[front cover]
[logo] STATE STREET RESEARCH
Government Income Fund
[photo of partial clock face]
This prospectus has information you should know before you invest. Please read
it carefully and keep it with your investment records.
Although these securities have been registered with the Securities and Exchange
Commission, the commission has not judged them for investment merit and does not
guarantee the accuracy or adequacy of the information in this prospectus. Anyone
who informs you otherwise is committing a federal crime.
A bond fund focusing on
U.S. government securities.
Prospectus
March 1, 1998
<PAGE>
Who May Want to Invest
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State Street Research Government Income Fund is designed for investors who seek
one or more of the following:
[bullet] a relatively conservative investment for income
[bullet] a bond fund that emphasizes highly creditworthy U.S. government
securities
[bullet] a fund to complement a portfolio of more aggressive investments
The fund is NOT appropriate for investors who:
[bullet] want to avoid even moderate volatility
[bullet] are seeking high growth or maximum income
[bullet] are investing emergency reserve money
The fund's shares will rise and fall in value. There is a risk that you could
lose money by investing in the fund.
The fund cannot be certain that it will achieve its goal.
Fund shares are not bank deposits and are not guaranteed, endorsed or insured by
any financial institution, government entity or the FDIC.
<PAGE>
Contents 1
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2 The Fund
The fund's goal and strategy, main
risks, expenses and performance,
plus financial highlights
12 Your Account
Managing your State Street Research
investments
12 Opening an Account
12 Choosing a Share Class
14 Sales Charges
16 Policies for Buying Shares
18 Policies for Selling Shares
20 Account Policies
21 Distributions and Taxes
23 Investor Services
24 Fund Details
The fund's business structure
and dealer compensation, plus
additional policies
26 Other Securities and Risks
Information on additional
portfolio securities and
practices, and the risks
associated with them
Back Cover For Additional Information
<PAGE>
2 The Fund
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[graphic of chesspiece] Goal and Strategy
Fundamental Goal The fund seeks high current income.
Strategy Under normal market conditions, the fund invests at least 65% of total
assets in U.S. government securities. These may include debt securities of such
issuers as:
[bullet] the U.S. Treasury
[bullet] the Government National Mortgage Association (Ginnie Mae)
[bullet] the Federal National Mortgage Association (Fannie Mae)
[bullet] the Federal Home Loan Mortgage Corporation (Freddie Mac)
[bullet] the Resolution Funding Corporation
The fund may also invest in STRIPS, securities offered by the government in
which the principal and interest components of U.S. Treasury bonds trade
separately from each other.
The fund may invest up to 35% of total assets in other government and private
securities. These may include mortgage-related securities (securities that
represent interests in pools of mortgages) that are issued by investment banks
and insurance companies. At the time of purchase these securities are in the
highest rating category (Standard & Poor's AAA or Moody's Aaa) or if unrated are
the equivalent. The fund may also invest in foreign securities, asset-backed
securities and trust certificates (securities representing interest in pools of
U.S. government loans), as well as custodial receipts, which are similar to
STRIPS but are privately issued.
In managing its portfolio, the fund attempts to balance sensitivity to interest
rate movements with the potential for yields. Although the fund may invest in
securities of any maturity, it generally invests in those with medium- to
long-term remaining maturities in order to obtain higher yields. Securities with
longer maturities, however, tend to be more sensitive to interest rate changes.
Thus at times the fund may invest in short-term and other types of securities.
In addition, the fund may emphasize securities of different sectors -- for
example, U.S. Treasuries or mortgage-related securities, both for reasons of
yield and of interest rate sensitivity.
The fund may adjust the composition of its portfolio as market conditions and
economic outlooks change. For more information about the fund's investments and
practices, see page 26.
<PAGE>
3
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[graphic of traffic sign] Portfolio Risks
Because the fund invests primarily in bonds and other debt securities, its major
risks are those of bond investing, including the tendency of prices to fall when
interest rates rise. Such a fall would lower the fund's share price and the
value of your investment.
In general, the price of a bond will move in the opposite direction from
interest rates, for the reason that new bonds issued after a rise in rates will
offer higher yields to investors; the only way an existing bond with a lower
yield can appear attractive to investors is by selling at a lower price. (This
principle works in reverse as well: a fall in interest rates will tend to cause
a bond's price to rise). Also, STRIPS can be highly volatile.
[graphic of magnifying glass and page]
U.S. Government
Securities and
Credit Quality
The term "U.S. government securities" covers securities from a range of issuers.
These include the federal government itself, various agencies and certain
organizations created through legislation. Some of these issuers are actually
private (or partly so) but have a special relationship with the government.
Treasury securities are direct obligations of the U.S. Treasury, and are backed
by the full faith and credit of the federal government. This is recognized as
the strongest form of credit backing in the U.S.
Some securities that are not issued by the U.S. Treasury carry the government's
full faith and credit backing as to principal or interest, although they are not
actually direct obligations of the government. Other securities are backed by
the issuer's right to borrow up to a certain amount from the U.S. Treasury,
while some are backed only by the credit of the issuing organization itself or
by a pledge that the government would intervene in the event of a default.
While there are different shades of credit quality to these securities,
government securities as a group are considered highly creditworthy. Of course,
credit quality only pertains to the risk of default; the market value of these
securities will still change with movements in interest rates and other factors.
<PAGE>
4 The Fund continued
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Mortgage-related securities can offer attractive yields, but carry additional
risks.The prices and yields of mortgage-related securities typically assume that
the securities will be redeemed at a given time before maturity. When interest
rates fall substantially, these securities are usually redeemed early because
the underlying mortgages are often prepaid. The fund would then have to reinvest
the money at a lower rate. In addition, the price or yield of mortgage-related
securities may fall if they are redeemed after that date.
The success of the fund's investment strategy depends largely on the portfolio
manager's skill in assessing the direction and impact of interest rate movements
and the creditworthiness of the fund's non-U.S. government securities.
Information on other securities and risks appears on page 26.
A "snapshot" of the funds investments may be found in the current annual or
semiannual report (see back cover).
[graphic of "The Thinker"]
Investment
Management
The fund's investment manager is State Street Research & Management Company. The
firm traces its heritage back to 1924 and the founding of one of America's first
mutual funds. Today the firm has more than $47 billion in assets under
management (as of December 31, 1997), including more than $14 billion in mutual
funds.
John H. Kallis has been responsible for the fund's day-to-day portfolio
management since its inception in March 1987. A senior vice president, he joined
the firm in 1987 and has worked as an investment professional since 1963.
<PAGE>
Investor Expenses 5
- -------------------------------------------------------------------------------
Class descriptions begin on page 12
----------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
Shareholder fees are paid directly Shareholder Fees (% of offering price)(1) Class A Class B Class C(2) Class S(2)
by investors. ------------------------------------------------------------------------------------------
Maximum front-end sales charge 4.50 0.00 0.00 0.00
Maximum deferred sales charge 0.00(3) 5.00 1.00 0.00
Annual fund expenses are deducted Annual Fund Expenses (% of average net assets) Class A Class B Class C Class S
from fund assets. ------------------------------------------------------------------------------------------
Management fee 0.65 0.65 0.65 0.65
Marketing/service (12b-1) fees(4) 0.25 1.00 1.00 0.00
Other expenses 0.18 0.18 0.18 0.18
---- ---- ---- ----
Total annual fund expenses 1.08 1.83 1.83 0.83
==== ==== ==== ====
Example Here is what you would pay Year Class A Class B(6) Class C(6) Class S
if you invested $1,000 over the years ------------------------------------------------------------------------------------------
indicated. The example is for compari- 1 $56 $69/$19 $29/$19 $8
son only and does not represent the 3 $78 $88/$58 $58/$58 $26
fund's actual expenses, either past or 5 $102 $119/$99 $99/$99 $46
future(5). 10 $171 $195/$195 $215/$215 $103
</TABLE>
(1) Not charged on reinvestments or exchanges.
(2) Before November 1, 1997, Class C shares were designated Class D and Class S
shares were desig-nated Class C.
(3) Except for investments of $1 million or more; see page 14.
(4) For share classes that have 12b-1 fees, long-term shareholders may pay more
than the equivalent of the regulatory maximum sales charge.
(5) Example assumes dividend reinvestment, hypothetical 5% annual return,
maximum applicable sales charges and conversion of Class B shares to Class
A after eight years.
(6) The first number assumes you sold all your shares at the end of the period,
the second assumes you stayed in the fund.
<PAGE>
6 Financial Highlights
- -------------------------------------------------------------------------------
The information in these tables has been audited by Price Waterhouse LLP, the
fund's independent accountants. The top section of each table shows information
for a single share of the fund. Total return figures assume reinvestment of all
distributions.
<TABLE>
<CAPTION>
Years ended October 31
-----------------------------------------------------------------------------------------
Class A 1988 1989 1990 1991 1992 1993 1994(2) 1995(2) 1996(2) 1997(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 11.66 11.64 11.63 11.28 12.14 12.38 12.92 11.68 12.58 12.43
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net investment income ($) 1.12 1.05 0.96 0.93 0.90 0.84 0.81 0.83 0.81 0.80
Net realized and unrealized gain (loss) on
investments, options, forward contracts
and foreign currency ($) (0.03) -- (0.35) 0.84 0.26 0.56 (1.26) 0.88 (0.17) 0.22
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment operations ($) 1.09 1.05 0.61 1.77 1.16 1.40 (0.45) 1.71 0.64 1.02
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Dividends from net investment income ($) (1.11) (1.06) (0.96) (0.91) (0.91) (0.84) (0.79) (0.81) (0.79) (0.80)
Distributions from capital gains ($) -- -- -- -- (0.01) (0.02) -- -- -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions ($) (1.11) (1.06) (0.96) (0.91) (0.92) (0.86) (0.79) (0.81) (0.79) (0.80)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of year ($) 11.64 11.63 11.28 12.14 12.38 12.92 11.68 12.58 12.43 12.65
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Total return (3)(%) 9.77 9.62 5.54 16.25 9.86 11.63 (3.58) 15.07 5.28 8.52
Ratios/Supplemental Data:
Net assets at end of year
($ thousands) 1,529,640 1,134,786 894,074 762,517 798,705 868,556 638,418 655,045 584,313 524,565
Expense ratio (%) 1.04 1.06 1.03 1.05 1.05 1.05 1.07 1.10 1.09 1.08
Ratio of net investment income to
average net assets (%) 9.54 9.26 8.53 7.98 7.25 6.59 6.54 6.83 6.50 6.44
Portfolio turnover rate (%) 59.63 65.48 63.30 29.20 97.33 103.49 134.41 105.57 88.79 124.95
</TABLE>
<PAGE>
7
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<TABLE>
<CAPTION>
Years ended October 31
------------------------------------------------------
Class B 1993(1) 1994(2) 1995(2) 1996(2) 1997(2)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 12.67 12.91 11.66 12.55 12.40
----- ----- ----- ----- -----
Net investment income ($) 0.30 0.72 0.73 0.71 0.70
Net realized and unrealized gain (loss) on
investments, options, forward contracts
and foreign currency ($) 0.24 (1.27) 0.87 (0.16) 0.22
----- ----- ----- ----- -----
Total from investment operations ($) 0.54 (0.55) 1.60 0.55 0.92
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.30) (0.70) (0.71) (0.70) (0.71)
----- ----- ----- ----- -----
Total distributions ($) (0.30) (0.70) (0.71) (0.70) (0.71)
----- ----- ----- ----- -----
Net asset value, end of year ($) 12.91 11.66 12.55 12.40 12.61
===== ===== ===== ===== =====
Total return (3)(%) 4.32(4) (4.38) 14.15 4.51 7.66
Ratios/Supplemental Data:
Net assets at end of year ($ thousands) 26,578 52,319 87,908 95,218 97,253
Expense ratio (%) 1.81(5) 1.82 1.85 1.84 1.83
Ratio of net investment income to
average net assets (%) 5.67(5) 5.86 6.01 5.75 5.68
Portfolio turnover rate (%) 103.49 134.41 105.57 88.79 124.95
</TABLE>
(1) June 1, 1993 (commencement of share class designations) to October 31, 1993.
(2) Per-share figures have been calculated using the average shares method.
(3) Does not reflect any front-end or contingent deferred sales charge.
(4) Not annualized.
(5) Annualized.
<PAGE>
<TABLE>
<CAPTION>
8 Financial Highlights continued
- --------------------------------------------------------------------------------
Years ended October 31
------------------------------------------------------
Class C (formerly Class D) 1993(1) 1994(2) 1995(2) 1996(2) 1997(2)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 12.67 12.91 11.66 12.56 12.41
----- ----- ----- ----- -----
Net investment income ($) 0.30 0.72 0.74 0.71 0.70
Net realized and unrealized gain (loss) on
investments, options, forward contracts
and foreign currency ($) 0.24 (1.27) 0.87 (0.16) 0.22
----- ----- ----- ----- -----
Total from investment operations ($) 0.54 (0.55) 1.61 0.55 0.92
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.30) (0.70) (0.71) (0.70) (0.71)
----- ----- ----- ----- -----
Total distributions ($) (0.30) (0.70) (0.71) (0.70) (0.71)
----- ----- ----- ----- -----
Net asset value, end of year ($) 12.91 11.66 12.56 12.41 12.62
===== ===== ===== ===== =====
Total return (3)(%) 4.32(4) (4.38) 14.24 4.51 7.65
Ratios/Supplemental Data:
Net assets at end of year ($ thousands) 12,101 13,425 13,033 14,473 16,301
Expense ratio (%) 1.88(5) 1.82 1.85 1.84 1.83
Ratio of net investment income
to average net assets (%) 5.59(5) 5.84 6.08 5.76 5.68
Portfolio turnover rate (%) 103.49 134.41 105.57 88.79 124.95
</TABLE>
<PAGE>
9
---
<TABLE>
<CAPTION>
Years ended October 31
------------------------------------------------------
Class S (formerly Class C) 1993(1) 1994(2) 1995(2) 1996(2) 1997(2)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 12.67 12.92 11.67 12.57 12.42
----- ----- ----- ----- -----
Net investment income ($) 0.19 0.84 0.90 0.84 0.80
Net realized and unrealized gain (loss) on
investments, options, forward contracts
and foreign currency ($) 0.42 (1.27) 0.84 (0.17) 0.25
----- ----- ----- ----- -----
Total from investment operations ($) 0.61 (0.43) 1.74 0.67 1.05
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.36) (0.82) (0.84) (0.82) (0.83)
----- ----- ----- ----- -----
Total distributions ($) (0.36) (0.82) (0.84) (0.82) (0.83)
----- ----- ----- ----- -----
Net asset value, end of year ($) 12.92 11.67 12.57 12.42 12.64
===== ===== ===== ===== =====
Total return (3)(%) 4.82(4) (3.42) 15.37 5.55 8.80
Ratios/Supplemental Data:
Net assets at end of year ($ thousands) 36 203 5,036 7,767 32,115
Expense ratio (%) 0.80(5) 0.82 0.85 0.84 0.82
Ratio of net investment income to
average net assets (%) 6.59(5) 8.01 6.79 6.78 6.66
Portfolio turnover rate (%) 103.49 134.41 105.57 88.79 124.95
</TABLE>
(1) June 1, 1993 (commencement of share class designations) to October 31, 1993.
(2) Per-share figures have been calculated using the average shares method.
(3) Does not reflect any front-end or contingent deferred sales charge.
(4) Not annualized.
(5) Annualized.
<PAGE>
10 Performance and Volatility
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
As of October 31, 1997
----------------------------
Average Annual Total Return(1) 1 Year 5 Years 10 Years
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (%) 3.64 6.21 8.16
Class B (%) 2.66 6.12 8.28
Class C (%) 6.65 6.45 8.29
Class S (%) 8.80 7.41 8.77
Merrill Lynch Government Master Index (%) 8.67 7.33 8.90
Lipper General U.S. Government Funds Index (%) 8.04 6.07 7.82
</TABLE>
[bar chart]
<TABLE>
<CAPTION>
Years ended October 31
----------------------------------------------------------------------------
Class A Year-by-Year Total Return(1) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
9.77 9.62 5.54 16.25 9.86 11.63 (3.58) 15.07 5.28 8.52
</TABLE>
(1) Fund returns include performance from before the creation of share classes
in 1993. Because Classes B and C involve higher marketing/service (12b-1)
fees (as described on page 5), performance since that time is somewhat
lower for these classes.
<PAGE>
11
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[graphic of magnifying glass and page]
Understanding
Performance
and Volatility
The information on the opposite page is designed to show two aspects of the
fund's track record:
[bullet] Average annual total return is a measure of the fund's performance over
time. It is determined by taking the fund's performance over a given
period and expressing it as an average annual rate. Average annual
total return includes the effects of fund expenses and maximum sales
charges for each class, and assumes that you sold your shares at the
end of the period.
[bullet] The graph of year-by-year returns shows how volatile the fund has been:
how much the difference has been, historically, between its best years
and worst years. In general, funds with higher average annual total
returns will also have higher volatility. The graph includes the
effects of fund expenses, but not sales charges.
Also included are two independent measures of performance. The Merrill Lynch
Government Master Index is an unmanaged index of fixed-rate U.S. Treasury and
agency securities. The Lipper General U.S. Govern-ment Funds Index shows the
performance of a category of mutual funds with similar goals. The Lipper index,
which is also unmanaged, shows you how well the fund has done compared to
competing funds.
While the fund does not seek to match the returns or the volatility of any
index, these indices can be used as rough guides when gauging the return of this
and other investments. When making comparisons, keep in mind that none of the
indices includes the effects of sales charges. Also, even if your bond portfolio
were identical to the Merrill Lynch Government Master Index, your returns would
always be lower, because this index does not include brokerage and
administrative expenses.
<PAGE>
12 Your Account
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[graphic of a key]
Opening an Account
If you are opening an account through a financial professional, he or she can
assist you with all phases of your investment.
If you are investing through a large retirement plan or other special program,
follow the instructions in your program materials.
To open an account without the help of a financial professional, please use the
instructions on these pages.
[graphic of pencil and paper]
Choosing a Share Class
The fund offers four share classes, each with its own sales charge and expense
structure.
If you are investing a substantial amount and plan to hold your shares for a
long period, Class A shares may make the most sense for you. If you are
investing a lesser amount, you
Class A -- Front Load
[bullet] Initial sales charge of 4.5% or less; schedule on page 14
[bullet] Lower sales charges for larger investments; see sidebar on facing page
and sales charge schedule
[bullet] Lower annual expenses than Class B or C shares due to lower marketing/
service (12b-1) fee of 0.25%
Class B -- Back Load
[bullet] No initial sales charge
[bullet] Deferred sales charge of 5% or less on shares you sell within five
years; schedule on page 14
[bullet] Annual marketing/service (12b-1) fee
[bullet] Automatic conversion to Class A shares after eight years, reducing
future annual expenses
Class C(1) -- Level Load
[bullet] No initial sales charge
[bullet] Deferred sales charge of 1%, paid if you sell shares within one year of
purchase
[bullet] Lower deferred sales charge than Class B shares
[bullet] Annual marketing/service (12b-1) fee
[bullet] No conversion to Class A shares after eight years, so annual expenses
do not decrease
(1) Before November 1, 1997, these were designated Class D.
<PAGE>
may want to consider Class B shares (if investing for at least five years) or
Class C shares (if investing for less than five years). If you are investing
through a special program, such as a large employer-sponsored retirement plan or
certain programs available through brokers, you may be eligible to purchase
Class S shares.
Because all future investments in your account will be made in the share class
you designate when opening the account, you should make your decision carefully.
Your financial professional can help you choose the share class that makes the
most sense for you.
Class S(2) -- No Load
[bullet] No sales charges of any kind
[bullet] No marketing/service (12b-1) fees; annual expenses are lower than other
share classes
[bullet] Available through certain retirement accounts, advisory accounts of the
investment manager and special programs, including broker programs with
record-keeping and other services; these programs usually involve
special conditions and separate fees (contact your financial
professional for information)
(2) Before November 1, 1997, these were designated Class C.
[graphic of magnifying glass and page]
Class A Sales
Charge Reductions
and Waivers
[bullet] Substantial investments receive lower sales charge rates; see
information on the following page.
[bullet] The "right of accumulation" allows you to include your existing State
Street Research investments (except Money Market Fund Class E shares)
as part of your current investment for sales charge purposes.
[bullet] A "letter of intent" allows you to count all investments in this or
other State Street Research funds over the next 13 months as if you
were making them all at once, for purposes of calculating sales
charges.
To take advantage of right of accumulation or letter of intent waivers,
consult your financial professional or State Street Research.
<PAGE>
14 Your Account continued
- -------------------------------------------------------------------------------
Sales Charges
Class A -- Front Load
when you invest this % is which equals
this amount deducted this % of
for sales your net
charges investment
- ------------------------------------------------------
Up to $99,999 4.50 4.71
$100,000 - $249,999 3.50 3.63
$250,000 - $499,999 2.50 2.56
$500,000 - $999,999 2.00 2.04
$1 million or more see next column
With Class A shares, you pay a sales charge only when you buy shares.
If you are investing $1 million or more (either as a lump sum or through any of
the methods described on the previous page), you can purchase Class A shares
without any sales charge. However, you may be charged a "contingent deferred
sales charge" (CDSC) if you sell any shares you have held for less than one
year. Policies regarding the calculation of the CDSC are the same as for Class
B.
Class A shares are also offered with low or no sales charges through various
wrap-fee programs and other sponsored arrangements (contact your financial
professional for information).
Class B -- Back Load
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
- ----------------------------------------------------------------
First year 5.00
Second year 4.00
Third year 3.00
Fourth year 3.00
Fifth year 2.00
Sixth year or later None
With Class B shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for five years or less, as described in the table above. Any shares
acquired through reinvestment are not subject to the CDSC. There is no CDSC on
exchanges into other State Street Research funds, and the
<PAGE>
15
---
date of your initial investment will continue to be used as the basis for CDSC
calculations when you exchange. To ensure that you pay the lowest CDSC possible,
the fund will always use the shares with the lowest CDSC to fill your sell
requests.
The CDSC is waived on shares sold for mandatory retirement distributions or
because of disability or death. Consult your financial professional or the State
Street Research Service Center.
Class B shares automatically convert to Class A shares after eight years,
lowering your annual expenses from that time on.
Class C (Formerly Class D) -- Level Load
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
- -------------------------------------------------------
First year 1.00
Second year or later None
With Class C shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for one year or less, as described in the table above. Policies
regarding the calculation of the CDSC are the same as for Class B.
Class C shares currently have the same annual expenses as Class B shares, but
never convert to Class A shares (with their lower annual expenses).
Class S (Formerly Class C) -- No Load
Class S shares have no sales charges or CDSC.
<PAGE>
16 Your Account continued
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[graphic of adding machine]
Policies for
Buying Shares
Once you have chosen a share class, the next step is to determine the amount you
want to invest.
Minimum Initial Investments:
[bullet] $1,000 for accounts that use the Investamatic program
[bullet] $2,000 for Individual Retirement Accounts
[bullet] $2,500 for all other accounts
Minimum Additional Investments:
[bullet] $50 for any account
Complete the enclosed application. You can avoid future inconvenience by signing
up now for any services you might later use.
Timing of Requests All requests received by State Street Research before 4:00
p.m. eastern time will be executed the same day, at that day's closing share
price. Orders received after 4:00 p.m. will be executed the following day, at
that day's closing share price.
Wire Transactions Funds may be wired between 8:00 a.m. and 4:00 p.m. eastern
time. To make a same-day wire investment, please notify State Street Research by
12:00 noon of your intention to wire funds, and make sure your wire arrives by
4:00 p.m. Your bank may charge a fee for wiring money.
<PAGE>
Buying Shares 17
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
To Open an Account To Add to an Account
<S> <C> <C> <C>
[graphic of Through a Contact your financial professional. Contact your financial professional.
briefcase] Financial
Professional
By Mail [graphic of Make your check payable to "State Fill out the investment stub from an account
mailbox] Street Research Funds." Forward the statement, or indicate the fund name and account
check and your application to State number on your check. Make your check payable to
Street Research. "State Street Research Funds." Forward the check
and stub to State Street Research.
[graphic of By Federal Forward your application to State Call State Street Research to obtain a control
building] Funds Wire Street Research, then call to number. Instruct your bank to wire funds to:
obtain an account number. Wire [bullet] State Street Bank and Trust Company, Boston, MA
funds using the instructions at [bullet] ABA: 011000028
right. [bullet] BNF: fund name and share class you want to buy
[bullet] AC: 99029761
[bullet] OBI: your name and your account number
[bullet] Control: the number given to you by State Street
Research
By Electronic [graphic Verify that your bank is a member Call State Street Research to verify that the
Funds Transfer of electrical of the ACH (Automated Clearing necessary bank information is on file for your
(ACH) plug] House) system. Forward your account. If it is, you may request a transfer with
application to State Street the same phone call. If not, please ask State
Research. Please be sure to include Street Research to provide you with an EZ Trader
the appropriate bank information. application.
