investments as in the case of, for example, exchanges and investments under
various retirement and employee benefit plans, sponsored arrangements involving
group solicitations of the members of an organization, or other investment
plans for reinvestment of dividends and distributions or for periodic
investments (e.g., Investamatic Program).
Alternative Purchase Program
General
Alternative classes of shares permit investors to select a purchase program
which they believe will be the most advantageous for them, given the amount of
their purchase, the length of time they anticipate holding Fund shares, or the
flexibility they desire in this regard, and other relevant circumstances.
Investors will be able to determine whether in their particular circumstances
it is more advantageous to incur an initial sales charge and not be subject to
certain ongoing charges or to have their entire initial purchase price invested
in the Fund with the investment being subject thereafter to ongoing service
fees and distribution fees.
As described in greater detail below, dealers are paid differing amounts
of commissions and other compensation depending on which class of shares they
sell.
11
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------------------ ------------------------- --------- ----------------------
<S> <C> <C> <C> <C>
Sales Charges Initial sales Contingent deferred None Contingent deferred
charge at time of sales charge of 5% sales charge of 1%
investment of up to 2% applies to applies to any shares
to 4.5% depending any shares redeemed redeemed within one
on amount of within first five years year following
investment following their their purchase
purchase; no
contingent deferred
sales charge
after five years
On investments of $1
million or more, no
initial sales charge;
but contingent
deferred sales charge
of 1% applies to any
shares redeemed within
one year following
their purchase
Distribution Fee None 0.75% for first None 0.75% each year
eight years;
Class B shares
convert auto-
matically to
Class A shares
after eight years
Service Fee 0.25% each year 0.25% each year None 0.25% each year
Initial Above described 4% None 1%
Commission initial sales charge
Received by less 0.25% to 0.50%
Selling retained by
Dealers Distributor
On investments of
$1 million or more,
0.25% to 1.00%
paid to dealer by
Distributor
</TABLE>
12
<PAGE>
In deciding which class of shares to purchase, the investor should
consider the amount of the investment, the length of time the investment is
expected to be held, and the ongoing service fee and distribution fee, among
other factors.
Class A shares are sold at net asset value plus an initial sales charge of
up to 4.5% of the public offering price. Because of the sales charge, not all
of an investor's purchase amount is invested unless the purchase equals
$1,000,000 or more. Class B shareholders pay no initial sales charge, but a
contingent deferred sales charge of up to 5% generally applies to shares
redeemed within five years of purchase. Class D shareholders also pay no
initial sales charge, but a contingent deferred sales charge of 1% generally
applies to redemptions made within one year of purchase. For Class B and Class
D shareholders, therefore, the entire purchase amount is immediately invested
in a Fund.
An investor who qualifies for a significantly reduced initial sales
charge, or a complete waiver of the sales charge on investments of $1,000,000
or more, on the purchase of Class A shares might elect that option to take
advantage of the lower ongoing service and distribution fees that characterize
Class A shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. Class B shares are assessed an annual
distribution fee of 0.75% of daily net assets for an eight-year period
following the date of purchase and are then automatically converted to Class A
shares. Class D shares are assessed an annual distribution fee of 0.75% of
daily net assets for as long as the shares are held. The prospective investor
should consider these fees plus the initial or contingent deferred sales
charges in estimating the costs of investing in the various classes of a Fund's
shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are allocated to dealers (see
"Distribution Plan" below). In addition, the Distributor will, at its expense,
provide additional cash and noncash incentives to securities dealers that sell
shares. Such incentives may be extended only to those dealers that have sold or
may sell significant amounts of shares and/or meet other conditions established
by the Distributor; for example, the Distributor may sponsor special promotions
to develop particular distribution channels or to reach certain investor
groups. The Distributor may also compensate those dealers with clients who
maintain their investments in a Fund over a period of years. The incentives may
include merchandise and trips to and attendance at sales seminars at resorts.
The Distributor may also pay additional sales compensation to its affiliate,
MetLife Securities, Inc.
Class A Shares--Initial Sales Charges
Sales Charges
The purchase price of a Class A share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar amount
of the shares purchased as set forth in the table below. A major portion of
this sales charge is reallowed by the Distributor to the dealer responsible for
the sale.
- --------------------------------------------------------------
Sales Sales
Charge Charge
Paid by Paid by Dealer
Dollar Investor Investor Concession
Amount of As % of As % of As % of
Purchase Purchase Net Asset Purchase
Transaction Price Value Price
- --------------------------------------------------------------
Less than $100,000 4.50% 4.71% 4.00%
- --------------------------------------------------------------
$100,000 or above
but less than
$250,000 3.50% 3.63% 3.00%
- --------------------------------------------------------------
$250,000 or above
but less than
$500,000 2.50% 2.56% 2.00%
- --------------------------------------------------------------
$500,000 or above
but less than
$1 million 2.00% 2.04% 1.75%
- --------------------------------------------------------------
$1 million and See
above 0% 0% following
discussion
- --------------------------------------------------------------
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor may
13
<PAGE>
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%
On such sales of $1,000,000 or more, unless the above commission is waived
by the dealer, the investor is subject to a 1% contingent deferred sales charge
on any portion of the purchase redeemed within one year of the sale. However,
such redeemed shares will not be subject to the contingent deferred sales
charge to the extent that their value represents (1) capital appreciation or
(2) reinvestment of dividends or capital gains distributions. In addition, the
contingent deferred sales charge will be waived for certain other redemptions
as described under "Contingent Deferred Sales Charge Waivers" below (as
otherwise applicable to Class B shares).
Class A shares of the Fund that are purchased without a sales charge may
be exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption within
one year of the Class A shares which are acquired through such exchange. For
federal income tax purposes, the amount of the contingent deferred sales charge
will reduce the gain or increase the loss, as the case may be, on the amount
realized on redemption. The amount of any contingent deferred sales charge will
be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement of
Additional Information, of $100,000 or more of Class A shares of the Fund or a
combination of "Eligible Funds." "Eligible Funds" include the Fund and other
funds so designated by the Distributor from time to time. Class B, Class C and
Class D shares may also be included in the combination under certain
circumstances. Dealers should call Shareholder Services for details concerning
the other Eligible Funds and any persons who may qualify for reduced sales
charges and related information. See the Statement of Additional Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A shares
of the Fund and any other Eligible Funds within a 13-month period. Class B,
Class C and Class D shares may also be included in the combination under
certain circumstances. Additional information on a Letter of Intent is
available from dealers, or from the Distributor, and also appears in the
Statement of Additional Information.
Right of Accumulation
Investors may purchase Class A shares of the Fund or a combination of shares of
the Fund and other Eligible Funds at reduced sales charges pursuant to a Right
of Accumulation. Under the Right of Accumulation, the sales charge is
determined by combining the current purchase with the value of the Class A
shares of other Eligible Funds held at the time of purchase. Class B, Class C
and Class D shares may also be included in the combination under certain
circumstances. See the Statement of Additional Information and call Shareholder
Services for details concerning the Right of Accumulation.
Other Programs
Class A shares of the Fund may be sold or issued in an exchange at a reduced
sales charge or without a sales charge pursuant to certain sponsored
arrangements, which include programs under which a company, employee benefit
plan or other organization makes recommendations to, or permits group
solicitation of, its employees, members or participants, except any
organization created primarily for the purpose of obtaining shares of the Fund
at a reduced sales charge or without a sales charge. Sales without a sales
charge, or with a reduced sales charge, may also be made through brokers,
financial planners, institutions, and others, under managed fee-based programs
(e.g., "wrap fee" or similar programs) which meet certain requirements
established from
14
<PAGE>
time to time by the Distributor. Information on such arrangements and further
conditions and limitations is available from the Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and persons: (A) the
Investment Manager, Distributor, or any affiliated entities, including any
direct or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated Companies,
any relatives of any such individuals whose relationship is directly verified
by such individuals to the Distributor, or any beneficial account for such
relatives or individuals; and (C) employees, officers, sales representatives or
directors of dealers and other entities with a selling agreement with the
Distributor to sell shares of any aforementioned investment company, any spouse
or child of such person, or any beneficial account for any of them. The
purchase must be made for investment and the shares purchased may not be resold
except through redemption. This purchase program is subject to such
administrative policies, regarding the qualification of purchasers, minimum
investments by various groups of eligible persons and any other matters, as may
be adopted by the Distributor from time to time.
Class B Shares--Contingent Deferred
Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is duly received, as defined herein.
No sales charge is imposed at the time of purchase; thus the full amount of the
investor's purchase payment will be invested in the Fund. However, a contingent
deferred sales charge may be imposed upon redemptions of Class B shares as
described below.
The Distributor will pay dealers at the time of sale a 4% commission for
selling Class B shares. The proceeds of the contingent deferred sales charge
and the distribution fee are used to offset distribution expenses and thereby
permit the sale of Class B shares without an initial sales charge.
Class B shares that are redeemed within a five-year period after their
purchase will not be subject to a contingent deferred sales charge to the
extent that the value of such shares represents (1) capital appreciation of
Fund assets or (2) reinvestment of dividends or capital gains distributions.
The amount of any applicable contingent deferred sales charge will be
calculated by multiplying the net asset value of such shares at the time of
redemption or at the time of purchase, whichever is lower, by the applicable
percentage shown in the table below:
Contingent Deferred
Sales Charge
As A Percentage Of
Redemption During Net Asset Value
- ----------------- ------------------
1st Year Since Purchase .................. 5%
2nd Year Since Purchase .................. 4
3rd Year Since Purchase .................. 3
4th Year Since Purchase .................. 3
5th Year Since Purchase .................. 2
6th Year Since Purchase and Thereafter ... None
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first of
those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of the Fund acquired through an exchange from another
Eligible Fund will be measured from the date that such shares were initially
acquired in the other Eligible Fund, and Class B shares being redeemed will be
considered to represent, as applicable, capital appreciation or dividend and
capital gains distribution reinvestments in such other Eligible Fund. These
determinations will result in any contingent deferred sales charge being
imposed at the lowest possible rate. For federal income tax purposes, the
amount of the contingent deferred sales charge will reduce the gain or increase
the loss, as the case may be, on the amount realized on redemption. The amount
of any contingent deferred sales charge will be paid to the Distributor.
15
<PAGE>
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic withdrawal plan which meets certain conditions.
In addition, the contingent deferred sales charge will be waived for: (i)
redemptions made within one year of the death or total disability, as defined
by the Social Security Administration, of all shareholders of an account; (ii)
redemptions made after attainment of a specific age in an amount which
represents the minimum distribution required at such age under Section
401(a)(9) of the Internal Revenue Code for retirement accounts or plans (e.g.,
age 701/2 for IRAs and Section 403(b) plans), calculated solely on the basis of
assets invested in the Fund or other Eligible Funds; and (iii) a redemption
resulting from a tax-
free return of an excess contribution to an IRA. (The foregoing waivers do not
apply to a tax-free rollover or transfer of assets out of the Fund.) The Fund
may modify or terminate the waivers described above at any time; for example,
the Fund may limit the application of multiple waivers and establish other
conditions for employee benefit plans.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends or
distributions with respect to such shares, will automatically convert to Class
A shares of the Fund at the end of eight years following the issuance of such
Class B shares; consequently, they will no longer be subject to the higher
expenses borne by Class B shares. The conversion rate will be determined on the
basis of the relative per share net asset values of the two classes and may
result in a shareholder receiving either a greater or fewer number of Class A
shares than the Class B shares so converted. As noted above, holding periods
for Class B shares received in exchange for Class B shares of other Eligible
Funds will be counted toward the eight-year period.
Class C Shares--Institutional; No Sales Charge
The purchase price of a Class C share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase or
redemption. The Fund will receive the full amount of the investor's purchase
payment.
In general, Class C shares are only available for new investments by
certain large institutions, and employee benefit plans which acquire shares
through programs or products sponsored by Metropolitan Life Insurance Company
("Metropolitan") and/or its affiliates, for which Class C shares have been
designated. Information on the availability of Class C shares and further
conditions and limitations is available from the Distributor.
Class C shares may have also been issued directly or through exchanges to
those shareholders of the Fund or other Eligible Funds who previously held
shares not subject to any future sales charge or service fees or distribution
fees.
Class D Shares--Spread Sales Charges
The purchase price of a Class D share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase; thus the
full amount of the investor's purchase payment will be invested in the Fund.
Class D shares are subject to a 1% contingent deferred sales charge on any
portion of the purchase redeemed within one year of the sale. The contingent
deferred sales charge will be 1% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. The Distributor
pays dealers a 1% commission for selling Class D shares at the time of
purchase. The proceeds of the contingent deferred sales charge and the
distribution fee are used to offset distribution expenses and thereby permit
the sale of Class D shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will not
be subject to the contingent deferred sales charge to the extent that the value
of such shares represents (1) capital appreciation of Fund assets or (2)
reinvestment of dividends or capital gains distributions. In addition, the
contingent deferred sales charge will be waived for certain other redemptions
as described under "Contingent Deferred
16
<PAGE>
Sales Charge Waivers" above (as otherwise applicable to Class B shares). For
federal income tax purposes, the amount of the contingent deferred sales charge
will reduce the gain or increase the loss, as the case may be, on the amount
realized on redemption. The amount of any contingent deferred sales charge will
be paid to the Distributor.
Net Asset Value
The Fund's per share net asset values are determined Monday through Friday as
of the close of the New York Stock Exchange (the "NYSE") exclusive of days on
which the NYSE is closed. The NYSE ordinarily closes at 4 P.M. New York City
time. The Fund uses one or more pricing services to value its portfolio
securities. The pricing services utilize information with respect to market
transactions, quotations from dealers and various relationships among
securities in determining value and may provide prices determined as of times
prior to the close of the NYSE. Assets for which quotations are readily
available are valued as of the close of business on the valuation date.
Securities for which there is no pricing service valuation or last reported
sale price are valued as determined in good faith by or under the authority of
the Trustees of the Trust. The Trustees have authorized the use of the
amortized cost method to value short-term debt instruments issued with a
maturity of one year or less and having a remaining maturity of 60 days or less
when the value obtained is fair value. Further information with respect to the
valuation of the Fund's assets is included in the Statement of Additional
Information.
Distribution Plan
The Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the provisions of the
Distribution Plan, the Fund makes payments to the Distributor based on an
annual percentage of the average daily value of the net assets of each class of
shares as follows:
Class Service Fee Distribution Fee
- ------- ----------------- -----------------
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) or others for
personal services and/or the maintenance or servicing of shareholder accounts.
A portion of any initial commission paid to dealers for the sale of shares of
the Fund represents payment for personal services and/or the maintenance of
shareholder accounts by such dealers. Dealers who have sold Class A shares are
eligible for further reimbursement commencing as of the time of such sale.
Dealers who have sold Class B and Class D shares are eligible for further
reimbursement after the first year during which such shares have been held of
record by such dealer as nominee for its clients (or by such clients directly).
Any service fees received by the Distributor and not allocated to dealers may
be applied by the Distributor in reduction of expenses incurred by it directly
for personal services and the maintenance or servicing of shareholder accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to dealers for selling such shares. Any distribution fees
received by the Distributor and not allocated to dealers may be applied by the
Distributor in connection with sales or marketing efforts, including special
promotional fees and cash and noncash incentives based upon sales by dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs
similar expenses on behalf of, such other funds. When expenses of the
Distributor cannot be identified as relating to a specific fund, the
Distributor allocates expenses among the funds in a manner deemed fair and
equitable to each fund.
Commissions and other cash and noncash incentives and payments to dealers,
to the extent payable out of the general profits, revenues or other sources of
the Distributor (including the advisory fees
17
<PAGE>
paid by the Fund), have also been authorized pursuant to the Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which a Fund may incur under the Distribution
Plan to 1%, of which 0.75% may be used to pay distribution expenses and 0.25%
may be used to pay shareholder service fees. The NASD rule also limits the
aggregate amount which the Fund may pay for such distribution costs to 6.25% of
gross share sales of a class since the inception of any asset-based sales
charge plus interest at the prime rate plus 1% on unpaid amounts thereof (less
any contingent deferred sales charges). Such limitation does not apply to
shareholder service fees. Payments to the Distributor or to dealers funded
under the Distribution Plan may be discontinued at any time by the Trustees of
the Trust.
Redemption of Shares
Shareholders may redeem all or any portion of their accounts on any day the
NYSE is open for business. Redemptions will be effective at the net asset value
per share next determined (see "Purchase of Shares--Net Asset Value" herein)
after receipt of the redemption request, in accordance with the requirements
described below, by Shareholder Services and delivery of the request by
Shareholder Services to the Transfer Agent. To allow time for the clearance of
checks used for the purchase of any shares which are tendered for redemption
shortly after purchase, the remittance of the redemption proceeds for such
shares could be delayed for 15 days or more after the purchase. Shareholders
who anticipate a potential need for immediate access to their investments
should, therefore, purchase shares by wire. Except as noted, redemption
proceeds from the Fund are normally remitted within seven days after receipt of
the redemption request by the Fund and any necessary documents in good order.
Methods of Redemption
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed to
the shareholder or wired to a predesignated bank account (see "Proceeds By
Wire" below), by sending to State Street Research Shareholder Services, P.O.
Box 8408, Boston, Massachusetts 02266-8408: (1) a written request for
redemption signed by the registered owner(s) of the shares, exactly as the
account is registered; (2) an endorsed stock power in good order with respect
to the shares or, if issued, the share certificates for the shares endorsed for
transfer or accompanied by an endorsed stock power; (3) any required signature
guarantees (see "Redemption of Shares--Signature Guarantees" below); and (4)
any additional documents which may be required for redemption in the case of
corporations, trustees, etc., such as certified copies of corporate
resolutions, governing instruments, powers of attorney, and the like. The
Transfer Agent will not process requests for redemption until it has received
all necessary documents in good order. A shareholder will be notified promptly
if a redemption request cannot be accepted. Shareholders having any questions
about the requirements for redemption should call Shareholder Services
toll-free at 1-800-562-0032.
Request By Telephone
Shareholders may request redemption by telephone with proceeds to be
transmitted by check or by wire (see "Proceeds By Wire" below). A shareholder
can request a redemption for $50,000 or less to be transmitted by check. Such
check for the proceeds will be made payable to the shareholder of record and
will be mailed to the address of record. There is no fee for this service. It
is not available for shares held in certificate form or if the address of
record has been changed within 30 days of the redemption request. The Fund may
revoke or suspend the telephone redemption privilege at any time and without
notice. See "Shareholder Services-- Telephone Services" for a discussion of the
conditions and risks associated with Telephone Privileges.
Request By Check (Class A Shares Only)
Shareholders of Class A shares of the Fund may redeem shares by checks drawn on
State Street Bank and Trust Company. Checks may be made payable to the order of
any person or organization designated by the shareholder and must be for
amounts of at least $500 but not more than $100,000. Shareholders will continue
to earn dividends on the shares to be
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redeemed until the check clears. There is currently no charge associated with
redemption of shares by check. Checkbooks are supplied for a $2 fee. Checks
will be sent only to the registered owner at the address of record. A $10 fee
will be charged against an account in the event a redemption check is presented
for payment and not honored pursuant to the terms and conditions established by
State Street Bank and Trust Company.
Shareholders can request the checkwriting privilege by completing the
signature card which is part of the Application. In order to arrange for
redemption-by-check after an account has been opened, a revised Application
with signature card and signatures guaranteed must be sent to Shareholder
Services. Cancelled checks will be returned to shareholders at the end of each
month.
The redemption-by-check service is subject to State Street Bank and Trust
Company's rules and regulations applicable to checking accounts (as amended
from time to time), and is governed by the Massachusetts Uniform Commercial
Code. All notices with respect to checks drawn on State Street Bank and Trust
Company must be given to State Street Bank and Trust Company. Stop payment
instructions with respect to checks must be given to State Street Bank and
Trust Company by calling 1-617-985-8543. Shareholders may not close out an
account by check.
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder has
Telephone Privileges (see "Shareholder Services--Telephone Services" herein),
the Trust's custodian will wire redemption proceeds to the shareholder's
predesignated bank account. To make the request, the shareholder should call
1-800-562-0032 prior to 4 P.M. Boston time. A $7.50 charge against the
shareholder's account will be imposed for each wire redemption. This charge is
subject to change without notice. The shareholder's bank may also impose a
charge for receiving wires of redemption proceeds. The minimum redemption by
wire is $5,000.
Request to Dealer to Repurchase
For the convenience of shareholders, the Fund has authorized the Distributor as
its agent to accept orders from dealers by wire or telephone for the repurchase
of shares by the Distributor from the dealer. The Fund may revoke or suspend
this authorization at any time. The repurchase price is the net asset value for
the applicable shares next determined following the time at which the shares
are offered for repurchase by the dealer to the Distributor. The dealer is
responsible for promptly transmitting a shareholder's order to the Distributor.
Payment of the repurchase proceeds is made to the dealer who placed the order
promptly upon delivery of certificates for shares in proper form for transfer
or, for Open Accounts, upon the receipt of a stock power with signatures
guaranteed as described below, and, if required, any supporting documents.
Neither the Fund nor the Distributor imposes any charge upon such a repurchase.
However, a dealer may impose a charge as agent for a shareholder in the
repurchase of his or her shares.
The Fund has reserved the right to change, modify or terminate the
services described above at any time.
Additional Information
Because of the relatively high cost of maintaining small shareholder accounts,
the Fund reserves the right to involuntarily redeem at its option any
shareholder account which remains below $1,500 for a period of 60 days after
notice is mailed to the applicable shareholder, or to impose a maintenance fee
on such account after 60 days' notice. Such involuntary redemptions will be
subject to applicable sales charges, if any. The Fund may increase such minimum
account value above such amount in the future after notice to affected
shareholders. Involuntarily redeemed shares will be priced at the net asset
value on the date fixed for redemption by the Fund, and the proceeds of the
redemption will be mailed to the affected shareholder at the address of record.
Currently, the maintenance fee is $18 annually, which is paid to the Transfer
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Agent. The fee does not apply to certain retirement accounts or if the
shareholder has more than an aggregate $50,000 invested in the Fund and other
Eligible Funds combined. Imposition of a maintenance fee on a small account
could, over time, exhaust the assets of such account.
To cover the cost of additional compliance administration, a $20 fee will
be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date of
payment of redemption proceeds for more than seven days, except that (a) it may
elect to suspend the redemption of shares or postpone the date of payment of
redemption proceeds: (1) during any period that the NYSE is closed (other than
customary weekend and holiday closings) or trading on the NYSE is restricted;
(2) during any period in which an emergency exists as a result of which
disposal of portfolio securities is not reasonably practicable or it is not
reasonably practicable to fairly determine the Fund's net asset value; or (3)
during such other periods as the Securities and Exchange Commission may by
order permit for the protection of investors; and (b) the payment of redemption
proceeds may be postponed as otherwise provided under "Redemption of Shares"
herein.
Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Fund, the Investment
Manager and the Distributor from possible fraud, signature guarantees are
required for certain redemptions. Signature guarantees help the Transfer Agent
to determine that the person who has authorized a redemption from the account
is, in fact, the shareholder. Signature guarantees are required for, among
other things: (1) written requests for redemptions for more than $50,000; (2)
written requests for redemptions for any amount if the proceeds are transmitted
to other than the current address of record (unchanged in the past 30 days);
(3) written requests for redemptions for any amount submitted by corporations
and certain fiduciaries and other intermediaries; (4) requests to transfer the
registration of shares to another owner; and (5) authorizations to establish
the checkwriting privilege. Signatures must be guaranteed by a bank, a member
firm of a national stock exchange, or other eligible guarantor institution. The
Transfer Agent will not accept guarantees (or notarizations) from notaries
public. The above requirements may be waived in certain instances. Please
contact Shareholder Services at 1-800-562-0032 for specific requirements
relating to your account.
Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of the Fund owned by
shareholders are credited to their accounts by the Transfer Agent, State Street
Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110.
Certificates representing Class B or Class D shares will not be issued, while
certificates representing Class A or Class C shares will only be issued if
specifically requested in writing and, in any case, will only be issued for
full shares, with any fractional shares to be carried on the shareholder's
account. Shareholders will receive periodic statements of transactions in their
account.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through dealers,
by wire or by mailing a check, payable to the Fund, to Shareholder
Services under the terms set forth above under "Purchase of Shares."
2. The following methods of receiving dividends from investment income and
distributions from capital gains are available:
(a) All income dividends and capital gains distributions reinvested in
additional shares of the Fund.
(b) All income dividends in cash; all capital gains distributions
reinvested in additional shares of the Fund.
(c) All income dividends and capital gains distributions in cash.
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(d) All income dividends and capital gains distributions invested in any
one available Eligible Fund designated by the shareholder as described
below. See "Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will automatically be coded for reinvestment of all
dividends and distributions in additional shares of the same class of the Fund.
Selections may be changed at any time by telephone or written notice to
Shareholder Services. Dividends and distributions are reinvested at net asset
value without a sales charge.
Exchange Privilege
Shareholders of the Fund may exchange their shares for available shares with
corresponding characteristics of any of the other Eligible Funds at any time on
the basis of the relative net asset values of the respective shares to be
exchanged, subject to compliance with applicable securities laws. Shareholders
of any other Eligible Fund may similarly exchange their shares for Fund shares
with corresponding characteristics. Prior to making an exchange, shareholders
should obtain the Prospectus of the Eligible Fund into which they are
exchanging. Under the Direct Program, subject to certain conditions,
shareholders may make arrangements for regular exchanges from the Fund into
other Eligible Funds. To effect an exchange, Class A, Class B and Class D
shares may be redeemed without the payment of any contingent deferred sales
charge that might otherwise be due upon an ordinary redemption of such shares.
The State Street Research Money Market Fund issues Class E shares which are
sold without any sales charge. Exchanges of State Street Research Money Market
Fund Class E shares into Class A shares of the Fund or any other Eligible Fund
are subject to the initial sales charge or contingent deferred sales charge
applicable to an initial investment in such Class A shares, unless a prior
Class A sales charge has been paid directly or indirectly with respect to the
shares redeemed. For purposes of computing the contingent deferred sales charge
that may be payable upon disposition of any acquired Class A, Class B and Class
D shares, the holding period of the redeemed shares is "tacked" to the holding
period of the acquired shares. The period any Class E shares are held is not
tacked to the holding period of any acquired shares. No exchange transaction
fee is currently imposed on any exchange.
Shares of the Fund may also be acquired or redeemed in exchange for shares
of the Summit Cash Reserves Fund ("Summit Cash Reserves") by customers of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (subject to completion of
steps necessary to implement the program). The Fund and Summit Cash Reserves
are related mutual funds for purposes of investment and investor services. Upon
the acquisition of shares of Summit Cash Reserves by exchange for redeemed
shares of the Fund, (a) no sales charge is imposed by Summit Cash Reserves, (b)
no contingent deferred sales charge is imposed by the Fund on the Fund shares
redeemed, and (c) any applicable holding period of the Fund shares redeemed is
"tolled," that is, the holding period clock stops running pending further
transactions. Upon the acquisition of shares of the Fund by exchange for
redeemed shares of Summit Cash Reserves, (a) the acquisition of Class A shares
shall be subject to the initial sales charges or contingent deferred sales
charges applicable to an initial investment in such Class A shares, unless a
prior Class A sales charge has been paid indirectly, and (b) the acquisition of
Class B or Class D shares of the Fund shall restart any holding period
previously tolled, or shall be subject to the contingent deferred sales charge
applicable to an initial investment in such shares.
For the convenience of the shareholders who have Telephone Privileges, the
Fund permits exchanges by telephone request from either the shareholder or his
or her dealer. Shares may be exchanged by telephone provided that the
registration of the two accounts is the same. The toll-free number for
exchanges is 1-800-562-0032. See "Telephone Services" herein for a discussion
of conditions and risks associated with Telephone Privileges.
The exchange privilege may be exercised only in those states where shares
of the relevant other Eligible Fund may legally be sold. For tax purposes, each
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<PAGE>
exchange actually represents the sale of shares of one fund and the purchase of
shares of another. Accordingly, exchanges may produce a capital gain or loss
for tax purposes. The exchange privilege may be terminated or suspended or its
terms changed at any time, subject, if required under applicable regulations,
to 60 days' prior notice. New accounts established for investments upon
exchange from an existing account in another fund will have the same Telephone
Privileges as the existing account, unless Shareholder Services is instructed
otherwise. Related administrative policies and procedures may also be adopted
with regard to a series of exchanges, street name accounts, sponsored
arrangements and other matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer identification
number, may be aggregated for purposes of the six exchange limit.
Notwithstanding the six exchange limit, the Fund reserves the right to refuse
exchanges by any person or group if, in the Investment Manager's judgment, the
Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
Exchanges may be restricted or refused if the Fund receives or anticipates
simultaneous orders affecting significant portions of the Fund's assets. In
particular, a pattern of exchanges that coincides with a "market timing"
strategy may be disruptive to the Fund. The Fund may impose these restrictions
at any time. The exchange limit may be modified for accounts in certain
institutional retirement plans because of plan exchange limits, Department of
Labor regulations or administrative and other considerations. Subject to the
foregoing, if an exchange request in good order is received by Shareholder
Services and delivered by Shareholder Services to the Transfer Agent by 12 noon
Boston time on any business day, the exchange usually will occur that day. For
further information regarding the exchange privilege, shareholders should
contact Shareholder Services.
Reinvestment Privilege
A shareholder of the Fund who has redeemed shares or had shares repurchased at
his or her request may reinvest all or any portion of the proceeds (plus that
amount necessary to acquire a fractional share to round off his or her
reinvestment to full shares) in shares, of the same class as the shares
redeemed, of the Fund or any other Eligible Fund at net asset value and without
subjecting the reinvestment to an initial sales charge, provided such
reinvestment is made within 120 calendar days after a redemption or repurchase.
Upon such reinvestment, the shareholder will be credited with any contingent
deferred sales charge previously charged with respect to the amount reinvested.
The redemption of shares is, for federal income tax purposes, a sale on which
the shareholder may realize a gain or loss. If a redemption at a loss is
followed by a reinvestment within 30 days, the transaction may be a "wash sale"
resulting in a denial of the loss for federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by Shareholder
Services of such shareholder's written purchase request and delivery of the
request by Shareholder Services to the Transfer Agent. A shareholder may
exercise this reinvestment privilege only once per 12-month period with respect
to his or her shares of the Fund. No charge is imposed by the Fund for such
reinvestments; however, dealers may charge fees in connection with the
reinvestment privilege. The reinvestment privilege may be exercised with
respect to an Eligible Fund only in those states where shares of the relevant
other Eligible Fund may legally be sold.
Investment Plans
The Investamatic Program is available to Class A, Class B and Class D
shareholders. Under this Program, shareholders may make regular investments
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<PAGE>
by authorizing withdrawals from their bank accounts each month or quarter on
the Application available from Shareholder Services.
The Distributor also offers IRAs and retirement plans, including prototype
and other employee benefit plans for employees, sole proprietors, partnerships
and corporations. Details of these investment plans and their availability may
be obtained from securities dealers or from Shareholder Services.
Systematic Withdrawal Plan
A shareholder who owns noncertificated Class A or Class C shares with a value
of $5,000 or more, or Class B or Class D shares with a value of $10,000 or
more, may elect, by participating in the Fund's Systematic Withdrawal Plan, to
have periodic checks issued for specified amounts. These amounts may not be
less than certain minimums, depending on the class of shares held. The Plan
provides that all income dividends and capital gains distributions of the Fund
shall be credited to participating shareholders in additional shares of the
Fund. Thus, the withdrawal amounts paid can only be realized by redeeming
shares of the Fund under the Plan. To the extent such amounts paid exceed
dividends and distributions from the Fund, a shareholder's investment will
decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually of
either (a) the value, at the time the Plan is initiated, of the shares then in
the account, or (b) the value, at the time of a withdrawal, of the same number
of shares as in the account when the Plan was initiated, whichever is higher.
Expenses of the Plan are borne by the Fund. A participating shareholder
may withdraw from the Plan, and the Fund may terminate the Plan at any time on
written notice. Purchase of additional shares while a shareholder is receiving
payments under a Plan is ordinarily disadvantageous because of duplicative
sales charges. For this reason, a shareholder may not participate in the
Investamatic Check Program and the Systematic Withdrawal Plan at the same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all their
dividends and any other distributions from the Fund or any Eligible Fund
automatically invested at net asset value in one other such Eligible Fund
designated by the shareholder, provided the account into which the dividends
and distributions are directed is initially funded with the requisite minimum
amount. The number of shares purchased will be determined as of the dividend
payment date. The Dividend Allocation Plan is subject to state securities law
requirements, to suspension at any time, and to such policies, limitations and
restrictions, as, for instance, may be applicable to street name or master
accounts, that may be adopted from time to time.
Automatic Bank Connection
A shareholder may elect, by participating in the Fund's Automatic Bank
Connection ("ABC"), to have dividends and other distributions, including
Systematic Withdrawal Plan payments, automatically deposited in the
shareholder's bank account by electronic funds transfer. Some contingent
deferred sales charges may apply. See "Systematic Withdrawal Plan" herein.
Reports
Reports for the Fund will be sent to shareholders of record at least
semiannually. These reports will include a list of the securities owned by the
Fund as well as the Fund's financial statements.
Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing the shareholder to make telephone redemptions for
amounts up to $50,000 to be mailed to the shareholder's address of record
is available automatically;
(2) the privilege allowing the shareholder or his or her dealer to make
telephone exchanges is available automatically;
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<PAGE>
(3) the privilege allowing the shareholder to make telephone redemptions for
amounts over $5,000, to be remitted by wire to the shareholder's
predesignated bank account, is available by election on the Application
accompanying this Prospectus. A current shareholder who did not previously
request such telephone wire privilege on his or her original Application
may request the privilege by completing a Telephone Redemption- by-Wire
Form which may be obtained by calling 1-800-562-0032. The Telephone
Redemption-by- Wire Form requires a signature guarantee; and
(4) the privilege allowing the shareholder to make telephone purchases or
redemptions, transmitted via the Automated Clearing House system, into or
from the shareholder's predesignated bank account, is available upon
completion of the requisite initial documentation. For details and forms,
call 1-800-562-0032. The documentation requires a signature guarantee.
A shareholder may decline the automatic Telephone Privileges set forth in
(1) and (2) above by so indicating on the Application accompanying this
Prospectus.
A shareholder may discontinue any Telephone Privilege at any time by
advising Shareholder Services that the shareholder wishes to discontinue the
use of such privileges in the future.
Unless such Telephone Privileges are declined, a shareholder is deemed to
authorize Shareholder Services and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder to
redeem, or purporting to be the shareholder or the shareholder's dealer to
exchange, shares from any account for which such services have been authorized;
and (2) honor any written instructions for a change of address regardless of
whether such request is accompanied by a signature guarantee. All telephone
calls will be recorded. None of the Fund, the other Eligible Funds, the
Transfer Agent, the Investment Manager or the Distributor will be liable for
any loss, expense or cost arising out of any request, including any fraudulent
or unauthorized requests. Shareholders assume the risk to the full extent of
their accounts that telephone requests may be unauthorized. Reasonable
procedures will be followed to confirm that instructions communicated by
telephone are genuine. The shareholder will not be liable for any losses
arising from unauthorized or fraudulent instructions if such procedures are not
followed.
Shareholders may redeem or exchange shares by calling toll-free
1-800-562-0032. Although it is unlikely, during periods of extraordinary market
conditions, a shareholder may have difficulty in reaching Shareholder Services
at such telephone number. In that event, the shareholder should contact
Shareholder Services at 1-800-357-7800 or otherwise at its main office at One
Financial Center, Boston, Massachusetts 02111-2690.
Shareholder Account Inquiries:
Please call 1-800-562-0032
Call this number for assistance in answering general questions on your account,
including account balance, available shareholder services, statement
information and performance of the Funds. Account inquiries may also be made in
writing to State Street Research Shareholder Services, P.O. Box 8408, Boston,
Massachusetts 02266-8408. A fee of up to $10 will be charged against an account
for providing additional account transcripts or photocopies of paid redemption
checks or for researching records in response to special requests.
Shareholder Telephone Transactions:
Please call 1-800-562-0032
Call this number for assistance in purchasing shares by wire and for telephone
redemptions or telephone exchange transactions. Shareholder Services will
require some form of personal identification prior to acting upon instructions
received by telephone. Written confirmation of each transaction will be
provided.
The Fund and Its Shares
The Fund was organized in 1985 as series of State Street Research Income Trust,
a Massachusetts business trust. The Trustees have authorized shares of the Fund
to be issued in four classes: Class A, Class B, Class C
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<PAGE>
and Class D shares. The Trust is registered with the Securities and Exchange
Commission as an open-end management investment company. The fiscal year end of
the Fund is March 31.
Except for those differences between the classes of shares described below
and elsewhere in the Prospectus, each share of the Fund has equal dividend,
redemption and liquidation rights with other shares of the Fund and when issued
is fully paid and nonassessable. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common usage of terms which may develop in the mutual fund
industry. For example, Class C shares may be redesignated as Class Y shares and
Class D shares may be redesignated as Class C shares. Any redesignations would
not affect any substantive rights respecting the shares.
Each share of each class of shares represents an identical legal interest
in the same portfolio of investments of the Fund, has the same rights and is
identical in all respects, except that Class A, Class B and Class D shares bear
the expenses of the deferred sales arrangement and any expenses (including the
higher service and distribution fees) resulting from such sales arrangement,
and certain other incremental expenses related to a class. Each class will have
exclusive voting rights with respect to provisions of the Rule 12b-1
distribution plan pursuant to which the service and distribution fees, if any,
are paid. Although the legal rights of holders of each class of shares are
identical, it is likely that the different expenses borne by each class will
result in different net asset values and dividends. The different classes of
shares of the Fund also have different exchange privileges.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have a material, adverse effect on
the rights of any shareholder. On any matter submitted to the shareholders, the
holder of each Fund share is entitled to one vote per share (with proportionate
voting for fractional shares) regardless of the relative net asset value
thereof.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder
meetings unless required by the 1940 Act. Except as otherwise provided under
said Act, the Board of Trustees will be a self-perpetuating body until fewer
than two thirds of the Trustees serving as such are Trustees who were elected
by shareholders of the Trust. In the event less than a majority of the Trustees
serving as such were elected by shareholders of the Trust, a meeting of
shareholders will be called to elect Trustees. Under the Master Trust
Agreement, any Trustee may be removed by vote of two thirds of the outstanding
Trust shares; holders of 10% or more of the outstanding shares of the Trust can
require that the Trustees call a meeting of shareholders for purposes of voting
on the removal of one or more Trustees. In connection with such meetings called
by shareholders, shareholders will be assisted in shareholder communications to
the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations of the
Trust. However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for indemnification
for all losses and expenses of any shareholder of the Fund held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund would be unable to meet its obligations. The
Investment Manager believes that, in view of the above, the risk of personal
liability to shareholders is remote.
Management of the Fund
Under the provisions of the Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees.
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The Fund's investment manager is State Street Research & Management
Company. The Investment Manager is charged with the overall responsibility for
managing the investments and business affairs of the Fund, subject to the
authority of the Board of Trustees.
The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve as investment adviser to one of the nation's first
mutual funds, presently known as State Street Research Investment Trust, which
they had formed in 1924. Their investment management philosophy emphasized
comprehensive fundamental research and analysis, including meetings with the
management of companies under consideration for investment. The Investment
Manager's portfolio management group has extensive investment industry
experience managing equity and debt securities. In managing debt securities, if
any, for a portfolio, the Investment Manager may consider yield curve
positioning, sector rotation and duration, among other factors.
The Investment Manager and the Distributor are indirect wholly owned
subsidiaries of Metropolitan Life Insurance Company and are located at One
Financial Center, Boston, Massachusetts 02111-2690.
The Investment Manager has entered into an Advisory Agreement with the
Trust pursuant to which investment research and management, administrative
services, office facilities and personnel are provided for the Fund in
consideration of a fee from the Fund.
Under its Advisory Agreement with the Trust, the Investment Manager
receives a monthly investment advisory fee equal to 0.65% (on an annual basis)
of the average daily value of the net assets of the Fund. The Fund bears all
costs of its operation other than those incurred by the Investment Manager
under the Advisory Agreement. In particular, the Fund pays, among other
expenses, investment advisory fees, certain distribution expenses under the
Fund's Distribution Plan and the compensation and expenses of the Trustees who
are not otherwise currently affiliated with the Investment Manager or any of
its affiliates. The Investment Manager compensates Trustees of the Trust if
such persons are employees or affiliates of the Investment Manager or its
affiliates.
The Fund is managed by Bartlett R. Geer. Mr. Geer has managed the Fund
since early 1987. Mr. Geer's principal occupation currently is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as Vice President of State Street Research &
Management Company.
Subject to the policy of seeking best overall price and execution, sales
of shares of the Fund may be considered by the Investment Manager in the
selection of broker or dealer firms for the Fund's portfolio transactions.
The Investment Manager has a Code of Ethics governing personal securities
transactions of certain of its employees; see the Statement of Additional
Information.
Dividends and Distributions; Taxes
The Fund has qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code for its most recent
fiscal year and intends to qualify as such in future fiscal years, although it
cannot give complete assurance that it will do so. As long as the Fund so
qualifies and satisfies certain distribution requirements, it will not be
subject to federal income tax on its taxable income (including capital gains,
if any) distributed to its shareholders. Consequently, the Fund intends to
distribute annually to its shareholders substantially all of its net investment
income and any capital gain net income (capital gains net of capital losses).
Dividends from net investment income will be declared daily during each
calendar month and paid after the end of the month; distributions of long-term
and short-term capital gain net income will generally be made on an annual
basis, shortly after the end of the fiscal year in which such gains are
realized (or as otherwise required for compliance with applicable tax
regulations), except to the extent that net short-term gains, if any, are
included in the monthly income dividends for the purpose of stabilizing, to the
extent possible, the amount of net monthly distributions as described below.
Both dividends from net investment income and distributions of capital gain net
income will be paid in additional shares of the Fund at net asset value (except
in the case of shareholders who elect a different available distribution
method).
26
<PAGE>
The Fund will provide its shareholders with annual information on a timely
basis concerning the federal tax status of dividends and distributions during
the preceding calendar year.
The Fund has adopted distribution procedures which differ from those which
have been customary for investment companies in general. The Fund will declare
a dividend each day in an amount based on monthly projections of its future net
investment income and will pay such dividends monthly as described above.
Consequently, the amount of each daily dividend may differ from actual net
investment income as determined under generally accepted accounting principles.
The purpose of these distribution procedures is to attempt to eliminate, to the
extent possible, fluctuations in the level of monthly dividend payments that
might result if the Fund declared dividends in the exact amount of its daily
net investment income.
