[logo: State Street Research]
HIGH INCOME FUND
An aggressive bond fund focusing on high-yield securities.
Prospectus
August 1, 1998
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This prospectus has information you should know before you invest. Please read
it carefully and keep it with your investment records.
Although these securities have been registered with the Securities and Exchange
Commission, the SEC has not approved or disapproved them and does not guarantee
the accuracy or adequacy of the information in this prospectus. Anyone who
informs you otherwise is committing a federal crime.
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CONTENTS 1
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<TABLE>
<CAPTION>
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2 THE FUND
2 Goal and Strategies
3 Principal Risks
6 Volatility and Performance
8 Investor Expenses
10 Investment Management
11 YOUR INVESTMENT
11 Opening an Account
11 Choosing a Share Class
13 Sales Charges
15 Dealer Compensation
16 Buying and Selling Shares
20 Account Policies
22 Distributions and Taxes
23 Investor Services
24 OTHER INFORMATION
24 Other Securities and Risks
26 Financial Highlights
Back Cover For Additional Information
</TABLE>
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2 THE FUND
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[graphic: Chess-piece: Knight]
Goal and Strategies
FUNDAMENTAL GOAL The fund seeks, primarily, high current income and,
secondarily, capital appreciation, from investments in fixed-income securities.
PRINCIPAL STRATEGIES Under normal circumstances, the fund invests at least 65%
of total assets in lower quality fixed-income securities -- primarily junk
bonds, but also preferred stocks. At the time of purchase, these securities are
rated within or below the BB or Ba major rating categories (Standard &
Poor's/Moody's), or are unrated but considered equivalent by the investment
manager. The fund may not invest more than 20% of total assets in securities in
the CCC/Caa or lower rating categories.
Lower quality securities tend to be issued by companies that are less secure
financially. In addition, in the event these companies have financial
difficulty, banks or other senior lenders will have priority in being repaid. As
a result, when selecting investments, the fund relies on fundamental research to
identify companies with adequate cash flows, attractive valuations and strong
management teams.
In managing its portfolio, the fund attempts to balance its portfolio risks with
high yield and the potential for capital appreciation. The fund may
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[graphic: Looking through magnifying glass at paper]
WHO MAY WANT TO INVEST
State Street Research High Income Fund is designed for investors who seek one or
more of the following:
[bullet] an aggressive bond fund for a long-term goal
[bullet] a fund to complement a portfolio of equity or investment-grade debt
securities
[bullet] a fund with the potential to generate high current income and some
capital appreciation
The fund is NOT appropriate for investors who:
[bullet] want to avoid high volatility or possible losses
[bullet] are using the fund as their sole source of investment income
[bullet] are making short-term investments
[bullet] are investing emergency reserve money
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3
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invest in debt securities of any maturity, although it generally invests in
those with medium- to long-term remaining maturities in order to obtain higher
yields. Debt securities with longer maturities, however, usually are more
sensitive to interest rate changes.
The fund may invest up to 35% of total assets in other investments, such as
higher quality fixed-income securities as well as dividend-paying common stocks
of established companies.
The fund may adjust the composition of its portfolio as market conditions and
economic outlooks change.
For more information about the fund's investments and practices, see page 24.
[graphic: Traffic sign, arrows indicate fork in road, one with a sharp u-turn]
PRINCIPAL RISKS
Because the fund invests primarily in junk bonds and other lower quality
fixed-income securities, its major risks are those of junk bond investing. These
include the tendency for prices to fall when the economy is sluggish or overall
corporate earnings are weak.
Lower quality fixed-income securities generally are considered to be speculative
investments and involve greater risks than higher quality securities. The prices
of most lower quality securities are vulnerable to economic
recessions, when it becomes difficult for issuers to generate sufficient cash
flow to pay principal and interest. Many also are affected by weak equity
markets, when issuers find it hard to improve their financial condition by
replacing debt with equity and when investors, such as the fund, find it hard to
sell their lower quality securities at fair prices. In addition, the value of a
security will usually fall substantially if an issuer defaults or goes bankrupt.
Even anticipation of defaults by certain issuers, or the perception of economic
or financial weakness, may cause the market for lower quality securities to
fall.
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4 THE FUND CONTINUED
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Junk bonds, especially those that are newly issued, are traded primarily by
institutions. Because this limits the market for these securities, it may be
difficult for the fund to sell them at fair prices when it needs to raise cash
to meet redemptions.
The value of any bonds held by the fund is likely to decline when interest rates
rise; this risk is greater for bonds with longer maturities. The fund's
management approach, which may include short-term trading, could cause the
fund's portfolio turnover rate to be above-average for a bond fund. High
turnover will increase the fund's transaction costs and may increase your tax
liability.
The fund's shares will rise and fall in value and there is a risk that you could
lose money by investing in the fund. Also, the fund cannot be certain that it
will achieve its goal. Finally, fund shares are not bank deposits and are not
guaranteed, endorsed or insured by any financial institution, government entity
or the FDIC.
Information on other securities and risks appears on page 24.
A "snapshot" of the fund's investments may be found in the current annual or
semiannual report (see back cover).
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5
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INVESTING IN JUNK BONDS
Investing in junk bonds involves a trade-off, between greater risk on the one
hand and the potential for higher income and capital appreciation on the other.
The highest rated bonds are usually issued by the companies that are strongest
financially. Because the risk of default on investment-grade bonds tends to be
small, interest rates paid on these bonds are correspondingly lower. Moreover,
because the financial health of the issuer usually is so strong, there is little
possibility that the price of a highly rated bond will rise substantially
through any improvement in the issuer's creditworthiness. Instead, the main
factor influencing the prices of these bonds is changes in market interest
rates.
With many junk bonds, however, the financial health of the issuer is not
certain, and the risk of default on payments of principal and interest or other
negative events can be significant. To compensate investors for such risks,
issuers of junk bonds usually must pay higher interest rates.
In addition, because the financial health of the issuer normally is not certain,
the prices at which these bonds are traded before they mature may be more
affected by the financial health of the issuer and the economy generally and
less by movements in market interest rates. In this context, there is a higher
possibility of positive events affecting a bond's value than is the case for the
most highly rated bonds. For these reasons, in-depth research can be
particularly important in managing a portfolio of junk bonds.
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6 VOLATILITY AND PERFORMANCE
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<TABLE>
<CAPTION>
[bar chart graphic]
Years ended December 31
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YEAR-BY-YEAR TOTAL RETURN (CLASS A) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
40%
30%
20%
10%
0%
(10%)
(20%) 16.41 1.55 (16.55) 36.49 20.37 22.35 (1.85) 12.38 16.88 14.39
</TABLE>
[triangle pointing up] Best quarter: first quarter 1991, up 15.96%
[triangle pointing down] Worst quarter: third quarter 1990, down 10.81%
Return from 1/1/98 - 6/30/98 (not annualized): up 6.83%
[end bar chart]
<TABLE>
<CAPTION>
As of December 31, 1997
-----------------------------
AVERAGE ANNUAL TOTAL RETURN 1 Year 5 Years 10 Years
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<S> <C> <C> <C>
Class A (%) 9.24 11.49 10.81
Class B (%) 8.62 11.44 10.91
Class C (%) 12.59 11.72 10.92
Class S (%) 14.75 12.72 11.42
First Boston High Yield Index (%) 12.63 11.84 12.10
Lipper High Current Yield Funds Index (%) 12.91 11.50 10.88
</TABLE>
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7
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UNDERSTANDING
VOLATILITY AND
PERFORMANCE
The chart and table on the opposite page are designed to show two aspects of the
fund's track record:
[bullet] YEAR-BY-YEAR TOTAL RETURN shows how volatile the fund has been: how
much the difference has been, historically, between its best years and
worst years. In general, funds with higher average annual total returns
will also have higher volatility. The graph includes the effects of
fund expenses, but not sales charges. If sales charges had been
included, returns would have been less than shown.
[bullet] AVERAGE ANNUAL TOTAL RETURN is a measure of the fund's performance over
time. It is determined by taking the fund's performance over a given
period and expressing it as an average annual rate.
Average annual total return includes the effects of fund expenses and maximum
sales charges for each class, and assumes that you sold your shares at the end
of the period.
Also included with the fund's average annual returns are two independent
measures of performance. The First Boston High Yield Index is an unmanaged index
which mirrors the public high-yield debt market representing a total of 250
different sectors within this market. The Lipper High Current Yield Funds Index
shows the performance of a category of mutual funds with similar goals. This
index, which is also unmanaged, shows you how well the fund has done compared to
competing funds.
When making comparisons, keep in mind that neither the First Boston HIgh Yield
Index nor the Lipper index includes the effects of sales charges.
Also, even if your portfolio were identical to the First Boston High Yield
Index, your returns would always be lower, because the First Boston High Yield
Index does not include brokerage and administrative expenses.
In both the chart and the table, the returns shown for the fund include
performance from before the creation of share classes in 1993. If the returns
for Class B and Class C from before 1993 had reflected their current
distribution/service (12b-1) fees (as described on page 8), these returns would
have been lower.
Keep in mind that past performance is no guarantee of future results.
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8 INVESTOR EXPENSES
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<TABLE>
<CAPTION>
Class descriptions begin on page 11
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Shareholder Fees (% of offering price) Class A Class B Class C(1) Class S(1)
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<S> <C> <C> <C> <C>
Maximum front-end sales charge (load) 4.50 0.00 0.00 0.00
Maximum deferred sales charge (load) 0.00(2) 5.00 1.00 0.00
Annual Fund Expenses (% of average net assets) Class A Class B Class C Class S
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Management fee(3) 0.57 0.57 0.57 0.57
Distribution/service (12b-1) fees 0.25 1.00 1.00 0.00
Other expenses 0.20 0.20 0.20 0.20
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Total annual fund operating expenses 1.02 1.77 1.77 0.77
==== ==== ==== ====
Example Year Class A Class B Class C Class S
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1 $549 $680/$180 $280/$180 $79
3 $760 $857/$557 $557 $246
5 $988 $1,159/$959 $959 $428
10 $1,642 $1,886 $2,084 $954
</TABLE>
[footnote text]
(1) Before November 1, 1997, Class C shares were designated Class D and Class S
shares were designated Class C.
(2) Except for investments of $1 million or more; see page 13.
(3) Reflects fee schedule that became effective August 1, 1998 as if it had
been in place during the fund's previous fiscal year.
[end of footnote text]
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9
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UNDERSTANDING
INVESTOR EXPENSES
The information on the opposite page is designed to give you an idea of what you
should expect to pay in expenses as an investor in the fund:
[bullet] SHAREHOLDER FEES are costs that are charged to you directly. These fees
are not charged on reinvestments or exchanges.
[bullet] ANNUAL FUND EXPENSES are deducted from the fund's assets every year,
and are thus paid indirectly by all fund investors.
[bullet] The EXAMPLE is designed to allow you to compare the costs of this fund
with those of other funds. It assumes that you invested $10,000 over
the years indicated, reinvested all distributions, earned a
hypothetical 5% annual return and paid the maximum applicable sales
charges. For Class B shares, it also assumes the automatic conversion
to Class A after eight years.
Where two numbers are shown separated by a slash, the first one assumes you sold
all your shares at the end of the period, while the second assumes you stayed in
the fund. Where there is only one number, the costs would be the same either
way.
Investors should keep in mind that the example is for comparison purposes only.
The fund's actual performance and expenses may be higher or lower.
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10 THE FUND CONTINUED
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[graphic: Rodin's sculpture "The Thinker"]
INVESTMENT MANAGEMENT
The fund's investment manager is State Street Research & Management Company, One
Financial Center, Boston, MA 02111. The firm traces its heritage back to 1924
and the founding of one of America's first mutual funds. Today the firm has more
than $53 billion in assets under management (as of June 30, 1998), including
more than $17 billion in mutual funds.
The investment manager is responsible for the fund's investment and business
activities, and receives the management fee as compensation. The management fee
is 0.60% of the first $500 million of net assets, annually, 0.55% of the next
$500 million, and 0.50% of any amount over $1 billion. The investment manager is
a subsidiary of Metropolitan Life Insurance Company.
Bartlett R. Geer has been responsible for the fund's day-to-day portfolio
management since April 1987. A senior vice president, he has worked as an
investment professional since joining the firm in 1981.
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YOUR INVESTMENT 11
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[graphic: Key]
OPENING AN ACCOUNT
If you are opening an account through a financial professional, he or she can
assist you with all phases of your investment.
If you are investing through a large retirement plan or other special program,
follow the instructions in your program materials.
To open an account without the help of a financial professional, please use the
instructions on these pages.
[pencil and paper graphic]
CHOOSING A SHARE CLASS
The fund offers four share classes, each with its own sales charge and expense
structure.
If you are investing a substantial amount and plan to hold your shares for a
long period, Class A shares may make the most sense for you. If you are
investing a lesser amount, you may want to consider Class B shares (if investing
for at least five years) or Class C shares (if investing for less than five
years). If you are investing through a special program, such as a large
employer-sponsored retirement plan or certain programs available through
brokers, you may be eligible to purchase Class S shares.
Because all future investments in your account will be made in the share class
you designate when opening the account, you should make your decision carefully.
Your financial professional can help you choose the share class that makes the
most sense for you.
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12 YOUR INVESTMENT CONTINUED
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UNDERSTANDING
DISTRIBUTION/SERVICE FEES
As noted in the descriptions at right, all share classes except Class S have an
annual distribution/service fee. This is also called a 12b-1 fee, after the SEC
rule that permits this type of fee.
Under its current 12b-1 plan, the fund may pay certain distribution and service
fees for these classes out of fund assets. Because 12b-1 fees are an ongoing
expense, they will increase the cost of your investment and, over time, could
potentially cost you more than if you had paid other types of sales charges. For
that reason, you should consider the effects of 12b-1 fees as well as sales
loads when choosing a share class (the example on page 8 in this prospectus can
be helpful in this regard).
Some of the 12b-1 fee is used to compensate those financial professionals who
sell fund shares and provide ongoing service to shareholders. The table on page
15 shows how these professionals' compensation is calculated.
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CLASS A -- FRONT LOAD
[bullet] Initial sales charge of 4.5% or less
[bullet] Lower sales charges for larger investments; see sales charge schedule
on facing page
[bullet] Lower annual expenses than Class B or Class C shares because of lower
distribution/ service (12b-1) fee of 0.25%
CLASS B -- BACK LOAD
[bullet] No initial sales charge
[bullet] Deferred sales charge of 5% or less on shares you sell within five
years
[bullet] Annual distribution/service (12b-1) fee of 1.00%
[bullet] Automatic conversion to Class A shares after eight years, reducing
future annual expenses
CLASS C(1) -- LEVEL LOAD
[bullet] No initial sales charge
[bullet] Deferred sales charge of 1%, paid if you sell shares within one year of
purchase
[bullet] Lower deferred sales charge than Class B shares
[bullet] Annual distribution/service (12b-1) fee of 1.00%
[bullet] No conversion to Class A shares after eight years, so annual expenses
do not decrease
CLASS S(2) -- SPECIAL PROGRAMS
[bullet] Available only through certain retirement accounts, advisory accounts
of the investment manager and other special programs, including broker
programs with recordkeeping and other services; these programs usually
involve special conditions and separate fees (consult your financial
professional or your program materials)
[bullet] No sales charges of any kind
[bullet] No distribution/service (12b-1) fees; annual expenses are lower than
other share classes
[footnote text]
(1) Before November 1, 1997, these were designated Class D.
(2) Before November 1, 1997, these were designated Class C.
[end footnote text]
<PAGE>
13
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SALES CHARGES
CLASS A -- FRONT LOAD
<TABLE>
<CAPTION>
when you invest this % is which equals
this amount deducted this % of
for sales your net
charges investment
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<S> <C> <C>
Up to $99,999 4.50 4.71
$100,000 - $249,999 3.50 3.63
$250,000 - $499,999 2.50 2.56
$500,000 - $999,999 2.00 2.04
$1 million or more see next column
</TABLE>
With Class A shares, you pay a sales charge only when you buy shares. If you are
investing $1 million or more (either as a lump sum or through any of the methods
described on the application), you can purchase Class A shares without any sales
charge. However, you may be charged a "contingent deferred sales charge" (CDSC)
of 1% of the purchase price of any shares you sell within the first year. Other
policies regarding the calculation of the CDSC are the same as for Class B.
Class A shares are also offered with low or no sales charges through various
wrap-fee programs and other sponsored arrangements (consult your financial
professional or your program materials).
CLASS B -- BACK LOAD
<TABLE>
<CAPTION>
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
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<S> <C>
First year 5.00
Second year 4.00
Third year 3.00
Fourth year 3.00
Fifth year 2.00
Sixth year or later None
</TABLE>
With Class B shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for five years or less, as described in the table above. Any shares
acquired through reinvestment are not subject to the CDSC. There is no CDSC on
exchanges into other State Street Research funds, and the
<PAGE>
14 YOUR INVESTMENT CONTINUED
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date of your initial investment will continue to be used as the basis for CDSC
calculations when you exchange. To ensure that you pay the lowest CDSC possible,
the fund will always use the shares with the lowest CDSC to fill your sell
requests.
The CDSC is waived on shares sold for mandatory retirement distributions or
because of disability or death. Consult your financial professional or the State
Street Research Service Center.
Class B shares automatically convert to Class A shares after eight years; Class
A shares have lower annual expenses.
CLASS C (FORMERLY CLASS D) -- LEVEL LOAD
<TABLE>
<CAPTION>
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
- ------------------------------------------------------------
<S> <C>
First year 1.00
Second year or later None
</TABLE>
With Class C shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for one year or less, as described in the table above. Policies
regarding the calculation of the CDSC are the same as for Class B.
Class C shares currently have the same annual expenses as Class B shares, but
never convert to Class A shares (with their lower annual expenses).
CLASS S (FORMERLY CLASS C) -- SPECIAL PROGRAMS
Class S shares have no sales charges.
<PAGE>
15
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[graphic: check (money)]
DEALER COMPENSATION
Financial professionals who sell shares of State Street Research funds and
perform services for fund investors may receive sales commissions and annual
fees. These are paid by the fund's distributor, using money from sales charges,
distribution/service (12b-1) fees and its other resources.
Financial professionals may impose a transaction fee on the purchase or sale of
shares by shareholders.The distributor may pay its affiliate MetLife Securities,
Inc. additional compensation of up to 0.25% of certain sales or assets.
<TABLE>
<CAPTION>
Maximum Dealer Compensation Class A Class B Class C Class S
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<S> <C> <C> <C> <C>
Initial commission (%) -- 4.00 1.00 0.00
Investments up to $100,000 (%) 4.00 -- -- --
$100,000 - $249,999 (%) 3.00 -- -- --
$250,000 - $499,999 (%) 2.00 -- -- --
$500,000 - $999,999 (%) 1.75 -- -- --
First $1-3 million (%) 1.00(1) -- -- --
Next $2 million (%) 0.50(1) -- -- --
Next $1 and above (%) 0.25(1) -- -- --
Annual fee (%) 0.25 0.25 0.90 0.00
</TABLE>
BROKERS FOR PORTFOLIO TRADES
When placing trades for the fund's portfolio, State Street Research chooses
brokers that provide the best execution (a term defined by service as well as
price), but may also consider a broker's sales of fund shares.
[footnote text]
(1) If your broker declines this commission, the one-year CDSC on your
investment is waived.
[end footnote text]
<PAGE>
16 BUYING AND SELLING SHARES
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[graphic: old-fashioned hand-cranked cash register]
POLICIES FOR
BUYING SHARES
Once you have chosen a share class, the next step is to determine the amount you
want to invest.
MINIMUM INITIAL INVESTMENTS:
[bullet] $1,000 for accounts that use the Investamatic program
[bullet] $2,000 for Individual Retirement Accounts
[bullet] $2,500 for all other accounts
MINIMUM ADDITIONAL INVESTMENTS:
[bullet] $50 for any account
Complete the enclosed application. You can avoid future inconvenience by signing
up now for any services you might later use.
TIMING OF REQUESTS All requests received by State Street Research before 4:00
p.m. eastern time will be executed the same day, at that day's closing share
price. Orders received after 4:00 p.m. will be executed the following day, at
that day's closing share price.
WIRE TRANSACTIONS Funds may be wired between 8:00 a.m. and 4:00 p.m. eastern
time. To make a same-day wire investment, please notify State Street Research by
12:00 noon of your intention to wire funds, and make sure your wire arrives by
4:00 p.m. Your bank may charge a fee for wiring money.
<PAGE>
INSTRUCTIONS FOR BUYING SHARES 17
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<TABLE>
<CAPTION>
To Open an Account To Add to an Account
<S> <C> <C> <C>
[graphic: Through a Consult your financial professional Consult your financial professional
brief case] Professional or your program materials. or your program materials.
or Program
- ------------------------------------------------------------------------------------------------------------------
By Mail [graphic: Make your check payable to "State Fill out an investment slip or
mailbox] Street Research Funds." Forward the indicate the fund name and account
check and your application to State number on your check. Make your check
Street Research. payable to "State Street Research Funds."
Forward the check and slip to State
Street Research.
- ------------------------------------------------------------------------------------------------------------------
[graphic: By Federal Call to obtain an account number and Call State Street Research to obtain
the Capitol Funds Wire forward your application to State a control number. Instruct your bank
building] Street Research. Wire funds using to wire funds to:
the instructions at right.
[bullet] State Street Bank and Trust
Company, Boston, MA
[bullet] ABA: 011000028
[bullet] BNF: fund name and share
class you want to buy
[bullet] AC: 99029761
[bullet] OBI: your name and your
account number
[bullet] Control: the number given
to you by State Street
Research
- ------------------------------------------------------------------------------------------------------------------
By Electronic [graphic: Verify that your bank is a member of Call State Street Research to verify
Funds Transfer electric the ACH (Automated Clearing House) that the necessary bank information
(ACH) plug] system. Forward your application to is on file for your account. If it
State Street Research. Please be is, you may request a transfer with
sure to include the appropriate bank the same phone call. If not, please
information. Call State Street ask State Street Research to provide
Research to request a purchase. you with an EZ Trader application.
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[graphic: By Investamatic Forward your application, with all Call State Street Research to verify
front of a appropriate sections completed, to that Investamatic is in place on
bank building] State Street Research, along with a your account, or to request a form
check for your initial investment to add it. Investments are automatic
payable to "State Street Research once Investamatic is in place.
Funds."
- ------------------------------------------------------------------------------------------------------------------
By Exchange [graphic: Call State Street Research or visit Call State Street Research or visit
arrows pointing our Web site. our Web site.
in two
directions]
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408
Call toll-free: 1-800-562-0032 (business days 8:00 a.m.-6:00 p.m., eastern time)
Internet www.ssrfunds.com
<PAGE>
18 YOUR INVESTMENT CONTINUED
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[graphic: old-fashioned hand-cranked adding machine]
POLICIES FOR
SELLING SHARES
CIRCUMSTANCES THAT REQUIRE WRITTEN REQUESTS Please submit instructions in
writing when any of the following apply:
[bullet] you are selling more than $100,000 worth of shares
[bullet] the name or address on the account has changed within the last 30 days
[bullet] you want the proceeds to go to a name or address not on the account
registration
[bullet] you are transferring shares to an account with a different registration
or share class
[bullet] you are selling shares held in a corporate or fiduciary account; for
these accounts, additional documents are required:
corporate accounts: certified copy of a corporate resolution
fiduciary accounts: copy of power of attorney or other governing
document
To protect your account against fraud, all signatures on these documents must be
guaranteed. You may obtain a signature guarantee at most banks and securities
dealers. A notary public cannot provide a signature guarantee.
INCOMPLETE SELL REQUESTS State Street Research will attempt to notify you
promptly if any information necessary to process your request is missing.
TIMING OF REQUESTS All requests received in good order by State Street Research
before 4:00 p.m. eastern time will be executed the same day, at that day's
closing share price. Requests received after 4:00 p.m. will be executed the
following day, at that day's closing share price.
WIRE TRANSACTIONS Proceeds sent by federal funds wire must total at least
$5,000. A fee of $7.50 will be deducted from all proceeds sent by wire, and your
bank may charge an additional fee to receive wired funds.
SELLING RECENTLY PURCHASED SHARES If you sell shares before the check or
electronic funds transfer (ACH) for those shares has been collected, you will
not receive the proceeds until your initial payment has cleared. This may take
up to 15 days after your purchase was recorded (in rare cases, longer). If you
open an account with shares purchased by wire, you cannot sell those shares
until your application has been processed.
<PAGE>
INSTRUCTIONS FOR SELLING SHARES 19
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<TABLE>
<S> <C> <C>
[graphic: Through a Consult your financial professional or your program materials.
brief case] Professional
or Program
- -------------------------------------------------------------------------------------------------------------------
By Mail [graphic: Send a letter of instruction, an endorsed stock power or share certificates (if
mailbox] you hold certificate shares) to State Street Research. Specify the fund, the
account number and the dollar value or number of shares. Be sure to include all
necessary signatures and any additional
documents, as well as signature guarantees if
required (see facing page).
- -------------------------------------------------------------------------------------------------------------------
[graphic: By Federal Check with State Street Research to make sure that a wire redemption privilege,
the Capitol Funds Wire including a bank designation, is in place on your account. Once this is
building] established, you may place your request to sell shares with State Street
Research. Proceeds will be wired to your pre-designated bank account. (See "Wire
Transactions" on facing page.)
- -------------------------------------------------------------------------------------------------------------------
By Electronic [graphic: Check with State Street Research to make sure that the EZ Trader feature,
Funds Transfer electric including a bank designation, is in place on your account. Once this is
(ACH) plug] established, you may place your request to sell shares with State Street
Research. Proceeds will be sent to your pre-designated bank account.
- -------------------------------------------------------------------------------------------------------------------
[graphic: By Telephone As long as the transaction does not require a written request (see facing page),
telephone] you or your financial professional can sell shares by calling State Street
Research. A check will be mailed to you on the following business day.
- -------------------------------------------------------------------------------------------------------------------
By Exchange [graphic: Read the prospectus for the fund into which you are exchanging. Call State
arrows pointing Street Research or visit our Web site.
in two
directions]
- -------------------------------------------------------------------------------------------------------------------
[graphic: By Systematic See plan information on page 23.
calendar] Withdrawal Plan
- -------------------------------------------------------------------------------------------------------------------
By Check [graphic: The checkwriting privilege is available for Class A shares only if you have
check] requested this privilege on your application, you may write checks for amounts
from $500 to $100,000.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408
Call toll-free: 1-800-562-0032 (business days 8:00 a.m.-6:00 p.m., eastern time)
Internet www.ssrfunds.com
<PAGE>
20 YOUR INVESTMENT CONTINUED
- --------------------------------------------------------------------------------
[graphic: stack of papers]
ACCOUNT POLICIES
TELEPHONE REQUESTS When you open an account you automatically receive telephone
privileges, allowing you to place requests for your account by telephone. Your
financial professional can also use these privileges to request exchanges on
your account and, with your written permission, redemptions. For your
protection, all telephone calls are recorded.
As long as State Street Research takes certain measures to authenticate
telephone requests on your account, you may be held responsible for unauthorized
requests. Unauthorized telephone requests are rare, but if you want to protect
yourself completely, you can decline the telephone privilege on your
application. The fund may suspend or eliminate the telephone privilege at any
time.
EXCHANGE PRIVILEGES There is no fee to exchange shares among State Street
Research funds. Your new fund shares will be the equivalent class of your
current shares. Any contingent deferred sales charges will continue to be
calculated from the date of your initial investment.
Frequent exchanges can interfere with fund management and drive up costs for all
shareholders. Because of this, the fund currently limits each account, or group
of accounts under common ownership or control, to six exchanges per calendar
year. The fund may change or eliminate the exchange privilege at any time, may
limit or cancel any shareholder's exchange privilege and may refuse to accept
any exchange request, particularly those associated with "market timing"
strategies.
For Merrill Lynch customers, exchange privileges extend to Summit Cash Reserves
Fund, which is related to the fund for purposes of investment and investor
services.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $1,500,
State Street Research may mail you a notice asking you to bring the account back
up to $1,500 or close it out. If you do not take action within 60 days, State
Street Research may either sell your shares and mail the proceeds to you at the
address of record or, depending on the circumstances, may deduct an annual
maintenance fee (currently $18).
<PAGE>
21
-----
THE FUND'S BUSINESS HOURS The fund is open the same days as the New York Stock
Exchange (generally Monday through Friday). Fund representatives are available
from 8:00 a.m. to 6:00 p.m. eastern time on these days.
CALCULATING SHARE PRICE The fund calculates its share price every business day
at the close of regular trading on the New York Stock Exchange (usually at 4:00
p.m. eastern time). The share price is the fund's total assets minus its
liabilities (net asset value, or NAV) divided by the number of existing shares.
In calculating its NAV, the fund uses the last reported sale price or quotation
for portfolio securities. However, in cases where these are unavailable, or when
the investment manager believes that subsequent events have rendered them
unreliable, the fund may use fair-value estimates instead.
Because foreign securities markets are sometimes open on different days from
U.S. markets, there may be instances when the value of the fund's portfolio
changes on days when you cannot buy or sell fund shares.
REINSTATING RECENTLY SOLD SHARES For 120 days after you sell shares, you have
the right to "reinstate" your investment by putting some or all of the proceeds
into any currently available State Street Research fund at net asset value. Any
CDSC you paid on the amount you are reinstating will be credited to your
account. You may only use this privilege once in any twelve-month period with
respect to your shares of a given fund.
ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserves certain rights, including:
[bullet] The fund may vary its requirements for initial or additional
investments, exchanges, reinvestments, periodic investment plans,
retirement and employee benefit plans, sponsored arrangements and other
similar programs
[bullet] All orders to purchase shares are subject to acceptance by the fund
[bullet] At any time, the fund may change or discontinue its sales charge
waivers and any of its order acceptance practices, and may suspend the
sale of its shares
[bullet] The fund may delay sending you redemption proceeds for up to seven
days, or longer if permitted by the SEC
[bullet] To permit investors to obtain the current price, dealers are
responsible for transmitting all orders to the State Street Research
Service Center promptly
<PAGE>
22 YOUR INVESTMENT CONTINUED
- --------------------------------------------------------------------------------
[sidebar text]------------------------------------------------------------------
[graphic: Looking through magnifying glass at paper]
TAX CONSIDERATIONS
Unless your investment is in a tax-deferred account, you may want to avoid:
[bullet] investing a large amount in the fund close to the end of the fiscal
year or a calendar year (if the fund makes a capital gains
distribution, you will receive some of your investment back as a
taxable distribution)
[bullet] selling shares at a loss for tax purposes and investing in a
substantially identical investment within 30 days before or after such
sale (such a transaction is usually considered a "wash sale," and you
will not be allowed to claim a tax loss)
[end sidebar text]--------------------------------------------------------------
[graphic: "Uncle Sam"]
DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund distributes its net income and
net capital gains to shareholders. Using projections of its future income, the
fund declares dividends daily and pays them monthly. Net capital gains, if any,
are distributed around the end of the fund's fiscal year, which is March 31. To
comply with tax regulations, the fund may also pay an additional capital gains
distribution in December.
You may have your distributions reinvested in the fund, invested in a different
State Street Research fund, deposited in a bank account or mailed out by check.
If you do not give State Street Research other instructions, your distributions
will automatically be reinvested in the fund.
TAX EFFECTS OF DISTRIBUTIONS AND TRANSACTIONS In general, any dividends and
short-term capital gains distributions you receive from the fund are taxable as
ordinary income. Distributions of other capital gains are generally taxable as
capital gains -- in most cases, at different rates from those that apply to
ordinary income.
The tax you pay on a given capital gains distribution generally depends on how
long the fund has held the portfolio securities it sold. It does not depend on
how long you have owned your fund shares or whether you reinvest your
distributions.
<PAGE>
23
-----
Every year, the fund will send you information detailing the amount of ordinary
income and capital gains distributed to you for the previous year.
The sale of shares in your account may produce a gain or loss, and is a taxable
event. For tax purposes, an exchange is the same as a sale.
Your investment in the fund could have additional tax consequences. Please
consult your tax professional for assistance.
BACKUP WITHHOLDING By law, the fund must withhold 31% of your distributions and
proceeds if you have not provided complete, correct taxpayer information.
[graphic: shaking hands]
INVESTOR SERVICES
INVESTAMATIC PROGRAM Use Investamatic to set up regular automatic investments in
the fund from your bank account. You determine the frequency and amount of your
investments.
SYSTEMATIC WITHDRAWAL PLAN This plan is designed for retirees and other
investors who want regular withdrawals from a fund account. The plan is free and
allows you to withdraw up to 8% of your fund assets a year without incurring any
contingent deferred sales charges. Certain terms and minimums apply.
EZ TRADER This service allows you to purchase or sell fund shares over the
telephone through the ACH (Automated Clearing House) system.
DIVIDEND ALLOCATION PLAN This plan automatically invests your distributions from
the fund into another fund of your choice, without any fees or sales charges.
AUTOMATIC BANK CONNECTION This plan lets you route any distributions or
Systematic Withdrawal Plan payments directly to your bank account.
RETIREMENT PLANS State Street Research also offers a full range of prototype
retirement plans for individuals, sole proprietors, partnerships, corporations
and employees.
Call 1-800-562-0032 for information on any of the services described above.
<PAGE>
24 OTHER INFORMATION
- --------------------------------------------------------------------------------
[graphic: stock certificates]
OTHER SECURITIES
AND RISKS
Each of the fund's portfolio securities and investment practices offers certain
opportunities and carries various risks. Major investments and risk factors are
outlined in the fund description starting on page 2. Below are brief
descriptions of other securities and practices, along with their associated
risks.
RESTRICTED AND ILLIQUID SECURITIES Any securities that are thinly traded or
whose resale is restricted can be difficult to sell at a desired time and price.
Some of these securities are new and complex, and trade only among institutions;
the markets for these securities are still developing, and may not function as
efficiently as established markets. Owning a large percentage of restricted and
illiquid securities could hamper the fund's ability to raise cash to meet
redemptions. Also, because there may not be an established market price for
these securities, the fund may have to estimate their value, which means that
their valuation -- and the valuation of the fund--may have a subjective element.
SECURITIES RATINGS When securities are rated by one or more independent rating
agencies, the fund uses these ratings to determine credit quality. In cases
where a security is rated in conflicting categories by different rating
agencies, the fund may choose to follow the higher rating. If a security is
unrated, the fund may assign it to a given category based on its own credit
research. If a rating agency downgrades a security, the fund will determine
whether to hold or sell the security, depending on all of the facts and
circumstances at that time.
FOREIGN INVESTMENTS Foreign securities are generally more volatile than their
domestic counterparts, in part because of higher political and economical risks,
lack of reliable information and fluctuations in currency exchange rates. These
risks are usually higher in less developed countries. The fund may use foreign
currencies and related instruments to hedge its foreign investments.
DERIVATIVES Derivatives, a category that includes options and futures, are
financial instruments whose value derives from one or more securities,
<PAGE>
25
-----
indices or currencies. The fund may use certain derivatives for hedging
(attempting to offset a potential loss in one position by establishing an
interest in an opposite position). The fund may also use certain derivatives for
speculation (investing for potential income or capital gain).
While hedging can guard against potential risks, it adds to the fund's expenses
and can eliminate some opportunities for gains. There is also a risk that a
derivative intended as a hedge may not perform as expected.
The main risk with derivatives is that some types can amplify a gain or loss,
potentially earning or losing substantially more money than the actual cost of
the derivative.
With some derivatives, whether used for hedging or speculation, there is also
the risk that the counterparty may fail to honor its contract terms, causing a
loss for the fund.
ZERO (OR STEP) COUPONS A zero coupon security is a debt security that is
purchased and traded at discount to its face value because it pays no interest
for some or all of its life. Interest, however, is reported as income to the
fund and the fund is required to distribute to shareholders an amount equal to
the amount reported. Those distributions may force the fund to liquidate
portfolio securities at a disadvantageous time.
SECURITIES LENDING The fund may seek additional income by lending portfolio
securities to qualified institutions. By reinvesting any cash collateral it
receives in these transactions, the fund could realize additional gains or
losses. If the borrower fails to return the securities and the invested
collateral has declined in value, the fund could lose money.
WHEN-ISSUED SECURITIES The fund may invest in securities prior to their date of
issue. These securities could fall in value by the time they are actually
issued, which may be any time from a few days to over a year.
DEFENSIVE INVESTING During unusual market conditions, the fund may place up to
100% of total assets in cash or high-quality, short-term debt securities. To
the extent that the fund does this, it is not pursuing its goal.
YEAR 2000 The investment manager does not currently anticipate that computer
problems related to the year 2000 will have a material effect on the fund.
However, there can be no assurances in this area, including the possibility that
year 2000 computer problems could negatively affect communication systems,
investment markets or the economy in general.
<PAGE>
26 FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
These highlights are intended to help you understand the fund's performance over
the past five years. The information in these tables has been audited by
PricewaterhouseCoopers LLP, the fund's independent accountants. Total return
figures assume reinvestment of all distributions.
<TABLE>
<CAPTION>
Class A
-------------------------------------------------
Years ended March 31
Per Share Data 1994 1995(1) 1996(1) 1997(1) 1998(1)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 6.32 6.43 5.80 5.95 6.01
----- ----- ----- ----- -----
Net investment income ($) 0.66 0.61 0.52 0.59 0.58
Net realized and unrealized gain (loss)
on investments, foreign currency and
forward contracts ($) 0.22 (0.58) 0.20 (0.01) 0.63
----- ----- ----- ----- -----
Total from investment operations ($) 0.88 0.03 0.72 0.58 1.21
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.62) (0.60) (0.56) (0.52) (0.60)
Distributions from capital gains ($) (0.15) (0.06) (0.01) -- --
----- ----- ----- ----- -----
Total distributions ($) (0.77) (0.66) (0.57) (0.52) (0.60)
----- ----- ----- ----- -----
Net asset value, end of year ($) 6.43 5.80 5.95 6.01 6.62
===== ===== ===== ===== =====
Total return (%)(3) 14.58 1.80 12.85 10.30 20.98
Ratios/Supplemental Data
- ---------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 650,775 618,462 646,473 658,413 718,705
Expense ratio (%) 1.16 1.23 1.17 1.10 1.10
Ratio of net investment income
to average net assets (%) 10.41 10.19 8.88 9.70 9.10
Portfolio turnover rate (%) 24.36 31.55 56.47 81.75 70.53
Class B
-------------------------------------------------
Years ended March 31
Per Share Data 1994(2) 1995(1) 1996(1) 1997(1) 1998(1)
- ---------------------------------------------------------------------------------------------------
Net asset value, beginning of year ($) 6.34 6.42 5.79 5.93 5.98
----- ----- ----- ----- -----
Net investment income ($) 0.51 0.57 0.46 0.55 0.53
Net realized and unrealized gain (loss)
on investments, foreign currency and
forward contracts ($) 0.15 (0.58) 0.21 (0.02) 0.62
----- ----- ----- ----- -----
Total from investment operations ($) 0.66 (0.01) 0.67 0.53 1.15
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.48) (0.56) (0.52) (0.48) (0.55)
Distributions from capital gains ($) (0.10) (0.06) (0.01) -- --
----- ----- ----- ----- -----
Total distributions ($) (0.58) (0.62) (0.53) (0.48) (0.55)
----- ----- ----- ----- -----
Net asset value, end of year ($) 6.42 5.79 5.93 5.98 6.58
===== ===== ===== ===== =====
Total return (%)(3) 10.76(4) 0.89 12.06 9.35 20.02
Ratios/Supplemental Data
- ----------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 67,337 117,767 185,735 259,077 345,797
Expense ratio (%) 1.93(5) 1.98 1.92 1.85 1.85
Ratio of net investment income
to average net assets (%) 10.32(5) 9.65 7.95 9.01 8.36
Portfolio turnover rate (%) 24.36 31.55 56.47 81.75 70.53
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Class C
(formerly Class D)
----------------------------------------------------
Years ended March 31
Per Share Data 1994(2) 1995(1) 1996(1) 1997(1) 1998(1)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 6.34 6.42 5.79 5.93 5.99
-- ---- ---- ---- ---- ----
Net investment income ($) 0.51 0.58 0.46 0.54 0.53
Net realized and unrealized gain (loss)
on investments, foreign currency and
forward contracts ($) 0.15 (0.59) 0.21 (0.00) 0.62
-- ---- ---- ---- ---- ----
Total from investment operations ($) 0.66 (0.01) 0.67 0.54 1.15
-- ---- ---- ---- ---- ----
Dividends from net investment income ($) (0.48) (0.56) (0.52) (0.48) (0.55)
Distributions from capital gains ($) (0.10) (0.06) (0.01) -- --
-- ---- ---- ---- ---- ----
Total distributions ($) (0.58) (0.62) (0.53) (0.48) (0.55)
-- ---- ---- ---- ---- ----
Net asset value, end of year ($) 6.42 5.79 5.93 5.99 6.59
==== ===== ==== ===== =====
Total return (%)(3) 10.74(4) 0.88 12.05 9.52 19.99 11.67(4)
Ratios/Supplemental Data
- -----------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 2,661 6,766 15,262 28,488 34,586
Expense ratio (%) 1.93(5) 1.98 1.92 1.85 1.85
Ratio of net investment income
to average net assets (%) 10.32(5) 9.81 7.91 9.09 8.35
Portfolio turnover rate (%) 24.36 31.55 56.47 81.75 70.53
Class S
(formerly Class C)
-------------------------------------------------
Years ended March 31
Per Share Data 1994(2) 1995(1) 1996(1) 1997(1) 1998(1)
- ---------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ($) 6.34 6.42 5.78 5.92 5.98
----- ----- ----- ----- -----
Net investment income ($) 0.57 0.64 0.53 0.61 0.59
Net realized and unrealized gain (loss)
on investments, foreign currency and
forward contracts ($) 0.14 (0.60) 0.20 (0.01) 0.63
----- ----- ----- ----- -----
Total from investment operations ($) 0.71 0.04 0.73 0.60 1.22
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.53) (0.62) (0.58) (0.54) (0.62)
Distributions from capital gains ($) (0.10) (0.06) (0.01) -- --
----- ----- ----- ----- -----
Total distributions ($) (0.63) (0.68) (0.59) (0.54) (0.62)
----- ----- ----- ----- -----
Net asset value, end of year ($) 6.42 5.78 5.92 5.98 6.58
===== ===== ===== ===== =====
Total return (%)(3) 10.74(4) 11.67(4) 1.73 13.19 10.63 21.22
Ratios/Supplemental Data
Net assets at end of year ($ thousands) 851 2,579 3,840 6,255 7,860
Expense ratio (%) 0.93(5) 0.98 0.92 0.85 0.85
Ratio of net investment income
to average net assets (%) 11.32(5) 10.85 8.97 10.04 9.36
Portfolio turnover rate (%) 24.36 31.55 56.47 81.75 70.53
</TABLE>
(1) Per-share figures have been calculated using the average shares method.
(2) June 1, 1993 (commencement of share class designations) to March 31, 1994.
(3) Does not reflect any front-end or contingent deferred sales charges.
(4) Not annualized.
(5) Annualized.
<PAGE>
28 NOTES
- --------------------------------------------------------------------------------
<PAGE>
NOTES 29
- --------------------------------------------------------------------------------
<PAGE>
[sidebar text]------------------------------------------------------------------
If you have questions about the fund or would like to request a free copy of the
current annual/semiannual report or SAI, contact State Street Research or your
financial professional.
[logo: State Street Research]
Service Center
P.O. Box 8408, Boston, MA 02266
Telephone: 1-800-562-0032
Internet: www.ssrfunds.com
You can also obtain information about the fund, including the SAI and certain
other fund documents, on the Internet at www.sec.gov, in person at the SEC's
Public Reference Room in Washington, DC (telephone 1-800-SEC-0330) or by mail by
sending your request, along with a duplicating fee, to the SEC's Public
Reference Section, Washington, DC 20549-6009.
prospectus
- -----------------------------------
SEC File Number: 811-4559
[end sidebar text]--------------------------------------------------------------
FOR ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
You can find additional information on the fund's structure and its performance
in the following documents:
ANNUAL/SEMIANNUAL REPORTS While the prospectus describes the fund's potential
investments, these reports detail the fund's actual investments as of the report
date. Reports include a discussion by fund management of recent economic and
market trends and fund performance. The annual report also includes the report
of the fund's independent accountants.
STATEMENT OF ADDITIONAL INFORMATION (SAI) A supplement to the prospectus, the
SAI contains further information about the fund and its investment limitations
and policies. It also includes the most recent annual report and the independent
accountants' report. A current SAI for this fund is on file with the Securities
and Exchange Commission and is incorporated by reference (is legally part of
this prospectus).
<TABLE>
<CAPTION>
Ticker Symbols
- -----------------------
<S> <C>
Class A SSAMX
Class B SSRMX
Class C SSMDX
Class S SSMCX
</TABLE>
HI-038F-898
Control Number: 5205-980801(exp0899)SSR-LD
<PAGE>
[logo: State Street Research]
MANAGED ASSETS
[photo: Custom House, Boston]
[sidebar text]------------------------------------------------------------------
This prospectus has information you should know before you invest. Please read
it carefully and keep it with your investment records.
Although these securities have been registered with the Securities and Exchange
Commission, the SEC has not approved or disapproved them and does not guarantee
the accuracy or adequacy of the information in this prospectus. Anyone who
informs you otherwise is committing a federal crime.
[end sidebar text]--------------------------------------------------------------
An asset allocation fund investing in a dynamic mix of stocks, bonds and other
securities.
Prospectus
August 1, 1998
<PAGE>
[PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
CONTENTS 1
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
2 THE FUND
2 Goal and Strategies
3 Principal Risks
6 Volatility and Performance
8 Investor Expenses
10 Investment Management
11 YOUR INVESTMENT
11 Opening an Account
11 Choosing a Share Class
13 Sales Charges
15 Dealer Compensation
16 Buying and Selling Shares
20 Account Policies
22 Distributions and Taxes
23 Investor Services
24 OTHER INFORMATION
24 Other Securities and Risks
26 Financial Highlights
Back Cover For Additional Information
</TABLE>
<PAGE>
2 THE FUND
- --------------------------------------------------------------------------------
[graphic: Chess-piece: Knight]
GOAL AND STRATEGIES
FUNDAMENTAL GOAL The fund seeks a high total return while attempting to limit
investment risk and preserve capital.
PRINCIPAL STRATEGIES In managing its portfolio, the fund uses an asset
allocation strategy, investing varying percentages of its portfolio in three
major categories: stocks, bonds and, to a lesser extent, money market
instruments. Drawing on its analysis of financial trends and market conditions,
the investment manager monitors and adjusts those allocations from time to time.
The fund has wide flexibility in the relative weightings given to each category;
however, it intends to remain diversified across categories.
The assets allocated to the stock and bond categories undergo a further
allocation process. The portfolio manager assigns varying percentages to
individual investment team members. Some team members are responsible for
particular types of stock investments, such as stocks of larger companies,
smaller companies, companies that appear to be trading below their true worth or
international companies.
Other members are responsible for various types of bond investments, such as
investment grade securities, junk bonds and international debt. The fund
reserves the right to invest up to 25% of total assets in junk bonds (at the
time of purchase, in Standard & Poor's BB or B major rating categories or
Moody's Ba or B major rating categories, or their unrated equivalents).
[sidebar text]------------------------------------------------------------------
[graphic: Looking through magnifying glass at paper]
WHO MAY WANT TO INVEST
State Street Research Managed Assets is designed for investors who seek one or
more of the following:
[bullet] a foundation for a long-term portfolio
[bullet] professional asset allocation within a single fund
[bullet] a fund that is highly diversified
The fund is NOT appropriate for investors who:
[bullet] want to avoid even moderate volatility or possible losses
[bullet] are seeking either maximum growth or high income
[bullet] are making short-term investments
[bullet] are investing emergency reserve money
[end sidebar text]--------------------------------------------------------------
<PAGE>
3
-----
Based on its economic outlook, the fund may allocate a portion of its
investments to inflation-responsive securities: securities that tend to
appreciate when inflation rates increase. These may include stocks of energy and
natural resource companies, commodities and precious metals.
The fund generally does not invest substantially in money market instruments,
such as high-quality short-term U.S. securities. However, it will hold cash for
defensive purposes during unusual market conditions or to maintain liquidity.
For more information about the fund's investments and practices, see page 24.
[graphic: Traffic sign: arrows indicate fork in road, one with a sharp u-turn]
PRINCIPAL RISKS
Because the fund pursues an asset allocation strategy, its major risks include
the risk that the fund will not correctly anticipate the relative performance of
different asset categories over specific periods. In such cases, the fund may
underperform other types of asset allocation investments or other types of
investments in general.
To the extent that the fund invests in stocks, it takes on the risks of stock
investing, including sudden, unpredictable drops in value and the potential for
lackluster performance.
In addition, certain categories of stocks may involve particular types of risk.
Growth stocks generally are more sensitive to market movements, in part because
their prices tend to reflect future expectations. Smaller company stocks also
tend to be more sensitive to market movements, usually because they may be
thinly traded or the companies may be less able to withstand hard times. Larger,
more established companies may be unable to respond as quickly to competitive
challenges. Stocks that appear to be trading below their true worth may not
achieve their expected values because the factors causing them to be underpriced
do not change.
To the extent that the fund invests in bonds, it takes on the risks of bond
investing, including the tendency of prices to fall when interest rates rise.
This risk is greater for bonds with longer maturities. A less significant risk
is that a bond issuer
<PAGE>
4 THE FUND CONTINUED
- --------------------------------------------------------------------------------
could default on principal or interest payments, causing a loss for the fund.
Junk bonds have a higher risk of default than investment grade bonds, are more
affected by the financial health of the issuer and the economy generally, and
their market prices can be more volatile.
Foreign securities present risks beyond those of U.S. securities. They are
generally more volatile and less liquid than their U.S. counterparts. Moreover,
changes in currency exchange rates have the potential to reduce or eliminate
certain gains achieved in securities markets or create net losses. These risks
are usually higher for investments in less developed markets.
