As filed with the Securities and Exchange Commission on February 27, 1997
Securities Act of 1933 Registration No. 33-10327
Investment Company Act of 1940 File No. 811-4911
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. ____ [ ]
Post-Effective Amendment No. 16 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 17 [X]
____________________
STATE STREET RESEARCH FINANCIAL TRUST
(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (617) 357-1200
Francis J. McNamara, III
Senior Vice President, Secretary & General Counsel
State Street Research & Management Company
One Financial Center
Boston, Massachusetts 02111
(Name and Address of Agent for Service)
Copy of Communications To:
Geoffrey R.T. Kenyon, Esq.
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
It is proposed that this filing will become effective under Rule 485:
[ ] Immediately upon filing pursuant to paragraph (b),
[X] On March 1, 1997 pursuant to paragraph (b),
[ ] 60 days after filing pursuant to paragraph (a)(1),
[ ] On March 1, 1996 pursuant to paragraph (a)(1).
[ ] 75 days after filing pursuant to paragraph (a)(2).
[ ] On ___________ pursuant to paragraph (a)(2).
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
The Registrant hereby declares that, pursuant to Rule 24f-2 promulgated under
the Investment Company Act of 1940, as amended, it has registered an indefinite
number of shares of beneficial interest, par value $.001 per share, in each of
the State Street Research Government Income Fund, State Street Research
Strategic Portfolios: Conservative, State Street Strategic Portfolios: Moderate
and State Street Strategic Portfolios: Aggressive series of the Registrant,
which shares are designated as Class A shares, Class B shares, Class C shares
and Class D shares of beneficial interest, par value $.001 per share, in such
series.
A Rule 24f-2 Notice for the most recent fiscal year ended October 31, 1996 was
filed by the Registrant on or about December 23, 1996.
===============================================================================
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Rule 481(a)
Part A
<TABLE>
<CAPTION>
CAPTION OR LOCATION
IN PROSPECTUS FOR STATE
STREET RESEARCH STRATEGIC
PORTFOLIOS: CONSERVATIVE,
STATE STREET RESEARCH
CAPTION OR LOCATION STRATEGIC PORTFOLIOS:
IN PROSPECTUS FOR MODERATE AND STATE STREET
STATE STREET RESEARCH RESEARCH STRATEGIC
FORM N-1A ITEM NO. GOVERNMENT INCOME FUND PORTFOLIOS: AGGRESSIVE
<S> <C> <C>
1. Cover Page............ Same Same
2. Synopsis.............. Table of Expenses Table of Expenses
3. Condensed Financial
Information........... Financial Highlights; Financial Highlights; Calculation of
Calculation of Performance Performance Data
Data
4. General Description
of Registrant......... The Fund's Investments; The Funds' Investments and Asset
The Fund and its Shares Allocation; The Funds and Their
Shares
5. Management of the
Fund.................. Management of the Fund; Management of the Funds;
Purchase of Shares Purchase of Shares
5A. Management's Discussion
of Fund Performance... [To be included in [To be included in
Financial Statements] Financial Statements]
6. Capital Stock and
Other Securities...... Shareholder Services; The Shareholder Services; The
Fund and Its Shares; Funds and Their Shares;
Management of the Management of the
Fund; Dividends Funds; Dividends and
and Distributions; Taxes Distributions; Taxes
7. Purchase of
Securities Being
Offered............... Purchase of Shares; Purchase of Shares;
Shareholder Services Shareholder Services
8. Redemption or
Repurchase............ Redemption of Shares; Redemption of Shares;
Shareholder Services Shareholder Services
9. Legal Proceedings..... Not Applicable Not Applicable
i
<PAGE>
Part B
CAPTION OR LOCATION
IN STATEMENT OF ADDITIONAL
INFORMATION FOR STATE
STREET RESEARCH STRATEGIC
PORTFOLIOS: CONSERVATIVE,
CAPTION OR LOCATION STATE STREET RESEARCH
IN STATEMENT OF ADDITIONAL STRATEGIC PORTFOLIOS:
INFORMATION FOR STATE MODERATE AND STATE
STREET RESEARCH STREET RESEARCH STRATEGIC
FORM N-1A ITEM NO. GOVERNMENT INCOME FUND PORTFOLIOS: AGGRESSIVE
10. Cover Page.......... Same Same
11. Table of Contents... Same Same
12. General Information
and History......... Not Applicable Not Applicable
13. Investment
Objectives
and Policies........ Additional Investment Additional Investment
Policies and Restrictions; Policies and Restrictions;
Additional Information Additional Information
Concerning Certain Concerning Certain
Investment Techniques; Investment Techniques;
Debt Instruments and Debt Instruments and
and Permitted Cash Investments; Permitted Cash Investments;
Portfolio Transactions Portfolio Transactions
14. Management of the
Registrant.......... Trustees and Officers Trustees and Officers
15. Control Persons and
Principal Holders of
Securities.......... Trustees and Officers; Trustees and Officers;
Investment Advisory Services Investment Advisory Services
16. Investment
Advisory and
Other Services...... Investment Advisory Services; Investment Advisory
Custodian; Independent Services; Custodian;
Accountants; Distribution of Independent Accountants;
Shares of the Fund Distribution of Shares of the
Funds
17. Brokerage
Allocation.......... Portfolio Transactions Portfolio Transactions
18. Capital Stock and
Other Securities.... Not Applicable (Description in Not Applicable (Description
Prospectus) in Prospectus)
ii
<PAGE>
CAPTION OR LOCATION
IN STATEMENT OF ADDITIONAL
INFORMATION FOR STATE
STREET RESEARCH STRATEGIC
PORTFOLIOS: CONSERVATIVE,
CAPTION OR LOCATION STATE STREET RESEARCH
IN STATEMENT OF ADDITIONAL STRATEGIC PORTFOLIOS:
INFORMATION FOR STATE MODERATE AND STATE
STREET RESEARCH STREET RESEARCH STRATEGIC
FORM N-1A ITEM NO. GOVERNMENT INCOME FUND PORTFOLIOS: AGGRESSIVE
19. Purchase, Redemption
and Pricing of
Securities Being
Offered............. Purchase and Redemption of Purchase and Redemption
Shares; Net Asset Value of Shares; Net Asset Value
20. Tax Status.......... Certain Tax Matters Certain Tax Matters
21. Underwriters........ Distribution of Shares of the Distribution of Shares of the
Fund Funds
22. Calculation of
Performance
Data.............. Calculation of Performance Data Calculation of Performance Data
23. Financial
Statements........ Financial Statements Financial Statements
</TABLE>
50847.c3
1/25/95
iii
<PAGE>
State Street Research
Government Income Fund
Prospectus
March 1, 1997
The investment objective of State Street Research Government Income Fund (the
"Fund") is to seek high current income. In seeking to achieve its investment
objective, the Fund invests primarily in U.S. Government securities.
State Street Research & Management Company serves as investment adviser
for the Fund (the "Investment Manager"). As of December 31, 1996, the
Investment Manager had assets of approximately $41.7 billion under
management. State Street Research Investment Services, Inc. serves as
distributor (the "Distributor") for the Fund.
Shareholders may have their shares redeemed directly by the Fund at net
asset value plus the applicable contingent deferred sales charge, if any;
redemptions processed through securities dealers may be subject to processing
charges.
There are risks in any investment program, including the risk of changing
economic and market conditions, and there is no assurance that the Fund will
achieve its investment objective. The net asset value of a share of the Fund
will fluctuate as market conditions change.
This Prospectus sets forth concisely the information a prospective
investor ought to know about the Fund before investing. It should be retained
for future reference. A Statement of Additional Information about the Fund
dated March 1, 1997 has been filed with the Securities and Exchange
Commission and is incorporated by reference in this
Prospectus. It is available, at no charge, upon request to the Fund at the
address indicated on the back cover or by calling 1-800-562-0032.
The Fund is a diversified series of State Street Research Financial Trust
(the "Trust"), an open-end management investment company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY,
AND INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
Table of Contents Page
Table of Expenses 2
Financial Highlights 4
The Fund's Investments 6
Limiting Investment Risk 9
Purchase of Shares 10
Redemption of Shares 18
Shareholder Services 20
The Fund and its Shares 24
Management of the Fund 25
Dividends and Distributions; Taxes 26
Calculation of Performance Data 27
<PAGE>
The Fund offers four classes of shares which may be purchased at the next
determined net asset value per share plus, in the case of all classes except
Class C shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5%
and (ii) an annual service fee of 0.25% of the average daily net asset value
of the Class A shares.
Class B shares are subject to (i) a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made
within five years of purchase and (ii) annual distribution and service fees
of 1% of the average daily net asset value of such shares. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after purchase. No contingent deferred sales charge
applies after the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and
large institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1%
if redeemed within one year following purchase and (ii) annual distribution
and service fees of 1% of the average daily net asset value of such shares.
Table of Expenses
<TABLE>
<CAPTION>
Class A Class B Class C Class D
------------------------ ------------ ------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses(1)
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price) 4.5% None None None
Maximum Deferred Sales Charge (as a percentage of net
asset value at time of purchase or redemption,
whichever is lower) None(2) 5% None 1%
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None None None None
Redemption Fees (as a percentage of amount redeemed, if
applicable) None None None None
Exchange Fee None None None None
</TABLE>
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
thereafter and no contingent deferred sales charge is imposed after the
fifth year. Class D shares are subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the
sale. Long-term investors in Class A, Class B or Class D shares may, over
a period of years, pay more than the economic equivalent of the maximum
sales charge permissible under applicable rules. See "Purchase of
Shares." The contingent deferred sales charge may also be imposed on
shares involuntarily redeemed for accounts which have not maintained
requisite minimum balances. See "Redemption of Shares--Additional
Information."
(2) Purchases of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption.
See "Purchase of Shares."
2
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C Class D
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.65% 0.65% 0.65% 0.65%
12b-1 Fees 0.25% 1.00% None 1.00%
Other Expenses 0.19% 0.19% 0.19% 0.19%
--------- --------- --------- ----------
Total Fund Operating Expenses 1.09% 1.84% 0.84% 1.84%
========= ========= ========= ==========
</TABLE>
Example:
You would pay the following expenses on a $1,000 investment including, for
Class A shares, the maximum applicable initial sales charge and assuming (1)
5% annual return and (2) redemption of the entire investment at the end of
each time period:
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- -----------
Class A shares $56 $78 $102 $172
Class B shares (1) $69 $88 $120 $196
Class C shares $ 9 $27 $ 47 $104
Class D shares $29 $58 $100 $216
You would pay the following expenses on the same investment, assuming no
redemption:
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- -----------
Class B shares (1) $19 $58 $100 $196
Class D shares $19 $58 $100 $216
(1) Ten-year figures assume conversion of Class B shares to Class A shares at
the end of eight years.
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than
shown.
The purpose of the table above is to assist the investor in understanding
the various costs and expenses that an investor will bear directly or
indirectly. The percentage expense levels shown in the table above are based
on experience with expenses for the fiscal year ended October 31, 1996;
actual expense levels for the current fiscal year and future years may vary
from the amounts shown. The table does not reflect charges for optional
services elected by certain shareholders, such as the $7.50 fee for
remittance of redemption proceeds by wire. For further information on sales
charges, see "Purchase of Shares--Alternative Purchase Program"; for further
information on management fees, see "Management of the Fund"; and for further
information on 12b-1 fees, see "Purchase of Shares--Distribution Plan."
3
<PAGE>
Financial Highlights
The data set forth below has been audited by Price Waterhouse LLP,
independent accountants, and their report thereon for the latest five years
is included in the Statement of Additional Information. For further
information about the performance of the Fund, see "Financial Statements" in
the Statement of Additional Information.
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------------------------------
Year ended October 31
--------------------------------------------------------------------------------
1996* 1995* 1994* 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $12.58 $ 11.68 $ 12.92 $ 12.38 $12.14 $11.28 $11.63
Net investment income .81 .83 .81 .84 .90 .93 .96
Net realized and unrealized
gain (loss) on investments,
forward contracts and
foreign currency (.17) .88 (1.26) .56 .26 .84 (.35)
Dividends from net investment
income (.79) (.81) (.79) (.84) (.91) (.91) (.96)
Distributions from net
realized gains -- -- -- (.02) (.01) -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of year $12.43 $ 12.58 $ 11.68 $ 12.92 $12.38 $12.14 $11.28
========== ========== ========== ========== ========== ========== ==========
Total return 5.28%+ 15.07%+ (3.58)%+ 11.63%+ 9.86%+ 16.25%+ 5.54%+
Net assets at end of year
(000s) $584,313 $655,045 $638,418 $868,556 $798,705 $762,517 $894,074
Ratio of operating expenses
to average net assets 1.09% 1.10% 1.07% 1.05% 1.05% 1.05% 1.03%
Ratio of net investment
income to average net
assets 6.50% 6.83% 6.54% 6.59% 7.25% 7.98% 8.53%
Portfolio turnover rate 88.79% 105.57% 134.41% 103.49% 97.33% 29.20% 63.30%
</TABLE>
<TABLE>
<CAPTION>
Class A
------------------------------------------
March 23, 1987
(commencement of
Year ended October 31 operations) to
1989 1988 October 31, 1987
------------ ------------ ----------------
<S> <C> <C> <C>
Net asset value, beginning of year $11.64 $11.66 $ 12.50
Net investment income 1.05 1.12 .65
Net realized and unrealized gain (loss) on
investments, forward contracts and foreign
currency -- (.03) (.84)
Dividends from net investment income (1.06) (1.11) (.65)
Distributions from net realized gains -- -- --
------------ ------------ ----------------
Net asset value, end of year $11.63 $11.64 $ 11.66
============ ============ ================
Total return 9.62%+ 9.77%+ (2.43)%+++
Net assets at end of year (000s) $1,134,786 $1,529,640 $2,009,853
Ratio of operating expenses to average net
assets 1.06% 1.04% 1.03%++
Ratio of net investment income to average
net assets 9.26% 9.54% 8.93%++
Portfolio turnover rate 65.48% 59.63% 148.69%
</TABLE>
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges.
* Per-share figures have been calculated using the average shares method.
4
<PAGE>
<TABLE>
<CAPTION>
Class B
---------------------------------------------------------
June 1, 1993
(Commencement
of Share Class
Year ended October 31, Designations) to
------------------------------------ October 31,
1996* 1995* 1994* 1993
----------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 12.55 $ 11.66 $ 12.91 $ 12.67
Net investment income .71 .73 .72 .30
Net realized and unrealized gain (loss) on
investments, forward contracts and foreign
currency (.16) .87 (1.27) .24
Dividends from net investment income (.70) (.71) (.70) (.30)
----------- ----------- ----------- -------------------
Net asset value, end of year $ 12.40 $ 12.55 $ 11.66 $ 12.91
=========== =========== =========== ===================
Total return 4.51%+ 14.15%+ (4.38)%+ 4.32%+++
Net assets at end of year (000s) $95,218 $87,908 $52,319 $26,578
Ratio of operating expenses to average net
assets 1.84% 1.85% 1.82% 1.81%++
Ratio of net investment income to average
net assets 5.75% 6.01% 5.86% 5.67%++
Portfolio turnover rate 88.79% 105.57% 134.41% 103.49%
</TABLE>
<TABLE>
<CAPTION>
Class C
---------------------------------------------------------
June 1, 1993
(Commencement
of Share Class
Year ended October 31, Designations) to
------------------------------------ October 31,
1996* 1995* 1994* 1993
----------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $12.57 $ 11.67 $ 12.92 $ 12.67
Net investment income .84 .90 .84 .19
Net realized and unrealized gain (loss) on
investments, forward contracts and foreign
currency (.17) .84 (1.27) .42
Dividends from net investment income (.82) (.84) (.82) (.36)
----------- ----------- ----------- -------------------
Net asset value, end of year $12.42 $ 12.57 $ 11.67 $ 12.92
=========== =========== =========== ===================
Total return 5.55%+ 15.37%+ (3.42)%+ 4.82%+++
Net assets at end of year (000s) $7,767 $ 5,036 $ 203 $ 36
Ratio of operating expenses to average net
assets 0.84% 0.85% 0.82% 0.80%++
Ratio of net investment income to average
net assets 6.78% 6.79% 8.01% 6.59%++
Portfolio turnover rate 88.79% 105.57% 134.41% 103.49%
</TABLE>
<TABLE>
<CAPTION>
Class D
---------------------------------------------------------
June 1, 1993
(Commencement
of Share Class
Year ended October 31, Designations) to
------------------------------------ October 31,
1996* 1995* 1994* 1993
----------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 12.56 $ 11.66 $ 12.91 $ 12.67
Net investment income .71 .74 .72 .30
Net realized and unrealized gain (loss) on
investments, forward contracts
and foreign currency (.16) .87 (1.27) .24
Dividends from net investment income (.70) (.71) (.70) (.30)
----------- ----------- ----------- -------------------
Net asset value, end of year $ 12.41 $ 12.56 $ 11.66 $ 12.91
=========== =========== =========== ===================
Total return 4.51%+ 14.24%+ (4.38)%+ 4.32%+++
Net assets at end of year (000s) $14,473 $13,033 $13,425 $12,101
Ratio of operating expenses to average net
assets 1.84% 1.85% 1.82% 1.88%++
Ratio of net investment income to average
net assets 5.76% 6.08% 5.84% 5.59%++
Portfolio turnover rate 88.79% 105.57% 134.41% 103.49%
</TABLE>
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges.
* Per-share figures have been calculated using the average shares method.
5
<PAGE>
The Fund's Investments
The Fund's investment objective is to seek high current income; this
investment objective cannot be changed without approval of the Fund's
shareholders.
The Fund will seek to attain its investment objective by following the
investment policies described below. These may be changed by the Board of
Trustees without shareholder approval.
Under normal circumstances, the Fund will invest at least 65% of the value
of its total assets in U.S. Government securities. U.S. Government securities
are securities which are issued or guaranteed by the U.S. Government, a U.S.
Government agency or instrumentality, or certain mixed-ownership Government
corporations as described herein. The U.S. Government securities in which the
Fund invests include, among others:
(bullet) direct obligations of the U.S. Treasury, i.e., U.S. Treasury
bills, notes, certificates and bonds;
(bullet) obligations of U.S. Government agencies or instrumentalities such
as the Federal Home Loan Banks, the Farmers Home Administration,
the Federal Farm Credit Banks, the Federal National Mortgage
Association, the Government National Mortgage Association and the
Federal Home Loan Mortgage Corporation; and
(bullet) obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a variety
of ways by the U.S. Government, its agencies or instrumentalities. Some of
these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the
U.S. Treasury. Other obligations, such as those of the Federal National
Mortgage Association, are backed by the discretionary authority of the U.S.
Government to purchase certain obligations of agencies or instrumentalities.
Obligations such as those of the Federal Home Loan Banks, the Federal Farm
Credit Banks, the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation are backed by the credit of the agency or
instrumentality issuing the obligations. Certain obligations of Resolution
Funding Corporation, a mixed-ownership Government corporation, are backed
with respect to interest payments by the U.S. Treasury, and with respect to
principal payments by U.S. Treasury obligations held in a segregated account
with a Federal Reserve Bank. Except for certain mortgage-related securities,
the Fund will only invest in obligations issued by mixed-ownership Government
corporations where such securities are guaranteed as to payment of principal
or interest by the U.S. Government or a U.S. Government agency or
instrumentality, and any unguaranteed principal or interest is otherwise
supported by U.S. Government obligations held in a segregated account.
In addition, the Fund may also invest in mortgage-related securities
which represent interests in pools of mortgage loans and provide the Fund
with a flow-through of interest and principal payments as such payments are
received with respect to the mortgages in the pool. Mortgage-related
securities may be issued by private entities such as investment banking firms
and insurance companies. An issuer may offer senior or subordinated
securities backed by the same pool of mortgages. The senior securities have
priority to the interest and/or principal payments on the mortgages in the
pool; the subordinate securities have less priority to such payments on the
mortgages in the pool. The mortgage-related securities in which the Fund
invests will be rated in the AAA major rating category by Standard & Poor's
Corporation ("S&P") or Aaa major rating category by Moody's Investor's
Service, Inc. ("Moody's") or not rated but considered by the Investment
Manager to be of equivalent investment quality to comparably rated
securities.
Mortgage-related securities and certain U.S. Government securities which
are based on mortgages currently offer yields higher than those available
from other kinds of government securities, but because of the possibility of
prepayment of the underlying mortgages, they may be less effective than other
types of securities as a means of locking in attractive long-term interest
rates. This is caused by the need to reinvest prepayments of principal
generally and the possibility of significant unscheduled payments resulting
from a decline in mortgage rates. As a result, mortgage-related securities
may have less potential for capital appreciation during periods of declining
6
<PAGE>
interest rates than other securities with comparable maturities, while having
a comparable risk of decline during periods of rising interest rates.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually
numbered and separately issued by the U.S. Treasury at the request of
depository financial institutions, which then trade the component parts
independently. Obligations of Resolution Funding Corporation are similarly
divided into principal and interest components and maintained as such on the
book entry records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks
and brokerage firms. Such notes and bonds are held in custody by a bank on
behalf of the owners of the receipts. These custodial receipts are known by
various names, including "Treasury Receipts" ("TRs"), "Treasury Investment
Growth Receipts" ("TIGRs") and "Certificates of Accrual on Treasury
Securities" ("CATS"), and may not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, which issue, for example, government trust certificates that are
backed by pools of assets such as U.S. Government securities or loans. Other
asset-backed securities in which the Fund can invest may be supported by
consumer credit card or other receivables.
The U.S. Government securities in which the Fund invests do not, in
general, have as high a yield as more speculative securities or securities
not supported by the U.S. Government or its agencies or instrumentalities.
When interest rates increase, the value of debt securities and shares of the
Fund can be expected to decline.
Portfolio Maturity and Turnover
The Fund's holdings may include issues across the maturity spectrum.
Ordinarily the Fund will emphasize investments in instruments that have
stated or remaining maturities that are medium or longer term; the weighted
average maturity of portfolio holdings, however, may be shortened or
lengthened through a mix of securities depending primarily upon the
Investment Manager's outlook for interest rates.
The Fund reserves full freedom with respect to portfolio turnover. In
periods when there are rapid changes in economic conditions or security price
levels or when investment strategy is changed significantly, portfolio
turnover may be significantly higher than during times of economic and market
price stability or when investment strategy remains relatively constant. A
high rate of portfolio turnover will result in increased transaction costs
for the Fund and may also result in an increase in realization of short-term
capital gains.
Other Investment Policies
Fixed income securities in which the Fund may invest include zero or step
coupon securities. Zero or step coupon securities may pay no interest for all
or a portion of their life but are purchased at a discount to face value at
maturity. Their return consists of the amortization of the discount between
their purchase price and their maturity value, plus, in the case of a step
coupon, any fixed rate interest income. Zero coupon securities pay no
interest to holders prior to maturity even though interest on these
securities is reported as income to the Fund. The Fund will be required to
distribute all or substantially all or such amounts annually to its
shareholders. These distributions may cause the Fund to liquidate portfolio
assets in order to make such distributions at a time when the Fund may have
otherwise chosen not to sell such securities. The amount of the discount
fluctuates with the market value of such securities, which may be more
volatile than that of securities which pay interest at regular intervals.
The Fund reserves the right to invest varying amounts of its total assets
in securities of foreign issuers such as foreign corporate, government, or
7
<PAGE>
government agency securities consistent with its investment objective and
policies. Under current policy, however, the Fund limits such investments to
a maximum of 20% of its total assets. It is anticipated that most of the
foreign investments of the Fund will consist of securities of issuers in
countries with developed economies. However, the Fund may also invest in the
securities of issuers in countries with new or developing capital markets as
deemed appropriate by the Investment Manager, although the Fund does not
presently expect to invest more than 5% of its total assets in issuers in
such less developed countries. Such countries include countries that have an
emerging stock market that trades a small number of securities; countries
with low- to middle-income economies; and/or countries with economies that
are based on only a few industries. Eastern European countries are considered
to have less developed capital markets.
The risks associated with investments in foreign securities include those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments including the risks of
nationalization or expropriation, the possible imposition of currency
exchange blockages, higher operating expenses, foreign withholding and other
taxes which may reduce investment return, reduced availability of public
information concerning issuers, the difficulties in obtaining and enforcing a
judgment against a foreign issuer and the fact that foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to
those applicable to domestic issuers. Moreover, securities of many foreign
issuers may be less liquid and their prices more volatile than those of
securities of comparable domestic issuers. Investments in foreign securities
also involve the additional cost of converting the foreign currency into U.S.
dollars.
In order to protect against the effect of uncertain future exchange rates
on securities denominated in foreign currencies, the Fund may engage in
currency exchange transactions such as spot (i.e., cash) transactions at the
rate prevailing in the currency exchange market or by entering into forward
contracts to purchase or sell currencies. Although such contracts tend to
minimize the risk of loss resulting from a correctly predicted decline in
value of hedged currency, they tend to limit any potential gain that might
result should the value of such currency increase. In entering a forward
currency transaction, the Fund is dependent upon the creditworthiness and
good faith of the counterparty. The Fund attempts to reduce the risks of
nonperformance by a counterparty by dealing only with established, reputable
institutions with which the Investment Manager has done substantial business
in the past.
For further information regarding foreign investments, see the Statement
of Additional Information.
The Fund may lend portfolio securities with a value of up to 33-1/3% of
its total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of
the current market value of the loaned securities plus accrued interest.
Collateral received by the Fund will generally be held in the form tendered,
although cash may be invested in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, irrevocable stand-by letters
of credit issued by a bank, or any combination thereof. The investing of cash
collateral received from loaning portfolio securities involves leverage which
magnifies the potential for gain or loss on monies invested and, therefore,
results in an increase in the volatility of the Fund's outstanding
securities. Such loans may be terminated at any time.
The Fund will retain most rights of ownership including rights to
dividends, interest or other distributions on the loaned securities. Voting
rights pass with the lending, although the Fund may call loans to vote
proxies if desired. Should the borrower of the securities fail financially,
there is a risk of delay in recovery of the securities or loss of rights in
the collateral. Loans are made only to borrowers which are deemed by the
Investment Manager to be of good financial standing.
The Fund may, subject to certain limitations, buy and sell options,
futures contracts and options on futures contracts on securities and
securities indices, enter into repurchase agreements and purchase securi
8
<PAGE>
ties on a "when-issued" or forward commitment basis. The Fund may not
establish a position in a commodity futures contract or purchase or sell a
commodity option contract for other than bona fide hedging purposes if
immediately thereafter the sum of the amount of initial margin deposits and
premiums required to establish such positions for such nonhedging purposes
would exceed 5% of the market value of the Fund's net assets; similar
policies apply to options which are not commodities. The Fund may enter
various forms of swap arrangements, which have simultaneously the
characteristics of a security and a futures contract, although the Fund does
not presently expect to invest more than 5% of its total assets in such
items. These swap arrangements include interest rate swaps, currency swaps
and index swaps. See the Statement of Additional Information.
Limiting Investment Risk
In seeking to lessen investment risk, the Fund operates under certain
fundamental and nonfundamental investment restrictions.
Under the fundamental investment restrictions, the Fund may not (a)
purchase a security of any one issuer (other than securities issued or
guaranteed as to principal or interest by the U.S. Government or its agencies
or instrumentalities or mixed-ownership Government corporations) if such
purchase would, with respect to 75% of the Fund's total assets, cause more
than 5% of the Fund's total assets to be invested in the securities of such
issuer or cause more than 10% of the voting securities of such issuer to be
held by the Fund or (b) invest more than 25% of the Fund's total assets in
securities of issuers principally engaged in any one industry, except this
restriction does not apply to investments in securities issued or guaranteed
by the U.S. Government or its agencies or instrumentalities. Under the
nonfundamental investment restrictions, the Fund may not invest more than 15%
of its net assets in illiquid securities including repurchase agreements
extending for more than seven days. The Fund may invest in restricted
securities eligible for resale under Rule 144A under the Securities Act of
1933 and other restricted securities.
The foregoing fundamental investment restrictions may not be changed
except by vote of the holders of a majority of the outstanding voting
securities of the Fund. The foregoing nonfundamental investment restriction
may be changed without a shareholder vote. For further information on the
above and other fundamental and nonfundamental investment restrictions, see
the Statement of Additional Information.
The Fund may not lend money; however, the Fund may purchase bonds,
debentures, notes and similar obligations (and enter into repurchase
agreements with respect thereto).
The Fund may hold up to 100% of its assets in cash or short-term, fixed
income securities for temporary defensive purposes. The Fund will adopt a
temporary defensive position when, in the opinion of the Investment Manager,
such a position is more likely to provide protection against adverse market
conditions than adherence to the Fund's other investment policies. The types
of short-term instruments in which the Fund may invest for such purposes are
described in the Statement of Additional Information and include short-term
money market securities such as repurchase agreements, securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
certificates of deposit, time deposits and bankers' acceptances of certain
qualified financial institutions and corporate commercial paper rated at
least "A" by S&P or "Prime" by Moody's (or, if not rated, issued by companies
having an outstanding long-term unsecured debt issue rated at least "A" by
S&P or Moody's). See the Statement of Additional Information.
9
<PAGE>
Information on the Purchase of Shares, Redemption of Shares and Shareholder
Services is set forth on pages 10 to 24 below.
The Fund is available for investment by many kinds of investors including
participants investing through 401(k) or other retirement plan sponsors,
employees investing through savings plans sponsored by employers, Individual
Retirement Accounts ("IRAs"), trusts, corporations, individuals, etc. The
applicability of the general information and administrative procedures set
forth below accordingly will vary depending on the investor and the
recordkeeping system established for a shareholder's investment in the Fund.
Participants in 401(k) and other plans should first consult with the
appropriate person at their employer or refer to the plan materials before
following any of the procedures below. For more information or assistance,
anyone may call 1-800-562-0032.
Purchase of Shares
Methods of Purchase
Through Dealers and Others
Shares of the Fund are continuously offered through securities dealers,
financial institutions and others (collectively referred to herein as
securities dealers or dealers) who have entered into sales agreements with
the Distributor. Purchases through dealers are confirmed at the offering
price, which is the net asset value plus the applicable sales charge, next
determined after the order is duly received by State Street Research
Shareholder Services ("Shareholder Services"), a division of State Street
Research Investment Services, Inc., from the dealer. ("Duly received" for
purposes herein means in accordance with the conditions of the applicable
method of purchase as described below.) The dealer is responsible for
transmitting the order promptly to Shareholder Services in order to permit
the investor to obtain the current price. See "Purchase of Shares--Net Asset
Value" herein.
By Mail
Initial investments in the Fund may be made by mailing or delivering to the
investor's dealer a completed Application (accompanying this Prospectus),
together with a check for the total purchase price payable to the Fund. The
dealer must forward the Application and check in accordance with the
instructions on the Application.
Additional shares may be purchased by mailing to Shareholder Services a
check payable to the Fund in the amount of the total purchase price together
with any one of the following: (i) an Application; (ii) the stub from a
shareholder's account statement; or (iii) a letter setting forth the name of
the Fund, the class of shares and the shareholder's account name and number.
Shareholder Services will deliver the purchase order to the transfer agent
and dividend paying agent, State Street Bank and Trust Company (the "Transfer
Agent").
If a check is not honored for its full amount, the purchaser could be
subject to additional charges to cover collection costs and any investment
loss, and the purchase may be cancelled.
By Wire
An investor may purchase shares by wiring Federal Funds of not less than
$5,000 to State Street Bank and Trust Company, which also serves as the
Trust's custodian (the "Custodian"), as set forth below. Prior to making an
investment by wire, an investor must notify Shareholder Services at
1-800-562-0032 and obtain a control number and instructions. Following such
notification, Federal Funds should be wired through the Federal Reserve
System to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF = State Street Research Government
Income Fund and class of shares
(A, B, C or D)
AC = 99029761
OBI = Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street
Research Shareholder Services)
10
<PAGE>
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make
such investment by 12 noon Boston time on the day of his or her investment;
and (ii) the wire must be received by 4 P.M. Boston time that same day.
An investor making an initial investment by wire must promptly complete
the Application accompanying this Prospectus and deliver it to his or her
securities dealer, who should forward it as required. No redemptions will be
effected until the Application has been duly processed.
The Fund may in its discretion discontinue, suspend or change the practice
of accepting orders by any of the methods described above. Orders for the
purchase of shares are subject to acceptance by the Fund. The Fund reserves
the right to suspend the sale of shares, or to reject any purchase order,
including orders in connection with exchanges, for any reason.
Minimum Investment
Class of Shares
-----------------------------------
A B C D
-------- -------- --------------
Minimum Initial Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $2,000 $2,000 (a) $2,000
By Investamatic $1,000 $1,000 (a) $1,000
All other $2,500 $2,500 (a) $2,500
Minimum Subsequent Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $ 50 $ 50 (a) $ 50
By Investamatic $ 50 $ 50 (a) $ 50
All other $ 50 $ 50 (a) $ 50
(a) Special conditions apply; contact the Distributor.
The Fund reserves the right to vary the minimums for initial or subsequent
investments as in the case of, for example, exchanges and investments under
various employee benefit plans, sponsored arrangements involving group
solicitations of the members of an organization, or other investment plans
for reinvestment of dividends and distributions or for periodic investments
(e.g., Investamatic Program).
Alternative Purchase Program
General
Alternative classes of shares permit investors to select a purchase program
which they believe will be the most advantageous for them, given the amount
of their purchase, the length of time they anticipate holding Fund shares, or
the flexibility they desire in this regard, and other relevant circumstances.
Investors will be able to determine whether in their particular circumstances
it is more advantageous to incur an initial sales charge and not be subject
to certain ongoing charges or to have their entire initial purchase price
invested in the Fund with the investment being subject thereafter to ongoing
service fees and distribution fees.
As described in greater detail below, dealers are paid differing amounts
of commission and other compensation depending on which class of shares they
sell.
11
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
---------------------- ---------------------------------- -----------------------
<S> <C> <C> <C> <C>
Sales Charges Initial sales charge Contingent deferred None Contingent deferred
at time of investment sales charge of 5% to sales charge of 1%
of up to 4.5% 2% applies to any applies to any shares
depending on amount of shares redeemed within redeemed within one
investment first five years year following their
following their purchase
purchase; no
contingent deferred
sales charge after
five years
On investments of $1
million or more, no
initial sales charge;
but contingent
deferred sales charge
of 1% applies to any
shares redeemed within
one year following
their purchase
Distribution Fee None 0.75% for first eight None 0.75% each year
years; Class B shares
convert automatically
to Class A shares
after eight years
Service Fee 0.25% each year 0.25% each year None 0.25% each year
Initial Above described 4% None 1%
Commission initial sales charge
Received by less 0.25% to 0.50%
Selling retained by
Dealers Distributor
On investments of $1
million or more, 0.25%
to 1% paid to dealer
by Distributor
</TABLE>
12
<PAGE>
In deciding which class of shares to purchase, the investor should
consider the amount of the investment, the length of time the investment is
expected to be held, and the ongoing service fee and distribution fee, among
other factors.
Class A shares are sold at net asset value plus an initial sales charge of
up to 4.5% of the public offering price. Because of the sales charge, not all
of an investor's purchase amount is invested unless the purchase equals
$1,000,000 or more. Class B shareholders pay no initial sales charge, but a
contingent deferred sales charge of up to 5% generally applies to shares
redeemed within five years of purchase. Class D shareholders also pay no
initial sales charge, but a contingent deferred sales charge of 1% generally
applies to redemptions made within one year of purchase. For Class B and
Class D shareholders, therefore, the entire purchase amount is immediately
invested in the Fund.
An investor who qualifies for a significantly reduced initial sales
charge, or a complete waiver of the sales charge on investments of $1,000,000
or more, on the purchase of Class A shares might elect that option to take
advantage of the lower ongoing service and distribution fees that
characterize Class A shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. Class B shares are assessed an annual
distribution fee of 0.75% of daily net assets for an eight-year period
following the date of purchase and are then automatically converted to Class
A shares. Class D shares are assessed an annual distribution fee of 0.75% of
daily net assets for as long as the shares are held. The prospective investor
should consider these fees plus the initial or contingent deferred sales
charges in estimating the costs of investing in the various classes of the
Fund's shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are also allocated to dealers
(see "Distribution Plan" below). In addition, the Distributor will, at its
expense, provide additional cash and noncash incentives to dealers that sell
shares. Such incentives may be extended only to those dealers that have sold
or may sell significant amounts of shares and/or meet other conditions
established by the Distributor; for example, the Distributor may sponsor
special promotions to develop particular distribution channels or to reach
certain investor groups. The Distributor may also compensate those dealers
with clients who maintain their investments in the Fund over a period of
years. The incentives may include merchandise and trips to and attendance at
sales seminars at resorts.
Class A Shares--Initial Sales Charges
Sales Charges
The purchase price of a Class A share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar
amount of the shares purchased as set forth in the table below. A major
portion of this sales charge is reallowed by the Distributor to the dealer
responsible for the sale.
Sales Sales
Charge Charge
Paid by Paid by Dealer
Dollar Investor Investor Concession
Amount of As % of As % of As % of
Purchase Purchase Net Asset Purchase
Transaction Price Value Price
Less than $100,000 4.50% 4.71% 4.00%
$100,000 or above but less
than $250,000 3.50% 3.63% 3.00%
$250,000 or above but less
than $500,000 2.50% 2.56% 2.00%
$500,000 or above but less
than $1 million 2.00% 2.04% 1.75%
See
following
$1 million and above 0% 0% discussion
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor may pay the authorized dealer a
commission based on the aggregate of such sales as follows:
13
<PAGE>
Amount of Sale Commission
------------------------------- -------------
(a) $1 million to $3 million 1.00%
(b) Next $2 million 0.50%
(c) Amount over $5 million 0.25%
On such sales of $1,000,000 or more, unless the above commission is waived
by the dealer, the investor is subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the sale.
However, such redeemed shares will not be subject to the contingent deferred
sales charge to the extent that their value represents (1) capital
appreciation or (2) reinvestment of dividends or capital gains distributions.
In addition, the contingent deferred sales charge will be waived for certain
other redemptions as described under "Contingent Deferred Sales Charge
Waivers" below (as otherwise applicable to Class B shares).
Class A shares of the Fund that are purchased without a sales charge may
be exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption
within one year of the Class A shares which are acquired through such
exchange. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any contingent
deferred sales charge will be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement
of Additional Information, of $100,000 or more of Class A shares of the Fund
or a combination of "Eligible Funds." "Eligible Funds" include the Fund and
other funds so designated by the Distributor from time to time. Class B,
Class C and Class D shares may also be included in the combination under
certain circumstances. Securities dealers should call Shareholder Services
for details concerning the other Eligible Funds and any persons who may
qualify for reduced sales charges and related information. See the Statement
of Additional Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A
shares of the Fund and any other Eligible Funds within a 13-month period.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances. Additional information on a Letter of Intent is
available from dealers, or from the Distributor, and also appears in the
Statement of Additional Information.
Right of Accumulation
Investors may purchase Class A shares of the Fund or a combination of shares
of the Fund and other Eligible Funds at reduced sales charges pursuant to a
Right of Accumulation. Under the Right of Accumulation, the sales charge is
determined by combining the current purchase with the value of the Class A
shares of other Eligible Funds held at the time of purchase. Class B, Class C
and Class D shares may also be included in the combination under certain
circumstances. See the Statement of Additional Information and call
Shareholder Services for details concerning the Right of Accumulation.
Other Programs
Class A shares of the Fund may be sold or issued in an exchange at a reduced
sales charge or without a sales charge pursuant to certain sponsored
arrangements, which include programs under which a company, employee benefit
plan or other organization makes recommendations to, or permits group
solicitation of, its employees, members or participants, except any
organization created primarily for the purpose of obtaining shares of the
Fund at a reduced sales charge or without a sales charge. Sales without a
sales charge, or with a reduced sales charge, may also be made through
brokers, financial planners, institutions, and others, under managed
fee-based programs (e.g., "wrap fee" or similar programs) which meet certain
requirements established from time to time by the Distributor. Information on
such arrangements and further conditions and limitations is available from
the Distributor.
14
<PAGE>
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and persons: (A) the
Investment Manager, Distributor, or any affiliated entities, including any
direct or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated
Companies, any relatives of any such individuals whose relationship is
directly verified by such individuals to the Distributor, or any beneficial
account for such relatives or individuals; and (C) employees, officers, sales
representatives or directors of dealers and other entities with a selling
agreement with the Distributor to sell shares of any aforementioned
investment company, any spouse or child of such person, or any beneficial
account for any of them. The purchase must be made for investment and the
shares purchased may not be resold except through redemption. This purchase
program is subject to such administrative policies, regarding the
qualification of purchasers, minimum investments by various groups of
eligible persons and any other matters, as may be adopted by the Distributor
from time to time.
Class B Shares--Contingent Deferred Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is duly received, as defined herein.
No sales charge is imposed at the time of purchase; thus the full amount of
the investor's purchase payment will be invested in the Fund. However, a
contingent deferred sales charge may be imposed upon redemptions of Class B
shares as described below.
The Distributor will pay dealers at the time of sale a 4% commission for
selling Class B shares. The proceeds of the contingent deferred sales charge
and the distribution fee are used to offset distribution expenses and thereby
permit the sale of Class B shares without an initial sales charge.
Class B shares that are redeemed within a five-year period after their
purchase will not be subject to a contingent deferred sales charge to the
extent that the value of such shares represents (1) capital appreciation of
Fund assets or (2) reinvestment of dividends or capital gains distributions.
The amount of any applicable contingent deferred sales charge will be
calculated by multiplying the net asset value of such shares at the time of
redemption or at the time of purchase, whichever is lower, by the applicable
percentage shown in the table below:
Contingent Deferred
Sales Charge
As A Percentage Of
Net Asset Value
Redemption During At Redemption
---------------------------------------------- ------------------------
1st Year Since Purchase 5%
2nd Year Since Purchase 4
3rd Year Since Purchase 3
4th Year Since Purchase 3
5th Year Since Purchase 2
6th Year Since Purchase and Thereafter None
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first
of those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of the Fund acquired through an exchange from
another Eligible Fund will be measured from the date that such shares were
initially acquired in the other Eligible Fund, and Class B shares being
redeemed will be considered to represent, as applicable, capital appreciation
or dividend and capital gains distribution reinvestments in such other
Eligible Fund. These determinations will result in any contingent deferred
sales charge being imposed at the lowest possible rate. For federal income
tax purposes, the amount of the contingent deferred sales charge will reduce
the gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any contingent deferred sales charge will be paid
to the Distributor.
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic withdrawal plan which meets certain
conditions. In addition, the contingent deferred sales charge will be
15
<PAGE>
waived for: (i) redemptions made within one year of the death or total
disability, as defined by the Social Security Administration, of all
shareholders of an account; (ii) redemptions made after attainment of a
specific age in an amount which represents the minimum distribution required
at such age under Section 401(a)(9) of the Internal Revenue Code for
retirement accounts or plans (e.g., age 70-1/2 for IRAs and Section 403(b)
plans), calculated solely on the basis of assets invested in the Fund or
other Eligible Funds; and (iii) a redemption resulting from a tax-free return
of an excess contribution to an IRA. (The foregoing waivers do not apply to a
tax-free rollover or transfer of assets out of the Fund.) The Fund may modify
or terminate the waivers described above at any time; for example, the Fund
may limit the application of multiple waivers and establish other conditions
for employee benefit plans.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends or
distributions with respect to such shares, will automatically convert to
Class A shares of the Fund at the end of eight years following the issuance
of such Class B shares; consequently, they will no longer be subject to the
higher expenses borne by Class B shares. The conversion rate will be
determined on the basis of the relative per share net asset values of the two
classes and may result in a shareholder receiving either a greater or fewer
number of Class A shares than the Class B shares so converted. As noted
above, holding periods for Class B shares received in exchange for Class B
shares of other Eligible Funds will be counted toward the eight-year period.
Class C Shares--Institutional; No Sales Charge
The purchase price of a Class C share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase or
redemption. The Fund will receive the full amount of the investor's purchase
payment.
In general, Class C shares are only available for new investments by
certain large institutions and employee benefit plans which acquire shares
through programs or products sponsored by Metropolitan Life Insurance Company
("Metropolitan") and/or its affiliates, for which Class C shares have been
designated. Information on the availability of Class C shares and further
conditions and limitations is available from the Distributor.
Class C shares may have also been issued directly or through exchanges to
those shareholders of the Fund or other Eligible Funds who previously held
shares which are not subject to any future sales charge or service fees or
distribution fees.
Class D Shares--Spread Sales Charges
The purchase price of a Class D share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase; thus the
full amount of the investor's purchase payment will be invested in the Fund.
Class D shares are subject to a 1% contingent deferred sales charge on any
portion of the purchase redeemed within one year of the sale. The contingent
deferred sales charge will be 1% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. The Distributor
pays dealers a 1% commission for selling Class D shares at the time of
purchase. The proceeds of the contingent deferred sales charge and the
distribution fee are used to offset distribution expenses and thereby permit
the sale of Class D shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will not
be subject to the contingent deferred sales charge to the extent that the
value of such shares represents (1) capital appreciation of Fund assets or
(2) reinvestment of dividends or capital gains distributions. In addition,
the contingent deferred sales charge will be waived for certain other
redemptions as described under "Contingent Deferred Sales Charge Waivers"
above (as otherwise applicable to Class B shares). For federal income tax
purposes, the amount of the contingent deferred sales charge will reduce the
gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any contingent deferred sales charge will be paid
to the Distributor.
16
<PAGE>
Net Asset Value
The Fund's per share net asset values are determined Monday through Friday as
of the close of regular trading of the New York Stock Exchange (the "NYSE")
exclusive of days on which the NYSE is closed. The NYSE ordinarily closes at
4 P.M. New York City time. The Fund uses one or more pricing services to
value its portfolio securities. The pricing services utilize information with
respect to market transactions, quotations from dealers and various
relationships among securities in determining value and may provide prices
determined as of times prior to the close of the NYSE. Assets for which
quotations are readily available are valued as of the close of business on
the valuation date. Securities for which there is no pricing service
valuation or last reported sale price are valued as determined in good faith
by or under the authority of the Trustees of the Trust. The Trustees have
authorized the use of the amortized cost method to value short-term debt
instruments issued with a maturity of one year or less and having a remaining
maturity of 60 days or less when the value obtained is fair value. Further
information with respect to the valuation of the Fund's assets is included in
the Statement of Additional Information.
Distribution Plan
The Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the provisions of the
Distribution Plan, the Fund makes payments to the Distributor based on an
annual percentage of the average daily value of the net assets of each class
of shares as follows:
Class Service Fee Distribution Fee
- ---------- ---------------- ----------------------
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) or others for
personal services and/or the maintenance of shareholder accounts. A portion
of any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance or servicing
of shareholder accounts by such dealers. Dealers who have sold Class A shares
are eligible for further reimbursement commencing as of the time of such
sale. Dealers who have sold Class B and Class D shares are eligible for
further reimbursement after the first year during which such shares have been
held of record by such dealer as nominee for its clients (or by such clients
directly). Any service fees received by the Distributor and not allocated to
dealers may be applied by the Distributor in reduction of expenses incurred
by it directly for personal services and the maintenance or servicing of
shareholder accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to dealers for selling such shares. Any distribution fees
received by the Distributor and not allocated to dealers may be applied by
the Distributor in connection with sales or marketing efforts, including
special promotional fees and cash and noncash incentives based upon sales by
dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs
similar expenses on behalf of, such other funds. When expenses of the
Distributor cannot be identified as relating to a specific fund, the
Distributor allocates expenses among the funds in a manner deemed fair and
equitable to each fund.
Commissions and other cash and noncash incentives and payments to dealers,
to the extent payable out of the general profits, revenues or other sources
of the Distributor (including the advisory fees paid by the Fund), have also
been authorized pursuant to the Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which the Fund may incur under the
Distribution Plan to 1%, of which 0.75% may be used to pay distribution
expenses and 0.25% may be used to pay shareholder service fees. The NASD rule
also limits the aggregate amount which the Fund may pay for such distribution
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<PAGE>
costs to 6.25% of gross share sales of a class since the inception of any
asset-based sales charge plus interest at the prime rate plus 1% on unpaid
amounts thereof (less any contingent deferred sales charges). Such limitation
does not apply to shareholder service fees. Payments to the Distributor or to
dealers funded under the Distribution Plan may be discontinued at any time by
the Trustees of the Trust.
Redemption of Shares
Shareholders may redeem all or any portion of their accounts on any day the
NYSE is open for business. Redemptions will be effective at the net asset
value per share next determined (see "Purchase of Shares--Net Asset Value"
herein) after receipt of the redemption request, in accordance with the
requirements described below, by Shareholder Services and delivery of the
request by Shareholder Services to the Transfer Agent. To allow time for the
clearance of checks used for the purchase of any shares which are tendered
for redemption shortly after purchase, the remittance of the redemption
proceeds for such shares could be delayed for 15 days or more after the
purchase. Shareholders who anticipate a potential need for immediate access
to their investments should, therefore, purchase shares by wire. Except as
noted, redemption proceeds from the Fund are normally remitted within seven
days after receipt of the redemption request by the Fund and any necessary
documents in good order.
Methods of Redemption
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed to
the shareholder or wired to a predesignated bank account (see "Proceeds By
Wire" below), by sending to State Street Research Shareholder Services, P.O.
Box 8408, Boston, Massachusetts 02266-8408: (1) a written request for
redemption signed by the registered owner(s) of the shares, exactly as the
account is registered; (2) an endorsed stock power in good order with respect
to the shares or, if issued, the share certificates for the shares endorsed
for transfer or accompanied by an endorsed stock power; (3) any required
signature guarantees (see "Redemption of Shares--Signature Guarantees"
below); and (4) any additional documents which may be required for redemption
in the case of corporations, trustees, etc., such as certified copies of
corporate resolutions, governing instruments, powers of attorney, and the
like. The Transfer Agent will not process requests for redemption until it
has received all necessary documents in good order. A shareholder will be
notified promptly if a redemption request cannot be accepted. Shareholders
having any questions about the requirements for redemption should call
Shareholder Services toll-free at 1-800-562-0032.
Request By Telephone
Shareholders may request redemption by telephone with proceeds to be
transmitted by check or by wire (see "Proceeds By Wire" below). A shareholder
can request a redemption for $50,000 or less to be transmitted by check. Such
check for the proceeds will be made payable to the shareholder of record and
will be mailed to the address of record. There is no fee for this service. It
is not available for shares held in certificate form or if the address of
record has been changed within 30 days of the redemption request. The Fund
may revoke or suspend the telephone redemption privilege at any time and
without notice. See "Shareholder Services--Telephone Services" for a
discussion of the conditions and risks associated with Telephone Privileges.
Request By Check (Class A Shares Only)
Shareholders of Class A shares of the Fund may redeem shares by checks drawn
on State Street Bank and Trust Company. Checks may be made payable to the
order of any person or organization designated by the shareholder and must be
for amounts of at least $500 but not more than $100,000. Shareholders will
continue to earn dividends on the shares to be redeemed until the check
clears. Checkbooks are supplied for a $2 fee. Checks will be sent only to the
registered owner at the address of record. A $10 fee will be charged against
an account in the event a redemption check is presented for payment and not
honored pursuant to the terms and conditions established by State Street Bank
and Trust Company.
Shareholders can request the checkwriting privilege by completing the
signature card which is part of the
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<PAGE>
Application. In order to arrange for redemption-by-check after an account
has been opened, a revised Application with signature card and signatures
guaranteed must be sent to Shareholder Services. Cancelled checks will be
returned to shareholders at the end of each month.
The redemption-by-check service is subject to State Street Bank and Trust
Company's rules and regulations applicable to checking accounts (as amended
from time to time), and is governed by the Massachusetts Uniform Commercial
Code. All notices with respect to checks drawn on State Street Bank and Trust
Company must be given to State Street Bank and Trust Company. Stop payment
instructions with respect to checks must be given to State Street Bank and
Trust Company by calling 1-617-985-8543. Shareholders may not close out an
account by check.
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder has
Telephone Privileges (see "Shareholder Services--Telephone Services" herein),
the Trust's custodian will wire redemption proceeds to the shareholder's
predesignated bank account. To make the request, the shareholder should call
1-800-562-0032 prior to 4 P.M. Boston time. A $7.50 charge against the
shareholder's account will be imposed for each wire redemption. This charge
is subject to change without notice. The shareholder's bank may also impose a
charge for receiving wires of redemption proceeds. The minimum redemption by
wire is $5,000.
Request to Dealer to Repurchase
For the convenience of shareholders, the Fund has authorized the Distributor
as its agent to accept orders from dealers by wire or telephone for the
repurchase of shares by the Distributor from the dealer. The Fund may revoke
or suspend this authorization at any time. The repurchase price is the net
asset value for the applicable shares next determined following the time at
which the shares are offered for repurchase by the dealer to the Distributor.
The dealer is responsible for promptly transmitting a shareholder's order to
the Distributor. Payment of the repurchase proceeds is made to the dealer who
placed the order promptly upon delivery of certificates for shares in proper
form for transfer or, for Open Accounts, upon the receipt of a stock power
with signatures guaranteed as described below, and, if required, any
supporting documents. Neither the Fund nor the Distributor imposes any charge
upon such a repurchase. However, a dealer may impose a charge as agent for a
shareholder in the repurchase of his or her shares.
The Fund has reserved the right to change, modify or terminate the
services described above at any time.
Additional Information
Because of the relatively high cost of maintaining small shareholder
accounts, the Fund reserves the right to involuntarily redeem at its option
any shareholder account which remains below $1,500 for a period of 60 days
after notice is mailed to the applicable shareholder, or to impose a
maintenance fee on such account after 60 days' notice. Such involuntary
redemptions will be subject to applicable sales charges, if any. The Fund may
increase such minimum account value above such amount in the future after
notice to affected shareholders. Involuntarily redeemed shares will be priced
at the net asset value on the date fixed for redemption by the Fund, and the
proceeds of the redemption will be mailed promptly 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
19
<PAGE>
period in which an emergency exists as a result of which disposal of
portfolio securities is not reasonably practicable or it is not reasonably
practicable to fairly determine the Fund's net asset value; or (3) during
such other periods as the Securities and Exchange Commission may by order
permit for the protection of investors; and (b) the payment of redemption
proceeds may be postponed as otherwise provided under "Redemption of Shares"
herein.
Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Fund, the Investment
Manager and the Distributor from possible fraud, signature guarantees are
required for certain redemptions. Signature guarantees help the Transfer
Agent determine that the person who has authorized a redemption from the
account is, in fact, the shareholder. Signature guarantees are required for,
among other things: (1) written requests for redemptions for more than
$50,000; (2) written requests for redemptions for any amount if the proceeds
are transmitted to other than the current address of record (unchanged in the
past 30 days); (3) written requests for redemptions for any amount submitted
by corporations and certain fiduciaries and other intermediaries; (4)
requests to transfer the registration of shares to another owner; and (5)
authorizations to establish the checkwriting privilege. Signatures must be
guaranteed by a bank, a member firm of a national stock exchange, or other
eligible guarantor institution. The Transfer Agent will not accept guarantees
(or notarizations) from notaries public. The above requirements may be waived
in certain instances. Please contact Shareholder Services at 1-800-562-0032
for specific requirements relating to your account.
Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of the Fund owned by
shareholders are credited to their accounts by the Transfer Agent, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110. Certificates representing Class B or Class D shares will not be
issued, while certificates representing Class A or Class C shares will only
be issued if specifically requested in writing and, in any case, will only be
issued for full shares, with any fractional shares to be carried on the
shareholder's account. Shareholders will receive periodic statements of
transactions in their 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 the Fund, to Shareholder
Services under the terms set forth above under "Purchase of Shares."
2. The following methods of receiving dividends from investment income and
distributions from capital gains are available:
(a) All income dividends and capital gains distributions reinvested in
additional shares of the Fund.
(b) All income dividends in cash; all capital gains distributions
reinvested in additional shares of the Fund.
(c) All income dividends and capital gains distributions in cash.
(d) All income dividends and capital gains distributions invested in any
one available Eligible Fund designated by the shareholder as described
below. See "Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will automatically be coded for reinvestment of all
dividends and distributions in additional shares of the same class of the
Fund. Selections may be changed at any time by telephone or written notice to
Shareholder Services. Dividends and distributions are reinvested at net asset
value without a sales charge.
Exchange Privilege
Shareholders of the Fund may exchange their shares for available shares with
corresponding characteristics of any of the other Eligible Funds at any time
on the basis of the relative net asset values of the respective
20
<PAGE>
shares to be exchanged, subject to compliance with applicable securities
laws. Shareholders of any other Eligible Fund may similarly exchange their
shares for Fund shares with corresponding characteristics. Prior to making an
exchange, shareholders should obtain the Prospectus of the Eligible Fund into
which they are exchanging. Under the Direct Program, subject to certain
conditions, shareholders may make arrangements for regular exchanges from the
Fund into other Eligible Funds. To effect an exchange, Class A, Class B and
Class D shares may be redeemed without the payment of any contingent deferred
sales charge that might otherwise be due upon an ordinary redemption of such
shares. The State Street Research Money Market Fund issues Class E shares
which are sold without any sales charge. Exchanges of State Street Research
Money Market Fund Class E shares into Class A shares of the Fund or any other
Eligible Fund are subject to the initial sales charge or contingent deferred
sales charge applicable to an initial investment in such Class A shares,
unless a prior Class A sales charge has been paid directly or indirectly with
respect to the shares redeemed. For purposes of computing the contingent
deferred sales charge that may be payable upon disposition of any acquired
Class A, Class B and Class D shares, the holding period of the redeemed
shares is "tacked" to the holding period of the acquired shares. The period
any Class E shares are held is not tacked to the holding period of any
acquired shares. No exchange transaction fee is currently imposed on any
exchange.
Shares of the Fund may also be acquired or redeemed in exchange for shares
of the Summit Cash Reserves Fund ("Summit Cash Reserves") by customers of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (subject to completion of
steps necessary to implement the program). The Fund and Summit Cash Reserves
are related mutual funds for purposes of investment and investor services.
Upon the acquisition of shares of Summit Cash Reserves by exchange for
redeemed shares of the Fund, (a) no sales charge is imposed by Summit Cash
Reserves, (b) no contingent deferred sales charge is imposed by the Fund on
the Fund shares redeemed, and (c) any applicable holding period of the Fund
shares redeemed is "tolled," that is, the holding period clock stops running
pending further transactions. Upon the acquisition of shares of the Fund by
exchange for redeemed shares of Summit Cash Reserves, (a) the acquisition of
Class A shares shall be subject to the initial sales charges or contingent
deferred sales charges applicable to an initial investment in such Class A
shares, unless a prior Class A sales charge has been paid indirectly, and (b)
the acquisition of Class B or Class D shares of the Fund shall restart any
holding period previously tolled, or shall be subject to the contingent
deferred sales charge applicable to an initial investment in such shares.
For the convenience of its shareholders who have Telephone Privileges, the
Fund permits exchanges by telephone request from either the shareholder or
his or her dealer. Shares may be exchanged by telephone provided that the
registration of the two accounts is the same. The toll-free number for
exchanges is 1-800-562-0032. See "Telephone Services" herein for a discussion
of conditions and risks associated with Telephone Privileges.
The exchange privilege may be exercised only in those states where shares
of the relevant other Eligible Fund may legally be sold. For tax purposes,
each exchange actually represents the sale of shares of one fund and the
purchase of shares of another. Accordingly, exchanges may produce a capital
gain or loss for tax purposes. The exchange privilege may be terminated or
suspended or its terms changed at any time, subject, if required under
applicable regulations, to 60 days' prior notice. New accounts established
for investments upon exchange from an existing account in another fund will
have the same Telephone Privileges as the existing account, unless
Shareholder Services is instructed otherwise. Related administrative policies
and procedures may also be adopted with regard to a series of exchanges,
street name accounts, sponsored arrangements and other matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under com-
21
<PAGE>
mon ownership or control, including accounts with the same taxpayer
identification number, may be aggregated for purposes of the six exchange
limit. Notwithstanding the six exchange limit, the Fund reserves the right to
refuse exchanges by any person or group if, in the Investment Manager's
judgment, the Fund would be unable to invest effectively in accordance with
its investment objective and policies, or would otherwise potentially be
adversely affected. Exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincides with
a "market timing" strategy may be disruptive to the Fund. The Fund may impose
these restrictions at any time. The exchange limit may be modified for
accounts in certain institutional retirement plans because of plan exchange
limits, Department of Labor regulations or administrative and other
considerations. Subject to the foregoing, if an exchange request in good
order is received by Shareholder Services and delivered by Shareholder
Services to the Transfer Agent by 12 noon Boston time on any business day,
the exchange usually will occur that day. For further information regarding
the exchange privilege, shareholders should contact Shareholder Services.
Reinvestment Privilege
A shareholder of the Fund who has redeemed shares or had shares repurchased
at his or her request may reinvest all or any portion of the proceeds (plus
that amount necessary to acquire a fractional share to round off his or her
reinvestment to full shares) in shares, of the same class as the shares
redeemed, of the Fund or any other Eligible Fund at net asset value and
without subjecting the reinvestment to an initial sales charge, provided such
reinvestment is made within 120 calendar days after a redemption or
repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the
amount reinvested. The redemption of shares is, for federal income tax
purposes, a sale on which the shareholder may realize a gain or loss. If a
redemption at a loss is followed by a reinvestment within 30 days, the
transaction may be a "wash sale" resulting in a denial of the loss for
federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by Shareholder
Services of such shareholder's written purchase request and delivery of the
request by Shareholder Services to the Transfer Agent. A shareholder may
exercise this reinvestment privilege only once per 12-month period with
respect to his or her shares of the Fund. No charge is imposed by the Fund
for such reinvestments; however, dealers may charge fees in connection with
the reinvestment privilege. The reinvestment privilege may be exercised with
respect to an Eligible Fund only in those states where shares of the relevant
other Eligible Fund may legally be sold.
Investment Plans
The Investamatic Program is available to Class A, Class B and Class D
shareholders. Under this Program, shareholders may make regular investments
by authorizing withdrawals from their bank accounts each month or quarter on
the Application available from Shareholder Services.
The Distributor also offers IRAs and tax-sheltered retirement plans,
including prototype and other employee benefit plans for employees, sole
proprietors, partnerships and corporations. Details of these investment plans
and their availability may be obtained from securities dealers or from
Shareholder Services.
Systematic Withdrawal Plan
A shareholder who owns noncertificated Class A or Class C shares with a value
of $5,000 or more, or Class B or Class D shares with a value of $10,000 or
more, may elect, by participating in the Fund's Systematic Withdrawal Plan,
to have periodic checks issued for specified amounts. These amounts may not
be less than certain minimums, depending on the class of shares held. The
Plan provides that all
22
<PAGE>
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 sales charges will be imposed on withdrawals of up to 8%
annually of either (a) the value, at the time the Plan is initiated, of the
shares then in the account or (b) the value, at the time of a withdrawal, of
the same number of shares as in the account when the Plan was initiated,
whichever is higher.
Expenses of the Plan are borne by the Fund. A participating shareholder
may withdraw from the Plan, and the Fund may terminate the Plan at any time
on written notice. Purchase of additional shares while a shareholder is
receiving payments under a Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate
in the Investamatic Check Program and the Systematic Withdrawal Plan at the
same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all their
dividends and any other distributions from the Fund or any Eligible Fund
automatically invested at net asset value in one other such Eligible Fund
designated by the shareholder, provided the account into which the dividends
and distributions are directed is initially funded with the requisite minimum
amount. The number of shares purchased will be determined as of the dividend
payment date. The Dividend Allocation Plan is subject to state securities law
requirements, to suspension at any time, and to such policies, limitations
and restrictions, as, for instance, may be applicable to street name or
master accounts, that may be adopted from time to time.
Automatic Bank Connection
A shareholder may elect, by participating in the Fund's Automatic Bank
Connection ("ABC"), to have dividends and other distributions, including
Systematic Withdrawal Plan payments, automatically deposited in the
shareholder's bank account by electronic funds transfer. Some contingent
deferred sales charges may apply. See "Systematic Withdrawal Plan" herein.
Reports
Reports for the Fund will be sent to shareholders of record at least
semiannually. These reports will include a list of the securities owned by
the Fund as well as the Fund's financial statements.
Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing the shareholder to make telephone redemptions for
amounts up to $50,000 to be mailed to the shareholder's address of record
is available automatically;
(2) the privilege allowing the shareholder or his or her dealer to make
telephone exchanges is available automatically;
(3) the privilege allowing the shareholder to make telephone redemptions for
amounts over $5,000, to be remitted by wire to the shareholder's
predesignated bank account, is available by election on the Application
accompanying this Prospectus. A current shareholder who did not
previously request such telephone wire privilege on his or her original
Application may request the privilege by completing a Telephone
Redemption-by-Wire Form which may be obtained by calling 1-800-562-0032.
The Telephone Redemption-by-Wire Form requires a signature guarantee; and
(4) the privileges allowing the shareholder to make telephone purchases or
redemptions transmitted
23
<PAGE>
via the Automated Clearing House system, into or from the shareholder's
predesignated bank account, is available upon completion of the requisite
initial documentation. For details and forms, call 1-800-562-0032. The
documentation requires a signature guarantee.
A shareholder may decline the automatic Telephone Privileges set forth in
(1) and (2) above by so indicating on the Application accompanying this
Prospectus.
A shareholder may discontinue any Telephone Privilege at any time by
advising Shareholder Services that the shareholder wishes to discontinue the
use of such privileges in the future.
Unless such Telephone Privileges are declined, a shareholder is deemed to
authorize Shareholder Services and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder to
redeem, or purporting to be the shareholder or the shareholder's dealer to
exchange, shares from any account; and (2) honor any written instructions for
a change of address regardless of whether such request is accompanied by a
signature guarantee. All telephone calls will be recorded. None of the Fund,
the other Eligible Funds, the Transfer Agent, the Investment Manager or the
Distributor will be liable for any loss, expense or cost arising out of any
request, including any fraudulent or unauthorized requests. Shareholders
assume the risk to the full extent of their accounts that telephone requests
may be unauthorized. Reasonable procedures will be followed to confirm that
instructions communicated by telephone are genuine. The shareholder will not
be liable for any losses arising from unauthorized or fraudulent instructions
if such procedures are not followed.
Shareholders may redeem or exchange shares by calling toll-free
1-800-562-0032. Although it is unlikely, during periods of extraordinary
market conditions, a shareholder may have difficulty in reaching Shareholder
Services at such telephone number. In that event, the shareholder should
contact Shareholder Services at 1-800-562-0032 or otherwise at its main
office at One Financial Center, Boston, Massachusetts 02111-2690.
Shareholder Account Inquiries:
Please call 1-800-562-0032
Call this number for assistance in answering general questions on your
account, including account balance, available shareholder services, statement
information and performance of the Fund. Account inquiries may also be made
in writing to State Street Research Shareholder Services, P.O. Box 8408,
Boston, Massachusetts 02266-8408. A fee of up to $10 will be charged against
an account for providing additional account transcripts or photocopies of
paid redemption checks or for researching records in response to special
requests.
Shareholder Telephone Transactions:
Please call 1-800-562-0032
Call this number for assistance in purchasing shares by wire, and for
telephone redemptions or telephone exchange transactions. Shareholder
Services will require some form of personal identification prior to acting
upon instructions received by telephone. Written confirmation of each
transaction will be provided.
The Fund and its Shares
The Fund was organized in 1986 as a series of State Street Research Financial
Trust, a Massachusetts business trust. The Trustees have authorized shares of
the Fund to be issued in four classes: Class A, Class B, Class C and Class D.
The Trust is registered with the Securities and Exchange Commission as an
open-end management investment company. The fiscal year end of the Fund is
October 31.
Except for those differences between the classes of shares described below
and elsewhere in the Prospectus, each share of a Fund has equal dividend,
redemption and liquidation rights with other shares of the Fund and when
issued is fully paid and nonassessable. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common usage of terms which may develop in the mutual fund
industry. For example, Class C shares may be redesignated as Class Y shares
and Class D shares
24
<PAGE>
may be redesignated as Class C shares. Any redesignation would not affect any
substantive rights respecting the shares.
Each share of each class of shares represents an identical legal interest
in the same portfolio of investments of the Fund, has the same rights and is
identical in all respects, except that Class A, Class B and Class D shares
bear the expenses of the deferred sales arrangement and any expenses
(including the higher service and distribution fees) resulting from such
sales arrangement, and certain other incremental expenses related to a class.
Each class will have exclusive voting rights with respect to provisions of
the Rule 12b-1 distribution plan pursuant to which the service and
distribution fees, if any, are paid. Although the legal rights of holders of
each class of shares are identical, it is likely that the different expenses
borne by each class will result in different net asset values and dividends.
The different classes of shares of the Fund also have different exchange
privileges.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have a material adverse effect on
the rights of any shareholder. Under the Master Trust Agreement, the Trustees
may reorganize, merge or liquidate the Fund without prior shareholder
approval. On any matter submitted to the shareholders, the holder of shares
of the Fund is entitled to one vote per share (with proportionate voting for
fractional shares) regardless of the relative net asset value thereof.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder
meetings unless required by the 1940 Act. Except as otherwise provided under
said Act, the Board of Trustees will be a self-perpetuating body until fewer
than two thirds of the Trustees serving as such are Trustees who were elected
by shareholders of the Trust. In the event less than a majority of the
Trustees serving as such were elected by shareholders of the Trust, a meeting
of shareholders will be called to elect Trustees. Under the Master Trust
Agreement, any Trustee may be removed by vote of two thirds of the
outstanding Trust shares; holders of 10% or more of the outstanding shares of
the Trust can require that the Trustees call a meeting of shareholders for
purposes of voting on the removal of one or more Trustees. In connection with
such meetings called by shareholders, shareholders will be assisted in
shareholder communications to the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations of the
Trust. However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for
indemnification for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund would be unable to meet its
obligations. The Investment Manager believes that, in view of the above, the
risk of personal liability to shareholders is remote.
Management of the Fund
Under the provisions of the Trust's Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees.
The Fund's investment manager is State Street Research & Management
Company. The Investment Manager is charged with the overall responsibility
for managing the investments and business affairs of the Fund, subject to the
authority of the Board of Trustees.
The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve as investment adviser to one of the nation's first
mutual funds, presently known as State Street Research Investment Trust,
which they had formed in 1924. Their investment management philosophy, which
continues to this day, emphasized comprehensive fundamental research and
analysis, including meetings with the management of companies under
consideration for investment. The Investment Manager's portfolio management
group has extensive investment industry experience managing equity and debt
securities. In managing debt securities for a portfolio, the Investment
Manager may consider yield curve positioning, sector rotation and duration,
among other factors.
25
<PAGE>
The Investment Manager and the Distributor are indirect wholly-owned
subsidiaries of Metropolitan and both are located at One Financial Center,
Boston, Massachusetts 02111-2690.
The Investment Manager has entered into an Advisory Agreement with the
Trust pursuant to which investment research and management, administrative
services, office facilities and personnel are provided for the Fund in
consideration of a fee from the Fund.
Under its Advisory Agreement with the Trust, the Investment Manager
receives a monthly investment advisory fee equal to 0.65% (on an annual
basis) of the average daily value of the net assets of the Fund. The Fund
bears all costs of its operation other than those incurred by the Investment
Manager under the Advisory Agreement. In particular, the Fund pays, among
other expenses, investment advisory fees, certain distribution expenses under
the Fund's Distribution Plan and the compensation and expenses of the
Trustees who are not otherwise currently affiliated with the Investment
Manager or any of its affiliates. The Investment Manager compensates Trustees
of the Trust if such persons are employees or affiliates of the Investment
Manager or its affiliates.
The Fund is managed by John H. Kallis. Mr. Kallis has managed the Fund
since May 1987. Mr. Kallis's principal occupation currently is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as portfolio manager for State Street Research &
Management Company.
Subject to the policy of seeking best overall price and execution, sales
of shares of the Fund may be considered by the Investment Manager in the
selection of broker or dealer firms for the Fund's portfolio transactions.
The Investment Manager has a Code of Ethics governing personal securities
transactions of certain of its employees; see the Statement of Additional
Information.
Dividends and Distributions; Taxes
The Fund has qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code for its most recent
fiscal year and intends to qualify as such in future fiscal years, although
it cannot give complete assurance that it will do so. As long as it so
qualifies and satisfies certain distribution requirements, it will not be
subject to federal income tax on its income (including capital gains, if any)
distributed to its shareholders. Consequently, the Fund intends to distribute
annually to its shareholders substantially all of its net investment income
and any capital gain net income (capital gains net of capital losses).
Dividends from net investment income will be declared daily during each
calendar month and paid monthly; distributions of long-term and short-term
capital gain net income will generally be made on an annual basis (or as
otherwise required for compliance with applicable tax regulations), except to
the extent that net short-term gains, if any, are included in the monthly
income dividends for the purpose of stabilizing, to the extent possible, the
amount of net monthly distributions as described below. Both dividends from
net investment income and distributions of capital gain net income will be
paid to shareholders in additional shares of the Fund at net asset value
(except in the case of shareholders who elect a different available
distribution method). The Fund will provide its shareholders with annual
information on a timely basis concerning the federal tax status of dividends
and distributions during the preceding calendar year.
The Fund has adopted distribution procedures which differ from those which
have been customary for investment companies in general. The Fund will
declare a dividend each day in an amount based on monthly projections of its
future net investment income and will pay such dividends monthly as described
above. Consequently, the amount of each daily dividend may differ from actual
net investment income as determined under generally accepted accounting
principles. The purpose of these distribution procedures is to attempt to
eliminate, to the extent possible, fluctuations in the level of monthly
dividend payments that might result if the Fund declared dividends in the
exact amount of its daily net investment income.
Each daily dividend is payable to shareholders of record at the time of
its declaration (for this purpose,
26
<PAGE>
including only holders of shares purchased for which payment has been
received by the Transfer Agent and excluding holders of shares redeemed on
that day).
Although not contemplated, it is possible that total distributions in a
year could exceed the total of the Fund's current and accumulated earnings
and profits as calculated for federal income tax purposes, because of
technical tax and accounting considerations and the distribution procedures
described above, among other reasons. This excess would first be treated as a
"return of capital" for federal income tax purposes and would reduce by its
amount the shareholder's cost or other basis in his or her shares. After the
shareholder's cost or other basis is reduced to zero, which is highly
unlikely, the distribution will be treated as gain from the sale of Fund
shares.
Dividends paid by the Fund from taxable net investment income and
distributions of net short-term capital gains, whether they are paid in cash
or reinvested in additional shares, will be taxable for federal income tax
purposes to shareholders as ordinary income. Distributions of net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) which are designated as capital gains distributions, whether paid in
cash or reinvested in additional shares, will be taxable for federal income
tax purposes to shareholders as long-term capital gains, regardless of how
long shareholders have held their shares. If shares of the Fund which are
sold at a loss have been held six months or less, the loss will be considered
as a long-term capital loss to the extent of any capital gains distributions
received.
Dividends and other distributions and proceeds of redemption of Fund
shares paid to individuals and other nonexempt payees will be subject to a
31% federal backup withholding tax if the Transfer Agent is not provided with
the shareholder's correct taxpayer identification number and certification
that the shareholder is not subject to such backup withholding.
The foregoing discussion relates only to generally applicable federal
income tax provisions in effect as of the date of this Prospectus.
Distributions from the Fund that represent interest income from U.S.
Government securities may not be tax-exempt at some state and local levels.
Therefore, prospective shareholders are urged to consult their own tax
advisers regarding tax matters, including state and local tax consequences.
Calculation of Performance Data
From time to time, in advertisements or in communications to shareholders or
prospective investors, the Fund may compare the performance of its Class A,
Class B, Class C or Class D shares to that of other mutual funds with similar
investment objectives, to certificates of deposit and/or to other financial
alternatives, such as 5-, 10- and 30-year U.S. Treasury notes and bonds. The
Fund may also compare its performance to appropriate indices such as the
Merrill Lynch Government Master Index, Consumer Price Index, Shearson-Lehman
Government Bond Index, and 5-, 10- and 30-Year Government Bond Indices;
and/or to appropriate rankings or averages such as the U.S. Government Funds
Average compiled by Lipper Analytical Services, Inc. or to those compiled by
Morningstar, Inc., Money Magazine, Business Week, Forbes Magazine, The Wall
Street Journal and Investor's Daily.
Total return is computed separately for each class of shares of the Fund.
The average annual total return ("standard total return") for shares of the
Fund is computed by determining the average annual compounded rate of return
for a designated historical period as applied to a hypothetical $1,000
initial investment, which is redeemed in total at the end of such period. In
making the calculation, all dividends and distributions are assumed to be
reinvested, and all accrued expenses and recurring charges, including
management and distribution fees, are recognized. The calculation also
reflects the highest applicable initial or contingent deferred sales charge,
determined as of the assumed date of initial investment or the assumed date
of redemption, as the case may be. Standard total return may be accompanied
with nonstandard total return information computed in the same manner, but
for differing periods and with or without annualizing the total return or
taking sales charges into account.
The Fund's yield is computed separately for each class of shares by
dividing the net investment income, after recognition of all recurring
charges, per
27
<PAGE>
share earned during the most recent month or other specified 30-day period by
the applicable maximum offering price per share on the last day of such
period and annualizing the result. For purposes of the yield calculation,
interest income is computed based on the yield to maturity of each debt
obligation in the Fund's portfolio, and all recurring charges are recognized.
The standard total returns and yield results take sales charges into
account, if applicable, but do not take into account recurring and
nonrecurring charges for optional services which only certain shareholders
elect and which involve nominal fees, such as the $7.50 fee for remittance of
redemption proceeds by wire. Where sales charges are not applicable and
therefore not taken into account in the calculation of standard total return
and yield, the results will be increased.
The Fund's distribution rate is calculated separately for each class of
shares by annualizing the latest distribution and dividing the result by the
maximum offering price per share as of the end of the period to which the
distribution relates. The distribution rate is not computed in the same
manner as the above described yield, and therefore can be significantly
different from it. In its supplemental sales literature, the Fund may quote
its distribution rate together with the above described standard total return
and yield information. The use of such distribution rates would be subject to
an appropriate explanation of how the components of the distribution rate
differ from the above described yield.
Performance information may be useful in evaluating the Fund and for
providing a basis for comparison with other financial alternatives. Since the
performance of the Fund varies in response to fluctuations in economic and
market conditions, interest rates and Fund expenses, among other things, no
performance quotation should be considered a representation as to the Fund's
performance for any future period. In addition, the net asset value of shares
of the Fund will fluctuate, with the result that shares of the Fund, when
redeemed, may be worth more or less than their original cost. Neither an
investment in the Fund nor its performance is insured or guaranteed; such
lack of insurance or guarantees should accordingly be given appropriate
consideration when comparing the Fund to financial alternatives which have
such features.
