STATEMENT OF ADDITIONAL INFORMATION
for
STATE STREET RESEARCH STRATEGIC GROWTH & INCOME FUND
STATE STREET RESEARCH HIGH INCOME FUND
Series of State Street Research Income Trust
July 15, 1999
As Supplemented February 11, 2000
This Statement of Additional Information is divided into Section
One and Section Two. Section One contains the information which is specific to
each fund identified above (the "Funds"). Section Two contains information
that applies to both Funds.
The Statement of Additional Information is not a Prospectus. It
should be read in conjunction with the Prospectuses of each above-referenced
State Street Research Fund, each dated July 15, 1999. Each Prospectus may be
obtained without charge from State Street Research Investment Services, Inc.
(the "Distributor"), One Financial Center, Boston, Massachusetts 02111-2690 or
by calling 1-800-562-0032.
Financial statements for each of the Funds, as of and for the fiscal
year ended March 31, 1999, are included in its Annual Report to Shareholders
for that year. The annual reports are incorporated by reference herein and are
available without charge, upon request by calling the State Street Research
Service Center at 1-800-562-0032.
CONTROL NUMBER: (EXP00800)SSR-LD SSR-032G-0799
<PAGE>
TABLE OF CONTENTS
Section One
- -----------
Fund
----
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
I. State Street Research Strategic Growth & Income Fund I-1
II. State Street Research High Income Fund I-13
Appendices
A. Trustees and Officers A-1
B. Industry Classifications B-1
C. Distribution of Shares of the Funds C-1
Section Two
- -----------
ADDITIONAL INFORMATION CONCERNING
CERTAIN RISKS AND INVESTMENT TECHNIQUES............................II-1
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS.........................II-13
THE TRUST AND ITS SHARES................................................II-20
INVESTMENT ADVISORY SERVICES............................................II-21
PURCHASE AND REDEMPTION OF SHARES.......................................II-23
SHAREHOLDER ACCOUNTS....................................................II-30
NET ASSET VALUE.........................................................II-35
PORTFOLIO TRANSACTIONS..................................................II-36
CERTAIN TAX MATTERS.....................................................II-39
CALCULATION OF PERFORMANCE DATA.........................................II-41
CUSTODIAN ..............................................................II-44
INDEPENDENT ACCOUNTANTS.................................................II-45
FINANCIAL STATEMENTS....................................................II-45
</TABLE>
ii
<PAGE>
SECTION ONE
-----------
I. STATE STREET RESEARCH STRATEGIC GROWTH & INCOME FUND
The information in this part I of Section One relates only to State
Street Research Strategic Growth & Income Fund. For information concerning State
Street Research High Income Fund, please see page I-13.
INVESTMENT OBJECTIVE
As set forth under "The Fund--Goal and Strategies--Fundamental Goal"
in the Prospectus of State Street Research Strategic Growth & Income Fund (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 RESTRICTIONS AND POLICIES
Fundamental and Nonfundamental Restrictions
- -------------------------------------------
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
I-1
<PAGE>
cause more than 10% of the voting securities of such issuer
to be held by the Fund;
(2) not to issue senior securities;
(3) not to underwrite or participate in the marketing of securities
of other issuers, except (a) the Fund may, acting alone or in
syndicates or groups, if determined by the Trust's Board of
Trustees, purchase or otherwise acquire securities of other
issuers for investment, either from the issuers or from persons
in a control relationship with the issuers or from underwriters
of such securities; and (b) to the extent that, in connection
with the disposition of the Fund's securities, the Fund may be
deemed to be an underwriter under certain federal securities
laws;
(4) not to purchase or sell fee simple interests in real estate,
although the Fund may purchase and sell other interests in real
estate including securities which are secured by real estate,
or securities of companies which own or invest or deal in real
estate;
(5) not to invest in physical commodities or physical commodity
contracts or options in excess of 10% of the Fund's total
assets, except that investments in essentially financial items
or arrangements such as, but not limited to, swap arrangements,
hybrids, currencies, currency and other forward contracts,
delayed delivery and when-issued contracts, futures contracts
and options on 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
I-2
<PAGE>
(10) not to borrow money except for borrowings from banks for
extraordinary and emergency purposes, such as permitting
redemption requests to be honored, and then not in an amount in
excess of 25% of the value of its total assets, and except
insofar as reverse repurchase agreements may be regarded as
borrowing. As a matter of current operating, but not
fundamental, policy, the Fund will not purchase additional
portfolio securities at any time when it has outstanding money
borrowings in excess of 5% of the Fund's total assets (taken at
current value).
The following investment restrictions may be changed by a vote of a
majority of the Trustees. Under these restrictions, it is the Fund's policy:
(1) not to purchase any security or enter into a repurchase
agreement if as a result more than 15% of its net assets would
be invested in securities that are illiquid (including
repurchase agreements not entitling the holder to payment of
principal and interest within seven days);
(2) not to 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
I-3
<PAGE>
Certain Investment Policies
The Investment Manager adheres to certain additional investment
policies in managing the Fund's assets. These policies may be changed at any
time subject to applicable law.
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.
Industry Classifications.
In determining how much of the portfolio is invested in a given
industry, the Fund follows the industry classifications set forth in Appendix B.
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").
For more information on investment risks and techniques, see
"Additional Information Concerning Certain Risks and Investment Techniques" in
Section Two.
THE FUND
The Fund was organized in 1988 as a separate series of State Street
Research Income Trust, a Massachusetts business trust (the "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
Strategic Growth & Income Fund (formerly, State Street Research Managed Assets).
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.
I-4
<PAGE>
For more information on the Trust and its shares, see "The Trust and
Its Shares" in Section Two.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
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 of that class.
As of May 31, 1999, the Trustees and principal officers of the Trust
as a group owned approximately 1.2% of the Fund's outstanding Class A shares and
owned no shares of the Fund's outstanding Class B, Class B(1), Class C or Class
S shares.
Also as of May 31, 1999, 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 Merrill Lynch 14.2
Class S Chase Manhattan Bank 85.0
</TABLE>
The full name and address of each of the above persons or entities
are as follows:
Merrill Lynch, Pierce, Fenner & Smith, Inc. (a)
4800 Deerlake Drive East
Jacksonville, FL 32246
Chase Manhattan Bank, N.A. (a)(b)
4 New York Plaza
New York, NY 10004
- -----------------------
(a) The Fund believes that each named record holder does not have beneficial
ownership of such shares.
(b) Chase Manhattan Bank holds such shares as a trustee under certain
employee benefit plans serviced by Metropolitan Life Insurance Company.
I-5
<PAGE>
TRUSTEES AND PRINCIPAL OFFICERS OF THE TRUST
<TABLE>
<CAPTION>
Trustee/Principal Officer Position
- ------------------------- --------
<S> <C>
*Peter C. Bennett Vice President
Bruce R. Bond Trustee
Steve A. Garban Trustee
*Bartlett R. Geer Vice President
Malcolm T. Hopkins Trustee
*John H. Kallis Vice President
*Gerard P. Maus Treasurer
*Francis J. McNamara, III Secretary and General Counsel
Dean O. Morton Trustee
Susan M. Phillips Trustee
Toby Rosenblatt Trustee
Michael S. Scott Morton Trustee
*Thomas A. Shively Vice President
*Ralph F. Verni Chairman of Board, President, Chief Executive
Officer and Trustee
*James M. Weiss Vice President
</TABLE>
*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.
For more information on the above Trustees and officers, see Appendix A.
I-6
<PAGE>
TRUSTEE COMPENSATION
The Trustees were compensated as follows:
<TABLE>
<CAPTION>
Total Total Compensation
Compensation From All State
From All Street Research Funds
Aggregate State Street and Metropolitan
Compensation Research Funds Series Fund, Inc.
Name of Trustee From Fund(a) Paid to Trustees (b) Paid to Trustees (c)
- --------------- ------------ -------------------- --------------------
<S> <C> <C> <C>
Bruce R. Bond* $ 0 $ 0 $ 0
Steven A. Garban $ 4,400 $ 81,300 $ 110,300
Malcolm T. Hopkins $ 4,000 $ 69,700 $ 97,200
Dean O. Morton $ 4,500 $ 84,700 $ 110,700
Susan M. Phillips* $ 0 $ 12,145 $ 12,145
Toby Rosenblatt $ 4,000 $ 72,600 $ 72,600
Michael S. Scott Morton $ 4,700 $ 89,500 $ 115,500
Ralph F. Verni $ 0 $ 0 $ 0
</TABLE>
- ---------------
*Bruce Bond and Susan Phillips were elected as Trustees of the Trust on January
1, 1999 and April 6, 1999, respectively, and therefore did not receive any
compensation from the Fund for the year ended December 31, 1998.
(a) For the Fund's fiscal year ended March 31, 1999. The Fund does not provide
any pension or retirement benefits for the Trustees.
(b) Includes compensation on behalf of all series of 11 investment companies
for which the Investment Manager serves as sole investment adviser. The
figure in this column is for the 12 months ended December 31, 1998
(c) Includes compensation on behalf of all series of 11 investment companies
for which the Investment Manager serves as sole investment adviser and all
series of Metropolitan Series Fund, Inc. The primary adviser to
Metropolitan Series Fund, Inc. is Metropolitan Life Insurance Company,
which has retained State Street Research & Management Company as
sub-adviser to certain series of Metropolitan Series Fund, Inc. The figure
in this column includes compensation relating to series of Metropolitan
Series Fund, Inc. which are not advised by State Street Research &
Management Company. The figure is for the 12 months ended December 31,
1998.
I-7
<PAGE>
ADVISORY FEE
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, 1997, 1998 and 1999 the Fund's
investment advisory fee prior to the assumption of fees or expenses was
$3,692,033, $4,785,350 and $5,412,219, respectively. For the same periods, the
voluntary reduction of fees or assumption of expenses amounted to $475,396,
$113,307 and $0, respectively.
For more information on investment advisory services provided to the
Fund, see "Investment Advisory Services" in Section Two.
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,
1998 and 1999 were 133.30% and 136.37%, respectively.
For more information on the Fund's portfolio turnover, see
"Portfolio Transactions" in Section Two.
BROKERAGE COMMISSIONS
Brokerage commissions paid by the Fund in secondary trading during
the last three fiscal years ended March 31 were as follows: 1997, $1,136,104;
1998, $1,252,657; and 1999, $1,134,027.
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.
For more information on the Fund's brokerage practices, see
"Portfolio Transactions -- Brokerage Allocation" in Section Two.