Each daily dividend is payable to shareholders of record at the time of
its declaration (for this purpose, including only holders of shares purchased
for which payment has been received by the Transfer Agent and excluding holders
of shares redeemed on that day).
Although not contemplated, it is possible that total distributions in a
year could exceed the total of the Fund's current and accumulated earnings and
profits as calculated for federal income tax purposes, because of technical
accounting considerations and the distribution procedures described above,
among other reasons. This excess would first be treated as a "return of
capital" for federal income tax purposes and would reduce by its amount the
shareholder's cost or other basis in his or her shares. After the shareholder's
cost or other basis is reduced to zero, which is highly unlikely, the
distribution will be treated as gain from the sale of the Fund shares.
Dividends paid by the Fund from taxable net investment income and
distributions of net short-term capital gains, whether they are paid in cash or
reinvested in additional shares, will be taxable for federal income tax
purposes to shareholders as ordinary income. Distributions of net capital gains
(the excess of net long-term capital gains over net short-term capital losses)
which are designated as capital gains distributions, whether paid in cash or
reinvested in additional shares, will be taxable for federal income tax
purposes to shareholders as long-term capital gains, regardless of how long
shareholders have held their shares.
Dividends and other distributions and proceeds of redemption of Fund
shares paid to individuals and other nonexempt payees will be subject to a 31%
federal backup withholding tax if the Transfer Agent is not provided with the
shareholder's correct taxpayer identification number or certification that the
shareholder is not subject to such backup withholding.
The foregoing discussion relates only to generally applicable federal
income tax provisions in effect as of the date of this Prospectus. Therefore,
prospective shareholders are urged to consult their own tax advisers regarding
tax matters, including state and local tax consequences.
Calculation of Performance Data
From time to time, in advertisements or in communications to shareholders or
prospective investors, the Fund may compare the performance of its Class A,
Class B, Class C or Class D shares to that of other mutual funds with similar
investment objectives, to certificates of deposit, to other financial
alternatives and/or to appropriate indices, rankings or averages such as those
compiled by Lipper Analytical Services, Inc., Morningstar, Inc., Money
Magazine, Business Week, Forbes Magazine, Fortune Magazine, The Wall Street
Journal, Investor's Daily, or Wiesenberger Mutual Fund Investment Report. For
example, the performance of the Fund might be compared to the Lipper High
Current Yield Fund category, First Boston High Yield Index, Lehman Corporate
Bond Index, Salomon Brothers Mortgage PT Index, Shearson/Lehman Government
Agency Index, S&P 500, U.S. Government securities, Merrill Lynch Treasury
Index, Salomon Brothers High Yield Index and Consumer Price Index.
Total return is computed separately for each class of shares of the Fund.
The average annual total return ("standard total return") for shares of the
Fund is computed by determining the average annualcompounded rate of return for
a designated
27
<PAGE>
historical period that, as applied to a hypothetical $1,000 initial investment
which is redeemed in total at the end of such period. In making the
calculation, all dividends and distributions are assumed to be reinvested, and
all accrued expenses and recurring charges, including management and
distribution fees, are recognized. The calculation also reflects the highest
applicable initial or contingent deferred sales charge, determined as of the
assumed date of initial investment or the assumed date of redemption, as the
case may be. Standard total return would be calculated for the periods
specified in applicable regulations and may be accompanied with nonstandard
total return information for differing periods computed in the same manner with
or without annualizing the total return or taking sales charges into account.
The Fund's yield is computed separately for each class of shares by
dividing the net investment income, after recognition of all recurring charges,
per share earned during the most recent month or other specified thirty-day
period by the applicable maximum offering price per share on the last day of
such period and annualizing the result.
The standard total return and yield results take sales
charges into account, if applicable, but do not take into
account recurring and nonrecurring charges for optional
services which only certain shareholders elect and which involve nominal fees,
such as the $7.50 fee for remittance of redemption proceeds by wire. Where
sales charges are not applicable and therefore not taken into account in the
calculation of standard total return and yield, the results will be increased.
The Fund's distribution rate is calculated separately for each class of
shares by annualizing the latest distribution and dividing the result by the
maximum offering price per share as of the end of the period to which the
distribution relates. The distribution rate is not computed in the same manner
as the above described yield and, therefore, can be significantly different
from it. In its supplemental sales literature, the Fund may quote its
distribution rate together with the above described standard total return and
yield information. The use of such distribution rates would be subject to an
appropriate explanation of how the components of the distribution rate differ
from the above described yield.
Performance information may be useful in evaluating
the Fund and for providing a basis for comparison with other financial
alternatives. Since the performance of the Fund varies in response to
fluctuations in economic and market conditions, interest rates and Fund
expenses, among other things, no performance quotation should be considered a
representation as to the Fund's performance for any future period.
In evaluating the Fund's performance, consideration should be given to
changes in the Fund's investment objective and policies effected in January
1994. Prior to that time the Fund's investment objective was "to seek a high
level of current income by investing under normal conditions at least 65% of
its total assets in fixed income securities rated at the time of purchase BBB,
BB or B by S&P or Baa, Ba or B by Moody's or which are unrated but believed by
the Investment Manager to be of comparable quality." The change in the
investment objective, i.e. "to seek, primarily, high current income and,
secondarily, capital appreciation, from investments in fixed income securities"
enables the Fund's Investment Manager (i) to take into account, as a secondary
consideration in selecting portfolio securities, their possible capital
appreciation, (ii) to remove the percentage of the Fund's portfolio which, as a
minimum, must be invested in fixed income securities included in the foregoing
specific rating categories and (iii) to include within the scope of fixed
income securities convertible debt securities and preferred stock. Further, the
Fund's investment policy limiting the purchase of illiquid securities was
changed from a fundamental policy to a nonfundamental policy and the Fund may
now invest up to 15% (rather than up to 10%) in such securities.
In addition, the net asset value of shares of the Fund will fluctuate,
with the result that shares of the Fund, when redeemed, may be worth more or
less than their original cost. Neither an investment in the Fund nor its
performance is insured or guaranteed; such lack of insurance or guarantees
should accordingly be given appropriate consideration when comparing the Fund
to financial alternatives which have such features.
28
<PAGE>
Shares of the Fund had no class designations until June 1, 1993, when
designations were assigned based on the pricing and Rule 12b-1 fees applicable
to shares sold thereafter. Performance data for a specified class includes
periods prior to the adoption of class designations. Performance data for
periods prior to June 1, 1993 do not reflect additional Rule 12b-1 Distribution
Plan fees, if any, of up to 1% per year depending on the class of shares, which
will adversely affect performance results for periods after such date.
Performance data or rankings for a given class of shares should be interpreted
carefully by investors who hold or may invest in a different class of shares.
In reviewing performance for the Fund, a number of factors should be
considered. The price of lower rated, high yield, high risk securities can rise
and fall substantially. A substantial decline can dramatically increase yields
on these securities. The price declines reflect an expectation that many
issuers of these securities will experience financial difficulties, among other
things. Thus, significantly higher yields do not reflect the income stream
investors can expect but rather the risk that their investment may lose a
substantial portion of its value in a financial restructuring or default.
29
<PAGE>
APPENDIX
Description of Debt/Bond Ratings
Standard & Poor's Corporation
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having speculative
characteristics with respect to capacity to pay interest and repay principal.
BB indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the due date even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high
variability in expected returns due to noncredit risks created by the terms of
the obligation, such as securities whose principal or interest return is
indexed to equities, commodities, or currencies; certain swaps and options; and
interest only (IO) and principal only (PO) mortgage securities.
30
<PAGE>
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
1, 2 or 3: The ratings from Aa through B may be modified by the addition
of a numeral indicating a bond's rank within its rating category.
31
<PAGE>
STATE STREET RESEARCH
HIGH INCOME FUND
One Financial Center
Boston, MA 02111
INVESTMENT ADVISER
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
DISTRIBUTOR
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
SHAREHOLDER SERVICES
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266
800-562-0032
CUSTODIAN
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
LEGAL COUNSEL
Goodwin, Procter & Hoar, LLP
Exchange Place
Boston, MA 02109
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
[STATE STREET RESEARCH LOGO]
State Street Research
High Income Fund
August 1, 1997
P R O S P E C T U S
HI-612D-897IBS CONTROL NUMBER: 3988-970729(0898)SSR-LD
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
Prospectus
August 1, 1997
The investment objective of State Street Research Managed Assets (the
"Fund") is to seek a high total return while attempting to limit investment
risk and preserve capital. To achieve its investment objective, the Fund
intends to allocate assets among selected investments in the following sectors:
Fixed Income Securities, Equity Securities, Inflation Responsive Investments
and Cash & Cash Equivalents (as defined herein). Total return may include
current income as well as capital appreciation. The Fund's investment manager
believes that the timely re-allocation of assets can enhance performance and
reduce portfolio volatility.
Allocation of the Fund's assets among the different investment sectors
will vary from time to time consistent with the short- and long-term investment
outlook of the Fund's investment manager. No minimum or maximum percentage
applies to the Fund's assets that may be invested in any of the investment
sectors, and from time to time all of the Fund's assets could conceivably be
invested in a single investment sector in the discretion of the Fund's
investment manager. The four investment sectors described herein are broad in
scope and to some extent may overlap. In the future, these sectors could be
redefined or other sectors added to highlight a particular area of focus, such
as foreign investments, which are included in each of the four presently
identified sectors but not specifically delineated as a separate sector.
State Street Research & Management Company serves as investment adviser for
the Fund (the "Investment Manager"). As of May 31, 1997, the Investment Manager
had assets of approximately $44.2 billion under management. State Street
Research Investment Services, Inc. serves as distributor (the "Distributor") for
the Fund.
Shareholders may have their shares redeemed directly by the Fund at net
asset value plus the applicable contingent deferred sales charge, if any;
redemptions processed through securities dealers may be subject to processing
charges.
There are risks in any investment program, including the risk of changing
economic and market conditions, and there is no assurance that the Fund will
achieve its investment objective. The net asset value of a share of the Fund
will fluctuate as market conditions change.
This Prospectus sets forth concisely the information a prospective
investor ought to know about the Fund before investing. It should be retained
for future reference. A Statement of Additional Information about the Fund
dated August 1, 1997, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this Prospectus. It is
available, at no charge, upon request to the Fund at the address indicated on
the back cover or by calling 1-800-562-0032.
The Fund is a diversified series of State Street Research Income Trust
(the "Trust"), an open-end management investment company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND
INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
Table of Contents Page
- ----------------------------------------------------------
Table of Expenses ................................. 2
Financial Highlights .............................. 4
The Fund's Asset Allocation and Investments ...... 6
Other Investment Policies and Considerations ...... 9
Purchase of Shares ................................. 12
Redemption of Shares .............................. 21
Shareholder Services .............................. 23
The Fund and its Shares ........................... 27
Management of the Fund .............................. 28
Dividends and Distributions; Taxes .................. 29
Calculation of Performance Data ..................... 29
Appendix--Description of Debt/Bond Ratings ......... 31
<PAGE>
The Fund offers four classes of shares which may be purchased at the next
determined net asset value per share plus, in the case of all classes except
Class C shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a deferred
basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5%
and (ii) an annual service fee of 0.25% of the average daily net asset value of
the Class A shares.
Class B shares are subject to (i) a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made
within five years of purchase and (ii) annual distribution and service fees of
1% of the average daily net asset value of such shares. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses) at
the end of eight years after purchase. No contingent deferred sales charge
applies after the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and
large institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1%
if redeemed within one year following purchase and (ii) annual distribution and
service fees of 1% of the average daily net asset value of such shares.
Table of Expenses
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C Class D
----------- ---------- --------- --------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses(1)
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) ........................... 4.5% None None None
Maximum Deferred Sales Charge (as a percentage of net asset
value at time of purchase or redemption, whichever is lower)..... None(2) 5% None 1%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) ........................... None None None None
Redemption Fees (as a percentage of amount redeemed,
if applicable) ................................................ None None None None
Exchange Fee ................................................... None None None None
</TABLE>
- ------------
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
thereafter and no contingent deferred sales charge is imposed after the
fifth year. Class D shares are subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the
sale. Long-term investors in Class A, Class B or Class D shares may, over
a period of years, pay more than the economic equivalent of the maximum
sales charge permissible under applicable rules. See "Purchase of Shares."
(2) Purchases of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption.
See "Purchase of Shares."
2
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C Class D
------- ------- ------- -------
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees ................................................... 0.75% 0.75% 0.75% 0.75%
12b-1 Fees ......................................................... 0.25% 1.00% None 1.00%
Other Expenses ...................................................... 0.35% 0.35% 0.35% 0.35%
---- ---- ---- ----
Total Fund Operating Expenses* .................................... 1.35% 2.10% 1.10% 2.10%
==== ==== ==== ====
</TABLE>
*The Fund has been advised that the Distributor and its affiliates may
voluntarily assume some portion of fees or expenses relating to the Fund
through August 31, 1997, which would have the effect of reducing Total Fund
Operating Expenses until such date for each class of shares to the following
levels:
Class A Class B Class C Class D
1.25% 2.10% 1.10% 2.10%
The Fund has not received any assurance that the subsidization will be received.
Example:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption of the entire
investment at the end of each time period:
Class A shares ................................................ $58 $86 $116 $200
Class B shares (1) .......................................... $71 $96 $133 $224
Class C shares ................................................ $11 $35 $ 61 $134
Class D shares ................................................ $31 $66 $113 $243
You would pay the following expenses on the same investment,
assuming no redemption: 1 Year 3 Years 5 Years 10 Years
------- -------- --------- ---------
Class B shares (1) .......................................... $21 $66 $113 $224
Class D shares ............................................. $21 $66 $113 $243
</TABLE>
(1) Ten-year figures assume conversion of Class B shares to Class A shares at
the end of eight years.
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than
shown.
The purpose of the table above is to assist the investor in understanding
the various costs and expenses that an investor will bear directly or
indirectly. The percentage expense levels shown in the table above are based on
experience with expenses during the fiscal year ended March 31, 1997 and the
assumed discontinuation of a subsidy of expenses as of September 1, 1997,
subject to requisite administrative action; actual expense levels for the
current fiscal year and future years may vary from the amounts shown. The table
does not reflect charges for optional services elected by certain shareholders,
such as the $7.50 fee for remittance of redemption proceeds by wire. For further
information on sales charges, see "Purchase of Shares--Alternative Purchase
Program"; for further information on management fees, see "Management of the
Fund"; and for further information on 12b-1 fees, see "Purchase of Shares--
Distribution Plan."
For the fiscal year ended March 31, 1997, Total Fund Operating Expenses as
a percentage of the average net assets of Class A, Class B, Class C and Class D
shares, respectively, would have been 1.35%, 2.10%, 1.10% and 2.10% in the
absence of the voluntary assumption of fees or expenses by the Distributor and
its affiliates. Such assumption of fees or expenses, as a percentage of average
net assets, amounted to 0.10% for each class of shares of the Fund.
3
<PAGE>
Financial Highlights
The data set forth below has been audited by Price Waterhouse LLP, independent
accountants, and their report thereon for the latest five years is included in
the Statement of Additional Information. For further information about the
performance of the Fund, see "Financial Statements" in the Statement of
Additional Information.
<TABLE>
<CAPTION>
Class A
------------------------------------------------------
Year ended March 31
------------------------------------------------------
1997*** 1996*** 1995 1994
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
year ................................ $10.29 $8.76 $8.94 $8.94
Net investment income* ............... .21 .23 .27 .22
Net realized and unrealized
gain (loss) on investments,
foreign currency and
forward contracts ................... 1.05 1.72 (.14) .72
------ ------ ----- -----
Total from investment
operations ......................... 1.26 1.95 .13 .94
------ ------ ----- -----
Dividends from net
investment income ................... (.28) (.26) (.17) (.22)
Distributions from net
realized gains ...................... (.87) (.16) (.14) (.72)
------ ------ ----- -----
Total distributions ................. (1.15) (.42) (.31) (.94)
------ ------ ----- -----
Net asset value, end of year ......... $10.40 $10.29 $8.76 $8.94
====== ====== ===== =====
Total return ......................... 12.49%+ 22.55%+ 1.52%+ 10.96%+
Net assets at end of year
(000s) .............................. $244,348 $207,713 $181,358 $166,011
Ratio of operating expenses
to average net assets* .............. 1.25% 1.25% 1.25% 1.25%
Ratio of net investment
income to average net
assets* ............................. 2.02% 2.34% 3.11% 2.75%
Portfolio turnover rate .............. 108.41% 109.20% 89.58% 105.17%
Average commission rate@ ............. $0.0266 -- -- --
- ------------
*Reflects voluntary assumption of
fees or expenses per share in
each year ........................... $0.01 $0.02 $0.03 $0.02
<CAPTION>
December 29, 1988
(Commencement of
Operations) to
1993 1992 1991 1990 March 31, 1989
---------- ---------- ---------- ---------- --------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year ................................. $8.22 $7.61 $7.81 $7.60 $7.40
Net investment income* ............... .27 .37 .44 .46 .13
Net realized and unrealized
gain (loss) on investments,
foreign currency and
forward contracts ..................... 1.01 .62 (.14) .36 .19
----- ----- ----- ----- -----
Total from investment
operations ........................ 1.28 .99 .30 .82 .32
----- ----- ----- ----- -----
Dividends from net
investment income ..................... (.25) (.38) (.41) (.47) (.12)
Distributions from net
realized gains ........................ (.31) -- (.09) (.14) --
----- ----- ----- ----- -----
Total distributions .................. (.56) (.38) (.50) (.61) (.12)
----- ----- ----- ----- -----
Net asset value, end of year $8.94 $8.22 $7.61 $7.81 $7.60
===== ===== ===== ===== =====
Total return ........................... 16.54%+ 13.29%+ 4.06%+ 10.78%+ 4.26%++
Net assets at end of year
(000s) .............................. $93,537 $78,483 $64,139 $56,267 $27,762
Ratio of operating expenses
to average net assets* ............... 1.25% 1.25% 1.25% 1.25% 1.25%[dbldag]
Ratio of net investment
income to average net
assets* .............................. 3.26% 4.60% 5.78% 6.29% 7.37%[dbldag]
Portfolio turnover rate ............... 142.86% 97.76% 68.08% 71.88% 34.57%
Average commission rate@ . -- -- -- -- --
- ------------
*Reflects voluntary assumption of fees
or expenses per share in
each year ........................... $0.02 $0.02 $0.02 $0.02 $0.01
</TABLE>
[dbldag] Annualized.
*** Per-share figures have been calculated using the average shares method.
+ Total return figures do not reflect any front-end or contingent
deferred sales charges. Total return would be lower if the Distributor
and its affiliates had not voluntarily assumed a portion of the Fund's
expenses.
++ Represents aggregate return for the period without annualization and
does not reflect any front-end or contingent deferred sales charges.
Total return would be lower if the Distributor and its affiliates had
not voluntarily assumed a portion of the Fund's expenses.
@ Average commission rate per share paid for security trades for fiscal
years beginning on or after April 1, 1996.
- --------------------------------------------------------------------------------
4
<PAGE>
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------------
Year ended March 31
------------------------------------------------------------------
1997*** 1996*** 1995 1994**
------------- ------------ ------------ --------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ...... $10.25 $8.74 $8.92 $8.78
Net investment income* .................. .13 .15 .20 .16
Net realized and unrealized gain (loss)
on investments, foreign currency and
forward contracts ...................... 1.06 1.71 (.13) .39
------ ------ ----- -----
Total from investment operations ....... 1.19 1.86 .07 .55
------ ------ ----- -----
Dividends from net investment income .... (.20) (.19) (.11) (.18)
Distributions from net realized gains ... (.87) (.16) (.14) (.23)
------ ------ ----- -----
Total distributions .................... (1.07) (.35) (.25) (.41)
------ ------ ----- -----
Net asset value, end of year ............ $10.37 $10.25 $8.74 $8.92
====== ====== ===== =====
Total return ............................ 11.76%+ 21.48%+ 0.82%+ 6.26%++
Net assets at end of year (000s) ........ $251,518 $193,272 $152,251 $83,244
Ratio of operating expenses to average
net assets* ............................ 2.00% 2.00% 2.00% 2.00%[dbldag]
Ratio of net investment income to
average net assets* .................... 1.27% 1.59% 2.38% 2.03%[dbldag]
Portfolio turnover rate ................. 108.41% 109.20% 89.58% 105.17%
Average commission rate@ ................ $0.0266 -- -- --
*Reflects voluntary assumption of fees
or expenses per share in each year ..... $0.01 $0.02 $0.03 $0.03
<CAPTION>
Class C
-----------------------------------------------
Year ended March 31
-----------------------------------------------
1997*** 1996*** 1995 1994**
--------- --------- --------- -------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ... $10.29 $8.77 $8.95 $8.78
Net investment income* .................. .24 .25 .29 .21
Net realized and unrealized gain (loss)
on investments, foreign currency and
forward contracts ..................... 1.05 1.71 (.14) .43
------ ------ ----- -----
Total from investment operations ...... 1.29 1.96 .15 .64
------ ------ ----- -----
Dividends from net investment income (.31) (.28) (.19) (.24)
Distributions from net realized gains ... (.87) (.16) (.14) (.23)
------ ------ ----- -----
Total distributions .................. (1.18) (.44) (.33) (.47)
------ ------ ----- -----
Net asset value, end of year ......... $10.40 $10.29 $8.77 $8.95
====== ====== ===== =====
Total return ........................... 12.77%+ 22.70%+ 1.77%+ 7.27%++
Net assets at end of year (000s) ...... $21,263 $19,548 $25,803 $21,434
Ratio of operating expenses to average
net assets* ........................... 1.00% 1.00% 1.00% 1.00%[dbldag]
Ratio of net investment income to
average net assets* .................. 2.26% 2.59% 3.37% 3.03%[dbldag]
Portfolio turnover rate ............... 108.41% 109.20% 89.58% 105.17%
Average commission rate@ ............... $0.0266 -- -- --
- ------------
*Reflects voluntary assumption of fees
or expenses per share in each year ... $0.01 $0.02 $0.03 $0.02
</TABLE>
<TABLE>
<CAPTION>
Class D
--------------------------
Year ended March 31
--------------------------
1997*** 1996***
------------- ------------
<S> <C> <C>
Net asset value, beginning of year .................................... $10.27 $8.75
Net investment income* ................................................... .13 .15
Net realized and unrealized gain (loss) on investments, foreign currency
and forward contracts ................................................... 1.05 1.72
------ ------
Total from investment operations ....................................... 1.18 1.87
------ ------
Dividends from net investment income .................................... (.20) (.19)
Distributions from net realized gains .................................... (.87) (.16)
------ ------
Total distributions ................................................... (1.07) (.35)
------ ------
Net asset value, end of year .......................................... $10.38 $10.27
====== ======
Total return ............................................................ 11.64%+ 21.54%+
Net assets at end of year (000s) ....................................... $17,485 $13,061
Ratio of operating expenses to average net assets* ..................... 2.00% 2.00%
Ratio of net investment income to average net assets* .................. 1.26% 1.60%
Portfolio turnover rate ................................................ 108.41% 109.20%
Average commission rate @ ............................................. $0.0266 --
- ------------
*Reflects voluntary assumption of fees or expenses per share in each year $0.01 $0.02
<CAPTION>
1995 1994**
-------- -------
<S> <C> <C>
Net asset value, beginning of year .................................... $8.93 $8.78
Net investment income* ................................................... .20 .16
Net realized and unrealized gain (loss) on investments, foreign currency
and forward contracts ................................................... (.13) .40
----- -----
Total from investment operations ....................................... .07 .56
----- -----
Dividends from net investment income .................................... (.11) (.18)
Distributions from net realized gains .................................... (.14) (.23)
----- -----
Total distributions ................................................... (.25) (.41)
----- -----
Net asset value, end of year .......................................... $8.75 $8.93
===== =====
Total return ............................................................ 0.82%+ 6.31%++
Net assets at end of year (000s) ....................................... $12,772 $7,117
Ratio of operating expenses to average net assets* ..................... 2.00% 2.00%[dbldag]
Ratio of net investment income to average net assets* .................. 2.39% 2.03%[dbldag]
Portfolio turnover rate ................................................ 89.58% 105.17%
Average commission rate @ ............................................. -- --
- ------------
*Reflects voluntary assumption of fees or expenses per share in each year $0.03 $0.03
</TABLE>
[dbldag] Annualized.
** June 1, 1993 (commencement of share class designations) to March 31, 1994.
*** Per-share figures have been calculated using the average shares method.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
@ Average commission rate per share paid for security trades for fiscal years
beginning on or after April 1, 1996.
- --------------------------------------------------------------------------------
5
<PAGE>
The Fund's Asset Allocation and Investments
The investment objective of the Fund is to seek a high total return while
attempting to limit investment risk and preserve capital. This investment
objective cannot be changed without approval of the Fund's shareholders.
To achieve its investment objective, the Fund intends to allocate assets
among selected investments in the following sectors: Fixed Income Securities,
Equity Securities, Inflation Responsive Investments and Cash & Cash Equivalents
(as defined herein). Total return may include current income as well as capital
appreciation. The Fund's investment policies, including the identification of
investment sectors and the components thereof, may be changed by the Board of
Trustees without shareholder approval. The Fund's ability to concentrate its
investments within particular investment sectors or to hold all of its
investments in a particular investment sector in the discretion of the
Investment Manager may increase the risks to the Fund from adverse developments
or conditions within a particular sector.
Asset Allocation
The Investment Manager believes that the timely reallocation of assets can
enhance performance and reduce portfolio volatility. The Investment Manager
will continuously monitor and change allocations of the Fund's assets based
upon an evaluation of risks and potential total return, taking into
consideration secular trends, economic cycles and market conditions, among
other factors. Accordingly, the allocation of the Fund's assets among the
different investment sectors will vary from time to time consistent with the
Investment Manager's short- and long-term investment outlook. No minimum or
maximum percentage applies to the Fund's assets that may be invested in any of
the investment sectors. From time to time, all of the Fund's assets could
conceivably be invested in a single investment sector in the discretion of the
Investment Manager.
The Fund has established specific investment sectors, i.e., Fixed Income
Securities, Equity Securities, Inflation Responsive Investments and Cash & Cash
Equivalents (as defined herein) to identify general investment areas into which
the Fund will, from time to time, allocate its assets in varying proportions.
The establishment of these sectors is not intended to isolate mutually
exclusive categories of investment instruments. For instance, the Fixed Income
Securities sector and the Equity Securities sector may both hold debt
securities convertible into equity securities, while the Inflation Responsive
Investments sector may hold instruments similar to those held in the other
sectors. However, each sector will have a central focus: interest income and
gains from debt financings for the Fixed Income Securities sector, capital
appreciation for the Equity Securities sector, inflation hedging for the
Inflation Responsive Investments sector and liquidity and defensiveness for the
Cash & Cash Equivalents sector. Redefined or additional sectors, such as an
international or global sector, may be established in the future if, in the
discretion of the Investment Manager, circumstances warrant.
Because the total return of the Fund may be comprised of varying amounts of
current income and capital appreciation over time, the dividends paid by the
Fund may vary substantially from period to period. Accordingly, the Fund
encourages shareholders who wish to receive cash payments of a fixed amount
with respect to their investments to reinvest all dividends and capital gains
distributions in shares of the Fund, and to use the Systematic Withdrawal Plan
to receive current cash payments from the Fund. See "Shareholder
Services--Systematic Withdrawal Plan." Payments under the Systematic Withdrawal
Plan may constitute, in whole or part, a return of the capital invested in the
Fund.
Fixed Income Securities
The Fund may invest in fixed income or interest bearing securities of various
maturities, including bonds, debentures, notes, preferred stocks and debt
instruments convertible into common stock, issued by domestic or foreign
corporations, partnerships or similar business entities, governments or
municipalities ("Fixed Income Securities").
The Fund will generally purchase Fixed Income Securities that are considered
investment grade securities (i.e., rated at the time of purchase within the
AAA, AA, A or BBB major rating categories by Standard & Poor's Corporation
("S&P") or within the Aaa, Aa, A or
6
<PAGE>
Baa major rating categories by Moody's Investors Service, Inc. ("Moody's")), or
securities that are not rated but considered by the Investment Manager to be of
equivalent investment quality to comparable rated securities. Bonds rated Baa
by Moody's lack outstanding investment characteristics and in fact have
speculative characteristics as well. The Fund, however, may also purchase lower
quality debt securities rated at the time of purchase within the BB or B
categories by S&P or Ba or B categories by Moody's or securities that are not
rated but considered by the Investment Manager to be of equivalent investment
quality to comparable rated securities. Where an investment is split rated, the
Fund may invest on the basis of the higher rating. Where an investment is only
rated by one rating agency, the Fund may invest on the basis of a higher rating
derived from its own analysis. Fixed Income Securities rated within the BB or B
categories by S&P or Ba or B categories by Moody's or unrated securities deemed
by the Investment Manager to be of equivalent quality are considered to be
below investment grade, generally involve more credit risk than higher rated
securities and are considered by S&P and Moody's to be predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. Such lower quality securities
could comprise the entire allocation of assets to the Fixed Income Securities
sector at a particular point in time, but in no event will they comprise more
than 25% of the Fund's total assets at the time of purchase. In selecting Fixed
Income Securities, the Investment Manager considers both its own credit
analysis and the ratings of S&P and Moody's. Fixed Income Securities may
include both taxable and nontaxable fixed income investments. For further
information concerning the ratings of Fixed Income Securities, see the
Appendix.
For the fiscal year ended March 31, 1997, the percentage of the Fund's total
investments on an average annual basis invested in debt securities of any
particular rating category or its equivalent, as determined by the Investment
Manager, was as follows: 14% AAA, 3% AA, 2% A, 1% BBB, 1% BB, and 6% B as
determined on a dollar weighted basis, comprising 27% of total investments. Of
these bonds, 96% were rated by a nationally recognized statistical rating
organization and 4% were unrated but considered to be equivalent, as determined
by the Investment Manager, to comparable rated securities. The above
percentages reflect ratings, as of the time of purchase and subsequent changes,
if any, including downgrades, for the period the securities were held.
In the event the rating of a security is downgraded, the Investment Manager
will determine whether the security should be retained or sold depending on an
assessment of all facts and circumstances at that time.
Fixed Income Securities may include zero coupon securities, which pay no
cash income for all or a portion of their term but are purchased at a discount
from their value at maturity. Their return consists of the amortization of
discount between their purchase price and their maturity value, plus any fixed
rate interest income. Fixed Income Securities also include mortgage-related
securities and asset-backed securities. Mortgage-related securities represent
interests in pools of mortgage loans. Some mortgage-related securities provide
the Fund with a flow-through of interest and principal payments as such payments
are received with respect to the mortgages in the pool. Other mortgage-related
securities, such as collateralized mortgage obligations ("CMO's") are offered in
the form of senior or subordinated interests in the interest and/or principal
payments on a pool of mortgages. Asset-backed (other than mortgage-related)
securities represent interests in pools of consumer loans such as credit card
receivables, automobile loans and leases, leases on equipment such as computers
and other financial instruments. These securities provide a flow-through of
interest and principal payments as payments are received on the loans or leases
and may be supported by letters of credit or similar guarantees of payment by a
financial institution.
Fixed Income Securities also include custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf
of the owners of the receipts. These custodial receipts are known by various
names, including "Treasury Receipts" ("TRs"), "Treasury Investment Growth
Receipts" ("TIGRs") and "Certificates of Accrual on Treasury Securities"
("CATS").
7
<PAGE>
Equity Securities
The Fund may invest in domestic and foreign common stocks, preferred stocks,
debt securities and warrants convertible into or carrying the right to acquire
common stock and depositary receipts in respect of the foregoing ("Equity
Securities"). The Fund may invest in the Equity Securities of a broad spectrum
of both large and small capitalization companies. These may include Equity
Securities of companies with above-average prospects for long-term growth and
more cyclical or lesser growing companies when these securities are considered
by the Investment Manager to be undervalued. The Fund anticipates that a
majority of the Equity Securities in which it will invest will be listed on a
major securities exchange or included on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") system. The Fund does not presently
expect unlisted securities or over-the-counter securities which are not on
NASDAQ to be a substantial portion of the Equity Securities sector, although no
limitation applies to such securities.
Inflation Responsive Investments
The Fund may invest in Equity Securities, Cash & Cash Equivalents and other
domestic and foreign investments which the Investment Manager believes may
offer appreciation potential and/or serve to hedge invested capital against
erosion of the purchasing power of the U.S. dollar ("Inflation Responsive
Investments"). Inflation Responsive Investments may include the securities of
companies engaged in the extraction and/or processing of gold and other
precious metals, raw materials and petroleum and other sources of energy;
securities which are secured by real estate or securities of companies which
own or invest or deal in real estate (including limited partnership interests
and securities issued by real estate investment trusts ("REITs")); securities
denominated in foreign currencies; securities directly or indirectly indexed in
value to the value of real assets (for example, gold or oil) or to the value of
foreign currencies, including commercial paper and short-term obligations; and
foreign currencies. Certain instruments constituting Inflation Responsive
Investments may qualify for inclusion in other investment sectors. They will be
deemed part of the Inflation Responsive Investments sector, however, when in
the view of the Investment Manager their predominant investment attribute is
the potential to hedge invested capital against erosion of the purchasing power
of the U.S. dollar. For example, the stock of a company engaged in the
extraction of gold could be included in the Inflation Responsive Investments
sector because of its potential to appreciate immediately in response to
accelerating inflation, even though it may also be a candidate for the Equity
Securities sector because of its longer term earnings potential. The Fund will
accordingly allocate investments to and from the Inflation Responsive
Investments sector as circumstances warrant.
The Fund may invest up to 10% of its total assets directly in commodities
such as precious and other metals, minerals and agricultural goods. For
example, the Fund may acquire interests in gold, silver, platinum and palladium
by buying bullion or certificates, receipts or contracts representing ownership
interests in such precious metals and gold, silver and platinum coins or
medallions. Similarly, the Fund may trade in options, futures and related
instruments based on the Commodity Research Bureau Futures Price Index, which
represents a diverse selection of commodities including, among others, copper,
oil and grains. As further described under "Other Investment Policies and
Considerations," investments in commodities and commodity-
related options, futures and instruments may involve risks not associated with
other types of instruments.
Cash & Cash Equivalents
The Fund may invest in cash, short-term debt or money market securities, such
as repurchase agreements, securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, certificates of deposit, time
deposits, bankers' acceptances, corporate commercial paper rated within
categories not lower than A by S&P or Prime by Moody's (or unrated commercial
paper issued by a corporation having an outstanding long-term unsecured debt
issue rated at least A by S&P or Moody's) and similar domestic or foreign
instruments ("Cash & Cash Equivalents"). The Fund will purchase Cash & Cash
Equivalents for defensive purposes, to maintain liquidity or to obtain total
return when other investment alternatives are relatively less attractive for
the Fund as a whole. The Fund could hold virtually all of its assets in Cash &
Cash Equivalents
8
<PAGE>
from time to time, subject to applicable diversification and concentration
limitations as described under "Other Investment Policies and
Considerations--Investment Limitations and Practices."
Other Investment Policies and Considerations
Other Investment Practices
The Fund may buy and sell options, futures contracts and options on futures
contracts on securities, securities indices and precious metals and other
commodities (if available), and enter into closing transactions with respect to
each of the foregoing under circumstances in which such techniques are expected
by the Investment Manager to aid in achieving the investment objective of the
Fund. The Fund may not establish a position in a commodity futures contract or
purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such nonhedging
purposes would exceed 5% of the market value of the Fund's net assets; similar
policies apply to options which are not commodities. The Fund may enter various
forms of swap arrangements, which have simultaneously the characteristics of a
security and a futures contract, although the Fund does not presently expect to
invest more than 5% of its total assets in such items. These swap arrangements
include interest rate swaps, currency swaps and index swaps. See the Statement
of Additional Information.
The Fund may invest in restricted securities in accordance with Rule 144A,
under the Securities Act of 1933, which allows for the resale of such
securities among certain qualified institutional buyers. Because the market for
such securities is still developing, such securities could possibly become
illiquid in particular circumstances. See the Statement of Additional
Information.
The Fund may 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.
The Fund may lend portfolio securities with a value of up to 331/3% of its
total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of the loaned securities plus accrued interest. Collateral
received by the Fund will generally be invested in quality short-term
unaffiliated mutual funds, securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, irrevocable stand-by letters of
credit issued by a bank or repurchase agreements, among similar investments.
The investing of cash collateral received from loaning portfolio securities
involves leverage, which magnifies the potential for gain or loss on monies
invested and, therefore, results in an increase in the volatility of the Fund's
outstanding securities. Such loans may be terminated at any time.
The Fund will retain most rights of ownership including rights to
dividends, interest or other distributions on the loaned securities. Voting
rights pass with the lending, although the Fund may call loans to vote proxies
if desired. Should the borrower of the securities fail financially, there is a
risk of delay in recovery of the securities or loss of rights in the
collateral. Loans are made only to borrowers which are deemed by the Investment
Manager to be of good financial standing.
Risk Factors and Special Considerations
Value of Shares and Assets
The value of the Fund's investments (and accordingly the net asset value of its
shares) will be subject to fluctuation in response to a variety of economic,
political and other factors. For example, the Fund's holdings of Inflation
Responsive Investments such as gold stocks and gold (to which the value of some
of the Fund's investments may be indexed) could be adversely affected by
circumstances such as currency revaluations, economic conditions, social
conditions within a country (particularly South Africa, the world's largest
producer of gold), trade imbalances and trade and currency restrictions. The
prices of oil stocks and the price of oil (to which the value of some of the
Fund's investments may be indexed) may be similarly affected by unpredictable
circumstances such as social, political or military disturbances in or near oil
producing countries or oil shipping or pipeline routes, the policies of various
governments and the Organization of Petroleum Exporting Countries ("OPEC"), an
organization of major oil
9
<PAGE>
producing countries, the discovery of new reserves and the development of new
techniques for producing, refining and transporting oil, gas and related
products, energy conservation and the development of alternative energy
sources.
Foreign Investments
The Fund reserves the right to invest without limitation in securities of
non-U.S. issuers directly or in the form of American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") or similar securities
representing interests in the securities of foreign issuers.
ADRs are receipts, typically issued by a U.S. bank or trust company, which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs are receipts issued in Europe which evidence a similar ownership
arrangement. Generally, ADRs, in registered form, are designed for use in U.S.
securities markets, and EDRs are designed for use in European securities
markets. The underlying securities are not always denominated in the same
currency as the ADRs or EDRs. Although investment in the form of ADRs or EDRs
facilitates trading in foreign securities, it does not mitigate the risks
associated with investing in foreign securities.
ADRs are available through facilities which may be either "sponsored" or
"unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and usually agrees to
provide shareholder communications. In an unsponsored arrangement, the foreign
issuer is not involved, and the ADR holders pay the fees of the depository.
Sponsored ADRs are generally more advantageous to the ADR holders and the issuer
than are unsponsored ADRs. More and higher fees are generally charged in an
unsponsored program compared to a sponsored facility. Only sponsored ADRs may be
listed on the New York or American Stock Exchanges. Unsponsored ADRs may prove
to be more risky due to (a) the additional costs involved to the Fund; (b) the
relative illiquidity of the issue in U.S. markets; and (c) the possibility of
higher trading costs in the over-the-counter market as opposed to exchange-based
trading. The Fund will take these and other risk considerations into account
before making an investment in an unsponsored ADR.
The risks associated with investments in foreign securities include those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks of
nationalization or expropriation, the possible imposition of currency exchange
blockages, higher operating expenses, foreign withholding and other taxes which
may reduce investment return, reduced availability of public information
concerning issuers, the difficulties in obtaining and enforcing a judgment
against a foreign issuer and the fact that foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements comparable to those applicable to
domestic issuers. Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of securities of comparable
domestic issuers. Investments in foreign securities also involve the additional
cost of converting the foreign currency into U.S. dollars. Finally, to the
extent the Fund invests in securities of issuers in less developed countries or
emerging foreign markets, it will be subject to a variety of additional risks,
including risks associated with political instability, economies based on
relatively few industries, lesser market liquidity, high rates of inflation,
significant price volatility of portfolio holdings and high levels of external
debt in the relevant country.
Although the Fund may invest in securities denominated in foreign
currencies, the Fund values its securities and other assets in U.S. dollars. As
a result, the net asset value of the Fund's shares may fluctuate with U.S.
dollar exchange rates as well as with price changes of the Fund's securities in
the various local markets and currencies. Thus, an increase in the value of the
U.S. dollar compared to the currencies in which the Fund makes its investments
could reduce the effect of increases and magnify the effect of decreases in the
prices of the Fund's securities in their local markets. Conversely, a decrease
in the value of the U.S. dollar will have the opposite effect of magnifying the
effect of increases and reducing the effect of decreases in the prices of the
Fund's securities in their local markets.
Currency Transactions
In order to protect against the effects of uncertain future exchange rates on
securities denominated in foreign currencies, the Fund may engage in currency
exchange
10
<PAGE>
transactions either on a spot (i.e., cash) basis at the rate prevailing in the
currency exchange market, or by entering into forward contracts to purchase or
sell currencies. The Fund's dealings in forward currency exchange contracts
will be limited to hedging involving either specific transactions or aggregate
portfolio positions. A forward currency contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are not commodities and
are entered into in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. In entering a
forward currency contract, the Fund is dependent upon the creditworthiness and
good faith of the counterparty. The Fund attempts to reduce the risks of
nonperformance by the counterparty by dealing only with established, large
institutions, with whom the Investment Manager has done substantial business in
the past. Although spot and forward contracts will be used primarily to protect
the Fund from adverse currency movements, they also involve the risk that
anticipated currency movements will not be accurately predicted, which may
result in losses to the Fund. This method of protecting the value of the Fund's
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange that can be achieved at some future point in
time. Although such contracts tend to minimize the risk of loss due to a
decline in value of hedged currency, they tend to limit any potential gain that
might result should the value of such currency increase.
Equity Securities
Although the Fund anticipates that a substantial portion of the Equity
Securities in which it will invest will be listed on a major securities
exchange, it reserves the right to invest without limitation in Equity
Securities that are unlisted or traded over-the-counter. The issuers of such
Equity Securities may be limited in product lines, markets and financial
resources and may be dependent on entrepreneurial management. The Equity
Securities of less seasoned companies may have limited marketability and may be
subject to more abrupt or erratic market movements over time, both up and down,
than securities of larger, more seasoned companies or the market as a whole.
Smaller, growing companies also typically reinvest most of their net income in
the enterprise and typically do not pay dividends.