Shares of the Fund had no class designations until June 1, 1993, when
designations were assigned based on the pricing and Rule 12b-1 fees
applicable to shares sold thereafter. Performance data for a specified class
includes periods prior to the adoption of class designations.
Performance data for periods prior to June 1, 1993 will not reflect
additional Rule 12b-1 Distribution Plan fees, if any, of up to 1% per year
depending on the class of shares, which will adversely affect performance
results for periods after such date. Performance data or rankings for a given
class of shares should be interpreted carefully by investors who hold or may
invest in a different class of shares.
28
<PAGE>
[cover]
[State Street tower logo]
State Street Research
Government Income Fund
March 1, 1997
P R O S P E C T U S
[back]
STATE STREET RESEARCH
GOVERNMENT INCOME FUND
One Financial Center
Boston, MA 02111
INVESTMENT ADVISER
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
DISTRIBUTOR
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
SHAREHOLDER SERVICES
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266
800-562-0032
CUSTODIAN
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
GI-609D-397IBS CONTROL NUMBER: 3738-970227(0398)SSR-LD
<PAGE>
Supplement No. 1 dated
March 1, 1997
to
Prospectus dated March 1, 1997
for
STATE STREET RESEARCH
STRATEGIC PORTFOLIOS: CONSERVATIVE
STATE STREET RESEARCH
STRATEGIC PORTFOLIOS: MODERATE
STATE STREET RESEARCH
STRATEGIC PORTFOLIOS: AGGRESSIVE
series of State Street Research Financial Trust
Shares of the Funds are available as set forth below:
Class A for Strategic Portfolios: Conservative and Strategic Portfolios:
Aggressive: Prior approval must be obtained from the Distributor before Class A
shares are offered to anyone. Subject to such advance approval, Class A shares
are only currently available in certain designated states for investments of
$1,000,000 or more. Contact the Distributor for details.
Class A shares are not currently available for acquisition through exchanges
from another fund.
Class A for Strategic Portfolios: Moderate: Class A shares are not currently
offered.
Class B: Class B shares of all three Funds are not currently offered.
CLASS C: CLASS C SHARES OF ALL THREE FUNDS ARE CURRENTLY OFFERED AND
AVAILABLE FOR INVESTMENT BY CERTAIN EMPLOYEE BENEFIT PLANS AND LARGE
INSTITUTIONS.
CLASS D: Class D shares of all three Funds are not currently offered.
CONTROL NUMBER: SP-601E-297IBS
3763-970314(0498)SSR-LD
<PAGE>
STATE STREET RESEARCH
STRATEGIC PORTFOLIOS: CONSERVATIVE
STRATEGIC PORTFOLIOS: MODERATE
STRATEGIC PORTFOLIOS: AGGRESSIVE
Prospectus
March 1, 1997
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE ("Strategic
Portfolios: Conservative" or the "Fund") seeks to provide, primarily, a high
level of current income and, secondarily, long-term growth of capital,
consistent with the preservation of capital and reasonable investment risk,
by allocating assets across an actively managed diversified mix of debt and
equity securities.
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE ("Strategic Portfolios:
Moderate" or the "Fund") seeks to provide both current income and capital
appreciation, consistent with the preservation of capital and reasonable
investment risk, by allocating assets across an actively managed, diversified
mix of equity and debt securities.
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE ("Strategic
Portfolios: Aggressive" or the "Fund") seeks to provide high total return
from, primarily, growth of capital and, secondarily, current income,
consistent with reasonable investment risk, by allocating assets across an
actively managed diversified mix of equity and debt securities.
In seeking to achieve their respective investment objectives, Strategic
Portfolios: Conservative aims at investing 70% of its net assets in debt
securities and 30% of its net assets in equity securities; Strategic
Portfolios: Moderate aims at investing 55% of its net assets in equity
securities and 45% of its net assets in debt securities; and Strategic
Portfolios: Aggressive aims at investing 80% of its net assets in equity
securities and 20% of its net assets in debt securities.
State Street Research & Management Company serves as investment adviser
for the Funds (the "Investment Manager"). As of December 31, 1996, the
Investment Manager had assets of approximately $41.7 billion under
management. State Street Research Investment Services, Inc. serves as
distributor (the Distributor) for the Funds.
Shareholders may have their shares redeemed directly by the Funds at net
asset value plus the applicable contingent deferred sales charge, if any;
redemptions processed through securities dealers may be subject to processing
charges.
There are risks in any investment program, including the risk of changing
economic and market conditions, and there is no assurance that the Funds will
achieve their investment objectives. The net asset value of a share of a Fund
will fluctuate as market conditions change.
This Prospectus sets forth concisely the information a prospective
investor ought to know about the Funds before investing. It should be
retained for future reference. A Statement of Additional Information about
the Funds dated March 1, 1997 has been filed with the Securities and Exchange
Commission and is incorporated by reference in this Prospectus. It is
available, at no charge, upon request to the Funds at the address indicated
on the back cover or by calling 1-800-562-0032.
Each Fund is a diversified series of State Street Research Financial Trust
(the "Trust"), an open-end management investment company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY,
AND INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
<PAGE>
Table of Contents Page
- --------------------------------------------------------------------------------
Table of Expenses 2
Financial Highlights 5
The Funds' Investments and Asset Allocation 8
Investment Practices 12
Limiting Investment Risk 14
Purchase of Shares 15
Redemption of Shares 23
Shareholder Services 25
The Funds and Their Shares 29
Management of the Funds 30
Dividends and Distributions; Taxes 31
Calculation of Performance Data 32
Appendix--Description of Debt/Bond Ratings 33
The Funds offer four classes of shares which may be purchased at the next
determined net asset value per share plus, in the case of all classes except
Class C shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5%
and (ii) an annual service fee of 0.25% of the average daily net asset value
of the Class A shares.
Class B shares are subject to (i) a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made within
five years of purchase and (ii) annual distribution and service fees of 1% of
the average daily net asset value of such shares. Class B shares automatically
convert into Class A shares (which pay lower ongoing expenses) at the end of
eight years after purchase. No contingent deferred sales charge applies after
the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and
large institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1%
if redeemed within one year following purchase and (ii) annual distribution
and service fees of 1% of the average daily net asset value of such shares.
Table of Expenses
- --------------------------------------------------------------------------------
Class A Class B Class C Class D
------- ------- ------- -------
Shareholder Transaction
Expenses (1)
Maximum Sales Charge
Imposed on Purchases
(as a percentage of
offering price) 4.5% None None None
Maximum Deferred Sales
Charge (as a
percentage of net
asset value at time
of purchase or
redemption, whichever
is lower) None(2) 5% None 1%
Maximum Sales Charge
Imposed on Reinvested
Dividends (as a
percentage of
offering price) None None None None
Redemption Fees (as a
percentage of amount
redeemed, if
applicable) None None None None
Exchange Fee None None None None
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
thereafter and no contingent deferred sales charge is imposed after the
fifth year. Class D shares are subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the
sale. Long-term investors in Class A, Class B or Class D shares may, over
a period of years, pay more than the economic equivalent of the maximum
sales charge permissible under applicable rules. See "Purchase of
2
<PAGE>
Shares." The contingent deferred sales charge may also be imposed on
shares involuntarily redeemed for accounts which have not maintained
requisite minimum balances. See "Redemption of Shares--Additional
Information."
(2) Purchases of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption.
See "Purchase of Shares."
Strategic Portfolios:
Conservative Class A Class B Class C Class D
------- ------- ------- -------
Annual Fund Operating
Expenses
(as a percentage of
average net assets)
Management Fees 0.60% 0.60% 0.60% 0.60%
12b-1 Fees 0.25% 1.00% None 1.00%
Other Expenses 0.89% 0.89% 0.89% 0.89%
Less Voluntary
Reduction (0.59%) (0.59%) (0.59%) (0.59%)
------ ------ ------ ------
Total Fund Operating
Expenses (after
voluntary reduction) 1.15% 1.90% 0.90% 1.90%
===== ====== ====== ======
Strategic Portfolios:
Moderate Class A Class B Class C Class D
------- ------- ------- -------
Annual Fund Operating
Expenses
(as a percentage of
average net assets)
Management Fees 0.65% 0.65% 0.65% 0.65%
12b-1 Fees 0.25% 1.00% None 1.00%
Other Expenses 0.85% 0.85% 0.85% 0.85%
Less Voluntary
Reduction (0.50%) (0.50%) (0.50%) (0.50%)
------ ------ ------ ------
Total Fund Operating
Expenses (after
voluntary reduction) 1.25% 2.00% 1.00% 2.00%
===== ====== ====== ======
Strategic Portfolios:
Aggressive Class A Class B Class C Class D
------- ------- ------- -------
Annual Fund Operating
Expenses
(as a percentage of
average net assets)
Management Fees 0.75% 0.75% 0.75% 0.75%
12b-1 Fees 0.25% 1.00% None 1.00%
Other Expenses 0.55% 0.55% 0.55% 0.55%
Less Voluntary
Reduction (0.20%) (0.20%) (0.20%) (0.20%)
------ ------ ------ ------
Total Fund Operating
Expenses (after
voluntary reduction) 1.35% 2.10% 1.10% 2.10%
===== ====== ====== ======
3
<PAGE>
Example:
You would pay the following expenses on a $1,000 investment including, for
Class A shares, the maximum applicable initial sales charge and assuming (1)
5% annual return and (2) redemption of the entire investment at the end of
each time period:
Strategic Portfolios: Conservative
1 Year 3 Years 5 Years 10 Years
Class A shares $56 $80 $105 $178
Class B shares (1) $69 $90 $123 $203
Class C shares $ 9 $29 $ 50 $111
Class D shares $29 $60 $103 $222
You would pay the following expenses on the same investment, assuming no
redemption:
Strategic Portfolios: Conservative
1 Year 3 Years 5 Years 10 Years
Class B (1) $19 $60 $103 $203
Class D $19 $60 $103 $222
Strategic Portfolios: Moderate
1 Year 3 Years 5 Years 10 Years
Class A shares $57 $83 $111 $189
Class B shares (1) $70 $93 $128 $213
Class C shares $10 $32 $ 55 $122
Class D shares $30 $63 $108 $233
Strategic Portfolios: Moderate
1 Year 3 Years 5 Years 10 Years
Class B (1) $20 $63 $108 $213
Class D $20 $63 $108 $233
Strategic Portfolios: Aggressive
1 Year 3 Years 5 Years 10 Years
Class A shares $58 $86 $116 $200
Class B shares (1) $71 $96 $133 $224
Class C shares $11 $35 $ 61 $134
Class D shares $31 $66 $113 $243
Strategic Portfolios: Aggressive
1 Year 3 Years 5 Years 10 Years
Class B (1) $21 $66 $113 $224
Class D $21 $66 $113 $243
(1) Ten-year figures assume conversion of Class B shares to Class A shares at
the end of eight years.
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than
shown.
The purpose of the table above is to assist the investor in understanding
the various costs and expenses that an investor will bear directly or
indirectly. The percentage expense levels shown in the table above are based
on experience with expenses during the fiscal year ended October 31, 1996;
actual expense levels for the current fiscal year and future years may vary
from the amounts shown. The table does not reflect charges for optional
services elected by certain shareholders, such as the $7.50 fee for
remittance of redemption proceeds by wire. For further information on sales
charges, see "Purchase of Shares--Alternative Purchase Program"; for further
information on management fees, see "Management of the Funds"; and for
further information on 12b-1 fees, see "Purchase of Shares--Distribution
Plan."
The Funds have been advised that the Distributor and its affiliates may
from time to time and in varying amounts voluntarily assume some portion of
fees or expenses relating to a Fund. Each Fund presently expects such
assistance to be provided for the next 12 months or until such Fund's net
assets reach $100 million, whichever first occurs. However, no Fund has
received any firm commitment that such assistance will in fact be provided.
For the period ended October 31, 1996, Total Fund Operating Expenses as a
percentage of average
4
<PAGE>
net assets of Class A and Class C shares, respectively, would have been 1.91%
and 1.41% of the Strategic Portfolios: Conservative; and 1.49% and 1.32% of
the Strategic Portfolios: Aggressive; and would have been 1.50% for Class C
shares of the Strategic Portfolios: Moderate, in the absence of the voluntary
assumption of expenses by the Distributor and its affiliates. Such assumption
of fees or expenses, as a percentage of average net assets, amounted to 0.76%
and 0.51% of the Class A and Class C shares of the Strategic Portfolios:
Conservative, respectively; 0.14% and 0.22% of the Class A and Class C shares
of the Strategic Portfolios: Aggressive, respectively; and 0.50% of the Class
C shares of the Strategic Portfolios: Moderate. The amount of fees or
expenses assumed during the fiscal year ended October 31, 1996 differed among
classes because of fluctuating relative levels of assets in each class and
expenses before reimbursement which may not be constant over time.
Financial Highlights
The data set forth below has been audited by Price Waterhouse LLP,
independent accountants, and their reports thereon are included in the
Statement of Additional Information. For further information about the
performance of the Funds, see "Financial Statements" in the Statement of
Additional Information. Financial information is not presented for Class B
and Class D shares of the Strategic Portfolios: Conservative and the
Strategic Portfolios: Aggressive and for Class A, Class B and Class D shares
of the Strategic Portfolios: Moderate because no shares of those classes were
outstanding during the periods presented.
Strategic Portfolios: Conservative
<TABLE>
<CAPTION>
Class A
-------------------------------------------
May 16, 1994
(Commencement of
Year ended October 31 Operations) to
-------------------- October 31, 1994
1996** 1995** ----------------
------ ------
<S> <C> <C> <C>
Net asset value, beginning of year $ 10.56 $ 9.56 $ 9.55
Net investment income* .42 .47 .20
Net realized and unrealized gain (loss) on
investments, foreign currency and forward
contracts .66 1.00 (.09)
Dividends from net investment income (.36) (.47) (.10)
Distribution from net realized gains (.25) -- --
------- ------- -------
Net asset value, end of year $ 11.03 $ 10.56 $ 9.56
======= ======= =======
Total return 10.55%+ 15.84%+ 1.15%+++
Net assets at end of year (000s) $ 552 $27,637 $25,014
Ratio of operating expenses to average net
assets* 1.15% 1.15% 1.15%++
Ratio of net investment income to average
net assets* 4.35% 4.74% 4.48%++
Portfolio turnover rate 126.41% 132.50% 70.35%
Average commission rate@ $ .0436 -- --
*Reflects voluntary assumption of fees or
expenses per share in each year $ .07 $ .05 $ .03
</TABLE>
<TABLE>
<CAPTION>
Class C
-------------------------------------------
May 16, 1994
(Commencement of
Year ended October 31 Operations) to
--------------------- October 31, 1994
1996** 1995** ----------------
------ ------
<S> <C> <C> <C>
Net asset value, beginning of year $ 10.56 $ 9.56 $ 9.55
Net investment income* .50 .52 .21
Net realized and unrealized gain (loss) on
investments, foreign currency and forward
contracts .60 .97 (.09)
Dividends from net investment income (.48) (.49) (.11)
Distribution from net realized gains (.25) -- --
------- ------- -------
Net asset value, end of year $ 10.93 $ 10.56 $ 9.56
======= ======= =======
Total return 10.82%+ 16.11%+ 1.25%+++
Net assets at end of year (000s) $33,236 $ 1,433 $ 100
Ratio of operating expenses to average net
assets* 0.90% 0.90% 0.90%++
Ratio of net investment income to average
net assets* 4.50% 4.91% 4.73%++
Portfolio turnover rate 126.41% 132.50% 70.35%
Average commission rate@ $ .0436 -- --
*Reflects voluntary assumption of fees or
expenses per share in each year $ .06 $ .05 $ .03
</TABLE>
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges.
Total return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
** Per-share figures have been calculated using the average shares method.
@ Average commission rate per share paid for security trades for fiscal years
beginning on or after November 1, 1995.
5
<PAGE>
Strategic Portfolios: Moderate
<TABLE>
<CAPTION>
Class C
------------------------------------------------------------
September 28, 1993
(Commencement of
Year ended October 31 Operations) to
----------------------------------- October 31, 1993
1996** 1995** 1994 ----------------
------ ------ ----
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 10.26 $ 9.18 $ 9.57 $ 9.55
Net investment income* .35 .36 .28 .02
Net realized and unrealized gain
(loss) on investments, foreign
currency and forward contracts 1.07 1.01 (.45) --
Dividends from net investment income (.40) (.29) (.22) --
------- ------- ------- -------
Net asset value, end of year $ 11.28 $ 10.26 $ 9.18 $ 9.57
======= ======= ======= =======
Total return 14.08%+ 15.24%+ (1.81)%+ 0.21%+++
Net assets at end of year (000s) $44,989 $39,821 $28,494 $25,040
Ratio of operating expenses to
average net assets* 1.00% 1.00% 1.00% 1.00%++
Ratio of net investment income to
average net assets* 3.23% 3.68% 3.05% 2.32%++
Portfolio turnover rate 127.59% 120.62% 142.86% 0.00%
Average commission rate@ $ .0258 -- -- --
*Reflects voluntary assumption of
fees or expenses per share in each
year $ .05 $ .07 $ .05 $ .00
</TABLE>
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
** Per-share figures have been calculated using the average shares method.
@ Average commission rate per share paid for security trades for fiscal years
beginning on or after Novemer 1, 1995.
6
<PAGE>
Strategic Portfolios: Aggressive
<TABLE>
<CAPTION>
Class A Class C
----------------------------------------- ------------------------------------------
May 16, 1994 May 16, 1994
(Commencement of (Commencement of
Year ended October 31 Operations) to Year ended October 31 Operations) to
--------------------- October 31, 1994 --------------------- October 31, 1994
1996** 1995** ---------------- 1996** 1995** ----------------
------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 10.93 $ 9.74 $ 9.55 $ 10.94 $ 9.74 $ 9.55
Net investment income* .14 .20 .09 .22 .22 .10
Net realized and
unrealized gain on
investments, foreign
currency and forward
contracts 1.79 1.19 .14 1.74 1.20 .14
Dividends from net
investment income (.17) (.20) (.04) (.23) (.22) (.05)
Distribution from net
realized gains (.24) -- -- (.24) -- --
------- ------- -------- ------- -------- -------
Net asset value, end of
year $ 12.45 $ 10.93 $ 9.74 $ 12.43 $ 10.94 $ 9.74
======= ======= ======== ======= ======== =======
Total return 18.05%+ 14.49%+ 2.41%+++ 18.37%+ 14.85%+ 2.50%+++
Net assets at end of year
(000s) $ 623 $39,555 $50,999 $63,272 $20,809 $ 102
Ratio of operating
expenses to average net
assets* 1.35% 1.35% 1.35%++ 1.10% 1.10% 1.10%++
Ratio of net investment
income to average net
assets* 1.43% 1.98% 2.01%++ 1.78% 2.13% 2.26%++
Portfolio turnover rate 145.59% 127.44% 37.75% 145.59% 127.44% 37.75%
Average commission rate@ $ .0251 -- -- $ .0251 -- --
*Reflects voluntary
assumption of fees or
expenses per share in
each year $ .01 $ .02 $ .01 $ .03 $ .02 $ .01
</TABLE>
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
** Per-share figures have been calculated using the average shares method.
@ Average commission rate per share paid for security trades for fiscal years
beginning on or after November 1, 1995.
7
<PAGE>
The Funds' Investments and Asset Allocation
Each of Strategic Portfolios: Conservative, Strategic Portfolios: Moderate
and Strategic Portfolios: Aggressive has its own investment objective and
policies, as described below. Each Fund's investment objective is a
fundamental policy of that Fund and may not be changed without approval of
the shareholders of that Fund.
In seeking to achieve its investment objective, each Fund follows certain
investment strategies and policies which are described below and which may be
changed without shareholder approval.
Each Fund will generally allocate its net assets over the long term
between equity and debt securities in accordance with the percentage targets
set forth for each Fund below. Each Fund, however, may vary from its target
from time to time within the ranges specified, based on the Investment
Manager's view of economic and market conditions. In addition, each Fund may
at any given point in time hold up to 15% of its net assets in cash or cash
items for reasons of liquidity or for managing the duration of its debt
securities. In the event that, owing to market action or for other reasons,
the allocation of a Fund's net assets falls outside its specified percentage
ranges for any significant length of time, the Investment Manager will
rebalance such Fund's portfolio so that it falls within the specified ranges.
State Street Research Strategic Portfolios: Conservative
The investment objective of Strategic Portfolios: Conservative is to provide,
primarily, a high level of current income and, secondarily, long-term growth
of capital, consistent with the preservation of capital and reasonable
investment risk.
In seeking to achieve this investment objective the Fund allocates assets
across an actively managed diversified mix of debt and equity securities,
which the Fund intends, under normal conditions, to allocate, as percentages
of net assets, as follows:
Security Type Target Range
------------- ------ -----
Debt 70 60-80
Equity 30 20-40
The Fund will attempt to limit risk by allocating a substantial majority
of the debt portion of its portfolio to investment grade securities. The Fund
will not invest more than 5% of its net assets in non-investment grade debt
securities. Equity securities will generally be stocks of larger, well
established companies, i.e. companies with a market capitalization in excess
of $2 billion whose securities are traded on a national securities exchange.
State Street Research Strategic Portfolios: Moderate
The investment objective of Strategic Portfolios: Moderate is to provide both
current income and capital appreciation, consistent with the preservation of
capital and reasonable investment risk.
In seeking to achieve this investment objective the Fund allocates assets
across an actively managed diversified mix of equity and debt securities,
which the Fund intends, under normal conditions, to allocate, as percentages
of net assets, as follows:
Security Type Target Range
------------- ------ -----
Equity 55 45-65
Debt 45 35-55
The Fund will attempt to prudently moderate risk by investing in a broad
spectrum of equity and debt securities selected primarily from established
companies and investment grade securities. The equity securities will
generally be traded on either a national securities exchange or the National
Association of Securities Dealers Automated Quotation ("NASDAQ") system.
State Street Research Strategic Portfolios: Aggressive
The Investment objective of Strategic Portfolios: Aggressive is to provide
high total return from, primarily, growth of capital and secondarily, current
income, consistent with reasonable investment risk.
In seeking to achieve this investment objective the Fund allocates assets
across an actively managed diversified mix of equity and debt securities,
which the Fund intends, under normal conditions, to allocate, as percentages
of net assets, as follows:
8
<PAGE>
Security Type Target Range
------------- ------ -----
Equity 80 70-90
Debt 20 10-30
The Fund may invest in stocks of smaller and emerging companies and lower
quality bonds and other securities that management believes will provide
higher returns over the long-term. The equity securities will generally be
traded on either a national securities exchange or the NASDAQ system;
however, emphasis will likely be on securities traded on the NASDAQ system.
Since this strategy involves a higher degree of market risk compared to
Strategic Portfolios: Moderate and Strategic Portfolios: Conservative, this
Fund may be more appropriate for investors who have greater tolerance for
market fluctuations.
Equity Securities
Each Fund's equity investments will consist of common stocks, or securities
convertible into common stocks (e.g. preferred stocks, bonds and debentures),
or which carry the right to acquire common stocks (e.g., warrants), primarily
having long-term growth potential. Each Fund invests in a broad range of
industries and a diversified list of companies whose earnings and/or assets
are expected to grow at a rate above the average of the Standard & Poor's 500
Stock Index (the "S&P 500") over the long term. Consequently, the Investment
Manager seeks to identify those industries offering the greatest
possibilities-for profitable expansion. Each Fund also invests in those equity
securities which the Investment Manager believes to be selling below their
intrinsic values or equity securities of cyclical companies at low points in
their cycles.
Each Fund may invest in securities of non-U.S. issuers directly or
indirectly, as for example, in American Depositary Receipts and European
Depositary Receipts. See "Investment Practices" herein.
Each Fund to a lesser or greater degree may invest in equity securities of
companies with a smaller or intermediate market capitalization and companies
in the emerging growth stage of development. Such securities generally will
constitute no more than 10% of the net assets of Strategic Portfolios:
Conservative, but may constitute in the range of 10% to 30% and 15% to 40%,
respectively, of Strategic Portfolios: Moderate and Strategic Portfolios:
Aggressive. A company's market capitalization, i.e., the total market value
of its publicly traded equity securities, is currently regarded by the
Investment Manager as small or intermediate if it is $2 billion or less; the
specific dollar amount of capitalization may vary over time and is dependent
to some extent on market conditions. The Investment Manager considers
emerging growth companies to be those companies which are less mature and
have the potential to grow substantially faster than the economy. Investments
in these securities may involve greater than average risks because of the
possible limited marketability of such securities and the possibility that
their prices may fluctuate more widely than the securities of larger more
established companies or than the market as a whole.
For further information regarding equity investments, see "Investment
Practices" herein and the Statement of Additional Information.
Debt Securities
Each Fund's debt investments consist of a broad range of short-term or
long-term corporate bonds and notes, and U.S. Government securities, and may
also include mortgage-related securities, including jumbo mortgage pools, and
asset-backed securities, both senior and subordinated, zero coupon
securities, pay in kind (PIK) securities, stripped securities, indexed
securities, and debt securities of foreign issuers, governments or agencies.
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. The
U.S. Government securities in which the Funds invest 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
9
<PAGE>
the Federal Home Loan Mortgage Corporation; and obligations of
mixed-ownership Government corporations such as Resolution Funding
Corporation. 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.
Strategic Portfolios: Conservative will invest 55% or more, and Strategic
Portfolios: Moderate will invest 25% or more, of net assets in debt
securities that are considered investment grade by either Standard & Poor's
Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's" ), i.e.,
rated in the BBB major rating category or higher by S&P or in the Baa major
rating category or higher by Moody's, or which are not rated but considered
by the Investment Manager to be equivalent to investment grade. Strategic
Portfolios: Aggressive may invest but is not required to invest any
particular percentage of net assets in such debt securities. Strategic
Portfolios: Conservative may invest up to 5%, and Strategic Portfolios:
Moderate and Strategic Portfolios: Aggressive may invest up to 15%, of net
assets in non-investment grade debt securities, including securities rated
as low as D by S&P or C by Moody's.
In seeking debt investments for the Funds, including any in the lower
rated categories, the Investment Manager seeks to identify those securities
the returns on which are appropriate within the context of the risks
involved. In doing so, the Investment Manager will consider both its own
credit analysis and the ratings of S&P and Moody's. In the event the rating
of a security held by a Fund 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. When interest rates
increase, the value of debt securities and shares of a Fund can be expected
to decline.
For debt rated in the BBB category by S&P, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal. Bonds rated in the Baa category by Moody's lack
outstanding investment characteristics and in fact have speculative
characteristics as well. Lower rated high yield, high risk securities (i.e.,
bonds rated in the BB category or lower by S&P or in the Ba category or lower
by Moody's or equivalent as determined by the Investment Manager) commonly
known as "junk bonds" generally involve more credit risk than higher rated
securities and are considered by S&P and Moody's to be predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. Such securities may also be
subject to greater market price fluctuations than lower yielding, higher
rated debt securities; credit ratings do not reflect this market risk. In
addition, these ratings may not reflect the effect of recent developments on
an issuer's ability to make interest and principal payments. Bonds rated in
the lowest category and in default may never resume interest payments or
repay principal, and their market value may be difficult to determine.
Additional risks of such securities include (i) limited liquidity and
secondary market support, particularly in the case of securities that are not
rated or are subject to restrictions on resale, which may limit the
availability of securities for purchase by the Funds, limit the ability of
the Funds to sell portfolio securities either to meet redemption requests or
in response to changes in the economy or the financial markets, heighten the
effect of adverse publicity and investor perceptions and make selection and
valuation of portfolio securities more subjective and dependent upon the
Investment Manager's credit analysis; (ii) substantial market price
volatility and/or the potential for the insolvency of issuers during periods
of changing interest rates and economic difficulty, particularly with respect
to securities that do not pay interest currently in cash; (iii) subordination
to the prior claims of banks and other senior lenders; (iv) the possibility
that earnings of the issuer may be insufficient to meet its debt service; and
(v) the realization of taxable income for shareholders without the
corresponding receipt of cash in connection with investments in "zero coupon"
or "pay-in-kind" securities. Growth in the market for lower rated high yield,
high risk securities has parallelled a general expansion in certain sectors
in the U.S.
10
<PAGE>
economy, and the effects of adverse economic changes (including recessions)
are unclear.
For further information concerning the ratings of debt securities, see the
Appendix to this Prospectus.
Strategic Portfolios: Conservative, Strategic Portfolios: Moderate and
Strategic Portfolios: Aggressive may invest up to 40%, 30% and 15%,
respectively, of total assets in mortgage-related securities which the
Investment Manager considers to be investment grade securities.
Mortgage-related securities represent interests in private pools of
mortgage loans and provide the Funds with a flow-through of interest and
principal payments as such payments are received with respect to the
mortgages in the pool. Mortgage-related securities may be issued by private
entities such as investment banking firms, insurance companies, mortgage
bankers and home builders. An issuer may offer senior or subordinated
securities related to the same pool of mortgages. The senior securities have
priority to the interest and/or principal payments on the mortgages in the
pool; the subordinate securities have less priority to such payments. The
possibility of prepayment of underlying mortgages, which might be motivated,
for instance, by declining interest rates, could lessen the potential for
total return in mortgage-related securities. Under such conditions it may
not be possible to reinvest the proceeds at the prior interest rate levels.
U.S. Government agency securities and private label mortgage-related
securities in which the Funds may invest include: collateralized mortgage
obligations which may be sequential, planned amortization class or tactical
amortization class; adjustable rate mortgage, used primarily for defensive
purposes, which may be constant-maturity treasuries or 11th District
(California) cost-of-funds; and whole or jumbo loans which are loans in
excess of an agency's maximum mortgage size.
Jumbo mortgage pools are backed by mortgages on single family residential
homes for a dollar amount higher than mortgages underwritten by government-
backed agency mortgage programs. Investments in these pools are subject to
the additional risks entailed by the geographic and economic concentration of
a majority of the mortgages in these pools being in large metropolitan
centers on the East and West coasts and on homes owned by high income
individuals and the adverse effect of possible recessions in these areas
resulting in potential defaults in mortgage payments and consequent losses to
the pool.
Each Fund may also invest in stripped securities issued by governmental or
private issuers. Stripped securities include mortgage-backed securities which
have been divided into separate interest and principal components. Holders of
the interest components will receive payments of the interest, and holders of
the principal components will receive payments of the principal, on the
mortgages. Issuers may issue combinations of interest components and
principal components. "Interest only" securities are known as IOs; "principal
only" securities are known as POs. The risks inherent in IOs and POs, or
variations thereof, stem from the effects of declining interest rates and the
resultant prepayments of the mortgages. For example, if the underlying
mortgage securities experience greater than anticipated prepayments of
principal, a Fund may fail to fully recoup its initial investment in an IO,
even though the IO is rated in the highest rating category by a nationally
recognized statistical rating organization. In the case of a PO, a Fund may
have difficulty reinvesting receipts of prepayments of principal for an
attractive return. The market for IOs and POs is new and there is no
assurance it will operate efficiently or provide liquidity in the future.
Asset-backed (other than mortgage-related) securities represent interests
in pools of consumer loans such as credit card receivables, auto loans and
leases, loans on equipment such as computers, and other financial
instruments. These securities provide a flow-through of interest and
principal payments as payments are received on the loans or leases and may be
supported by letters of credit or similar guarantees of payment by a
financial institution. These securities are subject to the risks of
non-payment of the underlying loans as well as the risks of pre-payment. An
interest in a bank sponsored master trust which holds the receivables for a
major international credit card is an example of an asset-backed security; an
interest in
11
<PAGE>
a trust which holds the customer receivables for a large consumer products
company is another example.
Strategic Portfolios: Conservative, Strategic Portfolios: Moderate and
Strategic Portfolios: Aggressive may invest up to 35%, 25%, and 10%,
respectively, of total assets in stripped and asset-backed (other than
mortgage-related) securities which the Investment Manager considers to be
investment grade.
Zero or step coupon securities may pay no interest for all or a portion of
their life but are purchased at a discount to face value at maturity. Their
return consists of the amortization of the discount between their purchase
price and their maturity value, plus, in the case of a step coupon, any fixed
rate interest income. Zero coupon securities pay no interest to holders prior
to maturity even though interest on these securities is reported as income to
a Fund. The reporting of interest for PIK securities is similar to the
reporting of interest for zero coupon securities. Each Fund will be required
to distribute all or substantially all of such amounts annually to its
shareholders. These distributions may cause a 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. PIK
debt securities permit the issuer to pay the interest thereon either in cash
or as additional debt obligations and generally provide a higher rate of
overall return than obligations which pay interest on a regular basis
although they may experience greater market volatility than the latter.
Excluding U.S. Treasury strip securities (zero coupon securities), none of
the Funds expect to invest more than 5% of its net assets in zero or step
coupon securities.
Investment Practices
Foreign Investments
Each 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") and European Depositary Receipts ("EDRs") or indices or
baskets of securities of foreign issuers. Under current policy, however,
Strategic Portfolios: Conservative limits such investments to a maximum of
25%, Strategic Portfolios: Moderate to a maximum of 30%, and Strategic
Portfolios: Aggressive to a maximum of 35%, of its total assets including
ADRs.
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. Generally, ADRs in registered form are designed for
use in U.S. securities markets and EDRs are designed for use in European
securities markets. The underlying securities are not always denominated in
the same currency as the ADRs or EDRs. Although investment in the form of
ADRs or EDRs facilitates trading in foreign securities, it does not mitigate
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. A Fund will
take these and other risk considerations into account before making an
investment in an unsponsored ADR.
The risks associated with investments in foreign securities include those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks
of nationalization or expropriation, the possible imposition of currency
exchange blockages, higher operating expenses, foreign withholding and other
taxes which may reduce investment return,
12
<PAGE>
reduced availability of public information concerning issuers, the
difficulties in obtaining and enforcing a judgment against a foreign issuer
and the fact that foreign issuers are not generally subject to uniform
accounting, auditing and financial reporting standards or to other regulatory
practices and requirements comparable to those applicable to domestic
issuers. Moreover, securities of many foreign issuers may be less liquid and
their prices more volatile than those of securities of comparable domestic
issuers. Investments in foreign securities also involve the additional cost
of converting foreign currency into U.S. dollars.
It is anticipated that a majority of the foreign investments by each Fund
will consist of securities of issuers in countries with developed economies.
However, each Fund may also invest in the securities of issuers in countries
with less developed economies as deemed appropriate by the Investment
Manager. Such countries include countries that have an emerging stock market
that trades a small number of securities; countries with low- to
middle-income economies; and/or countries with economies that are based on
only a few industries. Eastern European countries are considered to have less
developed capital markets. Some of the risks set forth above may be
heightened for investments in those countries.
For further information regarding foreign investments, see the Statement
of Additional Information.
Currency Transactions
In order to protect against the effect of uncertain future exchange rates on
securities denominated in foreign currencies, each Fund may engage in
currency exchange transactions either on a spot (i.e., cash) basis at the
rate prevailing in the currency exchange market or by entering into forward
contracts to purchase or sell currencies. Although such contracts tend to
minimize the risk of loss resulting from a correctly predicted decline in
value of hedged currency, they tend to limit any potential gain that might
result should the value of such currency increase. In entering a forward
currency transaction, the Funds are dependent upon the creditworthiness and
good faith of the counterparty. The Funds will attempt to reduce the risks of
nonperformance by a counterparty by dealing only with established, reputable
institutions with which the Investment Manager has done substantial business
in the past. For further information, see the Statement of Additional
Information.
Securities Lending
A Fund may lend portfolio securities with a value of up to 33-1/3% of its
total assets. A Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of
the current market value of the loaned securities plus accrued interest.
Collateral received by a Fund will generally be held in the form tendered,
although cash may be invested in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, irrevocable stand-by letters
of credit issued by a bank, or any combination thereof. The investing of cash
collateral received from loaning portfolio securities involves leverage which
magnifies the potential for gain or loss on monies invested and, therefore,
results in an increase in the volatility of a Fund's outstanding securities.
Such loans may be terminated at any time.
A Fund will retain most rights of ownership including rights to dividends,
interest or other distributions on the loaned securities. Voting rights pass
with the lending, although a Fund may call loans to vote proxies if desired.
Should the borrower of the securities fail financially, there is a risk of
delay in recovery of the securities or loss of rights in the collateral.
Loans are made only to borrowers which are deemed by the Investment Manager
to be of good financial standing.
Other Considerations
Certain Derivative Securities
Each Fund may, subject to certain limitations, buy and sell options, futures
contracts and options on futures contracts on securities, securities indices
and currencies. A Fund may not establish a position in a commodity futures
contract or purchase or sell a commodity option contract for other than bona
fide hedging purposes if immediately thereafter the sum of the amount of
initial margin deposits and premiums required to establish such positions for
such nonhedging purposes would exceed 5% of the market value of the Fund's
net assets; similar policies apply
13
<PAGE>
to options which are not commodities. Each Fund may enter various forms of
swap arrangements, which have simultaneously the characteristics of a
security and a futures contract, although none of the Funds presently expect
to invest more than 5% of its total assets in such items. These swap
arrangements include interest rate swaps, currency swaps and index swaps. See
the Statement of Additional Information.
Other Investments
Each Fund may invest in restricted securities including restricted securities
available in accordance with Rule 144A under the Securities Act of 1933
("Rule 144A Securities"), which allows for the resale of such securities
among certain qualified institutional buyers. Rule 144A Securities may be
determined to be liquid by or in accordance with guidelines established by
the Board of Trustees for purposes of complying with a Fund's investment
restrictions applicable to investments in illiquid securities. Because the
market for such securities is still developing, such securities could
possibly become illiquid in particular circumstances. See the Statement of
Additional Information.
Each Fund may enter into repurchase agreements and purchase securities on
a "when-issued" or forward commitment basis. See the Statement of Additional
Information.
Portfolio Turnover
Each Fund reserves full freedom with respect to portfolio turnover. In
periods when there are rapid changes in economic conditions or security price
levels or when investment strategy changes significantly, portfolio turnover
may be higher than during times of economic and market price stability or
when investment strategy remains relatively constant. A higher portfolio
turnover rate may result in greater transaction costs relative to other
funds, and may have tax and other consequences as well. See the Statement of
Additional Information.
Limiting Investment Risk
In seeking to lessen investment risk, each Fund operates under certain
investment restrictions which may not be changed except by a vote of the
shareholders of the Fund. Under these restrictions, none of the Funds may
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 (except that for Stratetgic Portfolios: Conservative the 10%
limit on voting securities applies to 100% of the Fund's total assets). None
of the Funds may invest more than 25% of the Fund's total assets in
securities of issuers principally engaged in any one industry, except this
restriction does not apply to investments in U.S. Government securities. In
addition, each Fund may borrow money (through reverse repurchase agreements
or otherwise) only for extraordinary and emergency purposes, and then not in
an amount in excess of 25% of the value of its total assets.
Each Fund operates under other investment restrictions which may be
changed without shareholder approval. Under these restrictions none of the
Funds may invest more than 15% of its total assets in illiquid securities
including repurchase agreements extending for more than seven days. An
illiquid portfolio may affect the ability of a Fund to sell securities either
to meet redemption requests or in response to changes in the economy or the
financial markets.
For further information on the above and other investment restrictions,
including additional investment restrictions which may be changed without a
shareholder vote, see the Statement of Additional Information.
A Fund may not lend money; however, a Fund may purchase bonds, debentures,
notes and similar obligations (and enter into repurchase agreements with
respect thereto).
Each Fund may hold up to 100% of its assets in cash or short-term debt
securities for temporary defensive purposes. A Fund will adopt a temporary
defensive position when, in the opinion of the Investment Manager, such a
position is more likely to pro-
14
<PAGE>
vide protection against adverse market conditions than adherence to the
Fund's other investment policies. The types of short-term instruments in
which a Fund may invest for such purposes include short-term money market
securities such as repurchase agreements, U.S. Government securities,
certificates of deposit, time deposits and bankers' acceptances of certain
qualified financial institutions and corporate commercial paper rated at the
time of purchase at least "A" by S&P or "Prime" by Moody's (or, if not rated,
issued by companies having an outstanding long-term unsecured debt issue
rated at least "A" by S&P or Moody's). See the Statement of Additional
Information. When a Fund adopts a temporary defensive position, its
investment objective may not be achieved.
Information on the Purchase of Shares, Redemption of Shares and Shareholder
Services is set forth below on pages 15 to 29.
The Funds are available for investment by many kinds of investors including
participants investing through 401(k) or other retirement plan sponsors,
employees investing through savings plans sponsored by employers, Individual
Retirement Accounts ("IRAs"), trusts, corporations, individuals, etc. The
applicability of the general information and administrative procedures set
forth below under Purchase of Shares, Redemption of Shares and Shareholder
Services accordingly will vary depending on the investor and the
recordkeeping system established for a shareholder's investment in a Fund.
Participants in 401(k) and other plans should first consult with the
appropriate person at their employer or refer to the plan materials before
following any of the procedures below. For more information or assistance,
anyone may call 1-800-562-0032.
Purchase of Shares
Methods of Purchase
Through Dealers and Others
Shares of the Funds are continuously offered through securities dealers,
financial institutions and others (collectively referred to herein as
securities dealers or dealers) who have entered into sales agreements with
the Distributor. Purchases through dealers are confirmed at the offering
price, which is the net asset value plus the applicable sales charge, next
determined after the order is duly received by State Street Research
Shareholder Services ("Shareholder Services"), a division of State Street
Research Investment Services, Inc., from the dealer. ("Duly received" for
purposes herein means in accordance with the conditions of the applicable
method of purchase as described below.) The dealer is responsible for
transmitting the order promptly to Shareholder Services in order to permit
the investor to obtain the current price. See "Purchase of Shares--Net Asset
Value" herein.
By Mail
Initial investments in a Fund may be made by mailing or delivering to the
investor's dealer a completed Application (accompanying this Prospectus),
together with a check for the total purchase price payable to the Fund. The
dealer must forward the Application and check in accordance with the
instructions on the Application.
Additional shares may be purchased by mailing to Shareholder Services a
check payable to a Fund in the amount of the total purchase price together
with any one of the following: (i) an Application; (ii) the stub from a
shareholder's account statement; or (iii) a letter setting forth the name of
the Fund, the class of shares and the shareholder's account name and number.
Shareholder Services will deliver the purchase order to the transfer agent
and dividend paying agent, State Street Bank and Trust Company (the "Transfer
Agent").
If a check is not honored for its full amount, the purchaser could be
subject to additional charges to cover collection costs and any investment
loss, and the purchase may be cancelled.
By Wire
An investor may purchase shares by wiring Federal Funds of not less than
$5,000 to State Street Bank and Trust Company, which also serves as the
Trust's custodian (the "Custodian"), as set forth below. Prior
15
<PAGE>
to making an investment by wire, an investor must notify Shareholder Services
at 1-800-562-0032 and obtain a control number and instructions. Following
such notification, Federal Funds should be wired through the Federal Reserve
System to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF = Name of Fund and class of shares
(A, B, C or D)
AC = 99029761
OBI = Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street
Research Shareholder Services)
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make
such investment by 12 noon Boston time on the day of his or her investment;
and (ii) the wire must be received by 4 P.M. Boston time that same day.
An investor making an initial investment by wire must promptly complete
the Application accompanying this Prospectus and deliver it to his or her
securities dealer, who should forward it as required. No redemptions will be
effected until the Application has been duly processed.
A Fund may in its discretion discontinue, suspend or change the practice
of accepting orders by any of the methods described above. Orders for the
purchase of shares are subject to acceptance by a Fund. Each Fund reserves
the right to suspend the sale of shares, or to reject any purchase order,
including orders in connection with exchanges, for any reason.
Minimum Investment
Class of Shares
-----------------------------------------
A B C D
------ ------ ----- -------
Minimum Initial Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $2,000 $2,000 (a) $2,000
By Investamatic $1,000 $1,000 (a) $1,000
All other $2,500 $2,500 (a) $2,500
Minimum Subsequent Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $ 50 $ 50 (a) $ 50
By Investamatic $ 50 $ 50 (a) $ 50
All other $ 50 $ 50 (a) $ 50
(a) Special conditions apply; contact the Distributor.
Each Fund reserves the right to vary the minimums for initial or
subsequent investments as in the case of, for example, exchanges and
investments under various employee benefit plans, sponsored arrangements
involving group solicitations of the members of an organization, or other
investment plans for reinvestment of dividends and distributions or for
periodic investments (e.g., Investamatic Program).
Alternative Purchase Program
General
Alternative classes of shares permit investors to select a purchase program
which they believe will be the most advantageous for them, given the amount
of their purchase, the length of time they anticipate holding Fund shares, or
the flexibility they desire in this regard, and other relevant circumstances.
Investors will be able to determine whether in their particular circumstances
it is more advantageous to incur an initial sales charge and not be subject
to certain ongoing charges or to have their entire initial purchase price
invested in a Fund with the investment being subject thereafter to ongoing
service fees and distribution fees.
As described in greater detail below, dealers are paid differing amounts
of commission and other compensation depending on which class of shares they
sell.
16
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales Charges Initial sales charge Contingent deferred None Contingent deferred
at time of investment sales charge of 5% to sales charge of 1%
of up to 4.5% 2% applies to any applies to any shares
depending on amount shares redeemed redeemed within one
of investment within first five year following their
years following their purchase
purchase; no
contingent deferred
sales charge after
five years
On investments of $1
million or more, no
initial sales charge;
but contingent
deferred sales charge
of 1% applies to any
shares redeemed
within one year
following their
purchase
Distribution Fee None 0.75% for first eight None 0.75% each year
years; Class B shares
convert automatically
to Class A shares
after eight years
Service Fee 0.25% each year 0.25% each year None 0.25% each year
Initial Above described 4% None 1%
Commission initial sales charge
Received by less 0.25% to 0.50%
Selling retained by
Dealers Distributor
On investments of
$1 million or more,
0.25% to 1% paid to
dealer by Distributor
</TABLE>
17
<PAGE>
In deciding which class of shares to purchase, the investor should
consider the amount of the investment, the length of time the investment is
expected to be held, and the ongoing service fee and distribution fee, among
other factors.
Class A shares are sold at net asset value plus an initial sales charge of
up to 4.5% of the public offering price. Because of the sales charge, not all
of an investor's purchase amount is invested unless the purchase equals
$1,000,000 or more. Class B shareholders pay no initial sales charge, but a
contingent deferred sales charge of up to 5% generally applies to shares
redeemed within five years of purchase. Class D shareholders also pay no
initial sales charge, but a contingent deferred sales charge of 1% generally
applies to redemptions made within one year of purchase. For Class B and
Class D shareholders, therefore, the entire purchase amount is immediately
invested in a Fund.
An investor who qualifies for a significantly reduced initial sales
charge, or a complete waiver of the sales charge on investments of $1,000,000
or more, on the purchase of Class A shares might elect that option to take
advantage of the lower ongoing service and distribution fees that
characterize Class A shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. Class B shares are assessed an annual
distribution fee of 0.75% of daily net assets for an eight-year period
following the date of purchase and are then automatically converted to Class
A shares. Class D shares are assessed an annual distribution fee of 0.75% of
daily net assets for as long as the shares are held. The prospective investor
should consider these fees plus the initial or contingent deferred sales
charges in estimating the costs of investing in the various classes of a
Fund's shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are allocated to dealers (see
"Distribution Plan" below). In addition, the Distributor will, at its
expense, provide additional cash and noncash incentives to dealers that sell
shares. Such incentives may be extended only to those dealers that have sold
or may sell significant amounts of shares and/or meet other conditions
established by the Distributor; for example, the Distributor may sponsor
special promotions to develop particular distribution channels or to reach
certain investor groups. The Distributor may also compensate those dealers
with clients who maintain their investments in a Fund over a period of years.
The incentives may include merchandise and trips to and attendance at sales
seminars at resorts.
Class A Shares--Initial Sales Charges
Sales Charges
The purchase price of a Class A share of a Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar
amount of the shares purchased as set forth in the table below. A major
portion of this sales charge is reallowed by the Distributor to the dealer
responsible for the sale.
Sales
Sales Charge
Charge Paid
Paid By By Dealer
Dollar Investor Investor Concession
Amount of As % of As % of As % of
Purchase Purchase Net Asset Purchase
Transaction Price Value Price
Less than $100,000 4.50% 4.71% 4.00%
$100,000 or above but less
than $250,000 3.50% 3.63% 3.00%
$250,000 or above but less
than $500,000 2.50% 2.56% 2.00%
$500,000 or above but less
than $1 million 2.00% 2.04% 1.75%
See
following
$1 million and above 0% 0% discussion
18
<PAGE>
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor may pay the authorized dealer a
commission based on the aggregate of such sales as follows:
Amount of Sale Commission
- -------------- ----------
(a) $1 million to $3 million 1.00%
(b) Next $2 million 0.50%
(c) Amount over $5 million 0.25%
On such sales of $1,000,000 or more, unless the above commission is waived
by the dealer, the investor is subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the sale.
However, such redeemed shares will not be subject to the contingent deferred
sales charge to the extent that their value represents (1) capital
appreciation or (2) reinvestment of dividends or capital gains distributions.
In addition, the contingent deferred sales charge will be waived for certain
other redemptions as described under "Contingent Deferred Sales Charge
Waivers" below (as otherwise applicable to Class B shares).
Class A shares of a Fund that are purchased without a sales charge may be
exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption
within one year of the Class A shares which are acquired through such
exchange. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any contingent
deferred sales charge will be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement
of Additional Information, of $100,000 or more of Class A shares of a Fund or
a combination of "Eligible Funds." "Eligible Funds" include the Funds and
other funds so designated by the Distributor from time to time. Class B,
Class C and Class D shares may also be included in the combination under
certain circumstances. Securities dealers should call Shareholder Services
for details concerning the other Eligible Funds and any persons who may
qualify for reduced sales charges and related information. See the Statement
of Additional Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A
shares of a Fund and any other Eligible Funds within a 13-month period.
Class B, Class C and Class D shares may also be included under certain
circumstances. Additional information on a Letter of Intent is available from
dealers, or from the Distributor, and also appears in the Statement of
Additional Information.
Right of Accumulation
Investors may purchase Class A shares of a Fund or a combination of shares of
the Funds and other Eligible Funds at reduced sales charges pursuant to a
Right of Accumulation. Under the Right of Accumulation, the sales charge is
determined by combining the current purchase with the value of the Class A
shares of other Eligible Funds held at the time of purchase. Class B, Class C
and Class D shares may also be included in the combination under certain
circumstances. See the Statement of Additional Information and call
Shareholder Services for details concerning the Right of Accumulation.
Other Programs
Class A shares of the Funds may be sold or issued in an exchange at a reduced
sales charge or without a sales charge pursuant to certain sponsored
arrangements, which include programs under which a company, employee benefit
plan or other organization makes recommendations to, or permits group
solicitation of, its employees, members or participants, except any
organization created primarily for the purpose of obtaining shares of the
Funds at a reduced sales charge or without a sales charge. Sales without a
sales charge, or with a reduced sales charge, may also be made through
brokers, financial planners, institutions, and others, under managed
fee-based programs (e.g., "wrap fee" or similar programs) which meet certain
requirements established from
19
<PAGE>
time to time by the Distributor. Information on such arrangements and further
conditions and limitations is available from the Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of a Fund to the following entities and persons: (A) the
Investment Manager, Distributor, or any affiliated entities, including any
direct or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated
Companies, any relatives of any such individuals whose relationship is
directly verified by such individuals to the Distributor, or any beneficial
account for such relatives or individuals; and (C) employees, officers, sales
representatives or directors of dealers and other entities with a selling
agreement with the Distributor to sell shares of any aforementioned
investment company, any spouse or child of such person, or any beneficial
account for any of them. The purchase must be made for investment and the
shares purchased may not be resold except through redemption. This purchase
program is subject to such administrative policies, regarding the
qualification of purchasers, minimum investments by various groups of
eligible persons and any other matters, as may be adopted by the Distributor
from time to time.
Class B Shares--Contingent Deferred Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is duly received, as defined herein.
No sales charge is imposed at the time of purchase; thus the full amount of
the investor's purchase payment will be invested in the Funds. However, a
contingent deferred sales charge may be imposed upon redemptions of Class B
shares as described below.
The Distributor will pay securities dealers at the time of sale a 4%
commission for selling Class B shares. The proceeds of the contingent
deferred sales charge and the distribution fee are used to offset
distribution expenses and thereby permit the sale of Class B shares without
an initial sales charge.
Class B shares that are redeemed within a five-year period after their
purchase will not be subject to a contingent deferred sales charge to the
extent that the value of such shares represents (1) capital appreciation of
Fund assets or (2) reinvestment of dividends or capital gains distributions.
The amount of any applicable contingent deferred sales charge will be
calculated by multiplying the net asset value of such shares at the time of
redemption or at the time of purchase, whichever is lower, by the applicable
percentage shown in the table below:
Contingent
Deferred Sales
Charge As
A Percentage Of
Net Asset Value
Redemption During At Redemption
- ----------------- ----------------
1st Year Since Purchase 5%
2nd Year Since Purchase 4
3rd Year Since Purchase 3
4th Year Since Purchase 3
5th Year Since Purchase 2
6th Year Since Purchase and Thereafter None
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first
of those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of a Fund acquired through an exchange from another
Eligible Fund will be measured from the date that such shares were initially
acquired in the other Eligible Fund, and Class B shares being redeemed will
be considered to represent, as applicable, capital appreciation or dividend
and capital gains distribution reinvestments in such other Eligible Fund.
These determinations will result in any contingent deferred sales charge
being imposed at the lowest possible rate. For federal income tax purposes,
the amount of the contingent deferred sales charge will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption.
The amount of any contingent deferred sales charge will be paid to the
Distributor.
20
<PAGE>
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic withdrawal plan which meets certain
conditions. In addition, the contingent deferred sales charge will be waived
for: (i) redemptions made within one year of the death or total disability,
as defined by the Social Security Administration, of all shareholders of an
account; (ii) redemptions made after attainment of a specific age in an
amount which represents the minimum distribution required at such age under
Section 401(a)(9) of the Internal Revenue Code for retirement accounts or
plans (e.g., age 70-1/2 for IRAs and Section 403(b) plans), calculated solely
on the basis of assets invested in a Fund or other Eligible Funds; and (iii)
a redemption resulting from a tax-free return of an excess contribution to an
IRA. (The foregoing waivers do not apply to a tax-free rollover or transfer
of assets out of a Fund.) The Funds may modify or terminate the waivers
described above at any time; for example, the Funds may limit the application
of multiple waivers and establish other conditions for employee benefit
plans.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends or
distributions with respect to such shares, will automatically convert to
Class A shares of a Fund at the end of eight years following the issuance of
the Class B shares; consequently, they will no longer be subject to the
higher expenses borne by Class B shares. The conversion rate will be
determined on the basis of the relative per share net asset values of the two
classes and may result in a shareholder receiving either a greater or fewer
number of Class A shares than the Class B shares so converted. As noted
above, holding periods for Class B shares received in exchange for Class B
shares of other Eligible Funds will be counted toward the eight-year period.
Class C Shares--Institutional; No Sales Charge
The purchase price of a Class C share of a Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase or
redemption. The Funds will receive the full amount of the investor's purchase
payment.
In general, Class C shares are only available for new investments by
certain large institutions and employee benefit plans which acquire shares
through programs or products sponsored by Metropolitan Life Insurance Company
("Metropolitan") and/or its affiliates, for which Class C shares have been
designated. Information on the availability of Class C shares and further
conditions and limitations is available from the Distributor.
Class D Shares--Spread Sales Charges
The purchase price of a Class D share of a Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase; thus the
full amount of the investor's purchase payment will be invested in the Funds.
Class D shares are subject to a 1% contingent deferred sales charge on any
portion of the purchase redeemed within one year of the sale. The contingent
deferred sales charge will be 1% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. The Distributor
pays dealers a 1% commission for selling Class D shares at the time of
purchase. The proceeds of the contingent deferred sales charge and the
distribution fee are used to offset distribution expenses and thereby permit
the sale of Class D shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will not
be subject to the contingent deferred sales charge to the extent that the
value of such shares represents (1) capital appreciation of Fund assets or
(2) reinvestment of dividends or capital gains distributions. In addition,
the contingent deferred sales charge will be waived for certain other
redemptions as described under "Contingent Deferred Sales Charge Waivers"
above (as otherwise applicable to Class B shares). For federal income tax
purposes, the amount of the contingent deferred sales charge will reduce the
gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any contingent deferred sales charge will be paid
to the Distributor.
21
<PAGE>
Net Asset Value
Each Fund's per share net asset values are determined Monday through Friday
as of the close of regular trading on the New York Stock Exchange (the
"NYSE") exclusive of days on which the NYSE is closed. The NYSE ordinarily
closes at 4 P.M. New York City time. Assets held by a Fund are valued on the
basis of the last reported sale price or quotation as of the close of
business on the valuation date, except that securities and assets for which
market quotations are not readily available are valued as determined in good
faith by or under the authority of the Trustees of the Trust. In determining
the value of certain assets for which market quotations are not readily
available, the Funds may use one or more pricing services. The pricing
services utilize information with respect to market transactions, quotations
from dealers and various relationships among securities in determining value
and may provide prices determined as of times prior to the close of the NYSE.
The Trustees have authorized the use of the amortized cost method to value
short-term debt instruments issued with a maturity of one year or less and
having a remaining maturity of 60 days or less when the value obtained is
fair value. Further information with respect to the valuation of the Funds'
assets is included in the Statement of Additional Information.
Distribution Plan
Each Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the provisions of the
Distribution Plan, each Fund makes payments to the Distributor based on an
annual percentage of the average daily value of the net assets of each class
of shares as follows:
Class Service Fee Distribution Fee
----- ----------- ----------------
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) or others for
personal services and/or the maintenance or servicing of shareholder
accounts. A portion of any initial commission paid to dealers for the sale of
shares of a Fund represents payment for personal services and/or the
maintenance of shareholder accounts by such dealers. Dealers who have sold
Class A shares are eligible for reimbursement commencing as of the time of
such sale. Dealers who have sold Class B and Class D shares are eligible for
reimbursement after the first year during which such shares have been held of
record by such dealer as nominee for its clients (or by such clients
directly). Any service fees received by the Distributor and not allocated to
dealers may be applied by the Distributor in reduction of expenses incurred
by it for personal services and the maintenance or servicing of shareholder
accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to dealers for selling such shares. Any distribution fees
received by the Distributor and not allocated to dealers may be applied by
the Distributor in connection with sales or marketing efforts, including
special promotional fees and cash and noncash incentives based upon sales by
dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs
similar expenses on behalf of, such other funds. When expenses of the
Distributor cannot be identified as relating to a specific fund, the
Distributor allocates expenses among the funds in a manner deemed fair and
equitable to each fund.
Commissions and other cash and noncash incentives and payments to dealers,
to the extent payable out of the general profits, revenues or other sources
of the Distributor (including the advisory fees paid by the Funds), have also
been authorized pursuant to the Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which a Fund may incur under the Distribution
Plan to 1%, of which 0.75% may be used to pay distribution expenses and 0.25%
may be used to pay shareholder service fees. The NASD rule also limits the
aggregate amount which a 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
22
<PAGE>
the prime rate plus 1% on unpaid amounts thereof (less any contingent
deferred sales charges). Such limitation does not apply to shareholder
service fees. Payments to the Distributor or to dealers funded under the
Distribution Plan may be discontinued at any time by the Trustees of the
Trust.
Redemption of Shares
Shareholders may redeem all or any portion of their accounts on any day the
NYSE is open for business. Redemptions will be effective at the net asset
value per share next determined (see "Purchase of Shares--Net Asset Value"
herein) after receipt of the redemption request, in accordance with the
requirements described below, by Shareholder Services and delivery of the
request by Shareholder Services to the Transfer Agent. To allow time for the
clearance of checks used for the purchase of any shares which are tendered
for redemption shortly after purchase, the remittance of the redemption
proceeds for such shares could be delayed for 15 days or more after the
purchase. Shareholders who anticipate a potential need for immediate access
to their investments should, therefore, purchase shares by wire. Except as
noted, redemption proceeds from a Fund are normally remitted within seven
days after receipt of the redemption request by a Fund and any necessary
documents in good order.
Methods of Redemption
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed to
the shareholder or wired to a predesignated bank account (see "Proceeds By
Wire" below), by sending to State Street Research Shareholder Services, P.O.
Box 8408, Boston, Massachusetts 02266-8408: (1) a written request for
redemption signed by the registered owner(s) of the shares, exactly as the
account is registered; (2) an endorsed stock power in good order with respect
to the shares or, if issued, the share certificates for the shares endorsed
for transfer or accompanied by an endorsed stock power; (3) any required
signature guarantees (see "Redemption of Shares--Signature Guarantees"
below); and (4) any additional documents which may be required for redemption
in the case of corporations, trustees, etc., such as certified copies of
corporate resolutions, governing instruments, powers of attorney, and the
like. The Transfer Agent will not process requests for redemption until it
has received all necessary documents in good order. A shareholder will be
notified promptly if a redemption request cannot be accepted. Shareholders
having any questions about the requirements for redemption should call
Shareholder Services toll-free at 1-800-562-0032.
Request By Telephone
Shareholders may request redemption by telephone with proceeds to be
transmitted by check or by wire (see "Proceeds By Wire" below). A shareholder
can request a redemption for $50,000 or less to be transmitted by check. Such
check for the proceeds will be made payable to the shareholder of record and
will be mailed to the address of record. There is no fee for this service. It
is not available if the address of record has been changed within 30 days of
the redemption request. The Funds may revoke or suspend the telephone
redemption privilege at any time and without notice. See "Shareholder
Services--Telephone Services" for a discussion of the conditions and risks
associated with Telephone Privileges.
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder has
Telephone Privileges (see "Shareholder Services--Telephone Services" herein),
the Trust's custodian will wire redemption proceeds to the shareholder's
predesignated bank account. To make the request, the shareholder should call
1-800-562-0032 prior to 4 P.M. Boston time. A $7.50 charge against the
shareholder's account will be imposed for each wire redemption. This charge
is subject to change without notice. The shareholder's bank may also impose a
charge for receiving wires of redemption proceeds. The minimum redemption by
wire is $5,000.
23
<PAGE>
Request to Dealer to Repurchase
For the convenience of shareholders, each 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 Funds may revoke
or suspend this authorization at any time. The repurchase price is the net
asset value for the applicable shares next determined following the time at
which the shares are offered for repurchase by the dealer to the Distributor.
The dealer is responsible for promptly transmitting a shareholder's order to
the Distributor. Payment of the repurchase proceeds is made to the dealer who
placed the order promptly upon delivery of certificates for shares in proper
form for transfer or, for Open Accounts, upon the receipt of a stock power
with signatures guaranteed as described below, and, if required, any
supporting documents. Neither the Fund nor the Distributor imposes any charge
upon such a repurchase. However, a dealer may impose a charge as agent for a
shareholder in the repurchase of his or her shares.
The Funds have reserved the right to change, modify or terminate the
services described above at any time.
Additional Information
Because of the relatively high cost of maintaining small shareholder
accounts, each Fund reserves the right to involuntarily redeem at its option
any shareholder account which remains below $1,500 for a period of 60 days
after notice is mailed to the applicable shareholder, or to impose a
maintenance fee on such account after 60 days' notice. Such involuntary
redemptions will be subject to applicable sales charges, if any. Each 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 a Fund, and the
proceeds of the redemption will be mailed promptly 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 a 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.
A Fund may not suspend the right of redemption or postpone the date of
payment of redemption proceeds for more than seven days, except that (a) it
may elect to suspend the redemption of shares or postpone the date of payment
of redemption proceeds: (1) during any period that the NYSE is closed (other
than customary weekend and holiday closings) or trading on the NYSE is
restricted; (2) during any period in which an emergency exists as a result of
which disposal of portfolio securities is not reasonably practicable or it is
not reasonably practicable to fairly determine the Fund's net asset value; or
(3) during such other periods as the Securities and Exchange Commission may
by order permit for the protection of investors; and (b) the payment of
redemption proceeds may be postponed as otherwise provided under "Redemption
of Shares" herein.
Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Funds, the
Investment Manager and the Distributor from possible fraud, signature
guarantees are required for certain redemptions. Signature guarantees help
the Transfer Agent determine that the person who has authorized a redemption
from the account is, in fact, the shareholder. Signature guarantees are
required for, among other things: (1) written requests for redemptions for
more than $50,000; (2) written requests for redemptions for any amount if the
proceeds are transmitted to other than the current address of record
(unchanged in the past 30 days); (3) written requests for redemptions for any
amount submitted by corporations and certain fiduciaries and other
intermediaries; and (4) requests to transfer the registration of 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 guar-
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antees (or notarizations) from notaries public. The above requirements may be
waived in certain instances. Please contact Shareholder Services at
1-800-562-0032 for specific requirements relating to your account.
Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of each 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 shares will not be issued. Shareholders will
receive periodic statements of transactions in their accounts.
The Funds' Open Account System provides the following options:
1. Additional purchases of shares of a Fund may be made through dealers, by
wire or by mailing a check, payable to the Fund, to Shareholder Services
under the terms set forth above under "Purchase of Shares."
2. The following methods of receiving dividends from investment income and
distributions from capital gains are available:
(a) All income dividends and capital gains distributions reinvested in
additional shares of the applicable Fund.
(b) All income dividends in cash; all capital gains distributions
reinvested in additional shares of the applicable Fund.
(c) All income dividends and capital gains distributions in cash.
(d) All income dividends and capital gains distributions invested in any
one available Eligible Fund designated by the shareholder as described
below. See "Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will automatically be coded for reinvestment of all
dividends and distributions in additional shares of the same class of the
applicable Fund. Selections may be changed at any time by telephone or
written notice to Shareholder Services. Dividends and distributions are
reinvested at net asset value without a sales charge.
Exchange Privilege
Shareholders of a Fund may exchange their shares for available shares with
corresponding characteristics of any of the other Eligible Funds at any time
on the basis of the relative net asset values of the respective shares to be
exchanged, subject to compliance with applicable securities laws.
Shareholders of any other Eligible Fund may similarly exchange their shares
for Fund shares with corresponding characteristics. Prior to making an
exchange, shareholders should obtain the Prospectus of the Eligible Fund into
which they are exchanging. Under the Direct Program, subject to certain
conditions, shareholders may make arrangements for regular exchanges from a
Fund into other Eligible Funds. To effect an exchange, Class A, Class B and
Class D shares may be redeemed without the payment of any contingent deferred
sales charge that might otherwise be due upon an ordinary redemption of such
shares. The State Street Research Money Market Fund issues Class E shares
which are sold without any sales charge. Exchanges of State Street Research
Money Market Fund Class E shares into Class A shares of a Fund or any other
Eligible Fund are subject to the initial sales charge or contingent deferred
sales charge applicable to an initial investment in such Class A shares,
unless a prior Class A sales charge has been paid directly or indirectly with
respect to the shares redeemed. For purposes of computing the contingent
deferred sales charge that may be payable upon disposition of any acquired
Class A, Class B and Class D shares, the holding period of the redeemed
shares is "tacked" to the holding period of the acquired shares. The period
any Class E shares are held is not tacked to the holding period of any
acquired shares. No exchange transaction fee is currently imposed on any
exchange.
Shares of a Fund may also be acquired or redeemed
in exchange for shares of the Summit Cash Reserves
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Fund ("Summit Cash Reserves") by customers of Merrill Lynch, Pierce, Fenner &
Smith Incorporated (subject to completion of steps necessary to implement the
program). The Funds 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 a Fund, (a) no
sales charge is imposed by Summit Cash Reserves, (b) no contingent deferred
sales charge is imposed by a 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 a Fund by exchange for redeemed shares of Summit
Cash Reserves, (a) the acquisition of Class A shares shall be subject to the
initial sales charges or contingent deferred sales charges applicable to an
initial investment in such Class A shares, unless a prior Class A sales
charge has been paid indirectly, and (b) the acquisition of Class B or Class
D shares of a Fund shall restart any holding period previously tolled, or
shall be subject to the contingent deferred sales charge applicable to an
initial investment in such shares.
For the convenience of the shareholders who have Telephone Privileges, the
Funds permit exchanges by telephone request from either the shareholder or
his or her dealer. Shares may be exchanged by telephone provided that the
registration of the two accounts is the same. The toll-free number for
exchanges is 1-800-562-0032. See "Telephone Services" herein for a discussion
of conditions and risks associated with Telephone Privileges.
The exchange privilege may be exercised only in those states where shares
of the relevant other Eligible Fund may legally be sold. For tax purposes,
each exchange actually represents the sale of shares of one fund and the
purchase of shares of another. Accordingly, exchanges may produce a capital
gain or loss for tax purposes. The exchange privilege may be terminated or
suspended or its terms changed at any time, subject, if required under
applicable regulations, to 60 days' prior notice. New accounts established
for investments upon exchange from an existing account in another fund will
have the same Telephone Privileges as the existing account, unless
Shareholder Services is instructed otherwise. Related administrative policies
and procedures may also be adopted with regard to a series of exchanges,
street name accounts, sponsored arrangements and other matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, each 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 such Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer
identification number, may be aggregated for purposes of the six exchange
limit. Notwithstanding the six exchange limit, each 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 a 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 a Fund. Each Fund may impose
these restrictions at any time. The exchange limit may be modified for
accounts in certain institutional retirement plans because of plan exchange
limits, Department of Labor regulations or administrative and other
considerations. Subject to the foregoing, if an exchange request in good
order is received by Shareholder Services and delivered by Shareholder
Services to the Transfer Agent by 12 noon Boston time on any business day,
the exchange usually will occur that day. For further information regarding
the exchange privilege, shareholders should consult Shareholder Services.
Reinvestment Privilege
A shareholder of a 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
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round off his or her reinvestment to full shares) in shares, of the same
class as the shares redeemed, of the Fund or any other Eligible Fund at net
asset value and without subjecting the reinvestment to an initial sales
charge, provided such reinvestment is made within 120 calendar days after a
redemption or repurchase. Upon such reinvestment, the shareholder will be
credited with any contingent deferred sales charge previously charged with
respect to the amount reinvested. The redemption of shares is, for federal
income tax purposes, a sale on which the shareholder may realize a gain or
loss. If a redemption at a loss is followed by a reinvestment within 30 days,
the transaction may be a "wash sale" resulting in a denial of the loss for
federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by Shareholder
Services of such shareholder's written purchase request and delivery of the
request by Shareholder Services to the Transfer Agent. A shareholder may
exercise this reinvestment privilege only once per 12-month period with
respect to his or her shares of a Fund. No charge is imposed by the Funds for
such reinvestments; however, dealers may charge fees in connection with the
reinvestment privilege. The reinvestment privilege may be exercised with
respect to an Eligible Fund only in those states where shares of the relevant
other Eligible Fund may legally be sold.
Investment Plans
The Investamatic Program is available to Class A, Class B and Class D
shareholders. Under this Program, shareholders may make regular investments
by authorizing withdrawals from their bank accounts each month or quarter on
the Application available from Shareholder Services.
The Distributor also offers IRAs and tax-sheltered retirement plans,
including prototype and other employee benefit plans for employees, sole
proprietors, partnerships and corporations. Details of these investment plans
and their availability may be obtained from securities dealers or from
Shareholder Services.
Systematic Withdrawal Plan
A shareholder who owns noncertificated Class A or Class C shares with a value
of $5,000 or more, or Class B or Class D shares with a value of $10,000 or
more, may elect, by participating in a 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 a Fund
shall be credited to participating shareholders in additional shares. Thus,
the withdrawal amounts paid can only be realized by redeeming shares of a
Fund under the Plan. To the extent such amounts paid exceed dividends and
distributions from a Fund, a shareholder's investment will decrease and may
eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually
of either (a) the value, at the time the Plan is initiated, of the shares
then in the account or (b) the value, at the time of a withdrawal, of the
same number of shares as in the account when the Plan was initiated,
whichever is higher.
Expenses of the Plan are borne by a Fund. A participating shareholder may
withdraw from the Plan, and a Fund may terminate the Plan at any time on
written notice. Purchase of additional shares while a shareholder is
receiving payments under a Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate
in the Investamatic Check Program and the Systematic Withdrawal Plan at the
same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all their
dividends and any other distributions from a Fund or any Eligible Fund
automatically invested at net asset value in one other such Eligible Fund
designated by the shareholder, provided the account into which the dividends
and distributions are directed is initially funded with the requisite minimum
amount. The number of shares purchased will be determined as of the dividend
payment date. The Dividend
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Allocation Plan is subject to state securities law requirements, to
suspension at any time, and to such policies, limitations and restrictions,
as, for instance, may be applicable to street name or master accounts, that
may be adopted from time to time.
Automatic Bank Connection
A shareholder may elect, by participating in a Fund's Automatic Bank
Connection ("ABC"), to have dividends and other distributions, including
Systematic Withdrawal Plan payments, automatically deposited in the
shareholder's bank account by electronic funds transfer. Some contingent
deferred sales charges may apply. See "Systematic Withdrawal Plan" herein.
Reports
Reports for each Fund will be sent to shareholders of record of that Fund at
least semiannually. These reports will include a list of the securities owned
by the Fund as well as the Fund's financial statements.
Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing the shareholder to make redemptions for amounts up
to $50,000 to be mailed to the shareholder's address of record is
available automatically;
(2) the privilege allowing the shareholder or his or her dealer to make
telephone exchanges is available automatically;
(3) the privilege allowing the shareholder to make telephone redemptions for
amounts over $5,000, to be remitted by wire to the shareholder's
predesignated bank account, is available by election on the Application
accompanying this Prospectus. A current shareholder who did not
previously request such telephone wire privilege on his or her original
Application may request the privilege by completing a Telephone
Redemption-by-Wire Form which may be obtained by calling 1-800-562-0032.
The Telephone Redemption-by-Wire Form requires a signature guarantee; and
(4) the privilege allowing the shareholder to make telephone purchases or
redemptions transmitted via the Automated Clearing House system, into or
from the shareholder's predesignated bank account, is available upon
completion of the requisite initial documentation. For details and forms,
call 1-800-562-0032. The documentation requires a signature guarantee.
A shareholder may decline the automatic Telephone Privileges set forth in
(1) and (2) above by so indicating on the Application accompanying this
Prospectus.
A shareholder may discontinue any Telephone Privilege at any time by
advising Shareholder Services that the shareholder wishes to discontinue the
use of such privileges in the future.
Unless such Telephone Privileges are declined, a shareholder is deemed to
authorize Shareholder Services and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder to
redeem, or purporting to be the shareholder or the shareholder's dealer to
exchange, shares from any account; and (2) honor any written instructions for
a change of address regardless of whether such request is accompanied by a
signature guarantee. All telephone calls will be recorded. None of the Funds,
the other Eligible Funds, the Transfer Agent, the Investment Manager or the
Distributor will be liable for any loss, expense or cost arising out of any
request, including any fraudulent or unauthorized requests. Shareholders
assume the risk to the full extent of their accounts that telephone requests
may be unauthorized. Reasonable procedures will be followed to confirm that
instructions communicated by telephone are genuine. The shareholder will not
be liable for any losses arising from unauthorized or fraudulent instructions
if such procedures are not followed.
Shareholders may redeem or exchange shares by calling toll-free
1-800-562-0032. Although it is unlikely, during periods of extraordinary
market conditions, a shareholder may have difficulty in reaching Shareholder
Services at such telephone number. In that event, the shareholder should
contact Shareholder Services at 1-800-562-0032 or otherwise at its main
office at One Financial Center, Boston, Massachusetts 02111-2690.
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Shareholder Account Inquiries:
Please call 1-800-562-0032
Call this number for assistance in answering general questions on your
account, including account balance, available shareholder services, statement
information and performance of the applicable Fund. Account inquiries may
also be made in writing to State Street Research Shareholder Services, P.O.
Box 8408, Boston, Massachusetts 02266-8408. A fee of up to $10 will be
charged against an account for providing additional account transcripts or
photocopies of paid redemption checks or for researching records in response
to special requests.
Shareholder Telephone Transactions:
Please call 1-800-562-0032
Call this number for assistance in purchasing shares by wire and for
telephone redemptions or telephone exchange transactions. Shareholder
Services will require some form of personal identification prior to acting
upon instructions received by telephone. Written confirmation of each
transaction will be provided.
The Funds and Their Shares
Strategic Portfolios: Conservative and Strategic Portfolios: Aggressive were
organized in 1994 and Strategic Portfolios: Moderate was organized in 1993,
all as series of State Street Research Financial Trust, a Massachusetts
business trust. The Trustees have authorized shares of each Fund to be issued
in four classes: Class A, Class B, Class C and Class D shares. The Trust is
registered with the Securities and Exchange Commission as an open-end
management investment company. The fiscal year end of each Fund is October
31.
Except for those differences between the classes of shares described below
and elsewhere in the Prospectus, each share of a Fund has equal dividend,
redemption and liquidation rights with other shares of the Fund and when
issued is fully paid and nonassessable. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common usage of terms which may develop in the mutual fund
industry. For example, Class C shares may be redesignated as Class Y shares
and Class D shares may be redesignated as Class C shares. Any redesignation
would not affect any substantive rights respecting the shares.
Each share of each class of shares represents an identical legal interest
in the same portfolio of investments of a Fund, has the same rights and is
identical in all respects, except that Class A, Class B and Class D shares
bear the expenses of the deferred sales arrangement and any expenses
(including the higher service and distribution fees) resulting from such
sales arrangement, and certain other incremental expenses related to a class.
Each class will have exclusive voting rights with respect to provisions of
the Rule 12b-1 distribution plan pursuant to which the service and
distribution fees, if any, are paid. Although the legal rights of holders of
each class of shares are identical, it is likely that the different expenses
borne by each class will result in different net asset values and dividends.
The different classes of shares of the Funds also have different exchange
privileges.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have a material adverse effect on
the rights of any shareholder. Under the Master Trust Agreement, the Trustees
may reorganize, merge or liquidate a Fund without prior shareholder approval.
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 Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder
meetings unless required by the 1940 Act. Except as otherwise provided under
said Act, the Board of Trustees will be a self-perpetuating body until fewer
than two thirds of the Trustees serving as such are Trustees who were elected
by shareholders of the Trust. In the event less than a majority of the
Trustees serving as such were elected by shareholders of the Trust, a meeting
of shareholders will be called to elect Trustees. Under the Master Trust
Agreement, any Trustee may be removed by vote of two thirds of the
outstanding Trust shares; holders of 10% or more of the
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<PAGE>
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 to the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations of the
Trust. However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for
indemnification for all losses and expenses of any shareholder of a 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 a 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.
As of January 31, 1996, Metropolitan was the record and/or beneficial
owner of 68.9% of the outstanding Class C shares of Strategic Portfolios:
Conservative; of 65.3% of the outstanding Class C shares of Strategic
Portfolios: Aggressive; and of 36.9% of the outstanding Class C shares of
Strategic Portfolios: Moderate. 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, such as any
Distribution Plan for a given class. Metropolitan may be deemed to be in
control of those classes of shares of which it owns more than 25%.