Call State Street Research to
request a purchase.
[graphic of By Investamatic Forward your application, with all Call State Street Research to verify that
calendar] appropriate sections completed, to Investamatic is in place on your account, or to
State Street Research, along with a request a form to add it. Investments are
check for your initial investment automatic once Investamatic is in place.
payable to "State Street Research
Funds."
By Exchange [graphic of Call State Street Research or visit Call State Street Research or visit our Web Site.
arrows] our Web Site.
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408 Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m.,
eastern time)
</TABLE>
<PAGE>
18 Your Account continued
- -------------------------------------------------------------------------------
[graphic of adding machine]
Policies for
Selling Shares
Circumstances that Require Written Requests Please submit instructions in
writing when any of the following apply:
[bullet] you are selling more than $100,000 worth of shares
[bullet] the name or address on the account has changed within the last 30 days
[bullet] you want the proceeds to go to a name or address not on the account
registration
[bullet] you are transferring shares to an account with a different registration
or share class
[bullet] you are selling shares held in a corporate or fiduciary account; for
these accounts, additional documents are required:
corporate accounts: certified copy of a corporate resolution
fiduciary accounts: copy of power of attorney or other governing
document
To protect your account against fraud, all signatures on these documents must be
guaranteed. You may obtain a signature guarantee at most banks and securities
dealers. A notary public cannot provide a signature guarantee.
Incomplete Sell Requests State Street Research will attempt to notify you
promptly if any information necessary to process your request is missing.
Timing of Requests All requests received in good order by State Street Research
before 4:00 p.m. eastern time will be executed the same day, at that day's
closing share price. Requests received after 4:00 p.m. will be executed the
following day, at that day's closing share price.
Wire Transactions Proceeds sent by federal funds wire must total at least
$5,000. A fee of $7.50 will be deducted from all proceeds sent by wire, and your
bank may charge an additional fee to receive wired funds.
Selling Recently Purchased Shares If you sell shares before the check or
electronic funds transfer (ACH) for those shares has been collected, you will
not receive the proceeds until your initial payment has cleared. This may take
up to 15 days after your purchase was recorded (in rare cases, longer). If you
open an account with shares purchased by wire, you cannot sell those shares
until your application has been processed.
<PAGE>
Selling Shares 19
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
To Sell Some or All of Your Shares
<S> <C> <C>
[graphic of Through a Contact your financial professional.
briefcase] Financial
Professional
By Mail [graphic of Send a letter of instruction, an endorsed stock power or share certificates (if you hold
mailbox] certificate shares) to State Street Research. Specify the fund, the account number and the
dollar value or number of shares. Be sure to include all necessary signatures and any
additional documents, as well as signature guarantees if required (see facing page).
[graphic of By Federal Check with State Street Research to make sure that a wire redemption privilege, including a bank
building] Funds Wire designation, is in place on your account. Once this is established, you may place your request to
sell shares with State Street Research. Proceeds will be wired to your pre-designated bank
account. (See "Wire Transactions" on facing page.)
By Electronic [graphic Check with State Street Research to make sure that the EZ Trader feature, including a bank
Funds Transfer of electrical designation, is in place on your account. Once this is established, you may place
(ACH) plug] your request to sell shares with State Street Research. Proceeds will be sent to your
pre-designated bank account.
[graphic of By Telephone As long as the transaction does not require a written request (see facing page), you or your
telephone] financial professional can sell shares by calling State Street Research. A check will be mailed
to you on the following business day.
By Exchange [graphic of Read the prospectus for the fund into which you are exchanging. Call State Street Research
arrows] or visit our Web Site.
[graphic of By Systematic See plan information on page 23.
calendar] Withdrawal Plan
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408 Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m., eastern time)
</TABLE>
<PAGE>
20 Your Account continued
- -------------------------------------------------------------------------------
[graphic of papers]
Account Policies
The Fund's Business Hours The fund is open the same days as the New York Stock
Exchange (generally Monday through Friday). Fund representatives are available
from 8:00 a.m. to 6:00 p.m. eastern time on these days.
Calculating Share Price The fund calculates its net asset value per share (NAV)
every business day at the close of regular trading on the New York Stock
Exchange (usually at 4:00 p.m. eastern time). Each class's share price is
calculated by dividing its net assets by the number of its shares outstanding.
Telephone Requests When you open an account you automatically receive telephone
privileges, allowing you to place requests on your account by telephone. Your
financial professional can also use these privileges to request exchanges on
your account, and with your written permission, redemptions. For your
protection, all telephone calls are recorded.
As long as State Street Research takes certain measures to authenticate
telephone requests on your account, you may be held responsible for unauthorized
requests. Unauthorized telephone requests are rare, but if you want to protect
yourself completely, you can decline the telephone privilege on your
application. The fund may suspend or eliminate the telephone privilege at any
time.
Exchange Privileges There is no fee to exchange shares among State Street
Research funds. Your new fund shares will be the equivalent class as your
current shares. Any contingent deferred sales charges will continue to be
calculated from the date of your initial investment.
Frequent exchanges can interfere with fund management and drive up costs for all
shareholders. Because of this, the fund currently limits each account, or group
of accounts under common ownership or control, to six exchanges per calendar
year. The fund may change or eliminate the exchange privilege at any time, may
limit or cancel any shareholder's exchange privilege and may refuse to
<PAGE>
21
---
accept any exchange request, particularly those associated with "market timing"
strategies.
For Merrill Lynch customers, exchange privileges extend to Summit Cash Reserves
Fund, which is related to the fund for purposes of investment and investor
services.
Accounts with Low Balances If the value of your account falls below $1,500,
State Street Research may mail you a notice asking you to bring the account back
up to $1,500 or close it out. If you do not take action within 60 days, State
Street Research may either sell your shares and mail the proceeds to you at the
address of record or may deduct an annual maintenance fee (currently $18).
Reinstating Recently Sold Shares For 120 days after you sell shares, you have
the right to "reinstate" your investment by putting some or all of the proceeds
into any currently available State Street Research fund at net asset value. Any
CDSC you paid on the amount you are reinstating will be credited to your
account. You may only use this privilege once in any twelve-month period with
respect to your shares of a given fund.
[graphic of Uncle Sam]
Distributions and Taxes
Income and Capital Gains Distributions The fund distributes its net income and
net capital gains to shareholders. Using projections of its future income, the
fund declares dividends daily and pays them monthly. Net capital gains, if any,
are distributed in December, after the end of the fund's fiscal year, which is
October 31.
You may have your distributions reinvested in the fund, invested in a different
State Street Research fund, deposited in a bank account or mailed out by check.
If you do not give State Street Research other instructions, your distributions
will automatically be reinvested in the fund.
<PAGE>
22 Your Account continued
- -------------------------------------------------------------------------------
[graphic of magnifying glass and page]
Tax Considerations
Unless your investment is in a tax-deferred account, you may want to avoid:
[bullet] investing a large amount in the fund close to the end of its fiscal
year (if the fund makes a capital gains distribution, you will receive
some of your investment back as a taxable distribution)
[bullet] selling shares at a loss for tax purposes and investing in a
substantially identical investment within 30 days before or after that
sale (such a transaction is usually considered a "wash sale," and you
will not be allowed to claim a tax loss)
Tax Effects of Distributions and Transactions In general, any dividends and
short-term capital gain distributions you receive from the fund are taxable as
ordinary income. Distributions of other capital gains are generally taxable as
capital gains. This is true no matter how long you have owned your shares and
whether you reinvest your distributions or take them in cash.
Every year, the fund will send you information detailing the amount of ordinary
income and capital gains distributed to you for the previous year.
The sale of shares in your account may produce a gain or loss, and is a taxable
event. For tax purposes, an exchange is the same as a sale.
Your investment in the fund could have additional tax consequences. Please
consult your tax professional for assistance.
Backup Withholding By law, the fund must withhold 31% of your distributions and
proceeds if you have not provided complete, correct taxpayer information.
<PAGE>
23
---
[graphic of handshake]
Investor Services
Investamatic Program Use Investamatic to set up regular automatic investments
in the fund from your bank account. You determine the frequency and amount of
your investments, and you can skip an investment with three days notice. Not
available with Class S shares.
Systematic Withdrawal Plan This plan is designed for retirees and other
investors who want regular withdrawals from a fund account. The plan is free and
allows you to withdraw up to 8% of your fund assets a year without incurring any
contingent deferred sales charges. Certain terms and minimums apply.
Dividend Allocation Plan This plan automatically invests your distributions
from the fund into another fund of your choice, without any fees or sales
charges.
Automatic Bank Connection This plan lets you route any distributions or
Systematic Withdrawal Plan payments directly to your bank account.
State Street Research also offers a full range of prototype retirement plans for
individuals, sole proprietors, partnerships, corporations and employees. Call
1-800-562-0032 for information on retirement plans or any of the services
described above.
<PAGE>
24 Fund Details
- --------------------------------------------------------------------------------
[graphic of column]
Business Structure
Formed in 1987, the fund is a diversified series of State Street Research
Financial Trust, an open-end management investment company that is organized as
a Massachusetts business trust. A board of trustees representing shareholder
interests oversees the fund's operations, including the hiring of the investment
manager and other service providers.
The fund does not hold regular shareholder meetings, but may call meetings when
matters arise that require shareholder approval. These may include amendments to
the investment management agreement, the election of trustees or proposed
changes in the fund's fundamental goal, which cannot be changed without
shareholder approval.
The investment manager is responsible for the fund's investment and business
activities, and receives the management fee as compensation (0.65% of fund
assets, annually). The investment manager and the distributor are subsidiaries
of Metropolitan Life Insurance Company.
Brokers for Portfolio Trades
When placing trades for the fund's portfolio, State Street Research chooses
brokers that provide the best execution (a term defined by service as well as
price), but may also consider a broker's sales of fund shares.
Investment Manager
State Street Research & Management Company
One Financial Center, Boston, MA 02111
Distributor
State Street Research Investment Services, Inc.
One Financial Center, Boston, MA 02111
Service Center
State Street Research Service Center
P.O. Box 8408, Boston, MA 02266
Custodian
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
<PAGE>
25
---
[graphic of check]
Dealer Compensation
Dealers who sell shares of the fund and perform services for fund
investors receive sales commissions and annual fees. These are paid by the
fund's distributor, using money from sales charges, marketing/service (12b-1)
fees and its other resources.
<TABLE>
<CAPTION>
Maximum Dealer Compensation Class A Class B Class C Class S
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Initial commission (%) -- 4.00 1.00 0.00
Investments up to $100,000 (%) 4.00 -- -- --
$100,000 - $249,999 (%) 3.00 -- -- --
$250,000 - $499,999 (%) 2.00 -- -- --
$500,000 - $999,999 (%) 1.75 -- -- --
First $1-3 million (%) 1.00(1) -- -- --
Next $2 million (%) 0.50(1) -- -- --
Next $1 and above (%) 0.25(1) -- -- --
Annual fee (%) 0.25 0.25 0.90 0.00
</TABLE>
Additional Policies Please note that the fund maintains additional policies and
reserves certain rights, including:
[bullet] The fund may vary its initial or additional investments in the case of
exchanges, reinvestments, periodic investment plans, retirement and
employee benefit plans, sponsored arrangements and other similar
programs.
[bullet] All orders to purchase shares are subject to acceptance by the fund.
[bullet] At any time, the fund may change or discontinue its sales charge
waivers and any of its order acceptance practices, and may suspend the
sale of its shares.
[bullet] To permit investors to obtain the current price, dealers are
responsible for transmitting all orders to the State Street Research
Service Center promptly.
[bullet] Dealers may impose a transaction fee on the purchase or sale of shares
by shareholders.
[bullet] The distributor may pay its affiliate MetLife Securities, Inc.
additional compensation of up to 0.25% of certain sales or assets.
(1) If your broker declines this commission, the one-year CDSC on your
investment is waived.
<PAGE>
26 Other Securities and Risks
- -------------------------------------------------------------------------------
[graphic of certificates]
Other Securities
and Risks
Each of the fund's portfolio securities and investment practices offers certain
opportunities and carries various risks. Major investments and risk factors are
outlined in the fund description starting on page 2. Below are brief
descriptions of other securities and practices, along with their associated
risks. A table of limitations follows.
Restricted and Illiquid Securities Any securities that are thinly traded or
whose resale is restricted can be difficult to sell at a desired time and price.
Some of these securities are new and complex, and trade only among institutions;
the markets for these securities are still developing, and may not function as
efficiently as established markets. Owning a large percentage of restricted and
illiquid securities could hamper the fund's ability to raise cash to meet
redemptions. Also, because there may not be an established market price for
these securities, the fund may have to estimate their value, which means that
their valuation (and, to a much smaller extent, the valuation of the fund) may
have a subjective element.
Foreign Investments Foreign securities are generally more volatile than their
domestic counterparts, in part because of higher political and economic risks,
lack of reliable information, and fluctuations in currency exchange rates. These
risks are usually higher in less developed countries. The fund may use foreign
currencies and related instruments to hedge its foreign investments.
In addition, foreign securities may be more difficult to resell and the markets
for them less efficient than
<PAGE>
27
---
for comparable U.S. securities. Even where a foreign security increases in price
in its local currency, the appreciation may be diluted by the negative effect of
exchange rates when the security's value is converted to U.S. dollars. Foreign
withholding taxes also may apply and errors and delays may occur in the
settlement process for foreign securities.
Derivatives Derivatives, a category that includes options and futures, are
financial instruments whose value derives from another security or an index. The
fund may use derivatives for hedging (attempting to offset a potential loss in
one position by establishing an interest in an opposite position). The fund may
also use derivatives for speculation (investing for potential income or capital
gain).
While hedging can guard against potential risks, it adds to the fund's expenses
and can eliminate some opportunities for gains. There is also a risk that a
derivative intended as a hedge may not perform as expected.
The main risk with derivatives is that some types can amplify a gain or loss,
potentially earning or losing substantially more money than the actual cost of
the derivative.
With all derivatives, whether used for hedging or speculation, there is also the
risk that the counterparty may fail to honor its contract terms, causing a loss
for the fund.
Securities Lending The fund may seek additional income by lending portfolio
securities to qualified institutions. By reinvesting collateral it receives in
these transactions, the fund could magnify any gain or loss it realizes on the
underlying investment. If the borrower fails to return the securities and the
collateral is insufficient to cover the loss, the fund could lose money.
When-issued Securities The fund may invest in securities prior to their date of
issue. These securities could fall in value by the time they are actually
issued, which may be anytime from a few days to over a year.
Short-term Trading While the fund ordinarily does not trade securities for
short-term profits, it will sell any security at the time it believes best,
which may result in short-term trading. Short-term trading can increase the
fund's brokerage costs and may increase your tax liability.
Repurchase Agreements The fund may buy securities with the understanding
<PAGE>
28 Other Securities and Risks continued
- -------------------------------------------------------------------------------
that
the seller will buy them back with interest at a later date. If the seller is
unable to honor its commitment to repurchase the securities, the fund could lose
money.
Zero (or Step) Coupons A zero coupon security is a debt security that is
purchased and traded at a discount to its face value because it pays no interest
for some or all of its life. Interest, however, is reported as income to the
fund and the fund is required to distribute to shareholders an amount equal to
the amount reported. Those distributions may force the fund to liquidate
portfolio securities at a disadvantageous time.
Defensive Investing During
unusual market conditions, the fund may place up to 100% of total assets in cash
or quality short-term debt securities.
Investment Limitations
<TABLE>
<CAPTION>
Limitation at the time of investment
------------------------------------
Practice % of total assets % of net assets
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Investing in securities of any given issuer (other
than the U.S. government and its agencies)(1) 5(2) --
Investing in any given industry(1) 25 --
Lending securities 33-1/3 --
Lending money(1) Prohibited --
Repurchase agreements -- 30
Swap arrangements -- 5
Security
- -------------------------------------------------------------------------------------------
Commodity futures contracts and options contracts
(for non-hedging purposes) -- 5(3)
Other options contracts (for non-hedging purposes) -- 5(3)
Illiquid securities -- 15(4)
Restricted securities 10(5) --
Foreign securities 20(6) --
</TABLE>
(1) Fundamental policy; may not be changed without shareholder approval.
(2) Applies only to 75% of fund's total assets. The fund is also prohibited
from investing in more than 10% of an issuer's voting securities.
(3) Initial margin deposits plus premiums may not exceed 5% of the market value
of the fund's net assets in non-hedging transactions. No limits apply when
used in hedging strategies.
(4) Includes repurchase agreements extending over more than seven days.
(5) Does not include Rule 144A securities.
(6) Applies to all direct and indirect interests in securities of non-U.S.
issuers; includes a 5% total asset limitation on investments in developing
countries.
<PAGE>
Notes 29
- -------------------------------------------------------------------------------
<PAGE>
[back cover]
For Additional Information
- -------------------------------------------------------------------------------
You can obtain a free copy of the
current annual/semiannual report
or SAI by contacting:
[logo] STATE STREET RESEARCH
Service Center
P.O. Box 8408, Boston, MA 02266
Telephone: 1-800-562-0032
Internet: www.ssrfunds.com
Or you can visit the SEC website at:
www.sec.gov
Control Number: 4702-980226(0399)SSR-LD
You can find additional information on the fund's structure and its performance
in the following documents:
Annual/Semiannual Reports While the prospectus describes the fund's potential
investments, these reports detail the fund's actual investments as of the report
date. Reports include a discussion by fund management of recent economic and
market trends and fund performance. The annual report also includes the report
of the fund's independent accountants.
Statement of Additional Information (SAI) A supplement to the prospectus, the
SAI contains further information about the fund and its investment limitations
and policies. It also includes the most recent annual report and the independent
accountants' report. A current SAI for this fund is on file with the Securities
and Exchange Commission and is incorporated by reference (is legally part of
this prospectus).
prospectus
- -------------------------------------------
GI-906E-398IBS
<PAGE>
STATE STREET RESEARCH
STRATEGIC PORTFOLIOS: CONSERVATIVE
STRATEGIC PORTFOLIOS: MODERATE
STRATEGIC PORTFOLIOS: AGGRESSIVE
Prospectus
March 1, 1998
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.
At the present time, only Class S shares are being offered and are
available for investment through certain retirement accounts and special
programs.
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 (the "Investment Manager")
serves as investment adviser for the Funds. As of December 31, 1997, the
Investment Manager had assets of approximately $47 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, 1998 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
Page
- ---------------------------------------------------------------------------
Table of Expenses........................................................ 2
Financial Highlights..................................................... 6
The Funds' Investments and Asset Allocation.............................. 9
Investment Practices.................................................... 13
Limiting Investment Risk................................................ 15
Purchase of Shares...................................................... 16
Redemption of Shares.................................................... 25
Shareholder Services.................................................... 27
The Funds and Their Shares.............................................. 31
Management of the Funds................................................. 32
Dividends and Distributions; Taxes...................................... 33
Calculation of Performance Data......................................... 34
Appendix--Description of Debt/Bond Ratings.............................. 35
- ---------------------------------------------------------------------------
The Funds are authorized to issue four classes of shares which may be
purchased at the next determined net asset value per share plus, in the case of
all classes except Class S shares, a sales charge which, at the election of the
investor, may be imposed (i) at the time of purchase (the Class A shares) or
(ii) on a deferred basis (the Class B and Class C shares).
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 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. Prior
to November 1, 1997, this class of shares was designated as Class D shares.
Class S shares are available through certain employee benefit plans, and
special programs with financial intermediaries, among other arrangements. No
sales charge is imposed at the time of purchase or redemption of Class S
shares. Class S shares do not pay any distribution or service fees. Prior to
November 1, 1997, this class of shares was designated as Class C shares.
Table of Expenses
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C Class S
-------------- ------------ ------------ --------
<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% 1% None
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 C 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 C 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."
<TABLE>
<CAPTION>
Strategic Portfolios: Conservative Class A Class B Class C Class S
- --------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
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% 1.00% None
Other Expenses ............................ 0.78% 0.78% 0.78% 0.78%
Less Voluntary Reduction ................ (0.48%) (0.48%) (0.48%) (0.48%)
----- ----- ----- ------
Total Fund Operating Expenses
(after voluntary reduction) ......... 1.15% 1.90% 1.90% 0.90%
===== ===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
Strategic Portfolios: Moderate Class A Class B Class C Class S
- --------------------------------------------- ------------ ------------ ------------ ------------
<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% 1.00% None
Other Expenses ............................ 0.96% 0.96% 0.96% 0.96%
Less Voluntary Reduction ................ (0.61%) (0.61%) (0.61%) (0.61%)
----- ----- ----- ------
Total Fund Operating Expenses
(after voluntary reduction) ......... 1.25% 2.00% 2.00% 1.00%
===== ===== ===== ======
</TABLE>
<TABLE>
<CAPTION>
Strategic Portfolios: Aggressive Class A Class B Class C Class S
- --------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees ........................... 0.75% 0.75% 0.75% 0.75%
12b-1 Fees ................................ 0.25% 1.00% 1.00% None
Other Expenses ............................ 0.53% 0.53% 0.53% 0.53%
Less Voluntary Reduction ................ (0.18%) (0.18%) (0.18%) (0.18%)
----- ----- ----- ------
Total Fund Operating Expenses
(after voluntary reduction) ......... 1.35% 2.10% 2.10% 1.10%
===== ===== ===== ======
</TABLE>
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 ............. $29 $60 $103 $222
Class S shares ............. $ 9 $29 $ 50 $111
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 ............. $30 $63 $108 $233
Class S shares ............. $10 $32 $ 55 $122
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 ............. $31 $66 $113 $243
Class S shares ............. $11 $35 $ 61 $134
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 C ............. $19 $60 $103 $222
Strategic Portfolios: Moderate
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
Class B (1) ......... $20 $63 $108 $213
Class C ............. $20 $63 $108 $233
Strategic Portfolios: Aggressive
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
Class B (1) ......... $21 $66 $113 $224
Class C ............. $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, 1997; actual
expense levels for the current fiscal year and future years may vary from the
amounts shown. The table does not reflect charges for optional services elected
by certain shareholders, such as the $7.50 fee for remittance of redemption
proceeds by wire. For further information on sales charges, see "Purchase of
Shares--Alternative Purchase Program"; for further information on management
fees, see "Management of the 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, 1997, Total Fund Operating Expenses as a
percentage of average
4
<PAGE>
net assets of Class S shares would have been 1.38% of the Strategic Portfolios:
Conservative; and 1.28% of the Strategic Portfolios: Aggressive; and would have
been 1.61% for Class S 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 0.48% of the Class S shares of the Strategic Portfolios:
Conservative; and 0.18% of the Class S shares of the Strategic Portfolios:
Aggressive; and 0.61% of the Class S shares of the Strategic Portfolios:
Moderate.