Fixed Income Securities
Lower rated high yield, high risk securities (i.e., bonds rated within the BB
category or lower by S&P or Ba category or lower by Moody's or equivalent as
determined by the Investment Manager), commonly known as "junk bonds," of the
type in which the Fund invests may be subject to greater market price
fluctuations than lower yielding, higher rated debt securities. Credit ratings
do not reflect this market risk and may not reflect the effect of recent
developments on an issuer's ability to make interest and principal payments.
Additional risks of such securities include limited liquidity and secondary
market support, particularly in the case of securities that are not rated or
are subject to restrictions on resale, which may limit the availability of
securities for purchase by the Fund and limit the ability of the Fund to sell
portfolio securities either to meet redemption requests or in response to
changes in the economy or the financial markets. See "Additional Information
Concerning Investment Sectors--Risk Factors of Lower Quality Fixed Income
Securities" in the Statement of Additional Information.
Commodities
By making investments in commodities and commodity-related options, futures and
indices as described herein, the Fund may risk failing to qualify in a
particular year as a regulated investment company under the Internal Revenue
Code, although the Investment Manager intends to manage the portfolio with a
view to minimizing such risk. By the same token, the Fund's intention to
qualify as a regulated investment company could limit the extent of the Fund's
investments in commodities and commodity-related options, futures and indices.
See the Statement of Additional Information. In the event the Fund failed to
qualify as a regulated investment company under the Internal Revenue Code in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Internal Revenue Code. The
primary effects of losing this tax status would be that the Fund would then owe
taxes on its net income for
11
<PAGE>
that year, and the shareholders, if they received a dividend, might receive a
return of capital that would reduce the basis of their shares of the Fund.
Investment Limitations and Practices
In seeking to lessen investment risk, the Fund operates under certain
fundamental and nonfundamental investment restrictions.
Under the fundamental investment restrictions, the Fund may not (a)
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 or (b) invest more than 25% of the Fund's total assets in securities
of issuers principally engaged in any one industry. The foregoing fundamental
investment restrictions may not be changed except by vote of the holders of a
majority of the outstanding voting securities of the Fund.
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.
For further information on the above and other fundamental and
nonfundamental investment restrictions, see the Statement of Additional
Information.
During periods when the Investment Manager deems it advisable, the Fund
may engage in active trading of portfolio investments. Increases in the rate of
portfolio turnover will result in increased transaction costs for the Fund and
may result in an increase in the realization of short-term capital gains.
The Investment Manager also manages the assets of other funds which, in
seeking to achieve their investment objectives, may hold similar investments to
those held by the Fund and trade in the same markets as the Fund. It is also
possible that a particular investment may be held by more than one fund when
the Investment Manager determines that holding such investment is in the best
interests of each fund and the investment meets the differing investment
objectives of each fund.
- --------------------------------------------------------------------------------
Information on the Purchase of Shares, Redemption of Shares and
Shareholder Services is set forth on pages 12 to 27 below.
- --------------------------------------------------------------------------------
The Fund is available for investment by many kinds of investors including
participants investing through 401(k) or other retirement plan sponsors,
employees investing through savings plans sponsored by employers,
Individual Retirement Accounts ("IRAs"), trusts, corporations,
individuals, etc. The applicability of the general information and
administrative procedures set forth below accordingly will vary depending
on the investor and the recordkeeping system established for a
shareholder's investment in the Fund. Participants in 401(k) and other
plans should first consult with the appropriate person at their employer
or refer to the plan materials before following any of the procedures
below. For more information or assistance, anyone may call 1-800-562-0032.
- --------------------------------------------------------------------------------
Purchase of Shares
Methods of Purchase
Through Dealers and Others
Shares of the Fund are continuously offered through securities dealers,
financial institutions and others (collectively referred to herein as
securities dealers or dealers) who have entered into sales agreements with the
Distributor. Purchases through dealers are confirmed at the offering price,
which is the net asset value plus the applicable sales charge, next determined
after the order is duly received by State Street Research Shareholder Services
("Shareholder Services"), a division of State Street Research Investment
Services, Inc., from the dealer. ("Duly received" for purposes herein means in
accordance with the conditions of the applicable method of purchase as
described below.) The dealer is responsible for transmitting the order promptly
to Shareholder Services in
12
<PAGE>
order to permit the investor to obtain the current price. See "Purchase of
Shares--Net Asset Value" herein.
By Mail
Initial investments in the Fund may be made by mailing or delivering to the
investor's dealer a completed Application (accompanying this Prospectus),
together with a check for the total purchase price payable to the Fund. The
dealer must forward the Application and check in accordance with the
instructions on the Application.
Additional shares may be purchased by mailing to Shareholder Services a
check payable to the Fund in the amount of the total purchase price together
with any one of the following: (i) an Application; (ii) the stub from a
shareholder's account statement; or (iii) a letter setting forth the name of
the Fund, the class of shares and the shareholder's account name and number.
Shareholder Services will deliver the purchase order to the transfer agent and
dividend paying agent, State Street Bank and Trust Company (the "Transfer
Agent").
If a check is not honored for its full amount, the purchaser could be
subject to additional charges to cover collection costs and any investment
loss, and the purchase may be cancelled.
By Wire
An investor may purchase shares by wiring Federal Funds of not less than $5,000
to State Street Bank and Trust Company, which also serves as the Trust's
custodian (the "Custodian"), as set forth below. Prior to making an investment
by wire, an investor must notify Shareholder Services at 1-800-562-0032 and
obtain a control number and instructions. Following such notification, Federal
Funds should be wired through the Federal Reserve System to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF = State Street Research Managed Assets and class of shares
(A, B, C or D)
AC = 99029761
OBI = Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street
Research Shareholder Services)
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make such
investment by 12 noon Boston time on the day of his or her investment; and (ii)
the wire must be received by 4 P.M. Boston time that same day.
An investor making an initial investment by wire must promptly complete
the Application accompanying this Prospectus and deliver it to his or her
dealer, who should forward it as required. No redemptions will be effected
until the Application has been duly processed.
The Fund may in its discretion discontinue, suspend or change the practice
of accepting orders by any of the methods described above. Orders for the
purchase of shares are subject to acceptance by the Fund. The Fund reserves the
right to suspend the sale of shares, or to reject any purchase order, including
orders in connection with exchanges, for any reason.
Minimum Investment
Class of Shares
-------------------------------
A B C D
-------- -------- ----- -------
Minimum Initial Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $2,000 $2,000 (a) $2,000
By Investamatic $1,000 $1,000 (a) $1,000
All Other $2,500 $2,500 (a) $2,500
Minimum Subsequent Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $ 50 $ 50 (a) $ 50
By Investamatic $ 50 $ 50 (a) $ 50
All Other $ 50 $ 50 (a) $ 50
(a) Special conditions apply; contact the Distributor.
The Fund reserves the right to vary the minimums for initial or subsequent
investments as in the case of, for example, exchanges and investments under
various retirement and employee benefit plans, sponsored arrangements involving
group solicitations of the members of an organization, or other investment
plans for reinvestment of dividends and distributions or for periodic
investments (e.g., Investamatic Program).
13
<PAGE>
Alternative Purchase Program
General
Alternative classes of shares permit investors to select a purchase program
which they believe will be the most advantageous for them, given the amount of
their purchase, the length of time they anticipate holding Fund shares or the
flexibility they desire in this regard, and other relevant circumstances.
Investors will be able to determine whether in their particular circumstances
it is more advantageous to incur an initial sales charge and not be subject to
certain ongoing charges or to have their entire initial purchase price invested
in the Fund with the investment being subject thereafter to ongoing service
fees and distribution fees.
As described in greater detail below, dealers are paid differing amounts
of commission and other compensation depending on which class of shares they
sell.
14
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------------------- --------------------- --------- ----------------
<S> <C> <C> <C> <C>
Sales Charges Initial sales charge Contingent None Contingent
at time of deferred sales deferred sales
investment of up to charge of 5% to charge of 1%
4.5 % depending on 2% applies to any applies to any
amount of shares redeemed shares redeemed
investment within first five within one year
years following following their
their purchase; no purchase
contingent deferred
sales charge after
five years
On investments of
$1 million or
more, no initial
sales charge; but
contingent deferred
sales charge of 1%
applies to any
shares redeemed
within one year
following their
purchase
Distribution Fee None 0.75% for first None 0.75% each year
eight years; Class
B shares convert
automatically to
Class A shares
after eight years
Service Fee 0.25% each year 0.25% each year None 0.25% each year
Initial Above described 4% None 1%
Commission initial sales charge
Received by less 0.25% to
Selling 0.50% retained by
Dealer Distributor
On investments of
$1 million or
more, 0.25% to 1%
paid to dealer by
Distributor
</TABLE>
15
<PAGE>
In deciding which class of shares to purchase, the investor should
consider the amount of the investment, the length of time the investment is
expected to be held, and the ongoing service fee and distribution fee, among
other factors.
Class A shares are sold at net asset value plus an initial sales charge of
up to 4.5% of the public offering price. Because of the sales charge, not all
of an investor's purchase amount is invested unless the purchase equals
$1,000,000 or more. Class B shareholders pay no initial sales charge, but a
contingent deferred sales charge of up to 5% generally applies to shares
redeemed within five years of purchase. Class D shareholders also pay no
initial sales charge, but a contingent deferred sales charge of 1% generally
applies to redemptions made within one year of purchase. For Class B and Class
D shareholders, therefore, the entire purchase amount is immediately invested
in the Fund.
An investor who qualifies for a significantly reduced initial sales
charge, or a complete waiver of the sales charge on investments of $1,000,000
or more, on the purchase of Class A shares might elect that option to take
advantage of the lower ongoing service and distribution fees that characterize
Class A shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. Class B shares are assessed an annual
distribution fee of 0.75% of daily net assets for an eight-year period
following the date of purchase and are then automatically converted to Class A
shares. Class D shares are assessed an annual distribution fee of 0.75% of
daily net assets for as long as the shares are held. The prospective investor
should consider these fees plus the initial or contingent deferred sales
charges in estimating the costs of investing in the various classes of the
Fund's shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are allocated to dealers (see
"Distribution Plan" below). In addition, the Distributor will, at its expense,
provide additional cash and noncash incentives to dealers that sell shares.
Such incentives may be extended only to those dealers that have sold or may
sell significant amounts of shares and/or meet other conditions established by
the Distributor; for example, the Distributor may sponsor special promotions to
develop particular distribution channels or to reach certain investor groups.
The Distributor may also compensate those dealers with clients who maintain
their investments in a Fund over a period of years. The incentives may include
merchandise and trips to and attendance at sales seminars at resorts. The
Distributor may also pay additional sales compensation to its affiliate,
MetLife Securities, Inc.
Class A Shares--Initial Sales Charges
Sales Charges
The purchase price of a Class A share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar amount
of the shares purchased as set forth in the table below. A major portion of
this sales charge is by the Distributor to the dealer responsible for the sale.
- -----------------------------------------------------------
Sales Sales
Charge Charge
Paid by Paid by Dealer
Investor Investor Concession
Dollar Amount As % of As % of As % of
of Purchase Purchase Net Asset Purchase
Transaction Price Value Price
- -----------------------------------------------------------
Less than $100,000 4.50% 4.71% 4.00%
- -----------------------------------------------------------
$100,000 or above
but less than
$250,000 3.50% 3.63% 3.00%
- -----------------------------------------------------------
$250,000 or above
but less than
$500,000 2.50% 2.56% 2.00%
- -----------------------------------------------------------
$500,000 or above
but less than
$1 million 2.00% 2.04% 1.75%
- -----------------------------------------------------------
$1 million and See following
above 0% 0% discussion
- -----------------------------------------------------------
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor
16
<PAGE>
may pay the authorized 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%
On such sales of $1,000,000 or more, unless the above commission is waived
by the dealer, the investor is subject to a 1% contingent deferred sales charge
on any portion of the purchase redeemed within one year of the sale. However,
such redeemed shares will not be subject to the contingent deferred sales
charge to the extent that their value represents (1) capital appreciation or
(2) reinvestment of dividends or capital gains distributions. In addition, the
contingent deferred sales charge will be waived for certain other redemptions
as described under "Contingent Deferred Sales Charge Waivers" below (as
otherwise applicable to Class B shares).
Class A shares of the Fund that are purchased without a sales charge may
be exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption within
one year of the Class A shares which are acquired through such exchange. For
federal income tax purposes, the amount of the contingent deferred sales charge
will reduce the gain or increase the loss, as the case may be, on the amount
realized on redemption. The amount of any contingent deferred sales charge will
be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement of
Additional Information, of $100,000 or more of Class A shares of the Fund or a
combination of "Eligible Funds." "Eligible Funds" include the Fund and other
funds so designated by the Distributor from time to time. Class B, Class C and
Class D shares may also be included in the combination under certain
circumstances. Dealers should call Shareholder Services for details concerning
the other Eligible Funds and any persons who may qualify for reduced sales
charges and related information. See the Statement of Additional Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A shares
of the Fund and any other Eligible Funds within a 13-month period. Class B,
Class C and Class D shares may also be included in the combination under
certain circumstances. Additional information on a Letter of Intent is
available from dealers, or from the Distributor, and also appears in the
Statement of Additional Information.
Right of Accumulation
Investors may purchase Class A shares of the Fund or a combination of shares of
the Fund and other Eligible Funds at reduced sales charges pursuant to a Right
of Accumulation. Under the Right of Accumulation, the sales charge is
determined by combining the current purchase with the value of the Class A
shares of other Eligible Funds held at the time of purchase. Class B, Class C
and Class D shares may also be included in the combination under certain
circumstances. See the Statement of Additional Information and call Shareholder
Services for details concerning the Right of Accumulation.
Other Programs
Class A shares of the Fund may be sold or issued in an exchange at a reduced
sales charge or without a sales charge pursuant to certain sponsored
arrangements, which include programs under which a company, employee benefit
plan or other organization makes recommendations to, or permits group
solicitation of, its employees, members or participants, except any
organization created primarily for the purpose of obtaining shares of the Fund
at a reduced sales charge or without a sales charge. Sales without a sales
charge, or with a reduced sales charge, may also be made through brokers,
financial planners, institutions, and others, under managed fee-based programs
(e.g., "wrap fee" or similar programs) which meet certain requirements
established from time to time by the Distributor. Information on such
17
<PAGE>
arrangements and further conditions and limitations is available from the
Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and persons: (A) the
Investment Manager, the Distributor, or any affiliated entities, including any
direct or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated Companies,
any relatives of any such individuals whose relationship is directly verified
by such individuals to the Distributor, or any beneficial account for such
relatives or individuals; and (C) employees, officers, sales representatives or
directors of dealers and other entities with a selling agreement with the
Distributor to sell shares of any aforementioned investment company, any spouse
or child of such person, or any beneficial account for any of them. The
purchase must be made for investment and the shares purchased may not be resold
except through redemption. This purchase program is subject to such
administrative policies, regarding the qualification of purchasers, minimum
investments by various groups of eligible persons and any other matters, as may
be adopted by the Distributor from time to time.
Class B Shares--Contingent Deferred
Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is duly received, as defined herein.
No sales charge is imposed at the time of purchase; thus the full amount of the
investor's purchase payment will be invested in the Fund. However, a contingent
deferred sales charge may be imposed upon certain redemptions of Class B shares
as described below.
The Distributor will pay dealers at the time of sale a 4% commission for
selling Class B shares. The proceeds of the contingent deferred sales charge
and the distribution fee are used to offset distribution expenses and thereby
permit the sale of Class B shares without an initial sales charge.
Class B shares that are redeemed within a five-year period after their
purchase will not be subject to a contingent deferred sales charge to the
extent that the value of such shares represents (1) capital appreciation of
Fund assets or (2) reinvestment of dividends or capital gains distributions.
The amount of any applicable contingent deferred sales charge will be
calculated by multiplying the net asset value of such shares at the time of
redemption or at the time of purchase, whichever is lower, by the applicable
percentage shown in the table below:
Contingent Deferred Sales
Charge As A Percentage Of
Redemption During Net Asset Value
- ------------------------- ---------------------------
1st Year Since Purchase 5%
2nd Year Since Purchase 4
3rd Year Since Purchase 3
4th Year Since Purchase 3
5th Year Since Purchase 2
6th Year Since Purchase
and Thereafter None
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first of
those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of the Fund acquired through an exchange from another
Eligible Fund will be measured from the date that such shares were initially
acquired in the other Eligible Fund, and Class B shares being redeemed will be
considered to represent, as applicable, capital appreciation or dividend and
capital gains distribution reinvestments in such other Eligible Fund. These
determinations will result in any contingent deferred sales charge being
imposed at the lowest possible rate. For federal income tax purposes, the
amount of the contingent deferred sales charge will reduce the gain or increase
the loss, as the case may be, on the amount realized on redemption. The amount
of any contingent deferred sales charge will be paid to the Distributor.
18
<PAGE>
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic withdrawal plan which meets certain conditions.
In addition, the contingent deferred sales charge will be waived for: (i)
redemptions made within one year of the death or total disability, as defined
by the Social Security Administration, of all shareholders of an account; (ii)
redemptions made after attainment of a specific age in an amount which
represents the minimum distribution at such age under Section 401(a)(9) of the
Internal Revenue Code for retirement accounts or plans (e.g., age 701/2 for
IRAs and Section 403(b) plans), calculated solely on the basis of assets
invested in the Fund or other Eligible Funds; and (iii) a redemption resulting
from a tax-free return of an excess contribution to an IRA. (The foregoing
waivers do not apply to a tax-free rollover or transfer of assets out of the
Fund.) The Fund may modify or terminate the waivers described above at any
time; for example, the Fund may limit the application of multiple waivers and
establish other conditions for employee benefit plans.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends or
distributions with respect to such shares, will automatically convert to Class
A shares of the Fund at the end of eight years following the issuance of such
Class B shares; consequently, they will no longer be subject to the higher
expenses borne by Class B shares. The conversion rate will be determined on the
basis of the relative per share net asset values of the two classes and may
result in a shareholder receiving either a greater or fewer number of Class A
shares than the Class B shares so converted. As noted above, holding periods
for Class B shares received in exchange for Class B shares of other Eligible
Funds will be counted toward the eight-year period.
Class C Shares--Institutional; No Sales Charge
The purchase price of a Class C share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase or
redemption. The Fund will receive the full amount of the investor's purchase
payment.
In general, Class C shares are only available for new investments by
certain large institutions, and employee benefit plans which acquire shares
through programs or products sponsored by Metropolitan Life Insurance Company
("Metropolitan") and/or its affiliates, for which Class C shares have been
designated. Information on the availability of Class C shares and further
conditions and limitations is available from the Distributor.
Class C shares may have also been issued directly or through exchanges to
those shareholders of the Fund or other Eligible Funds who previously held
shares not subject to any future sales charge or service fees or distribution
fees.
Class D Shares--Spread Sales Charges
The purchase price of a Class D share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase; thus the
full amount of the investor's purchase payment will be invested in the Fund.
Class D shares are subject to a 1% contingent deferred sales charge on any
portion of the purchase redeemed within one year of the sale. The contingent
deferred sales charge will be 1% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. The Distributor
pays dealers a 1% commission for selling Class D shares at the time of
purchase. The proceeds of the contingent deferred sales charge and the
distribution fee are used to offset distribution expenses and thereby permit
the sale of Class D shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will not
be subject to the contingent deferred sales charge to the extent that the value
of such shares represents (1) capital appreciation of Fund assets or (2)
reinvestment of dividends or capital gains distributions. In addition, the
contingent deferred sales charge will be waived for certain other redemptions
as described under "Contingent Deferred Sales Charge Waivers" above (as
otherwise applicable to Class B shares). For federal income tax
19
<PAGE>
purposes, the amount of the contingent deferred sales charge will reduce the
gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any contingent deferred sales charge will be paid to
the Distributor.
Net Asset Value
The Fund's per share net asset values are determined Monday through Friday as
of the close of the New York Stock Exchange (the "NYSE") exclusive of days on
which the NYSE is closed. The NYSE ordinarily closes at 4 P.M. New York City
time. Assets held by the Fund are valued on the basis of the last reported sale
price or quotations as of the close of business on the valuation date, except
that securities and assets for which market quotations are not readily
available are valued as determined in good faith by or under the authority of
the Trustees of the Trust. In determining the value of certain assets for which
market quotations are not readily available, the Fund may use one or more
pricing services. The pricing services utilize information with respect to
market transactions, quotations from dealers and various relationships among
securities in determining value and may provide prices determined as of times
prior to the close of the NYSE. The Trustees have authorized the use of the
amortized cost method to value short-term debt instruments issued with a
maturity of one year or less and having a remaining maturity of 60 days or less
when the value obtained is fair value. Further information with respect to the
valuation of the Fund's assets is included in the Statement of Additional
Information.
Distribution Plan
The Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the provisions of the
Distribution Plan, the Fund makes payments to the Distributor based on an
annual percentage of the average daily value of the net assets of each class of
shares as follows:
Class Service Fee Distribution Fee
- ----- ----------- ----------------
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) or others for
personal service and/or the maintenance or servicing of shareholder accounts. A
portion of any initial commission paid to dealers for the sale of shares of the
Fund represents payment for personal services and/or the maintenance or
servicing of shareholder accounts by such dealers. Dealers who have sold Class
A shares are eligible for further reimbursement commencing as of the time of
such sale. Dealers who have sold Class B and Class D shares are eligible for
further reimbursement after the first year during which such shares have been
held of record by such dealer as nominee for its clients (or by such clients
directly). Any service fees received by the Distributor and not allocated to
dealers may be applied by the Distributor in reduction of expenses incurred by
it directly for personal services and the maintenance or servicing of
shareholder accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to dealers for selling such shares. Any distribution fees
received by the Distributor and not allocated to dealers may be applied by the
Distributor in connection with sales or marketing efforts, including special
promotional fees and cash and noncash incentives based upon sales by dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs
similar expenses on behalf of, such other funds. When expenses of the
Distributor cannot be identified as relating to a specific fund, the
Distributor allocates expenses among the funds in a manner deemed fair and
equitable to each fund.
Commissions and other cash and noncash incentives and payments to dealers,
to the extent payable out of the general profits, revenues or other sources
20
<PAGE>
of the Distributor (including the advisory fees paid by the Fund), have also
been authorized pursuant to the Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which the Fund may incur under the Distribution
Plan to 1%, of which 0.75% may be used to pay distribution expenses and 0.25%
may be used to pay shareholder service fees. The NASD Rule also limits the
aggregate amount which the Fund may pay for such distribution costs to 6.25% of
gross share sales of a class since the inception of any asset-based sales
charge plus interest at the prime rate plus 1% on unpaid amounts thereof (less
any contingent deferred sales charges). Such limitation does not apply to
shareholder service fees. Payments to the Distributor or to dealers funded
under the Distribution Plan may be discontinued at any time by the Trustees of
the Trust.
Redemption of Shares
Shareholders may redeem all or any portion of their accounts on any day the
NYSE is open for business. Redemptions will be effective at the net asset value
per share next determined (see "Purchase of Shares -- Net Asset Value" herein)
after receipt of the redemption request, in accordance with the requirements
described below, by Shareholder Services and delivery of the request by
Shareholder Services to the Transfer Agent. To allow time for the clearance of
checks used for the purchase of any shares which are tendered for redemption
shortly after purchase, the remittance of the redemption proceeds for such
shares could be delayed for 15 days or more after the purchase. Shareholders
who anticipate a potential need for immediate access to their investments
should, therefore, purchase shares by wire. Except as noted, redemption
proceeds from the Fund are normally remitted within seven days after receipt of
the redemption request by the Fund and any necessary documents in good order.
Methods of Redemption
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed to
the shareholder or wired to a predesignated bank account (see "Proceeds By
Wire" below) by sending to State Street Research Shareholder Services, P.O. Box
8408, Boston, Massachusetts 02266-8408: (1) a written request for redemption
signed by the registered owner(s) of the shares, exactly as the account is
registered; (2) an endorsed stock power in good order with respect to the shares
or, if issued, the share certificates for the shares endorsed for transfer or
accompanied by an endorsed stock power; (3) any required signature guarantees
(see "Redemption of Shares -- Signature Guarantees" below); and (4) any
additional documents which may be required for redemption in the case of
corporations, trustees, etc., such as certified copies of corporate resolutions,
governing instruments, powers of attorney, and the like. The Transfer Agent will
not process requests for redemption until it has received all necessary
documents in good order. A shareholder will be notified promptly if a redemption
request cannot be accepted. Shareholders having any questions about the
requirements for redemption should call Shareholder Services toll-free at
1-800-562-0032.
Request By Telephone
Shareholders may request redemption by telephone with proceeds to be
transmitted by check or by wire (see "Proceeds By Wire" below). A shareholder
can request a redemption for $50,000 or less to be transmitted by check. Such
check for the proceeds will be made payable to the shareholder of record and
will be mailed to the address of record. There is no fee for this service. It
is not available for shares held in certificate form or if the address of
record has been changed within 30 days of the redemption request. The Fund may
revoke or suspend the telephone redemption privilege at any time and without
notice. See "Shareholder Services -- Telephone Services" for a discussion of
the conditions and possible risks associated with Telephone Privileges.
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder has
Telephone Privileges (see "Shareholder Services -- Telephone Services" herein),
the Trust's custodian will wire redemption proceeds to the shareholder's
predesignated bank account. To make the request, the shareholder should call
1-800-562-0032 prior to 4 P.M. Boston time. A $7.50 charge against the
shareholder's account will be imposed for each wire
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redemption. This charge is subject to change without notice. The shareholder's
bank may also impose a charge for receiving wires of redemption proceeds. The
minimum redemption by wire is $5,000.
Request to Dealer to Repurchase
For the convenience of shareholders, the Fund has authorized the Distributor as
its agent to accept orders from dealers by wire or telephone for the repurchase
of shares by the Distributor from the dealer. The Fund may revoke or suspend
this authorization at any time. The repurchase price is the net asset value for
the applicable shares next determined following the time at which the shares
are offered for repurchase by the dealer to the Distributor. The dealer is
responsible for promptly transmitting a shareholder's order to the Distributor.
Payment of the repurchase proceeds is made to the dealer who placed the order
promptly upon delivery of certificates for shares in proper form for transfer
or, for Open Accounts, upon the receipt of a stock power with signatures
guaranteed as described below, and, if required, any supporting documents.
Neither the Fund nor the Distributor imposes any charge upon such a repurchase.
However, a dealer may impose a charge as agent for a shareholder in the
repurchase of his or her shares.
The Fund has reserved the right to change, modify or terminate the
services described above at any time.
Additional Information
Because of the relatively high cost of maintaining small shareholder accounts,
the Fund reserves the right to involuntarily redeem at its option any
shareholder account which remains below $1,500 for a period of 60 days after
notice is mailed to the applicable shareholder, or to impose a maintenance fee
on such account after 60 days' notice. Such involuntary redemptions will be
subject to applicable sales charges, if any. The Fund may increase such minimum
account value above such amount in the future after notice to affected
shareholders. Involuntarily redeemed shares will be priced at the net asset
value on the date fixed for redemption by the Fund, and the proceeds of the
redemption will be mailed to the affected shareholder at the address of record.
Currently, the maintenance fee is $18 annually, which is paid to the Transfer
Agent. The fee does not apply to certain retirement accounts or if the
shareholder has more than an aggregate of $50,000 invested in the Fund and
other Eligible Funds combined. Imposition of a maintenance fee on a small
account could, over time, exhaust the assets of such account.
To cover the cost of additional compliance administration, a $20 fee will
be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date of
payment of redemption proceeds for more than seven days, except that (a) it may
elect to suspend the redemption of shares or postpone the date of payment of
redemption proceeds: (1) during any period that the NYSE is closed (other than
customary weekend and holiday closings) or trading on the NYSE is restricted;
(2) during any period in which an emergency exists as a result of which
disposal of portfolio securities is not reasonably practicable or it is not
reasonably practicable to fairly determine the Fund's net asset value; or (3)
during such other periods as the Securities and Exchange Commission may by
order permit for the protection of investors; and (b) the payment of redemption
proceeds may be postponed as otherwise provided under "Redemption of Shares"
herein.
Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Fund, the Investment
Manager and the Distributor from possible fraud, signature guarantees are
required for certain redemptions. Signature guarantees help the Transfer Agent
to determine that the person who has authorized a redemption from the account
is, in fact, the shareholder. Signature guarantees are required for, among
other things: (1) written requests for redemptions for more than $50,000; (2)
written requests for redemptions for any amount if the proceeds are transmitted
to other than the current address of record (unchanged in the past 30 days);
(3) written requests for redemptions for any amount submitted by corporations
and certain fiduciaries and other intermediaries; and (4) requests to transfer
the registration of
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shares to another owner. Signatures must be guaranteed by a bank, a member firm
of a national stock exchange, or other eligible guarantor institution. The
Transfer Agent will not accept guarantees (or notarizations) from notaries
public. The above requirements may be waived in certain instances. Please
contact Shareholder Services at 1-800-562-0032 for specific requirements
relating to your account.
Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of the Fund owned by
shareholders are credited to their accounts by the Transfer Agent, State Street
Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110.
Certificates representing Class B or Class D shares will not be issued.
Certificates representing Class A or Class C shares will not be issued unless
specifically requested in writing and in any case will only be issued for full
shares, with any fractional shares to be carried on the shareholder's account.
Shareholders will receive periodic statements of transactions in their account.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through dealers, by
wire or by mailing a check payable to the Fund to Shareholder Services
under the terms set forth above under "Purchase of Shares."
2. The following methods of receiving dividends from investment income and
distributions from capital gains are available:
(a) All income dividends and capital gains distributions reinvested in
additional shares of the Fund.
(b) All income dividends in cash; all capital gains distributions
reinvested in additional shares of the Fund.
(c) All income dividends and capital gains distributions in cash.
(d) All income dividends and capital gains distributions invested in any
one available Eligible Fund designated by the shareholder as
described below. See "Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will be automatically coded for reinvestment of all
dividends and distributions in additional shares of the same class of the Fund.
Selections may be changed at any time by telephone or written notice to
Shareholder Services. Dividends and distributions are reinvested at net asset
value without a sales charge.
Exchange Privilege
Shareholders of the Fund may exchange their shares for available shares with
corresponding characteristics of the other Eligible Funds at any time on the
basis of the relative net asset values of the respective shares to be
exchanged, subject to compliance with applicable securities laws. Shareholders
of any other Eligible Fund may similarly exchange their shares for shares of
the Fund with corresponding characteristics. Prior to making an exchange,
shareholders should obtain the Prospectus of the Eligible Fund into which they
are exchanging. Under the Direct Program, subject to certain conditions,
shareholders may make arrangements for regular exchanges from the Fund into
other Eligible Funds. To effect an exchange, Class A, Class B and Class D
shares may be redeemed without the payment of any contingent deferred sales
charge that might otherwise be due upon an ordinary redemption of such shares.
The State Street Research Money Market Fund issues Class E shares which are
sold without any sales charge. Exchanges of State Street Research Money Market
Fund Class E shares into Class A shares of the Fund or any other Eligible Fund
are subject to the initial sales charge or contingent deferred sales charge
applicable to an initial investment in such Class A shares, unless a prior
Class A sales charge has been paid directly or indirectly with respect to the
shares redeemed. For purposes of computing the contingent deferred sales charge
that may be payable
23
<PAGE>
upon disposition of any acquired Class A, Class B and Class D shares, the
holding period of the redeemed shares is "tacked" to the holding period of the
acquired shares. The period any Class E shares are held is not tacked to the
holding period of any acquired shares. No exchange transaction fee is currently
imposed on any exchange.
Shares of the Fund may also be acquired or redeemed in exchange for shares
of the Summit Cash Reserves Fund ("Summit Cash Reserves") by customers of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (subject to completion of
steps necessary to implement the program). The Fund and Summit Cash Reserves
are related mutual funds for purposes of investment and investor services. Upon
the acquisition of shares of Summit Cash Reserves by exchange for redeemed
shares of the Fund, (a) no sales charge is imposed by Summit Cash Reserves, (b)
no contingent deferred sales charge is imposed by the Fund on the Fund shares
redeemed, and (c) any applicable holding period of the Fund shares redeemed is
"tolled," that is, the holding period clock stops running pending further
transactions. Upon the acquisition of shares of the Fund by exchange for
redeemed shares of Summit Cash Reserves, (a) the acquisition of Class A shares
shall be subject to the initial sales charges or contingent deferred sales
charges applicable to an initial investment in such Class A shares, unless a
prior Class A sales charge has been paid indirectly, and (b) the acquisition of
Class B or Class D shares of the Fund shall restart any holding period
previously tolled, or shall be subject to the contingent deferred sales charge
applicable to an initial investment in such shares.
For the convenience of the shareholders who have Telephone Privileges, the
Fund permits exchanges by telephone request from either the shareholder or his
or her dealer. Shares may be exchanged by telephone provided that the
registration of the two accounts is the same. The toll-free number for
exchanges is 1-800-562-0032. See "Telephone Services" herein for a discussion
of conditions and risks associated with Telephone Privileges.
The exchange privilege may be exercised only in those states where shares
of the relevant other Eligible Fund may legally be sold. For tax purposes, each
exchange actually represents the sale of shares of one fund and the purchase of
shares of another. Accordingly, exchanges may produce a capital gain or loss
for tax purposes. The exchange privilege may be terminated or suspended or its
terms changed at any time, subject, if required under applicable regulations,
to 60 days' prior notice. New accounts established for investments upon
exchange from an existing account in another fund will have the same Telephone
Privileges as the existing account, unless Shareholder Services is instructed
otherwise. Related administrative policies and procedures may also be adopted
with regard to a series of exchanges, street name accounts, sponsored
arrangements and other matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer identification
number, may be aggregated for purposes of the six exchange limit.
Notwithstanding the six exchange limit, the Fund reserves the right to refuse
exchanges by any person or group if, in the Investment Manager's judgment, the
Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
Exchanges may be restricted or refused if the Fund receives or anticipates
simultaneous orders affecting significant portions of the Fund's assets. In
particular, a pattern of exchanges that coincides with a "market timing"
strategy may be disruptive to the Fund. The Fund may impose these restrictions
at any time. The exchange limit may be modified for accounts in certain
institutional retirement plans because of plan exchange limits, Department of
Labor regulations or administrative and other considerations. Subject to the
foregoing, if an exchange request in good order is received by Shareholder
Services and delivered by Shareholder Services to the Transfer Agent by 12 noon
Boston time on any business day, the exchange usually will occur that day. For
further information regarding the exchange privilege, shareholders should
contact Shareholder Services.
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<PAGE>
Reinvestment Privilege
A shareholder of the Fund who has redeemed shares or had shares repurchased at
his or her request may reinvest any portion or all of the proceeds (plus that
amount necessary to acquire a fractional share to round off his or her
reinvestment to full shares) in shares, of the same class as the shares
redeemed, of the Fund or any other Eligible Fund at net asset value and without
subjecting the reinvestment to an initial sales charge, provided such
reinvestment is made within 120 calendar days after a redemption or repurchase.
Upon such reinvestment, the shareholder will be credited with any contingent
deferred sales charge previously charged with respect to the amount reinvested.
The redemption of shares is, for federal income tax purposes, a sale on which
the shareholder may realize a gain or loss. If a redemption at a loss is
followed by a reinvestment within 30 days, the transaction may be a "wash sale"
resulting in a denial of the loss for federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by Shareholder
Services of such shareholder's written purchase request and delivery of the
request by Shareholder Services to the Transfer Agent. A shareholder may
exercise this reinvestment privilege only once per 12-month period with respect
to his or her shares of the Fund. No charge is imposed by the Fund for such
reinvestments; however, dealers may charge fees in connection with the
reinvestment privilege. The reinvestment privilege may be exercised with
respect to an Eligible Fund only in those states where shares of the relevant
other Eligible Fund may legally be sold.
Investment Plans
The Investamatic Program is available to Class A, Class B and Class D
shareholders. Under this Program, shareholders may make regular investments by
authorizing withdrawals from their bank accounts each month or quarter on the
Application available from Shareholder Services.
The Distributor also offers IRAs and retirement plans, including prototype
and other employee benefit plans for employees, sole proprietors, partnerships
and corporations. Details of these investment plans and their availability may
be obtained from securities dealers or from Shareholder Services.
Systematic Withdrawal Plan
A shareholder who owns noncertificated Class A or Class C shares with a value
of $5,000 or more, or Class B or Class D shares with a value of $10,000 or
more, may elect, by participating in the Fund's Systematic Withdrawal Plan, to
have periodic checks issued for specified amounts. These amounts may not be
less than minimums, depending on the class of shares held. The Plan provides
that all income dividends and capital gains distributions of the Fund shall be
credited to participating shareholders in additional shares of the Fund. Thus,
the withdrawal amounts paid can only be realized by redeeming shares of the
Fund under the Plan. To the extent such amounts paid exceed dividends and
distributions from the Fund, a shareholder's investment will decrease and may
eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually of
either (a) the value, at the time the Plan is initiated, of the shares then in
the account or (b) the value, at the time of a withdrawal, of the same number
of shares as in the account when the Plan was initiated, whichever is higher.
Expenses of the Plan are borne by the Fund. A participating shareholder
may withdraw from the Plan, and the Fund may terminate the Plan at any time on
written notice. Purchase of additional shares while a shareholder is receiving
payments under a Plan is ordinarily disadvantageous because of duplicative
sales charges. For this reason, a shareholder may not participate in the
Investamatic Program and the Systematic Withdrawal Plan at the same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all their
dividends and any other distri-
25
<PAGE>
butions from the Fund or any Eligible Fund automatically invested at net asset
value in one other such Eligible Fund designated by the shareholder, provided
the account into which the dividends and distributions are directed is
initially funded with the requisite minimum amount. The number of shares
purchased will be determined as of the dividend payment date. The Dividend
Allocation Plan is subject to state securities law requirements, to suspension
at any time, and to such policies, limitations and restrictions, such as may be
applicable to street name or master accounts, that may be adopted from time to
time.
Automatic Bank Connection
A shareholder may elect, by participating in the Fund's Automatic Bank
Connection ("ABC"), to have dividends and other distributions, including
Systematic Withdrawal Plan payments, automatically deposited in the
shareholder's bank account by electronic funds transfer. Some contingent
deferred sales charges may apply. See "Systematic Withdrawal Plan" herein.
Reports
Reports for the Fund will be sent to shareholders of record at least
semiannually. These reports will include a list of the securities owned by the
Fund as well as the Fund's financial statements.
Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing the shareholder to make telephone redemptions for
amounts up to $50,000 to be mailed to the shareholder's address of record
is available automatically;
(2) the privilege allowing the shareholder or his or her dealer to make
telephone exchanges is available automatically;
(3) the privilege allowing the shareholder to make telephone redemptions for
amounts over $5,000, to be remitted by wire to the shareholder's
predesignated bank account, is available by election on the Application
accompanying this Prospectus. A current shareholder who did not
previously request such telephone wire privilege on his or her original
Application may request the privilege by completing a Telephone
Redemption-by-Wire Form which may be obtained by calling 1-800-562-0032.
The Telephone Redemption-by-Wire Form requires a signature guarantee; and
(4) the privilege allowing the shareholder to make telephone purchases or
redemptions, transmitted via the Automated Clearing House system, into or
from the shareholder's predesignated bank account, is available upon
completion of the requisite initial documentation. For details and forms,
call 1-800-562-0032. The documentation requires a signature guarantee.
A shareholder may decline the automatic Telephone Privileges set forth in
(1) and (2) above by so indicating on the Application accompanying this
Prospectus.
A shareholder may discontinue any Telephone Privilege at any time by
advising Shareholder Services that the shareholder wishes to discontinue the
use of such privileges in the future.
Unless such Telephone Privileges are declined, a shareholder is deemed to
authorize Shareholder Services and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder to
redeem, or purporting to be the shareholder or the shareholder's dealer to
exchange, shares from any account for which such services have been authorized;
and (2) honor any written instructions for a change of address regardless of
whether such request is accompanied by a signature guarantee. All telephone
calls will be recorded. None of the Fund, the other Eligible Funds, the
Transfer Agent, the Investment Manager or the Distributor will be liable for
any loss, expense or cost arising out of any request, including any fraudulent
or unauthorized requests. Shareholders assume the risk to the full extent of
their accounts that telephone requests may be unauthorized. Reasonable
procedures will be followed to confirm that instructions communicated by
telephone are genuine. The shareholder will not be liable for any losses
arising from unauthorized or fraudulent instructions if such procedures are not
followed.
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<PAGE>
Shareholders may redeem or exchange shares by calling toll-free
1-800-562-0032. Although it is unlikely, during periods of extraordinary market
conditions, a shareholder may have difficulty in reaching Shareholder Services
at such telephone number. In that event, the shareholder should contact
Shareholder Services at 1-800-357-7800 or otherwise at its main office at One
Financial Center, Boston, Massachusetts 02111-2690.
Shareholder Account Inquiries:
Please call 1-800-562-0032
Call this number for assistance in answering general questions on your account,
including account balance, available shareholder services, statement
information and performance of the Fund. Account inquiries may also be made in
writing to State Street Research Shareholder Services, P.O. Box 8408, Boston,
Massachusetts 02266-8408. A fee of up to $10 will be charged against an account
for providing additional account transcripts or photocopies of paid redemption
checks or for researching records in response to special requests.
Shareholder Telephone Transactions:
Please call 1-800-562-0032
Call this number for assistance in purchasing shares by wire and for telephone
redemptions or telephone exchange transactions. Shareholder Services will
require some form of personal identification prior to acting upon instructions
received by telephone. Written confirmation of each transaction will be
provided.
The Fund and its Shares
The Fund was organized in 1988 as an additional series of State Street Research
Income Trust, a Massachusetts business trust. The Trustees have authorized
shares of the Fund to be issued in four classes: Class A, Class B, Class C and
Class D shares. The Trust is registered with the Securities and Exchange
Commission as an open-end management investment company. The fiscal year end of
the Fund is March 31.
Except for those differences between the classes of shares described below
and elsewhere in the Prospectus, each share of a Fund has equal dividend,
redemption and liquidation rights with other shares of the Fund and when issued
is fully paid and nonassessable. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common usage of terms which may develop in the mutual fund
industry. For example, Class C shares may be redesignated as Class Y shares and
Class D shares may be redesignated as Class C shares. Any redesignation would
not affect any substantive rights respecting the shares.
Each share of each class of shares represents an identical legal interest
in the same portfolio of investments of the Fund, has the same rights and is
identical in all respects, except that Class A, Class B and Class D shares bear
the expenses of the deferred sales arrangement and any expenses (including the
higher service and distribution fees) resulting from such sales arrangement,
and certain other incremental expenses related to a class. Each class will have
exclusive voting rights with respect to provisions of the Rule 12b-1
distribution plan pursuant to which the service and distribution fees, if any,
are paid. Although the legal rights of holders of each class of shares are
identical, it is likely that the different expenses borne by each class will
result in different net asset values and dividends. The different classes of
shares of the Fund also have different exchange privileges.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have a material, adverse effect on
the rights of any shareholder. On any matter submitted to the shareholders, the
holder of shares of the Fund is entitled to one vote per share (with
proportionate voting for fractional shares) regardless of the relative net asset
value thereof.