Management of the Funds
Under the provisions of the Trust's Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Funds
rests with the Trustees. The Funds' investment manager is State Street
Research & Management Company. The Investment Manager is charged with the
overall responsibility for managing the investments and business affairs of
the Funds, subject to the authority of the Board of Trustees.
The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve as investment adviser to one of the nation's first
mutual funds, presently known as State Street Research Investment Trust,
which they had formed in 1924. Their investment management philosophy, which
continues to this day, emphasized comprehensive fundamental research and
analysis, including meetings with the management of companies under
consideration for investment. The Investment Manager's portfolio management
group has extensive investment industry experience managing equity and debt
securities. In managing debt securities, if any, for a portfolio, the
Investment Manager may consider yield curve positioning, sector rotation and
duration, among other factors.
The Investment Manager and the Distributor are indirect wholly-owned
subsidiaries of Metropolitan and both are located at One Financial Center,
Boston, Massachusetts 02111-2690.
The Investment Manager has entered into an Advisory Agreement with the
Trust pursuant to which investment research and management, administrative
services, office facilities and personnel are provided for each Fund in
consideration of a fee from each Fund.
Under its Advisory Agreement with the Trust, the Investment Manager
receives a monthly investment advisory fee equal to a percentage (on an
annual basis) of the average daily value of the net assets of each Fund as
follows: Strategic Portfolios: Conservative, 0.60%; Strategic Portfolios:
Moderate, 0.65% and Strategic Portfolios: Aggressive, 0.75%. The fee charged
to Strategic Portfolios: Aggressive is higher than that charged to most
mutual funds but is believed by the Trustees to be justified given the
considerable analysis and research necessary to manage this Fund in light of
its investment objective and policies. Each Fund bears all costs of its
operation other than those incurred by the Investment Manager under the
Advisory Agreement. In particular, the Funds pay, among other expenses,
investment advisory fees, certain distribution expenses under the Funds'
Distribution Plan and the compensation and expenses of the Trustees who are
not otherwise currently affiliated with the Investment Manager or any of its
affiliates. The Investment Manager compensates
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Trustees of the Trust if such persons are employees or affiliates of the
Investment Manager or its affiliates.
Peter C. Bennett is primarily responsible for the day-to-day management of
the Funds' portfolios. Mr. Bennett has managed the Funds since December 1996.
Mr. Bennett's principal occupation currently is Executive Vice President and
Director of State Street Research & Management Company. Mr. Bennett also
serves as Chief Investment Officer--Equities and is a member of the
Management Committee of the Investment Manager. During the past five years he
has also served as Senior Vice President of the Investment Manager. Mr.
Bennett has investment discretion over the entire portfolio of each Fund,
makes investment decisions as to specific securities holdings, allocates and
continually adjusts such allocations of investments among equity and fixed
income securities and among different industry sectors. The portfolio manager
uses a team approach on behalf of each Fund and has delegated purchase and
sale authority for defined portions of the portfolios to other officers of
the Investment Manager. The team members focus on different investment areas
within each Fund's sectors, such as international securities, high-yield
high-risk securities, large- and small-capitalization equities, investment
grade debt, etc.
Subject to the policy of seeking best overall price and execution, sales
of shares of a Fund may be considered by the Investment Manager in the
selection of broker or dealer firms for the Funds portfolio transactions.
The Investment Manager has a Code of Ethics governing personal securities
transactions of certain of its employees; see the Statement of Additional
Information.
Dividends and Distributions; Taxes
Each Fund has qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code, although it cannot
give complete assurance that it will do so. As long as a Fund so qualifies
and satisfies certain distribution requirements, it will not be subject to
federal income tax on its taxable income (including capital gains, if any)
distributed to its shareholders. Consequently, each Fund intends to
distribute annually to its shareholders substantially all of its net
investment income and any capital gain net income (capital gains net of
capital losses).
Dividends from net investment income of each Fund normally will be paid
four times each year. Distributions of capital gain net income, if any, will
generally be made after the end of the fiscal year or as otherwise required
for compliance with applicable tax regulations. Both dividends from net
investment income and distributions of capital gain net income will be
declared and paid to shareholders in additional shares of a Fund at net asset
value (except in the case of shareholders who elect a different available
distribution method).
Each Fund will provide its shareholders of record with annual information
on a timely basis concerning the federal tax status of dividends and
distributions during the preceding calendar year.
Dividends paid by a Fund from taxable net investment income and
distributions of net short-term capital gains, whether paid in cash or
reinvested in additional shares, will be taxable for federal income tax
purposes to shareholders as ordinary income, and a portion may be eligible
for the 70% dividends-received deduction for corporations. The percentage of
a 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. Distributions of net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) which are designated as capital gains distributions, whether paid in
cash or reinvested in additional shares, will be taxable for federal income
tax purposes to shareholders as long-term capital gains, regardless of how
long shareholders have held their shares, and are not eligible for the
dividends-received deduction. If shares of a Fund which are sold at a loss
have been held six months or less, the loss will be considered as a long-term
capital loss to the extent of any capital gains distributions received.
Dividends and other distributions and the proceeds of redemption of Fund
shares paid to individuals and other nonexempt payees will be subject to a
31% federal
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backup withholding tax if the Transfer Agent is not provided with the
shareholder's correct taxpayer identification number and certification that
the shareholder is not subject to such backup withholding.
The foregoing discussion relates only to generally applicable federal
income tax provisions in effect as of the date of this Prospectus. Therefore,
prospective shareholders are urged to consult their own tax advisers
regarding tax matters, including state and local tax consequences.
Calculation of Performance Data
From time to time, in advertisements or in communications to shareholders or
prospective investors, a Fund may compare the performance of its Class A,
Class B, Class C or Class D shares to that of other mutual funds with similar
investment objectives, to certificates of deposit and/or to other financial
alternatives and/or to appropriate indices, rankings and averages such as
those compiled by Lipper Analytical Services, Inc. for the category in which
such Fund is placed, Morningstar, Inc., Money Magazine, Business Week, Forbes
Magazine, The Wall Street Journal and Investor's Daily.
Total return is computed separately for each class of shares of each Fund.
The average annual total return ("standard total return") for shares of each
Fund is computed by determining the average annual compounded rate of return
for a designated historical period as applied to a hypothetical $1,000
initial investment, which is redeemed in total at the end of such period. In
making the calculation, all dividends and distributions are assumed to be
reinvested, and all accrued expenses and recurring charges, including
management and distribution fees, are recognized. The calculation also
reflects the highest applicable initial or contingent deferred sales charge,
determined as of the assumed date of initial investment or the assumed date
of redemption, as the case may be. Standard total return may be accompanied
with nonstandard total return information computed in the same manner, but
for differing periods and with or without annualizing the total return or
taking sales charges into account.
A Fund's yield is computed separately for each class of shares by dividing
the net investment income, after recognition of all recurring charges, per
share earned during the most recent month or other specified thirty-day
period by the applicable maximum offering price per share on the last day of
such period and annualizing the result.
The standard total returns and yield results take sales charges into
account, if applicable, but do not take into account recurring and
nonrecurring charges for optional services which only certain shareholders
elect and which involve nominal fees, such as the $7.50 fee for remittance of
redemption proceeds by wire. Where sales charges are not applicable and
therefore not taken into account in the calculation of standard total return
and yield, the results will be increased. Any voluntary waiver of fees or
assumption of expenses by the Funds' affiliates will also increase
performance results.
A Fund's distribution rate is calculated separately for each class of
shares by annualizing the latest distribution and dividing the result by the
maximum offering price per share as of the end of the period to which the
distribution relates. The distribution rate is not computed in the same
manner as the above described yield, and, therefore, can be significantly
different from it. In its supplemental sales literature, each Fund may quote
its distribution rate together with the above described standard total return
and yield information. The use of such distribution rates would be subject to
an appropriate explanation of how the components of the distribution rate
differ from the above described yield.
Performance information may be useful in evaluating a Fund and for
providing a basis for comparison with other financial alternatives. Since the
performance of a Fund varies in response to fluctuations in economic and
market conditions, interest rates and Fund expenses, among other things, no
performance quotation should be considered a representation as to the Fund's
performance for any future period. In addition, the net asset value of shares
of a Fund will fluctuate, with the result that shares of a Fund, when
redeemed, may be worth more or less than their original cost. Neither an
investment in a Fund nor its performance is insured or guaranteed; such lack
of insurance or guarantees should accordingly be given appropriate
consideration when comparing a Fund to
32
<PAGE>
financial alternatives which have such features. 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.
Appendix
Description of Debt/Bond Ratings
Standard & Poor's Corporation
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakend capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having speculative
characteristics with respect to capacity to pay interest and repay principal.
BB indicates the least degree of speculation and C the highest. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions
to meet timely payment of interest and repayment of principal. In the event
of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is assigned
an actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the due date even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to BBB may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high vari-
33
<PAGE>
ability in expected returns due to noncredit risks created by the terms of
the obligation, such as securities whose principal or interest return is
indexed to equities, commodities or currencies, certain swaps and options,
and interest only (IO) and principal only (PO) mortgage securities.
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
1, 2 or 3: The ratings from Aa through Baa may be modified by the addition
of a numeral indicating a bond's rank within its rating category.
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<PAGE>
[cover]
[State Street tower logo]
State Street Research
Strategic Portfolios:
Conservative, Moderate, Aggressive
March 1, 1997
P R O S P E C T U S
[back]
STATE STREET RESEARCH
STRATEGIC PORTFOLIOS:
Conservative
Moderate
Aggressive
One Financial Center
Boston, MA 02111
INVESTMENT ADVISER
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
DISTRIBUTOR
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
SHAREHOLDER SERVICES
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266
800-562-0032
CUSTODIAN
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
SP-007E-397I CONTROL NUMBER: 3743-970314(0498)SSR-LD
<PAGE>
State Street Research Government Income Fund
a Series of
State Street Research Financial Trust
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1997
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS................................2
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT TECHNIQUES................5
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS...............................14
TRUSTEES AND OFFICERS.........................................................17
INVESTMENT ADVISORY SERVICES..................................................22
PURCHASE AND REDEMPTION OF SHARES.............................................23
NET ASSET VALUE...............................................................25
PORTFOLIO TRANSACTIONS........................................................26
CERTAIN TAX MATTERS...........................................................29
DISTRIBUTION OF SHARES OF THE FUND............................................31
CALCULATION OF PERFORMANCE DATA...............................................36
CUSTODIAN.....................................................................40
INDEPENDENT ACCOUNTANTS.......................................................40
FINANCIAL STATEMENTS..........................................................40
The following Statement of Additional Information is not a Prospectus.
It should be read in conjunction with the Prospectus of State Street Research
Government Income Fund (the "Fund") dated March 1, 1997, which may be obtained
without charge from the offices of State Street Research Financial Trust (the
"Trust") or State Street Research Investment Services, Inc. (the "Distributor"),
One Financial Center, Boston, Massachusetts 02111-2690.
CONTROL NUMBER: 1285F-960301(398)SSR-LD GI-879D-397
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under "The Fund's Investments" and "Limiting Investment
Risk" in the Fund's Prospectus, the Fund has adopted certain investment
restrictions.
All of the Fund's fundamental investment restrictions are set forth
below. These fundamental restrictions may not be changed by the Fund except by
the affirmative vote of a majority of the outstanding voting securities of the
Fund as defined in the Investment Company Act of 1940, as amended (the "1940
Act"). (Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at the annual or a special meeting of security
holders duly called, (i) of 67% or more of the voting securities present at 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.) 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, except that the Fund may borrow
money and engage in reverse repurchase agreements in amounts up
to one-third of the value of the Fund's net assets including the
amounts borrowed (provided that reverse repurchase agreements
shall be limited to 5% of the Fund's total assets);
(3) not to underwrite any issue of securities, except as it may be
deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with its
investment objective, policies and limitations;
(4) not to purchase or sell real estate, although it may invest in
securities of companies whose business involves the purchase or
sale of real estate or in securities which are secured by real
estate or interests 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,
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;
2
<PAGE>
(6) not to lend money; however, the Fund may lend portfolio
securities and purchase bonds, debentures, notes and similar
obligations (and enter into repurchase agreements with respect
thereto);
(7) not to sell securities short;
(8) not to invest in oil, gas or other mineral exploration or
development programs (provided that the Fund may invest in
securities issued by or which are based, directly or indirectly,
on the credit of companies which invest in or sponsor such
programs);
(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 issuers principally engaged in any one industry
(for purposes of this restriction, (a) utilities will be divided
according to their services so that, for example, gas, gas
transmission, electric and telephone companies will each be
deemed in a separate industry, (b) oil and oil related companies
will be divided by type so that, for example, oil production
companies, oil service companies and refining and marketing
companies will each be deemed in a separate industry, (c)
finance companies will be classified according to the industry
of their parent companies, and (d) securities issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities (including repurchase agreements
collateralized by U.S. Government securities) shall be
excluded);
(10) not to borrow money (through reverse repurchase agreements or
otherwise) except for emergency purposes or to facilitate
management of the portfolio by enabling the Fund to meet
redemption requests when the liquidation of portfolio accounts
is determined to be inconvenient or disadvantageous, provided
that additional investments will be suspended during any period
when borrowings exceed 5% of the Fund's net assets, and provided
further that reverse repurchase agreements shall not exceed 5%
of the Fund's total assets; (during the period in which any
reverse repurchase agreements are outstanding, the Fund will
restrict the purchase of portfolio instruments to money market
instruments maturing on or before the expiration date of the
reverse repurchase agreements. Such purchases will be made only
to the extent necessary to assure completion of the reverse
repurchase agreement);
(11) not to purchase securities on margin other than in connection
with the purchase of put options on financial futures contracts,
but the Fund may obtain such short-term credits as are necessary
for clearance of transactions;
(12) not to hypothecate, mortgage or pledge any of its assets except
to secure permitted borrowings and then not in excess of 10% of
such Fund's total assets,
3
<PAGE>
at the time of the borrowing; (as a matter of interpretation
which is not part of the fundamental policy, futures, options
and forward commitments, 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 such investments, are not deemed to involve a hypothecation,
mortgage or pledge of assets);
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); and
(2) not to invest more than 15% of its net assets in restricted
securities of all types (including not more than 5% of its net
assets in restricted securities which are not eligible for
resale pursuant to Rule 144A, Regulation S or other exemptive
provisions under the Securities Act of 1933);
(3) not to invest more than 5% of its total assets in securities of
private companies including predecessors with less than three
years' continuous operations except (a) securities guaranteed or
backed by an affiliate of the issuer with three years of
continuous operations, (b) securities issued or guaranteed as to
principal or interest by the U.S. Government, or its agencies or
instrumentalities, or a mixed-ownership Government corporation,
(c) securities of issuers with debt securities rated at least
"BBB" by Standard & Poor's Corporation or "Baa" by Moody's
Investor's Service, Inc. (or their equivalent by any other
nationally recognized statistical rating organization) or
securities of issuers considered by the Investment Manager to be
equivalent, (d) securities issued by a holding company with at
least 50% of its assets invested in companies with three years
of continuous operations including predecessors, and (e)
securities which generate income which is exempt from local,
state or federal taxes; provided that the fund may invest up to
15% in such issuers so long as such investments plus investments
in restricted securities (other than those which are eligible
for resale under Rule 144A, Regulation S or other exemptive
provisions) do not exceed 15% of the Fund's total assets;
(4) not to acquire any security issued by any other investment
company (the "acquired company") if immediately after such
acquisition the Fund and all companies controlled by the Fund,
if any, would own in the aggregate (i) more than 3% of the
outstanding voting stock of the acquired company, (ii)
securities issued by the acquired company having an aggregate
value in excess of 5% of the
4
<PAGE>
Fund's total assets or (iii) securities issued by the acquired
company and all other investment companies (other than treasury
stock of the Fund) having an aggregate value in excess of 10% of
the Fund's total assets, except to complete a merger,
consolidation or other acquisition of assets; and
(5) not to purchase or retain any security of an issuer if, to the
knowledge of the Trust, those of its officers and Trustees and
officers and directors of its investment advisers who
individually own more than 1/2 of 1% of the securities of such
issuer, when combined, own more than 5% of the securities of
such issuer taken at market.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Among other investments described below, the Fund may buy and sell
options, futures contracts and options on futures contracts with respect to
securities, securities indices, currencies, and may enter into closing
transactions with respect to each of the foregoing under circumstances in which
such instruments and techniques are expected by State Street Research &
Management Company (the "Investment Manager') to aid in achieving the investment
objectives of the Fund. The Fund on occasion may also purchase instruments with
characteristics of both futures and securities (e.g., debt instruments with
interest and principal payments determined by reference to the value of a
commodity or a currency at a future time) and which, therefore, possess the
risks of both future and securities investments.
Futures Contracts
- -----------------
Futures contracts are publicly traded contracts to buy or sell
underlying assets, such as certain securities, currencies, 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 transactions an amount of "initial
margin" in cash or U.S. Treasury obligations.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as
5
<PAGE>
"marking to market." For example, when the Fund has taken a long position in a
futures contract and the value of the underlying asset has risen, that position
will have increased in value and the Fund will receive from the broker a
maintenance margin payment equal to the increase in value of the underlying
asset. conversely, when the Fund has taken a long position in a futures contract
and the value of the underlying 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.
Futures contracts will be executed primarily (a) to establish a short
position, and thus protect the Fund from experiencing the full impact of an
expected decline in market value of portfolio holdings without requiring the
sale of holdings, or (b) to establish a long position, and thus to participate
in an expected rise in market value of securities which the Fund intends to
purchase. In transactions establishing a long position in a futures contract,
money market instruments equal to the face value of the futures contract will be
identified by the Fund to the Trust's custodian for maintenance in a separate
account to insure that the use of such futures contracts is unleveraged.
Similarly, a representative portfolio of securities having a value equal to the
aggregate face value of the futures contract will be identified with respect to
each short position. The Fund will employ any other appropriate method of cover
which is consistent with applicable regulatory and exchange requirements.
Options on Securities
- ---------------------
The Fund may use options on equity securities to implement its
investment strategy. A call option on a security, for example, gives the
purchaser of the option the right to buy, and the writer the obligation to sell,
the underlying asset at the exercise price during the option period. Conversely,
a put option on a security gives the purchaser the right to sell, and the writer
the obligation to buy, the underlying asset at the exercise price during the
option period.
Purchased options have defined risk, i.e., the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset.
Written options have varying degrees of risk. An uncovered written call
option theoretically carries unlimited risk, as the market price of the
underlying asset could rise far above the exercise price before its expiration.
The risk is tempered when the call option is covered, i.e., when the option
writer owns the underlying asset. In this case, the writer runs
6
<PAGE>
the risk of the lost opportunity to participate in the appreciation in value of
the asset rather than the risk of an out-of-pocket loss. A written put option
has defined risk, i.e., the difference between the agreed-upon price that the
Fund must pay to the buyer upon exercise of the put and the value, which could
be zero, of the asset at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
his obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Options on Securities Indices
- -----------------------------
The Fund may engage in transactions in call and put options on
securities indices. For example, the Fund may purchase put options on indices of
securities in anticipation of or during a market decline to attempt to offset
the decrease in market value of its equity securities that might otherwise
result.
Put options on indices of securities are similar to put options on the
securities themselves except that the delivery requirements are different.
Instead of giving the right to make delivery of a security at a specified price,
a put option on an index of securities gives the holder the right to receive an
amount of cash upon exercise of the option if the value of the underlying index
has fallen below the exercise price. The amount of cash received will be equal
to the difference between the closing price of the index and the exercise price
of the option expressed in dollars times a specified multiple. As with options
on equity securities or futures contracts, the Fund may offset its position
index options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
A securities index assigns relative values to the securities included
in the index and the index options are based on a broad market index. Although
there are at present few available options on indices of fixed income
securities, other than tax-exempt securities, or futures and related options
based on such indices such instruments may become available in the future. In
connection with the use of such options the Fund may cover its position by
identifying a representative portfolio of securities having a value equal to the
aggregate face value of the option position taken. However, the Fund may employ
any appropriate method to cover its positions that is consistent with applicable
regulatory and exchange requirements.
Options on Futures Contracts
- ----------------------------
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
7
<PAGE>
Options Strategy
- ----------------
A basic option strategy for protecting the Fund against a decline in
securities prices could involve (a) the purchase of a put -- thus "locking in"
the selling price of the underlying securities or securities indices -- or (b)
the writing of a call on securities or securities indices held by the Fund --
thereby generating income (the premium paid by the buyer) by giving the holder
of such call the option to buy the underlying asset at a fixed price. The
premium will offset, in whole or in part, a decline in portfolio value; however,
if prices of the relevant securities or securities indices rose instead of
falling, the call might be exercised thereby resulting in a potential loss of
appreciation in the underlying securities or securities indices.
A basic option strategy when a rise in securities prices is anticipated
is the purchase of a call -- thus, "locking in" the purchase price of the
underlying security or other asset. In transactions involving the purchase of
call options by the Fund, money market instruments equal to the aggregate
exercise price of the options will be identified by the Fund to the Trust's
custodian to insure that the use of such investments is unleveraged.
The Fund may write options in connection with buy-and-write
transactions; that is, the Fund may purchase a security and concurrently write a
call option against that security. If the call option is exercised in such a
transaction, the Fund' maximum gain will be the premium received by it for
writing the option, adjusted upward or downward by the difference between the
Fund's purchase price of the security and the exercise price of the option. If
the option is not exercised and the price of the underlying security declines,
the amount of such decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund's return will be the premium received from
writing the put option minus the amount by which the market price of the
security is below the exercise price.
Limitations and Risks of Options and Futures Activity
- -----------------------------------------------------
The Fund will engage in transactions in futures contracts or options
only as a hedge against changes resulting from market conditions which produce
changes in the values of its securities or the securities which it intends to
purchase (e.g., to replace portfolio securities which will mature in the near
future) and, subject to the limitations described below, to enhance return. The
Fund will not purchase any futures contract or purchase any call option if,
immediately thereafter, more than one third of the Fund's net assets would be
represented by long futures contracts or call options. The Fund will not write a
covered call or put option if, immediately thereafter, the aggregate value of
the assets (securities in the case of written
8
<PAGE>
calls and cash or cash equivalents in the case of written puts) underlying all
such options, determined as of the dates such options were written, would exceed
25% of the Fund's net assets. In addition, the Fund may not establish a position
in a commodity futures contract or purchase or sell a commodity option contract
for other than bona fide hedging purposes if immediately thereafter the sum of
the amount of initial margin deposits and premiums required to establish such
positions for such nonhedging purposes would exceed 5% of the market value of
the Fund's net assets.
Although effective hedging can generally capture the bulk of a desired
risk adjustment, no hedge is completely effective. The Fund's ability to hedge
effectively through transactions in futures and options depends on the degree to
which price movements in its holdings correlate with price movements of the
futures and options.
Some positions in 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 hedge their securities and might, in some cases, require the Fund to
deposit cash to meet applicable market requirements. The Fund will enter into an
option or futures position only if it appears to be a liquid investment.
U.S. Government Securities
- --------------------------
In addition to direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, notes, certificates and bonds), the types of U.S. Government
securities in which the Fund may invest generally include obligations issued or
guaranteed by U.S. Government agencies or instrumentalities or mixed ownership
Government corporations, whose securities are backed by:
- the full faith and credit of the U.S. Treasury (such as
instruments of the Government National Mortgage Association);
- the discretionary authority of the U.S. Government to purchase
certain obligations of agencies or instrumentalities (such as
instruments of the Federal National Mortgage Association);
- the credit of the agency or instrumentality issuing the
obligations (such as instruments of a Federal Home Loan Bank,
Federal Farm Credit Banks, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation);
or
9
<PAGE>
- a guarantee of principal or interest by the U.S. Government or
a U.S. Government agency or instrumentality and, with respect
to any unguaranteed principal or interest, U.S. Government
obligations held in a segregated account.
Mortgage-Related Securities
- ---------------------------
Mortgage-related securities generally represent an ownership interest
in a pool of residential mortgage loans. The majority of these loans are made to
purchasers of 1-4 family homes. The terms and characteristics of the mortgage
instruments are generally uniform within a pool, but may vary among pools.
When-Issued Securities
- ----------------------
The Fund may purchase "when-issued" securities, which are traded on a
price or yield basis prior to actual issuance. Such purchases will be made only
to achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs in the U.S. Treasury
market when dealers begin to trade a new issue of bonds or notes shortly after a
Treasury financing is announced, but prior to the actual sale of the securities.
Similarly, securities to be created by a merger of companies may also be traded
prior to the actual consummation of the merger. Such transactions may involve a
risk of loss if the value of the securities falls below the price committed to
prior to actual issuance. The Trust's custodian will establish a segregated
account for the Fund when it 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.
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. Repurchase agreements could involve certain risks in the event of
default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
Repurchase agreements will be limited to 30% of the Fund's total assets, except
that repurchase agreements extending for more than seven days and other illiquid
securities will be limited to 5% of the Fund's net assets.
10
<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.
Foreign Investments
- -------------------
The Fund reserves the right to invest varying amounts in securities of
non-U.S. issuers. To the extent the Fund invests in securities of issuers in
less developed countries or emerging foreign markets, it will be subject to a
variety of additional risks, including risks associated with political
instability, economies based on relatively few industries, lesser market
liquidity, high rates of inflation, significant price volatility of portfolio
holdings and high levels of external debt in the relevant country.
Although the Fund may invest in securities denominated in foreign
currencies, the Fund values its securities and other assets in U.S. dollars. As
a result, the net asset value of the Fund's shares may fluctuate with U.S.
dollar exchange rates as well as with price changes of the Fund's securities in
the various local markets and currencies. Thus, an increase in the value of the
U.S. dollar compared to the currencies in which the Fund makes its investments
could reduce the effect of increases and magnify the effect of decreases in the
prices of the Fund's securities in their local markets. Conversely, a decrease
in the value of the U.S. dollar will have the opposite effect of magnifying the
effect of increases and reducing the effect of decreases in the prices of the
Fund's securities in the local markets.
Currency Transactions
- ---------------------
The Fund 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
11
<PAGE>
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are not commodities and are entered into in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. Although spot and forward contracts will be used primarily to
protect the Fund from adverse currency movements, they also involve the risk
that anticipated currency movements will not be accurately predicted, which may
result in losses to the Fund. This method of protecting the value of the Fund's
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange that can be achieved at some future point in
time. Although such contracts tend to minimize the risk of loss due to a decline
in the value of hedged currency, they tend to limit any potential gain that
might result should the value of such currency increase.
Rule 144A Securities
- --------------------
Subject to the restrictions on illiquid and restricted securities noted
above, the Fund may buy or sell restricted securities in accordance with Rule
144A under the Securities Act of 1933 ("Rule 144A Securities"). Securities may
be resold pursuant to Rule 144A under certain circumstances only to be qualified
institutional buyers as defined in the rule, and the markets and trading
practices for such securities are relatively new and still developing; depending
on the development of such markets, such Rule 144A Securities may be deemed to
be liquid as determined by or in accordance with methods adopted by the
Trustees. Under such methods the following factors are considered, among others:
the frequency of trades and quotes for the security, the number of dealers and
potential purchasers in the market, market making activity, and the nature of
the security and marketplace trades. Investments in Rule 144A Securities could
have the effect of increasing the level of the Fund's illiquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing such securities. Also, the Fund may be adversely impacted by the
possible illiquidity and subjective valuation of such securities in the absence
of a market for them.
Swap Arrangements
- -----------------
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below. In an
interest rate swap, the Fund could agree for a specified period to pay a bank or
investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an assumed figure selected by the parties for this
purpose) in exchange for agreement by the bank or investment banker to pay the
Fund a fixed rate of interest on the notional principal amount. In a currency
swap, the Fund would agree with the other party to exchange cash flows based on
the relative differences in values of a notional amount of two (or more)
currencies; in an index swap, the Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices. Purchase
of a cap entitles the purchaser to receive payments from the seller on a
notional amount to the extent
12
<PAGE>
that the selected index exceeds an agreed upon interest rate or amount whereas
purchase of a floor entitles the purchaser to receive such payments to the
extent the selected index falls below an agreed-upon interest rate or amount. A
collar combines a cap and a floor.
Most swaps entered into by the Fund will be on a net basis; for
example, in an interest rate swap, amounts generated by application of the fixed
rate and the floating rate to the notional principal amount would first offset
one another, with the Fund either receiving or paying the difference between
such amounts. In order to be in a position to meet any obligations resulting
from swaps, the Fund will set up a segregated custodial account to hold
appropriate liquid assets, including cash; for swaps entered into on a net
basis, assets will be segregated having a daily net asset value equal to any
excess of the Fund's accrued obligations over the accrued obligations of the
other party, while for swaps on other than a net basis assets will be segregated
having a value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a part of the Fund's portfolio.
However, the Fund may enter into such arrangements for income purposes to the
extent permitted by the CFTC for entities which are not commodity pool
operators, such as the Fund. In entering a swap arrangement, the Fund is
dependent upon the creditworthiness and good faith 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.
Industry Classifications
- ------------------------
In determining how much of the Fund's portfolio is invested in a given
industry, the following industry classifications are currently used. Securities
issued or guaranteed as to principal or interest by the U.S. Government or its
agencies or instrumentalities or mixed-ownership Government corporations or
sponsored enterprises (including repurchase agreements involving U.S. Government
securities to the extent excludable under relevant regulatory interpretations)
are excluded. Securities issued by foreign governments are also excluded.
Companies engaged in the business of financing will be classified according to
the industries of their parent companies or industries that otherwise most
affect such financing companies. Issuers of asset-backed pools will be
classified as separate industries based on the
13
<PAGE>
nature of the underlying assets, such as mortgages, credit card receivables,
etc. "Asset-backed -- Mortgages" includes pools of nongovernment backed
mortgages.
Aerospace
Airline
Asset-backed -- Mortgages
Asset-backed -- Credit Card
Receivables
Automotive
Automotive Parts
Bank
Building
Business Services
Cable
Capital Goods & Equipment
Chemical
Computer Software & Service
Conglomerate
Consumer Goods & Services
Container
Cosmetics
Diversified
Drug
Electric
Electric Equipment
Electronic Components
Electronic Equipment
Entertainment
Financial Service
Food & Beverage
Forest Products
Gaming & Lodging
Gas
Gas Transmission
Grocery
Healthcare & Hospital
Management
Hospital Supply
Hotel & Restaurant
Insurance
Machinery
Media
Metal & Mining
Office Equipment
Oil Production
Oil Refining & Marketing
Oil Service
Paper Products
Personal Care
Photography
Plastics
Printing & Publishing
Railroad
Real Estate & Building
Recreation
Retail Trade
Savings & Loan
Shipping & Transportation
Technology &
Communications
Telephone
Textile & Apparel
Tobacco
Truckers
Trust Certificates--
Governmental Related
Lending
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
As indicated in the Fund's Prospectus, the Fund may invest in long-term and
short-term debt securities. The Fund may invest in cash and short-term
securities for temporary defensive purposes when, in the opinion of Investment
Manager, such a position is more likely to provide protection against
unfavorable market conditions than adherence to other investment policies.
Certain debt securities and money market instruments in which the Fund may
invest are described below.
U.S. Government Securities. U.S. Government securities consist of various
types of marketable securities issued by the U.S. Treasury, i.e., bills, notes
and bonds. Such securities are direct obligations of the U.S. Government and
differ mainly in the lengths of their maturities. Treasury bills, the most
frequently issued marketable government security, have a maturity of up to one
year and are issued on a discount basis. U.S. Government securities also include
securities issued under the U.S. Department of Treasury's STRIPS program,
14
<PAGE>
which is described in the Fund's Prospectus. Government agency securities are
also U.S. Government securities. Government agency securities consist of fixed
income securities issued or guaranteed by agencies and instrumentalities of the
U.S. Government, including the various types of instruments currently
outstanding or which may be offered in the future. See prior discussion of U.S.
Government Securities.
Custodial Receipts. Custodial receipts evidencing the ownership of future
interest payments, principal payments or both on U.S. Treasury notes or bonds
may be purchased in the form of "Treasury Receipts" ("TRs"), "Treasury
Investment Growth Receipts" ("TIGRs") and "Certificates of Accrual on Treasury
Securities" ("CATS") and in connection with similar programs as described in the
Fund's Prospectus.
Bank Money Investments. Bank money investments include but are not limited
to certificates of deposit, bankers' acceptances and time deposits. Certificates
of deposit are generally short-term (i.e., less than one year), interest-bearing
negotiable certificates issued by commercial banks or savings and loan
associations against funds deposited in the issuing institution. A banker's
acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods). A banker's acceptance may be obtained
from a domestic or foreign bank including a U.S. branch or agency of a foreign
bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. The Fund will not invest
in any such bank money investment unless the investment is issued by a U.S. bank
that is a member of the Federal Deposit Insurance Corporation ("FDIC"),
including any foreign branch thereof, a U.S. branch or agency of a foreign bank,
a foreign branch of a foreign bank or a savings bank or savings and loan
association that is a member of the FDIC and which at the date of investment has
capital, surplus and undivided profits (as of the date of its most recently
published financial statements) in excess of $50 million. The Fund will not
invest in time deposits maturing in more than seven days and will not invest
more than 10% of its total assets in time deposits maturing in two to seven
days.
U.S. branches and agencies of foreign banks are offices of foreign banks
and are not separately incorporated entities. They are chartered and regulated
either federally or under state law. U.S. federal branches or agencies of
foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such branches elect FDIC insurance. Unlike U.S. branches of foreign banks,
U.S. agencies of foreign banks may not accept deposits and thus are not eligible
for FDIC insurance. Both branches and agencies can maintain credit balances,
which are funds received by the office
15
<PAGE>
incidental to or arising out of the exercise of their banking powers and can
exercise other commercial functions, such as lending activities.
Short-Term Corporate Debt Instruments. Short-term corporate debt
instruments include commercial paper to finance short-term credit needs (i.e.,
short-term, unsecured promissory notes) issued by corporations including but not
limited to (a) domestic or foreign bank holding companies or (b) their
subsidiaries or affiliates where the debt instrument is guaranteed by the bank
holding company or an affiliated bank or where the bank holding company or the
affiliated bank is unconditionally liable for the debt instrument. Commercial
paper is usually sold on a discounted basis and has a maturity at the time of
issuance not exceeding nine months.
Commercial Paper Ratings. Commercial paper investments at the time of
purchase will be rated A by Standard & Poor's Corporation ("S&P") or Prime by
Moody's Investors Service, Inc. ("Moody's"), or, if not rated, issued by
companies having an outstanding long-term unsecured debt issue rated at least A
by S&P or by Moody's. The money market investments in corporate bonds and
debentures (which must have maturities at the date of settlement of one year or
less) must be rated at the time of purchase at least A by S&P or by Moody's.
Commercial paper rated A (highest quality) by S&P is issued by entities
which have liquidity ratios which are adequate to meet cash requirements.
Long-term senior debt is rated A or better, although in some cases BBB credits
may be allowed. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. The relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1, A-2
or A-3. (Those A-1 issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and 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.
16
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and principal officers of the Trust, their addresses, and
their principal occupations and positions with certain affiliates of Investment
Manager are set forth below.
*+Peter C. Bennett, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. He is 58. His principal occupation is Executive Vice
President and Director of State Street Research & Management Company. During the
past five years he has also served as Senior Vice President and as Vice
President of State Street Research & Management Company. Mr. Bennett's other
principal business affiliation is Director, State Street Research Investment
Services, Inc.
+Steve A. Garban, The Pennsylvania State University, 208 Old Main,
University Park, PA 16802, serves as Trustee of the Trust. He is 59. He is
retired and was formerly Senior Vice President Finance and Operations and
Treasurer Emeritus of The Pennsylvania State University.
+Malcolm T. Hopkins, 14 Brookside Road, Biltmore Forest, Asheville, NC
28803, serves as Trustee of the Trust. He is 68. He is engaged principally in
private investments. Previously, he was Vice Chairman of the Board and Chief
Financial Officer of St. Regis Corp.
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. He is 56. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as portfolio manager for State Street Research &
Management Company.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791, serves as
Trustee of the Trust. He is 70. He is engaged principally in private investments
and civic affairs, and is an author of business history. Previously, he was with
Morgan Guaranty Trust Company of New York.
+Robert A. Lawrence, Saltonstall & Co., 50 Congress Street, Boston, MA
02109 serves as Trustee of the Trust. He is 70. His principal occupation during
the past five years has been Partner, Saltonstall & Co., a private investment
firm.
- ------------------------
* or +, See footnotes on page 19.
17
<PAGE>
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 45. His principal occupation is Executive Vice
President, Treasurer, Chief Financial Officer and Director of State Street
Research & Management Company. During the past five years he has also served as
Executive Vice President and Chief Financial Officer of New England Investment
Companies and as Senior Vice President and Vice President of New England Mutual
Life Insurance Company. Mr. Maus's other principal business affiliations include
Executive Vice President, Treasurer, Chief Financial Officer and Director of
State Street Research Investment Services, Inc.
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111, serves
as Secretary and General Counsel of the Trust. He is 41. His principal
occupation is Executive Vice President, General Counsel and Secretary of State
Street Research & Management Company. During the past five years he has also
served as Senior Vice President of State Street Research & Management Company
and as Senior Vice President, General Counsel and Assistant Secretary of The
Boston Company, Inc., Boston Safe Deposit and Trust Company and The Boston
Company Advisors, Inc. Mr. McNamara's other principal business affiliations
include Senior Vice President, Clerk and General Counsel of State Street
Research Investment Services, Inc.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 64. He is retired, having served during the past
five years, until October 1992, as Executive Vice President, Chief Operating
Officer and Director of Hewlett-Packard Company.
+Thomas L. Phillips, 141 Spring Street, Lexington, MA 02173, serves as
Trustee of the Trust. He is 72. He is retired and was formerly Chairman of the
Board and Chief Executive Officer of Raytheon Company, of which he remains a
Director.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves as
Trustee of the Trust. He is 58. His principal occupations during the past five
years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
59. His principal occupation during the past five years has been Jay W.
Forrester Professor of Management at Sloan School of Management, Massachusetts
Institute of Technology.
- ------------------------
* or +, See footnotes on page 19.
18
<PAGE>
*+Thomas A. Shively, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. He is 42. His principal occupation is Executive Vice
President and Director of State Street Research & Management Company. During the
past five years he has also served as Senior Vice President of State Street
Research & Management Company. Mr. Shively's other principal business
affiliations include Director of State Street Research Investment Services, Inc.
*+Ralph F. Verni, One Financial Center, Boston, MA 02111, serves as
Chairman of the Board, President, Chief Executive Officer and Trustee of the
Trust. He is 54. His principal occupation is Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research & Management
Company. During the past five years he also served as President and Chief
Executive Officer of New England Investment Companies and as Chief Investment
Officer of New England Mutual Life Insurance Company. Mr. Verni's other
principal business affiliations include Chairman of the Board and Director of
State Street Research Investment Services, Inc., and, until February 1996, prior
positions as President and Chief Executive Officer.
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 72. He is retired and was formerly Of Counsel for
the law firm Choate, Hall & Stewart. He was a partner of that firm from 1960 to
1987.
As of January 31, 1997, 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
none of the Fund's outstanding Class B, Class C and Class D shares.
- -----------------
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the Investment Company Act of 1940 because
of their affiliations with the Fund's investment adviser.
+ Serves as a Trustee and/or officer of one or more of the following
investment companies, each of which has an advisory or distribution
relationship with the Investment Manager or its affiliates: State Street
Research Equity Trust, State Street Research Financial Trust, State
Street Research Income Trust, State Street Research Money Market Trust,
State Street Research Tax-Exempt Trust, State Street Research Capital
Trust, State Street Research Exchange Trust, State Street Research
Growth Trust, State Street Research Master Investment Trust, State
Street Research Securities Trust, State Street Research Portfolios, Inc.
and Metropolitan Series Fund, Inc.
19
<PAGE>
As of January 31, 1997, the following persons or entities were the record
and/or beneficial owners of the approximate amounts of each class of shares of
the Fund as set forth beside their names:
Shareholder %
----------- -------
Class A Merrill Lynch 39.2
Class B Merrill Lynch 14.4
Class C State Street Bank 30.7
Amalgamated Bank 48.7
Chase Manhattan Bank, N.A. 10.8
Class D Merrill Lynch 62.1
The full name and address of each of the above persons or entities are
as follows:
Merrill Lynch, Pierce, Fenner & Smith, Inc. (a)
One Liberty Plaza, 165 Broadway, New York, NY 10080
State Street Bank and Trust Company (a) (b)
225 Franklin Street, Boston, MA 02111
Amalgamated Bank of New York (a) (c)
P.O. Box 370, Cooper Station, New York, NY 10003
Chase Manhattan Bank, N.A.(a)(d)
770 Broadway
New York, NY 10003
(a) The Fund believes that each above-named record holder does not have
beneficial ownership of such shares.
(b) State Street Bank and Trust Company holds such shares as custodian for
individual retirement accounts.
(c) Amalgamated Bank holds such shares as custodian for various retirement
accounts.
(d) Chase Manhattan Bank, N.A. holds such shares as trustee under certain
employee benefit plans serviced by Metropolitan Life Insurance Company
("Metropolitan")
Ownership of 25% or more of a voting security is deemed "control" as
defined in the 1940 Act. So long as 25% of a class of shares is so owned, such
owners will be presumed to be in control of such class of shares for purposes of
voting on certain matters submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
20
<PAGE>
The Trustees have been compensated as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(1) (2) (3)
Name of Aggregate Total
Trustee Compensation Compensation
From Trust (a) From Trust and
Complex Paid
to Trustees(b)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Steve A. Garban $ 0(c) $ 34,750
Malcolm T. Hopkins $ 0(c) $ 34,750
Edward M. Lamont $ 9,700 $ 59,375
Robert A. Lawrence $ 9,700 $ 92,125
Dean O. Morton $ 10,900 $ 96,125
Thomas L. Phillips $ 9,700 $ 59,375
Toby Rosenblatt $ 9,700 $ 59,375
Michael S. Scott Morton $ 12,500 $ 100,325
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $ 10,900 $ 63,375
</TABLE>
(a) For the fiscal year ended October 31, 1996. Includes compensation from
multiple series of the Trust. See ADistribution of Shares" for a listing of
series.
(b) Includes compensation on behalf of 31 funds representing all series of
investment companies for which the Investment Manager serves as primary
investment adviser, series of Metropolitan Series Fund, Inc., for which the
Investment Manager serves as sub-investment adviser, and series of State
Street Research Portfolios, Inc., for which State Street Research
Investment Services, Inc. serves as distributor. ATotal Compensation from
Trust and Complex Paid to Trustees" is for the 12 months ended December 31,
1996. The Trust does not provide any pension or retirement benefits for the
Trustees.
(c) Did not serve as a Trustee during the fiscal year ended October 31, 1996.
21
<PAGE>
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Advisory
Agreement provides that the Investment Manager shall furnish the Fund with an
investment program, office facilities and such investment advisory, research and
administrative services as may be required from time to time. The Investment
Manager compensates all executive and clerical personnel and Trustees of the
Trust if such persons are employees of the Investment Manager or its affiliates.
The Investment Manager is an indirect wholly-owned subsidiary of Metropolitan.
The advisory fee payable monthly by the Fund to the Investment Manager
is computed as a percentage of the average of the value of the net assets of the
Fund as determined at the close of the New York Stock Exchange (the "NYSE") on
each day the NYSE is open for trading, at the annual rate of 0.65% of the net
assets of the Fund. For the fiscal years ended October 31, 1996, 1995 and 1994,
the Trust paid the Investment Manager investment advisory fees of $4,723,842,
$4,651,813 and $5,266,797, respectively.
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund from year to year as long as it is approved at least
annually both (i) by a vote of a majority of the outstanding voting securities
of the Fund (as defined in the Investment Company Act of 1940) 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. The Advisory Agreement terminates 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 to be an assignment.
Under a Funds Administration Agreement between the Investment Manager
and the Distributor, the Distributor provides assistance to the Investment
Manager in performing certain fund administration services for the Trust, such
as assistance in determining the daily net asset value of shares of series of
the Trust and in preparing various reports required by regulations.
Under a Shareholders' Administrative Services Agreement between the
Trust and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Fund, and is entitled to
reimbursements of its costs for providing such services. Under certain
arrangements for Metropolitan to provide subadministration services,
Metropolitan may receive a fee for the maintenance of certain share ownership
records for participants in
22
<PAGE>
sponsored arrangements, employee benefit plans, and similar programs or plans,
through or under which Fund shares may be purchased.
Under the Code of Ethics of the Investment Manager, its employees in
Boston, where investment management operations are conducted, are only permitted
to engage in personal securities transactions in accordance with certain
conditions relating to an employee's position, the identity of the security, the
timing of the transaction, and similar factors. Such employees must report their
personal securities transactions quarterly and supply broker confirmations of
such transactions to the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by the Distributor. The Fund offers
four classes of shares which may be purchased at the next determined net asset
value per share plus, in the case of all classes except Class C shares, a sales
charge which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B and Class
D shares). General information on how to buy shares of the Fund, as well as
sales charges involved, is set forth under "Purchase of Shares" in the
Prospectus. The following supplements that information.
Public Offering Price - The public offering price for each class of
shares of the Fund is based on their net asset value determined as of the close
of regular trading of the NYSE on the day the purchase order is received by
State Street Research Shareholder Services provided that the order is received
prior to the close of the NYSE on that day; otherwise the net asset value used
is that determined as of the close of the NYSE on the next day it is open for
unrestricted trading. When a purchase order is placed through a dealer, that
dealer is responsible for transmitting the order promptly to State Street
Research Shareholder Services in order to permit the investor to obtain the
current price. Any loss suffered by an investor which results from a dealer's
failure to transmit an order promptly is a matter for settlement between the
investor and the dealer.
Reduced Sales Charges - For purposes of determining whether a purchase
of Class A shares qualifies for reduced sales charges, the term "person"
includes: (i) an individual, or an individual combining with his or her spouse
and their children and purchasing for his, her or their own account; (ii) a
"company" as defined in Section 2(a)(8) of the 1940 Act; (iii) a trustee or
other fiduciary purchasing for a single trust estate or single fiduciary account
(including a pension, profit sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code);
(iv) a tax-exempt organization under Section 501(c)(3) or (13) of the Internal
Revenue Code; and (v) an employee benefit plan of a single employer or of
affiliated employers.
Investors may purchase Class A shares of the Fund at reduced sales
charges by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or
23
<PAGE>
any combination of Class A shares of "Eligible Funds" as designated by the
Distributor within a 13-month period. The sales charge applicable to each
purchase made pursuant to a Letter of Intent will be that which would apply if
the total dollar amount set forth in the Letter of Intent were being bought in a
single transaction. Purchases made within a 90-day period prior to the execution
of a Letter of Intent may be included therein; in such case the date of the
earliest of such purchases marks the commencement of the 13-month period.
An investor may include toward completion of a Letter of Intent the
value (at the current public offering price) of all of his or her Class A shares
of the Fund and of any of the other Class A shares of Eligible Funds held of
record as of the date of his or her Letter of Intent, plus the value (at the
current offering price) as of such date of all of such shares held by any
"person" described herein as eligible to join with the investor in a single
purchase. Class B, Class C and Class D shares may also be included in the
combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Class C Shares - Class C shares are currently available to certain
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants (currently a minimum of 100 eligible
employees), service arrangements, or similar factors; insurance companies;
investment companies; endowment funds of nonprofit organizations with
substantial minimum assets (currently a minimum of $10,000,000); and other
similar institutional investors.
24
<PAGE>
Reorganizations - In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined 1940 Act, as amended, the Fund may issue its shares at net asset
value (or more) to such entities or to their security holders.
Redemptions - The Fund reserves the right to pay redemptions in kind
with portfolio securities in lieu of cash. In accordance with its election
pursuant to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of
redemption proceeds paid in cash. Although it has no present intention to do so,
the Fund may, under unusual circumstances, limit redemptions in cash with
respect to each shareholder during any ninety-day period to the lesser of (i)
$250,000 or (ii) 1% of the net asset value of the Fund at the beginning of such
period. In connection with any redemptions paid in kind with portfolio
securities, brokerage and other costs may be incurred by the redeeming
shareholder in the sale of the securities received.
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily
as of the close of the NYSE, ordinarily 4 P.M. New York City time, Monday
through Friday, on each day during which the NYSE is open for unrestricted
trading. The NYSE is currently closed on New Year's Day, Presidents Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
The net asset value per share of the Fund is computed by dividing the
sum of the value of the securities held by the Fund plus any cash or other
assets minus all liabilities by the total number of outstanding shares of the
Fund at such time. Any expenses, except for extraordinary or nonrecurring
expenses, borne by the Fund, including the investment management fee payable to
the Investment Manager, are accrued daily.
In determining the values of portfolio assets, the Trustees may utilize
one or more pricing services to value certain securities for which market
quotations are not readily available on a daily basis. Most debt securities are
valued on the basis of data provided by such pricing services. Since the Fund is
comprised substantially of debt securities under normal circumstances, most of
the Fund's assets are therefore valued on the basis of such data from the
pricing services. The pricing services may provide prices determined as of times
prior to the close of the NYSE.
In general, securities are valued as follows. Securities which are
listed or traded on the New York or American Stock Exchange are valued at the
price of the last quoted sale on the respective exchange for that day.
Securities which are listed or traded on a national securities exchange or
exchanges, but not on the New York or American Stock Exchange, are valued at the
price of the last quoted sale on the exchange for that day prior to the close of
the NYSE. Securities not listed on any national securities exchange which are
traded "over the counter"
25
<PAGE>
and for which quotations are available on the National Association of Securities
Dealers' NASDAQ System, or other system, are valued at the closing price
supplied through such system for that day at the close of the NYSE. Other
securities are, in general, valued at the mean of the bid and asked quotations
last quoted prior to the close of the NYSE if there are market quotations
readily available, or in the absence of such market quotations, then at the fair
value thereof as determined by or under authority of the Trustees of the Trust
with the use of such pricing services as may be deemed appropriate or
methodologies approved by the Trustees.
Short-term debt instruments issued with a maturity of one year or less
which have a remaining maturity of 60 days or less are valued using the
amortized cost method, provided that during any period in which more than 25% of
the Fund's total assets is invested in short-term debt securities the current
market value of such securities will be used in calculating net asset value per
share in lieu of the amortized cost method. The amortized cost method is used
when the value obtained is fair value. Under the amortized cost method of
valuation, the security is initially valued at cost on the date of purchase (or
in the case of short-term debt instruments purchased with more than 60 days
remaining to maturity, the market value on the 61st day prior to maturity), and
thereafter a constant amortization to maturity of any discount or premium is
assumed regardless of the impact of fluctuating interest rates on the market
value of the security.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
- ------------------
The Fund's portfolio turnover rate is determined by dividing the lesser
of securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The portfolio turnover rates for the fiscal years ended October
31, 1995 and 1996 were 105.57% and 88.79%, respectively. The Fund reserves full
freedom with respect to portfolio turnover, as described in the Prospectus.
Brokerage Allocation
- --------------------
The Investment Manager's policy is to seek for its clients, including
the Fund, what in the Investment Manager's judgment will be the best overall
execution of purchase or sale orders and the most favorable net prices in
securities transactions consistent with its judgment as to the business
qualifications of the various broker or dealer firms with whom the Investment
Manager may do business, and the Investment Manager may not necessarily choose
the broker offering the lowest available commission rate. Decisions with respect
to the market where the transaction is to be completed, to the form of
transaction (whether principal or agency), and to the allocation of orders among
brokers or dealers are made in accordance with
26
<PAGE>
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 the transactions for the
Fund occur. Against this background, the Investment Manager evaluates the
reasonableness of a commission or a net price with respect to a particular
transaction by considering such factors as difficulty of execution or security
positioning by the executing firm. The Investment Manager may or may not solicit
competitive bids based on its judgment of the expected benefit or harm to the
execution process for that transaction.
When it appears that a number of firms could satisfy the required
standards in respect of a particular transaction, consideration may also be
given to services other than execution services which such firms have provided
in the past or may provide in the future. Negotiated commission rates and
prices, however, are based upon the Investment Manager's judgment of the rate
which reflects the execution requirements of the transaction without regard to
whether the broker provides services in addition to execution. Among such other
services are the supplying of supplemental investment research; general
economic, political and business information; analytical and statistical data;
relevant market information, quotation equipment and services; reports and
information about specific companies, industries and securities; purchase and
sale recommendations for stocks and bonds; portfolio strategy services;
historical statistical information; market data services providing information
on specific issues and prices; financial publications; proxy voting data and
analysis services; technical analysis of various aspects of the securities
markets, including technical charts; computer hardware used for brokerage and
research purposes; computer software and databases, including those used for
portfolio analysis and modeling; and portfolio evaluation services and relative
performance of accounts.
Certain nonexecution services provided by broker-dealers may in turn be
obtained by the broker-dealers from third parties who are paid for such services
by the broker-dealers. The Investment Manager has an investment of less than ten
percent of the outstanding equity of one such third party which provides
portfolio analysis and modelling and other research and investment
decision-making services integrated into a trading system developed and licensed
by the third party to others. The Investment Manager could be said to benefit
indirectly if in the future it allocates brokerage to a broker-dealer who in
turn pays this third party for services to be provided to the Investment
Manager.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. Some services may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Investment Manager allocates the cost
of such services to determine the appropriate proportion
27
<PAGE>
of the cost which is allocable to purposes other than research or investment
decision-making and is therefore paid directly by the Investment Manager. Some
research and execution services may benefit the Investment Manager's clients as
a whole, while others may benefit a specific segment of clients. Not all such
services will necessarily be used exclusively in connection with the accounts
which pay the commissions to the broker-dealer producing the services.
The Investment Manager has no fixed agreements or understandings with
any broker-dealer as to the amount of brokerage business which that firm may
expect to receive for services supplied to the Investment Manager or otherwise.
There may be, however, understandings with certain firms that in order for such
firms to be able to continuously supply certain services, they need to receive
allocation of a specified amount of brokerage business. These understandings are
honored to the extent possible in accordance with the policies set forth above.
It is not the Investment Manager's policy to intentionally pay a firm a
brokerage commission higher than that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided. However, the Fund and the Investment Manager are aware that
this is an area where differences of opinion as to fact and circumstances may
exist, and in such circumstances, if any, rely on the provisions of Section
28(e) of the Securities Exchange Act of 1934, to the extent applicable. For the
fiscal years ended October 31, 1996, 1995 and 1994, the Fund paid no brokerage
commissions in secondary trading.
During and at the end of its most recent fiscal year, the Fund held in
its portfolio no securities of any entity that might be deemed to be a regular
broker-dealer of the Fund as defined under the 1940 Act.
In the case of the purchase of fixed income securities in underwriting
transactions, the Investment Manager follows any instructions received from its
clients as to the allocation of new issue discounts, selling concessions and
designations to brokers or dealers which provide the client with research,
performance evaluation, master trustee and other services. In the absence of
instructions from the client, the Investment Manager may make such allocations
to broker-dealers which have provided the Investment Manager with research and
brokerage services.
When more than one client of the Investment Manager is seeking to buy
or sell the same security, the sale or purchase is carried out in a manner which
is considered fair and equitable to all accounts. In allocating investments
among various clients (including in what sequence orders for trades are placed),
the Investment Manager will use its best business judgment and will take into
account such factors as the investment objectives of the clients, the amount of
investment funds available to each, the amount already committed for each client
to a specific investment and the relative risks of the investments, all in order
to provide on
28
<PAGE>
balance a fair and equitable result to each client over time. Although sharing
in large transactions may sometimes affect price or volume of shares acquired or
sold, overall it is believed there may be an advantage in execution. The
Investment Manager may follow the practice of grouping orders of various clients
for execution to get the benefit of lower prices or commission rates. In certain
cases where the aggregate order may be executed in a series of transactions at
various prices, the transactions are allocated as to amount and price in a
manner considered equitable to each so that each receives, to the extent
practicable, the average price of such transactions. Exceptions may be made
based on such factors as the size of the account and the size of the trade. For
example, the Investment Manager may not aggregate trades where it believes that
it is in the best interests of clients not to do so, including situations where
aggregation might result in a large number of small transactions with consequent
increased custodial and other transactional costs which may disproportionately
impact smaller accounts. Such disaggregation, depending on the circumstances,
may or may not result in such accounts receiving more or less favorable
execution relative to other clients.
CERTAIN TAX MATTERS
Federal Income Taxation of the Fund -- In General
- -------------------------------------------------
As stated in the Prospectus, the Fund intends to qualify and elect to
be treated each taxable year as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"),
although it cannot give complete assurance that it will do so. Accordingly, the
Fund must, among other things, (a) derive at least 90% of its gross income in
each taxable year from dividends, interest, payments with respect to securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, or other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies (the "90% test"); (b) derive less than
30% of its gross income in each taxable year from the sale or other disposition
of any of the following held for less than three months (the "30% test"): (i)
stock or securities; (ii) options, futures, or forward contracts (other than
options, futures, or forward contracts on foreign currencies), or (iii) foreign
currencies (or options, futures, or forward contracts on foreign currencies) but
only if such currencies (or options, futures, or forward contracts) are not
directly related to the Fund's principal business of investing in stocks or
securities (or options and futures with respect to stocks or securities); (c)
satisfy certain diversification requirements; and (d) in order to be entitled to
utilize the dividends paid deduction, distribute annually at least 90% of its
investment company taxable income (determined without regard to the deduction
for dividends paid).
The 30% test will limit the extent to which the Fund may sell
securities held for less than three months, write options which expire in less
than three months, and effect closing transactions with respect to call or put
options that have been written or purchased within the preceding three months.
(If the Fund purchases a put option for the purpose of hedging an
29
<PAGE>
underlying portfolio security, the acquisition of the option is treated as a
short sale of the underlying security unless, for purposes only of the 30% test,
the option and the security are acquired on the same date.) Finally, as
discussed below, this requirement may also limit investments by the Fund in
options on stock indices, listed options on nonconvertible debt securities,
futures contracts, options on interest rate futures contracts and certain
foreign currency contracts.
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income or accumulated earnings and profits. Also, the
shareholders, if they received a distribution in excess of current or
accumulated earnings and profits, would receive a return of capital that would
reduce the basis of their shares of the Fund.
The Fund will be liable for a nondeductible 4% excise tax on amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement. To avoid the tax, during each calendar year the Fund
must distribute an amount equal to at least 98% of the sum of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, and its capital gain net income for the 12-month period ending on October
31, in addition to any undistributed portion of the respective balances from the
prior year. The Fund intends to make sufficient distributions to avoid this 4%
excise tax.
Federal Income Taxation of the Fund's Investments
- -------------------------------------------------
Original Issue Discount. For federal income tax purposes, debt
securities purchased by the Fund may be treated as having original issue
discount. Original issue discount represents interest for federal income tax
purposes and can generally be defined as the excess of the stated redemption
price at maturity of a debt obligation over the issue price. Original issue
discount is treated for federal income tax purposes as income earned by the
Fund, whether or not any income is actually received, and therefore is subject
to the distribution requirements of the Code. Generally, the amount of original
issue discount is determined on the basis of a constant yield to maturity which
takes into account the compounding of accrued interest. Under section 1286 of
the Code, an investment in a stripped bond or stripped coupon may result in
original issue discount.
Debt securities may be purchased by the Fund at a discount that exceeds
the original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for income tax
purposes. In the case of any debt security issued after July 18, 1984, having a
fixed maturity date of more than one year from the date of issue and having
market discount, the gain realized on disposition will be treated as interest
income to the extent it does
30
<PAGE>
not exceed the accrued market discount on the security (unless the Fund elects
to include such accrued market discount in income in the tax year to which it is
attributable). Generally, market discount is accrued on a daily basis. The Fund
may be required to capitalize, rather than deduct currently, part or all of any
direct interest expense incurred to purchase or carry any debt security having
market discount, unless the Fund makes the election to include market discount
currently. Because the Fund must include original issue discount in income, it
will be more difficult for the Fund to make the distributions required for the
Fund to maintain its status as a regulated investment company under Subchapter M
of the Code and to avoid the 4% excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may
be subject to provisions of the Code that (i) require inclusion of unrealized
gains or losses in the Fund's income for purposes of the 90% test, the 30% test,
the excise tax and the distribution requirements applicable to regulated
investment companies; (ii) defer recognition of realized losses; and (iii)
characterize both realized and unrealized gain or loss as short-term or
long-term gain or loss. Such provisions generally apply to, among other
investments, options on debt securities, indices on securities and futures
contracts.
Federal Income Taxation of Shareholders
- ---------------------------------------
Distributions generally are taxable to shareholders for the taxable
year in which they are received. However, dividends declared by the Fund in
October, November or December and made payable to shareholders of record on a
specified date in such a month are treated as received by such shareholders on
December 31, provided that the Fund pays the dividend during January of the
following calendar year.
Distributions, if any, 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 long-term capital gain,
even though, from an investment standpoint, it may constitute a partial return
of capital. In particular, investors should be careful to consider the tax
implications of buying shares just prior to a distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
DISTRIBUTION OF SHARES OF THE FUND
State Street Research Financial Trust is currently comprised of the
following series: State Street Research Government Income Fund, State Street
Research Strategic Portfolios: Conservative, State Street Research Strategic
Portfolios: Moderate and State Street Research Strategic Portfolios: Aggressive.
The Trustees of the Trust have authorized the Fund to issue
31
<PAGE>
four classes of shares: Class A, Class B, Class C and Class D shares. The
Trustees of the Trust have authority to issue an unlimited number of shares of
beneficial interest of separate series, $.001 par value per share. A "series" is
a separate pool of assets of the Trust which is separately managed and has a
different investment objective and different investment policies from those of
any other series. The Trustees have authority, without the necessity of a
shareholder vote, to create any number of new series or classes or to commence
the public offering of shares of any previously established series or class.
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (Class B and Class D shares). The Distributor may reallow all or
portions of such sales charges as concessions to dealers. For the fiscal years
ended October 31, 1994, 1995 and 1996, total sales charges on Class A shares
paid to the Distributor amounted to $1,134,461, $572,439 and $724,878,
respectively. For the same periods,$172,266,$70,689 and $89,615, respectively,
was retained by the Distributor after reallowance of concessions to dealers.
The differences in the price at which the Fund's Class A shares are
offered due to scheduled variations in sales charges, as described in the Fund's
Prospectus, result from cost savings inherent in economies of scale. Management
believes that the cost of sales efforts of the Distributor and broker-dealers
tends to decrease as the size of purchases increases, or does not involve any
incremental sales expenses as in the case of, for example, exchanges,
reinvestments or dividend investments at net asset value. Similarly, no
significant sales effort is necessary for sales of shares at net asset value to
certain Directors, Trustees, officers, employees, their relatives and other
persons directly or indirectly related to the Fund or associated entities. Where
shares of the Fund are offered at a reduced sales charge or without a sales
charge pursuant to sponsored arrangements and managed fee-based programs, the
amount of the sales charge reduction will similarly reflect the anticipated
reduction in sales expenses associated with such arrangements. The reduction in
sales expenses, and therefore the reduction in sales charge, will vary depending
on factors such as the size and other characteristics of the organization or
program, and the nature of its membership or the participants. The Fund reserves
the right to make variations in, or eliminate, sales charges at any time or to
revise the terms of or to suspend or discontinue sales pursuant to sponsored
arrangements at any time.
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
32
<PAGE>
having a net asset value of $1,000,000 or more. Shares sold with such
commissions payable are subject to a one-year contingent deferred sales charge
of 1.00% on any portion of such shares redeemed within one year following their
sale. After a particular purchase of Class A shares is made under the Letter of
Intent, the commission will be paid only in respect of that particular purchase
of shares. If the Letter of Intent is not completed, the commission paid will be
deducted from any discounts or commissions otherwise payable to such dealer in
respect of shares actually sold. If an investor is eligible to purchase shares
at net asset value on account of the Right of Accumulation, the commission will
be paid only in respect of the incremental purchase at net asset value.
For the periods shown below, the Distributor received contingent
deferred sales charges upon redemption of Class A, Class B and Class D shares of
the Fund and paid initial commissions to securities dealers for sales of such
shares as follows:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
October 31, 1996 October 31, 1995 October 31, 1994
---------------- ---------------- ----------------
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 $ 635,263 $ 180 $ 501,750 $ 0 $ 962,195
Class B $ 372,729 $ 973,303 $ 262,267 $ 423,866 $ 155,134 $ 905,438
Class D $ 1,828 $ 55,368 $ 1,189 $ 0 $ 3,754 $ 480
</TABLE>
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "Distribution Plan") under which the Fund may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of Class A, Class B and Class D shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to underwriters, securities dealers
and others engaged in the sale of shares, including payments to the Distributor
to be used to pay commissions and/or reimbursement to securities dealers (which
securities dealers may be affiliates of the Distributor) engaged in the
distribution and marketing of shares and furnishing ongoing assistance to
investors, (2) reimbursement of direct out-of-pocket expenditures incurred by
the Distributor in connection with the distribution and marketing of shares and
the servicing of investor accounts including special promotional fees and cash
and noncash incentives based upon sales by securities dealers, expenses relating
to the formulation and implementation of marketing strategies and promotional
activities such as direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising, the preparation, printing and
distribution of Prospectuses of the Fund and reports for recipients other than
existing shareholders of the Fund, and obtaining such information, analyses and
reports with respect to marketing and promotional activities and investor
accounts as the Fund may, from time to time, deem advisable, and (3)
reimbursement of expenses incurred by the Distributor in connection with the
maintenance or servicing of shareholder accounts including payments to
securities dealers
33
<PAGE>
and others in consideration of the provision of personal services to investors
and/or the maintenance of shareholder accounts and expenses associated with the
provision of personal services by the Distributor directly to investors. In
addition, the Distribution Plan is deemed to authorize the Distributor and the
Investment Manager to make payments out of general profits, revenues or other
sources to underwriters, securities dealers and others in connection with sales
of shares, to the extent, if any, that such payments may be deemed to be within
the scope of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class D shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class D
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class D shares (as the case may be) to make payments for personal
service and/or the maintenance or servicing of shareholder accounts. Proceeds
from the service fee will be used by the Distributor to compensate securities
dealers and others selling shares of the Fund for rendering service to
shareholders on an ongoing basis. Such amounts are based on the net asset value
of shares of the Fund held by such dealers as nominee for their customers or
which are owned directly by such customers for so long as such shares are
outstanding and the Distribution Plan remains in effect with respect to the
Fund. Any amounts received by the Distributor and not so allocated may be
applied by the Distributor as reimbursement for expenses incurred in connection
with the servicing of investor accounts. The distribution and servicing expenses
of a particular class will be borne solely by that class.
34
<PAGE>
During the fiscal year ended October 31, 1996, the Fund paid the
Distributor fees under the Distribution Plan and the Distributor used all of
such payments for expenses incurred on behalf of the Fund as follows:
Class A Class B Class D
------- ------- -------
Advertising $ 0 $ 0 $ 989
Printing and mailing
of prospectuses to
other than current
shareholders 0 0 357
Compensation to dealers 1,536,412 923,020 129,336
Compensation to sales
personnel 0 0 4,712
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses:
marketing; general 0 0 2,281
---------- -------- --------
Total fees $1,536,412 $923,020 $137,675
========== ======== ========
The Distributor may have also used additional resources of its own for further
expenses on behalf of the Fund.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Fund will attempt to make
alternative arrangements for such services for shareholders who acquired shares
through such institutions.
35
<PAGE>
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") and yield of
the Class A, Class B, Class C and Class D shares of the Fund will be calculated
as set forth below. Total return and yield are computed separately for each
class of shares of the Fund. Performance data for a specified class includes
periods prior to the adoption of class designations. Shares of the Fund had no
class designations until June 1, 1993 when designations were assigned based on
the pricing and 12b-1 fees applicable to shares sold thereafter. Performance
data for a specified class includes periods prior to the adoption of class
designations.
The performance data below reflects Rule 12b-1 fees and, where
applicable, sales charges as follows:
<TABLE>
<CAPTION>
Rule 12b-1 Fees Sales Charges
----------------------------------------------- ----------------------------------------
Current
Class Amount Period
- ----- ------ ------
<S> <C> <C> <C>
A 0.25% Since commencement of Maximum 4.5% sales charge reflected
operations to present
B 1.00% 0.25% until June 1, 1993; 1- and 5-year periods reflect a 5% and a
1.00% June 1, 1993 to present; 2% contingent deferred sales charge,
fee will reduce performance respectively
for periods after June 1, 1993
C None 0.25% until June 1, 1993; None
0% thereafter
D 1.00% 0.25% until June 1, 1993; 1-year period reflects a 1% contingent
1.00% June 1, 1993 to present; deferred sales charge
fee will reduce performance
for periods after June 1, 1993
</TABLE>
Total Return
- ------------
The average annual total returns ("standard total return") of each
class of the Fund's shares were as follows:
36
<PAGE>
<TABLE>
<CAPTION>
Commencement of
Operations Five Years One Year
(March 23, 1987) Ended Ended
Fund to October 31, 1996 October 31, 1996 October 31, 1996
- ---- ------------------- ---------------- ----------------
<S> <C> <C> <C>
Class A 7.41% 6.47% 0.54%
Class B 7.62% 6.56% -0.43%
Class C 8.02% 7.62% 5.55%
Class D 7.63% 6.88% 3.52%
</TABLE>
Standard total return is computed separately for each class of shares
by determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value, in accordance with the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated period
assuming a hypothetical $1,000 payment made at the beginning of
the designated period
The calculation is based on the further assumptions that the highest
applicable initial or contingent deferred sales charge is deducted, and that all
dividends and distributions by the Fund are reinvested at net asset value on the
reinvestment dates during the periods. All accrued expenses and recurring
charges are also taken into account as described later herein.
Yield
- -----
The annualized yield of each class of shares of the Fund based on the
month of October 1996 was as follows:
Class A 5.62%
Class B 5.16%
Class C 6.15%
Class D 5.16%
37
<PAGE>
Yield for each of the Fund's Class A, Class B, Class C and Class D
shares is computed by dividing the net investment income per share earned during
a recent month or other specified 30-day period by the maximum offering price
per share on the last day of the period and annualizing the result in accordance
with the following formula:
YIELD = 2[( a-b + 1)6 -1]
---
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of voluntary expense
reductions by the Investment Manager, if any)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
To calculate interest earned (for the purpose of "a" above) on debt
obligations, the Fund computes the yield to maturity of each obligation held by
the Fund based on the market value of the obligation (including actual accrued
interest) at the close of the last business day of the preceding period, or,
with respect to obligations purchased during the period, the purchase price
(plus actual accrued interest). The yield to maturity is then divided by 360 and
the quotient is multiplied by the market value of the obligation (including
actual accrued interest) to determine the interest income on the obligation for
each day of the period that the obligation is in the portfolio. Dividend income
is recognized daily based on published rates.
With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("paydowns"), the Fund accounts for gain or
loss attributable to actual monthly paydowns as a realized capital gain or loss
during the period. The Fund has elected not to amortize discount or premium on
such securities.
Undeclared earned income, computed in accordance with generally
accepted accounting principles, may be subtracted from the maximum offering
price. Undeclared earned income is the net investment income which, at the end
of the base period, has not been declared as a dividend, but is reasonably
expected to be declared as a dividend shortly thereafter. The 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
38
<PAGE>
shares with bank deposits, savings accounts and similar investment alternatives
which often provide an agreed or guaranteed fixed yield for a stated period of
time. Shareholders should remember that yield is a function of the kind and
quality of the instruments in the Fund's portfolio, portfolio maturity and
operating expenses and market conditions.
Accrued Expenses
- ----------------
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return and yield results take sales charges, if applicable, into
account, although the results do not take into account recurring and
nonrecurring charges for optional services which only certain shareholders elect
and which involve nominal fees, such as the $7.50 fee for wire orders.
Nonstandardized Total Return
- ----------------------------
The Fund may provide the above described standard total return results
for Class A, Class B, Class C and Class D shares for periods which end no
earlier than the most recent calendar quarter end and which begin twelve months
before, five years before and at the time of commencement of the Fund's
operations. In addition, the Fund may provide nonstandardized total return
results for differing periods, such as for the most recent six months, and/or
without taking sales charges into account. Such nonstandardized total return is
computed as otherwise described under "Total Return" except the result may or
may not be annualized and as noted, any applicable sales charge, if any, may not
be taken into account and therefore not deducted from the hypothetical initial
payment of $1,000. For example, the Fund's nonstandardized total returns for the
six months ended October 31, 1996, without taking sales charges into account,
were as follows:
Class A 4.64%
Class B 4.35%
Class C 4.78%
Class D 4.35%
Distribution Rates
- ------------------
The Fund may also quote its distribution rate for each class of shares.
The distribution rate is calculated by annualizing the latest per-share
distribution from ordinary income and dividing the result by the maximum
offering price per share as of the end of the period. 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.
39
<PAGE>
Because a distribution can include such premiums, capital gains and
option income, the amount of the distribution may be susceptible to control by
the Investment Manager through transactions designed to increase the amount of
such items. Also, because the distribution rate is calculated in part by
dividing the latest distribution by the offering price, which is based on net
asset value plus any applicable sales charge, the distribution rate will
increase as the net asset value declines. A distribution rate can be greater
than the yield rate calculated as described above.
The distribution rates of the Fund, based on the month ended October
31, 1996, were as follows:
Class A 6.22%
Class B 5.78%
Class C 6.77%
Class D 5.77%
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as the Trust's independent accountants, providing professional services
including (1) an audit of the Fund's annual financial statements, (2) assistance
and consultation in connection with Securities and Exchange Commission filings
and (3) review of the annual income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a
semiannual basis, other supplementary financial reports may be made available
from time to time and holders of record may request a copy of the current
supplementary report, if any, by calling State Street Research Shareholder
Services.
40
<PAGE>
The following financial statements are for the Fund's fiscal year ended
October 31, 1996:
357413.c3
41
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
INVESTMENT PORTFOLIO
October 31, 1996
<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
-------------------------------- ------------------------------- ---------------
<S> <C> <C> <C>
U.S. GOVERNMENT SECURITIES 75.3%
U.S. Treasury 33.2%
U.S. Treasury Bond, 13.75% $10,000,000 8/15/2004 $ 14,523,400
U.S. Treasury Bond, 10.75% 14,100,000 8/15/2005 18,213,252
U.S. Treasury Bond, 12.00% 4,000,000 8/15/2013 5,758,760
U.S. Treasury Bond, 9.25% 29,500,000 2/15/2016 37,575,625
U.S. Treasury Bond, 8.13% 26,300,000 8/15/2021 30,594,264
U.S. Treasury Bond, 7.50% 20,000,000 11/15/2024 21,937,400
U.S. Treasury Note, 9.00% 52,000,000 5/15/1998 54,518,880
U.S. Treasury Note, 5.13% 5,525,000 6/30/1998 5,476,656
U.S. Treasury Note, 6.63% 7,075,000 7/31/2001 7,224,212
U.S. Treasury Note, 5.75% 38,500,000 8/15/2003 37,495,535
---------------
233,317,984
---------------
U.S. Agency 5.4%
Federal Home Loan Mortgage Corp.
Deb., 7.24% 10,020,000 5/15/2002 10,106,072
Federal National Mortgage
Association STRIPS, 0.00% 15,000,000 11/22/2001 14,974,200
Guaranteed Export Trust Notes
Series 95-A, 6.28% 8,470,588 6/15/2004 8,430,692
Guaranteed Export Trust Notes
Series 96-A, 6.55% 4,282,353 6/15/2004 4,316,783
---------------
37,827,747
---------------
U.S. Agency Mortgage 36.7%
Federal Home Loan Mortgage Corp.
FHA-VA, 9.00% 6,380,465 12/01/2009 6,761,315
Federal Home Loan Mortgage Corp.
Gold, 7.00% 19,442,488 12/01/2024 19,223,760
Federal Home Loan Mortgage Corp.
Gold, 7.50% 15,539,494 1/01/2025 15,663,188
Federal Home Loan Mortgage Corp.
Series 29-H PAC, 6.50% 5,525,000 3/25/2023 5,381,682
Federal Housing Administration
Court Yard Project, 10.75% 6,493,547 8/01/2032 7,150,005
Federal Housing Administration
East Bay Manor Project, 10.00% 6,767,250 3/01/2033 7,324,491
Federal Housing Administration
Charles River Project, 9.63% 9,483,615 12/01/2033 10,217,113
Federal National Mortgage
Association, 7.50% 13,251,633 6/01/2010 13,496,788
Federal National Mortgage
Association, 7.00% 43,897 2/01/2024 43,294
Federal National Mortgage
Association FHA-VA, 8.00% 4,931,289 4/01/2008 5,134,853
U.S. Agency Mortgage (cont'd)
Federal National Mortgage
Association FHA-VA, 8.00% $ 6,275,948 6/01/2008 $ 6,527,362
Federal National Mortgage
Association FHA-VA, 8.50% 9,144,145 2/01/2009 9,706,784
Federal National Mortgage
Association FHA-VA, 9.00% 15,347,081 5/01/2009 16,258,237
Federal National Mortgage
Association FHA-VA, 9.00% 540,084 4/01/2016 572,149
Government National Mortgage
Association, 6.50% 12,022,695 5/15/2009 11,911,845
Government National Mortgage
Association, 9.50% 3,352,791 9/15/2009 3,641,937
Government National Mortgage
Association, 9.50% 6,113,777 10/15/2009 6,641,028
Government National Mortgage
Association, 9.50% 2,755,827 11/15/2009 2,993,490
Government National Mortgage
Association, 9.00% 2,053,186 4/15/2017 2,201,385
Government National Mortgage
Association, 8.00% 1,981,223 10/15/2017 2,063,068
Government National Mortgage
Association, 8.00% 3,879,519 11/15/2017 4,039,782
Government National Mortgage
Association, 9.50% 1,269,806 11/15/2017 1,378,730
Government National Mortgage
Association, 9.50% 251,838 9/15/2019 273,203
Government National Mortgage
Association, 7.50% 3,063,323 9/15/2021 3,098,153
Government National Mortgage
Association, 8.00% 423,236 5/15/2022 434,871
Government National Mortgage
Association, 8.00% 2,712,413 6/15/2022 2,783,587
Government National Mortgage
Association, 8.00% 2,891,233 7/15/2022 2,968,079
Government National Mortgage
Association, 8.00% 60,743 8/15/2022 62,337
Government National Mortgage
Association, 8.00% 7,890,136 12/15/2022 8,104,604
Government National Mortgage
Association, 7.50% 1,425,293 1/15/2023 1,436,866
Government National Mortgage
Association, 7.50% 12,910,593 6/15/2023 13,003,291
Government National Mortgage
Association, 10.00% 17,010,077 6/15/2023 18,232,591
Government National Mortgage
Association, 7.50% 835,717 8/15/2023 841,717
The accompanying notes are an integral part of the financial statements.