5
<PAGE>
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 C shares of the
Strategic Portfolios: Conservative and the Strategic Portfolios: Aggressive and
for Class A, Class B and Class C 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
---------------------------------------------------------------------
Year ended October 31
November 1, 1996 -----------------------------------------------
to March 27, 1997(1) 1996(1) 1995(1) 1994(2)
--------------------- ------------- ----------- ---------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ....... $ 11.03 $10.56 $ 9.56 $ 9.55
------- ------- ------- --------
Net investment income* ................... .21 .42 .47 .20
Net realized and unrealized gain
(loss) on investments, foreign
currency and forward contracts .......... .08 .66 1.00 (.09)
------- ------- ------- --------
Total from investment operations ......... .29 1.08 1.47 0.11
------- ------- ------- --------
Dividends from net investment
income .................................. (.19) (.36) (.47) (.10)
Distribution from net realized gains ..... (.55) (.25) -- --
-------- --------- -------- --------
Total distributions ...................... (.74) (.61) (.47) (.10)
-------- --------- -------- --------
Net asset value, end of year ............. $ 10.58 $11.03 $ 10.56 $ 9.56
======== ========= ======== ========
Ratios/supplemental data:
Total return(3) .......................... 2.67%(4) 10.55% 15.84% 1.15%(4)
Net assets at end of year (000s) ......... $ -- $ 552 $27,637 $25,014
Ratio of operating expenses to
average net assets* ..................... 1.15%(5) 1.15% 1.15% 1.15%(5)
Ratio of net investment income to
average net assets* ..................... 4.18%(5) 4.35% 4.74% 4.48%(5)
Portfolio turnover rate .................. 117.66% 126.41% 132.50% 70.35%
Average commission rate(6) ............... $0.0308 $.0436 -- --
*Reflects voluntary assumption of
fees or expenses per share in
each year ............................... $ .03 $ .07 $ .05 $ .03
<CAPTION>
Class S***
------------------------------------------------------
Year ended October 31
------------------------------------------------------
1997(1) 1996(1) 1995(1) 1994(2)
------------- ------------- ---------- ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ....... $ 10.93 $ 10.56 $ 9.56 $9.55
------- ------- ------- --------
Net investment income* ................... 0.49 .50 .52 .21
Net realized and unrealized gain
(loss) on investments, foreign
currency and forward contracts .......... 0.95 .60 .97 (.09)
------- ------- ------- --------
Total from investment operations ......... 1.44 1.10 1.49 0.12
------- ------- ------- --------
Dividends from net investment
income .................................. (.50) (.48) (.49) (.11)
Distribution from net realized gains ..... (.55) (.25) -- --
--------- --------- -------- --------
Total distributions ...................... (1.05) (.73) (.49) (.11)
--------- --------- -------- --------
Net asset value, end of year ............. $ 11.32 $ 10.93 $10.56 $9.56
========= ========= ======== ========
Ratios/supplemental data:
Total return(3) .......................... 14.11% 10.82% 16.11% 1.25%(4)
Net assets at end of year (000s) ......... $38,501 $33,236 $1,433 $ 100
Ratio of operating expenses to
average net assets* ..................... 0.90% 0.90% 0.90% 0.90%(5)
Ratio of net investment income to
average net assets* ..................... 4.47% 4.50% 4.91% 4.73%(5)
Portfolio turnover rate .................. 117.66% 126.41% 132.50% 70.35%
Average commission rate(6) ............... $0.0308 $ .0436 -- --
*Reflects voluntary assumption of
fees or expenses per share in
each year ............................... $ .05 $ .06 $ .05 $ .03
</TABLE>
(1) Per-share figures have been calculated using the average shares method.
(2) May 16, 1994 (commencement of operations) to October 31, 1994.
(3) Does not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
(4) Not annualized.
(5) Annualized.
(6) Average commission rate per share paid for security trades beginning with
the fiscal year ended October 31, 1996.
***Prior to November 1, 1997 Class S shares were designated as Class C shares.
- --------------------------------------------------------------------------------
6
<PAGE>
Strategic Portfolios: Moderate
<TABLE>
<CAPTION>
Class S***
-----------------------------------------
Year ended October 31
-----------------------------------------
1997(1) 1996(1) 1995(1)
------------- -------------- ------------
<S> <C> <C> <C>
Net asset value, beginning of year ............................ $ 11.28 $ 10.26 $ 9.18
------- ------- -------
Net investment income* ........................................ .35 .35 .36
Net realized and unrealized gain (loss) on investments,
foreign currency and forward contracts ....................... 1.53 1.07 1.01
------- ------- -------
Total from investment operations .............................. 1.88 1.42 1.37
------- ------- -------
Dividends from net investment income .......................... (.39) (.40) (.29)
Distributions from net realized gains ......................... (.69) -- --
--------- -------- -------
Total distributions ........................................... (1.08) (.40) (.29)
--------- -------- -------
Net asset value, end of year .................................. $ 12.08 $ 11.28 $ 10.26
========= ======== =======
Ratios/supplemental data:
Total return(3) ............................................... 17.83% 14.08%+ 15.24%+
Net assets at end of year (000s) .............................. $53,498 $44,989 $39,821
Ratio of operating expenses to average net assets* ............ 1.00% 1.00% 1.00%
Ratio of net investment income to average net assets* ......... 3.03% 3.23% 3.68%
Portfolio turnover rate ....................................... 136.17% 127.59% 120.62%
Average commission rate(6) .................................... $ .0257 $ .0258 --
*Reflects voluntary assumption of fees or expenses
per share in each year ....................................... $ .07 $ .05 $ .07
<CAPTION>
Class S***
---------------------------------
Year ended October 31
---------------------------------
1994 1993(2)
------------ --------------------
<S> <C> <C>
Net asset value, beginning of year ............................ $ 9.57 $ 9.55
------- -------
Net investment income* ........................................ .28 .02
Net realized and unrealized gain (loss) on investments,
foreign currency and forward contracts ....................... (.45) --
------- -------
Total from investment operations .............................. (.17) (.02)
------- -------
Dividends from net investment income .......................... (.22) --
Distributions from net realized gains ......................... -- --
------- -------
Total distributions ........................................... (.22) --
------- -------
Net asset value, end of year .................................. $ 9.18 $ 9.57
======= =======
Ratios/supplemental data:
Total return(3) ............................................... (1.81)% 0.21%(4)
Net assets at end of year (000s) .............................. $28,494 $25,040
Ratio of operating expenses to average net assets* ............ 1.00% 1.00%(5)
Ratio of net investment income to average net assets* ......... 3.05% 2.32(5)
Portfolio turnover rate ....................................... 142.86% 0.00%
Average commission rate(6) .................................... -- --
*Reflects voluntary assumption of fees or expenses
per share in each year ....................................... $ .05 $ .00
</TABLE>
(1) Per-share figures have been calculated using the average shares method.
(2) September 28, 1993 (commencement of operations) to October 31, 1993.
(3) Does not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
(4) Not annualized.
(5) Annualized.
(6) Average commission rate per share paid for security trades beginning with
the fiscal year ended October 31, 1996.
***Prior to November 1, 1997 Class S shares were designated as Class C shares.
- --------------------------------------------------------------------------------
7
<PAGE>
Strategic Portfolios: Aggressive
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------------------
Year ended October 31
November 1, 1996 -----------------------------------------------
to March 27, 1997(1) 1996(1) 1995(1) 1994(2)
--------------------- ------------- ----------- ---------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ... $12.45 $10.93 $ 9.74 $ 9.55
------- ------- ------- --------
Net investment income* ............... .10 .14 .20 .09
Net realized and unrealized gain
on investments, foreign
currency and forward contracts ...... .41 1.79 1.19 .14
------- ------- ------- --------
Total from investment operations ..... .51 1.93 1.39 .23
------- ------- ------- --------
Dividends from net investment
income .............................. (.13) (.17) (.20) (.04)
Distribution from net realized
gains ............................... (1.48) (.24) -- --
-------- ------- ------- --------
Total distributions .................. (1.61) (.41) (.20) (.04)
-------- ------- ------- --------
Net asset value, end of year ......... $11.35 $12.45 $ 10.93 $ 9.74
======== ======= ======= ========
Ratios/supplemental data:
Total return(3) ...................... 4.18%(4 ) 18.05% 14.49% 2.41%(4)
Net assets at end of year (000s) ..... $ -- $ 623 $39,555 $50,999
Ratio of operating expenses to
average net assets* ................. 1.35(5) 1.35% 1.35% 1.35%(5)
Ratio of net investment income to
average net assets* ................. 1.69(5) 1.43% 1.98% 2.01%(5)
Portfolio turnover rate .............. 136.48% 145.59% 127.44% 37.75%
Average commission rate(6) ........... $.0244 $.0251 -- --
*Reflects voluntary assumption of
fees or expenses per share in
each year .......................... $ .02 $ .01 $ .02 $ .01
<CAPTION>
Class S***
------------------------------------------------------------
Year ended October 31
------------------------------------------------------------
1997(1) 1996(1) 1995(1) 1994(2)
------------- ------------- ----------- --------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ... $ 12.43 $ 10.94 $ 9.74 $9.55
------- ------- ------- --------
Net investment income* ............... .22 .22 .22 .10
Net realized and unrealized gain
on investments, foreign
currency and forward contracts ...... 2.27 1.74 1.20 .14
------- ------- ------- --------
Total from investment operations ..... 2.49 1.96 1.42 .24
------- ------- ------- --------
Dividends from net investment
income .............................. (.26) (.23) (.22) (.05)
Distribution from net realized
gains ............................... (1.48) (.24) -- --
------- ------- -------- --------
Total distributions .................. (1.74) (.47) (.22) (.05)
------- ------- -------- --------
Net asset value, end of year ......... $ 13.18 $ 12.43 $ 10.94 $9.74
======= ======= ======== ========
Ratios/supplemental data:
Total return(3) ...................... 22.54% 18.37% 14.85% 2.50%(4)
Net assets at end of year (000s) ..... $77,753 $63,272 $20,809 $ 102
Ratio of operating expenses to
average net assets* ................. 1.10% 1.10% 1.10% 1.10%(5)
Ratio of net investment income to
average net assets* ................. 1.79% 1.78% 2.13% 2.26%(5)
Portfolio turnover rate .............. 136.48% 145.59% 127.44% 37.75%
Average commission rate(6) ........... $ .0244 $ .0251 -- --
*Reflects voluntary assumption of
fees or expenses per share in
each year .......................... $ .02 $ .03 $ .02 $ .01
</TABLE>
(1) Per-share figures have been calculated using the average shares method.
(2) May 16, 1994 (commencement of operations) to October 31, 1994.
(3) Does not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
(4) Not Annualized.
(5) Annualized.
(6) Average commission rate per share paid for security trades beginning with
the fiscal year ended October 31, 1996.
***Prior to November 1, 1997 Class S shares were designated as Class C shares.
8
<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:
9
<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 possibilitiesfor
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
10
<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.
For the fiscal year ended October 31, 1997, the percentage of State Street
Research Strategic Portfolios: Aggressive total investments on an average
annual basis invested in debt securities of any particular rating category or
its equivalent, as determined by the Investment Manager, was as follows: 11%
AAA, 3% AA, 1% A, 2% BBB, 1% BB, and 6% B, on a dollar weighted basis,
comprising 24% of total investments. Of these bonds, all were rated by a
nationally recognized statistical rating organization. The above percentages
reflect ratings as of the time of purchase and subsequent changes, if any,
including downgrades, for the period the securities were held.
In 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 within 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 within the BB category or lower by S&P or within 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
11
<PAGE>
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. 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
12
<PAGE>
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 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
13
<PAGE>
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, 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.
These risks are usually higher in less-developed countries. Such countries
include countries that have an emerging stock market that trades a small number
of securities and/or countries with economies that are based on only a few
industries. Each Fund may invest in the securities of issuers in countries with
less developed economies as deemed appropriate by the Investment Manager.
However, it is anticipated that a majority of the foreign investments by each
Fund will consist of securities of issuers in countries with developed
economies.
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 invested in unaffiliated mutual funds with
quality short-term portfolios, securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, irrevocable stand-by letters
of credit issued by a bank or repurchase agreements, or other similar
investments. The investing of cash collateral received from loaning portfolio
securities involves leverage which magnifies the potential for gain or loss on
monies invested and, therefore, results in an increase in the volatility of a
Fund's outstanding securities. Such loans may be terminated at any time.
The transactions are generally structured so that a Fund will retain
rights to dividends, interest or other distributions. 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.
14
<PAGE>
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 and securities indices.
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 its net assets; similar policies apply 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
credit protection swaps, interest rate swaps, currency swaps and index swaps.
See the Statement of Additional Information.
Other Investments
The Fund may invest in securities restricted as to resale. Restricted
securities may be subject to the risks of illiquidity and subjective valuations
because generally, there is a limited resale market for them. Some restricted
securities in which the Fund may invest may be resold pursuant to Rule 144A
under the Securities Act of 1933, as amended (the "1933 Act"), which allows the
Fund more flexibility to resell such securities, specifically to certain
qualified institutional buyers. The market for Rule 144A securities, however,
still is developing, and thus, even securities sold pursuant to the rule may be
illiquid or their current market value difficult to determine.
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 Strategic 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.
15
<PAGE>
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 provide 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 within the "A" category by S&P or within the
"Prime" category by Moody's (or, if not rated, issued by companies having an
outstanding long-term unsecured debt issue rated at least within the "A"
category by S&P or 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 16 to 31.
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 Service Center
("Service Center"), 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 the Service
Center 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 the Service Center 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.
The Service Center 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.
16
<PAGE>
By Wire
An investor may purchase shares by wiring Federal Funds of not less than $5,000
to State Street Bank and Trust Company, which also serves as the Trust's
custodian (the "Custodian"), as set forth below. Prior to making an investment
by wire, an investor must notify the Service Center 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 S)
AC = 99029761
OBI = Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street
Research Service Center)
In order for a wire investment to be processed on the same day (i) the
investor must notify the Service Center 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.
17
<PAGE>
Minimum Investment
Class of Shares
---------------------------------------------
A B C S
--------- --------- --------- ---------
Minimum Initial Investment
By Wire .................... $5,000 $5,000 $5,000 (a)
IRAs ....................... $2,000 $2,000 $2,000 (a)
By Investamatic ............ $1,000 $1,000 $1,000 (a)
All other .................. $2,500 $2,500 $2,500 (a)
Minimum Subsequent Investment
By Wire .................... $5,000 $5,000 $5,000 (a)
IRAs ....................... $ 50 $ 50 $ 50 (a)
By Investamatic ............ $ 50 $ 50 $ 50 (a)
All other .................. $ 50 $ 50 $ 50 (a)
(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.
18
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS S
----------------------- -------------------- ----------------- --------
<S> <C> <C> <C> <C>
Sales Charges Initial sales charge Contingent Contingent None
at time of deferred sales deferred sales
investment of up charge of 5% to charge of 1%
to 4.5% depending 2% applies to any applies to any
on amount of shares redeemed shares redeemed
investment within first five within one year
years following following their
their purchase; no purchase
contingent deferred
sales charge after
five years
On investments of
$1 million or more,
no initial sales
charge; but
contingent deferred
sales charge of 1%
applies to any
shares redeemed
within one year
following their
purchase
Distribution Fee None 0.75% for first 0.75% each year None
eight years; Class
B shares convert
automatically to
Class A shares
after eight years
Service Fee 0.25% each year 0.25% each year 0.25% each year None
Initial Above described 4% 1% None
Commission initial sales charge
Received by less 0.25% to
Selling 0.50% retained by
Dealers Distributor
On investments of
$1 million or
more, 0.25% to
1% paid to dealer
by Distributor
</TABLE>
19
<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 C 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
C 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 C shares.
Class A, Class B and Class C 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 C 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.
Class S shares are available through certain employee benefit plans, and
special programs with financial intermediaries, among other arrangements.
Some of the service and distribution fees are allocated to dealers (see
"Distribution Plan" below). In addition, the Distributor will, at its expense,
provide additional cash and noncash incentives to dealers that sell shares.
Such incentives may be extended only to those dealers that have sold or may
sell significant amounts of shares and/or meet other conditions established by
the Distributor; for example, the Distributor may sponsor special promotions to
develop particular distribution channels or to reach certain investor groups.
The Distributor may also compensate those dealers with clients who maintain
their investments in a Fund over a period of years. The incentives may include
merchandise and trips to and attendance at sales seminars at resorts. The
Distributor may also pay its affiliate MetLife Securities, Inc. additional
sales compensation of up to 0.25% of certain sales or assets.
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 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
$1 million and following
above 0% 0% discussion
- --------------------------------------------------------------------------------
20
<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 S shares may also be included in the combination under certain
circumstances. Securities dealers should call the Service Center 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 S 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 S shares may also be included in the combination under certain
circumstances. See the Statement of Additional Information and call the Service
Center 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,
registered investment advisers, financial planners, institutions, and others,
under managed fee-based programs (e.g., "wrap fee" or similar programs) which
meet certain requirements
21
<PAGE>
established from time to time by the Distributor. Information on such
arrangements and further conditions and limitations is available from the
Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of 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. In certain cases, a dealer may elect to
waive the 4% commission on Class B shares and receive in lieu thereof a 1%
annual fee with respect to such shares until the shares convert to Class A
shares. The proceeds of the contingent deferred sales charge and the
distribution fee are used to offset distribution expenses and thereby permit
the sale of Class B shares without an initial sales charge.
Class B shares that are redeemed within a five-year period after their
purchase will not be subject to a contingent deferred sales charge to the
extent that the value of such shares represents (1) capital appreciation of
Fund assets or (2) reinvestment of dividends or capital gains distributions.
The amount of any applicable contingent deferred sales charge will be
calculated by multiplying the net asset value of such shares at the time of
redemption or at the time of purchase, whichever is lower, by the applicable
percentage shown in the table below:
Contingent
Deferred Sales
Charge As
A Percentage Of
Redemption During Net Asset Value
- ------------------------------------------------ ----------------
1st Year Since Purchase ........................ 5%
2nd Year Since Purchase ........................ 4
3rd Year Since Purchase ........................ 3
4th Year Since Purchase ........................ 3
5th Year Since Purchase ........................ 2
6th Year Since Purchase and Thereafter ......... None
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first of
those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of 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
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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 waived for: (i)
redemptions made within one year of the death or total disability, as defined
by the Social Security Administration, of all shareholders of an account; (ii)
redemptions made after attainment of a specific age in an amount which
represents the minimum distribution required at such age under Section
401(a)(9) of the Internal Revenue Code for retirement accounts or plans (e.g.,
age 701/2 for IRAs and Section 403(b) plans), calculated solely on the basis of
assets invested in 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--Spread Sales Charges
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; thus the
full amount of the investor's purchase payment will be invested in the Funds.
Class C 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 C 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 C shares without an initial sales charge.
Class C 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.
Class S Shares--Special Programs; No Sales Charge
The purchase price of a Class S 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 S shares are only available for new investments by
certain large institutions, other
23
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advisory accounts of the Investment Manager, 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 S
shares have been designated. In addition, Class S shares are available through
programs under which, for example, investors pay an asset-based fee and/or a
transaction fee to intermediaries. Class S share availability is determined by
the Distributor and intermediaries based on overall direct and indirect costs
of a particular program, expected assets, account sizes and similar
considerations. Information on the availability of Class S shares and further
conditions and limitations is available from the Distributor.
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 0.25% 0.75%
S None None
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 C 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
24
<PAGE>
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 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 the Service Center and delivery of the request by the
Service Center 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 Service Center, 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 the Service Center 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
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<PAGE>
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, 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
26
<PAGE>
address of record (unchanged in the past 30 days); (3) written requests for
redemptions for any amount submitted by corporations and certain fiduciaries
and other intermediaries; and (4) requests to transfer the registration of
shares to another owner. Signatures must be guaranteed by a bank, a member firm
of a national stock exchange, or other eligible guarantor institution. The
Transfer Agent will not accept guarantees (or notarizations) from notaries
public. The above requirements may be waived in certain instances. Please
contact the Service Center 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 the Service Center
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 the Service Center. 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 C shares may
be redeemed without the payment of any contingent deferred sales charge that
might otherwise be due upon an ordinary redemption of such shares. The State
Street Research Money Market Fund issues Class E shares which are sold without
any sales charge. Exchanges of State Street Research Money Market Fund Class E
shares into Class A shares of 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,
27
<PAGE>
Class B and Class C 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 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 C 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 the Service Center is instructed
otherwise. Related administrative policies and procedures may also be adopted
with regard to a series of exchanges, street name accounts, sponsored
arrangements and other matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, 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 the Service
Center and delivered by the Service Center to the Transfer Agent by 12 noon
Boston time on any business day, the exchange usually will occur that
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<PAGE>
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 round off his or her
reinvestment to full shares) in shares, of the same class as the shares
redeemed, of the Fund or any other Eligible Fund at net asset value and without
subjecting the reinvestment to an initial sales charge, provided such
reinvestment is made within 120 calendar days after a redemption or repurchase.
Upon such reinvestment, the shareholder will be credited with any contingent
deferred sales charge previously charged with respect to the amount reinvested.
The redemption of shares is, for federal income tax purposes, a sale on which
the shareholder may realize a gain or loss. If a redemption at a loss is
followed by a reinvestment within 30 days, the transaction may be a "wash sale"
resulting in a denial of the loss for federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by the Service
Center of such shareholder's written purchase request and delivery of the
request by the Service Center to the Transfer Agent. A shareholder may exercise
this reinvestment privilege only once per 12-month period with respect to his
or her shares of 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 C
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 the Service Center.
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 the
Service Center.
Systematic Withdrawal Plan
A shareholder who owns noncertificated Class A or Class S shares with a value
of $5,000 or more, or Class B or Class C shares with a value of $10,000 or
more, may elect, by participating in 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 Program and the Systematic Withdrawal Plan at the same time.
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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 Allocation Plan is subject 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 the Service Center 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 the Service Center 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 share-
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<PAGE>
holder 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 the Service Center at
such telephone number. In that event, the shareholder should contact the
Service Center at 1-800-357-7800 or otherwise at its main office at One
Financial Center, Boston, Massachusetts 02111-2690.
Shareholder Account Inquiries:
Please call 1-800-562-0032
Call this number for assistance in answering general questions on your account,
including account balance, available shareholder services, statement
information and performance of the applicable Fund. Account inquiries may also
be made in writing to State Street Research Service Center, 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. The Service Center 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 S 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. 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 C shares bear
the expenses of the deferred sales arrangement and any expenses (including the
higher service and distribution fees) resulting from such sales arrangement,
and certain other incremental expenses related to a class. Each class will have
exclusive voting rights with respect to provisions of the Rule 12b-1
distribution plan pursuant to which the service and distribution fees, if any,
are paid. Although the legal rights of holders of each class of shares are
identical, it is likely that the different expenses borne by each class will
result in different net asset values and dividends. The different classes of
shares of the 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. 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
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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 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, 1998, Metropolitan was the record and/or beneficial
owner of 66.0% of the outstanding Class S shares of Strategic Portfolios:
Conservative; of 52.3% of the outstanding Class S shares of Strategic
Portfolios: Aggressive; and of 35.7% of the outstanding Class S 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
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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 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
33
<PAGE>
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.
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 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 S 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 is calculated for the periods specified in
applicable regulations and may be accompanied by nonstandard total return
information for differing periods computed in the same manner, 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
34
<PAGE>
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 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: An obligation rated within the AAA category has the highest rating
assigned by S&P. Capacity to meet the financial obligation is strong is
extremely strong.
AA: An obligation rated within the AA category differs from the highest
rated obligation only in small degree. Capacity to meet the financial
commitment on the obligation is very strong.
A: An obligation rated within the A category is somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
debt in higher rated categories. However, capacity to meet the financial
commitment on the obligation is still strong.
BBB: An obligation rated within the BBB category exhibits adequate
protection parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakend capacity to meet the
financial commitment on the obligation.
Obligations rated within the BB, B, CCC, CC and C categories are regarded
as having significant speculative characteristics. BB indicates the least
degree of speculation and C the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
BB: An obligation rated within the BB category is less vulnerable to
nonpayment than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic conditions
which could lead to inadequate capacity to meet the financial commitment on the
obligation. The BB rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied BBB- rating.
B: An obligation rated within the B category is more vulnerable to
nonpayment than obligations rated within the BB category, but currently has the
capacity to meet the financial commitment on the obligation. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
meet the financial commitment on the obligation. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: An obligation rated within the CCC category is currently vulnerable
to nonpayment, and is dependent upon favorable business, financial and economic
conditions to meet the financial commitment on the obligation. In the event of
adverse business, financial or economic conditions, it is not likely to have
the capacity to meet the financial commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy
petition has been filed, but payments on this obligation are being continued.
D: An obligation rated within the D category is in payment default. The D
rating category is used when
35
<PAGE>
payments on an obligation 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 or the taking of a similar action if payments on an
obligation 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 the ratings of instruments with
significant noncredit risks. It highlights risks to principal or volatility of
expected returns which are not addressed in the credit rating. Examples
include: obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risks--such as interest only (IO) and
principal only (PO) mortgage securities; and obligations with unusually risky
terms, such as inverse floaters.
Moody's Investors Service, Inc.
Aaa: Bonds which are rated within the Aaa category are judged to be of the
best quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
such issues.
Aa: Bonds which are rated within the Aa category are judged to be of high
quality by all standards. Together with the Aaa group they comprise what are
generally known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than in Aaa securities.
A: Bonds which are rated within the A category possess many favorable
investment attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa: Bonds which are rated within the Baa category are considered as
medium grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba: Bonds which are rated within the Ba category are judged to have
speculative elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very moderate and
thereby not well safeguarded during other good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds which are rated within the B category generally lack
characteristics of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the contract over any
long period of time may be small.
Caa: Bonds which are rated within the Caa category are of poor standing.
Such issues may be in default or there may be present elements of danger with
respect to principal or interest.
Ca: Bonds which are rated within the Ca category represent obligations
which are speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C: Bonds which are rated within the C category are the lowest rated class
of bonds, and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
1, 2 or 3: The ratings from Aa through Baa may be modified by the addition
of a numeral indicating a bond's rank within its rating category.