Shares of the Fund have equal dividend, redemption and liquidation rights
and when issued are fully paid and nonassessable by the Trust. Each share has
one vote (with proportionate voting for fractional shares) irrespective of net
asset value.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus,
27
<PAGE>
there will ordinarily be no shareholder meetings unless required by the 1940
Act. Except as otherwise provided under said Act, the Board of Trustees will be
a self-perpetuating body until fewer than two-thirds of the Trustees serving as
such are Trustees who were elected by shareholders of the Trust. In the event
less than a majority of the Trustees serving as such were elected by
shareholders of the Trust, a meeting of shareholders will be called to elect
Trustees. Under the Master Trust Agreement, any Trustee may be removed by vote
of two-thirds of the outstanding Trust shares; holders of 10% or more of the
outstanding shares of the Trust can require that the Trustees call a meeting of
shareholders for purposes of voting on the removal of one or more Trustees. In
connection with such meetings called by shareholders, shareholders will be
assisted in shareholder communications to the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations of the
Trust. However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for indemnification
for all losses and expenses of any shareholder of the Fund held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund would be unable to meet its obligations. The
Investment Manager believes that, in view of the above, the risk of personal
liability to shareholders is remote.
Management of the Fund
Under the provisions of the Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees.
The Fund's investment manager is State Street Research & Management
Company. The Investment Manager is charged with the overall responsibility
for managing the investments and business affairs of the Fund, subject to the
authority of the Board of Trustees.
The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve as investment adviser to one of the nation's first
mutual funds, presently known as State Street Research Investment Trust, which
they had formed in 1924. Their investment management philosophy emphasized
comprehensive fundamental research and analysis, including meetings with the
management of companies under consideration for investment. The Investment
Manager's portfolio management group has extensive investment industry
experience managing equity and debt securities. In managing debt securities, if
any, for a portfolio, the Investment Manager may consider yield curve
positioning, sector rotation and duration, among other factors.
The Investment Manager and the Distributor are indirect wholly owned
subsidiaries of Metropolitan Life Insurance Company and are located at One
Financial Center, Boston, Massachusetts 02111-2690.
The Investment Manager has entered into an Advisory Agreement with the
Trust pursuant to which investment research and management, administrative
services, office facilities and personnel are provided for the Fund in
consideration of a fee from the Fund.
Under its Advisory Agreement with the Trust, the Investment Manager
receives a monthly investment advisory fee equal to 0.75% (on an annual basis)
of the average daily value of the net assets of the Fund. Such fee is higher
than advisory fees paid by many other investment companies but is believed by
the Trustees to be justified given the considerable analysis and research
necessary to manage the Fund in light of its investment objective and policies.
The Fund bears all costs of its operation other than those incurred by the
Investment Manager under the Advisory Agreement. In particular, the Fund pays,
among other expenses, investment advisory fees, certain distribution expenses
under the Fund's Distribution Plan and the compensation and expenses of the
Trustees who are not otherwise currently affiliated with the Investment Manager
or any of its affiliates. The Investment Manager compensates Trustees of the
Trust if such persons are employees or affiliates of the Investment Manager or
its affiliates.
Peter C. Bennett is primarily responsible for the day-to-day management of
the Fund's portfolio. Mr. Bennett has managed the Fund since December 1996.
28
<PAGE>
Mr. Bennett's principal occupation currently is Executive Vice President and
Director of State Street Research & Management Company. Mr. Bennett also serves
as Chief Investment Officer -- Equities and is a member of the Management
Committee of the Investment Manager. During the past five years he has also
served as Senior Vice President of the Investment Manager. Mr. Bennett has
investment discretion over the entire portfolio of the Fund, makes investment
decisions as to specific securities holdings, allocates and continually adjusts
such allocations of investments among equity and fixed income securities and
among different industry sectors. The portfolio manager uses a team approach on
behalf of the Fund and has delegated purchase and sale authority for defined
portions of the portfolio to other officers of the Investment Manager. The team
members focus on different investment areas within the Fund's sectors, such as
international securities, high-yield high-risk securities, large- and
small-capitalization equities, investment grade debt, etc.
Subject to the policy of seeking best overall price and execution, sales
of shares of the Fund may be considered by the Investment Manager in the
selection of broker or dealer firms for the Fund's portfolio transactions.
The Investment Manager has a Code of Ethics governing personal securities
transactions of certain of its employees; see the Statement of Additional
Information.
Dividends and Distributions; Taxes
The Fund has qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code for its most recent
fiscal year and intends to qualify as such in future years, although it cannot
give complete assurance that it will do so. As long as it so qualifies and
satisfies certain distribution requirements, it will not be subject to federal
income tax on its taxable income (including capital gains, if any) distributed
to its shareholders. Consequently, the Fund intends to distribute annually to
its shareholders substantially all of its net investment income and any capital
gain net income (capital gains net of capital losses).
The Fund declares dividends from net investment income quarterly and pays
such dividends, if any, four times each year; distributions of long-term and
short-term capital gain net income will generally be made on an annual basis,
shortly after the end of the fiscal year in which such gains are realized (or
as otherwise required for compliance with applicable tax regulations). Both
dividends from net investment income and distributions of capital gain net
income will be declared and paid in additional shares of the Fund at net asset
value (except in the case of shareholders who elect a different available
distribution method). The Fund will provide its shareholders of record with
annual information on a timely basis concerning the federal tax status of
dividends and distributions during the preceding calendar year.
Dividends paid by the Fund from taxable net investment income and
distributions of net short-term capital gains, whether paid in cash or
reinvested in additional shares, will be taxable for federal income tax
purposes to shareholders as ordinary income. Distributions of net capital gains
(the excess of net long-term capital gains over net short-term capital losses)
which are designated as capital gains distributions, whether paid in cash or
reinvested in additional shares, will be taxable for federal income tax
purposes to shareholders as long-term capital gains, regardless of how long
shareholders have held their shares.
Dividends and other distributions and proceeds of redemption of Fund
shares paid to individuals and other nonexempt payees will be subject to a 31%
federal backup withholding tax if the Transfer Agent is not provided with the
shareholder's correct taxpayer identification number and certification that the
shareholder is not subject to such backup withholding.
The foregoing discussion relates only to generally applicable federal
income tax provisions in effect as of the date of this Prospectus. Therefore,
prospective shareholders are urged to consult their own tax advisers regarding
tax matters, including state and local tax consequences.
Calculation of Performance Data
From time to time, in advertisements or in communications to shareholders or
prospective investors, the Fund
29
<PAGE>
may compare the performance of its Class A, Class B, Class C or Class D shares
to that of other mutual funds with similar investment objectives, to
certificates of deposit, to other financial alternatives and/or to appropriate
indices, rankings or averages such as those compiled by Lipper Analytical
Services, Inc. for the Flexible Portfolio Funds category, Morningstar, Inc.,
Money Magazine, Business Week, Forbes Magazine, The Wall Street Journal,
Fortune Magazine, Investor's Daily or Wiesenberger Mutual Funds Investment
Report.
Total return is computed separately for each class of shares of the Fund.
The average annual total return ("standard total return") for shares of the
Fund is computed by determining the average annual compounded rate of return
for a designated historical period as applied to a hypothetical $1,000 initial
investment, which is redeemed in total at the end of such period. In making the
calculation, all dividends and distributions are assumed to be reinvested, and
all accrued expenses and recurring charges, including management and
distribution fees, are recognized. The calculation also reflects the highest
applicable initial or contingent deferred sales charge, determined as of the
assumed date of initial investment or the assumed date of redemption, as the
case may be. Standard total return would be calculated for the periods
specified in applicable regulations and may be accompanied by nonstandard total
return information for differing periods computed in the same manner with or
without annualizing the total return or taking sales charges into account.
The Fund's yield is computed separately for each class of shares by
dividing the net investment income, after recognition of all recurring charges,
per share earned during the most recent month or other specified thirty-day
period by the maximum offering price per share on the last day of such period
and annualizing the result.
The standard total return and yield results take sales charges into
account, if applicable, but do not take into account recurring and nonrecurring
charges for optional services which only certain shareholders elect and which
involve nominal fees, such as the $7.50 fee for remittance of redemption
proceeds by wire. Where sales charges are not applicable and therefore not
taken into account in the calculation of standard total return and yield, the
results will be increased.
The Fund's distribution rate is calculated separately for each class of
shares by annualizing the latest distribution and dividing the result by the
maximum offering price per share as of the end of the period to which the
distribution relates. The distribution rate is not computed in the same manner
as the above described yield, and therefore can be significantly different from
it. In its supplemental sales literature, the Fund may quote its distribution
rate together with the above described standard total return and yield
information. The use of such distribution rates would be subject to an
appropriate explanation of how the components of the distribution rate differ
from the above described yield.
Performance information may be useful in evaluating the Fund and for
providing a basis for comparison with other financial alternatives. Since the
performance of the Fund changes in response to fluctuations in economic and
market conditions, interest rates and Fund expenses, among other things, no
performance quotation should be considered a representation as to the Fund's
performance for any future period. In addition, the net asset value of shares
of the Fund will fluctuate, with the result that shares of the Fund, when
redeemed, may be worth more or less than their original cost. Neither an
investment in the Fund nor its performance is insured or guaranteed; such lack
of insurance or guarantees should accordingly be given appropriate
consideration when comparing the Fund to financial alternatives which have such
features.
Shares of the Fund had no class designations until June 1, 1993, when
designations were assigned based on the pricing and Rule 12b-1 fees applicable
to shares sold thereafter. Performance data for periods prior to June 1, 1993
do not reflect additional Rule 12b-1 Distribution Plan fees, if any, of up to
1% per year depending on the class of shares, which will adversely affect
performance results for periods after such date. Performance data or rankings
for a given class of shares should be interpreted carefully by investors who
hold or may invest in a different class of shares.
30
<PAGE>
APPENDIX
Description of Debt/Bond Ratings
Standard & Poor's Corporation
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having speculative
characteristics with respect to capacity to pay interest and repay principal.
BB indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the due date even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high
variability in expected returns due to noncredit risks created by the terms of
the obligation, such as securities whose principal or interest return is
indexed to equities, commodities, or currencies; certain swaps and options; and
interest only (IO) and principal only (PO) mortgage securities.
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest
31
<PAGE>
payments are protected by a large or by an exceptionally stable margin, and
principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
1, 2 or 3: The ratings from Aa through B may be modified by the addition
of a numeral indicating a bond's rank within its rating category.
32
<PAGE>
[COVER]
STATE STREET RESEARCH
MANAGED ASSETS
One Financial Center
Boston, MA 02111
INVESTMENT ADVISER
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
DISTRIBUTOR
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
SHAREHOLDER SERVICES
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
800-562-0032
CUSTODIAN
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
LEGAL COUNSEL
Goodwin, Procter & Hoar, LLP
Exchange Place
Boston, MA 02109
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
[STATE STREET RESEARCH LOGO]
State Street Research
Managed Assets
August 1, 1997
P R O S P E C T U S
MA-613D-897IBS CONTROL NUMBER: 3989-970729(0898)SSR-LD
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
a series of
STATE STREET RESEARCH INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1997
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.........................................................16
INVESTMENT ADVISORY SERVICES..................................................21
PURCHASE AND REDEMPTION OF SHARES.............................................22
NET ASSET VALUE...............................................................24
PORTFOLIO TRANSACTIONS........................................................25
CERTAIN TAX MATTERS...........................................................28
DISTRIBUTION OF SHARES OF THE FUND............................................30
CALCULATION OF PERFORMANCE DATA...............................................33
CUSTODIAN.....................................................................38
INDEPENDENT ACCOUNTANTS.......................................................38
FINANCIAL STATEMENTS..........................................................38
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, 1997, 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.
CONTROL NUMBER: 1285G-970829(0998)SSR-LD HI-879D-897
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under "The Fund's Investments" and "Other Investment
Policies" in the Fund's Prospectus, the Fund has adopted certain investment
restrictions.
All of the Fund's fundamental investment restrictions are set forth
below. These fundamental restrictions may not be changed by the Fund except by
the affirmative vote of a majority of the outstanding voting securities of the
Fund as defined in the Investment Company Act of 1940, as amended (the "1940
Act"). (Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at the annual or a special meeting of security
holders duly called, (i) of 67% or more of the voting securities present at a
meeting if the holders of more than 50% of the outstanding voting securities are
present or represented by proxy or (ii) of more than 50% of the outstanding
voting securities, whichever is less.) Under these restrictions, it is, except
as noted, the Fund's policy:
(1) not to 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 options on
2
<PAGE>
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:
(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
3
<PAGE>
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 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
4
<PAGE>
(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.
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.
5
<PAGE>
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,
permissible assets equal to the face value of the futures contract will be
identified by the Fund to the Trust's custodian for maintenance in a separate
account to insure that the use of such futures contracts is unleveraged.
Similarly, a representative portfolio of securities having a value equal to the
aggregate face value of the futures contract will be identified with respect to
each short position. The Fund will employ any other appropriate method of cover
which is consistent with applicable regulatory and exchange requirements.
Options on Securities
- ---------------------
The Fund may use options on securities to implement its investment
strategy. A call option on a security, for example, gives the purchaser of the
option the right to buy, and the writer the obligation to sell, the underlying
asset at the exercise price during the option period. Conversely, a put option
on a debt security gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying asset at the exercise price during the option
period.
Purchased options have defined risk, i.e., the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset.
Written options have varying degrees of risk. An uncovered written call
option theoretically carries unlimited risk, as the market price of the
underlying asset could rise far above the exercise price before its expiration.
This risk is tempered when the call option is covered, i.e., when the option
writer owns the underlying asset. In this case, the writer runs the risk of the
lost opportunity to participate in the appreciation in value of the asset rather
than the risk of an out-of-pocket loss. A written put option has defined risk,
i.e., the difference between the agreed upon price that the Fund must pay to the
buyer upon exercise of the put and the value, which could be zero, of the asset
at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
his obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
6
<PAGE>
Options on Securities Indices
- -----------------------------
The Fund may engage in transactions in call and put options on
securities indices. For example, the Fund may purchase put options on indices of
securities in anticipation of or during a market decline to attempt to offset
the decrease in market value of its securities that might otherwise result.
Put options on indices of securities are similar to put options on the
securities themselves except that the delivery requirements are different.
Instead of giving the right to make delivery of a security at a specified price,
a put option on an index of securities gives the holder the right to receive an
amount of cash upon exercise of the option if the value of the underlying index
has fallen below the exercise price. The amount of cash received will be equal
to the difference between the closing price of the index and the exercise price
of the option expressed in dollars times a specified multiple. As with options
on securities or future contracts, the Fund may offset its position in index
options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
A securities index assigns relative values to the securities included
in the index and the index options are based on a broad market index. Although
there are at present few available options on indices of fixed income
securities, other than tax-exempt securities, or futures and related options
based on such indices, such instruments may become available in the future. In
connection with the use of such options, the Fund may cover its position by
identifying a representative portfolio of securities having a value equal to the
aggregate face value of the option position taken. However, the Fund may employ
any appropriate method to cover its position that is consistent with applicable
regulatory and exchange requirements.
Options on Futures Contracts
- ----------------------------
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
Options Strategy
- ----------------
A basic option strategy for protecting the Fund against a decline in
securities prices could involve (a) the purchase of a put -- thus "locking in"
the selling price of the underlying securities or securities indices -- or (b)
the writing of a call on securities or securities indices held by the Fund --
thereby generating income (the premium paid by the buyer) by giving the holder
of such call the option to buy the underlying asset at a fixed price. The
premium will offset, in whole or in part, a decline in portfolio value; however,
if prices of the relevant securities or securities indices rose instead of
falling, the call might be exercised, thereby resulting in a potential loss of
appreciation in the underlying securities or securities indices.
7
<PAGE>
A basic option strategy when a rise in securities prices is anticipated
is the purchase of a call -- thus "locking in" the purchase price of the
underlying security or other asset. In transactions involving the purchase of
call options by the Fund, money market instruments equal to the aggregate
exercise price of the options will be identified by the Fund to the Trust's
custodian to insure that the use of such investments is unleveraged.
The Fund may write options in connection with buy-and-write
transactions; that is, the Fund may purchase a security and concurrently write a
call option against that security. If the call option is exercised in such a
transaction, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upward or downward by the difference between the
Fund's purchase price of the security and the exercise price of the option. If
the option is not exercised and the price of the underlying security declines,
the amount of such decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund's return will be the premium received from
writing the put option minus the amount by which the market price of the
security is below the exercise price.
Limitations and Risks of Options and Futures Activity
- -----------------------------------------------------
The Fund will engage in transactions in futures contracts or options 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. 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
8
<PAGE>
inability to close options and futures positions also could have an adverse
impact on the Fund's ability effectively to hedge its securities and might, in
some cases, require the Fund to deposit cash to meet applicable margin
requirements. The Fund will enter into an option or futures position only if it
appears to be a liquid investment.
Repurchase Agreements
- ---------------------
The Fund may enter into repurchase agreements. Repurchase agreements
occur when a Fund acquires a security and the seller, which may be either (i) a
primary dealer in U.S. Government securities or (ii) an FDIC-insured bank having
gross assets in excess of $500 million, simultaneously commits to repurchase it
at an agreed-upon price on an agreed-upon date within a specified number of days
(usually not more than seven) from the date of purchase. The repurchase price
reflects the purchase price plus an agreed-upon market rate of interest which is
unrelated to the coupon rate or maturity of the acquired security. The Fund will
only enter into repurchase agreements involving U.S. Government securities.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities. Repurchase
agreements will be limited to 30% of the Fund's total assets, except that
repurchase agreements extending for more than seven days when combined with any
other illiquid securities held by the Fund will be limited to 10% of the Fund's
total assets.
When-Issued Securities
- ----------------------
The Fund may purchase "when-issued" securities, which are traded on a
price or yield basis prior to actual issuance. Such purchases will be made only
to achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to 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
9
<PAGE>
for agreement by the bank or investment banker to pay the Fund a fixed rate of
interest on the notional principal amount. In a currency swap, the Fund would
agree with the other party to exchange cash flows based on the relative
differences in values of a notional amount of two (or more) currencies; in an
index swap, the Fund would agree to exchange cash flows on a notional amount
based on changes in the values of the selected indices. Purchase of a cap
entitles the purchaser to receive payments from the seller on a notional amount
to the extent that the selected index exceeds an agreed upon interest rate or
amount whereas purchase of a floor entitles the purchaser to receive such
payments to the extent the selected index falls below an agreed-upon interest
rate or amount. A collar combines a cap and a floor.
Most swaps entered into by the Fund will be on a net basis; for
example, in an interest rate swap, amounts generated by application of the fixed
rate and the floating rate to the notional principal amount would right offset
one another, with a fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, the Fund will set up a segregated custodial account to hold appropriate
liquid assets, including cash; for swaps entered into on a net basis, assets
will be segregated having a daily net asset value equal to any excess of the
Fund's accrued obligations over the accrued obligations of the other party,
while for swaps on other than a net basis assets will be segregated having a
value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a part of the Fund's portfolio.
However, the Fund may enter into such arrangements for income purposes to the
extent permitted by the CFTC for entities which are not commodity pool
operators, such as the Fund. In entering a swap arrangement, the Fund is
dependent upon the creditworthiness and good faith for the counterparty. The
Fund attempts to reduce the risks of nonperformance by the counterparty by
dealing only with the established, reputable institutions. The swap market is
still relatively new and emerging; positions in swap arrangements may become
illiquid to the extent that nonstandard arrangements with one counterparty are
not readily transferable to another counterparty of if a market for the transfer
of swap positions does not develop. The use of interest rate swaps is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Investment Manager is incorrect in its forecasts of market values, interest
rates and other applicable factors, the investment performance of the Fund would
diminish compared with what it would have been if these investment techniques
were not used. Moreover, even if the Investment Manager is correct in its
forecasts, there is a risk that the swap position may correlate imperfectly with
the price of the asset or liability being hedged.
Restricted Securities
- ---------------------
Subject to finalization of implementation steps, the Fund's policy is
to not make an investment in restricted securities, including Rule 144A and
other restricted securities if as a result more than 50% of its total assets are
invested in such securities provided not more than 10% of its total assets are
invested in non-Rule 144A restricted 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
10
<PAGE>
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.
Restricted securities which are not resalable under Rule 144A can be
subject to risks of illiquidity and subjective valuations to a greater degree
than Rule 144A securities.
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
11
<PAGE>
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 portfolio is invested in a given private
industry, the following industry classifications are currently used. Securities
issued or guaranteed as to principal or interest by the U.S. Government or its
agencies or instrumentalities or mixed-ownership Government corporations or
sponsored enterprises (including repurchase agreements involving U.S. Government
securities to the extent excludable under relevant regulatory interpretations)
are excluded. Securities issued by foreign governments are also excluded.
Companies engaged in the business of financing may be classified according to
the industries of their parent or sponsor companies, or industries that
otherwise most affect such financing companies. Issuers of asset-backed pools
will be classified as separate industries based on the nature of the underlying
assets, such as mortgages, credit card receivables includes private pools of
nongovernment backed mortgages.
Aerospace Grocery
Airline Healthcare & Hospital Management
Asset-backed--Mortgages Hospital Supply
Asset-backed--Credit Card Receivables Hotel & Restaurant
Automotive Insurance
Automotive Parts Machinery
Bank Media
Building Metal & Mining
Business Service Office Equipment
Cable Oil Production
Capital Goods & Equipment Oil Refining & Marketing
Chemical Oil Service
Computer Software & Service Paper Products
Conglomerate Personal Care
Consumer Goods & Services Photography
Container Plastics
Cosmetics Printing & Publishing
Diversified Railroad
Drug Real Estate & Building
Electric Recreation
Electrical Equipment Retail Trade
Electronic Components Savings & Loan
Electronic Equipment Shipping & Transportation
Entertainment Technology & Communications
Financial Service Telephone
Food & Beverage Textile & Apparel
Forest Products Tobacco
Gaming & Lodging Truckers
Gas Trust Certificates--Government
Gas Transmission Related Lending
12
<PAGE>
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:
[bullet] direct obligations of the U.S. Treasury, i.e., U.S. Treasury
bills, notes, certificates and bonds;
[bullet] obligations of U.S. Government agencies or instrumentalities
such as the Federal Home Loan Banks, the Federal Farm Credit
Banks, the Federal National Mortgage Association, the
Government National Mortgage Association and the Federal Home
Loan Mortgage Corporation; and
[bullet] obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a
variety of ways by the U.S. Government, its agencies or instrumentalities. Some
of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. Other obligations, such as those of the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government to
purchase certain obligations of agencies or instrumentalities, although the U.S.
Government has no legal obligation to do so. Obligations such as those of the
Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation are backed
by the credit of the agency or instrumentality issuing the obligations. Certain
obligations of Resolution Funding Corporation, a mixed-ownership Government
corporation, are backed with respect to interest payments by the U.S. Treasury,
and with respect to principal payments by U.S. Treasury obligations held in a
segregated account with a Federal Reserve Bank. Except for certain
mortgage-related securities, the Fund will only invest in obligations issued by
mixed-ownership Government corporations where such securities are guaranteed as
to payment of principal or interest by the U.S. Government or a U.S. Government
agency or instrumentality, and any unguaranteed
13
<PAGE>
principal or interest is otherwise supported by U.S. Government obligations held
in a segregated account.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Bank Money Investments. Bank money investments include but are not
limited to certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are generally short-term (i.e., less than one year),
interest-bearing negotiable certificates issued by commercial banks or savings
and loan associations against funds deposited in the issuing institution. A
banker's acceptance is a time draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods). A banker's acceptance may be
obtained from a domestic or foreign bank, including a U.S. branch or agency of a
foreign bank. The borrower is liable for payment as well as the bank, which
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
14
<PAGE>
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 within the "A" major rating category by S&P or within the
"Prime" category by Moody's, or, if not rated, issued by companies having an
outstanding long-term unsecured debt issue rated at least within the "A"
category by S&P or by Moody's. The money market investments in corporate bonds
and debentures (which must have maturities at the date of settlement of one year
or less) must be rated at the time of purchase at least within the "A" category
by S&P or within the "Prime" category by Moody's.
Commercial paper rated within the "A" category (highest quality) by S&P
is issued by entities which have liquidity ratios which are adequate to meet
cash requirements. Long-term senior debt is rated A or better, although in some
cases credits within the "BBB" category may be allowed. The issuer has access to
at least two additional channels of borrowing. Basic earnings and cash flow have
an upward trend with allowance made for unusual circumstances. Typically, the
issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are unquestioned.
The relative strength or weakness of the above factors determines whether the
issuer's commercial paper is rated A-1, A-2 or A-3. (Those A-1 issues determined
to possess overwhelming safety characteristics are denoted with a plus (+) sign:
A-1+.)
15
<PAGE>
The rating Prime is the highest commercial paper rating category
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: evaluation of the management of the issuer; economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; evaluation of the
issuer's products in relation to competition and customer acceptance; liquidity;
amount and quality of long-term debt; trend of earnings over a period of 10
years; financial management of obligations which may be present or may arise as
a result of public interest questions and preparations to meet such obligations.
These factors are all considered in determining whether the commercial paper is
rated Prime-1, Prime-2 or Prime-3.
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.
TRUSTEES AND OFFICERS
The Trustees and principal officers of the Trust, their addresses, and
their principal occupations and positions with certain affiliates of the
Investment Manager are set forth below.
*+Peter C. Bennett, One Financial Center, Boston, MA 02111 serves as
Vice President of the Trust. He is 58. His principal occupation is Executive
Vice President and Director of State Street Research & Management Company.
During the past five years he has also served as Senior Vice President of State
Street Research & Management Company. Mr. Bennett's other principal business
affiliation is Director, State Street Research Investment Services, Inc.
+Steve A. Garban, The Pennsylvania State University, 210 Old Main,
University Park, PA 16802, serves as Trustee of the Trust. He is 59. He is
retired and was formerly Senior Vice President for Finance and Operations and
Treasurer of The Pennsylvania State University.
+Malcom T. Hopkins, 14 Brookside Road, Biltmore Forest, Asheville, NC
28803, serves as Trustee of the Trust. He is 69. He is engaged principally in
private investments. Previously, he was Vice Chairman of the Board and Chief
Financial Officer of St. Regis Corp.
*+Bartlett R. Geer, One Financial Center, Boston, MA 02111 serves as
Vice President of the Trust. He is 42. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as Vice President of State Street Research & Management
Company.
- -----------------
* or + See footnotes on page 18
16
<PAGE>
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 56. 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 70. 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 70. 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 46. 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 41. 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.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 65. 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 73. He is retired and was formerly Chairman of the
Board and Chief Executive Officer of Raytheon Company, of which he remains a
Director.
- -----------------
* or + See footnotes on page 18
17
<PAGE>
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves
as Trustee of the Trust. He is 59. His principal occupations during the past
five years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
59. 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 43. 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 54. 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., and until February, 1996,
prior positions as President and Chief Executive Officer of that company.
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 72. He is retired and was formerly Of Counsel for
the law firm Choate, Hall & Stewart. He was a partner of that firm from 1960 to
1987.
- ------------------
* 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.
18
<PAGE>
As of May 31, 1997, 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 16.5
Class C Chase Manhattan Bank 32.5
Andover Newton Theological School 10.2
Class D Merrill Lynch 36.6
The full name and address of each of the above persons or entities are
as follows:
Andover Newton Theological School
c/o State Street Research Shareholder Services
One Financial Center
Boston, Massachusetts 02111
Chase Manhattan Bank, N.A. (a) (b)
770 Broadway
New York, New York 10003
Merrill Lynch, Pierce, Fenner & Smith, Inc. (a)
One Liberty Plaza
165 Broadway
New York, New York 10080
- --------------------
(a) The Fund believes that such entity does not have beneficial ownership
of such shares.
(b) Chase Manhattan Bank holds such shares as trustee under certain
employee benefit plans serviced by Metropolitan Life Insurance Company.
19
<PAGE>
As of May 31, 1997, the Trustees and principal officers of the Fund as
a group owned less than 1% of the Fund's outstanding Class A shares, and owned
no shares of the Fund's outstanding Class B, Class C or Class D shares.
Ownership of 25% or more of a voting security is deemed "control" as
defined in the 1940 Act. So long as 25% of a class of shares is so owned, such
owners will be presumed to be in control of such class of shares for purposes of
voting on certain matters submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
The Trustees were compensated as follows:
- --------------------------------------------------------------------------------
Total
Compensation
Aggregate From Trust and
Name of Compensation Complex Paid
Trustee From Trust(a) to Trustees(b)
Steve A. Garban $ 930 $ 34,750
Malcom T. Hopkins $ 930 $ 34,750
Edward M. Lamont $ 8,000 $ 59,375
Robert A. Lawrence $ 8,000 $ 92,125
Dean O. Morton $ 8,600 $ 96,125
Thomas L. Phillips $ 8,200 $ 59,375
Toby Rosenblatt $ 8,000 $ 59,375
Michael S. Scott Morton $ 9,000 $ 100,325
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $ 8,600 $ 63,375
- --------------------------------------------------------------------------------
(a) For the Fund's fiscal year ended March 31, 1997. Includes compensation
from multiple Series of the Trust. See "Distribution of Shares" for a
listing of series.
(b) Includes compensation on behalf of all series of 12 investment
companies for which the Investment Manager served directly or
indirectly as investment adviser or for which the Investment Manager
served as sub-investment adviser, and series of State Street Research
Portfolios, Inc., for which State Street Research Investment Services,
Inc. served as distributor. "Total Compensation from Trust and Complex"
is for 12 months ended December 31, 1996. The Trust does not provide
any pension or retirement benefits for the Trustees.
20
<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, 1995, 1996 and 1997,
the investment advisory fee for the Fund was $4,696,647, $5,199,204, and
$5,911,041 respectively.
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.
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.
21
<PAGE>
Under the Code of Ethics of the Investment Manager, its employees in
Boston and selected other persons elsewhere involved in investment management
operations, are only permitted to engage in personal securities transactions in
accordance with certain conditions relating to such person's position, the
identity of the security, the timing of the transaction and similar factors.
Such 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.
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
22
<PAGE>
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.
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
23
<PAGE>
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 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
with use of such pricing services as may be deemed appropriate or methodologies
approved by the Trustees.
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
24
<PAGE>
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,
1996 and 1997 were 56.47% and 81.75%, respectively. The Investment Manager
believes the portfolio turnover rate for the fiscal year ended March 31, 1997
was significantly higher because among other things, a change in portfolio
structure to increase the relative weighting of convertible bonds compared to
other securities. The Fund reserves full freedom with respect to portfolio
turnover, as described in the Prospectus.
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.
25
<PAGE>
When it appears that a number of firms could satisfy the required
standards in respect of a particular transaction, consideration may also be
given to services other than execution services which certain of such firms have
provided in the past or may provide in the future. Negotiated commission rates
and prices, however, are based upon the Investment Manager's judgment of the
rate which reflects the execution requirements of the transaction without regard
to whether the broker provides services in addition to execution. Among such
other services are the supplying of supplemental investment research; general
economic, political and business information; analytical and statistical data;
relevant market information, quotation equipment and services; reports and
information about specific companies, industries and securities; purchase and
sale recommendations for stocks and bonds; portfolio strategy services;
historical statistical information; market data services providing information
on specific issues and prices; financial publications; proxy voting data and
analysis services; technical analysis of various aspects of the securities
markets, including technical charts; computer hardware used for brokerage and
research purposes; computer software and databases (including those used for
portfolio analysis and modeling and including software providing investment
personnel with efficient access to current and historical data from a variety of
internal and external sources) and portfolio evaluation services and relative
performance of accounts.
In the case of the Fund and other registered investment companies
advised by the Investment Manager, the above services may include data relating
to performance, expenses and fees of those investment companies and other
investment companies; this information is used by the Trustees or Directors of
the investment companies to fulfill their responsibility to oversee the quality
of the Investment Manager's advisory services and to review the fees and other
provisions contained in the advisory contracts between the investment companies
and the Investment Manager. The Investment Manager considers these investment
company services only in connection with the execution of transactions on behalf
of its investment company clients and not its other clients.
Certain of the nonexecution services provided by broker-dealers may in
turn be obtained by the broker-dealers from third parties who are paid for such
services by the broker-dealers. The Investment Manager has an investment in less
than ten percent of the outstanding equity of one such third party which is
engaged in the development and licensing of trading systems which include
portfolio analysis and modeling and other research and investment
decision-making capabilities. The Investment Manager may allocate brokerage to
broker-dealers who in turn pay this third party for the portion of the third
party's trading system provided to the Investment Manager which is estimated by
the Investment Manager to provide appropriate assistance in the investment
decision-making process. Because of its minority interest in the third party,
the Investment Manager could be said to benefit indirectly from such brokerage
allocation.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. Among other measures, the Investment Manager's
investment management personnel seek to evaluate the quality of research and
other services received, and the results of this effort are made available to
the equity trading department which sometimes uses this information as a
consideration in the selection of brokers to execute portfolio transactions.
26
<PAGE>
Some services furnished by broker-dealers may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Investment Manager allocates the cost
of such services to determine the appropriate proportion of the cost which is
allocable to purposes other than research or investment decision-making and the
Investment Manager pays for that portion directly from its own funds. Some
research and execution services may benefit the Investment Manager's clients as
a whole, while others may benefit a specific segment of clients. Not all such
services will necessarily be used exclusively in connection with the accounts
which pay the commissions to the broker-dealer producing the services.
The Investment Manager has no fixed agreements or understandings with
any broker-dealer as to the amount of brokerage business which 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, the Investment Manager 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, 1995, 1996 and 1997, amounted to $56,055, $131,397 and
$262,173, respectively. The Investment Manager believes the amount of brokerage
commissions paid by the Fund during the fiscal year ended March 31, 1997 was
significantly higher than during the previous year because of increased
portfolio turnover. 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 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
27
<PAGE>
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 foreign currencies), or (iii) foreign currencies
(or options, futures, or forward contracts on foreign currencies) but only if
such currencies (or options, futures, or forward contracts) are not directly
related to the Fund's principal business of investing in stocks or securities
(or options and futures with respect to stocks or securities); (c) satisfy
certain diversification requirements; and (d) in order to be entitled to utilize
the dividends paid deduction, distribute annually at least 90% of its investment
company taxable income (determined without regard to the deduction for dividends
paid).
The 30% test will limit the extent to which the Fund may sell
securities held for less than three months, write options which expire in less
than three months, and effect closing transactions with respect to call or put
options that have been written or purchased within the preceding three months.
(If the Fund purchases a put option for the purpose of hedging an underlying
portfolio security, the acquisition of the option is treated as a short sale of
the underlying security unless, for purposes only of the 30% test, the option
and the security are
28
<PAGE>
acquired on the same date.) Finally, as discussed below, this requirement may
also limit investments by the Fund in options on stock indices, listed options
on nonconvertible debt securities, futures contracts, options on interest rate
futures contracts and certain foreign currency contracts.
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of such Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of the
Fund.
The Fund will be liable for a nondeductible 4% excise tax on amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement. To avoid the tax, during each calendar year the Fund
must distribute an amount equal to at least 98% of the sum of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, and its capital gain net income for the 12-month period ending on October
31, in addition to any undistributed portion of the respective balances from the
prior year. The Fund intends to make sufficient distributions to avoid this 4%
excise tax.
Federal Income Taxation of the Fund's Investments
- -------------------------------------------------
Original Issue Discount. For federal income tax purposes, debt
securities purchased by the Fund may be treated as having original issue
discount. Original issue discount represents interest for federal income tax
purposes and can generally be defined as the excess of the stated redemption
price at maturity of a debt obligation over the issue price. Original issue
discount is treated for federal income tax purposes as income earned by the
Fund, whether or not any income is actually received, and therefore is subject
to the distribution requirements of the Code. Generally, the amount of original
issue discount is determined on the basis of a constant yield maturity which
takes into account the compounding of accrued interest. Under section 1286 of
the Code, an investment in a stripped bond or stripped coupon may result in
original issue discount.
Debt securities may be purchased by the Fund at a discount that exceeds
the original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for income tax
purposes. In the case of any debt security issued after July 18, 1984, having a
fixed maturity date of more than one year from the date of issue and having
market discount, the gain realized on disposition will be treated as interest
income to the extent it does not exceed the accrued market discount on the
security (unless the Fund elects to include such accrued market discount in
income in the tax year to which it is attributable). Generally, market discount
is accrued on a daily basis. The Fund may be required to capitalize, rather than
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
29
<PAGE>
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.
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
30
<PAGE>
as concessions to dealers. For the fiscal years ended March 31, 1995, 1996 and
1997, total sales charges on Class A shares paid to the Distributor amounted to
$3,774,724, $2,741,302 and $2,477,538, respectively. For the same periods,
$447,617, $268,551 and $294,695, respectively, was retained by the Distributor
after reallowance of concessions to dealers. The Distributor may also pay its
affiliate, MetLife Securities, Inc. additional sales compensation of up to 0.25%
of certain sales.
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.
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:
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<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1997 March 31, 1996 March 31, 1995
------------------------------- ------------------------------- -------------------------------
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 $2,182,843 $ 0 $2,472,751 $ 1,238 $3,327,107
Class B $493,705 $3,153,798 $734,173 $2,802,176 $274,749 $2,315,926
Class D $ 61,492 $ 140,483 $ 4,449 $ 100,380 $ 2,188 $ 49,802
</TABLE>
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "Distribution Plan") under which the Fund may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of Class A, Class B and Class D shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to underwriters, securities dealers
and others engaged in the sale of shares, including payments to the Distributor
to be used to pay commissions and/or reimbursement to securities dealers (which
securities dealers may be affiliates of the Distributor) engaged in the
distribution and marketing of shares and furnishing ongoing assistance to
investors, (2) reimbursement of direct out-of-pocket expenditures incurred by
the Distributor in connection with the distribution and marketing of shares and
the servicing of investor accounts including expenses relating to the
formulation and implementation of marketing strategies and promotional
activities such as direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising, the preparation, printing and
distribution of Prospectuses of the Fund and reports for recipients other than
existing shareholders of the Fund, and obtaining such information, analyses and
reports with respect to marketing and promotional activities and investor
accounts as the Fund may, from time to time, deem advisable, and (3)
reimbursement of expenses incurred by the Distributor in connection with the
servicing of shareholder accounts including payments to securities dealers and
others in consideration of the provision of personal 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
32
<PAGE>
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, 1997, 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:
<TABLE>
<CAPTION>
Class A Class B Class D
------- ------- -------
<S> <C> <C> <C>
Advertising $ 0 $ 0 $ 0
Printing and mailing of prospectuses
to other than current shareholders 0 0 0
Compensation to dealers 1,649,935 2,236,399 207,441
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 $ 1,649,935 $ 2,236,399 $ 207,441
============== ============= ===========
</TABLE>
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
33
<PAGE>
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.
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, if any, by the Fund's affiliates to reduce expenses relating
to the Fund; see "Accrued Expenses" later in this section.
Total Return
The standard total return of each class of shares of the Fund was as
follows:
Ten Years Five Years One Year
Ended Ended Ended
March 31, 1997 March 31, 1997 March 31,1997
-------------- -------------- -------------
Class A 9.06% 10.48% 5.34%
Class B 9.21% 10.52% 4.35%
Class C 9.63% 11.63% 10.63%
Class D 9.22% 10.81% 8.52%
34
<PAGE>
Standard total return is computed separately for each class of shares
by determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value in accordance with the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated
period assuming a hypothetical $1,000 payment made at
the beginning of the designated period
The calculation is based on the further assumptions that the highest
applicable initial or contingent deferred sales charge is deducted, and that all
dividends and distributions by the Fund are reinvested at net asset value on the
reinvestment dates during the periods. All accrued expenses and recurring
charges are also taken into account as described later herein.
Yield
The annualized yield of each class of shares of the Fund based on the
month of March 1997 was as follows:
Class A 7.60%
Class B 7.22%
Class C 8.27%
Class D 7.20%
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:
35
<PAGE>
YIELD = 2[(a-b + 1)6 -1]
--
cd
Where a = dividends and interest earned during the period
b = expenses accrued for the period (net of voluntary expense
reductions by the Investment Manager)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
To calculate interest earned (for the purpose of "a" above) on debt
obligations, the Fund computes the yield to 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.
36
<PAGE>
Accrued Expenses
- ----------------
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return and yield results take sales charges, if applicable, into
account, although the results do not take into account recurring and
nonrecurring charges for optional services which only certain shareholders elect
and which involve nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by
affiliates of fees or expenses during the subject period. In the absence of such
subsidization, the performance of the Fund would have been lower.
Nonstandardized Total Return
- ----------------------------
The Fund may provide the above described standard total return results for
Class A, Class B, Class C and Class D shares for periods which end no earlier
than the most recent calendar quarter end and which begin one, five and ten
years before. In addition, the Fund may provide nonstandardized total return
results for differing periods, such as for the most recent six months, and/or
without taking sales charges into account. Such nonstandardized total return is
computed as otherwise described under "Total Return" except the result may or
may not be annualized, and as noted any applicable sales charge may not be taken
into account and therefore not deducted from the hypothetical initial payment of
$1,000. For example, the Fund's nonstandardized total returns for the six months
ended March 31, 1997 without taking sales charges into account, were as follows:
Class A 2.37%
Class B 2.00%
Class C 2.50%
Class D 1.99%
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
37
<PAGE>
asset value plus any applicable sales charge, the distribution rate will
increase as the net asset value declines. A distribution rate can be greater
than the yield rate calculated as described above.
The distribution rates of the Fund, based on the month of March 1997,
were as follows:
Class A 8.30%
Class B 7.95%
Class C 8.99%
Class D 7.93%
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 through electronic or other media. Shareholders with
substantial holdings in one or more State Street Research Funds may also receive
reports and other information which reflect or analyze their positions in a
consolidated manner. For more information, call State Street Research
Shareholder Services.
The following financial statements are for the Fund's fiscal year ended
March 31, 1997.