42
<PAGE>
Principal Maturity Value
Amount Date (Note 1)
-------------------------------- ------------------------------- ---------------
U.S. Agency Mortgage (cont'd)
Government National Mortgage
Association, 7.50% $ 850,107 10/15/2023 $ 857,010
Government National Mortgage
Association, 7.50% 601,181 12/15/2023 605,497
Government National Mortgage
Association, 7.50% 817,217 1/15/2024 823,085
Government National Mortgage
Association, 7.50% 10,092,908 4/15/2024 10,169,870
Government National Mortgage
Association, 8.00% 19,482,380 9/15/2026 19,920,733
Government National Mortgage
Association TBA, 7.50% 12,375,000 11/29/2008 12,626,367
Government National Mortgage
Association TBA, 8.00% 2,625,000 12/18/2026 2,688,985
---------------
257,263,132
---------------
Total U.S. Government Securities (Cost $515,301,325) 528,408,863
---------------
OTHER INVESTMENTS 19.8%
Foreign Government 3.7%
Australian Dollar
Government of Australia, 7.50% 7,850,000 7/15/2005 6,294,436
Canadian Dollar
Government of Canada, 7.50% 7,250,000 12/01/2003 5,839,544
Danish Krone
Kingdom of Denmark, 8.00% 25,475,000 11/15/2001 4,799,326
Kingdom of Denmark, 8.00% 25,700,000 3/15/2006 4,758,588
European Currency Unit
Government of France, 8.00% 3,225,000 4/25/2003 4,546,964
---------------
26,238,858
---------------
Trust Certificates 13.3%
Cooperative Utility Trust
Certificates, 9.50% $25,499,000 2/15/2017 27,659,275
Cooperative Utility Trust
Certificates, 9.52% 24,525,000 3/15/2019 26,652,789
Government Backed Trust Class
T-2, 9.40% 107,919 11/15/1996 108,004
Government Backed Trust Class
T-3, 9.63% 10,000,000 5/15/2002 10,729,500
Trust Certificates (cont'd)
Government Trust Certificates
Class 2-D, 9.25% $ 2,086,373 11/15/1996 $ 2,087,959
Government Trust Certificates
Class 2-E, 9.40% 24,000,000 5/15/2002 25,820,400
---------------
93,057,927
---------------
Finance/Mortgage 2.8%
Prudential Home Mortgage
Securities Co. Series 93-29 A-6
PAC, 6.75% 10,118,504 8/25/2008 10,178,507
Residential Funding Corp. Series
93-S25 A-1, 6.50% 9,364,517 7/25/2008 9,379,126
---------------
19,557,633
---------------
Total Other Investments (Cost $136,334,969) 138,854,418
---------------
SHORT-TERM OBLIGATIONS 5.3%
Federal Home Loan Bank, 5.22% 12,000,000 11/29/1996 11,951,467
Federal Home Loan Mortgage
Corp., 5.18% 9,795,000 11/01/1996 9,795,000
Federal Home Loan Mortgage
Corp., 5.50% 15,493,000 11/01/1996 15,493,000
---------------
Total Short-Term Obligations (Cost $37,239,467) 37,239,467
---------------
Total Investments (Cost $688,875,761)--100.4% 704,502,748
Cash and Other Assets, Less Liabilities--(0.4)% (2,730,819)
---------------
Net Assets--100.0% $701,771,929
===============
Federal Income Tax Information:
At October 31, 1996, the net unrealized appreciation of
investments based on cost for Federal income tax purposes of
$688,875,761 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost $ 20,181,429
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value (4,554,442)
---------------
$ 15,626,987
===============
</TABLE>
TBA Represents "TBA" (to be announced) purchase commitment to purchase
securities for a fixed unit price at a future date beyond customary
settlement time. Although the unit price has been established, the
principal value has not been finalized and may vary by no more than 1%.
The accompanying notes are an integral part of the financial statements.
43
<PAGE>
Forward currency exchange contracts outstanding at October 31, 1996, are as
follows:
<TABLE>
<CAPTION>
Unrealized
Appreciation
Total Value Contract Price (Depreciation) Delivery Date
- -------------------------------------------- ----------------------------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Buy Australian dollars, Sell U.S. dollars 3,590,000 AUD .79004 AUD $ 1,923 1/24/97
Buy Australian dollars, Sell U.S. dollars 570,000 AUD .79055 AUD 15 1/24/97
Sell Australian dollars, Buy U.S. dollars 1,025,000 AUD .77425 AUD (18,400) 11/14/96
Sell Australian dollars, Buy U.S. dollars 6,075,000 AUD .77450 AUD (107,533) 11/14/96
Sell Australian dollars, Buy U.S. dollars 570,000 AUD .79340 AUD 1,610 1/24/97
Sell Australian dollars, Buy U.S. dollars 3,590,900 AUD .79360 AUD 10,857 1/24/97
Sell Canadian dollars, Buy U.S. dollars 2,470,000 CAD .73099 CAD (38,979) 11/14/96
Sell Canadian dollars, Buy U.S. dollars 4,050,000 CAD .74702 CAD (12,436) 1/24/97
Sell Danish krone, Buy U.S. dollars 49,514,000 DKK .17584 DKK 181,977 11/14/96
Sell Danish krone, Buy U.S. dollars 2,030,000 DKK .17111 DKK (2,141) 11/14/96
Sell Danish krone, Buy U.S. dollars 833,000 DKK .17110 DKK (1,407) 1/24/97
Sell European currency units,
Buy U.S. dollars 3,311,000 ECU 1.27480 ECU 25,231 11/14/96
---------------
$ 40,717
===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
44
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments, at value (Cost $688,875,761) (Note 1) $704,502,748
Cash 3,184
Interest receivable 11,281,362
Receivable for securities sold 5,340,072
Receivable for fund shares sold 1,533,994
Receivable for open forward contracts 221,613
Other assets 23,161
---------------
722,906,134
Liabilities
Payable for securities purchased 15,334,878
Payable for fund shares redeemed 2,390,682
Dividends payable 2,277,552
Accrued management fee (Note 2) 384,992
Accrued distribution and service fees (Note 3) 215,047
Accrued transfer agent and shareholder services (Note 2) 213,526
Payable for open forward contracts 180,896
Accrued trustees' fees (Note 2) 10,352
Other accrued expenses 126,280
---------------
21,134,205
---------------
Net Assets $701,771,929
===============
Net Assets consist of:
Undistributed net investment income $ 3,771,439
Unrealized appreciation of investments 15,626,987
Unrealized appreciation of forward contracts and foreign
currency 45,123
Accumulated net realized loss (86,648,683)
Shares of beneficial interest 768,977,063
---------------
$701,771,929
===============
Net Asset Value and redemption price per share of Class A
shares ($584,313,469 / 46,990,520 shares of beneficial
interest) $12.43
===============
Maximum Offering Price per share of Class A shares ($12.43
/ .955) $13.02
===============
Net Asset Value and offering price per share of Class B
shares ($95,218,110 / 7,679,256 shares of beneficial
interest)* $12.40
===============
Net Asset Value, offering price and redemption price per
share of Class C shares ($7,767,449 / 625,275 shares of
beneficial interest) $12.42
===============
Net Asset Value and offering price per share of Class D
shares ($14,472,901 / 1,166,285 shares of beneficial
interest)* $12.41
===============
</TABLE>
* Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
STATEMENT OF OPERATIONS
For the year ended October 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Investment Income
Interest $55,174,545
Expenses
Management fee (Note 2) 4,723,842
Transfer agent and shareholder services (Note 2) 786,300
Custodian fee 250,860
Reports to shareholders 160,433
Service fee--Class A (Note 3) 1,536,412
Distribution and service fees--Class B (Note 3) 923,020
Distribution and service fees--Class D (Note 3) 137,675
Audit fee 56,273
Registration fees 53,807
Trustees' fees (Note 2) 33,363
Miscellaneous 29,917
--------------
8,691,902
--------------
Net investment income 46,482,643
--------------
Realized and Unrealized Gain (Loss) on Investments,
Forward Contracts and Foreign Currency
Net realized loss on investments (Notes 1 and 4) (3,528,385)
Net realized loss on forward contracts and foreign
currency (Note 1) (23,619)
--------------
Total net realized loss (3,552,004)
--------------
Net unrealized depreciation of investments (Note 5) (7,443,474)
Net unrealized appreciation of forward contracts and
foreign currency 1,038,389
--------------
Total net unrealized depreciation (6,405,085)
--------------
Net loss on investments, forward contracts and foreign
currency (9,957,089)
--------------
Net increase in net assets resulting from operations $36,525,554
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
45
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year ended October 31
-------------------------------
1996 1995
------------------------------- --------------- ---------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 46,482,643 $ 48,226,230
Net realized gain (loss) on
investments, forward contracts
and foreign currency* (3,552,004) 2,583,992
Net unrealized appreciation
(depreciation) of investments,
forward contracts and foreign
currency (6,405,085) 48,001,271
--------------- ---------------
Net increase resulting from
operations 36,525,554 98,811,493
--------------- ---------------
Dividends from net investment
income:
Class A (39,055,243) (42,302,801)
Class B (5,188,785) (3,875,565)
Class C (404,930) (166,657)
Class D (773,463) (735,022)
--------------- ---------------
(45,422,421) (47,080,045)
--------------- ---------------
Net increase (decrease) from
fund share transactions
(Note 6) (50,352,743) 4,925,189
--------------- ---------------
Total increase (decrease) in
net assets (59,249,610) 56,656,637
Net Assets
Beginning of year 761,021,539 704,364,902
--------------- ---------------
End of year (including
undistributed net investment
income of $3,771,439 and
$2,696,356, respectively) $701,771,929 $761,021,539
=============== ===============
*Net realized gain (loss) for
Federal income tax purposes
(Note 1) $ (4,139,815) $ 2,398,429
=============== ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
October 31, 1996
Note 1
State Street Research Government Income Fund (the "Fund") is a series of
State Street Research Financial Trust (the "Trust"), which was organized as a
Massachusetts business trust in November, 1986 and is registered under the
Investment Company Act of 1940, as amended, as an open-end management
investment company. The Fund commenced operations in March, 1987. The Trust
consists presently of four separate funds: State Street Research Government
Income Fund, State Street Research Strategic Portfolios: Moderate, State
Street Research Strategic Portfolios: Conservative and State Street Research
Strategic Portfolios: Aggressive.
The investment objective of the Fund is to seek high current income. In
seeking to achieve its investment objective, the Fund invests primarily in
U.S. Government securities.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and annual service fees of 0.25% of
average daily net assets. Class B shares are subject to a contingent deferred
sales charge on certain redemptions made within five years of purchase and
pay annual distribution and service fees of 1.00%. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after the issuance of the Class B shares. Class C
shares are only offered to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro-rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by
the Fund in preparing its financial statements, and such policies are in
conformity with generally accepted accounting principles for investment
companies.
A. Investment Valuation
Securities are valued by a pricing service, which utilizes market
transactions, quotations from dealers, and various relationships among
securities in determining value. Securities for which there is no such
valuation, if any, are valued at their fair value as determined in accordance
with established methods consistently applied. Short-term securities
maturing within sixty days are valued at amortized cost. Securities quoted in
foreign currencies are translated into U.S. dollars at the current exchange
rate.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported
46
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
on the basis of identified cost of securities delivered. Gains and losses
that arise from changes in exchange rates are not segregated from gains and
losses that arise from changes in market prices of investments.
C. Net Investment Income
Net investment income is determined daily and consists of interest accrued
and discount earned, less the estimated daily expenses of the Fund. Interest
income is accrued daily as earned. Accretion of discount is computed under
the effective yield method. The Fund is charged for expenses directly
attributable to it, while indirect expenses are allocated among all funds in
the Trust.
D. Dividends
Dividends are declared daily based upon projected net investment income and
are paid or reinvested monthly. Net realized capital gains, if any, are
distributed annually, unless additional distributions are required for
compliance with applicable tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing
treatments for foreign currency transactions.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund has
elected to qualify under Subchapter M of the Internal Revenue Code and its
policy is to distribute all of its taxable income, including net realized
capital gains, if any, within the prescribed time periods. At October 31,
1996, the Fund had a capital loss carryforward of $86,648,683 available, to
the extent provided in regulations, to offset future capital gains, if any,
of which $46,959,196, $18,353,379, $17,196,293 and $4,139,815 expires on
October 31, 1997, 1998, 2002 and 2004, respectively. The Fund had a capital
loss carryforward of $29,348,263 expire on October 31, 1996. In addition, as
part of a merger that occurred on May 12, 1995, the Fund acquired from
MetLife-State Street Research Government Securities Fund a capital loss
carryforward of $5,100,777, of which $3,074,207 and $2,026,570 expires on
October 31, 2001 and 2002, respectively. The Fund's use of such capital loss
carryforward may be limited under current tax laws.
F. Forward Contracts and Foreign Currencies The Fund enters into forward
foreign currency exchange contracts in order to hedge its exposure to changes
in foreign currency exchange rates on its foreign portfolio holdings and to
hedge certain purchase and sale commitments denominated in foreign
currencies. A forward foreign currency exchange contract is an obligation by
the Fund to purchase or sell a specific currency at a future date, which may
be any fixed number of days from the origination date of the contract.
Forward foreign currency exchange contracts establish an exchange rate at a
future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks)
and their customers. Risks may arise from the potential inability of a
counterparty to meet the terms of a contract and from unanticipated movements
in the value of foreign currencies relative to the U.S. dollar. The aggregate
principal amount of forward currency exchange contracts is recorded in the
Fund's accounts. All commitments are marked-to-market at the applicable
transaction rates resulting in unrealized gains or losses. The Fund records
realized gains or losses at the time the forward contracts are extinguished
by entry into a closing contract or by delivery of the currency. Neither spot
transactions nor forward currency exchange contracts eliminate fluctuations
in the prices of the Fund's portfolio securities or in foreign exchange
rates, or prevent loss if the price of these securities should decline.
G. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser
earns monthly fees at an annual rate of 0.65% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. During the year ended October 31, 1996, the fees pursuant to
such agreement amounted to $4,723,842.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. During the year ended October 31, 1996, the amount of
such expenses was $259,577.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $33,363 during the year ended October 31, 1996.
Note 3
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940. Under the Plan, the Fund
pays annual service fees to the Distributor at a rate of 0.25% of average
daily net assets for Class A, Class B and Class D shares. In addition, the
Fund pays annual distribution fees of 0.75% of average daily net assets for
Class B and Class D shares. The Distributor uses such payments for personal
service and/or the maintenance or servicing of shareholder accounts, to
reimburse securities dealers for distribution and marketing services, to
furnish ongoing assistance to investors and to defray a portion of its
distribution and marketing expenses. For the year ended October 31, 1996,
fees pursuant to such plan amounted to $1,536,412, $923,020 and $137,675 for
Class A, Class B and Class D shares, respectively.
47
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
NOTES (cont'd)
Note 3 (cont'd)
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly owned subsidiary of Metropolitan, earned initial sales charges
aggregating $89,615 and $495,180, respectively, on sales of Class A shares of
the Fund during the year ended October 31, 1996, and that MetLife Securities,
Inc. earned commissions aggregating $536,913 on sales of Class B shares, and
that the Distributor collected contingent deferred sales charges aggregating
$372,729 and $1,828 on redemptions of Class B and Class D shares,
respectively, during the same period.
Note 4
For the year ended October 31, 1996, purchases and sales of securities,
exclusive of short-term obligations, aggregated $609,470,532 and $688,024,321
(including $503,419,486 and $551,059,425 of U.S. Government obligations),
respectively.
Note 5
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At October 31, 1996, the
Distributor owned 12,241 Class A shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended October 31
-----------------------------------------------------------------
1996 1995
------------------------------- --------------------------------
Class A Shares Amount Shares Amount
------------------------------------------------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 2,386,852 $ 29,601,645 8,692,870 $ 106,770,703
Issued upon reinvestment of dividends 1,707,616 21,188,423 1,902,247 23,135,012
Shares repurchased (9,183,464) (113,908,052) (13,184,315) (159,163,704)
-------------- ---------------- --------------- ----------------
Net decrease (5,088,996) $ (63,117,984) (2,589,198) $ (29,257,989)
============== ================ =============== ================
Class B Shares Amount Shares Amount
------------------------------------------------------- ---------------- --------------- ----------------
Shares sold 2,341,362 $ 29,026,329 3,527,941 $ 42,934,470
Issued upon reinvestment of dividends 275,775 3,412,679 209,008 2,591,060
Shares repurchased (1,940,555) (24,024,991) (1,222,045) (14,751,417)
-------------- ---------------- --------------- ----------------
Net increase 676,582 $ 8,414,017 2,514,904 $ 30,774,113
============== ================ =============== ================
Class C Shares Amount Shares Amount
------------------------------------------------------- ---------------- --------------- ----------------
Shares sold 518,980 $ 6,381,030 435,479 $ 5,346,473
Issued upon reinvestment of dividends 30,667 379,365 12,362 153,460
Shares repurchased (324,941) (4,001,721) (64,617) (809,530)
-------------- ---------------- --------------- ----------------
Net increase 224,706 $ 2,758,674 383,224 $ 4,690,403
============== ================ =============== ================
Class D Shares Amount Shares Amount
------------------------------------------------------- ---------------- --------------- ----------------
Shares sold 520,289 $ 6,453,505 433,690 $ 5,281,361
Issued upon reinvestment of dividends 43,660 539,841 43,377 526,125
Shares repurchased (435,567) (5,400,796) (590,308) (7,088,824)
-------------- ---------------- --------------- ----------------
Net increase (decrease) 128,382 $ 1,592,550 (113,241) $ (1,281,338)
============== ================ =============== ================
</TABLE>
48
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Class B
------------------------------------------------ -----------------------------------------
Year ended October 31 Year ended October 31
------------------------------------------------ -----------------------------------------
1996* 1995* 1994* 1993 1992 1996* 1995* 1994* 1993**
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.58 $11.68 $12.92 $12.38 $12.14 $12.55 $11.66 $12.91 $12.67
Net investment income 0.81 0.83 0.81 0.84 0.90 0.71 0.73 0.72 0.30
Net realized and unrealized gain
(loss) on investments, forward
contracts and foreign currency (0.17) 0.88 (1.26) 0.56 0.26 (0.16) 0.87 (1.27) 0.24
Dividends from net investment
income (0.79) (0.81) (0.79) (0.84) (0.91) (0.70) (0.71) (0.70) (0.30)
Distributions from net realized
gains -- -- -- (0.02) (0.01) -- -- -- --
-------- -------- -------- -------- --------- -------- -------- --------- -----------
Net asset value, end of year $12.43 $12.58 $11.68 $12.92 $12.38 $12.40 $12.55 $11.6 $12.91
======== ======== ======== ======== ========= ======== ======== ========= ==========
Total return 5.28%+ 15.07%+ (3.58)%+ 11.63%+ 9.86%+ 4.51%+ 14.15%+ (4.38)%+ 4.32%+++
Net assets at end of year (000s) $584,313 $655,045 $638,418 $868,556 $798,705 $95,218 $87,908 $52,319 $26,578
Ratio of operating expenses to
average net assets 1.09% 1.10% 1.07% 1.05% 1.05% .84% 1.85% 1.82% 1.81%++
Ratio of net investment income to
average net assets 6.50% 6.83% 6.54% 6.59% 7.25% 5.75% 6.01% 5.86% 5.67%++
Portfolio turnover rate 88.79% 105.57% 134.41% 103.49% 97.33% 88.79% 105.57% 134.41% 103.49%
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
------------------------------------------ -------------------------------------------
Year ended October 31 Year ended October 31
------------------------------------------ -------------------------------------------
1996* 1995* 1994* 1993** 1996* 1995* 1994* 1993**
----------------------------------- -------- --------- ----------- --------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.57 $ 11.67 $ 12.92 $ 12.67 $ 12.56 $ 11.66 $ 12.91 $ 12.67
Net investment income 0.84 0.90 0.84 0.19 0.71 0.74 0.72 0.30
Net realized and unrealized gain
(loss) on
investments, forward contracts
and foreign currency (0.17) 0.84 (1.27) 0.42 (0.16) 0.87 (1.27) 0.24
Dividends from net investment
income (0.82) (0.84) (0.82) (0.36) (0.70) (0.71) (0.70) (0.30)
-------- --------- ----------- --------- --------- --------- ----------- ----------
Net asset value, end of year $12.42 $ 12.57 $ 11.67 $ 12.92 $ 12.41 $ 12.56 $ 11.66 $ 12.91
======== ========= =========== ========= ========= ========= =========== ==========
Total return 5.55%+ 15.37%+ (3.42)%+ 4.82%+++ 4.51%+ 14.24%+ (4.38)%+ 4.32%+++
Net assets at end of year (000s) $7,767 $ 5,036 $ 203 $ 36 $14,473 $13,033 $13,425 $12,101
Ratio of operating expenses to
average net assets 0.84% 0.85% 0.82% 0.80%++ 1.84% 1.85% 1.82% 1.88%++
Ratio of net investment income to
average net assets 6.78% 6.79% 8.01% 6.59%++ 5.76% 6.08% 5.84% 5.59%++
Portfolio turnover rate 88.79% 105.57% 134.41% 103.49% 88.79% 105.57% 134.41% 103.49%
</TABLE>
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges.
+++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges.
* Per-share figures have been calculated using the average shares method.
** June 1, 1993 (commencement of share class designations) to October 31,
1993.
49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of State Street Research
Financial Trust and the Shareholders of
State Street Research Government Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of State Street Research
Government Income Fund (a series of State Street Research Financial Trust,
hereafter referred to as the "Trust") at October 31, 1996, and the results of
its operations, the changes in its net assets and the financial highlights
for the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reason- able assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits,
which included confirmation of securities at October 31, 1996 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 11, 1996
50
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
Government Income Fund outperformed Lipper Analytical Service's General U.S.
Government Funds Category for the 12 months ended October 31, 1996. The
Fund's conservative positioning helped its performance when interest rates
were on the rise during much of 1996.
Government Income Fund's management was very active with the portfolio. Last
year at this time, when interest rates were declining, the Fund emphasized
Treasuries, at 41% of the portfolio. When interest rates rose in 1996, Fund
management reduced the Fund's position in Treasuries and increased its
holdings in mortgage securities. As of April 30, 1996, the Fund had 45% of
the portfolio invested in mortgages.
More recently, as interest rates have started to come down again, Fund
management reduced mortgage holdings and moved back into Treasuries, which
make up 33% of the portfolio as of October 31, 1996.
The non-dollar portions of the portfolio performed well and added value
during this time, even though their position in the portfolio was and is
relatively small.
The fluctuations in interest rates also caused movements in the Fund's yield.
The yield was at its lowest at the end of November at 5.36%, and at its
highest at the end of May at 6.25%.
October 31, 1996
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate, and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. Investments in the Fund are not insured
or guaranteed by the U.S. government or any other entity. Performance for a
class includes periods prior to the adoption of class designations. "C"
shares, offered without a sales charge, are available only to certain
employee benefit plans and large institutions. Performance for "B" and "D"
shares prior to class designations in 1993 reflects annual 12b-1 fees of
.25%, and performance thereafter reflects annual 12b-1 fees of 1%, which will
reduce subsequent performance. Performance reflects maximum 4.5% "A" share
front-end sales charge or 5% "B" share or 1% "D" share contingent deferred
sales charges, where applicable. The Merrill Lynch Government Master and
Blended Indices are commonly used measures of bond market performance. The
indices are unmanaged and do not take sales charges into consideration.
Direct investment in the indices is not possible; results are for
illustrative purposes only.
Change In Value Of $10,000 Based On
The Merrill Lynch Blended Index And
The Merrill Lynch Government Master Index
Compared To Change In Value Of $10,000 Invested
In Government Income Fund
[Data for Line Charts]
Class A Shares
Average Annual Total Return
- --------------------------------
1 Year 5 Years Life of Fund
- --------------------------------
+0.54% +6.47% +7.41%
- --------------------------------
$25,000 20,000 15,000 10,000
$19,896 $21,831 $21,263
3/87 9550 10000 10000
10/87 9408 9935 9849
10/88 10328 11045 10807
10/89 11321 12316 12106
10/90 11948 13154 12825
10/91 13890 15171 14703
10/92 15259 16660 16223
10/93 17034 18553 18333
10/94 16424 17933 17539
10/95 18899 20669 20242
10/96 19896 21831 21263
Government ML ML
Income Blended Government
Fund Index Master
Index
Class B Shares
Average Annual Total Return
- --------------------------------
1 Year 5 Years Life of Fund
- --------------------------------
- -0.43% +6.56% +7.62%
- --------------------------------
$25,000 20,000 15,000 10,000
$20,272 $21,831 $21,263
3/87 10000 10000 10000
10/87 9852 9935 9849
10/88 10814 11045 10807
10/89 11855 12316 12106
10/90 12511 13154 12825
10/91 14544 15171 14703
10/92 15978 16660 16223
10/93 17770 18553 18333
10/94 16992 17933 17539
10/95 19397 20669 20242
10/96 20272 21831 21263
Government ML ML
Income Blended Government
Fund Index Master
Index
Class C Shares
Average Annual Total Return
- --------------------------------
1 Year 5 Years Life of Fund
- --------------------------------
+5.55% +7.62% +8.02%
- --------------------------------
$25,000 20,000 15,000 10,000
$20,997 $21,831 $21,263
3/87 10000 10000 10000
10/87 9852 9935 9849
10/88 10814 11045 10807
10/89 11855 12316 12106
10/90 12511 13154 12825
10/91 14544 15171 14703
10/92 15978 16660 16223
10/93 17855 18553 18333
10/94 17244 17933 17539
10/95 19894 20669 20242
10/96 20997 21831 21263
Government ML ML
Income Blended Government
Fund Index Master
Index
Class D Shares
Average Annual Total Return
- --------------------------------
1 Year 5 Years Life of Fund
- --------------------------------
+3.52% +6.88% +7.63%
- --------------------------------
$25,000 20,000 15,000 10,000
$20,286 $21,831 $21,263
3/87 10000 10000 10000
10/87 9852 9935 9849
10/88 10814 11045 10807
10/89 11855 12316 12106
10/90 12511 13154 12825
10/91 14544 15171 14703
10/92 15978 16660 16223
10/93 17769 18553 18333
10/94 16991 17933 17539
10/95 19411 20669 20242
10/96 20286 21831 21263
Government ML ML
Income Blended Government
Fund Index Master
Index
51
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
REPORT ON SPECIAL MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of the State Street Research Government
Income Fund ("Fund"), along with shareholders of other series of State Street
Research Financial Trust ("Meeting"), was convened on February 14, 1996, and
continued thereafter. The results of the Meeting are set forth below.
<TABLE>
<CAPTION>
Votes (millions of Shares)
--------------------------
For Withheld
-----------------
<S> <C> <C>
1. The following persons were elected as Trustees:
Edward M. Lamont 43.4 3.0
Robert A. Lawrence 43.4 3.0
Dean O. Morton 43.4 3.0
Thomas L. Phillips 43.4 3.0
Toby Rosenblatt 43.4 3.0
Michael S. Scott Morton 43.8 2.6
Ralph F. Verni 43.8 2.7
Jeptha H. Wade 43.8 2.6
</TABLE>
<TABLE>
<CAPTION>
Votes (millions of Shares)
--------------------------
For Against Abstain
---- ---------------
<S> <C> <C> <C>
2. The Fund's following investment policies were reclassified from fundamental to
nonfundamental:
a. The policy regarding investments in securities of companies with less than three (3)
years' continuous operation 26.5 3.8 2.9
b. The policy regarding investments in illiquid securities 26.1 4.0 3.1
3. The Fund's fundamental policy regarding investments in commodities and commodity
contracts was amended 25.7 4.5 3.1
4. The Fund's fundamental policy on lending was amended to clarify the permissibility of
securities lending 26.0 4.2 3.0
5. The Fund's fundamental policies regarding diversification of investments were amended 27.3 3.0 2.9
6. The Master Trust Agreement was amended to permit the Trustees to reorganize, merge or
liquidate a fund without prior shareholder approval 33.1 7.3 4.2
7. The Master Trust Agreement was amended to eliminate specified time permitted between the
record date and any shareholders meeting 34.4 5.7 4.4
</TABLE>
52
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
SERIES OF STATE STREET RESEARCH FINANCIAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1997
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS................................2
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT TECHNIQUES................5
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS...............................15
TRUSTEES AND OFFICERS.........................................................19
INVESTMENT ADVISORY SERVICES..................................................24
PURCHASE AND REDEMPTION OF SHARES.............................................26
NET ASSET VALUE...............................................................28
PORTFOLIO TRANSACTIONS........................................................30
CERTAIN TAX MATTERS...........................................................33
DISTRIBUTION OF SHARES OF THE FUNDS...........................................36
CALCULATION OF PERFORMANCE DATA...............................................40
CUSTODIAN.....................................................................46
INDEPENDENT ACCOUNTANTS.......................................................46
FINANCIAL STATEMENTS..........................................................46
The following Statement of Additional Information is not a Prospectus.
It should be read in conjunction with the Prospectus of State Street Research
Strategic Portfolios: Conservative ("Strategic Portfolios: Conservative"), State
Street Research Strategic Portfolios: Moderate ("Strategic Portfolios:
Moderate") and State Street Research Strategic Portfolios: Aggressive
("Strategic Portfolios: Aggressive") (individually, a "Fund" and collectively,
the "Funds"), dated March 1, 1997, which may be obtained without charge from the
offices of State Street Research Financial Trust (the "Trust") or State Street
Research Investment Services, Inc. (the "Distributor"), One Financial Center,
Boston, Massachusetts 02111.
CONTROL NUMBER: 1285-960301(0398)SSR-LD SP-879D-397
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth in part under "The Funds' Investments and Asset
Allocation," "Investment Practices" and "Limiting Investment Risk" in the Funds'
Prospectus, the Funds have adopted certain investment restrictions.
The fundamental and nonfundamental policies of the Funds do not apply
to any matters involving the issuance of multiple classes of shares of the Funds
or the creation of a structure allowing the Funds to invest substantially all
its assets in a related collective investment vehicle for similar funds or
allowing the Funds to serve as such a collective investment vehicle for other
similar funds, to the extent permitted by law and regulatory authorities.
All of the Funds' fundamental investment restrictions are set forth
below. These fundamental investment restrictions may not be changed except by
the affirmative vote of a majority of the Funds' outstanding voting securities
as defined in the Investment Company Act of 1940, as amended (the "1940 Act").
(Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at a meeting of security holders duly called, (i) of
67% or more of the voting securities present at a meeting if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy or (ii) of more than 50% of the outstanding voting securities whichever is
less.) Under these restrictions, it is each 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 except that
for Strategic Portfolios: Conservative, the 10% limit on
voting securities applies to 100% of the Fund's total assets);
(2) not to issue senior securities as defined in the 1940 Act,
except as permitted by Section 18(f)(2) of that Act and the
rules thereunder or as permitted by an order of the Securities
and Exchange Commission;
(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, 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;
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(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 commodities or commodity contracts in excess
of 10% of the Fund's total assets, except that investments in
swap arrangements, currencies, futures contracts and options
on futures contracts on securities, securities indices and
currencies shall not be deemed an investment 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 (and enter into repurchase agreements with respect
thereto);
(7) not to make any investment which would cause more than 25% of
the value of the Fund's total assets to be invested in
securities of issuers principally engaged in any one industry
[for purposes of this restriction, (a) utilities may be
divided according to their services so that, for example, gas,
gas transmission, electric and telephone companies may each be
deemed in a separate industry, (b) oil and oil related
companies may be divided by type so that, for example, oil
production companies, oil service companies and refining and
marketing companies may each be deemed in a separate industry,
(c) finance companies may be classified according to the
industries of their parent companies, and (d) securities
issued or guaranteed as to principal or interest by the U.S.
Government or its agencies or instrumentalities (including
repurchase agreements involving such U.S. Government
securities to the extent excludable under relevant regulatory
interpretations) may be excluded]; and
(8) 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.
The following nonfundamental investment restrictions may be changed
without shareholder approval. Under these restrictions, it is each Fund's
policy:
(1) not to purchase any security or enter into a repurchase
agreement if as a result more than 15% of its total assets
would be invested in securities that are illiquid because of
the absence of a readily available market and repurchase
agreements not entitling the holder to payment of principal
and interest within seven days;
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<PAGE>
(2) not to invest more than 15% of its net assets in restricted
securities, of all types (including not more than 5% of its
net assets in restricted securities which are not eligible for
resale pursuant to Rule 144A, Regulation S or other exemptive
provisions under the Securities Act of 1933);
(3) not to invest more than 5% of its total assets in securities
of private issuers including predecessors with less than three
years continuous operations (except (a) securities guaranteed
or backed by an affiliate of the issuer with three years of
continuous operations, (b) securities issued or guaranteed as
to principal or interest by the U.S. Government, or its
agencies or instrumentalities, or a mixed-ownership Government
corporation, (c) securities of issuers with debt securities
rated either "BBB" by Standard & Poor's Corporation or "Baa"
by Moody's Investor's Service, Inc. or equivalent by any other
nationally recognized statistical rating organization, or
securities of issuers considered by the Investment Manager to
be equivalent, (d) securities issued by a holding company with
at least 50% of its assets invested in companies with three
years of continuous operations including predecessors, and (e)
securities which generate income which is exempt from local,
state or federal taxes); provided that a Fund may invest up to
15% of its total assets in such issuers so long as such
investments plus investments in restricted securities (other
than those which are eligible for resale under Rule 144A,
Regulation S or other exemptive provisions as noted above) do
not exceed 15% of the Fund's total assets;
(4) not to engage in transactions in options except in connection
with options on securities, securities indices and currencies,
and options on futures on securities, securities indices and
currencies;
(5) not to purchase securities on margin or make short sales of
securities or maintain a short position except for short sales
"against the box" (as a matter of current operating policy,
the Fund will not make short sales or maintain a short
position unless not more than 5% of the Fund's net assets
(taken at current value) is held as collateral for such sales
at any time);
(6) 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,
options and forward commitments, 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 such investments, are not deemed to
involve a hypothecation, mortgage or pledge of assets);
(7) 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
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<PAGE>
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;
(8) not to purchase or retain any security of an issuer if, to the
knowledge of the Fund, those of its officers and Trustees and
officers and directors of its investment adviser who
individually own more than 1/2 of 1% of the securities of such
issuer, when combined, own more than 5% of the securities of
such issuer taken at market;
(9) not to invest directly as a joint venturer or general partner
in oil, gas or other mineral exploration or development joint
ventures or general partnerships (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);
(10) not to invest in warrants in excess of 5% of the value, at the
lower of cost or market, of its net assets, provided that
warrants not listed on the New York or American Stock Exchange
shall be further limited to 2% of the Fund's net assets
(warrants initially attached to securities and acquired by the
Fund upon original issuance thereof shall be deemed to be
without value); and
(11) not to invest in companies for the purpose of exercising
control over their management, although the Fund may from time
to time present its views on various matters to the management
of issuers in which it holds investments.
Compliance with the above nonfundamental investment restrictions (1)
and (2) will be determined independently.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Among other investments described below, each Fund may buy and sell
domestic and foreign options, futures contracts, and options on futures
contracts with respect to securities, securities indices, and currencies, and
may enter into closing transactions with respect to each of the foregoing under
circumstances in which such instruments and techniques are expected by State
Street Research & Management Company (the "Investment Manager") to aid in
achieving the investment objective of a Fund. Each Fund on occasion may also
purchase instruments with characteristics of both futures and securities (e.g.,
debt instruments with interest and principal payments determined by reference to
the value of a commodity or a currency at a future time) and which, therefore,
possess the risks of both futures and securities investments.
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<PAGE>
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell
underlying assets, such as certain securities, currencies, or an index of
securities, at a future time at a specified price. A contract to buy establishes
a "long" position while a contract to sell establishes a "short" position.
The purchase of a futures contract on securities or an index of
securities normally enables a buyer to participate in the market movement of the
underlying asset or index after paying a transaction charge and posting margin
in an amount equal to a small percentage of the value of the underlying asset or
index. Each Fund will initially be required to deposit with the Trust's
custodian or the broker effecting the futures transaction an amount of "initial
margin" in cash or U.S. Treasury obligations.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when a 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 a 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, a 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.
Futures contracts will be executed primarily (a) to establish a short
position, and thus protect a Fund from experiencing the full impact of an
expected decline in market value of portfolio holdings without requiring the
sale of holdings, or (b) to establish a long position, and thus to participate
in an expected rise in market value of securities or currencies which a Fund
intends to purchase. Subject to the limitations described below, a Fund may also
enter into futures contracts for purposes of enhancing return. In transactions
establishing a long position in a futures contract, money market instruments
equal to the face value of the futures contract will be identified by the Fund
to the Trust's custodian for maintenance in a separate account to insure that
the use of such futures contracts is unleveraged. Similarly, a
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<PAGE>
representative portfolio of securities having a value equal to the aggregate
face value of the futures contract will be identified with respect to each short
position. Each Fund will employ any other appropriate method of cover which is
consistent with applicable regulatory and exchange requirements.
Options on Securities
Each Fund may use options on securities to implement its investment
strategy. A call option on a security, for example, gives the purchaser of the
option the right to buy, and the writer the obligation to sell, the underlying
asset at the exercise price during the option period. Conversely, a put option
on a security gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying asset at the exercise price during the option
period.
Purchased options have defined risk, i.e., the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset.
Written options have varying degrees of risk. An uncovered written call
option theoretically carries unlimited risk, as the market price of the
underlying asset could rise far above the exercise price before its expiration.
This risk is tempered when the call option is covered, i.e., when the option
writer owns the underlying asset. In this case, the writer runs the risk of the
lost opportunity to participate in the appreciation in value of the asset rather
than the risk of an out-of-pocket loss. A written put option has defined risk,
i.e., the difference between the agreed-upon price that the Fund must pay to the
buyer upon exercise of the put and the value, which could be zero, of the asset
at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
his obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Options on Securities Indices
Each Fund may engage in transactions in call and put options on
securities indices. For example, a Fund may purchase put options on indices of
securities in anticipation of or during a market decline to attempt to offset
the decrease in market value of its securities that might otherwise result.
Put options on indices of securities are similar to put options on the
securities themselves except that the delivery requirements are different.
Instead of giving the right to make delivery of a security at a specified price,
a put option on an index of securities gives the holder the right to receive an
amount of cash upon exercise of the option if the value of the
7
<PAGE>
underlying index has fallen below the exercise price. The amount of cash
received will be equal to the difference between the closing price of the index
and the exercise price of the option expressed in dollars times a specified
multiple. As with options on securities or futures contracts, a Fund may offset
its position in index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.
A securities index assigns relative values to the securities included
in the index and the index options are based on a broad market index. Although
there are at present few available options on indices of fixed income
securities, other than tax-exempt securities, or futures and related options
based on such indices, such instruments may become available in the future. In
connection with the use of such options, a Fund may cover its position by
identifying a representative portfolio of securities having a value equal to the
aggregate face value of the option position taken. However, the Fund may employ
any appropriate method to cover its positions that is consistent with applicable
regulatory and exchange requirements.
Options on Futures Contracts
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
Options Strategy
A basic option strategy for protecting a Fund against a decline in
securities prices could involve (a) the purchase of a put -- thus "locking in"
the selling price of the underlying securities or securities indices -- or (b)
the writing of a call on securities or securities indices held by a Fund --
thereby generating income (the premium paid by the buyer) by giving the holder
of such call the option to buy the underlying asset at a fixed price. The
premium will offset, in whole or in part, a decline in portfolio value; however,
if prices of the relevant securities or securities indices rose instead of
falling, the call might be exercised, thereby resulting in a potential loss of
appreciation in the underlying securities or securities indices.
A basic option strategy when a rise in securities prices is anticipated
is the purchase of a call -- thus "locking in" the purchase price of the
underlying security or other asset. In transactions involving the purchase of
call options by a Fund, money market instruments equal to the aggregate exercise
price of the options will be identified by a Fund to the Trust's custodian to
insure that the use of such investments is unleveraged.
A Fund may write options in connection with buy-and-write transactions;
that is, a Fund may purchase a security and concurrently write a call option
against that security. If the call option is exercised in such a transaction,
the Fund's maximum gain will be the premium received by it for writing the
option, adjusted upward or downward by the difference between
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<PAGE>
the Fund's purchase price of the security and the exercise price of the option.
If the option is not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by the
premium received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund's return will be the premium received from
writing the put option minus the amount by which the market price of the
security is below the exercise price.
Limitations and Risks of Options and Futures Activity
The Funds will engage in transactions in futures contracts or options
as a hedge against changes resulting from market conditions which produce
changes in the values of their securities or the securities which it intends to
purchase (e.g., to replace portfolio securities which will mature in the near
future) and, subject to the limitations described below, to enhance return. None
of the Funds will purchase any futures contract or purchase any call option if,
immediately thereafter, more than one third of the Fund's net assets would be
represented by long futures contracts or call options. A Fund will not write a
covered call or put option if, immediately thereafter, the aggregate value of
the assets (securities in the case of written calls and cash or cash equivalents
in the case of written puts) underlying all such options, determined as of the
dates such options were written, would exceed 25% of that Fund's net assets. In
addition, a Fund may not establish a position in a commodity futures contract or
purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such nonhedging
purposes would exceed 5% of the market value of the Fund's net assets.
Although effective hedging can generally capture the bulk of a desired
risk adjustment, no hedge is completely effective. Each Fund's ability to hedge
effectively through transactions in futures and options depends on the degree to
which price movements in its holdings correlate with price movements of the
futures and options.
Some positions in 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 Funds' ability to
effectively hedge its securities and might in some cases require a Fund to
deposit cash to meet applicable margin requirements. Each Fund will enter into
an option or futures position only if it appears to be a liquid investment.
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Foreign Investments
To the extent a Fund invests in securities of issuers in less developed
countries or emerging foreign markets, it will be subject to a variety of
additional risks, including risks associated with political instability,
economies based on relatively few industries, lesser market liquidity, high
rates of inflation, significant price volatility of portfolio holdings and high
levels of external debt in the relevant country.
Although the Funds may invest in securities denominated in foreign
currencies, each Fund values its securities and other assets in U.S. dollars. As
a result, the net asset value of a Fund's shares may fluctuate with U.S. dollar
exchange rates as well as with price changes of the Fund's securities in the
various local markets and currencies. Thus, an increase in the value of the U.S.
dollar compared to the currencies in which a Fund makes its investments could
reduce the effect of increases and magnify the effect of decreases in the prices
of the Fund's securities in their local markets. Conversely, a decrease in the
value of the U.S. dollar will have the opposite effect of magnifying the effect
of increases and reducing the effect of decreases in the prices of a Fund's
securities in the local markets.
Currency Transactions
The Funds may engage in currency exchange transactions. Each 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. Each Fund's dealings in
forward currency exchange contracts will be limited to hedging involving either
specific transactions or aggregate portfolio positions. A forward currency
contract involves an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. These
contracts are not commodities and are entered into in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. Although spot and forward contracts will be used primarily to
protect a 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 such Fund. This method of protecting the value of a 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.
Repurchase Agreements
The Funds may enter into repurchase agreements. Repurchase agreements
occur when a Fund acquires a security and the seller, which may be either (i) a
primary dealer in U.S.
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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. While repurchase agreements
involve the purchase and sale of the subject securities legally, the economic
effect may be similar to loans by a Fund collateralized by the underlying
securities. The Funds 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 a Fund's ability to dispose of the underlying securities.
Other risks include possible litigation over the rights of the respective
parties in the subject securities and the uncertainties and costs with respect
thereto. Repurchase agreements will be limited to 30% of a Fund's total assets,
except that repurchase agreements extending for more than seven days when
combined with other illiquid securities will be limited to 15% of a Fund's total
assets. None of the Funds presently intend to engage in repurchase agreements in
excess of 5% of its total assets.
Reverse Repurchase Agreements
The Funds may enter into reverse repurchase agreements. However, none
of the Funds presently intend to engage in reverse repurchase agreements in
excess of 5% of each Fund's total assets. In a reverse repurchase agreement a
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 it will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed-upon rate. While reverse repurchase
agreements involve the purchase and sale of the subject securities legally, the
economic effect may be similar to borrowings by a Fund collateralized by the
underlying securities. The ability to use reverse repurchase agreements may
enable, but does not ensure the ability of, a 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 a Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on its records at the trade date and maintained until the transaction
is settled.
When-Issued Securities
Each Fund may purchase "when-issued" securities, which are traded on a
price or yield basis prior to actual issuance. However, none of the Funds
presently intend to purchase when-issued securities in an amount in excess of 5%
of its total assets. Such purchases will be made only to achieve a Fund's
investment objectives 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
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period dividends or interest on the securities are not payable. No income
accrues to a Fund prior to the time it takes delivery. A frequent form of
when-issued trading occurs in the U.S. Treasury market when dealers begin to
trade a new issue of bonds or notes shortly after a Treasury financing is
announced, but prior to the actual sale of the securities. Similarly, corporate
securities to be created by a merger of companies may be traded prior to the
actual consummation of the merger. Such transactions may involve a risk of loss
if the value of the securities fall below the price committed to prior to the
actual issuance. The Trust's custodian will establish a segregated account for
each Fund when it 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 a Fund.
Rule 144A Securities
Subject to the investment limitation of each Fund applicable to
restricted securities set forth above, each Fund may buy or sell restricted
securities in accordance with Rule 144A under the Securities Act of 1933 ("Rule
144A Securities"). Securities may be resold pursuant to Rule 144A under certain
circumstances only to qualified institutional buyers as defined in the rule, and
the markets and trading practices for such securities are relatively new and
still developing; depending on the development of such markets, Rule 144A
Securities may be deemed to be liquid as determined by or in accordance with
methods adopted by the Trustees. Under such methods the following factors are
considered, among others: the frequency of trades and quotes for the security,
the number of dealers and potential purchasers in the market, market making
activity, and the nature of the security and marketplace trades. Investments in
Rule 144A Securities could have the effect of increasing the level of a Fund's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing such securities. Also, a Fund may be adversely
impacted by the possible illiquidity and subjective valuation of such securities
in the absence of a market for them.
Indexed Securities
Each Fund may purchase securities the value of which is indexed to
interest rates, foreign currencies and various indices and financial
indications, although none of the Funds presently intends to invest more than 5%
of its assets in such securities. These securities are generally short to
intermediate term debt securities. The interest rates or values at maturity
fluctuate with the index to which they are connected and may be more volatile
than such index.
Swap Arrangements
Each Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below. In an
interest rate swap, a Fund could agree for a specified period
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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
such Fund a fixed rate of interest on the notional principal amount. In a
currency swap, a 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, a Fund would agree to exchange cash flows on
a notional amount based on changes in the values of the selected indices.
Purchase of a cap entitles the purchaser to receive payments from the seller on
a notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an
agreed-upon interest rate or amount. A collar combines a cap and a floor.
Most swaps entered into by a 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 a Fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, a Fund will set up a segregated custodial account to hold appropriate
liquid assets, including cash; for swaps entered into on a net basis, assets
will be segregated having a daily net asset value equal to any excess of a
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 a Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a portion of a Fund's portfolio.
However, a Fund may enter into such arrangements for income purposes to the
extent permitted by the CFTC for entities which are not commodity pool
operators, such as the Fund. In entering a swap arrangement, a Fund is dependent
upon the creditworthiness and good faith of the counterparty. Each 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
non-standard 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 a Fund would diminish compared with what
it would have been if these investment techniques were not used. Moreover, even
if the Investment Manager is correct in its forecasts, there is a risk that the
swap position may correlate imperfectly with the price of the asset or liability
being hedged.
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Securities Lending
Collateral received by a Fund will generally be held in the form
tendered, although cash may be invested in securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities, irrevocable stand-by
letters of credit issued by a bank, or combination thereof. The collateral will
be reflected as an asset, with an offsetting liability to the counterparty, on
the records of each Fund.
Short Sales Against the Box
Each 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 a 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 a 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.
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 excludable. Securities issued by foreign governments are also excluded.
Companies engaged in the business of financing will be classified according to
the industries of their parent companies or industries that otherwise most
affect such financing companies. Issuers of asset-backed pools will be
classified as separate industries based on the nature of the underlying assets,
such as mortgages, credit card receivables, etc. "Asset-backed -- Mortgages"
includes pools of nongovernment backed mortgages.
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<TABLE>
<S> <C> <C>
Aerospace Electronic Components Oil Service
Airline Electronic Equipment Paper Products
Asset-backed -- Mortgages Entertainment Personal Care
Asset-backed -- Credit Card Financial Service Photography
Receivables Food & Beverage Plastics
Automotive Forest Products Printing & Publishing
Automotive Parts Gaming & Lodging Railroad
Bank Gas Real Estate & Building
Building Gas Transmission Recreation
Business Service Grocery Retail Trade
Cable Healthcare & Hospital Savings & Loan
Capital Goods & Equipment Management Shipping & Transportation
Chemical Hospital Supply Technology & Communications
Computer Software & Service Hotel & Restaurant Telephone
Conglomerate Insurance Textile & Apparel
Consumer Goods & Services Machinery Tobacco
Container Media Truckers
Cosmetics Metal & Mining Trust Certificates -
Diversified Office Equipment Government Related Lending
Drug Oil Production
Electric Oil Refining & Marketing
Electric Equipment
</TABLE>
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
As indicated in the Funds' Prospectus, the Funds may invest in
long-term and short-term debt securities. The Funds may invest in cash and
short-term securities for temporary defensive purposes when, in the opinion of
the Investment Manager, such a position is more likely to provide protection
against unfavorable market conditions than adherence to other investment
policies. Certain debt securities and money market instruments in which the
Funds may invest are described below.
U.S. Government and Related Securities. U.S. Government securities are
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S. Government
securities in which the Funds invest include, among others:
(degree) direct obligations of the U.S. Treasury, i.e., U.S. Treasury
bills, notes, certificates and bonds;
(degree) obligations of U.S. Government agencies or instrumentalities
such as the Federal Home Loan Banks, the Federal Farm Credit
Banks, the Federal National Mortgage Association, the
Government National Mortgage Association and the Federal Home
Loan Mortgage Corporation; and
15
<PAGE>
(degree) obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Funds may buy are backed in a
variety of ways by the U.S. Government, its agencies or instrumentalities. Some
of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. Other obligations, such as those of the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government to
purchase certain obligations of agencies or instrumentalities, although the U.S.
Government has no legal obligation to do so. Obligations such as those of the
Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation are backed
by the credit of the agency or instrumentality issuing the obligations. Certain
obligations of Resolution Funding Corporation, a mixed-ownership Government
corporation, are backed with respect to interest payments by the U.S. Treasury,
and with respect to principal payments by U.S. Treasury obligations held in a
segregated account with a Federal Reserve Bank. Except for certain
mortgage-related securities, the Funds 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 Funds in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Funds 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 Funds may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
16
<PAGE>
Bank Money Investments. Bank money investments include but are not
limited to certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are generally short-term (i.e., less than one year),
interest-bearing negotiable certificates issued by commercial banks or savings
and loan associations against funds deposited in the issuing institution. A
banker's acceptance is a time draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods). A banker's acceptance may be
obtained from a domestic or foreign bank, including a U.S. branch or agency of a
foreign bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. The Funds 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 Funds will not
invest in time deposits maturing in more than seven days and will not invest
more than 10% of its total assets in time deposits maturing in two to seven
days.
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under state law. U.S. federal branches or agencies
of foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such branches elect FDIC insurance. Unlike U.S. branches of foreign banks,
U.S. agencies of foreign banks may not accept deposits and thus are not eligible
for FDIC insurance. Both branches and agencies can maintain credit balances,
which are funds received by the office incidental to or arising out of the
exercise of their banking powers and can exercise other commercial functions,
such as lending activities.
Short-Term Corporate Debt Instruments. Short-term corporate debt
instruments include commercial paper to finance short-term credit needs (i.e.,
short-term, unsecured promissory notes) issued by corporations including but not
limited to (a) domestic or foreign bank holding companies or (b) their
subsidiaries or affiliates where the debt instrument is guaranteed by the bank
holding company or an affiliated bank or where the bank holding company or the
affiliated bank is unconditionally liable for the debt instrument. Commercial
paper is usually sold on a discounted basis and has a maturity at the time of
issuance not exceeding nine months.
17
<PAGE>
Commercial Paper Ratings. Commercial paper investments at the time of
purchase will be rated A by Standard & Poor's Corporation ("S&P") or Prime by
Moody's Investor's Service, Inc. ("Moody's"), or, if not rated, issued by
companies having an outstanding long-term unsecured debt issue rated at least A
by S&P or by Moody's. The money market investments in corporate bonds and
debentures (which must have maturities at the date of settlement of one year or
less) must be rated at the time of purchase at least A by S&P or by Moody's.
Commercial paper rated A (highest quality) by S&P is issued by entities
which have liquidity ratios which are adequate to meet cash requirements.
Long-term senior debt is rated A or better, although in some cases BBB credits
may be allowed. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. The relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1, A-2
or A-3. (Those A-1 issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and 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.
18
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and principal officers of the Trust, their addresses, and
their principal occupations and positions with certain affiliates of the
Investment Manager are set forth below.
*+Peter C. Bennett, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 58. His principal occupation is Executive
Vice President and Director of State Street Research & Management Company.
During the past five years he has also served as Senior Vice President and as
Vice President of State Street Research & Management Company. Mr. Bennett's
other principal business affiliation is Director, State Street Research
Investment Services, Inc.
+Steve A. Garban, The Pennsylvania State University, 208 Old Main,
University Park, PA 16802, serves as Trustee of the Trust. He is 59. He is
retired and was formerly Senior Vice President Finance and Operations and
Treasurer Emeritus of The Pennsylvania State University.
+Malcolm T. Hopkins, 14 Brookside Road, Biltmore Forest, Asheville, NC
28803, serves as Trustee of the Trust. He is 68. He is engaged principally in
private investments. Previously, he was Vice Chairman of the Board and Chief
Executive Officer of St. Regis Corp.
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 56. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as portfolio manager for State Street Research &
Management Company.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791,
serves as Trustee of the Trust. He is 70. He is engaged principally in private
investments and civic affairs, and is an author of business history. Previously,
he was with Morgan Guaranty Trust Company of New York.
+Robert A. Lawrence, Saltonstall & Co., 50 Congress Street, Boston, MA
02109, serves as Trustee of the Trust. He is 70. His principal occupation during
the past five years has been Partner, Saltonstall & Co., a private investment
firm.
- ------------------------
* or + See footnotes on page 21.
19
<PAGE>
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 45. His principal occupation is Executive Vice
President, Treasurer, Chief Financial Officer and Director of State Street
Research & Management Company. During the past five years he has also served as
Executive Vice President and Chief Financial Officer of New England Investment
Companies and as Senior Vice President and Vice President of New England Mutual
Life Insurance Company. Mr. Maus's other principal business affiliations include
Executive Vice President, Treasurer, Chief Financial Officer and Director of
State Street Research Investment Services, Inc.
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111 has
served as Secretary and General Counsel of the Trust. He is 41. His principal
occupation is Executive Vice President, General Counsel and Secretary of State
Street Research & Management Company. During the past five years he has also
served as Senior Vice President of State Street Research & Management Company
and as Senior Vice President, General Counsel and Assistant Secretary of The
Boston Company, Inc., Boston Safe Deposit and Trust Company and The Boston
Company Advisors, Inc. Mr. McNamara's other principal business affiliations
include Senior Vice President, Clerk and General Counsel of State Street
Research Investment Services, Inc.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 64. He is retired, having served during the past
five years, until October 1992, as Executive Vice President, Chief Operating
Officer and Director of Hewlett-Packard Company.
+Thomas L. Phillips, 141 Spring Street, Lexington, MA 02173 serves as
Trustee of the Trust. He is 72. He is retired and was formerly Chairman of the
Board and Chief Executive Officer of Raytheon Company, of which he remains a
Director.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves
as Trustee of the Trust. He is 58. His principal occupations during the past
five years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
- ------------------------
* or + See footnotes on page 21.
20
<PAGE>
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
59. His principal occupation during the past five years has been Jay W.
Forrester Professor of Management at Sloan School of Management, Massachusetts
Institute of Technology.
*+Thomas A. Shively, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 42. His principal occupation is Executive
Vice President and Director of State Street Research & Management Company.
During the past five years he has also served as Senior Vice President of State
Street Research & Management Company. Mr. Shively's other principal business
affiliations include Director of State Street Research Investment Services, Inc.
*+Ralph F. Verni, One Financial Center, Boston, MA 02111, serves as
Chairman of the Board, President, Chief Executive Officer and Trustee of the
Trust. He is 54. His principal occupation is Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research & Management
Company. During the past five years he also served as President and Chief
Executive Officer of New England Investment Companies and as Chief Investment
Officer of New England Mutual Life Insurance Company. Mr. Verni's other
principal business affiliations include Chairman of the Board and Director of
State Street Research Investment Services, Inc., and, until February 1996, prior
positions as President and Chief Executive Officer.
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 72. He is retired and was formerly Of Counsel for
the law firm Choate, Hall & Stewart. He was a partner of that firm from 1960 to
1987.
- -------------------------
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the 1940 Act because of their affiliations
with the Funds' investment adviser.
+ Serves as a Trustee and/or officer of one or more of the following
investment companies, each of which has an advisory or distribution
relationship with the Investment Manager or its affiliates: State
Street Research Equity Trust, State Street Research Financial Trust,
State Street Research Income Trust, State Street Research Money Market
Trust, State Street Research Tax-Exempt Trust, State Street Research
Capital Trust, State Street Research Exchange Trust, State Street
Research Growth Trust, State Street Research Master Investment Trust,
State Street Research Securities Trust, State Street Research
Portfolios, Inc. and Metropolitan Series Fund, Inc.
21
<PAGE>
As of January 31, 1997, the Trustees and principal officers of the
Trust as a group owned none of the outstanding shares of each Fund.
As of January 31, 1997, the following persons or entities were the record
and/or beneficial owners of the approximate amounts of each class of shares of
the Funds' as set forth beside their names:
Strategic Portfolios Strategic Portfolios Strategic Portfolios
Aggressive Moderate Conservative
% of % of % of
Class Holder Class Holder Class Holder Class
A State Street 82.7
Bank
G.L. Beals, Sr. &
D.Z. Beals 12.5
C Metropolitan 65.3 Metropolitan 36.9 Metropolitan 68.9
Life Life Life
Chase Manhattan 34.7 Chase Manhattan 50.5 Chase Manhattan 31.1
Bank, NA Bank, NA Bank, N.A.
State Street 11.8
Bank
The full name and address of the above persons and entities are as follows:
Metropolitan Life Insurance Company (a)
One Madison Avenue
New York, NY 10010
Chase Manhattan Bank, N.A.(b)(c)
770 Broadway
New York, NY 10003
State Street Bank and Trust Company (c)
225 Franklin Street
Boston, MA 02110
G.L. Beals, Sr. & D.Z. Beals
c/o State Street Research
Shareholders Services
One Financial Center
Boston, MA 02111
(a) Metropolitan Life Insurance Company ("Metropolitan"), a New York
corporation, was the record and/or beneficial owner, directly or
indirectly through its subsidiaries or affiliates, of such shares.
(b) Chase Manhattan Bank, N.A. holds such shares as trustee under certain
employee benefit plans serviced by Metropolitan.
(c) The respective Funds believe that each named recordholder does not have
beneficial ownership of such shares.
Ownership of 25% or more of a voting security is deemed "control" as
defined in the 1940 Act. So long as 25% of a class of shares is so owned, such
owner will be presumed to be in control of such class of shares for purposes of
voting on certain matters submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
22
<PAGE>
The Trustees have been compensated as follows:
- --------------------------------------------------------------------------------
(1) (2) (3)
Name of Aggregate Total
Trustee Compensation Compensation
From Trust(a) From Trust and
Complex Paid
to Trustees(b)
- --------------------------------------------------------------------------------
Steve A. Garban $ 0(c) $ 34,750
Malcolm T. Hopkins $ 0(c) $ 34,750
Edward M. Lamont $ 9,700 $ 59,375
Robert A. Lawrence $ 9,700 $ 92,125
Dean O. Morton $ 10,900 $ 96,125
Thomas L. Phillips $ 9,700 $ 59,375
Toby Rosenblatt $ 9,700 $ 59,375
Michael S. Scott Morton $ 12,500 $ 100,325
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $ 10,900 $ 63,375
(a) For the fiscal year ended October 31, 1996. Includes compensation from
multiple series of the Trust. See "Distribution of Shares" for a
listing of series.
(b) Includes compensation on behalf of 31 funds representing all series of
investment companies for which the Investment Manager serves as primary
investment adviser, series of Metropolitan Series Fund, Inc., for which
the Investment Manager serves as sub-investment adviser, and series of
State Street Research Portfolios, Inc., for which State Street Research
Investment Services, Inc. serves as distributor. "Total Compensation
from Trust and Complex Paid to Trustees" is for the 12 months ended
December 31, 1996. The Trust does not provide any pension or retirement
benefits for the Trustees.
(c) Did not serve as a Trustee during the fiscal year ended October 31,
1996.
23
<PAGE>
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Funds. The Advisory
Agreement provides that the Investment Manager shall furnish the Funds with an
investment program, suitable office space and 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 or affiliates of the
Investment Manager or its affiliates. The Investment Manager is an indirect
wholly-owned subsidiary of Metropolitan.
The advisory fee payable monthly by each Fund to the Investment Manager
is computed as a percentage of the average of the value of the net assets of
such Fund as determined at the close of the New York Stock Exchange (the "NYSE")
on each day the NYSE is open for trading, at the annual rate of 0.60% of the net
assets of Strategic Portfolios: Conservative, 0.65% of the net assets of
Strategic Portfolios: Moderate and 0.75% of the net assets of Strategic
Portfolios: Aggressive. The Distributor and its affiliates have from time to
time and in varying amounts voluntarily assumed some portion of fees or expenses
relating to each Fund.
The advisory fees paid by each Fund to the Investment Manager for the
periods shown below, prior to the assumption of fees or expenses, were as
follows:
<TABLE>
<CAPTION>
Year Ended
October 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Strategic Portfolios: Moderate $ 302,408 $ 216,199 $ 173,499
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
May 16, 1994
(commencement
Year Ended of operations) to
October 31, October 31, 1994
------------------------- -----------------
1996 1995
---- ----
<S> <C> <C> <C>
Strategic Portfolios: Conservative $ 201,690 $ 162,835 $ 69,793
Strategic Portfolios: Aggressive $ 526,134 $ 414,353 $ 174,306
</TABLE>
For the same period, the voluntary reduction of fees or assumption of expenses
were as follows:
<TABLE>
<CAPTION>
Year Ended
October 31,
-----------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Strategic Portfolios: Moderate $ 234,376 $ 244,843 $ 155,886
</TABLE>
<TABLE>
<CAPTION>
May 16, 1994
(commencement
Year Ended of operations) to
October 31, October 31, 1994
------------------------- -----------------
1996 1995
---- ----
<S> <C> <C> <C>
Strategic Portfolios: Conservative $ 197,940 $ 124,191 $ 81,035
Strategic Portfolios: Aggressive $ 142,848 $ 119,174 $ 32,452
</TABLE>
The Advisory Agreement provides that it shall continue in effect with
respect to each 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 such 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
25
<PAGE>
regulations provide that a transaction which does not result in a change of
actual control or management of an adviser is not deemed an assignment.
Under a Funds Administration Agreement between the Investment Manager
and the Distributor, the Distributor provides assistance to the Investment
Manager in performing certain fund administrative services for the Trust, such
as assistance in determining the daily net asset value of shares of the Funds
and in preparing various reports required by regulations.
Under a Shareholders' Administrative Services Agreement between the
Trust and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Funds, and is entitled
to reimbursements of its costs for providing such services. Under certain
arrangements for Metropolitan to provide subadministration services,
Metropolitan may receive a fee for the maintenance of certain share ownership
records for participants in sponsored arrangements, employee benefit plans, and
similar programs or plans through or under which a Fund's shares may be
purchased.
Under the Code of Ethics of the Investment Manager, its employees in
Boston, where investment management operations are conducted, are only permitted
to engage in personal securities transactions in accordance with certain
conditions relating to an employee's position, the identity of the security, the
timing of the transaction, and similar factors. Such employees must report their
personal securities transactions quarterly and supply broker confirmations of
such transactions to the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Funds are distributed by the Distributor. The Funds offer
four classes of shares which may be purchased at the next determined net asset
value per share plus, in the case of all classes except Class C shares, a sales
charge which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B and Class
D shares). General information on how to buy shares of the Funds, as well as
sales charges involved, are set forth under "Purchase of Shares" in the
Prospectus. The following supplements that information.
Public Offering Price
The public offering price for each class of shares of the Funds is
based on their net asset value determined as of the close of regular trading of
the NYSE on the day the purchase order is received by State Street Research
Shareholder Services provided that the order is received prior to the close of
the NYSE on that day; otherwise the net asset value used is that determined as
of the close of the NYSE on the next day it is open for unrestricted trading.
When a purchase order is placed through a dealer, that dealer is responsible for
transmitting
26
<PAGE>
the order promptly to State Street Research Shareholder Services in order to
permit the investor to obtain the current price. Any loss suffered by an
investor which results from a dealer's failure to transmit an order promptly is
a matter for settlement between the investor and the dealer.
Reduced Sales Charges - For purposes of determining whether a purchase
of Class A shares qualifies for reduced sales charges, the term "person"
includes: (i) an individual, or an individual combining with his or her spouse
and their children and purchasing for his, her or their own account; (ii) a
"company" as defined in Section 2(a)(8) of the 1940 Act; (iii) a trustee or
other fiduciary purchasing for a single trust estate or single fiduciary account
(including a pension, profit sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code);
(iv) a tax-exempt organization under Section 501(c)(3) or (13) of the Internal
Revenue Code; and (v) an employee benefit plan of a single employer or of
affiliated employers.
Investors may purchase Class A shares of the Funds at reduced sales
charges by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Funds or any combination of Class A shares of "Eligible Funds"
as designated by the Distributor within a 13-month period. The sales charge
applicable to each purchase made pursuant to a Letter of Intent will be that
which would apply if the total dollar amount set forth in the Letter of Intent
were being bought in a single transaction. Purchases made within a 90-day period
prior to the execution of a Letter of Intent may be included therein; in such
case the date of the earliest of such purchases marks the commencement of the
13-month period.
An investor may include toward completion of a Letter of Intent the
value (at the current public offering price) of all of his or her Class A shares
of the Funds and of any of the other Class A shares of Eligible Funds held of
record as of the date of his or her Letter of Intent, plus the value (at the
current offering price) as of such date of all of such shares held by any
"person" described herein as eligible to join with the investor in a single
purchase. Class B, Class C and Class D shares may also be included in the
combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The 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 Funds or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge
27
<PAGE>
under the right is determined on the amount arrived at by combining the dollar
amount of the purchase with the value (at the current public offering price) of
all Class A shares of the other Eligible Funds owned as of the purchase date by
the investor plus the value (at the current public offering price) of all such
shares owned as of such date by any "person" described herein as eligible to
join with the investor in a single purchase. Class B, Class C and Class D shares
may also be included in the combination under certain circumstances. Investors
must submit to the Distributor sufficient information to show that they qualify
for this Right of Accumulation.
Class C Shares - Class C shares are currently available to certain
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants (currently a minimum of 100 eligible
employees), service arrangements or similar factors; insurance companies;
investment companies; endowment funds of nonprofit organizations with
substantial minimum assets (currently a minimum of $10,000,000); and other
similar institutional investors.
Reorganizations - In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, as amended, each Fund may issue its shares at net
asset value (or more) to such entities or to their security holders.
Redemptions - The Funds reserve 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, a Fund may limit the amount of
redemption proceeds paid in cash. Although it has no present intention to do so,
a 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 such 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. If the Trustees determine that it is in the
best interests of a Fund to pay a redemption, or any portion thereof, in kind,
the portfolio securities used to make such payment will be selected in such
manner as the Trustees deem fair and equitable and valued in the manner
described under the heading "Net Asset Value" herein.
NET ASSET VALUE
The net asset values of the shares of each Fund are 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, Presidents
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
28
<PAGE>
The net asset value per share of a Fund is computed by dividing the sum
of the value of the securities held by a Fund plus any cash or other assets
minus all liabilities by the total number of outstanding shares of a Fund at
such time. Any expenses, except for extraordinary or nonrecurring expenses,
borne by a Fund, including the investment management fee payable to the
Investment Manager, are accrued daily.
In general, securities are valued as follows. Securities which are
listed or traded on the New York or American Stock Exchange are valued at the
price of the last quoted sale on the respective exchange for that day.
Securities which are listed or traded on a national securities exchange or
exchanges, but not on the New York or American Stock Exchange, are valued at the
price of the last quoted sale on the exchange for that day prior to the close of
the NYSE. Securities not listed on any national securities exchange which are
traded "over the counter" and for which quotations are available on the National
Association of Securities Dealers' NASDAQ System, or other system, are valued at
the closing price supplied through such system for that day at the close of the
NYSE. Other securities are, in general, valued at the mean of the bid and asked
quotations last quoted prior to the close of the NYSE if there are market
quotations readily available, or in the absence of such market quotations, then
at the fair value thereof as determined by or under authority of the Trustees of
the Trust with the use of such pricing services as may be deemed appropriate or
methodologies approved by the Trustees.
In determining the values of portfolio assets, 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. Most debt securities are
valued on the basis of data provided by such pricing services. Since Strategic
Portfolios: Conservative and Strategic Portfolios: Moderate are significantly
comprised of debt securities under normal circumstances; most of these Funds'
assets are therefore valued on the basis of such data from the pricing services.
The pricing services may provide prices determined as of times prior to the
close of the NYSE.
Short-term debt instruments issued with a maturity of one year or less
which have a remaining maturity of 60 days or less are valued using the
amortized cost method, provided that during any period in which more than 25% of
a Fund's total assets is invested in short-term debt securities the current
market value of such securities will be used in calculating net asset value per
share in lieu of the amortized cost method. The amortized cost method is used
when the value obtained is fair value. Under the amortized cost method of
valuation, the security is initially valued at cost on the date of purchase (or
in the case of short-term debt instruments purchased with more than 60 days
remaining to maturity, the market value on the 61st day prior to maturity), and
thereafter a constant amortization to maturity of any discount or premium is
assumed regardless of the impact of fluctuating interest rates on the market
value of the security.
29
<PAGE>
PORTFOLIO TRANSACTIONS
Portfolio Turnover
A 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 Funds reserve full freedom with respect to portfolio
turnover, as described in the Prospectus.
The Funds' portfolio turnover rates for the periods shown below were as
follows:
Year Ended
October 31,
---------------------------------
1996 1995
---- ----
Strategic Portfolios: Moderate 127.59% 120.62%
Strategic Portfolios: Conservative 126.41% 132.50%
Strategic Portfolios: Aggressive 145.59% 127.44%
Brokerage Allocation
The Investment Manager's policy is to seek for its clients, including
each 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 Funds 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
30
<PAGE>
firm. The Investment Manager may or may not solicit competitive bids on its
judgment of the expected benefit or harm to the execution process for that
transaction.
When it appears that a number of firms could satisfy the required
standards in respect of a particular transaction, consideration may also be
given to services other than execution services which certain of such firms have
provided in the past or may provide in the future. Negotiated commission rates
and prices, however, are based upon the Investment Manager's judgment of the
rate which reflects the execution requirements of the transaction without regard
to whether the broker provides services in addition to execution. Among such
other services are the supplying of supplemental investment research; general
economic, political and business information; analytical and statistical data;
relevant market information, quotation equipment and services; reports and
information about specific companies, industries and securities; purchase and
sale recommendations for stocks and bonds, portfolio; strategy services;
historical statistical information; market data services providing information
on specific issues and prices; financial publications; proxy voting data and
analysis services; technical analysis of various aspects of the securities
markets, including technical charts; computer hardware used for brokerage and
research purposes; computer software and databases, including those used for
portfolio analysis and modelling; and portfolio evaluation services and relative
performance of accounts.
Certain nonexecution services provided by a broker-dealer may in turn
be obtained by the broker-dealers from third parties who are paid for such
services by the broker-dealers. The Investment Manager has an investment of less
than ten percent of the outstanding equity of one such third party which
provides portfolio analysis and modelling and other research and investment
decision-making services integrated into a trading system developed and licensed
by the third party to others. The Investment Manager could be said to benefit
indirectly if in the future it allocates brokerage to a broker-dealer who in
turn pays this third party for services to be provided to the Investment
Manager.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. Some services may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Investment Manager allocates the cost
of such services to determine the appropriate proportion of the cost which is
allocable to purposes other than research or investment decision-making and is
therefore paid directly by the Investment Manager. Some research and execution
services may benefit the Investment Manager's clients as a whole, while others
may benefit a specific segment of clients. Not all such services will
necessarily be used exclusively in connection with the accounts which pay the
commissions to the broker-dealer producing the services.
The Investment Manager has no fixed agreements or understandings with
any broker-dealer as to the amount of brokerage business which that firm may
expect to receive for services supplied to the Investment Manager or otherwise.
There may be, however,
31
<PAGE>
understandings with certain firms that in order for such firms to be able to
continuously supply certain services, they need to receive allocation of a
specified amount of brokerage business. These understandings are honored to the
extent possible in accordance with the policies set forth above.
It is not the Investment Manager's policy to intentionally pay a firm a
brokerage commission higher than that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided. However, the Funds and the Investment Manager are aware that
this is an area where differences of opinion as to fact and circumstances may
exist, and in such circumstances, if any, rely on the provisions of Section
28(e) of the Securities Exchange Act of 1934, to the extent applicable.
Brokerage commissions paid by the Funds for the periods shown below were as
follows:
Year Ended
October 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
Strategic Portfolios: Moderate $ 93,000 $ 37,000 $ 18,000
<TABLE>
<CAPTION>
May 16, 1994
(commencement
Year Ended of operations) to
October 31, October 31, 1994
----------- -----------------
1996 1995
---- ----
<S> <C> <C> <C>
Strategic Portfolios: Conservative $ 38,000 $ 16,000 $ 7,000
Strategic Portfolios: Aggressive $ 204,000 $ 90,000 $ 33,000
</TABLE>
The Investment Manager believes that the amount of brokerage
commissions paid by the Fund during the fiscal year ended October 31, 1996 was
significantly higher than during the previous year because of transactions to
reposition the Funds to be more defensive in light of economic expectations.
During and at the end of its most recent fiscal year, no Fund held in
its portfolio securities of any entity that might be deemed to be a regular
broker-dealer of such Fund as defined under the 1940 Act.
32
<PAGE>
In the case of the purchase of fixed income securities in underwriting
transactions, the Investment Manager follows any instructions received from its
clients as to the allocation of new issue discounts, selling concessions and
designations to brokers or dealers which provide the client with research,
performance evaluation, master trustee and other services. In the absence of
instructions from the client, the Investment Manager may make such allocations
to broker-dealers which have provided the Investment Manager with research and
brokerage services.
When more than one client of the Investment Manager is seeking to buy
or sell the same security, the sale or purchase is carried out in a manner which
is considered fair and equitable to all accounts. In allocating investments
among various clients (including in what sequence orders for trades are placed),
the Investment Manager will use its best judgment and will take into account
such factors as the investment objectives of the clients, the amount of
investment funds available to each, the amount already committed for each client
to a specific investment and the relative risks of the investments, all in order
to provide on balance a fair and equitable result to each client over time.
Although sharing in large transactions may sometimes affect price or volume of
shares acquired or sold, overall it is believed there may be an advantage in
execution. The Investment Manager may follow the practice of grouping orders of
various clients for execution to get the benefit of lower prices or commission
rates. In certain cases where the aggregate order may be executed in a series of
transactions at various prices, the transactions are allocated as to amount and
price in a manner considered equitable to each so that each receives, to the
extent practicable, the average price of such transactions. Exceptions may be
made based on such factors as the size of the account and the size of the trade.
For example, the Investment Manager may not aggregate trades where it believes
that it is in the best interests of clients not to do so, including situations
where aggregation might result in a large number of small transactions with
consequent increased custodial and other transactional costs which may
disproportionately impact smaller accounts. Such disaggregation, depending on
the circumstances, may or may not result in such accounts receiving more or less
favorable execution relative to other clients.
CERTAIN TAX MATTERS
Federal Income Taxation of the Funds -- In General
- --------------------------------------------------
Each Fund intends to qualify and elect to be treated each taxable year
as a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), although it cannot give complete
assurance that it will do so. Accordingly, a Fund must, among other things, (a)
derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) derive less
33
<PAGE>
than 30% of its gross income in each taxable year from the sale or other
disposition of any of the following held for less than three months (the "30%
test"): (i) stock or securities, (ii) options, futures, or forward contracts
(other than options, futures or forward contracts on foreign currencies), or
(iii) foreign currencies (or options, futures, or forward contracts on foreign
currencies) but only if such currencies (or options, futures, or forward
contracts) are not directly related to the Funds' principal business of
investing in stocks or securities (or options and futures with respect to stocks
or securities); (c) satisfy certain diversification requirements; and (d) in
order to be entitled to utilize the dividends paid deduction, distribute
annually at least 90% of its investment company taxable income (determined
without regard to the deduction for dividends paid).
The 30% test will limit the extent to which a Fund may sell securities
held for less than three months, write options which expire in less than three
months, and effect closing transactions with respect to call or put options that
have been written or purchased within the preceding three months. (If a Fund
purchases a put option for the purpose of hedging an underlying portfolio
security, the acquisition of the option is treated as a short sale of the
underlying security unless, for purposes only of the 30% test, the option and
the security are acquired on the same date.) Finally, as discussed below, this
requirement may also limit investments by a Fund in options on stock indices,
listed options on nonconvertible debt securities, futures contracts, options on
interest rate futures contracts and certain foreign currency contracts.
If a Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of such Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of such
Fund.
A 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 a 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. Each Fund
intends to make sufficient distributions to avoid this 4% excise tax.
Federal Income Taxation of Investments
- --------------------------------------
Original Issue Discount. For federal income tax purposes, debt
securities purchased by a Fund may be treated as having original issue discount.
Original issue discount represents
34
<PAGE>
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 a 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 a 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 a Fund purchases the
securities. This additional discount represents market discount for income tax
purposes. In the case of any debt security issued after July 18, 1984, having a
fixed maturity date of more than one year from the date of issue and having
market discount, the gain realized on disposition will be treated as interest to
the extent it does not exceed the accrued market discount on the security
(unless a 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. A Fund may be required to capitalize, rather than deduct
currently, part or all of any direct interest expense incurred to purchase or
carry any debt security having market discount, unless a Fund makes the election
to include market discount currently. Because each Fund must include original
issue discount in income, it will be more difficult for a Fund to make the
distributions required for such Fund to maintain its status as a regulated
investment company under Subchapter M of the Code or to avoid the 4% excise tax
described above.