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<PAGE>
[STATE STREET COVER]
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
SERVICE CENTER
State Street Research
Service Center
P.O. Box 8408
Boston, MA 02266-8408
1-800-562-0032
CUSTODIAN
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
LEGAL COUNSEL
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
[State Street Research logo]
State Street Research
Strategic Portfolios:
Conservative, Moderate, Aggressive
March 1, 1998
PROSPECTUS
SP-007E-398 IBS CONTROL NUMBER: 4741-980301(0499)SSR-LD
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
a Series of
STATE STREET RESEARCH FINANCIAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1998
TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVE.....................................................2
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS..........................2
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT TECHNIQUES..........5
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS.........................16
THE TRUST, THE FUND AND ITS SHARES......................................20
TRUSTEES AND OFFICERS...................................................21
INVESTMENT ADVISORY SERVICES............................................27
PURCHASE AND REDEMPTION OF SHARES.......................................28
SHAREHOLDER ACCOUNTS....................................................34
NET ASSET VALUE.........................................................38
PORTFOLIO TRANSACTIONS..................................................39
CERTAIN TAX MATTERS.....................................................42
DISTRIBUTION OF SHARES OF THE FUND......................................44
CALCULATION OF PERFORMANCE DATA.........................................49
CUSTODIAN...............................................................55
INDEPENDENT ACCOUNTANTS.................................................55
FINANCIAL STATEMENTS....................................................55
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, 1998 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-980306(0499)SSR-LD GI-879D-398
1
<PAGE>
INVESTMENT OBJECTIVE
As set forth under "Government Income Fund--Goal and Strategy--
Fundamental Goal" in the Prospectus of State Street Research Government Income
Fund (the "Fund"), the Fund's investment goal, which is to seek high current
income, is fundamental and may not be changed except by the affirmative vote of
a majority of the outstanding voting securities of the Fund, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"). (Under the 1940
Act, a "vote of the majority of the outstanding voting securities" means the
vote, at the annual or a special meeting of security holders duly called, (i) of
67% or more of the voting securities present at the meeting if the holders of
more than 50% of the outstanding voting securities are present or represented by
proxy or (ii) of more than 50% of the outstanding voting securities, whichever
is less.)
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under "Government Income Fund--Portfolio Risks" and "Other
Securities and Risks" in the Fund's Prospectus, the Fund has adopted certain
investment restrictions, and those restrictions are either fundamental or not
fundamental. Fundamental restrictions may not be changed except by the
affirmative vote of a majority of the outstanding voting securities of the Fund.
Restrictions that are not fundamental may be changed by a vote of a majority of
the Trustees of the Trust.
The Fund's fundamental investment restrictions are set forth below.
Under these restrictions, it is the Fund's policy:
(1) not to purchase a security of any one issuer (other than
securities issued or guaranteed as to principal or interest by
the U.S. Government or its agencies or instrumentalities or
mixed-ownership Government corporations) if such purchase
would, with respect to 75% of the Fund's total assets, cause
more than 5% of the Fund's total assets to be invested in the
securities of such issuer or cause more than 10% of the voting
securities of such issuer to be held by the Fund;
(2) not to issue senior securities, 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;
2
<PAGE>
(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;
(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
3
<PAGE>
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; and
(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, 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 are not fundamental. 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 purchase a security issued by another investment
company, except to the extent permitted under the 1940 Act or
except by purchases in the open market involving only
customary brokers' commissions, or securities acquired as
dividends or distributions or in connection with a merger,
consolidation or similar transaction or other exchange.
4
<PAGE>
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Derivatives
The Fund may buy and sell certain types of derivatives, such as
options, futures contracts, options on futures contracts, and swaps under
circumstances in which such instruments are expected by the State Street
Research & Management Company (the "Investment Manager") to
aid in achieving the Fund's investment objective. The Fund may also purchase
instruments with characteristics of both futures and securities (e.g., debt
instruments with interest and principal payments determined by reference to the
value of a commodity or a currency at a future time) and which, therefore,
possess the risks of both futures and securities investments.
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Fund to take both "short" positions (positions
which anticipate a decline in the market value of a particular asset or index)
and "long" positions (positions which anticipate an increase in the market value
of a particular asset or index). The Fund may also use strategies which involve
simultaneous short and long positions in response to specific market conditions,
such as where the Investment Manager anticipates unusually high or low market
volatility.
The Investment Manager may enter into derivative positions for the Fund
for either hedging or non-hedging purposes. The term hedging is applied to
defensive strategies designed to protect the Fund from an expected decline in
the market value of an asset or group of assets that the Fund owns (in the case
of a short hedge) or to protect the Fund from an expected rise in the market
value of an asset or group of assets which it intends to acquire in the future
(in the case of a long or "anticipatory" hedge). Non-hedging strategies include
strategies designed to produce incremental income (such as the option writing
strategy described below) or "speculative" strategies which are undertaken to
profit from an expected decline in the market value of an asset or group of
assets which the Fund does not own or expected increases in the market value of
an asset which it does not plan to acquire. Information about specific types of
instruments is provided below.
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell an
underlying asset or group of assets, such as a currency, or an index of
securities, at a future time at a specified price. A contract to buy establishes
a long position while a contract to sell establishes a short position.
The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or index after paying a transaction charge and posting
margin in an amount equal to a small percentage of the value of the underlying
asset or index. The Fund will initially be required to
5
<PAGE>
deposit with the Trust's custodian or the broker effecting the futures
transaction an amount of "initial margin" in cash or securities, as permitted
under applicable regulatory policies.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the
Fund will receive from the broker a maintenance margin payment equal to the
increase in value of the underlying asset. Conversely, when the Fund has taken a
long position in a futures contract and the value of the underlying instrument
has declined, the position would be less valuable, and the Fund would be
required to make a maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will terminate
the Fund's position in the futures contract. A final determination of
maintenance margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. While futures
contracts with respect to securities do provide for the delivery and acceptance
of such securities, such delivery and acceptance are seldom made.
In transactions establishing a long position in a futures contract,
assets equal to the face value of the futures contract will be identified by the
Fund to the Trust's custodian for maintenance in a separate account to insure
that the use of such futures contracts is unleveraged. Similarly, assets having
a value equal to the aggregate face value of the futures contract will be
identified with respect to each short position. The Fund will utilize such
assets and methods of cover as appropriate under applicable exchange and
regulatory policies.
Options
The Fund may use options to implement its investment strategy. There
are two basic types of options: "puts" and "calls." Each type of option can
establish either a long or a short position, depending upon whether the Fund is
the purchaser or the writer of the option. A call option on a security, for
example, gives the purchaser of the option the right to buy, and the writer the
obligation to sell, the underlying asset at the exercise price during the option
period. Conversely, a put option on a security gives the purchaser the right to
sell, and the writer the obligation to buy, the underlying asset at the exercise
price during the option period.
Purchased options have defined risk, that is, the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset. In general, a
6
<PAGE>
purchased put increases in value as the value of the underlying security falls
and a purchased call increases in value as the value of the underlying security
rises.
The principal reason to write options is to generate extra income (the
premium paid by the buyer). Written options have varying degrees of risk. An
uncovered written call option theoretically carries unlimited risk, as the
market price of the underlying asset could rise far above the exercise price
before its expiration. This risk is tempered when the call option is covered,
that is, when the option writer owns the underlying asset. In this case, the
writer runs the risk of the lost opportunity to participate in the appreciation
in value of the asset rather than the risk of an out-of-pocket loss. A written
put option has defined risk, that is, the difference between the agreed-upon
price that the Fund must pay to the buyer upon exercise of the put and the
value, which could be zero, of the asset at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
its obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Among the options which the Fund may enter are options on securities
indices. In general, options on indices of securities are similar to options on
the securities themselves except that delivery requirements are different. For
example, a put option on an index of securities does not give the holder the
right to make actual delivery of a basket of securities but instead gives the
holder the right to receive an amount of cash upon exercise of the option if the
value of the underlying index has fallen below the exercise price. The amount of
cash received will be equal to the difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple. As with options on equity securities or futures contracts,
the Fund may offset its position in index options prior to expiration by
entering into a closing transaction on an exchange or it may let the option
expire unexercised.
A securities index assigns relative values to the securities included
in the index and the index options are based on a broad market index. In
connection with the use of such options, the Fund may cover its position by
identifying assets having a value equal to the aggregate face value of the
option position taken.
Options on Futures Contracts
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
7
<PAGE>
Limitations and Risks of Options and Futures Activity
The Fund may not establish a position in a commodity futures contract
or purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such nonhedging
purposes would exceed 5% of the market value of the Fund's net assets. The Fund
applies a similar policy to options that are not commodities.
As noted above, the Fund may engage in both hedging and nonhedging
strategies. Although effective hedging can generally capture the bulk of a
desired risk adjustment, no hedge is completely effective. The Fund's ability to
hedge effectively through transactions in futures and options depends on the
degree to which price movements in its holdings correlate with price movements
of the futures and options.
Nonhedging strategies typically involve special risks. The
profitability of the Fund's nonhedging strategies will depend on the ability of
the Investment Manager to analyze both the applicable derivatives market and the
market for the underlying asset or group of assets. Derivatives markets are
often more volatile than corresponding securities markets and a relatively small
change in the price of the underlying asset or group of assets can have a
magnified effect upon the price of a related derivative instrument.
Derivatives markets also are often less liquid than the market for the
underlying asset or group of assets. Some positions in futures and options may
be closed out only on an exchange which provides a secondary market therefor.
There can be no assurance that a liquid secondary market will exist for any
particular futures contract or option at any specific time. Thus, it may not be
possible to close such an option or futures position prior to maturity. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively carry out their derivative
strategies and might, in some cases, require the Fund to deposit cash to meet
applicable margin requirements. The Fund will enter into an option or futures
position only if it appears to be a liquid investment.
Swaps
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including the 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
8
<PAGE>
entitles the purchaser to receive payments from the seller on a notional amount
to the extent that the selected index exceeds an agreed upon interest rate or
amount whereas purchase of a floor entitles the purchaser to receive such
payments to the extent the selected index falls below an agreed upon interest
rate or amount. A collar combines a cap and a floor.
The Fund may enter credit protection swap arrangements involving the
sale by the Fund of a put option on a debt security which is exercisable by the
buyer upon certain events, such as a default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
Most swaps entered into by the Fund will be on a net basis; for
example, in an interest rate swap, amounts generated by application of the fixed
rate and the floating rate to the notional principal amount would first offset
one another, with the Fund either receiving or paying the difference between
such amounts. In order to be in a position to meet any obligations resulting
from swaps, the Fund will set up a segregated custodial account to hold
appropriate liquid assets, including cash; for swaps entered into on a net
basis, assets will be segregated having a daily net asset value equal to any
excess of the Fund's accrued obligations over the accrued obligations of the
other party, while for swaps on other than a net basis assets will be segregated
having a value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a portion of the Fund's portfolio.
However, the Fund may, as noted above, enter into such arrangements for income
purposes to the extent permitted by the Commodities Futures Trading Commission
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.
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
9
<PAGE>
Fund will conduct its currency exchange transactions either on a spot (i.e.,
cash) basis at the rate prevailing in the currency exchange market, or by
entering into forward contracts to purchase or sell currencies. The Fund's
dealings in forward currency exchange contracts will be limited to hedging
involving either specific transactions or aggregate portfolio positions. A
forward currency contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are not commodities and are entered into in the
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. In entering a forward currency contract,
the Fund is dependent upon the creditworthiness and good faith of the
counterparty. The Fund attempts to reduce the risks of nonperformance by the
counterparty by dealing only with established, reputable institutions. Although
spot and forward contracts will be used primarily to protect the Fund from
adverse currency movements, they also involve the risk that anticipated currency
movements will not be accurately predicted, which may result in losses to the
Fund. This method of protecting the value of the Fund's portfolio securities
against a decline in the value of a currency does not eliminate fluctuations in
the underlying prices of the securities. It simply establishes a rate of
exchange that can be achieved at some future point in time. Although such
contracts tend to minimize the risk of loss due to a decline in the value of
hedged currency, they tend to limit any potential gain that might result should
the value of such currency increase.
Repurchase Agreements
The Fund may enter into repurchase agreements. Repurchase agreements
occur when the Fund acquires a security and the seller, which may be either (i)
a primary dealer in U.S. Government securities or (ii) an FDIC-insured bank
having gross assets in excess of $500 million, simultaneously commits to
repurchase it at an agreed-upon price on an agreed-upon date within a specified
number of days (usually not more than seven) from the date of purchase. The
repurchase price reflects the purchase price plus an agreed-upon market rate of
interest which is unrelated to the coupon rate or maturity of the acquired
security. The Fund will only enter into repurchase agreements involving U.S.
Government securities. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
Repurchase agreements will be limited to 30% of the Fund's total assets, except
that repurchase agreements extending for more than seven days when combined with
any other illiquid securities held by the Fund will be limited to 15% of the
Fund's total assets.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. However, the
Fund may not engage in reverse repurchase agreements in excess of 5% of the
Fund's total assets. 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
10
<PAGE>
the instrument's market value in cash, and agrees that on a stipulated date in
the future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed-upon rate. The ability to use
reverse repurchase agreements may enable, but does not ensure the ability of,
the Fund to avoid selling portfolio instruments at a time when a sale may be
deemed to be disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
When-Issued Securities
The Fund may purchase "when-issued" securities, which are traded at a
price or yield basis prior to actual issuance. Such purchases will be made only
to achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs in the U.S. Treasury
market when dealers begin to trade a new issue of bonds or notes shortly after a
Treasury financing is announced, but prior to the actual sale of the securities.
Similarly, securities to be created by a merger of companies may also be traded
prior to the actual consummation of the merger. Such transactions may involve a
risk of loss if the value of the securities falls below the price committed to
prior to actual issuance. The Trust's custodian will establish a segregated
account when the Fund purchases securities on a when-issued basis consisting of
cash or liquid securities equal to the amount of the when-issued commitments.
Securities transactions involving delayed deliveries or forward commitments are
frequently characterized as when-issued transactions and are similarly treated
by the Fund.
Restricted Securities
It is the Fund's policy not to make an investment in restricted
securities, including restricted securities sold in accordance with Rule 144A
under the Securities Act of 1933 ("Rule 144A Securities") if, as a result, more
than 35% of the Fund's total assets are invested in restricted securities,
provided not more than 10% of the Fund's total assets are invested in restricted
securities other than Rule 144A Securities.
Securities may be resold pursuant to Rule 144A under certain
circumstances only to qualified institutional buyers as defined in the rule, and
the markets and trading practices for such securities are relatively new and
still developing; depending on the development of such markets, Rule 144A
Securities may be deemed to be liquid as determined by or in accordance with
methods adopted by the Trustees. Under such methods the following factors are
considered, among others: the frequency of trades and quotes for the security,
the number of dealers and potential purchasers in the market, market making
activity, and the nature of the security and marketplace trades. Investments in
Rule 144A Securities could have the effect of
11
<PAGE>
increasing the level of the Fund's illiquidity to the extent that qualified
institutional buyers become, for a time, uninterested in purchasing such
securities. Also, the Fund may be adversely impacted by the subjective valuation
of such securities in the absence of a market for them. Restricted securities
that are not resalable under Rule 144A may be subject to risks of illiquidity
and subjective valuations to a greater degree than Rule 144A Securities.
Mortgage-Related Securities
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 S&P or Aaa
major rating category by 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 interest rates
than other securities with comparable maturities, while having a comparable risk
of decline during periods of rising interest rates.
Zero Coupon Securities
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
12
<PAGE>
securities, which may be more volatile than that of securities which pay
interest at regular intervals.
Foreign Investments
The Fund reserves the right to invest without limitation in securities
of non-U.S. issuers directly, or indirectly in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Under current
policy, however, the Fund limits such investments, including ADRs and EDRs, to a
maximum of 20% of its total assets.
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. The Fund will take these and other risk considerations into account
before making an investment in an unsponsored ADR.
The risks associated with investments in foreign securities include
those resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks of
nationalization or expropriation, the possible imposition of currency exchange
blockages, higher operating expenses, foreign withholding and other taxes which
may reduce investment return, reduced availability of public information
concerning issuers, the difficulties in obtaining and enforcing a judgment
against a foreign issuer and the fact that foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements comparable to those applicable to
domestic issuers. Moreover, securities of many foreign issuers may be
13
<PAGE>
less liquid and their prices more volatile than those of securities of
comparable domestic issuers.
It is anticipated that a majority of the foreign investments by 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 less developed economies as deemed appropriate by the Investment
Manager, although the Fund presently does not 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; and/or countries with economies that are based on only a few
industries. Eastern European countries are considered to have less developed
capital markets.
Securities Lending
The Fund may lend portfolio securities with a value of up to 33 1/3 %
of its total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of any loaned securities plus accrued interest. Collateral
received by the Fund will generally be held in the form tendered, although cash
may be invested in unaffiliated mutual funds with quality short-term portfolios,
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities or certain unaffiliated mutual funds, irrevocable stand-by
letters of credit issued by a bank, or repurchase agreements, or other similar
investments. The investing of cash collateral received from loaning portfolio
securities involves leverage which magnifies the potential for gain or loss on
monies invested and, therefore, results in an increase in the volatility of the
Fund's outstanding securities. Such loans may be terminated at any time.
The Fund will retain rights to dividends, interest or other
distributions, on the loaned securities. Voting rights pass with the lending,
although the Fund may call loans to vote proxies if desired. Should the borrower
of the securities fail financially, there is a risk of delay in recovery of the
securities or loss of rights in the collateral. Loans are made only to borrowers
which are deemed by the Investment Manager or its agents to be of good financial
standing.
Short-Term Trading
The Fund may engage in short-term trading of securities and reserves
full freedom with respect to portfolio turnover. In periods where there are
rapid changes in economic conditions and security price levels or when
reinvestment strategy changes significantly, portfolio turnover may be higher
than during times of economic and market price stability or when investment
strategy remains relatively constant. The Fund's portfolio turnover rate
involves greater transaction costs, relative to other funds in general, and may
have tax and other consequences.
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<PAGE>
Temporary and Defensive Investments
The Fund may hold up to 100% of its assets in cash or short-term debt
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Investment Manager, such a
position is more likely to provide protection against adverse market conditions
than adherence to the Fund's other investment policies. The types of short-term
instruments in which the Fund may invest for such purposes include short-term
money market securities, such as repurchase agreements, and securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
certificates of deposit, time deposits and bankers' acceptances of certain
qualified financial institutions and corporate commercial paper, which at the
time of purchase are rated at least within the "A" major rating category by S&P
or the "Prime" major rating category by Moody's, or, if not rated, issued by
companies having an outstanding long-term unsecured debt issued rated at least
within the "A" category by S&P or Moody's.
Industry Classifications
In determining how much of the Fund's portfolio is invested in a given
industry, the following industry classifications are currently used. Securities
issued or guaranteed as to principal or interest by the U.S. Government or its
agencies or instrumentalities or mixed-ownership Government corporations or
sponsored enterprises (including repurchase agreements involving U.S. Government
securities to the extent excludable under relevant regulatory interpretations)
are excluded. Securities issued by foreign governments are also excluded.
Companies engaged in the business of financing may be classified according to
the industries of their parent or sponsor companies or industries that otherwise
most affect such financing companies. Issuers of asset-backed pools will be
classified as separate industries based on the nature of the underlying assets,
such as mortgages and credit card receivables. "Asset-backed-Mortgages" includes
private pools of nongovernment backed mortgages.
<TABLE>
<CAPTION>
<S> <C> <C>
Aerospace Electric Oil Refining & Marketing
Airline Electric Equipment Oil Service
Asset-backed--Mortgages Electronic Components Paper Products
Asset-backed--Credit Card Electronic Equipment Personal Care
Receivables Entertainment Photography
Automotive Financial Service Plastics
Automotive Parts Food & Beverage Printing & Publishing
Bank Forest Products Railroad
Building Gaming & Lodging Real Estate & Building
Business Services Gas Recreation
Cable Gas Transmission Retail Trade
Capital Goods & Equipment Grocery Savings & Loan
Chemical Healthcare & Hospital Shipping & Transportation
Computer Software & Management Technology &
Service Hospital Supply Communications
Conglomerate Hotel & Restaurant Telephone
Consumer Goods & Insurance Textile & Apparel
Services Machinery Tobacco
Container Media Truckers
Cosmetics Metal & Mining Trust Certificates--
Diversified Office Equipment Government Related
Drug Oil Production Lending
</TABLE>
15
<PAGE>
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
The Fund may invest in long-term and short-term debt securities.
Certain debt securities and money market instruments in which the Fund may
invest are described below.
Managing Volatility. In administering the Fund's portfolio, the
Investment Manager attempts to manage volatility in part by managing the
duration and weighted average maturity of the Fund's bond position.
Duration is an indicator of the expected volatility of a bond position
in response to changes in interest rates. In calculating duration, the Fund
measures the average time required to receive all cash flows associated with
those debt securities held in the Fund's portfolio -- representing payments of
principal and interest -- by considering the timing, frequency and amount of
payment expected from each portfolio security. The higher the duration, the
greater the gains and losses when interest rates change. Duration generally is a
more accurate measure of potential volatility with a portfolio composed of
high-quality debt securities, such as U.S. government securities, municipal
securities and high-grade U.S. corporate bonds, than with lower-grade
securities.
The Investment Manager may use several methods to manage the duration
of the Fund's bond position in order to increase or decrease its exposure to
changes in interest rates. First, the Investment Manager may adjust portfolio
duration by adjusting the mix of debt securities held by the Fund. For example,
if the Investment Manager intends to shorten duration, it may sell debt
instruments that individually have a long duration and purchase other debt
instruments that individually have a shorter duration. Among the factors that
will affect a debt security's duration are the length of time to maturity, the
timing of interest and principal payments, and whether the terms of the security
give the issuer of the security the right to call the security prior to
maturity. Second, the Investment Manager may adjust bond portfolio duration
using derivative transactions, especially with interest rate futures and options
contracts. For example, if the Investment Manager wants to lengthen the duration
of the Fund's bond position, it could purchase interest rate futures contracts
instead of buying longer-term bonds or selling shorter-term bonds. Similarly,
during periods of lower interest rate volatility, the Investment Manager may use
a technique to extend duration in the event rates rise by writing an out-of-the-
money put option and receiving premium income with the expectation that the
option could be exercised. In managing duration, the use of such derivatives may
be faster and more efficient than trading specific portfolio securities.
Weighted average maturity is another indicator of potential volatility
used by the Investment Manager with respect to the Fund's bond portfolio,
although for certain types of debt securities, such as high quality debt
securities, it is not as accurate as duration in quantifying potential
volatility. Weighted average maturity is the average of all maturities of the
individual debt securities held by the Fund, weighted by the market value of
each security. Generally, the longer the weighted average maturity, the more
bond prices will vary in response to changes in interest rates.
U.S. Government and Related Securities. U.S. Government securities are
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S. Government
securities in which the Fund invests include, among others:
[bullet] direct obligations of the U.S. Treasury, i.e., U.S. Treasury bills,
notes, certificates and bonds;
[bullet] obligations of U.S. Government agencies or instrumentalities, such as
the Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal
National Mortgage Association, the Government National Mortgage
Association and the Federal Home Loan Mortgage Corporation; and
[bullet] obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a
variety of ways by the U.S. Government, its agencies or instrumentalities. Some
of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. Other obligations, such as those of the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government to
purchase certain obligations of agencies or instrumentalities, although the U.S.
Government
16
<PAGE>
has no legal obligation to do so. Obligations such as those of the Federal Home
Loan Banks, the Federal Farm Credit Banks, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation are backed by the
credit of the agency or instrumentality issuing the obligations. Certain
obligations of Resolution Funding Corporation, a mixed-ownership Government
corporation, are backed with respect to interest payments by the U.S. Treasury,
and with respect to principal payments by U.S. Treasury obligations held in a
segregated account with a Federal Reserve Bank. Except for certain
mortgage-related securities, the Fund will only invest in obligations issued by
mixed-ownership Government corporations where such securities are guaranteed as
to payment of principal or interest by the U.S. Government or a U.S. Government
agency or instrumentality, and any unguaranteed principal or interest is
otherwise supported by U.S. Government obligations held in a segregated account.