Inflation-responsive investments may not fully compensate for the effects of
inflation. Stocks of energy and natural resource companies usually are affected
by variations in the markets for their commodities.
Because of the fund's management approach, which may include short-term trading,
the fund's portfolio turnover rate may be above-average at times for an asset
allocation fund. High turnover can increase the fund's brokerage costs and may
increase your tax liability if there are capital gains.
The fund's shares will rise and fall in value and there is a risk that you could
lose money by investing in the fund. Also, the fund cannot be certain that it
will achieve its goal. Finally, fund shares are not bank deposits and are not
guaranteed, endorsed or insured by any financial institution, government entity
or the FDIC.
Information on other securities and risks appears on page 24.
A "snapshot" of the fund's investments may be found in the current annual or
semiannual report (see back cover).
<PAGE>
5
-----
[sidebar text]------------------------------------------------------------------
[graphic: Looking through magnifying glass at paper]
WHAT IS
ASSET ALLOCATION?
Asset allocation is a strategy used to apportion investments among categories of
assets, such as stocks, bonds and money market instruments. In many instances,
various categories will respond differently to economic conditions. To the
extent that they do, having a portfolio diversified across multiple categories
can help limit volatility by cushioning the impact of poor performance from any
one type of investment. Investing across several different asset categories can
also enhance long-term performance by capturing the opportunities available in
each area at different times.
Through an asset allocation fund, investors can benefit from the experience of a
professional manager who analyzes market and economic conditions to identify the
most promising asset classes. Some funds take a more structured approach to
asset allocation, varying only slightly from their "neutral" proportions of
stocks, bonds and money market instruments. Other funds take a "market timer"
approach, making dramatic shifts among asset classes in response to short-term
market conditions. This fund generally avoids both extremes. It is not bound by
any "neutral" allocation and it has no set limits on the percentage of its
assets that must be invested in any one category or sector, giving it the
ability to adapt to changing markets and invest wherever opportunities appear
greatest. On the other hand, the fund tends to avoid large, sudden shifts in the
composition of its portfolio, taking a more incremental approach to asset
allocation by focusing on longer term market conditions. In addition, this fund
has added another category, inflation-responsive investments.
By pursuing an asset allocation strategy through diligent research and active
management, the fund is designed to be the cornerstone of an investor's
long-term portfolio.
[end sidebar text]--------------------------------------------------------------
<PAGE>
6 VOLATILITY AND PERFORMANCE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
[bar chart graphic]
Years ended December 31
---------------------------------------------------------------------
YEAR-BY-YEAR RETURN (CLASS A) 1989 1990 1991 1992 1993 1994 1995 1996 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30%
25%
20%
15%
10%
5%
0%
(5%)
(10%) 17.05 (3.24) 21.04 7.86 22.08 (5.85) 22.75 20.13 16.27
</TABLE>
[TRIANGLE POINTING UP] BEST QUARTER: third quarter 1997, up 10.16%
[TRIANGLE POINTING DOWN] WORST QUARTER: third quarter 1990, down 6.36%
RETURN FROM 1/1/98 - 6/30/98 (not annualized): up 9.64%
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
As of December 31, 1997
----------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (%) 11.04 13.48 12.01
Class B (%) 10.42 13.51 12.16
Class C (%) 14.38 13.74 12.16
Class S (%) 16.55 14.78 12.73
S&P 500 Index (%) 33.35 20.25 18.19
Lehman Brothers Aggregate Bond Index (%) 9.65 7.48 9.32
Lipper Flexible Portfolio Funds Index (%) 18.77 12.93 12.63
</TABLE>
[footnote text]
*Since inception (12/29/88)
[end footnote text]
<PAGE>
7
-----
[sidebar text]------------------------------------------------------------------
[graphic: Looking through magnifying glass at paper]
UNDERSTANDING
VOLATILITY AND
PERFORMANCE
The chart and table on the opposite page are designed to show two aspects of the
fund's track record:
[bullet] YEAR-BY-YEAR TOTAL RETURN shows how volatile the fund has been: how
much the difference has been, historically, between its best years and
worst years. In general, funds with higher average annual total returns
will also have higher volatility. The graph includes the effects of
fund expenses, but not sales charges. If sales charges had been
included, returns would have been less than shown.
[bullet] AVERAGE ANNUAL TOTAL RETURN is a measure of the fund's performance over
time. It is determined by taking the fund's performance over a given
period and expressing it as an average annual rate.
Average annual total return includes the effects of fund expenses and maximum
sales charges for each class, and assumes that you sold your shares at the end
of the period.
Also included with the fund's average annual returns are three independent
measures of performance. Two are unmanaged indices: the S&P 500 (officially, the
"Standard & Poor's 500 Composite Stock Price Index") which includes 500 U.S.
stocks, and the Lehman Brothers Aggregate Bond Index which includes fixed-rate
debt issues rated investment grade or higher. The Lipper Flexible Portfolio
Funds Index shows the performance of a category of mutual funds with similar
goals. The Lipper index shows you how well the fund has done compared to
competing funds. While the fund does not seek to match the returns or the
volatility of either the S&P 500 index or the Lehman index, they are good
indicators of general stock and bond market performance, respectively and can be
used as rough guides when gauging the return of this and other investments. When
making comparisons, keep in mind that none of the indices includes the effects
of sales charges. Also, even if your portfolio were identical to the S&P 500 or
the Lehman Brothers Aggregate Bond Index, your returns would always be lower,
because these indices do not include brokerage and administrative expenses.
In both the chart and the table, the returns shown for the fund include
performance from before the creation of share classes in 1993. If the returns
for Class B and Class C from before 1993 had reflected their current
distribution/service (12b-1) fees (as described on page 8), these returns would
have been lower.
Keep in mind that past performance is no guarantee of future results.
[end sidebar text]--------------------------------------------------------------
<PAGE>
8 INVESTOR EXPENSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class descriptions begin on page 11
-----------------------------------------------
SHAREHOLDER FEES (% of offering price) Class A Class B Class C(1) Class S(1)
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum front-end sales charge (load) 4.50 0.00 0.00 0.00
Maximum deferred sales charge (load) 0.00(2) 5.00 1.00 0.00
ANNUAL FUND EXPENSES (% of average net assets) Class A Class B Class C Class S
- -----------------------------------------------------------------------------------------------
Management fee(3) 0.74 0.74 0.74 0.74
Distribution/service (12b-1) fees 0.25 1.00 1.00 0.00
Other expenses 0.30 0.30 0.30 0.30
---- ---- ---- ----
Total annual fund operating expenses 1.29 2.04 2.04 1.04
==== ==== ==== ====
EXAMPLE Year Class A Class B Class C Class S
- -----------------------------------------------------------------------------------------------
1 $575 $707/$207 $307/$207 $107
3 $841 $940/$640 $640 $331
5 $1,126 $1,298/$1,098 $1,098 $574
10 $1,936 $2,176 $2,369 $1,271
</TABLE>
[footnote text]
(1) Before November 1, 1997, Class C shares were designated Class D and Class S
shares were designated Class C.
(2) Except for investments of $1 million or more; see page 13.
(3) Reflects fee schedule that became effective August 1, 1998 as if it had
been in place during the fund's previous fiscal year.
[end footnote text]
<PAGE>
9
-----
[sidebar text]------------------------------------------------------------------
[graphic: Looking through magnifying glass at paper]
UNDERSTANDING
INVESTOR EXPENSES
The information on the opposite page is designed to give you an idea of what you
should expect to pay in expenses as an investor in the fund:
[bullet] SHAREHOLDER FEES are costs that are charged to you directly. These fees
are not charged on reinvestments or exchanges.
[bullet] ANNUAL FUND EXPENSES are deducted from the fund's assets every year,
and are thus paid indirectly by the fund's investors.
[bullet] The EXAMPLE is designed to allow you to compare the costs of this fund
with those of other funds. It assumes that you invested $10,000 over
the years indicated, reinvested all distributions, earned a
hypothetical 5% annual return and paid the maximum applicable sales
charges. For Class B shares, it also assumes the automatic conversion
to Class A after eight years.
Where two numbers are shown separated by a slash, the first one assumes you sold
all your shares at the end of the period, while the second assumes you stayed in
the fund. Where there is only one number, the costs would be the same either
way.
Investors should keep in mind that the example is for comparison purposes only.
The fund's actual performance and expenses may be higher or lower.
[end sidebar text]--------------------------------------------------------------
<PAGE>
10 THE FUND CONTINUED
- --------------------------------------------------------------------------------
[graphic: Rodin's sculpture "The Thinker"]
Investment Management
The fund's investment manager is State Street Research & Management Company, One
Financial Center, Boston, MA 02111. The firm traces its heritage back to 1924
and the founding of one of America's first mutual funds. Today the firm has more
than $53 billion in assets under management (as of June 30, 1998) including more
than $17 billion in mutual funds.
The investment manager is responsible for the fund's investment and business
activities, and receives the management fee as compensation. The management fee
is 0.75% of the first $500 million of net assets, annually, 0.70% of the next
$500 million, and 0.65% of any amount over $1 billion. The investment manager is
a subsidiary of Metropolitan Life Insurance Company.
Peter C. Bennett has been responsible for the fund's day-to-day portfolio
management since December 1996. An executive vice president and director, he is
the chief investment officer for equities and is a member of the management
committee. He joined the firm in 1968 and has worked as an investment
professional since 1963. Mr. Bennett is supported by an in-house team of
investment specialists.
<PAGE>
YOUR INVESTMENT 11
- --------------------------------------------------------------------------------
[graphic: Key]
OPENING AN ACCOUNT
If you are opening an account through a financial professional, he or she can
assist you with all phases of your investment.
If you are investing through a large retirement plan or other special program,
follow the instructions in your program materials.
To open an account without the help of a financial professional, please use the
instructions on these pages.
[graphic: pencil and paper]
CHOOSING A SHARE CLASS
The fund offers four share classes, each with its own sales charge and expense
structure.
If you are investing a substantial amount and plan to hold your shares for a
long period, Class A shares may make the most sense for you. If you are
investing a lesser amount, you may want to consider Class B shares (if investing
for at least five years) or Class C shares (if investing for less than five
years). If you are investing through a special program, such as a large
employer-sponsored retirement plan or certain programs available through
brokers, you may be eligible to purchase Class S shares.
Because all future investments in your account will be made in the share class
you designate when opening the account, you should make your decision carefully.
Your financial professional can help you choose the share class that makes the
most sense for you.
<PAGE>
12 YOUR INVESTMENT CONTINUED
- --------------------------------------------------------------------------------
[sidebar text]------------------------------------------------------------------
[graphic: Looking through magnifying glass at paper]
UNDERSTANDING
DISTRIBUTION/SERVICE
FEES
As noted in the descriptions at right, all share classes except Class S have an
annual distribution/service fee. This is also called a 12b-1 fee, after the SEC
rule that permits this type of fee.
Under its current 12b-1 plan, the fund may pay certain distribution and service
fees for these classes out of fund assets. Because 12b-1 fees are an ongoing
expense, they will increase the cost of your investment and, over time, could
potentially cost you more than if you had paid other types of sales charges. For
that reason, you should consider the effects of 12b-1 fees as well as sales
loads when choosing a share class (the example on page 8 in this prospectus can
be helpful in this regard).
Some of the 12b-1 fee is used to compensate those financial professionals who
sell fund shares and provide ongoing service to shareholders. The table on page
15 shows how these professionals' compensation is calculated
[end sidebar text]--------------------------------------------------------------
CLASS A -- FRONT LOAD
[bullet] Initial sales charge of 4.5% or less
[bullet] Lower sales charges for larger investments; see sales charge schedule
on facing page
[bullet] Lower annual expenses than Class B or Class C shares because of lower
distribution/service (12b-1) fee of 0.25%
CLASS B -- BACK LOAD
[bullet] No initial sales charge
[bullet] Deferred sales charge of 5% or less on shares you sell within five
years
[bullet] Annual distribution/service (12b-1) fee of 1.00%
[bullet] Automatic conversion to Class A shares after eight years, reducing
future annual expenses
CLASS C(1) -- LEVEL LOAD
[bullet] No initial sales charge
[bullet] Deferred sales charge of 1%, paid if you sell shares within one year of
purchase
[bullet] Lower deferred sales charge than Class B shares
[bullet] Annual distribution/service (12b-1) fee of 1.00%
[bullet] No conversion to Class A shares after eight years, so annual expenses
do not decrease
[footnote text]
(1) Before November 1, 1997, these were designated Class D.
[end footnote text]
CLASS S(2) -- SPECIAL PROGRAMS
[bullet] Available only through certain retirement accounts, advisory accounts
of the investment manager and other special programs, including broker
programs with recordkeeping and other services; these programs usually
involve special conditions and separate fees (consult your financial
professional or your program materials)
[bullet] No sales charges of any kind
[bullet] No distribution/service (12b-1) fees; annual expenses are lower than
other share classes
[footnote text]
(2) Before November 1, 1997, these were designated Class C.
[end footnote text]
<PAGE>
13
-----
SALES CHARGES
CLASS A -- FRONT LOAD
<TABLE>
<CAPTION>
when you invest this % is which equals
this amount deducted this % of
for sales your net
charges investment
- ------------------------------------------------------------
<S> <C> <C>
Up to $99,999 4.50 4.71
$100,000 - $249,999 3.50 3.63
$250,000 - $499,999 2.50 2.56
$500,000 - $999,999 2.00 2.04
$1 million or more see next column
</TABLE>
With Class A shares, you pay a sales charge only when you buy shares.
If you are investing $1 million or more (either as a lump sum or through any of
the methods described on the application), you can purchase Class A shares
without any sales charge. However, you may be charged a "contingent deferred
sales charge" (CDSC) of 1% of the purchase price of any shares you sell within
the first year. Other policies regarding the calculation of the CDSC are the
same as for Class B.
Class A shares are also offered with low or no sales charges through various
wrap-fee programs and other sponsored arrangements (consult your financial
professional or your program materials).
CLASS B -- BACK LOAD
<TABLE>
<CAPTION>
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
- ----------------------------------------------------------
<S> <C>
Second year 4.00
Third year 3.00
Fourth year 3.00
Fifth year 2.00
Sixth year or later None
</TABLE>
With Class B shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for five years or less, as described in the table above. Any shares
acquired through reinvestment are not subject to the CDSC. There is no CDSC on
exchanges into other State Street Research funds, and the
<PAGE>
14 YOUR INVESTMENT CONTINUED
- --------------------------------------------------------------------------------
date of your initial investment will continue to be used as the basis for CDSC
calculations when you exchange. To ensure that you pay the lowest CDSC possible,
the fund will always use the shares with the lowest CDSC to fill your sell
requests.
The CDSC is waived on shares sold for mandatory retirement distributions or
because of disability or death. Consult your financial professional or the State
Street Research Service Center.
Class B shares automatically convert to Class A shares after eight years; Class
A shares have lower annual expenses.
CLASS C (FORMERLY CLASS D) -- LEVEL LOAD
<TABLE>
<CAPTION>
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
- ---------------------------------------------------------
<S> <C>
First year 1.00
Second year or later None
</TABLE>
With Class C shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for one year or less, as described in the table above. Policies
regarding the calculation of the CDSC are the same as for Class B.
Class C shares currently have the same annual expenses as Class B shares, but
never convert to Class A shares (with their lower annual expenses).
CLASS S (FORMERLY CLASS C) --
SPECIAL PROGRAMS
Class S shares have no sales charges.
<PAGE>
15
-----
[graphic: check (money)]
DEALER COMPENSATION
Financial professionals who sell shares of State Street Research funds and
perform services for fund investors may receive sales commissions and annual
fees. These are paid by the fund's distributor, using money from sales charges,
distribution/service (12b-1) fees and its other resources.
Financial professionals may impose a transaction fee on the purchase or sale of
shares by shareholders. The distributor may pay its affiliate MetLife
Securities, Inc. additional compensation of up to 0.25% of certain sales or
assets.
<TABLE>
<CAPTION>
Maximum Dealer Compensation Class A Class B Class C Class S
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Initial commission (%) -- 4.00 1.00 0.00
Investments up to $100,000 (%) 4.00 -- -- --
$100,000 - $249,999 (%) 3.00 -- -- --
$250,000 - $499,999 (%) 2.00 -- -- --
$500,000 - $999,999 (%) 1.75 -- -- --
First $1-3 million (%) 1.00(1) -- -- --
Next $2 million (%) 0.50(1) -- -- --
Next $1 and above (%) 0.25(1) -- -- --
Annual fee (%) 0.25 0.25 0.90 0.00
</TABLE>
BROKERS FOR PORTFOLIO TRADES
When placing trades for the fund's portfolio, State Street Research chooses
brokers that provide the best execution (a term defined by service as well as
price), but may also consider a broker's sales of fund shares.
[footnote text]
(1) If your broker declines this commission, the one-year CDSC on your
investment is waived.
[end footnote text]
<PAGE>
16 BUYING AND SELLING SHARES
- --------------------------------------------------------------------------------
[graphic: old-fashioned hand-cranked cash register]
POLICIES FOR
BUYING SHARES
Once you have chosen a share class, the next step is to determine the amount you
want to invest.
MINIMUM INITIAL INVESTMENTS:
[bullet] $1,000 for accounts that use the Investamatic program
[bullet] $2,000 for Individual Retirement Accounts
[bullet] $2,500 for all other accounts
MINIMUM ADDITIONAL INVESTMENTS:
[bullet] $50 for any account
Complete the enclosed application. You can avoid future inconvenience by signing
up now for any services you might later use.
TIMING OF REQUESTS All requests received by State Street Research before 4:00
p.m. eastern time will be executed the same day, at that day's closing share
price. Orders received after 4:00 p.m. will be executed the following day, at
that day's closing share price.
WIRE TRANSACTIONS Funds may be wired between 8:00 a.m. and 4:00 p.m. eastern
time. To make a same-day wire investment, please notify State Street Research by
12:00 noon of your intention to wire funds, and make sure your wire arrives by
4:00 p.m. Your bank may charge a fee for wiring money.
<PAGE>
INSTRUCTIONS FOR BUYING SHARES 17
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
To Open an Account To Add to an Account
<S> <C> <C> <C>
[graphic: Through a Consult your financial professional Consult your financial professional
brief case] Professional or your program materials. or your program materials.
or Program
- ------------------------------------------------------------------------------------------------------------------
By Mail [graphic: Make your check payable to "State Fill out an investment slip or
mailbox] Street Research Funds." Forward the indicate the fund name and account
check and your application to State number on your check. Make your check
Street Research. payable to "State Street Research Funds."
Forward the check and slip to State
Street Research.
- ------------------------------------------------------------------------------------------------------------------
[graphic: By Federal Call to obtain an account number and Call State Street Research to obtain
the Capitol Funds Wire forward your application to State a control number. Instruct your bank
building] Street Research. Wire funds using to wire funds to:
the instructions at right.
[bullet] State Street Bank and Trust
Company, Boston, MA
[bullet] ABA: 011000028
[bullet] BNF: fund name and share
class you want to buy
[bullet] AC: 99029761
[bullet] OBI: your name and your
account number
[bullet] Control: the number given
to you by State Street
Research
- ------------------------------------------------------------------------------------------------------------------
By Electronic [graphic: Verify that your bank is a member of Call State Street Research to verify
Funds Transfer electric the ACH (Automated Clearing House) that the necessary bank information
(ACH) plug] system. Forward your application to is on file for your account. If it
State Street Research. Please be is, you may request a transfer with
sure to include the appropriate bank the same phone call. If not, please
information. Call State Street ask State Street Research to provide
Research to request a purchase. you with an EZ Trader application.
- ------------------------------------------------------------------------------------------------------------------
[graphic: By Investamatic Forward your application, with all Call State Street Research to verify
front of a appropriate sections completed, to that Investamatic is in place on
bank building] State Street Research, along with a your account, or to request a form
check for your initial investment to add it. Investments are automatic
payable to "State Street Research once Investamatic is in place.
Funds."
- ------------------------------------------------------------------------------------------------------------------
By Exchange [graphic: Call State Street Research or visit Call State Street Research or visit
arrows pointing our Web site. our Web site.
in two
directions]
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408
Call toll-free: 1-800-562-0032 (business days 8:00 a.m.-6:00 p.m., eastern time)
Internet www.ssrfunds.com
<PAGE>
18 YOUR INVESTMENT CONTINUED
- --------------------------------------------------------------------------------
[graphic: old-fashioned hand-cranked adding machine]
POLICIES FOR
SELLING SHARES
CIRCUMSTANCES THAT REQUIRE WRITTEN REQUESTS Please submit instructions in
writing when any of the following apply:
[bullet] you are selling more than $100,000 worth of shares
[bullet] the name or address on the account has changed within the last 30 days
[bullet] you want the proceeds to go to a name or address not on the account
registration
[bullet] you are transferring shares to an account with a different registration
or share class
[bullet] you are selling shares held in a corporate or fiduciary account; for
these accounts, additional documents are required:
corporate accounts: certified copy of a corporate resolution
fiduciary accounts: copy of power of attorney or other governing
document
To protect your account against fraud, all signatures on these documents must be
guaranteed. You may obtain a signature guarantee at most banks and securities
dealers. A notary public cannot provide a signature guarantee.
INCOMPLETE SELL REQUESTS State Street Research will attempt to notify you
promptly if any information necessary to process your request is missing.
TIMING OF REQUESTS All requests received in good order by State Street Research
before 4:00 p.m. eastern time will be executed the same day, at that day's
closing share price. Requests received after 4:00 p.m. will be executed the
following day, at that day's closing share price.
WIRE TRANSACTIONS Proceeds sent by federal funds wire must total at least
$5,000. A fee of $7.50 will be deducted from all proceeds sent by wire, and your
bank may charge an additional fee to receive wired funds.
SELLING RECENTLY PURCHASED SHARES If you sell shares before the check or
electronic funds transfer (ACH) for those shares has been collected, you will
not receive the proceeds until your initial payment has cleared. This may take
up to 15 days after your purchase was recorded (in rare cases, longer). If you
open an account with shares purchased by wire, you cannot sell those shares
until your application has been processed.
<PAGE>
INSTRUCTIONS FOR SELLING SHARES 19
- --------------------------------------------------------------------------------
To Sell Some or All of Your Shares
<TABLE>
<CAPTION>
<S> <C> <C>
[graphic: Through a Consult your financial professional or your program materials.
brief case] Professional
or Program
- -------------------------------------------------------------------------------------------------------------------
By Mail [graphic: Send a letter of instruction, an endorsed stock power or share certificates (if
mailbox] you hold certificate shares) to State Street Research. Specify the fund, the
account number and the dollar value or number of shares. Be sure to include all
necessary signatures and any additional
documents, as well as signature guarantees if
required (see facing page).
- -------------------------------------------------------------------------------------------------------------------
[graphic: By Federal Check with State Street Research to make sure that a wire redemption privilege,
the Capitol Funds Wire including a bank designation, is in place on your account. Once this is
building] established, you may place your request to sell shares with State Street
Research. Proceeds will be wired to your pre-designated bank account. (See "Wire
Transactions" on facing page.)
- -------------------------------------------------------------------------------------------------------------------
By Electronic [graphic: Check with State Street Research to make sure that the EZ Trader feature,
Funds Transfer electric including a bank designation, is in place on your account. Once this is
(ACH) plug] established, you may place your request to sell shares with State Street
Research. Proceeds will be sent to your pre-designated bank account.
- -------------------------------------------------------------------------------------------------------------------
[graphic: By Telephone As long as the transaction does not require a written request (see facing page),
telephone] you or your financial professional can sell shares by calling State Street
Research. A check will be mailed to you on the following business day.
- -------------------------------------------------------------------------------------------------------------------
By Exchange [graphic: Read the prospectus for the fund into which you are exchanging. Call State
arrows pointing Street Research or visit our Web site.
in two
directions]
- -------------------------------------------------------------------------------------------------------------------
[graphic: By Systematic See plan information on page 23.
calendar] Withdrawal Plan
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408
Call toll-free: 1-800-562-0032 (business days 8:00 a.m.-6:00 p.m., eastern time)
Internet www.ssrfunds.com
<PAGE>
20 YOUR INVESTMENT CONTINUED
- --------------------------------------------------------------------------------
[graphic: stack of papers]
ACCOUNT POLICIES
TELEPHONE REQUESTS When you open an account you automatically receive telephone
privileges, allowing you to place requests for your account by telephone. Your
financial professional can also use these privileges to request exchanges on
your account and, with your written permission, redemptions. For your
protection, all telephone calls are recorded.
As long as State Street Research takes certain measures to authenticate
telephone requests on your account, you may be held responsible for unauthorized
requests. Unauthorized telephone requests are rare, but if you want to protect
yourself completely, you can decline the telephone privilege on your
application. The fund may suspend or eliminate the telephone privilege at any
time.
EXCHANGE PRIVILEGES There is no fee to exchange shares among State Street
Research funds. Your new fund shares will be the equivalent class of your
current shares. Any contingent deferred sales charges will continue to be
calculated from the date of your initial investment.
Frequent exchanges can interfere with fund management and drive up costs for all
shareholders. Because of this, the fund currently limits each account, or group
of accounts under common ownership or control, to six exchanges per calendar
year. The fund may change or eliminate the exchange privilege at any time, may
limit or cancel any shareholder's exchange privilege and may refuse to accept
any exchange request, particularly those associated with "market timing"
strategies.
For Merrill Lynch customers, exchange privileges extend to Summit Cash Reserves
Fund, which is related to the fund for purposes of investment and investor
services.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $1,500,
State Street Research may mail you a notice asking you to bring the account back
up to $1,500 or close it out. If you do not take action within 60 days, State
Street Research may either sell your shares and mail the proceeds to you at the
address of record or, depending on the circumstances, may deduct an annual
maintenance fee (currently $18).
<PAGE>
21
-----
THE FUND'S BUSINESS HOURS The fund is open the same days as the New York Stock
Exchange (generally Monday through Friday). Fund representatives are available
from 8:00 a.m. to 6:00 p.m. eastern time on these days.
CALCULATING SHARE PRICE The fund calculates its share price every business day
at the close of regular trading on the New York Stock Exchange (usually at 4:00
p.m. eastern time). The share price is the fund's total assets minus its
liabilities (net asset value, or NAV) divided by the number of existing shares.
In calculating its NAV, the fund uses the last reported sale price or quotation
for portfolio securities. However, in cases where these are unavailable, or when
the investment manager believes that subsequent events have rendered them
unreliable, the fund may use fair-value estimates instead.
Because foreign securities markets are sometimes open on different days from
U.S. markets, there may be instances when the value of the fund's portfolio
changes on days when you cannot buy or sell fund shares.
REINSTATING RECENTLY SOLD SHARES For 120 days after you sell shares, you have
the right to "reinstate" your investment by putting some or all of the proceeds
into any currently available State Street Research fund at net asset value. Any
CDSC you paid on the amount you are reinstating will be credited to your
account. You may only use this privilege once in any twelve-month period with
respect to your shares of a given fund.
ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserves certain rights, including:
[bullet] The fund may vary its requirements for initial or additional
investments, exchanges, reinvestments, periodic investment plans,
retirement and employee benefit plans, sponsored arrangements and other
similar programs
[bullet] All orders to purchase shares are subject to acceptance by the fund
[bullet] At any time, the fund may change or discontinue its sales charge
waivers and any of its order acceptance practices, and may suspend the
sale of its shares
[bullet] The fund may delay sending you redemption proceeds for up to seven
days, or longer if permitted by the SEC
[bullet] To permit investors to obtain the current price, dealers are
responsible for transmitting all orders to the State Street Research
Service Center promptly
<PAGE>
22 YOUR INVESTMENT CONTINUED
- --------------------------------------------------------------------------------
[sidebar text]------------------------------------------------------------------
[graphic: Looking through magnifying glass at paper]
TAX CONSIDERATIONS
Unless your investment is in a tax-deferred account, you may want to avoid:
[bullet] investing a large amount in the fund close to the end of the fiscal
year or a calendar year (if the fund makes a capital gains
distribution, you will receive some of your investment back as a
taxable distribution)
[bullet] selling shares at a loss for tax purposes and investing in a
substantially identical investment within 30 days before or after such
sale (such a transaction is usually considered a "wash sale," and you
will not be allowed to claim a tax loss)
[end sidebar text]--------------------------------------------------------------
[graphic: "Uncle Sam"]
DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund typically distributes any net
income to shareholders four times a year. Net capital gains, if any, are
distributed around the end of the fund's fiscal year, which is March 31. To
comply with tax regulations, the fund may also pay an additional capital gains
distribution in December.
You may have your distributions reinvested in the fund, invested in a different
State Street Research fund, deposited in a bank account or mailed out by check.
If you do not give State Street Research other instructions, your distributions
will automatically be reinvested in the fund.
TAX EFFECTS OF DISTRIBUTIONS AND TRANSACTIONS In general, any dividends and
short-term capital gains distributions you receive from the fund are taxable as
ordinary income. Distributions of other capital gains are generally taxable as
capital gains -- in most cases, at different rates from those that apply to
ordinary income.
The tax you pay on a given capital gains distribution generally depends on how
long the fund has held the portfolio securities it sold. It does not depend on
how long you have owned your fund shares or whether you reinvest your
distributions.
<PAGE>
23
-----
Every year, the fund will send you information detailing the amount of ordinary
income and capital gains distributed to you for the previous year.
The sale of shares in your account may produce a gain or loss, and is a taxable
event. For tax purposes, an exchange is the same as a sale.
Your investment in the fund could have additional tax consequences. Please
consult your tax professional for assistance.
BACKUP WITHHOLDING By law, the fund must withhold 31% of your distributions and
proceeds if you have not provided complete, correct taxpayer information.
[graphic: shaking hands]
INVESTOR SERVICES
INVESTAMATIC PROGRAM Use Investamatic to set up regular automatic investments in
the fund from your bank account. You determine the frequency and amount of your
investments.
SYSTEMATIC WITHDRAWAL PLAN This plan is designed for retirees and other
investors who want regular withdrawals from a fund account. The plan is free and
allows you to withdraw up to 8% of your fund assets a year without incurring any
contingent deferred sales charges. Certain terms and minimums apply.
EZ TRADER This service allows you to purchase or sell fund shares over the
telephone through the ACH (Automated Clearing House) system.
DIVIDEND ALLOCATION PLAN This plan automatically invests your distributions from
the fund into another fund of your choice, without any fees or sales charges.
AUTOMATIC BANK CONNECTION This plan lets you route any distributions or
Systematic Withdrawal Plan payments directly to your bank account.
RETIREMENT PLANS State Street Research also offers a full range of prototype
retirement plans for individuals, sole proprietors, partnerships, corporations
and employees.
Call 1-800-562-0032 for information on any of the services described above.
<PAGE>
24 OTHER INFORMATION
- --------------------------------------------------------------------------------
[graphic: securities certificates]
OTHER SECURITIES
AND RISKS
Each of the fund's portfolio securities and investment practices offers certain
opportunities and carries various risks. Major investments and risk factors are
outlined in the fund description starting on page 2. Below are brief
descriptions of other securities and practices, along with their associated
risks.
RESTRICTED AND ILLIQUID SECURITIES Any securities that are thinly traded or
whose resale is restricted can be difficult to sell as a desired time and price.
Some of these securities are new and complex, and trade only among institutions;
the markets for these securities are still developing, and may not function as
efficiently as established markets. Owning a large percentage of restricted and
illiquid securities could hamper the fund's ability to raise cash to meet
redemptions. Also, because there may not be an established market price for
these securities, the fund may have to estimate their value, which means that
their valuation (and, to a much smaller extent, the valuation of the fund) may
have a subjective element.
SECURITIES RATINGS When securities are rated by one or more independent rating
agencies, the fund uses these ratings to determine credit quality. In cases
where a security is rated in conflicting categories by different rating
agencies, the fund may choose to follow the higher rating. If a rating agency
downgrades a security, the fund will determine whether to hold or sell the
security.
FOREIGN INVESTMENTS Foreign securities are generally more volatile than their
domestic counterparts, in part because of higher political and economical risks,
lack of reliable information and fluctuations in currency exchange rates. These
risks are usually higher in less developed countries. The fund may use foreign
currencies and related instruments to hedge its foreign investments.
DERIVATIVES Derivatives, a category that includes options and futures, are
financial instruments whose value derives from another security, an index or a
currency. The fund may use derivatives for hedging (attempting to offset a
potential loss in one position by establishing an interest in an opposite
position). This includes the use of currency-based
<PAGE>
25
-----
derivatives for hedging its positions in foreign securities. The fund may also
use derivatives for speculation (investing for potential income or capital
gain).
While hedging can guard against potential risks, it adds to the fund's expenses
and can eliminate some opportunities for gains. There is also a risk that a
derivative intended as a hedge may not perform as expected.
The main risk with derivatives is that some types can amplify a gain or loss,
potentially earning or losing substantially more money than the actual cost of
the derivative.
With some derivatives, whether used for hedging or speculation, there is also
the risk that the counterparty may fail to honor its contract terms, causing a
loss for the fund.
SECURITIES LENDING The fund may seek additional income by lending portfolio
securities to qualified institutions. By reinvesting any cash collateral it
receives in these transactions, the fund could realize additional gains or
losses. If the borrower fails to return the securities and the invested
collateral has declined in value, the fund could lose money.
WHEN-ISSUED SECURITIES The fund may invest in securities prior to their date of
issue. These securities could fall in value by the time they are actually
issued, which may be any time from a few days to over a year.
YEAR 2000 The investment manager does not currently anticipate that computer
problems related to the year 2000 will have a material effect on the fund.
However, there can be no assurances in this area, including the possibility that
year 2000 computer problems could negatively affect communication systems,
investment markets or the economy in general.
<PAGE>
26 FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
These highlights are intended to help you understand the fund's performance over
the past five years. The information in these tables has been audited by
PricewaterhouseCoopers LLP, the fund's independent accountants. Total return
figures assume reinvestment of all distributions.
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------------
Years ended March 31
Per Share Data 1994 1995 1996(1) 1997(1) 1998(1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 8.94 8.94 8.76 10.29 10.40
----- ----- ----- ----- -----
Net investment income ($)* 0.22 0.27 0.23 0.21 0.22
Net realized and unrealized gain (loss)
on investments, foreign currency and
forward contracts ($) 0.72 (0.14) 1.72 1.05 2.61
----- ----- ----- ----- -----
Total from investment operations ($) 0.94 0.13 1.95 1.26 2.83
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.22) (0.17) (0.26) (0.28) (0.23)
Distributions from capital gains ($) (0.72) (0.14) (0.16) (0.87) (1.40)
----- ----- ----- ----- -----
Total distributions ($) (0.94) (0.31) (0.42) (1.15) (1.63)
----- ----- ----- ----- -----
Net asset value, end of year ($) 8.94 8.76 10.29 10.40 11.60
===== ===== ===== ===== =====
Total return (%)(3) 10.96 1.52 22.55 12.49 29.62
Ratios/Supplemental Data
- --------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 166,011 181,358 207,713 244,348 330,421
Expense ratio (%)* 1.25 1.25 1.25 1.25 1.28
Ratio of net investment income
to average net assets (%)* 2.75 3.11 2.34 2.02 1.96
Portfolio turnover rate (%) 105.17 89.58 109.20 108.41 133.30
*Reflects voluntary reduction of
expenses per share of these amounts ($) 0.02 0.03 0.02 0.01 0.00
Class B
--------------------------------------------------------------
Years ended March 31
Per Share Data 1994(2) 1995 1996(1) 1997(1) 1998(1)
- --------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ($) 8.78 8.92 8.74 10.25 10.37
----- ----- ----- ----- -----
Net investment income ($)* 0.16 0.20 0.15 0.13 0.13
Net realized and unrealized gain (loss)
on investments, foreign currency and
forward contracts ($) 0.39 (0.13) 1.71 1.06 2.59
----- ----- ----- ----- -----
Total from investment operations ($) 0.55 0.07 1.86 1.19 2.72
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.18) (0.11) (0.19) (0.20) (0.14)
Distributions from capital gains ($) (0.23) (0.14) (0.16) (0.87) (1.40)
----- ----- ----- ----- -----
Total distributions ($) (0.41) (0.25) (0.35) (1.07) (1.54)
----- ----- ----- ----- -----
Net asset value, end of year ($) 8.92 8.74 10.25 10.37 11.55
===== ===== ===== ===== =====
Total return (%)(3) 6.26(4) 0.82 21.48 11.76 28.53
Ratios/Supplemental Data
- --------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 83,244 152,251 193,272 251,518 368,975
Expense ratio (%)* 2.00(5) 2.00 2.00 2.00 2.03
Ratio of net investment income
to average net assets (%)* 2.03(5) 2.38 1.59 1.27 1.21
Portfolio turnover rate (%) 105.17 89.58 109.20 108.41 133.30
*Reflects voluntary reduction of
expenses per share of these amounts ($) 0.03 0.03 0.02 0.01 0.00
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Class C (formerly Class D)
--------------------------------------------------------------
Years ended March 31
Per Share Data 1994(2) 1995 1996(1) 1997(1) 1998(1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 8.78 8.93 8.75 10.27 10.38
----- ----- ----- ----- -----
Net investment income ($)* 0.16 0.20 0.15 0.13 0.13
Net realized and unrealized gain (loss)
on investments, foreign currency and
forward contracts ($) 0.40 (0.13) 1.72 1.05 2.60
----- ----- ----- ----- -----
Total from investment operations ($) 0.56 0.07 1.87 1.18 2.73
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.18) (0.11) (0.19) (0.20) (0.14)
Distributions from capital gains ($) (0.23) (0.14) (0.16) (0.87) (1.40)
----- ----- ----- ----- -----
Total distributions ($) (0.41) (0.25) (0.35) (1.07) (1.54)
----- ----- ----- ----- -----
Net asset value, end of year ($) 8.93 8.75 10.27 10.38 11.57
===== ===== ===== ===== =====
Total return (%)(3) 6.31(4) 0.82 21.54 11.64 28.59
Ratios/Supplemental Data
- --------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 7,117 12,772 13,061 17,485 23,807
Expense ratio (%)* 2.00(5) 2.00 2.00 2.00 2.03
Ratio of net investment income
to average net assets (%)* 2.03(5) 2.39 1.60 1.26 1.21
Portfolio turnover rate (%) 105.17 89.58 109.20 108.41 133.30
*Reflects voluntary reduction of
expenses per share of these amounts ($) 0.03 0.03 0.02 0.01 0.00
Class S
(formerly Class C)
--------------------------------------------------------------
Years ended March 31
Per Share Data 1994(2) 1995 1996(1) 1997(1) 1998(1)
- --------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ($) 8.78 8.95 8.77 10.29 10.40
----- ----- ----- ----- -----
Net investment income ($)* 0.21 0.29 0.25 0.24 0.25
Net realized and unrealized gain (loss)
on investments, foreign currency and
forward contracts ($) 0.43 (0.14) 1.71 1.05 2.60
----- ----- ----- ----- -----
Total from investment operations ($) 0.64 0.15 1.96 1.29 2.85
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.24) (0.19) (0.28) (0.31) (0.25)
Distributions from capital gains ($) (0.23) (0.14) (0.16) (0.87) (1.40)
----- ----- ----- ----- -----
Total distributions ($) (0.47) (0.33) (0.44) (1.18) (1.65)
----- ----- ----- ----- -----
Net asset value, end of year ($) 8.95 8.77 10.29 10.40 11.60
===== ===== ===== ===== =====
Total return (%)(3) 7.27(4) 1.77 22.70 12.77 29.93
Ratios/Supplemental Data
- --------------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 21,434 25,803 19,548 21,263 26,648
Expense ratio (%)* 1.00(5) 1.00 1.00 1.00 1.03
Ratio of net investment income
to average net assets (%)* 3.03(5) 3.37 2.59 2.26 2.21
Portfolio turnover rate (%) 105.17 89.58 109.20 108.41 133.30
*Reflects voluntary reduction of
expenses per share of these amounts ($) 0.02 0.03 0.02 0.01 0.00
</TABLE>
[footnote text]
(1) Per-share figures have been calculated using the average shares method.
(2) June 1, 1993 (commencement of share class designations) to March 31, 1994.
(3) Does not reflect any front-end or contingent deferred sales charge. Total
return would be lower if the distributor and its affiliates had not
voluntarily reduced a portion of the fund's expenses.
(4) Not annualized.
(5) Annualized.
[end of footnote text]
<PAGE>
28 NOTES
- --------------------------------------------------------------------------------
<PAGE>
NOTES 29
- --------------------------------------------------------------------------------
<PAGE>
[sidebar text]------------------------------------------------------------------
If you have questions about the fund or would like to request a free copy of the
current annual/semiannual report or SAI, contact State Street Research or your
financial professional.
[logo: State Street Research]
Service Center
P.O. Box 8408, Boston, MA 02266
Telephone: 1-800-562-0032
Internet: www.ssrfunds.com
You can also obtain information about the fund, including the SAI and certain
other fund documents, on the Internet at www.sec.gov, in person at the SEC's
Public Reference Room in Washington, DC (telephone 1-800-SEC-0330) or by mail by
sending your request, along with a duplicating fee, to the SEC's Public
Reference Section, Washington, DC 20549-6009.
prospectus
- -----------------------------------
SEC File Number: 811-4559
[end sidebar text]--------------------------------------------------------------
FOR ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
You can find additional information on the fund's structure and its performance
in the following documents:
ANNUAL/SEMIANNUAL REPORTS While the prospectus describes the fund's potential
investments, these reports detail the fund's actual investments as of the report
date. Reports include a discussion by fund management of recent economic and
market trends and fund performance. The annual report also includes the report
of the fund's independent accountants.
STATEMENT OF ADDITIONAL INFORMATION (SAI) A supplement to the prospectus, the
SAI contains further information about the fund and its investment limitations
and policies. It also includes the most recent annual report and the independent
accountants' report. A current SAI for this fund is on file with the Securities
and Exchange Commission and is incorporated by reference (is legally part of
this prospectus).
<TABLE>
<CAPTION>
Ticker Symbols
- -----------------------
<S> <C>
Class A SSAMX
Class B SSRMX
Class C SSMDX
Class S SSMCX
</TABLE>
MA-043F-0898
Control Number: 5207-980801(exp0899)SSR-LD
<PAGE>
State Street Research High Income Fund
a series of
State Street Research Income Trust
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVE..............................................................................................1
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS...................................................................1
ADDITIONAL INFORMATION CONCERNING
CERTAIN RISKS AND INVESTMENT TECHNIQUES..................................................................3
DEBT INSTRUMENTS AND
PERMITTED CASH INVESTMENTS..............................................................................14
THE TRUST, THE FUND AND ITS SHARES...............................................................................21
TRUSTEES AND OFFICERS............................................................................................24
MANAGEMENT OF THE FUND AND INVESTMENT ADVISORY SERVICES..........................................................29
PURCHASE AND REDEMPTION OF SHARES................................................................................30
SHAREHOLDER ACCOUNTS.............................................................................................35
NET ASSET VALUE..................................................................................................39
PORTFOLIO TRANSACTIONS...........................................................................................41
DISTRIBUTIONS AND CERTAIN TAX MATTERS............................................................................44
DISTRIBUTION OF SHARES OF THE FUND...............................................................................47
CALCULATION OF PERFORMANCE DATA..................................................................................52
CUSTODIAN........................................................................................................57
INDEPENDENT ACCOUNTANTS..........................................................................................57
FINANCIAL STATEMENTS.............................................................................................57
</TABLE>
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, 1998, 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-980815(exp0899)SSR-LD HI-879D-0898]
<PAGE>
INVESTMENT OBJECTIVE
As set forth under "The Fund--Goal and Strategies--Fundamental Goal" in
the Prospectus of State Street Research High Income Fund (the "Fund"), the
Fund's investment goal, which is to seek, primarily, high current income and,
secondarily, capital appreciation, from investments in fixed income securities,
is fundamental and 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 the meeting if the holders of
more than 50% of the outstanding voting securities are present or represented by
proxy or (ii) of more than 50% of the outstanding voting securities, whichever
is less.)
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under "The Fund--Principal Risks" and "Other
Information--Other Securities and Risks" in the Fund's Prospectus, the Fund has
adopted certain investment restrictions, and those investment restrictions are
either fundamental or not fundamental. Fundamental restrictions may not be
changed by the Fund except by the affirmative vote of a majority of the
outstanding voting securities of the Fund. Restrictions that are not fundamental
may be changed by a vote of a majority of the Trustees of the Trust.
The Fund's fundamental investment restrictions are set forth below.
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 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;
<PAGE>
(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 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 by a vote of a
majority of the Trustees. Under these restrictions, it is the Fund's policy:
(1) not to purchase securities on margin, make a short sale of any
securities or purchase or deal in puts, calls, straddles or
spreads with respect to any security, except in connection
with the purchase or writing of options, including options
2
<PAGE>
on financial futures, and futures contracts to the extent set
forth in the Trust's Prospectus and Statement of Additional
Information;
(2) not to hypothecate, mortgage or pledge any of its assets
except as may be necessary in connection with permitted
borrowings and then not in excess of 15% of the Fund's net
assets, taken at cost (for the purpose of this restriction
financial futures, options on financial futures and forward
currency exchange contracts are not deemed to involve a pledge
of assets);
(3) not to purchase a security issued by another investment
company, except to the extent permitted under the 1940 Act or
except by purchases in the open market involving only
customary brokers' commissions, or securities acquired as
dividends or distributions or in connection with a merger,
consolidation or similar transaction or other exchange;
(4) 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
(5) 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 RISKS AND INVESTMENT TECHNIQUES
Derivatives
The Fund may buy and sell certain types of derivatives, such as
options, futures contracts, options on futures contracts, and swaps under
circumstances in which such instruments are expected by State Street Research &
Management Company, the Fund's Investment Manager (the "Investment Manager"), to
aid in achieving the Fund's investment objective. The Fund may also purchase
instruments with characteristics of both futures and securities (e.g., debt
instruments with interest and principal payments determined by reference to the
value of a commodity or a currency at a future time) and which, therefore,
possess the risks of both futures and securities investments.
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Fund to take both "short" positions (positions
which anticipate a decline in the market value of a particular asset or index)
and "long" positions (positions which anticipate an increase in the market value
of a particular asset or index). The Fund may also use strategies which involve
simultaneous short and long positions in response to
3
<PAGE>
specific market conditions, such as where the Investment Manager anticipates
unusually high or low market volatility.
The Investment Manager may enter into derivative positions for the Fund
for either hedging or non-hedging purposes. The term hedging is applied to
defensive strategies designed to protect the Fund from an expected decline in
the market value of an asset or group of assets that the Fund owns (in the case
of a short hedge) or to protect the Fund from an expected rise in the market
value of an asset or group of assets which it intends to acquire in the future
(in the case of a long or "anticipatory" hedge). Non-hedging strategies include
strategies designed to produce incremental income (such as the option writing
strategy described below) or "speculative" strategies which are undertaken to
profit from (i) an expected decline in the market value of an asset or group of
assets which the Fund does not own or (ii) expected increases in the market
value of an asset which it does not plan to acquire. Information about specific
types of instruments is provided below.
Futures Contracts.
Futures contracts are publicly traded contracts to buy or sell an
underlying asset or group of assets, such as a currency or an index of
securities, at a future time at a specified price. A contract to buy establishes
a long position while a contract to sell establishes a short position.
The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or index after paying a transaction charge and posting
margin in an amount equal to a small percentage of the value of the underlying
asset or index. The Fund will initially be required to deposit with the Trust's
custodian or the futures commission merchant effecting the futures transaction
an amount of "initial margin" in cash or securities, as permitted under
applicable regulatory policies.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
4
<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 such securities, such delivery and acceptance are seldom made.
In transactions establishing a long position in a futures contract,
assets equal to the face value of the futures contract will be identified by the
Fund to the Trust's custodian for maintenance in a separate account to insure
that the use of such futures contracts is unleveraged. Similarly, assets having
a value equal to the aggregate face value of the futures contract will be
identified with respect to each short position. The Fund will utilize such
assets and methods of cover as appropriate under applicable exchange and
regulatory policies.
Options.
The Fund may use options to implement its investment strategy. There
are two basic types of options: "puts" and "calls." Each type of option can
establish either a long or a short position, depending upon whether the Fund is
the purchaser or the writer of the option. A call option on a security, for
example, gives the purchaser of the option the right to buy, and the writer the
obligation to sell, the underlying asset at the exercise price during the option
period. Conversely, a put option on a security gives the purchaser the right to
sell, and the writer the obligation to buy, the underlying asset at the exercise
price during the option period.
Purchased options have defined risk, that is, the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset. In general, a purchased put increases in value
as the value of the underlying security falls and a purchased call increases in
value as the value of the underlying security rises.
The principal reason to write options is to generate extra income (the
premium paid by the buyer). Written options have varying degrees of risk. An
uncovered written call option theoretically carries unlimited risk, as the
market price of the underlying asset could rise far above the exercise price
before its expiration. This risk is tempered when the call option is covered,
that is, when the option writer owns the underlying asset. In this case, the
writer runs the risk of the lost opportunity to participate in the appreciation
in value of the asset rather than the risk of an out-of-pocket loss. A written
put option has defined risk, that is, the difference between the agreed-upon
price that the Fund must pay to the buyer upon exercise of the put and the
value, which could be zero, of the asset at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
its obligation to deliver the underlying asset in the case of a
5
<PAGE>
call option, or to pay for the underlying asset in the case of a put option, a
covered writer is required to deposit in escrow the underlying security or other
assets in accordance with the rules of the applicable clearing corporation and
exchanges.
Among the options which the Fund may enter are options on securities
indices. In general, options on indices of securities are similar to options on
the securities themselves except that delivery requirements are different. For
example, a put option on an index of securities does not give the holder the
right to make actual delivery of a basket of securities but instead gives the
holder the right to receive an amount of cash upon exercise of the option if the
value of the underlying index has fallen below the exercise price. The amount of
cash received will be equal to the difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple. As with options on equity securities or futures contracts,
the Fund may offset its position in index options prior to expiration by
entering into a closing transaction on an exchange or it may let the option
expire unexercised.
A securities index assigns relative values to the securities included
in the index and the index options are based on a broad market index. In
connection with the use of such options, the Fund may cover its position by
identifying assets having a value equal to the aggregate face value of the
option position taken.