I-8
<PAGE>
SALES CHARGES ON SHARES OF THE FUND
For the fiscal years ended March 31, 1997, 1998 and 1999, total
sales charges on Class A shares paid to the Distributor amounted to $1,283,941,
$1,621,289 and $1,348,733, respectively. For the same periods, the Distributor
retained $158,495, $203,896 and $167,865, respectively, after reallowance of
concessions to dealers.
For the periods shown below, the Distributor received contingent
deferred sales charges upon redemption of Class A, Class B(1), Class B and Class
C shares of the Fund and paid initial commissions to securities dealers for
sales of such Class A, Class B(1), Class B and Class C shares as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999 March 31, 1998 March 31, 1997
------------------------------- ----------------------------- -----------------------------
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 $ 1,180,868 $ 0 $ 1,417,393 $ 0 $ 1,125,446
Class B(1)* $ 4,579 $ 359,661 $ -- $ -- $ -- $ --
Class B $ 656,057 $ 2,345,050 $ 483,752 $ 2,853,020 $ 387,778 $ 2,208,110
Class C $ 3,304 $ 38,699 $ 1,611 $ 47,177 $ 1,277 $ 46,532
</TABLE>
- --------------
*Class B(1) was introduced January 1, 1999.
For more information on sales charges, see Appendix C.
RULE 12b-1 FEES
During the fiscal year ended March 31, 1999, the Fund paid the
Distributor fees under its distribution plans adopted under Rule 12b-1, and the
Distributor used such payments for expenses incurred on behalf of the Fund as
follows:
I-9
<PAGE>
<TABLE>
<CAPTION>
Class A Class B(1) Class B Class C
------- ---------- ------- -------
<S> <C> <C> <C> <C>
Advertising $ 0 $ 876 $ 31,075 $ 8,298
Printing and mailing of prospectuses to 0 397 4,615 1,713
other than current shareholders
Compensation to dealers 788,433 4,849 3,467,678 175,822
Compensation to sales personnel 0 2,802 74,118 19,801
Interest 0 0 0 0
Carrying or other financing charges 0 0 0 0
Other expenses: marketing; general 0 2,733 101,119 17,375
- ----- ------- ------
Total Fees $ 788,433 $ 11,657 $ 3,678,605 $ 223,009
= ======= = ====== = ========= = =======
</TABLE>
The Distributor may have also used additional resources of its own for further
expenses on behalf of the Fund.
The Fund's distribution plans are described in Appendix C.
PERFORMANCE
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.
The average annual total return ("standard total return") of the
Class A, Class B(1), 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. Performance for Class B(1) shares reflects Class B
performance through December 31, 1998. Class B(1) shares were introduced on
January 1,
I-10
<PAGE>
1999.
For more information on how the Fund calculates performance, see
"Calculation of Performance Data" in Section Two.
Standard Total Return
- ---------------------
The average annual total return ("standard total return") of each
class of shares of the Fund was as follows:
<TABLE>
<CAPTION>
Ten Years Five Years One Year
Ended Ended Ended
March 31, 1999 March 31, 1999 March 31, 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Class A 11.11% 11.18% -6.37%
Class B(1) 11.29% 11.42% -5.74%
Class B 11.28% 11.41% -5.79%
Class C 11.29% 11.66% -2.23%
Class S 11.93% 12.75% -0.41%
</TABLE>
Nonstandard Total Return
- ------------------------
The nonstandard total return of each class of shares of the Fund for
the six months ended March 31, 1999, without taking sales charges into account,
was as follows:
<TABLE>
<S> <C>
Class A 9.37%
Class B(1) 9.06%
Class B 9.00%
Class C 9.01%
Class S 9.50%
</TABLE>
Yield
- -----
The annualized yield of each class of shares of the Fund, based on
the month of March 1999, was as follows:
I-11
<PAGE>
<TABLE>
<S> <C>
Class A 1.77%
Class B(1) 1.13%
Class B 1.14%
Class C 1.13%
Class S 2.10%
</TABLE>
Distribution Rates
- ------------------
The distribution rate of each class of shares of the Fund, based on
the month of March 1999, was as follows:
<TABLE>
<S> <C>
Class A 1.84%
Class B(1) 1.66%
Class B 1.43%
Class C 1.39%
Class S 2.08%
</TABLE>
FINANCIAL STATEMENTS
Each of the Investment Portfolio, Statement of Assets and
Liabilities, Statement of Operations and Statement of Changes in Net Assets
included in the Fund's Annual Report to Shareholders as of and for the fiscal
year ended March 31, 1999, including any notes thereto or Report of Independent
Accountants is hereby incorporated by reference from the Fund's Annual Report,
filed with the Securities and Exchange Commission (EDGAR accession number
0000950156-99-000409). Shareholder reports are available without charge upon
request. For more information, call the State Street Research Service Center at
(800) 562-0032.
I-12
<PAGE>
II. STATE STREET RESEARCH HIGH INCOME FUND ("FUND")
The information in this part II of Section One relates only to State
Street Research High Income Fund. For information concerning State Street
Research Strategic Growth & Income Fund, see page I-1.
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 RESTRICTIONS AND POLICIES
Fundamental and Nonfundamental Restrictions
- -------------------------------------------
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;
I-13
<PAGE>
(3) not to underwrite or participate in the marketing of securities
of other issuers, except (a) the Fund may, acting alone or in a
syndicate or group, purchase or otherwise acquire securities of
other issuers for investment, either from the issuers or from
persons in a control relationship with the issuers or from
underwriters of such securities; and (b) to the extent that, in
connection with the disposition of the Fund's securities, the
Fund may be a selling shareholder in an offering or deemed to
be an underwriter under certain federal securities laws;
(4) not to purchase or sell real estate in fee simple;
(5) not to lend money; however, the Fund may lend portfolio
securities and purchase bonds, debentures, notes, bills and any
other debt-related instruments or interests (and enter into
repurchase agreements with respect thereto);
(6) not to invest in physical commodities or physical commodity
contracts or options in excess of 10% of the Fund's total
assets, except that investments in essentially financial items
or arrangements such as, but not limited to, swap arrangements,
hybrids, currencies, currency and other forward contracts,
delayed delivery and when-issued contracts, futures contracts
and options on 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
I-14
<PAGE>
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 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; and
(4) 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).
Certain Investment Policies
- ---------------------------
The Investment Manager adheres to certain additional investment
policies in managing the Fund's assets. These policies may be changed at any
time subject to applicable law.
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.
I-15
<PAGE>
Industry Classifications.
In determining how much of the portfolio is invested in a given
industry, the Fund follows the industry classifications set forth in Appendix B.
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.
For more information on investment risks and techniques, see
"Additional Information Concerning Certain Risks and Investment Techniques" in
Section Two.
THE FUND
The Fund was organized in 1985 as a separate series of State Street
Research Income Trust, a Massachusetts business trust (the "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
Strategic Growth & Income Fund.
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.
For more information on the Trust and its shares, see "The Trust
and Its Shares" in Section Two.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
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^ of that class.
I-16
<PAGE>
As of May 31, 1999, the Trustees and principal officers of the Trust
as a group owned less than 1% of the Fund's outstanding Class A shares and owned
no shares of the Fund's outstanding Class B, Class B(1), Class C or Class S
shares.
Also as of May 31, 1999, 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(1) Merrill Lynch 19.6
Class B Merrill Lynch 18.5
Class C Merrill Lynch 50.2
Class S Chase Manhattan Bank 5.9
Minnesota Life 85.5
</TABLE>
The full name and address of each of the above persons or entities
are as follows:
Merrill Lynch, Pierce, Fenner & Smith, Inc. (a)
4800 Deerlake Drive East
Jacksonville, FL 32246
Chase Manhattan Bank, N.A. (a)(b)
4 New York Plaza
New York, NY 10004
Minnesota Life Insurance Co.
400 Robert Street North
St. Paul, MN 55101
- -----------------------
(a) The Fund believes that each named record holder does not have beneficial
ownership of such shares.
(b) Chase Manhattan Bank holds such shares as a trustee under certain employee
benefit plans serviced by Metropolitan Life Insurance Company.
I-17
<PAGE>
TRUSTEES AND PRINCIPAL OFFICERS OF THE TRUST
<TABLE>
<CAPTION>
Trustee/Principal Officer Position
- ------------------------- --------
<S> <C>
*Peter C. Bennett Vice President
Bruce R. Bond Trustee
Steve A. Garban Trustee
*Bartlett R. Geer Vice President
Malcolm T. Hopkins Trustee
*John H. Kallis Vice President
*Gerard P. Maus Treasurer
*Francis J. McNamara, III Secretary and General Counsel
Dean O. Morton Trustee
Susan M. Phillips Trustee
Toby Rosenblatt Trustee
Michael S. Scott Morton Trustee
*Thomas A. Shively Vice President
*Ralph F. Verni Chairman of Board, President, Chief Executive
Officer and Trustee
*James M. Weiss Vice President
</TABLE>
*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.
For more information on the above Trustees and officers, see
Appendix A.
I-18
<PAGE>
TRUSTEE COMPENSATION
The Trustees were compensated as follows:
<TABLE>
<CAPTION>
Total Total Compensation
Compensation from All
From All State Street Research
Aggregate State Street Funds and Metropolitan
Compensation Research Funds Series Fund, Inc.
Name of Trustee From Fund(a) Paid to Trustees (b) Paid to Trustees (c)
- --------------- ------------ -------------------- --------------------
<S> <C> <C> <C>
Bruce R. Bond* $ 0 $ 0 $ 0
Steven A. Garban $ 4,400 $ 81,300 $ 110,300
Malcolm T. Hopkins $ 4,000 $ 69,700 $ 97,200
Dean O. Morton $ 4,500 $ 84,700 $ 110,700
Susan M. Phillips* $ 0 $ 12,145 $ 12,145
Toby Rosenblatt $ 4,000 $ 72,600 $ 72,600
Michael S. Scott Morton $ 4,700 $ 89,500 $ 115,500
Ralph F. Verni $ 0 $ 0 $ 0
</TABLE>
- ---------------
*Bruce Bond and Susan Phillips were elected as Trustees of the Trust on January
1, 1999 and April 6, 1999, respectively, and therefore did not receive any
compensation from the Fund for the year ended December 31, 1998.
(a) For the Fund's fiscal year ended March 31, 1999. The Fund does not provide
any pension or retirement benefits for the Trustees.
(b) Includes compensation on behalf of all series of 11 investment companies
for which the Investment Manager serves as sole investment adviser. The
figure in this column is for the 12 months ended December 31, 1998.