Treasury STRIPS and Custodial Receipts. U.S. Government securities may
be acquired by the Fund in the form of separately traded principal and interest
components of securities issued or guaranteed by the U.S. Treasury. The
principal and interest components of selected securities are traded
independently under the Separate Trading of Registered Interest and Principal of
Securities ("STRIPS") program. Under the STRIPS program, the principal and
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently. Obligations of Resolution Funding Corporation
are similarly divided into principal and interest components and maintained as
such on the book entry records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Bank Money Investments. Bank money investments include, but are not
limited to, certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are generally short-term (i.e., less than one year),
interest-bearing negotiable certificates issued by commercial banks or savings
and loan associations against funds deposited in the issuing institution. A
banker's acceptance is a time draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods). A banker's acceptance may be
obtained from a domestic
17
<PAGE>
or foreign bank, including a U.S. branch or agency of a foreign bank. The
borrower is liable for payment as well as the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Most
acceptances have maturities of six months or less and are traded in secondary
markets prior to maturity. Time deposits are nonnegotiable deposits for a fixed
period of time at a stated interest rate. The Fund will not invest in any such
bank money investment unless the investment is issued by a U.S. bank that is a
member of the Federal Deposit Insurance Corporation ("FDIC"), including any
foreign branch thereof, a U.S. branch or agency of a foreign bank, a foreign
branch of a foreign bank, or a savings bank or savings and loan association that
is a member of the FDIC and which at the date of investment has capital, surplus
and undivided profits (as of the date of its most recently published financial
statements) in excess of $50 million. The Fund will not invest in time deposits
maturing in more than seven days and will not invest more than 10% of its total
assets in time deposits maturing in two to seven days.
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under state law. U.S. federal branches or agencies
of foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such branches elect FDIC insurance. Unlike U.S. branches of foreign banks,
U.S. agencies of foreign banks may not accept deposits and thus are not eligible
for FDIC insurance. Both branches and agencies can maintain credit balances,
which are funds received by the office incidental to or arising out of the
exercise of their banking powers and can exercise other commercial functions,
such as lending activities.
Short-Term Corporate Debt Instruments. Short-term corporate debt
instruments include commercial paper to finance short-term credit needs (i.e.,
short-term, unsecured promissory notes) issued by corporations including but not
limited to (a) domestic or foreign bank holding companies or (b) their
subsidiaries or affiliates where the debt instrument is guaranteed by the bank
holding company or an affiliated bank or where the bank holding company or the
affiliated bank is unconditionally liable for the debt instrument. Commercial
paper is usually sold on a discounted basis and has a maturity at the time of
issuance not exceeding nine months.
Commercial Paper Ratings. Commercial paper investments at the time of
purchase will be rated within the "A" major rating category by S&P or within the
"Prime" major rating category by Moody's, or, if not rated, issued by companies
having an outstanding long-term unsecured debt issue rated at least within the
"A" category by S&P or by Moody's. The money market investments in corporate
bonds and debentures (which must have maturities at the date of settlement of
one year or less) must be rated at the time of purchase at least within the "A"
category by S&P or within the "Prime" category by Moody's.
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<PAGE>
Commercial paper rated within the "A" category (highest quality) by S&P
is issued by entities which have liquidity ratios which are adequate to meet
cash requirements. Long-term senior debt is rated within the "A" category or
better, although in some cases credits within the "BBB" category may be allowed.
The issuer has access to at least two additional channels of borrowing. Basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances. Typically, the issuer's industry is well established and the
issuer has a strong position within the industry. The reliability and quality of
management are unquestioned. The relative strength or weakness of the above
factors determines whether the issuer's commercial paper is rated A-1, A-2 or
A-3. (Those A-1 issues determined to possess overwhelming safety characteristics
are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating category
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: evaluation of the management of the issuer; economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; evaluation of the
issuer's products in relation to competition and customer acceptance; liquidity;
amount and quality of long-term debt; trend of earnings over a period of 10
years; financial management of obligations which may be present or may arise as
a result of public interest questions and preparations to meet such obligations.
These factors are all considered in determining whether the commercial paper is
rated Prime-1, Prime-2 or Prime-3.
In the event the lowering of ratings of debt instruments held by the
Fund by applicable rating agencies results in a material decline in the overall
quality of the Fund's portfolio, the Trustees of the Trust will review the
situation and take such action as they deem in the best interests of the Fund's
shareholders, including, if necessary, changing the composition of the
portfolio.
THE TRUST, THE FUND AND ITS SHARES
State Street Research Financial Trust currently is 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 authority to issue an unlimited number of shares
of beneficial interest of separate series, $.001 par value per share. The
Trustees also have authority, without the necessity of a shareholder vote, to
create any number of new series or classes or to commence the public offering of
shares of any previously established series or class. 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 authorized shares of the Fund to be issued in four
classes: Class A, Class B, Class C and Class S shares. Prior to November 1,
1997, the Fund's current Class C
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<PAGE>
shares were designated as Class D shares and the Fund's current Class S shares
were designated as Class C shares.
Each share of each class of shares represents an identical legal
interest in the same portfolio of investments of the Fund, has the same rights
and is identical in all respects, except that Class A, Class B and Class C
shares bear the expenses of the deferred sales arrangement and any expenses
(including the higher service and distribution fees) resulting from such sales
arrangement, and certain other incremental expenses related to a class. Each
class will have exclusive voting rights with respect to provisions of the Rule
12b-1 distribution plan pursuant to which the service and distribution fees, if
any, are paid. Although the legal rights of holders of each class of shares are
identical, it is likely that the different expenses borne by each class will
result in different net asset values and dividends. The different classes of
shares of the Fund also have different exchange privileges. Except for those
differences between classes of shares described above, in the Fund's Prospectus
and otherwise this Statement of Additional Information, each share of the Fund
has equal dividend, redemption and liquidation rights with other shares of the
Fund, and when issued, is fully paid and nonassessable by the Fund.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have a material, adverse effect on
the rights of any shareholder. On any matter submitted to the shareholders, the
holder of a Fund share is entitled to one vote per share (with proportionate
voting for fractional shares) regardless of the relative net asset value
thereof.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there ordinarily will be no shareholder meetings
unless required by the 1940 Act. Except as otherwise provided under the 1940
Act, the Board of Trustees will be a self-perpetuating body until fewer than
two-thirds of the Trustees serving as such are Trustees who were elected by
shareholders of the Trust. In the event less than a majority of the Trustees
serving as such were elected by shareholders of the Trust, a meeting of
shareholders will be called to elect Trustees. Under the Master Trust Agreement,
any Trustee may be removed by vote of two thirds of the outstanding Trust
shares; holders of 10% or more of the outstanding shares of the Trust can
require that the Trustees call a meeting of shareholders for purposes of voting
on the removal of one or more Trustees. In connection with such meetings called
by shareholders, shareholders will be assisted in shareholder communications to
the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations for the
Trust. However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for indemnification
for all losses and expenses of any shareholder of the Fund held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which
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<PAGE>
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.
TRUSTEES AND OFFICERS
The Trustees and principal officers of the Trust, their addresses, and
their principal occupations and positions with certain affiliates of the
Investment Manager are set forth below.
*+Peter C. Bennett, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 59. His principal occupation is Executive
Vice President and Director of State Street Research & Management Company.
During the past five years he has also served as Senior Vice President of State
Street Research & Management Company. Mr. Bennett's other principal business
affiliation is Director, State Street Research Investment Services, Inc. and
Executive Vice President, GFM International Investors, Inc.
+Steve A. Garban, The Pennsylvania State University, 210 Old Main,
University Park, PA 16802, serves as Trustee of the Trust. He is 60. He is
retired and was formerly Senior Vice President for Finance and Operations and
Treasurer of The Pennsylvania State University.
+Malcolm T. Hopkins, 14 Brookside Road, Biltmore Forest, Asheville, NC
28803, serves as Trustee of the Trust. He is 69. He is engaged principally in
private investments. Previously, he was Vice Chairman of the Board and Chief
Financial Officer of St. Regis Corp.
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 57. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as portfolio manager for State Street Research &
Management Company.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791,
serves as Trustee of the Trust. He is 71. He is engaged principally in private
investments and civic affairs, and is an author of business history. Previously,
he was with an affiliate of J.P. Morgan & Co. in New York.
- ------------------------
* or +, see footnotes on page 24.
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<PAGE>
+Robert A. Lawrence, 175 Congress Street, Boston, MA 02110, serves as
Trustee of the Trust. He is 71. He is retired and was formerly a Partner in
Saltonstall & Co., a private investment firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 46. His principal occupation currently, and during
the past five years has been, Executive Vice President, Treasurer, Chief
Financial Officer and Director of State Street Research & Management Company.
Mr. Maus's other principal business affiliations include Executive Vice
President, Treasurer, Chief Financial Officer and Director of State Street
Research Investment Services, Inc. and Executive Vice President, Chief Financial
Officer, Administrative Officer and Director, GFM International Investors, Inc.
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111,
serves as Secretary and General Counsel of the Trust. He is 42. His principal
occupation is Executive Vice President, General Counsel and Secretary of State
Street Research & Management Company. During the past five years he has also
served as Senior Vice President of State Street Research & Management Company
and as Senior Vice President, General Counsel and Assistant Secretary of The
Boston Company, Inc., Boston Safe Deposit and Trust Company and The Boston
Company Advisors, Inc. Mr. McNamara's other principal business affiliations
include Executive Vice President, Clerk and General Counsel of State Street
Research Investment Services, Inc. and Executive Vice President and General
Counsel, GFM International Investors, Inc.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 65. He is retired, and was formerly Executive Vice
President, Chief Operating Officer and Director of Hewlett-Packard Company.
+Thomas L. Phillips, 141 Spring Street, Lexington, MA 02173, serves as
Trustee of the Trust. He is 73. He is retired and was formerly Chairman of the
Board and Chief Executive Officer of Raytheon Company, of which he remains a
Director.
- ------------------------
* or +, see footnotes on page 24.
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<PAGE>
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves
as Trustee of the Trust. He is 59. His principal occupations during the past
five years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
60. His principal occupation during the past five years has been Jay W.
Forrester Professor of Management at Sloan School of Management, Massachusetts
Institute of Technology.
*+Thomas A. Shively, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 43. His principal occupation is Executive
Vice President and Director of State Street Research & Management Company.
During the past five years he has also served as Senior Vice President of State
Street Research & Management Company. Mr. Shively's other principal business
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 55. His principal occupation currently, and during the past five
years, has been Chairman of the Board, President, Chief Executive Officer and
Director of State Street Research & Management Company. Mr. Verni's other
principal business affiliations include Chairman of the Board and Director of
State Street Research Investment Services, Inc. (until February 1996, prior
positions as President and Chief Executive Officer of that company) and Chairman
of the Board, Chief Executive Officer and Director of GFM International
Investors, Inc.
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 73. He is retired and was formerly Of Counsel for
the law firm Choate, Hall & Stewart. He was a partner of that firm from 1960 to
1987.
- ------------------------
* or +, see footnotes on page 24.
23
<PAGE>
- -------------
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the 1940 Act because of their affiliations
with the Fund's investment adviser.
+ Serves as a Trustee/Director and/or officer of one or more of the
following investment companies, each of which has an advisory
relationship with the Investment Manager or its parent, Metropolitan
Life Insurance Company ("Metropolitan"): State Street Research Equity
Trust, State Street Research Financial Trust, State Street Research
Income Trust, State Street Research Money Market Trust, State Street
Research Tax-Exempt Trust, State Street Research Capital Trust, State
Street Research Exchange Trust, State Street Research Growth Trust,
State Street Research Master Investment Trust, State Street Research
Securities Trust, State Street Research Portfolios, Inc. and
Metropolitan Series Fund, Inc.
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<PAGE>
Record ownership of shares of the Fund as of November 30, 1997 was as
follows:
Class Holder % of Class
A Merrill Lynch 38.51
B Merrill Lynch 17.10
C(a) Merrill Lynch 60.05
S(a) Chase Manhattan Bank 6.93
State Street Bank 6.52
Amalgamated Bank 12.87
Metropolitan 69.40
The full name and address of the above persons or institutions are:
Merrill Lynch, Pierce, Fenner & Smith, Inc. (b)
One Liberty Plaza, 165 Broadway, New York, NY 10080
State Street Bank and Trust Company (b)(c)
225 Franklin Street, Boston, MA 02111
Amalgamated Bank of New York (b)(d)
P.O. Box 370, Cooper Station, New York, NY 10003
Chase Manhattan Bank, N.A. (b)(e)
770 Broadway, New York, NY 10003
Metropolitan Life Insurance Company
303 Perimeter Center N. Suite 500, Atlanta, GA 30346
(a) Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
(b) The Fund believes that each named recordholder does not have beneficial
ownership of such shares.
(c) State Street Bank and Trust Company holds such shares as custodian for
individual retirement accounts.
(d) Amalgamated Bank holds such shares as custodian for various retirement
accounts.
(e) Chase Manhattan Bank holds such shares as trustee under certain employee
benefit plans serviced by 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.
As of November 30, 1997, the Trustees and principal officers of the
Trust as a group owned less than 1% of the outstanding Class A shares of the
Fund, and owned none of the outstanding Class B, Class C or Class S shares.*
______________
* Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
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<PAGE>
The Trustees were compensated as follows:
Total
Compensation
Aggregate From Trust and
Compensation Complex Paid
Name of Trustee From Trust(a) to Trustees(b)
Steve A. Garban $ 5,459 $ 75,899
Malcolm T. Hopkins $ 6,059 $ 78,499
Edward M. Lamont $ 9,700 $ 68,741
Robert A. Lawrence $10,100 $ 93,125
Dean O. Morton $10,900 $ 97,125
Thomas L. Phillips $10,100 $ 68,275
Toby Rosenblatt $ 9,700 $ 68,741
Michael S. Scott Morton $12,100 $103,625
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $11,300 $ 74,475
(a) For the Fund's fiscal year ended October 31, 1997. Includes
compensation received from multiple series of the Trust. See "The
Trust, the Fund and its Shares" in this Statement of Additional
Information for a listing of series.
(b) Includes compensation on behalf of all series of 12 investment
companies for which the Investment Manager or its parent, Metropolitan,
served as investment adviser. "Total Compensation from Trust and
Complex Paid to Trustees" for the 12 months ended December 31, 1997.
The Trust does not provide any pension or retirement benefits for the
Trustees.
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<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 Investment
Manager was founded by Paul Cabot, Richard Saltonstall and Richard Paine to
serve as investment adviser to one of the nation's first mutual funds, presently
known as State Street Research Investment Trust, which they had formed in 1924.
Their investment management philosophy emphasized comprehensive
fundamental research and analysis, including meetings with the management of
companies under consideration for investment. The Investment Manager's portfolio
management group has extensive investment industry experience managing equity
and debt securities. In managing debt securities, if any, for a portfolio, the
Investment Manager may consider yield curve positioning, sector rotation and
duration, among other factors.
The Advisory Agreement provides that the Investment Manager shall
furnish the Fund with an investment program, office facilities and such
investment advisory, research and administrative services as may be required
from time to time. The Investment Manager compensates all executive and clerical
personnel and Trustees of the Trust if such persons are employees of the
Investment Manager or its affiliates. The Investment Manager is an indirect
wholly-owned subsidiary of Metropolitan.
The advisory fee payable monthly by the Fund to the Investment Manager
is computed as a percentage of the average of the value of the net assets of the
Fund as determined at the close of regular trading on the New York Stock
Exchange (the "NYSE") on each day the NYSE is open for trading, at the annual
rate of 0.65% of the net assets of the Fund.
The advisory fees paid by the Fund to the Investment Manager for the
last three fiscal years, prior to the assumption of fees or expenses, were as
follows: 1997, $4,364,193; 1996, $4,723,842; and 1995, $4,651,813
The Advisory Agreement provides that it shall continue in effect from
year to year with respect to the Fund as long as it is approved at least
annually both (i) by a vote of a majority of the outstanding voting securities
of the Fund (as defined in the 1940 Act) or by the Trustees of the Trust, and
(ii) in either event by a vote of a majority of the Trustees who are not parties
to the Advisory Agreement or "interested persons" of any party thereto, cast in
person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated on 60 days' written notice by either party
and will terminate automatically in the event of its assignment, as defined
under the 1940 Act and regulations thereunder. Such regulations provide that a
transaction which does not result in a change of actual control or management of
an adviser is not deemed an assignment.
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<PAGE>
Under the Fund's 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
each series of the Trust and in preparing various reports required by
regulations.
Under a Shareholders' Administrative Services Agreement between the
Trust and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Fund, and is entitled to
reimbursements of its costs for providing such services. Under certain
arrangements for Metropolitan to provide subadministration services,
Metropolitan may receive a fee for the maintenance of certain share ownership
records for participants in sponsored arrangements, such as employee benefit
plans, through or under which the Fund's shares may be purchased.
Under the Code of Ethics of the Investment Manager, investment
management personnel are only permitted to engage in personal securities
transactions in accordance with certain conditions relating to such person's
position, the identity of the security, the timing of the transaction, and
similar factors. Such personnel must report their personal securities
transactions quarterly and supply broker confirmations of such transactions to
the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by State Street Research Investment
Services, Inc., the 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 S shares, a sales charge which, at the election
of the investor, may be imposed (i) at the time of purchase (the Class A shares)
or (ii) on a deferred basis (the Class B and Class C shares). General
information on how to buy shares of the Fund, as well as sales charges involved,
are set forth under "Your Account" in the Prospectus. The following supplements
that information.
Public Offering Price. The public offering price for each class of
shares is based on their net asset value determined as of the close of regular
trading on the NYSE on the day the purchase order is received by State Street
Research Service Center (the "Service Center"), provided that the order is
received prior to the close of regular trading on the NYSE on that day;
otherwise the net asset value used is that determined as of the close of the
NYSE on the next day it is open for unrestricted trading. When a purchase order
is placed through a dealer, that dealer is responsible for transmitting the
order promptly to the Service Center in order to permit the investor to obtain
the current price. Any loss suffered by an investor which results from a
dealer's failure to transmit an order promptly is a matter for settlement
between the investor and the dealer.
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<PAGE>
Class A Shares--Reduced Sales Charges. The reduced sales charges set
forth under "Your Account--Class A Sales Charge Reductions and Waivers" in the
Fund's Prospectus apply to purchases made at any one time by any "person," which
includes: (i) an individual, or an individual combining with his or her spouse
and their children and purchasing for his, her or their own account; (ii) a
"company" as defined in Section 2(a)(8) of the 1940 Act; (iii) a trustee or
other fiduciary purchasing for a single trust estate or single fiduciary account
(including a pension, profit sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code);
(iv) a tax-exempt organization under Section 501(c)(3) or (13) of the Internal
Revenue Code; and (v) an employee benefit plan of a single employer or of
affiliated employers.
Investors may purchase Class A shares of the Fund at reduced sales
charges by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds"
(which include the Fund and other funds as designated by the Distributor from
time to time) within a 13-month period. The sales charge applicable to each
purchase made pursuant to a Letter of Intent will be that which would apply if
the total dollar amount set forth in the Letter of Intent were being bought in a
single transaction. Purchases made within a 90-day period prior to the execution
of a Letter of Intent may be included therein; in such case the date of the
earliest of such purchases marks the commencement of the 13-month period.
An investor may include toward completion of a Letter of Intent the
value (at the current public offering price) of all of his or her Class A shares
of the Fund and of any of the other Class A shares of Eligible Funds held of
record as of the date of his or her Letter of Intent, plus the value (at the
current offering price) as of such date of all of such shares held by any
"person" described herein as eligible to join with the investor in a single
purchase. Class B, Class C and Class S shares may also be included in the
combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current
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public offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class S shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Other Programs Related to Class A Shares. Class A shares of the Fund
may be sold or issued in an exchange at a reduced sales charge or without sales
charge pursuant to certain sponsored arrangements, which include programs under
which a company, employee benefit plan or other organization makes
recommendations to, or permits group solicitation of, its employees, members or
participants, except any organization created primarily for the purpose of
obtaining shares of the Fund at a reduced sales charge or without a sales
charge. Sales without a sales charge, or with a reduced sales charge, may also
be made through brokers, registered investment advisers, financial planners,
institutions, and others, under managed fee-based programs (e.g., "wrap fee" or
similar programs) which meet certain requirements established from time to time
by the Distributor. Information on such arrangements and further conditions and
limitations is available from the Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and person: (A) the
Investment Manager, Distributor or any affiliated entities, including any direct
or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated Companies,
any relatives of any such individuals whose relationship is directly verified by
such individuals to the Distributor, or any beneficial account for such
relatives or individuals; and (C) employees, officers, sales representatives or
directors of dealers and other entities with a selling agreement with the
Distributor to sell shares of any aforementioned investment company, any spouse
or child of such person, or any beneficial account for any of them. The purchase
must be made for investment and the shares purchased may not be resold except
through redemption. This purchase program is subject to such administrative
policies, regarding the qualification of purchasers and any other matters, as
may be adopted by the Distributor from time to time.
Conversion of Class B Shares to Class A Shares. A shareholder's Class B
shares of the Fund, including all shares received as dividends or distributions
with respect to such shares, will automatically convert to Class A shares of the
Fund at the end of eight years following the issuance of such Class B shares;
consequently, they will no longer be subject to the higher expenses borne by
Class B shares. The conversion rate will be determined on the basis of the
relative per share net asset values of the two classes and may result in a
shareholder receiving either a greater or fewer number of Class A shares than
the Class B shares so converted. As noted above, holding periods for Class B
shares received in exchange for Class B shares of other Eligible Funds will be
counted toward the eight-year period.
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Contingent Deferred Sales Charges. The amount of any contingent
deferred sales charge paid on Class A shares (on sales of $1 million or more and
which do not involve an initial sales charge) or on Class B or Class C shares of
the Fund will be paid to the Distributor. The Distributor will pay dealers at
the time of sale a 4% commission for selling Class B shares and a 1% commission
for selling Class C shares. In certain cases, a dealer may elect to waive the 4%
commission on Class B shares and receive in lieu thereof a 1% annual fee with
respect to such outstanding shares until the shares convert to Class A shares.
The proceeds of the contingent deferred sales charges and the distribution fees
are used to offset distribution expenses and thereby permit the sale of Class B
and Class C shares without an initial sales charge.
In determining the applicability and rate of any contingent deferred
sales charge of Class B or Class C shares, it will be assumed that a redemption
of the shares is made first of those shares having the greatest capital
appreciation, next of shares representing reinvestment of dividends and capital
gains distributions and finally of remaining shares held by shareholder for the
longest period of time. Class B shares that are redeemed within a five-year
period after their purchase, and Class C shares that are redeemed within a
one-year period after their purchase, will not be subject to a contingent
deferred sales charge to the extent that the value of such shares represents (1)
capital appreciation of Fund assets or (2) reinvestment of dividends or capital
gains distributions. The holding period for purposes of applying a contingent
deferred sales charge for a particular class of shares of the Fund acquired
through an exchange from another Eligible Fund will be measured from the date
that such shares were initially acquired in the other Eligible Fund, and shares
of the same class being redeemed will be considered to represent, as applicable,
capital appreciation or dividend and capital gains distribution reinvestments in
such other Eligible Fund. These determinations will result in any contingent
deferred sales charge being imposed at the lowest possible rate. For federal
income tax purposes, the amount of the contingent deferred sales charge will
reduce the gain or increase the loss, as the case may be, on the amount realized
on redemption.
Contingent Deferred Sales Charge Waivers. With respect to Class A
shares (on sales of $1 million or more and which do not involve an initial sales
charge), and Class B and Class C shares of the Fund, the contingent deferred
sales charge does not apply to exchanges or to redemptions under a systematic
withdrawal plan which meets certain conditions. In addition, the contingent
deferred sales charge will be waived for: (i) redemptions made within one year
of the death or total disability, as defined by the Social Security
Administration, of all shareholders of an account; (ii) redemptions made after
attainment of a specific age in an amount which represents the minimum
distribution required at such age under Section 401(a)(9) of the Internal
Revenue Code of 1986, as amended, for retirement accounts or plans (e.g., age
70 1/2 for Individual Retirement Accounts and Section 403(b) plans), calculated
solely on the basis of assets invested in the Fund or other Eligible Funds; and
(iii) a redemption resulting from a tax-free return of an excess contribution to
an Individual Retirement Account. (The foregoing waivers do not apply to a
tax-free rollover or transfer of assets out of the Fund). The Fund may modify or
terminate the waivers at any time; for example, the Fund
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may limit the application of multiple waivers and establish other conditions for
employee benefit plans.