Options on Futures Contracts.
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
Limitations and Risks of Options and Futures Activity.
The Fund may not establish a position in a commodity futures contract
or purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such non-hedging
purposes would exceed 5% of the market value of the Fund's net assets. The Fund
applies a similar policy to options that are not commodities.
As noted above, the Fund may engage in both hedging and nonhedging
strategies. Although effective hedging can generally capture the bulk of a
desired risk adjustment, no hedge is completely effective. The Fund's ability to
hedge effectively through transactions in futures and options depends on the
degree to which price movements in its holdings correlate with price movements
of the futures and options.
6
<PAGE>
Non-hedging strategies typically involve special risks. The
profitability of the Fund's non-hedging strategies will depend on the ability of
the Investment Manager to analyze both the applicable derivatives market and the
market for the underlying asset or group of assets. Derivatives markets are
often more volatile than corresponding securities markets and a relatively small
change in the price of the underlying asset or group of assets can have a
magnified effect upon the price of a related derivative instrument.
Derivatives markets also are often less liquid than the market for the
underlying asset or group of assets. Some positions in futures and options may
be closed out only on an exchange which provides a secondary market therefor.
There can be no assurance that a liquid secondary market will exist for any
particular futures contract or option at any specific time. Thus, it may not be
possible to close such an option or futures position prior to maturity. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively carry out their derivative
strategies and might, in some cases, require a Fund to deposit cash to meet
applicable margin requirements. The Fund will enter into an option or futures
position only if it appears to be a liquid investment.
Zero and Step Coupon Securities
Zero and step coupon securities are debt securities that may pay no
interest for all or a portion of their life but are purchased at a discount to
face value at maturity. Their return consists of the amortization of the
discount between their purchase price and their maturity value, plus, in the
case of a step coupon, any fixed rate interest income. Zero and step coupon
securities pay no interest to holders prior to maturity even though interest on
these securities is reported as income to the Fund. The Fund will be required to
distribute all or substantially all of such amounts annually to its
shareholders. These distributions may cause the Fund to liquidate portfolio
assets in order to make such distributions at a time when the Fund may have
otherwise chosen not to sell such securities. The amount of the discount
fluctuates with the market value of such securities, which may be more volatile
than that of securities which pay interest at regular intervals.
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, although the
Fund does not presently expect to invest more than 5% of its net assets in such
items. 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
7
<PAGE>
receive such payments to the extent the selected index falls below an
agreed-upon interest rate or amount. A collar combines a cap and a floor.
The Fund may enter credit protection swap arrangements involving the
sale by the Fund of a put option on a debt security which is exercisable by the
buyer upon certain events, such as a default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
Most swaps entered into by the Fund will be on a net basis; for
example, in an interest rate swap, amounts generated by application of the fixed
rate and the floating rate to the notional principal amount would first offset
one another, with the Fund either receiving or paying the difference between
such amounts. In order to be in a position to meet any obligations resulting
from swaps, the Fund will set up a segregated custodial account to hold
appropriate liquid assets, including cash; for swaps entered into on a net
basis, assets will be segregated having a daily net asset value equal to any
excess of the Fund's accrued obligations over the accrued obligations of the
other party, while for swaps on other than a net basis assets will be segregated
having a value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a portion of the Fund's portfolio.
However, the Fund may, as noted above, enter into such arrangements for income
purposes to the extent permitted by the Commodities Futures Trading Commission
(the "CFTC") for entities which are not commodity pool operators, such as the
Fund. In entering a swap arrangement, the Fund is dependent upon the
creditworthiness and good faith of the counterparty. The Fund attempts to reduce
the risks of nonperformance by the counterparty by dealing only with
established, reputable institutions. The swap market is still relatively new and
emerging; positions in swap arrangements may become illiquid to the extent that
nonstandard arrangements with one counterparty are not readily transferable to
another counterparty or if a market for the transfer of swap positions does not
develop. The use of interest rate swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Investment Manager is
incorrect in its forecasts of market values, interest rates and other applicable
factors, the investment performance of the Fund would diminish compared with
what it would have been if these investment techniques were not used. Moreover,
even if the Investment Manager is correct in its forecasts, there is a risk that
the swap position may correlate imperfectly with the price of the asset or
liability being hedged.
Repurchase Agreements
The Fund may enter into repurchase agreements. Repurchase agreements
occur when the Fund acquires a security and the seller, which may be either (i)
a primary dealer in U.S.
8
<PAGE>
Government securities or (ii) an FDIC-insured bank having gross assets in excess
of $500 million, simultaneously commits to repurchase it at an agreed-upon price
on an agreed-upon date within a specified number of days (usually not more than
seven) from the date of purchase. The repurchase price reflects the purchase
price plus an agreed-upon market rate of interest which is unrelated to the
coupon rate or maturity of the acquired security. The Fund will only enter into
repurchase agreements involving U.S. Government securities. Repurchase
agreements could involve certain risks in the event of default or insolvency of
the other party, including possible delays or restrictions upon the Fund's
ability to dispose of the underlying securities. Repurchase agreements will be
limited to 30% of the Fund's net assets, except that repurchase agreements
extending for more than seven days when combined with any other illiquid
securities held by the Fund will be limited to 15% of the Fund's net assets.
When-Issued Securities
The Fund may purchase "when-issued" securities, which are traded on a
price or yield basis prior to actual issuance. Such purchases will be made only
to achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs when corporate securities
to be created by a merger of companies are traded prior to the actual
consummation of the merger. Such transactions may involve a risk of loss if the
value of the securities falls below the price committed to prior to actual
issuance. The Trust's custodian will establish a segregated account when the
Fund purchases securities on a when-issued basis consisting of cash or liquid
securities equal to the amount of the when-issued commitments. Securities
transactions involving delayed deliveries or forward commitments are frequently
characterized as when-issued transactions and are similarly treated by the Fund.
Restricted Securities
It is the Fund's policy not to make an investment in restricted
securities, including restricted securities sold in accordance with Rule 144A
under the Securities Act of 1933 ("Rule 144A Securities") if, as a result, more
than 50% of the Fund's total assets are invested in restricted securities,
provided not more than 10% of the Fund's total assets are invested in restricted
securities other than Rule 144A Securities.
Securities may be resold pursuant to Rule 144A under certain
circumstances only to qualified institutional buyers as defined in the rule, and
the markets and trading practices for such securities are relatively new and
still developing; depending on the development of such markets, Rule 144A
Securities may be deemed to be liquid as determined by or in accordance with
methods adopted by the Trustees. Under such methods the following factors are
considered, among others: the frequency of trades and quotes for the security,
the number of dealers and potential purchasers in the market, market making
activity, and the nature of the security and marketplace trades. Investments in
Rule 144A Securities could have the effect of increasing the level of the Fund's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing such securities. Also, the Fund may be
9
<PAGE>
adversely impacted by the subjective valuation of such securities in the absence
of a market for them. Restricted securities that are not resalable under Rule
144A may be subject to risks of illiquidity and subjective valuations to a
greater degree than Rule 144A Securities.
Foreign Investments
The Fund reserves the right to invest without limitation in securities
of non-U.S. issuers directly, or indirectly in the form of American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary
Receipts ("GDRs"). Under current policy, however, the Fund limits such
investments, including ADRs, EDRs and GDRs, to a maximum of 20% of its total
investments.
ADRs are receipts, typically issued by a U.S. bank or trust company,
which evidence ownership of underlying securities issued by a foreign
corporation or other entity. EDRs are receipts issued in Europe which evidence a
similar ownership arrangement. GDRs are receipts issued in one country which
also evidence a similar ownership arrangement. Generally, ADRs in registered
form are designed for use in U.S. securities markets and EDRs are designed for
use in European securities markets. GDRs are designed for use when the issuer is
raising capital in more than one market simultaneously, such as the issuer's
local market and the U.S., and have been used to overcome local selling
restrictions to foreign investors. In addition, many GDRs are eligible for
book-entry settlement through Cedel, Euroclear and DTC. The underlying
securities are not always denominated in the same currency as the ADRs, EDRs or
GDRs. Although investment in the form of ADRs, EDRs or GDRs facilitates trading
in foreign securities, it does not mitigate all the risks associated with
investing in foreign securities.
ADRs are available through facilities which may be either "sponsored"
or "unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and usually agrees to
provide shareholder communications. In an unsponsored arrangement, the foreign
issuer is not involved, and the ADR holders pay the fees of the depository.
Sponsored ADRs are generally more advantageous to the ADR holders and the issuer
than are unsponsored ADRs. More and higher fees are generally charged in an
unsponsored program compared to a sponsored facility. Only sponsored ADRs may be
listed on the New York or American Stock Exchanges. Unsponsored ADRs may prove
to be more risky due to (a) the additional costs involved to the Fund; (b) the
relative illiquidity of the issue in U.S. markets; and (c) the possibility of
higher trading costs in the over-the-counter market as opposed to exchange based
tradings. The Fund will take these and other risk considerations into account
before making an investment in an unsponsored ADR.
The risks associated with investments in foreign securities include
those resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks of
nationalization or expropriation, the possible imposition of currency exchange
blockages, higher operating expenses, foreign withholding and other taxes which
may reduce investment return, reduced availability of
10
<PAGE>
public information concerning issuers, the difficulties in obtaining and
enforcing a judgment against a foreign issuer and the fact that foreign issuers
are not generally subject to uniform accounting, auditing and financial
reporting standards or to other regulatory practices and requirements comparable
to those applicable to domestic issuers. Moreover, securities of many foreign
issuers may be less liquid and their prices more volatile than those of
securities of comparable domestic issuers.
These risks are usually higher in less-developed countries. Such
countries include countries that have an emerging stock market on which trade a
small number of securities and/or countries with economies that are based on
only a few industries. The Fund may invest in the securities of issuers in
countries with less developed economies as deemed appropriate by the Investment
Manager. However, it is anticipated that a majority of the foreign investments
by the Fund will consist of securities of issuers in countries with developed
economies.
Currency Transactions
The Fund may engage in currency exchange transactions in order to
protect against the effect of uncertain future exchange rates on securities
denominated in foreign currencies. The Fund will conduct its currency exchange
transactions either on a spot (i.e., cash) basis at the rate prevailing in the
currency exchange market, or by entering into forward contracts to purchase or
sell currencies. The Fund's dealings in forward currency exchange contracts will
be limited to hedging involving either specific transactions or aggregate
portfolio positions. A forward currency contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are not commodities and
are entered into in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. In entering a
forward currency contract, the Fund is dependent upon the creditworthiness and
good faith of the counterparty. The Fund attempts to reduce the risks of
nonperformance by the counterparty by dealing only with established, reputable
institutions. Although spot and forward contracts will be used primarily to
protect the Fund from adverse currency movements, they also involve the risk
that anticipated currency movements will not be accurately predicted, which may
result in losses to the Fund. This method of protecting the value of the Fund's
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange that can be achieved at some future point in
time. Although such contracts tend to minimize the risk of loss due to a decline
in the value of hedged currency, they tend to limit any potential gain that
might result should the value of such currency increase.
Securities Lending
The Fund may lend portfolio securities with a value of up to 33 1/3% of
its total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value
11
<PAGE>
of any loaned securities plus accrued interest. Collateral received by the Fund
will generally be held in the form tendered, although cash may be invested in
unaffiliated mutual funds with quality short-term portfolios, securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities or
certain unaffiliated mutual funds, repurchase agreements or other similar
investments. The investing of cash collateral received from loaning portfolio
securities involves leverage which magnifies the potential for gain or loss on
monies invested and, therefore, results in an increase in the volatility of the
Fund's outstanding securities. Such loans may be terminated at any time.
The Fund will retain rights to dividends, interest or other
distributions, on the loaned securities. Voting rights pass with the lending,
although the Fund may call loans to vote proxies if desired. Should the borrower
of the securities fail financially, there is a risk of delay in recovery of the
securities or loss of rights in the collateral. Loans are made only to borrowers
which are deemed by the Investment Manager or its agents to be of good financial
standing.
Short-Term Trading
The Fund may engage in short-term trading of securities and reserves
full freedom with respect to portfolio turnover. In periods where there are
rapid changes in economic conditions and security price levels or when
reinvestment strategy changes significantly, portfolio turnover may be higher
than during times of economic and market price stability or when investment
strategy remains relatively constant. The Fund's portfolio turnover rate may
involve greater transaction costs, relative to other funds in general, and may
have tax and other consequences.
Temporary and Defensive Investments
The Fund may hold up to 100% of its assets in cash or high-quality debt
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Investment Manager, such a
position is more likely to provide protection against adverse market conditions
than adherence to the Fund's other investment policies. The types of
high-quality instruments in which the Fund may invest for such purposes include
money market securities, such as repurchase agreements, and securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
certificates of deposit, time deposits and bankers' acceptances of certain
qualified financial institutions and corporate commercial paper, which at the
time of purchase are rated at least within the "A" major rating category by
Standard & Poor's Corporation ("S&P") or the "Prime" major rating category by
Moody's Investor's Service, Inc. ("Moody's"), or, if not rated, issued by
companies having an outstanding long-term unsecured debt issued rated at least
within the "A" category by S&P or Moody's.
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<PAGE>
Industry Classifications
In determining how much of the portfolio is invested in a given
industry, the following industry classifications are currently used. Securities
issued or guaranteed as to principal or interest by the U.S. Government or its
agencies or instrumentalities or mixed-ownership Government corporations or
sponsored enterprises (including repurchase agreements involving U.S. Government
securities to the extent excludable under relevant regulatory interpretations)
are excluded. Securities issued by foreign governments are also excluded.
Companies engaged in the business of financing may be classified according to
the industries of their parent or sponsor companies, or industries that
otherwise most affect such financing companies. Issuers of asset-backed pools
will be classified as separate industries based on the nature of the underlying
assets, such as mortgages and credit card receivables. "Asset-
backed--Mortgages" includes private pools of nongovernment backed mortgages.
<TABLE>
<S> <C> <C>
Aerospace Electronic Components Oil Service
Airline Electronic Equipment Paper Products
Asset-backed--Mortgages Entertainment Personal Care
Asset-backed--Credit Card Financial Service Photography
Receivables Food & Beverage Plastics
Automotive Forest Products Printing & Publishing
Automotive Parts Gaming & Lodging Railroad
Bank Gas Real Estate & Building
Building Gas Transmission Recreation
Business Service Grocery Retail Trade
Cable Healthcare & Hospital Savings & Loan
Capital Goods & Equipment Management Shipping & Transportation
Chemical Hospital Supply Technology & Communications
Computer Software & Service Hotel & Restaurant Telephone
Conglomerate Insurance Textile & Apparel
Consumer Goods & Services Machinery Tobacco
Container Media Truckers
Cosmetics Metal & Mining Trust Certificates--Government
Diversified Office Equipment Related Lending
Drug Oil Production
Electric Oil Refining &
Electrical Equipment Marketing
</TABLE>
Computer-Related Risks
Many mutual funds and other companies that issue securities, as well as
government entities upon whom those mutual funds and companies depend, may be
adversely affected by computer systems (whether their own systems or systems of
their service providers) that do not properly process dates beginning with
January 1, 2000 and information related to those dates. In addition, many funds
and other companies,
13
<PAGE>
especially those funds and companies that do business in one or more national
currencies of the countries in the European Union (the "EU"), may be adversely
affected by computer systems that cannot accommodate concurrent references to
two currencies, the national currency and the euro (the proposed currency unit
of the EU). Beginning on January 1, 1999 and for the three years thereafter,
businesses and governments in most EU countries generally must be prepared to
conduct their businesses in their national currency and the euro. After such
three-year period, they must conduct their businesses only in the euro.
The euro conversion presents additional risks for the Fund to the
extent that it invests in securities denominated in a national currency that
eventually will be replaced by the euro. For example, trading, accounting and
other administrative systems must be able to reflect exchange rates between a
national currency of an EU member and the euro and to redenominate outstanding
tradeable debt securities into the euro in accordance with specific technical
requirements.
The Investment Manager currently is in the process of reviewing its
internal computer systems as they relate to the Fund, as well as the computer
systems of those service providers upon which the Fund relies, in order to
obtain reasonable assurances that the Fund will not experience a material
adverse impact related to either problem. The Fund does not currently anticipate
that either problem will have a material adverse impact on its portfolio
investments, taken as a whole. There can be no assurances in either area,
however, including the possibility that either or both problems could negatively
affect the investment markets or the economy generally.
DEBT INSTRUMENTS AND
PERMITTED CASH INVESTMENTS
The Fund may invest in long-term and short-term debt securities.
Certain debt securities and money market instruments in which the Fund may
invest are described below.
Managing Volatility.
In administering the Funds' investments, the Investment Manager
attempts to manage the volatility of the Fund's portfolio of debt securities by
managing the duration and weighted average maturity of those securities.
Duration is an indicator of the expected volatility of a bond
portfolio's net asset value in response to changes in interest rates. In
calculating duration, the fund measures the average time required to receive all
cash flows associated with those debt securities -- representing payments of
principal and interest -- by considering the timing, frequency and amount of
payment expected from each portfolio debt security. The higher the duration, the
greater the gains and losses when interest rates change. Duration generally is a
more accurate measure of potential volatility with a portfolio composed of
high-
14
<PAGE>
quality debt securities, such as U.S. government securities, municipal
securities and high-grade U.S. corporate bonds, than with lower-grade
securities.
The Investment Manager may use several methods to manage the duration
of the Fund's portfolio of debt securities in order to increase or decrease its
exposure to changes in interest rates. First, the Investment Manager may adjust
duration by adjusting the mix of debt securities held by the Fund. For example,
if the Investment Manager intends to shorten duration, it may sell debt
instruments that individually have a long duration and purchase other debt
instruments that individually have a shorter duration. Among the factors that
will affect a debt security's duration are the length of time to maturity, the
timing of interest and principal payments, and whether the terms of the security
give the issuer of the security the right to call the security prior to
maturity. Second, the Investment Manager may adjust duration using derivative
transactions, especially with interest rate futures and options contracts. For
example, if the Investment Manager wants to lengthen the duration of a Fund's
portfolio of debt securities, it could purchase interest rate futures contracts
instead of buying longer-term bonds or selling shorter-term bonds. Similarly,
during periods of lower interest rate volatility, the Investment Manager may use
a technique to extend duration in the event rates rise by writing an
out-of-the-money put option and receiving premium income with the expectation
that the option could be exercised. In managing duration, the use of such
derivatives may be faster and more efficient than trading specific portfolio
securities.
Weighted average maturity is another indicator of potential volatility
used by the Investment Manager with respect to the Fund's portfolio of debt
securities, although for certain types of debt securities, such as high quality
debt securities, it is not as accurate as duration in quantifying potential
volatility. Weighted average maturity is the average of all maturities of the
individual debt securities held by the Fund, weighted by the market value of
each security. Generally, the longer the weighted average maturity, the more
Fund price will vary in response to changes in interest rates.
U.S. Government and Related Securities.
U.S. Government securities are securities which are issued or
guaranteed as to principal or interest by the U.S. Government, a U.S. Government
agency or instrumentality, or certain mixed-ownership Government corporations as
described herein. The U.S. Government securities in which the Fund invests
include, among others:
o direct obligations of the U.S. Treasury, i.e., U.S. Treasury
bills, notes, certificates and bonds;
o obligations of U.S. Government agencies or instrumentalities
such as the Federal Home Loan Banks, the Federal Farm Credit
Banks, the Federal National Mortgage Association, the
Government National Mortgage Association and the Federal Home
Loan Mortgage Corporation; and
15
<PAGE>
o obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a
variety of ways by the U.S. Government, its agencies or instrumentalities. Some
of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. Other obligations, such as those of the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government to
purchase certain obligations of agencies or instrumentalities, although the U.S.
Government has no legal obligation to do so. Obligations such as those of the
Federal Home Loan Bank, the Federal Farm Credit Bank, 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.
16
<PAGE>
Bank Money Investments.
Bank money investments include, but are not limited to, certificates of
deposit, bankers' acceptances and time deposits. Certificates of deposit are
generally short-term (i.e., less than one year), interest-bearing negotiable
certificates issued by commercial banks or savings and loan associations against
funds deposited in the issuing institution. A banker's acceptance is a time
draft drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction (to finance the import, export, transfer or
storage of goods). A banker's acceptance may be obtained from a domestic or
foreign bank, including a U.S. branch or agency of a foreign bank. The borrower
is liable for payment as well as the bank, which unconditionally guarantees to
pay the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity. Time deposits are nonnegotiable deposits for a fixed period of time at
a stated interest rate. The Fund will not invest in any such bank money
investment unless the investment is issued by a U.S. bank that is a member of
the Federal Deposit Insurance Corporation ("FDIC"), including any foreign branch
thereof, a U.S. branch or agency of a foreign bank, a foreign branch of a
foreign bank, or a savings bank or savings and loan association that is a member
of the FDIC and which at the date of investment has capital, surplus and
undivided profits (as of the date of its most recently published financial
statements) in excess of $50 million. The Fund will not invest in time deposits
maturing in more than seven days and will not invest more than 10% of its total
assets in time deposits maturing in two to seven days.
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under state law. U.S. federal branches or agencies
of foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such branches elect FDIC insurance. Unlike U.S. branches of foreign banks,
U.S. agencies of foreign banks may not accept deposits and thus are not eligible
for FDIC insurance. Both branches and agencies can maintain credit balances,
which are funds received by the office incidental to or arising out of the
exercise of their banking powers and can exercise other commercial functions,
such as lending activities.
Short-Term Corporate Debt Instruments.
Short-term corporate debt instruments include commercial paper to
finance short-term credit needs (i.e., short-term, unsecured promissory notes)
issued by, among others, (a) corporations and (b) domestic or foreign bank
holding companies or their subsidiaries or affiliates where the debt instrument
is guaranteed by the bank holding company or an affiliated bank or where the
bank holding company or the affiliated bank is unconditionally liable for the
debt instrument. Commercial paper is usually sold on a discounted basis and has
a maturity at the time of issuance not exceeding nine months.
17
<PAGE>
Certain Securities Ratings.
Commercial Paper Ratings.
Commercial paper investments at the time of purchase will be rated
within the "A" major rating category by S&P or within the "Prime" major rating
category by Moody's, or, if not rated, issued by companies having an outstanding
long-term unsecured debt issue rated at least within the "A" category by S&P or
by Moody's. The money market investments in corporate bonds and debentures
(which must have maturities at the date of settlement of one year or less) must
be rated at the time of purchase at least within the "A" category by S&P or
within the "Prime" category by Moody's.
Commercial paper rated within the "A" category (highest quality) by S&P
is issued by entities which have liquidity ratios which are adequate to meet
cash requirements. Long-term senior debt is rated within the "A" category or
better, although in some cases credits within the "BBB" category may be allowed.
The issuer has access to at least two additional channels of borrowing. Basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances. Typically, the issuer's industry is well established and the
issuer has a strong position within the industry. The reliability and quality of
management are unquestioned. The relative strength or weakness of the above
factors determines whether the issuer's commercial paper is rated A-1, A-2 or
A-3. (Those A-1 issues determined to possess overwhelming safety characteristics
are denoted with a plus (+) sign: A-1+.)
The rating "Prime" is the highest commercial paper rating category
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: evaluation of the management of the issuer; economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; evaluation of the
issuer's products in relation to competition and customer acceptance; liquidity;
amount and quality of long-term debt; trend of earnings over a period of 10
years; financial management of obligations which may be present or may arise as
a result of public interest questions and preparations to meet such obligations.
These factors are all considered in determining whether the commercial paper is
rated Prime-1, Prime-2 or Prime-3.
Rating Categories of Debt Securities.
Set forth below is a description of S&P corporate bond and debenture
rating categories:
AAA: An obligation rated within the AAA category has the highest rating
assigned by S&P. Capacity to meet the financial commitment on the obligation is
extremely strong.
AA: An obligation rated within the AA category differs from the highest
rated obligation only in small degree. Capacity to meet the financial obligation
is very strong.
18
<PAGE>
A: An obligation rated within the A category is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories. However, capacity to meet the
financial commitment on the obligation is still strong.
BBB: An obligation rated within the BBB category exhibits adequate
protection parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to meet the
financial commitment on the obligation.
Obligations rated within the BB, B, CCC, CC and C categories are
regarded as having significant speculative characteristics. BB indicates the
least degree of speculation and C the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated within the BB category is less vulnerable to
nonpayment than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet the financial commitment on the
obligation. The BB rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BBB rating.
B: An obligation rated within the B category is more vulnerable to
nonpayment than obligations rated within the BB category, but currently has the
capacity to meet the financial commitment on the obligation. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
meet the financial commitment on the obligation. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: An obligation rated within the CCC category is vulnerable to
nonpayment and is dependent upon favorable business, financial and economic
conditions to meet the financial commitment on the obligation. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to meet the financial commitment on the obligation.
CC: An obligation rated within the CC category is currently highly
vulnerable to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed, but payments on this obligation are being continued.
D: An obligation rated within the D category is in payment default. The
D rating category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a
19
<PAGE>
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayments risks-such as interest only (IO) and
principal only (PO) mortgage securities; and obligations with unusually risky
terms, such as inverse floaters.
Set forth below is a description of Moody's corporate bond and
debenture rating categories:
Aaa: Bonds which are rated within the Aaa category are judged to be of
the best quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt-edge." Interest payments are protected by a large
or by an exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated within the Aa category are judged to be of
high quality by all standards. Together with the Aaa group they comprise what
are generally known as high-grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than in Aaa securities.
A: Bonds which are rated within the A category possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa: Bonds which are rated within the Baa category are considered as
medium grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba: Bonds which are rated within the Ba category are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of
20
<PAGE>
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated within the B category generally lack
characteristics of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small.
Caa: Bonds which are rated within the Caa category are of poor
standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca: Bonds which are rated within the Ca category represent obligations
which are speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C: Bonds which are rated within the C category are the lowest rated
class of bonds, and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
1, 2 or 3: The ratings from Aa through B may be modified by the
addition of a numeral indicating a bond's rank within its rating category.
Rating Downgrades.
In the event the lowering of ratings of debt instruments held by the
Fund by applicable rating agencies results in a material decline in the overall
quality of the Fund's portfolio, the Trustees of the Trust will review the
situation and take such action as they deem in the best interests of the Fund's
shareholders, including, if necessary, changing the composition of the
portfolio.
THE TRUST, THE FUND AND ITS SHARES
The Fund was organized in 1985 as a separate series of State Street
Research Income Trust, a Massachusetts business trust. A "series" is a separate
pool of assets of the Trust which is separately managed and may have a different
investment objective and different investment policies from the objective and
policies of another series. The Trust currently is comprised of two series:
State Street Research High Income Fund and State Street Research Managed Assets.
The Trustees of the Trust have authority to issue an unlimited number of shares
of beneficial interest of each separate series, $.001 par value per share. The
Trustees also have authority, without the necessity of a shareholder vote, to
create any number of new series or classes or to commence the public offering of
shares of any previously established series or classes. The Trustees have
authorized shares of the Fund to be issued in four classes: Class A, Class B,
Class C and Class S shares. Prior to
21
<PAGE>
November 1, 1997, the Fund's current Class C shares were designated as Class D
shares and the Fund's current Class S shares were designated as Class C 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 C
shares bear the expenses of the deferred sales arrangement and any expenses
(including the higher service and distribution fees) resulting from such sales
arrangement, and certain other incremental expenses related to a class. Each
class will have exclusive voting rights with respect to provisions of the Rule
12b-1 distribution plan pursuant to which the service and distribution fees, if
any, are paid. Although the legal rights of holders of each class of shares are
identical, it is likely that the different expenses borne by each class will
result in different net asset values and dividends. The different classes of
shares of the Fund also have different exchange privileges. Except for those
differences between classes of shares described above, in the Fund's Prospectus
and otherwise this Statement of Additional Information, each share of the Fund
has equal dividend, redemption and liquidation rights with other shares of the
Fund, and when issued, is fully paid and nonassessable by the Fund.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have an adverse effect on the rights
of any shareholder. On any matter submitted to the shareholders, the holder of a
Fund share is entitled to one vote per share (with proportionate voting for
fractional shares) regardless of the relative net asset value thereof.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there ordinarily will be no shareholder meetings
unless required by the 1940 Act. Except as otherwise provided under the 1940
Act, the Board of Trustees will be a self-perpetuating body until fewer than
two-thirds of the Trustees serving as such are Trustees who were elected by
shareholders of the Trust. In the event less than a majority of the Trustees
serving as such were elected by shareholders of the Trust, a meeting of
shareholders will be called to elect Trustees. Under the Master Trust Agreement,
any Trustee may be removed by vote of two-thirds of the outstanding Trust
shares; holders of 10% or more of the outstanding shares of the Trust can
require that the Trustees call a meeting of shareholders for purposes of voting
on the removal of one or more Trustees. In connection with such meetings called
by shareholders, shareholders will be assisted in shareholder communications to
the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations for the
Trust. However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for indemnification
for all losses and expenses of any shareholder of the Fund held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund would be unable to meet its obligations. The
22
<PAGE>
Investment Manager believes that, in view of the above, the risk of personal
liability to shareholders is remote.
The Fund is an "open-end" management investment company and is a
"diversified company" as those terms are defined in the 1940 Act. Among other
things, a diversified fund must, with respect to 75% of its total assets, not
invest more than 5% of its total assets in any one issuer.
23
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and principal officers of the Trust, their addresses, and
their principal occupations and positions with certain affiliates of the
Investment Manager are set forth below.
*+Peter C. Bennett, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 59. His principal occupation is currently,
and during the past five years has been, Executive Vice President of State
Street Research & Management Company. Mr. Bennett is also a Director of State
Street Research & Management Company. Mr. Bennett's other principal business
affiliations include Director, State Street Research Investment Services, Inc.
and Executive Vice President, GFM International Investors, Inc.
+Steve A. Garban, The Pennsylvania State University, 210 Old Main,
University Park, PA 16802, serves as Trustee of the Trust. He is 60. He is
retired and was formerly Senior Vice President for Finance and Operations and
Treasurer of The Pennsylvania State University.
+Bartlett R. Geer, One Financial Center, Boston, MA 02111 serves as
Vice President of the Trust. He is 43. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as Vice President of State Street Research & Management
Company.
+Malcolm T. Hopkins, 14 Brookside Road, Biltmore Forest, Asheville, NC
28803, serves as Trustee of the Trust. He is 70. He is engaged principally in
private investments. Previously, he was Vice Chairman of the Board and Chief
Financial Officer of St. Regis Corp.
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 57. 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 71. He is engaged principally in private
investments and civic affairs, and is an author of business history. Previously,
he was with an affiliate of J.P. Morgan & Company in New York.
+Robert A. Lawrence, 175 Federal Street, Boston, MA 02110, serves as
Trustee of the Trust. He is 71. He is retired and was formerly a Partner in
Saltonstall & Co., a private investment firm.
- -----------------
* or + see footnotes on page 26
24
<PAGE>
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 47. His principal occupation is currently, and
during the past five years has been, Executive Vice President, Treasurer, Chief
Financial Officer and Director of State Street Research & Management Company.
Mr. Maus's other principal business affiliations include Executive Vice
President, Treasurer, Chief Financial Officer and Director of State Street
Research Investment Services, Inc. and Executive Vice President, Chief Financial
Officer, Administrative Officer and Director, GFM International Investors, Inc.
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111,
serves as Secretary and General Counsel of the Trust. He is 42. His principal
occupation is Executive Vice President, General Counsel and Secretary of State
Street Research & Management Company. During the past five years he has also
served as Senior Vice President of State Street Research & Management Company,
Senior Vice President of State Street Research Investment Services, Inc. and as
Senior Vice President, General Counsel and Assistant Secretary of The Boston
Company, Inc., Boston Safe Deposit and Trust Company and The Boston Company
Advisors, Inc. Mr. McNamara's other principal business affiliations include
Executive Vice President, Clerk and General Counsel of State Street Research
Investment Services, Inc. and Executive Vice President and General Counsel, GFM
International Investors, Inc.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 66. He is retired and was formerly Executive Vice
President, Chief Operating Officer and Director of Hewlett-Packard Company.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves
as Trustee of the Trust. He is 60. His principal occupations during the past
five years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
60. His principal occupation during the past five years has been Jay W.
Forrester Professor of Management at Sloan School of Management, Massachusetts
Institute of Technology.
*+Thomas A. Shively, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 44. 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 26
25
<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 55. His principal occupation is currently, and during the past five
years has been, Chairman of the Board, President, Chief Executive Officer and
Director of State Street Research & Management Company. Mr. Verni's other
principal business affiliations include Chairman of the Board and Director of
State Street Research Investment Services, Inc. and (until February 1996, prior
positions as President and Chief Executive Officer of that company) and Chairman
of the Board, President, Chief Executive Officer and Director of GFM
International Investors, Inc.
- -----------------
*These Trustees and/or officers are or may be deemed to be "interested persons"
of the Trust under the 1940 Act because of their affiliations with the Fund's
investment adviser.
+Serves as a Trustee/Director and/or officer of one or more of the following
investment companies, each of which has an advisory relationship with the
Investment Manager or its parent, Metropolitan Life Insurance Company
("Metropolitan"): State Street Research Equity Trust, State Street Research
Financial Trust, State Street Research Income Trust, State Street Research Money
Market Trust, State Street Research Tax-Exempt Trust, State Street Research
Capital Trust, State Street Research Exchange Trust, State Street Research
Growth Trust, State Street Research Master Investment Trust, State Street
Research Securities Trust, State Street Research Portfolios, Inc. and
Metropolitan Series Fund, Inc.
26
<PAGE>
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.
As of April 30, 1998, the Trustees and principal officers of the Trust
as 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 S shares.
Also as of April 30, 1998, 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:
<TABLE>
<CAPTION>
Shareholder %
----------- -
<S> <C> <C>
Class B Merrill Lynch 18.6
Class C (a) Merrill Lynch 47.2
Class S (a) Chase Manhattan Bank 44.0
Andover Newton Theological School 9.7
State Street Bank and Trust Company 6.9
</TABLE>
The full name and address of each of the above persons or entities are
as follows:
Merrill Lynch, Pierce, Fenner & Smith, Inc. (b)
4800 Deerlake Drive East
Jacksonville, FL 32246
Chase Manhattan Bank, N.A. (b)(c)
770 Broadway
New York, NY 10003
Andover Newton Theological School
c/o State Street Research Service Center
One Financial Center
Boston, MA 02111
State Street Bank and Trust Company (b)(d)
225 Franklin Street
Boston, MA 02110
27
<PAGE>
- --------------------
(a) Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
(b) The Fund believes that each named record holder does not have
beneficial ownership of such shares.
(c) The Chase Manhattan Bank holds such shares as a trustee under certain
employee benefit plans serviced by Metropolitan Life Insurance Company.
(d) Includes shares owned by the indicated holder of record for the benefit
of named owners who may separately own less than 5% of the share class.
The Trustees were compensated as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Total
Compensation
Aggregate From Fund and
Name of Compensation Complex Paid
Trustee From Fund(a) to Trustees(b)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Steve A. Garban $ 3,800 $ 75,899
Malcolm T. Hopkins $ 4,000 $ 78,499
Edward M. Lamont $ 3,700 $ 68,741
Robert A. Lawrence $ 4,100 $ 93,125
Dean O. Morton $ 4,300 $ 97,125
Toby Rosenblatt $ 4,100 $ 68,741
Michael S. Scott Morton $ 4,600 $ 103,625
Ralph F. Verni $ 0 $ 0
</TABLE>
- --------------------
(a) For the Fund's fiscal year ended March 31, 1998.
(b) Includes compensation on behalf of all series of 12 investment
companies for which the Investment Manager or its parent, Metropolitan
served as investment adviser. "Total Compensation from Fund and
Complex Paid to Trustees" for the 12 months ended December 31, 1997.
The Trust does not provide any pension or retirement benefits for the
Trustees.
28
<PAGE>
MANAGEMENT OF THE FUND AND INVESTMENT ADVISORY SERVICES
Under the provisions of the Trust's Master Trust Agreement and the laws
of Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees.
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Investment
Manager was founded by Paul Cabot, Richard Saltonstall and Richard Paine to
serve as investment adviser to one of the nation's first mutual funds, presently
known as State Street Research Investment Trust, which they had formed in 1924.
Their investment management philosophy emphasized comprehensive fundamental
research and analysis, including meetings with the management of companies under
consideration for investment. The Investment Manager's portfolio management
group has extensive investment industry experience managing equity and debt
securities.
The Investment Manager is charged with the overall responsibility for
managing the investments and business affairs of the Fund, subject to the
authority of the Board of Trustees. The Advisory Agreement provides that the
Investment Manager shall furnish the Fund with an investment program, office
facilities and such investment advisory, research and administrative services as
may be required from time to time. The Investment Manager compensates all
executive and clerical personnel and Trustees of the Trust if such persons are
employees of the Investment Manager or its affiliates. The Investment Manager is
an indirect wholly owned subsidiary of Metropolitan.
The advisory fee payable monthly by the Fund to the Investment Manager
is computed as a percentage of the average of the value of the net assets of the
Fund as determined at the close of regular trading on the New York Stock
Exchange (the "NYSE") on each day the NYSE is open for trading, at the annual
rate of 0.60% on the first $500 million, 0.55% on the next $500 million, and
0.50% on amounts over $1 billion 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, 1996, 1997 and 1998, the Fund's
investment advisory fee prior to the assumption of fees or expenses was
$5,199,204, $5,911,041, and $6,649,051, respectively.
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund for a period of two years after its initial effectiveness
and will continue from year to year thereafter as long as it is approved at
least annually both (i) by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act) or by the Trustees of the
Trust, and (ii) in either event by a vote of a majority of the Trustees who are
not parties to the Advisory Agreement or "interested persons" of any party
thereto, cast in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement may be terminated on 60 days' written notice by
either party and will terminate automatically in the
29
<PAGE>
event of its assignment, as defined under the 1940 Act and regulations
thereunder. Such regulations provide that a transaction which does not result in
a change of actual control or management of an adviser is not deemed an
assignment.
Under the Code of Ethics of the Investment Manager, investment
management personnel are only permitted to engage in personal securities
transactions in accordance with certain conditions relating to such person's
position, the identity of the security, the timing of the transaction, and
similar factors. Such personnel must report their personal securities
transactions quarterly and supply broker confirmations of such transactions to
the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by State Street Research Investment
Services, Inc. The Fund offers four classes of shares which may be purchased at
the next determined net asset value per share plus, in the case of all classes
except Class S shares, a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class C shares). General information on how to
buy shares of the Fund, as well as sales charges involved, is set forth under
"Your Investment" in the Prospectus. The following supplements that information.
Public Offering Price. The public offering price for each class of
shares is based on their net asset value determined as of the close of regular
trading on the NYSE on the day the purchase order is received by State Street
Research Service Center (the "Service Center"), provided that the order is
received prior to the close of regular trading on the NYSE on that day;
otherwise the net asset value used is that determined as of the close of the
NYSE on the next day it is open for unrestricted trading. When a purchase order
is placed through a dealer, that dealer is responsible for transmitting the
order promptly to the Service Center in order to permit the investor to obtain
the current price. Any loss suffered by an investor which results from a
dealer's failure to transmit an order promptly is a matter for settlement
between the investor and the dealer.
Class A Shares--Reduced Sales Charges. The reduced sales charges set
forth under "Your Investment--Choosing a Share Class" in the Prospectus apply to
purchases made at any one time by any "person," which includes: (i) an
individual, or an individual combining with his or her spouse and their children
and purchasing for his, her or their own account; (ii) a "company" as defined in
Section 2(a)(8) of the 1940 Act; (iii) a trustee or other fiduciary purchasing
for a single trust estate or single fiduciary account (including a pension,
profit sharing or other employee benefit trust created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code); (iv) a tax-exempt
organization under Section 501(c)(3) or (13) of the Internal Revenue Code; and
(v) an employee benefit plan of a single employer or of affiliated employers.
30
<PAGE>
Investors may purchase Class A shares of the Fund at reduced sales
charges by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds"
(which include the Fund and other funds as designated by the Distributor from
time to time) within a 13-month period. The sales charge applicable to each
purchase made pursuant to a Letter of Intent will be that which would apply if
the total dollar amount set forth in the Letter of Intent were being bought in a
single transaction. Purchases made within a 90-day period prior to the execution
of a Letter of Intent may be included therein; in such case the date of the
earliest of such purchases marks the commencement of the 13-month period.
An investor may include toward completion of a Letter of Intent the
value (at the current public offering price) of all of his or her Class A shares
of the Fund and of any of the other Class A shares of Eligible Funds held of
record as of the date of his or her Letter of Intent, plus the value (at the
current offering price) as of such date of all of such shares held by any
"person" described herein as eligible to join with the investor in a single
purchase. Class B, Class C and Class S shares may also be included in the
combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class S shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Other Programs Related to Class A Shares. Class A shares of the Fund
may be sold or issued in an exchange at a reduced sales charge or without sales
charge pursuant to certain sponsored arrangements, which include programs under
which a company, employee benefit plan or other organization makes
recommendations to, or permits group solicitation of, its employees, members or
participants, except any organization created primarily for the purpose of
obtaining shares of the Fund at a reduced sales charge or without a sales
charge. Sales without a sales charge, or with a reduced sales charge, may
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also be made through brokers, registered investment advisers, financial
planners, institutions, and others, under managed fee-based programs (e.g.,
"wrap fee" or similar programs) which meet certain requirements established from
time to time by the Distributor. Information on such arrangements and further
conditions and limitations is available from the Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and person: (A) the
Investment Manager, Distributor or any affiliated entities, including any direct
or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated Companies,
any relatives of any such individuals whose relationship is directly verified by
such individuals to the Distributor, or any beneficial account for such
relatives or individuals; and (C) employees, officers, sales representatives or
directors of dealers and other entities with a selling agreement with the
Distributor to sell shares of any aforementioned investment company, any spouse
or child of such person, or any beneficial account for any of them. The purchase
must be made for investment and the shares purchased may not be resold except
through redemption. This purchase program is subject to such administrative
policies, regarding the qualification of purchasers and any other matters, as
may be adopted by the Distributor from time to time.
Conversion of Class B Shares to Class A Shares. A shareholder's Class B
shares of the Fund, including all shares received as dividends or distributions
with respect to such shares, will automatically convert to Class A shares of the
Fund at the end of eight years following the issuance of such Class B shares;
consequently, they will no longer be subject to the higher expenses borne by
Class B shares. The conversion rate will be determined on the basis of the
relative per share net asset values of the two classes and may result in a
shareholder receiving either a greater or fewer number of Class A shares than
the Class B shares so converted. As noted above, holding periods for Class B
shares received in exchange for Class B shares of other Eligible Funds will be
counted toward the eight-year period.
Contingent Deferred Sales Charges. The amount of any contingent
deferred sales charge paid on Class A shares (on sales of $1 million or more and
which do not involve an initial sales charge) or on Class B or Class C shares of
the Fund will be paid to the Distributor. The Distributor will pay dealers at
the time of sale a 4% commission for selling Class B shares and a 1% commission
for selling Class C shares. In certain cases, a dealer may elect to waive the 4%
commission on Class B shares and receive in lieu thereof an annual fee, usually
1% with respect to such outstanding shares. The proceeds of the contingent
deferred sales charges and the distribution fees are used to offset distribution
expenses and thereby permit the sale of Class B and Class C shares without an
initial sales charge.
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In determining the applicability and rate of any contingent deferred
sales charge of Class B or Class C shares, it will be assumed that a redemption
of the shares is made first of those shares having the greatest capital
appreciation, next of shares representing reinvestment of dividends and capital
gains distributions and finally of remaining shares held by shareholder for the
longest period of time. Class B shares that are redeemed within a five-year
period after their purchase, and Class C shares that are redeemed within a
one-year period after their purchase, will not be subject to a contingent
deferred sales charge to the extent that the value of such shares represents (1)
capital appreciation of Fund assets or (2) reinvestment of dividends or capital
gains distributions. The holding period for purposes of applying a contingent
deferred sales charge for a particular class of shares of the Fund acquired
through an exchange from another Eligible Fund will be measured from the date
that such shares were initially acquired in the other Eligible Fund, and shares
of the same class being redeemed will be considered to represent, as applicable,
capital appreciation or dividend and capital gains distribution reinvestments in
such other Eligible Fund. These determinations will result in any contingent
deferred sales charge being imposed at the lowest possible rate. For federal
income tax purposes, the amount of the contingent deferred sales charge will
reduce the gain or increase the loss, as the case may be, on the amount realized
on redemption.
Contingent Deferred Sales Charge Waivers. With respect to Class A
shares (on sales of $1 million or more and which do not involve an initial sales
charge), and Class B and Class C shares of the Fund, the contingent deferred
sales charge does not apply to exchanges or to redemptions under a systematic
withdrawal plan which meets certain conditions. In addition, the contingent
deferred sales charge will be waived for: (i) redemptions made within one year
of the death or total disability, as defined by the Social Security
Administration, of all shareholders of an account; (ii) redemptions made after
attainment of a specific age in an amount which represents the minimum
distribution required at such age under Section 401(a)(9) of the Internal
Revenue Code of 1986, as amended, for retirement accounts or plans (e.g., age 70
1/2 for Individual Retirement Accounts and Section 403(b) plans), calculated
solely on the basis of assets invested in the Fund or other Eligible Funds; and
(iii) a redemption resulting from a tax-free return of an excess contribution to
an Individual Retirement Account. (The foregoing waivers do not apply to a
tax-free rollover or transfer of assets out of the Fund). The Fund may modify or
terminate the waivers at any time; for example, the Fund may limit the
application of multiple waivers and establish other conditions for employee
benefit plans.
Class S Shares. Class S shares are currently available to certain
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants, service arrangements, or similar factors;
insurance companies; investment companies; advisory accounts of the Investment
Manager; endowment funds of nonprofit organizations with substantial minimum
assets (currently a minimum of $10 million); and other similar institutional
investors. Class S shares may be acquired through programs or products sponsored
by Metropolitan, its affiliates, or both for which Class S shares have been
designated. In addition, Class S shares are available through programs under
which, for example, investors pay an asset-based fee and/or a transaction fee to
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intermediaries. Class S share availability is determined by the Distributor and
intermediaries based on the overall direct and indirect costs of a particular
program, expected assets, account sizes and similar considerations.
Reorganizations. In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, the Fund may issue its shares at net asset value (or
more) to such entities or to their security holders.
Redemptions. The Fund reserves the right to pay redemptions in kind
with portfolio securities in lieu of cash. In accordance with its election
pursuant to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of
redemption proceeds paid in cash. Although it has no present intention to do so,
the Fund may, under unusual circumstances, limit redemptions in cash with
respect to each shareholder during any ninety-day period to the lesser of (i)
$250,000 or (ii) 1% of the net asset value of the Fund at the beginning of such
period. In connection with any redemptions paid in kind with portfolio
securities, brokerage and other costs may be incurred by the redeeming
shareholder in the sale of the securities received.
Systematic Withdrawal Plan. A shareholder who owns noncertificated
Class A or Class S shares with a value of $5,000 or more, or Class B or Class C
shares with a value of $10,000 or more, may elect, by participating in the
Fund's Systematic Withdrawal Plan, to have periodic checks issued for specified
amounts. These amounts may not be less than certain minimums, depending on the
class of shares held. The Plan provides that all income dividends and capital
gains distributions of the Fund shall be credited to participating shareholders
in additional shares of the Fund. Thus, the withdrawal amounts paid can only be
realized by redeeming shares of the Fund under the Plan. To the extent such
amounts paid exceed dividends and distributions from the Fund, a shareholder's
investment will decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually of
either (a) the value, at the time the Systematic Withdrawal Plan is initiated,
of the shares then in the account or (b) the value, at the time of a withdrawal,
of the same number of shares as in the account when the Systematic Withdrawal
Plan was initiated, whichever is higher.
Expenses of the Systematic Withdrawal Plan are borne by the Fund. A
participating shareholder may withdraw from the Systematic Withdrawal Plan, and
the Fund may terminate the Systematic Withdrawal Plan at any time on written
notice. Purchase of additional shares while a shareholder is receiving payments
under a Systematic Withdrawal Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate in
the Investamatic Program (see "Your Investment--Investor Services--Investamatic
Program" in the Fund's Prospectus) and the Systematic Withdrawal Plan at the
same time.
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Request to Dealer to Repurchase. For the convenience of shareholders,
the Fund has authorized the Distributor as its agent to accept orders from
dealers by wire or telephone for the repurchase of shares by the Distributor
from the dealer. The Fund may revoke or suspend this authorization at any time.
The repurchase price is the net asset value for the applicable shares next
determined following the time at which the shares are offered for repurchase by
the dealer to the Distributor. The dealer is responsible for promptly
transmitting a shareholder's order to the Distributor.
Signature Guarantees. Signature guarantees are required for, among
other things: (1) written requests for redemptions for more than $100,000; (2)
written requests for redemptions for any amount if the proceeds are transmitted
to other than the current address of record (unchanged in the past 30 days); (3)
written requests for redemptions for any amount submitted by corporations and
certain fiduciaries and other intermediaries; and (4) requests to transfer the
registration of shares to another owner. Signatures must be guaranteed by a
bank, a member firm of a national stock exchange, or other eligible guarantor
institution. The Transfer Agent will not accept guarantees (or notarizations)
from notaries public. The above requirements may be waived in certain instances.
Dishonored Checks. If a purchaser's check is not honored for its full
amount, the purchaser could be subject to additional charges to cover collection
costs and any investment loss, and the purchase may be canceled.
Processing Charges. Purchases and redemptions processed through
securities dealers may be subject to processing charges imposed by the
securities dealer in addition to sales charges that may be imposed by the Fund
or the Distributor.
SHAREHOLDER ACCOUNTS
General information on shareholder accounts is included in the Fund's
Prospectus under "Your Investment." The following supplements that information.