DOCSC\518443.3
38
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
March 31, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS 74.2%
Aerospace/Defense 1.5%
Dyncorp Inc. Sr. Sub. Note, 9.50%+ $ 2,250,000 3/01/2007 $ 2,193,750
Haynes International Inc. Sr. Note, 11.625% 5,240,000 9/01/2004 5,502,000
Ladish Company, Inc. Sr. Sub. Sec. Note, 12.00%++ 199,732 12/22/2000 213,234
Ladish Inc. Sr. Sub. Note, 12.00%++**@ 975,550 12/22/2000 908,530
Wyman-Gordon Co. Sr. Note, 10.75% 5,390,000 3/15/2003 5,740,350
--------------
14,557,864
--------------
Airlines 1.3%
CHC Helicopter Corp. Sr. Sub. Note, 11.50% 11,700,000 7/15/2002 12,051,000
--------------
Automotive Parts 0.2%
Exide Corp. Sr. Note, 10.00% 2,250,000 4/15/2005 2,250,000
--------------
Cable Television 5.2%
American Telecasting Inc. Sr. Note, 0.00% to
6/14/99, 14.50% from 6/15/99 to maturity 15,685,372 6/15/2004 5,333,027
American Telecasting Inc. Sr. Note Series B, 0.00%
to 8/14/2000, 14.50% from 8/15/2000 to maturity 4,545,000 8/15/2005 1,386,225
Intermedia Capital Partners LP Sr. Note, 11.25% 6,250,000 8/01/2006 6,375,000
Marcus Cable Co. L.P. Sr. Deb., 11.875% 6,500,000 10/01/2005 6,760,000
Marcus Cable Co. L.P. Sr. Note, 0.00% to 6/14/2000,
14.25% from 6/15/2000 to maturity 19,750,000 12/15/2005 13,627,500
Telewest Communications PLC Sr. Deb., 9.625% 2,000,000 10/01/2006 1,940,000
Wireless One Inc. Sr. Disc. Note, 13.00% 10,950,000 10/15/2003 7,117,500
Wireless One Inc. Sr. Note, 0.00% to 7/31/2001,
13.50% from 8/1/2001 to maturity 27,250,000 8/01/2006 7,357,500
--------------
49,896,752
--------------
Capital Goods/Equipment 4.3%
Celestica International Inc. Sr. Sub. Note, 10.50%+ 1,750,000 12/31/2006 1,837,500
<CAPTION>
- -----------------------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Capital Goods/Equipment (cont'd)
Chatwins Group Inc. Sr. Exch. Note, 13.00% $ 6,250,000 5/01/2003 $ 5,812,500
ICF International Inc. Sr. Sub. Note, 13.00% 10,250,000 6/30/1996 9,686,250
Intertek Financial Corp. Sr. Sub. Note, 10.25%+ 9,000,000 11/01/2006 9,270,000
Tokheim Corp. Sr. Sub. Note Series B, 11.50% 10,500,000 8/01/2006 11,235,000
Tracor Inc. Sr. Sub. Note, 8.50%+ 3,250,000 3/01/2007 3,120,000
--------------
40,961,250
--------------
Conglomerate 0.9%
Alvey Systems Inc. Sr. Sub. Note, 11.375% 7,375,000 1/31/2003 7,670,000
Axia Inc. Sr. Sub. Note Series B, 11.00% 750,000 3/15/2001 765,000
--------------
8,435,000
--------------
Consumer Goods & Services 3.0%
Anchor Advanced Products Inc. Sr. Note, 11.75%+ 3,000,000 4/01/2004 3,037,500
La Petite Holdings Corp. Sr. Sec. Notes, 9.625% 10,750,000 8/01/2001 10,535,000
Norcal Waste Systems Inc. Sr. Note Series B, 13.00%
to 5/14/97, 13.25% from 5/15/97 to 11/14/97,
13.50% from 11/15/97 to maturity 7,940,000 11/15/2005 8,734,000
Renaissance Cosmetics Inc. Sr. Note, 11.75%+ 1,000,000 2/15/2004 1,005,000
Rose Hills Acquisition Corp. Sr. Sub. Note, 9.50%+ 4,750,000 11/15/2004 4,797,500
--------------
28,109,000
--------------
Electric Utility 0.2%
Calpine Corp. Sr. Note, 9.25% 2,000,000 2/01/2004 2,000,000
--------------
Entertainment/Leisure 2.5%
Coleman Worldwide Corp. Sr. Sec. Liquid Yield
Option Note, 0.00% 65,000,000 5/27/2013 18,850,000
Premier Parks Inc. Sr. Note Series A, 12.00% 3,300,000 8/15/2003 3,630,000
Premier Parks Inc. Sr. Note, 9.75% 1,000,000 1/15/2007 1,015,000
--------------
23,495,000
--------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Food & Beverage 0.8%
Cafeteria Operators L.P. Sr. Sec. Note, 12.00% $ 8,082,980 12/31/2001 $ 7,759,661
--------------
Gaming & Lodging 0.5%
Belle Casinos Inc. First Mortgage Note, 12.00%+*** 700,000 10/15/2000 266,000
Mohegan Tribal Gaming Authority Sr. Sec. Notes
Series B, 13.50% 3,000,000 11/15/2002 3,870,000
Treasure Bay Gaming and Resorts, Inc. First
Mortgage Units, 12.25%+*** 1,000,000 11/15/2000 200,000
--------------
4,336,000
--------------
Grocery 2.5%
Electronic Retailing Systems International, Inc.
Unit, 13.25%+ 1,500,000 2/01/2004 1,012,500
Grand Union Co. Sr. Sub. Note, 12.00% 13,000,000 9/01/2004 12,772,500
Pathmark Stores Inc. Sub. Note, 11.625% 3,750,000 6/15/2002 3,871,875
Ralphs Grocery Co. Sr. Sub. Note, 13.75% 2,500,000 6/15/2005 2,675,000
Safeway Inc. Lease Certificate, 13.50% 90,123 1/15/2009 126,623
Star Market Inc. Sr. Sub. Note, 13.00% 2,500,000 11/01/2004 2,800,000
Victory Markets Inc. Sub. Deb., 12.50%*** 925,000 3/15/2000 46,250
--------------
23,304,748
--------------
Hospital/Health Care 1.8%
Dade International Inc. Sr. Sub. Note, 11.125% 4,000,000 5/01/2006 4,510,000
Healthsource Inc. Sub. Cv. Note, 5.00% 2,000,000 3/01/2003 1,962,500
Owens & Minor Inc. Sr. Sub. Note, 10.875% 1,875,000 6/01/2006 2,020,313
Quest Diagnostics Inc. Sr. Sub. Note, 10.75% 5,250,000 12/15/2006 5,407,500
Theratx, Inc. Cv. Sub. Deb., 8.00% 3,000,000 2/01/2002 2,902,500
--------------
16,802,813
--------------
<CAPTION>
- -----------------------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Media 9.9%
Affiliated Newspapers Investments, Inc. Sr. Deb.,
0.00% to 6/30/99, 13.25% from 7/1/99 to maturity $ 3,000,000 7/01/2006 $ 2,550,000
Affinity Group Inc. Sr. Sub. Deb., 11.50% 5,250,000 10/15/2003 5,512,500
Allbritton Communications Co. Sr. Sub. Deb., 11.50% 5,000,000 8/15/2004 5,225,000
Benedek Broadcasting Corp. Sr. Note, 11.875% 6,250,000 3/01/2005 6,875,000
Benedek Communications Corp. Sr. Sub. Note, 0.00%
to 5/14/2001, 13.25% from 5/15/2001 to maturity 16,500,000 5/15/2006 9,570,000
Busse Broadcasting Corp. Sr. Sec. Note, 11.625% 4,000,000 10/15/2000 4,210,000
Capstar Broadcasting Partners Sr. Note, 0.00% to
1/31/2002, 12.75% from 2/1/2002 to maturity+ 15,500,000 2/01/2009 8,215,000
Lamar Advertising Co. Sr. Sub. Note, 9.625% 3,250,000 12/01/2006 3,250,000
Muzak L.P. Sr. Note, 10.00% 3,000,000 10/01/2003 3,030,000
Outdoor Systems Inc. Sr. Sub. Note, 9.375% 11,250,000 10/15/2006 11,475,000
Spanish Broadcasting Systems Inc. Sr. Note, 7.50%
to 6/14/97, 12.50% from 6/15/97 to maturity 13,250,000 6/15/2002 14,177,500
Sun Media Corp. Sr. Sub. Note, 9.50%+ 3,000,000 2/15/2007 2,850,000
Telemundo Group Inc. Sr. Note, 7.00% to 2/14/99,
10.50% from 2/15/99 to maturity 7,000,000 2/15/2006 6,895,000
TV Azteca SA de CV Sr. Note Series B, 10.50%+ 3,500,000 2/15/2007 3,410,190
Universal Outdoor Inc. Sr. Sub. Note, 9.75% 6,000,000 10/15/2006 5,940,000
Universal Outdoor Inc. Sr. Sub. Note Series B,
9.75%+ 1,250,000 10/15/2006 1,237,500
--------------
94,422,690
--------------
Metals/Mining/Steel 5.4%
Crown Resources Corp. Cv. Sub. Deb., 5.75% 220,000 8/27/2001 193,600
Envirosource Inc. Note, 9.75% 17,875,000 6/15/2003 17,428,125
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Metals/Mining/Steel (cont'd)
Euramax International PLC Sr. Sub. Note, 11.25% $ 2,500,000 10/01/2006 $ 2,631,250
GS Technologies Operating Inc. Sr. Note, 12.00% 5,250,000 9/01/2004 5,486,250
NS Group Inc. Sr. Sec. Note, 13.50% 14,500,000 7/15/2003 15,515,000
Sheffield Steel Corp. First Mortgage Note, 12.00% 10,750,000 11/01/2001 10,105,000
--------------
51,359,225
--------------
Oil & Gas 5.3%
Empire Gas Corp. Sr. Sec. Note, 7.00% to 7/14/99,
12.875% from 7/15/99 to maturity 11,500,000 7/15/2004 10,005,000
Moran Energy Inc. Cv. Deb., 8.75% 2,420,000 1/15/2008 2,117,500
TransAmerican Refining Corp. Sr. Note, 0.00% to
2/14/98, 18.50% from 2/15/98 to 8/14/98, 18.00%
from 8/15/98 to maturity 10,000,000 2/15/2002 9,150,000
TransAmerican Refining Corp. Sr. Note, 16.50% to
8/14/98, 16.00% from 8/15/98 to maturity 5,190,000 2/15/2002 5,605,200
TransTexas Gas Corp. Sr. Sec. Note, 11.50% 21,713,000 6/15/2002 23,775,735
--------------
50,653,435
--------------
Paper Products 2.8%
Crown Packaging Enterprises Ltd. Sr. Sec. Note,
14.00%+ 9,000,000 8/01/2006 1,530,000
Crown Packaging Ltd. Sr. Sec. Note, 10.75% 1,000,000 11/01/2000 945,000
Mail-Well Envelope Corp. Sr. Sub. Note, 10.50% 2,250,000 2/15/2004 2,351,250
Packaging Resources Inc. Sr. Sec. Note, 11.625% 12,250,000 5/01/2003 12,678,750
Spinnaker Industries Inc. Sr. Sec. Note, 10.75%+ 9,000,000 10/15/2006 9,270,000
--------------
26,775,000
--------------
Plastics 1.2%
Plastic Containers Inc. Sr. Sec. Note, 10.00%+ 1,250,000 12/15/2006 1,262,500
Plastic Specialties & Technologies, Inc. Sr. Note,
11.25% 9,750,000 12/01/2003 10,530,000
--------------
11,792,500
--------------
<CAPTION>
- -----------------------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Real Estate/Building 0.9%
Miles Homes Services Inc. Sr. Note, 12.00% $ 2,000,000 4/01/2001 $ 1,620,000
Overhead Door Corp. Note, 12.25% 7,000,000 2/01/2000 7,350,000
--------------
8,970,000
--------------
Retail Trade 1.0%
Almacs Inc. Sr. Sub. Note, 11.50%** 1,000 11/18/2004 20
Finlay Enterprises, Inc. Sr. Deb., 0.00% to
4/30/98, 12.00% from 5/1/98 to maturity 10,070,000 5/01/2005 9,314,750
--------------
9,314,770
--------------
Technology/Communications 23.0%
Advanced Radio Telecom Corp. Unit, 14.00% 6,500,000 2/15/2007 7,085,000
Anacomp Inc. Sr. Sub. Note, 13.00%** 13,605,260 6/04/2002 14,557,628
Brooks Fiber Properties Inc. Sr. Note, 0.00% to
2/28/2001, 10.875% from 3/1/2001 to maturity 5,500,000 3/01/2006 3,410,000
Celcaribe SA Sr. Sec. Note, 0.00% to 3/14/98,
13.50% from 3/15/98 to maturity 5,810,000 3/15/2004 5,229,000
Clearnet Communications Inc. Sr. Note, 0.00% to
12/14/2000, 14.75% from
12/15/2000 to maturity 27,100,000 12/15/2005 16,666,500
Dial Callable Communications Inc. Sr. Note, 0.00%
to 4/14/99, 12.25% from 4/15/99 to maturity 10,750,000 4/15/2004 7,740,000
Echostar Satellite Broadcast Corp. Sr. Sec. Note,
0.00% to 3/14/2000, 13.125% from 3/15/2000 to
maturity 9,000,000 3/15/2004 7,110,000
Geotek Communications Inc. Sr. Note Series B, 0.00%
to 7/14/2000, 15.00% from 7/15/2000 to maturity 6,000,000 7/15/2005 3,450,000
ICG Holdings Inc. Sr. Note, 0.00% to 9/14/2000,
13.50% from 9/15/2000 to maturity 20,575,000 9/15/2005 13,785,250
Intercel Inc. Sr. Note, 0.00% to 1/31/2001, 12.00%
from 2/1/2001 to maturity 2,650,000 2/01/2006 1,590,000
Ionica PLC Sr. Note, 13.50% 8,500,000 8/15/2006 8,500,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Technology/Communications (cont'd)
Mobile Telecommunication Technology, Inc. Sr. Sub.
Disc. Note, 13.50% $ 7,500,000 12/15/2002 $ 7,050,000
Nextel Communications Inc. Sr. Note, 0.00% to
2/14/99, 9.75% from 2/15/99 to maturity 16,000,000 8/15/2004 10,880,000
Orion Network Systems Inc. Unit, 11.25% 14,250,000 1/15/2007 14,036,250
Pagemart Inc. Sr. Exch. Note, 0.00% to 10/31/98,
12.25% from 11/1/98 to maturity 7,400,000 11/01/2003 5,920,000
Pagemart Nationwide Inc. Sr. Exch. Note, 0.00% to
1/31/2000,15.00% from 2/1/2000 to maturity 16,750,000 2/01/2005 11,515,625
Phonetel Technologies Inc. Sr. Note, 12.00% 1,500,000 12/15/2006 1,501,875
Pricellular Wireless Corp. Sr. Note, 10.75% 6,000,000 11/01/2004 6,075,000
Protection One Alarm Inc. Sr. Sub. Note, 0.00% to
6/29/98, 13.625% from 6/30/98 to maturity 6,000,000 6/30/2005 5,700,000
Qwest Communications International Inc. Sr. Note,
10.875%+ 2,000,000 4/01/2007 1,970,000
Real Time Data Inc. Unit, 0.00% to 8/14/2001,
13.50% from 8/15/2001 to maturity+ 17,436,000 8/15/2006 9,415,440
RSL Communications Ltd. Unit, 12.25%+ 12,500,000 11/15/2006 12,500,000
U.S.A. Mobile Communications Inc. Sr. Note, 9.50% 7,120,000 2/01/2004 6,123,200
U.S.A. Mobile Communications Inc. Sr. Note, 14.00% 11,000,000 11/01/2004 11,770,000
Viatel Inc. Sr. Note, 0.00% to 1/14/2000, 15.00%
from 1/15/2000 to maturity 5,190,000 1/15/2005 3,269,700
Winstar Communications Inc. Sr. Sub. Cv. Note,
0.00% to 10/14/2000, 14.00% from 10/15/2000 to
maturity+ 6,525,000 10/15/2005 4,110,750
Winstar Equipment Corp. Sr. Sec. Note, 12.50%+ 18,250,000 3/15/2004 17,839,375
--------------
218,800,593
--------------
Total Bonds (Cost $716,310,042) 706,047,301
--------------
</TABLE>
- -----------------------------------------------------------------------------
Value
Shares (Note 1)
- -----------------------------------------------------------------------------
PREFERRED STOCKS 14.7%
Automotive 0.1%
Harvard Industries Inc. 14.25% Exch. Pfd.** 423,790 1,218,396
--------------
Bank 0.3%
Riverbank America Pfd.* 110,000 2,640,000
--------------
Business Service 1.6%
La Petite Holdings Corp. Cum. Red. Exch. Pfd.* 361,000 14,710,750
--------------
Cable Television 0.6%
Cablevision Systems Corp. Series B Pfd. 57,913 5,168,735
--------------
Chemical 1.9%
Atlantic Richfield Co. Exch. Note 836,800 18,409,600
--------------
Electric 0.0%
Consolidated Hydro Inc. Cv. Pfd.* 2,000 300,000
--------------
Food & Beverage 0.1%
Silgan Holdings Inc. Exch. Pfd.* 1,065 1,235,400
--------------
Financial Service 0.6%
Gentra Inc. Series G Pfd.* 100,100 1,418,897
Gentra Inc. Series J Pfd.* 264,102 3,672,057
Gentra Inc. Series Q Pfd.* 70,300 787,035
--------------
5,877,989
--------------
Forest Product 0.7%
Equitable Bag Inc. Series A Pfd.* 134,760 2,897,340
S.D. Warren Co. Series B Sr. Exch. Pfd.* 108,000 4,023,000
--------------
6,920,340
--------------
Gaming & Lodging 0.4%
Station Casinos Inc. Cv. Pfd. 78,600 3,389,625
--------------
Hotel & Restaurant 0.5%
Ameriking Inc. Sr. Exch. Pfd.* 191,000 5,061,500
--------------
Media 2.3%
American Radio Systems Corp. Exch. Pfd.+ 12,500 1,225,000
Granite Broadcasting Corp. Cv. Exch. Pfd. 114,700 5,620,300
Granite Broadcasting Corp. Exch. Pfd.+ 15,250 14,106,250
SFX Broadcasting Inc. Series E Pfd. 10,000 990,000
--------------
21,941,550
--------------
Personal Care 0.0%
Renaissance Cosmetics Inc. Sr. Exch. Pfd.+** 72 63,000
--------------
Printing & Publishing 3.8%
Hollinger International, Inc. Cv. Pfd. 2,000,000 20,000,000
K-III Communications Corp. Series B Exch. Pfd.** 73,485 8,028,227
K-III Communications Corp. Series D Exch. Pfd.* 80,000 8,020,000
--------------
36,048,227
--------------
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Value
Shares (Note 1)
- -----------------------------------------------------------------------------------
<S> <C> <C>
Retail Trade 1.4%
Supermarkets General Holdings Corp. Exch. Pfd.** 568,540 $13,502,825
--------------
Telephone 0.4%
ICG Holdings Inc. Exch. Pfd.* 3,890 3,890,000
--------------
Total Preferred Stocks (Cost $151,798,079) 140,377,937
--------------
COMMON STOCKS & OTHER 4.6%
American Communications Services, Inc. Wts.*+ 9,500 285,000
American Telecasting Inc. Wts.* 41,130 41,130
Ameriking Inc. Com.*+ 4,775 238,750
Anacomp Inc. Com.* 873,507 9,608,577
Anacomp Inc. Wts.* 25,848 96,930
Axia Holding Corp. Com.*++ 2,250 90,000
Bar Technologies Inc. Wts.*+ 4,250 191,250
Belle Casinos Inc. Wts.*+ 1,400 14
Boomtown Inc. Wts.*+ 7,250 15
Celcaribe SA Trust Certificates*+ 944,706 2,125,588
Central Rents Inc. Com.*+ 5,250 288,750
Chatwins Group Inc. Wts.*+ 7,000 7,000
CHC Helicopter Corp. Wts.*++ 46,000 23,000
Clearnet Communications Inc. Wts.* 85,305 490,504
County Seat Holdings Inc. Wts.*++ 2,000 20
Crown Packaging Enterprises Ltd. Com.*+ 1,170,000 11,700
Crown Packaging Holdings Ltd. Wts.*+ 20,750 2,594
DeGeorge Financial Corp. Wts.* 51,000 12,750
Dr Pepper Bottling Holdings Inc. Cl. A Com.* 50,000 700,000
Empire Gas Corp. Wts.*++ 2,760 13,800
Equitable Bag Inc. Com.* 1,347,600 673,800
Fitzgeralds South Inc. Wts.*++ 3,750 37,500
Goldriver Hotel & Casino Corp. Cl. B Com.*++ 52,500 6,563
Goldriver Hotel & Casino Corp. Liquidation Trust
Units*++ 5,250,000 66,675
Heartland Wireless Communications, Inc. Wts.*++ 37,500 37,500
ICF Kaiser International Inc. Wts.* 49,200 24,600
Indspec Chemical Corp. Wts.*++@ 506 1,479,630
Insight Capital Corp. Wts.*++ 25,000 68,750
Intelcom Group, Inc. Wts.*++ 21,450 257,400
Intercel Inc. Wts.* 8,480 50,880
Intermedia Communications Inc. Wts.*+ 1,500 30,000
Ionica PLC Wts.*+ 9,500 1,377,500
Jewel Recovery L.P. Units*++ 82,595 826
Ladish Co., Inc. Wts.++@* 520,000 975,000
LTX Corp. Com.* 145,000 715,937
Mail-Well Holdings, Inc. Com.*++ 14,205 280,549
<CAPTION>
- -----------------------------------------------------------------------------------
Value
Shares (Note 1)
- -----------------------------------------------------------------------------------
<S> <C> <C>
Motels of America Inc. Com.*+ 5,500 $ 63,250
Nextel Communications Inc. Wts.* 1,250 38
NS Group Inc. Wts.*+ 13,250 39,750
Pagemart Inc. Wts.*+ 21,850 87,400
Pagemart Nationwide Inc. Com.*+ 18,375 101,062
Pegasus Communications Corp. Cl. A Com.*+ 8,461 93,071
Plastic Specialties & Technologies, Inc. Com.* 45,300 135,900
Protection One Inc. Wts.*+ 10,400 70,200
Ralphs Grocery Co. Wts.*++@ 401,762 4,050,086
Renaissance Cosmetics Inc. Com.*+ 1,000 1,000,000
Renaissance Cosmetics Inc. Wts.*+ 2,000 100,000
Sabreliner Corp. Wts.*+ 1,750 5,250
SDW Holdings Corp. Wts.* 108,000 459,000
Seven-Up / RC Bottling Company of Southern California
Com.* 472,500 5,610,937
Sheffield Steel Corp. Wts.* 38,750 116,250
Tom Brown, Inc. Com.* 283,304 5,241,124
Town & Country Corp. Cl. A Com.*++@ 188,526 58,914
TransAmerican Refining Corp. Wts.* 12,626 25,252
Universal Outdoor Holdings Inc. Com.* 155,200 4,500,800
Vestar/LPA Investment Corp. Com.*+ 14,250 142,500
Viatel Inc. Com.*+ 108,300 649,800
Waxman Industries Inc. Wts.*+ 236,000 708,000
Wireless One Inc. Wts.*+ 16,500 16,500
Wireless One Inc. Wts.* 27,250 20,437
--------------
Total Common Stocks & Other (Cost $32,700,049) 43,606,003
--------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Principal Maturity
Amount Date
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM OBLIGATIONS 5.4%
Beneficial Corp., 5.55% $14,458,000 4/01/1997 14,458,000
Commercial Credit Co., 5.45% 10,000,000 4/02/1997 10,000,000
Ford Motor Credit Co., 5.65% 11,730,000 4/07/1997 11,730,000
General Electric Capital Corp., 5.63% 8,448,000 4/03/1997 8,448,000
General Electric Capital Corp., 5.65% 6,813,000 4/03/1997 6,813,000
--------------
Total Short-Term Obligations (Cost $51,449,000) 51,449,000
--------------
Total Investments (Cost $952,257,170) - 98.9% 941,480,241
Cash and Other Assets, Less Liabilities - 1.1% 10,751,937
--------------
Net Assets - 100.0% $952,232,178
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Federal Income Tax Information (Note 1):
At March 31, 1997, the net unrealized depreciation
of investments based on cost for Federal income
tax purposes of $952,442,680 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost $ 51,153,778
Aggregate gross unrealized depreciation for all
investments in which there is an excess of value
over tax cost (62,116,217)
---------------
$(10,962,439)
===============
- --------------------------------------------------------------------------------
*Nonincome-producing securities
**Payments of income may be made in cash or in the form of additional
securities.
***Security is in default.
@Security valued under consistently applied procedures established by the
Trustees.
++Security restricted as to public resale. At March 31, 1997, 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,
1997 were $4,032,871 and $8,567,977 (0.90% 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, 1997 were $128,334,504 and $123,379,699
(12.96% of net assets), respectively.
ASSET COMPOSITION TABLE
March 31, 1997 (Unaudited)
Percentage of
Ratings+++ Net Assets*
- ---------- -----------
BB 4.4%
B 59.9
CCC and below 9.9
Equities 19.3
Other 6.5
-----
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.
8
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
- --------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------
March 31, 1997
Assets
Investments, at value (Cost $952,257,170) (Note 1) $941,480,241
Cash 28,628
Interest and dividends receivable 15,646,022
Receivable for securities sold 4,684,543
Receivable for fund shares sold 1,722,546
Other assets 39,427
-------------
963,601,407
Liabilities
Payable for securities purchased 5,110,773
Dividends payable 2,631,925
Payable for fund shares redeemed 2,000,197
Accrued transfer agent and shareholder services (Note 2) 573,330
Accrued management fee (Note 2) 538,356
Accrued distribution and service fees (Note 4) 392,014
Accrued trustees' fees (Note 2) 10,850
Other accrued expenses 111,784
-------------
11,369,229
-------------
Net Assets $952,232,178
=============
Net Assets consist of:
Undistributed net investment income $ 6,713,699
Unrealized depreciation of investments (10,776,929)
Accumulated net realized loss (26,194,290)
Shares of beneficial interest 982,489,698
-------------
$952,232,178
=============
Net Asset Value and redemption price per share of Class A
shares ($658,412,513 [divided by] 109,584,701 shares of
beneficial interest) $6.01
=====
Maximum Offering Price per share of Class A shares ($6.01
[divided by] .955) $6.29
=====
Net Asset Value and offering price per share of
Class B shares ($259,077,249 [divided by] 43,309,066
shares of beneficial interest)* $5.98
=====
Net Asset Value, offering price and redemption price per
share of Class C shares ($6,254,742 [divided by] 1,046,284
shares of beneficial interest) $5.98
=====
Net Asset Value and offering price per share of
Class D shares ($28,487,674 [divided by] 4,757,298 shares
of beneficial interest)* $5.99
=====
- --------------------------------------------------------------------------------
* 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, 1997
Investment Income
Interest, net of foreign taxes of $46,751 $91,335,450
Dividends 7,006,175
------------
98,341,625
Expenses
Management fee (Note 2) 5,911,041
Transfer agent and shareholder services (Note 2) 1,284,233
Custodian fee 210,634
Service fee--Class A (Note 4) 1,649,935
Distribution and service fees--Class B (Note 4) 2,236,399
Distribution and service fees--Class D (Note 4) 207,441
Reports to shareholders 130,348
Audit fee 40,817
Registration fees 38,972
Trustees' fees (Note 2) 29,250
Legal fees 3,393
Miscellaneous 44,406
------------
11,786,869
------------
Net investment income 86,554,756
------------
Realized and Unrealized (Gain) Loss on Investments
Net realized gain on investments (Notes 1 and 3) 5,358,925
Net unrealized depreciation of investments (6,463,064)
------------
Net loss on investments (1,104,139)
------------
Net increase in net assets resulting from operations $85,450,617
============
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
- ------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------
Year ended March 31
--------------------------------
1997 1996
- ----------------------------------------------------------------------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 86,554,756 $ 69,201,345
Net realized gain (loss) on
investments* 5,358,925 (16,029,655)
Net unrealized appreciation
(depreciation) of investments (6,463,064) 43,116,209
------------ ------------
Net increase resulting from operations 85,450,617 96,287,899
------------ ------------
Dividends from net investment income:
Class A (58,427,483) (60,859,257)
Class B (18,222,317) (13,275,143)
Class C (463,672) (319,668)
Class D (1,682,938) (1,000,485)
------------ ------------
(78,796,410) (75,454,553)
------------ ------------
Distribution from net realized
gains:
Class A -- (804,838)
Class B -- (159,995)
Class C -- (3,577)
Class D -- (10,572)
------------ ------------
-- (978,982)
------------ ------------
Net increase from fund share
transactions (Note 5) 94,267,308 85,881,692
------------ ------------
Total increase in net assets 100,921,515 105,736,056
Net Assets
Beginning of year 851,310,663 745,574,607
------------ ------------
End of year (including undistributed
net investment income of $6,713,699
and $635,185, respectively) $952,232,178 $851,310,663
============ ============
* Net realized gain (loss) for Federal
income tax purposes (Note 1) $ 10,417,121 $(27,502,856)
============ ============
- ------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------
March 31, 1997
Note 1
State Street Research High Income Fund, (the "Fund"), is a series of State
Street Research 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 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.
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
- --------------------------------------------------------------------------------
NOTES (cont'd)
- --------------------------------------------------------------------------------
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, 1997, the
Fund had a capital loss carryforward of $20,803,392 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, 1996
through March 31, 1997, the Fund incurred net capital losses of $5,068,197
and has deferred and treated such losses as arising in the fiscal year ended
March 31, 1998.
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, 1997, the fees pursuant to
such agreement amounted to $5,911,041.
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, 1997, the amount of such
expenses was $288,490.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $29,250 during the year ended March 31, 1997.
Note 3
For the year ended March 31, 1997, purchases and sales of securities,
exclusive of short-term investments, aggregated $803,583,108 and
$707,229,117, 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 or servicing 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, 1997, fees
pursuant to such plan amounted to $1,649,935, $2,236,399, and $207,441 for
Class A, Class B and Class D shares, respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly owned subsidiary of Metropolitan, earned initial sales charges
aggregating $294,695 and $1,737,055 respectively, on sales of Class A shares
of the Fund during the year ended March 31, 1997, and that MetLife
Securities, Inc. earned commissions aggregating $1,356,752 on sales of Class
B shares, and that the Distributor collected contingent deferred sales
charges aggregating $493,705 and $61,492 on redemptions of Class B and Class
D shares, respectively, during the same period.
11
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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, 1997, the
Distributor owned 7,018 Class A shares and Metropolitan owned 1,567 Class B
and 16,155 Class D shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended March 31
-----------------------------------------------------------------
1997 1996
------------------------------- --------------------------------
Class A Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 15,602,119 $ 94,973,592 18,288,203 $ 107,141,811
Issued upon reinvestment of:
Dividends from net investment income 6,212,698 37,840,814 6,699,217 39,227,013
Distribution from net realized gains -- -- 110,651 647,284
Shares repurchased (20,888,291) (127,047,788) (22,983,923) (134,676,806)
----------- ------------ ----------- ------------
Net increase 926,526 $ 5,766,618 2,114,148 $ 12,339,302
=========== ============ =========== ============
Class B Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------
Shares sold 15,907,481 $ 96,551,028 14,268,713 $ 83,337,086
Issued upon reinvestment of:
Dividends from net investment income 1,668,549 10,129,956 1,319,995 7,702,343
Distribution from net realized gains -- -- 21,578 125,811
Shares repurchased (5,605,180) (33,954,283) (4,623,289) (27,005,817)
----------- ------------ ----------- ------------
Net increase 11,970,850 $ 72,726,701 10,986,997 $ 64,159,423
=========== ============ =========== ============
Class C Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------
Shares sold 733,872 $ 4,470,033 458,494 $ 2,676,110
Issued upon reinvestment of:
Dividends from net investment income 58,765 357,467 42,106 245,608
Distribution from net realized gains -- -- 486 2,834
Shares repurchased (394,609) (2,403,760) (298,694) (1,741,339)
----------- ------------ ----------- ------------
Net increase 398,028 $ 2,423,740 202,392 $ 1,183,213
=========== ============ =========== ============
Class D Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------
Shares sold 2,630,966 $ 16,046,241 1,922,890 $ 11,234,354
Issued upon reinvestment of:
Dividends from net investment income 163,926 998,823 76,557 447,554
Distribution from net realized gains -- -- 1,314 7,661
Shares repurchased (609,727) (3,694,815) (596,429) (3,489,815)
----------- ------------ ----------- ------------
Net increase 2,185,165 $ 13,350,249 1,404,332 $ 8,199,754
=========== ============ =========== ============
</TABLE>
12
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------------
Year ended March 31
--------------------------------------------------------------
1997* 1996* 1995* 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 5.95 $ 5.80 $ 6.43 $ 6.32 $ 5.95
Net investment income 0.59 0.52 0.61 0.66 0.67
Net realized and unrealized gain
(loss) on investments (0.01) 0.20 (0.58) 0.22 0.37
----- ----- ----- ----- -----
Total from investment operations 0.58 0.72 0.03 0.88 1.04
----- ----- ----- ----- -----
Dividends from net investment income (0.52) (0.56) (0.60) (0.62) (0.67)
Distributions from net realized gains -- (0.01) (0.06) (0.15) --
----- ----- ----- ----- -----
Total distributions (0.52) (0.57) (0.66) (0.77) (0.67)
----- ----- ----- ----- -----
Net asset value, end of year $6.01 $5.95 $5.80 $6.43 $6.32
===== ===== ===== ===== =====
Total return 10.30%+ 12.85%+ 1.80%+ 14.58%+ 18.70%+
Net assets at end of year (000s) $658,413 $646,473 $618,462 $650,755 $496,352
Ratio of operating expenses to
average net assets 1.10% 1.17% 1.23% 1.16% 1.15%
Ratio of net investment income to
average net assets 9.70% 8.88% 10.19% 10.41% 11.25%
Portfolio turnover rate 81.75% 56.47% 31.55% 24.36% 79.39%
Average commission rate@ $0.0152 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
Class B
------------------------------------------------
Year ended March 31
------------------------------------------------
1997* 1996* 1995* 1994**
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 5.93 $ 5.79 $ 6.42 $ 6.34
Net investment income 0.55 0.46 0.57 0.51
Net realized and unrealized gain
(loss) on investments (0.02) 0.21 (0.58) 0.15
----- ----- ----- -----
Total from investment operations 0.53 0.67 (0.01) 0.66
----- ----- ----- -----
Dividends from net investment income (0.48) (0.52) (0.56) (0.48)
Distributions from net realized gains -- (0.01) (0.06) (0.10)
----- ----- ----- -----
Total distributions (0.48) (0.53) (0.62) (0.58)
----- ----- ----- -----
Net asset value, end of year $5.98 $5.93 $5.79 $6.42
===== ===== ===== =====
Total return 9.35%+ 12.06%+ 0.89%+ 10.76%+++
Net assets at end of year (000s) $259,077 $185,735 $117,767 $67,337
Ratio of operating expenses to
average net assets 1.85% 1.92% 1.98% 1.93%++
Ratio of net investment income to
average net assets 9.01% 7.95% 9.65% 10.32%++
Portfolio turnover rate 81.75% 56.47% 31.55% 24.36%
Average commission rate@ $0.0152 -- -- --
</TABLE>
<TABLE>
<CAPTION>
Class C
----------------------------------------------------
Year ended March 31
----------------------------------------------------
1997* 1996* 1995* 1994**
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 5.92 $ 5.78 $ 6.42 $ 6.34
Net investment income 0.61 0.53 0.64 0.57
Net realized and unrealized gain
(loss) on investments (0.01) 0.20 (0.60) 0.14
------ ------ ------ ------
Total from investment operations 0.60 0.73 0.04 0.71
------ ------ ------ ------
Dividends from net investment income (0.54) (0.58) (0.62) (0.53)
Distributions from net realized gains -- (0.01) (0.06) (0.10)
------ ------ ------ ------
Total distributions (0.54) (0.59) (0.68) (0.63)
------ ------ ------ ------
Net asset value, end of year $ 5.98 $ 5.92 $ 5.78 $ 6.42
====== ====== ====== ======
Total return 10.63%+ 13.19%+ 1.73%+ 11.67%+++
Net assets at end of year (000s) $6,255 $3,840 $2,579 $851
Ratio of operating expenses to
average net assets 0.85% 0.92% 0.98% 0.93%++
Ratio of net investment income to
average net assets 10.04% 8.97% 10.85% 11.32%++
Portfolio turnover rate 81.75% 56.47% 31.55% 24.36%
Average commission rate@ $0.0152 -- -- --
</TABLE>
<TABLE>
<CAPTION>
Class D
-------------------------------------------------
Year ended March 31
-------------------------------------------------
1997* 1996* 1995* 1994**
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 5.93 $ 5.79 $ 6.42 $ 6.34
Net investment income 0.54 0.46 0.58 0.51
Net realized and unrealized gain
(loss) on investments (0.00) 0.21 (0.59) 0.15
------ ------ ------ ------
Total from investment operations 0.54 0.67 (0.01) 0.66
------ ------ ------ ------
Dividends from net investment income (0.48) (0.52) (0.56) (0.48)
Distributions from net realized gains -- (0.01) (0.06) (0.10)
------ ------ ------ ------
Total distributions (0.48) (0.53) (0.62) (0.58)
------ ------ ------ ------
Net asset value, end of year $ 5.99 $ 5.93 $ 5.79 $ 6.42
====== ====== ====== ======
Total return 9.52%+ 12.05%+ 0.88%+ 10.74%+++
Net assets at end of year (000s) $28,488 $15,262 $6,766 $2,661
Ratio of operating expenses to
average net assets 1.85% 1.92% 1.98% 1.93%++
Ratio of net investment income to
average net assets 9.09% 7.91% 9.81% 10.32%++
Portfolio turnover rate 81.75% 56.47% 31.55% 24.36%
Average commission rate@ $ 0.0152 -- -- --
</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.
@ For fiscal years beginning on or after April 1, 1996, the Fund is required
to disclose its average commission rate per share paid for security trades.
13
<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 (a series of State Street Research Income Trust, hereafter
referred to as the "Trust") at March 31, 1997, 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, 1997 by correspondence
with the custodian and brokers and the application of alternative procedures
where confirmations from brokers were not received, provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
May 9, 1997
14
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
High Income Fund turned in a solid performance but slightly underperformed
the average of its competitive group. Class A shares generated a total return
of 10.30% (does not reflect sales charge) versus the average of 11.35% of the
154 fund classes in Lipper Analytical Services' High Current Yield Funds
category.
The environment was positive for high-yield bonds for most of the past year.
At the end of 1996, however, interest rates began to rise. Throughout 1996
and the first part of 1997, the economic climate was favorable and demand was
strong from both traditional and non-traditional investors in high-yield
bonds. Inflation was low and interest rates were stable.
High-yield bonds were the top-performing U.S. fixed- income sector during the
past year and were the only U.S. fixed-income sector to generate a positive
return in the first quarter of 1997. In addition to the attractive yields in
an otherwise low-interest-rate environment, positive events, such as
takeovers, pushed high-yield bond prices higher. This demand drove yields in
this sector to historically low levels relative to higher- quality
fixed-income investments. High-yield bonds maintained their value better than
most U.S. fixed- income sectors during this time.
The Fund was primarily invested in B-rated bonds. These bonds tended to
benefit from the healthy economic environment and provided attractive yields.
Fund management believes that B-rated bonds help add more value through the
firm's fundamental credit research. In terms of sectors, telecommunications
was a point of focus over the past year.
The yields of lower-quality bonds recently have risen, making them more
attractive. If rates continue to rise, we will continue our emphasis on
B-rated bonds.
March 31, 1997
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 part of
its objective and to allow greater use of lower-rated securities, and
convertible and preferred securities. Performance for a class may include
periods prior to the adoption of class designations in 1993, which resulted
in new or increased 12b-1 fees of up to 1% per class thereafter and which
will reduce subsequent performance. Performance reflects maximum 4.5% "A"
share front-end sales charge, or 5% "B" share or 1% "D" share contingent
deferred sales charges, where applicable. "C" shares, offered without a sales
charge, are available only to certain employee benefit plans and large
institutions. The First Boston High Yield Index is a commonly used measure of
bond market performance. The index is unmanaged and does not take transaction
charges into consideration. Direct investment in the index is not possible;
results are for illustrative purposes only.
Change In Value of $10,000
Based On The First Boston High Yield Index
Compared to Change In Value of $10,000
Invested In High Income Fund
[LINE CHART CLASS A SHARES]
High Income Fund First Boston High Yield Index
3/87 9550 10000
3/88 10004 10613
3/89 11247 11612
3/90 10484 11162
3/91 10713 12713
3/92 13814 16682
3/93 16397 19243
3/94 18786 21159
3/95 19124 22176
3/96 21581 25398
3/97 23804 28363
[LINE CHART CLASS B SHARES]
High Income Fund First Boston High Yield Index
3/87 10000 10000
3/88 10475 10613
3/89 11767 11612
3/90 10978 11162
3/91 11218 12713
3/92 12182 16682
3/93 17169 19243
3/94 19526 21159
3/95 19700 22176
3/96 22076 25398
3/97 24140 28363
[LINE CHART CLASS C SHARES]
High Income Fund First Boston High Yield Index
3/87 10000 10000
3/88 10475 10613
3/89 11767 11612
3/90 10978 11162
3/91 11218 12713
3/92 14465 16682
3/93 17169 19243
3/94 19685 21159
3/95 20025 22176
3/96 22668 25398
3/97 25076 28363
[LINE CHART CLASS D SHARES]
High Income Fund First Boston High Yield Index
3/87 10000 10000
3/88 10475 10613
3/89 11767 11612
3/90 10978 11162
3/91 11218 12713
3/92 14465 16682
3/93 17169 19243
3/94 19522 21159
3/95 19693 22176
3/96 22066 25398
3/97 24166 28363
15
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
- --------------------------------------------------------------------------------
REPORT ON SPECIAL MEETING OF SHAREHOLDERS
- --------------------------------------------------------------------------------
A Special Meeting of Shareholders of the State Street Research High Income Fund
("Fund"), along with shareholders of other series of State Street Research
Income Trust ("Meeting"), was convened on July 19, 1996. The results of the
Meeting are set forth below.