Class S Shares. Class S shares are currently available to certain
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants, service arrangements, or similar factors;
insurance companies; investment companies; advisory accounts of the Investment
Manager; endowment funds of nonprofit organizations with substantial minimum
assets (currently a minimum of $10 million); and other similar institutional
investors. Class S shares may be acquired through programs or products sponsored
by Metropolitan, its affiliates, or both for which Class S shares have been
designated. In addition, Class S shares are available through programs under
which, for example, investors pay an asset-based fee and/or a transaction fee to
intermediaries. Class S share availability is determined by the Distributor and
intermediaries based on the overall direct and indirect costs of a particular
program, expected assets, account sizes and similar considerations.
Reorganizations. In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, the Fund may issue its shares at net asset value (or
more) to such entities or to their security holders.
Redemptions. The Fund reserves the right to pay redemptions in kind
with portfolio securities in lieu of cash. In accordance with its election
pursuant to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of
redemption proceeds paid in cash. Although it has no present intention to do so,
the Fund may, under unusual circumstances, limit redemptions in cash with
respect to each shareholder during any ninety-day period to the lesser of (i)
$250,000 or (ii) 1% of the net asset value of the Fund at the beginning of such
period. In connection with any redemptions paid in kind with portfolio
securities, brokerage and other costs may be incurred by the redeeming
shareholder in the sale of the securities received.
Systematic Withdrawal Plan. A shareholder who owns noncertificated
Class A or Class S shares with a value of $5,000 or more, or Class B or Class C
shares with a value of $10,000 or more, may elect, by participating in the
Fund's Systematic Withdrawal Plan, to have periodic checks issued for specified
amounts. These amounts may not be less than certain minimums, depending on the
class of shares held. The Plan provides that all income dividends and capital
gains distributions of the Fund shall be credited to participating shareholders
in additional shares of the Fund. Thus, the withdrawal amounts paid can only be
realized by redeeming shares of the Fund under the Plan. To the extent such
amounts paid exceed dividends and distributions from the Fund, a shareholder's
investment will decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually of
either (a) the value, at the
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time the Systematic Withdrawal Plan is initiated, of the shares then in the
account or (b) the value, at the time of a withdrawal, of the same number of
shares as in the account when the Systematic Withdrawal Plan was initiated,
whichever is higher.
Expenses of the Systematic Withdrawal Plan are borne by the Fund. A
participating shareholder may withdraw from the Systematic Withdrawal Plan, and
the Fund may terminate the Systematic Withdrawal Plan at any time on written
notice. Purchase of additional shares while a shareholder is receiving payments
under a Systematic Withdrawal Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate in
the Investamatic Program (see "Your Account--Investor Services--Investamatic
Program" in the Fund's Prospectus) and the Systematic Withdrawal Plan at the
same time.
Request to Dealer to Repurchase. For the convenience of shareholders,
the Fund has authorized the Distributor as its agent to accept orders from
dealers by wire or telephone for the repurchase of shares by the Distributor
from the dealer. The Fund may revoke or suspend this authorization at any time.
The repurchase price is the net asset value for the applicable shares next
determined following the time at which the shares are offered for repurchase by
the dealer to the Distributor. The dealer is responsible for promptly
transmitting a shareholder's order to the Distributor.
Signature Guarantees. Signature guarantees are required for, among
other things: (1) written requests for redemptions for more than $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 guarantees (or notarizations)
from notaries public. The above requirements may be waived in certain instances.
Dishonored Checks. If a purchaser's check is not honored for its full
amount, the purchaser could be subject to additional charges to cover collection
costs and any investment loss, and the purchase may be canceled.
Processing Charges. Purchases and redemptions processed through
securities dealers may be subject to processing charges imposed by the
securities dealer in addition to sales charges that may be imposed by the Fund
or the Distributor.
SHAREHOLDER ACCOUNTS
General information on shareholder accounts is included in the Fund's
Prospectus under "Your Account." The following supplements that information.
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Maintenance Fees and Involuntary Redemption. Because of the relatively
high cost of maintaining small shareholder accounts, the Fund reserves the right
to redeem at its option any shareholder account which remains below $1,500 for a
period of 60 days after notice is mailed to the applicable shareholder, or to
impose a maintenance fee on such account after 60 days' notice. Such
involuntarily redemptions will be subject to applicable sales charges, if any.
The Fund may increase such minimum account value above such amount in the future
after notice to affected shareholders. Involuntarily redeemed shares will be
priced at the net asset value on the date fixed for redemption by the Fund, and
the proceeds of the redemption will be mailed to the affected shareholder at the
address of record. Currently, the maintenance fee is $18 annually, which is paid
to the Transfer Agent. The fee does not apply to certain retirement accounts or
if the shareholder has more than an aggregate $50,000 invested in the Fund and
other Eligible Funds combined. Imposition of a maintenance fee on a small
account could, over time, exhaust the assets of such account.
To cover the cost of additional compliance administration, a $20 fee
will be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date
of payment of redemption proceeds for more than seven days, except that (a) it
may elect to suspend the redemption of shares or postpone the date of payment of
redemption proceeds: (1) during any period that the NYSE is closed (other than
customary weekend and holiday closings) or trading on the NYSE is restricted;
(2) during any period in which an emergency exists as a result of which disposal
of portfolio securities is not reasonably practicable or it is not reasonably
practicable to fairly determine the Fund's net asset values; or (3) during such
other periods as the Securities and Exchange Commission (the "SEC") may by order
permit for the protection of investors; and (b) the payment of redemption
proceeds may be postponed as otherwise provided under "Purchase and Redemption
of Shares" in this Statement of Additional Information.
The Open Account System. Under the Open Account System full and
fractional shares of the Fund owned by shareholders are credited to their
accounts by the Transfer Agent, State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110. Certificates representing Class B
or Class C shares will not be issued, while certificates representing Class A or
Class S shares will only be issued if specifically requested in writing and, in
any case, will only be issued for full shares, with any fractional shares to be
carried on the shareholder's account. Shareholders will receive periodic
statements of transactions in their accounts.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through
dealers, by wire or by mailing a check payable to "State Street
Research Funds" under the
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terms set forth above under "Purchase and Redemption of Shares"
in this Statement of Additional Information.
2. The following methods of receiving dividends from investment
income and distributions from capital gains generally are
available:
(a) All income dividends and capital gains distributions
reinvested in additional shares of the Fund.
(b) All income dividends and capital gains distributions in cash.
(c) All income dividends and capital gains distributions invested
in any one available Eligible Fund designated by the
shareholder as described below. See "--Dividend Allocation
Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will be automatically coded for reinvestment of all
dividends and distributions in additional shares of the same class of the Fund.
Selections may be changed at any time by telephone or written notice to the
Service Center. Dividends and distributions are reinvested at net asset value
without a sales charge.
Exchange Privileges. Shareholders of the Fund may exchange their shares
for available shares with corresponding characteristics of any of the other
Eligible Funds at any time on the basis of the relative net asset values of the
respective shares to be exchanged, subject to compliance with applicable
securities laws. Shareholders of any other Eligible Fund may similarly exchange
their shares for Fund shares with corresponding characteristics. Prior to making
an exchange, shareholders should obtain the Prospectus of the Eligible Fund into
which they are exchanging. Under the Direct Program, subject to certain
conditions, shareholders may make arrangements for regular exchanges from the
Fund into other Eligible Funds. To effect an exchange, Class A, Class B and
Class C shares may be redeemed without the payment of any contingent deferred
sales charge that might otherwise be due upon an ordinary redemption of such
shares. The State Street Research Money Market Fund issues Class E shares which
are sold without any sales charge. Exchanges of State Street Research Money
Market Fund Class E shares into Class A shares of the Fund or any other Eligible
Fund are subject to the initial sales charge or contingent deferred sales charge
applicable to an initial investment in such Class A shares, unless a prior Class
A sales charge has been paid directly or indirectly with respect to the shares
redeemed. For purposes of computing the contingent deferred sales charge that
may be payable upon disposition of any acquired Class A, Class B and Class C
shares, the holding period of the redeemed shares is "tacked" to the holding
period of any acquired shares. No exchange transaction fee is currently imposed
on any exchange.
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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 C shares of the Fund shall restart any holding period
previously tolled, or shall be subject to the contingent deferred sales charge
applicable to an initial investment in such shares.
The exchange privilege may be terminated or suspended or its terms
changed at any time, subject, if required under applicable regulations, to 60
days' prior notice. New accounts established for investments upon exchange from
an existing account in another fund will have the same telephone privileges with
respect to the Fund (see "Your Account--Account Policies--Telephone Requests" in
the Fund's Prospectus and "--Telephone Privileges," below) as the existing
account unless the Service Center is instructed otherwise. Related
administrative policies and procedures may also be adopted with regard to a
series of exchanges, street name accounts, sponsored arrangements and other
matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer identification
number, may be aggregated for purposes of the six exchange limit.
Notwithstanding the six exchange limit, the Fund reserves the right to refuse
exchanges by any person or group if, in the Investment Manager's judgment, the
Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
Exchanges may be restricted or refused if the Fund receives or anticipates
simultaneous orders affecting significant portions of the Fund's assets. In
particular, a pattern of exchanges that coincides with a "market timing"
strategy may be disruptive to the Fund. The Fund may impose these restrictions
at any time. The exchange limit may be modified for accounts in certain
institutional retirement plans because of plan exchange limits, Department of
Labor regulations or administrative and other considerations. Subject to the
foregoing, if an exchange request in good order is received by the Service
Center and delivered by the Service Center to the Transfer Agent by 12 noon
Boston time on
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any business day, the exchange usually will occur that day. For further
information regarding the exchange privilege, shareholders should contact the
Service Center.
Reinvestment Privilege. A shareholder of the Fund who has redeemed
shares or had shares repurchased at his or her request may reinvest all or any
portion of the proceeds (plus that amount necessary to acquire a fractional
share to round off his or her reinvestment to full shares) in shares, of the
same class as the shares redeemed, of the Fund or any other Eligible Fund at net
asset value and without subjecting the reinvestment to an initial sales charge,
provided such reinvestment is made within 120 calendar days after a redemption
or repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the amount
reinvested. The redemption of shares is, for federal income tax purposes, a sale
on which the shareholder may realize a gain or loss. If a redemption at a loss
is followed by a reinvestment within 30 days, the transaction may be a "wash
sale" resulting in a denial of the loss for federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject
to any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by the Service
Center of such shareholder's written purchase request and delivery of the
request by the Service Center to the Transfer Agent. A shareholder may exercise
this reinvestment privilege only once per 12-month period with respect to his or
her shares of the Fund.
Dividend Allocation Plan. The Dividend Allocation Plan allows
shareholders to elect to have all their dividends and any other distributions
from the Fund or any Eligible Fund automatically invested at net asset value in
one other such Eligible Fund designated by the shareholder, provided the account
into which the dividends and distributions are directed is initially funded with
the requisite minimum amount.
Telephone Privileges. Unless a shareholder declines telephone
privileges that are offered with his or her Account, (see "Your Account--Account
Policies--Telephone Requests"), he or she is deemed to authorize the Service
Center and the Transfer Agent to: (1) act upon the telephone instructions of any
person purporting to be the shareholder or the shareholder's financial
professional to redeem or exchange shares from any account; and (2) honor any
written instructions for a change of address regardless of whether such request
is accompanied by a signature guarantee. All telephone calls will be recorded.
Neither the Fund, the other Eligible Funds, the Transfer Agent, the Investment
Manager nor the Distributor will be liable for any loss, expense or cost arising
out of any request, including any fraudulent or unauthorized requests.
Shareholders assume the risk to the full extent of their accounts that telephone
requests may be unauthorized. Reasonable procedures will be followed to confirm
that instructions communicated by telephone are genuine. The shareholder will
not be liable for any losses arising from unauthorized or fraudulent
instructions if such procedures are not followed.
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Alternative Means of Contacting the Fund. It is unlikely, even during
periods of extraordinary market conditions, that a shareholder will have
difficulty in reaching the Service Center. In that event, however, the
shareholder should contact the Service Center at 1-800- 562-0032, 1-617-357-7800
or otherwise at its main office at One Financial Center, Boston, Massachusetts
02111-2690.
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily
as of the close of regular trading on the NYSE, ordinarily 4 P.M. New York City
time, Monday through Friday, on each day during which the NYSE is open for
unrestricted trading. The NYSE is currently closed on New Year's Day, Presidents
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
The net asset value per share of the Fund is computed by dividing the
sum of the value of the securities held by the Fund plus any cash or other
assets minus all liabilities by the total number of outstanding shares of the
Fund at such time. Any expenses, except for extraordinary or nonrecurring
expenses, borne by the Fund, including the investment management fee payable to
the Investment Manager, are accrued daily.
In determining the values of portfolio assets as provided below, the
Trustees utilize one or more pricing services in lieu of market quotations for
certain securities which are not readily available on a daily basis. Such
services utilize information with respect to market transactions, quotations
from dealers and various relationships among securities in determining value and
may provide prices determined as of times prior to the close of the NYSE.
In general, securities are valued as follows. Securities which are
listed or traded on the New York or American Stock Exchange are valued at the
price of the last quoted sale on the respective exchange for that day.
Securities which are listed or traded on a national securities exchange or
exchanges, but not on the New York or American Stock Exchange, are valued at the
price of the last quoted sale on the exchange for that day prior to the close of
the NYSE. Securities not listed on any national securities exchange which are
traded "over the counter" and for which quotations are available on the National
Association of Securities Dealers, Inc.'s (the "NASD") NASDAQ System are valued
at the closing price supplied through such system for that day at the close of
the NYSE. Other securities are, in general, valued at the mean of the bid and
asked quotations last quoted prior to the close of the NYSE if there are market
quotations readily available, or in the absence of such market quotations, then
at the fair value thereof as determined by or under authority of the Trustees of
the Trust with the use of such pricing services as may be deemed appropriate or
methodologies approved by the Trustees.
The Trustees 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
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60 days or less when the value obtained is fair value, provided that during any
period in which more than 25% of the Fund's total assets is invested in
short-term debt securities the current market value of such securities will be
used in calculating net asset value per share in lieu of the amortized cost
method. Under the amortized cost method of valuation, the security is initially
valued at cost on the date of purchase (or in the case of short-term debt
instruments purchased with more than 60 days remaining to maturity, the market
value on the 61st day prior to maturity), and thereafter a constant amortization
to maturity of any discount or premium is assumed regardless of the impact of
fluctuating interest rates on the market value of the security.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
The Fund's portfolio turnover rate is determined by dividing the lesser
of securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The Fund's portfolio turnover rates for the fiscal years ended
October 31, 1996 and 1997, respectively, were as follows: 88.79% and 124.95%.
The Fund's portfolio turnover rate for the most recent fiscal year was
significantly higher than the portfolio turnover rate for the previous fiscal
year because of measures taken in light of interest rate movements and
expectations. The Fund reduced its exposure to mortgage-backed and mortgage-
related securities as interest rate spreads tightened and mortgage re-financings
became more likely. In that context, the Fund also took steps to move to a
slightly longer duration based on the weakness of the bond market.
Brokerage Allocation
The Investment Manager's policy is to seek for its clients, including
the Fund, what in the Investment Manager's judgment will be the best overall
execution of purchase or sale orders and the most favorable net prices in
securities transactions consistent with its judgment as to the business
qualifications of the various broker or dealer firms with whom the Investment
Manager may do business, and the Investment Manager may not necessarily choose
the broker offering the lowest available commission rate. Decisions with respect
to the market where the transaction is to be completed, to the form of
transaction (whether principal or agency), and to the allocation of orders among
brokers or dealers are made in accordance with this policy. In selecting brokers
or dealers to effect portfolio transactions, consideration is given to their
proven integrity and financial responsibility, their demonstrated execution
experience and capabilities both generally and with respect to particular
markets or securities, the competitiveness of their commission rates in agency
transactions (and their net prices in principal transactions), their willingness
to commit capital, and their clearance and settlement capability. The Investment
Manager makes every effort to keep informed of commission rate structures and
prevalent bid/ask spread characteristics of the markets and securities in which
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.
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When it appears that a number of firms could satisfy the required
standards in respect of a particular transaction, consideration may also be
given to services other than execution services which certain of such firms have
provided in the past or may provide in the future. Negotiated commission rates
and prices, however, are based upon the Investment Manager's judgment of the
rate which reflects the execution requirements of the transaction without regard
to whether the broker provides services in addition to execution. Among such
other services are the supplying of supplemental investment research; general
economic, political and business information; analytical and statistical data;
relevant market information, quotation equipment and services; reports and
information about specific companies, industries and securities; purchase and
sale recommendations for stocks and bonds; portfolio strategy services;
historical statistical information; market data services providing information
on specific issues and prices; financial publications; proxy voting data and
analysis services; technical analysis of various aspects of the securities
markets, including technical charts; computer hardware used for brokerage and
research purposes; computer software and databases (including those used for
portfolio analysis and modeling in conjunction with certain trading systems, and
including software providing investment personnel with efficient access to
current and historical data from a variety of internal and external sources) and
portfolio evaluation services and relative performance of accounts. Certain of
the nonexecution services provided by broker-dealers may in turn be obtained by
the broker-dealers from third parties who are paid for such services by the
broker-dealers.
In the case of the Fund and other registered investment companies
advised by the Investment Manager or its affiliates, the above services may
include data relating to performance, expenses and fees of those investment
companies and other investment companies; this information is used by the
Trustees or Directors of the investment companies to fulfill their
responsibility to oversee the quality of the Investment Manager's advisory
contracts between the investment companies and the Investment Manager. The
Investment Manager considers these investment company services only in
connection with the execution of transactions on behalf of its investment
company clients and not its other clients.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. Among other measures, the Investment Manager's
investment management personnel seek to evaluate the quality of research and
other services received, and the results
40
<PAGE>
of this effort are made available to the equity trading department, which
sometimes uses this information as consideration in the selection of brokers to
execute portfolio transactions.
Some services furnished by broker-dealers may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Investment Manager allocates the cost
of such services to determine the appropriate proportion of the cost which is
allocable to purposes other than research or investment decision-making and the
Investment Manager pays for that portion directly from its own funds. Some
research and execution services may benefit the Investment Manager's clients as
a whole, while others may benefit a specific segment of clients. Not all such
services will necessarily be used exclusively in connection with the accounts
which pay the commissions to the broker-dealer producing the services.
The Investment Manager has no fixed agreements or understandings with
any broker-dealer as to the amount of brokerage business which the firm may
expect to receive for services supplied to the Investment Manager or otherwise.
There may be, however, understandings with certain firms that in order for such
firms to be able to continuously supply certain services, they need to receive
allocation of a specified amount of brokerage business. These understandings are
honored to the extent possible in accordance with the policies set forth above.
It is not the Investment Manager's policy to intentionally pay a firm a
brokerage commission higher than that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided. However, the Investment Manager is aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, the Investment Manager relies on the provisions of
Section 28(e) of the Securities Exchange Act of 1934, to the extent applicable.
The Fund did not pay any brokerage commission in secondary trading during the
fiscal years ended October 31, 1995, 1996, and 1997.
During and at the end of its most recent fiscal year, the Fund did not
hold in its portfolio securities of any entity that might be deemed to be a
regular broker-dealer of the Fund as defined under the 1940 Act.
In the case of the purchase of fixed income securities in underwriting
transactions, the Investment Manager follows any instructions received from its
clients as to the allocation of new issue discounts, selling commissions and
designations to brokers or dealers which provide the client with research,
performance evaluation, master trustee and other services. In the absence of
instructions from the client, the Investment Manager may make such allocations
to broker-dealers which have provided the Investment Manager with research and
brokerage services.
41
<PAGE>
When more than one client of the Investment Manager is seeking to buy
or sell the same security, the sale or purchase is carried out in a manner which
is considered fair and equitable to all accounts. In allocating investments
among various clients (including in what sequence orders for trades are placed),
the Investment Manager will use its best business judgment and will take into
account such factors as the investment objectives of the clients, the amount of
investment funds available to each, the amount already committed for each client
to a specific investment and the relative risks of the investments, all in order
to provide on balance a fair and equitable result to each client over time.
Although sharing in large transactions may sometimes affect price or volume of
shares acquired or sold, overall it is believed there may be an advantage in
execution. The Investment Manager may follow the practice of grouping orders of
various clients for execution to get the benefit of lower prices or commission
rates. In certain cases where the aggregate order may be executed in a series of
transactions at various prices, the transactions are allocated as to amount and
price in a manner considered equitable to each so that each receives, to the
extent practicable, the average price of such transactions. Exceptions may be
made based on such factors as the size of the account and the size of the trade.
For example, the Investment Manager may not aggregate trades where it believes
that it is in the best interests of clients not to do so, including situations
where aggregation might result in a large number of small transactions with
consequent increased custodial and other transactional costs which may
disproportionately impact smaller accounts. Such disaggregation, depending on
the circumstances, may or may not result in such accounts receiving more or less
favorable execution relative to other clients.
CERTAIN TAX MATTERS
Federal Income Taxation of the Fund--in General
The Fund intends to qualify and elect to be treated each taxable year
as a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), although it cannot give complete
assurance that it will do so. Accordingly, the Fund must, among other things,
(a) derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) satisfy certain diversification
requirements; and (c) 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).
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
42
<PAGE>
will be taxable to shareholders as ordinary income to the extent of the Fund's
current or accumulated earnings and profits. Also, the shareholders, if they
received a distribution in excess of current or accumulated earnings and
profits, would receive a return of capital that would reduce the basis of their
shares of the Fund to the extent thereof. Any distribution in excess of a
shareholder's basis in the shareholder's shares would be taxable as gain
realized from the sale of such shares.
The Fund will be liable for a nondeductible 4% excise tax on amounts
not distributed (or deemed distributed) on a timely basis in accordance with a
calendar year distribution requirement. To avoid the tax, during each calendar
year the Fund must distribute (or be deemed to have distributed) an amount equal
to at least 98% of the sum of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, and its capital gain net income
for the 12-month period ending on October 31, in addition to any undistributed
portion of the respective balances from the prior year. For that purpose, any
income or gain retained by the Fund that is subject to corporate tax will be
considered to have been distributed by year-end. The Fund intends to make
sufficient distributions to avoid this 4% excise tax.
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 federal
income tax purposes. In the case of any debt security issued after July 18,
1984, having a fixed maturity date of more than one year from the date of issue
and having market discount, the gain realized on disposition will be treated as
interest to the extent it does not exceed the accrued market discount on the
security (unless the Fund elects to include such accrued market discount in
income in the tax year to which it is attributable). Generally, market discount
is accrued on a daily basis. The Fund may be required to capitalize, rather than
deduct currently, part or all of any direct interest expense incurred or
continued to purchase or carry any debt security having market discount, unless
the Fund makes the election to include market discount currently. Because the
Fund must include original issue discount in income, it will be more difficult
for the Fund to make the distributions required for the Fund to
43
<PAGE>
maintain its status as a regulated investment company under Subchapter M of the
Code or to avoid the 4% excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may
be subject to provisions of the Code that (i) require inclusion of unrealized
gains or losses in the Fund's income for purposes of the 90% test, the excise
tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and (iii) characterize
both realized and unrealized gain or loss as short-term or long-term gain or
loss. Such provisions generally apply to, among other investments, options on
debt securities, indices on securities and futures contracts.
Federal Income Taxation of Shareholders
Dividends paid by the Fund may be eligible for the 70%
dividends-received deduction for corporations. The percentage of the Fund's
dividends eligible for such tax treatment may be less than 100% to the extent
that less than 100% of the Fund's gross income may be from qualifying dividends
of domestic corporations. Any dividend declared in October, November or December
and made payable to shareholders of record in any such month is treated as
received by such shareholder on December 31, provided that the Fund pays the
dividend during January of the following calendar year.
Distributions by the Fund can result in a reduction in the fair market
value of the Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as ordinary income or long-term capital gain, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
DISTRIBUTION OF SHARES OF THE FUND
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (Class B and Class C shares). The Distributor may reallow all or
portions of such sales charges as concessions to dealers.
44
<PAGE>
Total sales charges on Class A shares paid to the Distributor for the
last three fiscal years were as follows: 1997, $403,481; 1996, $724,878; and
1995, $572,439.
For the same periods, the Distributor retained the following amounts
after reallowance of concessions to dealers: 1997, $50,558; 1996, $89,615; and
1995, $70,689.