Maintenance Fees and Involuntary Redemption. Because of the relatively
high cost of maintaining small shareholder accounts, the Fund reserves the right
to redeem at its option any shareholder account which remains below $1,500 for a
period of 60 days after notice is mailed to the applicable shareholder, or to
impose a maintenance fee on such account after 60-days' notice. Such
involuntarily redemptions will be subject to applicable sales charges, if any.
The Fund may increase such minimum account value above such amount in the future
after notice to affected shareholders. Involuntarily redeemed shares will be
priced at the net asset value on the date fixed for redemption by the Fund, and
the proceeds of the redemption will be mailed to the affected shareholder at the
address of record. Currently, the maintenance fee is $18 annually, which is paid
to the Transfer Agent. The fee does not apply to certain retirement accounts or
if the shareholder has more than an aggregate $50,000 invested in the Fund and
other Eligible
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Funds combined. Imposition of a maintenance fee on a small account could, over
time, exhaust the assets of such account.
To cover the cost of additional compliance administration, a $20 fee
will be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date
of payment of redemption proceeds for more than seven days, except that (a) it
may elect to suspend the redemption of shares or postpone the date of payment of
redemption proceeds: (1) during any period that the NYSE is closed (other than
customary weekend and holiday closings) or trading on the NYSE is restricted;
(2) during any period in which an emergency exists as a result of which disposal
of portfolio securities is not reasonably practicable or it is not reasonably
practicable to fairly determine the Fund's net asset values; or (3) during such
other periods as the Securities and Exchange Commission (the "SEC") may by order
permit for the protection of investors; and (b) the payment of redemption
proceeds may be postponed as otherwise provided under "Purchase and Redemption
of Shares" in this Statement of Additional Information.
The Open Account System. Under the Open Account System full and
fractional shares of the Fund owned by shareholders are credited to their
accounts by the Transfer Agent, State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110. Certificates representing Class B
or Class C shares will not be issued, while certificates representing Class A or
Class S shares will only be issued if specifically requested in writing and, in
any case, will only be issued for full shares, with any fractional shares to be
carried on the shareholder's account. Shareholders will receive periodic
statements of transactions in their accounts.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through
dealers, by wire or by mailing a check payable to "State
Street Research Funds" under the terms set forth above under
"Purchase and Redemption of Shares" in this Statement of
Additional Information.
2. The following methods of receiving dividends from investment
income and distributions from capital gains generally are
available:
(a) All income dividends and capital gains distributions
reinvested in additional shares of the Fund.
(b) All income dividends and capital gains distributions
in cash.
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(c) All income dividends and capital gains distributions
invested in any one available Eligible Fund
designated by the shareholder as described below. See
"--Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will be automatically coded for reinvestment of all
dividends and distributions in additional shares of the same class of the Fund.
Selections may be changed at any time by telephone or written notice to the
Service Center. Dividends and distributions are reinvested at net asset value
without a sales charge.
Exchange Privileges. Shareholders of the Fund may exchange their shares
for available shares with corresponding characteristics of any of the other
Eligible Funds at any time on the basis of the relative net asset values of the
respective shares to be exchanged, subject to compliance with applicable
securities laws. Shareholders of any other Eligible Fund may similarly exchange
their shares for Fund shares with corresponding characteristics. Prior to making
an exchange, shareholders should obtain the Prospectus of the Eligible Fund into
which they are exchanging. Under the Direct Program, subject to certain
conditions, shareholders may make arrangements for regular exchanges from the
Fund into other Eligible Funds. To effect an exchange, Class A, Class B and
Class C shares may be redeemed without the payment of any contingent deferred
sales charge that might otherwise be due upon an ordinary redemption of such
shares. The State Street Research Money Market Fund issues Class E shares which
are sold without any sales charge. Exchanges of State Street Research Money
Market Fund Class E shares into Class A shares of the Fund or any other Eligible
Fund are subject to the initial sales charge or contingent deferred sales charge
applicable to an initial investment in such Class A shares, unless a prior Class
A sales charge has been paid directly or indirectly with respect to the shares
redeemed. For purposes of computing the contingent deferred sales charge that
may be payable upon disposition of any acquired Class A, Class B and Class C
shares, the holding period of the redeemed shares is "tacked" to the holding
period of any acquired shares. No exchange transaction fee is currently imposed
on any exchange.
Shares of the Fund may also be acquired or redeemed in exchange for
shares of the Summit Cash Reserves Fund ("Summit Cash Reserves") by customers of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (subject to completion of
steps necessary to implement the program). The Fund and Summit Cash Reserves are
related mutual funds for purposes of investment and investor services. Upon the
acquisition of shares of Summit Cash Reserves by exchange for redeemed shares of
the Fund, (a) no sales charge is imposed by Summit Cash Reserves, (b) no
contingent deferred sales charge is imposed by the Fund on the Fund shares
redeemed, and (c) any applicable holding period of the Fund shares redeemed is
"tolled," that is, the holding period clock stops running pending further
transactions. Upon the acquisition of shares of the Fund by exchange for
redeemed shares of Summit Cash Reserves, (a) the acquisition of Class A shares
shall be subject to the initial sales charges or contingent deferred sales
charges applicable to an
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initial investment in such Class A shares, unless a prior Class A sales charge
has been paid indirectly, and (b) the acquisition of Class B or Class C shares
of the Fund shall restart any holding period previously tolled, or shall be
subject to the contingent deferred sales charge applicable to an initial
investment in such shares.
The exchange privilege may be terminated or suspended or its terms
changed at any time, subject, if required under applicable regulations, to 60
days' prior notice. New accounts established for investments upon exchange from
an existing account in another fund will have the same telephone privileges with
respect to the Fund (see "Your Investment--Account Policies--Telephone Requests"
in the Fund's Prospectus and "--Telephone Privileges," below) as the existing
account unless the Service Center is instructed otherwise. Related
administrative policies and procedures may also be adopted with regard to a
series of exchanges, street name accounts, sponsored arrangements and other
matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer identification
number, may be aggregated for purposes of the six exchange limit.
Notwithstanding the six exchange limit, the Fund reserves the right to refuse
exchanges by any person or group if, in the Investment Manager's judgment, the
Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
Exchanges may be restricted or refused if the Fund receives or anticipates
simultaneous orders affecting significant portions of the Fund's assets. In
particular, a pattern of exchanges that coincides with a "market timing"
strategy may be 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 the Service
Center and delivered by the Service Center to the Transfer Agent by 12 noon
Boston time on any business day, the exchange usually will occur that day. For
further information regarding the exchange privilege, shareholders should
contact the Service Center.
Reinvestment Privilege. A shareholder of the Fund who has redeemed
shares or had shares repurchased at his or her request may reinvest all or any
portion of the proceeds (plus that amount necessary to acquire a fractional
share to round off his or her reinvestment to full shares) in shares, of the
same class as the shares redeemed, of the Fund or any other Eligible Fund at net
asset value and without subjecting the reinvestment to an initial sales charge,
provided such reinvestment is made within 120 calendar days after a redemption
or repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the amount
reinvested. The redemption of shares is, for federal income
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tax purposes, a sale on which the shareholder may realize a gain or loss. If a
redemption at a loss is followed by a reinvestment within 30 days, the
transaction may be a "wash sale" resulting in a denial of the loss for federal
income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject
to any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by the Service
Center of such shareholder's written purchase request and delivery of the
request by the Service Center to the Transfer Agent. A shareholder may exercise
this reinvestment privilege only once per 12-month period with respect to his or
her shares of the Fund.
Dividend Allocation Plan. The Dividend Allocation Plan allows
shareholders to elect to have all their dividends and any other distributions
from the Fund or any Eligible Fund automatically invested at net asset value in
one other such Eligible Fund designated by the shareholder, provided the account
into which the dividends and distributions are directed is initially funded with
the requisite minimum amount.
Telephone Privileges. A shareholder with telephone privileges that are
offered with his or her Account (see "Your Investment--Account
Policies--Telephone Requests") is deemed to authorize the Service Center and the
Transfer Agent to: (1) act upon the telephone instructions of any person
purporting to be the shareholder or the shareholder's financial professional to
redeem or exchange, shares from any account; and (2) honor any written
instructions for a change of address regardless of whether such request is
accompanied by a signature guarantee. All telephone calls will be recorded.
Neither the Fund, the other Eligible Funds, the Transfer Agent, the Investment
Manager nor the Distributor will be liable for any loss, expense or cost arising
out of any request, including any fraudulent or unauthorized requests.
Shareholders assume the risk to the full extent of their accounts that telephone
requests may be unauthorized. Reasonable procedures will be followed to confirm
that instructions communicated by telephone are genuine. The shareholder will
not be liable for any losses arising from unauthorized or fraudulent
instructions if such procedures are not followed.
Alternative Means of Contacting the Fund. It is unlikely, during
periods of extraordinary market conditions, that a shareholder may have
difficulty in reaching the Service Center. In that event, however, the
shareholder should contact the Service Center at 1-800-562-0032, 1-617-357-7800
or otherwise at its main office at One Financial Center, Boston, Massachusetts
02111-2690.
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily
as of the close of regular trading on the NYSE, ordinarily 4 P.M. New York City
time, Monday through Friday, on each day during which the NYSE is open for
unrestricted trading. The NYSE is
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currently closed on New Year's Day, Martin Luther King, Jr. Day, Presidents Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
The net asset value per share of the Fund is computed by dividing the
sum of the value of the securities held by the Fund plus any cash or other
assets minus all liabilities by the total number of outstanding shares of the
Fund at such time. Any expenses, except for extraordinary or nonrecurring
expenses, borne by the Fund, including the investment management fee payable to
the Investment Manager, are accrued daily.
In determining the values of portfolio assets as provided below, the
Trustees 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 utilize information with respect to market transactions, quotations
from dealers and various relationships among securities in determining value and
may provide prices determined as of times prior to the close of the NYSE.
In general, securities are valued as follows. Securities which are
listed or traded on the New York or American Stock Exchange are valued at the
price of the last quoted sale on the respective exchange for that day.
Securities which are listed or traded on a national securities exchange or
exchanges, but not on the New York or American Stock Exchange, are valued at
the price of the last quoted sale on the exchange for that day prior to the
close of the NYSE. Securities not listed on any national securities exchange
which are traded "over the counter" and for which quotations are available on
the National Association of Securities Dealers, Inc.'s (the "NASD") 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 of such pricing
services as may be deemed appropriate or methodologies approved by the Trustees.
The Trustees have authorized the use of the amortized cost method to
value short-term debt instruments issued with a maturity of one year or less and
having a remaining maturity of 60 days or less when the value obtained is fair
value, provided that during any period in which more than 25% of the Fund's
total assets is invested in short-term debt securities the current market value
of such securities will be used in calculating net asset value per share in lieu
of the amortized cost method. Under the amortized cost method of valuation, the
security is initially valued at cost on the date of purchase (or in the case of
short-term debt instruments purchased with more than 60 days remaining to
maturity, the market value on the 61st day prior to maturity), and thereafter a
constant amortization to maturity of any discount or premium is assumed
regardless of the impact of fluctuating interest rates on the market value of
the security.
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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,
1997 and 1998 were 81.75% and 70.53%, 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 the reasonableness of a commission or a net price with respect to a
particular transaction by considering such factors as difficulty of execution or
security positioning by the executing firm. The Investment Manager may or may
not solicit competitive bids based on its judgment of the expected benefit or
harm to the execution process for that transaction.
When it appears that a number of firms could satisfy the required
standards in respect of a particular transaction, consideration may also be
given by the Investment Manager to services other than execution services which
certain of such firms have provided in the past or may provide in the future.
Negotiated commission rates and prices, however, are based upon the Investment
Manager's judgment of the rate which reflects the execution requirements of the
transaction without regard to whether the broker provides services in addition
to execution. Among such other services are the supplying of supplemental
investment research; general economic, political and business information;
analytical and statistical data; relevant market information, quotation
equipment and services; reports and information about specific companies,
industries and securities; purchase and sale recommendations for stocks and
bonds; portfolio strategy services; historical statistical information; market
data services providing information on specific issues and prices; financial
publications; proxy voting data and analysis
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services; technical analysis of various aspects of the securities markets,
including technical charts; computer hardware used for brokerage and research
purposes; computer software and databases (including those contained in certain
trading systems used for portfolio analysis and modeling and also including
software providing investment personnel with efficient access to current and
historical data from a variety of internal and external sources); and portfolio
evaluation services and relative performance of accounts.
In the case of the Fund and other registered investment companies
advised by the Investment Manager or its affiliates, the above services may
include data relating to performance, expenses and fees of those investment
companies and other investment companies; this information is used by the
Trustees or Directors of the investment companies to fulfill their
responsibility to oversee the quality of the Investment Manager's advisory
contracts between the investment companies and the Investment Manager. The
Investment Manager considers these investment company services only in
connection with the execution of transactions on behalf of its investment
company clients and not its other clients. Certain of the nonexecution services
provided by broker-dealers may in turn be obtained by the broker-dealers from
third parties who are paid for such services by the broker-dealers.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. The Investment Manager's investment management
personnel conduct internal surveys and use other methods to evaluate the quality
of the research and other services provided by various broker-dealer firms, and
the results of these efforts are made available to the equity trading
department, which uses this information as consideration to the extent described
above in the selection of brokers to execute portfolio transactions.
Some services furnished by broker-dealers may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Investment Manager allocates the cost
of the services to determine the proportion which is allocable to research or
investment decision-making and the proportion allocable to other purposes. The
Investment Manager pays directly from its own funds for that portion allocable
to uses other than research or investment decision-making. Some research and
execution services may benefit the Investment Manager's clients as a whole,
while others may benefit a specific segment of clients. Not all such services
will necessarily be used exclusively in connection with the accounts which pay
the commissions to the broker-dealer providing the services.
The Investment Manager has no fixed agreements or understandings with
any broker-dealer as to the amount of brokerage business which the firm may
expect to receive for services supplied to the Investment Manager or otherwise.
There may be, however, understandings with certain firms that in order for such
firms to be able to continuously supply certain services, they need to receive
an allocation of a specified amount of brokerage business. These understandings
are honored to the extent possible in accordance with the policies set forth
above.
42
<PAGE>
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. Brokerage commissions paid
by the Fund in secondary trading during the last three fiscal years ended March
31 were as follows: 1996, $131,397; 1997, $262,173; and 1998, $76,776. The
Investment Manager believes the amount of brokerage commissions paid by the Fund
during the fiscal year ended March 31, 1998 was significantly lower than during
the previous year because during the fiscal year ended March 31, 1997 relatively
more transactions were entered as changes were made to increase the relative
weighting of convertible bonds compared to other securities in the portfolio.
During and at the end of its most recent fiscal year, the Fund did not
hold in its portfolio 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 commissions and
designations to brokers or dealers which provide the client with research,
performance evaluation, master trustee and other services. In the absence of
instructions from the client, the Investment Manager may make such allocations
to broker-dealers which have provided the Investment Manager with research and
brokerage services.
In some instances, certain clients of the Investment Manager request it
to place all or part of the orders for their account with certain brokers or
dealers, which in some cases provide services to those clients. The Investment
Manager generally agrees to honor those requests to the extent practicable.
Clients may condition their requests by requiring that the Investment Manager
only effect transactions with the specified broker-dealers if the broker-dealers
are competitive as to price and execution. In other cases, the Investment
Manager may be unable to negotiate commissions or obtain volume discounts or
best execution. In addition, a disparity may exist among the commissions charged
to clients who request the Investment Manager to use particular brokers or
dealers, and also between those clients and those who do not make such requests.
A client who requests the use of a particular broker-dealer should understand
that it may lose the possible advantage which non-requesting clients derive from
aggregation of orders for several clients as a single transaction for the
purchase or sale of a particular security. Among other reasons why best
execution may not be achieved with directed brokerage is that, in an effort to
achieve orderly execution of transactions, execution of orders that have
designated particular brokers may, at the discretion of the trading desk, be
delayed until execution of other non-designated orders had been completed.
When more than one client of the Investment Manager is seeking to buy
or sell the same security, the sale or purchase is carried out in a manner which
is considered fair and equitable to all accounts. In allocating investments
among various clients (including in what sequence orders for trades are placed),
the Investment Manager will use its best business judgment and will take into
account such factors as the investment objectives of the clients, the
43
<PAGE>
amount of investment funds available to each, the size of the order, 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.
DISTRIBUTIONS AND CERTAIN TAX MATTERS
Distributions
The Fund has adopted distribution procedures that differ from those
procedures which have been customary for many investment companies. The Fund
will declare a dividend each day in an amount based on monthly projections of
its future net investment income and pay such dividends monthly after the end of
the month. 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.
Taxation Of The Fund--In General
The Fund intends to qualify and elects to be treated each taxable year
as a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), although it cannot give complete
assurance that it will qualify to do so. Accordingly, the Fund must, among other
things, (a) derive at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); and (b) satisfy certain
diversification requirements on a quarterly basis.
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of the Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of the
Fund to the extent thereof. Any distribution in excess of a shareholder's basis
in the shareholder's shares would be taxable as gain realized from the sale of
such shares.
The Fund will be liable for a nondeductible 4% excise tax on amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement. To avoid the
44
<PAGE>
tax, during each calendar year, the Fund must distribute, or be deemed to have
distributed, an amount equal to the sum of (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (2) at least 98% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for the 12-month period ending on October
31 of the calendar year and (3) all ordinary income and capital gains for
previous years that were not distributed during such years. For this purpose,
any income or gain retained by the Fund that is subject to corporate tax will be
considered to have been distributed by year-end. The Fund intends to make
sufficient distributions to avoid this 4% excise tax.
Taxation Of The Fund's Investments
Original Issue Discount; Market Discount. For federal income tax purposes, debt
securities purchased by the Fund may be treated as having original issue
discount. Original issue discount represents interest for federal income tax
purposes and can generally be defined as the excess of the stated redemption
price at maturity of a debt obligation over the issue price. Original issue
discount is treated for federal income tax purposes as income earned by the
Fund, whether or not any cash 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, 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 having a fixed maturity date of more
than one year from the date of issue and having market discount, the gain
realized on disposition will be treated as interest to the extent it does not
exceed the accrued market discount on the security (unless the Fund elects to
include such accrued market discount in income in the tax year to which it is
attributable). For debt securities acquired before May 1, 1993, this rule
applies only if the debt security was issued after July 18, 1984. 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 in income
currently. Because the Fund must include original issue discount in income, it
will be more difficult for the Fund to make the distributions required for the
Fund to maintain its status as a regulated investment company under Subchapter M
of the Code or to avoid the 4% excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may
be subject to provisions of the Code that (i) require inclusion of unrealized
gains or losses in the Fund's income for purposes of the 90% test, the excise
tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and (iii) characterize
both realized and unrealized gain or loss as short-term or long-term gain or
loss. Such provisions generally apply to, among other investments, options on
debt securities, indices on securities and futures contracts. The Fund will
monitor its transactions and may make certain tax elections available to it in
order to mitigate the impact of these rules and prevent disqualification of the
Fund as a regulated investment company.
45
<PAGE>
Gains or losses attributable to foreign currency contracts or
fluctuations in exchange rates that occur between the time the Fund accrues
income or expenses denominated in a foreign currency and the time the Fund
actually collects such income or pays such expenses are treated as ordinary
income or loss. The portion of any gain or loss on the disposition of a debt
security denominated in a foreign currency that is attributable to fluctuations
in the value of the foreign currency during the holding period of the debt
security will likewise be treated as ordinary income or loss. Such ordinary
income or loss will increase or decrease the amount of the Fund's net investment
income.
If the Fund invests in the stock of certain "passive foreign investment
companies" ("PFICs"), income of such companies may become taxable to the Fund
prior to its distribution to the Fund or, alternatively, ordinary income taxes
and interest charges may be imposed on the Fund on "excess distributions"
received by the Fund or on gain from the disposition of such investments by the
Fund. The Fund does not intend to invest in PFICs. Because of the broad scope of
the PFIC rules, however, there can be no assurance that the Fund can avoid doing
so.
Taxation Of The Fund's Shareholders
The Fund may be subject to foreign taxes, including foreign income
taxes. If so, the Fund intends to meet the requirements of the Code for passing
through to its shareholders the tax benefit of foreign income taxes paid,
although there is no assurance that it will be able to do so. Under this
provision, if more than half of the value of the total assets of the Fund at the
close of its taxable year consists of stock or securities of foreign
corporations, the Fund will be eligible and intends to elect to pass through to
its shareholders the amount of foreign taxes it paid if such amounts are
material. Pursuant to this election, a United States shareholder will, in
general, be required to (i) include in gross income, in addition to taxable
distributions actually received, his or her pro rata share of the foreign taxes
paid by the Fund, (ii) treat that share of taxes as having been paid directly by
him or her, and (iii) either deduct such share of taxes or treat such share of
taxes as a credit against United States income tax liability. A tax-exempt
shareholder will ordinarily not benefit from this election.
Generally, a credit for foreign taxes paid by the Fund may not exceed a
shareholder's United States income tax attributable to the shareholder's foreign
source income. This limitation applies separately to different categories of
income, one of which is foreign-source passive income, which is likely to
include all of the foreign-source income of the Fund. As a result of these
limitations, some shareholders may not be able to utilize fully any foreign tax
credits generated by an investment in the Fund. The Fund will provide its
shareholders with information about the source of its income and the foreign
taxes it has paid for use in preparing the shareholder's United States income
tax return.
Dividends from domestic corporations are not expected to comprise a
substantial part of the income of the Fund. If such dividends are earned by the
Fund, then a portion of the dividends paid by the Fund may qualify for the 70%
deduction for dividends
46
<PAGE>
received which is available to corporate shareholders of the Fund. Shareholders
will be informed of any portion of the dividends paid by the Fund which
qualifies for this deduction. The dividends-received deduction is reduced to the
extent the dividends received are treated as debt-financed, under the Code, and
is eliminated if the stock is held for less than 46 days.
Any dividend declared in October, November or December and made payable
to shareholders of record in any such month is treated as received by such
shareholder on December 31, provided that the Fund pays the dividend during
January of the following calendar year.
Distributions by the Fund result in a reduction in the fair market
value of the Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as ordinary income or long-term capital gain, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
The foregoing discussion of United States federal income tax law
relates solely to the application of that law to United States persons, that is,
United States citizens and residents and United States corporations,
partnerships, trusts and estates. Each shareholder who is not a United States
person should consider the United States and foreign tax consequences of
ownership of shares of the Fund, including the possibility that such a
shareholder may be subject to United States withholding tax at a rate of up to
30% (or at a lower rate under an applicable treaty) on distributions from the
Fund.
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this Statement of Additional Information
in light of their particular tax situations.
DISTRIBUTION OF SHARES OF THE FUND
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the
47
<PAGE>
Fund plus (subject to certain exceptions) a sales charge which, at the election
of the investor, may be imposed (i) at the time of purchase (the Class A shares)
or (ii) on a deferred basis (Class B and Class C shares). The Distributor may
reallow all or portions of such sales charges as concessions to dealers. For the
fiscal years ended March 31, 1996, 1997 and 1998, total sales charges on Class A
shares paid to the Distributor amounted to $2,741,302, $2,477,538 and
$2,136,869, respectively. For the same periods, the Distributor retained
$268,551, $294,695 and $262,404, respectively, 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, managed fee-based programs and
so-called "mutual fund supermarkets," among other programs, the amount of the
sales charge reduction will similarly reflect the anticipated reduction in sales
expenses associated with such arrangements. The reductions in sales expenses,
and therefore the reduction in sales charges, will vary depending on factors
such as the size and other characteristics of the organization or program, and
the nature of its membership or the participants. The Fund reserves the right to
make variations in, or eliminate, sales charges at any time or to revise the
terms of or to suspend or discontinue sales pursuant to sponsored arrangements
or similar programs at any time.
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 C shares of
the Fund and paid initial
48
<PAGE>
commissions to securities dealers for sales of such Class A, Class B and Class C
shares as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1998 March 31, 1997 March 31, 1996
-------------------------------- ----------------------------- ------------------------------
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 $ 1,874,465 $ 0 $ 2,182,843 $ 0 $ 2,472,751
Class B $ 604,906 $ 2,809,146 $ 493,705 $ 3,153,798 $ 734,173 $ 2,802,176
Class C $ 7,193 $ 98,814 $ 61,492 $ 140,483 $ 4,449 $ 100,380
</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 C shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to underwriters, securities dealers
and others engaged in the sale of shares, including payments to the Distributor
to be used to pay commissions and/or reimbursement to securities dealers (which
securities dealers may be affiliates of the Distributor) engaged in the
distribution and marketing of shares and furnishing ongoing assistance to
investors, (2) reimbursement of direct out-of-pocket expenditures incurred by
the Distributor in connection with the distribution and marketing of shares and
the servicing of investor accounts including expenses relating to the
formulation and implementation of marketing strategies and promotional
activities such as direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising, the preparation, printing and
distribution of Prospectuses of the Fund and reports for recipients other than
existing shareholders of the Fund, and obtaining such information, analyses and
reports with respect to marketing and promotional activities and investor
accounts as the Fund may, from time to time, deem advisable, and (3)
reimbursement of expenses incurred by the Distributor in connection with the
servicing of shareholder accounts including payments to securities dealers and
others in consideration of the provision of personal 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.
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) or others for
personal services and/or the maintenance of shareholder accounts. A portion of
any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance or servicing of
shareholder accounts by such dealers. Dealers who have sold Class A shares are
eligible for further reimbursement commencing as of the time of such sale.
Dealers who have sold Class B and Class C shares are eligible for further
reimbursement after the first year during which such shares have been held of
record by such dealer as nominee for its clients (or by such clients directly).
Any service fees received by the Distributor and not allocated to dealers may be
applied by the Distributor
49
<PAGE>
in reduction of expenses incurred by it directly for personal services and the
maintenance or servicing of shareholder accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to dealers for selling such shares. Any distribution fees
received by the Distributor and not allocated to dealers may be applied by the
Distributor in connection with sales or marketing efforts, including special
promotional fees and cash and noncash incentives based upon sales by dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs similar
expenses on behalf of, such other funds. When expenses of the Distributor cannot
be identified as relating to a specific fund, the Distributor allocates expenses
among the funds in a manner deemed fair and equitable to each fund.
Commissions and other cash and noncash incentives and payments to
dealers, to the extent payable out of the general profits, revenues or other
sources of the Distributor (including the advisory fees paid by the Fund), have
also been authorized pursuant to the Distribution Plan.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class C shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class C
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class C shares (as the case may be) to make payments for personal
services and/or the maintenance or servicing of shareholder accounts. The
distribution and servicing expenses of a particular class will be borne solely
by that class. In addition, a rule of the NASD limits annual expenditures that
the Fund may incur under the Distribution Plan to 1%, of which 0.75% may be used
to pay distribution expenses and 0.25% may be used to pay shareholder service
fees. The NASD rule also limits the aggregate amount that the Fund may pay for
such distribution costs to 6.25% of gross share sales of a class since the
inception of any asset-based sales charge plus interest at the prime rate plus
1% on unpaid amounts thereof (less any contingent deferred sales charges). Such
limitation does not apply to shareholder service fees. Payments to the
Distributor or to dealers funded under the Distribution Plan may be discontinued
at any time.
The Distributor may pay certain dealers and other intermediaries
additional compensation for sales and administrative services. The Distributor
may provide cash and noncash incentives to intermediaries who, for example, sell
significant amounts of shares or develop particular distribution channels. The
Distributor may compensate dealers with clients who maintain their investments
in the Fund over a period of years. The incentives can include merchandise and
trips to, and attendance at, sales seminars at resorts. The Distributor may pay
for administrative services, such as technological and
50
<PAGE>
computer systems support for the maintenance of pension plan participant
records, for subaccounting, and for distribution through mutual fund
supermarkets or similar arrangements.
During the fiscal year ended March 31, 1998, 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 C*
------- ------- --------
<S> <C> <C> <C>
Advertising $ 0 $ 0 $ 17,748
Printing and mailing of prospectuses
to other than current shareholders 0 0 4,525
Compensation to dealers 1,717,282 2,974,244 234,377
Compensation to sales personnel 0 0 37,598
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses: marketing; general 0 0 19,460
---------- ---------- --------
Total fees $1,717,282 $2,974,244 $313,708
</TABLE>
- -----------------
* Prior to November 1, 1997, the Fund's current Class C shares were designated
as Class D shares.
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 make alternative
arrangements for such services for shareholders who acquired shares through such
institutions.
51
<PAGE>
CALCULATION OF PERFORMANCE DATA
From time to time, in advertisements or in communications to
shareholders or prospective investors, the Fund may compare the performance of
its Class A, Class B, Class C or Class S shares to the performance of other
mutual funds with similar investment objectives, to certificates of deposit
and/or to other financial alternatives. The Fund may also compare its
performance to appropriate indices, such as Standard & Poor's 500 Index,
Consumer Price Index and Dow Jones Industrial Average and/or to appropriate
rankings and averages such as those compiled by Lipper Analytical Services,
Inc., Morningstar, Inc., Money Magazine, Business Week, Forbes Magazine, The
Wall Street Journal and Investor's Daily. For example, the performance of the
Fund might be compared to the Lipper High Current Yield Fund category.
The average annual total return ("standard total return") of the Class
A, Class B, Class C and Class S shares of the Fund will be calculated as set
forth below. Total return is 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 on June 1, 1993, when designations were assigned
based on the pricing and Rule 12b-1 fees applicable to shares sold thereafter.
The application of the additional Rule 12b-1 fees, if any, of up to 1% will, for
periods after June 1, 1993, adversely affect Fund performance results. Thus,
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.
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<PAGE>
The performance data below reflect Rule 12b-1 fees, where applicable,
sales charges as follows:
<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* 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
S* None 0.25% until June 1, 1993; None
0% thereafter
</TABLE>
- --------------------
* Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
All calculations of performance data in this section reflect the
voluntary measures, if any, by the Fund's affiliates to reduce fees or expenses
relating to the Fund; see "Accrued Expenses and Recurring Charges" later in this
section.
Total Return
The Fund's standard average annual total returns ("standard total
return") of each class of shares were as follows:
<TABLE>
<CAPTION>
Ten Years Five Years One Year
Ended Ended Ended
March 31, 1998 March 31, 1998 March 31,1998
-------------- -------------- -------------
<S> <C> <C> <C>
Class A 10.64% 10.90% 15.54%
Class B 10.71% 10.77% 15.02%
Class C 10.72% 11.05% 18.99%
Class S 11.24% 12.10% 21.22%
</TABLE>
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
53
<PAGE>
initial amount invested, would produce the ending redeemable value in accordance
with the following formula:
P(1+T)(n) = ERV
<TABLE>
<S> <C> <C> <C>
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
</TABLE>
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 1998 was as follows:
<TABLE>
<S> <C>
Class A 6.18%
Class B 5.46%
Class C 5.46%
Class S 6.41%
</TABLE>
Yield for each of the Fund's Class A, Class B, Class C and Class S
shares is computed by dividing the net investment income per share earned during
a recent month or other specified 30-day period by the maximum offering price
per share on the last day of the period and annualizing the result in accordance
with the following formula:
YIELD = 2[(a-b + 1)(6) -1]
---
cd
54
<PAGE>
<TABLE>
<S> <C> <C> <C>
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
</TABLE>
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.
55
<PAGE>
Accrued Expenses and Recurring Charges
Accrued expenses include all recurring charges that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return results take sales charges, if applicable, into account,
although the results do not take into account recurring and nonrecurring charges
for optional services which only certain shareholders elect and which involve
nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by
affiliates of fees or expenses during the subject period. In the absence of such
subsidization, the performance of the Fund 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 S 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, 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, 1998 without taking sales charges into account, were
as follows:
<TABLE>
<S> <C>
Class A 6.84%
Class B 6.32%
Class C 6.31%
Class S 6.85%
</TABLE>
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
56
<PAGE>
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 1998,
were as follows:
<TABLE>
<S> <C>
Class A 8.23%
Class B 7.91%
Class C 7.90%
Class S 8.92%
</TABLE>
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 Fund's annual financial statements, (2) assistance
and consultation in connection with SEC filings and (3) review of the annual
income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a
semiannual basis, other supplementary financial reports may be made available
from time to time through electronic or other media. Shareholders with
substantial holdings in one or more State Street Research Funds may also receive
reports and other information which reflect or analyze their positions in a
consolidated manner. For more information, call State Street Research Service
Center.
The following financial statements are for the Fund's fiscal year
ended March 31, 1998:
57
<PAGE>
<TABLE>
STATE STREET RESEARCH HIGH INCOME FUND
- -------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------------------------------------------
March 31, 1998
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Principal Maturity Value
Amount Date (Note 1)
- -------------------------------------------------------------------------------------------------------------
BONDS 75.2%
AEROSPACE/DEFENSE 0.5%
<S> <C> <C> <C>
L-3 Communications Corp. Sr. Sub. Note, 10.375% .. $ 2,625,000 5/01/2007 $2,907,188
Tracor Inc. Sr. Sub. Deb., 8.50% ................. 3,000,000 3/01/2007 3,101,250
----------
6,008,438
----------
AIRLINES 0.2%
Kitty Hawk Inc. Sr. Sec. Note, 9.95%+ . 2,500,000 11/15/2004 2,581,250
----------
CABLE TELEVISION 1.1%
American Telecasting Inc. Sr. Note, 0.00% to
6/14/99, 14.50% from 6/15/99 to maturity ....... 17,785,372 6/15/2004 3,734,928
American Telecasting Inc. Sr. Note Series B, 0.00%
to 8/14/2000, 14.50% from 8/15/2000 to maturity. 2,265,000 8/15/2005 453,000
Falcon Holding Group L.P. Sr. Deb., 8.375%+ ...... 8,500,000 4/15/2010 8,477,220
----------
12,665,148
----------
CAPITAL GOODS/EQUIPMENT 2.2%
Alvey Systems Inc. Sr. Sub. Note, 11.375% ........ 5,625,000 1/31/2003 6,046,875
Columbus McKinnon Corp. Sr. Sub. Note, 8.50%+ .... 3,000,000 4/01/2008 3,015,000
Elgar Holdings Inc. Sr. Note, 9.875%+ . 3,750,000 2/01/2008 3,787,500
International Knife & Saw Inc. Sr. Sub. Note,
11.375% ........................................ 3,650,000 11/15/2006 4,005,875
Tokheim Corp. Sr. Sub. Note Series B, 11.50% ..... 6,875,000 8/01/2006 7,665,625
----------
24,520,875
----------
CHEMICALS/FERTILIZERS 0.2%
American Pacific Corp. Sr. Sub. Note, 9.25%+ ..... 2,750,000 3/01/2005 2,832,500
----------
CONGLOMERATE 3.8%
Amphenol Corp. Sr. Sub. Note, 9.875% ............. 1,000,000 5/15/2007 1,070,000
Axia Inc. Sr. Sub. Note Series B, 11.00% ......... 394,000 3/15/2001 401,092
Elgin National Industries Inc. Sr. Note, 11.00%+ . 2,700,000 11/01/2007 2,868,750
ICF International Inc. Sr. Sub. Note, 13.00% ..... 9,500,000 12/31/2003 9,880,000
International Utility Structures Inc. Sr. Sub.
Note, 10.75%+ .................................. 2,500,000 2/01/2008 2,593,750
J.B. Poindexter Inc. Sr. Note, 12.50% ............ 8,250,000 5/15/2004 8,250,000
Numatics Inc. Sr. Sub. Note, 9.625%+ . 3,300,000 4/01/2008 3,378,375
Owens-Illinois Inc. Sr. Note, 8.10% .............. 10,000,000 5/15/2007 10,616,100
Purina Mills Inc. Sr. Sub. Note, 9.00%+ . 2,500,000 3/15/2010 2,581,250
----------
41,639,317
----------
CONSUMER GOODS & SERVICES 12.3%
Anchor Advanced Products Inc. Sr. Note Series B,
11.75% ......................................... 3,000,000 4/01/2004 3,285,000
Drypers Corp. Series B Sr. Note, 10.25% .......... 9,250,000 6/15/2007 9,643,125
Empire Gas Corp. Sr. Sec. Note, 7.00% to 7/14/99,
12.875% from 7/15/99 to maturity ............... 16,100,000 7/15/2004 13,966,750
Intertek Finance PLC Series B Sr. Sub. Note,
10.25% ......................................... 17,900,000 11/01/2006 18,974,000
Krystal Co. Sr. Note, 10.25% ..................... 7,250,000 10/01/2007 7,540,000
La Petite Holdings Corp. Sr. Sec. Note, 9.625% ... 10,750,000 8/01/2001 11,018,750
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 9,210,400
North Atlantic Trading Inc. Sr. Note, 11.00% ..... 12,500,000 6/15/2004 12,968,750
Pagemart Nationwide Inc. Sr. Exch. Note, 0.00% to
1/31/2000, 15.00% from 2/1/2000 to maturity .... 25,275,000 2/01/2005 22,494,750
Real Time Data Inc. Sub. Note, 0.00% to 8/14/2001,
13.50% from 8/15/2001 to maturity+ ............. 25,250,000 8/15/2006 13,887,500
Rose Hills Co. Sr. Sub. Note, 9.50% .............. 4,750,000 11/15/2004 4,963,750
Shop Vac Corp. Sr. Sec. Note, 10.625% ............ 7,500,000 9/01/2003 8,175,000
-----------
136,127,775
-----------
COSMETICS 0.8%
French Fragrances Inc. Sr. Note Series B, 10.375% 8,250,000 5/15/2007 8,786,250
-----------
ENTERTAINMENT/LEISURE 0.4%
SFX Entertainment Inc. Sr. Sub. Note, 9.125%+ .... 4,000,000 2/01/2008 3,960,000
-----------
<PAGE>
FOOD & BEVERAGE 2.1%
Archibald Candy Corp. Sr. Sec. Note, 10.25% ...... 17,000,000 7/01/2004 18,147,500
Silgan Holdings Inc. Sub. Deb., 13.25% ........... 1,123,000 7/15/2006 1,274,605
Tom's Foods Inc. Sr. Sec. Note, 10.50%+ .......... 3,750,000 11/01/2004 3,787,500
-----------
23,209,605
-----------
GAMING & LODGING 0.6%
Ameristar Casinos Inc. Sr. Sub. Note, 10.50% ..... 6,750,000 8/01/2004 7,222,500
-----------
GROCERY 0.6%
Pathmark Stores Inc. Sub. Note, 11.625% 3,250,000 6/15/2002 3,201,250
Safeway Inc. Lease Certificate, 13.50% ........... 90,123 1/15/2009 135,185
Star Market Inc. Sr. Sub. Note, 13.00% ........... 2,500,000 11/01/2004 2,850,000
Victory Markets Inc. Sub. Deb., 12.50%[ ] ........ 925,000 3/15/2000 46,250
-----------
6,232,685
-----------
HOSPITAL/HEALTH CARE 2.0%
Dade International Inc. Sr. Sub. Note, 11.125% ... 4,000,000 5/01/2006 4,470,000
Quest Diagnostics Inc. Sr. Sub. Note, 10.75% ..... 8,500,000 12/15/2006 9,520,000
Unilab Corp. Sr. Note, 11.00% .................... 7,400,000 4/01/2006 7,807,000
----------
21,797,000
----------
HOTEL & RESTAURANT 0.2%
Extended Stay America Inc. Sr. Sub. Note, 9.15%+ . 2,000,000 3/15/2008 2,005,000
----------
MEDIA 7.5%
Allbritton Communications Co. Sr. Sub. Deb., 9.75% 9,345,000 11/30/2007 9,835,612
Benedek Broadcasting Corp. Sr. Note, 11.875% ..... 6,250,000 3/01/2005 7,046,875
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 13,200,000
Busse Broadcasting Corp. Sr. Sec. Note, 11.625% .. 4,000,000 10/15/2000 4,315,000
CapStar Broadcasting Partners Sr. Note, 0.00% to
1/31/2002, 12.75% from 2/1/2002 to maturity .... 15,750,000 2/01/2009 11,891,250
CD Radio Inc. Sr. Note, 0.00% to
11/30/2002, 15.00% from 12/1/2002 to maturity .. 750,000 12/01/2007 405,000
Intermedia Capital Partners LP Sr. Note, 11.25% .. 6,250,000 8/01/2006 7,031,250
K-III Communications Corp. Sr. Note, 8.50% ....... 950,000 2/01/2006 973,750
Primedia Inc. Sr. Note, 7.625%+ .................. 8,250,000 4/01/2008 8,105,625
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 15,237,500
Telemundo Group Inc. Sr. Note, 7.00% to 2/14/99,
10.50% from 2/15/99 to maturity ................ 4,250,000 2/15/2006 4,515,625
----------
82,557,487
----------
METALS/MINING/STEEL 3.3%
Crown Resources Corp. Cv. Sub. Deb., 5.75% ....... 220,000 8/27/2001 171,600
Envirosource Inc. Note, 9.75% .................... 19,000,000 6/15/2003 19,427,500
Envirosource Inc. Sr. Note Series B, 9.75%+ ...... 3,250,000 6/15/2003 3,315,000
GS Technologies Operating Inc. Sr. Note, 12.00% .. 5,250,000 9/01/2004 5,840,625
Johnstown America Industries Inc. Sr. Sub. Note
Series C, 11.75% ............................... 4,875,000 8/15/2005 5,460,000
Kaiser Aluminum & Chemical Corp. Sr. Sub. Note,
12.75% ......................................... 2,500,000 2/01/2003 2,665,625
----------
36,880,350
----------
OIL & GAS 0.9%
Moran Energy Inc. Cv. Deb., 8.75% ................ 2,420,000 1/15/2008 2,401,850
Wainoco Oil Corp. Sr. Note, 9.125%+ .............. 7,250,000 2/15/2006 7,213,750
----------
9,615,600
----------
OIL SERVICE 4.1%
Newpark Resources Inc. Sr. Sub. Note, 8.625%+ .... 3,300,000 12/15/2007 3,374,250
Pool Energy Services Co. Sr. Sub. Note, 8.625%+ .. 6,400,000 4/01/2008 6,432,000
Transamerican Energy Corp. Sr. Sec. Note Series B,
0.00% to 6/14/2000, 13.00% from 6/15/2000 to
maturity ....................................... 21,750,000 6/15/2002 18,270,000
Transamerican Energy Corp. Sr. Sec. Note Series B,
11.50% ......................................... 17,500,000 6/15/2002 17,325,000
----------
45,401,250
----------
PAPER PRODUCTS 0.1%
Bear Island Paper Co. LLC Sr. Sec. Note Series B,
10.00% ......................................... $ 1,000,000 12/01/2007 1,033,750
Crown Packaging Enterprise Ltd. Sr. Sec. Note,
0.00% to 7/31/2003, 14.00% from 8/1/2003 to
maturity ....................................... 9,000,000 8/01/2006 450,000
----------
1,483,750
----------
PRINTING & PUBLISHING 2.0%
American Lawyer Media Holdings, Inc. Sr. Note,
0.00% to 12/14/2002, 12.50% from 12/15/2002 to
maturity+ 2,650,000 12/15/2008 1,689,375
American Lawyer Media Holdings, Inc. Sr. Sub.
Note, 9.75%+ ................................... 9,350,000 12/15/2007 9,794,125
<PAGE>
Sun Media Corp. Sr. Sub. Note, 9.50% ............. 3,555,000 2/15/2007 3,839,400
Sun Media Corp. Sr. Sub. Note, 9.50% ............. 3,315,000 5/15/2007 3,563,625
Transwestern Holdings L.P. Sr. Note, 0.00% to 11/
14/2002, 11.875% from 11/15/2002 to maturity+ .. 1,700,000 11/15/2008 1,168,750
Transwestern Publishing Co. L.P. Sr. Sub. Note,
9.625%+ ........................................ 1,750,000 11/15/2007 1,850,625
----------
21,905,900
----------
PLASTICS 1.7%
Packaging Resources Inc. Sr. Sec. Note, 11.625% .. 12,250,000 5/01/2003 12,005,000
Tekni-Plex Inc. Series B Sr. Sub. Note, 11.25% ... 6,250,000 4/01/2007 7,015,625
----------
19,020,625
----------
RETAIL TRADE 1.5%
J Crew Operating Corp. Sr. Sub. Note, 10.375%+ ... 4,000,000 10/15/2007 3,760,000
Loehmanns Inc. Sr. Note, 11.875% ................. 6,160,000 5/15/2003 5,759,600
NBTY Inc. Sr. Sub. Note Series B, 8.625% ......... 1,900,000 9/15/2007 1,947,500
Phar-Mor, Inc. Note, 11.72% ...................... 4,564,000 9/11/2002 4,883,480
----------
16,350,580
----------
SHIPPING/TRANSPORTATION 5.2%
CHC Helicopter Corp. Sr. Sub. Note, 11.50% ....... 12,914,000 7/15/2002 13,753,410
First Wave Marine Inc. Sr. Note, 11.00% .......... 2,500,000 2/01/2008 2,618,750
Golden Ocean Group Ltd. Sr. Note, 10.00%+ ........ 9,750,000 8/31/2001 7,800,000
International Shipholding Corp. Sr. Note, 7.75%+ . 6,650,000 10/15/2007 6,533,625
International Shipholding Corp. Sr. Note, 9.00% .. 4,500,000 7/01/2003 4,618,125
Johnstown America Industries Inc. Sr. Sub. Note,
11.75% ......................................... 5,250,000 8/15/2005 5,880,000
Pegasus Shipping Hellas Ltd. Sr. Note, 11.875%+ .. 3,500,000 11/15/2004 3,482,500
Sea Containers Ltd. Sr. Note,
7.875%+ ........................................ 7,500,000 2/15/2008 7,387,500
Stena AB Sr. Note, 8.75% ......................... 5,250,000 6/15/2007 5,407,500
----------
57,481,410
----------
TECHNOLOGY/COMMUNICATIONS 21.9%
Advanced Radio Telecom Corp. Sr. Note, 14.00% .... 2,200,000 2/15/2007 2,376,000
Argo Tech Corp. Sr. Sub. Note, 8.625% ............ 3,000,000 10/01/2007 3,075,000
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 5,955,250
Cellnet Data Systems Inc. Sr. Note Series B, 0.00%
to 9/30/2002, 14.00% from 10/1/2002 to maturity 5,000,000 10/01/2007 2,650,000
Clearnet Communications Inc. Sr. Note, 0.00% to
12/14/2000, 14.75% from 12/15/2000 to maturity . 12,850,000 12/15/2005 10,601,250
Concentric Network Corp. Sr. Note, 12.75%+ ....... 1,500,000 12/15/2007 1,758,750
Dobson Communications Corp. Sr. Note, 11.75% ..... 4,100,000 4/15/2007 4,510,000
Econophone Inc. Sr. Note, 0.00% to 2/14/2003,
11.00% from 2/15/2003 to maturity+ ............. 5,850,000 2/15/2008 3,363,750
Econophone Inc. Sr. Note, 13.50% ................. 18,750,000 7/15/2007 21,562,500
ICG Holdings Inc. Sr. Note, 0.00% to
9/14/2000, 13.50% from 9/15/2000 to maturity ... 17,850,000 9/15/2005 15,217,125
ICG Services Inc. Sr. Note, 0.00% to
2/14/2003, 10.00% from 2/15/2003 to maturity+ .. 7,250,000 2/15/2008 4,658,125
Ionica PLC Sr. Note, 13.50% ...................... 10,250,000 8/15/2006 8,405,000
ITC Deltacom Inc. Sr. Note, 8.875%+ .............. 3,000,000 3/01/2008 3,090,000
Microcell Telecommunications Sr. Note Series B,
0.00% to 11/30/2001, 14.00% from 12/1/2001 to
maturity ....................................... 4,750,000 6/01/2006 3,526,875
Microcell Telecommunications, Inc. Sr. Note Series
B, 0.00% to 10/14/2002, 11.125% from 10/15/2002
to maturity .................................... 23,250,000 10/15/2007 10,420,122
Mobile Telecommunication Technology, Inc. Sr. Sub.