Options and Futures Transactions. Certain of a Fund's investments may
be subject to provisions of the Code that (i) require inclusion of unrealized
gains or losses in a Fund's income for purposes of the 90% test, the 30% test,
the excise tax and the distribution requirements applicable to regulated
investment companies; (ii) defer recognition of realized losses; and (iii)
characterize both realized and unrealized gain or loss as short-term or
long-term gain or loss. Such provisions generally apply to, among other
investments, options on debt securities, indices on securities and futures
contracts.
Federal Income Taxation of Shareholders
- ---------------------------------------
Dividends paid by a Fund may be eligible for the 70% dividends-received
deduction for corporations. The percentage of a Fund's dividends eligible for
such tax treatment may be less than 100% to the extent that less than 100% of a
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.
35
<PAGE>
Distributions by a Fund can result in a reduction in the fair market
value of such Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as ordinary income or long-term capital gain, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
DISTRIBUTION OF SHARES OF THE FUNDS
State Street Research Financial Trust is currently comprised of the
following series: State Street Research Government Income Fund, State Street
Research Strategic Portfolios: Conservative, State Street Research Strategic
Portfolios: Moderate and State Street Research Strategic Portfolios: Aggressive.
The Trustees have authorized shares of the Funds to be issued in four classes:
Class A, Class B, Class C and Class D shares. The Trustees of the Trust have
authority to issue an unlimited number of shares of beneficial interest of
separate series, $.001 par value per share. A "series" is a separate pool of
assets of the Trust which is separately managed and has a different investment
objective and different investment policies from those of another series. The
Trustees have authority, without the necessity of a shareholder vote, to create
any number of new series or classes or to commence the public offering of shares
of any previously established series or class.
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Funds. Shares of the Funds 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 applicable Fund plus (subject to certain exceptions) a sales charge which,
at the election of the investor, may be imposed (i) at the time of purchase (the
Class A shares) or (ii) on a deferred basis (Class B and Class D shares). The
Distributor may reallow all or portions of such sales charges as concessions to
dealers.
For the fiscal years ended October 31, 1996, 1995 and 1994, no sales
charges on Class A shares of Strategic Portfolios: Moderate were paid to the
Distributor. For the fiscal years ended October 31, 1996 and 1995 and for the
period May 16, 1994 (commencement of operations) to October 31, 1994, no sales
charges on Class A shares of Strategic Portfolios: Conservative and Strategic
Portfolios: Aggressive were paid to the Distributor.
The differences in the price at which the Funds' Class A shares are
offered due to scheduled variations in sales charges, as described in the Funds'
Prospectus, result from cost
36
<PAGE>
savings inherent in economies of scale. Management believes that the cost of
sales efforts of the Distributor and broker-dealers tends to decrease as the
size of purchases increases, or does not involve any incremental sales expenses
as in the case of, for example, exchanges, reinvestments or dividend investments
at net asset value. Similarly, no significant sales effort is necessary for
sales of shares at net asset value to certain Directors, Trustees, officers,
employees, their relatives and other persons directly or indirectly related to
the Funds or associated entities. Where shares of the Funds are offered at a
reduced sales charge or without a sales charge pursuant to sponsored
arrangements and managed fee-based programs, the amount of the sales charge
reduction will similarly reflect the anticipated reduction in sales expenses
associated with such arrangements. The reduction in sales expenses, and
therefore the reduction in sales charge, will vary depending on factors such as
the size and other characteristics of the organization or program, and the
nature of its membership or the participants. The Funds reserve the right to
make variations in, or eliminate, sales charges at any time or to revise the
terms of or to suspend or discontinue sales pursuant to sponsored arrangements
at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission based on the aggregate of such sales. Such
commission also is payable to authorized securities dealers upon sales of Class
A shares made pursuant to a Letter of Intent to purchase shares having a net
asset value of $1,000,000 or more. Shares sold with such commissions payable are
subject to a one-year contingent deferred sales charge of 1.00% on any portion
of such shares redeemed within one year following their sale. After a particular
purchase of Class A shares is made under the Letter of Intent, the commission
will be paid only in respect of that particular purchase of shares. If the
Letter of Intent is not completed, the commission paid will be deducted from any
discounts or commissions otherwise payable to such dealer in respect of shares
actually sold. If an investor is eligible to purchase shares at net asset value
on account of the Right of Accumulation, the commission will be paid only in
respect of the incremental purchase at net asset value.
For the fiscal years ended October 31, 1996, 1995 and 1994, the
Distributor received no contingent deferred sales charges upon redemption of
Class A, Class B and Class D shares of Strategic Portfolios: Moderate and paid
no initial commissions to securities dealers for sales of such shares. For the
fiscal years ended October 31, 1996 and 1995 and for the period May 16, 1994
(commencement of operations) to October 31, 1994, the Distributor received no
contingent deferred sales charges upon redemption of Class A, Class B and Class
D shares of Strategic Portfolios: Conservative and Strategic Portfolios:
Aggressive and paid no initial commissions to securities dealers for sales of
such shares.
Each Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "Distribution Plan") under which the Funds may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of Class A, Class B and Class D shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to
37
<PAGE>
underwriters, securities dealers and others engaged in the sale of shares,
including payments to the Distributor to be used to pay commissions and/or
reimbursement to securities dealers (which securities dealers may be affiliates
of the Distributor) engaged in the distribution and marketing of shares and
furnishing ongoing assistance to investors, (2) reimbursement of direct
out-of-pocket expenditures incurred by the Distributor in connection with the
distribution and marketing of shares and the servicing of investor accounts
including expenses relating to the formulation and implementation of marketing
strategies and promotional activities such as direct mail promotions and
television, radio, newspaper, magazine and other mass media advertising, the
preparation, printing and distribution of Prospectuses of the Funds and reports
for recipients other than existing shareholders of the Fund, and obtaining such
information, analyses and reports with respect to marketing and promotional
activities and investor accounts as the Funds may, from time to time, deem
advisable, and (3) reimbursement of expenses incurred by the Distributor in
connection with the maintenance or servicing of shareholder accounts including
payments to securities dealers and others in consideration of the provision of
personal services to investors and/or the maintenance of shareholder accounts
and expenses associated with the provision of personal services by the
Distributor directly to investors. In addition, the Distribution Plan is deemed
to authorize the Distributor to make payments out of general profits, revenues
or other sources to underwriters, securities dealers and others in connection
with sales of shares, to the extent, if any, that such payments may be deemed to
be within the scope of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class D shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class D
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class D shares (as the case may be) to make payments for personal
services and/or the maintenance or servicing of shareholder accounts. Proceeds
from the service fee will be used by the Distributor to compensate securities
dealers and others selling shares of the Funds for rendering service to
shareholders on an ongoing basis. Such amounts are based on the net asset value
of shares of the Funds held by such dealers as nominee for their customers or
which are owned directly by such customers for so long as such shares are
outstanding and the Distribution Plan remains in effect with respect to the
Funds. Any amounts received by the Distributor and not so allocated may be
applied by the Distributor as reimbursement for expenses incurred in connection
with the servicing of investor accounts. The distribution and servicing expenses
of a particular class will be borne solely by that class.
During the fiscal year ended October 31, 1996, Strategic Portfolios:
Moderate paid the Distributor no fees under the Distribution Plan. During the
fiscal year ended October 31, 1996, Strategic Portfolios: Conservative and
Strategic Portfolios: Aggressive paid the
38
<PAGE>
Distributor fees under the Distribution Plan and the Distributor used all of
such payments for expenses incurred on behalf of the Funds as follows:
39
<PAGE>
<TABLE>
<CAPTION>
Class A
-------
Strategic Portfolios: Strategic Portfolios
Conservative Aggressive
------------ ----------
<S> <C> <C>
Advertising $ 6,763 $ 9,751
Printing and mailing of
prospectuses to other than
current shareholders 2,435 3,510
Compensation to dealers 0 0
Compensation to sales personnel 10,835 15,622
Interest 0 0
Carrying or other financing charges 0 0
Other expenses: marketing; general 5,203 7,501
-------- --------
Total fees $ 25,236 $ 36,384
======== ========
</TABLE>
The Distributor may have also used additional resources of its own for further
expenses on behalf of the Fund.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Funds will make alternative
arrangements for such services for shareholders who acquired shares through such
institutions.
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") and yield of
the Class A, Class B, Class C and Class D shares of the Funds will be calculated
as set forth below. Total return and yield are computed separately for each
class of shares of the Funds.
The Funds' performance is shown below, and where is noted, reflects the
voluntary measures by the Funds' affiliates to reduce fees or expenses relating
to the Funds; see "Accrued Expenses" later in this section.
40
<PAGE>
Total Return
- ------------
The total returns ("standard total return") of each class of the Funds'
shares currently being offered were as follows:
<TABLE>
<CAPTION>
Commencement
of Operations One Year
(September 28, 1993) Ended
to October 31, 1996 October 31, 1996
----------------------- ----------------
With Without With Without
Subsidy Subsidy Subsidy Subsidy
------- ------- ------- -------
<S> <C> <C> <C> <C>
Strategic Portfolios: Moderate
Class C 8.67% 8.10% 14.08% 13.65%
</TABLE>
<TABLE>
<CAPTION>
Commencement
of Operations One Year
(May 16, 1994) Ended
to October 31, 1996 October 31, 1996
----------------------- ----------------
With Without With Without
Subsidy Subsidy Subsidy Subsidy
------- ------- ------- -------
<S> <C> <C> <C> <C>
Strategic Portfolios: Conservative
Class A 9.01% 8.47% 5.58% 5.18%
Class C 11.32% 10.79% 10.82% 10.40%
Strategic Portfolios: Aggressive
Class A 11.98% 11.77% 12.74% 12.55%
Class C 14.40% 14.19% 18.37% 18.17%
</TABLE>
Standard total return is computed separately for each class of shares
by determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value in accordance with the following formula:
41
<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 Funds are reinvested at net asset value on
the reinvestment dates during the periods. All accrued expenses are also taken
into account as described later herein.
Yield
- -----
The annualized yield of each class of shares of the Funds currently
being offered, based on the month of October 1996, was as follows:
With Subsidy Without Subsidy
------------ ---------------
Strategic Portfolios: Conservative
Class A 3.89% 3.34%
Class C 4.37% 3.80%
Strategic Portfolios: Moderate
Class C 2.85% 2.02%
Strategic Portfolios: Aggressive
Class A 1.10% 0.72%
Class C 1.40% 1.01%
Yield is computed separately for each class of shares 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:
42
<PAGE>
YIELD = 2[(a-b\+\1)6\-1]
---
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of voluntary expense
reductions by the Investment Manager)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
To calculate interest earned (for the purpose of "a" above) on debt
obligations, a Fund computes the yield to maturity of each obligation held by
such Fund based on the market value of the obligation (including actual accrued
interest) at the close of the last business day of the preceding period, or,
with respect to obligations purchased during the period, the purchase price
(plus actual accrued interest). The yield to maturity is then divided by 360 and
the quotient is multiplied by the market value of the obligation (including
actual accrued interest) to determine the interest income on the obligation for
each day of the period that the obligation is in the portfolio. Dividend income
is recognized daily based on published rates.
With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("paydowns"), each Fund accounts for gain or
loss attributable to actual monthly paydowns as realized capital gain or loss
during the period. Each 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 a Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in a 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
43
<PAGE>
instruments in the Fund's portfolio, portfolio maturity and operating expenses
and market conditions.
Accrued Expenses
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return and yield results take sales charges, if applicable, into
account, although the results do not take into account recurring and
nonrecurring charges for optional services which only certain shareholders elect
and which involve nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by
affiliates of fees or expenses during the subject period. In the absence of such
subsidization, the performance of the Funds would have been lower.
Nonstandardized Total Return
A Fund may provide the above described standard total return results
for Class A, Class B, Class C and Class D shares for periods which end no
earlier than the most recent calendar quarter end and which begin twelve months
before and at the time of commencement of such Fund's operations. In addition,
the Funds may provide nonstandardized total return results for differing
periods, such as for the most recent six months, and/or without taking sales
charges into account. Such nonstandardized total return is computed as otherwise
described under "Total Return" except the result may or may not be annualized,
and, as noted, any applicable sales charge may not be taken into account and
therefore not deducted from the hypothetical initial payment of $1,000 or ending
value. For example, the nonstandard total returns of each class of shares
currently being offered, without taking sales charges into account, were as
follows:
44
<PAGE>
Six Months ended October 31, 1996
---------------------------------
With Subsidy Without Subsidy
------------ ---------------
Strategic Portfolios: Moderate
Class C 5.38% 5.19%
Strategic Portfolios: Conservative
Class A 5.97% 5.77%
Class C 6.06% 5.86%
Strategic Portfolios: Aggressive
Class A 5.19% 5.10%
Class C 5.23% 5.14%
Distribution Rates
A Fund may also quote its distribution rate for each class of shares.
The distribution rate is calculated by annualizing the latest per-share
distribution from ordinary income and dividing the result by the maximum
offering price per share as of the end of the period. 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 a 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.
45
<PAGE>
The distribution rate of each class of shares of the Funds currently
being offered, based on the month ended October 31, 1996, was as follows:
Strategic Portfolios: Conservative
Class A 3.22%
Class C 3.66%
Strategic Portfolios: Moderate
Class C 2.48%
Strategic Portfolios: Aggressive
Class A 1.01%
Class C 1.29%
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Funds' cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Funds' investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or any of its affiliates.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as the Trust's independent accountants, providing professional services
including (1) audits of the Funds' annual financial statements, (2) assistance
and consultation in connection with Securities and Exchange Commission filings
and (3) review of the annual income tax returns filed on behalf of the Funds.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a
semiannual basis, other supplementary financial reports may be made available
from time to time and holders of record may request a copy of a current
supplementary report, if any, by calling State Street Research Shareholder
Services.
46
<PAGE>
The following financial statements are for the Funds' fiscal year ended
October 31, 1996.
357797.c3
2/20/97
47
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
INVESTMENT PORTFOLIO
October 31, 1996
Value
Shares (Note 1)
- -------------------------------------------------- -------- --------------
EQUITY SECURITIES 68.5%
Basic Industries 9.6%
Chemical 2.5%
Cambrex Corp. 6,850 $ 214,063
General Chemical Group Inc. 7,300 138,700
Hoechst AG* 12,250 460,669
IMC Global Inc. 7,900 296,250
Monsanto Co. 13,000 515,125
--------------
1,624,807
--------------
Diversified 0.9%
Cardo AB* 10,000 244,841
Tenma Corp.* 17,000 301,612
--------------
546,453
--------------
Forest Product 0.3%
Aracruz Celulose SA ADR 20,000 160,000
--------------
Machinery 2.1%
Case Corp. 7,500 348,750
Linde AG* 546 338,005
Sundstrand Corp. 9,700 390,425
Terex Corp. Rts.*++ 300 75
Triumph Group, Inc.* 2,000 45,000
US Filter Corp.* 6,700 231,150
--------------
1,353,405
--------------
Metal & Mining 2.8%
Alumax Inc.* 10,000 321,250
Aluminum Company of America 6,500 381,062
Bohler Uddeholm AG* 3,100 231,893
Carbide/Graphite Group Inc.* 4,400 71,775
RTZ Corp.* 17,653 282,436
SGL Carbon AG* 3,000 337,758
Wyman-Gordon Co.* 8,000 176,000
--------------
1,802,174
--------------
Railroad 1.0%
Canadian National Railway Co. 23,500 646,250
--------------
Total Basic Industries 6,133,089
--------------
Consumer Cyclical 9.0%
Airline 0.4%
Atlas Air Inc.* 7,500 276,562
--------------
Automotive 1.3%
Exide Corp. 15,200 $ 395,200
Ford Motor Co. 9,000 281,250
Lear Corp.* 3,300 122,100
--------------
798,550
--------------
Building 0.6%
Lafarge Corp. 19,800 368,775
--------------
Hotel & Restaurant 1.5%
Harrah's Entertainment Inc.* 13,900 232,825
Mirage Resorts Inc.* 21,600 475,200
Motels of America Inc.*+ 175 10,500
Primadonna Resorts Inc.* 8,000 129,000
Station Casinos Inc.* 6,600 73,425
U.S. Franchise Systems, Inc. Cl. A* 2,800 40,600
--------------
961,550
--------------
Recreation 1.4%
Amer Group, Ltd. Cl. A* 17,700 403,958
American Radio Systems Corp. Cl. A* 5,600 170,800
Anchor Gaming* 2,000 100,000
Cox Radio Inc. Cl. A* 5,100 92,438
Silver King Communications Inc.* 4,500 100,125
--------------
867,321
--------------
Retail Trade 3.8%
CUC International Inc.* 5,850 143,325
Dominick's Supermarkets Inc.* 4,800 95,400
Global DirectMail Corp.* 6,400 315,200
Home Depot Inc. 12,600 689,850
Kroger Co.* 8,600 383,775
Loehmann's, Inc.* 4,500 120,938
MSC Industrial Direct, Inc. Cl. A* 3,300 122,100
Renters Choice Inc.* 4,900 93,100
Sunglass Hut International Inc.* 14,300 126,913
Wal-Mart Stores, Inc. 13,400 356,775
--------------
2,447,376
--------------
Total Consumer Cyclical 5,720,134
--------------
Consumer Staple 15.7%
Business Service 2.3%
ADT Ltd.* 20,400 402,900
ATC Communications Group Inc.* 8,600 163,400
Carriage Services, Inc. Cl. A* 8,400 190,050
HA-LO Industries, Inc.* 8,300 257,300
HBO & Co. 2,000 120,250
The accompanying notes are an integral part of the financial statements.
48
<PAGE>
Value
Shares (Note 1)
- -------------------------------------------------- -------- --------------
Business Service (cont'd)
Personnel Group of America Inc.* 8,200 $ 226,525
Technology Solutions Co.* 3,300 128,287
--------------
1,488,712
--------------
Drug 2.9%
Amgen Inc.* 3,400 208,463
BioVail Corp. International* 9,100 266,175
Pfizer Inc. 7,600 628,900
Roussel-Uclaf* 1,500 396,968
Sandoz AG* 300 346,756
--------------
1,847,262
--------------
Food & Beverage 3.1%
Anheuser-Busch Companies, Inc. 9,400 361,900
Coca-Cola Co. 10,000 505,000
Coca-Cola Enterprises Inc. 14,800 630,850
Whitman Corp. 21,400 518,950
--------------
2,016,700
--------------
Hospital Supply 4.7%
American Medical Response, Inc.* 5,300 159,000
Baxter International Inc. 16,100 670,162
Genesis Health Ventures Inc. 6,400 146,400
Healthdyne Technologies Inc.* 20,000 177,500
Imagyn Medical, Inc.* 15,400 125,125
Johnson & Johnson 10,200 502,350
Karrington Health Inc.* 9,600 151,200
Lincare Holdings Inc.* 4,100 153,750
Mariner Health Group Inc. 11,900 101,150
Medtronic Inc. 5,900 379,813
Physio-Control International Corp.* 3,400 66,300
Respironics Inc.* 5,400 81,000
Rural/Metro Corp.* 4,800 175,200
Ultra-Fem Inc.* 4,500 101,250
--------------
2,990,200
--------------
Personal Care 0.1%
U.S.A. Detergents Inc.* 1,950 64,350
--------------
Printing & Publishing 1.3%
Heritage Media Corp. Cl. A* 6,300 96,075
Hollinger International Inc. Cl. A* 42,500 531,250
Providence Journal Co. Cl. A* 6,300 203,175
--------------
830,500
--------------
Tobacco 1.3%
Imperial Tobacco Group PLC* 40,900 239,648
Philip Morris Companies, Inc. 5,500 509,438
Tobacco (cont'd)
Schweitzer-Mauduit International, Inc. 2,400 $ 73,800
--------------
822,886
--------------
Total Consumer Staple 10,060,610
--------------
Energy 5.6%
Oil 5.4%
Abacan Resources Corp.* 27,900 212,738
ENI SPA ADR 5,300 251,750
Imperial Oil Ltd. 5,700 250,800
KCS Energy Inc. 3,700 159,563
Nuevo Energy Co.* 3,800 189,525
Oryx Energy Co.* 22,100 425,425
Plains Resources Inc.* 4,300 60,200
Ranger Oil Ltd.* 13,600 102,000
Seagull Energy Corp.* 25,124 543,306
Tosco Corp. 9,500 533,187
Woodside Petroleum Ltd. ADR* 51,300 361,898
Total SA CI. B* 4,610 360,594
--------------
3,450,986
--------------
Oil Service 0.2%
Dreco Energy Services Ltd. Cl. A* 4,300 112,875
--------------
Total Energy 3,563,861
--------------
Finance 9.7%
Bank 4.2%
BankAmerica Corp. 4,200 384,300
Bank of New York Inc. 16,700 553,188
Citicorp 6,300 623,700
Fleet Financial Group Inc. 11,100 553,612
Sparbanken Sverige AB* 38,000 601,001
--------------
2,715,801
--------------
Financial Service 2.3%
Alex Brown Inc. 2,200 124,850
CMAC Investment Corp.* 3,100 214,288
Federal Home Loan Mortgage Corp. 4,000 404,000
Federal National Mortgage Association 17,900 700,337
--------------
1,443,475
--------------
Insurance 3.2%
ACE Ltd. 7,900 432,525
AMBAC Inc. 4,600 287,500
Delphi Financial Group Inc.* 3,480 97,875
Mid Ocean Ltd. 10,100 474,700
Mutual Risk Management Ltd. 6,166 197,312
The accompanying notes are an integral part of the financial statements.
49
<PAGE>
Value
Shares (Note 1)
- -------------------------------------------------- -------- --------------
Insurance (cont'd)
NAC Re Corp. 4,600 $ 161,575
Travelers/Aetna Property Casualty Corp. Cl. A 12,900 387,000
--------------
2,038,487
--------------
Total Finance 6,197,763
--------------
Science & Technology 15.8%
Aerospace 2.2%
Boeing Co. 6,500 619,937
General Dynamics Corp. 5,800 398,025
Rockwell International Corp. 6,600 363,000
--------------
1,380,962
--------------
Computer Software & Service 5.4%
Anacomp Inc.* 5,594 48,948
Applied Graphics Technologies, Inc. 5,900 92,925
Cisco Systems Inc.* 9,500 587,812
Desktop Data Inc.* 3,200 76,000
Electronic Data Systems Corp. 5,500 247,500
Manugistics Group Inc.* 2,200 94,600
Microsoft Corp.* 4,500 617,625
National Processing, Inc.* 12,700 241,300
Oracle Systems Corp.* 5,800 245,412
Planning Sciences International PLC ADR* 4,900 62,475
SystemSoft Corp.* 3,200 90,400
Ultratech Stepper Inc.* 6,400 108,800
Vantive Corp.* 1,900 62,700
Videoserver Inc.* 3,600 170,550
Wang Laboratories Inc.* 10,400 243,100
Western Digital Corp. Rts.* 10,200 494,700
--------------
3,484,847
--------------
Electronic Components 3.1%
ABB AG* 165 203,900
AMP Inc. 10,000 338,750
Augat Inc. 7,100 195,250
Encad Inc.* 2,400 98,400
Intel Corp.* 6,700 736,162
VLSI Technology Inc.* 4,200 72,450
Xicor Inc.* 10,900 123,988
Zebra Technologies Corp. Cl. A* 7,800 225,225
--------------
1,994,125
--------------
Electronic Equipment 4.3%
Berg Electronics Corp.* 7,500 211,875
Chicago Miniature Lamp, Inc.* 4,100 121,975
L.M. Ericsson Telephone Co. Cl. B* 21,920 593,360
Electronic Equipment (cont'd)
L.M. Ericsson Telephone Co. ADR Cl. B* 13,130 $ 362,716
Lucent Technologies Inc.* 5,200 244,400
Network Equipment Technologies, Inc. Rts.* 6,900 92,288
Nokia AB Cl. A Pfd.* 4,600 212,401
Nokia AB Cl. K Pfd.* 11,000 519,074
Toolex Alpha NV* 40,600 390,040
--------------
2,748,129
--------------
Office Equipment 0.8%
FileNet Corp.* 7,700 218,488
International Business Machines Corp. 2,100 270,900
--------------
489,388
--------------
Total Science & Technology 10,097,451
--------------
Utility 3.1%
Electric 0.8%
Allegheny Power Systems Inc. 10,000 298,750
American Electric Power Inc. 5,800 240,700
--------------
539,450
--------------
Natural Gas 0.5%
ENSERCH Corp. 10,500 225,750
TransTexas Gas Corp.* 7,900 110,600
--------------
336,350
--------------
Telephone 1.8%
Allen Group Inc. 8,600 136,525
Clearnet Communications Inc. Wts.* 990 8,910
Geotek Communications Inc.* 17,400 128,325
NetCom Systems AB* 36,200 456,925
Tel-Save Holdings Inc.* 8,700 217,500
Trescom International Inc.* 14,300 182,325
--------------
1,130,510
--------------
Total Utility 2,006,310
--------------
Total Equity Securities (Cost $36,371,173) 43,779,218
--------------
Principal Maturity
Amount Date
----------------------------------------- ------------- -------------
FIXED INCOME SECURITIES 21.5%
U.S. Treasury 4.3%
U.S. Treasury Bond, 12.00% $ 225,000 8/15/2013 323,930
U.S. Treasury Bond, 8.125% 1,075,000 8/15/2021 1,250,526
U.S. Treasury Bond, 6.25% 25,000 8/15/2023 23,484
U.S. Treasury Note, 9.00% 575,000 5/15/1998 602,853
U.S. Treasury Note, 6.625% 300,000 7/31/2001 306,327
U.S. Treasury Note, 7.875% 250,000 11/15/2004 274,375
-------------
2,781,495
-------------
The accompanying notes are an integral part of the financial statements.
50
<PAGE>
Principal Maturity Value
Amount Date (Note 1)
- ------------------------------------ ------------ ------------- --------------
U.S. Agency Mortgage 5.8%
Federal Home Loan Mortgage Corp.
Gold, 6.50% $ 115,445 7/01/2008 $ 114,471
Federal Home Loan Mortgage Corp.
Gold, 9.50% 46,144 7/25/2022 49,634
Federal Home Loan Mortgage Corp.
Series 29-H PAC, 6.50% 50,000 3/25/2023 48,703
Federal Home Loan Mortgage Corp.
Gold, 7.00% 180,520 12/01/2024 178,489
Federal Home Loan Mortgage Corp.
Gold, 7.50% 151,323 1/01/2025 152,528
Federal Home Loan Mortgage Corp.
Gold, 7.50% 31,321 11/01/2025 31,492
Federal Home Loan Mortgage Corp.
Gold, 8.00% 79,539 1/01/2026 81,278
Federal National Mortgage
Association, 7.50% 375,933 6/01/2010 382,887
Federal National Mortgage
Association TBA, 6.50% 150,000 11/14/2010 147,469
Federal National Mortgage
Association TBA, 7.50% 325,000 11/14/2010 330,078
Federal National Mortgage
Association TBA, 7.00% 175,000 11/13/2025 171,719
Federal National Mortgage
Association TBA, 7.50% 400,000 11/13/2025 400,750
Government National Mortgage
Association, 8.00% 105,120 5/15/2008 110,113
Government National Mortgage
Association, 6.50% 45,978 2/15/2009 45,547
Government National Mortgage
Association, 6.50% 111,619 7/15/2009 110,589
Government National Mortgage
Association TBA, 6.50% 125,000 11/14/2010 123,320
Government National Mortgage
Association, 8.00% 229,158 12/15/2022 235,458
Government National Mortgage
Association, 6.50% 227,543 7/15/2024 219,152
Government National Mortgage
Association, 7.00% 25,634 1/15/2025 25,290
Government National Mortgage
Association, 7.50% 121,872 11/15/2025 122,329
Government National Mortgage
Association, 7.50% 74,462 4/15/2026 74,694
Government National Mortgage
Association, 8.00% 124,827 9/15/2026 127,636
Government National Mortgage
Association TBA, 7.00% 225,000 11/19/2025 220,711
U.S. Agency Mortgage (cont'd)
Government National Mortgage
Association TBA, 8.00% $ 175,000 11/19/2025 $ 178,938
--------------
3,683,275
--------------
Canadian-Yankee 0.7%
Hydro-Quebec Deb. Series HS, 9.40% 75,000 2/01/2021 90,130
Usinor Sacilor Note 7.25% 350,000 8/01/2006 350,812
--------------
440,942
--------------
Foreign Government 2.7% Australian Dollar
Government of Australia, 7.50% 600,000 7/15/2005 481,104
Canadian Dollar
Government of Canada, 7.50% 465,000 12/01/2003 374,536
Danish Krone
Kingdom of Denmark, 8.00% 1,100,000 11/15/2001 207,233
Kingdom of Denmark, 8.00% 1,850,000 3/15/2006 342,544
European Currency Unit
Government of France, 8.00% 225,000 4/25/2003 317,230
--------------
1,722,647
--------------
Trust Certificates 0.3%
Cooperative Utility Trust
Certificates, 10.70% $ 75,000 9/15/2017 81,692
Rural Electric Cooperative Grantor
Trust Certificates, 10.11% 75,000 12/15/2017 81,677
--------------
163,369
--------------
Finance/Mortgage 1.8%
Associates Corp. of North America
Note, 6.375% 50,000 10/15/2002 49,440
Capital One Bank Sr. Note, 7.08% 325,000 10/30/2001 327,688
Discover Credit Card Trust Series
1993 A, 6.25% 75,000 8/16/2000 75,163
First Chicago Credit Trust Series
91-D, 8.40% 8,333 6/15/1998 8,331
Ford Credit Auto Loan Master Trust
Series 95-1, 6.50% 125,000 8/15/2002 125,000
GE Global Insurance Holding Corp.
Note, 7.00% 75,000 2/15/2026 72,469
General Motors Acceptance Corp.
Deb., 8.625% 75,000 6/15/1999 79,193
General Motors Acceptance Corp.
Note, 7.85% 100,000 11/17/1997 102,032
Household Affinity Credit Card
Master Trust Series 1994-1A,
5.525% 50,000 5/15/2010 50,047
The accompanying notes are an integral part of the financial statements.
51
<PAGE>
Principal Maturity Value
Amount Date (Note 1)
- ------------------------------------ ------------ ------------- --------------
Finance/Mortgage (cont'd)
Household Finance Co. Note, 6.75% $ 75,000 6/01/2000 $ 75,887
Sears Credit Trust Series 1995-2A,
8.10% 200,000 6/15/2004 210,000
--------------
1,175,250
--------------
Corporate 5.9%
Anacomp Inc. Sr. Sub. Note, 13.00% 71,000 6/04/2002 73,307
Chevron Corp. Note, 8.11% 75,000 12/01/2004 80,179
Clearnet Communications Inc. Sr.
Disc. Note, 0.00% to 12/14/2000,
14.75% from 12/15/2000 to maturity 300,000 12/15/2005 174,844
Columbia / HCA Healthcare Corp.
Note, 6.87% 50,000 9/15/2003 50,634
Crown Packaging Inc. Sr. Note Series
B, 10.75% 175,000 11/01/2000 162,750
Dade International Inc. Sr. Sub.
Note, 11.125%+ 250,000 5/01/2006 267,500
Envirosource Inc. Sr. Note, 9.75% 250,000 6/15/2003 233,750
Grand Union Co. Sr. Sub. Note,
12.00% 175,000 9/01/2004 176,750
K & F Industries Inc. Sr. Sec. Note,
11.875% 30,000 12/01/2003 32,400
K & F Industries Inc. Sr. Sub. Deb.,
10.375% 200,000 9/01/2004 206,000
K-III Communications Corp. Sr. Note,
8.50% 150,000 2/01/2006 139,875
Norcal Waste Systems Inc. Sr. Note,
12.75% to 11/14/96, 13.00% from
11/15/96 to 5/14/97, 13.25% from
5/15/97 to 11/14/97, 13.50% from
11/15/97 to maturity 250,000 11/15/2005 270,625
Park Newspapers Inc. Sr. Note,
11.875% 250,000 5/15/2004 288,125
Presidio Oil Co. Sr. Sec. Note,
11.50% (ballot box) 200,000 9/15/2000 197,500
Corporate (cont'd)
Ralphs Grocery Co. Sr. Note, 10.45% $ 150,000 6/15/2004 $ 151,500
Sears Roebuck Acceptance Corp. Note,
6.86% 325,000 8/06/2001 328,770
Spanish Broadcasting Systems Inc.
Sr. Note, 7.50% 250,000 6/15/2002 261,250
Talley Manufacturing & Technology
Inc. Sr. Note, 10.75% 150,000 10/15/2003 155,250
Tele-Communications Inc. Note, 8.25% 375,000 1/15/2003 370,815
United Meridian Corp. Sr. Sub. Note,
10.375% 130,000 10/15/2005 140,400
--------------
3,762,224
--------------
Total Fixed Income Securities (Cost $13,476,253) 13,729,202
--------------
SHORT-TERM OBLIGATIONS 13.0%
American Express Credit Corp., 5.25% 2,690,000 11/04/1996 2,690,000
Beneficial Corp., 5.28% 593,000 11/06/1996 593,000
Beneficial Corp., 5.25% 1,177,000 11/13/1996 1,177,000
Ford Motor Credit Co., 5.20% 2,405,000 11/01/1996 2,405,000
General Electric Capital Corp.,
5.25% 1,427,000 11/13/1996 1,427,000
--------------
Total Short-Term Obligations (Cost $8,292,000) 8,292,000
--------------
Total Investments (Cost $58,139,426)--103.0% 65,800,420
Cash and Other Assets, Less Liabilities--(3.0)% (1,905,721)
--------------
Net Assets--100.0% $63,894,699
==============
Federal Income Tax Information:
At October 31, 1996, the net unrealized appreciation of
investments based on cost for Federal income tax purposes of
$58,256,949 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost $ 9,150,470
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value (1,606,999)
--------------
$ 7,543,471
==============
ADR stands for American Depositary Receipt, representing ownership of foreign
securities.
* Nonincome-producing securities.
TBA Represents "TBA" (to be announced) purchase commitment to purchase
securities for a fixed unit price at a future date beyond customary
settlement time. Although the unit price has been established, the
principal value has not been finalized and may vary by no more than 1%.
++ Security restricted as to public resale. The total cost and market value
of restricted securities owned at October 31, 1996 were $0 and $75 (0.00%
of net assets), respectively.
+ Security restricted in accordance with Rule 144A under the Securities Act
of 1933, which allows for the resale of such securities among certain
qualified buyers. The total cost and market value of Rule 144A securities
owned at October 31, 1996 were $264,500 and $278,000 (0.44% of net assets),
respectively.
(ballot box) Security is in default.
The accompanying notes are an integral part of the financial statements.
52
<PAGE>
Forward currency exchange contracts outstanding at October 31, 1996, are as
follows:
<TABLE>
<CAPTION>
Unrealized
Contract Appreciation Delivery
Total Value Price (Depreciation) Date
- -------------------------------------------------- ---------------- -------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sell Australian dollars, Buy U.S. dollars 516,600 AUD .79475 AUD $ 2,156 1/24/97
Sell Australian dollars, Buy U.S. dollars 100,000 AUD .77425 AUD (1,795) 11/14/96
Sell Australian dollars, Buy U.S. dollars 316,000 AUD .77450 AUD (5,594) 11/14/96
Sell Australian dollars, Buy U.S. dollars 205,000 AUD .79340 AUD 579 1/24/97
Buy Australian dollars, Sell U.S. dollars 220,000 AUD .78910 AUD 682 11/14/96
Buy Australian dollars, Sell U.S. dollars 205,000 AUD .79055 AUD 5 1/24/97
Buy Australian dollars, Sell U.S. dollars 100,000 AUD .79147 AUD 121 11/14/96
Sell Canadian dollars, Buy U.S. dollars 155,000 CAD .73153 CAD (2,363) 11/14/96
Sell Canadian dollars, Buy U.S. dollars 100,000 CAD .73099 CAD (1,578) 11/14/96
Sell Canadian dollars, Buy U.S. dollars 252,000 CAD .74703 CAD (774) 1/24/97
Buy Canadian dollars, Sell U.S. dollars 100,000 CAD .73265 CAD 1,412 11/14/96
Sell Danish krone, Buy U.S. dollars 1,497,000 DKK .17110 DKK (2,529) 1/24/97
Sell Danish krone, Buy U.S. dollars 926,000 DKK .17578 DKK 3,346 11/14/96
Sell Danish krone, Buy U.S. dollars 1,305,800 DKK .17107 DKK (2,244) 1/24/97
Buy Danish krone, Sell U.S. dollars 719,000 DKK .17555 DKK (2,436) 11/14/96
Sell European currency units, Buy U.S. dollars 234,000 ECU 1.27480 ECU 1,784 11/14/96
---------------
$(9,228)
===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
53
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
Assets
Investments, at value (Cost $58,139,426) (Note 1) $65,800,420
Cash 25,468
Receivable for securities sold 689,548
Interest and dividends receivable 305,083
Receivable for fund shares sold 42,160
Receivable from Distributor (Note 3) 20,736
Receivable for open forward contracts 10,085
Deferred organization costs and other assets (Note 1) 69,400
--------------
66,962,900
Liabilities
Payable for securities purchased 2,891,434
Accrued management fee (Note 2) 40,524
Accrued transfer agent and shareholder services (Note 2) 25,647
Payable for open forward contracts 19,313
Accrued trustees' fees (Note 2) 5,403
Payable for fund shares redeemed 4,248
Accrued service fee (Note 5) 132
Other accrued expenses 81,500
--------------
3,068,201
--------------
Net Assets $63,894,699
==============
Net Assets consist of:
Undistributed net investment income $ 606,033
Unrealized appreciation of investments 7,660,994
Unrealized depreciation of forward contracts and foreign
currency (8,744)
Accumulated net realized gain 7,672,002
Shares of beneficial interest 47,964,414
--------------
$63,894,699
==============
Net Asset Value and redemption price per share of Class A
shares ($622,709 / 50,022 shares of beneficial interest) $ 12.45
==============
Maximum Offering Price per share of Class A shares ($12.45
/ .955) $ 13.04
==============
Net Asset Value, offering price and redemption price per
share of Class C shares ($63,271,990 / 5,089,802 shares of
beneficial interest) $ 12.43
==============
STATEMENT OF OPERATIONS
For the year ended October 31, 1996
Investment Income
Interest $ 1,300,681
Dividends, net of foreign taxes of $25,332 699,378
--------------
2,000,059
Expenses
Management fee (Note 2) 526,134
Custodian fee 196,585
Transfer agent and shareholder services (Note 2) 84,101
Service fee--Class A (Note 5) 36,384
Audit fee 34,233
Reports to shareholders 22,342
Trustees' fees (Note 2) 16,277
Legal fees 10,648
Registration fees 4,016
Amortization of organization costs (Note 1) 7,503
Miscellaneous 12,672
--------------
950,895
Expenses borne by the Distributor (Note 3) (142,848)
--------------
808,047
--------------
Net investment income 1,192,012
--------------
Realized and Unrealized Gain on Investments,
Foreign Currency and Forward Contracts
Net realized gain on investments (Notes 1 and 4) 7,818,652
Net realized gain on forward contracts and foreign currency
(Note 1) 180,049
--------------
Total net realized gain 7,998,701
--------------
Net unrealized appreciation of investments 1,622,625
Net unrealized appreciation of forward contracts and
foreign currency 95,527
--------------
Total net unrealized appreciation 1,718,152
--------------
Net gain on investments, foreign currency and forward
contracts 9,716,853
--------------
Net increase in net assets resulting from operations $10,908,865
==============
The accompanying notes are an integral part of the financial statements.
54
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
Year ended October 31
-----------------------------
1996 1995
- --------------------------------------- -------------- --------------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 1,192,012 $ 1,118,939
Net realized gain on investments,
foreign currency and forward
contracts 7,998,701 1,877,149
Net unrealized appreciation of
investments, foreign currency and
forward contracts 1,718,152 4,697,296
-------------- --------------
Net increase resulting from operations 10,908,865 7,693,384
-------------- --------------
Dividends from net investment
income:
Class A (365,226) (853,158)
Class C (910,584) (262,218)
-------------- --------------
(1,275,810) (1,115,376)
-------------- --------------
Distribution from net realized
gains:
Class A (850,522) --
Class C (463,669) --
-------------- --------------
(1,314,191) --
-------------- --------------
Net increase (decrease) from fund share
transactions (Note 6) (4,788,166) 2,684,658
-------------- --------------
Total increase in net assets 3,530,698 9,262,666
Net Assets
Beginning of year 60,364,001 51,101,335
-------------- --------------
End of year (including undistributed
net investment income of $606,033 and
$464,967, respectively) $63,894,699 $60,364,001
============== ==============
* Net realized gain for Federal income
tax purposes (Note 1) $ 7,791,106 $ 1,314,496
============== ==============
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
October 31, 1996
Note 1
State Street Research Strategic Portfolios: Aggressive (the "Fund"), is a
series of State Street Research Financial Trust (the "Trust"), which was
organized as a Massachusetts business trust in November, 1986 and is
registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. The Fund commenced operations in May,
1994. The Trust consists presently of four separate funds: State Street
Research Strategic Portfolios: Aggressive, State Street Research Government
Income Fund, State Street Research Strategic Portfolios: Moderate and State
Street Research Strategic Portfolios: Conservative.
The investment objective of the fund is to provide high total return from,
primarily, growth of capital and secondarily, current income, consistent with
reasonable investment risk.
The Fund is authorized to issue four classes of shares. Only Class A and
Class C shares are presently available for purchase. Class B and Class D
shares are not being offered at this time. Class A shares are subject to an
initial sales charge of up to 4.50% and annual service fees of 0.25% of
average daily net assets. Class B shares will be subject to a contingent
deferred sales charge on certain redemptions made within five years of
purchase and pay annual distribution and service fees of 1.00%. Class B
shares automatically convert into Class A shares (which pay lower ongoing
expenses) at the end of eight years after the issuance of the Class B shares.
Class C shares are only offered to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro-rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by
the Fund in preparing its financial statements, and such policies are in
conformity with generally accepted accounting principles for investment
companies.
A. Investment Valuation
Values for listed equity securities reflect final sales on national
securities exchanges quoted prior to the close of the New York Stock
Exchange. Over-the-counter securities quoted on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") system are valued at
closing prices supplied through such system. If not quoted on the NASDAQ
system, such securities are valued at prices obtained from brokers. In the
absence of recorded sales, valuations are at the mean of the closing bid and
asked quotations. Fixed income securities are valued by a pricing service,
which utilizes market transactions, quotations from dealers, and various
relationships among securities in determining value. Short-term securities
maturing within sixty days are valued at amortized cost. Securities quoted in
foreign currencies are translated into U.S. dollars at the current exchange
rate.
55
<PAGE>
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered. Gains and losses that arise from
changes in exchange rates are not segregated from gains and losses that arise
from changes in market prices of investments.
C. Net Investment Income
Net investment income is determined daily and consists of interest and
dividends accrued and discount earned, less the estimated daily expenses of
the Fund. Interest income is accrued daily as earned. Dividend income is
accrued on the ex-dividend date. Discount on debt obligations is amortized
under the effective yield method. The Fund is charged for expenses directly
attributable to it, while indirect expenses are allocated among all funds in
the Trust.
D. Dividends
Dividends from net investment income are declared and paid or reinvested
quarterly. Net realized capital gains, if any, are distributed annually,
unless additional distributions are required for compliance with applicable
tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing
treatments for foreign currency transactions.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund intends
to qualify under Subchapter M of the Internal Revenue Code and its policy is
to distribute all of its taxable income, including net realized capital
gains, within the prescribed time periods.
F. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and are being amortized under the straight-line method over a
period of five years.
G. Forward Contracts and Foreign Currencies
The Fund enters into forward foreign currency exchange contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its
foreign portfolio holdings and to hedge certain purchase and sale commitments
denominated in foreign currencies. A forward foreign currency exchange
contract is an obligation by the Fund to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the origination
date of the contract. Forward foreign currency exchange contracts establish
an exchange rate at a future date. These contracts are transferable in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. Risks may arise from the potential
inability of a counterparty to meet the terms of a contract and from
unanticipated movements in the value of foreign currencies relative to the
U.S. dollar. The aggregate principal amount of forward currency exchange
contracts is recorded in the Fund's accounts. All commitments are
marked-to-market at the applicable transaction rates resulting in unrealized
gains or losses. The Fund records realized gains or losses at the time the
forward contracts are extinguished by entry into a closing contract or by
delivery of the currency. Neither spot transactions nor forward currency
exchange contracts eliminate fluctuations in the prices of the Fund's
portfolio securities or in foreign exchange rates, or prevent loss if the
price of these securities should decline.
H. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly owned subsidiary of Metropolitan Life
Insurance Company ("Metropolitan"), have entered into an agreement under
which the Adviser earns monthly fees at an annual rate of 0.75% of the Fund's
average daily net assets. In consideration of these fees, the Adviser
furnishes the Fund with management, investment advisory, statistical and
research facilities and services. The Adviser also pays all salaries, rent
and certain other expenses of management. During the year ended October 31,
1996, the fees pursuant to such agreement amounted to $526,134.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. In addition, Metropolitan receives a fee for maintenance
of the accounts of certain shareholders who are participants in sponsored
arrangements, employee benefit plans and similar programs or plans, through
or under which shares of the Fund may be purchased. During the year ended
October 31, 1996, the amount of such expenses was $59,885.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $16,277 during the year ended October 31, 1996.
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended October 31, 1996, the amount of such expenses
assumed by the Distributor and its affiliates was $142,848.
Note 4
For the year ended October 31, 1996, purchases and sales of securities,
exclusive of short-term obligations, aggregated $92,070,967 and $102,352,972
(including $12,057,697 and $9,507,188 of U.S. Government securities),
respectively.
56
<PAGE>
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940. Under the Plan, the Fund
will pay annual service fees to the Distributor at a rate of 0.25% of average
daily net assets for Class A, Class B and Class D shares. In addition, the
Fund will pay annual distribution fees of 0.75% of average daily net assets
for Class B and Class D shares. The Distributor uses such payments for
personal service and/or the maintenance or servicing of shareholder accounts,
to reimburse securities dealers for distribution and marketing services, to
furnish ongoing assistance to investors and to defray a portion of its
distribution and marketing expenses. For the year ended October 31, 1996,
fees pursuant to such plan amounted to $36,384 for Class A shares.
Note 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At October 31, 1996,
Metropolitan owned 50,000 Class A shares and 3,613,659 Class C shares of the
Fund and the Adviser owned one Class A share of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended October 31
----------------------------------------------------------------
1996 1995
------------------------------- -------------------------------
Class A Shares Amount Shares Amount
--------------------------------------------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Shares sold -- $ -- 21 $ 191
Issued upon reinvestment of distribution from
net realized gains 78,245 850,522 -- --
Shares repurchased (3,647,468) (42,310,619) (1,616,379) (15,000,000)
-------------- ---------------- -------------- ----------------
Net decrease (3,569,223) $(41,460,097) (1,616,358) $(14,999,809)
============== ================ ============== ================
Class C Shares Amount Shares Amount
--------------------------------------------- -------------- ---------------- -------------- ----------------
Shares sold 5,031,860 $ 58,556,573 1,924,849 $ 18,026,952
Issued upon reinvestment of:
Dividends from net investment income 14,250 168,031 3,000 31,088
Distribution from net realized gains 42,616 463,669 -- --
Shares repurchased (1,901,217) (22,516,342) (36,027) (373,573)
-------------- ---------------- -------------- ----------------
Net increase 3,187,509 $ 36,671,931 1,891,822 $ 17,684,467
============== ================ ============== ================
</TABLE>
57
<PAGE>
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Class C
---------------------------------------- -----------------------------------------
May 16, 1994 May 16, 1994
Year ended October 31 (Commencement Year ended October 31 (Commencement
--------------------- of Operations) to ---------------------- of Operations) to
1996** 1995** October 31, 1994 1996** 1995** October 31, 1994
- -------------------------- --------- ----------- ----------------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 10.93 $ 9.74 $ 9.55 $ 10.94 $ 9.74 $ 9.55
Net investment income* 0.14 0.20 0.09 0.22 0.22 0.10
Net realized and
unrealized gain on
investments, foreign
currency and forward
contracts 1.79 1.19 0.14 1.74 1.20 0.14
Dividends from net
investment income (0.17) (0.20) (0.04) (0.23) (0.22) (0.05)
Distribution from net
realized gains (0.24) -- -- (0.24) -- --
--------- ----------- ----------------- ----------- ----------- -----------------
Net asset value, end of
year $ 12.45 $ 10.93 $ 9.74 $ 12.43 $ 10.94 $ 9.74
========= =========== ================= =========== =========== =================
Total return 18.05%+ 14.49%+ 2.41%+++ 18.37%+ 14.85%+ 2.50%+++
Net assets at end of year
(000s) $ 623 $39,555 $50,999 $63,272 $20,809 $ 102
Ratio of operating
expenses to average net
assets* 1.35% 1.35% 1.35%++ 1.10% 1.10% 1.10%++
Ratio of net investment
income to average net
assets* 1.43% 1.98% 2.01%++ 1.78% 2.13% 2.26%++
Portfolio turnover rate 145.59% 127.44% 37.75% 145.59% 127.44% 37.75%
Average commission rate@ $ .0251 -- -- $ .0251 -- --
*Reflects voluntary
assumption of fees or
expenses per share in
each year
(Note 3) $ 0.01 $ 0.02 $ 0.01 $ 0.03 $ 0.02 $ 0.01
</TABLE>
++ Annualized
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
** Per-share figures have been calculated using the average shares method.
@ For fiscal years beginning on or after November 1, 1995, the Fund is
required to disclose its average commission rate per share paid for security
trades.
58
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of State Street Research
Financial Trust and the Shareholders of
State Street Research Strategic Portfolios: Aggressive
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of State Street Research
Strategic Portfolios: Aggressive (a series of State Street Research Financial
Trust, hereafter referred to as the "Trust") at October 31, 1996, and the
results of its operations, the changes in its net assets and the financial
highlights for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at October 31, 1996 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 11, 1996
59
<PAGE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
As of October 31, 1996, State Street Research Strategic Portfolios:
Aggressive held 69% of its assets in equities, 21% in fixed income securities
and 10% in cash. For the 12 months ended October 31, 1996, Class A shares of
the Fund provided a total return of 18.05% (does not include sales charge).
Stocks
Positive stock returns helped the portfolio's performance. Large-cap and
value stocks made up the largest equity holdings. Value stocks performed
strongly, large-cap growth stocks less so. Small-cap growth stocks, which
were also a large component, performed well. International stocks, which only
comprised a small portion of the portfolio, brought in strong performance.
Bonds
The Fund's fixed-income component performed well, but did not keep pace with
its stock holdings. This was due in large part to our high-grade bond
holdings, which comprised our largest fixed-income position and provided flat
performance. High-yield and international bonds brought in strong
performance.
All returns represent past performance, which is no guarantee of future results.
The investment return and principal value of an investment made in the Fund will
fluctuate, and shares, when redeemed, may be worth more or less than their
original cost. All returns assume reinvestment of capital gain distributions and
income dividends. "A" share returns reflect the maximum 4.5% front-end sales
charge. "C" shares, offered without a sales charge, are available only to
certain employee benefit plans and large institutions. The Standard & Poor's 500
Composite Index (S&P 500) includes 500 widely traded common stocks and is a
commonly used measure of U.S. stock market performance. The Lehman Brothers
Government/Corporate Bond Index is a commonly used index of bond market
performance. The indices are unmanaged and do not take sales charges into
consideration. Direct investment in the indices is not possible; results are for
illustrative purposes only. Performance results for the Fund are increased by
the voluntary reduction of Fund fees and expenses. In the box in the chart at
the right, the first figure reflects expense reduction; the second shows what
results would have been without subsidization.
Change In Value Of $10,000 Based On The
S&P 500 And The Lehman Brothers
Government/Corporate Bond Index Compared
To Change In Value Of $10,000 Invested In
Strategic Portfolios: Aggressive
Class A Shares
Average Annual Total Return
1 Year Life of Fund
+12.74%/+12.55% +11.98%/+11.77%
[line chart]
Strategic Portfolios: LB Gov't/Corp
Aggressive S&P 500 Bond Index
5/16/94 9550 10000 10000
10/31/94 9780 10549 10006
10/31/95 11198 13334 11622
10/31/96 13219 16546 12250
Class C Shares
Average Annual Total Return
1 Year Life of Fund
+18.37%/+18.17% +14.40%/+14.19%
[line chart]
Strategic Portfolios: LB Gov't/Corp
Aggressive S&P 500 Bond Index
5/16/94 10000 10000 10000
10/31/94 10250 10549 10006
10/31/95 11772 13334 11622
10/31/96 13935 16546 12250
60
<PAGE>
REPORT ON SPECIAL MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of State Street Research Strategic
Portfolios: Aggressive ("Fund"), along with shareholders of other series of
State Street Research Financial Trust ("Meeting"), was convened on February
14, 1996, and continued thereafter. The results of the Meeting are set forth
below.
Votes (millions of
shares)
------------------------
For Withheld
---------- -------------
1. The following persons were elected as Trustees:
Edward M. Lamont 43.4 3.0
Robert A. Lawrence 43.4 3.0
Dean O. Morton 43.4 3.0
Thomas L. Phillips 43.4 3.0
Toby Rosenblatt 43.4 3.0
Michael S. Scott Morton 43.8 2.6
Ralph F. Verni 43.8 2.7
Jeptha H. Wade 43.8 2.6
<TABLE>
<CAPTION>
Votes (millions of
shares)
----------------------
For Against Abstain
---- ------- --------
<S> <C> <C> <C>
2. The Fund's fundamental policy on diversification of investments was
amended 3.9 0.4 1.0
3. The Master Trust Agreement was amended to permit the Trustees to
reorganize, merge or liquidate a fund without prior shareholder
approval 33.1 7.3 4.2
4. The Master Trust Agreement was amended to eliminate specified time
permitted between the record date and any shareholders meeting 34.4 5.7 4.4
</TABLE>
61
<PAGE>
STATE STREET RESEARCH PORTFOLIO: MODERATE
INVESTMENT PORTFOLIO
October 31, 1996
Value
Shares (Note 1)
- --------------------------------------------------- -------- --------------
EQUITY SECURITIES 51.7%
Basic Industries 7.5%
Chemical 2.3%
Cambrex Corp. 2,550 $ 79,688
General Chemical Group Inc. 2,300 43,700
Hoechst AG* 11,500 432,465
IMC Global Inc. 4,410 165,375
Monsanto Co. 7,700 305,112
--------------
1,026,340
--------------
Diversified 0.7%
Cardo AB* 5,100 124,869
Tenma Corp.* 12,000 212,902
--------------
337,771
--------------
Forest Product 0.2%
Aracruz Celulose SA ADR 8,500 68,000
--------------
Machinery 1.6%
Case Corp. 4,600 213,900
Linde AG* 255 157,860
Sundstrand Corp. 5,800 233,450
Terex Corp. Rts.*++ 150 37
Triumph Group, Inc.* 700 15,750
US Filter Corp.* 2,600 89,700
--------------
710,697
--------------
Metal & Mining 1.9%
Alumax Inc.* 5,700 183,113
Aluminum Company of America 3,400 199,325
Bohler Uddeholm AG* 1,400 104,726
Carbide/Graphite Group Inc.* 2,400 39,150
RTZ Corp.* 8,574 137,178
SGL Carbon AG* 1,300 146,362
Wyman-Gordon Co.* 2,700 59,400
--------------
869,254
--------------
Railroad 0.8%
Canadian National Railway Co. 13,200 363,000
--------------
Total Basic Industries 3,375,062
--------------
Consumer Cyclical 6.7%
Airline 0.2%
Atlas Air Inc.* 2,400 88,500
--------------
Automotive 1.5%
Honda Motor Co.* 8,000 191,120
Suzuki Motor Co. Ltd.* 7,000 71,319
Automotive (cont'd)
Exide Corp. 8,600 $ 223,600
Ford Motor Co. 5,300 165,625
Lear Corp.* 1,100 40,700
--------------
692,364
--------------
Building 0.5%
Lafarge Corp. 11,600 216,050
--------------
Hotel & Restaurant 1.1%
Harrah's Entertainment Inc.* 7,900 132,325
Mirage Resorts Inc.* 11,700 257,400
Motels of America Inc.*+ 75 4,500
Primadonna Resorts Inc.* 2,700 43,537
Station Casinos Inc.* 3,500 38,938
U.S. Franchise Systems, Inc. CI. A* 1,000 14,500
--------------
491,200
--------------
Recreation 0.8%
Amer Group, Ltd. Cl. A* 8,700 198,556
American Radio Systems Corp. CI. A* 1,900 57,950
Anchor Gaming* 700 35,000
Cox Radio Inc. Cl. A* 1,700 30,812
Silver King Communications Inc.* 1,500 33,375
--------------
355,693
--------------
Retail Trade 2.6%
CUC International Inc.* 2,021 49,502
Dominick's Supermarkets Inc.* 1,700 33,788
Global DirectMail Corp.* 2,200 108,350
Home Depot Inc. 7,400 405,150
Kroger Co.* 4,900 218,662
Loehmann's, Inc.* 1,500 40,313
MSC Industrial Direct, Inc. Cl. A* 1,100 40,700
Renters Choice Inc.* 1,600 30,400
Sunglass Hut International Inc.* 4,900 43,488
Wal-Mart Stores, Inc. 8,000 213,000
--------------
1,183,353
--------------
Total Consumer Cyclical 3,027,160
--------------
Consumer Staple 12.7%
Business Service 1.5%
ADT Ltd.* 11,900 235,025
ATC Communications Group Inc.* 2,900 55,100
Carriage Services, Inc. Cl. A* 2,900 65,613
HA-LO Industries, Inc.* 3,150 97,650
HBO & Co. 1,200 72,150
National Media Corp.* 900 10,800
The accompanying notes are an integral part of the financial statements.
62
<PAGE>
Value
Shares (Note 1)
- --------------------------------------------------- -------- --------------
Business Service (cont'd)
Personnel Group of America Inc.* 2,900 $ 80,112
Technology Solutions Co.* 1,250 48,594
--------------
665,044
--------------
Drug 2.9%
Amgen Inc.* 1,800 110,362
BioVail Corp. International* 3,100 90,675
Pfizer Inc. 4,500 372,375
Roussel-Uclaf* 1,400 370,504
Sandoz AG* 300 346,756
--------------
1,290,672
--------------
Food & Beverage 2.7%
Anheuser-Busch Companies, Inc. 5,700 219,450
Coca-Cola Co. 5,900 297,950
Coca-Cola Enterprises Inc. 8,700 370,837
Whitman Corp. 12,600 305,550
--------------
1,193,787
--------------
Hospital Supply 3.7%
American Medical Response, Inc.* 1,800 54,000
Baxter International Inc. 9,300 387,112
Genesis Health Ventures Inc. 2,200 50,325
Healthdyne Technologies Inc.* 6,800 60,350
Imagyn Medical, Inc.* 5,100 41,438
Johnson & Johnson 6,000 295,500
Karrington Health Inc.* 3,100 48,825
Lincare Holdings Inc.* 1,200 45,000
Mariner Health Group Inc. 4,100 34,850
Medtronic Inc. 3,500 225,313
Physio-Control International Corp.* 1,200 23,400
Respironics Inc.* 1,700 25,500
Roche Holdings AG* 35 264,715
Rural/Metro Corp.* 1,600 58,400
Ultra-Fem Inc.* 1,500 33,750
--------------
1,648,478
--------------
Personal Care 0.0%
U.S.A. Detergents Inc.* 650 21,450
--------------
Printing & Publishing 0.9%
Heritage Media Corp. Cl. A* 2,200 33,550
Hollinger International Inc. CI. A* 24,200 302,500
Providence Journal Co. Cl. A* 2,100 67,725
--------------
403,775
--------------
Tobacco 1.0%
Imperial Tobacco Group PLC* 23,900 $ 140,039
Philip Morris Companies, Inc. 3,300 305,663
Schweitzer-Mauduit International, Inc. 800 24,600
--------------
470,302
--------------
Total Consumer Staple 5,693,508
--------------
Energy 3.8%
Oil 3.7%
Abacan Resources Corp.* 9,500 72,438
ENI SPA ADR 3,300 156,750
Imperial Oil Ltd. 2,700 118,800
KCS Energy Inc. 1,100 47,438
Nuevo Energy Co.* 1,300 64,838
Oryx Energy Co.* 12,900 248,325
Plains Resources Inc.* 1,500 21,000
Ranger Oil Ltd.* 4,600 34,500
Seagull Energy Corp. 13,012 281,384
Tosco Corp. 5,500 308,687
Total SA* 2,049 160,273
Woodside Petroleum Ltd. ADR* 25,000 176,363
--------------
1,690,796
--------------
Oil Service 0.1%
Dreco Energy Services Ltd. Cl. A* 1,400 36,750
--------------
Total Energy 1,727,546
--------------
Finance 7.8%
Bank 3.7%
Bank of New York Inc. 9,800 324,625
BankAmerica Corp. 2,500 228,750
Citicorp 4,400 435,600
Fleet Financial Group Inc. 6,300 314,212
Sparbanken Sverige AB* 24,100 381,161
--------------
1,684,348
--------------
Financial Service 1.7%
Alex Brown Inc. 600 34,050
CMAC Investment Corp. 1,000 69,125
Federal Home Loan Mortgage Corp. 2,300 232,300
Federal National Mortgage Association 10,600 414,725
--------------
750,200
--------------
The accompanying notes are an integral part of the financial statements.
63
<PAGE>
Value
Shares (Note 1)
- --------------------------------------------------- -------- --------------
Insurance 2.4%
ACE Ltd. 4,500 $ 246,375
AMBAC Inc. 2,700 168,750
Delphi Financial Group Inc.* 960 27,000
Mid Ocean Ltd. 5,900 277,300
Mutual Risk Management Ltd. 2,066 66,112
NAC Re Corp. 1,600 56,200
Travelers/Aetna Property Casualty Corp. CI. A* 7,400 222,000
--------------
1,063,737
--------------
Total Finance 3,498,285
--------------
Science & Technology 11.1%
Aerospace 1.8%
Boeing Co. 3,600 343,350
General Dynamics Corp. 3,400 233,325
Rockwell International Corp. 3,800 209,000
--------------
785,675
--------------
Computer Software & Service 3.9%
Anacomp Inc.* 5,594 48,948
Applied Graphics Technologies, Inc. 1,900 29,925
Cisco Systems Inc.* 5,600 346,500
Desktop Data Inc.* 1,000 23,750
Electronic Data Systems Corp. 3,300 148,500
Manugistics Group Inc.* 700 30,100
Microsoft Corp.* 2,600 356,850
National Processing, Inc.* 4,300 81,700
Oracle Systems Corp.* 3,400 143,862
Planning Sciences International PLC ADR* 1,700 21,675
SystemSoft Corp.* 1,200 33,900
Ultratech Stepper Inc.* 2,700 45,900
Vantive Corp.* 700 23,100
Videoserver Inc.* 1,200 56,850
Wang Laboratories Inc.* 3,600 84,150
Western Digital Corp. Rts.* 5,800 281,300
--------------
1,757,010
--------------
Electronic Components 2.1%
ABB AG* 65 80,324
AMP Inc. 5,700 193,087
Augat Inc. 2,400 66,000
Encad Inc.* 800 32,800
Intel Corp.* 4,000 439,500
VLSI Technology Inc.* 1,400 24,150
Xicor Inc. 3,700 42,088
Zebra Technologies Corp. Cl. A* 2,700 77,963
--------------
955,912
--------------
Electronic Equipment 2.8%
Berg Electronics Corp.* 2,500 $ 70,625
Chicago Miniature Lamp, Inc.* 1,400 41,650
L.M. Ericsson Telephone Co. ADR Cl. B* 7,570 209,121
L.M. Ericsson Telephone Co. Cl. B* 8,769 237,371
Lucent Technologies Inc.* 2,800 131,600
Network Equipment Technologies, Inc. Rts.* 2,400 32,100
Nokia AB Cl. A Pfd.* 1,960 90,502
Nokia AB Cl. K Pfd. 5,500 259,537
Toolex Alpha NV* 20,500 196,941
--------------
1,269,447
--------------
Office Equipment 0.5%
FileNet Corp.* 2,600 73,775
International Business Machines Corp. 1,100 141,900
--------------
215,675
--------------
Total Science & Technology 4,983,719
--------------
Utility 2.1%
Electric 0.7%
Allegheny Power Systems Inc. 5,600 167,300
American Electric Power Inc. 3,300 136,950
--------------
304,250
--------------
Natural Gas 0.4%
ENSERCH Corp. 6,000 129,000
TransTexas Gas Corp.* 4,500 63,000
--------------
192,000
--------------
Telephone 1.0%
Allen Group Inc. 2,900 46,037
Clearnet Communications Inc. Wts.* 495 4,455
Geotek Communications Inc.* 5,500 40,563
NetCom Systems AB* 17,700 223,413
Tel-Save Holdings Inc.* 2,900 72,500
Trescom International Inc.* 4,900 62,475
--------------
449,443
--------------
Total Utility 945,693
--------------
Total Equity Securities (Cost $19,668,040) 23,250,973
--------------
The accompanying notes are an integral part of the financial statements.
64
<PAGE>
<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
- ----------------------------------- ------------------------------- --------------
<S> <C> <C> <C>
FIXED INCOME SECURITIES 39.5%
U.S. Treasury 13.2%
U.S. Treasury Bond, 12.00% $ 400,000 8/15/2013 $ 575,876
U.S. Treasury Bond, 8.125% 850,000 8/15/2021 988,788
U.S. Treasury Bond, 6.25% 750,000 8/15/2023 704,527
U.S. Treasury Note, 8.50% 550,000 5/15/1997 558,849
U.S. Treasury Note, 5.125% 125,000 6/30/1998 123,906
U.S. Treasury Note, 6.75% 650,000 5/31/1999 663,611
U.S. Treasury Note, 7.125% 175,000 9/30/1999 180,605
U.S. Treasury Note, 6.875% 550,000 3/31/2000 565,037
U.S. Treasury Note, 6.625% 625,000 7/31/2001 638,181
U.S. Treasury Note, 7.50% 275,000 11/15/2001 291,242
U.S. Treasury Note, 5.75% 225,000 8/15/2003 219,130
U.S. Treasury Note, 7.875% 375,000 11/15/2004 411,563
--------------
5,921,315
--------------
U.S. Agency Mortgage 11.5%
Federal Home Loan Mortgage Corp.,
6.50% 175,376 2/01/2009 173,895
Federal Home Loan Mortgage Corp.,
6.50% 120,946 7/01/2009 119,925
Federal Home Loan Mortgage Corp.,
9.50% 109,415 7/25/2022 117,689
Federal Home Loan Mortgage Corp.
Series 29-H PAC, 6.50% 100,000 3/25/2023 97,406
Federal Home Loan Mortgage Corp.,
7.00% 328,889 12/01/2024 325,189
Federal Home Loan Mortgage Corp.
Gold, 7.50% 147,956 1/01/2025 149,133
Federal Home Loan Mortgage Corp.,
8.00% 56,192 6/01/2025 57,491
Federal Home Loan Mortgage Corp.,
7.50% 82,815 7/01/2025 83,268
Federal Home Loan Mortgage Corp.,
7.50% 473,837 6/01/2026 475,462
Federal National Mortgage
Association, 9.50% 218,279 10/01/2003 229,463
Federal National Mortgage
Association, 7.00% 183,193 12/01/2007 185,018
Federal National Mortgage
Association, 8.00% 216,381 4/01/2008 225,314
Federal National Mortgage
Association TBA, 7.00% 225,000 11/13/2025 220,781
Government National Mortgage
Association, 6.50% 114,945 2/15/2009 113,867
Government National Mortgage
Association, 6.50% 255,308 5/15/2009 252,954
Government National Mortgage
Association, 9.00% 131,853 2/15/2022 140,340
U.S. Agency Mortgage (cont'd)
Government National Mortgage
Association, 8.00% $ 682,250 7/15/2022 $ 700,152
Government National Mortgage
Association, 6.50% 88,276 12/15/2023 85,020
Government National Mortgage
Association, 6.50% 298,168 7/15/2024 287,172
Government National Mortgage
Association, 7.00% 148,234 1/15/2025 146,244
Government National Mortgage
Association, 7.00% 68,472 10/15/2025 67,188
Government National Mortgage
Association, 7.50% 316,866 11/15/2025 318,054
Government National Mortgage
Association TBA, 7.00% 150,000 11/19/2025 147,141
Government National Mortgage
Association, 7.50% 148,923 4/15/2026 149,388
Government National Mortgage
Association, 8.00% 299,586 9/15/2026 306,326
--------------
5,173,880
--------------
Canadian-Yankee 0.9%
Hydro-Quebec Deb. Series HS, 9.40% 225,000 2/01/2021 270,391
Talisman Energy Inc. Deb., 7.125% 125,000 6/01/2007 124,630
--------------
395,021
--------------
Trust Certificates 0.3%
Cooperative Utility Trust
Certificates, 10.70% 125,000 9/15/2017 136,154
--------------
Foreign Government 3.0% Australian Dollar
Government of Australia, 7.50% 400,000 7/15/2005 320,736
Canadian Dollar
Government of Canada, 7.50% 515,000 12/01/2003 414,809
Danish Krone
Kingdom of Denmark, 8.00% 1,200,000 11/15/2001 226,072
Kingdom of Denmark, 8.00% 1,200,000 3/15/2006 222,191
European Currency Unit
Government of France, 8.00% 125,000 4/25/2003 176,239
--------------
1,360,047
--------------
Finance/Mortgage 5.0%
Allmerica Financial Corp. Sr. Note,
7.625% $ 150,000 10/15/2025 149,816
Associates Corp. of North America
Note, 6.375% 150,000 10/15/2002 148,320
Capital One Bank Note, 7.08% 250,000 10/30/2001 252,067
CIT Group Holdings Inc. Note, 6.75% 250,000 5/14/2001 253,580
The accompanying notes are an integral part of the financial statements.
65
<PAGE>
Principal Maturity Value
Amount Date (Note 1)
- ----------------------------------- ------------------------------- --------------
Finance/Mortgage (cont'd)
Countrywide Mortgage Inc. Series
1994-2 Class A-7, 6.50% $ 150,000 4/25/2008 $ 150,280
Discover Credit Card Trust Series
1993 A, 6.25% 125,000 8/16/2000 125,273
First Chicago Master Trust Series
91-D, 8.40% 16,667 6/15/1998 16,661
Ford Credit Auto Loan Master Trust
Series 95-1, 6.50% 200,000 8/15/2002 200,000
GE Global Insurance Holding Corp.
Note, 7.00% 175,000 2/15/2026 169,094
General Motors Acceptance Corp.
Note, 8.375% 200,000 5/01/1997 202,502
General Motors Acceptance Corp.
Note, 7.85% 50,000 11/17/1997 51,016
Household Finance Co. Sr. Note,
6.75% 100,000 6/01/2000 101,183
NationsBank Credit Card Master
Trust Series 1995-1A, 6.45% 150,000 4/15/2003 150,843
Prudential Home Mortgage Securities
Co. Series 93-57 A-1 PAC, 6.50% 108,307 12/26/2023 107,968
Prudential Home Mortgage Securities
Co.Series 93-29 A-6 PAC, 6.75% 70,980 8/25/2008 71,401
Sears Credit Account Master Trust
Series 1995-2A, 8.10% 100,000 6/15/2004 105,000
--------------
2,255,004
--------------
Corporate 5.6%
Anacomp Inc. Sr. Sub. Note, 13.00% 71,000 6/04/2002 73,307
Chevron Corp. Profit Sharing Note,
8.11% 100,000 12/01/2004 106,906
Clearnet Communications Inc. Sr.
Disc. Note, 0.00% to 12/14/2000,
14.75% from 12/15/2000 to
maturity 150,000 12/15/2005 87,422
Columbia/HCA Healthcare Corp.
Master Trust Note, 6.87% 125,000 9/15/2003 126,584
Crown Packaging Ltd. Sr. Sec. Note,
10.75% 75,000 11/01/2000 69,750
Dade International Inc. Sr. Sub.
Note, 11.125%+ 250,000 5/01/2006 267,500
Envirosource Inc. Note, 9.75% 125,000 6/15/2003 116,875
Grand Union Co. Sr. Sub. Note,
12.00% 75,000 9/01/2004 75,750
Corporate (cont'd)
K & F Industries Inc. Sr. Sec.
Note, 11.875% $ 175,000 12/01/2003 $ 189,000
K & F Industries Inc. Sr. Sub.
Deb., 10.375% 100,000 9/01/2004 103,000
K-III Communications Corp. Sr.
Note, 8.50% 100,000 2/01/2006 93,250
Norcal Waste Systems Inc. Sr. Note,
12.75% to 11/14/96, 13.00% from
11/15/96 to 5/14/97, 13.25% from
5/15/97 to 11/14/97, 13.50% from
11/15/97 to maturity 200,000 11/15/1996 216,500
Presidio Oil Co. Sr. Sec. Note,
11.50% (ballot box) 100,000 9/15/2000 98,750
Ralphs Grocery Co. Sr. Note, 10.45% 170,000 6/15/2004 171,700
Sears Roebuck Acceptance Corp.
Note, 6.86% 225,000 8/06/2001 227,610
Spanish Broadcasting Systems Inc.
Sr. Note, 7.50% 100,000 6/15/2002 104,500
Talley Manufacturing & Technology
Inc. Sr. Note, 10.75% 250,000 10/15/2003 258,750
United Meridian Corp. Sr. Sub.
Note, 10.375% 120,000 10/15/2005 129,600
--------------
2,516,754
--------------
Total Fixed Income Securities (Cost $17,534,083) 17,758,175
--------------
SHORT-TERM OBLIGATIONS 10.2%
American Express Credit Corp.,
5.22% 1,566,000 11/06/1996 1,566,000
Associates Corp. of North America,
5.15% 333,000 11/01/1996 333,000
Beneficial Corp., 5.22% 1,000,000 11/04/1996 1,000,000
Federal Home Loan Mortgage Corp.,
5.17% 957,000 11/01/1996 957,000
Ford Motor Credit Co., 5.25% 739,000 11/04/1996 739,000
--------------
Total Short-Term Obligations (Cost $4,595,000) 4,595,000
--------------
Total Investments (Cost $41,797,123)--101.4% 45,604,148
Cash and Other Assets, Less Liabilities--(1.4)% (615,297)
--------------
Net Assets--100.0% $44,988,851
==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
66
<PAGE>
Federal Income Tax Information:
At October 31, 1996, the net unrealized appreciation of
investments based on cost for Federal income tax purposes of
$41,942,980 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost $4,594,225
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value (933,057)
-------------
$3,661,168
=============
ADR stands for American Depositary Receipt, representing ownership of foreign
securities.
* Nonincome-producing securities.
TBA Represents "TBA" (to be announced) purchase commitment to purchase
securities for a fixed unit price at a future date beyond customary
settlement time. Although the unit price has been established, the
principal value has not been finalized and may vary by no more than 1%.
+ Security restricted in accordance with Rule 144A under the Securities Act
of 1933, which allows for the resale of such securities among certain
qualified buyers. The total cost and market value of Rule 144A securities
owned at October 31, 1996 were $258,625 and $272,000 (0.60% of net assets),
respectively.
(ballot box) Security is in default.
++ Security restricted as to public resale. At October 31, 1996, there were
no outstanding unrestricted securities of the same class as those held.
The total cost and market value of restricted securities at October 31,
1996 were $0 and $37 (0.00% of net assets), respectively.
Forward currency exchange contracts outstanding at October 31, 1996, are as
follows:
<TABLE>
<CAPTION>
Unrealized
Contract Appreciation Delivery
Total Value Price (Depreciation) Date
- -------------------------------------------------- ---------------- -------------- --------------- -----------
<S> <C> <C> <C> <C>
Sell Australian dollars, Buy U.S. dollars 157,000 AUD .79475 AUD $ 655 1/24/97
Sell Australian dollars, Buy U.S. dollars 40,000 AUD .77425 AUD (718) 11/14/96
Sell Australian dollars, Buy U.S. dollars 175,000 AUD .77450 AUD (3,098) 11/14/96
Buy Australian dollars, Sell U.S. dollars 10,000 AUD .79147 AUD 7 11/14/96
Buy Australian dollars, Sell U.S. dollars 83,000 AUD .79055 AUD 2 1/24/97
Sell Australian dollars, Buy U.S. dollars 83,000 AUD .79340 AUD 234 1/24/97
Sell Canadian dollars, Buy U.S. dollars 76,000 CAD .73153 CAD (1,159) 11/14/96
Sell Canadian dollars, Buy U.S. dollars 15,000 CAD .74683 CAD (49) 1/24/97
Sell Canadian dollars, Buy U.S. dollars 270,000 CAD .73099 CAD (4,261) 11/14/96
Sell Canadian dollars, Buy U.S. dollars 103,000 CAD .74703 CAD (316) 1/24/97
Sell Danish krone, Buy U.S. dollars 1,438,100 DKK .17110 DKK (2,429) 1/24/97
Sell Danish krone, Buy U.S. dollars 1,012,000 DKK .17578 DKK 3,657 11/14/96
Sell European currency units, Buy U.S. dollars 130,000 ECU 1.27480 ECU 991 11/14/96
---------------
$(6,484)
===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
67
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
Assets
Investments, at value (Cost $41,797,123) (Note 1) $45,604,148
Cash 5,486
Interest and dividends receivable 325,468
Receivable for securities sold 181,290
Receivable for fund shares sold 53,471
Receivable from Distributor (Note 3) 30,879
Receivable for open forward contracts 5,546
Deferred organization costs and other assets (Note 1) 47,567
--------------
46,253,855
Liabilities
Payable for securities purchased 1,081,019
Payable for fund shares redeemed 50,520
Accrued management fee (Note 2) 24,618
Accrued transfer agent and shareholder services (Note 2) 17,375
Payable for open forward contracts 12,030
Accrued trustees' fees (Note 2) 5,214
Other accrued expenses 74,228
--------------
1,265,004
--------------
Net Assets $44,988,851
==============
Net Assets consist of:
Undistributed net investment income $ 541,601
Unrealized appreciation of investments 3,807,025
Unrealized depreciation of forward contracts and foreign
currency (6,167)
Accumulated net realized gain 2,644,453
Shares of beneficial interest 38,001,939
--------------
$44,988,851
==============
Net Asset Value, offering price and redemption price per
share of Class C shares ($44,988,851 / 3,986,663 shares of
beneficial interest) $ 11.28
==============
STATEMENT OF OPERATIONS
For the year ended October 31, 1996
Investment Income
Interest $1,620,422
Dividends, net of foreign taxes of $11,151 348,800
--------------
1,969,222
Expenses
Management fee (Note 2) 302,408
Custodian fee 155,325
Transfer agent and shareholder services (Note 2) 113,217
Reports to shareholders 32,861
Audit fee 32,158
Amortization of organization costs (Note 1) 16,682
Trustees' fees (Note 2) 16,133
Registration fees 13,053
Legal fees 6,774
Miscellaneous 10,908
--------------
699,519
Expenses borne by the Distributor (Note 3) (234,376)
--------------
465,143
--------------
Net investment income 1,504,079
--------------
Realized and Unrealized Gain on Investments, Foreign
Currency and Forward Contracts
Net realized gain on investments (Notes 1 and 4) 3,068,164
Net realized gain on forward contracts and foreign currency
(Note 1) 82,986
--------------
Total net realized gain 3,151,150
--------------
Net unrealized appreciation of investments 1,058,351
Net unrealized appreciation of forward contracts and
foreign currency 43,163
--------------
Total net unrealized appreciation 1,101,514
--------------
Net gain on investments, foreign currency and forward
contracts 4,252,664
--------------
Net increase in net assets resulting from operations $5,756,743
==============
The accompanying notes are an integral part of the financial statements.