The differences in the price at which the Fund's Class A shares are
offered due to scheduled variations in sales charges, as described in the Fund's
Prospectus, result from cost savings inherent in economies of scale. Management
believes that the cost of sales efforts of the Distributor and broker-dealers
tends to decrease as the size of purchases increases, or does not involve any
incremental sales expenses as in the case of, for example, exchanges,
reinvestments or dividend investments at net asset value. Similarly, no
significant sales effort is necessary for sales of shares at net asset value to
certain Directors, Trustees, officers, employees, their relatives and other
persons directly or indirectly related to the Fund or associated entities. Where
shares of the Fund are offered at a reduced sales charge or without a sales
charge pursuant to sponsored arrangements, managed fee-based programs and
so-called "mutual fund supermarkets," among other programs, the amount of the
sales charge reduction will similarly reflect the anticipated reduction in sales
expenses associated with such arrangements. The reductions in sales expenses,
and therefore the reduction in sales charges, will vary depending on factors
such as the size and other characteristics of the organization or program, and
the nature of its membership or the participants. The Fund reserves the right to
make variations in, or eliminate, sales charges at any time or to revise the
terms of or to suspend or discontinue sales pursuant to sponsored arrangements
or similar programs at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission based on the aggregate of such sales. Such
commission also is payable to authorized securities dealers upon sales of Class
A shares made pursuant to a Letter of Intent to purchase shares having a net
asset value of $1,000,000 or more. Shares sold with such commissions payable are
subject to a one-year contingent deferred sales charge of 1.00% on any portion
of such shares redeemed within one year following their sale. After a particular
purchase of Class A shares is made under the Letter of Intent, the commission
will be paid only in respect of that particular purchase of shares. If the
Letter of Intent is not completed, the commission paid will be deducted from any
discounts or commissions otherwise payable to such dealer in respect of shares
actually sold. If an investor is eligible to purchase shares at net asset value
on account of the Right of Accumulation, the commission will be paid only in
respect of the incremental purchase at net asset value.
For the periods shown below, the Distributor received contingent
deferred sales charges upon redemption of Class A, Class B and Class C shares of
the Fund and paid initial commissions to securities dealers for sales of such
Class A, Class B and Class C shares as follows:
45
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended October 31, 1997 Ended October 31, 1996 Ended October 31, 1995
---------------------- ---------------------- ----------------------
Contingent Commissions Contingent Commissions Contingent Commissions
Deferred Paid to Deferred Paid to Deferred Paid to
Sales Charges Dealers Sales Charges Dealers Sales Charges Dealers
------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Class A $ 0 $352,923 $ 0 $635,263 $ 180 $501,750
Class B $287,730 $506,486 $372,729 $973,303 $262,267 $423,866
Class C $ 3,988 $ 46,920 $ 1,828 $ 55,368 $ 1,189 $ 0
</TABLE>
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "Distribution Plan") under which the Fund may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of Class A, Class B and Class C shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to underwriters, securities dealers
and others engaged in the sale of shares, including payments to the Distributor
to be used to pay commissions and/or reimbursement to securities dealers (which
securities dealers may be affiliates of the Distributor) engaged in the
distribution and marketing of shares and furnishing ongoing assistance to
investors, (2) reimbursement of direct out-of-pocket expenditures incurred by
the Distributor in connection with the distribution and marketing of shares and
the servicing of investor accounts including expenses relating to the
formulation and implementation of marketing strategies and promotional
activities such as direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising, the preparation, printing and
distribution of Prospectuses of the Fund and reports for recipients other than
existing shareholders of the Fund, and obtaining such information, analyses and
reports with respect to marketing and promotional activities and investor
accounts as the Fund may, from time to time, deem advisable, and (3)
reimbursement of expenses incurred by the Distributor in connection with the
servicing of shareholder accounts including payments to securities dealers and
others in consideration of the provision of personal service to investors and/or
the maintenance or servicing of shareholder accounts and expenses associated
with the provision of personal service by the Distributor directly to investors.
In addition, the Distribution Plan is deemed to authorize the Distributor and
the Investment Manager to make payments out of general profits, revenues or
other sources to underwriters, securities dealers and others in connection with
sales of shares, to the extent, if any, that such payments may be deemed to be
within the scope of Rule 12b-1 under the 1940 Act.
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) or others for
personal services and/or the maintenance of shareholder accounts. A portion of
any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance or servicing of
shareholder accounts by such dealers. Dealers who have sold Class A shares are
eligible for further reimbursement commencing as of the time of such sale.
Dealers who have sold Class B and Class C shares are eligible for further
reimbursement after the first year during which such shares have been held of
record by such dealer as nominee for its clients (or by such clients directly).
Any service fees received by the Distributor and not allocated to dealers may be
46
<PAGE>
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.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class C shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class C
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class C shares (as the case may be) to make payments for personal
services and/or the maintenance or servicing of shareholder accounts. The
distribution and servicing expenses of a particular class will be borne solely
by that class. In addition, a rule of the NASD limits annual expenditures that
the Fund may incur under the Distribution Plan to 1%, of which 0.75% may be used
to pay distribution expenses and 0.25% may be used to pay shareholder service
fees. The NASD rule also limits the aggregate amount that the Fund may pay for
such distribution costs to 6.25% of gross share sales of a class since the
inception of any asset-based sales charge plus interest at the prime rate plus
1% on unpaid amounts thereof (less any contingent deferred sales charges). Such
limitation does not apply to shareholder service fees. Payments to the
Distributor or to dealers funded under the Distribution Plan may be discontinued
at any time.
The Distributor may pay certain dealers and other intermediaries
additional compensation for sales and administrative services. The Distributor
may provide cash and noncash incentives to intermediaries who, for example, sell
significant amounts of shares or develop particular distribution channels. The
Distributor may compensate dealers with clients who maintain their investments
in the Fund over a period of years. The incentives can include
47
<PAGE>
merchandise and trips to, and attendance at, sales seminars at resorts. The
Distributor may pay for administrative services, such as technological and
computer systems support for the maintenance of pension plan participant
records, for subaccounting, and for distribution through mutual fund
supermarkets or similar arrangements.
During the fiscal year ended October 31, 1997, the Fund paid the
Distributor fees under the Distribution Plan and the Distributor used all of
such payments for expenses incurred on behalf of the Fund as follows:
Class A Class B Class C
---------- -------- --------
Advertising $ 0 $ 0 $3,873
Printing and mailing of prospectuses to
other than current shareholders 0 0 1,445
Compensation to dealers 1,362,695 947,297 131,656
Compensation to sales personnel 0 0 11,724
Interest 0 0 0
Carrying or other financing charges 0 0 0
Other expenses: marketing; general 0 0 5,619
_____ _____ _____
Total fees $1,362,695 $947,297 $154,317
========== ======== ========
The Distributor may have also used additional resources of its own for
further expenses on behalf of the Fund.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Fund will make alternative
arrangements for such services for shareholders who acquired shares through such
institutions.
48
<PAGE>
CALCULATION OF PERFORMANCE DATA
From time to time, in advertisements or in communications to
shareholders or prospective investors, the Fund may compare the performance of
its Class A, Class B, Class C or Class S shares to the performance of other
mutual funds with similar investment objectives, to certificates of deposit
and/or to other financial alternatives. The Fund may also compare its
performance to appropriate indices, such as Standard & Poor's 500 Index,
Consumer Price Index and Dow Jones Industrial Average and/or to appropriate
rankings and averages such as those compiled by Lipper Analytical Services,
Inc., Morningstar, Inc., Money Magazine, Business Week, Forbes Magazine, The
Wall Street Journal and Investor's Daily. For example, the performance of the
Fund might be compared to the Lipper General U.S.
Government Funds Average.
The average annual total return ("standard total return") and yield of
the Class A, Class B, Class C and Class S 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 on June 1, 1993, when
designations were assigned based on the pricing and Rule 12b-1 fees applicable
to shares sold thereafter. The application of the additional Rule 12b-1 fees, if
any, of up to 1% will, for periods after June 1, 1993 adversely affect Fund
performance results. Thus, performance data or rankings for a given class of
shares should be interpreted carefully by investors who hold or may invest in a
different class of shares.
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<PAGE>
The performance data below reflect Rule 12b-1 fees and, where
applicable, sales charges as follows:
Rule 12b-1 Fees Sales Charges
-------------------------------------- -----------------------------
Class Amount Period
- ----- ------ ------
A 0.25% Since commencement of Maximum 4.5% sales charge
operations to present reflected
B 1.00% 0.25% until June 1, 1993; 1- and 5-year periods reflect
1.00% June 1, 1993 to present; a 5% and a 2% contingent
fee will reduce performance deferred sales charge,
for periods after June 1, 1993 respectively
C* 1.00% 0.25% until June 1, 1993; 1-year period reflects a 1%
1.00% June 1, 1993 to present; contingent deferred sales
fee will reduce performance charge
for periods after June 1, 1993
S* None 0.25% until June 1, 1993; None
0% thereafter
___________________
* Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
All calculations of performance data in this section reflect the
voluntary measures, if any, by the Fund's affiliates to reduce fees or expenses
relating to the Fund; see "--Accrued Expenses and Recurring Charges" later in
this section.
Total Return
The Fund's standard average annual total returns ("standard total
return") of each class of shares were as follows:
50
<PAGE>
Ten Years Five Years One Year
Ended Ended Ended
Fund October 31, 1997 October 31, 1997 October 31, 1997
- ---- ---------------- ---------------- ----------------
Class A 8.16% 6.21% 3.64%
Class B 8.28% 6.12% 2.66%
Class C* 8.29% 6.45% 6.65%
Class S* 8.77% 7.41% 8.80%
______________
* Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
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:
n
P(1+T) = 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 1997 was as follows:
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<PAGE>
Class A 5.76%
Class B 5.30%
Class C* 5.31%
Class S* 6.30%
- ------------
* Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
Yield for the Fund's Class A, Class B, Class C and Class S shares is
computed by dividing the net investment income per share earned during a recent
month or other specified 30-day period by the maximum offering price per share
on the last day of the period and annualizing the result in accordance with the
following formula:
6
YIELD = 2[( a-b + 1) -1]
----
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of voluntary expense
reductions by the Investment Manager)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
To calculate interest earned (for the purpose of "a" above) on debt
obligations, the Fund computes the yield to 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 realized capital gain or loss
during the period. The Fund has elected not to amortize discount or premium on
such securities.
52
<PAGE>
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 and recurring charges are taken into account as
described later herein.
Yield information is useful in reviewing the Fund's performance, but
because yields fluctuate, such information cannot necessarily be used to compare
an investment in the Fund's shares with bank deposits, savings accounts and
similar investment alternatives which often are insured and/or provide an agreed
or guaranteed fixed yield for a stated period of time. Shareholders should
remember that yield is a function of the kind and quality of the instruments in
the Fund's portfolio, portfolio maturity and operating expenses and market
conditions.
Accrued Expenses and Recurring Charges
Accrued expenses include all recurring charges that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return and yield results take sales charges, if applicable, into
account, although the results do not take into account recurring and
nonrecurring charges for optional services which only certain shareholders elect
and which involve nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by
affiliates of fees or expenses during the subject period. In the absence of such
subsidization, the performance of the Fund would have been lower.
Nonstandardized Total Return
The Fund may provide the above described standard total return results
for Class A, Class B, Class C and Class S shares for periods which end no
earlier than the most recent calendar quarter end and which begin twelve months
before, five years before and ten years before. In addition, the Fund may
provide nonstandardized total return results for differing periods, such as for
the most recent six months, and/or without taking sales charges into account.
Such nonstandardized total return is computed as otherwise described under
"--Total Return" except the result may or may not be annualized, and as noted
any applicable sales charge may not be taken into account and therefore not
deducted from the hypothetical initial payment of $1,000. For example, the
Fund's nonstandardized total returns for the six months ended October 31, 1997,
without taking sales charges into account, were as follows:
53
<PAGE>
Class A 7.00%
Class B 6.62%
Class C* 7.14%
Class S* 6.62%
__________________
* Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
Distribution Rates
The Fund may also quote its distribution rate for each class of shares.
The distribution rate is calculated by annualizing the latest per-share
distribution from ordinary income and dividing the result by the maximum
offering price per share as of the end of the period to which the distribution
relates. A distribution can include gross investment income from debt
obligations purchased at a premium and in effect include a portion of the
premium paid. A distribution can also include nonrecurring, gross short-term
capital gains without recognition of any unrealized capital losses. Further, a
distribution can include income from the sale of options by the Fund even though
such option income is not considered investment income under generally accepted
accounting principles.
Because a distribution can include such premiums, capital gains and
option income, the amount of the distribution may be susceptible to control by
the Investment Manager through transactions designed to increase the amount of
such items. Also, because the distribution rate is calculated in part by
dividing the latest distribution by the offering price, which is based on net
asset value plus any applicable sales charge, the distribution rate will
increase as the net asset value declines. A distribution rate can be greater
than the yield rate calculated as described above.
The distribution rate of each class of the Fund, based on the quarter
ended October 31, 1997, was as follows:
Class A 5.89%
Class B 5.42%
Class C* 6.43%
Class S* 5.42%
__________________
* Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
54
<PAGE>
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as the Trust's independent accountants, providing professional services
including (1) audits of the Fund's annual financial statements, (2) assistance
and consultation in connection with SEC filings and (3) review of the annual
income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a
semiannual basis, other supplementary financial reports may be made available
from time to time through electronic or other media. Shareholders with
substantial holdings in one or more State Street Research Funds may also receive
reports and other information which reflect or analyze their positions in a
consolidated manner. For more information, call State Street Research Service
Center.
The following financial statements are for the Fund's fiscal year ended
October 31, 1997:
55
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
October 31, 1997
Principal Maturity Value
Amount Date (Note 1)
------------- ------------ --------------
U.S. GOVERNMENT SECURITIES 71.2%
U.S. Treasury 41.5%
U.S. Treasury Bond, 13.75% ...... $ 7,725,000 8/15/2004 $ 11,092,637
U.S. Treasury Bond, 11.625% ...... 24,900,000 11/15/2004 33,031,344
U.S. Treasury Bond, 10.75% ...... 21,500,000 8/15/2005 27,916,460
U.S. Treasury Bond, 12.00% ...... 12,000,000 8/15/2013 17,583,720
U.S. Treasury Bond, 9.875% ...... 8,500,000 11/15/2015 11,893,370
U.S. Treasury Bond, 9.25% ......... 17,000,000 2/15/2016 22,668,480
U.S. Treasury Bond, 8.75% ......... 11,225,000 5/15/2017 14,438,156
U.S. Treasury Bond, 8.125% ...... 43,400,000 8/15/2021 53,510,895
U.S. Treasury Bond, 6.25% ......... 14,050,000 8/15/2023 14,100,440
U.S. Treasury Bond, 7.50% ......... 20,000,000 11/15/2024 23,334,400
U.S. Treasury Note Inflation
Indexed, 3.375% ............... 3,399,580 1/15/2007 3,353,890
U.S. Treasury Note, 6.625% ...... 3,900,000 7/31/2001 4,013,334
U.S. Treasury Note, 6.25% ......... 3,450,000 2/28/2002 3,511,445
U.S. Treasury Note, 7.875% ...... 13,825,000 11/15/2004 15,412,663
U.S. Treasury Note, 6.50% ......... 4,575,000 8/15/2005 4,746,563
U.S. Treasury Note, 6.875% ...... 7,150,000 5/15/2006 7,606,957
U.S. Treasury STRIPS, 0.00% ...... 13,000,000 11/15/2001 10,333,180
------------
278,547,934
------------
U.S. Agency Mortgage 26.5%
Federal Home Loan Mortgage
Corp. FHA-VA, 9.00% ............ 5,325,142 12/01/2009 5,664,354
Federal Home Loan Mortgage
Corp. Series 29-H PAC,
6.50% ........................... 5,525,000 3/25/2023 5,537,045
Federal Housing Administration
Court Yard Project, 10.75% ...... 6,477,776 8/01/2032 7,174,137
Federal Housing Administration
East Bay Manor Project,
10.00% ........................ 6,748,516 3/01/2033 7,414,932
Federal Housing Administration
Charles River Project,
9.625% ........................ 9,453,561 12/01/2033 10,398,917
Federal National Mortgage
Association, 8.50% ............ 10,000,000 2/01/2005 10,459,300
Federal National Mortgage
Association, 7.50% ............ 10,880,196 6/01/2010 11,206,602
Federal National Mortgage
Association, 7.00% ............ 40,118 2/01/2024 40,431
Federal National Mortgage
Association FHA-VA, 8.00% ....... 4,141,193 4/01/2008 4,328,872
Federal National Mortgage
Association FHA-VA, 8.00% ....... 5,865,417 6/01/2008 6,131,237
Principal Maturity Value
Amount Date (Note 1)
------------- ------------ --------------
Federal National Mortgage
Association FHA-VA, 8.50% ....... $ 7,665,481 2/01/2009 $ 8,053,508
Federal National Mortgage
Association FHA-VA, 9.00% ....... 7,138,894 5/01/2009 7,582,862
Federal National Mortgage
Association FHA-VA, 9.00% ....... 1,660,462 4/01/2016 1,763,726
Federal National Mortgage
Association TBA, 7.50% ......... 6,250,000 12/15/2012 6,402,344
Government National Mortgage
Association, 7.50% ............ 10,456,865 6/15/2009 10,793,367
Government National Mortgage
Association, 9.50% ............ 2,770,840 9/15/2009 3,006,139
Government National Mortgage
Association, 9.50% ............ 4,958,526 10/15/2009 5,378,432
Government National Mortgage
Association, 9.50% ............ 2,254,638 11/15/2009 2,446,102
Government National Mortgage
Association, 9.00% ............ 1,783,238 4/15/2017 1,934,046
Government National Mortgage
Association, 8.00% ............ 1,735,198 10/15/2017 1,826,834
Government National Mortgage
Association, 9.50% ............ 12,231,956 11/15/2017 13,224,871
Government National Mortgage
Association, 9.50% ............ 248,451 9/15/2019 269,768
Government National Mortgage
Association, 7.50% ............ 2,655,950 9/15/2021 2,729,626
Government National Mortgage
Association, 7.50% ............ 1,310,682 1/15/2023 1,344,261
Government National Mortgage
Association, 10.00% ............ 28,545,686 6/15/2023 30,094,763
Government National Mortgage
Association, 7.50% ............ 736,003 8/15/2023 754,859
Government National Mortgage
Association, 7.50% ............ 780,210 10/15/2023 800,199
Government National Mortgage
Association, 7.50% ............ 534,501 12/15/2023 548,195
Government National Mortgage
Association, 7.50% ............ 715,792 1/15/2024 733,679
Government National Mortgage
Association, 7.50% ............ 9,085,943 4/15/2024 9,313,001
------------
177,356,409
------------
The accompanying notes are an integral part of the financial statements.
56
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Maturity Value
Amount Date (Note 1)
------------------- ------------ ----------------
<S> <C> <C> <C>
U.S. Agency 3.2%
Federal Home Loan Mortgage
Corp. Deb., 7.24% ............ $10,020,000 5/15/2002 $ 10,074,809
Guaranteed Export Trust Notes
Series 95-A, 6.28% ............ 7,411,765 6/15/2004 7,488,402
Guaranteed Export Trust Notes
Series 96-A, 6.55% ............ 3,747,055 6/15/2004 3,817,462
------------
21,380,673
------------
Total U.S. Government Securities (Cost $457,523,646) ............ 477,285,016
------------
OTHER INVESTMENTS 26.4%
Trust Certificates 12.9%
Cooperative Utility Trust
Certificates, 9.50% ............ 25,499,000 2/15/2017 26,969,272
Cooperative Utility Trust
Certificates, 10.11% ......... 1,500,000 12/15/2017 1,582,005
Cooperative Utility Trust
Certificates, 9.52% ............ 24,525,000 3/15/2019 25,986,690
Government Backed Trust Class
T-3, 9.625% .................. 8,420,577 5/15/2002 8,925,054
Government Trust Certificates
Class 2-E, 9.40% ............... 21,939,540 5/15/2002 23,275,658
------------
86,738,679
------------
Foreign Government 7.9%
Australian Dollar
Commonwealth of Australia,
9.00% ........................ 19,950,000 9/15/2004 16,560,825
Canadian Dollar
Government of Canada, 0.00% 5,875,000 2/05/1998 4,128,153
New Zealand Dollar
Government of New Zealand,
10.00% ........................ 9,625,000 3/15/2002 6,715,102
Government of New Zealand,
8.00% ........................ 9,500,000 11/15/2006 6,484,273
Pound Sterling
United Kingdom Treasury,
8.50% ........................ 10,000,000 12/07/2005 18,733,130
------------
52,621,483
============
Principal Maturity Value
Amount Date (Note 1)
------------------- ------------ ----------------
<S> <C> <C> <C>
Finance/Mortgage 5.6%
Chase Mortgage Finance Corp.
Series 93L-5, 6.25% ............ $ 5,000,000 10/25/2024 $ 4,951,562
CWMBS Inc. Series 1994-9 A-2
PAC, 6.50% ..................... 6,844,898 5/25/2024 6,857,732
GE Capital Mortgage Services
Inc., 5.85% .................. 3,647,520 9/25/2023 3,633,842
Prudential Home Mortgage
Securities Co. Series 93-29
A-6 PAC, 6.75% ............... 8,089,032 8/25/2008 8,139,589
Residential Funding Corp.
Series 93-S25 A-1, 6.50% ...... 7,323,294 7/25/2008 7,336,989
Structured Asset Securities
Corp. Series 97-LL1-A1,
Certificates Series 97-LLI,
6.79% ........................ 6,625,000 10/15/2034 6,717,412
------------
37,637,126
------------
Total Other Investments (Cost $177,693,180) ........................ 176,997,288
------------
SHORT-TERM OBLIGATIONS 1.9%
Federal Home Loan Bank, 5.50% 4,253,000 11/04/1997 4,251,051
Federal Home Loan Bank, 5.47% 8,100,000 11/05/1997 8,095,077
------------
Total Short-Term Obligations (Cost $12,346,128) .................... 12,346,128
------------
Total Investments (Cost $647,562,954)--99.5% ....................... 666,628,432
Cash and Other Assets, Less Liabilities--0.5% ....................... 3,604,290
------------
Net Assets--100.0% .................................................. $670,232,722
============
Federal Income Tax Information:
At October 31, 1997, the net unrealized appreciation of
investments based on cost for Federal income tax
purposes of $647,562,954 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost .................................................... $ 22,467,765
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value .............................. (3,402,287)
------------
$ 19,065,478
============
</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.
57
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- --------------------------------------------------------------------------------
Forward currency exchange contracts outstanding at October 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Unrealized
Appreciation
Total Value Contract Price (Depreciation) Delivery Date
-------------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Sell Australian dollars, Buy U.S. dollars 1,272,000 AUD .73565 AUD $ 40,960 11/14/97
Sell Australian dollars, Buy U.S. dollars 11,783,000 AUD .70850 AUD 44,357 1/23/98
Sell Australian dollars, Buy U.S. dollars 4,000,000 AUD .73289 AUD 116,058 12/10/97
Sell Australian dollars, Buy U.S. dollars 4,910,000 AUD .73480 AUD 151,835 12/10/97
Sell British pounds, Buy U.S. dollars 10,687,000 GBP 1.62700 GBP (479,216) 1/23/98
Sell New Zealand dollars, Buy U.S. dollars 10,700,000 NZD .62300 NZD 37,918 1/23/98
Sell New Zealand dollars, Buy U.S. dollars 10,310,000 NZD .62414 NZD 48,290 1/23/98
---------
$ (39,798)
=========
</TABLE>
Written put option transactions during the year ended October 31, 1997 were as
follows:
Principal
Amount Premiums
---------------- -------------
Outstanding, beginning of year -- --
Options written $ 16,500,000 $ 101,876
Options expired -- --
Options closed (16,500,000) (101,876)
------------- ----------
Outstanding, end of year $ -- $ --
============= ==========
The accompanying notes are an integral part of the financial statements.