Note, 13.50% ................................... 4,500,000 12/15/2002 5,298,750
Nextel Communications Inc. Sr. Note, 0.00% to
2/14/2003, 9.95% from 2/15/2003 to maturity+ ... 4,500,000 2/15/2008 2,868,750
Orion Network Systems Inc. Sr. Note, 11.25% ...... 10,000,000 1/15/2007 11,600,000
Pagemart Wireless Inc. Sr. Sub. Note, 0.00% to
1/31/2003, 11.25% from 2/1/2003 to maturity+ ... 2,500,000 2/01/2008 1,543,750
Paging Network Do Brasil SA Sr. Note, 13.50% ..... 750,000 6/06/2005 759,375
Phase Metrics Inc. Sr. Note, 10.75%+ ............. 10,750,000 2/01/2005 10,750,000
Primus Telecommunications Group Sr. Note, 11.75% . 8,750,000 8/01/2004 10,018,750
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 6,810,000
RSL Communications Ltd. Sr. Note, 12.25% ......... 12,639,000 11/15/2006 14,408,460
Sitel Corp. Sr. Sub. Note, 9.25%+ ................ 6,250,000 3/15/2006 6,406,250
Trump Atlantic City Associates First Mortgage
Note, 11.25% ................................... 3,550,000 5/01/2006 3,647,625
U.S.A. Mobile Communications Inc. Sr. Note, 14.00% 21,250,000 11/01/2004 23,587,500
Viatel Inc. Sr. Note, 0.00% to 1/14/2000, 15.00%
from 1/15/2000 to maturity ..................... 8,690,000 1/15/2005 8,516,200
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 9,787,500
Winstar Equipment Corp. Sr. Sec. Exch. Note,
12.50% ......................................... 16,500,000 3/15/2004 18,892,500
Wireless One Inc. Sr. Note, 13.00% ............... 10,600,000 10/15/2003 2,968,000
Wireless One Inc. Sr. Note, 0.00% to 7/31/2001,
13.50% from 8/1/2001 to maturity ............... 26,750,000 8/01/2006 3,210,000
<PAGE>
-----------
242,243,157
-----------
Total Bonds (Cost $825,749,518) ......................................................... 832,528,452
-----------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
SHARES
- ------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS 14.8%
BANK 0.2%
<S> <C> <C>
Riverbank America Pfd.* ..................................... 110,000 2,640,000
----------
BUSINESS SERVICE 1.5%
La Petite Academy Inc. Cl. A Exch. Pfd.* .................... 361,000 16,606,000
----------
CHEMICAL 0.0%
KTI Inc. Cv. Exch. Pfd.+ .................................... 10,000 397,500
----------
ELECTRONIC COMPONENTS 1.1%
Nextel Communications Inc. Series D Exch. Pfd. # ............ 10,371 2,038,138
----------
FOREST PRODUCT 0.2%
Equitable Bag Inc. Series A Pfd.* ........................... 134,760 12,021,400
----------
HOTEL & RESTAURANT 0.6%
Ameriking Inc. Sr. Exch. Pfd.*# ............................. 223,961 6,046,947
---------
MEDIA 2.8%
American Radio Systems Corp. Series B Exch. Pfd.#............ 13,160 1,552,880
Benedek Communications Corp. Sr. Exch. Pfd.+# ............... 55,000 8,112,500
Granite Broadcasting Corp. Cv. Exch. Pfd. ................... 114,700 6,523,562
Granite Broadcasting Corp. Exch. Pfd.# ...................... 12,904 14,710,560
---------
30,899,502
---------
NATURAL GAS 0.2%
International Utility Structures Inc. Exch. Pfd.+# .......... 1,750 1,833,125
---------
OIL 0.9%
Clark U.S.A. Inc. Sr. Exch. Pfd. # .......................... 9,224 10,169,460
---------
HOSPITAL SUPPLY 0.3%
Laboratory Corp. of America Exch. Pfd. Series A * ........... 74,500 3,566,688
---------
PERSONAL CARE 0.0%
Renaissance Cosmetics Inc. Series C Sr. Pfd.* ............... 1,231 123,100
---------
PRINTING & PUBLISHING 4.3%
Hollinger International, Inc. Cv. Pfd. ...................... 2,252,000 32,231,750
Primedia Inc. Exch. Pfd. Series D ........................... 80,000 8,500,000
Primedia Inc. Exch. Pfd. Series F ........................... 64,500 6,611,250
---------
47,343,000
----------
RETAIL TRADE 1.5%
North Atlantic Trading Inc. Sr. Pfd.*# ...................... 173,803 4,736,132
Supermarkets General Holdings Corp. Exch. Pfd.# ............. 568,540 11,939,340
----------
16,675,472
----------
TELEPHONE 1.0%
ICG Holdings Inc. Exch. Pfd.* ............................... 8,688 10,686,240
----------
TOBACCO 0.2%
DECS Trust Exch. Pfd. ....................................... 148,000 2,590,000
-----------
Total Preferred Stocks (Cost $149,516,548) .................. 163,636,572
-----------
COMMON STOCKS & OTHER 7.0%
Advanced Radio Telecom Corp. Wts.* .......................... 52,500 1,124,550
American Communications Services, Inc. Wts.*+ ............... 9,500 1,520,000
American Telecasting Inc. Wts.* ............................. 41,130 41,130
Ameriking Inc. Com.*+ ....................................... 4,775 238,750
Anacomp Inc. Com.* .......................................... 873,507 13,320,982
Anacomp Inc. Wts.* .......................................... 25,940 184,012
Axia Holding Corp. Com.*(+) ................................. 2,250 227,250
Bar Technologies Inc. Wts.*+ ................................ 4,250 255,000
Belle Casinos Inc. Wts.*+ ................................... 1,400 14
Boomtown Inc. Wts.*+ ........................................ 7,250 7
Celcaribe SA Trust Certificates *+ .......................... 944,706 3,778,824
Central Rents Inc. Com.*+ ................................... 5,250 288,750
Chatwins Group Inc. Wts.*+ .................................. 7,000 7,000
CHC Helicopter Corp. Wts.*(+) ............................... 46,000 138,000
CHI Energy Inc. Cl. B Wts.* ................................. 5,052 50
CHI Energy Inc. Cl. C Wts.* ................................. 3,279 33
Clearnet Communications Inc. Wts.* .......................... 78,705 826,402
<PAGE>
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 10,375
Dr Pepper Bottling Holdings Inc. Cl. A Com.* ................ 50,000 1,400,000
Econophone Inc. Wts.*+ ...................................... 14,750 590,000
Empire Gas Corp. Wts.*(+) ................................... 2,760 2,760
Equitable Bag Inc. Com.* .................................... 1,347,600 539,040
Fitzgeralds South Inc. Wts.*(+) ............................. 3,750 37,500
Fred Meyer Inc. Com.* ....................................... 197,230 9,109,563
Golden Ocean Group Ltd. Com.*+ .............................. 5,500 27,500
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.*(+) ............ 37,500 375
ICF Kaiser International Inc. Wts. * ........................ 49,200 24,600
Indspec Chemical Corp. Wts.*(+)@ ............................ 506 1,098,875
Insight Communications L.P. Unit *(+) ....................... 105,500 105,500
Intelcom Group, Inc. Wts.*(+) ............................... 21,450 536,250
Intermedia Communications Inc. Wts.*+ ....................... 1,500 241,500
Ionica PLC Wts.*+ ........................................... 9,500 950,000
Jewel Recovery L.P. Units *(+) .............................. 82,595 826
Ladish Inc. Com.*(+) ........................................ 86,667 1,332,500
Ladish Inc. Wts.*(+) ........................................ 150,946 2,139,657
Lyondell Petrochemical Co. Com. ............................. 550,000 18,734,375
Mail-Well Holdings, Inc. Com.*(+) ........................... 21,307 807,003
Motels of America Inc. Com.*+ ............................... 5,500 55,000
Nextel Communications Inc. Cl. A Com.* ...................... 41,442 1,398,668
Nextel Communications Inc. Wts.* ............................ 1,250 3,613
NS Group Inc. Wts.*+ ........................................ 13,250 1,987,500
Orion Network Systems Inc. Wts.*+ ........................... 14,500 174,000
Pagemart Inc. Wts.*+ ........................................ 21,850 163,875
Pagemart Nationwide Inc. Com.*+ ............................. 18,375 158,484
Paging Brazil Holdings Co. LLC Cl. B Com.*+ ................. 750 8
Pegasus Communications Corp. Cl. A Com.*+ ................... 8,461 194,603
Powertel Inc. Wts.* ......................................... 8,480 89,040
Primus Telecommunications Group Wts.*+ ...................... 6,500 19,500
Protection One Inc. Wts.*+ .................................. 10,400 140,400
Renaissance Cosmetics Inc. Wts.*+ ........................... 3,000 2,010
RSL Communications Ltd. Wts.*+ .............................. 13,500 1,215,000
Sabreliner Corp. Wts.*+ ..................................... 1,750 17,500
Seven-Up/RC Bottling Co. of
Southern California Com.* ................................. 472,500 5,670,000
Sheffield Steel Corp. Com.*+ ................................ 38,750 116,250
Tom Brown, Inc. Com.* ....................................... 180,000 4,027,500
Town & Country Corp. Cl. A Com.*+ ........................... 195,632 12,227
Vestar/LPA Investment Corp. Com. *+ ......................... 14,250 199,500
Viatel Inc. Com.* ........................................... 108,300 1,489,125
Waxman Industries Inc. Wts.*+ ............................... 236,000 590,000
Wireless One Inc. Wts.*+ .................................... 16,500 165
Wireless One Inc. Wts.* ..................................... 27,250 1,363
----------
Total Common Stocks & Other (Cost $45,124,272) .............. 77,449,242
----------
SHORT-TERM INVESTMENTS 4.5%
Navigator Securities Lending Prime Portfolio ................ 49,602,170 49,602,170
----------
Total Short-Term Investments (Cost $49,602,170) ............. 49,602,170
----------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PRINCIPAL MATURITY
AMOUNT DATE
- --------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER 0.8%
<S> <C> <C> <C>
Ford Motor Credit Co., 5.62% .................... $6,902,000 4/01/1998 6,902,000
Merrill Lynch & Co. Inc., 5.85% ................. 2,149,000 4/03/1998 2,148,302
--------------
Total Commercial Paper (Cost $9,050,302) ............................................... 9,050,302
--------------
REPURCHASE AGREEMENTS 0.3%
State Street Bank and Trust Co., dated 3/31/98,
4.25%, repurchase proceeds $3,619,427,
collateralized by $3,655,000 U.S. Treasury
Note, 6.00%, due 5/31/98, market value
$3,731,897 .................................... 3,619,000 4/01/1998 3,619,000
---------------
Total Repurchase Agreements (Cost $3,619,000) .......................................... 3,619,000
---------------
Total Investments (Cost $1,082,661,810) - 102.6% ....................................... 1,135,885,738
Cash and Other Assets, Less Liabilities - (2.6%) ....................................... (28,938,411)
---------------
Net Assets - 100.0% .................................................................... $1,106,947,327
==============
Federal Income Tax Information (Note 1):
At March 31, 1998, the net unrealized appreciation of
investments based on cost for Federal income tax purposes
of $1,082,752,776 was as follows:
<PAGE>
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost ........... $ 113,349,339
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value ......... (60,216,377)
--------------
$ 53,132,962
==============
</TABLE>
* 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, 1998, 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,
1988 were $3,069,732 and $6,499,754 (0.59% of net assets), respectively.
+ Security restricted in accordance with Rule 144A under the Securities Act
of 1933, which allows for the resale of such secur ities among certain
qualified institutional buyers. The total cost and market value of Rule
144A securities owned at March 31, 199 8 were $184,880,691 and
$195,186,462 (17.63% of net assets), respectively.
Forward currency exchange contracts outstanding at March 31, 1998, are as
follows:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACT APPRECIATION DELIVERY
TOTAL VALUE PRICE (DEPRECIATION) DATE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sell Canadian dollars, Buy U.S. dollars 5,900,000 CAD 0.70388 CAD $(13,608) 4/23/98
Sell Canadian dollars, Buy U.S. dollars 7,950,000 CAD 0.69575 CAD (82,964) 4/23/98
--------
$(96,572)
========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------------------
March 31, 1998
ASSETS
<S> <C>
Investments, at value (Cost $1,082,661,810) (Note 1) $1,135,885,738
Cash .................................................................. 550
Receivable for securities sold ........................................ 25,009,620
Interest and dividends receivable ..................................... 19,531,452
Receivable for fund shares sold ....................................... 2,120,571
Other assets .......................................................... 42,064
--------------
1,182,589,995
LIABILITIES
Payable for collateral received on securities loaned 49,602,170
Payable for securities purchased ...................................... 20,234,615
Dividends payable ..................................................... 3,066,601
Payable for fund shares redeemed ...................................... 926,864
Accrued management fee (Note 2) ....................................... 601,873
Accrued distribution and service fees (Note 4) ........................ 446,852
Accrued transfer agent and shareholder services
(Note 2) ............................................................ 395,992
Payable for open forward contracts .................................... 96,572
Accrued trustees' fees (Note 2) ....................................... 20,849
Other accrued expenses ................................................ 250,280
--------------
75,642,668
--------------
NET ASSETS $1,106,947,327
==============
Net Assets consist of:
Undistributed net investment income ................................. $ 2,927,957
Unrealized appreciation of investments .............................. 53,223,928
Unrealized depreciation of forward contracts ........................ (96,572)
Accumulated net realized gain ....................................... 11,432,291
Paid-in capital ..................................................... 1,039,459,723
--------------
$1,106,947,327
==============
Net Asset Value and redemption price per share of
Class A shares ($718,705,462 / 108,622,224 shares) .................. $6.62
=====
Maximum Offering Price per share of Class A shares ($6.62 / .955) ..... $6.93
=====
Net Asset Value and offering price per share of Class
B shares ($345,796,702 / 52,518,757 shares)* ........................ $6.58
=====
Net Asset Value and offering price per share of Class
C shares ($34,585,642 / 5,248,228 shares)* .......................... $6.59
=====
Net Asset Value, offering price and redemption price
per share of Class S shares ($7,859,521 /
1,194,458 shares) ................................................... $6.58
=====
- --------------------------------------------------------------------------------------------------
* Redemption price per share for Class B and Class C is equal to net
asset value less any applicable contingent deferred sales charge.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------------------------
For the year ended March 31, 1998
INVESTMENT INCOME
<S> <C>
Interest (Note 1) ....................................................... $ 92,947,365
Dividends ............................................................... 11,487,180
------------
104,434,545
EXPENSES
Management fee (Note 2) ................................................. 6,649,051
Transfer agent and shareholder services (Note 2) ........................ 1,425,207
Service fee - Class A (Note 4) .......................................... 1,717,282
Distribution and service fees - Class B (Note 4) ........................ 2,974,244
Distribution and service fees - Class C (Note 4) ........................ 313,708
Custodian fee ........................................................... 237,186
Reports to shareholders ................................................. 209,197
Registration fees ....................................................... 85,251
Audit fee ............................................................... 44,743
Trustees' fees (Note 2) ................................................. 38,729
Legal fees .............................................................. 19,029
Miscellaneous ........................................................... 31,842
------------
13,745,469
------------
Net investment income ................................................... 90,689,076
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FOREIGN CURRENCY AND FORWARD CONTRACTS
Net realized gain on investments (Notes 1 and 3) ........................ 37,778,193
Net realized loss on forward contracts and foreign
currency (Note 1) ..................................................... (7,455)
------------
Total net realized gain ............................................... 37,770,738
------------
Net unrealized appreciation of investments .............................. 64,000,857
Net unrealized depreciation of forward contracts ........................ (96,572)
------------
Total net unrealized appreciation ..................................... 63,904,285
------------
Net gain on investments, foreign currency and forward contracts ......... 101,675,023
------------
Net increase in net assets resulting from operations $192,364,099
============
</TABLE>
<PAGE>
<TABLE>
STATE STREET RESEARCH HIGH INCOME FUND
- ------------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------
<CAPTION>
YEARS ENDED MARCH 31
--------------------------------------
1997 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income ..................................... $ 86,554,756 $ 90,689,076
Net realized gain on investments,
foreign currency and forward
contracts ............................................... 5,358,925 37,770,738
Net unrealized appreciation
(depreciation) of investments and
forward contracts ................................... (6,463,064) 63,904,285
------------- --------------
Net increase resulting from operations 85,450,617 192,364,099
------------- --------------
Dividends from net investment income:
Class A ................................................. (58,427,483) (64,944,093)
Class B ................................................. (18,222,317) (26,096,802)
Class C ................................................. (1,682,938) (2,736,047)
Class S ................................................. (463,672) (661,138)
------------- --------------
(78,796,410) (94,438,080)
------------- --------------
Net increase from fund share
transactions (Note 5) ................................... 94,267,308 56,789,130
------------- --------------
Total increase in net assets .............................. 100,921,515 154,715,149
NET ASSETS
Beginning of year ......................................... 851,310,663 952,232,178
------------- --------------
End of year (including undistributed net investment income
of $6,713,699 and $2,927,957, respectively) ............. $ 952,232,178 $1,106,947,327
============= ==============
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
March 31, 1998
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 presently 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. Before November 1, 1997, Class C
shares were designated Class D and Class S shares were designated Class C.
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 subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class C shares also pay annual distribution and service fees of 1.00%. Class S
shares are only offered through certain retirement accounts, advisory accounts
of State Street Research & Management Company (the "Adviser"), an indirect
wholly owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), and special programs. No sales charge is imposed at the time
of purchase or redemption of Class S shares. Class S shares do not pay any
distribution or service fees. 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.
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 in 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
<PAGE>
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 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.
E. 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.
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, 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.
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.
H. SECURITIES LENDING
The Fund may seek additional income by lending portfolio securities to
qualified institutions. The Fund will receive cash or securities as collateral
in an amount equal to at least 100% of the current market value of any loaned
securities plus accrued interest. By reinvesting any cash collateral it
receives in these transactions, the Fund could realize additional gains and
losses. If the borrower fails to return the securities and the value of the
collateral has declined during the term of the loan, the Fund will bear the
loss. At March 31, 1998, the value of the securities loaned and the value of
collateral were $48,574,052 and $49,602,170, respectively. During the year
ended March 31, 1998, income from securities lending amounted to $29,438 and
is included in interest income.
NOTE 2
The Trust and the Adviser 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, 1998, the fees
pursuant to such agreement amounted to $6,649,051.
State Street Research Service Center, 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, employee benefit plans and similar programs or plans, through or
under which shares of the Fund may be purchased. During the year ended March
31, 1998, the amount of such expenses was $312,377.
The fees of the Trustees not currently affiliated with the Adviser amounted to
$38,729 during the year ended March 31, 1998.
NOTE 3
For the year ended March 31, 1998, purchases and sales of securities,
<PAGE>
exclusive of short-term investments, aggregated $741,366,581 and $689,925,487,
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 C shares. In addition,
the Fund pays annual distribution fees of 0.75% of average daily net assets
for Class B and Class C 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, 1998, fees
pursuant to such plan amounted to $1,717,282, $2,974,244 and $313,708 for
Class A, Class B and Class C 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 $262,404 and $1,484,263, respectively, on sales of Class A shares
of the Fund during the year ended March 31, 1998, and that MetLife Securities,
Inc. earned commissions aggregating $1,419,437 on sales of Class B shares, and
that the Distributor collected contingent deferred sales charges aggregating
$604,906 and $7,193 on redemptions of Class B and Class C shares,
respectively, during the same period.
NOTE 5
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share.
Share transactions were as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
-------------------------------------------------------------------------
1997 1998
------------------------------------ -----------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold ................ 15,602,119 $ 94,973,592 12,963,682 $ 82,425,854
Issued upon reinvestment of
dividends from net
investment income .......... 6,212,698 37,840,814 6,618,274 42,225,833
Shares repurchased ......... (20,888,291) (127,047,788) (20,544,433) (130,474,889)
----------- ------------- ----------- -------------
Net increase (decrease) .... 926,526 $ 5,766,618 (962,477) $ (5,823,202)
=========== ============= =========== =============
CLASS B SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
Shares sold ................ 15,907,481 $ 96,551,028 14,827,294 $ 93,945,959
Issued upon reinvestment of
dividends from net
investment income ........ 1,668,549 10,129,956 2,307,608 14,730,736
Shares repurchased ......... (5,605,180) (33,954,283) (7,925,211) (50,115,631)
----------- ------------- ---------- -------------
Net increase ............... 11,970,850 $ 72,726,701 9,209,691 $ 58,561,064
=========== ============= ========== =============
CLASS C (FORMERLY CLASS D) SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
Shares sold ................ 2,630,966 $ 16,046,241 2,027,089 $ 12,888,653
Issued upon reinvestment of
dividends from net
investment income .......... 163,926 998,823 284,960 1,810,521
Shares repurchased ......... (609,727) (3,694,815) (1,821,119) (11,592,323)
----------- ------------- ----------- -------------
Net increase ............... 2,185,165 $ 13,350,249 490,930 $ 3,106,851
=========== ============= =========== =============
CLASS S (FORMERLY CLASS C) SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
Shares sold ................ 733,872 $ 4,470,033 412,049 $ 2,620,376
Issued upon reinvestment of
dividends from net
investment income .......... 58,765 357,467 85,387 542,346
Shares repurchased ......... (394,609) (2,403,760) (349,262) (2,218,305)
----------- ------------- ----------- -------------
Net increase ............... 398,028 $ 2,423,740 148,174 $ 944,417
=========== ============= =========== =============
</TABLE>
<PAGE>
<TABLE>
STATE STREET RESEARCH HIGH INCOME FUND
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------------------------
For a share outstanding throughout each year:
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------
YEARS ENDED MARCH 31
----------------------------------------------------------------------------------------
1994 1995(1) 1996(1) 1997(1) 1998(1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR($) 6.32 6.43 5.80 5.95 6.01
---- ---- ---- ---- ----
Net investment income ($) 0.66 0.61 0.52 0.59 0.58
Net realized and unrealized gain
(loss) on investments, foreign
currency and forward contracts
($) 0.22 (0.58) 0.20 (0.01) 0.63
---- ---- ---- ---- ----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.88 0.03 0.72 0.58 1.21
---- ---- ---- ---- ----
Dividends from net investment
income ($) (0.62) (0.60) (0.56) (0.52) (0.60)
Distributions from net realized
gains ($) (0.15) (0.06) (0.01) -- --
---- ---- ---- ---- ----
TOTAL DISTRIBUTIONS ($) (0.77) (0.66) (0.57) (0.52) (0.60)
---- ---- ---- ---- ----
NET ASSET VALUE, END OF YEAR ($) 6.43 5.80 5.95 6.01 6.62
==== ==== ==== ==== ====
Total return(3) (%) 14.58 1.80 12.85 10.30 20.98
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($
thousands) 650,755 618,462 646,473 658,413 718,705
Ratio of operating expenses to
average net assets (%) 1.16 1.23 1.17 1.10 1.10
Ratio of net investment income to
average net assets (%) 10.41 10.19 8.88 9.70 9.10
Portfolio turnover rate (%) 24.36 31.55 56.47 81.75 70.53
Average commission rate(6) ($) -- -- -- 0.0152 0.0075
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------------------------------
YEARS ENDED MARCH 31
------------------------------------------------------------------------------------------
1994(2) 1995(1) 1996(1) 1997(1) 1998(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 6.34 6.42 5.79 5.93 5.98
---- ---- ---- ---- ----
Net investment income ($) 0.51 0.57 0.46 0.55 0.53
Net realized and unrealized gain
(loss) on investments, foreign
currency and forward contracts ($) 0.15 (0.58) 0.21 (0.02) 0.62
---- ---- ---- ---- ----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.66 (0.01) 0.67 0.53 1.15
---- ---- ---- ---- ----
Dividends from net investment
income ($) (0.48) (0.56) (0.52) (0.48) (0.55)
Distributions from net realized
gains ($) (0.10) (0.06) (0.01) -- --
---- ---- ---- ---- ----
TOTAL DISTRIBUTIONS ($) (0.58) (0.62) (0.53) (0.48) (0.55)
---- ---- ---- ---- ----
NET ASSET VALUE, END OF YEAR ($) 6.42 5.79 5.93 5.98 6.58
==== ==== ==== ==== ====
Total return(3) (%) 10.76(4) 0.89 12.06 9.35 20.02
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($
thousands) 67,337 117,767 185,735 259,077 345,797
Ratio of operating expenses to
average net assets (%) 1.93(5) 1.98 1.92 1.85 1.85
Ratio of net investment income to
average net assets (%) 10.32(5) 9.65 7.95 9.01 8.36
Portfolio turnover rate (%) 24.36 31.55 56.47 81.75 70.53
Average commission rate(6) ($) -- -- -- 0.0152 0.0075
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Per-share figures have been calculated using the average shares method.
(2) June 1, 1993 (commencement of share class designations) to March 31,
1994.
(3) Does not reflect any front-end or contingent deferred sales charges.
(4) Not annualized.
(5) Annualized.
(6) Average commission rate per share paid by the Fund for security trades on
which commissions are charged beginning with the fiscal year ended March
31, 1997.
<PAGE>
<TABLE>
<CAPTION>
Class C (Formerly Class D)
---------------------------------------------------------------------------------------
Years ended March 31
---------------------------------------------------------------------------------------
1994(2) 1995(1) 1996(1) 1997(1) 1998(1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR($) 6.34 6.42 5.79 5.93 5.99
---- ---- ---- ---- ----
Net investment income ($) 0.51 0.58 0.46 0.54 0.53
Net realized and unrealized gain
(loss) on investments, foreign
currency and forward contracts ($) 0.15 (0.59) 0.21 (0.00) 0.62
---- ---- ---- ---- ----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.66 (0.01) 0.67 0.54 1.15
---- ---- ---- ---- ----
Dividends from net investment
income ($) (0.48) (0.56) (0.52) (0.48) (0.55)
Distributions from net realized
gains ($) (0.10) (0.06) (0.01) -- --
---- ---- ---- ---- ----
TOTAL DISTRIBUTIONS ($) (0.58) (0.62) (0.53) (0.48) (0.55)
---- ---- ---- ---- ----
NET ASSET VALUE, END OF YEAR ($) 6.42 5.79 5.93 5.99 6.59
==== ==== ==== ==== ====
Total return(3) (%) 10.74(4) 0.88 12.05 9.52 19.99
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($
thousands) 2,661 6,766 15,262 28,488 34,586
Ratio of operating expenses to
average net assets (%) 1.93(5) 1.98 1.92 1.85 1.85
Ratio of net investment income to
average net assets (%) 10.32(5) 9.81 7.91 9.09 8.35
Portfolio turnover rate (%) 24.36 31.55 56.47 81.75 70.53
Average commission rate(6) ($) -- -- -- 0.0152 0.0075
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Class S (Formerly Class C)
------------------------------------------------------------------------------------------
Years ended March 31
------------------------------------------------------------------------------------------
1994(2) 1995(1) 1996(1) 1997(1) 1998(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR($) 6.34 6.42 5.78 5.92 5.98
---- ---- ---- ---- ----
Net investment income ($) 0.57 0.64 0.53 0.61 0.59
Net realized and unrealized gain
(loss) on investments, foreign
currency and forward contracts
($) 0.14 (0.60) 0.20 (0.01) 0.63
---- ---- ---- ---- ----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.71 0.04 0.73 0.60 1.22
---- ---- ---- ---- ----
Dividends from net investment
income ($) (0.53) (0.62) (0.58) (0.54) (0.62)
Distributions from net realized
gains ($) (0.10) (0.06) (0.01) -- --
---- ---- ---- ---- ----
TOTAL DISTRIBUTIONS ($) (0.63) (0.68) (0.59) (0.54) (0.62)
---- ---- ---- ---- ----
NET ASSET VALUE, END OF YEAR ($) 6.42 5.78 5.92 5.98 6.58
==== ==== ==== ==== ====
Total return(3) (%) 11.67(4) 1.73 13.19 10.63 21.22
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($
thousands) 851 2,579 3,840 6,255 7,860
Ratio of operating expenses to
average net assets (%) 0.93(5) 0.98 0.92 0.85 0.85
Ratio of net investment income to
average net assets (%) 11.32(5) 10.85 8.97 10.04 9.36
Portfolio turnover rate (%) 24.36 31.55 56.47 81.75 70.53
Average commission rate(6) ($) -- -- -- 0.0152 0.0075
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Per-share figures have been calculated using the average shares method.
(2) June 1, 1993 (commencement of share class designations) to March 31,
1994.
(3) Does not reflect any front-end or contingent deferred sales charges.
(4) Not annualized.
(5) Annualized.
(6) Average commission rate per share paid by the Fund for security trades on
which commissions are charged beginning with the fiscal year ended March
31, 1997.
<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, 1998, 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, 1998 by correspondence with the
custodian and brokers and the application of alternative procedures where
confirmations from brokers were not received, provide a reasonable basis for
the opinion expressed above.
/s/Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
May 8, 1998
<PAGE>
STATE STREET RESEARCH HIGH INCOME FUND
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
High Income Fund was among the top performers in its category for the 12-month
period ended March 31, 1998. The Fund's 20.98% return (without sales charge)
on Class A shares, outpaced most of the 199 high current yield funds tracked
by Lipper Analytical Services Inc. According to Lipper, the average high
current yield fund produced a 16.94% return. High Income Fund also
outperformed the First Boston High Yield Index, which rose 14.33% and the
Lehman Brothers Aggregate Bond Index, which rose 11.99%.
A positive economic environment for high-yield bonds and good security and
industry selection contributed to the Fund's successful year. Portfolio
strategy changed little over the 12 months. The Fund continued to invest the
largest portion of its assets in technology/communications, consumer goods and
broadcasting areas. These industries benefited from deregulation, new
technologies, and high product demand for voice, data, wire and wireless
communications. We reduced oil industry bonds from the portfolio, because
their prices had risen to a level at which we thought they were overvalued.
We began to upgrade the quality of the portfolio by adding higher-rated
securities. While we expect the environment to remain positive, we believe
there is a need for vigilance.
March 31, 1998
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% "C" share contingent deferred
sales charges, where applicable. "S" shares, offered without a sales charge,
are available through certain employee benefit plans and special programs. 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. The Lehman Brothers Aggregate Bond Index is a market-value
weighted index of fixed-rate debt issues, including U.S. Treasury, agency, and
corporate bond issues, and mortgage/backed securities. Direct investment in
the indices is not possible; results are for illustrative purposes only.
Before November 1, 1997, Class C shares were designated Class D, and Class S
shares were designated Class C.
<PAGE>
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
CLASS A SHARES
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
1 Year 5 Years 10 Years
- ------ ------- --------
+15.54% +10.90% +10.64%
High Income Fund S&P 500
- ---------------------------------------
3/88 $ 9,550 $10,000
3/89 10,730 10,940
3/90 10,010 10,520
3/91 10,260 11,980
3/92 13,190 15,720
3/93 15,650 18,130
3/94 17,930 19,940
3/95 18,260 20,900
3/96 20,600 23,930
3/97 22,720 26,730
3/98 27,492 30,555
CLASS B SHARES
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
1 Year 5 Years 10 Years
- ------ ------- --------
+15.02% +10.77% +10.71%
High Income Fund S&P 500
- ---------------------------------------
3/88 $10,000 $10,000
3/89 11,230 10,940
3/90 10,480 10,520
3/91 10,710 11,980
3/92 13,910 15,720
3/93 16,390 18,130
3/94 18,640 19,940
3/95 18,810 20,900
3/96 21,080 23,930
3/97 23,050 26,730
3/98 27,658 30,555
CLASS C SHARES
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
1 Year 5 Years 10 Years
- ------ ------- --------
+18.99% +11.05% +10.72%
High Income Fund S&P 500
- ---------------------------------------
3/88 $10,000 $10,000
3/89 11,230 10,940
3/90 10,480 10,520
3/91 10,710 11,980
3/92 13,810 15,720
3/93 16,390 18,130
3/94 18,640 19,940
3/95 18,800 20,900
3/96 21,070 23,930
3/97 23,070 26,730
3/98 27,681 30,555
CLASS S SHARES
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
1 Year 5 Years 10 Years
- ------ ------- --------
+21.22% +12.10% +11.24%
High Income Fund S&P 500
- ---------------------------------------
3/88 $10,000 $10,000
3/89 11,230 10,940
3/90 10,480 10,520
3/91 10,710 11,980
3/92 13,810 15,720
3/93 16,390 18,130
3/94 18,790 19,940
3/95 19,120 20,900
3/96 21,640 23,930
3/97 23,940 26,730
3/98 29,018 30,555
<PAGE>
State Street Research Managed Assets
a series of
State Street Research Income Trust
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVE..............................................................................................1
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS...................................................................1
ADDITIONAL INFORMATION CONCERNING
CERTAIN RISKS AND INVESTMENT TECHNIQUES..................................................................3
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS..................................................................16
THE TRUST, THE FUND AND ITS SHARES...............................................................................24
TRUSTEES AND OFFICERS............................................................................................26
MANAGEMENT OF THE FUND AND INVESTMENT ADVISORY SERVICES..........................................................31
PURCHASE AND REDEMPTION OF SHARES................................................................................32
SHAREHOLDER ACCOUNTS.............................................................................................37
NET ASSET VALUE..................................................................................................42
PORTFOLIO TRANSACTIONS...........................................................................................43
CERTAIN TAX MATTERS..............................................................................................46
DISTRIBUTION OF SHARES OF THE FUND...............................................................................50
CALCULATION OF PERFORMANCE DATA..................................................................................54
CUSTODIAN........................................................................................................60
INDEPENDENT ACCOUNTANTS..........................................................................................60
FINANCIAL STATEMENTS.............................................................................................60
</TABLE>
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, 1998, 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-980815(exp0899)SSR-LD MA-879D-0898]
<PAGE>
INVESTMENT OBJECTIVE
As set forth under "The Fund--Goal and Strategies--Fundamental Goal" in
the Prospectus of State Street Research Managed Assets (the "Fund"), the Fund's
investment goal, which is to seek a high total return while attempting to limit
investment risk and preserve capital, is fundamental and 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 the meeting if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy or (ii) of
more than 50% of the outstanding voting securities, whichever is less.)
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under "The Fund--Principal Risks" and "Other
Information--Other Securities and Risks" in the Fund's Prospectus, the Fund has
adopted certain investment restrictions, and those investment restrictions are
either fundamental or not fundamental. Fundamental restrictions may not be
changed by the Fund except by the affirmative vote of a majority of the
outstanding voting securities of the Fund. Restrictions that are not fundamental
may be changed by a vote of a majority of the Trustees of the Trust.
The Fund's fundamental investment restrictions are set forth below.
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;
<PAGE>
(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 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:
2
<PAGE>
(1) not to purchase any security or enter into a repurchase
agreement if as a result more than 15% of its net assets would
be invested in securities that are illiquid (including
repurchase agreements not entitling the holder to payment of
principal and interest within seven days);
(2) not to engage in transactions in options except in connection
with options on securities, securities indices and
commodities, and options on futures on securities, securities
indices and commodities;
(3) not to purchase securities on margin or make short sales of
securities or maintain a short position except for short
sales "against the box";
(4) 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);
(5) not to purchase a security issued by another investment
company, except to the extent permitted under the 1940 Act or
except by purchases in the open market involving only
customary brokers' commissions, or securities acquired as
dividends or distributions or in connection with a merger,
consolidation or similar transaction or other exchange; and
(6) 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.
ADDITIONAL INFORMATION CONCERNING
CERTAIN RISKS AND INVESTMENT TECHNIQUES
Derivatives
The Fund may buy and sell certain types of derivatives, such as options
futures contracts, options on futures contracts, and swaps under circumstances
in which such instruments are expected by State Street Research & Management
Company, the Fund's Investment Manager (the "Investment Manager"), to aid in
achieving the Fund's investment objective. The Fund may also purchase
instruments with characteristics of both futures and securities (e.g., debt
instruments with interest and principal payments determined by reference to the
value of a commodity or a currency at a future time) and which, therefore,
possess the risks of both futures and securities investments.
3
<PAGE>
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Fund to take both "short" positions (positions
which anticipate a decline in the market value of a particular asset or index)
and "long" positions (positions which anticipate an increase in the market value
of a particular asset or index). The Fund may also use strategies which involve
simultaneous short and long positions in response to specific market conditions,
such as where the Investment Manager anticipates unusually high or low market
volatility.
The Investment Manager may enter into derivative positions for the Fund
for either hedging or non-hedging purposes. The term hedging is applied to
defensive strategies designed to protect the Fund from an expected decline in
the market value of an asset or group of assets that the Fund owns (in the case
of a short hedge) or to protect the Fund from an expected rise in the market
value of an asset or group of assets which it intends to acquire in the future
(in the case of a long or "anticipatory" hedge). Non-hedging strategies include
strategies designed to produce incremental income (such as the option writing
strategy described below) or "speculative" strategies which are undertaken to
profit from (i) an expected decline in the market value of an asset or group of
assets which the Fund does not own or (ii) expected increases in the market
value of an asset which it does not plan to acquire. Information about specific
types of instruments is provided below.
Futures Contracts.
Futures contracts are publicly traded contracts to buy or sell an
underlying asset or group of assets, such as a currency or an index of
securities, at a future time at a specified price. A contract to buy establishes
a long position while a contract to sell establishes a short position.
The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or index after paying a transaction charge and posting
margin in an amount equal to a small percentage of the value of the underlying
asset or index. The Fund will initially be required to deposit with the Trust's
custodian or the broker effecting the futures transaction an amount of "initial
margin" in cash or securities, as permitted under applicable regulatory
policies.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position
4
<PAGE>
would be less valuable, and the Fund would be required to make a maintenance
margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will terminate
the Fund's position in the futures contract. A final determination of
maintenance margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. While futures
contracts with respect to securities do provide for the delivery and acceptance
of such securities, such delivery and acceptance are seldom made.
In transactions establishing a long position in a futures contract,
assets equal to the face value of the futures contract will be identified by the
Fund to the Trust's custodian for maintenance in a separate account to insure
that the use of such futures contracts is unleveraged. Similarly, assets having
a value equal to the aggregate face value of the futures contract will be
identified with respect to each short position. The Fund will utilize such
assets and methods of cover as appropriate under applicable exchange and
regulatory policies.
Options.
The Fund may use options to implement its investment strategy. There
are two basic types of options: "puts" and "calls." Each type of option can
establish either a long or a short position, depending upon whether the Fund is
the purchaser or the writer of the option. A call option on a security, for
example, gives the purchaser of the option the right to buy, and the writer the
obligation to sell, the underlying asset at the exercise price during the option
period. Conversely, a put option on a security gives the purchaser the right to
sell, and the writer the obligation to buy, the underlying asset at the exercise
price during the option period.
Purchased options have defined risk, that is, the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset. In general, a purchased put increases in value
as the value of the underlying security falls and a purchased call increases in
value as the value of the underlying security rises.
The principal reason to write options is to generate extra income (the
premium paid by the buyer). Written options have varying degrees of risk. An
uncovered written call option theoretically carries unlimited risk, as the
market price of the underlying asset could rise far above the exercise price
before its expiration. This risk is tempered when the call option is covered,
that is, when the option writer owns the underlying asset. In this case, the
writer runs the risk of the lost opportunity to participate in the appreciation
in value of the asset rather than the risk of an out-of-pocket loss. A written
put option has defined risk, that
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is, the difference between the agreed upon price that the Fund must pay to the
buyer upon exercise of the put and the value, which could be zero, of the asset
at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
its obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Among the options which the Fund may enter are options on securities
indices. In general, options on indices of securities are similar to options on
the securities themselves except that delivery requirements are different. For
example, a put option on an index of securities does not give the holder the
right to make actual delivery of a basket of securities but instead gives the
holder the right to receive an amount of cash upon exercise of the option if the
value of the underlying index has fallen below the exercise price. The amount of
cash received will be equal to the difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple. As with options on equity securities or futures contracts,
the Fund may offset its position in index options prior to expiration by
entering into a closing transaction on an exchange or it may let the option
expire unexercised.
A securities index assigns relative values to the securities included
in the index and the index options are based on a broad market index. In
connection with the use of such options, the Fund may cover its position by
identifying assets having a value equal to the aggregate face value of the
option position taken.
Options on Futures Contracts.
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
Limitations and Risks of Options and Futures Activity.
The Fund may not establish a position in a commodity futures contract
or purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such non-hedging
purposes would exceed 5% of the market value of the Fund's net assets. The Fund
applies a similar policy to options that are not commodities.
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As noted above, the Fund may engage in both hedging and nonhedging
strategies. Although effective hedging can generally capture the bulk of a
desired risk adjustment, no hedge is completely effective. The Fund's ability to
hedge effectively through transactions in futures and options depends on the
degree to which price movements in its holdings correlate with price movements
of the futures and options.
Non-hedging strategies typically involve special risks. The
profitability of the Fund's non-hedging strategies will depend on the ability of
the Investment Manager to analyze both the applicable derivatives market and the
market for the underlying asset or group of assets. Derivatives markets are
often more volatile than corresponding securities markets and a relatively small
change in the price of the underlying asset or group of assets can have a
magnified effect upon the price of a related derivative instrument.
Derivatives markets also are often less liquid than the market for the
underlying asset or group of assets. Some positions in futures and options may
be closed out only on an exchange which provides a secondary market therefor.
There can be no assurance that a liquid secondary market will exist for any
particular futures contract or option at any specific time. Thus, it may not be
possible to close such an option or futures position prior to maturity. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively carry out their derivative
strategies and might, in some cases, require a Fund to deposit cash to meet
applicable margin requirements. The Fund will enter into an option or futures
position only if it appears to be a liquid investment.
Short Sales Against the Box
The Fund may effect short sales, but only if such transactions are
short sale transactions known as short sales "against the box." A short sale is
a transaction in which the Fund sells a security it does not own by borrowing it
from a broker, and consequently becomes obligated to replace that security. A
short sale against the box is a short sale where the Fund owns the security sold
short or has an immediate and unconditional right to acquire that security
without additional cash consideration upon conversion, exercise or exchange of
options with respect to securities held in its portfolio. The effect of selling
a security short against the box is to insulate that security against any future
gain or loss.
Zero and Step Coupon Securities
Zero and step coupon securities are debt securities that may pay no
interest for all or a portion of their life but are purchased at a discount to
face value at maturity. Their return consists of the amortization of the
discount between their purchase price and their maturity value, plus in the case
of a step coupon, any fixed rate interest income. Zero and step coupon
securities pay no interest to holders prior to maturity even though interest on
these securities is reported as income to the Fund. The Fund will be required to
distribute all or substantially all of such amounts annually to its
shareholders. These
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<PAGE>
distributions may cause the Fund to liquidate portfolio assets in order to make
such distributions at a time when the Fund may have otherwise chosen not to sell
such securities. The amount of the discount fluctuates with the market value of
such securities, which may be more volatile than that of securities which pay
interest at regular intervals.
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 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.
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.
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, although the
Fund does not presently expect to invest more than 5% of its net assets in such
items. 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
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<PAGE>
parties for this purpose) in exchange for agreement by the bank or investment
banker to pay the Fund a fixed rate of interest on the notional principal
amount. In a currency swap, the Fund would agree with the other party to
exchange cash flows based on the relative differences in values of a notional
amount of two (or more) currencies; in an index swap, the Fund would agree to
exchange cash flows on a notional amount based on changes in the values of the
selected indices. Purchase of a cap entitles the purchaser to receive payments
from the seller on a notional amount to the extent that the selected index
exceeds an agreed upon interest rate or amount whereas purchase of a floor
entitles the purchaser to receive such payments to the extent the selected index
falls below an agreed-upon interest rate or amount. A collar combines a cap and
a floor.
The Fund may enter credit protection swap arrangements involving the
sale by the Fund of a put option on a debt security which is exercisable by the
buyer upon certain events, such as a default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
Most swaps entered into by the Fund will be on a net basis; for
example, in an interest rate swap, amounts generated by application of the fixed
rate and the floating rate to the notional principal amount would first offset
one another, with the Fund either receiving or paying the difference between
such amounts. In order to be in a position to meet any obligations resulting
from swaps, the Fund will set up a segregated custodial account to hold
appropriate liquid assets, including cash; for swaps entered into on a net
basis, assets will be segregated having a daily net asset value equal to any
excess of the Fund's accrued obligations over the accrued obligations of the
other party, while for swaps on other than a net basis assets will be segregated
having a value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a portion of the Fund's portfolio.
However, the Fund may, as noted above, enter into such arrangements for income
purposes to the extent permitted by the Commodities Futures Trading Commission
(the "CFTC") for entities which are not commodity pool operators, such as the
Fund. In entering a swap arrangement, the Fund is dependent upon the
creditworthiness and good faith of the counterparty. The Fund attempts to reduce
the risks of nonperformance by the counterparty by dealing only with
established, reputable institutions. The swap market is still relatively new and
emerging; positions in swap arrangements may become illiquid to the extent that
nonstandard arrangements with one counterparty are not readily transferable to
another counterparty or if a market for the transfer of swap positions does not
develop. The use of interest rate swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
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
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<PAGE>
the swap position may correlate imperfectly with the price of the asset or
liability being hedged.
Repurchase Agreements
The Fund may enter into repurchase agreements. Repurchase agreements
occur when the Fund acquires a security and the seller, which may be either (i)
a primary dealer in U.S. Government securities or (ii) an FDIC-insured bank
having gross assets in excess of $500 million, simultaneously commits to
repurchase it at an agreed-upon price on an agreed-upon
date within a specified number of days (usually not more than seven) from the
date of purchase. The repurchase price reflects the purchase price plus an
agreed-upon market rate of interest which is unrelated to the coupon rate or
maturity of the acquired security. The Fund will only enter into repurchase
agreements involving U.S. Government securities. Repurchase agreements could
involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon the Fund's ability to dispose of
the underlying securities. Repurchase agreements will be limited to 30% of the
Fund's net assets, except that repurchase agreements extending for more than
seven days when combined with any other illiquid securities held by the Fund
will be limited to 15% of the Fund's net assets.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. In a reverse
repurchase agreement the Fund transfers possession of a portfolio instrument to
another person, such as a financial institution, broker or dealer, in return for
a percentage of the instrument's market value in cash, and agrees that on a
stipulated date in the future the Fund will repurchase the portfolio instrument
by remitting the original consideration plus interest at an agreed-upon rate.
The ability to use reverse repurchase agreements may enable, but does not ensure
the ability of, the Fund to avoid selling portfolio instruments at a time when a
sale may be deemed to be disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
When-Issued Securities
The Fund may purchase "when-issued" securities, which are traded on a
price or yield basis prior to actual issuance. Such purchases will be made only
to achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs when corporate securities
to be created by a merger of companies are traded prior to the actual
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consummation of the merger. Such transactions may involve a risk of loss if the
value of the securities falls below the price committed to prior to actual
issuance. The Trust's custodian will establish a segregated account when the
Fund purchases securities on a when-issued basis consisting of cash or liquid
securities equal to the amount of the when-issued commitments. Securities
transactions involving delayed deliveries or forward commitments are frequently
characterized as when-issued transactions and are similarly treated by the Fund.
Restricted Securities
It is the Fund's policy not to make an investment in restricted
securities, including restricted securities sold in accordance with Rule 144A
under the Securities Act of 1933 ("Rule 144A Securities") if, as a result, more
than 35% of the Fund's total assets are invested in restricted securities,
provided not more than 10% of the Fund's total assets are invested in restricted
securities other than Rule 144A Securities. Securities may be resold pursuant to
Rule 144A under certain circumstances only to qualified institutional buyers as
defined in the rule, and the markets and trading practices for such securities
are relatively new and still developing; depending on the development of such
markets, Rule 144A Securities may be deemed to be liquid as determined by or in
accordance with methods adopted by the Trustees. Under such methods the
following factors are considered, among others: the frequency of trades and
quotes for the security, the number of dealers and potential purchasers in the
market, market making activity, and the nature of the security and marketplace
trades. Investments in Rule 144A Securities could have the effect of increasing
the level of the Fund's illiquidity to the extent that qualified institutional
buyers become, for a time, uninterested in purchasing such securities. Also, the
Fund may be adversely impacted by the subjective valuation of such securities in
the absence of a market for them. Restricted securities that are not resalable
under Rule 144A may be subject to risks of illiquidity and subjective valuations
to a greater degree than Rule 144A Securities.
Foreign Investments
The Fund reserves the right to invest without limitation in securities
of non-U.S. issuers directly, or indirectly in the form of American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary
Receipts ("GDRs").
ADRs are receipts, typically issued by a U.S. bank or trust company,
which evidence ownership of underlying securities issued by a foreign
corporation or other entity. EDRs are receipts issued in Europe which evidence a
similar ownership arrangement. GDRs are receipts issued in one country which
also evidence a similar ownership arrangement. Generally, ADRs in registered
form are designed for use in U.S. securities markets and EDRs are designed for
use in European securities markets. GDRs are designed for use when the issuer is
raising capital in more than one market simultaneously, such as the issuer's
local market and the U.S., and have been used to overcome local selling
restrictions to foreign investors. In addition, many GDRs are eligible for
book-entry settlement through Cedel, Euroclear and DTC. The underlying
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<PAGE>
securities are not always denominated in the same currency as the ADRs, EDRs or
GDRs. Although investment in the form of ADRs, EDRs or GDRs facilitates trading
in foreign securities, it does not mitigate all the risks associated with
investing in foreign securities.
ADRs are available through facilities which may be either "sponsored"
or "unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and usually agrees to
provide shareholder communications. In an unsponsored arrangement, the foreign
issuer is not involved, and the ADR holders pay the fees of the depository.
Sponsored ADRs are generally more advantageous to the ADR holders and the issuer
than are unsponsored ADRs. More and higher fees are generally charged in an
unsponsored program compared to a sponsored facility. Only sponsored ADRs may be
listed on the New York or American Stock Exchanges. Unsponsored ADRs may prove
to be more risky due to (a) the additional costs involved to the Fund; (b) the
relative illiquidity of the issue in U.S. markets; and (c) the possibility of
higher trading costs in the over-the-counter market as opposed to exchange based
tradings. The Fund will take these and other risk considerations into account
before making an investment in an unsponsored ADR.
The risks associated with investments in foreign securities include
those resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks of
nationalization or expropriation, the possible imposition of currency exchange
blockages, higher operating expenses, foreign withholding and other taxes which
may reduce investment return, reduced availability of public information
concerning issuers, the difficulties in obtaining and enforcing a judgment
against a foreign issuer and the fact that foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements comparable to those applicable to
domestic issuers. Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of securities of comparable
domestic issuers.
These risks are usually higher in less-developed countries. Such
countries include countries that have an emerging stock market on which trade a
small number of securities and/or countries with economies that are based on
only a few industries. The Fund may invest in the securities of issuers in
countries with less developed economies as deemed appropriate by the Investment
Manager. However, it is anticipated that a majority of the foreign investments
by the Fund will consist of securities of issuers in countries with developed
economies.
Currency Transactions
The Fund may engage in currency exchange transactions in order to
protect against the effect of uncertain future exchange rates on securities
denominated in foreign currencies. The Fund will conduct its currency exchange
transactions either on a spot (i.e., cash) basis at the rate prevailing in the
currency exchange market, or by entering
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into forward contracts to purchase or sell currencies. The Fund's dealings in
forward currency exchange contracts will be limited to hedging involving either
specific transactions or aggregate portfolio positions. A forward currency
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are not commodities and are entered into in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. In entering a forward currency contract, the Fund is dependent
upon the creditworthiness and good faith of the counterparty. The Fund attempts
to reduce the risks of nonperformance by the counterparty by dealing only with
established, reputable institutions. Although spot and forward contracts will be
used primarily to protect the Fund from adverse currency movements, they also
involve the risk that anticipated currency movements will not be accurately
predicted, which may result in losses to the Fund. This method of protecting the
value of the Fund's portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange that can be achieved at
some future point in time. Although such contracts tend to minimize the risk of
loss due to a decline in the value of hedged currency, they tend to limit any
potential gain that might result should the value of such currency increase.