Votes (millions of
shares)
------------------
For Withheld
--- --------
1. The following persons were elected as Trustees:
Thomas L. Phillips 97.9 2.6
Toby Rosenblatt 98.2 2.3
Ralph F. Verni 98.0 2.5
<TABLE>
<CAPTION>
Votes (millions
of shares)
--------------------------
Against
For Proposal Abstain
- -------------------------------------------------------------------------------------------------------- ------- ---------- -------
<S> <C> <C> <C>
Proposal
2. The Fund's following investment policies were reclassified from fundamental to nonfundamental:
a. The policy regarding investments in securities of companies with less than three (3) years'
continuous operation 67.9 3.7 5.9
c. The policy regarding arbitrage and warrants 67.8 3.2 6.4
3. The Fund's fundamental policy regarding investments in commodities and commodity contracts was amended 67.5 4.0 6.0
4. The Fund's fundamental policy on lending was amended to clarify the permissibility of securities
lending 67.2 3.9 6.3
5. The Fund's fundamental policies regarding diversification of investments were amended 68.8 2.7 5.9
6. The Fund's fundamental policy regarding industry concentration was amended 68.4 3.0 6.1
7. The Fund's fundamental policy regarding participation in underwritings was amended 67.7 3.1 6.6
8. The Master Trust Agreement was amended to permit the Trustees to reorganize, merge or liquidate a fund
without prior shareholder approval 83.0 9.8 7.6
9. The Master Trust Agreement was amended to eliminate specified time permitted between the record date
and any shareholders meeting 86.2 6.3 8.0
</TABLE>
16
<PAGE>
State Street Research Managed Assets
a series of
State Street Research Income Trust
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1997
TABLE OF CONTENTS
Page
----
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS................................2
ADDITIONAL INFORMATION CONCERNING INVESTMENT SECTORS...........................5
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT TECHNIQUES................9
TRUSTEES AND OFFICERS.........................................................18
INVESTMENT ADVISORY SERVICES..................................................23
PURCHASE AND REDEMPTION OF SHARES.............................................24
NET ASSET VALUE...............................................................26
PORTFOLIO TRANSACTIONS........................................................27
CERTAIN TAX MATTERS...........................................................30
DISTRIBUTION OF SHARES OF THE FUND............................................33
CALCULATION OF PERFORMANCE DATA...............................................36
CUSTODIAN.....................................................................41
INDEPENDENT ACCOUNTANTS.......................................................41
FINANCIAL STATEMENTS..........................................................41
The following Statement of Additional Information is not a Prospectus.
It should be read in conjunction with the Prospectus of State Street Research
Managed Assets (the "Fund") dated August 1, 1997, 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.
CONTROL NUMBER: 1285K-970829(0998)SSR-LD MA-879D-897
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under "Other Investment Policies and Considerations - Risk
Factors and Special Considerations - Investment Limitations and Practices" in
the Fund's Prospectus, the Fund has adopted certain investment restrictions.
All of the Fund's fundamental investment restrictions are set forth
below. These fundamental restrictions may not be changed except by the
affirmative vote of a majority of the Fund's outstanding voting securities as
defined in the Investment Company Act of 1940, as amended (the "1940 Act").
(Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at a meeting of security holders duly called, (i) of
67% or more of the voting securities present at a meeting if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy or (ii) of more than 50% of the outstanding voting securities, whichever
is less.) Under these restrictions, it is the Fund's policy:
(1) not to 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 syndicates or groups, if determined by the Trust's
Board of Trustees, purchase or otherwise acquire securities of
other issuers for investment, either from the issuers or from
persons in a control relationship with the issuers or from
underwriters of such securities; and (b) to the extent that,
in connection with the disposition of the Fund's securities,
the Fund may be deemed to be an underwriter under certain
federal securities laws;
(4) not to purchase or sell fee simple interests in real estate,
although the Fund may purchase and sell other interests in
real estate including securities which are secured by real
estate, or securities of companies which own or invest or deal
in real estate;
(5) not to invest in physical commodities or physical commodity
contracts or options in excess of 10% of the Fund's total
assets, except that investments in essentially financial items
or arrangements such as, but not limited to, swap
arrangements, hybrids, currencies, currency and other forward
contracts, delayed delivery and when-issued contracts, futures
contracts and options on
2
<PAGE>
futures contracts on securities, securities indices, interest
rates and currencies, shall not be deemed investments in
commodities or commodities contracts;
(6) not to make loans, except that the Fund may lend portfolio
securities and purchase bonds, debentures, notes and similar
obligations (including repurchase agreements with respect
thereto);
(7) not to conduct arbitrage transactions (provided that
investments in futures and options shall not be deemed
arbitrage transactions);
(8) not to invest in oil, gas or other mineral exploration or
development programs (provided that the Fund may invest in
securities issued by companies which invest in or sponsor such
programs and in securities indexed to the price of oil, gas or
other minerals);
(9) 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
(10) not to borrow money except for borrowings from banks for
extraordinary and emergency purposes, such as permitting
redemption requests to be honored, and then not in an amount
in excess of 25% of the value of its total assets, and except
insofar as reverse repurchase agreements may be regarded as
borrowing. As a matter of current operating, but not
fundamental, policy, the Fund will not purchase additional
portfolio securities at any time when it has outstanding money
borrowings in excess of 5% of the Fund's total assets (taken
at current value).
The following investment restrictions may be changed by a vote of a
majority of the Trustees. Under these restrictions, it is the Fund's policy:
(1) not to purchase any security or enter into a repurchase
agreement if as a result more than 15% of its net assets would
be invested in securities that are illiquid (including
repurchase agreements not entitling the holder to payment of
principal and interest within seven days);
(2) not to 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
3
<PAGE>
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;
(3) not to engage in transactions in options except in connection
with options on securities, securities indices and
commodities, and options on futures on securities, securities
indices and commodities;
(4) not to purchase securities on margin or make short sales of
securities or maintain a short position except for short sales
"against the box" (as a matter of current operating, but not
fundamental policy, the Fund will not make short sales or
maintain a short position unless not more than 5% of the
Fund's net assets (taken at current value) is held as
collateral for such sales at any time);
(5) not to hypothecate, mortgage or pledge any of its assets
except as may be necessary in connection with permitted
borrowings (for the purpose of this restriction, futures and
options, and related escrow or custodian receipts or letters,
margin or safekeeping accounts, or similar arrangements used
in the industry in connection with the trading of futures and
options, are not deemed to involve a hypothecation, mortgage
or pledge of assets);
(6) not to purchase a security issued by another investment
company including any real estate investment trust, any issuer
of collateralized mortgage obligations or any unit investment
trust to the extent such entity is deemed an "investment
company" for purposes of the Investment Company Act of 1940
if, immediately after such purchase, the Fund would own, in
the aggregate, (i) more than 3% of the total outstanding
voting stock of such other investment company; (ii) securities
issued by such other investment company having an aggregate
value in excess of 5% of the value of the Fund's total assets;
or (iii) securities issued by such other investment company
and all other investment companies (other than treasury stock
of the Fund) having an aggregate value in excess of 10% of the
value of the Fund's total assets; provided, however, that the
Fund may purchase investment company securities without limit
for the purpose of completing a merger, consolidation or other
acquisition of assets;
4
<PAGE>
(7) not to purchase or retain any security of an issuer if, to the
knowledge of the Trust, those of its officers and Trustees and
officers and directors of its investment advisers who
individually own more than 1/2 of 1% of the securities of such
issuer, when combined, own more than 5% of the securities of
such issuer taken at market;
(8) not to invest in warrants more than 5% of the value of its
total assets and not to invest in warrants that are not
publicly traded more than 2% of its total assets, in each
case, taken at the lower of cost or market value (warrants
initially attached to securities and acquired by the Fund upon
original issuance thereof shall be deemed to be without
value);
(9) not to invest in companies for the purpose of exercising
control over their management, although the Fund may from time
to time present its views on various matters to the management
of issuers in which it holds investments; and
ADDITIONAL INFORMATION CONCERNING
INVESTMENT SECTORS
Certain Fixed Income Securities
Fixed income securities acquired by the Fund may include the following:
U.S. Government and Related Securities. U.S. Government securities are
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S. Government
securities in which the Fund invests include, among others:
[bullet] direct obligations of the U.S. Treasury, i.e., Treasury bills,
notes, certificates and bonds;
[bullet] obligations of U.S. Government agencies or instrumentalities
such as the Federal Home Loan Banks, the Federal Farm Credit
Banks, the Federal National Mortgage Association, the
Government National Mortgage Association and the Federal Home
Loan Mortgage Corporation; and
[bullet] obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a
variety of ways by the U.S. Government, its agencies or instrumentalities. Some
of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full
5
<PAGE>
faith and credit of the U.S. Treasury. Other obligations, such as those of the
Federal National Mortgage Association, are backed by the discretionary authority
of the U.S. Government to purchase certain obligations of agencies or
instrumentalities. Obligations such as those of the Federal Home Loan Banks, the
Federal Farm Credit Banks, the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation are backed by the credit of the agency or
instrumentality issuing the obligations. Certain obligations of Resolution
Funding Corporation, a mixed-ownership Government corporation, are backed with
respect to interest payments by the U.S. Treasury, and with respect to principal
payments by U.S. Treasury obligations held in a segregated account with a
Federal Reserve Bank. Except for certain mortgage-related securities, the Fund
will only invest in obligations issued by mixed-ownership Government
corporations where such securities are guaranteed as to payment of principal or
interest by the U.S. Government or a U.S. Government agency or instrumentality,
and any unguaranteed principal or interest is otherwise supported by U.S.
Government obligations held in a segregated account.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Risk Factors of Lower Quality Fixed Income Securities
- -----------------------------------------------------
In addition to those risks set forth in the Prospectus, lower quality
securities involve risks (i) that the limited liquidity and secondary market
support for such securities will heighten the effect of adverse publicity and
investor perceptions and make selection and valuation of portfolio securities
more subjective and dependent upon the Investment Manager's credit analysis;
(ii) of substantial market price volatility and/or the potential for the
insolvency
6
<PAGE>
of issuers during periods of changing interest rates and economic difficulty,
particularly with respect to securities that do not pay interest currently in
cash; (iii) of subordination to the prior claims of banks and other senior
lenders; (iv) of the possibility that earnings of an issuer may be insufficient
to meet its debt service; and (v) of realization of taxable income for
shareholders without the corresponding receipt of cash in connection with
investments in "zero coupon" or "pay-in-kind" securities. Growth in the market
for this type of security has paralleled a general expansion in certain sectors
in the U.S. economy, and the effects of adverse economic changes (including a
recession) are unclear.
In the event the rating of a security is downgraded, the Investment
Manager will determine whether the security should be retained or sold depending
on an assessment of all facts and circumstances at that time.
Cash & Cash Equivalent Investments
- ----------------------------------
Cash & Cash Equivalent Investments may include the following:
Bank Money Investments. Bank money investments include but are not
limited to certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are generally short-term (i.e., less than one year),
interest-bearing negotiable certificates issued by commercial banks or savings
and loan associations against funds deposited in the issuing institution. A
banker's acceptance is a time draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods). A banker's acceptance may be
obtained from a domestic or foreign bank including a U.S. branch or agency of a
foreign bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. The Fund will not invest
in any such bank money investment unless the investment is issued by a U.S. bank
that is a member of the Federal Deposit Insurance Corporation ("FDIC"),
including any foreign branch thereof, a U.S. branch or agency of a foreign bank,
a foreign branch of a foreign bank, or a savings bank or savings and loan
association that is a member of the FDIC and which at the date of investment has
capital, surplus and undivided profits (as of the date of its most recently
published financial statements) in excess of $50 million. The Fund will not
invest in time deposits maturing in more than seven days and will not invest
more than 10% of its total assets in time deposits maturing in two to seven
days.
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under state law. U.S. federal branches or agencies
of foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such
7
<PAGE>
branches elect FDIC insurance. Unlike U.S. branches of foreign banks, U.S.
agencies of foreign banks may not accept deposits and thus are not eligible for
FDIC insurance. Both branches and agencies can maintain credit balances, which
are funds received by the office incidental to or arising out of the exercise of
their banking powers and can exercise other commercial functions, such as
lending activities.
Short-Term Corporate Debt Instruments. Short-term corporate debt
instruments include commercial paper to finance short-term credit needs (i.e.,
short-term, unsecured promissory notes) issued by corporations including but not
limited to (a) domestic or foreign bank holding companies or (b) their
subsidiaries or affiliates where the debt instrument is guaranteed by the bank
holding company or an affiliated bank or where the bank holding company or the
affiliated bank is unconditionally liable for the debt instrument. Commercial
paper is usually sold on a discounted basis and has a maturity at the time of
issuance not exceeding nine months.
Commercial Paper Ratings. Commercial paper investments at the time of
purchase will be rated within the "A" major rating category by Standard & Poor's
Corporation ("S&P") or within the "Prime" category by Moody's Investors Service
Inc. ("Moody's"), or, if not rated, issued by companies having an outstanding
long-term unsecured debt issue rated at least within the "A" major rating
category by S&P or by Moody's. The money market investments in corporate bonds
and debentures (which must have maturities at the date of settlement of one year
or less) must be rated at the time of purchase at least within the "A" major
rating category by S&P or within the "Prime" category by Moody's.
Commercial paper rated within the "A" major rating category (highest
quality) by S&P is issued by entities which have liquidity ratios which are
adequate to meet cash requirements. Long-term senior debt is rated A or better,
although in some cases credits within the "BBB" category may be allowed. The
issuer has access to at least two additional channels of borrowing. Basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances. Typically, the issuer's industry is well established and the
issuer has a strong position within the industry. The reliability and quality of
management are unquestioned. The relative strength or weakness of the above
factors determines whether the issuer's commercial paper is rated A-1, A-2 or
A-3. (Those A-1 issues determined to possess overwhelming safety characteristics
are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating category
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: evaluation of the management of the issuer; economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; evaluation of the
issuer's products in relation to competition and customer acceptance; liquidity;
amount and quality of long-term debt; trend of earnings over a period of 10
years; financial management of obligations which may be present or may arise as
a result of public interest questions and preparations to meet such obligations.
These factors are all considered in determining whether the commercial paper is
rated Prime-1, Prime-2 or Prime-3.
8
<PAGE>
In the event applicable rating agencies lower the ratings of debt
instruments held by the Fund, resulting in a material decline in the overall
quality of the Fund's portfolio, the situation will be reviewed and necessary
action, if any, will be taken, including changes in the composition of the
portfolio.
Cash & Cash Equivalents may also include securities of the U.S.
Government and its agencies and instrumentalities and custodial receipts in
respect thereof as described above under "Certain Fixed Income Securities" from
time to time.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Among other investments described below, the Fund may buy and sell
domestic and foreign options on securities, securities indices and precious
metals and other commodities, futures contracts, and options on futures
contracts, and may enter into closing transactions with respect to each of the
foregoing under circumstances in which such techniques are expected by State
Street Research & Management Company (the "Investment Manager") to aid in
achieving the investment objective of the Fund.
The Fund on occasion may also purchase instruments with characteristics
of both futures and securities (e.g., debt instruments with interest and
principal payments determined by reference to the value of a commodity or a
currency at a future time) and which, therefore, possess the risks of both
futures and securities investments.
Futures Contracts
- -----------------
Futures contracts are publicly traded contracts to buy or sell certain
underlying assets, such as precious metals or other commodities, securities or
an index of securities, at a future time at a specified price. A contract to buy
establishes a "long" position while a contract to sell establishes a "short"
position.
The purchase of a futures contract on precious metals and other
commodities, securities or an index of securities normally enables a buyer to
participate in the market movement of the underlying commodity, security or
index after paying a transaction charge and posting margin in an amount equal to
a small percentage of the value of the underlying commodity, security or index.
The Fund will initially be required to deposit with the Trust's custodian or the
broker effecting the transaction an amount of "initial margin" in cash or U.S.
Treasury obligations.
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
9
<PAGE>
"marking to market." For example, when the Fund has taken a long position in a
futures contract and the value of the underlying asset has risen, that position
will have increased in value and the Fund will receive from the broker a
maintenance margin payment equal to the increase in value of the underlying
asset. Conversely, when the Fund has taken a long position in a futures contract
and the value of the underlying asset has declined, the position would be less
valuable, and the Fund would be required to make a maintenance margin payment to
the broker.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will terminate
its position in the futures contract. A final determination of maintenance
margin is then made, additional cash is required to be paid by or released to
the Fund, and the Fund realizes a loss or a gain. While futures contracts with
respect to securities do provide for the delivery and acceptance of securities,
such delivery and acceptance are seldom made.
Futures contracts will be executed primarily (a) to establish a short
position, and thus protect the Fund from experiencing the full impact of an
expected decline in market value of portfolio holdings without requiring the
sale of holdings, or (b) to establish a long position, and thus to participate
in an expected rise in market value of securities or commodities which the Fund
intends to purchase. In transactions establishing a long position in a futures
contract, permissible assets equal to the face value of the futures contract
will be identified by the Fund to the Trust's custodian for maintenance in a
separate account to insure that the use of such futures contracts is
unleveraged. Similarly, a representative portfolio of securities having a value
equal to the aggregate face value of the futures contract will be identified
with respect to each short position. The Fund will employ any other appropriate
method of cover which is consistent with applicable regulatory and exchange
requirements.
Options on Securities and Commodities
- -------------------------------------
The Fund may use options on equity or fixed income securities and
commodities to implement its investment strategy. A call option on a security,
for example, gives the purchaser of the option the right to buy, and the writer
the obligation to sell, the underlying asset at the exercise price during the
option period. Conversely, a put option on a security gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying asset at the
exercise price during the option period.
Purchased options have defined risk, i.e., the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset.
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
10
<PAGE>
the risk of the lost opportunity to participate in the appreciation in value of
the asset rather than the risk of an out-of-pocket loss. A written put option
has defined risk, i.e., the difference between the agreed upon price that the
Fund must pay to the buyer upon exercise of the put and the value, which could
be zero, of the asset at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
his obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Options on Securities Indices
- -----------------------------
The Fund may engage in transactions in call and put options on
securities indices. For example, the Fund may purchase put options on indices of
equity or fixed income securities in anticipation of or during a market decline
to attempt to offset the decrease in market value of its securities that might
otherwise result.
Put options on indices of securities are similar to put options on the
securities themselves except that the delivery requirements are different.
Instead of giving the right to make delivery of a security at a specified price,
a put option on an index of securities gives the holder the right to receive an
amount of cash upon exercise of the option if the value of the underlying index
has fallen below the exercise price. The amount of cash received will be equal
to the difference between the closing price of the index and the exercise price
of the option expressed in dollars times a specified multiple. As with options
on equity or fixed income securities, futures contracts or commodities, the Fund
may offset its position in index option prior to expiration by entering into a
closing transaction on an exchange or it may let the option expire unexercised.
A securities index assigns relative values to the securities included
in the index and the index options are based on a broad market index such as the
Standard & Poor's 500 Stock Index or the New York Stock Exchange Composite
Index, or a narrower market index such as the Standard & Poor's 100 Stock Index.
Securities indices are also based on industry or market segments such as the
American Stock Exchange Oil and Gas Index or the Computer and Business Equipment
Index.
Although there are at present few available options on indices of fixed
income securities, other than tax-exempt securities, or futures and related
options based on such indices, such instruments may become available in the
future. In connection with the use of such options, the Fund may cover its
position by identifying a representative portfolio of securities having a value
equal to the aggregate face value of the option position taken. However, the
Fund may employ any appropriate method to cover its positions that is consistent
with applicable regulatory and exchange requirements.
11
<PAGE>
Options on Futures Contracts
- ----------------------------
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
Options Strategy
- ----------------
A basic option strategy for protecting the Fund against a decline in
securities prices could involve (a) the purchase of a put -- thus "locking in"
the selling price of the underlying securities or securities indices -- or (b)
the writing of a call on securities or securities indices held by the Fund --
thereby generating income (the premium paid by the buyer) by giving the holder
of such call the option to buy the underlying asset at a fixed price. The
premium will offset, in whole or in part, a decline in portfolio value; however,
if prices of the relevant securities or securities indices rose instead of
falling, the call might be exercised, thereby resulting in a potential loss of
appreciation in the underlying securities or securities indices.
A basic option strategy when a rise in securities prices is anticipated
is the purchase of a call -- thus "locking in" the purchase price of the
underlying security or other asset. In transactions involving the purchase of
call options by the Fund, money market instruments equal to the aggregate
exercise price of the options will be identified by the Fund to the Trust's
custodian to insure that the use of such investments is unleveraged.
The Fund may write options in connection with buy-and-write
transactions; that is, the Fund may purchase a security or other asset and
concurrently write a call option against that security or other asset. If the
call option is exercised in such a transaction, the Fund's maximum gain will be
the premium received by it for writing the option, adjusted upward or downward
by the difference between the Fund's purchase price of the security or other
asset and the exercise price of the option. If the option is not exercised and
the price of the underlying security or other asset declines, the amount of such
decline will be offset in part, or entirely, by the premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security or other asset rises or otherwise is above the exercise
price, the put option will expire worthless and the Fund's gain will be limited
to the premium received. If the market price of the underlying security or other
asset declines or otherwise is below the exercise price, the Fund's return will
be the premium received from writing the put option minus the amount by which
the market price of the security or other asset is below the exercise price.
12
<PAGE>
Limitations and Risks of Options and Futures Activity
- -----------------------------------------------------
The Fund will engage in transactions in futures contracts or options as
a hedge against changes resulting from market conditions which produce changes
in the values of its securities or the securities which it intends to purchase
(e.g., to replace portfolio securities which will mature in the near future)
and, subject to the limitations described below, to enhance return. The Fund
will not purchase any futures contract or purchase any call option if,
immediately thereafter, more than one-third of the Fund's net assets would be
represented by long futures contracts or call options. In addition, the Fund may
not establish a position in a commodity futures contract or purchase or sell a
commodity option contract for other than bona fide hedging purposes if
immediately thereafter the sum of the amount of initial margin deposits and
premiums required to establish such positions for such nonhedging purposes would
exceed 5% of the market value of the Fund's net assets.
Although effective hedging can generally capture the bulk of a desired
risk adjustment, no hedge is completely effective. Moreover, the use of options,
futures and options on futures may involve risks not associated with other types
of investments which the Fund intends to purchase. Most of the hedging
anticipated for the Fund will be against the risk characteristics of its
portfolio and not against the risk characteristics of specific investments. The
Fund's ability to hedge effectively through transactions in futures or options
depends on the degree to which price movements in its holdings correlate with
price movements of the futures and options. The prices of the assets being
hedged may not move in the same amount as the hedging instrument, which would
result in an ineffective hedge and a loss to the Fund.
Some positions in futures and options may be closed out only on an
exchange which provides a secondary market therefor. There can be no assurance
that a liquid secondary market will exist for any particular futures contract or
option at any specific time. Thus, it may not be possible to close such an
option or futures position prior to maturity. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability
effectively to hedge its securities and might, in some cases, require the Fund
to deposit cash to meet applicable margin requirements. The Fund will enter into
an option or futures position only if it appears to be a liquid investment.
The Fund may engage in transactions in unlisted options. A position in
an unlisted option may be closed out only with the other party to the
transaction. The lack of an established secondary market may lead the Fund to
encounter more difficulties in effecting closing purchase or sale transactions
with respect to unlisted options than in the case of listed options. If the Fund
as a covered call option writer is unable to effect a closing purchase
transaction, it will not be able to sell the underlying assets until the option
expires. When the Fund purchases or writes an option listed on a domestic
securities exchange, it is afforded the protections offered by the Options
Clearing Corporation. If any member of the Options Clearing Corporation fails to
perform any of its obligations in a transaction involving the purchase or sale
of options, then the Options Clearing corporation will perform the obligations
of that member. The Options Clearing Corporation also maintains Clearing Funds
to ensure
13
<PAGE>
that it can do so. This protection is not available with respect to transactions
in unlisted options. The Fund, however, will enter into unlisted options
transactions only with persons which the Investment Manager believes to be of
high credit standing.
Transactions in Precious Metals
- -------------------------------
The Fund will invest in precious metals only through banks (both United
States and foreign), brokers or dealers who are members of (or affiliated with
members of) a regulated North American commodities, commodities futures or
securities exchange or a foreign commodities, commodities futures or securities
exchange, or other institutions that meet certain standards of creditworthiness
established by the Trustees from time to time. Bullion and coins do not usually
generate income, offering only the potential of capital appreciation, and, in
these transactions, the Fund may encounter higher custody and transaction costs
than those normally associated with the ownership of securities, as well as
insurance and shipping costs. In addition, investments in bullion and coins
could adversely affect the Fund's ability to qualify as a regulated investment
company under the Internal Revenue Code. See "Certain Tax Matters" herein.
Repurchase Agreements
- ---------------------
The Fund may enter into repurchase agreements. Repurchase agreements
occur when the Fund acquires a security and the seller, which may be either (i)
a primary dealer in U.S. Government securities or (ii) an FDIC-insured bank
having gross assets in excess of $500 million, simultaneously commits to
repurchase it at an agreed-upon price on an agreed-upon date within a specified
number of days (usually not more than seven) from the date of purchase. The
repurchase price reflects the purchase price plus an agreed-upon market rate of
interest which is unrelated to the coupon rate or maturity of the acquired
security. The Fund will only enter into repurchase agreements involving U.S.
Government securities. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
Repurchase agreements will be limited to 30% of the Fund's total assets, except
that repurchase agreements extending for more than seven days when combined with
any other illiquid assets held by the Fund will be limited to 15% of the Fund's
total assets.
Reverse Repurchase Agreements
- -----------------------------
The Fund may enter into reverse repurchase agreements. In a reverse
repurchase agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker or dealer, in return for
a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed-upon rate.
The ability to use reverse repurchase agreements may enable, but does not ensure
the ability of, the Fund to avoid selling portfolio instruments at a time when a
sale may be deemed to be disadvantageous.
14
<PAGE>
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
Short Sales Against the Box
- ---------------------------
The Fund may effect short sales, but only if such transactions are
short sale transactions known as short sales "against the box." A short sale is
a transaction in which the Fund sells a security it does not own by borrowing it
from a broker, and consequently becomes obligated to replace that security. A
short sale against the box is a short sale where the Fund owns the security sold
short or has an immediate and unconditional right to acquire that security
without additional cash consideration upon conversion, exercise or exchange of
options with respect to securities held in its portfolio. The effect of selling
a security short against the box is to insulate that security against any future
gain or loss.
When-Issued Securities
- ----------------------
The Fund may purchase "when-issued" securities, which are traded on a
price or yield basis prior to actual issuance. Such purchases will be made only
to achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to up to 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.
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
15
<PAGE>
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 subject to risks of illiquidity and
subjective valuations to a greater degree than Rule 144A securities.
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 first offset
one another, with the Fund either receiving or paying the difference between
such amounts. In order to be in a position to meet any obligations resulting
from swaps, the Fund will set up a segregated custodial account to hold
appropriate liquid assets, including cash; for swaps entered into on a net
basis, assets will be segregated having a daily net asset value equal to any
excess of the Fund's accrued obligations over the accrued obligations of the
other party, while for swaps on other than a net basis assets will be segregated
having a value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a part of the Fund's portfolio.
However, the Fund may enter into such arrangements for income purposes to the
extent permitted by the CFTC for entities which are not commodity pool
operators, such as the Fund. In entering a swap arrangement, the Fund is
dependent upon the creditworthiness and good faith for the counterparty. The
Fund attempts to reduce the risks of nonperformance by the counterparty by
dealing only with the established, reputable institutions. The swap market is
still relatively new and emerging; positions in swap arrangements may become
illiquid to the extent that nonstandard arrangements with one counterparty are
not readily transferable to another counterparty of if a
16
<PAGE>
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.
Industry Classifications
- ------------------------
In determining how much of the portfolio is invested in a given private
industry, the following industry classifications are currently used. Securities
issued or guaranteed as to principal or interest by the U.S. Government or its
agencies or instrumentalities or mixed-ownership Government corporations or
sponsored enterprises (including repurchase agreements involving U.S. Government
securities to the extent excludable under relevant regulatory interpretations)
are excluded. Securities issued by foreign governments are also excluded.
Companies engaged in the business of financing may be classified according to
the industries of their parent or sponsor companies, or industries that
otherwise most affect such financing companies. Issuers of asset-backed pools
will be classified as separate industries based on the nature of the underlying
assets, such as mortgages, credit card receivables includes private pools of
nongovernment backed mortgages.
<TABLE>
<CAPTION>
Basic Industries Consumer Staple Science & Technology
- ---------------- --------------- --------------------
<S> <C> <C>
Chemical Business Service Aerospace
Diversified Container Computer Software & Service
Electrical Equipment Drug Electronic Components
Forest Products Food & Beverage Electronic Equipment
Machinery Hospital Supply Office Equipment
Metal & Mining Personal Care
Railroad Printing & Publishing
Truckers Tobacco
Utility Energy Consumer Cyclical
- ------- ------ -----------------
Electric Oil Refining & Marketing Airline
Gas Oil Production Automotive
Gas Transmission Oil Service Building
Telephone Hotel & Restaurant
Photography
Other Finance Recreation
- ----- ------- Retail Trade
Trust Certificates-- Bank Textile & Apparel
Government Related Lending Financial Service
Asset-backed--Mortgages Insurance
Asset-backed--Credit
Card Receivables
</TABLE>
17
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and principal officers of the Trust, their addresses, and
their principal occupations and positions with certain affiliates of the
Investment Manager are set forth below.
*+Peter C. Bennett, One Financial Center, Boston, MA 02111 serves as
Vice President of the Trust. He is 58. His principal occupation is Executive
Vice President and Director of State Street Research & Management Company.
During the past five years he has also served as Senior Vice President of State
Street Research & Management Company. Mr. Bennett's other principal business
affiliation is Director, State Street Research Investment Services, Inc.
+Steve A. Garban, The Pennsylvania State University, 210 Old Main,
University Park, PA 16802, serves as Trustee of the Trust. He is 59. He is
retired and was formerly Senior Vice President for Finance and Operations and
Treasurer of The Pennsylvania State University.
+Malcolm T. Hopkins, 14 Brookside Road, Biltmore Forest, Asheville, NC
28803, serves as Trustee of the Trust. He is 69. He is engaged principally in
private investments. Previously, he was Vice Chairman of the Board and Chief
Financial Officer of St. Regis Corp.
*+Bartlett R. Geer, One Financial Center, Boston, MA 02111 serves as
Vice President of the Trust. He is 42. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as Vice President of State Street Research & Management
Company.
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 56. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as portfolio manager for State Street Research &
Management Company.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791,
serves as Trustee of the Trust. He is 70. He is engaged principally in private
investments and civic affairs, and is an author of business history. Previously,
he was with 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 70. 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 46. His principal occupation is Executive Vice
President, Treasurer, Chief Financial Officer and Director of State Street
Research & Management Company. During the
- ---------------
* or + See footnotes on page 20.
18
<PAGE>
past five years he has also served as Executive Vice President and Chief
Financial Officer of New England Investment Companies and as Senior Vice
President and Vice President of New England Mutual Life Insurance Company. Mr.
Maus's other principal business affiliations include Executive Vice President,
Treasurer, Chief Financial Officer and Director of State Street Research
Investment Services, Inc.
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111
serves as Secretary and General Counsel of the Trust. He is 41. 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.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 65. 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 73. He is retired and was formerly Chairman of the
Board and Chief Executive Officer of Raytheon Company, of which he remains a
Director.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves
as Trustee of the Trust. He is 59. His principal occupations during the past
five years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
59. 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 43. 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.
- ---------------
* or + See footnotes on page 20.
19
<PAGE>
*+Ralph F. Verni, One Financial Center, Boston, MA 02111, serves as
Chairman of the Board, President, Chief Executive Officer and Trustee of the
Trust. He is 54. His principal occupation is Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research & Management
Company. During the past five years he also served as President and Chief
Executive Officer of New England Investment Companies and as Chief Investment
Officer and Director of New England Mutual Life Insurance Company. Mr. Verni's
other principal business affiliations include Chairman of the Board and Director
of State Street Research Investment Services, Inc., and until February, 1996,
prior positions as President and Chief Executive Officer of that company.
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 72. He is retired and was formerly Of Counsel for
the law firm Choate, Hall & Stewart. He was a partner of that firm from 1960 to
1987.
- ---------------
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the 1940 Act because of their affiliations
or past affiliations with the Fund's investment adviser.
+ Serves as a Trustee and/or officer of one or more of the following
investment companies, each of which has an advisory relationship with
the Investment Manager or 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.
20
<PAGE>
As of May 31, 1997, the following persons or entities were the record
and/or beneficial owners of the approximate amounts of each class of shares of
the Fund as set forth beside their names:
Shareholder %
----------- ----
Class C Chase Manhattan Bank 91.1
Class D Merrill Lynch 26.0
The full name and address of each of the above persons or entities are
as follows:
Chase Manhattan Bank, N.A. (a)(b)
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) Chase Manhattan Bank holds such shares as trustee under certain
employee benefit plans serviced by Metropolitan Life Insurance Company.
(b) The Fund believes that such entity does not have beneficial ownership
of such shares.
As of May 31, 1997, the Trustees and principal officers of the Fund as
a group owned approximately 1.9% of the Fund's outstanding Class A shares, and
owned no shares of the Fund's outstanding Class B, Class C or Class D shares.
Ownership of 25% or more of a voting security is deemed "control" as
defined in the 1940 Act. So long as 25% of a class of shares is so owned, such
owners will be presumed to be in control of such class of shares for purposes of
voting on certain matters submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
21
<PAGE>
The Trustees were compensated as follows:
- --------------------------------------------------------------------------------
Total
Compensation
Aggregate From Trust and
Name of Compensation Complex Paid
Trustee From Trust(a) to Trustees(b)
- --------------------------------------------------------------------------------
Steve A. Garban $ 930 $ 34,750
Malcolm T. Hopkins $ 930 $ 34,750
Edward M. Lamont $ 8,000 $ 59,375
Robert A. Lawrence $ 8,000 $ 92,125
Dean O. Morton $ 8,600 $ 96,125
Thomas L. Phillips $ 8,200 $ 59,375
Toby Rosenblatt $ 8,000 $ 59,375
Michael S. Scott Morton $ 9,000 $ 100,325
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $ 8,600 $ 63,375
(a) For the Fund's fiscal year ended March 31, 1997. Includes compensation
from multiple series of the Trust for the fiscal year ended March 31,
1997. See "Distribution of Shares" for a listing of series.
(b) Includes compensation on behalf of all series of 12 investment
companies for which the Investment Manager served directly or
indirectly as investment adviser or for which the Investment Manager
served as sub-investment adviser, and series of State Street Research
Portfolios, Inc., for which State Street Research Investment Services,
Inc. served as distributor. "Total Compensation from Trust and Complex"
is for the 12 months ended December 31, 1996. The Trust does not
provide any pension or retirement benefits for the Trustees.
22
<PAGE>
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Advisory
Agreement provides that the Investment Manager shall furnish the Fund with an
investment program, office facilities and such investment advisory, research and
administrative services as may be required from time to time. The Investment
Manager compensates all executive and clerical personnel and Trustees of the
Trust if such persons are employees of the Investment Manager or its affiliates.
The Investment Manager is an indirect wholly owned subsidiary of Metropolitan
Life Insurance Company.
The advisory fee payable monthly by the Fund to the Investment Manager
is computed as a percentage of the average of the value of the net assets of the
Fund as determined at the close of the New York Stock Exchange (the "NYSE") on
each day the NYSE is open for trading, at the annual rate of 0.75% of the net
assets of the Fund. The 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, 1995, 1996 and 1997
the investment advisory fee for the Fund was $2,564,590, $3,051,182 and
$3,692,033, respectively. For the same periods, the voluntary reduction of fees
or assumption of expenses amounted to $1,062,971, $715,739 and $475,396,
respectively.
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund from year to year as long as it is approved at least
annually both (i) by a vote of a majority of the outstanding voting securities
of the Fund (as defined in the 1940 Act) or by the Trustees of the Trust, and
(ii) in either event by a vote of a majority of the Trustees who are not parties
to the Advisory Agreement or "interested persons" of any party thereto, cast in
person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated on 60 days' written notice by either party
and will terminate automatically in the event of its assignment, as defined
under the 1940 Act and regulations thereunder. Such regulations provide that a
transaction which does not result in a change of actual control or management of
an adviser is not deemed an assignment.
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
23
<PAGE>
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 and selected other persons elsewhere involved in investment management
operations, are only permitted to engage in personal securities transactions in
accordance with certain conditions relating to such person's position, the
identity of the security, the timing of the transaction, and similar factors.
Such 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 Fund, as well as
sales charges involved, are set forth under "Purchase of Shares" in the
Prospectus. The following supplements that information.
Public Offering Price - The public offering price for each class of
shares of the Fund is based on their net asset value determined as of the close
of the NYSE on the day the purchase order is received by State Street Research
Shareholder Services provided that the order is received prior to the close of
the NYSE on that day; otherwise the net asset value used is that determined as
of the close of the NYSE on the next day it is open for unrestricted trading.
When a purchase order is placed through a dealer, that dealer is responsible for
transmitting the order promptly to State Street Research Shareholder Services in
order to permit the investor to obtain the current price. Any loss suffered by
an investor which results from a dealer's failure to transmit an order promptly
is a matter for settlement between the investor and the dealer.
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
24
<PAGE>
any combination of Class A shares of "Eligible Funds" as designated by the
Distributor within a 13-month period. The sales charge applicable to each
purchase made pursuant to a Letter of Intent will be that which would apply if
the total dollar amount set forth in the Letter of Intent were being bought in a
single transaction. Purchases made within a 90-day period prior to the execution
of a Letter of Intent may be included therein; in such case the date of the
earliest of such purchases marks the commencement of the 13-month period.
An investor may include toward completion of a Letter of Intent the
value (at the current public offering price) of all of his or her Class A shares
of the Fund and of any of the other Class A shares of Eligible Funds held of
record as of the date of his or her Letter of Intent, plus the value (at the
current offering price) as of such date of all of such shares held by any
"person" described herein as eligible to join with the investor in a single
purchase. Class B, Class C and Class D shares may also be included in the
combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrow shares will be released when the Letter of Intent is completed
or, if it is not completed, when the balance of the higher sales charge is, upon
notice, remitted by the investor. All dividends and capital gains distributions
with respect to the escrowed shares will be credited to the investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to the Right of Accumulation.
The applicable sales charge under this right is determined on the amount arrived
at by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C, and Class D shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Class C Shares - Class C shares are currently available to 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
25
<PAGE>
Act, the Fund may issue its shares at net asset value (or more) to such entities
or to their security holders.
Redemptions - The Fund reserves the right to pay redemptions in kind
with portfolio securities in lieu of cash. In accordance with its election
pursuant to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of
redemption proceeds paid in cash. Although it has no present intention to do so,
the Fund may, under unusual circumstances, limit redemptions in cash with
respect to each shareholder during any ninety-day period to the lesser of (i)
$250,000, or (ii) 1% of the net asset value of the Fund at the beginning of such
period. In connection with any redemptions paid in kind with portfolio
securities, brokerage and other costs may be incurred by the redeeming
shareholder in the sale of the securities received.
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily
as of the close of the NYSE, ordinarily 4 P.M. New York City time, Monday
through Friday, on each day during which the NYSE is open for trading. The NYSE
is currently closed on New Year's Day, Presidents Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is computed by dividing the
sum of the value of the securities held by the Fund plus any cash or other
assets minus all liabilities by the total number of outstanding shares of the
Fund at such time. Any expenses, except for extraordinary or nonrecurring
expenses, borne by the Fund, including the investment management fee payable to
the Investment Manager, are accrued daily.
In determining the values of portfolio assets as provided below, the
Trustees may utilize one or more pricing services, in lieu of market quotations
for certain securities which are not readily available on a daily basis. Such
services may provide prices determined as of times prior to the close of the New
York Stock Exchange.
In general, securities are valued as follows. Securities which are
listed or traded on the New York or American Stock Exchange are valued at the
price of the last quoted sale on the respective exchange for that day.
Securities which are listed or traded on a national securities exchange or
exchanges, but not on the New York or American Stock Exchange, are valued at the
price of the last quoted sale on the exchange for that day prior to the close of
the NYSE. Securities not listed on any national securities exchange which are
traded "over the counter" and for which quotations are available on the National
Association of Securities Dealers' NASDAQ System, or other system, are valued at
the closing price supplied through such system for that day at the close of the
NYSE. Other securities are, in general, valued at the mean of the bid and asked
quotations last quoted prior to the close of the NYSE if there are market
quotations readily available, or in the absence of such market quotations, then
at the fair value thereof as determined by or under authority of the Trustees of
the Trust with the use
26
<PAGE>
of such pricing services as may be deemed appropriate or methodologies approved
by the Trustees.
Short-term debt instruments issued with a maturity of one year or less
which have a remaining maturity of 60 days or less are valued using the
amortized cost method, provided that during any period in which more than 25% of
the Fund's total assets is invested in short-term debt securities the current
market value of such securities will be used in calculating net asset value per
share in lieu of the amortized cost method. The amortized cost method is used
when the value obtained reflects fair value. Under the amortized cost method of
valuation, the security is initially valued at cost on the date of purchase (or
in the case of short-term debt instruments purchased with more than 60 days
remaining to maturity, the market value on the 61st day prior to maturity), and
thereafter a constant amortization to maturity of any discount or premium is
assumed regardless of the impact of fluctuating interest rates on the market
value of the security.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
- ------------------
The Fund's portfolio turnover rate is determined by dividing the lesser
of securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The Fund reserves full freedom with respect to portfolio
turnover, as described in the Prospectus. The portfolio turnover rates for the
fiscal years ended March 31, 1996 and 1997 were 109.20% and 108.41%,
respectively.
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
27
<PAGE>
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 modeling and including software providing investment
personnel with efficient access to current and historical data from a variety of
internal and external sources) and portfolio evaluation services and relative
performance of accounts.
In the case of the Fund and other registered investment companies
advised by the Investment Manager, the above services may include data relating
to performance, expenses and fees of those investment companies and other
investment companies; this information is used by the Trustees or directors of
the investment companies to fulfill their responsibility to oversee the quality
of the Investment Manager's advisory services and to review the fees and other
provisions contained in the advisory contracts between the investment companies
and the Investment Manager. The Investment Manager considers these investment
company services only in connection with the execution of transactions on behalf
of its investment company clients and not its other clients.
Certain of the nonexecution services provided by broker-dealers may in
turn be obtained by the broker-dealers from third parties who are paid for such
services by the broker-dealers. The Investment Manager has an investment in less
than ten percent of the outstanding equity of one such third party which is
engaged in the development and licensing of trading systems which include
portfolio analysis and modelling and other research and investment
decision-making capabilities. The Investment Manager may allocate brokerage to
broker-dealers who in turn pay this third party for the portion of the third
party's trading system provided to the Investment Manager which is estimated by
the Investment Manager to provide appropriate assistance in the investment
decision-making process. Because of its minority interest in the third party,
the Investment Manager could be said to benefit indirectly from such brokerage
allocation.
28
<PAGE>
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. Among other measures, the Investment Manager's
investment management personnel seek to evaluate the quality of research and
other services received, and the results of this effort are made available to
the equity trading department which sometimes uses this information as a
consideration in the selection of brokers to execute portfolio transactions.