(c) Includes compensation on behalf of all series of 11 investment companies
for which the Investment Manager serves as sole investment adviser and all
series of Metropolitan Series Fund, Inc. The primary adviser to
Metropolitan Series Fund, Inc. is Metropolitan Life Insurance Company,
which has retained State Street Research & Management Company as
sub-adviser to certain series of Metropolitan Series Fund, Inc. The figure
in this column includes compensation relating to series of Metropolitan
Series Fund, Inc. which are not advised by State Street Research &
Management Company. The figure is for the 12 months ended December 31,
1998.
I-19
<PAGE>
ADVISORY FEE
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.
For the fiscal years ended March 31, 1997, 1998 and 1999, the Fund's
investment advisory fee, prior to the assumption of fees or expenses, was
$5,911,041, $6,649,051 and $6,463,062 respectively.
For more information on investment advisory services provided to the
Fund, see "Investment Advisory Services" in Section Two.
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,
1998 and 1999 were 70.53% and 53.46%, respectively.
The Investment Manager believes that the portfolio turnover rate for
the fiscal year ended March 31, 1999 was significantly lower than the previous
year because the Fund invested in relatively fewer new issues and continued to
hold current positions. In addition, less new funds had to be invested in the
year ended March 31, 1999, then had to be invested in the prior year.
For more information on the Fund's portfolio turnover, see
"Portfolio Transactions" in Section Two.
BROKERAGE COMMISSIONS
Brokerage commissions paid by the Fund in secondary trading during
the last three fiscal years ended March 31 were as follows: 1997, $262,173;
1998, $76,776; and $91,759.
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.
I-20
<PAGE>
For more information on the Fund's brokerage practices, see
"Brokerage Allocation" in Section Two.
SALES CHARGES ON SHARES OF THE FUND
For the fiscal years ended March 31, 1997, 1998 and 1999, total
sales charges on Class A shares paid to the Distributor amounted to $2,477,538,
$2,136,869 and $2,753,504, respectively. For the same periods, the Distributor
retained $294,695, $262,404 and $335,706, respectively, after reallowance of
concessions to dealers.
For the periods shown below, the Distributor received contingent
deferred sales charges upon redemption of Class A, Class B(1), Class B and Class
C shares of the Fund and paid initial commissions to securities dealers for
sales of such Class A, Class B(1), Class B and Class C shares as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
March 31, 1999 March 31, 1998 March 31, 1997
-------------------------------- ------------------------------- ---------------------------------
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 $ 2,417,798 $ 0 $ 1,874,465 $ 0 $ 2,182,843
Class B(1)* $ 428 $ 3,227,125 $ -- $ -- $ -- $ --
Class B $ 692,839 $ 425,480 $ 604,906 $ 2,809,146 $ 493,705 $ 3,153,798
Class C $ 4,393 $ 228,326 $ 7,193 $ 98,814 $ 61,492 $ 140,483
</TABLE>
- --------------
*Class B(1) was introduced January 1, 1999.
For more information on sales charges, see Appendix C.
RULE 12b-1 FEES
During the fiscal year ended March 31, 1999, the Fund paid the
Distributor fees under its distribution plans adopted under Rule 12b-1, and the
Distributor used such payments for expenses incurred on behalf of the Fund as
follows:
I-21
<PAGE>
<TABLE>
<CAPTION>
Class A Class B(1) Class B Class C
------- ---------- ------- -------
<S> <C> <C> <C> <C>
Advertising $ 0 $ 1,024 $ 0 $ 64
Printing and mailing of prospectuses to 0 464 0 13
other than current shareholders
Compensation to dealers 1,686,952 7,148 3,478,093 387,814
Compensation to sales personnel 0 3,298 0 159
Interest 0 0 0 0
Carrying or other financing charges 0 0 0 0
Other expenses: marketing; general 0 3,232 0 146
- ----- - ---
Total Fees $1,686,952 $15,166 $3,478,093 $388,196
========== ======= ========== ========
</TABLE>
The Distributor may have also used additional resources of its own for further
expenses on behalf of the Fund.
The Fund's distribution plans are described in Appendix C.
PERFORMANCE
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(1), 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
I-22
<PAGE>
may invest in a different class of shares. Performance for Class B(1) shares
reflects Class B performance through December 31, 1998. Class B(1) shares were
introduced on January 1, 1999.
For more information on how the Fund calculates performance, see
"Calculation of Performance Data" in Section Two.
Standard Total Return
- ---------------------
The average annual total return ("standard total return") of each
class of shares of the Fund was as follows:
<TABLE>
<CAPTION>
Ten Years Five Years One Year
Ended Ended Ended
March 31, 1999 March 31, 1999 March 31, 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Class A 9.01% 7.22% -7.55%
Class B(1) 9.01% 7.12% -8.04%
Class B 9.01% 7.12% -8.04%
Class C 9.02% 7.41% -4.62%
Class S 9.62% 8.42% -2.97%
</TABLE>
Nonstandard Total Return
The nonstandard total return of each class of shares of the Fund for
the six months ended March 31, 1999, without taking sales charges into account,
was as follows:
<TABLE>
<S> <C>
Class A 4.35%
Class B(1) 4.00%
Class B 4.00%
Class C 3.99%
Class S 4.33%
</TABLE>
Yield
- -----
The annualized yield of each class of shares of the Fund, based on
the month of March 1999, was as follows:
I-23
<PAGE>
<TABLE>
<S> <C>
Class A 7.30%
Class B(1) 6.86%
Class B 6.95%
Class C 6.94%
Class S 7.95%
</TABLE>
Distribution Rates
- ------------------
The distribution rate of each class of shares of the Fund, based on
the month of March 1999, was as follows:
<TABLE>
<S> <C>
Class A 8.92%
Class B(1) 8.65%
Class B 8.65%
Class C 8.63%
Class S 9.67%
</TABLE>
FINANCIAL STATEMENTS
Each of the Investment Portfolio, Statement of Assets and
Liabilities, Statement of Operations and Statement of Changes in Net Assets
included in the Fund's Annual Report to Shareholders as of and for the fiscal
year ended March 31, 1999, including any notes thereto or Report of Independent
Accountants is hereby incorporated by reference from the Fund's Annual Report,
filed with the Securities and Exchange Commission (EDGAR accession number
0000950156-99-000409). Shareholder reports are available without charge upon
request. For more information, call the State Street Research Service Center at
(800) 562-0032.
DOCSC\773876.2
I-24
<PAGE>
APPENDIX A
TRUSTEES AND OFFICERS
Additional information on the Trustees, Directors and principal
officers of the State Street Research Funds is provided below. (Unless otherwise
indicated, the address for each person is One Financial Center, Boston,
Massachusetts 02111.) All ages are as of December 31, 1998.
Peter C. Bennett: He is 60 and his principal occupation is
currently, and during the past five years has been, Executive Vice President of
the Investment Manager. Mr. Bennett is also a Director and Chief Investment
Officer-Equity of the Investment Manager. Mr. Bennett's other principal business
affiliations include Director, State Street Research Investment Services, Inc.
+Bruce R. Bond (100 Minuteman Road, Andover, MA 01810): He is 52 and
his principal occupation is Chairman of the Board, Chief Executive Officer and
President of PictureTel Corporation. During the past five years, Mr. Bond has
also served as Chief Executive Officer of ANS Communications (a communications
networking company) and as managing director of British Telecommunications PLC.
Jesus A. Cabrera: He is 37 and his principal occupation is Senior
Vice President of the Investment Manager. During the past five years he has also
served as Vice President of the Investment Manager and as Vice President at
First Chicago Investment Management Company.
Paul J. Clifford, Jr.: He is 36 and his principal occupation is
currently, and during the past five years has been, Vice President of the
Investment Manager.
Thomas J. Dillman: He is 49 and his principal occupation is Senior
Vice President of the Investment Manager. During the past five years he has also
served as research director at Bank of New York.
+Steve A. Garban (The Pennsylvania State University, 210 Old Main,
University Park, PA 16802): He is 61 and he is retired and was formerly Senior
Vice President for Finance and Operations and Treasurer of The Pennsylvania
State University. Mr. Garban is also a Director of Metropolitan Series Fund,
Inc. (an investment company).
Bartlett R. Geer: He is 43 and his principal occupation is
currently, and during the past five years has been, Senior Vice President of the
Investment Manager.
Lawrence J. Haverty, Jr.: He is 54 and his principal occupation is
currently, and during the past five years has been, Senior Vice President of the
Investment Manager.
A-1
<PAGE>
+Malcolm T. Hopkins (14 Brookside Road, Biltmore Forest, Asheville,
NC 28803): He is 71 and he is engaged principally in private investments.
Previously, he was Vice Chairman of the Board and Chief Financial Officer of St.
Regis Corp. Mr. Hopkins is also a Director of Metropolitan Series Fund, Inc. (an
investment company).
Richard J. Jodka: He is 55 and his principal occupation is Senior
Vice President of the Investment Manager. During the past five years he has also
served as a portfolio manager at Frontier Capital Management and Putnam
Investments.
John H. Kallis: He is 58 and his principal occupation is currently,
and during the past five years has been, Senior Vice President of the Investment
Manager.
Dyann H. Kiessling: She is 35 and her principal occupation is Vice
President of the Investment Manager. During the past five years she has also
served as a fixed income trader for the Investment Manager.
Rudolph K. Kluiber: He is 39 and his principal occupation currently
is Senior Vice President of the Investment Manager. During the past five years
he has also served as a Vice President of the Investment Manager.
Gerard P. Maus: He is 47 and his principal occupation is Executive
Vice President, Treasurer, Chief Financial Officer, Chief Administrative
Officer, and Director of the Investment Manager. Mr. Maus's other principal
business affiliations include Executive Vice President, Chief Financial Officer,
Chief Administrative Officer, Treasurer and Director of State Street Research
Investment Services, Inc.; Treasurer and Chief Financial Officer of SSRM
Holdings, Inc.; and Director of SSR Realty Advisors, Inc.
Francis J. McNamara, III: He is 43 and his principal occupation is
Executive Vice President, General Counsel and Secretary of the Investment
Manager. During the past five years he has also served as Senior Vice President
of the Investment Manager and as Senior Vice President and General Counsel 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, General Counsel and Clerk of State Street
Research Investment Services, Inc.; and Secretary and General Counsel of SSRM
Holdings, Inc.
+Dean O. Morton (3200 Hillview Avenue, Palo Alto, CA 94304): He is
67 and he is retired and was formerly Executive Vice President, Chief Operating
Officer and Director of Hewlett-Packard Company. Mr. Morton is also a Director
of Metropolitan Series Fund, Inc. (an investment company).