68
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
Year ended October 31
------------------------------
1996 1995
-------------------------------- --------------- --------------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 1,504,079 $ 1,224,242
Net realized gain on
investments, foreign currency
and forward contracts* 3,151,150 579,909
Net unrealized appreciation of
investments, foreign currency
and forward contracts 1,101,514 2,954,377
--------------- --------------
Net increase resulting from
operations 5,756,743 4,758,528
--------------- --------------
Dividends from net investment
income--Class C (1,633,976) (996,013)
--------------- --------------
Class C share transactions (Note
6):
Proceeds from sale of shares 14,756,256 10,791,980
Net asset value of shares
issued in payment of
dividends 510,768 236,847
Cost of shares repurchased (14,221,849) (3,464,385)
--------------- --------------
Net increase from fund share
transactions 1,045,175 7,564,442
--------------- --------------
Total increase in net assets 5,167,942 11,326,957
Net Assets
Beginning of year 39,820,909 28,493,952
--------------- --------------
End of year (including
undistributed net investment
income of $541,601 and
$551,744, respectively) $ 44,988,851 $39,820,909
=============== ==============
Number of Class C shares:
Sold 1,373,024 1,120,799
Issued upon reinvestment of
dividends 47,952 24,757
Repurchased (1,314,427) (371,031)
--------------- --------------
Net increase in fund shares 106,549 774,525
=============== ==============
*Net realized gain for Federal
income tax purposes (Note 1) $ 2,790,310 $ 522,329
=============== ==============
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
October 31, 1996
Note 1
State Street Research Strategic Portfolios: Moderate (the "Fund"), is a
series of State Street Research Financial Trust, (the "Trust"), which was
organized as a Massachusetts business trust in November, 1986 and is
registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. The Fund commenced operations in
September, 1993. The Trust consists presently of four separate funds: State
Street Research Strategic Portfolios: Moderate, State Street Research
Government Income Fund, State Street Research Strategic Portfolios:
Conservative and State Street Research Strategic Portfolios: Aggressive.
The investment objective of the fund is to provide both current income and
capital appreciation, consistent with the preservation of capital and
reasonable investment risk.
The Fund is authorized to issue four classes of shares. Only Class C shares
are presently available for purchase. Class A, Class B and Class D shares are
not being offered at this time. Class A shares will be subject to an initial
sales charge of up to 4.50% and annual service fees of 0.25% of average daily
net assets. Class B shares will be subject to a contingent deferred sales
charge on certain redemptions made within five years of purchase and pay
annual distribution and service fees of 1.00%. Class B shares automatically
convert into Class A shares (which pay lower ongoing expenses) at the end of
eight years after the issuance of the Class B shares. Class C shares are only
offered to certain employee benefit plans and large institutions. No sales
charge is imposed at the time of purchase or redemption of Class C shares.
Class C shares do not pay any distribution or service fees. Class D shares
are subject to a contingent deferred sales charge of 1.00% on any shares
redeemed within one year of their purchase. Class D shares also pay annual
distribution and service fees of 1.00%. The Fund's expenses are borne
pro-rata by each class, except that each class bears expenses, and has
exclusive voting rights with respect to provisions of the Plan of
Distribution, related specifically to that class. The Trustees declare
separate dividends on each class of shares.
The following significant accounting policies are consistently followed by
the Fund in preparing its financial statements, and such policies are in
conformity with generally accepted accounting principles for investment
companies.
A. Investment Valuation
Values for listed equity securities reflect final sales on national
securities exchanges quoted prior to the close of the New York Stock
Exchange. Over-the-counter securities quoted on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") system are valued at
closing prices supplied through such system. If not quoted on the NASDAQ
system, such securities are valued at prices obtained from brokers. In the
absence of recorded sales, valuations are at the mean of the closing bid and
asked quotations. Fixed income securities are valued by a pricing service,
which utilizes market transactions, quotations from dealers, and various
relationships among securities in determining value. Short-term securities
maturing within sixty days are valued at amortized cost. Securities quoted in
foreign currencies are translated into U.S. dollars at the current exchange
rate.
69
<PAGE>
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered. Gains and losses that arise from
changes in exchange rates are not segregated from gains and losses that arise
from changes in market prices of investments.
C. Net Investment Income
Net investment income is determined daily and consists of interest and
dividends accrued and discount earned, less the estimated daily expenses of
the Fund. Interest income is accrued daily as earned. Dividend income is
accrued on the ex-dividend date. Discount on debt obligations is amortized
under the effective yield method. The Fund is charged for expenses directly
attributable to it, while indirect expenses are allocated among all funds in
the Trust.
D. Dividends
Dividends from net investment income are declared and paid or reinvested
quarterly. Net realized capital gains, if any, are distributed annually,
unless additional distributions are required for compliance with applicable
tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing
treatments for foreign currency transactions.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund intends
to qualify under Subchapter M of the Internal Revenue Code and its policy is
to distribute all of its taxable income, including net realized capital
gains, within the prescribed time periods.
F. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and are being amortized under the straight-line method over a
period of five years.
G. Forward Contracts and Foreign Currencies
The Fund enters into forward foreign currency exchange contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its
foreign portfolio holdings and to hedge certain purchase and sale commitments
denominated in foreign currency. A forward foreign currency exchange contract
is an obligation by the Fund to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the origination date
of the contract. Forward foreign currency exchange contracts establish an
exchange rate at a future date. These contracts are transferable in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. Risks may arise from the potential
inability of a counterparty to meet the terms of a contract and from
unanticipated movements in the value of foreign currencies relative to the
U.S. dollar. The aggregate principal amount of forward currency exchange
contracts is recorded in the Fund's accounts. All commitments are
marked-to-market at the applicable transaction rates resulting in unrealized
gains or losses. The Fund records realized gains or losses at the time the
forward contracts are extinguished by entry into a closing contract or by
delivery of the currency. Neither spot transactions nor forward currency
exchange contracts eliminate fluctuations in the prices of the Fund's
portfolio securities or in foreign exchange rates, or prevent loss if the
price of these securities should decline.
H. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser
earns monthly fees at an annual rate of 0.65% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. During the year ended October 31, 1996, the fees pursuant to
such agreement amounted to $302,408.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. In addition, Metropolitan receives a fee for maintenance
of the accounts of certain shareholders who are participants in sponsored
arrangements, employee benefit plans and similar programs or plans, through
or under which shares of the Fund may be purchased. During the year ended
October 31, 1996, the amount of such expenses was $100,775.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $16,133 during the year ended October 31, 1996.
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended October 31, 1996, the amount of such expenses
assumed by the Distributor and its affiliates was $234,376.
Note 4
For the year ended October 31, 1996, purchases and sales of securities,
exclusive of short-term obligations, aggregated $55,044,548 and $52,997,716
(including $15,452,703 and $13,761,143 of U.S. Government securities),
respectively.
70
<PAGE>
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940. Under the Plan, the Fund
will pay annual service fees to the Distributor at a rate of 0.25% of average
daily net assets for Class A, Class B and Class D shares. In addition, the
Fund will pay annual distribution fees of 0.75% of average daily net assets
for Class B and Class D shares. The Distributor uses such payments for
personal service and/or the maintenance or servicing of shareholder accounts,
to reimburse securities dealers for distribution and marketing services, to
furnish ongoing assistance to investors and to defray a portion of its
distribution and marketing expenses.
Note 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share.
At October 31, 1996, Metropolitan owned 1,695,308 Class C shares of the Fund
and the Adviser owned one Class C share of the Fund.
FINANCIAL HIGHLIGHTS
For a Class C share outstanding throughout each year:
<TABLE>
<CAPTION>
September 28, 1993
Year ended October 31 (Commencement of
--------------------------------- Operations) to
1996** 1995** 1994 October 31, 1993
- ------------------------------------------------------- ----------- ----------- -------- --------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 10.26 $ 9.18 $ 9.57 $ 9.55
Net investment income* 0.35 0.36 0.28 0.02
Net realized and unrealized gain (loss) on investments,
foreign currency and forward contracts 1.07 1.01 (0.45) --
Dividends from net investment income (0.40) (0.29) (0.22) --
----------- ----------- ----------- ------------------
Net asset value, end of year $ 11.28 $ 10.26 $ 9.18 $ 9.57
=========== =========== =========== ==================
Total return 14.08%+ 15.24%+ (1.81)%+ 0.21%+++
Net assets at end of year (000s) $44,989 $39,821 $28,494 $25,040
Ratio of expenses to average net assets* 1.00% 1.00% 1.00% 1.00%++
Ratio of net investment income to average net assets* 3.23% 3.68% 3.05% 2.32%++
Portfolio turnover rate 127.59% 120.62% 142.86% 0.00%
Average commission rate@ $0.0258 -- -- --
*Reflects voluntary assumption of fees or expenses per
share in each year (Note 3) $ 0.05 $ 0.07 $ 0.05 $ 0.00
</TABLE>
++ Annualized
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
** Per-share figures have been calculated using the average shares method.
@ For fiscal years beginning on or after November 1, 1995, the Fund is
required to disclose its average commission rate per share paid for security
trades.
71
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of State Street Research
Financial Trust and the Shareholders of
State Street Research Strategic Portfolios: Moderate
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of State Street Research
Strategic Portfolios: Moderate (a series of State Street Research Financial
Trust, hereafter referred to as the "Trust") at October 31, 1996, and the
results of its operations, the changes in its net assets and the financial
highlights for the periods indicated, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at October 31, 1996 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 11, 1996
72
<PAGE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
As of October 31, 1996, State Street Research Strategic Portfolios: Moderate
held 52% of its assets in equities, 39% in fixed income securities and 9% in
cash. For the 12 months ended October 31, 1996, Class C shares of the Fund
provided a total return of +14.08%.
We strive to achieve capital appreciation, current income, and preservation
of capital, all with moderate investment risk. We remain widely diversified
in stocks and bonds to achieve this objective.
Stocks
Positive stock returns helped the portfolio's performance. Large-cap and
value stocks made up the largest equity holdings. Value stocks performed
strongly, large-cap growth stocks less so. International equities, which were
also a large component performed well. Small-cap growth stocks, which only
comprised a small portion of the portfolio, brought in strong performance.
Bonds
The Fund's fixed-income component performed well, but did not keep pace with
its stock holdings. This was due in large part to our high-grade bond
holdings, which comprised our largest fixed-income position and provided flat
performance. High-yield and international bonds brought in strong
performance.
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate, and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. "C" shares, offered without a sales
charge, are available only to certain employee benefit plans and large
institutions. The Standard & Poor's 500 Composite Index (S&P 500) includes
500 widely traded common stocks and is a commonly used measure of U.S. stock
market performance. The Lehman Brothers Government/ Corporate Bond Index is a
commonly used index of bond market performance. The indices are unmanaged and
do not take sales charges into consideration. Direct investment in the
indices is not possible; results are for illustrative purposes only.
Performance results for the Fund are increased by the voluntary reduction of
Fund fees and expenses. In the box in the chart at the right, the first
figure reflects expense reduction; the second shows what results would have
been without subsidization.
Change In Value Of $10,000 Based On The S&P 500
And The Lehman Brothers Government/Corporate Bond
Index Compared To Change In Value Of $10,000
Invested In Strategic Portfolios: Moderate
[line chart]
Average Annual Total Return
1 Year Life of Fund
+14.08%/+13.65% +8.67%/+8.10%
Class C Shares
Strategic Portfolios: LB Gov't/Corp
Moderate Bond Index S&P 500
9/28/93 10000 10000 10000
10/31/93 10021 10041 10207
10/31/94 9840 9575 10600
10/31/95 11340 11123 13400
10/31/96 12936 11722 16627
73
<PAGE>
REPORT ON SPECIAL MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of State Street Research Strategic
Portfolios: Moderate ("Fund"), along with shareholders of other series of
State Street Research Financial Trust ("Meeting"), was convened on February
14, 1996, and continued thereafter. The results of the Meeting are set forth
below.
Votes (millions of
shares)
------------------
For Withheld
------ -----------
1. The following persons were elected as Trustees:
Edward M. Lamont 43.4 3.0
Robert A. Lawrence 43.4 3.0
Dean O. Morton 43.4 3.0
Thomas L. Phillips 43.4 3.0
Toby Rosenblatt 43.4 3.0
Michael S. Scott Morton 43.8 2.6
Ralph F. Verni 43.8 2.7
Jeptha H. Wade 43.8 2.6
Votes (millions of
shares)
----------------------
For Against Abstain
---- ------- --------
2. The Fund's fundamental policy on diversification
of investments was amended 3.1 0.1 0.2
3. The Master Trust Agreement was amended to permit
the Trustees to reorganize, merge or liquidate a
fund without prior shareholder approval 33.1 7.3 4.2
4. The Master Trust Agreement was amended to
eliminate specified time permitted between the
record date and any shareholders meeting. 34.4 5.7 4.4
74
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE
INVESTMENT PORTFOLIO
October 31, 1996
Value
Shares (Note 1)
- ------------------------------------------------- -------- --------------
EQUITY SECURITIES 28.8%
Basic Industries 3.9%
Chemical 1.2%
Hoechst AG* 3,250 $ 122,218
IMC Global Inc. 3,250 121,875
Monsanto Co. 3,600 142,650
--------------
386,743
--------------
Diversified 0.2%
Cardo AB* 1,400 34,278
Tenma Corp.* 2,000 35,484
--------------
69,762
--------------
Forest Product 0.1%
Aracruz Celulose SA ADR 3,300 26,400
--------------
Machinery 0.9%
Case Corp. 2,000 93,000
Linde AG* 81 50,144
Sundstrand Corp. 4,100 165,025
--------------
308,169
--------------
Metal & Mining 1.0%
Alumax Inc.* 4,200 134,925
Aluminum Company of America 1,400 82,075
Bohler Uddeholm AG* 500 37,402
RTZ Corp. PLC* 2,521 40,334
SGL Carbon AG* 500 56,293
--------------
351,029
--------------
Railroad 0.5%
Canadian National Railway Co. 6,300 173,250
--------------
Total Basic Industries 1,315,353
--------------
Consumer Cyclical 3.6%
Automotive 1.1%
Exide Corp. 6,300 163,800
Ford Motor Co. 3,800 118,750
Honda Motor Co.* 2,000 47,780
Suzuki Motor Co. Ltd.* 4,000 40,754
--------------
371,084
--------------
Building 0.5%
Lafarge Corp. 8,300 154,588
--------------
Hotel & Restaurant 0.6%
Harrah's Entertainment Inc.* 5,700 95,475
Mirage Resorts Inc.* 5,700 125,400
--------------
220,875
--------------
Recreation 0.1%
Amer Group, Ltd. Cl. A* 2,200 50,209
--------------
Retail Trade 1.3%
Home Depot Inc. 3,200 $ 175,200
Kroger Co.* 3,600 160,650
Wal-Mart Stores, Inc. 3,600 95,850
--------------
431,700
--------------
Total Consumer Cyclical 1,228,456
--------------
Consumer Staple 6.5%
Business Service 0.6%
ADT Ltd.* 8,300 163,925
HBO & Co. 500 30,063
--------------
193,988
--------------
Drug 1.2%
Amgen Inc.* 900 55,181
Pfizer Inc. 1,900 157,225
Roussel-Uclaf* 400 105,858
Sandoz AG* 70 80,910
--------------
399,174
--------------
Food & Beverage 2.1%
Anheuser-Busch Companies, Inc. 2,600 100,100
Coca-Cola Co. 2,600 131,300
Coca-Cola Enterprises Inc. 6,100 260,012
Whitman Corp. 8,900 215,825
--------------
707,237
--------------
Hospital Supply 1.3%
Baxter International Inc. 5,400 224,775
Johnson & Johnson 2,600 128,050
Medtronic Inc. 1,400 90,125
--------------
442,950
--------------
Printing & Publishing 0.6%
Hollinger International Inc. Cl. A* 17,600 220,000
--------------
Tobacco 0.7%
Imperial Tobacco Group PLC* 17,100 100,195
Philip Morris Companies, Inc. 1,500 138,938
--------------
239,133
--------------
Total Consumer Staple 2,202,482
--------------
Energy 2.2%
Oil 2.2%
ENI SPA ADR 900 42,750
Imperial Oil Ltd. 850 37,400
Oryx Energy Co.* 9,000 173,250
Seagull Energy Corp.* 7,800 168,675
Tosco Corp. 3,900 218,887
The accompanying notes are an integral part of the financial statements.
75
<PAGE>
Value
Shares (Note 1)
- ------------------------------------------------- -------- --------------
Oil (cont'd)
Total SA Cl. B* 717 $ 56,084
Woodside Petroleum Ltd. ADR* 7,700 54,320
--------------
751,366
--------------
Total Energy 751,366
--------------
Finance 5.4%
Bank 2.4%
BankAmerica Corp. 1,100 100,650
Bank of New York Inc. 6,800 225,250
Citicorp 1,600 158,400
Fleet Financial Group Inc. 4,600 229,425
Sparbanken Sverige AB* 5,700 90,150
--------------
803,875
--------------
Financial Service 1.0%
Federal Home Loan Mortgage Corp. 1,700 171,700
Federal National Mortgage Association 4,600 179,975
--------------
351,675
--------------
Insurance 2.0%
ACE Ltd. 3,300 180,675
AMBAC Inc. 1,900 118,750
Mid Ocean Ltd. 4,200 197,400
Travelers/Aetna Property Casualty Corp. Cl. A 5,400 162,000
--------------
658,825
--------------
Total Finance 1,814,375
--------------
Science & Technology 6.0%
Aerospace 1.6%
Boeing Co. 2,100 200,287
General Dynamics Corp. 2,500 171,563
Rockwell International Corp. 2,700 148,500
--------------
520,350
--------------
Computer Software & Service 1.9%
Cisco Systems Inc.* 2,400 148,500
Electronic Data Systems Corp. 1,400 63,000
Microsoft Corp.* 1,300 178,425
Oracle Systems Corp.* 1,600 67,700
Western Digital Corp. Rts.* 3,900 189,150
--------------
646,775
--------------
Electronic Components 1.3%
ABB AG* 30 37,073
AMP Inc. 4,200 142,275
Intel Corp.* 1,700 186,787
Rohm Co.* 1,000 59,286
--------------
425,421
--------------
Electronic Equipment 1.0%
L.M. Ericsson Telephone Co. Cl. B* 3,568 $ 96,584
L.M. Ericsson Telephone Co. ADR Cl. B* 3,390 93,649
Lucent Technologies Inc.* 1,400 65,800
Nokia AB Cl. A Pfd.* 760 35,092
Toolex Alpha NV* 5,200 49,956
--------------
341,081
--------------
Office Equipment 0.2%
International Business Machines Corp. 600 77,400
--------------
Total Science & Technology 2,011,027
--------------
Utility 1.2%
Electric 0.7%
Allegheny Power Systems Inc. 4,200 125,475
American Electric Power Inc. 2,400 99,600
--------------
225,075
--------------
Natural Gas 0.4%
ENSERCH Corp. 4,300 92,450
TransTexas Gas Corp.* 2,200 30,800
--------------
123,250
--------------
Telephone 0.1%
NetCom Systems AB* 4,100 51,751
--------------
Total Utility 400,076
--------------
Total Equity Securities (Cost $8,240,477) 9,723,135
--------------
Principal Maturity
Amount Date
----------------------------------------- ------------- --------------
FIXED INCOME SECURITIES 60.9%
U.S. Treasury 23.1%
U.S. Treasury Bond, 12.00% $ 200,000 8/15/2013 287,938
U.S. Treasury Bond, 8.125% 1,450,000 8/15/2021 1,686,756
U.S. Treasury Bond, 6.25% 775,000 8/15/2023 728,012
U.S. Treasury Note, 8.50% 575,000 5/15/1997 584,252
U.S. Treasury Note, 5.125% 275,000 6/30/1998 272,594
U.S. Treasury Note, 6.75% 675,000 5/31/1999 689,134
U.S. Treasury Note, 7.125% 1,200,000 9/30/1999 1,238,436
U.S. Treasury Note, 6.875% 350,000 3/31/2000 359,569
U.S. Treasury Note, 6.25% 400,000 8/31/2000 403,064
U.S. Treasury Note, 6.625% 250,000 7/31/2001 255,272
U.S. Treasury Note, 7.50% 300,000 11/15/2001 317,718
U.S. Treasury Note, 7.875% 900,000 11/15/2004 987,750
--------------
7,810,495
--------------
The accompanying notes are an integral part of the financial statements.
76
<PAGE>
<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
--------------------------------- ------------------------------- --------------
<S> <C> <C> <C>
U.S. Agency Mortgage 19.7%
Federal Home Loan Mortgage Corp.
Gold, 9.50% $ 139,204 7/25/2022 $ 149,730
Federal Home Loan Mortgage Corp.
Series 29-H PAC, 6.50% 125,000 3/25/2023 121,758
Federal Home Loan Mortgage Corp.
Gold, 7.00% 867,046 6/01/2024 857,292
Federal Home Loan Mortgage Corp.
Gold, 7.50% 539,194 8/01/2024 543,486
Federal Home Loan Mortgage Corp.
Gold, 8.00% 74,600 6/01/2025 76,325
Federal Home Loan Mortgage Corp.
Gold, 7.50% 365,379 4/01/2026 367,377
Federal Home Loan Mortgage Corp.
Gold, 7.50% 856,876 6/01/2026 859,815
Government National Mortgage
Association, 8.00% 315,357 5/15/2008 330,337
Government National Mortgage
Association, 6.50% 137,934 2/15/2009 136,640
Government National Mortgage
Association, 6.50% 66,493 6/15/2009 65,870
Government National Mortgage
Association, 6.50% 312,530 7/15/2009 309,649
Government National Mortgage
Association, 8.00% 134,753 10/15/2017 140,319
Government National Mortgage
Association, 8.00% 838,493 5/15/2022 861,543
Government National Mortgage
Association, 6.50% 88,250 12/15/2023 84,995
Government National Mortgage
Association, 6.50% 458,720 7/15/2024 441,802
Government National Mortgage
Association, 7.00% 324,842 1/15/2025 320,480
Government National Mortgage
Association, 7.00% 48,786 10/15/2025 47,871
Government National Mortgage
Association, 7.50% 389,989 11/15/2025 391,451
Government National Mortgage
Association, 7.50% 198,566 4/15/2026 199,185
Government National Mortgage
Association, 8.00% 349,517 9/15/2026 357,381
--------------
6,663,306
--------------
Canadian-Yankee 2.2%
Hydro-Quebec Deb. Series HS,
9.40% $ 325,000 2/01/2021 $ 390,565
Usinor Sacilor Note, 7.25% 350,000 8/01/2006 350,812
--------------
741,377
--------------
Foreign Government 3.0% Australian Dollar
Government of Australia, 7.50% 350,000 7/15/2005 280,644
Canadian Dollar
Government of Canada, 7.50% 220,000 12/01/2003 177,200
Danish Krone
Kingdom of Denmark, 8.00% 850,000 11/15/2001 160,135
Kingdom of Denmark, 8.00% 700,000 3/15/2006 129,611
European Currency Unit
Government of France, 8.00% 175,000 4/25/2003 246,734
--------------
994,324
--------------
Trust Certificates 1.4%
Cooperative Utility Trust
Certificates, 10.70% $ 225,000 9/15/2017 245,077
Rural Electric Cooperative
Grantor Trust Certificates,
10.11% 200,000 12/15/2017 217,804
--------------
462,881
--------------
Finance/Mortgage 8.7%
Associates Corp. of North America
Note, 6.375% 200,000 10/15/2002 197,760
Capital One Bank Sr. Note, 7.08% 175,000 10/30/2001 176,447
Chase Manhattan Master Trust
96-3A, 7.04% 275,000 2/15/2005 282,131
CIT Group Holdings Inc. Note,
6.75% 175,000 5/14/2001 177,506
Countrywide Funding Corp. Note,
6.28% 200,000 1/15/2003 193,634
Discover Credit Card Trust Series
1993 A, 6.25% 250,000 8/16/2000 250,545
First Chicago Credit Trust Series
91-D, 8.40% 25,000 6/15/1998 24,992
Ford Credit Auto Loan Master
Trust Series 95-1, 6.50% 375,000 8/15/2002 375,000
GE Global Insurance Holding Corp.
Note, 7.00% 225,000 2/15/2026 217,406
General Motors Acceptance Corp.
Note, 7.85% 325,000 11/17/1997 331,604
The accompanying notes are an integral part of the financial statements.
77
<PAGE>
Principal Maturity Value
Amount Date (Note 1)
--------------------------------- ------------------------------- --------------
Finance/Mortgage (cont'd)
Household Affinity Master Trust
Series 1994-1A, 5.525% $175,000 4/25/2003 $ 175,163
Household Finance Co. Note, 6.75% 125,000 6/01/2000 126,479
Prudential Home Mortgage Series
93-29 A-6 PAC, 6.75% 235,523 8/25/2008 236,920
Sears Roebuck Acceptance Corp.
Note, 6.86% 175,000 8/06/2001 177,030
--------------
2,942,617
--------------
Corporate 2.8%
Chevron Corp. Note, 8.11% 175,000 12/01/2004 187,085
Columbia/HCA Healthcare Corp.
Note, 6.87% 150,000 9/15/2003 151,900
Electronic Data Systems Corp.
Note, 6.85% + 250,000 5/15/2000 254,105
K-III Communications Corp. Sr.
Note, 8.50% 75,000 2/01/2006 69,938
Loews Corp. Sr. Note, 7.00% 125,000 10/15/2023 114,338
Tele-Communications Inc. Sr.
Note, 8.25% 175,000 1/15/2003 173,047
--------------
950,413
--------------
Total Fixed Income Securities (Cost $20,147,196) 20,565,413
--------------
SHORT-TERM OBLIGATIONS 9.5%
American Express Credit Corp.,
5.25% 219,000 11/04/1996 219,000
American Express Credit Corp.,
5.25% 836,000 11/12/1996 836,000
Beneficial Corp., 5.22% 691,000 11/05/1996 691,000
Ford Motor Credit Co., 5.20% 968,000 11/01/1996 968,000
General Electric Capital Corp.,
5.17% 500,000 11/01/1996 500,000
--------------
Total Short-Term Obligations (Cost $3,214,000) 3,214,000
--------------
Total Investments (Cost $31,601,673)--99.2% 33,502,548
Cash and Other Assets, Less Liabilities--0.8% 284,902
--------------
Net Assets--100.0% $33,787,450
==============
</TABLE>
Federal Income Tax Information:
At October 31, 1996, the net unrealized appreciation of
investments based on cost for Federal income tax purposes of
$31,664,750 was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost $2,120,103
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value (282,305)
-------------
$1,837,798
=============
ADR stands for American Depositary Receipt, representing ownership of foreign
securities.
* Nonincome-producing securities.
+ Security restricted in accordance with Rule 144A under the Securities Act
of 1933, which allows for the resale of such securities among certain
qualified institutional buyers. The total cost and market value of Rule
144A securities owned at October 31, 1996 were $249,803 and $254,105 (0.75%
of net assets), respectively.
The accompanying notes are an integral part of the financial statements.
78
<PAGE>
Forward currency exchange contracts outstanding at October 31, 1996, are as
follows:
<TABLE>
<CAPTION>
Unrealized
Contract Appreciation Delivery
Total Value Price (Depreciation) Date
- -------------------------------------------------- ---------------- ---------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sell Australian dollars, Buy U.S. dollars 265,900 AUD .79475 AUD $ 1,110 1/24/97
Sell Australian dollars, Buy U.S. dollars 60,000 AUD .77425 AUD (1,077) 11/14/96
Sell Australian dollars, Buy U.S. dollars 203,000 AUD .77450 AUD (3,592) 11/14/96
Sell Australian dollars, Buy U.S. dollars 112,000 AUD .79340 AUD 316 1/24/97
Buy Australian dollars, Sell U.S. dollars 88,000 AUD .78910 AUD 273 11/14/96
Buy Australian dollars, Sell U.S. dollars 112,000 AUD .79144 AUD (97) 1/24/97
Buy Australian dollars, Sell U.S. dollars 60,000 AUD .79147 AUD 88 11/14/96
Sell Canadian dollars, Buy U.S. dollars 177,000 CAD .73153 CAD (2,699) 11/14/96
Sell Canadian dollars, Buy U.S. dollars 15,000 CAD .73099 CAD (237) 11/14/96
Sell Danish krone, Buy U.S. dollars 104,000 DKK .17110 DKK (177) 1/24/97
Sell Danish krone, Buy U.S. dollars 882,000 DKK .17578 DKK 3,187 11/14/96
Sell Danish krone, Buy U.S. dollars 837,500 DKK .17107 DKK (1,439) 1/24/97
Buy Danish krone, Sell U.S. dollars 225,000 DKK .17555 DKK (762) 11/14/96
Sell European currency units, Buy U.S. dollars 182,000 ECU 1.27480 ECU 1,387 11/14/96
---------------
$(3,719)
===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
79
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
October 31, 1996
Assets
Investments, at value (Cost $31,601,673) (Note 1) $33,502,548
Cash 22,607
Interest and dividends receivable 312,956
Receivable for securities sold 212,947
Receivable for fund shares sold 23,939
Receivable from Distributor (Note 3) 15,792
Receivable for open forward contracts 6,361
Deferred organization costs and other assets (Note 1) 44,766
--------------
34,141,916
Liabilities
Payable for securities purchased 230,055
Accrued transfer agent and shareholder services (Note 2) 19,896
Payable for open forward contracts 10,080
Accrued management fee (Note 2) 17,053
Payable for fund shares redeemed 6,419
Accrued trustees' fees (Note 2) 4,793
Accrued service fee (Note 5) 116
Other accrued expenses 66,054
--------------
354,466
--------------
Net Assets $33,787,450
==============
Net Assets consist of:
Undistributed net investment income $ 410,962
Unrealized appreciation of investments 1,900,875
Unrealized depreciation of forward contracts and foreign
currency (3,408)
Accumulated net realized gain 1,658,025
Shares of beneficial interest 29,820,996
--------------
$33,787,450
==============
Net Asset Value and redemption price per share of Class A
shares ($551,564 / 50,023 shares of beneficial interest) $ 11.03
==============
Maximum Offering Price per share of Class A shares ($11.03
/ .955) $ 11.55
==============
Net Asset Value, offering price and redemption price per
share of Class C shares ($33,235,886 / 3,039,822 shares of
beneficial interest) $ 10.93
==============
STATEMENT OF OPERATIONS
For the year ended October 31, 1996
Investment Income
Interest, net of foreign taxes of $616 $ 1,651,704
Dividends, net of foreign taxes of $4,928 173,951
--------------
1,825,655
Expenses
Management fee (Note 2) 201,690
Custodian fee 122,038
Service fee-Class A (Note 5) 25,236
Transfer agent and shareholder services (Note 2) 66,719
Audit fee 33,559
Reports to shareholders 18,633
Trustees' fees (Note 2) 18,001
Registration fees 15,211
Amortization of organization costs (Note 1) 7,503
Legal fees 7,175
Miscellaneous 9,958
--------------
525,723
Expenses borne by the Distributor (Note 3) (197,940)
--------------
327,783
--------------
Net investment income 1,497,872
--------------
Realized and Unrealized Gain on Investments,
Foreign Currency and Forward Contracts
Net realized gain on investments (Notes 1 and 4) 1,696,404
Net realized gain on forward contracts and foreign currency
(Note 1) 14,439
--------------
Total net realized gain 1,710,843
--------------
Net unrealized appreciation of investments 46,364
Net unrealized appreciation of forward contracts and
foreign currency 43,785
--------------
Total net unrealized appreciation 90,149
--------------
Net gain on investments, foreign currency and forward
contracts 1,800,992
--------------
Net increase in net assets resulting from operations $ 3,298,864
==============
The accompanying notes are an integral part of the financial statements.
80
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
Year ended October 31
-----------------------------
1996 1995
--------------------------------------------------------- --------------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 1,497,872 $ 1,288,775
Net realized gain on investments, foreign
currency and forward contracts 1,710,843 791,816
Net unrealized appreciation of investments,
foreign currency and forward contracts 90,149 1,955,540
-------------- --------------
Net increase resulting from operations 3,298,864 4,036,131
-------------- --------------
Dividends from net investment income:
Class A (454,334) (1,230,373)
Class C (970,526) (51,204)
-------------- --------------
(1,424,860) (1,281,577)
-------------- --------------
Distribution from net realized gains:
Class A (651,838) --
Class C (42,210) --
-------------- --------------
(694,048) --
-------------- --------------
Net increase from fund share transactions
(Note 6) 3,537,654 1,200,860
-------------- --------------
Total increase in net assets 4,717,610 3,955,414
Net Assets
Beginning of year 29,069,840 25,114,426
-------------- --------------
End of year (including undistributed net
investment income of $410,962 and
$303,997, respectively) $33,787,450 $29,069,840
============== ==============
*Net realized gain for Federal income tax
purposes (Note 1) $ 1,717,406 $ 693,902
============== ==============
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
October 31, 1996
Note 1
State Street Research Strategic Portfolios: Conservative (the "Fund") is a
series of State Street Research Financial Trust (the "Trust"), which was
organized as a Massachusetts business trust in November, 1986 and is
registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. The Fund commenced operations in May,
1994. The Trust consists presently of four separate funds: State Street
Research Strategic Portfolios: Conservative, State Street Research Government
Income Fund, State Street Research Strategic Portfolios: Moderate and State
Street Research Strategic Portfolios: Aggressive.
The investment objective of the fund is to provide, primarily, a high level
of current income and, secondarily, long term growth of capital, consistent
with the preservation of capital and reasonable investment risk.
The Fund is authorized to issue four classes of shares. Only Class A and
Class C shares are presently available for purchase. Class B and Class D
shares are not being offered at this time. Class A shares are subject to an
initial sales charge of up to 4.50% and annual service fees of 0.25% of
average daily net assets. Class B shares will be subject to a contingent
deferred sales charge on certain redemptions made within five years of
purchase and pay annual distribution and service fees of 1.00%. Class B
shares automatically convert into Class A shares (which pay lower ongoing
expenses) at the end of eight years after the issuance of the Class B shares.
Class C shares are only offered to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro-rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by
the Fund in preparing its financial statements, and such policies are in
conformity with generally accepted accounting principles for investment
companies.
A. Investment Valuation
Values for listed equity securities reflect final sales on national
securities exchanges quoted prior to the close of the New York Stock
Exchange. Over-the-counter securities quoted on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") system are valued at
closing prices supplied through such system. If not quoted on the NASDAQ
system, such securities are valued at prices obtained from brokers. In the
absence of recorded sales, valuations are at the mean of the closing bid and
asked quotations. Fixed income securities are valued by a pricing service,
which utilizes market transactions, quotations from dealers, and various
relationships among securities in determining value. Short-term securities
maturing within sixty days are valued at amortized cost. Securities quoted in
foreign currencies are translated into U.S. dollars at the current exchange
rate.
81
<PAGE>
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered. Gains and losses that arise from
changes in exchange rates are not segregated from gains and losses that arise
from changes in market prices of investments.
C. Net Investment Income
Net investment income is determined daily and consists of interest and
dividends accrued and discount earned, less the estimated daily expenses of
the Fund. Interest income is accrued daily as earned. Dividend income is
accrued on the ex-dividend date. Discount on debt obligations is amortized
under the effective yield method. The Fund is charged for expenses directly
attributable to it, while indirect expenses are allocated among all funds in
the Trust.
D. Dividends
Dividends from net investment income are declared and paid or reinvested
quarterly. Net realized capital gains, if any, are distributed annually,
unless additional distributions are required for compliance with applicable
tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing
treatments for foreign currency transactions.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund intends
to qualify under Subchapter M of the Internal Revenue Code and its policy is
to distribute all of its taxable income, including net realized capital
gains, within the prescribed time periods.
F. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and are being amortized under the straight-line method over a
period of five years.
G. Forward Contracts and Foreign Currencies
The Fund enters into forward foreign currency exchange contracts in order to
hedge its exposure to changes in foreign currency exchange rates on its foreign
portfolio holdings and to hedge certain purchase and sale commitments
denominated in foreign currencies. A forward foreign currency exchange contract
is an obligation by the Fund to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the origination date of the
contract. Forward foreign currency exchange contracts establish an exchange rate
at a future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. Risks may arise from the potential inability of a counterparty
to meet the terms of a contract and from unanticipated movements in the value of
foreign currencies relative to the U.S. dollar. The aggregate principal amount
of forward currency exchange contracts is recorded in the Fund's accounts. All
commitments are marked-to-market at the applicable transaction rates resulting
in unrealized gains or losses. The Fund records realized gains or losses at the
time the forward contracts are extinguished by entry into a closing contract or
by delivery of the currency. Neither spot transactions nor forward currency
exchange contracts eliminate fluctuations in the prices of the Fund's portfolio
securities or in foreign exchange rates, or prevent loss if the price of these
securities should decline.
H. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser earns
monthly fees at an annual rate of 0.60% of the Fund's average daily net assets.
In consideration of these fees, the Adviser furnishes the Fund with management,
investment advisory, statistical and research facilities and services. The
Adviser also pays all salaries, rent and certain other expenses of management.
During the year ended October 31, 1996, the fees pursuant to such agreement
amounted to $201,690.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. In addition, Metropolitan receives a fee for maintenance
of the accounts of certain shareholders who are participants in sponsored
arrangements, employee benefit plans and similar programs or plans, through
or under which shares of the Fund may be purchased. During the year ended
October 31, 1996, the amount of such expenses was $37,814.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $18,001 during the year ended October 31, 1996.
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended October 31, 1996, the amount of such expenses
assumed by the Distributor and its affiliates was $197,940.
Note 4
For the year ended October 31, 1996, purchases and sales of securities,
exclusive of short-term obligations, aggregated $38,260,101 and $37,908,373
(including $19,136,638 and $17,807,946 of U.S. Government securities),
respectively.
82
<PAGE>
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940. Under the Plan, the Fund
will pay annual service fees to the Distributor at a rate of 0.25% of average
daily net assets for Class A, Class B and Class D shares. In addition, the
Fund will pay annual distribution fees of 0.75% of average daily net assets
for Class B and Class D shares. The Distributor uses such payments for
personal service and/or the maintenance or servicing of shareholder accounts,
to reimburse securities dealers for distribution and marketing services, to
furnish ongoing assistance to investors and to defray a portion of its
distribution and marketing expenses. For the year ended October 31, 1996,
fees pursuant to such plan amounted to $25,236 for Class A shares.
Note 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At October 31, 1996,
Metropolitan owned 50,000 Class A shares and 2,154,550 Class C shares of the
Fund and the Adviser owned one Class A share of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended October 31
---------------------------------------------------------
1996 1995
------------------------------- -------------------------
Class A Shares Amount Shares Amount
- -------------------------------- -------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
Shares sold -- $ -- 21 $ 192
Issued upon reinvestment of
distribution from net realized
gains 62,677 651,777 -- --
Shares repurchased (2,630,477) (28,093,497) -- --
-------------- ---------------- ----------- -------------
Net increase (decrease) (2,567,800) $(27,441,720) 21 $ 192
============== ================ =========== =============
Class C Shares Amount Shares Amount
- -------------------------------- -------------- ---------------- ----------- -------------
Shares sold 3,511,159 $ 37,399,443 164,827 $1,608,388
Issued upon reinvestment of:
Dividends from net investment
income 21,689 229,456 3,527 35,611
Distribution from net realized
gains 4,058 42,210 -- --
Shares repurchased (632,775) (6,691,735) (43,134) (443,331)
-------------- ---------------- ----------- -------------
Net increase 2,904,131 $ 30,979,374 125,220 $1,200,668
============== ================ =========== =============
</TABLE>
83
<PAGE>
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Class C
----------------------------------------- -----------------------------------------
May 16, 1994 May 16, 1994
Year ended October 31 (Commencement of Year ended October 31 (Commencement of
----------------------- Operations) to ----------------------- Operations) to
1996** 1995** October 31, 1994 1996** 1995** October 31, 1994
------------------------------------- ----------- ---------------------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 10.56 $ 9.56 $ 9.55 $ 10.56 $ 9.56 $ 9.55
Net investment income* 0.42 0.47 0.20 0.50 0.52 0.21
Net realized and
unrealized gain (loss)
on investments, foreign
currency and forward
contracts 0.66 1.00 (0.09) 0.60 0.97 (0.09)
Dividends from net
investment income (0.36) (0.47) (0.10) (0.48) (0.49) (0.11)
Distribution from net
realized gains (0.25) -- -- (0.25) -- --
----------- ----------- ---------------------------- ----------- -----------------
Net asset value, end of
year $ 11.03 $ 10.56 $ 9.56 $ 10.93 $ 10.56 $ 9.56
=========== =========== ============================ =========== =================
Total return 10.55%+ 15.84%+ 1.15%+++ 10.82%+ 16.11%+ 1.25%+++
Net assets at end of year
(000s) $ 552 $27,637 $25,014 $33,236 $ 1,433 $ 100
Ratio of expenses to
average net assets* 1.15% 1.15% 1.15%++ 0.90% 0.90% 0.90%++
Ratio of net investment
income to average net
assets* 4.35% 4.74% 4.48%++ 4.50% 4.91% 4.73%++
Portfolio turnover rate 126.41% 132.50% 70.35% 126.41% 132.50% 70.35%
Average commission rate@ $ .0436 -- -- $ .0436 -- --
*Reflects voluntary
assumption of fees or
expenses per share in
each year (Note 3) $ 0.07 $ 0.05 $ 0.03 $ 0.06 $ 0.05 $ 0.03
</TABLE>
++ Annualized
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges.
Total return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
** Per-share figures have been calculated using the average shares method.
@ For fiscal years beginning on or after November 1, 1995, the Fund is
required to disclose its average commission rate per share paid for security
trades.
84
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of State Street Research
Financial Trust and the Shareholders of
State Street Research Strategic Portfolios: Conservative
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of State Street Research
Strategic Portfolios: Conservative (a series of State Street Research
Financial Trust, hereafter referred to as the "Trust") at October 31, 1996,
and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at October 31, 1996 by
correspondence with the custodian and brokers and the application of
alternative auditing procedures where confirmations from brokers were not
received, provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
December 11, 1996
85
<PAGE>
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
As of October 31, 1996, State Street Research Strategic Portfolios: Conservative
held 61% of its assets in fixed-income securities, 29% in equities and 10% in
cash. For the 12 months ended October 31, 1996, Class A shares of the Fund
provided a total return of +10.55% (does not reflect sales charge).
Bonds
The Fund's fixed-income component had mixed performance. The largest position
was in high-grade bonds, which delivered relatively flat performance.
International bonds performed well, but weren't heavily weighted in the
portfolio.
Stocks
Healthy stock returns also helped the portfolio's performance. Large-cap and
value stocks dominated the Fund's equity holdings. Large-cap growth stocks
performed strongly, value stocks less so. International equities demonstrated
positive performance as well.
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate, and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. "A" share returns reflect the maximum
4.5% front-end sales charge. "C" shares, offered without a sales charge, are
available only to certain employee benefit plans and large institutions. The
Standard & Poor's 500 Composite Index (S&P 500) includes 500 widely traded
common stocks and is a commonly used measure of U.S. stock market
performance. The Lehman Brothers Government/Corporate Bond Index is a
commonly used index of bond market performance. The indices are unmanaged and
do not take sales charges into consideration. Direct investment in the
indices is not possible; results are for illustrative purposes only.
Performance results for the Fund are increased by the voluntary reduction of
Fund fees and expenses. In the box in the chart at the right, the first
figure reflects expense reduction; the second shows what results would have
been without subsidization.
Change In Value Of $10,000 Based On
The S&P 500 And The Lehman Brothers
Government/Corporate Bond Index Compared
To Change In Value Of $10,000 Invested
In Strategic Portfolios: Conservative
Class A Shares
Average Annual Total Return
1 Year Life of Fund
+5.58%/+5.18% +9.01%/+8.47%
[line chart]
Strategic Portfolios: LB Gov't/Corp
Conservative S&P 500 Bond Index
5/16/94 9550 10000 10000
10/31/94 9660 10549 10006
10/31/95 11190 13334 11622
10/31/96 12371 16546 12250
Class C Shares
Average Annual Total Return
1 Year Life of Fund
+10.82%/+10.40% +11.32%/+10.79%
[line chart]
Strategic Portfolios: LB Gov't/Corp
Conservative S&P 500 Bond Index
5/16/94 10000 10000 10000
10/31/94 10006 10549 10125
10/31/95 11622 13334 11755
10/31/96 12250 16546 13027
86
<PAGE>
REPORT ON SPECIAL MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of State Street Research Strategic
Portfolios: Conservative ("Fund"), along with shareholders of other series of
State Street Research Financial Trust ("Meeting"), was convened on February
14, 1996, and continued thereafter. The results of the Meeting are set forth
below.
Votes (millions of
shares)
------------------
For Withheld
------ -----------
1. The following persons were elected as Trustees:
Edward M. Lamont 43.4 3.0
Robert A. Lawrence 43.4 3.0
Dean O. Morton 43.4 3.0
Thomas L. Phillips 43.4 3.0
Toby Rosenblatt 43.4 3.0
Michael S. Scott Morton 43.8 2.6
Ralph F. Verni 43.8 2.7
Jeptha H. Wade 43.8 2.6
<TABLE>
<CAPTION>
Votes (millions of shares)
----------------------------
For Against Abstain
------ -------------------
<S> <C> <C> <C>
2. The Fund's fundamental policy on diversification of investments was
not amended 1.3 1.1 0.2
3. The Master Trust Agreement was amended to permit the Trustees to
reorganize, merge or liquidate a fund without prior shareholder
approval 33.1 7.3 4.2
4. The Master Trust Agreement was amended to eliminate specified time
permitted between the record date and any shareholders meeting 34.4 5.7 4.4
</TABLE>
87
<PAGE>
METLIFE - STATE STREET FINANCIAL TRUST
PART C
OTHER INFORMATION
Item 24: Financial Statements and Exhibits
(a) Financial Statements
(1) Financial Statements included in PART A (Prospectus) of this
Registration Statement:
Financial Highlights for State Street Research Government
Income Fund for the period March 23, 1987 (commencement of
operations) through October 31, 1996.
Financial Highlights for State Street Research Strategic
Portfolios: Moderate for the period September 28, 1993
(commencement of operations) through October 31, 1996.
Financial Highlights for State Street Research Strategic
Portfolios: Conservative and State Street Research Strategic
Portfolios: Aggressive for the period May 16, 1994
(commencement of operations) through October 31, 1996.
(2) Financial Statements included in PART B (Statement of
Additional Information) of this Registration Statement:
For State Street Research Government Income Fund, State Street
Research Strategic Portfolios: Conservative, State Street
Research Strategic Aggressive and State Street
Research Strategic Portfolios: Moderate for the fiscal year
ended October 31, 1996 (except as provided below):
Investment Portfolio
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets (fiscal years
ended October 31, 1996 and 1995
Notes to Financial Statements (including financial
highlights)
Report of Independent Accountants
Management's Discussion of Fund Performance
Report of Special Meeting of Shareholders
C-1
<PAGE>
(b) Exhibits
(1)(a) First Amended and Restated Master Trust Agreement and
Amendment No. 1 and Amendment No. 2 to First Amended and
Restated Master Trust Agreement (15)
(1)(b) Amendment No. 3 to First Amended and Restated Master Trust
Agreement
(2)(a) By-Laws of the Registrant(1)
(2)(b) Amendment No. 1 to By-Laws effective September 30, 1992(8)
(3) Not applicable
(4) Specimen Share Certificate -- Government Income Fund(2)**
(5)(a) Advisory Agreement with MetLife - State Street Investment
Services, Inc.(2)*
(5)(c) Transfer and Assumption of Responsibilities and Rights
relating to the Advisory Agreement between State Street
Financial Services, Inc. and State Street Research &
Management Company(8)*
(5)(d) Letter Agreement with respect to the Advisory Agreement
relating to MetLife - State Street Research Balanced Fund(11)**
C-2
<PAGE>
(5)(d)(i) Letter Agreement with respect to the Advisory Agreement
relating to State Street Research Strategic Portfolios:
Conservative and State Street Research Strategic Portfolios:
Aggressive(13)
(6)(a) First Amended and Restate Distribution Agreement with State
Street Research Investment Services, Inc.
(6)(b) Form of Selected Dealer Agreement(15)
(6)(c) Form of Bank and Bank-Affiliated Broker-Dealer Agreement(13)
(6)(d) Form of Revised Supplement No. 1 to Selected Dealer Agreement
(7) Not applicable
(8)(a) Custodian Contract with State Street Bank and Trust Company(2)
(8)(a)(i) Letter Agreement with respect to Custodian Contract relating to
MetLife - State Street Research Balanced Fund(11)**
(8)(a)(ii) Letter Agreement with respect to the Custodian Contract
relating to State Street Research Strategic Portfolios:
Conservative and State Street Research Strategic Portfolios:
Aggressive(13)
(8)(e) Amendment to the Custodian Contract with State Street Bank and
Trust Company(5)
(9) Not applicable
(10) Opinion and consent of Goodwin, Procter & Hoar(12)
(11) Consent of Price Waterhouse
(12) Not applicable
(13)(a) Purchase Agreement and Investment Letter(1)
(13)(b) Purchase Agreement and Investment Letter(2)
(13)(c) Subscription and Investment Letter -- MetLife - State Street
Research Balanced Fund(11)**
(13)(c)(i) Subscription and Investment Letters -- Street Research
Strategic Portfolios: Conservative and State Street Research
Strategic Portfolios: Aggressive(13)
(14)(a) State Street Research IRA: Disclosure Statement, Forms Booklet
and Transfer of Assets/Direct Rollover Form(15)
(14)(b) State Street Research 403(b): Brochure, Maximum Salary
Reduction Worksheet, Account Application, Salary Reduction
Agreement and Transfer of 403(b) Assets Form
(15)(a) Amended and Restated Plan of Distribution Pursuant to Rule
12b-1(10)
(15)(a)(i) Letter Agreement with respect to Amended and Restated Plan of
Distribution Pursuant to Rule 12b-1 relating to MetLife -
State Street Research Balanced Fund(11)**
C-3
<PAGE>
(15)(a)(ii)Letter Agreement with respect to Amended and Restated Plan of
Distribution Pursuant to Rule 12b-1 relating to State Street
Research Strategic Portfolios: Conservative and State Street
Research Strategic Portfolios: Aggressive(13)
(16)(a) Calculation of Performance Data relating to State Street
Research Government Income Fund(5)**
(16)(b) Calculation of Distribution Rate relating to State Street
Research Government Income Fund(6)**
(16)(c) Calculation of Performance Data relating to State Street
Research Strategic Portfolios: Conservative, State Street
Research Strategic Portfolios: Moderate and State Street
Research Strategic Portfolios: Aggressive(14)
(17) First Amended and Restated Multiple Class Expense Allocation
Plan Adopted Pursuant to Rule 18f-2
(18) Powers of Attorney(15)
(19) Certificate of Board Resolution Respecting Powers of
Attorney(15)
(20) Application Forms
(27) Financial Data Schedules
- ---------------
* MetLife - State Street Investment Services, Inc. changed its name to State
Street Financial Services, Inc. effective as of June 18, 1992, and
subsequently changed its name to State Street Research Investment
Services, Inc. effective October 28, 1992. Documents in this listing of
Exhibits which were effective prior to the most recent name change
accordingly refer to MetLife - State Street Investment Services, Inc. or
State Street Financial Services, Inc.
** The Series of the Registrant have changed their names at various times.
Documents in this listing of Exhibits which were immediately
effective prior to the most recent name change accordingly refer to
a prior name of a securities.
C-4
<PAGE>
Filed as part of the Registration Statement as noted below and incorporated
herein by reference:
Footnote Securities Act of 1933
Reference Registration/Amendment Date Filed
1 Initial Registration November 21, 1986
2 Pre-Effective Amendment No. 1 February 13, 1987
3 Post-Effective Amendment No. 1 August 27, 1987
4 Post-Effective Amendment No. 2 June 3, 1988
5 Post-Effective Amendment No. 3 February 22, 1989
6 Post-Effective Amendment No. 4 February 28, 1990
7 Post-Effective Amendment No. 5 February 26, 1991
8 Post-Effective Amendment No. 7 February 26, 1993
9 Post-Effective Amendment No. 8 April 2, 1993
10 Post-Effective Amendment No. 9 July 8, 1993
11 Post-Effective Amendment No. 10 February 9, 1994
12 Post-Effective Amendment No. 11 February 18, 1994
13 Post-Effective Amendment No. 13 November 30, 1994
14 Post-Effective Amendment No. 14 January 31, 1995
15 Post-Effective Amendment No. 15 December 28, 1995
Item 25. Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 26. Number of Holders of Securities
As of January 31, 1997 the numbers of record holders of shares of the
Registrant's Fund was as follows:
(1) (2)
Number of
Title of Class Record Holders
- --------------------------------------------------------------------------------
Shares of Beneficial Interest
State Street Research Government Income Fund
Class A 11,175
Class B 2,349
Class C 25
Class D 178
C-5
<PAGE>
State Street Research Strategic Portfolios: Moderate
Class A 0
Class B 0
Class C 11
Class D 0
State Street Research Strategic Portfolios: Conservative
Class A 5
Class B 0
Class C 6
Class D 0
State Street Research Strategic Portfolios: Aggressive
Class A 9
Class B 0
Class C 6
Class D 0
Item 27. Indemnification
Under Article VI of the Registrant's Master Trust Agreement each of its
Trustees and officers or persons serving in such capacity with another entity at
the request of the Registrant ("Covered Person") shall be indemnified against
all liabilities, including, but not limited to, amounts paid in satisfaction of
judgments, in compromises or as fines and penalties, and expenses, including
reasonable accountants' and counsel fees, incurred by any Covered Person, in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such person may be or may have been involved as a
party or otherwise or with which such Covered Person may be or may have been
threatened, while in office or thereafter, by reason of being or having been
such a Trustee or officer, director or trustee, except with respect to any
matter as to which it has been determined that such Covered Person had acted
with willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of such Covered Person's office (such conduct
referred to hereafter as "Disabling Conduct"). A determination that the Covered
Person is entitled to indemnification may be made by (i) a final decision on the
merits by a court or other body before which the proceeding was brought that the
person to be indemnified was not liable by reason of Disabling Conduct, (ii)
dismissal of a court action or an administrative proceeding against a Covered
Person for insufficiency of evidence of Disabling Conduct, or (iii) a reasonable
determination, based upon a review of the facts, that the indemnitee was not
liable
C-6
<PAGE>
by reason of Disabling Conduct by (a) a vote of a majority of a quorum of
Trustees who are neither "interested persons" of the Registrant as defined in
section 2(a)(19) of the 1940 Act nor parties to the proceeding, or (b) an
independent legal counsel in a written opinion.
Under the Distribution Agreement between the Registrant and State Street
Research Investment Services, Inc., the Registrant's distributor, the Registrant
has agreed to indemnify and hold harmless State Street Research Investment
Services, Inc. and each person who has been, is, or may hereafter be an officer,
director, employee or agent of State Street Research Investment Services, Inc.
against any loss, damage or expense reasonably incurred by any of them in
connection with any claim or in connection with any action, suit or proceeding
to which any of them may be a party, which arises out of or is alleged to arise
out of or is based upon a violation of any of its covenants herein contained or
any untrue or alleged untrue statement of material fact, or the omission or
alleged omission to state a material fact necessary to make the statements made
not misleading, in a Registration Statement or Prospectus of the Registrant, or
any amendment or supplement thereto, unless such statement or omission was made
in reliance upon written information furnished by State Street Research
Investment Services, Inc.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 may be permitted to trustees, officers, underwriters
and controlling persons of the Registrant, pursuant to Article VI of the
Registrant's Master Trust Agreement, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such trustee, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
C-7
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
Describe any other business, profession, vocation or employment of a
substantial nature in which each investment adviser of the Registrant, and each
director, officer or partner of any such investment adviser, is or has been, at
any time during the past two fiscal years, engaged for his own account or in the
capacity of director, officer, employee, partner or trustee.
<TABLE>
<CAPTION>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
<S> <C> <C> <C>
State Street Research & Investment Adviser Various investment advisory Boston, MA
Management Company clients
Arpiarian, Tanya None
Vice President
Bangs, Linda L. None
Vice President
Barton, Michael E. None
Vice President
Bennett, Peter C. Vice President State Street Research Capital Trust Boston, MA
Director and Vice President State Street Research Exchange Trust Boston, MA
Executive Vice Vice President State Street Research Financial Trust Boston, MA
President Vice President State Street Research Growth Trust Boston, MA
Vice President State Street Research Master Investment Trust Boston, MA
Vice President State Street Research Equity Trust Boston, MA
Director State Street Research Investment Services, Inc Boston, MA
Director Boston Private Bank & Trust Co. Boston, MA
President and Director Christian Camps & Conferences, Inc. Boston, MA
Chairman and Trustee Gordon College Wenham, MA
Bochman, Kathleen None
Vice President
Bray, Michael J. Employee Merrill Lynch & Co. Boston, MA
Vice President
Brown, Susan H. None
Vice President
Buffum, Andrea Project Manager BankBoston Boston, MA
(until 12/96)
Managing Director State Street Global Advisors Boston, MA
(until 12/95)
Burbank, John F. None
Senior Vice President
(Vice President
until 7/96)
Cabrera, Jesus A. Vice President First Chicago Investment Management Co. Chicago, IL
Vice President (until 5/96)
Vice President State Street Research Capital Trust Boston, MA
Canavan, Joseph W. Assistant Treasurer State Street Research Equity Trust Boston, MA
Vice President Assistant Treasurer State Street Research Financial Trust Boston, MA
Assistant Treasurer State Street Research Income Trust Boston, MA
Assistant Treasurer State Street Research Money Market Trust Boston, MA
Assistant Treasurer State Street Research Tax-Exempt Trust Boston, MA
Assistant Treasurer State Street Research Capital Trust Boston, MA
Assistant Treasurer State Street Research Exchange Trust Boston, MA
Assistant Treasurer State Street Research Growth Trust Boston, MA
Assistant Treasurer State Street Research Master Investment Trust Boston, MA
Assistant Treasurer State Street Research Securities Trust Boston, MA
Assistant Controller State Street Research Portfolios, Inc. New York, NY
C-8
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Carmen, Michael Portfolio Manager Montgomery Asset Management San Francisco, CA
Vice President (until 11/96)
Vice President State Street Research & Boston, MA
(until 4/96) Management Company
Vice President State Street Research Capital Trust Boston, MA
Carstens, Linda C. None
Vice President
Clifford, Jr., Paul J. Vice President State Street Research Tax-Exempt Trust Boston, MA
Vice President
D'Vari, Ronald None
Vice President
DeVeuve, Donald None
Vice President
DiFazio, Susan M.W. Senior Vice President State Street Research Investment Services, Inc. Boston, MA
Vice President
Dillman, Thomas J. Director of Research Bank of New York New York, NY
Senior Vice President (until 6/95)
Drake, Susan W. Vice President State Street Research Tax-Exempt Trust Boston, MA
Vice President (until 2/96)
Duggan, Peter J. None
Senior Vice President
Evans, Gordon Senior Vice President State Street Research Investment Services, Inc. Boston, MA
Vice President (Vice President until 3/96)
Even, Karen K. None
Vice President
Federoff, Alex G. None
Vice President
Feliciano, Rosalina None
Vice President
Gardner, Michael D. Partner Prism Group Seattle, WA
Senior Vice President
(Vice President until
6/95)
Geer, Bartlett R. Vice President State Street Research Equity Trust Boston, MA
Senior Vice President Vice President State Street Research Income Trust Boston, MA
Vice President State Street Research Securities Trust Boston, MA
Govoni, Electra None
Vice President
C-9
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Granger, Allison None
Vice President
Hamilton, Jr., William A. Treasurer and Director Ellis Memorial and Eldredge House Boston, MA
Senior Vice President Treasurer and Director Nautical and Aviation Publishing Company, Inc. Baltimore, MD
Treasurer and Director North Conway Institute Boston, MA
Hanson, Phyllis None
Vice President
Haverty, Jr., Lawrence J. None
Senior Vice President
Heineke, George R. None
Vice President
Jackson, Jr., Certain trusts of related and
F. Gardner non-related individuals
Senior Vice President Trustee and Chairman of the Board Vincent Memorial Hospital Boston, MA
Jamieson, Frederick H. Vice President and Asst. Treasurer State Street Research Investment Services, Inc. Boston, MA
Senior Vice President Vice President and Asst. Treasurer SSRM Holdings, Inc. Boston, MA
(Vice President Vice President and Controller MetLife Securities, Inc. New York, NY
until 6/95) Assistant Treasurer State Street Research Energy, Inc. Boston, MA
Kallis, John H. Vice President State Street Research Financial Trust Boston, MA
Senior Vice President Vice President State Street Research Income Trust Boston, MA
Vice President State Street Research Tax-Exempt Trust Boston, MA
Vice President State Street Research Securities Trust Boston, MA
Trustee 705 Realty Trust Washington, D.C.
Director and President K&G Enterprises Washington, D.C.
Kasper, M. Katherine None
Vice President
C-10
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Kluiber, Rudolph K. Vice President State Street Research Capital Trust Boston, MA
Vice President
Kobrick, Frederick R. Vice President State Street Research Equity Trust Boston, MA
Senior Vice Vice President State Street Research Capital Trust Boston, MA
President Vice President State Street Research Growth Trust Boston, MA
Member Harvard Business School Association Cambridge, MA
Member National Alumni Council, Boston University Boston, MA
Langholm, Knut None
Vice President
Leary, Eileen M. None
Vice President
McNamara, III, Francis J. Senior Vice President, Clerk State Street Research Investment Services, Inc. Boston, MA
Executive Vice and General Counsel
President, Secretary Secretary and General Counsel State Street Research Master Investment Trust Boston, MA
and General Counsel Secretary and General Counsel State Street Research Capital Trust Boston, MA
(Senior Vice President Secretary and General Counsel State Street Research Exchange Trust Boston, MA
until 7/96) Secretary and General Counsel State Street Research Growth Trust Boston, MA
Secretary and General Counsel State Street Research Securities Trust Boston, MA
Secretary and General Counsel State Street Research Equity Trust Boston, MA
Secretary and General Counsel State Street Research Financial Trust Boston, MA
Secretary and General Counsel State Street Research Income Trust Boston, MA
Secretary and General Counsel State Street Research Money Market Trust Boston, MA
Secretary and General Counsel State Street Research Tax-Exempt Trust Boston, MA
Secretary and General Counsel SSRM Holdings, Inc. Boston, MA
Clerk and Director State Street Research Energy, Inc. Boston, MA
Senior Vice President, General The Boston Company, Inc. Boston, MA
Counsel and Assistant Secretary
(until 5/95)
Senior Vice President, General Boston Safe Deposit and Trust Company Boston, MA
Counsel and Asistant Secretary
(until 5/95)
Senior Vice President, General The Boston Company Advisors, Inc. Boston, MA
Counsel and Assistant Secretary
(until 5/95)
C-11
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Maus, Gerard P. Treasurer State Street Research Equity Trust Boston, MA
Director, Executive Treasurer State Street Research Financial Trust Boston, MA
Vice President Treasurer State Street Research Income Trust Boston, MA
and Treasurer Treasurer State Street Research Money Market Trust Boston, MA
Treasurer State Street Research Tax-Exempt Trust Boston, MA
Treasurer State Street Research Capital Trust Boston, MA
Treasurer State Street Research Exchange Trust Boston, MA
Treasurer State Street Research Growth Trust Boston, MA
Treasurer State Street Research Master Investment Trust Boston, MA
Treasurer State Street Research Securities Trust Boston, MA
Director, Executive Vice President, State Street Research Investment Services, Inc. Boston, MA
Treasurer and Chief Financial Officer
Director and Treasurer State Street Research Energy, Inc. Boston, MA
Director Metric Holdings, Inc. San Francisco, CA
Director Certain wholly-owned subsidiaries
of Metric Holdings, Inc.
Director (until 11/94) GFM International Investors, Ltd. London, England
Treasurer and Chief Financial SSRM Holdings, Inc. Boston, MA
Officer
Treasurer MetLife Securities, Inc. New York, NY
Milder, Judith J. None
Senior Vice President
(Vice President until 6/95)
Miller, Joan D. Senior Vice President State Street Research Investment Services, Inc. Boston, MA
Senior Vice President
(Vice President until 7/96)
Moore, Jr., Thomas P.
Senior Vice Vice President State Street Research Capital Trust Boston, MA
President (until 11/96)
Vice President State Street Research Exchange Trust Boston, MA
Vice President State Street Research Growth Trust Boston, MA
Vice President State Street Research Master Investment Trust Boston, MA
Vice President State Street Research Equity Trust Boston, MA
Vice President State Street Research Energy, Inc. Boston, MA
Director Hibernia Savings Bank Quincy, MA
Governor on the Board of Govenors Association for Investment Management Charlottesville,
and Research VA
Mulligan, JoAnne C. Vice President State Street Research Money Market Trust Boston, MA
Senior Vice President
(Vice President until 7/96)
Orr, Stephen C. Member Technology Analysts of Boston Boston, MA
Vice President Member Electro-Science Analysts (of NYC) New York, NY
C-12
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Paddon, Steven W. Employee Metropolitan Life Insurance Company New York, NY
Vice President (until 10/96)
Pannell, James C. None
Vice President
Peters, Kim M. Vice President State Street Research Securities Trust Boston, MA
Senior Vice President
Ragsdale, Easton Senior Vice President Kidder, Peabody, & Co. Incorporated New York, NY
Senior Vice President (until 12/94)
(Vice President
until 7/96)
Rawlins, Jeffrey A. None
Senior Vice President
(Vice President
until 7/96)
Rice III, Daniel Joseph Vice President State Street Research Equity Trust Boston, MA
Senior Vice President
Richards, Scott None
Vice President
Romich, Douglas A. Assistant Treasurer State Street Research Equity Trust Boston, MA
Vice President Assistant Treasurer State Street Research Financial Trust Boston, MA
Assistant Treasurer State Street Research Income Trust Boston, MA
Assistant Treasurer State Street Research Money Market Trust Boston, MA
Assistant Treasurer State Street Research Tax-Exempt Trust Boston, MA
Assistant Treasurer State Street Research Capital Trust Boston, MA
Assistant Treasurer State Street Research Exchange Trust
Assistant Treasurer State Street Research Growth Trust Boston, MA
Assistant Treasurer State Street Research Master Investment Trust Boston, MA
Assistant Treasurer State Street Research Securities Trust Boston, MA
Assistant Controller State Street Research Portfolios, Inc. New York, NY
Saperstone, Paul None
Vice President
C-13
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Schrage, Michael None
Vice President
Schultz, David C. Director and Treasurer Mafraq Hospital Association Mafraq, Jordan
Executive Vice President Member Association of Investment
Management Sales Executives Atlanta, GA
Member, Investment Committee Lexington Christian Academy Lexington, MA
Shaver, Jr. C. Troy President and Chief State Street Research Investment Services, Inc. Boston, MA
Executive Vice Executive Officer
President President and Chief John Hancock Funds, Inc. Boston, MA
Executive Officer
(until 1/96)
Shean, William G. None
Vice President
Shively, Thomas A. Vice President State Street Research Financial Trust Boston, MA
Director and Vice President State Street Research Money Market Trust Boston, MA
Executive Vice Vice President State Street Research Tax-Exempt Trust Boston, MA
President Director State Street Research Investment Services, Inc Boston, MA
Vice President State Street Research Securities Trust Boston, MA
Shoemaker, Richard D. None
Senior Vice President
Strelow, Dan R. None
Senior Vice President
C-14
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Swanson, Amy McDermott None
Senior Vice President
Trebino, Anne M. Vice President SSRM Holdings, Inc. Boston, MA
Senior Vice President
Verni, Ralph F. Chairman, President, Chief State Street Research Capital Trust Boston, MA
Chairman, President, Executive Officer and Trustee
Chief Executive Chairman, President, Chief State Street Research Exchange Trust Boston, MA
Officer and Executive Officer and Trustee
Director Chairman, President, Chief State Street Research Growth Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Master Investment Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Securities Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Equity Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Financial Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Income Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Money Market Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Tax-Exempt Trust Boston, MA
Executive Officer and Trustee
Chairman and Director State Street Research Investment Services, Inc. Boston, MA
(President and Chief Executive
Officer until 2/96)
President and Director State Street Research Energy, Inc. Boston, MA
Chairman and Director Metric Holdings, Inc. San Francisco, CA
Director and Officer Certain wholly-owned subsidiaries
of Metric Holdings, Inc.
Director MetLife Securities, Inc. New York, NY
Chairman and Director (until 11/94) GFM International Investors, Ltd. London, England
President, Chief Executive SSRM Holdings, Inc. Boston, MA
Officer and Director
Director CML Group, Inc. Boston, MA
Director Colgate University Hamilton, NY
C-15
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Wade, Dudley Vice President State Street Research Growth Trust Boston, MA
Freeman Vice President State Street Research Master Investment Trust Boston, MA
Senior Vice
President
Wallace, Julie K. None
Vice President
Ward, Geoffrey None
Senior Vice President
Weiss, James M. Vice President State Street Research Capital Trust Boston, MA
Senior Vice President Vice President State Street Research Equity Trust Boston, MA
Vice President State Street Research Master Investment Trust Boston, MA
Chief Investment Officer IDS Equity Advisors Minneapolis, MN
(until 12/95)
Westvold, Vice President State Street Research Securities Trust Boston, MA
Elizabeth McCombs
Senior Vice President
(Vice President
until 7/96)
Wilson, John T. Vice President State Street Research Equity Trust Boston, MA
Vice President Vice President State Street Research Master Investment Trust Boston, MA
Vice President Phoenix Investment Counsel, Inc. Hartford, CT
(until 6/96)
Wing, Darman A. Senior Vice President and State Street Research Investment Services, Inc. Boston, MA
Vice President, Asst. Clerk (Vice President
Assistant Secretary until 6/95)
and Assistant Assistant Secretary State Street Research Capital Trust Boston, MA
General Counsel Assistant Secretary State Street Research Exchange Trust Boston, MA
Assistant Secretary State Street Research Growth Trust Boston, MA
Assistant Secretary State Street Research Master Investment Trust Boston, MA
Assistant Secretary State Street Research Securities Trust Boston, MA
Assistant Secretary State Street Research Equity Trust Boston, MA
Assistant Secretary State Street Research Financial Trust Boston, MA
Assistant Secretary State Street Research Income Trust Boston, MA
Assistant Secretary State Street Research Money Market Trust Boston, MA
Assistant Secretary State Street Research Tax-Exempt Trust Boston, MA
Assistant Secretary SSRM Holdings, Inc. Boston, MA
Woodbury, Robert S. Employee Metropolitan Life Insurance Company New York, NY
Vice President
Woodworth, Jr., Kennard Vice President State Street Research Exchange Trust Boston, MA
Senior Vice Vice President State Street Research Growth Trust Boston, MA
President (until 2/96)
C-16
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Wu, Norman N. Partner Atlantic-Acton Realty Framingham, MA
Senior Vice President Director Bond Analysts Society of Boston Boston, MA
</TABLE>
C-17
<PAGE>
Item 29. Principal Underwriters
(a) State Street Research Investment Services, Inc. serves as principal
underwriter for 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 Growth Trust, State Street Research Master
Investment Trust, State Street Research Securities Trust and State Street
Research Portfolios, Inc.
(b) Directors and Officers of State Street Research Investment
Services, Inc. are as follows:
(1) (2) (3)
Positions Positions
Name and Principal and Offices and Offices
Business Address with Underwriter with Registrant
Ralph F. Verni Chairman of the Chairman of
One Financial Center Board and Director the Board,
Boston, MA 02111 President,
Chief Executive
Officer and
Trustee
Peter C. Bennett Director Vice President
One Financial Center
Boston, MA 02111
Gerard P. Maus Executive Vice Treasurer
One Financial Center President, Treasurer,
Boston, MA 02111 Chief Financial
Officer and Director
Thomas A. Shively Director None
One Financial Center
Boston, MA 02111
C. Troy Shaver, Jr. President and None
One Financial Center Chief Executive
Boston, MA 02111 Officer
George B. Trotta Executive None
One Madison Avenue Vice President
New York, NY 10010
Dennis C. Barghann Senior Vice President None
One Madison Avenue
New York, NY 10010
Peter Borghi Senior Vice President None
One Financial Center
Boston, MA 02111
C-18
<PAGE>
Paul V. Daly Senior Vice President None
One Financial Center
Boston, MA 02111
Susan M.W. DiFazio Senior Vice President None
One Financial Center
Boston, MA 02111
Gordon Evans Senior Vice President None
One Financial Center
Boston, MA 02111
Robert Hauesler Senior Vice President None
One Madison Avenue
New York, NY 10010
Gregory R. McMahan Senior Vice President None
One Financial Center
Boston, MA 02111
Francis J. McNamara, III Senior Vice Secretary
One Financial Center President and
Boston, MA 02111 Clerk
Joan D. Miller Senior Vice President None
One Financial Center
Boston, MA 02111
Richard P. Samartin Senior Vice President None
One Financial Center
Boston, MA 02111
Darman A. Wing Senior Vice Assistant
One Financial Center President and Secretary
Boston, MA 02111 Assistant Clerk
Linda Grasso Vice President None
One Financial Center
Boston, MA 02111
Robert M. Gunville Vice President None
One Financial Center
Boston, MA 02111
Frederick H. Jamieson Vice President and None
One Financial Center Assistant Treasurer
Boston, MA 02111
Amy L. Simmons Vice President Assistant
One Financial Center Secretary
Boston, MA 02111
C-19
<PAGE>
Item 30. Location of Accounts and Records
Gerard P. Maus
State Street Research & Management Company
One Financial Center
Boston, MA 02111
Item 31. Management Services
Inapplicable.
Item 32. Undertakings
(a) Inapplicable.
(b) Deleted.
(c) The Registrant undertakes to hold a special meeting of shareholders
for the purpose of voting upon the question of removal of any trustee or
trustees when requested in writing to do so by the record holders of not less
than 10 per centum of the outstanding shares of the Trust and, in connection
with such meeting, to comply with the provisions of Section 16(c) of the
Investment Company Act of 1940 relating to shareholder communications.
(d) The Registrant has elected to include the information required by Item
5A of Form N-1A in its annual report to shareholders. The Registrant undertakes
to furnish each person to whom a prospectus is delivered with a copy of the
applicable fund's latest annual report to shareholders upon request and without
charge.
C-20
<PAGE>
NOTICE
A copy of the Master Trust Agreement of the Registrant is on file with the
Secretary of State of the Commonwealth of Massachusetts and notice is hereby
given that the obligations of the Registrant hereunder, and the authorization,
execution and delivery of this Registration Statement and Amendment, shall not
be binding upon any of the Trustees, shareholders, nominees, officers, agents or
employees of the Registrant as individuals or personally, but shall bind only
the property of the series of the Registrant, as provided in the Master Trust
Agreement. Each series of the Registrant shall be solely and exclusively
responsible for all of its direct or indirect debts, liabilities, and
obligations, and no other series shall be responsible for the same.
C-21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment No. 16 to its Registration Statement on Form N-1A to be
signed on its behalf by the undersigned, thereto duly authorized, in the City of
Boston and the Commonwealth of Massachusetts on the 26th day of February, 1997.
STATE STREET RESEARCH FINANCIAL TRUST
By: ____________________________*________________
Ralph F. Verni
Chief Executive Officer and President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed on the
above date by the following persons in the capacities indicated:
* Trustee, Chairman of the Board
- ---------------------------------- and Chief Executive Officer
Ralph F. Verni (principal executive officer)
* Treasurer (principal financial
- ---------------------------------- and accounting officer)
Gerard P. Maus
*
- ---------------------------------- Trustee
Edward M. Lamont
* Trustee
- ----------------------------------
Robert A. Lawrence
* Trustee
- ----------------------------------
Dean O. Morton
* Trustee
- ----------------------------------
Thomas L. Phillips
*
- ---------------------------------- Trustee
Toby Rosenblatt
* Trustee
- ----------------------------------
Michael S. Scott Morton
<PAGE>
* Trustee
- ----------------------------------
Jeptha H. Wade
*By: /s/ Francis J. McNamara, III
----------------------------
Francis J. McNamara, III,
Attorney-in-Fact under Powers of
Attorney dated December 27, 1995,
incorporated by reference from
Post-Effective Amendment No. 15.
1933 Act Registration No. 33-10327
1940 Act File No. 811-4911
======================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. ____ [ ]
Post-Effective Amendment No. 16 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 17 [X]
____________________
STATE STREET RESEARCH FINANCIAL TRUST
(Exact Name of Registrant as Specified in Declaration of Trust)
____________________
EXHIBITS
<PAGE>
INDEX TO EXHIBITS
(1)(b) Amendment No. 3 to the First Amended and Restated Master Trust
Agreement
(6)(a) First Amended and Restated Distribution Agreement with State
Street Research Investment Services, Inc.
(6)(d) Form of Revised Supplement No. 1 to Selected Dealer Agreement
(11) Consent of Price Waterhouse
(14)(b) State Street Research 403(b): Brochure, Maximum Salary
Reduction Worksheet, Account Application, Salary Reduction
Agreement and Transfer of 403(b) Assets Form
(17) First Amended and Restated Multiple Class Expense Allocation Plan
Adopted Pursuant to Rule 18f-2
(20) Application Forms
(27) Financial Data Schedules
METLIFE - STATE STREET FINANCIAL TRUST
Amendment No. 3 to First Amended and
Restated Master Trust Agreement
INSTRUMENT OF AMENDMENT
Pursuant to Article VII, Section 7.3 of the First Amended and Restated
Master Trust Agreement of the MetLife - State Street Financial Trust (the
"Trust") dated June 1, 1993 ("Master Trust Agreement"), as heretofore amended,
the Master Trust Agreement is hereby amended as follows:
Pursuant to Article I, Section 1.1, the name of the Trust is hereby
changed to "State Street Research Financial Trust."