Securities Lending
The Fund may lend portfolio securities with a value of up to 33 1/3% of
its total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of any loaned securities plus accrued interest. Collateral
received by the Fund will generally be held in the form tendered, although cash
may be invested in unaffiliated mutual funds with quality short-term portfolios,
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities or certain unaffiliated mutual funds, repurchase agreements or
other similar investments. The investing of cash collateral received from
loaning portfolio securities involves leverage which magnifies the potential for
gain or loss on monies invested and, therefore, results in an increase in the
volatility of the Fund's outstanding securities. Such loans may be terminated at
any time.
The Fund will retain rights to dividends, interest or other
distributions, on the loaned securities. Voting rights pass with the lending,
although the Fund may call loans to vote proxies if desired. Should the borrower
of the securities fail financially, there is a risk of delay in recovery of the
securities or loss of rights in the collateral. Loans are made only to borrowers
which are deemed by the Investment Manager or its agents to be of good financial
standing.
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Short-Term Trading
The Fund may engage in short-term trading of securities and reserves
full freedom with respect to portfolio turnover. In periods where there are
rapid changes in economic conditions and security price levels or when
reinvestment strategy changes significantly, portfolio turnover may be higher
than during times of economic and market price stability or when investment
strategy remains relatively constant. The Fund's portfolio turnover rate may
involve greater transaction costs, relative to other funds in general, and may
have tax and other consequences.
Temporary and Defensive Investments
The Fund may hold up to 100% of its assets in cash or high-quality debt
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Investment Manager, such a
position is more likely to provide protection
against adverse market conditions than adherence to the Fund's other investment
policies. The types of high-quality instruments in which the Fund may invest for
such purposes include money market securities, such as repurchase agreements,
and securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, certificates of deposit, time deposits and bankers'
acceptances of certain qualified financial institutions and corporate commercial
paper, which at the time of purchase are rated at least within the "A" major
rating category by Standard & Poor's Corporation ("S&P") or the "Prime" major
rating category by Moody's Investor's Service, Inc. ("Moody's"), or, if not
rated, issued by companies having an outstanding long-term unsecured debt issued
rated at least within the "A" category by S&P or Moody's.
Industry Classifications
In determining how much of the portfolio is invested in a given
industry, the following industry classifications are currently used. Securities
issued or guaranteed as to principal or interest by the U.S. Government or its
agencies or instrumentalities or mixed-ownership Government corporations or
sponsored enterprises (including repurchase agreements involving U.S. Government
securities to the extent excludable under relevant regulatory interpretations)
are excluded. Securities issued by foreign governments are also excluded.
Companies engaged in the business of financing may be classified according to
the industries of their parent or sponsor companies, or industries that
otherwise most affect such financing companies. Issuers of asset-backed pools
will be classified as separate industries based on the nature of the underlying
assets, such as mortgages and credit card receivables. "Asset-backed Mortgages"
includes private pools of nongovernment backed mortgages.
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<TABLE>
<S> <C> <C>
Basic Industries Consumer Staple Science & Technology
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
Trust Certificates-- Bank Retail Trade
Government Related Lending Financial Service Textile & Apparel
Asset-backed--Mortgages Insurance
Asset-backed--Credit
Card Receivables
</TABLE>
Computer-Related Risks
Many mutual funds and other companies that issue securities, as well as
government entities upon whom those mutual funds and companies depend, may be
adversely affected by computer systems (whether their own systems or systems of
their service providers) that do not properly process dates beginning with
January 1, 2000 and information related to those dates. In addition, many funds
and other companies, especially those funds and companies that do business in
one or more national currencies of the countries in the European Union (the
"EU"), may be adversely affected by computer systems that cannot accommodate
concurrent references to two currencies, the national currency and the euro (the
proposed currency unit of the EU). Beginning on January 1, 1999 and for the
three years thereafter, businesses and governments in most EU countries
generally must be prepared to conduct their businesses in their national
currency and the euro. After such three-year period, they must conduct their
businesses only in the euro.
The euro conversion presents additional risks for the Fund to the
extent that it invests in securities denominated in a national currency that
eventually will be replaced by the euro. For example, trading, accounting and
other administrative systems must be
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<PAGE>
able to reflect exchange rates between a national currency of an EU member and
the euro and to redenominateoutstanding tradeable debt securities into the euro
in accordance with specific technical requirements.
The Investment Manager currently is in the process of reviewing its
internal computer systems as they relate to the Fund, as well as the computer
systems of those service providers upon which the Fund relies, in order to
obtain reasonable assurances that the Fund will not experience a material
adverse impact related to either problem. The Fund does not currently anticipate
that either problem will have a material adverse impact on its portfolio
investments, taken as a whole. There can be no assurances in either area,
however, including the possibility that either or both problems could negatively
affect the investment markets or the economy generally.
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
The Fund may invest in long-term and short-term debt securities.
Certain debt securities and money market instruments in which the Fund may
invest are described below.
Managing Volatility.
In administering the Funds' investments, the Investment Manager
attempts to manage the volatility of the Fund's portfolio of debt securities by
managing the duration and weighted average maturity of those securities.
Duration is an indicator of the expected volatility of a bond
portfolio's net asset value in response to changes in interest rates. In
calculating duration, the fund measures the average time required to receive all
cash flows associated with those debt securities -- representing payments of
principal and interest -- by considering the timing, frequency and amount of
payment expected from each portfolio debt security. The higher the duration, the
greater the gains and losses when interest rates change. Duration generally is a
more accurate measure of potential volatility with a portfolio composed of
high-quality debt securities, such as U.S. government securities, municipal
securities and high-grade U.S. corporate bonds, than with lower-grade
securities.
The Investment Manager may use several methods to manage the duration
of the Fund's portfolio of debt securities in order to increase or decrease its
exposure to changes in interest rates. First, the Investment Manager may adjust
duration by adjusting the mix of debt securities held by the Fund. For example,
if the Investment Manager intends to shorten duration, it may sell debt
instruments that individually have a long duration and purchase other debt
instruments that individually have a shorter duration. Among the factors that
will affect a debt security's duration are the length of time to maturity, the
timing of interest and principal payments, and whether the terms of the security
give the
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issuer of the security the right to call the security prior to maturity. Second,
the Investment Manager may adjust duration using derivative transactions,
especially with interest rate futures and options contracts. For example, if the
Investment Manager wants to lengthen the duration of a Fund's portfolio of debt
securities, it could purchase interest rate futures contracts instead of buying
longer-term bonds or selling shorter-term bonds. Similarly, during periods of
lower interest rate volatility, the Investment Manager may use a technique to
extend duration in the event rates rise by writing an out-of-the-money put
option and receiving premium income with the expectation that the option could
be exercised. In managing duration, the use of such derivatives may be faster
and more efficient than trading specific portfolio securities.
Weighted average maturity is another indicator of potential volatility
used by the Investment Manager with respect to the Fund's portfolio of debt
securities, although for certain types of debt securities, such as high quality
debt securities, it is not as accurate as duration in quantifying potential
volatility. Weighted average maturity is the average of all maturities of the
individual debt securities held by the Fund, weighted by the market value of
each security. Generally, the longer the weighted average maturity, the more
Fund price will vary in response to changes in interest rates.
U.S. Government and Related Securities.
U.S. Government securities are securities which are issued or
guaranteed as to principal or interest by the U.S. Government, a U.S. Government
agency or instrumentality, or certain mixed-ownership Government corporations as
described herein. The U.S. Government securities in which the Fund invests
include, among others:
o direct obligations of the U.S. Treasury, i.e., U.S. Treasury
bills, notes, certificates and bonds;
o obligations of U.S. Government agencies or instrumentalities
such as the Federal Home Loan Banks, the Federal Farm Credit
Banks, the Federal National Mortgage Association, the
Government National Mortgage Association and the Federal Home
Loan Mortgage Corporation; and
o obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a
variety of ways by the U.S. Government, its agencies or instrumentalities. Some
of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. Other obligations, such as those of the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government to
purchase certain obligations of agencies or instrumentalities, although the U.S.
Government has no legal obligation to do so.
17
<PAGE>
Obligations such as those of the Federal Home Loan Bank, the Federal Farm Credit
Bank, 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,
amixed-ownership Government corporation, are backed with respect to interest
payments by the U.S. Treasury, and with respect to principal payments by U.S.
Treasury obligations held in a segregated account with a Federal Reserve Bank.
Except for certain mortgage-related securities, the Fund will only invest in
obligations issued by mixed-ownership Government corporations where such
securities are guaranteed as to payment of principal or interest by the U.S.
Government or a U.S. Government agency or instrumentality, and any unguaranteed
principal or interest is otherwise supported by U.S. Government obligations held
in a segregated account.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Bank Money Investments.
Bank money investments include, but are not limited to, certificates of
deposit, bankers' acceptances and time deposits. Certificates of deposit are
generally short-term (i.e., less than one year), interest-bearing negotiable
certificates issued by commercial banks or savings and loan associations against
funds deposited in the issuing institution. A banker's acceptance is a time
draft drawn on a commercial bank by a borrower,
18
<PAGE>
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 astated interest rate. The Fund will not invest in
any such bank money investment unless the investment is issued by a U.S. bank
that is a member of the Federal Deposit Insurance Corporation ("FDIC"),
including any foreign branch thereof, a U.S. branch or agency of a foreign bank,
a foreign branch of a foreign bank, or a savings bank or savings and loan
association that is a member of the FDIC and which at the date of investment has
capital, surplus and undivided profits (as of the date of its most recently
published financial statements) in excess of $50 million. The Fund will not
invest in time deposits maturing in more than seven days and will not invest
more than 10% of its total assets in time deposits maturing in two to seven
days.
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under state law. U.S. federal branches or agencies
of foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such branches elect FDIC insurance. Unlike U.S. branches of foreign banks,
U.S. agencies of foreign banks may not accept deposits and thus are not eligible
for FDIC insurance. Both branches and agencies can maintain credit balances,
which are funds received by the office incidental to or arising out of the
exercise of their banking powers and can exercise other commercial functions,
such as lending activities.
Short-Term Corporate Debt Instruments.
Short-term corporate debt instruments include commercial paper to
finance short-term credit needs (i.e., short-term, unsecured promissory notes)
issued by, among others, (a) corporations and (b) domestic or foreign bank
holding companies or their subsidiaries or affiliates where the debt instrument
is guaranteed by the bank holding company or an affiliated bank or where the
bank holding company or the affiliated bank is unconditionally liable for the
debt instrument. Commercial paper is usually sold on a discounted basis and has
a maturity at the time of issuance not exceeding nine months.
Lower Rated Debt Securities.
The Fund may invest up to 10% of its total assets in debt securities
within the BB major rating category or lower by S&P or the Ba major rating
category or lower by Moody's or debt securities that are unrated but considered
by the Investment Manager to
19
<PAGE>
be of equivalent investment quality to comparable rated securities. Such
securities generally involve more credit risk than higher rated securities and
are considered by S&P and Moody's to be predominantly speculative with respect
to capacity to pay interest and repay principal in accordance with the terms of
the obligation. Further, such securities may be subject to greater market
fluctuations and risk of loss of income and principal than lower yielding,
higher rated debt securities. Risks of lower quality debt securities include (i)
limited liquidity and secondary market support, (ii) substantial market price
volatility resulting from changes in prevailing interest rates an/or investor
perception, (iii) subordination to the prior claims of banks and other senior
lenders, (iv) the operation of mandatory sinking fund or call/redemption
provisions during periods of declining interest rates when the fund may be
required to reinvest premature redemption proceeds in lower yielding portfolio
securities; (v) the possibility that earnings of the issuer may be insufficient
to meet its debt service; and (vi) the issuer's low creditworthiness and
potential for insolvency during periods of rising interest rates and economic
downturn. For further information concerning the ratings of debt securities, see
"--Commercial Paper Ratings" and "--Rating Categories of Debt Securities,"
below. In the event the rating of a security is downgraded, the Investment
Manager will determine whether the security should be retained or sold depending
on an assessment of all facts and circumstances at that time.
Certain Ratings Categories.
Commercial Paper Ratings.
Commercial paper investments at the time of purchase will be rated
within the "A" major rating category by S&P or within the "Prime" major rating
category by Moody's, or, if not rated, issued by companies having an outstanding
long-term unsecured debt issue rated at least within the "A" category by S&P or
by Moody's. The money market investments in corporate bonds and debentures
(which must have maturities at the date of settlement of one year or less) must
be rated at the time of purchase at least within the "A" category by S&P or
within the "Prime" category by Moody's.
Commercial paper rated within the "A" category (highest quality) by S&P
is issued by entities which have liquidity ratios which are adequate to meet
cash requirements. Long-term senior debt is rated within the "A" category or
better, although in some cases credits within the "BBB" category may be allowed.
The issuer has access to at least two additional channels of borrowing. Basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances. Typically, the issuer's industry is well established and the
issuer has a strong position within the industry. The reliability and quality of
management are unquestioned. The relative strength or weakness of the above
factors determines whether the issuer's commercial paper is rated A-1, A-2 or
A-3. (Those A-1 issues determined to possess overwhelming safety characteristics
are denoted with a plus (+) sign: A-1+.)
20
<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.
Rating Categories of Debt Securities.
Set forth below is a description of S&P corporate bond and debenture
rating categories:
AAA: An obligation rated within the AAA category has the highest rating
assigned by S&P. Capacity to meet the financial commitment on the obligation is
extremely strong.
AA: An obligation rated within the AA category differs from the highest
rated obligation only in small degree. Capacity to meet the financial obligation
is very strong.
A: An obligation rated within the A category is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories. However, capacity to meet the
financial commitment on the obligation is still strong.
BBB: An obligation rated within the BBB category exhibits adequate
protection parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to meet the
financial commitment on the obligation.
Obligations rated within the BB, B, CCC, CC and C categories are
regarded as having significant speculative characteristics. BB indicates the
least degree of speculation and C the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated within the BB category is less vulnerable to
nonpayment than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet the financial commitment on the
obligation. The BB rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BBB rating.
21
<PAGE>
B: An obligation rated within the B category is more vulnerable to
nonpayment than obligations rated within the BB category, but currently has the
capacity to meet the financial commitment on the obligation. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
meet the financial commitment on the obligation. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: An obligation rated within the CCC category is vulnerable to
nonpayment and is dependent upon favorable business, financial and economic
conditions to meet the financial commitment on the obligation. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to meet the financial commitment on the obligation.
CC: An obligation rated within the CC category is currently highly
vulnerable to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed, but payments on this obligation are being continued.
D: An obligation rated within the D category is in payment default. The
D rating category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The D rating
also will be used upon the filing of a bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayments risks-such as interest only (IO) and
principal only (PO) mortgage securities; and obligations with unusually risky
terms, such as inverse floaters.
Set forth below is a description of Moody's corporate bond and
debenture rating categories:
Aaa: Bonds which are rated within the Aaa category are judged to be of
the best quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt-edge." Interest payments are protected by a large
or by an exceptionally stable margin, and principal is secure. While the various
protective elements are likely to
22
<PAGE>
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated within the Aa category are judged to be of
high quality by all standards. Together with the Aaa group they comprise what
are generally known as high-grade bonds. They are rated lower than the best
bonds because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than in Aaa securities.
A: Bonds which are rated within the A category possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa: Bonds which are rated within the Baa category are considered as
medium grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present, but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba: Bonds which are rated within the Ba category are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during other good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated within the B category generally lack
characteristics of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small.
Caa: Bonds which are rated within the Caa category are of poor
standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca: Bonds which are rated within the Ca category represent obligations
which are speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C: Bonds which are rated within the C category are the lowest rated
class of bonds, and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
23
<PAGE>
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.
Ratings Downgrades.
In the event the lowering of ratings of debt instruments held by the
Fund by applicable rating agencies results in a material decline in the overall
quality of the Fund's portfolio, the Trustees of the Trust will review the
situation and take such action as they deem in the best interests of the Fund's
shareholders, including, if necessary, changing the composition of the
portfolio.
THE TRUST, THE FUND AND ITS SHARES
The Fund was organized in 1988 as a separate series of State Street
Research Income Trust, a Massachusetts business trust. A "series" is a separate
pool of assets of the Trust which is separately managed and may have a different
investment objective and different investment policies from the objective and
policies of another series. The Trust currently is comprised of two series:
State Street Research High Income Fund and State Street Research Managed Assets.
The Trustees of the Trust have authority to issue an unlimited number of shares
of beneficial interest of each separate series, $.001 par value per share. The
Trustees also have authority, without the necessity of a shareholder vote, to
create any number of new series or classes or to commence the public offering of
shares of any previously established series or classes. The Trustees have
authorized shares of the Fund to be issued in four classes: Class A, Class B,
Class C and Class S shares. Prior to November 1, 1997, the Fund's current Class
C shares were designated as Class D shares and the Fund's current Class S shares
were designated as Class C 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 C
shares bear the expenses of the deferred sales arrangement and any expenses
(including the higher service and distribution fees) resulting from such sales
arrangement, and certain other incremental expenses related to a class. Each
class will have exclusive voting rights with respect to provisions of the Rule
12b-1 distribution plan pursuant to which the service and distribution fees, if
any, are paid. Although the legal rights of holders of each class of shares are
identical, it is likely that the different expenses borne by each class will
result in different net asset values and dividends. The different classes of
shares of the Fund also have different exchange privileges. Except for those
differences between classes of shares described above, in the Fund's Prospectus
and otherwise this Statement of Additional Information, each share of the Fund
has equal dividend, redemption and liquidation rights with other shares of the
Fund, and when issued, is fully paid and nonassessable by the Fund.
24
<PAGE>
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have an adverse effect on the rights
of any shareholder. On any matter submitted to the shareholders, the holder of a
Fund share is entitled to one vote per share (with proportionate voting for
fractional shares) regardless of the relative net asset value thereof.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there ordinarily will be no shareholder meetings
unless required by the 1940 Act. Except as otherwise provided under the 1940
Act, the Board of Trustees will be a self-perpetuating body until fewer than
two-thirds of the Trustees serving as such are Trustees who were elected by
shareholders of the Trust. In the event less than a majority of the Trustees
serving as such were elected by shareholders of the Trust, a meeting of
shareholders will be called to elect Trustees. Under the Master Trust Agreement,
any Trustee may be removed by vote of two-thirds of the outstanding Trust
shares; holders of 10% or more of the outstanding shares of the Trust can
require that the Trustees call a meeting of shareholders for purposes of voting
on the removal of one or more Trustees. In connection with such meetings called
by shareholders, shareholders will be assisted in shareholder communications to
the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations for the
Trust. However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for indemnification
for all losses and expenses of any shareholder of the Fund held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund would be unable to meet its obligations. The
Investment Manager believes that, in view of the above, the risk of personal
liability to shareholders is remote.
The Fund is an "open-end" management investment company and is a
"diversified company" as those terms are defined in the 1940 Act. Among other
things, a diversified fund must, with respect to 75% of its total assets, not
invest more than 5% of its total assets in any one issuer.
25
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and principal officers of the Trust, their addresses, and
their principal occupations and positions with certain affiliates of the
Investment Manager are set forth below.
*+Peter C. Bennett, One Financial Center, Boston, MA 02111 serves as
Vice President of the Trust. He is 59. His principal occupation is currently,
and during the past five years has been, Executive Vice President of State
Street Research & Management Company. Mr. Bennett is also a Director of State
Street Research & Management Company. Mr. Bennett's other principal business
affiliations include Director, State Street Research Investment Services, Inc.
and Executive Vice President, GFM International Investors, Inc.
+Steve A. Garban, The Pennsylvania State University, 210 Old Main,
University Park, PA 16802, serves as Trustee of the Trust. He is 60. He is
retired and was formerly Senior Vice President for Finance and Operations and
Treasurer of The Pennsylvania State University.
*+Bartlett R. Geer, One Financial Center, Boston, MA 02111 serves as
Vice President of the Trust. He is 43. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as Vice President of State Street Research & Management
Company.
+Malcolm T. Hopkins, 14 Brookside Road, Biltmore Forest, Asheville, NC
28803, serves as Trustee of the Trust. He is 70. He is engaged principally in
private investments. Previously, he was Vice Chairman of the Board and Chief
Financial Officer of St. Regis Corp.
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 57. 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 71. He is engaged principally in private
investments and civic affairs, and is an author of business history. Previously,
he was with an affiliate of J.P. Morgan & Co. in New York.
- ---------------
* or + see footnotes on page 28
26
<PAGE>
+Robert A. Lawrence, 175 Federal Street, Boston, MA 02110, serves as
Trustee of the Trust. He is 71. He is retired and was formerly a Partner in
Saltonstall & Co., a private investment firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 47. His principal occupation is currently, and
during the past five years has been, Executive Vice President, Treasurer, Chief
Financial Officer and Director of State Street Research & Management Company.
Mr. Maus's other principal business affiliations include Executive Vice
President, Treasurer, Chief Financial Officer and Director of State Street
Research Investment Services, Inc. and Executive Vice President, Chief Financial
Officer, Administrative Officer and Director, GFM International Investors, Inc.
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111,
serves as Secretary and General Counsel of the Trust. He is 42. His principal
occupation is Executive Vice President, General Counsel and Secretary of State
Street Research & Management Company. During the past five years he has also
served as Senior Vice President of State Street Research & Management Company,
Senior Vice President of State Street Research Investment Services, Inc. and as
Senior Vice President, General Counsel and Assistant Secretary of The Boston
Company, Inc., Boston Safe Deposit and Trust Company and The Boston Company
Advisors, Inc.. Mr. McNamara's other principal business affiliations include
Executive Vice President, Clerk and General Counsel of State Street Research
Investment Services, Inc. and Executive Vice President and General Counsel, GFM
International Investors, Inc.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 66. He is retired and was formerly Executive Vice
President, Chief Operating Officer and Director of Hewlett-Packard Company.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves
as Trustee of the Trust. He is 60. His principal occupations during the past
five years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
60. His principal occupation during the past five years has been Jay W.
Forrester Professor of Management at Sloan School of Management, Massachusetts
Institute of Technology.
*+Thomas A. Shively, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 44. 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.
- ---------------
* or + see footnotes on page 28
27
<PAGE>
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 55. His principal occupation is currently, and during the past five
years has been, Chairman of the Board, President, Chief Executive Officer and
Director of State Street Research & Management Company. Mr. Verni's other
principal business affiliations include Chairman of the Board and Director of
State Street Research Investment Services, Inc., and (until February 1996, prior
positions as President, Chief Executive Officer of that company) and Chairman
of the Board, President, Chief Executive Officer and Director of GFM
International Investors, Inc.
- ---------------
*These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the 1940 Act because of their affiliations with the
Fund's investment adviser.
+Serves as a Trustee/Director and/or officer of one or more of the
following investment companies, each of which has an advisory relationship with
the Investment Manager or its parent, Metropolitan Life Insurance Company
("Metropolitan"): State Street Research Equity Trust, State Street Research
Financial Trust, State Street Research Income Trust, State Street Research Money
Market Trust, State Street Research Tax-Exempt Trust, State Street Research
Capital Trust, State Street Research Exchange Trust, State Street Research
Growth Trust, State Street Research Master Investment Trust, State Street
Research Securities Trust, State Street Research Portfolios, Inc. and
Metropolitan Series Fund, Inc.
28
<PAGE>
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.
As of April 30, 1998, the Trustees and principal officers of the Trust
as group owned approximately 1.5% of the Fund's outstanding Class A shares and
owned no shares of the Fund's outstanding Class B, Class C or Class S shares.
Also as of April 30, 1998, 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:
<TABLE>
<CAPTION>
Shareholder %
----------- -
<S> <C> <C>
Class C (a) Merrill Lynch 24.2
Class S (a) Chase Manhattan Bank 90.2
</TABLE>
The full name and address of each of the above persons or entities are
as follows:
Merrill Lynch, Pierce, Fenner & Smith, Inc. (b)
4800 Deerlake Drive East
Jacksonville, FL 32246
Chase Manhattan Bank, N.A. (b)(c)
770 Broadway
New York, NY 10003
- -----------------------
(a) Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
(b) The Fund believes that each named record holder does not have
beneficial ownership of such shares.
(c) Chase Manhattan Bank holds such shares as a trustee under certain
employee benefit plans serviced by Metropolitan Life Insurance Company.
29
<PAGE>
The Trustees were compensated as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Total
Compensation
Aggregate From Fund and
Name of Compensation Complex Paid
Trustee From Fund(a) to Trustees(b)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Steve A. Garban $ 3,800 $ 75,899
Malcolm T. Hopkins $ 4,000 $ 78,499
Edward M. Lamont $ 3,700 $ 68,741
Robert A. Lawrence $ 4,100 $ 93,125
Dean O. Morton $ 4,300 $ 97,125
Toby Rosenblatt $ 4,100 $ 68,741
Michael S. Scott Morton $ 4,300 $ 103,625
Ralph F. Verni $ 0 $ 0
</TABLE>
- -----------------------
(a) For the Fund's fiscal year ended March 31, 1998.
(b) Includes compensation on behalf of all series of 12 investment
companies for which the Investment Manager or its parent, Metropolitan
served as investment adviser. "Total Compensation from Fund and
Complex Paid to Trustees" for the 12 months ended December 31, 1997.
The Trust does not provide any pension or retirement benefits for the
Trustees.
30
<PAGE>
MANAGEMENT OF THE FUND AND INVESTMENT ADVISORY SERVICES
Under the provisions of the Trust's Master Trust Agreement and the laws
of Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees.
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Investment
Manager was founded by Paul Cabot, Richard Saltonstall and Richard Paine to
serve as investment adviser to one of the nation's first mutual funds, presently
known as State Street Research Investment Trust, which they had formed in 1924.
Their investment management philosophy emphasized comprehensive fundamental
research and analysis, including meetings with the management of companies under
consideration for investment. The Investment Manager's portfolio management
group has extensive investment industry experience managing equity and debt
securities.
The Investment Manager is charged with the overall responsibility for
managing the investments and business affairs of the Fund, subject to the
authority of the Board of Trustees. The Advisory Agreement provides that the
Investment Manager shall furnish the Fund with an investment program, office
facilities and such investment advisory, research and administrative services as
may be required from time to time. The Investment Manager compensates all
executive and clerical personnel and Trustees of the Trust if such persons are
employees of the Investment Manager or its affiliates. The Investment Manager is
an indirect wholly owned subsidiary of Metropolitan.
The advisory fee payable monthly by the Fund to the Investment Manager
is computed as a percentage of the average of the value of the net assets of the
Fund as determined at the close of regular trading on the New York Stock
Exchange (the "NYSE") on each day the NYSE is open for trading, at the annual
rate of 0.75% on the first $500 million, 0.70% on the next $500 million and
0.50% on amounts over $1 billion, 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, 1996, 1997 and 1998 the Fund's
investment advisory fee prior to the assumption of fees or expenses was
$3,051,182, $3,692,033, and $4,785,350, respectively. For the same periods, the
voluntary reduction of fees or assumption of expenses amounted to $715,739,
$475,396, and $113,307, respectively.
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund for a period of two years after its initial effectiveness
and will continue from year to year thereafter as long as it is approved at
least annually both (i) by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act) or by the Trustees of the
Trust, and (ii) in either event by a vote of a majority of the Trustees who are
not parties to the
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Advisory Agreement or "interested persons" of any party thereto, cast in person
at a meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated on 60-days' written notice by either party and will
terminate automatically in the event of its assignment, as defined under the
1940 Act and regulations thereunder. Such regulations provide that a transaction
which does not result in a change of actual control or management of an adviser
is not deemed an assignment.
Under the Code of Ethics of the Investment Manager, investment
management personnel are only permitted to engage in personal securities
transactions in accordance with certain conditions relating to such person's
position, the identity of the security, the timing of the transaction, and
similar factors. Such personnel must report their personal securities
transactions quarterly and supply broker confirmations of such transactions to
the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by State Street Research Investment
Services, Inc. The Fund offers four classes of shares which may be purchased at
the next determined net asset value per share plus, in the case of all classes
except Class S shares, a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class C shares). General information on how to
buy shares of the Fund, as well as sales charges involved, is set forth under
"Your Investment" in the Prospectus. The following supplements that information.
Public Offering Price. The public offering price for each class of
shares is based on their net asset value determined as of the close of regular
trading on the NYSE on the day the purchase order is received by State Street
Research Service Center (the "Service Center"), provided that the order is
received prior to the close of regular trading on the NYSE on that day;
otherwise the net asset value used is that determined as of the close of the
NYSE on the next day it is open for unrestricted trading. When a purchase order
is placed through a dealer, that dealer is responsible for transmitting the
order promptly to the Service Center in order to permit the investor to obtain
the current price. Any loss suffered by an investor which results from a
dealer's failure to transmit an order promptly is a matter for settlement
between the investor and the dealer.
Class A Shares--Reduced Sales Charges. The reduced sales charges set
forth under "Your Investment--Choosing a Share Class" in the Prospectus apply to
purchases made at any one time by any "person," which includes: (i) an
individual, or an individual combining with his or her spouse and their children
and purchasing for his, her or their own account; (ii) a "company" as defined in
Section 2(a)(8) of the 1940 Act; (iii) a trustee or other fiduciary purchasing
for a single trust estate or single fiduciary account (including a pension,
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profit sharing or other employee benefit trust created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code); (iv) a tax-exempt
organization under Section 501(c)(3) or (13) of the Internal Revenue Code; and
(v) an employee benefit plan of a single employer or of affiliated employers.
Investors may purchase Class A shares of the Fund at reduced sales
charges by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds"
(which include the Fund and other funds as designated by the Distributor from
time to time) within a 13-month period. The sales charge applicable to each
purchase made pursuant to a Letter of Intent will be that which would apply if
the total dollar amount set forth in the Letter of Intent were being bought in a
single transaction. Purchases made within a 90-day period prior to the execution
of a Letter of Intent may be included therein; in such case the date of the
earliest of such purchases marks the commencement of the 13-month period.
An investor may include toward completion of a Letter of Intent the
value (at the current public offering price) of all of his or her Class A shares
of the Fund and of any of the other Class A shares of Eligible Funds held of
record as of the date of his or her Letter of Intent, plus the value (at the
current offering price) as of such date of all of such shares held by any
"person" described herein as eligible to join with the investor in a single
purchase. Class B, Class C and Class S shares may also be included in the
combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C, and Class S shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
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Other Programs Related to Class A Shares. Class A shares of the Fund
may be sold or issued in an exchange at a reduced sales charge or without sales
charge pursuant to certain sponsored arrangements, which include programs under
which a company, employee benefit plan or other organization makes
recommendations to, or permits group solicitation of, its employees, members or
participants, except any organization created primarily for the purpose of
obtaining shares of the Fund at a reduced sales charge or without a sales
charge. Sales without a sales charge, or with a reduced sales charge, may also
be made through brokers, registered investment advisers, financial planners,
institutions, and others, under managed fee-based programs (e.g., "wrap fee" or
similar programs) which meet certain requirements established from time to time
by the Distributor. Information on such arrangements and further conditions and
limitations is available from the Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and person: (A) the
Investment Manager, Distributor or any affiliated entities, including any direct
or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated Companies,
any relatives of any such individuals whose relationship is directly verified by
such individuals to the Distributor, or any beneficial account for such
relatives or individuals; and (C) employees, officers, sales representatives or
directors of dealers and other entities with a selling agreement with the
Distributor to sell shares of any aforementioned investment company, any spouse
or child of such person, or any beneficial account for any of them. The purchase
must be made for investment and the shares purchased may not be resold except
through redemption. This purchase program is subject to such administrative
policies, regarding the qualification of purchasers and any other matters, as
may be adopted by the Distributor from time to time.
Conversion of Class B Shares to Class A Shares. A shareholder's Class B
shares of the Fund, including all shares received as dividends or distributions
with respect to such shares, will automatically convert to Class A shares of the
Fund at the end of eight years following the issuance of such Class B shares;
consequently, they will no longer be subject to the higher expenses borne by
Class B shares. The conversion rate will be determined on the basis of the
relative per share net asset values of the two classes and may result in a
shareholder receiving either a greater or fewer number of Class A shares than
the Class B shares so converted. As noted above, holding periods for Class B
shares received in exchange for Class B shares of other Eligible Funds will be
counted toward the eight-year period.
Contingent Deferred Sales Charges. The amount of any contingent
deferred sales charge paid on Class A shares (on sales of $1 million or more and
which do not involve an initial sales charge) or on Class B or Class C shares of
the Fund will be paid to the Distributor. The Distributor will pay dealers at
the time of sale a 4% commission for
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selling Class B shares and a 1% commission for selling Class C shares. In
certain cases, a dealer may elect to waive the 4% commission on Class B shares
and receive in lieu thereof an annual fee, usually 1% with respect to such
outstanding shares. The proceeds of the contingent deferred sales charges and
the distribution fees are used to offset distribution expenses and thereby
permit the sale of Class B and Class C shares without an initial sales charge.
In determining the applicability and rate of any contingent deferred
sales charge of Class B or Class C shares, it will be assumed that a redemption
of the shares is made first of those shares having the greatest capital
appreciation, next of shares representing reinvestment of dividends and capital
gains distributions and finally of remaining shares held by shareholder for the
longest period of time. Class B shares that are redeemed within a five-year
period after their purchase, and Class C shares that are redeemed within a
one-year period after their purchase, will not be subject to a contingent
deferred sales charge to the extent that the value of such shares represents (1)
capital appreciation of Fund assets or (2) reinvestment of dividends or capital
gains distributions. The holding period for purposes of applying a contingent
deferred sales charge for a particular class of shares of the Fund acquired
through an exchange from another Eligible Fund will be measured from the date
that such shares were initially acquired in the other Eligible Fund, and shares
of the same class being redeemed will be considered to represent, as applicable,
capital appreciation or dividend and capital gains distribution reinvestments in
such other Eligible Fund. These determinations will result in any contingent
deferred sales charge being imposed at the lowest possible rate. For federal
income tax purposes, the amount of the contingent deferred sales charge will
reduce the gain or increase the loss, as the case may be, on the amount realized
on redemption.
Contingent Deferred Sales Charge Waivers. With respect to Class A
shares (on sales of $1 million or more and which do not involve an initial sales
charge), and Class B and Class C shares of the Fund, the contingent deferred
sales charge does not apply to exchanges or to redemptions under a systematic
withdrawal plan which meets certain conditions. In addition, the contingent
deferred sales charge will be waived for: (i) redemptions made within one year
of the death or total disability, as defined by the Social Security
Administration, of all shareholders of an account; (ii) redemptions made after
attainment of a specific age in an amount which represents the minimum
distribution required at such age under Section 401(a)(9) of the Internal
Revenue Code of 1986, as amended, for retirement accounts or plans (e.g., age 70
1/2 for Individual Retirement Accounts and Section 403(b) plans), calculated
solely on the basis of assets invested in the Fund or other Eligible Funds; and
(iii) a redemption resulting from a tax-free return of an excess contribution to
an Individual Retirement Account. (The foregoing waivers do not apply to a
tax-free rollover or transfer of assets out of the Fund). The Fund may modify or
terminate the waivers at any time; for example, the Fund may limit the
application of multiple waivers and establish other conditions for employee
benefit plans.
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Class S Shares. Class S shares are currently available to certain
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants, service arrangements, or similar factors;
insurance companies; investment companies; advisory accounts of the Investment
Manager; endowment funds of nonprofit organizations with substantial minimum
assets (currently a minimum of $10 million); and other similar institutional
investors. Class S shares may be acquired through programs or products sponsored
by Metropolitan, its affiliates, or both for which Class S shares have been
designated. In addition, Class S shares are available through programs under
which, for example, investors pay an asset-based fee and/or a transaction fee to
intermediaries. Class S share availability is determined by the Distributor and
intermediaries based on the overall direct and indirect costs of a particular
program, expected assets, account sizes and similar considerations.
Reorganizations. In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, the Fund may issue its shares at net asset value (or
more) to such entities or to their security holders.
Redemptions. The Fund reserves the right to pay redemptions in kind
with portfolio securities in lieu of cash. In accordance with its election
pursuant to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of
redemption proceeds paid in cash. Although it has no present intention to do so,
the Fund may, under unusual circumstances, limit redemptions in cash with
respect to each shareholder during any ninety-day period to the lesser of (i)
$250,000 or (ii) 1% of the net asset value of the Fund at the beginning of such
period. In connection with any redemptions paid in kind with portfolio
securities, brokerage and other costs may be incurred by the redeeming
shareholder in the sale of the securities received.
Systematic Withdrawal Plan. A shareholder who owns noncertificated
Class A or Class S shares with a value of $5,000 or more, or Class B or Class C
shares with a value of $10,000 or more, may elect, by participating in the
Fund's Systematic Withdrawal Plan, to have periodic checks issued for specified
amounts. These amounts may not be less than certain minimums, depending on the
class of shares held. The Plan provides that all income dividends and capital
gains distributions of the Fund shall be credited to participating shareholders
in additional shares of the Fund. Thus, the withdrawal amounts paid can only be
realized by redeeming shares of the Fund under the Plan. To the extent such
amounts paid exceed dividends and distributions from the Fund, a shareholder's
investment will decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually of
either (a) the value, at the time the Systematic Withdrawal Plan is initiated,
of the shares then in the account or (b) the value, at the time of a withdrawal,
of the same number of shares as in the account when the Systematic Withdrawal
Plan was initiated, whichever is higher.
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Expenses of the Systematic Withdrawal Plan are borne by the Fund. A
participating shareholder may withdraw from the Systematic Withdrawal Plan, and
the Fund may terminate the Systematic Withdrawal Plan at any time on written
notice. Purchase of additional shares while a shareholder is receiving payments
under a Systematic Withdrawal Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate in
the Investamatic Program (see "Your Investment--Investor Services--Investamatic
Program" in the Fund's Prospectus) and the Systematic Withdrawal Plan at the
same time.
Request to Dealer to Repurchase. For the convenience of shareholders,
the Fund has authorized the Distributor as its agent to accept orders from
dealers by wire or telephone for the repurchase of shares by the Distributor
from the dealer. The Fund may revoke or suspend this authorization at any time.
The repurchase price is the net asset value for the applicable shares next
determined following the time at which the shares are offered for repurchase by
the dealer to the Distributor. The dealer is responsible for promptly
transmitting a shareholder's order to the Distributor.
Signature Guarantees. Signature guarantees are required for, among
other things: (1) written requests for redemptions for more than $100,000; (2)
written requests for redemptions for any amount if the proceeds are transmitted
to other than the current address of record (unchanged in the past 30 days); (3)
written requests for redemptions for any amount submitted by corporations and
certain fiduciaries and other intermediaries; and (4) requests to transfer the
registration of shares to another owner. Signatures must be guaranteed by a
bank, a member firm of a national stock exchange, or other eligible guarantor
institution. The Transfer Agent will not accept guarantees (or notarizations)
from notaries public. The above requirements may be waived in certain instances.
Dishonored Checks. If a purchaser's check is not honored for its full
amount, the purchaser could be subject to additional charges to cover collection
costs and any investment loss, and the purchase may be canceled.
Processing Charges. Purchases and redemptions processed through
securities dealers may be subject to processing charges imposed by the
securities dealer in addition to sales charges that may be imposed by the Fund
or the Distributor.
SHAREHOLDER ACCOUNTS
General information on shareholder accounts is included in the Fund's
Prospectus under "Your Investment." The following supplements that information.
Maintenance Fees and Involuntary Redemption. Because of the relatively
high cost of maintaining small shareholder accounts, the Fund reserves the right
to redeem at its
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option any shareholder account which remains below $1,500 for a period of 60
days after notice is mailed to the applicable shareholder, or to impose a
maintenance fee on such account after 60 days' notice. Such involuntarily
redemptions will be subject to applicable sales charges, if any. The Fund may
increase such minimum account value above such amount in the future after notice
to affected shareholders. Involuntarily redeemed shares will be priced at the
net asset value on the date fixed for redemption by the Fund, and the proceeds
of the redemption will be mailed to the affected shareholder at the address of
record. Currently, the maintenance fee is $18 annually, which is paid to the
Transfer Agent. The fee does not apply to certain retirement accounts or if the
shareholder has more than an aggregate $50,000 invested in the Fund and other
Eligible Funds combined. Imposition of a maintenance fee on a small account
could, over time, exhaust the assets of such account.
To cover the cost of additional compliance administration, a $20 fee
will be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date
of payment of redemption proceeds for more than seven days, except that (a) it
may elect to suspend the redemption of shares or postpone the date of payment of
redemption proceeds: (1) during any period that the NYSE is closed (other than
customary weekend and holiday closings) or trading on the NYSE is restricted;
(2) during any period in which an emergency exists as a result of which disposal
of portfolio securities is not reasonably practicable or it is not reasonably
practicable to fairly determine the Fund's net asset values; or (3) during such
other periods as the Securities and Exchange Commission (the "SEC") may by order
permit for the protection of investors; and (b) the payment of redemption
proceeds may be postponed as otherwise provided under "Purchase and Redemption
of Shares" in this Statement of Additional Information.
The Open Account System. Under the Open Account System full and
fractional shares of the Fund owned by shareholders are credited to their
accounts by the Transfer Agent, State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110. Certificates representing Class B
or Class C shares will not be issued, while certificates representing Class A or
Class S shares will only be issued if specifically requested in writing and, in
any case, will only be issued for full shares, with any fractional shares to be
carried on the shareholder's account. Shareholders will receive periodic
statements of transactions in their accounts.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through
dealers, by wire or by mailing a check payable to "State
Street Research Funds" under the terms set forth above under
"Purchase and Redemption of Shares" in this Statement of
Additional Information.
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2. The following methods of receiving dividends from investment
income and distributions from capital gains generally are
available:
(a) All income dividends and capital gains distributions
reinvested in additional shares of the Fund.
(b) All income dividends and capital gains distributions
in cash.
(c) All income dividends and capital gains distributions
invested in any one available Eligible Fund
designated by the shareholder as described below. See
"--Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will be automatically coded for reinvestment of all
dividends and distributions in additional shares of the same class of the Fund.
Selections may be changed at any time by telephone or written notice to the
Service Center. Dividends and distributions are reinvested at net asset value
without a sales charge.
Exchange Privileges. Shareholders of the Fund may exchange their shares
for available shares with corresponding characteristics of any of the other
Eligible Funds at any time on the basis of the relative net asset values of the
respective shares to be exchanged, subject to compliance with applicable
securities laws. Shareholders of any other Eligible Fund may similarly exchange
their shares for Fund shares with corresponding characteristics. Prior to making
an exchange, shareholders should obtain the Prospectus of the Eligible Fund into
which they are exchanging. Under the Direct Program, subject to certain
conditions, shareholders may make arrangements for regular exchanges from the
Fund into other Eligible Funds. To effect an exchange, Class A, Class B and
Class C shares may be redeemed without the payment of any contingent deferred
sales charge that might otherwise be due upon an ordinary redemption of such
shares. The State Street Research Money Market Fund issues Class E shares which
are sold without any sales charge. Exchanges of State Street Research Money
Market Fund Class E shares into Class A shares of the Fund or any other Eligible
Fund are subject to the initial sales charge or contingent deferred sales charge
applicable to an initial investment in such Class A shares, unless a prior Class
A sales charge has been paid directly or indirectly with respect to the shares
redeemed. For purposes of computing the contingent deferred sales charge that
may be payable upon disposition of any acquired Class A, Class B and Class C
shares, the holding period of the redeemed shares is "tacked" to the holding
period of any acquired shares. No exchange transaction fee is currently imposed
on any exchange.
Shares of the Fund may also be acquired or redeemed in exchange for
shares of the Summit Cash Reserves Fund ("Summit Cash Reserves") by customers of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (subject to completion of
steps necessary to
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<PAGE>
implement the program). The Fund and Summit Cash Reserves are related mutual
funds for purposes of investment and investor services. Upon the acquisition of
shares of Summit Cash Reserves by exchange for redeemed shares of the Fund, (a)
no sales charge is imposed by Summit Cash Reserves, (b) no contingent deferred
sales charge is imposed by the Fund on the Fund shares redeemed, and (c) any
applicable holding period of the Fund shares redeemed is "tolled," that is, the
holding period clock stops running pending further transactions. Upon the
acquisition of shares of the Fund by exchange for redeemed shares of Summit Cash
Reserves, (a) the acquisition of Class A shares shall be subject to the initial
sales charges or contingent deferred sales charges applicable to an initial
investment in such Class A shares, unless a prior Class A sales charge has been
paid indirectly, and (b) the acquisition of Class B or Class C shares of the
Fund shall restart any holding period previously tolled, or shall be subject to
the contingent deferred sales charge applicable to an initial investment in such
shares.
The exchange privilege may be terminated or suspended or its terms
changed at any time, subject, if required under applicable regulations, to 60
days' prior notice. New accounts established for investments upon exchange from
an existing account in another fund will have the same telephone privileges with
respect to the Fund (see "Your Investment--Account Policies--Telephone Requests"
in the Fund's Prospectus and "--Telephone Privileges," below) as the existing
account unless the Service Center is instructed otherwise. Related
administrative policies and procedures may also be adopted with regard to a
series of exchanges, street name accounts, sponsored arrangements and other
matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer identification
number, may be aggregated for purposes of the six exchange limit.
Notwithstanding the six exchange limit, the Fund reserves the right to refuse
exchanges by any person or group if, in the Investment Manager's judgment, the
Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
Exchanges may be restricted or refused if the Fund receives or anticipates
simultaneous orders affecting significant portions of the Fund's assets. In
particular, a pattern of exchanges that coincides with a "market timing"
strategy may be 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 the Service
Center and delivered by the Service Center to the Transfer Agent by 12 noon
Boston time on any business day, the exchange usually will occur that day. For
further information regarding the exchange privilege, shareholders should
contact the Service Center.
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Reinvestment Privilege. A shareholder of the Fund who has redeemed
shares or had shares repurchased at his or her request may reinvest all or any
portion of the proceeds (plus that amount necessary to acquire a fractional
share to round off his or her reinvestment to full shares) in shares, of the
same class as the shares redeemed, of the Fund or any other Eligible Fund at net
asset value and without subjecting the reinvestment to an initial sales charge,
provided such reinvestment is made within 120 calendar days after a redemption
or repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the amount
reinvested. The redemption of shares is, for federal income tax purposes, a sale
on which the shareholder may realize a gain or loss. If a redemption at a loss
is followed by a reinvestment within 30 days, the transaction may be a "wash
sale" resulting in a denial of the loss for federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject
to any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by the Service
Center of such shareholder's written purchase request and delivery of the
request by the Service Center to the Transfer Agent. A shareholder may exercise
this reinvestment privilege only once per 12-month period with respect to his or
her shares of the Fund.
Dividend Allocation Plan. The Dividend Allocation Plan allows
shareholders to elect to have all their dividends and any other distributions
from the Fund or any Eligible Fund automatically invested at net asset value in
one other such Eligible Fund designated by the shareholder, provided the account
into which the dividends and distributions are directed is initially funded with
the requisite minimum amount.
Telephone Privileges. A shareholder with telephone privileges that are
offered with his or her Account (see "Your Investment--Account
Policies--Telephone Requests") is deemed to authorize the Service Center and the
Transfer Agent to: (1) act upon the telephone instructions of any person
purporting to be the shareholder or the shareholder's financial professional to
redeem or exchange, shares from any account; and (2) honor any written
instructions for a change of address regardless of whether such request is
accompanied by a signature guarantee. All telephone calls will be recorded.
Neither the Fund, the other Eligible Funds, the Transfer Agent, the Investment
Manager nor the Distributor will be liable for any loss, expense or cost arising
out of any request, including any fraudulent or unauthorized requests.
Shareholders assume the risk to the full extent of their accounts that telephone
requests may be unauthorized. Reasonable procedures will be followed to confirm
that instructions communicated by telephone are genuine. The shareholder will
not be liable for any losses arising from unauthorized or fraudulent
instructions if such procedures are not followed.
Alternative Means of Contacting the Fund. It is unlikely, during
periods of extraordinary market conditions, that a shareholder may have
difficulty in reaching the
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Service Center. In that event, however, the shareholder should contact the
Service Center at 1-800-562-0032, 1-617-357-7800 or otherwise at its main office
at One Financial Center, Boston, Massachusetts 02111-2690.
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily
as of the close of regular trading on the NYSE, ordinarily 4 P.M. New York City
time, Monday through Friday, on each day during which the NYSE is open for
unrestricted trading. The NYSE is currently closed on New Year's Day, Martin
Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is computed by dividing the
sum of the value of the securities held by the Fund plus any cash or other
assets minus all liabilities by the total number of outstanding shares of the
Fund at such time. Any expenses, except for extraordinary or nonrecurring
expenses, borne by the Fund, including the investment management fee payable to
the Investment Manager, are accrued daily.
In determining the values of portfolio assets as provided below, the
Trustees 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 utilize information with respect to market transactions, quotations
from dealers and various relationships among securities in determining value and
may provide prices determined as of times prior to the close of the NYSE.
In general, securities are valued as follows. Securities which are
listed or traded on the New York or American Stock Exchange are valued at the
price of the last quoted sale on the respective exchange for that day.
Securities which are listed or traded on a national securities exchange or
exchanges, but not on the New York or American Stock Exchange, are valued at the
price of the last quoted sale on the exchange for that day prior to the close of
the NYSE. Securities not listed on any national securities exchange which are
traded "over the counter" and for which quotations are available on the National
Association of Securities Dealers, Inc.'s (the "NASD") 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 of such pricing services as
may be deemed appropriate or methodologies approved by the Trustees.
The Trustees have authorized the use of the amortized cost method to
value short-term debt instruments issued with a maturity of one year or less and
having a remaining maturity of 60 days or less when the value obtained is fair
value, provided that
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<PAGE>
during any period in which more than 25% of the Fund's total assets is invested
in short-term debt securities the current market value of such securities will
be used in calculating net asset value per share in lieu of the amortized cost
method. Under the amortized cost method of valuation, the security is initially
valued at cost on the date of purchase (or in the case of short-term debt
instruments purchased with more than 60 days remaining to maturity, the market
value on the 61st day prior to maturity), and thereafter a constant amortization
to maturity of any discount or premium is assumed regardless of the impact of
fluctuating interest rates on the market value of the security.
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,
1997 and 1998 were 108.41% and 133.30%, respectively. The Investment Manager
believes that the portfolio turnover for the fiscal year ended March 31, 1998
was significantly higher then the year before because of portfolio
restructuring to adjust to changes in the asset allocations that were made
based on market valuations and the economic outlook, among other things.