Kim M. Peters: He is 46 and his principal occupation is Senior Vice
President of the Investment Manager. During the past five years he has also
served as Vice President of the Investment Manager.
A-2
<PAGE>
+Susan M. Phillips (The George Washington University, 710 21st
Street, Suite 206, Washington, DC 20052): She is 56 and her principal occupation
is currently Dean of the School of Business and Public Management at George
Washington University and Professor of Finance. Previously, she was a member of
the Board of Governors of the Federal Reserve System and Chairman and
Commissioner of the Commodity Futures Trading Commission.
E.K. Easton Ragsdale, Jr.: He is 47 and his principal occupation is
Senior Vice President of the Investment Manager. During the past five years he
has also served as Vice President of the Investment Manager and as Senior Vice
President and Chief Quantitative Analyst for Kidder Peabody & Co.
+Toby Rosenblatt (3409 Pacific Avenue, San Francisco, CA 94118,
serves as Trustee of the Trust): He is 60 and 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): He is 61 and his principal
occupation during the past five years has been Jay W. Forrester Professor of
Management at Sloan School of Management, Massachusetts Institute of Technology.
Dr. Scott Morton is also a Director of Metropolitan Series Fund, Inc. (an
investment company).
Thomas A. Shively: He is 44 and his principal occupation is
currently, and during the past five years has been, Executive Vice President of
the Investment Manager. Mr. Shively is also a Director and Chief Investment
Officer-Fixed Income of the Investment Manager. Mr. Shively's other principal
business affiliations include Director of State Street Research Investment
Services, Inc.
+Ralph F. Verni: He is 56 and 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).
Dudley F. Wade: He is 80 and his principal occupation is currently,
and during the past five years has been, Senior Vice President of the Investment
Manager.
James M. Weiss: He is 52 and his principal occupation is Executive
Vice President of the Investment Manager. During the past five years he has also
served as Senior Vice President of the Investment Manager and as President and
Chief Investment Officer of IDS Equity Advisors.
A-3
<PAGE>
Elizabeth M. Westvold: She is 38 and her principal occupation is
Senior Vice President of the Investment Manager. During the past five years she
has also served as Vice President and as an analyst for the Investment Manager.
John T. Wilson: He is 35 and his principal occupation is Senior Vice
President of the Investment Manager. During the past five years he has also
served as a Vice President of the Investment Manager, as an analyst and
portfolio manager at Phoenix Home Life Mutual Insurance Company and as a Vice
President of Phoenix Investment Counsel Inc.
Kennard P. Woodworth, Jr.: He is 60 and his principal occupation is
currently, and during the past five years has been, Senior Vice President of the
Investment Manager.
- -----------------
+ 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.
A-4
<PAGE>
APPENDIX B
INDUSTRY CLASSIFICATIONS
In determining how much of a Fund's portfolio is invested in a given
industry, the following industry classifications are currently used. Securities
issued or guaranteed as to principal or interest by the U.S. Government or its
agencies or instrumentalities or mixed-ownership Government corporations or
sponsored enterprises (including repurchase agreements involving U.S. Government
securities to the extent excludable under relevant regulatory interpretations)
are excluded. Securities issued by foreign governments are also excluded.
Companies engaged in the business of financing 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.
Strategic Growth & Income Fund
- ------------------------------
Equity Securities Classifications:
Autos & Transportation
- ----------------------
Air Transport
Auto Parts
Automobiles
Miscellaneous Transportation
Railroad Equipment
Railroads
Recreational Vehicles & Boats
Tires & Rubber
Truckers
Consumer Discretionary
- ----------------------
Advertising Agencies
Casino/Gambling, Hotel/Motel
Commercial Services
Communications, Media & Entertainment
Consumer Electronics
Consumer Products
Consumer Services
Household Furnishings
Leisure Time
Photography
Printing & Publishing
Restaurants
B-1
<PAGE>
Retail
Shoes
Textile Apparel Manufacturers
Toys
Consumer Staples
- ----------------
Beverages
Drug & Grocery Store Chains
Foods
Household Products
Tobacco
Financial Services
- ------------------
Banks & Savings and Loans
Financial Data Processing Services & Systems
Insurance
Miscellaneous Financial
Real Estate Investment Trusts
Rental & Leasing Services: Commercial
Securities Brokerage & Services
Health Care
- -----------
Drugs & Biotechnology
Health Care Facilities
Health Care Services
Hospital Supply
Service Miscellaneous
B-2
<PAGE>
Integrated Oils
- ---------------
Oil: Integrated Domestic
Oil: Integrated International
Materials & Processing
- ----------------------
Agriculture
Building & Construction
Chemicals
Containers & Packaging
Diversified Manufacturing
Engineering & Contracting Services
Fertilizers
Forest Products
Gold & Precious Metals
Miscellaneous Materials & Processing
Non-Ferrous Metals
Office Supplies
Paper and Forest Products
Real Estate & Construction
Steel
Textile Products
Other
- -----
Trust Certificates--Government Related
Lending
Asset-backed--Mortgages*
Asset-backed--Credit Card Receivables
Miscellaneous
Multi-Sector Companies
Other Energy
- ------------
Gas Pipelines
Miscellaneous Energy
Offshore Drilling
Oil and Gas Producers
Oil Well Equipment & Services
Producer Durables
- -----------------
Aerospace
Electrical Equipment & Components
Electronics: Industrial
Homebuilding
Industrial Products
Machine Tools
Machinery
Miscellaneous Equipment
Miscellaneous Producer Durables
Office Furniture & Business Equipment
Pollution Control and Environmental Services
Production Technology Equipment
Telecommunications Equipment
Technology
- ----------
Communications Technology
Computer Software
Computer Technology
Electronics
Electronics: Semi-Conductors/Components
Miscellaneous Technology
Utilities
- ---------
Miscellaneous Utilities
Utilities: Cable TV & Radio
Utilities: Electrical
Utilities: Gas Distribution
Utilities:Telecommunications
Utilities: Water
*Includes private pools of Nongovernment-backed--Mortgages.
B-3
<PAGE>
Fixed Income Securities Classifications:
Collateralized Mortgage Obligations
- -----------------------------------
Whole Loan
Commercial Loan
Project Loan
Corporate
- ---------
Industrial
Utility
Financial
Yankee
Asset-Backed Securities
- -----------------------
Auto
Auto Dealerships
Credit Cards
Equipment
Home Equity
Manufactured Housing
Recreational Vehicles
Rate Reduction
Other
B-4
<PAGE>
High Income Fund Metals: Other Related
- ---------------- Metals: Steel
Manufacturing
Automotive Metals: Steel Related
Beverages & Bottling Manufacturing:
Cable: Developmental Consumer: Durable
Cable: US/Canada Manufacturing:
Casino: (Atlantic City, Consumer: Nondurable
Las Vegas, Emerging Paper & Packaging:
Mkt.) Packaging
Chemicals Paper & Packaging: Paper
Communications: Fixed Real Estate: Development
Communications: Mobile Real Estate: Material
Drug Stores Restaurants
Energy: Exploration & Retailing
Production Services
Energy: Energy/Services Supermarkets
Energy: Other Technology
Energy: Refining Transportation: Air
Financial: Service/Other Transportation: Land
Financial: Specialty Transportation: Other
Food Transportation: Sea
Gen. Industrial: Other Utility
Manufacturing Utility: Independent
Gen. Industrial: Textile Power Provider
Gen. Industrial:
Aerospace
Gen. Industrial: Capital
Goods
Healthcare: Acute Care
Healthcare: Equip./Labs/
Pharmaceuticals
Healthcare: Long Term
Care
Healthcare: Specialty Care
Hotels/Lodging
Leisure: Film Exhibition
Leisure: Other
Media: Broadcasting/
Advertising
Media: Other
Media: Publishing &
Printing
Metals: Other
Manufacturing
B-5
<PAGE>
APPENDIX C
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(1), Class B and Class C shares).
The Distributor may reallow all or portions of such sales charges as 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, or Class S shares are
offered, as described in the Fund's Prospectus, result from cost savings
inherent in economies of scale among other factors. Management believes that the
cost of sales efforts of the Distributor and broker-dealers tends to decrease as
the size of purchases increases, or does not involve any incremental sales
expenses as in the case of, for example, exchanges, reinvestments or dividend
investments at net asset value. Similarly, no significant sales effort is
necessary for sales of shares at net asset value to certain Directors, Trustees,
officers, employees, their relatives and other persons directly or indirectly
related to the Fund or associated entities. Where shares of the Fund are offered
at a reduced sales charge or without a sales charge pursuant to sponsored
arrangements, managed fee-based programs and so-called "mutual fund
supermarkets," among other special programs, the amount of the sales charge
reduction will similarly reflect the anticipated reduction in sales expenses
associated with such arrangements. The reductions in sales expenses, and
therefore the reduction in sales charges, will vary depending on factors such as
the size and other characteristics of the organization or program, and the
nature of its membership or the participants. The Fund reserves the right to
make variations in, or eliminate, sales charges at any time or to revise the
terms of or to suspend or discontinue sales pursuant to sponsored arrangements
or similar programs at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor 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
C-1
<PAGE>
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.
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "General 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, and (3) reimbursement of expenses incurred
by the Distributor in connection with the servicing of shareholder accounts
including payments to securities dealers and others in consideration of the
provision of personal service to investors and/or the maintenance or servicing
of shareholder accounts and expenses associated with the provision of personal
service by the Distributor directly to investors. In addition, the General
Distribution Plan is deemed to authorize the Distributor and the Investment
Manager to make payments out of general profits, revenues or other sources to
underwriters, securities dealers and others in connection with sales of shares,
to the extent, if any, that such payments may be deemed to be within the scope
of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the General 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 Fund also has adopted a "Rule 12b-1 Plan for Distribution of
Shares" (the "Share Distribution Plan") under which the Fund shall pay the
Distributor (a) a service fee at the end of each month at the annual rate of
0.25% of average daily net assets attributable to the Class B(1) shares to
compensate the Distributor and any securities firms or other third parties who
render personal services to and/or maintain shareholder accounts for the
shareholders of the respective class and (b) a distribution fee at the end of
each month at the annual rate of 0.75% of average daily net assets attributable
to the Class B(1) shares to compensate the Distributor for services provided and
expenses incurred by it in connection with sales, promotional and marketing
activities relating to the respective class. To the extent that any payments
made by
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<PAGE>
the Fund to the Distributor or the Investment Manager, including payment of
investment management fees, should be deemed to be an indirect financing of any
activity primarily resulting in the sale of shares of the Fund within the scope
of Rule 12b-1 under the 1940 Act, then such payments shall be deemed to be
authorized by the Share Distribution Plan.