The last sentence of Article IV, Section 4.2(d) of the Master Trust
Agreement is hereby amended to read as follows:
"The liquidation of any particular Sub-Trust or class thereof may be
authorized by vote of a majority of the Trustees then in office without
the approval of shareholders of such Sub-Trust."
Section 5.3 of Article V of the Master Trust Agreement is revised in
its entirety to read as follows:
"Section 5.3 Record Dates. For the purpose of determining the
Shareholders who are entitled to vote or act at any meeting or any
adjournment thereof, or who are entitled to participate in any dividend
or distribution, or for the purpose of any other action, the Trustees
may from time to time close the transfer books for such period, not
exceeding 30 days (except at or in connection with the termination of
the Trust), as the Trustees may determine; or without closing the
transfer books the Trustees may fix a reasonable date and time prior to
the date of any meeting of Shareholders or other action as the date and
time of record for the determination of Shareholders entitled to vote
at such meeting or any adjournment thereof or to be treated as a
Shareholder of record for purposes of such other action, even though he
has since that date and time disposed of his Shares, and no Shareholder
becoming such after that date and time shall be so entitled to vote at
such meeting or any adjournment thereof or to be treated as a
Shareholder of record for purposes of such other action."
<PAGE>
Section 7.2 of Article VII of the Master Trust Agreement is revised in
its entirety to read as follows:
"Section 7.2 Reorganization. The Trust, or any one or more Sub-Trusts,
may, either as the successor, survivor, or non-survivor, (1)
consolidate or merge with one or more other trusts, sub-trusts,
partnerships, associations or corporations organized under the laws of
The Commonwealth of Massachusetts or any other state of the United
States, to form a consolidated or merged trust, sub-trust, partnership,
limited liability company, association or corporation under the laws of
which any one of the constituent entities is organized, with the Trust
or Sub-Trust to be the survivor or non-survivor of such consolidation
or merger or (2) transfer a substantial portion of its assets to one or
more other trusts, sub-trusts, partnerships, limited liability
companies, associations or corporations organized under the laws of The
Commonwealth of Massachusetts or any other state of the United States,
or have one or more such trusts, sub-trusts, partnerships, limited
liability companies, associations or corporations transfer a
substantial portion of its assets to it, any such consolidation, merger
or transfer to be upon such terms and conditions as are specified in an
agreement and plan of reorganization authorized and approved by the
Trustees and entered into by the Trust, or one or more Sub-Trusts, as
the case may be, in connection therewith. Any such consolidation,
merger or transfer may be authorized by vote of a majority of the
Trustees then in office without the approval of shareholders of any
Sub-Trust."
This Amendment shall be effective as of March 1, 1996.
IN WITNESS WHEREOF, the undersigned officer of the Trust hereby adopts
the foregoing on behalf of the Trust pursuant to authorization by the Trustees
of the Trust.
/s/ Francis J. McNamara, III
----------------------------
Francis J. McNamara, III
Secretary
FIRST AMENDED AND RESTATED DISTRIBUTION AGREEMENT
-------------------------------------------------
FIRST AMENDED AND RESTATED DISTRIBUTION AGREEMENT effective as of
February 7, 1996, ("Agreement") by and between State Street Research Investment
Services, Inc., a corporation organized under the laws of the Commonwealth of
Massachusetts having its place of business in Boston, Massachusetts (the
"Distributor"), and State Street Research Financial Trust, a Massachusetts
business trust having its principal place of business in Boston, Massachusetts
(the "Trust"), which Trust offers shares of beneficial interest in different
series representing interests in separate portfolios of assets (each series
being referred to herein as a "Fund" and such series being referred to herein
collectively as the "Funds").
WITNESSETH:
-----------
In consideration of the agreements herein contained and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties, it is agreed:
1. Appointment of Distributor.
---------------------------
(a) Appointment. The Trust hereby appoints the Distributor as its
agent to sell and distribute shares of the State Street Research Government
Income Fund, Strategic Portfolios: Conservative, Strategic Portfolios: Moderate,
Strategic Portfolios: Aggressive (the "Initial Fund(s)") and the Distributor
hereby accepts such appointment and agrees during the term of this Agreement to
provide the services and to assume the obligations herein set forth. In the
event that the Trust establishes one or more series of shares other than the
Initial Funds with respect to which it desires to retain the Distributor to
serve as distributor and principal underwriter hereunder, it shall so notify the
Distributor in writing. If the Distributor is willing to render such services,
it shall so notify the Trust in writing, whereupon such series of shares shall
become a Fund hereunder. In such event a writing signed by both the Trust and
the Distributor shall be annexed hereto as a part hereof indicating that such
additional series of shares has become a Fund hereunder.
(b) Sales of Shares. Shares of each Fund shall be sold at the
offering price thereof as from time to time determined in the manner herein
provided. The Trust agrees that it will not, without the Distributor's consent,
sell or agree to sell any shares of a Fund otherwise than through the
Distributor, except that the Trust may (a) sell shares for not less than the net
asset value thereof as an investment to such persons or classes of persons as
may be indicated in the Prospectus of the Trust as amended and in effect from
time to time; (b) issue or sell shares for not less than the net asset value
thereof
<PAGE>
directly to holders of shares of any Fund upon such terms and for such
consideration, if any, as it may determine, whether in connection with the
distribution of subscription or purchase rights, the payment or reinvestment of
distributions or dividends, the exercise of any applicable reinvestment
privilege, or otherwise; (c) issue or sell shares for not less than the net
asset value thereof of any Fund to the shareholders of any other Fund or
investment company in connection with the exercise of exchange privileges
offered by the Trust; and (d) issue shares for not less than the net asset value
thereof in connection with a merger, consolidation or acquisition of assets on
such basis as may be authorized or permitted under the Investment Company Act of
1940, as amended (the "1940 Act").
2. Basis of Sale of Shares; Selected Dealers. The Distributor does not
agree to sell any specific number of shares. Shares will be sold by the
Distributor as agent for the Funds and the Trust only against orders therefor.
The Distributor will not purchase shares except as agent for the Trust.
Notwithstanding anything herein to the contrary, the Trust may terminate,
suspend or withdraw the offering of shares whenever, in its sole discretion, it
deems such action desirable. In connection with its performance of services
hereunder, the Distributor may engage other persons to act as selected dealers.
3. Compensation.
-------------
(a) Offering Price/Sales Charge. The offering price for shares of
any Fund of the Trust shall be the "net asset value per share" for that Fund
determined in accordance with the Master Trust Agreement of the Trust, as
amended (the "Master Trust Agreement"), plus a sales charge, if any, payable to
the Distributor as set forth in the Trust's Prospectus as from time to time
amended and in effect. The Distributor may reallow such portions of such sales
charges as dealer concessions to dealers through whom sales are made as the
Distributor may determine consistent with the terms of the Trust's Prospectus as
from time to time amended and in effect; provided, however, that the sales
charge to each purchaser of shares shall not exceed that set forth for such
category of purchaser in the Trust's Prospectus as from time to time amended and
in effect. The Distributor may also pay from its own funds a commission, if any,
with respect to sales to the extent consistent with and as contemplated by the
Trust's Prospectus as from time to time amended and in effect. The net asset
value per share for each Fund shall be determined at such time and on such days
as are established by the Board of Trustees of the Trust from time to time.
2
<PAGE>
(b) 12b-1 Expenses. In the event that the Trust has in effect a
distribution plan adopted pursuant to Rule 12b-1 under the 1940 Act (the "12b-1
Plan"), the Distributor agrees to fulfill any obligations it may have under the
12b-1 Plan.
4. Manner of Offering. The Distributor will comply with the securities
laws of any jurisdiction in which it sells, directly or indirectly, any shares
of the Trust. The Distributor also agrees to furnish to the Trust sufficient
copies of any sales literature it intends to use in connection with any sales of
shares in adequate time for the Trust to review such sales literature. The
Distributor agrees that it will be responsible for filing and clearing all such
sales literature with the proper authorities before the same is put in use to
the extent required by applicable law, and not to use the same until so filed
and cleared.
The Distributor and the Trust each shall have the right to accept or
reject orders for the purchase of shares of the Trust. Any consideration which
the Distributor may receive in connection with a rejected purchase order will be
returned promptly to the prospective purchaser. The Distributor agrees promptly
to issue confirmations of all accepted purchase orders and to transmit a copy of
such confirmations to the Trust, or, if so directed, to any duly appointed
transfer or shareholder servicing agent of the Trust. If the originating dealer,
if any, shall fail to make timely settlement of its purchase order in accordance
with the rules of the National Association of Securities Dealers, Inc. or other
applicable requirements, the Distributor shall have the right to cancel such
purchase order and to hold the originating dealer responsible. The Distributor
agrees promptly to reimburse the Trust for any amount by which the Trust's
losses attributable to any such cancellations or to accepted purchase orders
exceed gains realized by the Trust for either of such reasons in respect of
other purchase orders. The Trust shall register or cause to be registered all
shares sold by the Distributor pursuant to the provisions hereof in such name or
names and amounts as the Distributor may request from time to time.
The Distributor agrees that if any person tenders to the Trust for
redemption of any shares purchased from the Trust within seven days of the
redemption request, the Distributor will promptly pay to the Trust the full
sales commission paid, if any, with respect to the shares so tendered for
redemption (in the case of sales by selected dealers, if any, such payment shall
be made promptly after the Distributor's receipt of the same from the selected
dealer responsible for the sale).
The Distributor hereby agrees to act as agent for the Trust in
connection with any share repurchase arrangements from time to time offered by
the Trust in accordance with the terms of the Trust's Prospectus as from time to
time amended.
3
<PAGE>
5. Securities Law. The Trust has delivered to the Distributor a copy of
its current Prospectus. The Trust agrees that it will use its best efforts to
continue the effectiveness of its Registration Statement under the Securities
Act of 1933, as amended (the "Securities Act"), and the 1940 Act. The Trust
further agrees to prepare and file any amendments to such Registration Statement
and any supplemental data as may be necessary in order to comply with the
Securities Act and the 1940 Act. The Trust is presently registered under the
1940 Act as an investment company, and it will use its best efforts to maintain
such registration and to comply with the requirements of said Act.
At the Distributor's request, the Trust will take such steps as may be
necessary and feasible to qualify shares of the Funds for sale in states,
territories or dependencies of the United States of America, in the District of
Columbia and in foreign countries, in accordance with the laws thereof, and to
renew and extend any such qualification; provided, however, that the Trust shall
not be required to qualify shares or to maintain the qualification of shares in
any state, territory, dependency, district or country where it shall deem such
qualification disadvantageous to the Trust.
The Distributor agrees that it will (i) not use, distribute or
disseminate or authorize the use, distribution or dissemination by others in
connection with the sale of shares of the Funds, any statement, other than those
contained in the Trust's current Prospectus, except such supplemental literature
or advertising as shall be approved by the Trust, (ii) conform to the
requirements of all state and federal laws and the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. relating to the sale of shares
of the Trust (including, without limitation, the maintenance of effective
broker-dealer registrations as required), and (iii) observe and be bound by all
the provisions of the Master Trust Agreement (and of any fundamental policies
adopted by the Trust pursuant to the 1940 Act, notice of which shall have been
given to the Distributor) which at the time in any way require, limit, restrict
or prohibit or otherwise regulate any action on the part of the Distributor.
The Distributor further agrees that:
(a) the Distributor shall furnish to the Trust any information with
respect to the Distributor within the purview of any reports or registrations
required to be filed with any governmental authority; and
(b) the Distributor will not make any representations inconsistent
with the Registration Statement of the Trust filed under the Securities Act, as
from time to time amended and in effect.
4
<PAGE>
6. Allocation of Expenses.
-----------------------
(a) The Funds, either directly or through their investment adviser
or investment advisers, will be responsible for, and shall pay their allocable
portions of the expenses of:
(i) providing all necessary services, including fees and
disbursements of counsel, related to the preparation, setting in type, printing
and filing of any registration statement and/or prospectus required under the
Securities Act or the 1940 Act or under state securities laws covering their
shares, and all amendments and supplements thereto, the mailing of any such
prospectus to existing shareholders, and preparing, setting in type, printing
and mailing of periodic reports to existing shareholders;
(ii) the cost of all registration or qualification fees relating
to the Funds' shares, including the fees or expenses of qualifying the Trust as
a broker or dealer under laws of any state, if any;
(iii) the cost of preparing temporary and permanent share
certificates for shares, if any; and
(iv) any and all federal and state issue and/or transfer taxes
payable upon the issue by or (in the case of treasury shares) transfer from a
Fund of the shares distributed hereunder.
(b) The Distributor agrees that, after the Trust's Prospectus and
periodic reports have been set in type, it will bear the expense of printing and
distributing any copies thereof which are to be used in connection with the
offering of shares to prospective investors. The Distributor further agrees that
it will bear the expenses of preparing, printing and distributing any other
literature used by the Distributor or furnished by it for use in connection with
the offering of the shares for sale to the public, and any expenses of
advertising in connection with such offering. The Distributor will also pay fees
and expenses related to its registrations as a broker dealer and fees for
services rendered by the Trust's transfer agent on behalf of the Distributor.
(c) The Funds will be responsible for, and shall pay the expenses
of, maintaining shareholder accounts and furnishing or causing to be furnished
to each shareholder a statement of his account.
5
<PAGE>
7. Distributor Is Independent Contractor. The Distributor shall be an
independent contractor. The Distributor is responsible for its own conduct, for
the employment, control and conduct of its agents and employees and for injury
to such agents or employees or to others through its agents or employees. The
Distributor assumes full responsibility for its agents and employees under
applicable laws and agrees to pay all employer taxes relating thereto.
8. Term and Termination; Amendment.
--------------------------------
(a) Term and Termination. This Agreement shall become effective as
of the effective date noted above with respect to each Initial Fund; and, with
respect to any additional Fund, (i) on the date of receipt by the Trust of
notice from the Distributor in accordance with Section 1(a) hereof that the
Distributor is willing to serve as Distributor with respect to such Fund, or
(ii) such other date with respect to an additional Fund as the Trust and the
Distributor mutually agree. Unless terminated as herein provided, this Agreement
shall remain in full force and effect with respect to each Initial Fund until
November 30, 1996 and, with respect to each additional Fund, for two years from
the date on which such Fund becomes a Fund hereunder. Subsequent to such initial
periods of effectiveness this Agreement shall continue in full force and effect,
subject to the last sentence of this Section 8(a), for successive one-year
periods with respect to each Fund so long as such continuance with respect to
such Fund is approved at least annually (a) by either the Trustees of the Trust
or by vote of a majority of the outstanding voting securities (as defined in the
1940 Act) of such Fund, and (b) in either event, by the vote of a majority of
the Trustees of the Trust who are not parties to this Agreement or "interested
persons" (as defined in the 1940 Act) of any such party of the Trust and who
have no direct or indirect interest in the operation of any 12b-1 Plan or this
Agreement, cast in person at a meeting called for the purpose of voting on such
approval. This Agreement may be terminated with respect to the Trust or any Fund
at any time, without payment of any penalty, by a vote of (a) a majority of the
Trustees who are not "interested persons" of the Trust (as defined in the 1940
Act) and who have no direct or indirect financial interest in the operation of
any 12b-1 Plan or this Agreement or (b) a majority of the outstanding voting
securities of the Trust or that Fund, or by the Distributor, as the case may be,
in each case on sixty (60) days' prior written notice of the other party.
6
<PAGE>
(b) Amendment. Any amendment to this Agreement shall become
effective with respect to a Fund upon approval in writing of the Distributor and
the Trust (subject in the latter case to approval by a majority of the Trustees
and a majority of the Trustees who are not "interested persons" of the Trust (as
defined in the 1940 Act) and who have no direct or indirect financial interest
in the operation of any 12b-1 Plan; provided, however, that amendments relating
to any 12b-1 Plan shall not require the consent of the Distributor.
(c) Approval, Amendment or Termination by Individual Fund. Any
approval, amendment or termination of this Agreement with respect to any Fund
shall be effective to continue, amend or terminate this Agreement with respect
to such Fund notwithstanding (i) that such action has not been approved with
respect to any other Fund affected thereby, and (ii) that such action has not
been approved by the shareholders of such Fund, unless such action shall be
required by any applicable law or otherwise.
9. Assignment. The Distributor may not make any assignment, as defined
under the 1940 Act, of this Agreement and this Agreement shall automatically
terminate in the event of an attempted assignment by the Distributor; provided,
however, that the Distributor may employ or enter into agreements with such
other person, persons, corporation or corporations, as it shall determine in
order to assist it in carrying out this Agreement, including, without
limitation, selected dealers as contemplated by Section 2.
10. Indemnification by Distributor. The Distributor agrees to indemnify
and hold harmless the Trust or any other person who has been, is, or may
hereafter be an officer, Trustee, employee or agent of the Trust against any
loss, damage or expense reasonably incurred by any of them in connection with
any claim or in connection with any action, suit or proceeding to which any of
them may be a party, which arises out of or is alleged to arise out of or is
based upon any violation of any of its representations or covenants herein
contained or any untrue statement or alleged untrue statement of a material
fact, or the omission or alleged omission to state a material fact necessary to
make the statements made not misleading, on the part of the Distributor or any
agent or employee of the Distributor or any other person for whose acts the
Distributor is responsible or is alleged to be responsible (such as any selected
dealer or person through whom sales are made pursuant to an agreement with the
Distributor), whether made orally or in writing, unless such statement or
omission was made in or in reliance upon written information furnished by the
Trust. The term "expenses" for purposes of this and the next paragraph includes
reasonable attorneys' fees and amounts paid in satisfaction of judgments or in
settlements which are made with the Distributor's consent. The foregoing rights
of indemnification shall be in addition to
7
<PAGE>
any other rights to which any of the foregoing indemnified parties may be
entitled as a matter of law.
11. Indemnification by Trust. The Trust agrees to indemnify and hold
harmless the Distributor and each person who has been, is, or may hereafter be
an officer, director, employee or agent of the Distributor against any loss,
damage or expense reasonably incurred by any of them in connection with any
claim or in connection with any action, suit or proceeding to which any of them
may be party, which arises out of or is alleged to arise out of or is based upon
a violation of any of its covenants herein contained or any untrue or alleged
untrue statement of material fact, or the omission or alleged omission to state
a material fact necessary to make the statements made not misleading, in a
Registration Statement or Prospectus of the Trust, or any amendment or
supplement thereto, unless such statement or omission was made in reliance upon
written information furnished by the Distributor. The foregoing rights of
indemnification shall be in addition to any other rights to which any of the
foregoing indemnified parties may be entitled as a matter of law. Nothing
contained herein shall relieve the Distributor of any liability to the Trust or
its shareholders to which the Distributor would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence in the performance of its
duties or reckless disregard of its obligations and duties hereunder.
12. Non-Exclusive Agreement. The services of the Distributor to the
Trust hereunder shall not be deemed to be exclusive, and the Distributor shall
be free to (a) render similar services to, and act as underwriter or distributor
in connection with the distribution of shares of, other investment companies,
and (b) engage in any other businesses and activities from time to time.
13. Governing Law; Counterparts. This Agreement shall be construed in
accordance with the laws of the Commonwealth of Massachusetts. This Agreement
may be executed in any number of counterparts, each of which shall be deemed to
be an original, but such counterparts shall, together, constitute only one
instrument.
14. Prior Agreements Superseded; Construction. This Agreement
supersedes any prior agreement relating to the subject matter hereof between the
parties hereto. Where the context of this Agreement so permits, each of the
masculine, feminine and neuter genders shall be deemed to denote the other two
genders, the singular to denote the plural and the plural to denote the
singular. Without limiting the generality of the foregoing, all references to
the Trust's Prospectus shall include all Prospectuses thereunder.
8
<PAGE>
15. Notices. Notices under this Agreement shall be in writing and shall
be addressed, and delivered or mailed postage prepaid, to the other party at
such address as such other party may designate from time to time for the receipt
of such notices. Until further notice to the other party, the address of each
party to this Agreement for this purpose shall be One Financial Center, Boston,
Massachusetts 02111.
16. Limitation of Liability. The term "State Street Research Financial
Trust" means and refers to the Trustees from time to time serving under the
First Amended and Restated Master Trust Agreement of the Trust dated June 1,
1993 as the same may subsequently have been, or subsequently may be, amended. It
is expressly agreed that the obligations of the Trust hereunder shall not be
binding upon any of the Trustees, shareholders, nominees, officers, agents or
employees of the Trust as individuals or personally, but shall bind only the
trust property of the Trust, as provided in the Master Trust Agreement of the
Trust. The execution and delivery of this Agreement have been authorized by the
Trustees of the Trust and signed by an officer of the Trust, acting as such, and
neither such authorization nor such execution and delivery shall be deemed to
have been made individually or to impose any personal liability, but shall bind
only the trust property of the Trust as provided in its Master Trust Agreement.
The Master Trust Agreement of the Trust further provides, and it is expressly
agreed, that each Fund of the Trust shall be solely and exclusively responsible
for the payment of its debts, liabilities and obligations and that no other Fund
shall be responsible or liable for the same.
IN WITNESS WHEREOF, this Agreement has been executed for the
Distributor and the Trust by their duly authorized officers, as of the date
first set forth above.
State Street Research Investment
Services, Inc.
By: /s/ Gerard P. Maus
-----------------------
State Street Research Financial
Trust
By: /s/ Ralph F. Verni
-----------------------
9
Exhibit (6)(d)
SUPPLEMENT NO. 1 TO
SELECTED DEALER AGREEMENT
Boston, Massachusetts
Effective Date:
----------------
Dealer Name: _____________________________________
Address: _____________________________________
_____________________________________
Attn: _____________________________________
Ladies and Gentlemen:
This Agreement amends and supplements the Selected Dealer Agreement
between you and us, as in effect from time to time (the "Selected Dealer
Agreement"). All of the terms and provisions of the Selected Dealer Agreement
remain in full force and effect, and this Agreement and the Selected Dealer
Agreement shall be construed and interpreted as one Agreement, provided that in
the event of any inconsistency between this Agreement and the Selected Dealer
Agreement, the terms and provisions of this Agreement shall control. Capitalized
terms used in this Agreement and not defined herein are used as defined in the
Selected Dealer Agreement.
We understand that you wish to use Shares of the Funds in managed
fee-based programs in which you participate (the "Fee-Based Program"), and that
you wish to afford investors participating in such programs the opportunity to
qualify for the ability to purchase shares of the Funds at net asset value. We
are willing to allow you to purchase Shares of the Funds for sale to investors
participating in the Fee-Based Program on such basis, subject to the terms and
conditions of this Agreement and the Selected Dealer Agreement.
<PAGE>
1. Sale of Shares through Fee-Based Program
You may, in connection with the Fee-Based Program, sell shares of any
Funds made available by us, from time to time, at net asset value to investors
participating in a bona fide Fee-Based Program. You will receive no discount,
commission or other concession with respect to any such sale, but will be
entitled to receive any service fees otherwise payable with respect thereto to
the extent provided from time to time in the applicable Funds' Prospectuses and
in the Dealer Agreement. We will, after consulting with you, determine, from
time to time, which Funds we will make available to you for use in the Fee-Based
Program. You agree that Shares will not be made available through the Fee-Based
Program for the sole purpose of enabling evasion of sales charges.
2. Eligibility of Fee-Based Program
We reserve the right to establish basic eligibility requirements from time
to time for the sale of Fund shares under your programs, relating to the minimum
aggregate amount of your clients' assets invested in the Funds, management fees
you charge on such assets, regulatory requirements, and/or similar matters. You
shall send to us upon request from time to time the then-current standard fee
schedule for the applicable Fee-Based Program and a copy of the applicable
Schedule H to the Form ADV containing the required disclosures relating to the
Fee-Based Program, or any successor required disclosures. Any brochures, written
materials or advertising relating to the Fee-Based Program may refer to the
Funds as available at net asset value if the fees and expenses of the Fee-Based
Program are given at least equal prominence. In connection with explaining the
fees and expenses of the Fee-Based Program, your representatives may describe to
customers the option of purchasing Fund shares through such Program at net asset
value.
3. Undertakings
You will (i) provide us with continuous reasonable access to your offices,
representatives and mutual fund and Fee-Based Program sales support personnel,
(ii) include descriptions of all Funds offered through the Fee-Based Program in
internal sales materials and electronic information displays used in conjunction
with the Fee-Based Program, (iii) use reasonable efforts to motivate your
representatives to recommend suitable Funds for clients of the Fee-Based
Program, and (iv) include the Funds on any approved, preferred or other similar
list of mutual fund products offered through the Fee-Based Program.
4. Customer Accounts
You may maintain with the Funds' shareholder servicing agent either (i)
one or more omnibus accounts solely for the participants in the applicable
Fee-Based Program or (ii) separate accounts for each participant in the
applicable Fee-Based Program. If one or more omnibus accounts are maintained,
you shall, among other things, be responsible for forwarding proxies, annual and
semi-annual reports and other materials to each beneficial owner in a timely
manner.
<PAGE>
5. Applicable Law
This Agreement shall be governed by and construed and interpreted in
accordance with the internal laws of The Commonwealth of Massachusetts.
6. Disclaimer and Indemnity
We are not endorsing, recommending and are not otherwise involved in
providing any investment product of yours, including but not limited to any
Fee-Based Program. We are merely affording you the opportunity to use shares of
the Funds as an investment medium for the applicable Fee-Based Program. You
acknowledge and agree that you are solely responsible for any such Fee-Based
Program and you agree to indemnify, defend and hold harmless us, the Funds and
our and their affiliates, directors, trustees, officers, employees and agents
from and against any claims, losses, damages or costs (including attorneys'
fees) arising from or related to such Fee-Based Program, including without
limitation any brochures, written materials or advertising in any form that
refers to the Funds or the Fee-Based Program.
7. Miscellaneous
This Agreement is not exclusive and shall terminate automatically upon
termination of the Selected Dealer Agreement. We reserve the right, in our
discretion upon notice to you, to amend, modify or terminate this Agreement at
any time. You agree that any order to purchase Shares placed by you after notice
of any amendment to this Agreement has been sent to you shall constitute your
agreement to such amendment.
STATE STREET RESEARCH
INVESTMENT SERVICES, INC.
By: _______________________________
Name:
Title:
Accepted:
__________________________________
Name of Dealer
By: __________________________________
Name:
Title:
Exhibit 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statements of Additional Information
constituting part of this Post-Effective Amendment No. 16 to the registration
statement (No. 33-10327) on Form N-1A (the "Registration Statement") of our
reports dated December 11, 1996 relating to the financial statements and
financial highlights of State Street Research Government Income Fund, State
Street Research Strategic Portfolios: Conservative, State Street Research
Strategic Portfolios: Moderate and State Street Research Strategic Portfolios:
Aggressive (each a series of State Street Research Financial Trust), which
appear in such Statements of Additional Information and to the incorporation by
reference of our reports into the Prospectuses which constitute part of this
Registration Statement. We also consent to the reference to us under the heading
"Independent Accountants" in such Statements of Additional Information and to
the reference to us under the heading "Financial Highlights" in such
Prospectuses.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
February 26, 1997
Exhibit (14)(b)
[FRONT COVER]
[State Street Research logo]
Your Window of Opportunity
State Street Research 403(b)
[Graphic: 3 windows, one slightly open]
Inside
---------------------------------------------
State Street Research Makes It Easy page 1
Use a 403(b) Before An IRA page 3
403(b) Tax Savings page 4
The State Street Research Advantage page 5
How to Open An Account page 9
<PAGE>
RETIREMENT PLANNING TAKES TIME
A comfortable retirement is the number one reason most people invest. And,
today, successful retirement planning is more important than ever. Not only are
we retiring earlier, but we're living longer. That means your retirement nest
egg needs to last for 20 or 30 years.
Fortunately, the key to success in retirement planning isn't necessarily how
much you invest. It's giving your money time to grow and making the right
choices with your investments. This is why it pays to have a dedicated
investment representative who understands your investment goals and can help you
take advantage of investment opportunities.
STATE STREET RESEARCH 403(B) MAKES IT EASY
A 403(b) plan is your window of opportunity. It allows you to take personal
control of your retirement, deciding what to invest in, how much and when. The
State Street Research 403(b) account offers you distinct advantages:
[bullet] Tax benefits. You enjoy pre-tax contributions
and tax-deferred investing.
[bullet] A convenient loan privilege that lets you borrow against your
403(b) account.
[bullet] Convenience. Your contributions are made by
payroll deduction. [Graphic:
Window]
[bullet] The cost advantages of State Street Research
mutual funds.
[bullet] A wide range of investment options--stock funds, bond funds,
international and money market funds.
[bullet] The investment expertise of State Street Research--the result of
managing mutual funds for more than 70 years.
1
<PAGE>
IT PAYS TO START EARLY
It stands to reason that the more you invest, the more money you may have when
you retire. But one of the wonders of investing is how time, and the power of
compounding, can make your money grow faster. Consider the examples below.
[LINE CHARTS]
Chart 1 Chart 2
Year $(in thousands) Year $(in thousands)
1 5,406 1 5,406
2 10,812 2 10,812
3 16,650 3 16,650
4 22,956 4 22,956
5 29,766 5 29,766
6 37,120 6 37,120
7 45,064 7 45,064
8 53,642 8 53,642
9 62,907 9 62,907
10 72,913 10 72,913
11 83,720 11 83,720
12 95,391 12 95,391
13 107,996 13 107,996
14 121,610 14 121,610
15 136,312 15 136,312
16 152,191 16 152,191
17 169,340 17 169,340
18 187,861 18 187,861
19 207,863 ` 19 207,863
20 229,068 20 229,068
21 247,393
22 267,185
23 288,560
24 311,644
25 336,576
26 363,502
27 392,582
28 423,989
29 457,908
30 494,541
31 534,104
32 576,832
33 622,979
34 672,817
35 726,642
Linda Late began putting money away for retirement when she was 45. After 20
years of investing $400 each month--a total of $96,000--she accumulated $229,068
at age 65.
Ellen Early got a head start on her retirement planning, beginning at age 30.
She also invested $400 per month for 20 years, and then let her investment grow
for fifteen more years. After 35 years, her account grew to $726,643.
Ellen Early invested the same amount as Linda Late, yet had more than $497,000
extra to make her retirement a success. The real difference was the added time
her investment had to grow, and that's why it pays to start early.
These charts illustrate the growth of $400 monthly investments at an 8% annual
rate of return. Results are hypothetical and are for illustrative purposes only;
they are not intended to imply or guarantee a rate of return on any mutual fund
or other investment. All distributions are reinvested; sales charges are not
reflected.
How Investments Grow Over Time
Use this table as a guide in determining how your investments might grow. Choose
a number of years and an average annual rate of return. The table assumes a $100
monthly investment; but you can use it as a guide for nearly any amount. For
example, if you invest $200 (twice as much), just multiply the result in the
table by 2.
average annual rate of return
years 8% 10% 12%
5 $ 7,341 $ 7,717 $ 8,110
10 18,128 20,146 22,404
15 33,978 40,162 47,593
20 57,267 72,398 91,986
25 91,485 124,315 170,220
30 141,763 207,928 308,098
35 215,639 342,588 551,083
40 324,086 559,358 979,211
2
<PAGE>
THE BENEFITS OF 403(B)
A 403(b) retirement plan gives you the opportunity to save on taxes while you
invest. It is designed specifically for employees of public educational
institutions and certain tax-exempt organizations, such as hospitals and
colleges. The name "403(b)" refers to the part of the tax code that created the
plan.
A 403(b) is similar to the popular 401(k) plans available at many corporate
workplaces. Both allow you to invest by payroll deduction (before taxes), which
reduces the income taxes you pay. And both let your account grow free from taxes
until you withdraw money after age 59-1/2.
Why Use a State Street Research 403(b) BEFORE an IRA
For most investors, it's better to maximize contributions to a 403(b) plan
before contributing to an individual retirement account (IRA). Here's why:
- --------------------------------------------------------------------------------
State Street Research 403(b) IRA
- --------------------------------------------------------------------------------
Pre-tax contributions reduce
income taxes paid [checkmark] [checkmark](1)
- --------------------------------------------------------------------------------
Account is tax deferred until
money is withdrawn [checkmark] [checkmark]
- --------------------------------------------------------------------------------
You can invest by payroll deduction
[checkmark] [checkmark]
- --------------------------------------------------------------------------------
You can potentially invest up to
$9,500 maximum per year [checkmark]
- --------------------------------------------------------------------------------
You can take a loan against
your account [checkmark]
- --------------------------------------------------------------------------------
(1)In some cases, IRA contributions may be tax deductible.
3
<PAGE>
403(B) TAX SAVINGS
A 403(b) retirement plan helps you save on taxes in two ways. First, it reduces
your current taxable income because your contributions are made before taxes.
Pay Less Taxes Up Front
Saving with a 403(b) Plan Saving without a 403(b) Plan
- ---------------------------------- --------------------------------
Salary $50,000 Salary $50,000
403(b) savings $ 5,000 Non-403(b) savings $ 5,000
(pre-tax) (after tax)
Gross taxable income $45,000 Gross taxable income $50,000
Federal income taxes $ 7,815 Federal income taxes $ 9,215
(28% federal tax bracket) (28% federal tax bracket)
- ------------------------------------------------------------------------
Income after savings Income after savings
and taxes $37,185 and taxes $35,785
Pre-tax contributions mean you're currently taxed on less income, so your taxes
are lower!
Avoid Taxes While You Invest
Second, your 403(b) account is not taxed until you withdraw money, usually after
you reach age 59-1/2. Your account can grow tax deferred, which helps it to grow
faster! Taxes are paid when money is withdrawn from the 403(b) account.
The Advantages of Tax Deferral
(for monthly investments of $400)
[LINE CHART]
Taxable Line Tax-defered Line
Year Year
1 5,348 1 5,406
2 10,582 2 10,812
3 16,117 3 16,650
4 21,971 4 22,956
5 28,162 5 29,766
6 34,709 6 37,120
7 41,634 7 45,064
8 48,957 8 53,642
9 56,703 9 62,907
10 64,894 10 72,913
11 73,558 11 83,720
12 82,720 12 95,391
13 92,410 13 107,996
14 102,659 14 121,610
15 113,497 15 136,312
16 124,960 16 152,191
17 137,083 17 169,340
18 149,905 18 187,861
19 163,465 19 207,863
20 177,406 20 229,068
This chart illustrates general advantages of tax deferral. The chart shows
investments of $400 per month over a 20-year period. The taxable line reflects
annual taxes in the 28% tax bracket. Returns reflect hypothetical 8% annual
rates of return and are for illustrative purposes only; they are not intended to
imply or guarantee a rate of return on any mutual fund or other investment. All
distributions are reinvested; sales charges and deferred income taxes are not
reflected.
4
<PAGE>
THE MUTUAL FUND ADVANTAGE
State Street Research's mutual funds offer several advantages over other types
of investments or plans for 403(b) accounts.
Convenient loan privilege. If you have a short-term need for money, you can take
a loan against your account balance and pay the interest on the loan to your own
account.(2)
Wide range of investment options--stock, bond, international, and money market
funds. If your investment strategy changes, you can exchange your money from one
fund to another.(3)
Higher potential returns than fixed accounts. Investing in stock and bond mutual
funds can provide higher potential returns than fixed-rate investments. Of
course, the investment value and returns of mutual funds will fluctuate with
changes in market conditions.
Daily fund prices. Fund prices are reported daily in most newspapers, so it is
easy for you to keep track of your investment.
Flexible withdrawal options. When you are ready to retire, you have several
options for accessing your money.
[bullet] A lump-sum payment.
[bullet] A lump-sum payment made into another mutual fund account or
other investment.
[bullet] Regular monthly or quarterly payments from your account.
See page 7 for details on withdrawals.
(2)Subject to IRS penalty for non-repayment.
(3)The exchange privilege may be changed or discontinued at any time.
WHY STATE STREET RESEARCH
Since 1924, State Street Research has been respected by institutions and
knowledgeable individual investors. The firm has delivered exceptional results
to its clients:
[bullet] A history of selecting good stocks in both rising and falling markets.
State Street Research has successfully managed investor portfolios
throughout this century's best and worst market cycles since 1924.
[bullet] The choice of today's most demanding investors. Eight of the 10 largest
corporate pension plans and one of every four Fortune 100 companies is
a State Street Research client.
[bullet] Proprietary research. We built our reputation on the strength of our
in-house proprietary research.
[bullet] Institutional investment quality to individual investors. State Street
Research mutual fund investors receive the same distinctive portfolio
direction as our institutional clients.
[bullet] The important role of client service. State Street Research has been
recognized for providing quality shareholder service.
5
<PAGE>
RETIREMENT INVESTMENT STRATEGIES
To make it easier to develop a long-term plan,
State Street Research offers two special automatic investment strategies.
Direct Your Investment
Use our DIRECT strategy to invest gradually, moving money in pre-set amounts
from a conservative fund into a more aggressive fund.
HERE'S HOW IT WORKS:
[bullet] You transfer a lump-sum investment from an existing 403(b) plan into a
State Street Research mutual fund.(4)
[bullet] On a monthly or quarterly basis, money is "directed" from that fund
into another State Street Research fund that you select.
[bullet] You benefit from dollar cost averaging, which helps you invest in a
disciplined way whether the markets go up or down.(5)
DAP Your Dividends
Use DAP--Dividend Allocation Plan--to diversify dividends from a conservative
fund into a more aggressive fund.
HERE'S HOW IT WORKS:
[bullet] You make a lump-sum investment (plus any additional investments) in a
State Street Research mutual fund that pays regular dividend income.
[bullet] Your initial investment remains untouched, but the Fund's dividends are
transferred (or allocated) to another State Street Research fund that
you select.
[bullet] You benefit from diversification and dollar cost averaging.(5)
If you are interested in either of these automatic investing strategies, please
call 1-800-562-0032.
(4) Specific IRS rules apply to transfers. See the Transfer of 403(b) Assets
Form for more information.
(5) Dollar cost averaging will not assure that you will make a profit; neither
can it protect against losses in declining markets. Dollar cost averaging
involves continuous investment regardless of fluctuating prices, and
investors should consider their ability to purchase shares through high and
low markets.
What Has Performed Best Over the Long Term?
When investing for a long-term goal such as retirement, you may want to consider
stock funds for at least a portion of your investment. A longer time frame could
give you the time to ride out fluctuations in the market. Plus, you want your
investments to outpace inflation, and stocks have done that in the past 30
years.
[BAR CHART]
30 Years of Performance(6)
10.7% Large-company stocks
8.2% Long-term government bonds
6.9% U.S. Treasury bills
5.4% Inflation
(6) Source: Lipper Analytical Services, Johnson Charts
Average annual total returns for the years 1966-1995. All indices listed are
unmanaged and do not take sales charges into consideration. Direct investment in
the indices is not possible; results are for illustrative purposes only. Past
performance should not be considered indicative of the future performance of any
index or any available funds managed by State Street Research or its affiliates.
The Large-Company Stock data reflects the performance of the Standard & Poor's
500 Composite Index (S&P 500), which includes 500 widely traded common stocks
and is a commonly used measure of U.S. stock market performance. The Long-Term
Government Bond data are based on the performance of a one bond portfolio, which
includes a debt obligation issued by the U.S. Treasury with a 20-year maturity.
The U.S. Treasury Bill data are based on the performance of a one bill
portfolio, which includes a U.S. Treasury bill with a 30-day maturity. The
Consumer Price Index (CPI) is a measure of change in the prices of goods and
services as determined by the U.S. Bureau of Labor Statistics.
More information about stocks: Stocks are neither guaranteed nor tax advantaged.
The value of stocks will fluctuate, based on a variety of variables, including
market conditions.
More information about U.S. debt obligations: U.S. Treasury bonds and bills
offer a government guarantee as to the repayment of principal and/or interest if
held to maturity; income from these securities is tax exempt at the state and
local level. U.S. government agency securities are not direct obligations of the
U.S. government and, with some exceptions, are not guaranteed by the U.S.
government; many are exempt from state and local taxes.
6
<PAGE>
QUESTIONS AND ANSWERS
About Your 403(b) Account
Eligibility Who can have a 403(b) account?
Generally, employees of non-profit charitable, educational, scientific or
religious organizations, such as hospitals or colleges, may have a 403(b)
account. Also eligible are employees of state or local governments who are
employed by schools. Check with your employer to determine whether you qualify
for a 403(b) account.
Contributions
How do I make contributions to my 403(b) account?
Usually, you enter into a salary reduction agreement with your employer that
specifies the amount you want to contribute. Your compensation will be reduced
by this amount. Your employer may have a salary reduction agreement for you to
use. If not, a salary reduction agreement is attached.
What about fees? Is it expensive to open a 403(b) with State Street Research?
State Street Research offers some of the most competitive pricing for 403(b)s
that you'll find. You'll pay a $10 annual account administration (trustee) fee.
This $10 fee (per 403(b) plan) allows you to choose any number of our available
mutual funds. You pay per plan, not per fund. Remember though, sales charges may
also apply to the mutual funds that you invest in for your 403(b).
Maximum Contribution
How much can be contributed each year to my 403(b) account?
Determining your maximum 403(b) contribution is complex because several
different tax law limits apply depending on your individual situation. For most
employees, the maximum salary reduction contribution for a calendar year will be
the smaller of 20% of your compensation or $9,500. In the future, the $9,500
limit will be indexed for inflation. Employees of certain kinds of qualified
employers (for example, public schools, colleges, and hospitals) and
long-service employees (15 or more years of service) of such employers may have
different limits.
Your employer may be able to calculate your maximum contribution. If not, use
the attached worksheet. You may wish to consult an accountant or tax adviser to
confirm your maximum contribution, as penalties may apply if you exceed your
maximum.
Transfers
May I transfer all or part of my existing 403(b) to State Street Research? Yes.
Complete the attached Transfer of 403(b) Assets Form. Be sure to note the
requirements for a tax-free transfer described in the Form.
Withdrawals From Your Account
When will I begin to receive retirement benefits from my account?
You choose when to make withdrawals from your 403(b) account. However,
withdrawals may not begin until you have retired or terminated employment with
your employer or reached age 59-1/2. Earlier withdrawals are permitted only if
you become disabled or suffer a financial hardship (as defined by IRS
regulations).
You must begin making withdrawals by April 1 of the year following the year when
you reach age 70-1/2 or retire from your employer (if later).
7
<PAGE>
What happens to my account if I die?
Your account balance goes to the beneficiary(ies) you designate on the 403(b)
application or on another written document you send to State Street Research
Shareholder Services. Naming a beneficiary(ies) can have estate and tax-planning
implications, so consult a qualified professional. Any contingent deferred sales
charges (Class B shares) are waived if withdrawals are made within one year of
your death or disability.
Taxes
How will I be taxed on withdrawals from my 403(b)?
Generally, amounts withdrawn from your account are taxed as ordinary income in
the year when received. In addition, with limited exceptions, such as
disability, amounts withdrawn before age 59-1/2 are subject to an additional 10%
penalty tax.
If you withdraw an amount from your State Street Research 403(b) Account that is
eligible for rollover (see next question), mandatory 20% federal income tax
withholding will apply unless the withdrawn amount is rolled over directly to
another 403(b) arrangement or to an IRA. If the amount you withdraw is not
eligible for rollover to another 403(b) arrangement or IRA, 10% withholding of
federal income tax will apply unless you elect no withholding on your Withdrawal
Form.
Can I postpone federal income tax on a withdrawal from my 403(b) account?
You can defer income taxes on withdrawals from your 403(b) account if all or
part of the withdrawal is rolled over to another 403(b) account or into an IRA
either directly by State Street Research (direct rollover) or by you (regular
rollover) within 60 days. All withdrawals are eligible for rollover except
minimum required withdrawals after age 70-1/2 or retirement from your employer
and withdrawals over a period of at least 10 years or over your life expectancy
(or that of you and your designated beneficiary(ies)).
Caution: Rollovers must meet technical IRS requirements that cannot be described
in detail here.
Important: The preceding questions and answers are general and are provided for
informative purposes only. Some rules are not covered. Always consult your tax
adviser for advice on how the tax laws apply to you and how a State Street
Research 403(b) account will affect your tax situation or for advice on specific
matters such as contribution limits or rollover requirements. More information
is available in IRS Publication 571, Tax-Sheltered Annuity Plans for Employees
of Public Schools and Certain Tax-Exempt Organizations; this publication is
available from the IRS.
[Graphic: 3 diamond-shaped windows]
8
<PAGE>
How To Open Your
STATE STREET RESEARCH 403(B) ACCOUNT
1. Carefully read the material describing the State Street Research 403(b)
Account and the prospectus(es) for the fund(s) in which you plan to invest.
You may want to review the material with your accountant, lawyer or other tax
adviser because the rules under Section 403(b) are complex and subject to
change.
2. If you are transferring your current 403(b) assets to State Street Research,
complete and sign the Transfer of 403(b) Assets Form.
3. Complete and sign the State Street Research 403(b) Account Application. Be
sure to complete the beneficiary and employer (even if you are retired)
sections of the Application.
4. If contributions to your 403(b) Account will be made by salary reduction, you
should fill out a salary reduction agreement and you and your employer should
sign it. A sample Salary Reduction Agreement is attached.
5. Mail the completed and signed Application (and the Transfer of 403(b) Assets
Form, if used) to State Street Research Shareholder Services.
9
<PAGE>
[The following 2 pages make up the Transfer of Assets form that is inserted in
the booklet]
[Tab on right edge of page: TRANSFER OF 403(b) ASSETS FORM]
State Street Research 403(b)
TRANSFER OF 403(B) ASSETS FORM
How to transfer your existing 403(b) Account to State Street Research
[bullet] If you don't have a State Street Research 403(b) Account yet, complete
this transfer form and a State Street Research 403(b) Account
Application.
[bullet] If you already have a State Street Research 403(b) Account, just
complete this transfer form.
[bullet] When completed, send this transfer form (and if necessary, your 403(b)
Account Application) to: State Street Research Shareholder Services,
P.O. Box 8408, Boston, MA 02266-8408.
Information about you
_______________________________________________________________________________
Name Social Security #
_______________________________________________________________________________
Telephone (day) Telephone (night)
_______________________________________________________________________________
Account number (if you already have a State Street Research 403(b) Account)
Where is your 403(b) Account now?
_______________________________________________________________________________
Name of current Custodian/Insurer
_______________________________________________________________________________
Address
_______________________________________________________________________________
City State ZIP
_______________________________________________________________________________
Account number Name of mutual fund or fund family (if applicable)
_______________________________________________________________________________
Maturity date (if applicable)
[ ] This is a new State Street Research 403(b) Account. My investment choices
are on my 403(b) Account Application.
[ ] I already have a State Street Research 403(b) Account. Please invest the
amount transferred as follows:
Please tell us which Fund(s) you have selected for your 403(b) investment
_______________________________________________________________________________
Fund name Account number %
_______________________________________________________________________________
Fund name Account number %
_______________________________________________________________________________
Fund name Account number %
By signing below, I acknowledge that I have received a current prospectus(es) of
the Fund(s) selected.
[State Street Research logo] OVER >
<PAGE>
Please authorize transfer of your current 403(b) account to State Street
Research
To my current Custodian/Insurer: Please redeem [ ] ALL or [ ] PART ($ )
of my current 403(b) and transfer the proceeds in cash to my State Street
Research 403(b) Account. (For partial transfers, indicate which investments are
to be liquidated.)
_______________________________________________________________________________
Your signature Date
Note: Under current IRS rulings, a transfer from another 403(b) account to a
State Street Research 403(b) Account will be a tax-free transaction as long as
the withdrawal restrictions under your existing 403(b) are not more severe than
those under the State Street Research 403(b) Account (see Section 5.2 of the
State Street Research 403(b) Agreement). Also, amounts required to be
distributed to you under the minimum distribution rules of Code Section
403(b)(10) may not be transferred or rolled over. By signing this form, you are
certifying that this transfer will be a tax-free transaction under the preceding
two sentences.
Signature Guarantee
A signature guarantee may be required. Call your current Custodian/Insurer for
requirements.
_______________________________________________________________________________
Signature guaranteed by (name of bank or dealer firm)
_______________________________________________________________________________
Signature and title of officer
Directions to Current
Custodian/Insurer
PLEASE DO NOT FILL OUT THE FOLLOWING PORTION OF THIS FORM
Please liquidate and transfer on a fiduciary-to-fiduciary basis all or part of
the designated account as instructed above. Make check payable to State Street
Bank and Trust Company, Custodian.
Include the following account number and FBO on the check.
_______________________________________________________________________________
Account number Name
Mail to: State Street Research Shareholder Services,
P.O. Box 8408, Boston, MA 02266-8408
Include a copy of this Transfer of 403(b) Assets Form with the check for proper
credit to the customer's account. State Street Research Shareholder Services
will deliver the items to Boston Financial Data Services, Inc., which serves as
Agent for the Custodian.
Successor Custodian
State Street Bank and Trust Company will accept the transfer described above
once this form has been completed by you and the transfer has been completed by
your current 403(b) Custodian/Insurer.
_______________________________________________________________________________
Authorized signature of acceptance by Date
State Street Research Shareholder
Services on behalf of State Street Bank
and Trust Company, Custodian
<PAGE>
[The following 4 pages make up the Account Applicaiton form that is inserted
in the booklet]
[Tab on right edge of page: ACCOUNT APPLICATION]
-----------------------------------
Accompanying this form is a:
[ ] Transfer of 403(b) Assets Form
[ ] A check for a regular rollover
-----------------------------------
State Street Research 403(b)
ACCOUNT APPLICATION
How to open your State Street Research 403(b) Account
1. To open a State Street Research 403(b) Account, please complete this side
of the Application.
2. Your investment dealer must complete the dealer information section of
the Application.
What type of State Street Research 403(b) are you opening?
[ ] Regular 403(b) [ ] Transfer of Assets [ ] Regular Rollover
with Salary Reduction or Direct Rollover
Amount of investment accompanying this Application $___________________________
(Enclose a check for your contribution only if this is a regular rollover
403(b).)
Employee information
Complete the following information about yourself. Your account will be
registered in your name.
_______________________________________________________________________________
Name Birth date
_______________________________________________________________________________
Street
_______________________________________________________________________________
City State ZIP
_______________________________________________________________________________
Social Security #
_______________________________________________________________________________
Daytime telephone #
Employer information
Complete the following information about your employer.
_______________________________________________________________________________
Name
_______________________________________________________________________________
Street
_______________________________________________________________________________
City State ZIP
_______________________________________________________________________________
Name of contact person Daytime telephone #
Which Fund(s) have you selected for your 403(b)?
See relevant prospectus(es) for Fund details.
Name of Fund Class of Shares Percentage
A B D
[ ] [ ] [ ] %
____________________________________________________ ____________________
[ ] [ ] [ ] %
____________________________________________________ ____________________
[ ] [ ] [ ] %
____________________________________________________ ____________________
[ ] [ ] [ ] %
____________________________________________________ ____________________
[ ] [ ] [ ] %
____________________________________________________ ____________________
Total 100%
For information on the Direct or DAP(Dividend Allocation Plan) automatic
investing strategies, please call 1-800-562-0032.
[State Street Research logo]
<PAGE>
Who is the beneficiary of your State Street Research 403(b) Account?
1. Primary Beneficiary
_______________________________________________________________________________
Name Birth date
_______________________________________________________________________________
Relationship to you
_______________________________________________________________________________
Street
_______________________________________________________________________________
City State ZIP
_______________________________________________________________________________
Social Security #
2. Secondary Beneficiary
_______________________________________________________________________________
Name Birth date
_______________________________________________________________________________
Relationship to you
_______________________________________________________________________________
Street
_______________________________________________________________________________
City State ZIP
_______________________________________________________________________________
Social Security #
Important
Naming a beneficiary(ies) can have estate and tax-planning implications. Also,
if you are married and live in a community property state (AZ, CA, ID, LA, NM,
NV, TX or WA), you may need your spouse's consent to designate someone else as
beneficiary for more than half of your Account. Consult your attorney, or other
qualified professional, for additional advice.
Keep a copy of this account application with your other important papers (such
as your will).
Telephone exchange
The Telephone Exchange Privilege is available only for shares held on deposit
with the Transfer Agent. None of the Transfer Agent, any of the Funds, State
Street Research Shareholder Services, the Investment Manager or the Distributor
will be liable for any loss, injury, damage or expense as a result of acting
upon, and will not be responsible for the authenticity of, any telephone
instructions. I understand that all telephone calls are tape recorded. I am
liable for unauthorized telephone instructions unless reasonable procedures are
not used to confirm that instructions communicated by telephone are genuine.
<PAGE>
Telephone Exchange
by Shareholder or Dealer
The Transfer Agent may effect exchanges for my account according to telephone
instructions from me or my Dealer as set forth in the prospectus, and may
register the shares of the Fund to be acquired exactly the same as my existing
account. Authorizing an exchange constitutes an acknowledgment that Ihave
received the current prospectus of the Fund to be acquired. The account will
automatically have this privilege unless I expressly decline by providing my
initials in the space below.
I DO NOT WANT THE TELEPHONE EXCHANGE PRIVILEGE.
___ (Initial here.)
Sign here to establish the 403(b) Account
I hereby establish a State Street Research 403(b) Account, the terms of which
are contained in this Application and the State Street Research 403(b) Agreement
(which I have received and which is incorporated herein by reference) and
appoint State Street Bank and Trust Company as Custodian. I direct that
contributions to my 403(b) Account be invested as specified above in this
Application (until changed by me in accordance with the Agreement), designate
the individual(s) named above as my beneficiary(ies) (unless I have filed a
separate written designation with the Custodian or its agent), acknowledge that
I have received a current prospectus(es) of the Fund(s) indicated above, and
acknowledge that there is a $10 annual maintenance fee per plan (in addition to
any fees and charges described in the prospectus(es)).
Under penalties of perjury, I certify that (1) the number shown on this
Application is my correct taxpayer identification number (or I am waiting for a
number to be issued to me), and (2) I am not subject to backup withholding
because (a) I am exempt from backup withholding, or (b) I have not been notified
by the Internal Revenue Service that I am subject to backup withholding as a
result of a failure to report all interest or dividends, or (c) the IRS has
notified me that I am no longer subject to backup withholding.
Certification Instructions--You must cross out item (2) above if you have been
notified by the IRSthat you are currently subject to backup withholding because
of underreporting interest or dividends on your tax return.
The Internal Revenue Service does not require your consent to any provision of
this document other than certification required to avoid backup withholding.
_______________________________________________________________________________
Employee signature Date
<PAGE>
Signature Guarantee and Dealer Information
(Complete section (a) or (b) as applicable.)
The undersigned guarantees the signature and legal capacity of the
shareholder.
a. Signature Guarantee (fill out if your dealer does not complete section (b)
below)
__________________________________________________ _________________________
Name of Bank or Eligible Guarantor Street Address
__________________________________________________ _________________________
Authorized Signature of Bank or Eligible Guarantor City State ZIP
b. Dealer Information and Signature Guarantee (for Dealer use only)
______________________________ ______________________________________________
Dealer Name Branch Office Number
______________________________ ______________________________________________
Street Address of Home Office Address of Branch Office Serving Account
______________________________ ______________________________________________
City State ZIP City State ZIP
______________________________ ______________________________________________
Authorized Signature of Dealer Registered Representative's Name and Number
If this application is for an account introduced through the above-named Dealer,
the Dealer agrees to all applicable provisions in this application and in the
Prospectus(es), and represents that it has provided a current Prospectus for
each fund selected to the Applicant and that the application is properly
executed by a person authorized by the Dealer to guarantee signatures. The
Dealer warrants that this application is completed in accordance with the
shareholder's instructions and agrees to indemnify the Fund(s), any other
Eligible Funds, the Distributor, the Investment Manager, State Street Research
Shareholder Services and the Transfer Agent for any loss or liability from
acting or relying upon such instructions and information. The terms and
conditions of the Distributor's currently effective Selected Dealer Agreement or
sales agreement are included by reference in this section. The Dealer represents
that it has a currently effective Selected Dealer Agreement or sales agreement
with the Distributor authorizing the Dealer to sell shares of the Fund(s) and
the other Eligible Funds, and that it may lawfully sell shares of the designated
Fund(s) in the state designated as the Applicant's address of record.
State Street Bank and Trust Company, Custodian
You are hereby authorized and appointed on behalf of the above-signed dealer to
execute purchase transactions in accordance with the terms and conditions of
this Application, and to confirm each purchase.
Acceptance by the Custodian
This Account will be deemed to have been accepted by the Custodian, State Street
Bank and Trust Company, after all necessary forms, properly completed, are
received by State Street Research Shareholder Services and delivered by
Shareholder Services to the Transfer Agent.
Send completed application to:
State Street Research Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
<PAGE>
[The following 2 pages make up the Salary Reduction Agreement form that is
inserted in the booklet]
[Tab on right edge of page: SALARY REDUCTION AGREEMENT]
State Street Research 403(b)
SALARY REDUCTION AGREEMENT
Parties
Complete the information about the Employee and the Employer.
_______________________________________________________________________________
Employee name Social Security #
_______________________________________________________________________________
Employer name
Check one box.
[ ] Original Agreement [ ] Modification
AGREEMENTS The Employee and the Employer agree as follows:
1. The Employee has signed the State Street Research 403(b) Account Application
establishing the Account for the benefit of the Employee. The Employee and the
Employer are entering into this salary reduction agreement ("this Agreement") to
provide for contributions to the Account.
Fill in the dollar amount or percentage that you want to contribute in
section 2.
2. The Employee requests, and the Employer agrees, to reduce the compensation of
the Employee by $__________ or by ________% per pay period, starting with the
first pay period that begins after the Employee and the Employer have signed
this Agreement.
3. As soon as possible after each pay day, the Employer will transmit the amount
by which the Employee's compensation is reduced for that pay period to the agent
for the Custodian of the Employee's Account, to be credited to the Employee's
Account in accordance with the State Street Research 403(b) Account Agreement.
For federal income tax purposes, such amounts are considered Employer
contributions to the Employee's Account.
Where to send contributions.
Checks should be made payable to "State Street Bank and Trust Company,
Custodian, FBO [insert name of Employee] 403(b) Account." Mail checks to State
Street Research, P.O. Box 8408, Boston, MA 02266-8408.
[State Street Research logo] OVER >
<PAGE>
4. This Agreement will be effective only with respect to compensation not yet
earned by the Employee, and not with respect to compensation already earned by
the Employee on the date this Agreement is signed.
This Agreement is binding and irrevocable with respect to compensation earned by
the Employee while this Agreement is in effect. The Employer or the Employee may
terminate this Agreement at any time with respect to compensation not yet earned
by the Employee at the date of termination, by giving written notice to the
other party. After termination, the Employee may reinstate this Agreement (with
the same or a different salary reduction amount).
The Employee may modify the amount of salary reduction elected in Paragraph 2
above at any time by giving the Employer signed instructions specifying the new
salary reduction amount.
Notwithstanding the preceding two paragraphs, the Employer may impose reasonable
restrictions on the frequency with which the Employee may terminate, reinstate
or modify this Agreement and the number of days of advance notice required. Any
termination, reinstatement or modification will relate only to compensation not
yet earned, and not to compensation already earned, by the Employee as of the
effective date of such termination, reinstatement or modification.
5. Unless the Employer agrees to calculate the Employee's maximum 403(b)
contribution, the Employer has no responsibility for determining that the amount
by which the Employee's compensation is reduced, as set forth in Paragraph 2
above, does not exceed the limitations applicable to the Employee under the
Internal Revenue Code. The Employee agrees to indemnify the Employer, State
Street Research Investment Services, Inc., the State Street Research Funds, and
their affiliates and agents for any and all charges, expenses, taxes, interest
or penalties imposed on the Employer as a result of any reduction in
compensation in excess of such limitations.
Signatures
In witness whereof, the parties hereto have signed this Agreement
on___________________________ ,19_____.
Employee Employer
_________________________________________ ________________________________
(Signature) (Name of employer)
By:________________________________
(Signature and title of
authorized official)
<PAGE>
[Tab on right edge of page: SALARY REDUCTION WORKSHEET]
State Street Research 403(b)
MAXIMUM SALARY REDUCTION WORKSHEET
If your Employer's benefits or personnel department or business office does not
calculate your 403(b) maximum, use this worksheet to compute the maximum amount
by which you can reduce your salary to make 403(b) contributions. This worksheet
covers the main 403(b) rules and limits, but does not cover certain exceptions
and special rules that might permit larger contributions than the main rules. If
your employer will make contributions on your behalf as an addition to your
salary, or if you will contribute by foregoing an increase in compensation,
there are different rules to determine your maximum. Be sure to consult a tax
adviser to help you apply the rules to your personal situation. This worksheet
and the questions and answers following it are not intended to be tax advice.
You are responsible for meeting the tax law limits on contributions to your
403(b) account.
In the example, a college teacher will earn $40,000 in 1996. She will have
worked for the college 15 years at the end of 1996. The college has previously
contributed $20,000 on her behalf to its 403(b) retirement plan. The college
will contribute 10% of her salary ($4,000) to its retirement plan for 1996. In
addition, the employee reduced her salary in prior years by a total of $10,000
for contribution to her 403(b) account. The example shows how much this employee
can reduce her salary for 1996. Use the spaces for your own calculations.
Step 1--Determine Your Exclusion Allowance
(example)(your calculations)
(a) Expected salary for the current year
before reduction for 403(b)
contributions. $40,000 ________
(b) Number of whole and fractional years of
service as of the end of the current
year. 15 ________
(c) Multiply (a) by (b) by .20. $120,000 ________
(d) Your salary reduction contributions and
employer contributions for you to a
403(b) plan or to a tax-qualified plan
in prior years. $30,000 ________
(e) Your employer's contributions for you to
a 403(b) retirement plan for the current
year. $ 4,000 ________
(f) Subtract (d) and (e) from (c). $ 86,000 ________
(g) Multiply your years of service in (b) by
.20 and add 1. 4 ________
(h) Divide (f) by (g) to determine your
exclusion allowance for the year. $ 21,500 ________
Step 2--Determine Your Section 415 Limitation*
(a) Multiply your expected current year
salary (before reduction for 403(b)
contributions) by .20. $8,000 ________
(b) Multiply your employer's expected
current year contributions for you to a
403(b) plan by .80. $3,200 ________
(c) Subtract (b) from (a) to determine your
Section 415 general limitation (but not
in excess of $30,000). $4,800 ________
Step 3--Apply the $9,500 Limit*
Enter $9,500 (reduced by any salary
reduction contributions you make during the
same calendar year to other salary reduction
arrangements, such as a 401(k) plan). $9,500 ________
Step 4--Salary Reduction Agreement
Your maximum salary reduction amount is the smallest of the amounts determined
in Steps 1, 2 and 3. In the example, that amount was $4,800. Enter a salary
reduction agreement with your Employer, which reduces your compensation each pay
period so that the correct amount is contributed to your 403(b) account.
*See questions and answers for alternative ways to calculate the Section 415
limits and possible increases in the $9,500 limit.
[State Street Research logo]
<PAGE>
QUESTIONS AND ANSWERS
on calculating your maximum
1. What is the maximum annual contribution to my 403(b) account?
The maximum contribution you can exclude from your taxable income is the smaller
of your "403(b) exclusion allowance" (Questions 2 and 3) or your "415 limit"
(Question 4). Finally, your salary reduction contributions for a year cannot
exceed $9,500 (Question 5).
2. How do I compute my 403(b) "exclusion allowance"?
Follow these steps (see Step 1 of the worksheet) to compute your 403(b)
exclusion allowance.
(a) Take your expected salary for the current year (before reduction for your
403(b) contributions, but after reduction for salary reduction contributions
under a cafeteria or flexible benefits plan or 401(k) plan if your employer
maintains such a plan).
(b) Multiply (a) by your number of years of service with your current employer
as of the end of the current year, and then multiply the results by .20.
(c) Subtract the following total from (b):
[bullet] your total 403(b) salary reduction contributions in previous years
(which you excluded from your income).
[bullet] your employer's contributions in previous years on your behalf to a
403(b) retirement plan or to a qualified retirement plan, plus your
employer's expected contributions to a 403(b) retirement plan for
you for the current year.
(d) Divide (c) by the sum of one plus 20 percent of your years of service as of
the end of the current year.
The resulting figure is the amount of your exclusion allowance for the
current year.
For Step 1(d) of the worksheet, you need to know how much your employer has
contributed to a tax-qualified plan in prior years for you. If you cannot learn
this from your employer's benefits or personnel office, IRS regulations provide
a way to determine your employer's prior contributions. Consult your employer or
tax adviser for further information.
3. How do I determine my years of service?
Count one year of service for each full year you were a full-time employee.
Count a fraction of a year of service for years in which you were a part-time
employee or did not work a full year. (For additional information, see your
employer or your tax adviser). Add your full and fractional years of service
together to determine your total years of service. Only service with your
current employer can be counted. You may compute your exclusion allowance based
on one year of service even if you have worked for your employer for less than a
year or if your fractional years total less than a year.
4. What is my 415 limit?
Certain limits from Internal Revenue Code section 415 apply even though your
403(b) exclusion allowance for the year is greater. Section 415 has a general
limit and certain alternatives that may permit a larger 415 maximum.
Your 415 general limit is the smaller of (a) or (b) (see Step 2 of the
worksheet).
(a) 20 percent of your compensation for the year (before reduction for
contributions to your 403(b) account, but after reduction for salary
reduction contributions under any cafeteria or flexible benefits plan or
401(k) plan your employer maintains); this amount must be reduced by 80% of
your employer's contribution for the year to the 403(b) retirement plan; or
(b) $30,000. (This $30,000 figure will eventually be indexed for cost-of-living
changes. However, the indexing will not begin for some years depending on
future inflation.)
There are three section 415 alternative limits, which are available only to
employees of an educational organization, a hospital, a home health service
agency, a health and welfare service agency, or a church or association of
churches. If you do not work for such an employer, the alternatives do not apply
to you.
<PAGE>
Only one alternative may be used; in other words, if you elect to use one of the
alternatives in a year, you may not use either other alternative in any other
year. This means that choosing an alternative is an important decision.
The specific limits available under the different alternatives and the rules for
electing an alternative are complex. Consult your employer or your tax adviser
for additional information.
5. How does the $9,500 limit work?
Your salary reduction contributions for any calendar year are limited to $9,50 0
(indexed for future cost-of-living increases). This $9,500 cap applies as a
maximum salary reduction contribution even though your 403(b) exclusion
allowance or 415 limit is higher. This cap applies only to salary reduction
contributions, including your contributions to another 403(b) or 401(k) plan,
not to employer contributions to a 403(b) retirement plan for you.
An increased cap is available to certain employees who meet two requirements.
First, your employer must be one of the types listed in Answer 4 (eligibility
for 415 alternatives). Second, you must have 15 or more years of service with
your employer. If you qualify, consult your employer or tax adviser for more
information.
6. If for the current year my employer or any other employer contributes to
another 403(b) account or annuity for me, must such contributions be added to
my salary reduction contributions when determining my maximum contribution?
Yes. To determine your 403(b) exclusion allowance, your 415 limit or one of the
alternatives, your employer's current contributions to a 403(b) plan or
arrangement for you must be included. (See the worksheet for an example of this
situation). If your employer has a retirement plan, you should find out whether
it is a 403(b) plan.
7. If for the current year my employer makes contributions for me to a
retirement plan that is "qualified" under section 401(a) of the Code must
such contributions be counted when determining my maximum contributions?
The rules governing the limits for combinations of plans are very difficult and
can easily be violated unless you have expert professional guidance. This is
especially important if you "control" another employer (by owning a 50% or
greater interest), for example your own consulting business, which maintains a
plan covering you in addition to your employer's 403(b) plan.
<PAGE>
State Street Research 403(b)
ACCOUNT AGREEMENT [State Street Research logo]
Article 1: Introduction
1.1 Establishment of Account. This Agreement is intended to establish a 403(b)
Custodial Account meeting the requirements of Code Section 403(b)(7) and any
other applicable requirements of the Code or ERISA. This Agreement and the
Application will be interpreted and administered so as to carry out such intent.
The Application signed by the Employee and accepted by the Custodian (or its
agent) and this Agreement (which is incorporated by reference into the
Application), as either may be amended from time to time, are the legal
documents governing the Account.
1.2 Effective Date. This Agreement will become effective on the date on which
the Custodian accepts the Application signed by the Employee. Such acceptance
may be indicated in writing by the Custodian (or its agent) or by the
Custodian's opening the Account for the benefit of the Employee. The Account
will be opened on the date, coinciding with or after the date when this
Agreement is effective, when the Custodian receives and accepts a contribution
to the Account.
Article 2: Definition
2.1 Account or Employee's Account means the account established and maintained
by the Custodian under this Agreement for the benefit of the Employee.
2.2 Agreement means this State Street Research 403(b) Account Agreement, as it
may be amended from time to time.
2.3 Application means the State Street Research 403(b) Account Application
signed by the Employee as it may be amended from time to time.
2.4 Code means the Internal Revenue Code of 1986, as it may be amended from time
to time or any successor statute enacted in lieu thereof. Reference to any
provision of the Code includes reference to a similar provision in a successor
Statute.
2.5 Custodian means the Custodian named in the Application as Custodian, and any
party serving as successor Custodian in accordance with this Agreement.
2.6 Employee means the individual who is employed by the Employer and who signed
the Application.
The Employee must be an employee of an employer described in subsection 2.7(a),
or an employee of an employer described in subsection 2.7(b) who performs
services for an educational organization (as defined in Code Section
170(b)(1)(A)(ii)).
2.7 Employer means the Employer of the Employee. The Employer must be:
(a) an organization described in Code Section 501(c)(3) exempt from taxation
under Code Section 501(a), or
(b) a state, political subdivision of a state, or an agency or
instrumentality of a state or political subdivision of a state.
2.8 ERISA means the Employee Retirement Income Security Act of 1974, as it may
be amended from time to time.
2.9 Fund or Funds means one or more mutual funds designated from time to time by
the Sponsor as available for investment by the Account under this Agreement,
provided however that shares of the Fund may legally be offered for sale in the
state where the Employee resides.
2.10 Sponsor means State Street Research Investment Services, Inc., or its
successor.
Article 3: Contributions To Account
3.1 Establishment of Account. The Custodian will open and maintain the Account
in the name of the Employee. The Employee's interest in the Account will be
nonforfeitable at all times.
3.2 Contributions to Account.
(a) Salary Reduction Contributions. The Employee and the Employer may enter
into a salary reduction agreement, and the Employer will contribute to
the Employee's Account all amounts by which the Employee's salary is
reduced under such salary reduction agreement. Any salary reduction
agreement between the Employer and the Employee will be effective only
as to amounts earned by the Employee after such agreement becomes
effective. A salary reduction agreement may not be retroactively revoked
or modified with respect to amounts already earned by the Employee.
Either the Employee or the Employer may terminate a salary reduction
agreement at the end of any payroll period, and such agreement will not
apply to compensation subsequently earned by the Employee. The Employee
may modify his salary reduction agreement at any time, but such
modification will be effective only with respect to amounts earned by
the Employee after the effective date of the modification.
Contributions on behalf of the Employee pursuant to a salary reduction
agreement for any calendar year may not exceed the amount specified in
Code Section 402(g).
(b) Employer Contributions. The Employer may make contributions to the
Account other than under a salary reduction agreement with the Employee.
(c) Transfers or Rollovers. The Employee may by appropriate instructions
direct a transfer or direct rollover to the Account from an existing
custodial account described in Code Section 403(b)(7) or any annuity
contract described in Code Section 403(b)(1). Transfers must be in cash.
The Custodian will accept cash rollover contributions from the Employee
provided such amounts constitute rollover amounts under Code Section
403(b)(8) or rollover contributions under Code Section
408(d)(3)(A)(iii).
Transfers or rollovers will be accepted only if the Employee verifies
that the 403(b) account or annuity from which the transfer or rollover
is being made does not contain withdrawal or distribution restrictions
that are more restrictive than those contained herein. The Employee will
be responsible for insuring such a transfer or rollover satisfies the
applicable provisions of the Code in order to be a tax-free transaction.
Article 4:Investment Of Contributions
4.1 Purchase of Shares. As soon as is practicable after the Custodian receives a
contribution under Section 3.2, it will invest such contribution in shares or
fractional shares of one or more Funds in accordance with the Employee's
investment instructions. The Account may be invested in the shares of more than
one Fund provided that any applicable minimum investment requirements are met.
The Employee's initial investment instructions for the investment of
contributions to his Account will be specified in the Application for the
Account, and such instructions will remain in effect until the Custodian
receives new instructions, in writing or (if permitted)by telephone or other
electronic means, acceptable to the Custodian. If any instructions received by
the Custodian are incomplete or ambiguous in the judgment of the Custodian, the
Custodian may continue to invest contributions to the Account in accordance with
the Employee's most recent investment instructions (if any) until such
incompleteness or ambiguity has been resolved to the Custodian's satisfaction;
alternatively, the Custodian may return any contributions received for the
Employee's Account or may hold such contributions in a money market fund or
uninvested until such incompleteness or ambiguity has been resolved. In either
event, the Custodian will have no liability for interest or for loss or changes
in investment values of Fund shares which occur.
<PAGE>
Any shares of a Fund held hereunder for the Employee's Account may be registered
in the name of the Custodian or its nominee and will be held in uncertificated
form.
4.2 Reports and Voting of Securities. The Custodian will deliver to the
Employee or, if applicable, his or her Beneficiary, all notices or reports to
shareholders, prospectuses, financial statements, proxies and proxy solicitation
materials received by it with respect to shares of a Fund held in the Employee's
Account. The Custodian will vote shares in accordance with the timely
instructions of the Employee (or, if applicable, Beneficiary) as expressed in a
proxy, if received. If no timely instructions are received from the Employee (or
Beneficiary), the Custodian may vote such shares in such manner as it deems
appropriate, including "present" or in accordance with the instructions of the
Sponsor (provided that the Custodian will not take any action with respect to
voting which would render it an "affiliated person" as defined in the Investment
Company Act of 1940, as amended).
4.3 Dividends. The Custodian will invest all dividends and capital gains or
other distributions received on the shares of a Fund held in the Account in
additional shares and fractional shares of that Fund.
4.4 Change of Investments. Subject to any minimum investment requirement
applicable to a Fund, an Employee (or his or her Beneficiary, if the Employee is
deceased) may at any time direct the Custodian to exchange all or a specified
portion of the shares of a Fund in the Employee's Account for shares and
fractional shares of one or more other Funds.
The Employee (or Beneficiary) shall give such directions, by written or (if
permitted) telephonic notice or other electronic means, acceptable to the
Custodian, and the Custodian will process such directions as soon as practicable
after receipt thereof. If any such exchange instructions are incomplete or
ambiguous in the judgment of the Custodian, the Custodian may refrain from
carrying out any exchange until such incompleteness or ambiguity has been
resolved to its satisfaction, without liability for any loss or change in
investment values which occur.
Any sales or redemption fee or other charge payable in connection with such
exchange will be paid from the Employee's Account.
Article 5: Withdrawals
5.1 Instructions to Custodian. The Custodian will process written directions
from the Employee to make withdrawals. However, the Employee must insure that
withdrawals directed by the Employee comply with the requirements of this
article. No withdrawals will be processed upon the death of the Employee unless
the Custodian has been notified in writing of the Employee's death, and the
Custodian has been provided with verification of such death and of the due
authority of the person requesting the withdrawal which is adequate in the
Custodian's opinion.
5.2 Withdrawals by Employee. The Employee may make withdrawals from his Account
at the time(s) directed by the Employee on a form filed with the Custodian,
subject to the provisions of this section.
(a) Events Permitting Withdrawal. No withdrawal may be made before the
earliest of:
(i) the date the Employee reaches age 59-1/2;
(ii) the date the Employee terminates service with the Employer for any
reason, including retirement;
(iii) the date the Employee becomes disabled; as used in this subsection
(iii), "disabled" means unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or to be of
long-continued and indefinite duration; the Custodian may require the
Employee to furnish a certificate of a licensed physician stating that
the Employee is so disabled or may require the Employee to provide
satisfactory evidence that the Employee has been awarded Social
Security disability benefits before processing any withdrawals on
account of the Employee's disability; or
(iv) the date the Employee encounters financial hardship within the meaning
of Code Section 403(b)(7)(A)(ii); before processing a hardship
withdrawal, the Custodian may require the Employer to provide a
certificate of an independent person appointed by the Employer,
stating that the Employee has a financial hardship and the amount
needed to meet the financial hardship, or the Custodian may rely upon
the representations and statements of the Employee. Hardship
withdrawals are limited to the Employee's salary reduction
contributions (no earnings).
(b) Withdrawal of Excess Contributions or Deferrals. If for any taxable
year, contributions to the Employee's Account include an amount that
is an excess contribution under Code Section 4973, the Employee may
notify the Custodian to pay such amount (plus earnings) to the Em
ployee and the Custodian will process such withdrawal. Alternatively
the Employee may designate such amount as a contribution for a
subsequent taxable year.
If, on or before March 1 following the close of a calendar year, the Employee
notifies the Custodian in writing that an amount in the Account constitutes a
deferral (including salary reduction contributions) in excess of the limit set
forth in Code Section 402(g) (generally, $9,500, indexed as provided in such
Code section) and requests to withdraw such amount (plus earnings), the
Custodian will process such withdrawal and pay such amount (and any earnings
allocable to such amount) on or before the next following April 15.
(c) Required Start of Withdrawals. An Employee must begin taking
withdrawals from his Account no later than the April 1 of the year
following the year in which the Employee reaches age 70-1/2 or
(effective January 1, 1997), if later, the Employee's date of
retirement from the Employer, in accordance with the minimum
withdrawal rules applicable to 403(b) custodial accounts (compliance
with such rules is the responsibility of the Employee or Beneficiary).
5.3 Form of Distribution. The Employee may elect to receive the assets of his
Account in cash or in shares, in either or any combination of the following
forms (as directed by the Employee):
(a) a single sum;
(b) in monthly, quarterly or annual installment payments over a period
certain specified by the Employee, but not exceeding the life
expectancy of the Employee or the joint life and last survivor
expectancy of the Employee and his designated beneficiary or such
shorter period as is necessary to meet any applicable minimum
distribution requirement under Code Section 403(b)(10) and regulations
thereunder. The life expectancy of the Employee or the joint life and
last survivor expectancy of the Employee and his designated
beneficiary will be determined at the time of the first mandatory
distribution from the Account; life expectancies of the Employee and
his spouse will not be recalculated annually thereafter (unless the
Employee or spouse elects to recalculate--which election may be made
by calculating the amount of the required withdrawal using
recalculated life expectancies). Only life expectancies of the
Employee or spouse (not any other Beneficiary) may be recalculated.
Life expectancies will be determined in accordance with applicable
regulations. If the Employee elects to receive installments in
accordance with this subsection (b), the amount of any installment
will be calculated by dividing the value of the assets in the Account
by the number of installments remaining in the specified period
certain.