Some services furnished by broker-dealers may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Investment Manager allocates the cost
of such services to determine the appropriate proportion of the cost which is
allocable to purposes other than research or investment decision-making and the
Investment Manager pays for that portion directly from its own funds. Some
research and execution services may benefit the Investment Manager's clients as
a whole, while others may benefit a specific segment of clients. Not all such
services will necessarily be used exclusively in connection with the accounts
which pay the commissions to the broker-dealer producing the services.
The Investment Manager has no fixed agreements or understandings with
any broker-dealer as to the amount of brokerage business which 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, the Investment Manager 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, 1995, 1996 and 1997, amounted to $546,075, $754,584 and
$1,136,104, respectively. The Investment Manager believes that the amount of
brokerage commission paid by the Fund for the most recent fiscal year was
significantly higher than during the previous year because of the investment of
proceeds from the increased sale of Fund shares, and general investment activity
for a larger portfolio. 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 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
29
<PAGE>
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 Fund -- In General
- -------------------------------------------------
The Fund intends to qualify and elect to be treated each taxable year
as a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), although it cannot give complete
assurance that it will do so. Accordingly, the Fund must, among other things,
(a) derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of the
following held for less than three months (the "30% test"): (i) stock or
securities; (ii) options, futures or forward contracts (other than options,
futures or forward contracts on foreign currencies), or (iii) foreign currencies
(or options, futures or forward contracts on foreign currencies) but only if
such currencies (or options, futures or forward contracts) are not directly
related to the Fund's principal business of investing in stock or securities (or
options and futures with respect to stocks or securities); (c) satisfy certain
diversification
30
<PAGE>
requirements; and (d) in order to be entitled to utilize the dividends paid
deduction, distribute annually at least 90% of its investment company taxable
income (determined without regard to the deduction for dividend paid).
If in any year the Fund derived more than 10% of its gross income (as
defined in the Code, which disregards losses for that purpose) from investments
made directly in commodities, including precious metal investments, or
commodity-related options, futures or indices, the Fund in such year may fail to
qualify as a regulated investment company under the Code. The Investment Manager
intends to manage the Fund's portfolio so as to minimize the risk of such a
disqualification.
The 30% test will limit the extent to which the Fund may sell
securities held for less than three months, write options which expire in less
than three months, and effect closing transactions with respect to call or put
options that have been written or purchased within the preceding three months.
(If the Fund purchases a put option for the purpose of hedging an underlying
portfolio security, the acquisition of the option is treated as a short sale of
the underlying security unless, for purposes only of the 30% test, the option
and the security are acquired on the same date.) Finally, as discussed below,
this requirement may also limit investments by the Fund in options on stock
indices, listed options on nonconvertible debt securities, futures contracts,
options on interest rate futures contracts and certain foreign currency
contracts.
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income or accumulated earnings and profits. Also, the
shareholders, if they received a distribution in excess of current or
accumulated earnings and profits, would receive a return of capital that would
reduce the basis of their shares of the Fund.
The Fund will be liable for a nondeductible 4% excise tax on amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement. To avoid the tax, during each calendar year the Fund
must distribute an amount equal to at least 98% of the sum of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, and its capital gain net income for the 12-month period ending on October
31, in addition to any undistributed portion of the respective balances from the
prior year. The Fund intends to make sufficient distributions to avoid this 4%
excise tax.
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
31
<PAGE>
is treated for federal income tax purposes as income earned by the Fund, whether
or not any income is actually received, and therefore is subject to the
distribution requirements of the Code. Generally, the amount of original issue
discount is determined on the basis of a constant yield to maturity which takes
into account the compounding of accrued interest. Under section 1286 of the
Code, an investment in a stripped bond or stripped coupon may result in original
issue discount.
Debt securities may be purchased by the Fund at a discount that exceeds
the original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for income tax
purposes. In the case of any debt security issued after July 18, 1984, having a
fixed maturity date of more than one year from the date of issue and having
market discount, the gain realized on disposition will be treated as interest
income to the extent it does not exceed the accrued market discount on the
security (unless the Fund elects to include such accrued market discount in
income in the tax year to which it is attributable). Generally, market discount
is accrued on a daily basis. The Fund may be required to capitalize, rather than
deduct currently, part or all of any direct interest expense incurred to
purchase or carry any debt security having market discount, unless the Fund
makes the election to include market discount currently. Because the Fund must
include original issue discount in income, it will be more difficult for the
Fund to make the distributions required for the Fund to maintain its status as a
regulated investment company under Subchapter M of the Code or to avoid the 4%
excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may
be subject to provisions of the Code that (i) require inclusion of unrealized
gains or losses in the Fund's income for purposes of the 90% test, the 30% test,
the excise tax and the distribution requirements applicable to regulated
investment companies; (ii) defer recognition of realized losses; and (iii)
characterize both realized and unrealized gain or loss as short-term or
long-term gain or loss. Such provisions generally apply to, among other
investments, options on debt securities, indices on securities and futures
contracts.
Foreign Currency Transactions. Under section 988 of the Code, special
rules are provided for certain foreign currency transactions. Foreign currency
gains or losses from foreign currency contracts (whether or not traded in the
interbank market), from futures contracts that are not "regulated futures
contracts," and from unlisted options are treated as ordinary income or loss
under section 988. The Fund may elect to have foreign currency-related regulated
futures contracts and listed options subject to ordinary income or loss
treatment under section 988. In addition, in certain circumstances, the Fund may
elect capital gain or loss for foreign currency transactions. The rules under
section 988 may also affect the timing of income recognized by the Fund.
Federal Income Taxation of Shareholders
- ---------------------------------------
Dividends paid by the Fund may be eligible for the 70%
dividends-received deduction for corporations. The percentage of the Fund's
dividends eligible for such tax treatment may
32
<PAGE>
be less than 100% to the extent that less than 100% of the Fund's gross income
may be from qualifying dividends of domestic corporations. Any dividend declared
in October, November and December and made payable to shareholders of record in
any such month is treated as received by such shareholders on December 31,
provided that the Fund pays the dividend during January of the following
calendar year.
Distributions by the Fund can result in a reduction in the fair market
value of the Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless would be
taxable to the shareholder as ordinary income or long-term capital gain, even
though, from an investment standpoint, it may constitute a partial return of
capital. In particular, investors should be careful to consider the tax
implications of buying shares just prior to a taxable distribution. The price of
shares purchased at that time includes the amount of any forthcoming
distribution. Those investors purchasing shares just prior to a taxable
distribution will then receive a return of investment upon distribution which
will nevertheless be taxable to them.
DISTRIBUTION OF SHARES OF THE FUND
State Street Research Income Trust 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 reallow all or
a portion of such sales charges as concessions to dealers. For the fiscal years
ended March 31, 1995, 1996 and 1997, total sales charges on Class A shares paid
to the Distributor amounted to $1,652,827, $869,039 and $1,283,941,
respectively. For the same periods, $198,230, $107,358 and $158,495,
respectively, was retained by the Distributor after reallowance of concessions
to dealers. The Distributor may also pay its affiliate, MetLife Securities,
Inc., additional sales compensation of up to 0.25% of certain sales.
33
<PAGE>
The difference in the price at which the Fund's Class A shares are
offered due to scheduled variations in sales charges, as described in the Fund's
Prospectus, result from cost savings inherent in economies of scale. Management
believes that the cost of sales efforts of the Distributor and broker-dealers
tends to decrease as the size of purchases increases, or does not involve any
incremental sales expenses as in the case of, for example, exchanges,
reinvestments or dividend investments at net asset value. Similarly, no
significant sales effort is necessary for sales of shares at net asset value to
certain Directors, Trustees, officers, employees, their relatives and other
persons directly or indirectly related to the Fund or associated entities. Where
shares of the Fund are offered at a reduced sales charge or without a sales
charge pursuant to sponsored arrangements, and managed fee-based programs, the
amount of the sales charge reduction will similarly reflect the anticipated
reduction in sales expenses associated with such arrangements. The reduction in
sales expenses, and therefore the reduction in sales charge, will vary depending
on factors such as the size and other characteristics of the organization or
program, and the nature of its membership or the participants. The Fund reserves
the right to make variations in, or eliminate, sales charges at any time or to
revise the terms of or to suspend or discontinue sales pursuant to sponsored
arrangements at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission 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 Fund and paid initial commissions to securities dealers for sales of such
shares as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1997 March 31, 1996 March 31, 1995
----------------------------- ----------------------------- ---------------------------
Contingent Commissions Contingent Commissions Contingent Commissions
Deferred Paid to Deferred Paid to Deferred Paid to
Sales Charges Dealers Sales Charges Dealers Sales Charges Dealers
------------- ------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Class A $ 0 $1,125,446 $ 0 $ 761,681 $ 657 $1,454,597
Class B $387,778 $2,208,110 $965,398 $1,290,690 $451,301 $3,334,444
Class D $ 1,277 $ 46,532 $ 6,098 $ 22,246 $ 7,564 $ 71,301
</TABLE>
34
<PAGE>
For information on the amount of distribution fees paid by the Fund to
the Distributor, see below.
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "Distribution Plan") under which the Fund may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of Class A, Class B and Class D shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to underwriters, securities dealers
and others engaged in the sale of shares, including payments to the Distributor
to be used to pay commissions and/or reimbursement to securities dealers (which
securities dealers may be affiliates of the Distributor) engaged in the
distribution and marketing of shares and furnishing ongoing assistance to
investors, (2) reimbursement of direct out-of-pocket expenditures incurred by
the Distributor in connection with the distribution and marketing of shares and
the servicing of investor accounts including expenses relating to the
formulation and implementation of marketing strategies and promotional
activities such as direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising, the preparation, printing and
distribution of Prospectuses of the Fund and reports for recipients other than
existing shareholders of the Fund, and obtaining such information, analyses and
reports with respect to marketing and promotional activities and investor
accounts as the Fund may, from time to time, deem advisable, and (3)
reimbursement of expenses incurred by the Distributor in connection with the
servicing of shareholder accounts including payments to securities dealers and
others in consideration of the provision of personal services to investors
and/or the maintenance or servicing of shareholder accounts and expenses
associated with the provision of personal services by the Distributor directly
to investors. In addition, the Distribution Plan is deemed to authorize the
Distributor and the Investment Manager to make payments out of general profits,
revenues or other sources to underwriters, securities dealers and others in
connection with sales of shares, to the extent, if any, that such payments may
be deemed to be within the scope of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class D shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class D
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class D shares (as the case may be) to make payments for personal
services and/or the maintenance 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.
35
<PAGE>
During the fiscal year ended March 31, 1997, 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:
<TABLE>
<CAPTION>
Class A Class B Class D
------- ------- -------
<S> <C> <C> <C>
Advertising $ 2,244 $ 2,507 $ 1,295
Printing and mailing of prospectuses to 857 957 522
other than current shareholders
Compensation to dealers 560,647 2,232,701 145,310
Compensation to sales personnel 7,475 8,340 5,034
Interest 0 0 0
Carrying or other financing charges 0 0 0
Other expenses: marketing; general 3,730 4,165 2,295
-------- ---------- --------
Total Fees $574,953 $2,248,670 $154,456
======== ========== ========
</TABLE>
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 Fund will be calculated
as set forth below. Total return and yield are computed separately for each
class of shares of the Fund. Shares of the Fund had no class designations until
June 1, 1993, when designations were assigned based on the pricing and Rule
12b-1 fees applicable to shares sold thereafter. Performance data for a
specified class includes periods prior to the adoption of class designations.
36
<PAGE>
All calculations of performance data in this section reflect the
voluntary measures, if any, by the Fund's affiliates to reduce expenses relating
to the Fund; see "Accrued Expenses" later in this section.
The performance data reflects Rule 12b-1 fees and sales charges, 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 operations to present Maximum 4.5% sales charge reflected
B 1.00% 0.25% until June 1, 1993; 1.00% June 1, 1- and 5-year periods reflect a 5% and
1993 to present; fee will reduce performance a 2% contingent deferred sales charge,
for periods after June 1, 1993 respectively
C None 0.25% until June 1, 1993; 0% thereafter None
D 1.00% 0.25% until June 1, 1993; 1.00% June 1, 1993 1-year period reflects a 1% contingent
to present; fee will reduce performance for deferred sales charge
periods after June 1, 1993
</TABLE>
Total Return
- ------------
The standard total return of each class of shares of the Fund was as
follows:
Commencement of
Operations Five Years One Year
(December 29, 1988) Ended Ended
to March 31, 1997 March 31, 1997 March 31, 1997
----------------- -------------- --------------
Class A 10.92% 11.56% 7.43%
Class B 11.15% 11.70% 6.76%
Class C 11.66% 12.80% 12.77%
Class D 11.15% 11.95% 10.64%
Standard total return is computed by determining the average annual
compounded rates of return over the designated periods that, if applied to the
initial amount invested would produce the ending redeemable value, in accordance
with the following formula:
37
<PAGE>
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated period
assuming a hypothetical $1,000 payment made at the beginning of
the designated period
The calculation is based on the further assumptions that the highest
applicable initial or contingent deferred sales charge is deducted, and that all
dividends and distributions by the Fund are reinvested at net asset value on the
reinvestment dates during the periods. All accrued expenses and recurring
charges are also taken into account as described later herein.
Yield
- -----
The annualized yield of each class of shares of the Fund based on the
month of March 1997 was as follows:
Class A 1.65%
Class B 0.97%
Class C 1.98%
Class D 0.97%
Yield for each of the Fund's Class A, Class B, Class C and Class D
shares is computed by dividing the net investment income per share earned during
a recent month or other specified 30-day period by the applicable maximum
offering price per share on the last day of the period and annualizing the
result, according to the following formula:
YIELD = 2[(a-b + 1)6 -1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of voluntary expense
reductions by the Investment Manager)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
38
<PAGE>
To calculate interest earned (for the purpose of "a" above) on debt
obligations, the Fund computes the yield to maturity of each obligation held by
the Fund based on the market value of the obligation (including actual accrued
interest) at the close of the last business day of the preceding period, or,
with respect to obligations purchased during the period, the purchase price
(plus actual accrued interest). The yield to maturity is then divided by 360 and
the quotient is multiplied by the market value of the obligation (including
actual accrued interest) to determine the interest income on the obligation for
each day of the period that the obligation is in the portfolio. Dividend income
is recognized daily based on published rates.
With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("paydowns"), the Fund accounts for gain or
loss attributable to actual monthly paydowns as a realized capital gain or loss
during the period. The Fund has elected not to amortize discount or premium on
such securities.
Undeclared earned income, computed in accordance with generally
accepted accounting principles, may be subtracted from the maximum offering
price. Undeclared earned income is the net investment income which, at the end
of the base period, has not been declared as a dividend, but is reasonably
expected to be declared as a dividend shortly thereafter. The maximum offering
price includes, as applicable, a maximum sales charge of 4.5% with respect to
Class A shares.
All accrued expenses are taken into account as described later herein.
Yield information is useful in reviewing the Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in the Fund's shares with bank deposits, savings accounts and
similar investment alternatives which are insured and/or often provide an agreed
or guaranteed fixed yield for a stated period of time. Shareholders should
remember that yield is a function of the kind and quality of the instruments in
the Fund's portfolio, portfolio maturity and operating expenses and market
conditions.
Accrued Expenses
- ----------------
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return and yield results take sales charges, if applicable, into
account, although the results do not take into account recurring and
nonrecurring charges for optional services which only certain shareholders elect
and which involve nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by
affiliates of fees or expenses during the subject period. In the absence of such
subsidization, the performance of the Fund would have been lower.
39
<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 one year
before, five years before and at the time of commencement of the Fund's
operations. In addition, the Fund may provide nonstandardized total return
results for differing periods, such as for the most recent six months, and/or
without taking sales charges into account. Such nonstandardized total return is
computed as otherwise described under "Total Return" except the result may or
may not be annualized, and as noted any applicable sales charge, if any, may not
be taken into account and therefore not deducted from the hypothetical initial
payment of $1,000. For example, the Fund's nonstandardized total returns for the
six months ended March 31, 1997, without taking sales charges into account were
as follows:
Class A 4.17%
Class B 3.83%
Class C 4.30%
Class D 3.83%
Distribution Rates
- ------------------
The Fund may also quote its distribution rate for each class of shares.
The distribution rate is calculated by annualizing the latest per-share
distribution from ordinary income and dividing the result by the maximum
offering price per share as of the end of the period to which the distribution
relates. A distribution can include gross investment income from debt
obligations purchased at a premium and in effect include a portion of the
premium paid. A distribution can also include non-recurring, gross short-term
capital gains without recognition of any unrealized capital losses. Further, a
distribution can include income from the sale of options by the Fund even though
such option income is not considered investment income under generally accepted
accounting principles.
Because a distribution can include such premiums, capital gains and
option income, the amount of the distribution may be susceptible to control by
the Investment Manager through transactions designed to increase the amount of
such items. Also, because the distribution rate is calculated in part by
dividing the latest distribution by the offering price, which is based on net
asset value plus any applicable sales charge, the distribution rate will
increase as the net asset value declines. A distribution rate can be greater
than the yield rate calculated as described above.
The distribution rates of the Fund, based on the month of March 1997,
were as follows:
Class A 1.84%
Class B 0.93%
Class C 2.15%
Class D 0.89%
40
<PAGE>
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as the Trust's independent accountants, providing professional services
including (1) an audit of the Fund's annual financial statements, (2) assistance
and consultation in connection with Securities and Exchange Commission filings
and (3) review of the annual income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a
semiannual basis, other supplementary financial reports may be made available
from time to time through electronic or other media. Shareholders with
substantial holdings in one or more State Street Research Funds may also receive
reports and other information which reflect or analyze their positions in a
consolidated manner. For more information, call State Street Research
Shareholder Services.
The following financial statements are for the Fund's fiscal year ended
March 31, 1997.
DOCSC\518808.3
41
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
March 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED INCOME SECURITIES 24.7%
U.S. Treasury 6.0%
U.S. Treasury Bond, 12.00% $ 800,000 8/15/2013 $ 1,099,872
U.S. Treasury Bond, 8.125% 4,375,000 8/15/2021 4,814,556
U.S. Treasury Bond, 6.25% 875,000 8/15/2023 775,329
U.S. Treasury Note, 5.125% 975,000 6/30/1998 962,510
U.S. Treasury Note, 5.875% 1,950,000 10/31/1998 1,935,687
U.S. Treasury Note, 6.75% 2,275,000 5/31/1999 2,286,375
U.S. Treasury Note, 6.625% 6,475,000 7/31/2001 6,442,625
U.S. Treasury Note, 7.25% 3,475,000 5/15/2004 3,545,056
U.S. Treasury Note, 7.875% 6,375,000 11/15/2004 6,732,574
U.S. Treasury Note, 6.50% 3,700,000 8/15/2005 3,597,658
-------------
32,192,242
-------------
U.S. Agency Mortgage 5.4%
Federal Home Loan Mortgage Corp., 7.50% 103,849 4/01/2002 103,330
Federal Home Loan Mortgage Corp., 8.50% 358 7/01/2009 369
Federal Home Loan Mortgage Corp., 9.50% 444,890 7/25/2022 478,448
Federal Home Loan Mortgage Corp., 7.00% 1,568,475 6/01/2024 1,509,171
Federal Home Loan Mortgage Corp., 7.50% 1,221,813 8/01/2024 1,205,013
Federal Home Loan Mortgage Corp., 7.00% 803,606 12/01/2024 773,221
Federal Home Loan Mortgage Corp., 7.50% 908,998 11/01/2025 895,218
Federal Home Loan Mortgage Corp., 7.50% 495,435 4/01/2026 487,924
Federal Home Loan Mortgage Corp. Series 29-H PAC,
6.50% 425,000 3/25/2023 400,427
Federal National Mortgage Association, 9.50% 1,705,243 10/01/2003 1,794,751
Federal National Mortgage Association, 8.00% 252,528 4/01/2008 257,563
Federal National Mortgage Association, 8.00% 324,735 6/01/2008 331,210
Federal National Mortgage Association, 8.50% 293,961 2/01/2009 309,061
Federal National Mortgage Association, 7.50% 1,992,418 6/01/2010 1,998,874
Federal National Mortgage Association, 7.50% 982,977 10/01/2025 965,460
Federal National Mortgage Association, 7.50% 1,689,384 10/01/2025 1,657,709
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Agency Mortgage (cont'd)
Government National Mortgage Association, 6.50% $ 646,881 2/15/2009 $ 626,362
Government National Mortgage Association, 6.50% 238,466 6/15/2009 230,863
Government National Mortgage Association, 6.50% 1,417,768 7/15/2009 1,372,796
Government National Mortgage Association, 9.00% 422,142 6/15/2016 448,817
Government National Mortgage Association, 8.00% 754,986 9/15/2017 768,289
Government National Mortgage Association, 8.00% 735,673 8/15/2022 743,714
Government National Mortgage Association, 8.00% 578,287 12/15/2022 584,607
Government National Mortgage Association, 8.00% 590,114 12/15/2022 596,564
Government National Mortgage Association, 7.00% 1,217,897 1/15/2025 1,167,282
Government National Mortgage Association, 8.00% 744,805 5/15/2025 748,760
Government National Mortgage Association, 8.00% 909,559 7/15/2025 913,252
Government National Mortgage Association, 6.50% 937,647 11/15/2025 868,196
Government National Mortgage Association, 7.50% 1,334,858 11/15/2025 1,309,402
Government National Mortgage Association, 8.00% 640,212 9/15/2026 642,812
Government National Mortgage Association TBA,
7.50% 975,000 5/15/2012 978,656
Government National Mortgage Association TBA,
8.50% 2,925,000 4/17/2027 2,999,953
Government National Mortgage Association TBA,
8.00% 500,000 5/19/2027 500,938
-------------
28,669,012
-------------
Foreign 0.8%
Hydro-Quebec Deb. Series HS,
9.40% 1,025,000 2/01/2021 1,174,435
Usinor Sacilor Note ADR, 7.25% 3,500,000 8/01/2006 3,382,190
-------------
4,556,625
-------------
Foreign Government 1.8%
Government of Australia,
10.00% Australian Dollar
6,375,000 2/15/2006 5,630,900
Canadian Dollar
Government of Canada, 7.50% 1,775,000 12/01/2003 1,354,923
French Franc
Government of France, 8.00% 1,925,000 4/25/2003 2,511,711
-------------
9,497,534
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Trust Certificates 0.3%
Cooperative Trust Certificates, 10.11% $ 900,000 12/15/2017 $ 964,989
Cooperative Utility Trust Certificates, 10.70% 350,000 9/15/2017 375,123
Cooperative Utility Trust Certificates, 10.125% 225,000 3/15/2019 243,455
-------------
1,583,567
-------------
Corporate 6.5%
Acme Boot Inc. Sr. Note Series B, 11.50% 250,000 12/15/2000 105,000
Allbritton Communications Co. Sr. Sub. Deb.,
11.50% 500,000 8/15/2004 522,500
Alvey Systems Inc. Sr. Sub. Note, 11.375% 375,000 1/31/2003 390,000
American Telecasting Inc. Sr. Note, 0.00% to
6/14/99, 12.50% from 6/15/99 to maturity 499,947 6/15/2004 169,982
Anacomp Inc. Sr. Sub. Note, 13.00%[diamond] 268,688 6/04/2002 287,496
Anchor Advanced Products Inc. Sr. Note, 11.75%+ 500,000 4/01/2004 506,250
Axia Inc. Sr. Sub. Note, 11.00% 250,000 3/15/2001 255,000
Belle Casinos Inc. First Mortgage Note, 12.00%+[ ] 125,000 10/15/2000 47,500
Benedek Broadcasting Corp. Sr. Note, 11.875% 250,000 3/01/2005 275,000
Benedek Communications Co. Sr. Sub. Note, 0.00%
to 5/14/2001, 13.25% from 5/15/2001 to maturity 1,000,000 5/15/2006 580,000
Brooks Fiber Properties Inc. Sr. Note, 0.00% to
2/28/2001, 10.875% from 3/1/2001 to maturity 500,000 3/01/2006 310,000
Busse Broadcasting Corp. Sr. Sec. Note, 11.625% 500,000 10/15/2000 526,250
Cafeteria Operators L.P. Sr. Sec. Note, 12.00% 250,000 12/31/2001 240,000
Calpine Corp. Sr. Note, 9.25% 500,000 2/01/2004 500,000
Capstar Broadcasting Partners Sr. Note, 0.00% to
1/31/2002, 12.75% from 2/1/2002 to maturity+ 750,000 2/01/2009 397,500
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate (cont'd)
Celcaribe SA Sr. Sec. Note, 0.00% to 3/14/98,
13.50% from 3/15/98 to maturity $1,830,000 3/15/2004 $1,647,000
Celestica International Inc. Sr. Sub. Note,
10.50%+ 250,000 12/31/2006 262,500
Chatwins Group Inc. Sr. Exch. Note, 13.00% 250,000 5/01/2003 232,500
CHC Helicopter Corp. Sr. Sub. Note, 11.50% 600,000 7/15/2002 618,000
Clearnet Communications Inc. Sr. Note, 0.00% to
12/14/2000, 14.75% from 12/15/2000 to maturity 1,050,000 12/15/2005 645,750
Coleman Worldwide Corp. Sr. Sec. Liquid Yield
Option Note, 0.00% 5,000,000 5/27/2013 1,450,000
Dyncorp Inc. Sr. Sub. Note, 9.50%+ 500,000 3/01/2007 487,500
Echostar Satellite
Broadcast Corp. Sr. Note, 0.00% to 3/14/2000,
13.125% from 3/15/2000 to maturity 250,000 3/15/2004 197,500
Edison Mission Energy Funding Corp. Series A
Note, 6.77%+ 2,463,700 9/15/2003 2,423,468
Empire Gas Corp. Sr. Sec Note, 7.00% to 7/14/99,
12.875% from 7/15/99 to maturity 750,000 7/15/2004 652,500
Envirosource Inc. Note, 9.75% 1,000,000 6/15/2003 975,000
Euramax International PLC Sr. Sub. Note, 11.25% 500,000 10/01/2006 526,250
Exide Corp. Sr. Note, 10.00% 250,000 4/15/2005 250,000
Finlay Enterprises, Inc. Sr. Deb., 0.00% to
4/30/98, 12.00% from 5/1/98 to maturity 250,000 5/01/2005 231,250
Grand Union Co. Sr. Note, 12.00% 500,000 9/01/2004 491,250
Haynes International Inc. Sr. Note, 11.625% 125,000 9/01/2004 131,250
ICF International Inc. Sr. Sub. Note, 13.00% 500,000 12/31/2003 472,500
ICG Holdings Inc. Sr. Note, 0.00% to 9/14/2000,
13.50% from 9/15/2000 to maturity 675,000 9/15/2005 452,250
Intercel Inc. Sr. Note, 0.00% to 1/31/2001,
12.00% from 2/1/2001 to maturity 300,000 2/01/2006 180,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate (cont'd)
Intertek Financial Corp. Sr. Sub. Note, 10.25%+ $ 500,000 11/01/2006 $515,000
Ladish Company, Inc. Sr. Sub. Sec. Note, 12.00%++ 19,974 12/22/2000 21,324
Lamar Advertising Co. Sr. Sub. Note, 9.625% 250,000 12/01/2006 250,000
Mail-Well Envelope Corp. Sr. Sub. Note, 10.50% 250,000 2/15/2004 261,250
Marcus Cable Company L.P. Sr. Note, 0.00% to
6/14/2000, 14.25% from 6/15/2000 to maturity 1,000,000 12/15/2005 690,000
Muzak L.P. Sr. Note, 10.00% 250,000 10/01/2003 252,500
Nextel Communications Inc.
Sr. Note, 0.00% to 2/14/99, 9.75% from 2/15/99
to maturity 1,000,000 8/15/2004 680,000
Norcal Waste Systems Inc.
Sr. Note Series B, 13.00% to 5/14/97, 13.25%
from 5/15/97 to 11/14/97, 13.50% from 11/15/97
to maturity 500,000 11/15/2005 550,000
NS Group Inc. Sr. Sec. Note, 13.50% 650,000 7/15/2003 695,500
Outdoor Systems Inc. Sr. Sub. Note, 9.375% 500,000 10/15/2006 510,000
Overhead Door Corp. Note, 12.25% 500,000 2/01/2000 525,000
Owens & Minor Inc. Sr. Sub. Note, 10.875% 125,000 6/01/2006 134,687
Packaging Resources Inc.
Sr. Sec. Note, 11.625% 750,000 5/01/2003 776,250
Pagemart Inc. Sr. Exch. Note, 0.00% to 10/31/98,
12.25% from 11/1/98 to maturity 500,000 11/01/2003 400,000
Pathmark Stores Inc. Sub. Note, 11.625% 500,000 6/15/2002 516,250
Plastic Specialties & Technologies, Inc. Sr.
Note, 11.25% 350,000 12/01/2003 378,000
Pricellular Wireless Corp. Sr. Note, 10.75% 250,000 11/01/2004 253,125
Protection One Alarm Inc. Sr. Note, 0.00% to
6/29/98, 13.625% from 6/30/98 to maturity 500,000 6/30/2005 475,000
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate (cont'd)
Quest Diagnostics Inc. Sr. Sub. Note, 10.75% $ 500,000 12/15/2006 $ 515,000
Qwest Communications International Inc. Sr. Note,
10.875%+ 500,000 4/01/2007 492,500
RSL Communications Ltd. Unit, 12.25%+ 750,000 11/15/2006 750,000
Sam Houston Race Park Ltd. Sr. Sec. Note,
11.00%[diamond] 140,244 9/01/2001 56,097
Sheffield Steel Corp. First Mortgage Note, 12.00% 500,000 11/01/2001 470,000
Spanish Broadcasting Systems Inc. Sr. Note, 7.50% 1,000,000 6/15/2002 1,070,000
Spinnaker Industries Inc. Sr. Sec. Note, 10.75%+ 250,000 10/15/2006 257,500
Sun Media Corp. Sr. Sub. Note, 9.50%+ 250,000 2/15/2007 237,500
Telemundo Group Inc. Sr. Note, 7.00% to 2/14/99,
10.50% from 2/15/99 to maturity 250,000 2/15/2006 246,250
Tokheim Corp. Sr. Sub. Note, 11.50% 750,000 8/01/2006 802,500
Tracor Inc., 8.50%+ 750,000 3/01/2007 720,000
TransAmerican Refining Corp. Sr. Note, 0.00% to
2/14/98, 18.50% from 2/15/98 to 8/14/98, 18.00%
from 8/15/98 to maturity 500,000 2/15/2002 457,500
TransTexas Gas Corp. Sr. Sec. Note, 11.50% 750,000 6/15/2002 821,250
Treasure Bay Gaming and Resorts, Inc. First
Mortgage Units, 12.25%+[ ] 250,000 11/15/2000 50,000
TV Azteca SA de CV Sr. Note Series B, 10.50%+ 500,000 2/15/2007 487,170
U.S.A. Mobile Communications Inc. Sr. Note, 9.50% 150,000 2/01/2004 129,000
U.S.A. Mobile Communications Inc. Sr. Note,
14.00% 750,000 11/01/2004 802,500
Universal Outdoor Inc. Sr. Sub. Note Series B,
9.75%+ 250,000 10/15/2006 247,500
Winstar Communications Inc. Sr. Sub. Cv. Note,
0.00% to 10/14/2000, 14.00% from 10/15/2000 to
maturity+ 300,000 10/15/2005 189,000
Wireless One Inc. Sr. Disc Note, 13.00% 400,000 10/15/2003 260,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Corporate (cont'd)
Wireless One Inc. Sr. Note, 0.00% to 7/31/2001,
13.50% from 8/1/2001 to maturity $1,250,000 8/01/2006 $ 337,500
Wyman-Gordon Co. Sr. Note, 10.75% 250,000 3/15/2003 266,250
-------------
34,987,849
-------------
Finance/Mortgage 3.9%
Advanta Credit Card Master Trust Series 95F-A1,
6.05% 475,000 8/01/2003 462,085
Bank of New York Institutional Capital Trust,
7.78%+ 2,650,000 12/01/2026 2,475,126
BankAmerica Institutional Capital Series B,
7.70%+ 2,600,000 12/31/2026 2,432,404
Capital One Bank Sr. Note, 7.08% 2,500,000 10/30/2001 2,467,950
Chase Mortgage Finance Corp. Series 93L-2A5,
6.25% 675,000 10/25/2024 646,102
Countrywide Mortgage Inc. Series 1993-E A-1,
6.50% 270,352 1/25/2024 269,423
Countrywide Mortgage Inc. Series 1994-2 A-7,
6.50% 650,000 4/25/2008 647,354
DeBartolo Capital Partnership Class A2, 7.48%+ 2,475,000 5/01/2004 2,504,391
Ford Credit Auto Loan Master Trust Series 95-1,
6.50% 1,100,000 8/15/2000 1,086,591
GE Global Insurance Holding Corp. Note, 7.00% 1,500,000 2/15/2026 1,363,695
Prudential Home Mortgage Securities Co. Series
93-29 A-6 PAC, 6.75% 1,046,908 8/25/2008 1,040,030
Residential Funding Corp. Series 1993-S25 A-1,
6.50% 163,016 7/25/2008 161,182
Sears Credit Account Master Trust Series 1995-2A,
8.10% 2,650,000 6/15/2004 2,738,589
Sears Roebuck Acceptance Corp. Note, 6.86% 2,500,000 8/06/2001 2,475,625
-------------
20,770,547
-------------
Total Fixed Income Securities (Cost $134,462,387) 132,257,376
-------------
</TABLE>
- -------------------------------------------------------------------------------
Value
Shares (Note 1)
- -------------------------------------------------------------------------------
EQUITY SECURITIES 55.3%
Basic Industries 8.9%
Chemical 3.3%
Agrium Inc.*+++ 347,747 $ 4,433,774
Cabot Corp. 120,000 2,880,000
Cambrex Corp.+++ 45,750 1,532,625
Ciba Specialty Chemicals AG* 2,700 223,280
Monsanto Co. 65,000 2,486,250
Nippon Chemical Industrial Co. Ltd.* 19,000 109,849
Rhone-Poulenc SA* 72,700 2,464,122
Thiokol Corp. 60,000 3,315,000
--------------
17,444,900
--------------
Diversified 0.2%
Axia Holdings Corp.*++ 750 30,000
Plastic Specialties & Technology, Inc.* 7,500 22,500
Tenma Corp.* 99,000 1,320,854
--------------
1,373,354
--------------
Electrical Equipment 0.8%
Asia Pacific Wire & Cable Corp.* 121,800 1,461,600
General Electric Co. 25,900 2,570,575
Protection One Inc. Wts.*+ 800 5,400
Watsco Inc.* 10,800 275,400
--------------
4,312,975
--------------
Forest Product 0.7%
Aracruz Celulose SA ADR 47,000 857,750
Crown Packaging Holdings Ltd. Wts.*+ 3,750 469
Equitable Bag Inc.* 47,600 23,800
Equitable Bag Inc. Pfd.* 4,760 102,340
Mail-Well Holdings, Inc.*++ 14,205 280,548
S.D. Warren Co. Exch. Pfd.* 18,000 670,500
SDW Holdings Corp. Wts.* 18,000 76,500
Stone Container Corp. 135,000 1,501,875
--------------
3,513,782
--------------
Machinery 1.3%
Amada Co* 262,000 1,896,094
Chatwins Group Inc. Wts.*+ 500 500
NSK Ltd.* 50,000 266,435
Sundstrand Corp. 85,000 3,686,875
US Filter Corp.* 39,600 1,222,650
--------------
7,072,554
--------------
Metal & Mining 2.1%
Alumax Inc.* 80,000 2,770,000
Aluminum Company of America 35,800 2,434,400
Bar Technologies Inc. Wts.*+ 250 11,250
Kennametal Inc. 85,000 3,081,250
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Value
Shares (Note 1)
- -------------------------------------------------------------------------------
Metal & Mining (cont'd)
NS Group Inc. Wts.*+ 650 $ 1,950
RTZ Corp.* 51,952 823,129
SGL Carbon AG* 10,700 1,469,005
Sheffield Steel Corp. Wts.* 1,250 3,750
Wyman-Gordon Co.* 21,000 427,875
------------
11,022,609
------------
Railroad 0.5%
Canadian National Railway Co. 80,000 2,830,000
------------
Total Basic Industries 47,570,174
------------
Consumer Cyclical 7.7%
Airline 0.2%
America West Holding Corp. Cl. B* 46,500 726,563
CHC Helicopter Corp. Wts.*++ 2,000 1,000
UNC Inc.* 16,800 239,400
------------
966,963
------------
Automotive 1.3%
Exide Corp. 165,000 2,701,875
Harvard Industries Inc. 14.25% Exch. Pfd.[diamond] 11,533 33,157
Honda Motor Co.* 73,000 2,178,135
Lear Corp.* 18,800 627,450
NGK Spark Plug Co.* 175,000 1,698,068
------------
7,238,685
------------
Building 0.7%
DeGeorge Financial Corp. Wts.* 3,000 750
Lafarge Corp. 116,600 2,652,650
Shenzhen Expressway Co. Ltd.* 2,900,000 907,572
Waxman Industries Inc. Wts.*+ 29,500 88,500
------------
3,649,472
------------
Hotel & Restaurant 1.3%
Fine Host Corp.* 30,100 707,350
Harrah's Entertainment Inc.* 201,000 3,442,125
Mirage Resorts Inc.* 121,900 2,590,375
Motels of America Inc.*+ 500 5,750
Primadonna Resorts Inc.* 14,600 290,175
------------
7,035,775
------------
Recreation 1.2%
Amer Group Ltd. Cl. A* 80,300 1,655,637
American Radio Systems Corp. 14,300 436,150
American Radio Systems Corp. Exch. Pfd.*+ 2,500 245,000
American Telecasting Inc. Wts.* 1,250 1,250
Evergreen Media Corp. Cl. A 17,800 519,538
Fitzgeralds South Inc. Wts.*++ 1,250 12,500
Goldriver Hotel & Casino Corp. Cl. B*++ 20,000 2,500
Recreation (cont'd)
Goldriver Hotel & Casino Corp. Liquidation Trust
Units++ 500,000 $ 6,350
Granite Broadcasting Corp.*+ 250 231,250
Heartland Wireless Communications, Inc. Wts.*++ 1,500 1,500
SHRP Equity Inc.* 37 148
Walt Disney Co. 45,000 3,285,000
Wireless One Inc. Wts.*+ 750 750
Wireless One Inc. Wts.* 1,250 938
------------
6,398,511
------------
Retail Trade 2.8%
Carson Pirie Scott & Co.* 14,300 441,513
Central Rents Inc.*+ 250 13,750
Dominick's Supermarkets Inc.* 27,500 632,500
Filenes Basement Corp.* 35,100 236,925
Genesco Inc.* 29,500 331,875
Global DirectMail Corp.* 37,000 642,875
Gucci Group NV* 35,300 2,546,013
Kroger Co.* 100,000 5,075,000
Ralphs Grocery Co. Wts.*++# 9,686 97,645
Rite-Aid Corp. 41,600 1,747,200
Sears Roebuck & Co. 39,100 1,964,775
Stride Rite Corp. 19,100 286,500
Sunglass Hut International Inc.* 63,000 441,000
Supermarkets General Holdings Corp.