A rule of the National Association of Securities Dealers, Inc.
("NASD") limits annual expenditures that the Fund may incur to 0.75% for
distribution expenses and 0.25% for service fees. The NASD Rule also limits the
aggregate amount that the Fund may pay for such distribution costs to 6.25% of
gross share sales of a class since the inception of any asset-based sales charge
plus interest at the prime rate plus 1% on unpaid amounts thereof (less any
contingent deferred sales charges). Such limitation does not apply to the
service fees. Payments to the Distributor or to dealers funded under either the
General Distribution Plan or the Share Distribution Plan may be discontinued at
any time.
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(1), 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).
The distribution fees are used primarily to offset initial and
ongoing commissions paid to dealers for selling such shares and for other sales
and marketing expenditures.
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.
The payment of service and distribution fees may continue even if
the Fund ceases, temporarily or permanently, to sell one or more classes of
shares to new accounts. During the period the Fund is closed to new accounts,
the distribution fee will not be used for promotion expenses. The service and
distribution fees are used during a closed period to cover services provided to
current shareholders and to cover the compensation of financial professionals in
connection with the prior sale of Fund shares, among other non-promotional
distribution expenditures.
The Distributor may pay certain dealers and other intermediaries
additional compensation for sales and administrative services. The Distributor
may provide cash and
C-3
<PAGE>
noncash incentives to intermediaries who, for example, sell significant amount
of shares or develop particular distribution channels. The Distributor may
compensate dealers with clients who maintain their investments in the Fund over
a period of years. The incentives can include merchandise and trips to, and
attendance at, sales seminars at resorts. The Distributor may pay for
administrative services, such as technological and computer systems support for
the maintenance of pension plan participant records, for subaccounting, and for
distribution through mutual fund supermarkets or similar arrangements.
No interested Trustee of the Trust has any direct or indirect
financial interest in the operation of the Distribution 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.
DOCSC\773886.2
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<PAGE>
SECTION TWO
-----------
This Section Two contains general information applicable to each of
the Funds covered in this Statement of Additional Information. References to the
"Fund" in this Section Two refer to each of State Street Research High Income
Fund and State Street Research Strategic Growth & Income Fund, considered
separately.
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 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.
II-1
<PAGE>
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 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.
II-2
<PAGE>
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 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.
II-3
<PAGE>
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.
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.
II-4
<PAGE>
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 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.
This page supplemented as of February 11, 2000
II-5
<PAGE>
Transactions in Precious Metals (Only applies to State Street Research Strategic
Growth & Income Fund)
The Fund may invest in precious metals but 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 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
II-6
<PAGE>
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. 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.
II-7
<PAGE>
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
consummation of the merger. Such transactions may involve a risk of loss if the
value of the securities falls below the price committed to prior to actual
issuance. The ^ custodian holding Fund assets will establish a segregated
account when the Fund purchases securities on a when-issued basis consisting of
cash or liquid securities equal to the amount of the when-issued commitments.
Securities transactions involving delayed deliveries or forward commitments are
frequently characterized as when-issued transactions and are similarly treated
by the Fund.
Restricted Securities
- ---------------------
The Fund may invest in restricted securities, including restricted
securities sold in accordance with Rule 144A under the Securities Act of 1933
("Rule 144A Securities"). Securities may be resold pursuant to Rule 144A under
certain circumstances only to qualified institutional buyers as defined in the
rule, and the markets and trading practices for such securities are relatively
new and still developing; depending on the development of such markets, Rule
144A Securities may be deemed to be liquid as determined by or in accordance
with methods adopted by the Trustees for the Fund. Under such methods the
following factors are considered, among others: the frequency of trades and
quotes for the security, the number of dealers and potential purchasers in the
market, market making activity, and the nature of the security and marketplace
trades. Investments in Rule 144A Securities could have the effect of increasing
the level of the Fund's illiquidity to the extent that qualified institutional
buyers
II-8
<PAGE>
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 may invest in securities of non-U.S. issuers directly, or
indirectly in the form of American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs").
ADRs are receipts, typically issued by a U.S. bank or trust company,
which evidence ownership of underlying securities issued by a foreign
corporation or other entity. EDRs are 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
II-9
<PAGE>
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 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.
II-10
<PAGE>
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.
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.
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<PAGE>
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.
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.
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 the problem. The Fund does not currently anticipate
that the problem will have a material adverse impact on its portfolio
investments, taken as a whole. There can be no assurances in the area, however,
including the possibility that the problem could negatively affect the
investment markets or the economy generally.
Other Investment Companies
- --------------------------
The Fund may invest in securities of other investment companies,
including affiliated investment companies, such as open- or closed-end
management investment companies, hub and spoke (master/feeder) funds, pooled
accounts or other similar, collective investment vehicles. As a shareholder of
an investment company, the Fund may indirectly bear service and other fees in
addition to the fees the Fund pays its service providers. Similarly, other
investment companies may invest in the Fund. Other investment companies that
invest in the Fund may hold significant portions of the Fund and materially
affect the sale and redemption of Fund shares and the Fund's portfolio
transactions.
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<PAGE>
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
The Fund may invest in long-term and short-term debt securities.
Certain debt securities and money market instruments in which the Fund may
invest are described below.
Managing Volatility.
- --------------------
In administering the Fund's investments, the Investment Manager
attempts to manage the volatility of the Fund's portfolio of debt securities by
managing the duration and weighted average maturity of those securities.
Duration is an indicator of the expected volatility of a bond
portfolio's net asset value in response to changes in interest rates. In
calculating duration, the fund measures the average time required to receive all
cash flows associated with those debt securities -- representing payments of
principal and interest -- by considering the timing, frequency and amount of
payment expected from each portfolio debt security. The higher the duration, the
greater the gains and losses when interest rates change. Duration generally is a
more accurate measure of potential volatility with a portfolio composed of
high-quality debt securities, such as U.S. government securities, municipal
securities and high-grade U.S. corporate bonds, than with lower-grade
securities.
The Investment Manager may use several methods to manage the
duration of the Fund's portfolio of debt securities in order to increase or
decrease its exposure to changes in interest rates. First, the Investment
Manager may adjust duration by adjusting the mix of debt securities held by the
Fund. For example, if the Investment Manager intends to shorten duration, it may
sell debt instruments that individually have a long duration and purchase other
debt instruments that individually have a shorter duration. Among the factors
that will affect a debt security's duration are the length of time to maturity,
the timing of interest and principal payments, and whether the terms of the
security give the issuer of the security the right to call 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
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<PAGE>
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:
direct obligations of the U.S. Treasury, i.e., U.S. Treasury bills,
notes, certificates and bonds;
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
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
II-14
<PAGE>
separately issued by the U.S. Treasury at the request of depository financial
institutions, which then trade the component parts independently. Obligations of
Resolution Funding Corporation are similarly divided into principal and interest
components and maintained as such on the book entry records of the Federal
Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Bank Money Investments.
- -----------------------
Bank money investments include, but are not limited to, certificates
of deposit, bankers' acceptances and time deposits. Certificates of deposit are
generally short-term (i.e., less than one year), interest-bearing negotiable
certificates issued by commercial banks or savings and loan associations against
funds deposited in the issuing institution. A banker's acceptance is a time
draft drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction (to finance the import, export, transfer or
storage of goods). A banker's acceptance may be obtained from a domestic or
foreign bank, including a U.S. branch or agency of a foreign bank. The borrower
is liable for payment as well as the bank, which unconditionally guarantees to
pay the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity. Time deposits are nonnegotiable deposits for a fixed period of time at
a stated interest rate. The Fund will not invest in any such bank money
investment unless the investment is issued by a U.S. bank that is a member of
the Federal Deposit Insurance Corporation ("FDIC"), including any foreign branch
thereof, a U.S. branch or agency of a foreign bank, a foreign branch of a
foreign bank, or a savings bank or savings and loan association that is a member
of the FDIC and which at the date of investment has capital, surplus and
undivided profits (as of the date of its most recently published financial
statements) in excess of $50 million. The Fund will not invest in time deposits
maturing in 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
II-15
<PAGE>
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 in debt securities within the BB major rating category or
lower by S&P or the Ba major rating category or lower by Moody's or debt
securities that are unrated but considered by the Investment Manager to be of
equivalent investment quality to comparable rated securities. Such securities
generally involve more credit risk than higher rated securities and are
considered by S&P and Moody's to be predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the terms of the
obligation. Further, such securities may be subject to greater market
fluctuations and risk of loss of income and principal than lower yielding,
higher rated debt securities. Risks of lower quality debt securities include (i)
limited liquidity and secondary market support, (ii) substantial market price
volatility resulting from changes in prevailing interest rates and/or investor
perception, (iii) subordination to the prior claims of banks and other senior
lenders, (iv) the operation of mandatory sinking fund or call/redemption
provisions during periods of declining interest rates when the fund may be
required to reinvest premature redemption proceeds in lower yielding portfolio
securities; (v) the possibility that earnings of the issuer may be insufficient
to meet its debt service; (vi) the issuer's low creditworthiness and potential
for insolvency during periods of rising interest rates and economic downturn;
and (vii) the realization of taxable income for shareholders without the
corresponding receipt of cash in connection with investments in "zero coupon" or
"pay-in-kind" securities. Growth in the market for this type of security has
paralleled a general expansion in certain sectors in the U.S. economy, and the
effects of adverse economic changes (including a recession) are unclear. For
further information concerning the ratings of debt securities, see "--Commercial
Paper Ratings" and "--Rating Categories of Debt Securities," below. In the event
the rating of a security is downgraded, the Investment Manager will determine
whether the security should be retained or sold depending on an assessment of
all facts and circumstances at that time.
This page supplemented as of February 11, 2000
II-16
<PAGE>
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+.)
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.
II-17
<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 bankruptcy petition or the taking of a
similar action if payments on an obligation are jeopardized.
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<PAGE>
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 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.
II-19
<PAGE>
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.
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 AND ITS SHARES
The Trustees of the Trust have authority to issue an unlimited
number of shares of beneficial interest of separate series, $.001 par value per
share. 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 five classes: Class A, Class
B(1), Class B, Class C and Class S 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(1), Class B and
Class C shares bear the expenses of the deferred sales arrangement and any
expenses (including the higher service and distribution fees) resulting from
such sales arrangement, and certain other incremental expenses related to a
class. Each class will have exclusive voting rights with respect to provisions
of the Rule 12b-1 distribution plan pursuant to which the service and
distribution fees, if any, are paid. Although the legal rights of holders of
each class of shares are identical, it is likely that the different expenses
borne by each class will
II-20
<PAGE>
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
Investment Manager believes that, in view of the above, the risk of personal
liability to shareholders is remote.