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
43
<PAGE>
firm. The Investment Manager may or may not solicit competitive bids based on
its judgment of the expected benefit or harm to the execution process for that
transaction.
When it appears that a number of firms could satisfy the required
standards in respect of a particular transaction, consideration may also be
given by the Investment Manager to services other than execution services which
certain of such firms have provided in the past or may provide in the future.
Negotiated commission rates and prices, however, are based upon the Investment
Manager's judgment of the rate which reflects the execution requirements of the
transaction without regard to whether the broker provides services in addition
to execution. Among such other services are the supplying of supplemental
investment research; general economic, political and business information;
analytical and statistical data; relevant market information, quotation
equipment and services; reports and information about specific companies,
industries and securities; purchase and sale recommendations for stocks and
bonds; portfolio strategy services; historical statistical information; market
data services providing information on specific issues and prices; financial
publications; proxy voting data and analysis services; technical analysis of
various aspects of the securities markets, including technical charts; computer
hardware used for brokerage and research purposes; computer software and
databases (including those contained in certain trading systems and used for
portfolio analysis and modeling and also including software providing investment
personnel with efficient access to current and historical data from a variety of
internal and external sources); and portfolio evaluation services and relative
performance of accounts.
In the case of the Fund and other registered investment companies
advised by the Investment Manager or its affiliates, the above services may
include data relating to performance, expenses and fees of those investment
companies and other investment companies; this information is used by the
Trustees or Directors of the investment companies to fulfill their
responsibility to oversee the quality of the Investment Manager's advisory
contracts between the investment companies and the Investment Manager. The
Investment Manager considers these investment company services only in
connection with the execution of transactions on behalf of its investment
company clients and not its other clients. Certain of the nonexecution services
provided by broker-dealers may in turn be obtained by the broker-dealers from
third parties who are paid for such services by the broker-dealers.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. The Investment Manager's investment management
personnel conduct internal surveys and use other methods to evaluate the quality
of research and other services provided by various broker-dealer firms, and the
results of these efforts are made available to the equity trading department,
which uses this information as consideration to the extent described above in
the selection of brokers to execute portfolio transactions.
Some services furnished by broker-dealers may be used for research and
investment decision-making purposes, and also including for marketing or
administrative purposes. Under these circumstances, the Investment Manager
allocates the cost of the services to determine the
44
<PAGE>
proportion which is allocable to research or investment decision-making and the
proportion allocable to other purposes. The Investment Manager pays directly
from its own funds for that portion allocable to uses other than research or
investment decision-making. Some research and execution services may benefit the
Investment Manager's clients as a whole, while others may benefit a specific
segment of clients. Not all such services will necessarily be used exclusively
in connection with the accounts which pay the commissions to the broker-dealer
providing the services.
The Investment Manager has no fixed agreements or understandings with
any broker-dealer as to the amount of brokerage business which the firm may
expect to receive for services supplied to the Investment Manager or otherwise.
There may be, however, understandings with certain firms that in order for such
firms to be able to continuously supply certain services, they need to receive
an allocation of a specified amount of brokerage business. These understandings
are honored to the extent possible in accordance with the policies set forth
above.
It is not the Investment Manager's policy to intentionally pay a firm a
brokerage commission higher than that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided. However, the Investment Manager is aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, the Investment Manager relies on the provisions of
Section 28(e) of the Securities Exchange Act of 1934. Brokerage commissions paid
by the Fund in secondary trading during the last three fiscal years ended March
31 were as follows: 1996, $754,584; 1997, $1,136,104; and 1998, $1,252,657.
During and at the end of its most recent fiscal year, the Fund did not
hold in its portfolio 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 commissions and
designations to brokers or dealers which provide the client with research,
performance evaluation, master trustee and other services. In the absence of
instructions from the client, the Investment Manager may make such allocations
to broker-dealers which have provided the Investment Manager with research and
brokerage services.
In some instances, certain clients of the Investment Manager request it
to place all or part of the orders for their account with certain brokers or
dealers, which in some cases provide services to those clients. The Investment
Manager generally agrees to honor these requests to the extent practicable.
Clients may condition their requests by requiring that the Investment Manager
only effect transactions with the specified broker-dealers if the broker-dealers
are competitive as to price and execution. In other cases, the Investment
Manager may be unable to negotiate commissions or obtain volume discounts or
best execution. In addition a disparity may exist among the commissions charged
to
45
<PAGE>
clients who request the Investment Manager to use particular brokers or dealers,
and also between the those clients and those who do not make such requests. A
client who requests the use of a particular broker-dealer should understand that
it may lose the possible advantage which non-requesting clients derive from
aggregation of orders for several clients as a single transaction for the
purchase or sale of a particular security. Among other reasons why best
execution may not be achieved with directed brokerage is that, in an effort to
achieve orderly execution of transactions, execution of orders that have
designated particular brokers may, at the discretion of the trading desk, be
delayed until execution of other non-designated orders has been completed.
When more than one client of the Investment Manager is seeking to buy
or sell the same security, the sale or purchase is carried out in a manner which
is considered fair and equitable to all accounts. In allocating investments
among various clients (including in what sequence orders for trades are placed),
the Investment Manager will use its best business judgment and will take into
account such factors as the investment objectives of the clients, the amount of
investment funds available to each, the size of the order, the 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
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 qualify to do so. Accordingly, the Fund must, among other
things, (a) derive at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income (including, but not limited to, gains from options, futures or forward
contracts) derived with
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<PAGE>
respect to its business of investing in such stock, securities or currencies
(the "90% test"); and (b) satisfy certain diversification requirements on a
quarterly basis.
If in any year the Fund derives more than 10% of its gross income (as
defined in the Code, which disregards losses for that purpose) from investments
made directly in commodities, including precious metal investments, or
commodity-related options, futures or indices, the fund in such year may fail to
qualify as a regulated investment company under the Code. The Investment Manager
intends to manage the Fund's portfolio so as to minimize the risk of such a
disqualification.
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of the Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of the
Fund to the extent thereof. Any distribution in excess of a shareholder's basis
in the shareholder's shares would be taxable as gain realized from the sale of
such shares.
The Fund will be liable for a nondeductible 4% excise tax on amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement. To avoid the tax, during each calendar year, the Fund
must distribute, or be deemed to have distributed, an amount equal to the sum of
(1) at least 98% of its ordinary income (not taking into account any capital
gains or losses) for the calendar year, (2) at least 98% of its capital gains in
excess of its capital losses (adjusted for certain ordinary losses) for the
12-month period ending on October 31 of the calendar year and (3) all ordinary
income and capital gains for previous years that were not distributed during
such years. For this purpose, any income or gain retained by the Fund that is
subject to corporate tax will be considered to have been distributed by
year-end. The Fund intends to make sufficient distributions to avoid this 4%
excise tax.
Taxation Of The Fund's Investments
Original Issue Discount; Market Discount. For federal income tax
purposes, debt securities purchased by the Fund may be treated as having
original issue discount. Original issue discount represents interest for federal
income tax purposes and can generally be defined as the excess of the stated
redemption price at maturity of a debt obligation over the issue price. Original
issue discount is treated for federal income tax purposes as income earned by
the Fund, whether or not any cash 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.
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<PAGE>
Debt securities may be purchased by the Fund at a discount that exceeds
the original issue discount, 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 having a fixed maturity date of more
than one year from the date of issue and having market discount, the gain
realized on disposition will be treated as interest to the extent it does not
exceed the accrued market discount on the security (unless the Fund elects to
include such accrued market discount in income in the tax year to which it is
attributable). For debt securities acquired before May 1, 1993, this rule
applies only if the debt security was issued after July 18, 1984. 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 in income
currently. Because the Fund must include original issue discount in income, it
will be more difficult for the Fund to make the distributions required for the
Fund to maintain its status as a regulated investment company under Subchapter M
of the Code or to avoid the 4% excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may
be subject to provisions of the Code that (i) require inclusion of unrealized
gains or losses in the Fund's income for purposes of the 90% test, the excise
tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and (iii) characterize
both realized and unrealized gain or loss as short-term or long-term gain or
loss. Such provisions generally apply to, among other investments, options on
debt securities, indices on securities and futures contracts. The Fund will
monitor its transactions and may make certain tax elections available to it in
order to mitigate the impact of these rules and prevent disqualification of the
Fund as a regulated investment company.
Gains or losses attributable to foreign currency contracts or
fluctuations in exchange rates that occur between the time the Fund accrues
income or expenses denominated in a foreign currency and the time the Fund
actually collects such income or pays such expenses are treated as ordinary
income or loss. The portion of any gain or loss on the disposition of a debt
security denominated in a foreign currency that is attributable to fluctuations
in the value of the foreign currency during the holding period of the debt
security will likewise be treated as ordinary income or loss. Such ordinary
income or loss will increase or decrease the amount of the Fund's net investment
income.
If the Fund invests in the stock of certain "passive foreign investment
companies" ("PFICs"), income of such companies may become taxable to the Fund
prior to its distribution to the Fund or, alternatively, ordinary income taxes
and interest charges may be imposed on the Fund on "excess distributions"
received by the Fund or on gain from the disposition of such investments by the
Fund. The Fund does not intend to invest in PFICs. Because of the broad scope of
the PFIC rules, however, there can be no assurance that the Fund can avoid doing
so.
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<PAGE>
Taxation Of The Fund's Shareholders
The Fund may be subject to foreign taxes, including foreign income
taxes. If so, the Fund intends to meet the requirements of the Code for passing
through to its shareholders the tax benefit of foreign income taxes paid,
although there is no assurance that it will be able to do so. Under this
provision, if more than half of the value of the total assets of the Fund at the
close of its taxable year consists of stock or securities of foreign
corporations, the Fund will be eligible and intends to elect to pass through to
its shareholders the amount of foreign taxes it paid if such amounts are
material. Pursuant to this election, a United States shareholder will, in
general, be required to (i) include in gross income, in addition to taxable
distributions actually received, his or her pro rata share of the foreign taxes
paid by the Fund, (ii) treat that share of taxes as having been paid directly by
him or her, and (iii) either deduct such share of taxes or treat such share of
taxes as a credit against United States income tax liability. A tax-exempt
shareholder will ordinarily not benefit from this election.
Generally, a credit for foreign taxes paid by the Fund may not exceed a
shareholder's United States income tax attributable to the shareholder's foreign
source income. This limitation applies separately to different categories of
income, one of which is foreign-source passive income, which is likely to
include all of the foreign-source income of the Fund. As a result of these
limitations, some shareholders may not be able to utilize fully any foreign tax
credits generated by an investment in the Fund. The Fund will provide its
shareholders with information about the source of its income and the foreign
taxes it has paid for use in preparing the shareholder's United States income
tax return.
Dividends from domestic corporations are not expected to comprise a
substantial part of the income of the Fund. If such dividends are earned by the
Fund, then a portion of the dividends paid by the Fund may qualify for the 70%
deduction for dividends received which is available to corporate shareholders of
the Fund. Shareholders will be informed of any portion of the dividends paid by
the Fund which qualifies for this deduction. The dividends-received deduction is
reduced to the extent the dividends received are treated as debt-financed, under
the Code, and is eliminated if the stock is held for less than 46 days.
Any dividend declared in October, November or December and made payable
to shareholders of record in any such month is treated as received by such
shareholder on December 31, provided that the Fund pays the dividend during
January of the following calendar year.
Distributions by the Fund result in a reduction in the fair market
value of the Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as ordinary income or long-term capital gain, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the
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<PAGE>
tax implications of buying shares just prior to a taxable distribution. The
price of shares purchased at that time includes the amount of any forthcoming
distribution. Those investors purchasing shares just prior to a taxable
distribution will then receive a return of investment upon distribution which
will nevertheless be taxable to them.
The foregoing discussion of United States federal income tax law
relates solely to the application of that law to United States persons, that is,
United States citizens and residents and United States corporations,
partnerships, trusts and estates. Each shareholder who is not a United States
person should consider the United States and foreign tax consequences of
ownership of shares of the Fund, including the possibility that such a
shareholder may be subject to United States withholding tax at a rate of up to
30% (or at a lower rate under an applicable treaty) on distributions from the
Fund.
Shareholders should consult their tax advisers about the application of
the provisions of tax law described in this Statement of Additional Information
in light of their particular tax situations.
DISTRIBUTION OF SHARES OF THE FUND
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (Class B and Class C shares). The Distributor may reallow all or
portions of such sales charges as concessions to dealers. For the fiscal years
ended March 31, 1996, 1997 and 1998, total sales charges on Class A shares paid
to the Distributor amounted to $869,039, $1,283,941 and $1,621,289,
respectively. For the same periods, the Distributor retained $107,358, $158,495
and $203,896, respectively, 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,
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reinvestments or dividend investments at net asset value. Similarly, no
significant sales effort is necessary for sales of shares at net asset value to
certain Directors, Trustees, officers, employees, their relatives and other
persons directly or indirectly related to the Fund or associated entities. Where
shares of the Fund are offered at a reduced sales charge or without a sales
charge pursuant to sponsored arrangements, managed fee-based programs and
so-called "mutual fund supermarkets," among other programs, the amount of the
sales charge reduction will similarly reflect the anticipated reduction in sales
expenses associated with such arrangements. The reductions in sales expenses,
and therefore the reduction in sales charges, will vary depending on factors
such as the size and other characteristics of the organization or program, and
the nature of its membership or the participants. The Fund reserves the right to
make variations in, or eliminate, sales charges at any time or to revise the
terms of or to suspend or discontinue sales pursuant to sponsored arrangements
or similar programs at any time.
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 C shares of
the Fund and paid initial commissions to securities dealers for sales of such
Class A, Class B and Class C shares as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1998 March 31, 1997 March 31, 1996
----------------------------- ----------------------------- ---------------------------
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 $ 1,417,393 $ 0 $ 1,125,446 $ 0 $ 761,681
Class B $ 483,752 $ 2,853,020 $ 387,778 $ 2,208,110 $ 965,398 $ 1,290,690
Class C $ 1,611 $ 47,177 $ 1,277 $ 46,532 $ 6,098 $ 22,246
</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
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<PAGE>
activities primarily intended to result in the sale of Class A, Class B and
Class C shares, including, but not limited to, (1) the payment of commissions
and/or reimbursement to underwriters, securities dealers and others engaged in
the sale of shares, including payments to the Distributor to be used to pay
commissions and/or reimbursement to securities dealers (which securities dealers
may be affiliates of the Distributor) engaged in the distribution and marketing
of shares and furnishing ongoing assistance to investors, (2) reimbursement of
direct out-of-pocket expenditures incurred by the Distributor in connection with
the distribution and marketing of shares and the servicing of investor accounts
including expenses relating to the formulation and implementation of marketing
strategies and promotional activities such as direct mail promotions and
television, radio, newspaper, magazine and other mass media advertising, the
preparation, printing and distribution of Prospectuses of the Fund and reports
for recipients other than existing shareholders of the Fund, and obtaining such
information, analyses and reports with respect to marketing and promotional
activities and investor accounts as the Fund may, from time to time, deem
advisable, and (3) reimbursement of expenses incurred by the Distributor in
connection with the servicing of shareholder accounts including payments to
securities dealers and others in consideration of the provision of personal
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.
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) or others for
personal services and/or the maintenance of shareholder accounts. A portion of
any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance or servicing of
shareholder accounts by such dealers. Dealers who have sold Class A shares are
eligible for further reimbursement commencing as of the time of such sale.
Dealers who have sold Class B and Class C shares are eligible for further
reimbursement after the first year during which such shares have been held of
record by such dealer as nominee for its clients (or by such clients directly).
Any service fees received by the Distributor and not allocated to dealers may be
applied by the Distributor in reduction of expenses incurred by it directly for
personal services and the maintenance or servicing of shareholder accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to dealers for selling such shares. Any distribution fees
received by the Distributor and not allocated to dealers may be applied by the
Distributor in connection with sales or marketing efforts, including special
promotional fees and cash and noncash incentives based upon sales by dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs similar
expenses on
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behalf of, such other funds. When expenses of the Distributor cannot be
identified as relating to a specific fund, the Distributor allocates expenses
among the funds in a manner deemed fair and equitable to each fund.
Commissions and other cash and noncash incentives and payments to
dealers, to the extent payable out of the general profits, revenues or other
sources of the Distributor (including the advisory fees paid by the Fund), have
also been authorized pursuant to the Distribution Plan.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class C shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class C
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class C shares (as the case may be) to make payments for personal
services and/or the maintenance or servicing of shareholder accounts. The
distribution and servicing expenses of a particular class will be borne solely
by that class. In addition, a rule of the NASD limits annual expenditures that
the Fund may incur under the Distribution Plan to 1%, of which 0.75% may be used
to pay distribution expenses and 0.25% may be used to pay shareholder service
fees. The NASD rule also limits the aggregate amount that the Fund may pay for
such distribution costs to 6.25% of gross share sales of a class since the
inception of any asset-based sales charge plus interest at the prime rate plus
1% on unpaid amounts thereof (less any contingent deferred sales charges). Such
limitation does not apply to shareholder service fees. Payments to the
Distributor or to dealers funded under the Distribution Plan may be discontinued
at any time.
The Distributor may pay certain dealers and other intermediaries
additional compensation for sales and administrative services. The Distributor
may provide cash and noncash incentives to intermediaries who, for example, sell
significant amounts of shares or develop particular distribution channels. The
Distributor may compensate dealers with clients who maintain their investments
in the Fund over a period of years. The incentives can include merchandise and
trips to, and attendance at, sales seminars at resorts. The Distributor may pay
for administrative services, such as technological and computer systems support
for the maintenance of pension plan participant records, for subaccounting, and
for distribution through mutual fund supermarkets or similar arrangements.
During the fiscal year ended March 31, 1998, 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:
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<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C*
------- ------- --------
<S> <C> <C> <C>
Advertising $ 0 $ 46,071 $ 8,987
Printing and mailing of prospectuses to
other than current shareholders 0 11,703 2,292
Compensation to dealers 716,302 2,874,899 165,263
Compensation to sales personnel 0 91,325 19,178
Interest 0 0 0
Carrying or other financing charges 0 0 0
Other expenses: marketing; general 0 49,882 9,868
------------ ------------- ------------
Total Fees $ 716,302 $ 3,073,880 $ 205,588
</TABLE>
- -------------
* Prior to November 1, 1997, the Fund's current Class C shares were designated
as Class D shares.
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 make alternative
arrangements for such services for shareholders who acquired shares through such
institutions.
CALCULATION OF PERFORMANCE DATA
From time to time, in advertisements or in communications to
shareholders or prospective investors, the Fund may compare the performance of
its Class A, Class B, Class C or Class S shares to the performance of other
mutual funds with similar investment objectives, to certificates of deposit
and/or to other financial alternatives. The Fund may also compare its
performance to appropriate indices, such as Standard & Poor's 500 Index,
Consumer Price Index and Dow Jones Industrial Average and/or to appropriate
rankings and averages such as those compiled by Lipper Analytical Services,
Inc., Morningstar, Inc., Money Magazine, Business Week, Forbes Magazine, The
Wall Street Journal and Investor's Daily.
54
<PAGE>
The average annual total return ("standard total return") of the Class
A, Class B, Class C and Class S shares of the Fund will be calculated as set
forth below. Total return is 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 on June 1, 1993, when designations were assigned
based on the pricing and Rule 12b-1 fees applicable to shares sold thereafter.
The application of the additional Rule 12b-1 fees, if any, of up to 1% will, for
periods after June 1, 1993, adversely affect Fund performance results. Thus,
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.
The performance data below reflect Rule 12b-1 fees, where applicable,
sales charges as follows:
55
<PAGE>
<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 1- and 5-year periods reflect a 5% and
5-year periods reflect a 5% and 1993 to present; a 2% contingent deferred sales
fee will reduce performance a 2% contingent charge, respectively
deferred sales charge, for periods after June
1, 1993 respectively
C* 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
S* None 0.25% until June 1, 1993; 0% thereafter None
</TABLE>
- --------------------
* Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
All calculations of performance data in this section reflect the
voluntary measures, if any, by the Fund's affiliates to reduce fees or expenses
relating to the Fund; see "Accrued Expenses and Recurring Charges" later in this
section.
Total Return
The Fund's standard average annual total returns ("standard total
return") of each class of shares were as follows:
<TABLE>
<CAPTION>
Commencement of
Operations Five Years One Year
(December 29, 1988) Ended Ended
to March 31, 1998 March 31, 1998 March 31, 1998
------------------- -------------- --------------
<S> <C> <C> <C>
Class A 12.80% 13.96% 23.79%
Class B 12.91% 13.93% 23.53%
Class C 12.91% 14.18% 27.59%
Class S 13.50% 15.29% 29.93%
</TABLE>
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:
56
<PAGE>
P(1+T)(n) = ERV
<TABLE>
<S> <C> <C> <C>
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
</TABLE>
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 1998 was as follows:
<TABLE>
<S> <C>
Class A 1.34%
Class B 0.69%
Class C 0.68%
Class S 1.66%
</TABLE>
Yield for each of the Fund's Class A, Class B, Class C and Class S
shares is computed by dividing the net investment income per share earned during
a recent month or other specified 30-day period by the maximum offering price
per share on the last day of the period and annualizing the result in accordance
with the following formula:
YIELD = 2[(a-b + 1)(6) -1]
---
cd
<TABLE>
<S> <C> <C> <C>
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
</TABLE>
57
<PAGE>
To calculate interest earned (for the purpose of "a" above) on debt
obligations, the Fund computes the yield to effective maturity of each
obligation held by the Fund based on the market value of the obligation
(including actual accrued interest) at the close of the last business day of the
preceding period, or, with respect to obligations purchased during the period,
the purchase price (plus actual accrued interest). The yield to effective
maturity is then divided by 360 and the quotient is multiplied by the market
value of the obligation (including actual accrued interest) to determine the
interest income on the obligation for each day of the period that the obligation
is in the portfolio. Dividend income is recognized daily based on published
rates.
With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("paydowns"), the Fund accounts for gain or
loss attributable to actual monthly paydowns as a realized capital gain or loss
during the period. The Fund has elected not to amortize discount or premium on
such securities.
Undeclared earned income, computed in accordance with generally
accepted accounting principles, may be subtracted from the maximum offering
price. Undeclared earned income is the net investment income which, at the end
of the base period, has not been declared as a dividend, but is reasonably
expected to be declared as a dividend shortly thereafter. The maximum offering
price includes, as applicable, a maximum sales charge of 4.5%.
All accrued expenses are taken into account as described later herein.
Yield information is useful in reviewing the Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in the Fund's shares with bank deposits, savings accounts and
similar investment alternatives which often are insured and/or provide an agreed
or guaranteed fixed yield for a stated period of time. Shareholders should
remember that yield is a function of the kind and quality of the instruments in
the Fund's portfolio, portfolio maturity and operating expenses and market
conditions.
Accrued Expenses and Recurring Charges
Accrued expenses include all recurring charges that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return and yield results take sales charges, if applicable, into
account, although the results do not take into account recurring and
nonrecurring charges for optional services which only certain shareholders elect
and which involve nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by
affiliates of fees or expenses during the subject period. In the absence of such
subsidization, the performance of the Fund would have been lower.
58
<PAGE>
Nonstandardized Total Return
The Fund may provide the above described standard total return results
for Class A, Class B, Class C and Class S shares for periods which end no
earlier than the most recent calendar quarter end and which begin twelve months
before, five years before and 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, 1998 without taking sales charges into account, were
as follows:
<TABLE>
<S> <C>
Class A 7.28%
Class B 6.87%
Class C 6.85%
Class S 7.41%
</TABLE>
Distribution Rates
The Fund may also quote its distribution rate for each class of shares.
The distribution rate is calculated by annualizing the latest per-share
distribution from ordinary income and dividing the result by the offering price
per share as of the end of the period to which the distribution relates. A
distribution can include gross investment income from debt obligations purchased
at a premium and in effect include a portion of the premium paid. A distribution
can also include nonrecurring, gross short-term capital gains without
recognition of any unrealized capital losses. Further, a distribution can
include income from the sale of options by the Fund even though such option
income is not considered investment income under generally accepted accounting
principles.
Because a distribution can include such premiums, capital gains and
option income, the amount of the distribution may be susceptible to control by
the Investment Manager through transactions designed to increase the amount of
such items. Also, because the distribution rate is calculated in part by
dividing the latest distribution by the offering price, which is based on net
asset value plus any applicable sales charge, the distribution rate will
increase as the net asset value declines. A distribution rate can be greater
than the yield rate calculated as described above.
59
<PAGE>
The distribution rates of the Fund, based on the month of March 1998,
were as follows:
<TABLE>
<S> <C>
Class A 1.65%
Class B 0.83%
Class C 0.83%
Class S 1.97%
</TABLE>
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 Fund's annual financial statements, (2) assistance
and consultation in connection with SEC filings and (3) review of the annual
income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a
semiannual basis, other supplementary financial reports may be made available
from time to time through electronic or other media. Shareholders with
substantial holdings in one or more State Street Research Funds may also receive
reports and other information which reflect or analyze their positions in a
consolidated manner. For more information, call State Street Research Service
Center.
The following financial statements are for the Fund's fiscal year
ended March 31, 1998:
60
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- -------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------------
MARCH 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (Note 1)
- --------------------------------------------------------------------------------------------------
EQUITY SECURITIES 59.8%
BASIC INDUSTRIES 8.4%
CHEMICAL 2.4%
<S> <C> <C>
Agrium Inc. .................................................... 353,000 $ 4,986,125
Cabot Corp.++ .................................................. 159,100 5,866,812
Cambrex Corp. .................................................. 21,050 1,060,394
Ciba Specialty Chemicals AG* ................................... 12,400 1,586,094
E.I. Du Pont De Nemours & Co. .................................. 19,900 1,353,200
OM Group Inc. .................................................. 14,700 619,238
Thiokol Corp. .................................................. 52,800 2,550,900
------------
18,022,763
------------
DIVERSIFIED 0.8%
Axia Holdings Corp.*(+) ........................................ 750 75,750
Johnson Controls Inc. .......................................... 28,900 1,753,869
Mark IV Industries Inc. ........................................ 127,500 2,900,625
Ogden Corp. .................................................... 40,800 1,173,000
------------
5,903,244
------------
ELECTRICAL EQUIPMENT 1.1%
Asia Pacific Wire & Cable Corp. Ltd.* .......................... 200,400 1,603,200
Essex International Inc.* ...................................... 23,500 928,250
General Electric Co. ........................................... 53,300 4,593,794
Protection One Inc. Wts.*+ ..................................... 800 10,800
Sony Corp.* .................................................... 16,000 1,357,102
------------
8,493,146
------------
FOREST PRODUCT 1.0%
Abitibi-Consolidated Inc. ...................................... 338,800 5,145,525
Equitable Bag Inc.* ............................................ 47,600 19,040
Equitable Bag Inc. Pfd.* ....................................... 4,760 71,400
MacMillan Bloedel Ltd. ......................................... 124,500 1,750,781
Mail-Well Holdings, Inc.*(+) ................................... 21,307 807,003
------------
7,793,749
------------
MACHINERY 1.8%
Chatwins Group Inc. Wts.*+ ..................................... 500 500
Howmet International Inc.* ..................................... 165,300 2,954,737
ITEQ Inc.* ..................................................... 145,800 2,077,650
Sundstrand Corp. ............................................... 62,800 3,799,400
Tyco International Ltd. ........................................ 79,600 4,348,150
------------
13,180,437
------------
METAL & MINING 1.1%
Bar Technologies Inc. Wts.*+ ................................... 250 15,000
Crown Packaging Holdings Ltd. Wts.*+ ........................... 3,750 1,875
General Cable Corp.* ........................................... 26,600 1,206,975
Kennametal Inc. ................................................ 101,000 5,315,125
NS Group Inc. Wts.*+ ........................................... 650 97,500
Sheffield Steel Corp.*+ ........................................ 1,250 3,750
Wyman-Gordon Co.* .............................................. 62,600 1,431,975
------------
8,072,200
------------
TRUCKERS 0.2%
CNF Transportation Inc. ........................................ 45,600 1,638,750
------------
Total Basic Industries ......................................... 63,104,289
------------
CONSUMER CYCLICAL 9.3%
AIRLINE 0.4%
Aeroporti Di Roma SPA* ......................................... 163,100 2,809,292
CHC Helicopter Corp. Wts.*(+) .................................. 2,000 6,000
Virgin Express Holdings PLC ADR* ............................... 9,800 232,750
------------
3,048,042
------------
AUTOMOTIVE 1.1%
Budget Group Inc. Cl. A* ....................................... 16,200 607,500
Exide Corp. .................................................... 165,000 2,794,688
Gencorp Inc. ................................................... 60,500 1,860,375
Midas Inc.* .................................................... 21,983 453,399
Renault SA* .................................................... 58,200 2,591,884
------------
8,307,846
------------
BUILDING 0.1%
Golf Trust America Inc.* ....................................... 12,000 376,500
Waxman Industries Inc. Wts.*+ .................................. 29,500 73,750
------------
450,250
------------
HOTEL & RESTAURANT 1.3%
CKE Restaurants Inc. ........................................... 9,460 347,655
Harrah's Entertainment Inc.* ................................... 153,900 3,780,169
Landry Seafood Restaurants Inc.* ............................... 7,800 239,850
Mirage Resorts Inc.* ........................................... 224,400 5,455,725
Motels of America Inc.*+ ....................................... 500 5,000
------------
9,828,399
------------
RECREATION 2.1%
American Radio Systems Corp. Cl. A* ............................ 16,900 1,072,097
American Radio Systems Corp. Series B Exch. Pfd. ............... 2,632 310,576
American Telecasting Inc. Wts.* ................................ 1,250 1,250
Chancellor Media Corp. ......................................... 34,900 1,601,037
Cox Communications Inc.* ....................................... 39,600 1,663,200
Fitzgeralds South Inc. Wts.*(+) ................................ 1,250 12,500
Goldriver Hotel & Casino Corp. Cl. B*(+) ....................... 20,000 2,500
Goldriver Hotel & Casino Corp. Liquidation Trust Units*(+) 500,000 6,350
Granite Broadcasting Corp. Exch. Pfd.# ......................... 288 328,320
Gtech Holdings Corp.* .......................................... 49,700 1,932,087
Heartland Wireless Communications, Inc. Wts.*(+) ............... 1,500 15
International Game Technology Inc. ............................. 76,400 1,910,000
Mattel Inc. .................................................... 49,800 1,973,325
Panavision Inc.* ............................................... 6,300 165,769
SHRP Equity Inc.* .............................................. 37 148
Steiner Leisure Ltd.* .......................................... 36,400 1,849,575
US West Inc.* .................................................. 71,600 2,488,100
Wireless One Inc. Wts.*+ ....................................... 750 8
Wireless One Inc. Wts.* ........................................ 1,250 62
------------
15,316,919
------------
RETAIL TRADE 4.2%
Blyth Industries Inc.* ......................................... 13,800 470,925
Cendant Corp.* ................................................. 90,700 3,593,987
Central Rents Inc.*+ ........................................... 250 13,750
CSK Auto Corp.* ................................................ 8,200 184,500
Dayton Hudson Corp. ............................................ 26,600 2,340,800
Fred Meyer Inc.* ............................................... 4,755 219,642
Hannaford Brothers Co. ......................................... 105,800 4,701,487
Home Depot Inc. ................................................ 50,200 3,385,362
InaCom Corp.* .................................................. 22,900 632,613
RETAIL TRADE (CONT'D)
Kroger Co.* .................................................... 102,900 4,752,694
Proffitts Inc.* ................................................ 37,725 1,367,531
Rite Aid Corp. ................................................. 123,400 4,226,450
Supermarkets General Holdings Corp. Exch. Pfd.# ................ 18,200 382,200
Wal-Mart Stores, Inc. .......................................... 64,300 3,267,244
Wolters Kluwer NV* ............................................. 15,300 2,186,815
------------
31,726,000
------------
TEXTILE & APPAREL 0.1%
Acme Boot Co.*+ ................................................ 250 250
Columbia Sportswear Co.* ....................................... 1,100 23,238
Warnaco Group Inc. Cl. A ....................................... 21,500 843,875
------------
867,363
------------
Total Consumer Cyclical ........................................ 69,544,819
------------
CONSUMER STAPLE 13.3%
BUSINESS SERVICE 2.2%
A.C. Nielson Corp.* ............................................ 148,800 3,933,900
Apollo Group Inc. Cl. A* ....................................... 39,000 1,876,875
Avis Rent A Car, Inc.* ......................................... 8,800 285,450
Comverse Technology Inc.* ...................................... 17,915 875,596
Dollar Thrifty Automotive Group, Inc.* ......................... 16,100 362,250
Hagler Bailly Inc.* ............................................ 30,400 760,000
HBO & Co. ...................................................... 56,400 3,405,150
ICF Kaiser International Inc. Wts.* ............................ 2,400 1,200
La Petite Academy Inc. Cl. A Exch. Pfd.* ....................... 22,000 1,012,000
Maximus Inc.* .................................................. 28,100 841,244
Pagemart Inc. Wts.*+ ........................................... 2,300 17,250
Pameco Corp.* .................................................. 27,500 505,312
Shared Medical Systems Corp. ................................... 8,200 642,675
Staff Leasing Inc.* ............................................ 21,200 588,300
Vestar/LPA Investment Corp.*+ .................................. 1,375 19,250
Vestcom International Inc.* .................................... 26,700 278,681
Waddell & Reed Financial Inc. Cl. A* ........................... 10,700 278,200
Waterlink Inc.* ................................................ 51,300 718,200
------------
16,401,533
------------
CONTAINER 0.6%
Ball Corp. ..................................................... 133,400 4,368,850
Golden Ocean Group Ltd. Wts.*+ ................................. 500 2,500
------------
4,371,350
------------
DRUG 2.8%
Ascent Pediatrics Inc.* ........................................ 23,000 87,688
Atrix Laboratories Inc.* ....................................... 33,600 638,400
Axogen Ltd.* ................................................... 21,700 1,236,900
Biovail Corp.* ................................................. 56,100 2,706,825
Bristol-Myers Squibb Co. ....................................... 23,000 2,399,187
Intelligent Polymers Ltd.* ..................................... 76,900 2,364,675
Kos Pharmaceuticals Inc.* ...................................... 88,400 828,750
Nutraceutical International Corp.* ............................. 3,800 83,600
Pathogenesis Corp.* ............................................ 14,300 479,050
Pfizer Inc. .................................................... 34,000 3,389,375
Schering-Plough Corp. .......................................... 27,400 2,238,238
Spiros Development Corp.* ...................................... 59,900 958,400
Warner-Lambert Co. ............................................. 22,500 3,832,031
------------
21,243,119
------------
FOOD & BEVERAGE 2.1%
Coca-Cola Co. .................................................. 33,000 2,555,437
Dr Pepper Bottling Holdings Inc. Cl. A* ........................ 56,000 1,568,000
H.J. Heinz Co. ................................................. 25,600 1,494,400
Hussmann International Inc.* ................................... 65,950 1,236,563
Keebler Foods Co.* ............................................. 20,900 627,000
PepsiCo Inc. ................................................... 43,600 1,861,175
Sara Lee Corp. ................................................. 61,300 3,777,612
Seven-Up/RC Bottling Co. of Southern California* ............... 26,250 315,000
Whitman Corp. .................................................. 131,900 2,605,025
------------
16,040,212
------------
HOSPITAL SUPPLY 2.5%
Aradigm Corp.* ................................................. 30,300 382,538
Aviron Corp.* .................................................. 28,300 654,438
Centennial Healthcare Corp.* ................................... 31,900 801,487
Guidant Corp. .................................................. 33,100 2,428,712
Johnson & Johnson .............................................. 16,100 1,180,331
National Surgery Centers Inc.* ................................. 37,600 961,150
Quorum Health Group Inc.* ...................................... 88,900 2,989,262
Respironics Inc.* .............................................. 58,823 1,702,191
Rural/Metro Corp.* ............................................. 9,400 309,025
Total Renal Care Holdings Inc.* ................................ 132,633 4,418,337
U.S. Surgical Corp. ............................................ 53,500 1,765,500
Xomed Surgical Products Inc.* .................................. 35,100 965,250
------------
18,558,221
------------
PERSONAL CARE 0.3%
Wesley Jessen VisionCare Inc.* ................................. 78,700 2,587,263
------------
PRINTING & PUBLISHING 2.6%
A.H. Belo Corp. Cl. A .......................................... 12,852 706,860
General Media Inc. Wts.*(+) .................................... 250 250
Hollinger International, Inc. Cl. A* ........................... 340,000 5,652,500
Primedia Inc. Series D Pfd. .................................... 2,500 265,625
Primedia Inc. Series F Pfd. .................................... 2,000 205,000
Prosieben Media AG* ............................................ 57,100 2,979,184
Sullivan Holdings Inc.* ........................................ 149 53,467
Torstar Corp. Cl. B* ........................................... 86,400 3,003,282
Valassis Communications Inc. ................................... 152,400 6,248,400
------------
19,114,568
------------
TOBACCO 0.2%
Dimon Inc. ..................................................... 89,900 1,500,206
------------
Total Consumer Staple .......................................... 99,816,472
------------
ENERGY 3.8%
OIL 3.4%
Abacan Resources Corp.*++ ...................................... 539,500 758,672
British Petroleum Co. PLC* ..................................... 109,800 1,579,805
Energy Africa Ltd.* ............................................ 614,900 2,210,245
ENI SPA ADR .................................................... 48,800 3,306,200
Maxx Petroleum Ltd.*++ ......................................... 334,600 439,162
Oryx Energy Co. ................................................ 114,500 2,977,000
PTT Exploration & Production Public Co. Ltd.* .................. 127,200 1,441,708
Saipem SPA* .................................................... 250,000 1,487,932
Seagull Energy Corp.*++ ........................................ 319,288 6,126,338
Total SA Cl. B* ................................................ 12,909 1,549,705
Total SA Cl. B ADR ............................................. 57,800 3,471,612
------------
25,348,379
------------
OIL SERVICE 0.4%
Cliffs Drilling Co.* ........................................... 12,300 508,144
Schlumberger Ltd. .............................................. 17,000 1,287,750
UTI Energy Corp.* .............................................. 28,800 473,400
Willbros Group Inc.*++ ......................................... 34,900 573,669
------------
2,842,963
------------
Total Energy ................................................... 28,191,342
------------
FINANCE 8.0%
BANK 3.0%
Banc One Corp. ................................................. 70,510 4,459,757
BankAmerica Corp. .............................................. 36,900 3,048,863
Canadian Imperial Bank of Commerce ............................. 126,100 4,366,212
Chase Manhattan Corp. .......................................... 18,700 2,522,163
Commercial Federal Corp. ....................................... 8,850 321,919
Fleet Financial Group Inc. ..................................... 29,200 2,483,825
Golden State Bancorp Inc. ...................................... 20,000 763,750
National Bank of Canada ........................................ 204,700 3,843,046
Riverbank America Pfd.* ........................................ 20,000 480,000
------------
22,289,535
------------
FINANCIAL SERVICE 0.9%
CMAC Investment Corp. .......................................... 13,100 874,425
Contifinancial Corp.* .......................................... 19,700 600,850
CRIIMI MAE Inc.* ............................................... 20,300 313,381
Federal National Mortgage Association .......................... 22,900 1,448,425
First Industrial Realty Trust Inc. ............................. 11,300 406,800
FirstPlus Financial Group Inc.* ................................ 20,200 848,400
INMC Mortgage Holdings Inc. .................................... 28,200 705,000
Liberty Property Trust ......................................... 11,700 314,438
T & W Financial Corp.* ......................................... 58,100 1,670,375
------------
7,182,094
------------
INSURANCE 4.1%
Ace Ltd. ....................................................... 272,400 10,266,075
AMBAC Inc. ..................................................... 97,900 5,721,031
Capital Re Corp.* .............................................. 6,400 411,200
HCC Insurance Holdings Inc. .................................... 39,100 899,300
Mid Ocean Ltd. ................................................. 71,700 5,556,750
Mutual Risk Management Ltd. .................................... 34,100 1,155,137
Travelers Group Inc. ........................................... 43,250 2,595,000
UNUM Corp. ..................................................... 69,700 3,846,569
------------
30,451,062
------------
Total Finance .................................................. 59,922,691
------------
SCIENCE & TECHNOLOGY 11.9%
AEROSPACE 0.3%
Ladish Inc.*(+) ................................................ 8,667 133,250
Ladish Inc. Wts.*(+) ........................................... 15,095 213,972
Raytheon Co. Cl. A* ............................................ 32,400 1,842,750
------------
2,189,972
------------
COMPUTER SOFTWARE & SERVICE 5.4%
Anacomp Inc. Wts.* ............................................. 4,941 35,050
Box Hill Systems Corp.* ........................................ 33,000 422,813
Check Point Software Technologies Ltd.* ........................ 21,900 1,000,556
Cisco Systems Inc.* ............................................ 75,400 5,155,475
Complete Business Solutions Inc.* .............................. 23,000 825,125
Diamond Multimedia Systems Inc.* ............................... 57,400 853,825
Duane Reade Inc.* .............................................. 3,800 97,138
EMC Corp.* ..................................................... 60,500 2,287,656
Industir-Matematik International Corp.* ........................ 30,600 960,075
Mapics Inc.* ................................................... 59,800 1,057,712
Mastech Corp.* ................................................. 23,300 1,187,572
Microsoft Corp.* ............................................... 33,200 2,971,400
Nintendo Co. Ltd.* ............................................. 22,700 1,959,467
Radiant Systems Inc.* .......................................... 85,000 2,103,750
SAP AG Pfd.* ................................................... 7,500 3,189,289
Sema Group PLC* ................................................ 93,100 3,674,926
STB Systems Inc.* .............................................. 29,200 584,000
Transition Systems Inc.* ....................................... 40,800 831,300
TT Tieto Oy Cl. B* ............................................. 24,600 4,162,474
Veritas Software Co.* .......................................... 14,000 827,750
Walker Interactive Systems, Inc.* .............................. 42,000 821,625
Wang Laboratories Inc.* ........................................ 22,700 702,281
WM Data AB Cl. B* .............................................. 151,800 4,024,964
Xylan Corp.* ................................................... 30,000 731,250
------------
40,467,473
------------
ELECTRONIC COMPONENTS 2.1%
Digital Microwave Corp.* ....................................... 27,120 400,020
Lernout & Hauspie Speech Products NV ADR* ...................... 83,100 7,260,862
Remec Inc.* .................................................... 76,150 2,184,553
RF Micro Devices Inc.* ......................................... 34,100 498,713
Rohm Co.* ...................................................... 15,000 1,373,616
Texas Instruments Inc. ......................................... 61,900 3,350,338
World Access Inc.* ............................................. 14,500 471,250
------------
15,539,352
------------
ELECTRONIC EQUIPMENT 2.8%
Aeroflex Inc.* ................................................. 151,200 2,003,400
Applied Micro Circuits Corp.* .................................. 19,400 436,500
ATMI Inc.* ..................................................... 9,400 284,350
Chicago Miniature Lamp, Inc.* .................................. 117,000 4,548,375
L.M. Ericsson Telephone Co. Cl. B* ............................. 96,800 4,600,588
Lucent Technologies Inc.* ...................................... 32,100 4,104,787
Nokia AB Cl. K Pfd.* ........................................... 13,800 1,484,106
Onix Systems Inc.* ............................................. 41,200 597,400
Spectrian Corp.* ............................................... 28,500 473,813
Teradyne Inc.* ................................................. 69,100 2,768,319
------------
21,301,638
------------
OFFICE EQUIPMENT 1.3%
Lexmark International Group Inc. Cl. A* ........................ 36,200 1,633,525
Unisys Corp. ................................................... 243,000 4,617,000
Xerox Corp. .................................................... 34,100 3,629,519
------------
9,880,044
------------
Total Science & Technology ..................................... 89,378,479
------------
UTILITY 5.1%
ELECTRIC 2.9%
Allegheny Energy Inc.* ......................................... 24,200 812,213
Edison International Inc. ...................................... 110,000 3,231,250
Elecricidade De Portugal SA* ................................... 100,000 2,321,098
GPU Inc. ....................................................... 55,300 2,447,025
Illinova Corp. ................................................. 27,200 821,100
Montana Power Co. .............................................. 25,000 901,563
OGE Energy Corp. ............................................... 60,000 3,472,500
Pinnacle West Capital Corp. .................................... 75,100 3,337,256
Veba AG* ....................................................... 37,000 2,624,638
Western Resources Inc. ......................................... 37,900 1,620,225
------------
21,588,868
------------
NATURAL GAS 0.8%
Calpine Corp.* ................................................. 37,800 673,313
Williams Cos Inc. .............................................. 177,489 5,679,648
------------
6,352,961
------------
TELEPHONE 1.4%
AirTouch Communications Inc.* .................................. 38,500 1,884,094
Celcaribe SA*+ ................................................. 297,558 1,190,232
Clearnet Communications Inc. Wts.* ............................. 2,640 27,720
Econophone Inc. Wts.*+ ......................................... 750 30,000
Intelcom Group, Inc. Wts.*(+) .................................. 1,650 41,250
Nextel Communications Inc. Cl. A* .............................. 1,549 52,279
Nortel Inversora SA ADR ........................................ 66,000 1,905,750
Powertel Inc. Wts.* ............................................ 960 10,080
RSL Communications Ltd. Wts.*+ ................................. 750 67,500
SK Telecom Ltd ADR* ............................................ 3,600 28,575
Telecom Italia SPA* ............................................ 285,500 2,249,702
WorldCom Inc.* ................................................. 75,200 3,238,300
------------
10,725,482
------------
Total Utility .................................................. 38,667,311
------------
Total Equity Securities (Cost $341,596,102) .................... 448,625,403
------------
EQUITY SECURITIES -- INFLATION RESPONSIVE INVESTMENTS 4.6%
BASIC INDUSTRIES 0.7%
METAL & MINING 0.6%
Aber Resources Ltd.* ........................................... 13,600 170,000
Anglogold Ltd. ADR ............................................. 43,100 183,175
Ashanti Goldfields Ltd. GDR .................................... 50,000 465,625
Battle Mountain Gold Co. ....................................... 100,000 637,500
Crown Resources Corp.* ......................................... 125,000 562,500
Delta Gold NL* ................................................. 168,000 219,991
Menzies Gold NL* ............................................... 400,000 52,908
Newcrest Mining Ltd.* .......................................... 150,000 238,979
Normandy Mining Ltd.* .......................................... 511,325 547,827
Pan African Resources Corp.* ................................... 215,600 10,652
Shaw Group Inc.* ............................................... 5,300 132,168
Southernera Resources Ltd.* .................................... 100,000 935,173
Sutton Resources Ltd.* ......................................... 56,000 420,000
Viceroy Resource Corp.* ........................................ 100,000 172,919
------------
4,749,417
------------
RAILROAD 0.1%
OMI Corp. ...................................................... 76,400 687,600
Overseas Shipholding Group Inc. ................................ 3,100 66,263
------------
753,863
------------
Total Basic Industries ......................................... 5,503,280
------------
CONSUMER STAPLE 0.1%
BUSINESS SERVICE 0.1%
Commodore Applied Technologies, Inc.* .......................... 150,000 656,250
Commodore Applied Technologies, Inc. Wts.* ..................... 150,000 168,750
------------
825,000
------------
Total Consumer Staple .......................................... 825,000
------------
ENERGY 3.1%
OIL 2.9%
3DX Technologies Inc.* ......................................... 50,000 92,188
Arakis Energy Corp.*@ .......................................... 529,300 1,058,600
Barrington Petroleum Ltd.* ..................................... 126,300 383,308
Basin Exploration Inc.* ........................................ 15,000 309,375
Benton Oil & Gas Co.* .......................................... 9,400 103,988
Brigham Exploration Co.* ....................................... 19,400 240,075
Cabot Oil & Gas Corp. Cl. A .................................... 20,200 457,025
Canadian 88 Energy Corp.* ...................................... 113,200 587,232
Coho Energy Inc.* .............................................. 19,900 155,469
Crystal Oil Co.* ............................................... 10,000 420,000
Forcenergy Inc.* ............................................... 7,200 190,800
Forest Oil Corp.* .............................................. 26,300 406,006
Gulfstream Resources Canada Ltd. ............................... 58,000 270,177
KCS Energy Inc.@ ............................................... 198,900 3,182,400
Meridian Resource Corp.* ....................................... 41,600 332,800
Miller Exploration Co.* ........................................ 13,100 132,637
Nuevo Energy Co.* .............................................. 40,000 1,432,500
Ocean Energy Inc.* ............................................. 7,410 174,598
Oil Search Ltd.* ............................................... 448,600 792,140
Optima Petroleum Corp.* ........................................ 43,100 52,528
Patina Oil & Gas Corp. ......................................... 15,500 110,437
Plains Resources Inc.* ......................................... 109,800 1,866,600
Ranger Oil Ltd.* ............................................... 251,300 1,633,450
Santa Fe Energy Resources Inc. ................................. 34,900 383,900
Seven Seas Petroleum Inc.*@ .................................... 58,800 1,517,040
Snyder Oil Corp. ............................................... 23,400 476,775
Southwestern Energy Co. ........................................ 58,600 622,625
St. Mary Land & Exploration Co. ................................ 9,600 366,900
Stone Energy Corp.* ............................................ 9,200 359,375
Tarragon Oil & Gas Ltd.* ....................................... 116,357 796,600
Titan Exploration Inc.* ........................................ 51,000 414,375
Tom Brown, Inc.* ............................................... 35,600 796,550
Tri Link Resources Ltd. Cl. A* ................................. 20,700 226,453
Ulster Petroleum Ltd.* ......................................... 121,500 1,050,482
------------
21,395,408
------------
OIL SERVICE 0.2%
Atwood Oceanics Inc.* .......................................... 3,600 194,625
Diamond Offshore Drilling Inc.* ................................ 14,300 648,862
J. Ray McDermott SA* ........................................... 3,300 139,013
TMBR/Sharp Drilling, Inc.* ..................................... 20,500 235,750
Transocean Offshore Inc. ....................................... 12,400 637,825
------------
1,856,075
------------
Total Energy ................................................... 23,251,483
------------
SCIENCE & TECHNOLOGY 0.1%
ELECTRONIC EQUIPMENT 0.1%
Commodore Separation Technologies, Inc.* ....................... 150,000 403,125
Commodore Separation Technologies, Inc. Wts.* .................. 150,000 93,750
------------
496,875
------------
Total Science & Technology ..................................... 496,875
------------
UTILITY 0.6%
NATURAL GAS 0.6%
Coastal Corp. .................................................. 4,600 299,575
K N Energy Inc. ................................................ 5,300 313,031
Questar Corp. .................................................. 11,000 457,187
TransTexas Gas Corp.*@ ......................................... 189,300 2,969,644
Valero Refining and Marketing Corp. ............................ 15,600 520,650
------------
4,560,087
------------
Total Utility .................................................. 4,560,087
------------
Total Equity Securities -- Inflation Responsive
Investments (Cost $34,342,471) ............................... 34,636,725
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- -------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
PRINCIPAL MATURITY VALUE
AMOUNT DATE (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------------
FIXED INCOME SECURITIES 29.7%
U.S. TREASURY 8.0%
<S> <C> <C> <C>
U.S. Treasury Bond, 12.00% ..................... $ 800,000 8/15/2013 $ 1,175,128
U.S. Treasury Bond, 8.75% ...................... 5,400,000 5/15/2017 7,068,924
U.S. Treasury Bond, 8.125% ..................... 8,175,000 8/15/2021 10,308,184
U.S. Treasury Bond, 8.50% ...................... 4,850,000 2/15/2020 6,301,217
U.S. Treasury Bond, 6.875% ..................... 1,425,000 8/15/2025 1,589,317
U.S. Treasury Note, 6.625% ..................... 2,100,000 7/31/2001 2,160,711
U.S. Treasury Note, 5.625% ..................... 3,775,000 10/31/1999 3,775,604
U.S. Treasury Note, 6.25% ...................... 5,825,000 2/28/2002 5,941,500
U.S. Treasury Note, 7.875% ..................... 3,650,000 11/15/2004 4,077,744
U.S. Treasury Note, 6.50% ...................... 2,150,000 8/15/2005 2,247,094
U.S. Treasury Note, 6.50% ...................... 1,450,000 5/31/2002 1,493,500
U.S. Treasury Note, 7.50% ...................... 1,575,000 2/15/2005 1,731,760
U.S. Treasury Note, 6.875% ..................... 1,200,000 5/15/2006 1,286,628
U.S. Treasury TIPS, 3.375% ..................... 688,399 1/15/2007 667,423
U.S. Treasury TIPS, 3.625% ..................... 725,116 1/15/2008 716,958
U.S. Treasury STRIPS, 0.00% .................... 3,500,000 11/15/2001 2,858,940
U.S. Treasury STRIPS, 0.00% .................... 5,850,000 5/15/2003 4,393,350
U.S. Treasury STRIPS, 0.00% .................... 4,225,000 5/15/2007 2,496,933
------------
60,290,915
------------
U.S. AGENCY MORTGAGE 4.7%
Federal Home Loan Mortgage Corp., 7.50% ........ 75,294 4/01/2002 76,217
Federal Home Loan Mortgage Corp., 8.50% ........ 331 7/01/2009 346
Federal Home Loan Mortgage Corp. TBA, 7.00% .... 4,050,000 4/16/2013 4,118,344
Federal Home Loan Mortgage Corp. TBA, 6.00% .... 4,250,000 4/16/2013 4,187,578
Federal Home Loan Mortgage Corp., 7.00% ........ 1,414,132 6/01/2024 1,430,918
Federal Home Loan Mortgage Corp., 7.50% ........ 1,060,878 8/01/2024 1,087,888
Federal Home Loan Mortgage Corp., 7.00% ........ 728,297 12/01/2024 736,942
Federal Home Loan Mortgage Corp. TBA, 7.50% .... 6,375,000 4/13/2028 6,528,398
Federal National Mortgage Association, 9.50% ... 1,193,894 10/01/2003 1,241,841
Federal National Mortgage Association, 8.00% ... 207,708 4/01/2008 216,990
Federal National Mortgage Association, 8.00% ... 268,926 6/01/2008 280,944
Federal National Mortgage Association, 8.50% ... 242,463 2/01/2009 255,061
Federal National Mortgage Association, 6.00% ... 1,000,000 5/25/2022 985,310
Federal National Mortgage Association, 7.50% ... 848,459 10/01/2025 870,197
Federal National Mortgage Association, 7.50% ... 1,417,170 10/01/2025 1,453,039
Federal National Mortgage Association TBA, 7.00% 2,800,000 5/13/2028 2,824,500
Government National Mortgage Association, 6.50% 552,640 2/15/2009 558,509
Government National Mortgage Association, 6.50% 199,282 6/15/2009 201,398
Government National Mortgage Association, 6.50% 1,210,224 7/15/2009 1,223,076
Government National Mortgage Association TBA,
7.50% ........................................ 975,000 4/16/2013 1,008,211
Government National Mortgage Association, 8.00% 639,562 9/15/2017 672,135
Government National Mortgage Association, 7.00% 1,090,942 1/15/2025 1,104,578
Government National Mortgage Association, 7.50% 1,243,445 11/15/2025 1,275,302
Government National Mortgage Association TBA,
6.50% ........................................ 925,000 4/20/2028 915,461
Government National Mortgage Association TBA,
7.00% ........................................ 1,600,000 5/20/2028 1,614,500
------------
34,867,683
------------
TRUST CERTIFICATES 0.1%
Cooperative Utility Trust Certificates, 10.70% . 350,000 9/15/2017 369,617
Cooperative Utility Trust Certificates, 10.125% 225,000 3/15/2019 237,551
------------
607,168
------------
FINANCE/MORTGAGE 6.1%
Advanta Credit Card Master Trust Series 95F-A1,
6.05% ........................................ 475,000 8/01/2003 475,147
American Express Credit Account Master Trust
96-1 A, 6.80% ................................ 1,350,000 12/15/2003 1,382,481
Arcadia Automobile Trust Series 97-C A5, 6.55% . 675,000 6/15/2005 685,415
Associates Corp. of North America Sr. Note,
6.45% ........................................ 700,000 10/15/2001 707,959
Associates Corp. of North America Sr. Note,
6.70% ........................................ 1,400,000 5/29/2001 1,425,018
Bank of New York Institutional Capital Trust,
7.78%+ ....................................... 2,650,000 12/01/2026 2,729,844
Capital One Bank Sr. Note, 7.08% ............... 1,850,000 10/30/2001 1,893,845
Cigna Corp. Deb., 7.875% ....................... 1,400,000 5/15/2027 1,523,102
CIT Group Holdings Inc. Sr. Note, 6.80% ........ 1,400,000 4/17/2000 1,419,936
Citibank Credit Card Master Trust, 5.80% ....... 1,000,000 2/07/2005 987,810
Commercial Credit Group Inc. Note, 6.45% ....... 1,450,000 7/01/2002 1,461,093
Commercial Credit Group Inc. Sr. Note, 5.55% ... 1,400,000 2/15/2001 1,377,628
Countrywide Funding Corp. Note, 7.26% .......... 1,400,000 5/10/2004 1,450,316
Countrywide Funding Corp. Note, 6.58% .......... 1,100,000 9/21/2001 1,109,185
Countrywide Mortgage Inc. Series 1993-E A-1,
6.50% ........................................ 129,952 1/25/2024 129,708
Countrywide Mortgage Inc. Series 1994-2 A-7,
6.50% ........................................ 288,422 4/25/2008 287,519
Credit Suisse First Boston 97-C2 A2, 6.52% ..... 1,400,000 7/17/2007 1,404,296
DMARC Commercial Mortgage Series
98-1 A1, 6.22% ............................... 1,200,000 6/15/2031 1,204,875
DMARC Commercial Mortgage Series
98-C1 A2, 6.54% ............................. 1,100,000 6/15/2031 1,116,500
DLJ Mortgage Acceptance Corp. 97-CF2-A1A, 6.55%+ 683,566 11/15/2006 695,101
First Union Lehman Brothers Commercial 97-C2 A2,
6.60% ........................................ 1,375,000 11/18/2029 1,385,313
First USA Credit Card Master Trust Series
1997-6A, 6.42% ............................... 1,350,000 3/17/2005 1,369,143
Ford Credit Auto Loan Master Trust Series 95-1,
6.50% ........................................ 1,100,000 8/15/2002 1,109,966
Ford Credit Auto Owner Trust 1996 A, 6.50% ..... 1,497,644 11/15/1999 1,501,388
GE Global Insurance Holding Corp. Note, 7.00% .. 2,225,000 2/15/2026 2,311,174
GMAC Commercial Mortgage Security Inc. 97-C2 A,
6.45% ........................................ 691,891 12/15/2004 698,810
LB Commercial Conduit Mortgage Trust 98-C1 A1,
6.33% ........................................ 694,551 11/18/2004 690,427
MBNA Corp. Sr. Note, 6.875% .................... 675,000 11/15/2002 684,356
Morgan Stanley Capital Inc. 98-A1, 6.19% ....... 700,000 1/15/2007 699,344
Prime Credit Card Master Trust Series 1995-1A,
6.75% ........................................ 1,800,000 11/15/2005 1,837,674
Prudential Home Mortgage Securities Co. Series
93-29 A-6 PAC, 6.75% ......................... 783,282 8/25/2008 785,969
Prudential Home Mortgage Securities Co. Series
93-47A-11, 6.10% ............................. 1,300,000 12/25/2023 1,257,750
Residential Funding Corp. Series 1993-S25 A-1,
6.50% ........................................ 121,946 7/25/2008 122,098
Sears Credit Account Master Trust Series
1995-2A, 8.10% ............................... 2,650,000 6/15/2004 2,729,500
Sears Credit Account Master Trust Series
1997-1A, 6.20% ............................... 700,000 7/16/2007 704,539
Structured Asset Securities Corp. Series 97-LL1-
A1, 6.79% .................................... 1,362,463 16/12/2004 1,394,822
World Omni Automobile Lease Trust 97-B A3, 6.18% 1,400,000 11/25/2003 1,403,934
Zurich Capital Trust, 8.376%+ .................. 1,425,000 6/01/2037 1,545,341
------------
45,698,326
------------
FOREIGN GOVERNMENT 3.7%
Australian Dollar
Commonwealth of Australia, 8.75% ............... 13,500,000 8/15/2008 10,975,286
New Zealand Dollar
Government of New Zealand, 10.00% .............. 7,800,000 3/15/2002 4,670,594
Government of New Zealand, 8.00% ............... 4,850,000 11/15/2006 2,842,895
Pound Sterling
United Kingdom Treasury, 8.50% ................. 4,800,000 12/07/2005 9,222,896
------------
27,711,671
------------
CORPORATE 6.6%
Acme Boot Inc. Sr. Note Series B, 11.50% ....... 250,000 12/15/2000 105,000
Allbritton Communications Co. Sr. Sub. Deb.,
9.75% ........................................ 750,000 11/30/2007 789,375
Alvey Systems Inc. Sr. Sub. Note, 11.375% ...... 250,000 1/31/2003 268,750
American Lawyer Media Inc. Sr. Sub. Note, 9.75%+
.............................................. 250,000 12/15/2007 261,875
American Telecasting Inc. Sr. Note, 0.00% to
6/14/99, 14.50% from 6/15/99 to maturity ..... 499,947 6/15/2004 104,989
Ameristar Casinos Inc. Sr. Sub. Note, 10.50% ... 250,000 8/01/2004 267,500
Anchor Advanced Products, Inc. Series B Sr.