Exch. Pfd.[diamond] 18,200 432,250
------------
14,889,821
------------
Textile & Apparel 0.2%
Acme Boot Co.*+ 250 250
Kenneth Cole Productions Inc. Cl. A* 24,600 516,600
Samsonite Corp.* 8,700 376,275
------------
893,125
------------
Total Consumer Cyclical 41,072,352
------------
Consumer Staple 12.8%
Business Service 2.4%
ADT Ltd.* 170,000 4,250,000
Greenwich Air Services Inc.* 42,700 1,216,950
HBO & Co. 40,000 1,900,000
ICF Kaiser International Inc. Wts.* 2,400 1,200
La Petite Holdings Corp.* 22,000 896,500
Pagemart Inc. Wts.*+ 2,300 9,200
Philip Environmental Inc.* 74,900 1,132,863
Republic Industries Inc.* 76,700 2,660,531
Universal Outdoor Holdings Inc.* 16,000 464,000
Vestar/LPA Investment Corp.*+ 1,375 13,750
----------
12,544,994
----------
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Value
Shares (Note 1)
- -------------------------------------------------------------------------------
Drug 2.5%
Amgen Inc.* 44,300 $ 2,475,263
Axogen Ltd.* 52,500 1,207,500
Biora AB* 168,900 1,781,787
BioVail Corp.* 44,800 1,041,600
Novartis AG* 2,700 3,351,077
Pfizer Inc. 40,300 3,390,238
------------
13,247,465
------------
Food & Beverage 1.5%
Coca-Cola Enterprises Inc. 47,500 2,725,312
Dr Pepper Bottling Holdings Inc. Cl. A* 56,000 784,000
LVMH Moet Hennessy Louis Vuitton* 4,400 1,070,514
Seven-Up/RC Bottling Co. of Southern California* 26,250 311,719
Whitman Corp. 131,900 3,231,550
------------
8,123,095
------------
Hospital Supply 3.8%
Baxter International Inc. 59,600 2,570,250
Columbia/HCA Healthcare Corp. 84,350 2,836,269
Genesis Health Ventures Inc.* 10,900 340,625
Healthdyne Technologies Inc.* 67,100 944,642
IDX Systems Corp.* 5,400 147,150
Johnson & Johnson 60,000 3,172,500
Karrington Health Inc.* 35,000 420,000
Pacificare Health Systems, Inc. Cl. A* 12,000 991,500
Physio-Control International Corp.* 13,700 190,088
Roche Holdings AG* 475 4,107,974
Rural/Metro Corp.* 29,500 899,750
Tenet Healthcare Corp. 108,800 2,679,200
Total Renal Care Holdings Inc.* 25,700 780,637
Xomed Surgical Products Inc.* 22,300 367,950
------------
20,448,535
------------
Personal Care 0.6%
Avon Products Inc. 50,500 2,651,250
Wesley Jessen Visioncare Inc.* 48,000 744,000
------------
3,395,250
------------
Printing & Publishing 1.4%
A.H. Belo Corp. Cl. A 12,852 475,524
General Media Inc. Wts.*++ 250 250
Hollinger International, Inc. Cl. A* 340,000 3,102,500
K-III Communications Corp. Series B Exch. Pfd.* 5,424 592,562
K-III Communications Corp. Series D Exch. Pfd.* 2,500 250,625
Sullivan Holdings Inc.* 149 53,467
Valassis Communications Inc. 125,000 2,796,875
------------
7,271,803
------------
Tobacco 0.6%
Imperial Tobacco Group PLC* 359,100 $ 2,463,717
Philip Morris Companies, Inc. 8,500 970,062
------------
3,433,779
------------
Total Consumer Staple 68,464,921
------------
Energy 6.0%
Oil 4.9%
Burlington Resources Inc. 59,800 2,556,450
Energy Africa Ltd.* 938,900 4,355,119
ENI SPA ADR 41,700 2,111,063
Oryx Energy Co. 186,200 3,584,350
Royal Dutch Petroleum Co. 17,000 2,975,000
Seagull Energy Corp.*+++ 358,288 6,449,184
Tosco Corp. 117,000 3,334,500
Total SA Cl. B* 12,909 1,119,493
------------
26,485,159
------------
Oil Service 1.1%
Cliffs Drilling Co.* 4,700 279,062
Coflexip* 31,763 1,951,774
Schlumberger Ltd. 34,900 3,743,025
------------
5,973,861
------------
Total Energy 32,459,020
------------
Finance 7.6%
Bank 3.3%
BankAmerica Corp. 43,000 4,332,250
Citicorp 35,000 3,788,750
Fleet Financial Group Inc. 65,900 3,772,775
Glendale Federal Bank FSB 22,300 512,900
Mellon Bank Corp. 49,900 3,630,225
NationsBank Corp. 11,600 642,350
Riverbank America Pfd.* 20,000 480,000
Sovereign Bancorp Inc.* 32,660 391,920
------------
17,551,170
------------
Financial Service 0.9%
Beacon Properties Corp. 10,000 331,250
CMAC Investment Corp. 13,500 450,562
CRIIMI MAE Inc.* 13,500 199,125
Essex Property Trust, Inc.* 11,300 337,588
Federal Home Loan Mortgage Corp. 96,800 2,637,800
First Industrial Realty Trust Inc. 11,300 357,363
Homeside Inc.* 30,100 443,975
----------
4,757,663
----------
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Value
Shares (Note 1)
- -------------------------------------------------------------------------------
Insurance 3.4%
Ace Ltd. 88,900 $ 5,689,600
AMBAC Inc. 27,200 1,754,400
Capital Re Corp. 5,500 234,438
Mid Ocean Ltd. 90,000 4,297,500
Mutual Risk Management Ltd. 12,900 467,625
Penncorp Financial Group Inc.* 20,000 640,000
Saint Paul Companies, Inc. 7,000 454,125
Travelers Group Inc. 46,100 2,207,037
Travelers Property Casualty Corp. Cl. A 76,700 2,435,225
------------
18,179,950
------------
Total Finance 40,488,783
------------
Science & Technology 10.0%
Aerospace 1.2%
Boeing Co. 18,246 1,799,512
Bombardier, Inc. Cl. B 85,200 1,541,538
First Aviation Services Inc.* 49,900 474,050
General Dynamics Corp. 34,800 2,344,650
Ladish Company, Inc.*++# 52,000 97,500
Triumph Group, Inc.* 14,700 369,338
------------
6,626,588
------------
Computer Software & Service 3.2%
Anacomp Inc.* 19,457 214,027
Anacomp Inc. Wts.* 4,941 18,529
Boston Technology Inc.* 19,600 369,950
Check Point Software Technologies Ltd.* 21,200 434,600
Cisco Systems Inc.* 51,000 2,454,375
Complete Business Solutions Inc.* 15,500 151,125
Manugistics Group Inc.* 9,900 361,350
Mastech Corp.* 22,000 354,750
Microsoft Corp.* 27,800 2,548,912
National Processing, Inc.* 57,700 461,600
Planning Sciences International PLC ADR* 51,600 464,400
SAP AG Pfd.* 14,900 2,554,796
Sema Group PLC* 72,300 1,635,315
TriTeal Corp.* 12,000 141,000
TT Tieto Oy Cl. B* 8,000 658,179
Veritas Software Co.* 15,500 459,188
Wang Laboratories Inc.* 44,200 784,550
Western Digital Corp.* 27,500 1,557,187
Wind River Systems Inc.* 10,350 244,519
WM Data AB Cl. B* 8,100 706,170
Xylan Corp.* 12,400 238,700
------------
16,813,222
------------
- -------------------------------------------------------------------------------
Value
Shares (Note 1)
- -------------------------------------------------------------------------------
Electronic Components 2.0%
ABB AG* 775 $ 931,723
AMP Inc. 59,400 2,041,875
Hitachi Ltd.* 220,000 1,956,821
Intel Corp. 13,000 1,808,625
Lernout & Hauspie Speech Products NV ADR* 4,000 77,000
Microtouch Systems Inc.* 20,500 404,875
Remec Inc.* 28,900 621,350
Rohm Co. 32,000 2,359,829
Zebra Technologies Corp. Cl A* 20,400 469,200
------------
10,671,298
------------
Electronic Equipment 2.7%
Berg Electronics Corp.* 16,000 456,000
Chicago Miniature Lamp, Inc.* 22,900 449,412
L.M. Ericsson Telephone Co. ADR Cl. B* 88,480 2,991,730
L.M. Ericsson Telephone Co. Cl. B* 96,800 3,416,773
Lucent Technologies Inc.* 34,600 1,825,150
Motorola Inc. 38,900 2,348,587
Network Equipment Technologies, Inc.* 61,800 834,300
Pioneer-Standard Electronics Inc. 14,400 183,600
Toolex Alpha NV* 204,400 1,929,022
------------
14,434,574
------------
Office Equipment 0.9%
Compaq Computer Corp.* 45,400 3,478,775
FileNet Corp.* 17,500 282,188
Hewlett-Packard Co. 23,200 1,235,400
------------
4,996,363
------------
Total Science & Technology 53,542,045
------------
Utility 2.3%
Electric 1.7%
Allegheny Power Systems Inc. 78,600 2,328,525
Edison International Inc. 103,800 2,335,500
OGE Energy Corp. 60,000 2,512,500
Veba AG* 37,000 2,095,114
------------
9,271,639
------------
Electronic Equipment 0.1%
Telco Systems Inc.* 24,100 265,100
------------
Telephone 0.5%
Allen Telecom Inc. 33,400 584,500
BCE Inc. 30,000 1,380,000
Celcaribe SA Trust Certificates*+ 297,558 669,505
Clearnet Communications Inc. Wts.* 2,640 15,180
Intelcom Group, Inc. Wts.*++ 1,650 19,800
Intercel Inc. Wts.* 960 5,760
------------
2,674,745
------------
Total Utility 12,211,484
-----------
Total Equity Securities (Cost $266,295,334) 295,808,779
-----------
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Value
Shares (Note 1)
- -------------------------------------------------------------------------------
EQUITY SECURITIES--INFLATION RESPONSIVE
INVESTMENTS 12.2%
Basic Industries 2.3%
Metal & Mining 2.0%
Ashanti Goldfields Ltd. GDR 50,000 $ 687,500
AUR Resources Inc.* 50,000 274,467
Battle Mountain Gold Co. 100,000 662,500
Carpenter Technology Corp.* 25,000 956,250
Crown Resources Corp.* 125,000 765,625
Delta Gold NL* 168,000 247,601
Freeport-McMoRan Copper & Gold, Inc. Cl. B* 20,000 607,500
Kinross Gold Corp.* 60,000 405,000
Maxxam Inc.* 25,000 1,131,250
Menzies Gold NL* 400,000 163,061
Newcrest Mining Ltd.* 150,000 491,533
Normandy Mining Ltd.* 500,000 678,504
Pan African Resources Corp.* 215,600 62,290
Placer Dome Inc. 30,000 543,750
Royal Oak Mines Inc.* 100,000 318,750
Southernera Resources Ltd.* 100,000 548,935
Stillwater Mining Co.* 30,900 606,412
Sutton Resources Ltd.* 28,000 490,000
TVX Gold Inc.* 60,000 427,500
Vaal Reefs Exploration & Mining Ltd. ADR 43,100 261,294
Viceroy Resource Corp.* 100,000 426,147
------------
10,755,869
------------
Railroad 0.3%
OMI Corp. 142,200 1,386,450
------------
Total Basic Industries 12,142,319
------------
Consumer Staple 0.3%
Business Service 0.3%
Commodore Applied Technologies, Inc.* 150,000 1,068,750
Commodore Applied Technologies, Inc. Wts.* 150,000 337,500
------------
1,406,250
------------
Total Consumer Staple 1,406,250
------------
Energy 8.9%
Oil 6.6%
3DX Technologies Inc.* 50,000 550,000
Abacan Resource Corp.*@ 395,100 3,111,412
Apache Corp. 37,500 1,256,250
Arakis Energy Corp.*@ 453,100 1,925,675
Barrett Resources Corp.* 38,900 1,162,138
Barrington Petroleum Ltd.* 91,400 330,083
Basin Exploration Inc.* 65,000 446,875
Canadian 88 Energy Corp.* 40,700 163,153
- ------------------------------------------------------------------------------
Value
Shares (Note 1)
- ------------------------------------------------------------------------------
Oil (cont'd)
Canadian Conquest Exploration Inc.* 173,600 $ 206,891
Clayton Williams Energy Inc.* 27,198 333,176
Coho Energy Inc.* 139,300 1,009,925
Crystal Oil Co.* 10,000 347,500
CS Resources Ltd.* 100,000 841,459
Forcenergy Inc. 8,900 255,875
Intensity Resources Ltd.* 161,300 258,639
KCS Energy Inc.@ 110,800 3,642,550
Mercantile International Petroleum, Inc.* 101,600 162,560
Nuevo Energy Co.*@ 89,100 3,419,212
Oil Search Ltd.* 1,598,100 3,382,620
Optima Petroleum Corp.* 43,100 94,281
Pan East Petroleum Inc.* 85,300 277,248
Plains Resources Inc.* 109,800 1,454,850
Ranger Oil Ltd.* 367,000 3,486,500
Seven Seas Petroleum Inc* 30,000 300,000
Southwestern Energy Co.* 58,600 783,775
Stampeder Exploration Ltd. 225,350 1,126,750
Summit Resources Ltd. 50,000 234,742
Tarragon Oil & Gas Ltd.* 116,357 1,416,118
Tom Brown, Inc.*@ 96,843 1,791,595
Triton Energy Ltd. Cl. A 28,500 1,104,375
Ulster Petroleum Ltd.* 89,000 636,403
------------
35,512,630
------------
Oil Service 2.3%
Atwood Oceanics Inc.* 35,000 2,174,375
Dailey Petroleum Services Corp. Cl. A* 34,200 230,850
Dreco Energy Services Ltd. Cl. A*@ 47,100 1,601,400
Ensco International Inc.*@ 61,887 3,047,935
Global Marine Inc.* 31,900 685,850
J. Ray McDermott SA* 46,900 1,137,325
Noble Drilling Corp.* 83,200 1,435,200
Patterson Energy, Inc.* 4,584 126,633
Pool Energy Services Co.* 51,400 758,150
Rowan Companies, Inc.* 11,400 257,925
TMBR / Sharp Drilling, Inc.* 20,500 243,437
Tuboscope Vetco International Corp.* 30,000 408,750
------------
12,107,830
------------
Total Energy 47,620,460
------------
Utility 0.7%
Natural Gas 0.7%
TransTexas Gas Corp.*@ 279,700 3,915,800
------------
Total Utility 3,915,800
------------
Total Equity Securities--Inflation Responsive Investments
(Cost $50,538,462) 65,084,829
----------
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
-----------------------------------------------------------------------------
Investment Portfolio (cont'd)
-----------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- ------------------------------------------------------------------------------
REPURCHASE AGREEMENTS 0.1%
State Street Bank and Trust Co.,
dated 3/31/97, repurchase
proceeds $260,031,
collateralized by $265,000 U.S.
Treasury Note, 6.00%, due
5/31/98, market value $269,582 $ 260,000 4/01/1997 $ 260,000
--------------
Total Repurchase Agreements (Cost $260,000) 260,000
--------------
CASH EQUIVALENTS 8.8%
American Express Credit Corp.,
5.48% 1,325,000 4/01/1997 1,325,000
American Express Credit Corp.,
5.60% 2,646,000 4/08/1997 2,646,000
Deere & Co., 5.60% 15,000,000 4/10/1997 15,000,000
Ford Motor Credit Co., 5.56%* 14,582,000 4/01/1997 14,582,000
General Electric Capital Corp.,
5.63% 11,725,000 4/02/1997 11,725,000
General Electric Capital Corp.,
5.65% 1,643,000 4/10/1997 1,643,000
--------------
Total Cash Equivalents (Cost $46,921,000) 46,921,000
--------------
Total Investments (Cost $498,477,183)--101.1% 540,331,984
Cash and Other Assets, Less Liabilities--(1.1%) (5,718,014)
--------------
Net Assets--100.0% $ 534,613,970
==============
- -----------------------------------------------------------------------------
Federal Income Tax Information:
At March 31, 1997, the net unrealized appreciation of
investments based on cost for Federal income tax purposes of
$499,107,458 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost $ 61,630,193
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value (20,405,667)
-----------
$ 41,224,526
===========
ADR and GDR stand for American Depositary Receipt and Global Depositary
Receipt, respectively, representing ownership of foreign securities.
* Nonincome-producing securities.
[diamond] Payments of income may be made in cash or in the form of additional
securities.
[ ] Security is in default.
# Security valued under consistently applies procedures established by
the Trustees.
++ Security restricted as to public resale. The total cost and market
value of restricted securities owned at March 31, 1997 were $396,266
and $570,917 (0.11% 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, 1997 were $17,345,368
and $16,780,083 (3.14% of net assets), respectively.
+++ 152,747 shares of Agrium, Inc., 22,500 shares of Cambrex Corp. and
158,780 shares of Seagull Energy Corp. are considered by the Adviser
to be part of Inflation Responsive Investments.
@ 107,000 shares of Abacan Resource Corp., 118,200 shares of Arakis
Energy Corp., 17,100 shares of Dreco Energy Services Ltd., 28,100
shares of Ensco International, Inc., 30,800 shares of KCS Energy,
Inc., 14,100 shares of Nuevo Energy Co., 9,444 shares of Tom Brown,
Inc., and 70,000 shares of TransTexas Gas Corp. are considered by the
Adviser to be part of Equity Securities.
TBA Represents "TBA" (to be announced) purchase commitment to purchase
securities for a fixed unit price at a future date beyond customary
settlement time. Although the unit price has been established, the
principal value has not been finalized and may vary by no more than
1%.
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Forward currency exchange contracts outstanding at March 31, 1997, are as
follows:
<TABLE>
<CAPTION>
Unrealized
Contract Appreciation Delivery
Total Value Price (Depreciation) Date
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sell Australian dollars, buy U.S. dollars 2,300,000 AUD 0.78840 AUD $ 10,845 4/24/97
Sell Australian dollars, buy U.S. dollars 1,141,000 AUD 0.77500 AUD (9,910) 4/24/97
Buy Australian dollars, sell U.S. dollars 655,500 AUD 0.77567 AUD 5,150 5/14/97
Sell Australian dollars, buy U.S. dollars 3,965,500 AUD 0.75560 AUD (110,743) 5/14/97
Sell Canadian dollars, buy U.S. dollars 1,580,000 CAD 0.74223 CAD 28,064 5/14/97
Buy Canadian dollars, sell U.S. dollars 1,632,000 CAD 0.74228 CAD (29,078) 5/14/97
Buy Canadian dollars, sell U.S. dollars 1,580,000 CAD 0.74267 CAD (28,761) 5/14/97
Sell Canadian dollars, buy U.S. dollars 1,632,000 CAD 0.74247 CAD 29,393 5/14/97
Sell Danish krone, buy U.S. dollars 24,516,700 DKK 0.15680 DKK (23,029) 5/14/97
Buy Danish krone, sell U.S. dollars 14,170,000 DKK 0.15305 DKK 66,359 5/14/97
Buy Danish krone, sell U.S. dollars 10,346,700 DKK 0.15553 DKK 22,840 5/14/97
Buy Danish krone, sell U.S. dollars 3,032,300 DKK 0.15516 DKK 7,229 4/24/97
Sell Danish krone, buy U.S. dollars 3,032,300 DKK 0.16063 DKK 9,353 4/24/97
Sell European currency units, buy U.S.
dollars 2,148,000 XEU 1.16180 XEU (12,838) 5/14/97
Buy Hong Kong dollars, sell U.S. dollars 4,042,616 HKD 0.12904 HKD 53 4/01/97
Buy Hong Kong dollars, sell U.S. dollars 3,000,589 HKD 0.12907 HKD (35) 4/02/97
----------
$ (35,108)
==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
March 31, 1997
Assets
Investments, at value (Cost $498,477,183) (Note 1) $ 540,331,984
Cash 799,829
Receivable for securities sold 3,927,457
Interest and dividends receivable 2,574,248
Receivable for fund shares sold 1,157,255
Receivable for open forward contracts 179,286
Receivable from Distributor (Note 3) 43,318
Other assets 73,585
-----------
549,086,962
Liabilities
Payable for securities purchased 12,092,628
Payable for fund shares purchased 900,757
Accrued transfer agent and shareholder services (Note
2) 381,612
Accrued management fee (Note 2) 348,777
Accrued distribution and service fees (Note 5) 286,100
Payable for open forward contracts 214,394
Dividends payable 91,700
Accrued trustees' fees (Note 2) 8,580
Other accrued expenses 148,444
-----------
14,472,992
-----------
Net Assets $ 534,613,970
===========
Net Assets consist of:
Undistributed net investment income $ 6,424
Unrealized appreciation of investments 41,854,801
Unrealized depreciation of forward contracts and
foreign currency (52,419)
Accumulated net realized gain 25,604,549
Shares of beneficial interest 467,200,615
-----------
$ 534,613,970
===========
Net Asset Value and redemption price per share of Class
A shares ($244,347,819 / 23,497,866 shares of
beneficial interest) $10.40
======
Maximum Offering Price per share of Class A shares
($10.40 / .955) $10.89
======
Net Asset Value and offering price per share of
Class B shares ($251,518,149 / 24,263,341 shares of
beneficial interest)* $10.37
======
Net Asset Value, offering price and redemption price
per share of Class C shares ($21,262,673 / 2,044,892
shares of beneficial interest) $10.40
======
Net Asset Value and offering price per share of
Class D shares ($17,485,329 / 1,683,937 shares of
beneficial interest)* $10.38
======
- --------------------------------------------------------------------------------
* 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, 1997
Investment Income
Interest $ 12,294,998
Dividends, net of foreign taxes of $143,358 3,785,347
-----------
16,080,345
Expenses
Management fee (Note 2) 3,692,033
Transfer agent and shareholder services (Note 2) 1,050,878
Custodian fee 383,283
Service fee-Class A (Note 5) 574,953
Distribution and service fees-Class B (Note 5) 2,248,670
Distribution and service fees-Class D (Note 5) 154,456
Reports to shareholders 123,770
Registration fees 41,671
Audit fee 41,012
Trustees' fees (Note 2) 28,894
Miscellaneous 36,566
-----------
8,376,186
Expenses borne by the Distributor (Note 3) (475,396)
-----------
7,900,790
-----------
Net investment income 8,179,555
-----------
Realized and Unrealized Gain (Loss) on Investments,
Foreign Currency and Forward Contracts
Net realized gain on investments (Notes 1 and 4) 52,402,713
Net realized gain on forward contracts and foreign
currency (Note 1) 1,399,025
-----------
Total net realized gain 53,801,738
-----------
Net unrealized depreciation of investments (7,984,019)
Net unrealized depreciation of forward contracts and
foreign currency (260,085)
-----------
Total net unrealized depreciation (8,244,104)
-----------
Net gain on investments, foreign currency and forward
contracts 45,557,634
-----------
Net increase in net assets resulting from operations $ 53,737,189
===========
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
Year ended March 31
------------------------
1997 1996
- --------------------------------------------------------------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 8,179,555 $ 8,195,807
Net realized gain on investments,
foreign currency and forward
contracts* 53,801,738 33,933,659
Net unrealized appreciation
(depreciation) of investments,
foreign currency and forward
contracts (8,244,104) 38,037,693
---------- -----------
Net increase resulting from
operations 53,737,189 80,167,159
---------- -----------
Dividends from net investment
income:
Class A (6,086,782) (5,148,650)
Class B (4,234,267) (3,355,386)
Class C (634,525) (819,460)
Class D (289,417) (240,897)
---------- -----------
(11,244,991) (9,564,393)
---------- -----------
Distributions from net realized
gains:
Class A (18,380,936) (3,056,467)
Class B (18,075,176) (2,771,674)
Class C (1,771,455) (490,395)
Class D (1,236,399) (194,112)
---------- -----------
(39,463,966) (6,512,648)
---------- -----------
Net increase (decrease) from fund
share transactions (Note 6) 97,991,295 (2,678,848)
---------- -----------
Total increase in net assets 101,019,527 61,411,270
Net Assets
Beginning of year 433,594,443 372,183,173
---------- -----------
End of year (including
undistributed net investment
income of $6,424 and $3,185,167,
respectively) $534,613,970 $ 433,594,443
========== ===========
*Net realized gain for Federal
income tax purposes (Note 1) $ 52,820,595 $ 20,102,035
========== ===========
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
March 31, 1997
Note 1
State Street Research Managed Assets (the "Fund"), is a series of State
Street Research Income Trust (the "Trust"), which was organized as a
Massachusetts business trust in December, 1985 and is registered under the
Investment Company Act of 1940, as amended, as an open-end management
investment company. The Fund commenced operations in December, 1988. The
Trust consists presently of two separate funds: State Street Research Managed
Assets and State Street Research High Income Fund.
The investment objective of the Fund is to seek a high total return while
attempting to limit investment risk and preserve capital. To achieve its
investment objective, the Fund intends to allocate assets among selected
investments in the following sectors: Fixed Income Securities, Equity
Securities, Inflation Responsive Investments and Cash & Cash Equivalents.
Total return may include current income as well as capital appreciation. The
Fund's investment manager believes that the timely re-allocation of assets
can enhance performance and reduce portfolio volatility.
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
Values for listed equity securities reflect final sales on national
securities exchanges quoted prior to the close of the New York Stock
Exchange. Over-the-counter securities quoted on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") system are valued at
closing prices supplied through such system. If not quoted on the NASDAQ
system, such securities are valued at prices obtained from independent
brokers. In the absence of recorded sales, valuations are at the mean of the
closing bid and asked quotations. Fixed income securities are valued by a
pricing service, which utilizes market transactions, quotations from dealers,
and various relationships among securities in determining value. Short-term
securities maturing within sixty days are valued at amortized cost. Other
securities, if any,
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- --------------------------------------------------------------------------------
NOTES (cont'd)
- --------------------------------------------------------------------------------
are valued at their fair value as determined in good faith under consistently
applied procedures established by and under the supervision of the Trustees.
B. Forward Contracts and Foreign Currencies
The fund enters into forward foreign currency exchange contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its
foreign portfolio holdings and to hedge certain purchase and sale commitments
denominated in foreign currencies. A forward foreign currency exchange
contract is an obligation by the Fund to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the origination
date of the contract. Forward foreign currency exchange contracts establish
an exchange rate at a future date. These contracts are transferable in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. Risks may arise from the potential
inability of a counterparty to meet the terms of a contract and from
unanticipated movements in the value of foreign currencies relative to the
U.S. dollar. The aggregate principal amount of forward currency exchange
contracts is recorded in the Fund's accounts. All commitments are
marked-to-market at the applicable transaction rates resulting in unrealized
gains or losses. The Fund records realized gains or losses at the time the
forward contracts are extinguished by entry into a closing contract or by
delivery of the currency. Neither spot transactions nor forward currency
exchange contracts eliminate fluctuations in the prices of the Fund's
portfolio securities or in foreign exchange rates, or prevent loss if the
price of these securities should decline.
Securities quoted in foreign currencies are translated into U.S. dollars at
the current exchange rate. Gains and losses that arise from changes in
exchange rates are not segregated from gains and losses that arise from
changes in market prices of investments.
C. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered.
D. Net Investment Income
Net investment income is determined daily and consists of interest and
dividends accrued and discount earned, less the estimated daily expenses of
the Fund. Interest income is accrued daily as earned. Dividend income is
accrued on the ex-dividend date. Discount on debt obligations is amortized
under the effective yield method. Certain fixed income securities held by the
Fund pay interest or dividends in the form of additional securities
(payment-in-kind securities). Interest income on payment-in-kind fixed income
securities is recorded using the effective-interest method. Dividend income
on payment-in-kind preferred securities is recorded at the market value of
securities received. The Fund is charged for expenses directly attributable
to it, while indirect expenses are allocated among all funds in the Trust.
E. Dividends
Dividends from net investment income are declared and paid or
reinvestedquarterly. Net realized capital gains, if any, are distributed
annually, unless additional distributions are required for compliance with
applicabletax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing
treatments for foreign currency transactions, paydown gains and losses and
wash sale deferrals.
F. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund has
elected to qualify under Subchapter M of the Internal Revenue Code and its
policy is to distribute all of its taxable income, including net realized
capital gains, within the prescribed time periods.
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 $9,216,832
and has deferred and treated such losses as arising in the fiscal year ended
March 31, 1996.
G. 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 0.75% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. During the year ended March 31, 1997, the fees pursuant to
such agreement amounted to $3,692,033.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. In addition, Metropolitan receives a fee for maintenance
of the accounts of certain shareholders who are participants in sponsored
arrangements, such as employee benefit plans, through or under which shares
of the Fund may be purchased. During the year ended March 31, 1997, the
amount of such expenses was $275,962.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $28,894 during the year ended March 31, 1997.
15
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended March 31, 1997, the amount of such expenses
assumed by the Distributor and its affiliates was $475,396.
Note 4
For the year ended March 31, 1997, purchases and sales of securities,
exclusive of short-term obligations and forward foreign currency exchange
contracts, aggregated $547,388,033 and $490,693,454 (including $62,847,769
and $49,513,359 of U.S. Government obligations), respectively.
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940. Under the Plan, the Fund
pays annual service fees to the Distributor at a rate of 0.25% of average
daily net assets for Class A, Class B and Class D shares. In addition, the
Fund pays annual distribution fees of 0.75% of average daily net assets for
Class B and Class D shares. The Distributor uses such payments for personal
services and/or the maintenance of shareholder accounts, to reimburse
securities dealers for distribution and mar- keting services, to furnish
ongoing assistance to investors and to defray a portion of its distribution
and marketing expenses. For the year ended March 31, 1997, fees pursuant to
such plan amounted to $574,953, $2,248,670 and $154,456 for Class A, Class B
and Class D shares, respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly owned subsidiary of Metropolitan, earned initial sales charges
aggregating $158,495 and $1,045,013, respectively, on sales of Class A shares
of the Fund during the year ended March 31, 1997, and that MetLife
Securities, Inc. earned commissions aggregating $1,972,843 on sales of Class
B shares, and the Distributor collected contingent deferred sales charges
aggregating $387,778 and $1,277 on redemptions of Class B and Class D shares,
respectively, during the same period.
Note 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share.
At March 31, 1997, the Distributor owned one Class A share and Metropolitan
owned 1,019 Class B shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended March 31
-------------------------------------------------------------
1997 1996
---------------------------- ------------------------------
Class A Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 4,746,853 $ 50,499,204 3,142,066 $ 30,625,584
Issued upon reinvestment of:
Dividends from net investment income 558,830 5,876,689 505,011 4,934,090
Distributions from net realized gains 1,699,169 17,870,060 307,042 2,969,095
Shares repurchased (3,698,792) (39,318,613) (4,460,168) (43,019,460)
---------- ----------- ---------- -----------
Net increase (decrease) 3,306,060 $ 34,927,340 (506,049) $ (4,490,691)
========== =========== ========== ===========
<CAPTION>
Class B Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 6,191,667 $ 65,679,543 3,862,169 $ 37,612,607
Issued upon reinvestment of:
Dividends from net investment income 389,723 4,088,191 332,475 3,235,190
Distributions from net realized gains 1,680,278 17,607,323 281,171 2,710,479
Shares repurchased (2,845,172) (30,131,674) (3,052,294) (29,408,533)
---------- ----------- ---------- -----------
Net increase 5,416,496 $ 57,243,383 1,423,521 $ 14,149,743
========== =========== ========== ===========
<CAPTION>
Class C Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 718,397 $ 7,645,927 1,072,850 $ 10,385,513
Issued upon reinvestment of:
Dividends from net investment income 60,113 631,951 84,178 819,983
Distributions from net realized gains 168,533 1,771,442 50,697 489,441
Shares repurchased (802,252) (8,601,591) (2,251,394) (22,256,352)
---------- ----------- ---------- -----------
Net increase (decrease) 144,791 $ 1,447,729 (1,043,669) $(10,561,415)
========== =========== ========== ===========
<CAPTION>
Class D Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 594,410 $ 6,307,999 252,653 $ 2,474,692
Issued upon reinvestment of:
Dividends from net investment income 25,583 268,626 22,570 219,580
Distributions from net realized gains 110,940 1,163,717 18,905 182,432
Shares repurchased (319,082) (3,367,499) (482,326) (4,653,189)
---------- ----------- ---------- -----------
Net increase (decrease) 411,851 $ 4,372,843 (188,198) $ (1,776,485)
========== =========== ========== ===========
</TABLE>
16
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
-----------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
-----------------------------------------------------------------------------
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------
Year ended March 31
--------------------------------------------------------
1997*** 1996*** 1995 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 10.29 $ 8.76 $ 8.94 $ 8.94 $ 8.22
Net investment income* 0.21 0.23 0.27 0.22 0.27
Net realized and unrealized
gain (loss) on investments,
foreign currency and
forward contracts 1.05 1.72 (0.14) 0.72 1.01
--------- --------- --------- --------- ---------
Total from investment
operations 1.26 1.95 0.13 0.94 1.28
--------- --------- --------- --------- ---------
Dividends from net
investment income (0.28) (0.26) (0.17) (0.22) (0.25)
Distributions from net
realized gains (0.87) (0.16) (0.14) (0.72) (0.31)
--------- --------- --------- --------- ---------
Total distributions (1.15) (0.42) (0.31) (0.94) (0.56)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 10.40 $ 10.29 $ 8.76 $ 8.94 $ 8.94
========= ========= ========= ========= =========
Total return 12.49%+ 22.55%+ 1.52%+ 10.96%+ 16.54%+
Net assets at end of year
(000s) $244,348 $207,713 $181,358 $166,011 $93,537
Ratio of operating expenses
to average net assets* 1.25% 1.25% 1.25% 1.25% 1.25%
Ratio of net investment
income to average net
assets* 2.02% 2.34% 3.11% 2.75% 3.26%
Portfolio turnover rate 108.41% 109.20% 89.58% 105.17% 142.86%
Average commission rate@ $ 0.0266 -- -- -- --
*Reflects voluntary
assumption of fees
or expenses per share in
each year (Note 3) $ 0.01 $ 0.02 $ 0.03 $ 0.02 $ 0.02
</TABLE>
Class B
----------------------------------------------
Year ended March 31
----------------------------------------------
1997*** 1996*** 1995 1994**
- -----------------------------------------------------------------------------
Net asset value, beginning
of year $ 10.25 $ 8.74 $ 8.92 $ 8.78
Net investment income* 0.13 0.15 0.20 0.16
Net realized and unrealized
gain (loss) on investments,
foreign currency and
forward contracts 1.06 1.71 (0.13) 0.39
--------- --------- --------- ----------
Total from investment
operations 1.19 1.86 0.07 0.55
--------- --------- --------- ----------
Dividends from net
investment income (0.20) (0.19) (0.11) (0.18)
Distributions from net
realized gains (0.87) (0.16) (0.14) (0.23)
--------- --------- --------- ----------
Total distributions (1.07) (0.35) (0.25) (0.41)
--------- --------- --------- ----------
Net asset value, end of year $ 10.37 $ 10.25 $ 8.74 $ 8.92
========= ========= ========= ==========
Total return 11.76%+ 21.48%+ 0.82%+ 6.26%+++
Net assets at end of year
(000s) $251,518 $193,272 $152,251 $83,244
Ratio of operating expenses
to average net assets* 2.00% 2.00% 2.00% 2.00%++
Ratio of net investment
income to average net
assets* 1.27% 1.59% 2.38% 2.03%++
Portfolio turnover rate 108.41% 109.20% 89.58% 105.17%
Average commission rate@ $ 0.0266 -- -- --
*Reflects voluntary
assumption of fees
or expenses per share in
each year (Note 3) $ 0.01 $ 0.02 $ 0.03 $ 0.03
- --------------------------------------------------------------------------------
++ Annualized.
** June 1, 1993 (commencement of share class designations) to March 31, 1994.
*** Per-share figures have been calculated using the average shares method.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
+++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total return
would be lower if the Distributor and its affiliates had not voluntarily
assumed a portion of the Fund's expenses.
@ For fiscal years beginning on or after April 1, 1996, the Fund is required
to disclose its average commission rate per share paid for security trades.
17
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-----------------------------------------
Year ended March 31
-----------------------------------------
1997*** 1996*** 1995 1994**
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 10.29 $ 8.77 $ 8.95 $ 8.78
Net investment income* 0.24 0.25 0.29 0.21
Net realized and unrealized gain
(loss) on investments, foreign
currency and forward contracts 1.05 1.71 (0.14) 0.43
-------- -------- -------- ---------
Total from investment operations 1.29 1.96 0.15 0.64
-------- -------- -------- ---------
Dividends from net investment income (0.31) (0.28) (0.19) (0.24)
Distributions from net realized
gains (0.87) (0.16) (0.14) (0.23)
-------- -------- -------- ---------
Total distributions (1.18) (0.44) (0.33) (0.47)
-------- -------- -------- ---------
Net asset value, end of year $ 10.40 $ 10.29 $ 8.77 $ 8.95
======== ======== ======== =========
Total return 12.77%+ 22.70%+ 1.77%+ 7.27%+++
Net assets at end of year (000s) $21,263 $19,548 $25,803 $21,434
Ratio of operating expenses to
average net assets* 1.00% 1.00% 1.00% 1.00%++
Ratio of net investment income to
average net assets* 2.26% 2.59% 3.37% 3.03%++
Portfolio turnover rate 108.41% 109.20% 89.58% 105.17%
Average commission rate @ $0.0266 -- -- --
*Reflects voluntary assumption of
fees or expenses per share in each
year (Note 3) $ 0.01 $ 0.02 $ 0.03 $ 0.02
</TABLE>
<TABLE>
<CAPTION>
Class D
-----------------------------------------
Year ended March 31
-----------------------------------------
1997*** 1996*** 1995 1994**
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 10.27 $ 8.75 $ 8.93 $ 8.78
Net investment income* 0.13 0.15 0.20 0.16
Net realized and unrealized gain
(loss) on investments, foreign
currency and forward contracts 1.05 1.72 (0.13) 0.40
-------- -------- -------- ---------
Total from investment operations 1.18 1.87 0.07 0.56
-------- -------- -------- ---------
Dividends from net investment income (0.20) (0.19) (0.11) (0.18)
Distributions from net realized
gains (0.87) (0.16) (0.14) (0.23)
-------- -------- -------- ---------
Total distributions (1.07) (0.35) (0.25) (0.41)
-------- -------- -------- ---------
Net asset value, end of year $ 10.38 $ 10.27 $ 8.75 $ 8.93
======== ======== ======== =========
Total return 11.64%+ 21.54%+ 0.82%+ 6.31%+++
Net assets at end of year (000s) $17,485 $13,061 $12,772 $ 7,117
Ratio of operating expenses to
average net assets* 2.00% 2.00% 2.00% 2.00%++
Ratio of net investment income to
average net assets* 1.26% 1.60% 2.39% 2.03%++
Portfolio turnover rate 108.41% 109.20% 89.58% 105.17%
Average commission rate @ $0.0266 -- -- --
*Reflects voluntary assumption of
fees or expenses per share in each
year (Note 3) $ 0.01 $ 0.02 $ 0.03 $ 0.03
</TABLE>
- --------------------------------------------------------------------------------
++ Annualized.
** June 1, 1993 (commencement of share class designations) to March 31, 1994.
*** Per-share figures have been calculated using the average shares method.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
+++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total return
would be lower if the Distributor and its affiliates had not voluntarily
assumed a portion of the Fund's expenses.
@ For fiscal years beginning on or after April 1, 1996, the Fund is required
to disclose its average commission rate per share paid for security trades.
18
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Trustees of State Street Research Income Trust and
the Shareholders of State Street Research Managed Assets
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of State Street Research
Managed Assets (a series of State Street Research Income Trust, hereafter
referred to as the "Trust") at March 31, 1997, 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, 1997, by
correspondence with the custodian and brokers and the application of
alternative procedures where confirmations from brokers were not received,
provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
May 9, 1997
19
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
Managed Assets provided shareholders with consistent performance during the
year, in line with its broadly diversified portfolio. For the 12 months ended
March 31, 1997, Class A shares returned +12.49% (does not reflect sales
charge). The Fund outperformed the average for Lipper Analytical Services'
Flexible Portfolio Funds, which was +10.13% for 196 fund classes.
It was a year of generally rising stock prices that peaked in mid-March of
1997 and then experienced a modest correction during the last weeks of the
period. Returns were positive in all areas in which the Fund invests, but
varied considerably among asset classes. The Fund's overweighting in stocks
helped performance, particularly the portfolio's value stock and
inflation-responsive holdings. Small-company stocks, which had made a very
strong contribution early in the year, were hit hardest in the first quarter
of 1997 and dampened Fund performance.
Bond returns improved over the year. High-yield bonds continued as the top
performers and international bonds rebounded from their disappointing returns
the year before.
The Fund's asset allocation changed little during the year. The portfolio
continued its emphasis on stocks, with the equity allocation increasing from
54% on March 31, 1996 to 55% a year later. Bond allocation decreased from 27%
to 25%, inflation-responsive holdings remained steady at 12%, and cash
increased slightly from 7% to 8%.
March 31, 1997
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. Performance for a class may include
periods prior to the adoption of class designations in 1993, which resulted
in new or increased 12b-1 fees of up to 1% per class thereafter and which
will reduce subsequent performance. Performance reflects maximum 4.5% "A"
share front-end sales charge, or 5% "B" share or 1% "D" share contingent
deferred sales charges, where applicable. "C" shares, offered without a sales
charge, are available only to certain employee benefit plans and large
institutions. The Standard & Poor's 500 Composite Index (S&P 500) includes
500 widely traded common stocks and is a commonly used measure of U.S. stock
market performance. The Lehman Brothers Government/Corporate Bond Index is a
commonly used measure of bond market performance. The indices are unmanaged
and do not take transaction charges into consideration. Direct investment in
the indices is not possible; results are for illustrative purposes only.
Change In Value of $10,000 Based On The S&P 500
And The Lehman Brothers Government/Corporate Index
Compared To Change In Value of $10,000 Invested In
Managed Assets
Class A Shares
- ---------------------------------
Average Annual Total Return
- ---------------------------------
1 Year 5 Years Life of Fund
- ---------------------------------
+7.43% +11.56% +10.92%
- ---------------------------------
Managed Assets LB Gov't/Corp Index S&P 500
12/88 9550 10000 10000
3/89 9957 10111 10708
3/90 11030 11293 12767
3/91 11478 12703 14603
3/92 13003 14149 16212
3/93 15154 16172 18678
3/94 16815 16621 18951
3/95 17070 17381 21896
3/96 20918 19280 28918
3/97 23531 20140 34649
Class B Shares
- ---------------------------------
Average Annual Total Return
- ---------------------------------
1 Year 5 Years Life of Fund
- ---------------------------------
+6.76% +11.70% +11.15%
- ---------------------------------
Managed Assets LB Gov't/Corp Index S&P 500
12/88 10000 10000 10000
3/89 10426 10111 10708
3/90 11550 11293 12767
3/91 12019 12703 14603
3/92 13616 14149 16212
3/93 15868 16172 18678
3/94 17495 16621 18951
3/95 17638 17381 21896
3/96 21425 19280 28918
3/97 23945 20140 34649
Class C Shares
- ---------------------------------
Average Annual Total Return
- ---------------------------------
1 Year 5 Years Life of Fund
- ---------------------------------
+12.77% +12.80% +11.66%
- ---------------------------------
Managed Assets LB Gov't/Corp Index S&P 500
12/88 10000 10000 10000
3/89 10426 10111 10708
3/90 11550 11293 12767
3/91 12019 12703 14603
3/92 13616 14149 16212
3/93 15868 16172 18678
3/94 17661 16621 18951
3/95 17974 17381 21896
3/96 22053 19280 28918
3/97 24869 20140 34649
Class D Shares
- ---------------------------------
Average Annual Total Return
- ---------------------------------
1 Year 5 Years Life of Fund
- ---------------------------------
+10.64% +11.95% +11.15%
- ---------------------------------
Managed Assets LB Gov't/Corp Index S&P 500
12/88 10000 10000 10000
3/89 10426 10111 10708
3/90 11550 11293 12767
3/91 12019 12703 14603
3/92 13616 14149 16212
3/93 15868 16172 18678
3/94 17504 16621 18951
3/95 17647 17381 21896
3/96 21449 19280 28918
3/97 23945 20140 34649
20
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- --------------------------------------------------------------------------------
REPORT ON SPECIAL MEETING OF SHAREHOLDERS
- --------------------------------------------------------------------------------
Report on Special Meeting of ShareholdersA Special Meeting of Shareholders of
State Street Research Managed Assets ("Fund"), along with shareholders of
other series of State Street Research Income Trust ("Meeting"), was convened
on July 19, 1996. The results of the Meeting are set forth below.
Votes (millions
of shares)
------------------
For Withheld
----- ----------
1. The following persons were elected as Trustees:
Thomas L. Phillips 97.9 2.6
Toby Rosenblatt 98.2 2.3
Ralph F. Verni 98.0 2.5
<TABLE>
<CAPTION>
Votes (millions
of shares)
---------------------
Proposal For Against Abstain
--- ------- -------
<S> <C> <C> <C>
2. The Fund's following investment policies were
reclassified from fundamental to nonfundamental:
a. The policy regarding investments in securities of
companies with less than three (3) years'
continuous operation 19.9 1.3 1.8
b. The policy regarding investments in illiquid
securities. 19.7 1.4 1.9
3. The Fund's fundamental policy regarding investments in
commodities and commodity contracts was amended. 19.6 1.4 1.9
5. The Fund's fundamental policies regarding
diversification of investments were amended 20.1 1.1 1.8
6. The Fund's fundamental policy regarding industry
concentration was amended. 19.8 1.2 2.0
8. The Master Trust Agreement was amended to permit the
Trustees to reorganize, merge or liquidate a fund
without prior shareholder approval. 83.0 9.8 7.6
9. The Master Trust Agreement was amended to eliminate
specified time permitted between the record date and
any shareholders meeting. 86.2 6.3 8.0
</TABLE>
21