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
II-21
<PAGE>
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 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 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, 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.
II-22
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by State Street Research
Investment Services, Inc., the Distributor. The Fund generally offers four
classes of shares. Class A, Class B(1), Class C and Class S shares are available
to all eligible investors. The Fund also offers Class B shares, which are
available only to current Class B shareholders through reinvestment of dividends
and capital gains distributions or through exchanges from existing Class B
accounts of the State Street Research Funds. Class A, Class B(1), Class B, Class
C and Class S shares of the Fund may be purchased at the next determined net
asset value per share plus, in the case of all classes except Class S shares, a
sales charge which, at the election of the investor, may be imposed (i) at the
time of purchase (the Class A shares) or (ii) on a deferred basis (the Class
B(1), Class B and Class C shares). General information on how to buy shares of
the Fund, as well as sales charges involved, are set forth under "Your
Investment" in the Prospectus. The following supplements that information.
Public Offering Price. The public offering price for each class of
shares is based on their net asset value determined as of the close of regular
trading on the NYSE 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.
Alternative Purchase Program. Alternative classes of shares permit
investors to select a purchase program which they believe will be the most
advantageous for them, given the amount of their purchase, the length of time
they anticipate holding Fund shares, or the flexibility they desire in this
regard, and other relevant circumstances. Investors will be able to determine
whether in their particular circumstances it is more advantageous to incur an
initial sales charge and not be subject to certain ongoing charges or to have
their entire purchase price invested in the Fund with the investment being
subject thereafter to ongoing service fees and distribution fees.
As described in greater detail below, financial professionals are
paid differing amounts of compensation depending on which class of shares they
sell.
The major differences among the various classes of shares are as
follows:
II-23
<PAGE>
<TABLE>
<CAPTION>
Class A Class B(1) Class B Class C Class S
------- ---------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Sales Charges Paid Initial sales charge Contingent deferred Contingent deferred Contingent deferred None
by Investor to at time of sales charge of 5% sales charge of 5% sales charge of 1%
Distributor investment of up to to 1% applies to to 2% applies to applies to any
5.75% depending any shares any shares shares redeemed
on amount of redeemed within redeemed within within one year
investment first six years first five years following their
following their following their purchase
purchase; no purchase; no
contingent deferred contingent deferred
sales charge after sales charge after
six years five years
On investments of
.$1 million or more,
no initial sales
charge; but
contingent deferred
sales charge of up
to 1% may apply to
any shares redeemed
within one year
following their
purchase
Initial Commission Above described 4% 4% 1% None
Paid by initial sales charge
Distributor to less 0.25% to
Financial 0.75% retained by
Professional distributor
On investments of
$1 million or more,
0.25% to 1% paid
to dealer by
Distributor
Rule 12b-1 Service
Fee
Paid by Fund 0.25% each year 0.25% each year 0.25% each year 0.25% each year None
to Distributor
Paid by 0.25% each year 0.25% each year 0.25% each year 0.25% each year None
Distributor to commencing after commencing after commencing after
Financial one year following one year following one year following
Professional purchase purchase purchase
Rule 12b-1
Distribution Fee
Paid by Fund None 0.75% for first 0.75% for first 0.75% each year None
to Distributor eight years; Class eight years; Class B
B(1) shares convert shares convert
automatically to automatically to
Class A shares after Class A shares after
eight years eight years
Paid by None None None 0.75% each year None
Distributor to commencing after
Financial one year following
Professional purchase
</TABLE>
II-24
<PAGE>
Class A Shares--Reduced Sales Charges. The reduced sales charges set
forth under "Your Investment--Choosing a Share Class" in the Prospectus apply to
purchases made at any one time by any "person," which includes: (i) an
individual, or an individual combining with his or her spouse and their children
and purchasing for his, her or their own account; (ii) a "company" as defined in
Section 2(a)(8) of the 1940 Act; (iii) a trustee or other fiduciary purchasing
for a single trust estate or single fiduciary account (including a pension,
profit sharing or other employee benefit trust created pursuant to a plan
qualified under Section 401 of the Internal Revenue Code); (iv) a tax-exempt
organization under Section 501(c)(3) or (13) of the Internal Revenue Code; and
(v) an employee benefit plan of a single employer or of affiliated employers.
Investors may purchase Class A shares of the Fund at reduced sales
charges by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds"
(which include the Fund and other funds as designated by the Distributor from
time to time) within a 13-month period. The sales charge applicable to each
purchase made pursuant to a Letter of Intent will be that which would apply if
the total dollar amount set forth in the Letter of Intent were being bought in a
single transaction. Purchases made within a 90-day period prior to the execution
of a Letter of Intent may be included therein; in such case the date of the
earliest of such purchases marks the commencement of the 13-month period.
An investor may include toward completion of a Letter of Intent the
value (at the current public offering price) of all of his or her Class A shares
of the Fund and of any of the other Class A shares of Eligible Funds held of
record as of the date of his or her Letter of Intent, plus the value (at the
current offering price) as of such date of all of such shares held by any
"person" described herein as eligible to join with the investor in a single
purchase. Class B(1), Class B, Class C and Class S shares may also be included
in the combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the
specified amount. Shares equivalent to 5% of the specified amount will, however,
be taken from the initial purchase (or, if necessary, subsequent purchases) and
held in escrow in the investor's account as collateral against the higher sales
charge which would apply if the total purchase is not completed within the
allotted time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination
of Eligible Funds at reduced sales charges pursuant to a Right of Accumulation.
The applicable sales charge under the right is determined on the amount arrived
at by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B(1), Class B, Class C and Class S shares may also be included in the
combination under certain circumstances. Investors must submit to the
Distributor
II-25
<PAGE>
sufficient information to show that they qualify for this Right of Accumulation.
Other Programs Related to Class A Shares. Class A shares of the Fund
may be sold, or issued in an exchange, at a reduced sales charge or without a
sales charge pursuant to certain sponsored arrangements for designated classes
of investors. These arrangements include programs sponsored by the Distributor
or others under which, for example, a company, employee benefit plan or other
organization makes recommendations to, or permits group solicitation of, its
employees, members or participants to purchase Fund shares. (These arrangements
are not available to any organization created primarily for the purpose of
obtaining shares of the Fund at a reduced sales charge or without a sales
charge.) Sponsored arrangements may be established for non-profit organizations,
holders of individual retirement accounts or participants in limited promotional
campaigns, such as a special offering to shareholders of funds in other
complexes that may be liquidating. Sales without a sales charge, or with a
reduced sales charge, may also be made through brokers, registered investment
advisers, financial planners, institutions, and others, under managed fee-based
programs (e.g., "wrap fee" or similar programs) which meet certain requirements
established by the Distributor. Information on such arrangements and further
conditions and limitations is available from the Distributor.
The entire sales charge on Class A shares may be reallowed to
financial professionals who sell shares during certain special promotional
periods which may be instituted from time to time. The Fund reserves the right
to have such promotions without further supplement to the Prospectus or
Statement of Additional Information. The financial professionals who receive the
entire sales charge may be deemed to be underwriters of the Fund's shares under
the Securities Act of 1933 during such promotions.
In addition, no sales charge is imposed in connection with the sale
of Class A shares of the Fund to the following entities and persons: (A) the
Investment Manager, Distributor or any affiliated entities, including any direct
or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated Companies,
any relatives of any such individuals whose relationship is directly verified by
such individuals to the Distributor, or any beneficial account for such
relatives or individuals; (C) employees, officers, sales representatives or
directors of dealers and other entities with a selling agreement with the
Distributor to sell shares of any aforementioned investment company, any spouse
or child of such person, or any beneficial account for any of them; and (D)
others who because of their business relationship with the Fund, the Distributor
or its affiliates, and because of their knowledge of the Fund, do not require
any significant sales effort or expense to educate them about the Fund. The
purchase must be made for investment and the shares purchased may not be resold
except through redemption. This purchase program is subject to such
administrative policies, regarding the qualification of purchasers and any other
matters, as may be adopted by the Distributor from time to time.
II-26
<PAGE>
Conversion of Class B(1) and Class B Shares to Class A Shares. A
shareholder's Class B(1) and Class B shares of the Fund, including all shares
received as dividends or distributions with respect to such shares, will
automatically convert to Class A shares of the Fund at the end of eight years
following the issuance of such Class B shares; consequently, they will no longer
be subject to the higher expenses borne by Class B(1) and Class B shares. The
conversion rate will be determined on the basis of the relative per share net
asset values of the two classes and may result in a shareholder receiving either
a greater or fewer number of Class A shares than the Class B shares so
converted. As noted above, holding periods for Class B(1) shares received in
exchange for Class B(1) shares of other Eligible Funds and for Class B shares
received in exchange for Class B shares of other Eligible Funds, will be counted
toward the eight-year period.
Contingent Deferred Sales Charges. The amount of any contingent
deferred sales charge paid on Class A shares (on sales of $1 million or more and
which do not involve an initial sales charge) or on Class B(1), Class B or Class
C shares of the Fund will be paid to the Distributor. The Distributor will pay
dealers at the time of sale a 4% commission for selling Class B(1) and Class B
shares and a 1% commission for selling Class C shares. In certain cases, a
dealer may elect to waive the 4% commission on Class B(1) and Class B shares and
receive in lieu thereof an annual fee, usually 1%, with respect to such
outstanding shares. The proceeds of the contingent deferred sales charges and
the distribution fees are used to offset distribution expenses and thereby
permit the sale of Class B(1), Class B and Class C shares without an initial
sales charge.
In determining the applicability and rate of any contingent deferred
sales charge of Class B(1), Class B or Class C shares, it will be assumed that a
redemption of the shares is made first of those shares having the greatest
capital appreciation, next of shares representing reinvestment of dividends and
capital gains distributions and finally of remaining shares held by shareholder
for the longest period of time. Class B(1) shares that are redeemed within a
six-year period after purchase, Class B shares that are redeemed within a
five-year period after their purchase, and Class C shares that are redeemed
within a one-year period after their purchase, will not be subject to a
contingent deferred sales charge to the extent that the value of such shares
represents (1) capital appreciation of Fund assets or (2) reinvestment of
dividends or capital gains distributions. The holding period for purposes of
applying a contingent deferred sales charge for a particular class of shares of
the Fund acquired through an exchange from another Eligible Fund will be
measured from the date that such shares were initially acquired in the other
Eligible Fund, and shares of the same class being redeemed will be considered to
represent, as applicable, capital appreciation or dividend and capital gains
distribution reinvestments in such other Eligible Fund. These determinations
will result in any contingent deferred sales charge being imposed at the lowest
possible rate. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case may
be, on the amount realized on redemption.