Note, 11.75%+ ................................ 500,000 4/01/2004 547,500
Archibald Candy Corp. Sr. Sec. Note, 10.25% .... 500,000 7/01/2004 533,750
Axia Inc. Sr. Sub. Note, 11.00% ................ 132,000 3/15/2001 134,376
Benedek Broadcasting Corp. Sr. Note, 11.875% ... 250,000 3/01/2005 281,875
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 800,000
Busse Broadcasting Corp. Sr. Sec. Note, 11.625% 500,000 10/15/2000 539,375
Capstar Broadcasting Partners Sr. Note, 0.00% to
1/31/2002, 12.75% from 2/1/2002 to maturity .. 750,000 2/01/2009 566,250
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 1,875,750
CHC Helicopter Corp. Sr. Sub. Note, 11.50% ..... 600,000 7/15/2002 639,000
Clearnet Communications Inc. Sr. Note, 0.00% to
12/14/2000, 14.75% from 12/15/2000 to maturity 750,000 12/15/2005 616,875
Columbia/HCA Healthcare Corp. Deb., 7.50% ...... 700,000 12/15/2023 621,082
Columbia/HCA Healthcare Corp. Note, 6.91% ...... 1,400,000 6/15/2005 1,292,900
Columbia/HCA Healthcare Corp. Note, 7.69% ...... 650,000 6/15/2025 598,240
Columbus McKinnon Corp. Sr. Sub. Note, 8.50%+ .. 200,000 4/01/2008 201,000
Drypers Corp. Series B Sr. Note, 10.25% ........ 500,000 6/15/2007 521,250
Econophone Inc., 0.00% to 2/14/2003, 11.00% from
2/15/2003 to maturity+ ....................... 250,000 2/15/2008 143,750
Econophone Inc. Sr. Note, 13.50% ............... 750,000 7/15/2007 862,500
Edison Mission Energy Funding Corp. Series A
Note, 6.77%+ ................................. 2,162,420 9/15/2003 2,187,699
Elgar Holdings Inc. Sr. Note, 9.875%+ .......... 150,000 2/01/2008 151,500
Elgin National Industries Inc. Sr. Note, 11.00%+ 250,000 11/01/2007 265,625
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 650,625
Envirosource Inc. Note, 9.75% .................. 1,000,000 6/15/2003 1,022,500
ERAC USA Finance Co., 6.625%+ .................. 725,000 2/15/2005 725,770
Extended Stay America Inc. Sr. Sub. Note, 9.15%+ 250,000 3/15/2008 250,625
Falcon Holding Group LP Sr. Deb., 8.375%+ ...... 1,000,000 4/15/2010 997,320
First Wave Marine Inc. Sr. Note, 11.00% ........ 250,000 2/01/2008 261,875
Fort James Corp. Note, 6.23% ................... 825,000 3/15/2001 823,840
Fort James Corp. Sr. Note, 6.625% .............. 1,350,000 9/15/2004 1,350,567
French Fragrances Inc. Sr. Note, 10.375% ....... 250,000 5/15/2007 266,250
Golden Ocean Group Ltd. Sr. Note, 10.00%+ ...... 750,000 8/31/2001 600,000
ICF International Inc. Sr. Sub. Note, 13.00% ... 375,000 12/31/2003 390,000
ICG Holdings Inc. Sr. Note, 0.00% to 9/14/2000,
13.50% from 9/15/2000 to maturity ............ 500,000 9/15/2005 426,250
ICG Services Inc. Sr. Note, 0.00% to 2/14/2003,
10.00% from 2/15/2003 to maturity+ ........... 250,000 2/15/2008 160,625
International Knife & Saw Inc. Sr. Sub. Note,
11.375% ...................................... 250,000 11/15/2006 274,375
International Shipholding Corp. Sr. Note, 7.75% 250,000 10/15/2007 245,625
International Shipholding Corp. Sr. Note, 9.00%+ 250,000 7/01/2003 256,563
International Utility Structures Inc. Sr. Sub.
Note, 10.75%+ ................................ 250,000 2/01/2008 259,375
Intertek Finance PLC Series B Sr. Sub. Note,
10.25% ....................................... 625,000 11/01/2006 662,500
Ionica PLC Sr. Note, 13.50% .................... 500,000 8/15/2006 410,000
ITC Deltacom Inc. Sr. Note, 8.875%+ ............ 150,000 3/01/2008 155,250
J.B. Poindexter Co. Inc. Sr. Note, 12.50% ...... 350,000 5/15/2004 350,000
J Crew Operating Corp. Sr. Sub. Note, 10.375%+ . 250,000 10/15/2007 235,000
Johnstown America Industries Inc. Sr. Sub. Note
Series C, 11.75% ............................. 240,000 8/15/2005 268,800
Johnstown America Industries, Inc. Sr. Sub.
Note, 11.75% ................................. 250,000 8/15/2005 280,000
Kitty Hawk Inc. Sr. Sec. Note, 9.95%+ .......... 250,000 11/15/2004 258,125
Krystal Co. Sr. Note, 10.25% ................... 250,000 10/01/2007 260,000
L 3 Communications Corp. Sr. Sub. Note, 10.375% 250,000 5/01/2007 276,875
Loehmanns Inc. Sr. Note, 11.875% ............... 300,000 5/15/2003 280,500
Microcell Telecommunications Sr. Note Series B,
0.00% to 11/30/2001, 14.00% from 12/1/2001 to
maturity ..................................... 500,000 6/01/2006 371,250
National Energy Group Inc. Sr. Note Series D,
10.75% ....................................... 250,000 11/01/2006 242,500
NBTY Inc. Sr. Sub. Note Series B, 8.625% ....... 125,000 9/15/2007 128,125
New York State Power Authority Revenue Bonds
Series D, 6.17% .............................. 2,000,000 2/15/2001 2,003,740
Newpark Resources Inc. Sr. Sub. Note, 8.625%+ .. 100,000 12/15/2007 102,250
Norcal Waste Systems Inc. Series B Sr. Note,
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 580,000
North Atlantic Trading Inc. Sr. Note, 11.00% ... 750,000 6/15/2004 778,125
Numatics Inc. Sr. Sub. Note, 9.625%+ ........... 200,000 4/01/2008 204,750
Owens Illinois Inc. Sr. Note, 8.10% ............ 250,000 5/15/2007 265,403
Packaging Resources Inc. Sr. Sec. Note, 11.625% 750,000 5/01/2003 735,000
Pagemart Nationwide Inc. Sr. Note, 0.00% to 1/
31/2000, 15.00% from 2/1/2000 to maturity .... 550,000 2/01/2005 489,500
Pathmark Stores Inc. Sub. Note, 11.625% ........ 250,000 6/15/2002 246,250
Petroliam Nasional BHD Note, 7.125%+ ........... 1,450,000 8/15/2005 1,386,852
Phase Metrics Inc. Sr. Note, 10.75%+ ........... 250,000 2/01/2005 250,000
Pool Energy Services Co., 8.625%+ .............. 150,000 4/01/2008 150,750
Primedia Inc. Sr. Note, 7.625%+ ................ 250,000 4/01/2008 245,625
Primus Telecommunications Group Sr. Note, 11.75% 250,000 8/01/2004 286,250
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 567,500
Quest Diagnostics Inc. Sr. Sub. Note, 10.75% ... 500,000 12/15/2006 560,000
Railcar Leasing LLC Sr. Sec. Note, 6.75%+ ...... 810,188 7/15/2006 822,551
RSL Communications Ltd. Sr. Note, 12.25% ....... 525,000 11/15/2006 598,500
Sam Houston Race Park Ltd. Sr. Sec. Note, 11.00%# 156,096 9/01/2001 62,438
Sea Containers Ltd., 7.875%+ ................... 400,000 2/15/2008 394,000
SFX Entertainment Inc. Sr. Sub. Note, 9.125%+ .. 150,000 2/01/2008 147,750
Shop Vac Corp. Sr. Sec. Note, 10.625% .......... 450,000 9/01/2003 490,500
Sitel Corp. Sr Sub. Note, 9.25%+ ............... 250,000 3/15/2006 256,250
Solutia Inc. Note, 6.50% ....................... 1,400,000 10/15/2002 1,403,500
Spanish Broadcasting Systems Inc. Sr. Note, 7.50% 1,000,000 6/15/2002 1,150,000
Stena AB Sr. Note, 8.75% ....................... 250,000 6/15/2007 257,500
Sun Media Corp. Sr. Sub. Note, 9.50% ........... 325,000 2/15/2007 351,000
Tekni Plex Inc. Series B Sr. Sub. Note, 11.25% . 500,000 4/01/2007 561,250
Telemundo Group Inc. Sr. Note, 7.00% to 2/14/99,
10.50% from 2/15/99 to maturity .............. 250,000 2/15/2006 265,625
Tokheim Corp. Sr. Sub. Note, 11.50% ............ 458,000 8/01/2006 510,670
Tracor Inc. Sr. Sub. Deb., 8.50% ............... 500,000 3/01/2007 516,875
Transamerican Energy Corp. Sr. Note, 0.00% to
6/14/99, 13.00% from 6/15/99 to maturity ..... 250,000 6/15/2002 210,000
Transamerican Energy Corp. Sr. Sec. Note Series
B, 11.50% .................................... 1,000,000 6/15/2002 990,000
Transwestern Holdings LP Sr. Note, 0.00% to
11/14/2002, 11.875% from 11/15/2002 to maturity+ 250,000 11/15/2008 171,875
Transwestern Publishing Co. LP Sr.
Sub. Note, 9.625%+ ........................... 250,000 11/15/2007 264,375
Trump Atlantic City Associates First Mortgage
Note, 11.25% ................................. 200,000 5/01/2006 205,500
U.S.A. Mobile Communications Inc. Sr. Note,
14.00% ....................................... 1,000,000 11/01/2004 1,110,000
Unilab Corp. Sr. Note, 11.00% .................. 500,000 4/01/2006 527,500
Viatel Inc. Sr. Note, 15.00% ................... 250,000 1/15/2005 245,000
Wainoco Oil Corp. Sr. Note, 9.125%+ ............ 250,000 2/15/2006 248,750
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 450,000
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 150,000
------------
49,532,300
------------
FOREIGN 0.5%
Province of Quebec Deb., 7.125% ................ 375,000 2/09/2024 388,627
Usinor Sacilor ADR Note, 7.25% ................. 3,500,000 8/01/2006 3,584,140
------------
3,972,767
------------
Total Fixed Income Securities (Cost $220,521,520) ..................................... 222,680,830
-------------
CASH EQUIVALENTS 9.7%
Deere & Co., 5.55% ............................. 16,366,000 4/06/1998 16,366,000
General Electric Capital Corp., 5.53% .......... 18,621,000 4/01/1998 18,621,000
Household Finance Corp., 5.53% ................. 1,013,000 4/13/1998 1,013,000
Merrill Lynch & Company Inc., 5.80% ............ 9,754,000 4/02/1998 9,752,429
Merrill Lynch & Company Inc., 5.85% ............ 8,406,000 4/03/1998 8,403,268
Wal-Mart Stores Inc., 5.53% .................... 18,320,000 4/02/1998 18,317,191
------------
Total Cash Equivalents (Cost $72,472,888) ............................................. 72,472,888
------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Shares
- ---------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 17.9%
<S> <C> <C>
Navigator Securities Lending Prime Portfolio .............................. 134,214,390 134,214,390
-------------
Total Short-Term Investments (Cost $134,214,390) ...................................... 134,214,390
-------------
Total Investments (Cost $803,147,371) - 121.7% ........................................ 912,630,236
Other Assets, Less Liabilities - (21.7%) .............................................. (162,779,977)
-------------
Net Assets - 100.0% ................................................................... $ 749,850,259
=============
Federal Income Tax Information (Note 1):
At March 31, 1998, the net unrealized appreciation of investments
based on cost for Federal income tax purposes of $804,097,961 was as
follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost .................... $126,167,733
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value .................... (17,635,458)
------------
$108,532,275
============
</TABLE>
ADR and GDR stand for American Depositary Receipt and Global Depositary
Receipt, respectively, representing ownership of foreign securities.
* Nonincome-producing securities
# Payments of income may be made in cash or in the form of additional
securities.
(+) Security restricted as to public resale. The total cost and market value of
restricted securities owned at March 31, 1998 were $375,898 and $1,298,840
(0.17% 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, 1998 were $17,625,298 and $19,272,581 (2.57%
of net assets), respectively.
++ 268,200 shares of Abacan Resources Corp., 1,400 shares of Cabot Corp.,
141,300 shares of Maxx Petroleum Ltd., 158,780 shares of Seagull Energy
Corp. and 4,600 shares of Willbros Group Inc. are considered by the Adviser
to be part of Inflation Responsive Investments.
@ 194,400 shares of Arakis Energy Corp., 38,900 shares of KCS Energy, Inc.,
25,000 shares of Seven Seas Petroleum 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. Although the unit price has been established, the principal
value has not been finalized and may vary by no more than 1%.
Forward currency exchange contracts outstanding at March 31, 1998, 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 5,034,000 AUD 0.66880 AUD $ 32,805 6/10/98
Sell Australian dollars, buy U.S. dollars 1,141,000 AUD 0.66695 AUD 6,066 4/23/98
Sell Australian dollars, buy U.S. dollars 1,490,000 AUD 0.68109 AUD 28,022 6/10/98
Sell Australian dollars, buy U.S. dollars 962,000 AUD 0.67830 AUD 15,775 5/13/98
Sell Australian dollars, buy U.S. dollars 10,333,000 AUD 0.66740 AUD 59,582 4/23/98
Sell Australian dollars, buy U.S. dollars 2,700,000 AUD 0.66695 AUD 14,354 4/23/98
Buy Australian dollars, sell U.S. dollars 1,141,000 AUD 0.66820 AUD (7,492) 4/23/98
Buy Australian dollars, sell U.S. dollars 4,803,000 AUD 0.66885 AUD (34,659) 4/23/98
Sell British pounds, buy U.S. dollars 1,292,000 GBP 1.61900 GBP (68,339) 4/23/98
Sell British pounds, buy U.S. dollars 6,331,000 GBP 1.61900 GBP (334,873) 4/23/98
Sell British pounds, buy U.S. dollars 447,000 GBP 1.63152 GBP (18,047) 4/23/98
Buy British pounds, sell U.S. dollars 911,000 GBP 1.63515 GBP 33,474 4/23/98
Buy British pounds, sell U.S. dollars 1,739,000 GBP 1.63370 GBP 66,419 4/23/98
Sell New Zealand dollars, buy U.S. dollars 7,207,000 NZD 0.57940 NZD 202,794 4/23/98
Sell New Zealand dollars, buy U.S. dollars 4,580,000 NZD 0.58058 NZD 134,256 4/23/98
Sell New Zealand dollars, buy U.S. dollars 1,940,000 NZD 0.58265 NZD 63,209 5/13/98
Sell Japanese yen, buy U.S. dollars 539,308,000 JPY 0.00824 JPY 320,293 8/11/98
--------
$513,639
========
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
March 31, 1998
ASSETS
Investments, at value (Cost $803,147,371) (Note 1) ........... $912,630,236
Receivable for securities sold ............................... 10,998,237
Interest and dividends receivable ............................ 3,288,982
Receivable for open forward contracts ........................ 977,049
Receivable for fund shares sold .............................. 903,636
Other assets ................................................. 34,144
------------
928,832,284
LIABILITIES
Payable for collateral received on securities loaned ......... 134,214,390
Payable for securities purchased ............................. 42,146,983
Payable for fund shares redeemed ............................. 503,335
Accrued management fee (Note 2) .............................. 465,356
Payable for open forward contracts ........................... 463,410
Accrued distribution and service fees (Note 5) ............... 393,197
Accrued transfer agent and shareholder services (Note 2) ..... 259,769
Payable to custodian ......................................... 127,797
Dividends payable ............................................ 102,269
Accrued trustees' fees (Note 2) .............................. 20,737
Other accrued expenses ....................................... 284,782
------------
178,982,025
------------
NET ASSETS $749,850,259
============
Net Assets consist of:
Undistributed net investment income ........................ $ 2,015,262
Unrealized appreciation of investments ..................... 109,482,865
Unrealized appreciation of forward contracts
and foreign currency ..................................... 507,695
Accumulated net realized gain .............................. 29,827,380
Paid-in capital ............................................ 608,017,057
------------
$749,850,259
============
Net Asset Value and redemption price per share of
Class A shares ($330,420,901 / 28,496,828 shares) .......... $11.60
======
Maximum Offering Price per share of Class A shares
($11.60 / .955) ............................................ $12.15
======
Net Asset Value and offering price per share of Class B shares
($368,974,524 / 31,937,031 shares)* ........................ $11.55
======
Net Asset Value and offering price per share of Class C shares
($23,807,027 / 2,057,545 shares)* .......................... $11.57
======
Net Asset Value, offering price and redemption price per share
of Class S shares ($26,647,807 / 2,298,157 shares) ......... $11.60
======
- --------------------------------------------------------------------------------
* Redemption price per share for Class B and Class C is equal to net
asset value less any applicable contingent deferred sales charge.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the year ended March 31, 1998
INVESTMENT INCOME
Interest, net of foreign taxes of $2,670 (Note 1) ............ $ 16,872,684
Dividends, net of foreign taxes of $126,848 .................. 3,826,507
------------
20,699,191
EXPENSES
Management fee (Note 2) ...................................... 4,785,350
Transfer agent and shareholder services (Note 2) ............. 1,117,620
Custodian fee ................................................ 416,333
Service fee - Class A (Note 5) ............................... 716,302
Distribution and service fees - Class B (Note 5) ............. 3,073,880
Distribution and service fees - Class C (Note 5) ............. 205,588
Reports to shareholders ...................................... 161,846
Registration fees ............................................ 121,652
Trustees' fees (Note 2) ...................................... 38,787
Audit fee .................................................... 31,070
Legal fees ................................................... 7,047
Miscellaneous ................................................ 18,020
------------
10,693,495
Expenses borne by the Distributor (Note 3) ................... (113,307)
------------
10,580,188
------------
Net investment income ........................................ 10,119,003
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS,
FOREIGN CURRENCY AND FORWARD CONTRACTS
Net realized gain on investments (Notes 1 and 4) ............. 80,341,652
Net realized gain on forward contracts and foreign
currency (Note 1) .......................................... 2,516,122
------------
Total net realized gain .................................... 82,857,774
------------
Net unrealized appreciation of investments ................... 67,628,064
Net unrealized appreciation of forward contracts
and foreign currency ....................................... 560,114
------------
Total net unrealized appreciation .......................... 68,188,178
------------
Net gain on investments, foreign currency and forward contracts 151,045,952
------------
Net increase in net assets resulting from operations ......... $161,164,955
============
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
<TABLE>
- --------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------------------
<CAPTION>
Years ended March 31
-------------------------------
1997 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income .................................... $ 8,179,555 $ 10,119,003
Net realized gain on investments, foreign currency and
forward contracts ...................................... 53,801,738 82,857,774
Net unrealized appreciation (depreciation) of investments,
foreign currency and forward contracts ................. (8,244,104) 68,188,178
------------- -------------
Net increase resulting from operations ................... 53,737,189 161,164,955
------------- -------------
Dividends from net investment income:
Class A ................................................ (6,086,782) (5,845,453)
Class B ................................................ (4,234,267) (3,857,267)
Class C ................................................ (289,417) (254,051)
Class S ................................................ (634,525) (535,841)
------------- -------------
(11,244,991) (10,492,612)
------------- -------------
Distributions from net realized gains:
Class A ................................................ (18,380,936) (34,942,599)
Class B ................................................ (18,075,176) (37,667,215)
Class C ................................................ (1,236,399) (2,507,060)
Class S ................................................ (1,771,455) (2,858,624)
------------- -------------
(39,463,966) (77,975,498)
------------- -------------
Net increase from fund share transactions (Note 6) ....... 97,991,295 142,539,444
------------- -------------
Total increase in net assets ............................. 101,019,527 215,236,289
NET ASSETS
Beginning of year ........................................ 433,594,443 534,613,970
------------- -------------
End of year (including undistributed net investment income
of $6,424 and $2,015,262, respectively) ................ $ 534,613,970 $ 749,850,259
============= =============
The accompanying notes are an integral part of the financial statements.
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
March 31, 1998
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. Before November 1, 1997, Class C
shares were designated Class D and Class S shares were designated Class C.
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 subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class C shares also pay annual distribution and service fees of 1.00%. Class S
shares are only offered through certain retirement accounts, advisory accounts
of State Street Research & Management Company (the "Adviser"), an indirect
wholly owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), and special programs. No sales charge is imposed at the time
of purchase or redemption of Class S shares. Class S shares do not pay any
distribution or service fees. The Fund's expenses are borne pro-rata by each
class, except that each class bears expenses, and has exclusive voting rights
with respect to provisions of the Plan of Distribution, related specifically
to that class. The Trustees declare separate dividends on each class of
shares.
The following significant accounting policies are consistently followed by the
Fund in preparing its financial statements, and such policies are in
conformity with generally accepted accounting principles for investment
companies.
A. INVESTMENT VALUATION
Values for listed equity securities reflect final sales on national securities
exchanges quoted prior to the close of the New York Stock Exchange. Over-the-
counter securities quoted on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") system are valued at closing prices supplied
through such system. If not quoted on the NASDAQ system, such securities are
valued at prices obtained from independent brokers. In the absence of recorded
sales, valuations are at the mean of the closing bid and asked quotations.
Fixed income securities are valued by a pricing service, which utilizes market
transactions, quotations from dealers, and various relationships among
securities in determining value. Short-term securities maturing within sixty
days are valued at amortized cost. Other securities, if any, are valued at
their fair value as determined in good faith under consistently applied
procedures established by and under the supervision of the Trustees.
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
between both funds in the Trust.
E. DIVIDENDS
Dividends from net investment income are declared and paid or reinvested
quarterly. Net realized capital gains, if any, are distributed annually,
unless additional distributions are required for compliance with applicable
tax regulations For the year ended March 31, 1998, the Fund has designated its
distributions from net realized gains as $23,067,072 from 20% rate gains and
$30,673,983 from 28% rate gains.
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.
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.
H. SECURITIES LENDING
The Fund may seek additional income by lending portfolio securities to
qualified institutions. The Fund will receive cash or securities as collateral
in an amount equal to at least 100% of the current market value of any loaned
securities plus accrued interest. By reinvesting any cash collateral it
receives in these transactions, the Fund could realize additional gains and
losses. If the borrower fails to return the securities and the value of the
collateral has declined during the term of the loan, the Fund will bear the
loss. At March 31, 1998, the value of the securities loaned and the value of
collateral were $129,312,713 and $134,214,390, respectively. During the year
ended March 31, 1998, income from securities lending amounted to $101,934 and
is included in interest income.
NOTE 2
The Trust and the Adviser 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, 1998, the fees
pursuant to such agreement amounted to $4,785,350.
State Street Research Service Center, 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, 1998, the amount of
such expenses was $282,130.
The fees of the Trustees not currently affiliated with the Adviser amounted to
$38,787 during the year ended March 31, 1998.
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 period April 1, 1997 through August 31, 1997, the amount of
such expenses assumed by the Distributor and its affiliates was $113,307. On
September 1, 1997, the Distributor eliminated the voluntary assumption of fees
or expenses incurred by the Fund.
NOTE 4
For the year ended March 31, 1998, purchases and sales of securities,
exclusive of short-term obligations and forward foreign currency exchange
contracts, aggregated $879,327,948 and $798,403,163 (including $299,562,798
and $266,634,088 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 C shares. In addition, the Fund pays annual
distribution fees of 0.75% of average daily net assets for Class B and Class C
shares. The Distributor uses such payments for personal services and/or the
maintenance of shareholder accounts, to reimburse securities dealers for
distribution and marketing services, to furnish ongoing assistance to investors
and to defray a portion of its distribution and marketing expenses. For the year
ended March 31, 1998, fees pursuant to such plan amounted to $716,302,
$3,073,880 and $205,588 for Class A, Class B and Class C 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 $203,896 and $1,339,451, respectively, on sales of Class A shares of
the Fund during the year ended March 31, 1998, and that MetLife Securities, Inc.
earned commissions aggregating $2,564,919 on sales of Class B shares, and the
Distributor collected contingent deferred sales charges aggregating $483,752 and
$1,611 on redemptions of Class B and Class C 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.
Share transactions were as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
-------------------------------------------------------------------
1997 1998
------------------------------- ----------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold ................................................ 4,746,853 $ 50,499,204 5,722,390 $ 63,984,989
Issued upon reinvestment of:
Dividends from net investment income .................... 558,830 5,876,689 511,711 5,655,896
Distributions from net realized gains .................... 1,699,169 17,870,060 3,275,657 34,024,678
Shares repurchased ......................................... (3,698,792) (39,318,613) (4,510,796) (50,245,975)
---------- ------------ ---------- ------------
Net increase ............................................... 3,306,060 $ 34,927,340 4,998,962 $ 53,419,588
========== ============ ========== ============
CLASS B SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
Shares sold ................................................ 6,191,667 $ 65,679,543 7,594,312 $ 84,286,716
Issued upon reinvestment of:
Dividends from net investment income ..................... 389,723 4,088,191 351,570 3,838,405
Distributions from net realized gains .................... 1,680,278 17,607,323 3,545,630 36,684,475
Shares repurchased ......................................... (2,845,172) (30,131,674) (3,817,822) (42,267,060)
---------- ------------ ---------- ------------
Net increase ............................................... 5,416,496 $ 57,243,383 7,673,690 $ 82,542,536
========== ============ ========== ============
CLASS C (FORMERLY CLASS D) SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
Shares sold ................................................ 594,410 $ 6,307,999 465,412 $ 5,129,443
Issued upon reinvestment of:
Dividends from net investment income ..................... 25,583 268,626 20,654 226,439
Distributions from net realized gains .................... 110,940 1,163,717 221,602 2,295,214
Shares repurchased ......................................... (319,082) (3,367,499) (334,060) (3,714,768)
---------- ------------ ---------- ------------
Net increase ............................................... 411,851 $ 4,372,843 373,608 $ 3,936,328
========== ============ ========== ============
CLASS S (FORMERLY CLASS C) SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
Shares sold ................................................ 718,397 $ 7,645,927 644,321 $ 7,206,721
Issued upon reinvestment of:
Dividends from net investment income ..................... 60,113 631,951 48,246 534,170
Distributions from net realized gains .................... 168,533 1,771,442 274,906 2,856,650
Shares repurchased ......................................... (802,252) (8,601,591) (714,208) (7,956,549)
---------- ------------ ---------- ------------
Net increase ............................................... 144,791 $ 1,447,729 253,265 $ 2,640,992
========== ============ ========== ============
</TABLE>
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
<TABLE>
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------------
For a share outstanding throughout each year:
<CAPTION>
CLASS A
----------------------------------------------------
YEARS ENDED MARCH 31
----------------------------------------------------
1994 1995 1996(1) 1997(1) 1998(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 8.94 8.94 8.76 10.29 10.40
----- ----- ----- ----- -----
Net investment income ($)* 0.22 0.27 0.23 0.21 0.22
Net realized and unrealized gain (loss) on investments, foreign currency
and forward contracts ($) 0.72 (0.14) 1.72 1.05 2.61
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.94 0.13 1.95 1.26 2.83
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.22) (0.17) (0.26) (0.28) (0.23)
Distributions from net realizedgains ($) (0.72) (0.14) (0.16) (0.87) (1.40)
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS ($) (0.94) (0.31) (0.42) (1.15) (1.63)
----- ----- ----- ----- -----
NET ASSET VALUE, END OF YEAR ($) 8.94 8.76 10.29 10.40 11.60
===== ===== ===== ===== =====
Total return(3) (%) 10.96 1.52 22.55 12.49 29.62
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 166,011 181,358 207,713 244,348 330,421
Ratio of operating expenses to average net assets (%)* 1.25 1.25 1.25 1.25 1.28
Ratio of net investment income to average net assets (%)* 2.75 3.11 2.34 2.02 1.96
Portfolio turnover rate (%) 105.17 89.58 109.20 108.41 133.30
Average commission rate(6) ($) -- -- -- 0.0266 0.0270
*Reflects voluntary assumption of fees or expenses per share in each
year (Note 3) ($) 0.02 0.03 0.02 0.01 0.00
</TABLE>
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------
YEARS ENDED MARCH 31
----------------------------------------------------
1994(2) 1995 1996(1) 1997(1) 1998(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 8.78 8.92 8.74 10.25 10.37
----- ----- ----- ----- -----
Net investment income ($)* 0.16 0.20 0.15 0.13 0.13
Net realized and unrealized gain (loss) on investments, foreign currency
and forward contracts ($) 0.39 (0.13) 1.71 1.06 2.59
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.55 0.07 1.86 1.19 2.72
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.18) (0.11) (0.19) (0.20) (0.14)
Distributions from net realized gains ($) (0.23) (0.14) (0.16) (0.87) (1.40)
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS ($) (0.41) (0.25) (0.35) (1.07) (1.54)
----- ----- ----- ----- -----
NET ASSET VALUE, END OF YEAR ($) 8.92 8.74 10.25 10.37 11.55
===== ===== ===== ===== =====
Total return(3) (%) 6.26(4) 0.82 21.48 11.76 28.53
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 83,244 152,251 193,272 251,518 368,975
Ratio of operating expenses to average net assets (%)* 2.00(5) 2.00 2.00 2.00 2.03
Ratio of net investment income to average net assets (%)* 2.03(5) 2.38 1.59 1.27 1.21
Portfolio turnover rate (%) 105.17 89.58 109.20 108.41 133.30
Average commission rate(6) ($) -- -- -- 0.0266 0.0270
*Reflects voluntary assumption of fees or expenses per share in each
year (Note 3) ($) 0.03 0.03 0.02 0.01 0.00
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Per-share figures have been calculated using the average shares method.
(2) June 1, 1993 (commencement of share class designations) to March 31, 1994.
(3) Does not reflect any front-end or contingent deferred sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
(4) Not annualized.
(5) Annualized.
(6) Average commission rate per share paid by the Fund for security trades on which commissions are charged beginning with the
fiscal year ended March 31, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CLASS C (FORMERLY CLASS D)
----------------------------------------------------
YEARS ENDED MARCH 31
----------------------------------------------------
1994(2) 1995 1996(1) 1997(1) 1998(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 8.78 8.93 8.75 10.27 10.38
----- ----- ----- ----- -----
Net investment income ($)* 0.16 0.20 0.15 0.13 0.13
Net realized and unrealized gain (loss) on investments, foreign currency
and forward contracts ($) 0.40 (0.13) 1.72 1.05 2.60
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.56 0.07 1.87 1.18 2.73
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.18) (0.11) (0.19) (0.20) (0.14)
Distributions from net realized gains ($) (0.23) (0.14) (0.16) (0.87) (1.40)
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS ($) (0.41) (0.25) (0.35) (1.07) (1.54)
----- ----- ----- ----- -----
NET ASSET VALUE, END OF YEAR ($) 8.93 8.75 10.27 10.38 11.57
===== ===== ===== ===== =====
Total return(3) (%) 6.31(4) 0.82 21.54 11.64 28.59
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 7,117 12,772 13,061 17,485 23,807
Ratio of operating expenses to average net assets (%)* 2.00(5) 2.00 2.00 2.00 2.03
Ratio of net investment income to average net assets (%)* 2.03(5) 2.39 1.60 1.26 1.21
Portfolio turnover rate (%) 105.17 89.58 109.20 108.41 133.30
Average commission rate(6) ($) -- -- -- 0.0266 0.0270
*Reflects voluntary assumption of fees or expenses per share in each
year (Note 3) ($) 0.03 0.03 0.02 0.01 0.00
</TABLE>
<TABLE>
<CAPTION>
CLASS S (FORMERLY CLASS C)
----------------------------------------------------
YEARS ENDED MARCH 31
----------------------------------------------------
1994(2) 1995 1996(1) 1997(1) 1998(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 8.78 8.95 8.77 10.29 10.40
----- ----- ----- ----- -----
Net investment income ($)* 0.21 0.29 0.25 0.24 0.25
Net realized and unrealized gain (loss) on investments, foreign currency
and forward contracts ($) 0.43 (0.14) 1.71 1.05 2.60
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.64 0.15 1.96 1.29 2.85
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.24) (0.19) (0.28) (0.31) (0.25)
Distributions from net realized gains ($) (0.23) (0.14) (0.16) (0.87) (1.40)
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS ($) (0.47) (0.33) (0.44) (1.18) (1.65)
----- ----- ----- ----- -----
NET ASSET VALUE, END OF YEAR ($) 8.95 8.77 10.29 10.40 11.60
===== ===== ===== ===== =====
Total return(3) (%) 7.27(4) 1.77 22.70 12.77 29.93
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 21,434 25,803 19,548 21,263 26,648
Ratio of operating expenses to average net assets (%)* 1.00(5) 1.00 1.00 1.00 1.03
Ratio of net investment income to average net assets (%)* 3.03(5) 3.37 2.59 2.26 2.21
Portfolio turnover rate (%) 105.17 89.58 109.20 108.41 133.30
Average commission rate(6) ($) -- -- -- 0.0266 0.0270
*Reflects voluntary assumption of fees or expenses per share in each
year (Note 3) ($) 0.02 0.03 0.02 0.01 0.00
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Per-share figures have been calculated using the average shares method.
(2) June 1, 1993 (commencement of share class designations) to March 31, 1994.
(3) Does not reflect any front-end or contingent deferred sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
(4) Not annualized.
(5) Annualized.
(6) Average commission rate per share paid by the Fund for security trades on which commissions are charged beginning with the
fiscal year ended
March 31, 1997.
</TABLE>
<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, 1998, 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, 1998 by correspondence with the
custodian and brokers and the application of alternative procedures where
confirmations from brokers were not received, provide a reasonable basis for
the opinion expressed above.
/s/Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
May 8, 1998
<PAGE>
STATE STREET RESEARCH MANAGED ASSETS
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
Managed Assets was among the stronger performers in its category for the year
ended March 31, 1998. The total return for the Fund's Class A shares was
29.62% (without sales charge). The Fund outperformed the average of the 203
flexible portfolio funds tracked by Lipper Analytical Services, which rose
28.72%.
At March 31, 1998, the Fund's asset allocation was 60% stocks, 30% fixed-
income securities, 5% inflation-responsive and 5% cash. The stock portion of
the Fund was composed primarily of large-cap stocks, mid-cap value stocks, and
small-cap growth stocks. Large-company stocks were the largest contributor to
performance. Even though large-company stocks were market leaders during the
period, we reduced the number of large caps and added small- and mid-cap
stocks to the portfolio. We believed smaller stocks were more attractively
priced, had the potential for greater earnings growth, and would benefit from
a cut in the capital gains tax rate. Because oil prices declined as a result
of the Asian crisis and overproduction, we reduced oil stocks, which we had
owned as a hedge against the possibility of rising inflation.
The bond portion of the portfolio emphasized a combination of high-income,
investment-grade and international bonds. High-income bonds outperformed other
types of fixed-income securities during the period.
March 31, 1998
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 reflects maximum 4.5% "A"
share front-end, or 5% "B" share or 1% "C" share contingent deferred sales
charges. "S" shares, offered without a sales charge, are available only
through certain employee benefit plans and special programs. The Standard &
Poor's 500 Composite Index (S&P 500) includes 500 widely traded common stocks
and is a commonly used measure of U.S. stock market performance. Lehman
Brothers Government/Corporate Bond Index is a commonly used index of bond
market performance. Indices are unmanaged and do not take sales charges into
consideration. Direct investment in the indices is not possible; results are
for illustrative purposes only. Before November 1, 1997, Class C shares were
designated Class D, and Class S shares were designated Class C.
COMPARISON OF CHANGE IN VALUE OF A $10,000
INVESTMENT IN MANAGED ASSETS, THE S&P 500 AND
THE LEHMAN BROTHERS GOVERNMENT/CORPORATE INDEX
CLASS A SHARES
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
1 Year 5 Years 10 Years
- ------ ------- --------
+23.79% +13.96% +12.80%
Managed Assets LB Gov't/Corp Index S&P 500
- ---------------------------------------------------------
12/88 $ 9,550 $10,000 $10,000
3/89 9,980 10,110 10,710
3/90 11,030 11,290 12,770
3/91 11,480 12,700 14,600
3/92 13,000 14,150 16,210
3/93 15,150 16,170 18,680
3/94 16,820 16,620 18,950
3/95 17,070 17,380 21,900
3/96 20,910 19,280 28,920
3/97 23,530 20,140 34,650
3/98 30,501 22,635 51,267
CLASS B SHARES
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
1 Year 5 Years 10 Years
- ------ ------- --------
+23.53% +13.93% +12.91%
Managed Assets LB Gov't/Corp Index S&P 500
- ---------------------------------------------------------
12/88 $10,000 $10,000 $10,000
3/89 10,430 10,110 10,710
3/90 11,550 11,290 12,770
3/91 12,020 12,700 14,600
3/92 13,620 14,150 16,210
3/93 15,870 16,170 18,680
3/94 17,500 16,620 18,950
3/95 17,650 17,380 21,900
3/96 21,450 19,280 28,920
3/97 23,950 20,140 34,650
3/98 30,775 22,635 51,267
CLASS C SHARES
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
1 Year 5 Years 10 Years
- ------ ------- --------
+27.59% +14.18% +12.91%
Managed Assets LB Gov't/Corp Index S&P 500
- ---------------------------------------------------------
12/88 $10,000 $10,000 $10,000
3/89 10,430 10,110 10,710
3/90 11,550 11,290 12,770
3/91 12,020 12,700 14,600
3/92 13,620 14,150 16,210
3/93 15,870 16,170 18,680
3/94 17,500 16,620 18,950
3/95 17,640 17,380 21,900
3/96 21,430 19,280 28,920
3/97 23,950 20,140 34,650
3/98 30,792 22,635 51,267
CLASS S SHARES
AVERAGE ANNUAL TOTAL RETURN
- --------------------------------------
1 Year 5 Years 10 Years
- ------ ------- --------
+29.93% +15.29% +13.50%
Managed Assets LB Gov't/Corp Index S&P 500
- --------------------------------------------------------
12/88 $10,000 $10,000 $10,000
3/89 10,430 10,110 10,710
3/90 11,550 11,290 12,770
3/91 12,020 12,700 14,600
3/92 13,650 14,150 16,210
3/93 15,870 16,170 18,680
3/94 17,660 16,620 18,950
3/95 17,970 17,380 21,900
3/96 22,050 19,280 28,920
3/97 24,870 20,140 34,650
3/98 32,313 22,635 51,267