The Custodian will not be required to make any distributions, in the absence of
written instructions from the Employee. However, if the Employee does not make
an election specifying the form of payment within the prescribed time, the
Custodian may either assume that the Employee is satisfying all applicable
requirements through withdrawals from another 403(b) account or annuity, or may
distribute the assets of the Employee's Account to the Employee beginning as
soon as practicable thereafter in annual installments for ten years or, if
shorter, for the number of years in the Employee's life expectancy.
5.4 Distributions at the Employee's Death. At the Employee's death,
distributions will be made in the form elected by the Beneficiary unless the
Employee has specified the form of distribution. The Beneficiary must notify the
Custodian in writing of the Employee's death and provide such evidence of the
Employee's death as the Custodian requests. To the extent the Beneficiary may
elect the form of distribution, the Beneficiary must provide written notice to
the Custodian listing the date on which distribution will commence, and the
manner in which and the period over which distribution will be made. Any form of
distribution must comply with the following requirements, and it is the
responsibility of the Beneficiary (or other person directing distributions) to
insure that all distributions do so comply:
(a) Death While Receiving Withdrawals Under An Installment Program. If the
Employee had already begun taking withdrawals in a program of periodic
installments from the Account after the required beginning date, the
balance remaining in the Account at the time of the Employee's
<PAGE>
death must continue to be withdrawn at least as rapidly as under the
installment schedule in effect at the time of the Employee's death.
(b) Death Before Starting Required Installment Withdrawals.
(i) If the Employee dies before starting to take installment
withdrawals from the Account or before the required beginning
date, and the Employee's spouse is not the Beneficiary, the
Employee's Account must be withdrawn by the Beneficiary either (A)
within five years after the Employee's death, or (B) if the
Beneficiary was designated by the Employee and withdrawals by the
Beneficiary begin within one year after the Employee's death, in
substantially equal annual or more frequent installments over a
period not exceeding the life expectancy of the Beneficiary (as
determined as of the date of the Employee's death using applicable
regulations).
(ii) If the Employee dies before starting to take installment
withdrawals from the Account or before the required beginning
date, and the Em ployee's spouse is the Beneficiary, the
Employee's entire Account must be distributed to the Employee's
spouse either (A) within five years after the Employee's death, or
(B) in substantially equal annual or more frequent installments
over a period not longer than the spouse's life expectancy as
determined as of the time distribution is commenced (without
annual recalculation thereafter unless the spouse elects to
recalculate), using applicable regulations, provided that
withdrawals under this clause (B) must begin on or before the
later of the date on which the Employee would have attained age
70-1/2 or one year after the Employee's death.
5.5 Incompetent Recipient. If an amount is payable to a person known by the Cus
todian to be a minor or under a legal disability, the Custodian may, in its ab
solute discretion, pay all or any part of such amount to (a) a parent of such
person, (b) the guardian, committee or other legal representative, wherever
appointed, of such person, including a custodian for such person under a Uniform
Gifts to Minors Act or similar act, (c) any person having the control and
custody of such person, or (d) to such person directly.
5.6 Distributions Pursuant to Domestic Relations or Other Court Orders. Where
required by law, the Custodian will make payments pursuant to any "qualified
domestic relations order" (as defined in ERISA) or any other domestic relation s
or other order issued by a court having authority over the Account, where
applicable. The Employer will determine whether any domestic relations order m
eets the requirements of a qualified domestic order and will notify the
Custodian.
The Employee will direct the Custodian whether or not to contest or defend
against any such order and the Custodian will do so, provided that the Custodian
will have no responsibility to so contest or defend unless it has first been
indemnified to its satisfaction by the Employee against its costs, expenses
(including attorney's fees) and other liabilities arising therefrom.
5.7 Withdrawals Payable in Cash or in Shares. All withdrawals will be paid in
cash or in shares of one or more Funds, as designated in writing by the Employ
ee or Beneficiary. When required to pay a withdrawal in cash, the Custodian will
redeem sufficient shares of one or more Funds in the Employee's Account t o
provide the amount necessary; any such redemptions will be in accordance with
the Employee's instructions (or, in the absence of such instruction, in
proportion to the value of the shares of each Fund held in the Account). Payment
in shares will be carried out by reregistering the appropriate number of shares
in the name of the Employee.
5.8 Transfer of Account. At the written direction of the Employee, the Custod
ian will redeem a portion or all of the shares of one or more Funds in the
Employee's Account and will transfer the cash received, less any charges, to the
custodian or insurer of another custodial account or annuity contract esta
blished for the benefit of the Employee under Code Section 403(b) or to the
trustee or custodian of a rollover individual retirement account specified by
the Employee. Neither the Custodian nor the Sponsor will have any responsibili
ty to determine whether such other custodial account or annuity contract or
individual retirement account or annuity meets the requirements of Code Section
403(b) or 408 or whether the transfer or rollover will constitute a tax-free
transaction.
5.9 Loans. Loans may be made to Employees on the following basis:
(a) Upon receipt of a properly completed and signed written application and
promissory note payable to the Custodian from the Employee, the
Custodian may make a loan to the Employee from his or her Account. The
minimum loan will be $1,000, or such smaller amount as the Custodian may
specify in its rules and procedures for loans. In no event will the
total of any outstanding loan or loans to the Employee exceed the lesser
of $50,000 or 50% of the balance of his or her Account. The $50,000
limitation is reduced by the excess, if any, of the highest outstanding
balance of loans from the Account during the one-year period ending on
the day before the date of the current loan over the outstanding balance
of loans from the Account on the date of the current loan. All loans
will be secured by one-half of the Employee's Account balance. Interest
and principal repayments on the loan will be credited to the Employee's
Account and will be invested in shares and fractional shares of one or
more Funds in accordance with the Employee's investment instructions
under Section 4.1 in effect at the time each loan repayment is received
by the Custodian.
(b) All loans from the Employee's 403(b) Account will bear a reasonable rate
of interest; and the manner of determining such reasonable interest rate
may be specified in the Custodian's rules and procedures.
(c) If Section 12.2 is applicable, loans will be made available to all
Employees on a reasonably equivalent basis.
(d) Any loan or loans to an Employee from his or her 403(b) Account will be
repaid by the Employee over a specified period of time, in the form and
manner specified in the Note signed by the Employee, but in no event
over a longer period than five years from the date of borrowing. Any
loan must be amortized on a substantially level basis with payments not
less frequently than monthly. In the event the Employee does not repay
all or a portion of the principal amount on such loan within the time
prescribed, he or she will continue to be liable for any balance on the
loan not paid in addition to interest owed on principal payments not
made. Any default in the payment of principal or interest on a loan from
the Employee's account will reduce the amount available in such Account
for distribution to the Employee (or the Employee's beneficiary in the
event of the Employee's death). In addition, any default which is not
cured within the period of time provided in the Custodian's rules and
procedures will be treated as a taxable distribution to the Employee (or
beneficiary, if applicable).
(e) The Custodian may prescribe such rules and procedures as are deemed
proper in order to administer the provisions of this Section 5.9, and
reserves the right to charge an administration fee for processing and
maintaining such loans.
5.10 Direct Rollovers. Notwithstanding any provision of this Agreement to the
contrary that would otherwise limit a distributee's election under this section,
effective for distributions or withdrawals from the Employee's Account on or
after January 1, 1993, a distributee may elect (at the time and in the manner
specified by the Custodian) to have any portion of an eligible rollover
distribution paid directly to an eligible retirement plan specified by the
distributee in a direct rollover.
For purposes of this section, the following terms have the meaning given.
(a) Eligible rollover distribution means any withdrawal or distribution of
all or any portion of the amount in the Employee's Account, except that
an eligible rollover distribution does not include: any withdrawal or
distribution that is one of a series of substantially equal periodic
payments (not less frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or joint life
expectancies) of the distributee and the distributee's designated
beneficiary, or for a specified period of ten years or more; any
withdrawal or distribution to the extent such distribution is required
under Code Section 403(b)(10); and the portion (if any) of any
withdrawal or distribution that is not includable in gross income.
(b) Eligible retirement plan means an individual retirement account
described in Code Section 408(a), an individual retirement annuity
described in Code Section 408(b), or an arrangement described in Code
Section 403(b), that accepts the distributee's eligible rollover
distribution. However, in the case of an eligible rollover distribution
to the surviving spouse, an eligible retirement plan is an individual
retirement account or individual retirement annuity.
(c) Distributee means the Employee. In addition, the Employee's surviving
spouse and the Employee's spouse or former spouse who is the alternate
payee under a qualified domestic relations order, as defined in Code
Section 4l4(p) (if applicable), are distributees with regard to the
interest of the spouse or former spouse.
(d) Direct rollover means a payment from the Employee's account to the
eligible retirement plan specified by the distributee.
Article 6: Custodian
6.1 Duties. The Custodian will perform the following duties related to the
administration of the Employee's Account:
(a) Receive contributions under Section 3.2 (or, if applicable, loan
repayments), invest such contributions (or repayments) in shares of one
or more Funds in accordance with the Employee's investment instructions,
and credit such shares to the Employee's Account;
(b) Maintain custody of the assets in the Account;
(c) Collect income and reinvest such income as provided in this Agreement;
(d) Execute orders for purchase, sale or exchange of shares of Funds in
accordance with the Employee's instructions and make settlements in
accordance with general practice;
(e) Maintain records of all transactions in the Account;
(f) Not less frequently than annually, provide the Employee appropriate
statements of the Account showing all transactions of the Account;
(g) File with the Internal Revenue Service and/or any other government
agency such returns, reports, forms, and other information as may be
required of it as Custodian;
(h) Perform such other duties and services as may be necessary under this
Agreement.
The Custodian may appoint one or more agents, attorneys or contractors,
including the Sponsor (or a contractor or affiliate of the Sponsor), to carry
out any of its duties hereunder.
6.2 Share Redemptions. If cash is needed to pay taxes, fees, or other expenses
properly chargeable to the Account or to make payments to the Employee or his
Beneficiary under Article 5, the Employee (or Beneficiary, if applicable) will
instruct the Custodian in writing (or, if applicable, by telephone or other
electronic means) which Fund should be redeemed or sold if the Account is
invested in more than one Fund. In the absence of such written instructions, the
Custodian will redeem shares of all Funds in the Account in proportion to the
value of the shares of each such Fund held in the Account.
6.3 Limitations on Liabilities and Duties.
(a) The Custodian will be fully protected in acting in accordance with and
in reliance upon any document, order or other direction believed by the
Custodian to be genuine and properly given. Conversely, the Custodian
will be fully protected in not acting in the absence of proper
instructions or when it believes that any document, order or other
direction either is not genuine or was not properly given.
(b) To the extent permitted by law, 30 days after providing to the Employee
any statement (whether required under Section 6.1(f), or otherwise), the
Custodian will be released and discharged from all liability to the
Employee and any other person as to the matters contained in such
statement unless the Employee files written objections with the
Custodian within such 30-day period.
(c) The Employee (or Beneficiary) will be solely responsible for his
investment directions and the selection of Fund(s). The Custodian and
the Sponsor will not be under any fiduciary duty to the Employee (or
Beneficiary) with respect to the selection of investments (or otherwise)
or be liable for any loss or diminution in value incurred on account of
a selected investment.
(d) Neither the Custodian nor the Sponsor will have any responsibility for
determining the proper amount of any contribution or for collecting any
contribution (or, if applicable, loan repayment) from the Employer or
the Employee. Neither will have any responsibility for determining
whether the amount of any contribution is within any applicable
limitation under the Code. The Employee will have sole responsibility
for the computation of the Employee's exclusion allowance under Code
Section 403(b)(2), the limitation(s) on contributions under Code Section
415(c), any election available to the Employee under Code Section 415,
any limit on elective deferrals (including salary reduction
contributions) under Code Section 402(g), and all matters relating to
any tax consequences with respect to contributions, earnings,
withdrawals, loans or loan repayments, transfers or rollovers to or from
the Account (whether on account of the amount or time thereof or
otherwise).
(e) Neither the Custodian nor the Sponsor will be responsible for
determining the propriety, amount or timing of any withdrawal by the
Employee (or Beneficiary); in particular, neither the Custodian nor the
Sponsor will be responsible for compliance with the minimum withdrawal
rules of Code Section 403(b)(10) and will be entitled to assume that the
Employee (or Beneficiary) is satisfying such requirements from another
403(b) arrangement if the Employee (or Beneficiary) does not comply with
such requirements by withdrawals from the Account.
(f) The Custodian will not be required to carry out any instructions not
given in accordance with this Agreement. Neither the Custodian nor the
Sponsor will be liable for loss of income, or for appreciation or
depreciation in share value resulting from the Custodian's failure to
follow instructions not given in accordance with this Agreement.
(g) The Custodian will have no responsibility to pay any withdrawal unless
directed by the Employee or Beneficiary and unless the Employee's or
Beneficiary's written withdrawal instructions state the reason for the
withdrawal and contain all signature guarantees and other documents
(including proof of any legal representative's authority) requested by
the Custodian.
(h) Neither the Custodian nor the Sponsor will have any liability to the
Employee or Beneficiary for any tax penalty or other damages resulting
from any inadvertent failure by the Custodian to pay a withdrawal when
requested.
(i) To the extent permitted by law, the Employee agrees to indemnify the
Custodian, Sponsor and Funds ("Indemnitees") and hold them harmless from
any and all liability whatsoever which may arise either (i) in
connection with this Agreement and the Employee's Account (except
liability arising from the gross negligence or willful misconduct of any
Indemnitee) or (ii) with respect to making or failing to pay any
withdrawal, other than for failure to make any distribution in
accordance with instructions therefor which are in full compliance with
this Agreement.
(j) The Custodian will not be obligated to commence or to defend a legal
action or proceeding in connection with this Agreement unless the
Custodian agrees to do so and is indemnified to its satisfaction.
(k) Neither the Employer nor the Sponsor will have any responsibility or
liability for any acts or omissions of the Custodian hereunder.
6.4 Compensation. The Custodian will receive the fees specified in its then c
urrent fee schedule. The Custodian may substitute a revised fee schedule from
time to time upon 30 days written notice to the Employee. The Custodian will be
entitled to such reasonable additional fees as it may from time to time
determine for services required of it in addition to those reflected in the fee
schedule.
6.5 Resignation and Removal. The Custodian may resign by giving at least 30 d
ays written notice to the Employee at his last known address as shown on the
Custodian's records. The Sponsor may remove the Custodian hereunder by giving at
least 30 days written notice to the Custodian and the Employee at his last known
address as shown on the records of the Custodian or Sponsor. In each case, the
Sponsor will designate a successor custodian which successor custodian accepts
such appointment. Any Custodian appointed hereunder must be a bank or other
person who meets the requirements of Code Section 401(f)(2). If the Sponsor
fails to appoint a successor custodian in accordance with the preceding two
sentences, the Custodian may do so, or will have the right to apply to a court
of competent jurisdiction for the appointment of a successor.
On the effective date of its resignation or removal, the incumbent Custodian
will transfer to the successor custodian the assets and records (or copies
thereof) of the Account; provided, however, that the Custodian may retain
whatever assets it deems necessary for payment of its fees, costs, expenses,
compensation, and any other liabilities which constitute a charge on or against
the assets of the Account or on or against the Custodian.
<PAGE>
Article 7: Fees, Taxes, And Other Expenses
Any income or other taxes that may be levied or assessed upon the Account
(including any transfer taxes incurred in connection with the investment and
reinvestment of Account assets), expenses, fees and administrative costs
incurred by the Custodian in the performance of its duties (including fees for
legal services rendered to the Custodian), and the Custodian's compensation
under Section 6.4, will constitute a charge upon the assets of the Account. If
not paid by the Employee within 30 days after being billed therefor by the
Custodian, the Custodian will withdraw such fee, tax or expense from the Account
and may redeem sufficient shares of any Fund held in the Account to effect such
payment without liability for any loss incurred thereby.
Article 8: Protection Of Account
Except as specifically
permitted hereunder, no part of the Account will be used for purposes other than
for the exclusive benefit of the Employee. No right or benefit under this
Agreement will be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, or charge, and any attempt at such
will be void. No right or benefit hereunder will be subject to the debts,
contracts, liabilities, engagements or torts of the person who is entitled to
such right or benefit, and no such right or benefit shall be subject to
attachment or legal process for or against such person. However, the Custodian
will carry out the requirements of any qualified domestic relations or other
court order relating to the Account.
Article 9: Beneficiary Designation
Each Employee may submit to the Custodian a signed written designation of bene
ficiary acceptable to the Custodian. Any such designation of beneficiary will be
effective when filed with the Custodian during the Employee's lifetime. Whether
or not fully dispositive of the Account, the most recently filed designation of
beneficiary accepted by the Custodian will revoke all previously filed
designations. Any amount payable as a result of the Employee's death that is not
disposed of by a designation of beneficiary, for any reason whatsoever, will be
paid to the Employee's estate. If a Beneficiary dies while receiving
distributions, the portion of the Account to which the Beneficiary would have
been entitled (had he or she survived) shall be paid to the Beneficiary's
beneficiary or beneficiaries (or to the Beneficiary's estate) in a lump sum
within 90 days after the Custodian receives notification and evidence acceptable
to it of the Beneficiary's death.
Article 10: Amendment
10.1 Amendment. The Sponsor may amend this Agreement in its entirety or any por
tion thereof. The Sponsor will provide copies of such amendment to the Employer
and/or Employee. Nothing in this Agreement will impose on the Sponsor an
affirmative obligation to amend the Agreement.
10.2 Limitations. No amendment will be made:
(a) Which would cause or permit any part of the Account to be diverted to
purposes other than for the exclusive benefit of the Employee (or
Beneficiary), or cause or permit any portion of such assets to revert to
or become the property of the Employer,
(b) Which would increase the duties or responsibilities of the Custodian
without its written consent, or
(c) Which would retroactively deprive any Employee of any benefit to which
he or she was entitled under the Agreement, unless such amendment is
necessary, in the opinion of counsel to the Sponsor, to conform the
Agreement to, or satisfy the conditions of, Code Section 403(b) or any
other applicable law.
Article 11: Termination
11.1 Automatic Termination on
Distribution. This Agreement will terminate when all the assets held in the
Account have been distributed or otherwise transferred out of the Account.
11.2 Termination on Disqualification. This Agreement will terminate if, after
notification by the Internal Revenue Service that the Employee's Account does
not qualify under Code Section 403(b)(7), the Sponsor does not make such
amendments as are necessary to so qualify the Account. On such termination of
this Agreement, the Custodian will distribute all assets in an Account to the
Employee or, in the event of the Employee's death, to the Beneficiary, subject
to the Custodian's right to reserve funds as provided in Section 6.5.
11.3 Survival of Indemnification. Notwithstanding Sections 11.1 and 11.2,
Section 6.3(i) will survive the termination of this Agreement.
Article 12: Miscellaneous
12.1 Applicable Law. This Agreement will be construed, administered and
enforced in accordance with the laws of the Commonwealth of Massachusetts.
Any action concerning the Account or this Agreement must be brought in a state
or federal court located in such Commonwealth.
12.2 Employer Plan. In any instance where the Account is part of an employee
pension benefit plan within the meaning of Section 3(2) of ERISA (and
regulations thereunder) maintained by the Employer, the following provisions
will apply:
(a) The Employer will be the "plan administrator" within the meaning of
ERISA and will be responsible for compliance with the reporting and
disclosure and other responsibilities imposed on the plan administrator
under ERISA.
(b) If the Employee is married on the date that any distributions are made
from the Account to the Employee, such distribution will be made by
purchasing an annuity contract from an insurance company and
distributing such contract to the Employee; the form of payment under
such contract will meet the requirements of a joint and survivor annuity
under Section 205 of ERISA. However, the preceding sentence will not
apply if the Employee elects another form of payment permitted under
Section 5.3 of this Agreement and the Employee's spouse consents thereto
in writing. Notifications concerning such an election and consent by the
Employee's spouse will be in accordance with Section 205 of ERISA and
regulations thereunder.
If an Employee dies before the commencement of distributions to the Em
ployee from the Account, the Beneficiary will be the Employee's spouse
if the Employee is married, and the form of payment to the spouse will
be the purchase from an insurance company and delivery to the spouse of
an annuity contract providing for periodic payments to the spouse for
the spouse's lifetime. However, the Employee may designate a different
Beneficiary or the Employee or spouse may designate a different form of
payment provided that the notifications and procedures for spousal
consent under Section 205 of ERISA and regulations thereunder are
complied with.
No loan under Section 5.9 will be made from the Account in the case of a
married Employee unless the Employee's spouse consents to the loan.
(c) The plan administrator will determine whether any domestic relations
order purporting to award all or any portion of the Account to anyone
other than the Employee is a "qualified domestic relations order"within
the meaning of Section 206 of ERISA.
(d) The limitation provided in the third paragraph of Section 3.2(a) will be
applied taking into account salary reduction contributions on behalf of
the employee under all plans or arrangements maintained by the Employer.
(e) Contributions to an Employee's Account must be in accordance with the
plan document adopted by the Employer (which may be a separate plan
document, or may be this Agreement with such additional provisions
relating to eligibility, participation, contributions and other matters
as the Employer may adopt); the Employer will be responsible for the
plan's compliance with all applicable provisions (including those
relating to nondiscrimination) of the Code and ERISA.
12.3 Change of Address. The Employer or the Employee will notify the Custodian
in writing of any change of address within 30 days of such change.
12.4 Notice. Any notice from the Custodian or Sponsor to the Employee under this
Agreement will be effective when sent by U.S. mail to the address of the
Employer or Employee as then shown on the Custodian's or Sponsor's records. Any
notice to the Custodian under this Agreement will be by first class mail
addressed to its home office.
12.5 Successors. This Agreement will be binding upon and inure to the benefit of
the successors in interest of the parties hereto.
12.6 Separability. If any provision of this Agreement is held invalid or illegal
for any reason, such determination will not affect any remaining provisions of
this Agreement, but this Agreement will be construed and enforced as if such
invalid or illegal provision has never been included in this Agreement.
<PAGE>
[Graphic: Window slightly open]
<PAGE>
[State Street Research logo]
A MetLife Company
This brochure must be preceded or accompanied by the relevant fund
prospectus(es), which include(s) investment policies, sales charges and
expenses. Please read the prospectus(es) carefully before investing.
Control Number: 3494-961107(1297) SSR-LD 403B-447E-1096
#
First Amended and Restated
Multiple Class Expense Allocation Plan
WHEREAS, State Street Research Financial Trust, an unincorporated
association of the type commonly known as a business trust organized under the
laws of the Commonwealth of Massachusetts (the "Trust"), engages in business as
an open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "Act");
WHEREAS, the Trust (i) is authorized to issue shares of beneficial
interest ("Shares") in separate series, with the Shares of each such series
representing the interests in a separate portfolio of securities and other
assets, and (ii) is or may be authorized to divide the Shares within each such
series into two or more classes;
WHEREAS, the Trust has established one or more portfolio series as of
the date hereof (such portfolios being referred to collectively herein as the
"Initial Series", such series, together with all other series subsequently
established by the Trust and made subject to this Plan, being referred to herein
individually as a "Series" and collectively as the "Series"), and such Series,
and Series of affiliated investment companies, have or may establish classes
thereof designated as "Class A," "Class B," "Class C," "Class D" and "Class E"
shares;
WHEREAS, prior to the adoption of Rule 18f-3 by the Securities and
Exchange Commission the Trust received an Order from the Securities and Exchange
Commission under Section 6(c) of the Act for an exemption from Sections
2(a)(32), 2(a)(35), 18(f), 18(g), 18(i), 22(c) and 22(d) of the Act and Rule
22c-1 thereunder to permit the Trust to issue multiple classes of shares
representing interests in the same portfolio of securities, assess a contingent
deferred sales charge ("CDSC") on certain redemptions of shares, and waive the
CDSC in certain cases; and
WHEREAS, the Trustees have determined to operate under Rule 18f-3 and
pursuant to such Rule the Board of Trustees as a whole, and the Trustees who are
not interested persons of the Trust (as defined in the Act) (the "Qualified
Trustees"), having determined in the exercise of their reasonable business
judgment this Plan is in the best interest of each class of the Initial Series
individually and the Initial Series as a whole, have accordingly approved this
Plan.
NOW, THEREFORE, Trust hereby adopts this Plan in accordance with Rule
18f-3 under the Act, on the following terms and conditions:
1. Class Differences. Each class of Shares of each Initial Series shall
represent interests in the same portfolio of
<PAGE>
investments of Initial Series and shall be identical in all respects, and except
as otherwise set forth in this Plan, shall differ solely with respect to: (i)
arrangements for shareholder services or the distribution of Shares, or both, as
provided for in Sections 2 and 3 of this Plan; (ii) the exclusive right of a
Class to vote on certain matters relating to the Plan of Distribution Pursuant
to Rule 12b-1 adopted by the Trust with respect to such Class; (iii) such
differences relating to purchase minimums, sales charges and eligible investors
as may be set forth in the Prospectuses and Statement of Additional Information
of the Initial Series, as the same may be amended or supplemented from time to
time (the "Prospectuses" and "SAI"); (iv) the different exchange privileges of
the classes of Shares; (v) the fact that only certain classes will have a
conversion feature; and (iv) the designation of each Class of shares.
2. Differences in Distribution and Shareholder Services. Each Class of
Shares of the Initial Series shall have a different arrangement for shareholder
services or the distribution of Shares, or both, as follows:
Class A Shares shall be sold subject to a front-end sales charge as
set forth in the Prospectuses and SAI with respect to the applicable Initial
Series. Class A, Class B and Class D Shares shall be sold subject to a
contingent deferred sales charge as set forth in the Prospectuses and SAI with
respect to the applicable Initial Series. Class A, B and D Shares shall be
subject to a service fee of up to 0.25% of the nets assets of the Initial Series
allocable to such Class of Shares. Class B and D Shares shall also be subject to
an annual distribution fee of up to 0.75% of the nets assets of the Initial
Series allocable to such Class of Shares. Such service and distribution fees may
be used to finance activities in accordance with Rule 12b-1 under the Act and
the Plan of Distribution pursuant to Rule 12b-1 adopted by the Trust.
3. Allocation of Expenses. Expenses of the Series shall be allocated as
follows:
(a) Class Expenses. Expenses relating to different arrangements for
shareholder services or the distribution of Shares, or both, shall be allocated
to and paid by that class. A class may pay a different share of other expenses,
not including advisory or custodial fees or other expenses related to the
management of a Series' assets, if such expenses are actually incurred in a
different amount by that class, or if the class receives services of a different
kind or to a different degree than other classes.
(b) Other Allocations. All expenses of the Series not allocated to a
particular class pursuant to Sections 2 and 3(a) of this Plan shall be allocated
to each class on the basis of the net asset value of that class in relation to
the net asset value of the Series or on the basis of the Dividend Assets of that
2
<PAGE>
class in relation to the aggregate Dividend Assets of the Series for periodic
income distribution funds and daily income distributions funds, respectively.
"Dividend Assets" are defined as the net asset value of those shares eligible to
receive a dividend on the current day as set forth in the Fund's prospectus.
Notwithstanding the foregoing, the underwriter, adviser, or other provider of
services to a Series may waive or reimburse the expenses of a specific class or
classes to the extent permitted under Rule 18f-3 under the Act; provided,
however, that the Board shall monitor the use of such waivers or reimbursements
intended to differ by class.
4. Term and Termination.
(a) Initial Series. This Plan shall become effective with respect to
the multiple classes, if any, of the Initial Series as of May 5, 1995, and shall
continue in effect with respect to each Class of Shares of the Initial Series
(subject to Section 4(c) hereof) until terminated in accordance with the
provisions of Section 4(c) hereof.
(b) Additional Series or Classes. This Plan shall become effective
with respect to any class of the Initial Series other than Class A, Class B,
Class C, Class D, and Class E, and with respect to each additional Series or
class thereof established by the Trust after the date hereof and made subject to
this Plan, upon commencement of operations thereof or as otherwise determined,
and shall continue in effect with respect to each such additional Series or
class (subject to Section 4(c) hereof) until terminated in accordance with the
provisions of Section 4(c) hereof. An addendum hereto setting forth such
specific and different terms of such additional series of classes shall be
attached to this Plan.
(c) Termination. This Plan may be terminated at any time with
respect to the Trust or any Series or class thereof, as the case may be, by vote
of a majority of both the Trustees of the Trust and the Qualified Trustees. The
Plan may remain in effect with respect to a Series or class thereof even if it
has been terminated in accordance with this Section 4(e) with respect to such
Series or class or one or more other Series of the Trust.
5. Amendments. Any material amendment to this Plan shall require the
affirmative vote of a majority of both the Trustees of the Trust and the
Qualified Trustees.
Dated: May 8, 1996
-----------
Exhibit (20)
[STATE STREET RESEARCH LOGO]
MUTUAL FUND ACCOUNT APPLICATION
Mail this application to State Street Research Shareholder Services,
P.O. Box 8408, Boston, MA 02266-8408
- --------------------------------------------------------------------------------
1 Type of Account (PLEASE PRINT FULL NAME(S) CONSISTENT WITH YOUR SIGNATURE(S)
IN SECTION 5.)
<TABLE>
<S> <C> <C>
[ ] Individual--complete (a) only [ ] Joint Tenant--complete (a & b) [ ] Gift to a Minor--complete (c) only
[ ] Trust(1)--complete (d) only [ ] Corporation(1)--complete (e) only [ ] Partnership/Other Entity--complete (e) only
</TABLE>
Note: If the investment is to be used for an Individual Retirement Account
(IRA), a separate IRA application must be used.
(1)Call 1-800-562-0032 for additional forms.
Individual or Joint Tenant
a _____________________________________________________________________________
Name of Investor Social Security Number
b _____________________________________________________________________________
Name(s) of Joint Tenant(s)
Gift to a Minor
as custodian for under the
c _____________________________________________________________________________
Name of Custodian (one only) Name of Minor (one only)
"Uniform Gifts to Minors Act"
- -------------------------------------------------------------------------------
Minor's State of Residence Minor's Social Security Number
Trust Account
d _____________________________________________________________________________
Trustee(s) Name(s)
- -------------------------------------------------------------------------------
Name and Date of Trust Agreement Tax Identification Number
Corporation, Partnership or Other Entity (Please include corporate resolution.)
e _____________________________________________________________________________
Name of Corporation or Other Entity
------------------------------------------------------------------------------
Type of Business (specify corporation, Tax Identification Number
partnership, estate, guardian, etc.)
-----------------------------------------------------------------------------
2 Your Mailing Address (PLEASE PRINT.)
( )
- -------------------------------------------------------------------------------
Street Address Home Telephone Number
( )
- -------------------------------------------------------------------------------
City State ZIP Business Telephone Number
Residency [ ] U.S. (State ______) [ ] Other_____________________________
Specify Country
- --------------------------------------------------------------------------------
3 Fund Selection(s) and Distribution Option(s) (Choose only one distribution
option per Fund; see Fund prospectus for minimum initial investment
requirements.)
[ ] By Mail--Make check payable to "State Street Research" [ ] By Dealer
[ ] By Federal Funds Wire (Control #___________)
<TABLE>
<CAPTION>
Class Wire Order
Fund Name Designation(2) Amount Distribution Option by Dealer
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends & Dividends in Dividends & Dividend
Capital Gains Cash; Capital Capital Gains Allocation Confirmation
A B D Reinvested Gains Reinvested(3) in Cash Plan (DAP)(4) Number
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------- [ ] [ ] [ ] $------- [ ] [ ] [ ] [ ] -----------
- -------------- [ ] [ ] [ ] $------- [ ] [ ] [ ] [ ] -----------
- -------------- [ ] [ ] [ ] $------- [ ] [ ] [ ] [ ] -----------
- -------------- [ ] [ ] [ ] $------- [ ] [ ] [ ] [ ] -----------
</TABLE>
(2)All Money Market Fund investments will purchase Class E shares. Be sure to
designate share class for Money Market Fund DAP allocations.
(3)Does not apply to Money Market Fund.
(4)Dividend Allocation Plan: The Transfer Agent is authorized to invest all
dividends and distributions from ___________________________________________
Fund Name
in the following Eligible Fund: ____________________________________________
Fund Name Account Number
(Fund must meet (if existing
minimum investment account)
requirements)
Authorization of Dividend Allocation Plan constitutes an acknowledgment that the
shareholder has received the current prospectus of the Fund to be acquired.
Except for Money Market Fund Class E, DAP must be allocated to same class
designation.
<PAGE>
4 _____________________________________________________________________________
Reduced Sales Charges (Applies to Class A shares only)
[ ] Right of Accumulation (ROA): I apply for Right of Accumulation reduced sales
charges subject to the Transfer Agent's confirmation of the following holdings
of certain designated persons, e.g. family members, in the Eligible Funds:
- --------------------------------------------------------------------------------
Name on Account Account Number
- --------------------------------------------------------------------------------
Name on Account Account Number
[ ] Letter of Intent (LOI): Although I am not obligated to purchase and the
Funds are not obligated to sell, I intend to invest over a 13-month period
beginning___________, 19___ (purchase date not more than 90 days prior to this
letter) at least an aggregate of [ ] $100,000 [ ] $250,000 [ ] $500,000
[ ] $1,000,000 of Eligible Funds.
5 _____________________________________________________________________________
Your Signature (All registered shareholders must sign.)
I have received the current prospectus of the Fund and confirm that all the
information, instructions and agreements set forth hereon shall apply to the
account, and if applicable, shall also apply to any other fund account with
shares acquired upon exchange of shares of the Fund.
Under penalties of perjury, I certify that (1) the number shown on this form is
my correct taxpayer identification number (or I am waiting for a number to be
issued to me), and (2) I am not subject to backup withholding because (a) I am
exempt from backup withholding, or (b) I have not been notified by the Internal
Revenue Service that I am subject to backup withholding as a result of a failure
to report all interest or dividends, or (c) the IRS has notified me that I am no
longer subject to backup withholding.
Certification instructions: You must cross out item (2) above if you have been
notified by the IRS that you are currently subject to backup withholding because
of underreporting interest or dividends on your tax return.
The Internal Revenue Service does not require your consent to any provision of
this document other than the certification required to avoid backup withholding.
- --------------------------------------------------------------------------------
Signature of Shareholder (exactly as your name appears in Section 1) Date
- --------------------------------------------------------------------------------
Signature of Joint Tenant (if any) Date
6 _____________________________________________________________________________
Signature Guarantee and Dealer Information (Complete section (a) or (b) as
applicable.)
The undersigned guarantees the signature and legal capacity of the shareholder.
a. Signature Guarantee (fill out if your Dealer does not complete section below)
- --------------------------------- -------------------------------------------
Name of Bank or Street Address
Eligible Guarantor
- --------------------------------- -------------------------------------------
Authorized Signature of Bank City State ZIP
or Eligible Guarantor
b. Dealer Information and Signature Guarantee (for Dealer use only)
- --------------------------------- -------------------------------------------
Dealer Name Branch Office Number
- --------------------------------- -------------------------------------------
Street Address of Home Office Address of Branch Office Servicing Account
- --------------------------------- -------------------------------------------
City State ZIP City State ZIP
- --------------------------------- -------------------------------------------
Authorized Signature of Dealer Registered Representative's Name and Number
If this application is for an account introduced through the above-named Dealer,
the Dealer agrees to all applicable provisions in this application and in the
Prospectus, and represents that it has provided a current Prospectus to the
Applicant and that the application is properly executed by a person authorized
by the Dealer to guarantee signatures. The Dealer warrants that this application
is completed in accordance with the shareholder's instructions and agrees to
indemnify the Fund, any other Eligible Funds, the Distributor, the Investment
Manager, State Street Research Shareholder Services and the Transfer Agent for
any loss or liability from acting or relying upon such instructions and
information. The terms and conditions of the Distributor's currently effective
Selected Dealer Agreement or sales agreement are included by reference in this
section. The Dealer represents that it has a currently effective Selected Dealer
Agreement or sales agreement with the Distributor authorizing the Dealer to sell
shares of the Fund and the Eligible Funds, and that it may lawfully sell shares
of the designated Fund(s) in the state designated as the Applicant's address of
record.
<PAGE>
Application for Optional Shareholder Services
Your Bank Account (You must complete this section if you request Section A, B, D
or E.)
Type of Bank Account: [ ] Checking [ ] NOW or Money Market
- --------------------------------------------------------------------------------
Account Title (print exactly as it Bank Routing Number
appears on bank records)
- --------------------------------------------------------------------------------
Bank Account Number Bank Name
- --------------------------------------------------------------------------------
Bank Address City State ZIP
- --------------------------------------------------------------------------------
Depositor's Signature(s) (exactly Date
as it appears on bank records)
- --------------------------------------------------------------------------------
Depositor's Address City State ZIP
You must attach a blank check marked "VOID."
A _____________________________________________________________________________
Telephone Redemption and Exchange Privileges (Service available only for shares
held on deposit with Transfer Agent)
None of the Transfer Agent, the Fund, any other Eligible Funds, State Street
Research Shareholder Services, the Investment Manager or the Distributor will be
liable for any loss, injury, damage or expense as a result of acting upon, and
will not be responsible for the authenticity of, any telephone instructions. I
understand that all telephone calls are tape recorded. My liability shall be
subject to the use of reasonable procedures to confirm that instructions
communicated by telephone are genuine.
Telephone Exchange By Shareholder OR DEALER
The Transfer Agent may effect exchanges for my account according to telephone
instructions FROM ME OR MY DEALER as set forth in the Prospectus, and may
register the shares of the fund to be acquired exactly the same as my existing
account. Authorizing an exchange constitutes an acknowledgment that the
shareholder has received the current prospectus of the fund to be acquired. The
account will automatically have this privilege unless it is expressly declined
by providing your initials in the space below.
I DO NOT WANT THE TELEPHONE EXCHANGE PRIVILEGE. ____ (Initial here.)
Telephone Redemption By Shareholder Only
1. Proceeds to Shareholder's Address of Record. The Transfer Agent may effect
redemptions of shares from my account according to telephone instructions from
me, as set forth in the Prospectus, and send the proceeds to my address of
record. The account will automatically have this privilege unless it is
expressly declined by providing your initials in the space below.
I DO NOT WANT THE TELEPHONE REDEMPTION PRIVILEGE (to address of record).
____ (Initial here.)
2. Proceeds to Bank Designated by Shareholder. The Telephone Redemption
Privilege (to bank designated by shareholder) is not provided automatically;
please check the box below if you want this Privilege for the account. ATTACH A
BLANK CHECK MARKED "VOID" AND FILL OUT "YOUR BANK ACCOUNT" SECTION.
The Transfer Agent may effect redemptions of shares from my
account according to telephone instructions from me, as set forth in the
Prospectus, and send the proceeds to the bank named in "Your Bank Account."
[ ] (Check here.)
B _____________________________________________________________________________
Investamatic Check Program (YOU MUST ATTACH A BLANK CHECK MARKED "VOID.")
I hereby request and authorize the bank named in "Your Bank Account" section to
pay and charge checks drawn on, or debits against, my account initiated by and
payable to the order of the mutual fund transfer agent designated by the
Distributor. I agree that the named Bank's rights in respect to each such check
or debit shall be the same as if it were a check drawn on or debit against my
account authorized personally by me. This authority is to remain in effect until
revoked by me in writing, and until the named Bank actually receives such
notice, I agree that the named Bank shall be fully protected in honoring any
such check or debit authorization. I further agree that if any check or debit
authorization be dishonored, whether with or without cause and whether
intentionally or inadvertently, the named Bank shall be under no liability
whatsoever, unless the nonpayment is because of insufficient funds. I understand
that this Program may be revoked by the Transfer Agent or the Distributor
without prior notice if any check is not paid upon presentation, and that this
Program may be discontinued by the Distributor, the Transfer Agent or me upon
thirty (30) business days' notice prior to the due date of any deposit.
<TABLE>
<S> <C> <C> <C>
$
- ----------------------------------------------------------------------------------------------------
Fund Name Class Designation Amount ($50 minimum) Account Number
$
- ----------------------------------------------------------------------------------------------------
Fund Name Class Designation Amount ($50 minimum) Account Number
------------------------------------------------------------
Total Amount of Investment: $________ Account Registration (exactly as it appears on Fund records)
</TABLE>
<TABLE>
<S> <C> <C>
[ ] Monthly Investment Date: [ ] 5th or [ ] 20th If you do not choose a date, the 5th will be chosen automatically.
[ ] Quarterly Investment Date: [ ] 5th or [ ] 20th
</TABLE>
C _____________________________________________________________________________
Checkwriting Privilege
(Available for Class A shares and
Money Market Fund Class E shares only)
[ ] I request the checkwriting feature and have
completed the signature card to the right.
- --------------------------------------------------------------------------------
Account Number (if existing account)
- --------------------------------------------------------------------------------
Account Number (if existing account)
Signature Card Complete and sign this card and return it with your application
and investment. Do not detach.
<TABLE>
<CAPTION>
Check applicable Fund(s) TO: State Street Bank and Trust Company ("Bank")
<S> <C> <C> <C> <C>
[ ] Government Income ----------------------------------------------------------------------------
[ ] NY Tax-Free Name (please print)
[ ] Money Market, Class E
[ ] High Income ----------------------------------------------------------------------------
[ ] Tax-Exempt Name (please print)
[ ] Strategic Income
----------------------------------------------------------------------------
Address City State ZIP
----------------------------------------------------------------------------
Signature (exactly as it appears in the Application, including any capacity)
----------------------------------------------------------------------------
Signature (exactly as it appears in the Application, including any capacity)
----------------------------------------------------------------------------
Indicate the number of signatures required----------------------------------
----------------------------------------------------------------------------
Tax Identification Number
</TABLE>
Corporate and other accounts must include appropriate resolution forms. In
signing this signature card, the signator(s) signifies his/her or their
agreement to be subject to the rules and regulations of State Street Bank and
Trust Company pertaining thereto, as amended from time to time, and subject to
the conditions printed on the reverse side.
<PAGE>
D _____________________________________________________________________________
Automatic Bank Connection (ABC) Not available for retirement plan accounts. YOU
MUST ATTACH A BLANK CHECK MARKED "VOID."
[ ] I authorize the Transfer Agent to liquidate $________________ (minimum-$50)
from my fund account beginning the month of ________________ to provide [ ]
monthly, [ ] quarterly, [ ] semiannual or [ ] annual payments. I would like the
following payment to be deposited directly into the bank account named in "Your
Bank Account" section. (Choose only one.)
[ ] Income dividends only
[ ] Income dividends and capital gains
[ ] Systematic Withdrawal Plan payments (see below)
Specify Fund(s):
- --------------------------------------------------------------------------------
Fund Name Class Designation
- --------------------------------------------------------------------------------
Fund Name Class Designation
I hereby authorize the Fund and the Transfer Agent to effect the deposit of the
above indicated items by initiating credit entries to my account at the bank
named in "Your Bank Account" section. The named Bank shall not be responsible
for the correctness of the items, and the Transfer Agent is authorized to
correct and adjust any incorrect items to my bank account. This authorization
may be terminated at any time by written notification to the Fund, the Transfer
Agent and the Bank.
E _____________________________________________________________________________
Systematic Withdrawal Plan (SWP) Not available for retirement plan accounts. See
the prospectus for minimum account size and maximum withdrawal amounts. YOU MUST
ATTACH A BLANK CHECK MARKED "VOID."
[ ] I authorize the Transfer Agent to liquidate shares in and withdraw cash
(minimum-$50) from my fund account beginning the month of ________________ to
provide [ ] monthly, [ ] quarterly, [ ] semiannual or [ ] annual Systematic
Withdrawal Plan (SWP) payments in the amount of $________________ to [ ] me, [ ]
the bank named in "Your Bank Account" section, or[ ]the following payee. (Note:
If you authorize a SWP, you may not receive dividend or capital gain
distributions in cash.)
- --------------------------------------------------------------------------------
Name of Payee
- --------------------------------------------------------------------------------
Street Address City State ZIP
Specify Fund(s):
- --------------------------------------------------------------------------------
Fund Name Class Designation
- --------------------------------------------------------------------------------
Fund Name Class Designation
The payment of monies is authorized by the signature(s) on the reverse side.
If the shareholder's account with the Fund is joint, all checks drawn upon this
account must include the signatures of all persons named in the account, unless
the persons signing this card have indicated on the reverse side of this card
that the Bank is authorized to accept any one signature. Each person guarantees
the genuineness of the other's signature. Checks may not be for less than $500
or such other minimum or maximum amounts as may from time to time be established
by the Fund.
The Bank is hereby appointed agent by the person(s) signing this card (the
"Depositor(s)") and, as agent, is authorized and directed to present checks
drawn on this checking account to the Fund or its redemption agent as requests
to redeem shares of the Fund registered in the name of the Depositor(s) in the
amounts of such checks and to deposit the proceeds of such redemptions in this
checking account. The Bank shall be liable only for its own negligence.
Depositor(s) hereby authorize(s) the Fund or its redemption agent to honor
redemption requests presented in the above manner by the Bank. The Fund and its
redemption agent will not be liable for any loss, expense or cost arising out of
check redemptions. If shares of the Fund are purchased by check, redemption
proceeds will ordinarily be withheld until the Fund is reasonably assured that
payment has been collected on the check. The Bank has the right not to honor
checks in amounts exceeding the value of the depositor(s) shareholder account at
the time the check is presented for payment.
The Bank reserves the right to change, modify or terminate this checking account
at any time upon notification mailed to the address of record of the
Depositor(s).
SSR-543E-197
<PAGE>
[STATE STREET RESEARCH LOGO] [METLIFE SECURITIES LOGO]
Mutual Fund Account Application
Mail this application to MetLife Securities, Inc., P.O. Box 30421, Tampa, FL
33630
[ ] New Application [ ] Change--Account #_____________________
1 _____________________________________________________________________________
Type of Account (PLEASE PRINT FULL NAME(S) CONSISTENT WITH YOUR SIGNATURE(S) IN
SECTION 6.)
<TABLE>
<S> <C> <C>
[ ] Individual--complete (a) only [ ] Joint Tenant--complete (a & b) only [ ] Gift to a Minor--complete (c) only
[ ] Trust(1)--complete (d) only [ ] Corporation(1)--complete (e) only [ ] Partnership/Other Entity--complete (e) only
</TABLE>
Note: If the investment is to be used for an Individual Retirement Account
(IRA), a separate IRA application must be used.
(1)Call 1-800-638-8378 for additional forms.
Do you have any other mutual fund accounts with State Street Research?
[ ] Yes [ ] No
Individual or Joint Tenant
a _____________________________________________________________________________
Name of Investor Social Security Number
b _____________________________________________________________________________
Name(s) of Joint Tenant(s)
Gift to a Minor
as custodian for under the
_______________________________________________________________________________
Name of Custodian (one only) Name of Minor (one only)
"Uniform Gifts to Minors Act"
_______________________________________________________________________________
Minor's State of Residence Minor's Social Security Number
Trust Account
d _____________________________________________________________________________
Trustee(s) Name(s)
_______________________________________________________________________________
Name and Date of Trust Agreement Tax Identification Number
Corporation, Partnership or Other Entity (Please include corporate resolution.)
e _____________________________________________________________________________
Name of Corporation or Other Entity
_____________________________________________________________________________
Type of Business (specify corporation, Tax Identification Number
partnership, estate, guardian, etc.)
2 _____________________________________________________________________________
Your Mailing Address (Please print.)
( )
_______________________________________________________________________________
Street Address Home Telephone Number
( )
_______________________________________________________________________________
City State ZIP Business Telephone Number
Residency [ ] U.S. (State _____) [ ] Other(2)________________________
Specify Country
(2)Call 1-800-638-8378 for additional forms.
3 _____________________________________________________________________________
Fund Selection(s) and Distribution Option(s) (Choose only one distribution
option per Fund; see Fund prospectus for minimum initial investment
requirements.)
[ ] By Mail--Make check payable to "State Street Research"
[ ] By Federal Funds Wire
<TABLE>
<CAPTION>
Class
Fund Name Designation(3) Amount Distribution Option
- ----------------------------------------------------------------------------------------------------------------------------
Dividends & Dividends in Dividends & Dividend
Capital Gains Cash; Capital Capital Gains Allocation
A B(4) Reinvested Gains Reinvested(5) in Cash Plan (DAP)6
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
________________ [ ] [ ] $____________ [ ] [ ] [ ] [ ]
________________ [ ] [ ] $____________ [ ] [ ] [ ] [ ]
________________ [ ] [ ] $____________ [ ] [ ] [ ] [ ]
________________ [ ] [ ] $____________ [ ] [ ] [ ] [ ]
</TABLE>
(3)All Money Market Fund investments will purchase Class E shares. Be sure to
designate Class A or B shares for Money Market Fund DAP allocations.
(4)For purchase of Class B shares of more than $250,000, I hereby acknowledge
that I am aware of the reduced front-end sales charges available to me for
the purchase of Class A shares, and have chosen to purchase Class B shares. I
am aware that Class B shares have higher asset-based charges than Class A
shares for the first eight years.
(5)Does not apply to Money Market Fund.
(6)Dividend Allocation Plan: The Transfer Agent is authorized to invest all
dividends and distributions from ______________________
Fund Name
in the following Eligible Fund: _______________________________________________
Fund Name (Fund must Account Number
meet minimum investment (if existing
requirements) account)
Authorization of Dividend Allocation Plan constitutes an acknowledgment that the
shareholder has received the current prospectus of the Fund to be acquired.
Except for Money Market Fund Class E, DAP must be allocated to same class
designation.
<PAGE>
4 _____________________________________________________________________________
Reduced Sales Charges (Applies to Class A shares only)
[ ] Right of Accumulation (ROA): I apply for Right of Accumulation reduced sales
charges subject to the Transfer Agent's confirmation of the following holdings
of certain designated persons, e.g. family members, in the Eligible Funds:
- --------------------------------------------------------------------------------
Name of Account Account Number
- --------------------------------------------------------------------------------
Name of Account Account Number
[ ] Letter of Intent (LOI): Although I am not obligated to purchase and the
Funds are not obligated to sell, I intend to invest over a 13-month period
beginning ___________________, 19__ (purchase date not more than 90 days prior
to this letter) at least an aggregate of [ ] $100,000 [ ] $250,000 [ ] $500,000
[ ] $1,000,000 of Eligible Funds.
5 _____________________________________________________________________________
Optional Shareholder Services
Your Bank Account (You must complete this section if you request Section A, B, C
or D below.)
Type of Bank Account: [ ] Checking [ ] NOW or Money Market
- --------------------------------------------------------------------------------
Account Title (print exactly as it Bank Routing Number
appears on bank records)
- --------------------------------------------------------------------------------
Bank Account Number Bank Name
- --------------------------------------------------------------------------------
Bank Address City State ZIP
- --------------------------------------------------------------------------------
Depositor's Signature(s) (exactly as it Date
appears on bank records)
- --------------------------------------------------------------------------------
Depositor's Address City State ZIP
YOU MUST ATTACH A BLANK CHECK MARKED "VOID."
A _____________________________________________________________________________
Telephone Redemption and Exchange Privileges (Service available only for shares
held on deposit with Transfer Agent)
None of the Transfer Agent, the Fund, any other Eligible Funds, State Street
Research Shareholder Services, the Investment Manager or the Distributor will be
liable for any loss, injury, damage or expense as a result of acting upon, and
will not be responsible for the authenticity of, any telephone instructions. I
understand that all telephone calls are tape recorded. My liability shall be
subject to the use of reasonable procedures to confirm that instructions
communicated by telephone are genuine.
Telephone Exchange By Shareholder OR DEALER
The Transfer Agent may effect exchanges for my account according to telephone
instructions FROM ME OR MY DEALER as set forth in the Prospectus, and may
register the shares of the fund to be acquired exactly the same as my existing
account. Authorizing an exchange constitutes an acknowledgment that the
shareholder has received the current prospectus of the fund to be acquired. The
account will automatically have this privilege unless it is expressly declined
by providing your initials in the space below.
I DO NOT WANT THE TELEPHONE EXCHANGE PRIVILEGE. ____ (Initial here.)
Telephone Redemption By Shareholder Only
1. Proceeds to Shareholder's Address of Record. The Transfer Agent may effect
redemptions of shares from my account according to telephone instructions from
me, as set forth in the Prospectus, and send the proceeds to my address of
record. The account will automatically have this privilege unless it is
expressly declined by providing your initials in the space below. I DO NOT WANT
THE TELEPHONE REDEMPTION PRIVILEGE (to address of record). ____ (Initial here.)
2. Proceeds to Bank Designated by Shareholder. The Telephone Redemption
Privilege (to bank designated by shareholder) is not provided automatically;
please check the box below if you want this Privilege for the account. ATTACH A
BLANK CHECK MARKED "VOID" AND FILL OUT "YOUR BANK ACCOUNT" SECTION.
The Transfer Agent may effect redemptions of shares from my account according to
telephone instructions from me, as set forth in the Prospectus, and send the
proceeds to the bank named in "Your Bank Account." [ ] (Check here.)
<PAGE>
B _____________________________________________________________________________
Investamatic Check Program (YOU MUST ATTACH A BLANK CHECK MARKED "VOID.")
I hereby request and authorize the bank named in "Your Bank Account" section to
pay and charge checks drawn on, or debits against, my account initiated by and
payable to the order of the mutual fund transfer agent designated by the
Distributor. I agree that the named Bank's rights in respect to each such check
or debit shall be the same as if it were a check drawn on or debit against my
account authorized personally by me. This authority is to remain in effect until
revoked by me in writing, and until the named Bank actually receives such
notice, I agree that the named Bank shall be fully protected in honoring any
such check or debit authorization. I further agree that if any check or debit
authorization be dishonored, whether with or without cause and whether
intentionally or inadvertently, the named Bank shall be under no liability
whatsoever, unless the nonpayment is because of insufficient funds. I understand
that this Program may be revoked by the Transfer Agent or the Distributor
without prior notice if any check is not paid upon presentation, and that this
Program may be discontinued by the Distributor, the Transfer Agent or me upon
thirty (30) business days' notice prior to the due date of any deposit.
$
- --------------------------------------------------------------------------------
Fund Name Class Designation Amount ($50 minimum) Account Number
$
- --------------------------------------------------------------------------------
Fund Name Class Designation Amount ($50 minimum) Account Number
-----------------------------------------
Total Amount of Investment: $______ Account Registration (exactly as it
appears on Fund records)
[ ] Monthly Investment Date: [ ] 5th or [ ] 20th If you do not choose a date,
the 5th will be chosen
automatically.
[ ] Quarterly Investment Date: [ ] 5th or [ ] 20th
C _____________________________________________________________________________
Automatic Bank Connection (ABC) Not available for retirement plan accounts.
YOU MUST ATTACH A BLANK CHECK MARKED "VOID."
[ ] I authorize the Transfer Agent to liquidate $ _________ (minimum-$50) from
my fund account beginning the month of _________ to provide [ ] monthly,
[ ] quarterly, [ ] semiannual or [ ] annual payments. I would like the following
payment to be deposited directly into the bank account named in "Your Bank
Account" section. (Choose only one.)
[ ] Income dividends only
[ ] Income dividends and capital gains
[ ] Systematic Withdrawal Plan payments (see below)
- --------------------------------------------------------------------------------
Fund Name Class Designation
- --------------------------------------------------------------------------------
Fund Name Class Designation
I hereby authorize the Fund and the Transfer Agent to effect the deposit of the
above indicated items by initiating credit entries to my account at the bank
named in "Your Bank Account" section. The named Bank shall not be responsible
for the correctness of the items, and the Transfer Agent is authorized to
correct and adjust any incorrect items to my bank account. This authorization
may be terminated at any time by written notification to the Fund, the Transfer
Agent and the Bank.
D _____________________________________________________________________________
Systematic Withdrawal Plan (SWP) Not available for retirement plan accounts.
See the prospectus for minimum account size and maximum withdrawal amounts.
YOU MUST ATTACH A BLANK CHECK MARKED "VOID."
[ ] I authorize the Transfer Agent to liquidate shares in and withdraw cash
(minimum-$50) from my fund account beginning the month of _____________ to
provide [ ] monthly, [ ] quarterly, [ ] semiannual or [ ] annual Systematic
Withdrawal Plan (SWP) payments in the amount of $_____________ to [ ] me, [ ]
the bank named in "Your Bank Account" section, or [ ] the following payee.
(Note: If you authorize a SWP, you may not receive dividend or capital gain
distributions in cash.)
- --------------------------------------------------------------------------------
Name of Payee
- --------------------------------------------------------------------------------
Street Address City State ZIP
- --------------------------------------------------------------------------------
Fund Name Class Designation
- --------------------------------------------------------------------------------
Fund Name Class Designation
E _____________________________________________________________________________
Checkwriting Privilege
(Available for Class A shares and Money Market Fund Class E shares only)
[ ] I request the checkwriting feature and have completed the signature card
below.
- --------------------------------------------------------------------------------
Account Number (if existing account)
- --------------------------------------------------------------------------------
Account Number (if existing account)
Signature Card Complete and sign this card and return it with your application
and investment. Do not detach.
<TABLE>
<CAPTION>
Check applicable Fund(s) TO: State Street Bank and Trust Company ("Bank")
<S> <C> <C> <C> <C>
[ ] Money Market, Class E ----------------------------------------------------------------------------
[ ] High Income Name (please print)
[ ] Tax-Exempt
[ ] Government Income ----------------------------------------------------------------------------
[ ] NY Tax-Free Name (please print)
[ ] Strategic Income
----------------------------------------------------------------------------
Address City State ZIP
----------------------------------------------------------------------------
Signature (exactly as it appears in the Application, including any capacity)
----------------------------------------------------------------------------
Signature (exactly as it appears in the Application, including any capacity)
Indicate the number of signatures required----------------------------------
----------------------------------------------------------------------------
Tax Identification Number
</TABLE>
Corporate and other accounts must include appropriate resolution forms. In
signing this signature card, the signator(s) signifies his/her or their
agreement to be subject to the rules and regulations of State Street Bank and
Trust Company pertaining thereto, as amended from time to time, and subject to
the conditions printed on the reverse side.
<PAGE>
6 _____________________________________________________________________________
Your Signature (All registered shareholders must sign.)
The undersigned confirms that all the information, instructions and agreements
set forth hereon shall apply to the account, and if applicable, shall also apply
to any other fund account with shares acquired upon exchange of shares of the
Fund.
Under penalties of perjury, I certify that (1) the number shown on this
form is my correct taxpayer identification number (or I am waiting for a number
to be issued to me), and (2) I am not subject to backup withholding because (a)
I am exempt from backup withholding, or (b) I have not been notified by the
Internal Revenue Service that I am subject to backup withholding as a result of
a failure to report all interest or dividends, or (c) the IRS has notified me
that I am no longer subject to backup withholding.
Certification instructions: You must cross out item (2) above if you have been
notified by the IRS that you are currently subject to backup withholding because
of underreporting interest or dividends on your tax return.
1. Arbitration
(i) Arbitration is final and binding on the parties.
(ii) The parties are waiving their right to seek remedies in court, including
the right to jury trial.
(iii) Pre-arbitration discovery is generally more limited than and different
from court proceedings.
(iv) The arbitrators' award is not required to include factual findings or legal
reasoning and any party's right to appeal or to seek modification of rulings by
the arbitrators is strictly limited.
(v) The panel of arbitrators will typically include a minority of arbitrators
who were or are affiliated with the securities industry.
(vi) No person shall bring a putative or certified class action to arbitration,
nor seek to enforce any pre-dispute arbitration agreement against any person who
has initiated in court a putative class action; or who is a member of a putative
class who has not opted out of the class with respect to any claims encompassed
by the putative class action until (i) the class certification is denied; or
(ii) the class is decertified; or (iii) the customer is excluded from the class
by the court. Such forbearance to enforce an agreement to arbitrate shall not
constitute a waiver of any rights under this agreement except to the extent
stated herein.
2. MetLife Securities, Inc. (hereinafter "MSI") and the purchaser of the shares,
who is the signatory below (hereinafter the "Customer"), agree that any
controversy between MSI, its employees, directors, agents, officers or
affiliates and the Customer arising out of or relating to any transactions
between such parties shall be determined by arbitration. Any arbitration
pursuant to this agreement shall be conducted before, and under the rules of,
the National Association of Securities Dealers, Inc. Judgment upon the award of
the arbitrators may be entered in any federal or state court having
jurisdiction.
3. This agreement and any arbitration hereunder shall be governed and construed
in accordance with the laws of the State of New York, United States of America,
including New York procedural and substantive arbitration laws and rules,
without giving effect to conflicts of law principles. The predispute arbitration
agreement located immediately above is accepted and agreed to. I have also
received the current prospectus of the fund and have given a check in the amount
of $_______ on this, the ________ day of __________________ 19__
The Internal Revenue Service does not require your consent to any provision of
this document other than the certification required to avoid backup withholding.
- ------------------------------- ----------------------------------------
Customer Signature (exactly as Registered Representative's Signature
your name appears in Section 1)
/s/Ralph F. Verni
- ------------------------------- ----------------------------------------
Customer Signature MetLife Securities, Inc.;
by: Ralph F. Verni,
Chairman of the Board
- -------------------------------
Capacity
7 _____________________________________________________________________________
Dealer Information and Signature Guarantee (For Dealer use only)
The Dealer agrees to all applicable provisions in this application and in the
Prospectus, guarantees the signature and legal capacity of the shareholder, and
represents that it has provided a current Prospectus to the Applicant and that
the application is properly executed by a person authorized by the Dealer to
guarantee signatures. The Dealer warrants that this application is completed in
accordance with the shareholder's instructions and information and agrees to
indemnify the Fund, any other Eligible Funds, the Investment Manager, the
Distributor, State Street Research Shareholder Services and the Transfer Agent
for any loss or liability from acting or relying upon such instructions and
information.
Signature(s) Guaranteed By
MetLife Securities, Inc.
- ------------------------------- --------------------------------------------
Dealer Name Branch Office Number
P.O. Box 30421
- ------------------------------- --------------------------------------------
Address of Home Office Address of Branch Office Servicing Account
Tampa, FL 33630
- ------------------------------- --------------------------------------------
City State ZIP City State ZIP
- ------------------------------- --------------------------------------------
Authorized Signature of Registered Representative's
Dealer - Tampa, FL Name and Number
- -------------------------------
Signature Guarantee
The payment of monies is authorized by the signature(s) on the reverse side.
If the shareholder's account with the Fund is joint, all checks drawn upon this
account must include the signatures of all persons named in the account, unless
the persons signing this card have indicated on the reverse side of this card
that the Bank is authorized to accept any one signature. Each person guarantees
the genuineness of the other's signature. Checks may not be for less than $500
or such other minimum or maximum amounts as may from time to time be established
by the Fund.
The Bank is hereby appointed agent by the person(s) signing this card (the
"Depositor(s)") and, as agent, is authorized and directed to present checks
drawn on this checking account to the Fund or its redemption agent as requests
to redeem shares of the Fund registered in the name of the Depositor(s) in the
amounts of such checks and to deposit the proceeds of such redemptions in this
checking account. The Bank shall be liable only for its own negligence.
Depositor(s) hereby authorize(s) the Fund or its redemption agent to honor
redemption requests presented in the above manner by the Bank. The Fund and its
redemption agent will not be liable for any loss, expense or cost arising out of
check redemptions. If shares of the Fund are purchased by check, redemption
proceeds will ordinarily be withheld until the Fund is reasonably assured that
payment has been collected on the check. The Bank has the right not to honor
checks in amounts exceeding the value of the depositor(s) shareholder account at
the time the check is presented for payment.
The Bank reserves the right to change, modify or terminate this checking account
at any time upon notification mailed to the address of record of the
Depositor(s).
The terms and conditions of the Distributor's currently effective Selected
Dealer Agreement are included by reference in this section. The Dealer
represents that it has a currently effective Selected Dealer Agreement with the
Distributor authorizing the Dealer to sell shares of the Fund and the Eligible
Funds, and that it may lawfully sell shares of the designated Fund(s) in the
state designated as the Applicant's address of record.
- -----------------------------------
DO NOT COMPLETE
MSI - Tampa
Dealer #____________ ST _________
Rep #______________________________
Rep Name___________________________
- -----------------------------------
CONTROL NUMBER: 3659-970115(0298)SSR-LD
ML-544E-197
<PAGE>
MetLife Securities, Inc. Customer Profile
1
- --------------------------------------------------------------------------------
Client's Name (or minor if U.G.M.A.) Age Social Security Number
- --------------------------------------------------------------------------------
Joint Tenant Name (if any, or Age Social Security Number
custodian if U.G.M.A.)
Occupation______________________________________ State of Residence_________
Name/Address of Employer________________________________________________________
________________________________________________________
Is client an associated person of a broker/dealer? [ ] Yes [ ] No
If yes, furnish name and address________________________________________________
2 Client's Estimated Annual Income (Not including income from this investment)
(N/A for UGMA, Trust, Partnership or Corp.)
[ ] $0-9,999 [ ] $20-39,999 [ ] $60-79,999 [ ] $100,000-199,999
[ ] $10-19,999 [ ] $40-59,999 [ ] $80-99,999 [ ] $200,000+
3 Savings and Investments (Exclusive of personal residence, home furnishings,
personal automobiles, and the amount of this investment) (N/A for UGMA, Trust,
Partnership or Corp.)
[ ] $0-9,999 [ ] $20-39,999 [ ] $60-79,999 [ ] $100,000-199,999 [ ] $400,000+
[ ] $10-19,999 [ ] $40-59,999 [ ] $80-99,999 [ ] $200,000-399,999
4 Net Worth (Assets minus liabilities exclusive of assets and liabilities
relating to personal residence, home furnishings and automobiles) (N/A for UGMA,
Trust, Partnership or Corp.)
[ ] $0-9,999 [ ] $20-39,999 [ ] $60-79,999 [ ] $100,000-199,999 [ ] $400,000+
[ ] $10-19,999 [ ] $40-59,999 [ ] $80-99,999 [ ] $200,000-399,999
5 Main Investment Objective (select one)
[ ] Aggressive Growth [ ] Growth & Income [ ] Tax Advantages
[ ] Growth [ ] Current Income
Secondary Investment Objective (optional)
[ ] Aggressive Growth [ ] Growth & Income [ ] Tax Advantages
[ ] Growth [ ] Current Income
6 Source of Funds for This Investment
[ ] CD (Certificate of Deposit) [ ] Savings [ ] Money Market Fund
[ ] Surrender Life/Annuity Contract [ ] Rollover/Transfer of Pension Assets
[ ] Another MetLife Policy, Account or Contract [ ] Discretionary Income
[ ] Loan [ ] Other_________________
7 This account was: [ ] Solicited [ ] Unsolicited
8 Tax Status of These Funds: [ ] Qualified [ ] Non-Qualified
9 Prior Investment Experience: (complete all that apply) Stocks yrs.
Bonds yrs. Mutual Funds yrs. Margin yrs.
Limited Partnerships yrs. Options yrs. Other____ None
Investor Receipt and Arbitration Agreement
1. Arbitration
(i) Arbitration is final and binding on the parties.
(ii) The parties are waiving their right to seek remedies in court, including
the right to jury trial.
(iii) Pre-arbitration discovery is generally more limited than and different
from court proceedings.
(iv) The arbitrators' award is not required to include factual findings or legal
reasoning and any party's right to appeal or to seek modification of rulings by
the arbitrators is strictly limited.
(v) The panel of arbitrators will typically include a minority of arbitrators
who were or are affiliated with the securities industry.
(vi) No person shall bring a putative or certified class action to arbitration,
nor seek to enforce any pre-dispute arbitration agreement against any person who
has initiated in court a putative class action; or who is a member of a putative
class who has not opted out of the class with respect to any claims encompassed
by the putative class action until: (i) the class certification is denied; or
(ii) the class is decertified; or (iii) the customer is excluded from the class
by the court. Such forbearance to enforce an agreement to arbitrate shall not
constitute a waiver of any rights under this agreement except to the extent
stated herein.
2. MetLife Securities, Inc. (hereinafter "MSI") and the purchaser of the shares,
who is the signatory below (hereinafter the "Customer"), agree that any
controversy between MSI, its employees, directors, agents, officers or
affiliates and the Customer arising out of or relating to any transactions
between such parties shall be determined by arbitration. Any arbitration
pursuant to this agreement shall be conducted before, and under the rules of,
the National Association of Securities Dealers, Inc. Judgment upon the award of
the arbitrators may be entered in any federal or state court having
jurisdiction.
3. This agreement and any arbitration hereunder shall be governed and construed
in accordance with the laws of the State of New York, United States of America,
including New York procedural and substantive arbitration laws and rules,
without giving effect to conflicts of law principles.
The predispute arbitration agreement located immediately above is accepted and
agreed to. I have also received the current prospectus of the fund and have
given a check in the amount of $_______________ on this, the ____________ day of
______________________ 19__
- ----------------------------------- ------------------------------------------
Customer Signature (exactly as Registered Representative's Signature
your name appears in Section 1)
/s/ Ralph F. Verni
- ----------------------------------- ------------------------------------------
Customer Signature MetLife Securities, Inc.;
by: Ralph F. Verni, Chairman of the Board
- ----------------------------------- ------------------------------------------
Capacity
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000806390
<NAME> STATE STREET RESEARCH FINANCIAL TRUST
<SERIES>
<NUMBER> 011
<NAME> SSR GOVERNMENT INCOME FUND CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 688,875,761
<INVESTMENTS-AT-VALUE> 704,502,748
<RECEIVABLES> 18,377,041
<ASSETS-OTHER> 26,345
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 722,906,134
<PAYABLE-FOR-SECURITIES> 15,334,878
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,799,327
<TOTAL-LIABILITIES> 21,134,205
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 768,977,063
<SHARES-COMMON-STOCK> 46,990,520
<SHARES-COMMON-PRIOR> 52,079,516
<ACCUMULATED-NII-CURRENT> 3,771,439
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (86,648,683)
<ACCUM-APPREC-OR-DEPREC> 15,672,110
<NET-ASSETS> 701,771,929
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 55,174,545
<OTHER-INCOME> 0
<EXPENSES-NET> 8,691,902
<NET-INVESTMENT-INCOME> 46,482,643
<REALIZED-GAINS-CURRENT> (3,552,004)
<APPREC-INCREASE-CURRENT> (6,405,085)
<NET-CHANGE-FROM-OPS> 36,525,554
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (39,055,243)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,386,852
<NUMBER-OF-SHARES-REDEEMED> (9,183,464)
<SHARES-REINVESTED> 1,707,616
<NET-CHANGE-IN-ASSETS> (59,249,610)
<ACCUMULATED-NII-PRIOR> 2,696,356
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (114,552,578)
<GROSS-ADVISORY-FEES> 4,723,842
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,691,902
<AVERAGE-NET-ASSETS> 726,745,077
<PER-SHARE-NAV-BEGIN> 12.58
<PER-SHARE-NII> 0.81
<PER-SHARE-GAIN-APPREC> (0.17)
<PER-SHARE-DIVIDEND> (0.79)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.43
<EXPENSE-RATIO> 1.09
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000806390
<NAME> STATE STREET RESEARCH FINANCIAL TRUST
<SERIES>
<NUMBER> 012
<NAME> SSR GOVERNMENT INCOME FUND CLASS B
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 688,875,761
<INVESTMENTS-AT-VALUE> 704,502,748
<RECEIVABLES> 18,377,041
<ASSETS-OTHER> 26,345
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 722,906,134
<PAYABLE-FOR-SECURITIES> 15,334,878
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,799,327
<TOTAL-LIABILITIES> 21,134,205
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 768,977,063
<SHARES-COMMON-STOCK> 7,679,256
<SHARES-COMMON-PRIOR> 7,002,674
<ACCUMULATED-NII-CURRENT> 3,771,439
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (86,648,683)
<ACCUM-APPREC-OR-DEPREC> 15,672,110
<NET-ASSETS> 701,771,929
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 55,174,545
<OTHER-INCOME> 0
<EXPENSES-NET> 8,691,902
<NET-INVESTMENT-INCOME> 46,482,643
<REALIZED-GAINS-CURRENT> (3,552,004)
<APPREC-INCREASE-CURRENT> (6,405,085)
<NET-CHANGE-FROM-OPS> 36,525,554
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,188,785)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,341,362
<NUMBER-OF-SHARES-REDEEMED> (1,940,555)
<SHARES-REINVESTED> 275,775
<NET-CHANGE-IN-ASSETS> (59,249,610)
<ACCUMULATED-NII-PRIOR> 2,696,356
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (114,552,578)
<GROSS-ADVISORY-FEES> 4,723,842
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,691,902
<AVERAGE-NET-ASSETS> 726,745,077
<PER-SHARE-NAV-BEGIN> 12.55
<PER-SHARE-NII> 0.71
<PER-SHARE-GAIN-APPREC> (0.16)
<PER-SHARE-DIVIDEND> (0.70)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.40
<EXPENSE-RATIO> 1.84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000806390
<NAME> STATE STREET RESEARCH FINANCIAL TRUST
<SERIES>
<NUMBER> 013
<NAME> SSR GOVERNMENT INCOME FUND CLASS C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 688,875,761
<INVESTMENTS-AT-VALUE> 704,502,748
<RECEIVABLES> 18,377,041
<ASSETS-OTHER> 26,345
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 722,906,134
<PAYABLE-FOR-SECURITIES> 15,334,878
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,799,327
<TOTAL-LIABILITIES> 21,134,205
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 768,977,063
<SHARES-COMMON-STOCK> 625,275
<SHARES-COMMON-PRIOR> 400,569
<ACCUMULATED-NII-CURRENT> 3,771,439
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (86,648,683)
<ACCUM-APPREC-OR-DEPREC> 15,672,110
<NET-ASSETS> 701,771,929
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 55,174,545
<OTHER-INCOME> 0
<EXPENSES-NET> 8,691,902
<NET-INVESTMENT-INCOME> 46,482,643
<REALIZED-GAINS-CURRENT> (3,552,004)
<APPREC-INCREASE-CURRENT> (6,405,085)
<NET-CHANGE-FROM-OPS> 36,525,554
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (404,930)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 518,980
<NUMBER-OF-SHARES-REDEEMED> (324,941)
<SHARES-REINVESTED> 30,667
<NET-CHANGE-IN-ASSETS> (59,249,610)
<ACCUMULATED-NII-PRIOR> 2,696,356
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (114,552,578)
<GROSS-ADVISORY-FEES> 4,723,842
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,691,902
<AVERAGE-NET-ASSETS> 726,745,077
<PER-SHARE-NAV-BEGIN> 12.57
<PER-SHARE-NII> 0.84
<PER-SHARE-GAIN-APPREC> (0.17)
<PER-SHARE-DIVIDEND> (0.82)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.42
<EXPENSE-RATIO> 0.84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000806390
<NAME> STATE STREET RESEARCH FINANCIAL TRUST
<SERIES>
<NUMBER> 014
<NAME> SSR GOVERNMENT INCOME FUND CLASS D
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 688,875,761
<INVESTMENTS-AT-VALUE> 704,502,748
<RECEIVABLES> 18,377,041
<ASSETS-OTHER> 26,345
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 722,906,134
<PAYABLE-FOR-SECURITIES> 15,334,878
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,799,327
<TOTAL-LIABILITIES> 21,134,205
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 768,977,063
<SHARES-COMMON-STOCK> 1,166,285
<SHARES-COMMON-PRIOR> 1,037,903
<ACCUMULATED-NII-CURRENT> 3,771,439
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (86,648,683)
<ACCUM-APPREC-OR-DEPREC> 15,672,110
<NET-ASSETS> 701,771,929
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 55,174,545
<OTHER-INCOME> 0
<EXPENSES-NET> 8,691,902
<NET-INVESTMENT-INCOME> 46,482,643
<REALIZED-GAINS-CURRENT> (3,552,004)
<APPREC-INCREASE-CURRENT> (6,405,085)
<NET-CHANGE-FROM-OPS> 36,525,554
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (773,463)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 520,289
<NUMBER-OF-SHARES-REDEEMED> (435,567)
<SHARES-REINVESTED> 43,660
<NET-CHANGE-IN-ASSETS> (59,249,610)
<ACCUMULATED-NII-PRIOR> 2,696,356
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (114,552,578)
<GROSS-ADVISORY-FEES> 4,723,842
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,691,902
<AVERAGE-NET-ASSETS> 726,745,077
<PER-SHARE-NAV-BEGIN> 12.56
<PER-SHARE-NII> 0.71
<PER-SHARE-GAIN-APPREC> (0.16)
<PER-SHARE-DIVIDEND> (0.70)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.41
<EXPENSE-RATIO> 1.84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000806390
<NAME> STATE STREET RESEARCH FINANCIAL TRUST
<SERIES>
<NUMBER> 031
<NAME> SSR STRATEGIC PORTFOLIOS AGGRESSIVE CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 58,139,426
<INVESTMENTS-AT-VALUE> 65,800,420
<RECEIVABLES> 1,067,612
<ASSETS-OTHER> 94,868
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 66,962,900
<PAYABLE-FOR-SECURITIES> 2,891,434
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 176,767
<TOTAL-LIABILITIES> 3,068,201
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 47,964,414
<SHARES-COMMON-STOCK> 50,022
<SHARES-COMMON-PRIOR> 3,619,245
<ACCUMULATED-NII-CURRENT> 606,033
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,672,002
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,652,250
<NET-ASSETS> 63,894,699
<DIVIDEND-INCOME> 699,378
<INTEREST-INCOME> 1,300,681
<OTHER-INCOME> 0
<EXPENSES-NET> 808,047
<NET-INVESTMENT-INCOME> 1,192,012
<REALIZED-GAINS-CURRENT> 7,998,701
<APPREC-INCREASE-CURRENT> 1,718,152
<NET-CHANGE-FROM-OPS> 10,908,865
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (365,226)
<DISTRIBUTIONS-OF-GAINS> (850,522)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> (3,647,468)
<SHARES-REINVESTED> 78,245
<NET-CHANGE-IN-ASSETS> 3,530,698
<ACCUMULATED-NII-PRIOR> 464,967
<ACCUMULATED-GAINS-PRIOR> 1,190,810
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 526,134
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 950,895
<AVERAGE-NET-ASSETS> 140,302,133
<PER-SHARE-NAV-BEGIN> 10.93
<PER-SHARE-NII> 0.14
<PER-SHARE-GAIN-APPREC> 1.79
<PER-SHARE-DIVIDEND> (0.17)
<PER-SHARE-DISTRIBUTIONS> (0.24)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.45
<EXPENSE-RATIO> 1.35
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000806390
<NAME> STATE STREET RESEARCH FINANCIAL TRUST
<SERIES>
<NUMBER> 033
<NAME> SSR STRATEGIC PORTFOLIOS AGGRESSIVE CLASS C
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 58,139,426
<INVESTMENTS-AT-VALUE> 65,800,420
<RECEIVABLES> 1,067,612
<ASSETS-OTHER> 94,868
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