Contingent Deferred Sales Charge Waivers. With respect to Class A
shares (on sales of $1 million or more and which do not involve an initial sales
charge), and Class B(1), Class B and Class C shares of the Fund, the contingent
deferred sales charge does not apply to exchanges or to
II-27
<PAGE>
redemptions under a systematic withdrawal plan which meets certain conditions.
The contingent deferred sales charge will be waived for participant initiated
distributions from State Street Research prototype employee retirement plans. In
addition, the contingent deferred sales charge will be waived for: (i)
redemptions made within one year of the death or total disability, as defined by
the Social Security Administration, of all shareholders of an account; (ii)
redemptions made after attainment of a specific age in an amount which
represents the minimum distribution required at such age under Section 401(a)(9)
of the Internal Revenue Code of 1986, as amended, for retirement accounts or
plans (e.g., age 70 1/2 for Individual Retirement Accounts and Section 403(b)
plans), calculated solely on the basis of assets invested in the Fund or other
Eligible Funds; and (iii) a redemption resulting from a tax-free return of an
excess contribution to an Individual Retirement Account. (The foregoing waivers
do not apply to a tax-free rollover or transfer of assets out of the Fund). The
contingent deferred sales charge may also be waived on Class A shares under
certain exchange arrangements for selected brokers with substantial asset
allocation programs. 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. Certain employee benefit
plans sponsored by a financial professional may be subject to other conditions
for waivers under which the plans may initially invest in Class B(1) or Class B
shares and then Class A shares of certain funds upon meeting specific criteria.
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.
II-28
<PAGE>
Systematic Withdrawal Plan. A shareholder who owns noncertificated
Class A or Class S shares with a value of $5,000 or more, or Class B(1), Class B
or Class C shares with a value of $10,000 or more, may elect, by participating
in the Fund's Systematic Withdrawal Plan, to have periodic checks issued for
specified amounts. These amounts may not be less than certain minimums,
depending on the class of shares held. The Plan provides that all income
dividends and capital gains distributions of the Fund shall be credited to
participating shareholders in additional shares of the Fund. Thus, the
withdrawal amounts paid can only be realized by redeeming shares of the Fund
under the Plan. To the extent such amounts paid exceed dividends and
distributions from the Fund, a shareholder's investment will decrease and may
eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 12% annually
(minimum $50 per withdrawal) of either (a) the value, at the time the Systematic
Withdrawal Plan is initiated, of the shares then in the account or (b) the
value, at the time of a withdrawal, of the same number of shares as in the
account when the Systematic Withdrawal Plan was initiated, whichever is higher.
Expenses of the Systematic Withdrawal Plan are borne by the Fund. A
participating shareholder may withdraw from the Systematic Withdrawal Plan, and
the Fund may terminate the Systematic Withdrawal Plan at any time on written
notice. Purchase of additional shares while a shareholder is receiving payments
under a Systematic Withdrawal Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate in
the Investamatic Program (see "Your Investment--Investor Services--Investamatic
Program" in the Fund's Prospectus) and the Systematic Withdrawal Plan at the
same time.
Request to Dealer to Repurchase. For the convenience of
shareholders, the Fund has authorized the Distributor as its agent to accept
orders from 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.
II-29
<PAGE>
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 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.
II-30
<PAGE>
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(1), 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.
(c) All income dividends and capital gains distributions
invested in any one available Eligible Fund designated by
the shareholder as described below. See "--Dividend
Allocation Plan" herein.
Dividend and distribution selections should be made on the
Application accompanying the initial investment. If no selection is indicated on
the Application, that account will be automatically coded for reinvestment of
all dividends and distributions in additional shares of the same class of the
Fund. Selections may be changed at any time by telephone or written notice to
the Service Center. Dividends and distributions are reinvested at net asset
value without a sales charge.
Exchange Privileges. Shareholders of the Fund may exchange their
shares for available shares with corresponding characteristics of any of the
other Eligible Funds on the basis of the relative net asset values of the
respective shares to be exchanged, and subject to compliance with applicable
securities laws. Shareholders of any other Eligible Fund may similarly exchange
their shares for Fund shares with corresponding characteristics. Prior to making
an exchange, shareholders should obtain the Prospectus of the Eligible Fund into
which they are exchanging. Under the Direct Program, subject to certain
conditions, shareholders may make arrangements for regular exchanges from the
Fund into other Eligible Funds. To effect an exchange, Class A, Class
II-31
<PAGE>
B(1), Class B and Class C shares may be redeemed without the payment of any
contingent deferred sales charge that might otherwise be due upon an ordinary
redemption of such shares. The State Street Research Money Market Fund issues
Class E shares which are sold without any sales charge. Exchanges of State
Street Research Money Market Fund Class E shares into Class A shares of the Fund
or any other Eligible Fund are subject to the initial sales charge or contingent
deferred sales charge applicable to an initial investment in such Class A
shares, unless a prior Class A sales charge has been paid directly or indirectly
with respect to the shares redeemed. Class A shares acquired through a new
investment after January 1, 1999, are subject to an incremental sales charge if
exchanged within 30 days of acquisition for Class A shares of a Fund with a
higher applicable sales charge. For purposes of computing the contingent
deferred sales charge that may be payable upon disposition of any acquired Class
A, Class B(1), Class B and Class C shares, the holding period of the redeemed
shares is "tacked" to the holding period of any acquired shares. No exchange
transaction fee is currently imposed on any exchange.
Shares of the Fund may also be acquired or redeemed in exchange for
shares of the Summit Cash Reserves Fund ("Summit Cash Reserves") by customers of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (subject to completion of
steps necessary to implement the program). The Fund and Summit Cash Reserves are
related mutual funds for purposes of investment and investor services. Upon the
acquisition of shares of Summit Cash Reserves by exchange for redeemed shares of
the Fund, (a) no sales charge is imposed by Summit Cash Reserves, (b) no
contingent deferred sales charge is imposed by the Fund on the Fund shares
redeemed, and (c) any applicable holding period of the Fund shares redeemed is
"tolled," that is, the holding period clock stops running pending further
transactions. Upon the acquisition of shares of the Fund by exchange for
redeemed shares of Summit Cash Reserves, (a) the acquisition of Class A shares
shall be subject to the initial sales charges or contingent deferred sales
charges applicable to an initial investment in such Class A shares, unless a
prior Class A sales charge has been paid indirectly, and (b) the acquisition of
Class B(1), Class B or Class C shares of the Fund shall restart any holding
period previously tolled, or shall be subject to the contingent deferred sales
charge applicable to an initial investment in such shares.
The exchange privilege may be terminated or suspended or its terms
changed at any time, subject, if required under applicable regulations, to 60
days' prior notice. New accounts established for investments upon exchange from
an existing account in another fund will have the same telephone privileges with
respect to the Fund (see "Your Investment--Account Policies--Telephone Requests"
in the Fund's Prospectus and "--Telephone Privileges," below) as the existing
account unless the Service Center is instructed otherwise. Related
administrative policies and procedures may also be adopted with regard to a
series of exchanges, street name accounts, sponsored arrangements and other
matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or
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<PAGE>
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. The exchange limit may also be modified under certain exchange
arrangements for selected brokers with substantial asset allocation programs.
Subject to the foregoing, if an exchange request in good order is received by
the Service Center and delivered by the Service Center to the Transfer Agent by
12 noon Boston time on any business day, the exchange usually will occur that
day. For further information regarding the exchange privilege, shareholders
should contact the Service Center.
Reinvestment Privilege. A shareholder of the Fund who has redeemed
shares or had shares repurchased at his or her request may reinvest all or any
portion of the proceeds (plus that amount necessary to acquire a fractional
share to round off his or her reinvestment to full shares) in shares, of the
same class as the shares redeemed, of the Fund or any other Eligible Fund at net
asset value and without subjecting the reinvestment to an initial sales charge,
provided such reinvestment is made within 120 calendar days after a redemption
or repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the amount
reinvested. The redemption of shares is, for federal income tax purposes, a sale
on which the shareholder may realize a gain or loss. If a redemption at a loss
is followed by a reinvestment within 30 days, the transaction may be a "wash
sale" resulting in a denial of the loss for federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be
subject to any applicable minimum account standards imposed by the fund into
which the reinvestment is made. Shares are sold to a reinvesting shareholder at
the net asset value thereof next determined following timely receipt by the
Service Center of such shareholder's written purchase request and delivery of
the request by the Service Center to the Transfer Agent. A shareholder may
exercise this reinvestment privilege only once per 12-month period with respect
to his or her shares of the Fund.
Dividend Allocation Plan. The Dividend Allocation Plan allows
shareholders to elect to have all their dividends and any other distributions
from the Fund or any Eligible Fund automatically invested at net asset value in
one other such Eligible Fund designated by the shareholder, provided the account
into which the dividends and distributions are directed is initially funded with
the requisite minimum amount.
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<PAGE>
Telephone Privileges. The following telephone privileges are
available:
o Telephone Exchange Privilege for Shareholder and Shareholder's
Financial Professional
o Shareholders automatically receive this privilege unless
declined.
o This privilege allows a shareholder or a shareholder's
financial professional to request exchanges into other
State Street Research funds.
o Telephone Redemption Privilege for Shareholder
o Shareholders automatically receive this privilege unless
declined.
o This privilege allows a shareholder to phone requests to
sell shares, with the proceeds sent to the address of
record.
o Telephone Redemption Privilege for Shareholder's Financial
Professional (This privilege is not automatic; a shareholder
must specifically elect it)
o This privilege allows a shareholder's financial
professional to phone requests to sell shares, with the
proceeds sent to the address of record on the account.
A shareholder with the above telephone privileges is deemed to
authorize the Service Center and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be any of the shareholders of
an account or a shareholder's financial professional; 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.
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<PAGE>
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 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 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 also reserve the right to
adopt other valuations based on fair value in pricing in unusual circumstances
where use of other methods as discussed in part above, could otherwise have a
material adverse effect on the Fund as a whole.
The Trustees have authorized the use of the amortized cost method to
value short-term debt instruments issued with a maturity of one year or less and
having a remaining maturity of 60 days or less when the value obtained is fair
value, provided that during any period in which more than 25% of the Fund's
total assets is invested in short-term debt securities the current market value
of such securities will be used in calculating net asset value per share in lieu
of the amortized cost method. Under the amortized cost method of valuation, the
security is initially valued at cost on
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<PAGE>
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
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).
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
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<PAGE>
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 seek to evaluate the quality of the research and other services
provided by various broker-dealer firms, and the results of these efforts are
made available to the equity trading department, which uses this information as
consideration to the extent described above in the selection of brokers to
execute portfolio transactions.
Some services furnished by broker-dealers may be used for research
and investment decision-making purposes, and also for marketing or
administrative purposes. Under these circumstances, the Investment Manager
allocates the cost of the services to determine the proportion which is
allocable to research or investment decision-making and the proportion allocable
to other purposes. The Investment Manager pays directly from its own funds for
that portion allocable to uses other than research or investment
decision-making. Some research and execution services may benefit the Investment
Manager's clients as a whole, while others may benefit a specific segment of
clients. Not all such services will necessarily be used exclusively in
connection with the accounts which pay the commissions to the broker-dealer
providing the services.
The Investment Manager has no fixed agreements or understandings
with any broker-dealer as to the amount of brokerage business which the firm may
expect to receive for services supplied
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<PAGE>
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.
In the case of the purchase of fixed income securities in
underwriting transactions, the Investment Manager follows any instructions
received from its clients as to the allocation of new issue discounts, selling
commissions and designations to brokers or dealers which provide the client with
research, performance evaluation, master trustee and other services. In the
absence of instructions from the client, the Investment Manager may make such
allocations to broker-dealers which have provided the Investment Manager with
research and brokerage services.
In some instances, certain clients of the Investment Manager request
it to place all or part of the orders for their account with certain brokers or
dealers, which in some cases provide services to those clients. The Investment
Manager generally agrees to honor these requests to the extent practicable.
Clients may request that the Investment Manager only effect transactions with
the specified broker-dealers if the broker-dealers are competitive as to price
and execution. Where the request is not so conditioned, the Investment Manager
may be unable to negotiate commissions or obtain volume discounts or best
execution. In cases where the Investment Manager is requested to use a
particular broker-dealer, different commissions may be charged to clients making
the requests. A client who requests the use of a particular broker-dealer should
understand that it may lose the possible advantage which non-requesting clients
derive from aggregation of orders for several clients as a single transaction
for the purchase or sale of a particular security. Among other reasons why best
execution may not be achieved with directed brokerage is that, in an effort to
achieve orderly execution of transactions, execution of orders that have
designated particular brokers may, at the discretion of the trading desk, be
delayed until execution of other non-designated orders has been completed.
When more than one client of the Investment Manager is seeking to
buy or sell the same security, the sale or purchase is carried out in a manner
which is considered fair and equitable to all accounts. In allocating
investments among various clients (including in what sequence orders for trades
are placed), the Investment Manager will use its best business judgment and will
take into account such factors as the investment objectives of the clients, the
amount of investment funds available to each, the size of the order, the 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
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<PAGE>
sometimes affect price or volume of shares acquired or sold, overall it is
believed there may be an advantage in execution. The Investment Manager may
follow the practice of grouping orders of various clients for execution to get
the benefit of lower prices or commission rates. In certain cases where the
aggregate order may be executed in a series of transactions at various prices,
the transactions are allocated as to amount and price in a manner considered
equitable to each so that each receives, to the extent practicable, the average
price of such transactions. Exceptions may be made based on such factors as the
size of the account and the size of the trade. For example, the Investment
Manager may not aggregate trades where it believes that it is in the best
interests of clients not to do so, including situations where aggregation might
result in a large number of small transactions with consequent increased
custodial and other transactional costs which may disproportionately impact
smaller accounts. Such disaggregation, depending on the circumstances, may or
may not result in such accounts receiving more or less favorable execution
relative to other clients.
CERTAIN TAX MATTERS
Federal Income Taxation of the Fund--In General
- -----------------------------------------------
The Fund intends to qualify and elects to be treated each taxable
year as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), although it cannot give complete
assurance that it will qualify to do so. Accordingly, the Fund must, among other
things, (a) derive at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income (including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); and (b) satisfy certain
diversification requirements on a quarterly basis.
If in any year the Fund derives more than 10% of its gross income
(as defined in the Code, which disregards losses for that purpose) from
investments made directly in commodities, including precious metal investments,
or commodity-related options, futures or indices, the Fund in such year may fail
to qualify as a regulated investment company under the Code. The Investment
Manager intends to manage the Fund's portfolio so as to minimize the risk of
such a disqualification.
If the Fund should fail to qualify as a regulated investment company
in any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions 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
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<PAGE>
of the Fund to the extent thereof. Any distribution in excess of a shareholder's
basis in the shareholder's shares would be taxable as gain realized from the
sale of such shares.
The Fund will be liable for a nondeductible 4% excise tax on amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement. To avoid the tax, during each calendar year the Fund
must distribute an amount equal to at least 98% of the sum of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, and its capital gain net income for the 12-month period ending on October
31, in addition to any undistributed portion of the respective balances from the
prior year. For that purpose, any income or gain retained by the Fund that is
subject to corporate tax will be considered to have been distributed by
year-end. The Fund intends to make sufficient distributions to avoid this 4%
excise tax.
Taxation of the Fund's Investments
- ----------------------------------
Original Issue Discount; Market Discount. For federal income tax
purposes, debt securities purchased by the Fund may be treated as having
original issue discount. Original issue discount represents interest for federal
income tax purposes and can generally be defined as the excess of the stated
redemption price at maturity of a debt obligation over the issue price. Original
issue discount is treated for federal income tax purposes as income earned by
the Fund, whether or not any income is actually received, and therefore is
subject to the distribution requirements of the Code. Generally, the amount of
original issue discount is determined on the basis of a constant yield to
maturity which takes into account the compounding of accrued interest. Under
section 1286 of the Code, an investment in a stripped bond or stripped coupon
may result in original issue discount.
Debt securities may be purchased by the Fund at a discount that
exceeds the original issue discount plus previously accrued original issue
discount remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for federal
income tax purposes. In the case of any debt security issued after July 18,
1984, having a fixed maturity date of more than one year from the date of issue
and having market discount, the gain realized on disposition will be treated as
interest to the extent it does not exceed the accrued market discount on the
security (unless the Fund elects to include such accrued market discount in
income in the tax year to which it is attributable). Generally, market discount
is accrued on a daily basis. The Fund may be required to capitalize, rather than
deduct currently, part or all of any direct interest expense incurred or
continued to purchase or carry any debt security having market discount, unless
the Fund makes the election to include market discount currently. Because the
Fund must include original issue discount in income, it will be more difficult
for the Fund to make the 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.
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<PAGE>
Options and Futures Transactions. Certain of the Fund's investments
may be subject to provisions of the Code that (i) require inclusion of
unrealized gains or losses in the Fund's income for purposes of the 90% test,
and require inclusion of unrealized gains in the Fund's income for the purposes
of the excise tax and the distribution requirements applicable to regulated
investment companies; (ii) defer recognition of realized losses; and (iii)
characterize both realized and unrealized gain or loss as short-term and
long-term gain, irrespective of the holding period of the investment. Such
provisions generally apply to, among other investments, options on debt
securities, indices on securities and futures contracts. The Fund will monitor
its transactions and may make certain tax elections available to it in order to
mitigate the impact of these rules and prevent disqualification of the Fund as a
regulated investment company.
Federal Income Taxation of Shareholders
- ---------------------------------------
Dividends paid by the Fund may be eligible for the 70%
dividends-received deduction for corporations. The percentage of the Fund's
dividends eligible for such tax treatment may be less than 100% to the extent
that less than 100% of the Fund's gross income may be from qualifying dividends
of domestic corporations. Any dividend declared in October, November or December
and made payable to shareholders of record in any such month is treated as
received by such shareholder on December 31, provided that the Fund pays the
dividend during January of the following calendar year.
Distributions by the Fund can result in a reduction in the fair
market value of the Fund's shares. Should a distribution reduce the fair market
value below a shareholder's cost basis, such distribution nevertheless may be
taxable to the shareholder as ordinary income or capital gain, even though, from
an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
CALCULATION OF PERFORMANCE DATA
Total Return
- ------------
Standard total return is computed separately for each class of
shares by determining the average annual compounded rates of return over the
designated periods that, if applied to the initial amount invested, would
produce the ending redeemable value in accordance with the following formula:
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<PAGE>
P(1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated
period assuming a hypothetical $1,000 payment made at
the beginning of the designated period
The calculation is based on the further assumptions that the highest
applicable initial or contingent deferred sales charge is deducted, and that all
dividends and distributions by the Fund are reinvested at net asset value on the
reinvestment dates during the periods. All accrued expenses and recurring
charges are also taken into account as described later herein.
Yield
- -----
Yield for each class of the Fund's shares is computed by dividing
the net investment income per share earned during a recent month or other
specified 30-day period by the maximum offering price per share on the last day
of the period and annualizing the result in accordance with the following
formula:
YIELD = 2[(a-b + 1)(6) -1]
---
cd
Where a = dividends and interest earned during the period
b = expenses accrued for the period (net of voluntary expense
reductions by the Investment Manager)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
To calculate interest earned (for the purpose of "a" above) on debt
obligations, the Fund computes the yield to effective maturity of each
obligation held by the Fund based on the market value of the obligation
(including actual accrued interest) at the close of the last business day of the
preceding period, or, with respect to obligations purchased during the period,
the purchase price (plus actual accrued interest). The yield to effective
maturity is then divided by 360 and the quotient is multiplied by the market
value of the obligation (including
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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.
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<PAGE>
Nonstandardized Total Return
- ----------------------------
The Fund may provide the above described standard total return
results for Class A, Class B(1), Class B, Class C and Class S shares for periods
which end no earlier than the most recent calendar quarter end and which begin
twelve months before, five years before and ten years before (or the
commencement of the Fund's operations, whichever is earlier). In addition, the
Fund may provide nonstandardized total return results for differing periods,
such as for the most recent six months, and/or without taking sales charges into
account. Such nonstandardized total return is computed as otherwise described
under "Total Return" except the result may or may not be annualized, and as
noted any applicable sales charge, if any, may not be taken into account and
therefore not deducted from the hypothetical initial payment of $1,000.
Distribution Rates
- ------------------
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.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the custodian for Fund assets. As custodian State
Street Bank and Trust Company is responsible for, among other things,
safeguarding and controlling the Fund's cash and securities, handling the
receipt and delivery of securities and collecting interest and dividends on the
Fund's investments. State Street Bank and Trust Company is not an affiliate of
the Investment Manager or its affiliates.
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<PAGE>
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers 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.
DOCSC\773891.2
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