58
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES STATEMENT OF OPERATIONS
- ---------------------------------------------------------------------------
October 31, 1997 For the year ended October 31, 1997
Assets
Investments, at value (Cost $647,562,954) (Note 1) ......... $ 666,628,432
Cash ......................................................... 150,428
Receivable for securities sold .............................. 29,114,789
Interest receivable .......................................... 11,517,167
Receivable for open forward contracts ........................ 439,418
Receivable for fund shares sold .............................. 179,448
Other assets ................................................ 5,396
-------------
708,035,078
Liabilities
Payable for securities purchased ........................... 33,634,280
Dividends payable .......................................... 2,040,973
Payable for fund shares redeemed ........................... 552,035
Payable for open forward contracts ........................... 479,216
Accrued management fee (Note 2) .............................. 368,054
Accrued transfer agent and shareholder services
(Note 2) ................................................... 264,200
Accrued distribution and service fees (Note 3) ............... 206,647
Accrued trustees' fees (Note 2) .............................. 8,516
Other accrued expenses ....................................... 248,435
-------------
37,802,356
-------------
Net Assets $ 670,232,722
=============
Net Assets consist of:
Undistributed net investment income ........................ $ 2,339,029
Unrealized appreciation of investments ..................... 19,065,478
Unrealized depreciation of forward contracts and
foreign currency .......................................... (34,015)
Accumulated net realized loss .............................. (39,689,487)
Shares of beneficial interest .............................. 688,551,717
-------------
$ 670,232,722
=============
Net Asset Value and redemption price per share of
Class A shares ($524,564,649 [divided by] 41,460,715 shares
of beneficial interest) .................................... $ 12.65
=============
Maximum Offering Price per share of Class A shares
($12.65 [divided by] .955) ................................. $ 13.25
=============
Net Asset Value and offering price per share of Class
B shares ($97,252,569 [divided by] 7,709,687 shares of
beneficial interest)* .................................... $ 12.62
=============
Net Asset Value and offering price per share of Class
C shares ($16,300,666 [divided by] 1,291,316 shares of
beneficial interest)* .................................... $ 12.62
=============
Net Asset Value, offering price and redemption price
per share of Class S shares ($32,114,838 [divided by]
2,540,378 shares of beneficial interest) .................. $ 12.64
=============
_____________________________________
* Redemption price per share for Class B and Class C is equal to net asset
value less any applicable contingent deferred sales charge.
Investment Income
Interest ................................................ $50,464,680
Expenses
Management fee (Note 2) ................................. 4,364,193
Transfer agent and shareholder services (Note 2) ......... 686,265
Custodian fee .......................................... 226,325
Service fee-Class A (Note 3) ........................... 1,362,695
Distribution and service fees-Class B (Note 3) ......... 947,297
Distribution and service fees-Class C (Note 3) ......... 154,317
Reports to shareholders ................................. 120,433
Registration fees ....................................... 53,334
Audit fee ................................................ 43,561
Trustees' fees (Note 2) ................................. 34,065
Legal fees ............................................. 13,590
Miscellaneous .......................................... 33,406
-----------
8,039,481
-----------
Net investment income .................................... 42,425,199
-----------
Realized and Unrealized Gain (Loss) on
Investments, Options, Forward Contracts
and Foreign Currency
Net realized gain on investments (Notes 1 and 4) ......... 5,443,859
Net realized gain on written options ..................... 92,892
Net realized gain on forward contracts and foreign
currency (Note 1) .................................... 3,226,994
-----------
Total net realized gain ................................. 8,763,745
-----------
Net unrealized appreciation of investments (Note 5) . 2,636,837
Net unrealized depreciation of forward contracts and
foreign currency ....................................... (79,138)
-----------
Total net unrealized appreciation ..................... 2,557,699
-----------
Net gain on investments, options, forward contracts
and foreign currency ................................. 11,321,444
-----------
Net increase in net assets resulting from operations . $53,746,643
===========
The accompanying notes are an integral part of the financial statements.
59
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
October 31, 1997
Years ended October 31
----------------------------------
1996 1997
--------------- ----------------
Increase (Decrease) in Net Assets
Operations:
Net investment income ......... $ 46,482,643 $ 42,425,199
Net realized gain (loss) on
investments, options,
forward contracts and
foreign currency ............ (3,552,004) 8,763,745
Net unrealized appreciation
(depreciation) of
investments, forward
contracts and foreign
currency ..................... (6,405,085) 2,557,699
------------ -------------
Net increase resulting from
operations .................. 36,525,554 53,746,643
------------ -------------
Dividends from net
investment income:
Class A ........................ (39,055,243) (35,201,643)
Class B ........................ (5,188,785) (5,410,928)
Class C ........................ (773,463) (880,065)
Class S ........................ (404,930) (1,061,597)
------------ -------------
(45,422,421) (42,554,233)
------------ -------------
Net decrease from fund share
transactions (Note 6) ......... (50,352,743) (42,731,617)
------------ -------------
Total decrease in net assets .... (59,249,610) (31,539,207)
Net Assets
Beginning of year ............... 761,021,539 701,771,929
------------ -------------
End of year (including
undistributed net
investment income of
$100,856 and $2,339,029,
respectively) ............... $701,771,929 $ 670,232,722
============ =============
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
October 31, 1997
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. Before November 1, 1997, Class C shares
were designated Class D and Class S shares were designated Class C. Class A
shares are subject to an initial sales charge of up to 4.50% and an annual
service fee of 0.25% of average daily net assets. Class B shares are subject to
a contingent deferred sales charge on certain redemptions made within five
years of purchase and pay annual distribution and service fees of 1.00%. Class
B shares automatically convert into Class A shares (which pay lower ongoing
expenses) at the end of eight years after the issuance of the Class B shares.
Class C shares are subject to a contingent deferred sales charge of 1.00% on
any shares redeemed within one year of their purchase. Class C shares also pay
annual distribution and service fees of 1.00%. Class S shares are only offered
through certain retirement accounts, advisory accounts of State Street Research
& Management Company (the "Adviser") and special programs. No sales charge is
imposed at the time of purchase or redemption of Class S shares. Class S shares
do not pay any distribution or service fees. The Fund's expenses are borne
pro-rata by each class, except that each class bears expenses, and has
exclusive voting rights with respect to provisions of the Plan of Distribution,
related specifically to that class. The Trustees declare separate dividends on
each class of shares.
The following significant accounting policies are consistently followed by the
Fund in preparing its financial statements, and such policies are in conformity
with generally accepted accounting principles for investment companies.
A. Investment Valuation
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
The accompanying notes are an integral part of the financial statements.
60
<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, 1997, the Fund had a
capital loss carryforward of $39,689,487 available, to the extent provided in
regulations, to offset future capital gains, if any, of which $18,353,379,
$17,196,293 and $4,139,815 expires on October 31, 1998, 2002 and 2004,
respectively. The Fund had a capital loss carryforward of $40,525,802 expire on
October 31, 1997. 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.
H. Written Put Options
The Fund may write put options to enhance return and to hedge against
unfavorable market conditions. A written put option is a contract in which the
option writer grants the option buyer the right to sell back to the writer a
designated security at a specified price and time. The premium paid by the
buyer is recorded in the Fund's accounts as a liability and subsequently marked
to the current market value of the written option resulting in an unrealized
gain or loss. Exchange traded written options are valued at the last sale
price, or if no sales are reported, the last ask price. If the written option
expires unexercised, the Fund will realize a gain in the amount of the premium.
If the option is closed, the Fund will recognize a gain or loss based on the
difference between the cost of closing the option and the premium. If the
option is exercised, the Fund's cost basis of the acquired security will be the
exercise price decreased by the premium. The Fund accepts the risk of a decline
in value of the underlying security below the exercise price and the risk that
an illiquid secondary market will limit the Fund's ability to close the option
contract.
Note 2
The Trust and 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, 1997, the fees
pursuant to such agreement amounted to $4,364,193.
State Street Research Service Center, a division of State Street Research
Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. In addition, Metropolitan receives a fee for maintenance of
the accounts of certain shareholders who are participants in sponsored
arrangements, employee benefit plans and similar programs or
61
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
NOTES (cont'd)
- --------------------------------------------------------------------------------
plans, through or under which shares of the Trust may be purchased. During the
year ended October 31, 1997, the amount of such expenses was $242,080.
The fees of the Trustees not currently affiliated with the Adviser amounted to
$34,065 during the year ended October 31, 1997.
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 C shares. In addition, the Fund pays
annual distribution fees of 0.75% of average daily net assets for Class B and
Class C shares. The Distributor uses such payments for personal service and/or
the maintenance or servicing of shareholder accounts, to reimburse securities
dealers for distribution and marketing services, to furnish ongoing assistance
to investors and to defray a portion of its distribution and marketing
expenses. For the year ended October 31, 1997, fees pursuant to such plan
amounted to $1,362,695, $947,297 and $154,317 for Class A, Class B and Class C
shares, respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc., a
wholly owned subsidiary of Metropolitan, earned initial sales charges
aggregating $50,558 and $258,372, respectively, on sales of Class A shares of
the Fund during the year ended October 31, 1997, and that MetLife Securities,
Inc. earned commissions aggregating $253,677 on sales of Class B shares, and
that the Distributor collected contingent deferred sales charges aggregating
$287,730 and $3,988 on redemptions of Class B and Class C shares, respectively,
during the same period.
Note 4
For the year ended October 31, 1997, purchases and sales of securities,
exclusive of short-term obligations, aggregated $813,782,491 and $860,992,919
(including $745,334,612 and $697,592,306 of U.S. Government obligations),
respectively.
Note 5
On June 20, 1997, the Fund acquired the assets and liabilities of State Street
Research International Fixed Income Fund ("International Fixed Income Fund") in
exchange for shares of each class of the Fund. The acquisition was accounted
for as a tax-free exchange of 122,345 Class A shares, 226,623 Class B shares,
46,221 Class C shares and 1,845,952 Class S shares of the Fund for the net
assets of International Fixed Income Fund which amounted to $1,514,628,
$2,798,800, $571,293 and $22,834,432 for Class A, Class B, Class D and Class C
shares, respectively. The net assets of International Fixed Income Fund
included $801,654 of unrealized appreciation at the close of business on June
20, 1997. The net assets of the Fund immediately after the acquisition were
$680,812,302.
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, 1997, the
Distributor owned 12,241 Class A shares and Metropolitan owned 1,768,508 Class
S shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Years ended October 31
---------------------------------
1996
---------------------------------
Class A Shares Amount
- ------------------------------------------------------------------------- --------------- -----------------
<S> <C> <C>
Shares sold ............................................................ 2,386,852 $ 29,601,645
Issued in connection with acquisition of International Fixed Income Fund -- --
Issued upon reinvestment of dividends ................................. 1,707,616 21,188,423
Shares repurchased ...................................................... (9,183,464) (113,908,052)
---------- --------------
Net decrease ............................................................ (5,088,996) $ (63,117,984)
========== ==============
Class B Shares Amount
- ------------------------------------------------------------------------- ---------- --------------
Shares sold ............................................................ 2,341,362 $ 29,026,329
Issued in connection with acquisition of International Fixed Income Fund -- --
Issued upon reinvestment of dividends ................................. 275,775 3,412,679
Shares repurchased ...................................................... (1,940,555) (24,024,991)
---------- --------------
Net increase ............................................................ 676,582 $ 8,414,017
========== ==============
Class C (Formerly Class D) Shares Amount
- ------------------------------------------------------------------------- ---------- --------------
Shares sold ............................................................ 520,289 $ 6,453,505
Issued in connection with acquisition of International Fixed Income Fund -- --
Issued upon reinvestment of dividends ................................. 43,660 539,841
Shares repurchased ...................................................... (435,567) (5,400,796)
---------- --------------
Net increase ............................................................ 128,382 $ 1,592,550
========== ==============
Class S (Formerly Class C) Shares Amount
- ------------------------------------------------------------------------- ---------- --------------
Shares sold ............................................................ 518,980 $ 6,381,030
Issued in connection with acquisition of International Fixed Income Fund -- --
Issued upon reinvestment of dividends ................................. 30,667 379,365
Shares repurchased ...................................................... (324,941) (4,001,721)
---------- --------------
Net increase ............................................................ 224,706 $ 2,758,674
========== ==============
<CAPTION>
1997
---------------------------------
Class A Shares Amount
- ------------------------------------------------------------------------- --------------- -----------------
<S> <C> <C>
Shares sold ............................................................ 1,724,885 $ 21,326,126
Issued in connection with acquisition of International Fixed Income Fund 122,345 1,514,628
Issued upon reinvestment of dividends ................................. 1,617,477 20,020,535
Shares repurchased ...................................................... (8,994,512) (111,248,439)
---------- --------------
Net decrease ............................................................ (5,529,805) $ (68,387,150)
========== ==============
Class B Shares Amount
- -------------------------------------------------------------------------- ---------- --------------
Shares sold ............................................................ 1,428,886 $ 17,617,666
Issued in connection with acquisition of International Fixed Income Fund 226,623 2,798,800
Issued upon reinvestment of dividends ................................. 289,207 3,569,308
Shares repurchased ...................................................... (1,914,285) (23,580,814)
---------- --------------
Net increase ............................................................ 30,431 $ 404,960
========== ==============
Class C (Formerly Class D) Shares Amount
- -------------------------------------------------------------------------- ---------- --------------
Shares sold ............................................................ 463,886 $ 5,714,578
Issued in connection with acquisition of International Fixed Income Fund 46,221 571,293
Issued upon reinvestment of dividends ................................. 51,335 634,002
Shares repurchased ...................................................... (436,411) (5,400,255)
---------- --------------
Net increase ............................................................ 125,031 $ 1,519,618
========== ==============
Class S (Formerly Class C) Shares Amount
- -------------------------------------------------------------------------- ---------- --------------
Shares sold ............................................................ 211,412 $ 2,620,092
Issued in connection with acquisition of International Fixed Income Fund 1,845,952 22,834,432
Issued upon reinvestment of dividends ................................. 42,472 525,501
Shares repurchased ...................................................... (184,733) (2,249,070)
---------- --------------
Net increase ............................................................ 1,915,103 $ 23,730,955
========== ==============
</TABLE>
62
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A
--------------------------------------------------------------
Years ended October 31
--------------------------------------------------------------
1993 1994(1) 1995(1) 1996(1) 1997(1)
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 12.38 12.92 11.68 12.58 12.43
------ ------ ------ ----- ------
Net investment income ($) 0.84 0.81 0.83 0.81 0.80
Net realized and unrealized gain (loss) on investments,
options, forward contracts and foreign currency ($) 0.56 ( 1.26) 0.88 (0.17) 0.22
------ ------ ------ ----- ------
Total from investment operations ($) 1.40 ( 0.45) 1.71 0.64 1.02
------ ------ ------ ----- ------
Dividends from net investment income ($) ( 0.84) ( 0.79) ( 0.81) (0.79) ( 0.80)
Distributions from capital gains ($) ( 0.02) -- -- -- --
------ ------ ------ ----- ------
Total distributions ($) ( 0.86) ( 0.79) ( 0.81) (0.79) ( 0.80)
------ ------ ------ ----- ------
Net asset value, end of year ($) 12.92 11.68 12.58 12.43 12.65
====== ====== ====== ===== ======
Total return(3)(%) 11.63 ( 3.58) 15.07 5.28 8.52
Ratios/supplemental data:
Net assets at end of year ($ thousands) 868,556 638,418 655,045 584,313 524,565
Ratio of operating expenses to average net assets (%) 1.05 1.07 1.10 1.09 1.08
Ratio of net investment income to average net assets (%) 6.59 6.54 6.83 6.50 6.44
Portfolio turnover rate (%) 103.49 134.41 105.57 88.79 124.95
</TABLE>
<TABLE>
<CAPTION>
Class B
---------------------------------------------------------------
Years ended October 31
---------------------------------------------------------------
1993(2) 1994(1) 1995(1) 1996(1) 1997(1)
-------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 12.67 12.91 11.66 12.55 12.40
------- ------ ------ ----- ------
Net investment income ($) 0.30 0.72 0.73 0.71 0.70
Net realized and unrealized gain (loss) on investments,
options, forward contracts and foreign currency ($) 0.24 ( 1.27) 0.87 (0.16) 0.22
------- ------ ------ ----- ------
Total from investment operations ($) 0.54 ( 0.55) 1.60 0.55 0.92
------- ------ ------ ----- ------
Dividends from net investment income ($) ( 0.30) ( 0.70) ( 0.71) (0.70) ( 0.71)
------- ------ ------ ----- ------
Total distributions ($) ( 0.30) ( 0.70) ( 0.71) (0.70) ( 0.71)
------- ------ ------ ----- ------
Net asset value, end of year ($) 12.91 11.66 12.55 12.40 12.61
======= ====== ====== ===== ======
Total return(3)(%) 4.32(4) ( 4.38) 14.15 4.51 7.66
Ratios/supplemental data:
Net assets at end of year ($ thousands) 26,578 52,319 87,908 95,218 97,253
Ratio of operating expenses to average net assets (%) 1.81(5) 1.82 1.85 1.84 1.83
Ratio of net investment income to average net assets (%) 5.67(5) 5.86 6.01 5.75 5.68
Portfolio turnover rate (%) 103.49 134.41 105.57 88.79 124.95
</TABLE>
- --------------------------------------------------------------------------------
(1) Per-share figures have been calculated using the average shares method.
(2) June 1, 1993 (commencement of share class designations) to October 31,
1993.
(3) Does not reflect any front-end or contingent deferred sales charges.
(4) Not annualized.
(5) Annualized.
63
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (cont'd)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C (Formerly Class D)
---------------------------------------------------------------
Years ended October 31
---------------------------------------------------------------
1993(2) 1994(1) 1995(1) 1996(1) 1997(1)
-------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 12.67 12.91 11.66 12.56 12.41
------- ------ ------ ----- ------
Net investment income ($) 0.30 0.72 0.74 0.71 0.70
Net realized and unrealized gain (loss) on investments,
options, forward contracts and foreign currency ($) 0.24 ( 1.27) 0.87 (0.16) 0.22
------- ------ ------ ----- ------
Total from investment operations ($) 0.54 ( 0.55) 1.61 0.55 0.92
------- ------ ------ ----- ------
Dividends from net investment income ($) ( 0.30) ( 0.70) ( 0.71) (0.70) ( 0.71)
------- ------ ------ ----- ------
Total distributions ($) ( 0.30) ( 0.70) ( 0.71) (0.70) ( 0.71)
------- ------ ------ ----- ------
Net asset value, end of year ($) 12.91 11.66 12.56 12.41 12.62
======= ====== ====== ===== ======
Total return(3)(%) 4.32(4) ( 4.38) 14.24 4.51 7.65
Ratios/supplemental data:
Net assets at end of year ($ thousands) 12,101 13,425 13,033 14,473 16,301
Ratio of operating expenses to average net assets (%) 1.88(5) 1.82 1.85 1.84 1.83
Ratio of net investment income to average net assets (%) 5.59(5) 5.84 6.08 5.76 5.68
Portfolio turnover rate (%) 103.49 134.41 105.57 88.79 124.95
</TABLE>
<TABLE>
<CAPTION>
Class S (Formerly Class C)
---------------------------------------------------------------
Years ended October 31
---------------------------------------------------------------
1993(2) 1994(1) 1995(1) 1996(1) 1997(1)
-------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 12.67 12.92 11.67 12.57 12.42
------ ------ ------ ----- ------
Net investment income ($) 0.19 0.84 0.90 0.84 0.80
Net realized and unrealized gain (loss) on investments,
options, forward contracts and foreign currency ($) 0.42 ( 1.27) 0.84 (0.17) 0.25
------ ------ ------ ----- ------
Total from investment operations ($) 0.61 ( 0.43) 1.74 0.67 1.05
------ ------ ------ ----- ------
Dividends from net investment income ($) ( 0.36) ( 0.82) ( 0.84) (0.82) ( 0.83)
------ ------ ------ ----- ------
Total distributions ($) ( 0.36) ( 0.82) ( 0.84) (0.82) ( 0.83)
------ ------ ------ ----- ------
Net asset value, end of year ($) 12.92 11.67 12.57 12.42 12.64
====== ====== ====== ===== ======
Total return(3)(%) 4.82(4) ( 3.42) 15.37 5.55 8.80
Ratios/supplemental data:
Net assets at end of year ($ thousands) 36 203 5,036 7,767 32,115
Ratio of operating expenses to average net assets (%) 0.80(5) 0.82 0.85 0.84 0.82
Ratio of net investment income to average net assets (%) 6.59(5) 8.01 6.79 6.78 6.66
Portfolio turnover rate (%) 103.49 134.41 105.57 88.79 124.95
</TABLE>
- --------------------------------------------------------------------------------
(1) Per-share figures have been calculated using the average shares method.
(2) June 1, 1993 (commencement of share class designations) to October 31,
1993.
(3) Does not reflect any front-end or contingent deferred sales charges.
(4) Not annualized.
(5) Annualized.
64
<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, 1997, and the results of its
operations, the changes in its net assets and the financial highlights for the
periods indicated, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at October
31, 1997 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 12, 1997
65
<PAGE>
STATE STREET RESEARCH GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
Government Income Fund had a strong year. Class A shares of the Fund returned
+8.52% [without sales charge] for the 12 months ended October 31, 1997. This
total return performance was higher than that of the average U.S. government
income fund tracked by Lipper Analytical Services, which returned +7.99% for the
same period. The Merrill Lynch Government Master Index was up 8.67%.
The Fund's current portfolio consists primarily of U.S. Treasury bonds and
bonds issued or backed by agencies of the U.S. government.
A generally favorable environment and a shift from mortgage bonds to longer
duration U.S. Treasuries helped the Fund. The manager reduced the portfolio's
mortgage exposure from 37% to 27%, and reinvested the proceeds in U.S.
Treasuries. The Fund benefited as long-term bonds gained the most as interest
rates came down during the year and fewer new bonds were issued, the result of
a reduced budget deficit.
The Fund's foreign bond investments also added value. The manager increased the
Fund's exposure to foreign bonds and hedged the positions to protect returns
against a rising dollar.
October 31, 1997
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in the
Fund will fluctuate, and shares, when redeemed, may be worth more or less than
their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. 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. "S" shares,
offered without a sales charge, are available only through employee benefit
plans and special programs. Performance for "B" and "C" 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% "C" share contingent deferred sales charges, where
applicable. Before November 1, 1997, Class C shares were designated Class D and
Class S shares were designated Class C. 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
********************************[MOUNTAIN CHARTS:]*****************************
Class A Shares
Average Annual Total Return
1 Year 5 Years 10 Years
+3.64% +6.21% +8.16%
Government
Income ML Government ML Blended
Fund Master Index Index
10/87 9550 10000 10000
10/88 10483 11113 10973
10/89 11492 12393 12291
10/90 12128 13233 13022
10/91 14099 15259 14928
10/92 15489 16760 16472
10/93 17291 18672 18614
10/94 16671 18043 17808
10/95 19183 20797 20553
10/96 20196 21966 21590
10/97 21917 23900 23463
- --------------------------------------------------------------------------------
Class B Shares
Average Annual Total Return
1 Year 5 Years 10 Years
+2.66% +6.12% +8.28%
Government
Income ML Government ML Blended
Fund Master Index Index
10/87 10000 10000 10000
10/88 10977 11113 10973
10/89 12033 12393 12291
10/90 12700 13233 13022
10/91 14763 15259 14928
10/92 16219 16760 16472
10/93 18037 18672 18614
10/94 17248 18043 17808
10/95 19689 20797 20553
10/96 20577 21966 21590
10/97 22153 23900 23463
- --------------------------------------------------------------------------------
Class C Shares
Average Annual Total Return
1 Year 5 Years 10 Years
+6.65% +6.45% +8.29%
Government
Income ML Government ML Blended
Fund Master Index Index
10/87 10000 10000 10000
10/88 10977 11113 10973
10/89 12033 12393 12291
10/90 12700 13233 13022
10/91 14763 15259 14928
10/92 16219 16760 16472
10/93 18037 18672 18614
10/94 17247 18043 17808
10/95 19703 20797 20553
10/96 20591 21966 21590
10/97 22167 23900 23463
- --------------------------------------------------------------------------------
Class D Shares
Average Annual Total Return
1 Year 5 Years 10 Years
+8.80% +7.41% +8.77%
Government
Income ML Government ML Blended
Fund Master Index Index
10/87 10000 10000 10000
10/88 10977 11113 10973
10/89 12033 12393 12291
10/90 12700 13233 13022
10/91 14763 15259 14928
10/92 16219 16760 16472
10/93 18124 18672 18614
10/94 17503 18043 17808
10/95 20193 20797 20553
10/96 21313 21966 21590
10/97 23189 23900 23463
- --------------------------------------------------------------------------------
66
<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, 1998
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS ........................ 2
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT TECHNIQUES ........ 4
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS ........................ 13
TRUSTEES AND OFFICERS .................................................. 17
INVESTMENT ADVISORY SERVICES ........................................... 22
PURCHASE AND REDEMPTION OF SHARES ...................................... 23
NET ASSET VALUE ........................................................ 26
PORTFOLIO TRANSACTIONS ................................................. 27
CERTAIN TAX MATTERS .................................................... 30
DISTRIBUTION OF SHARES OF THE FUNDS .................................... 32
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
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, 1998, 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;
2
<PAGE>
(4) not to purchase or sell fee simple interests in real estate,
although the Fund may purchase and sell other interests in
real estate including securities which are secured by real
estate, or securities of companies which own or invest or deal
in real estate;
(5) not to invest in 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 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);
3
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(2) 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;
(3) not to purchase securities on margin or make short
sales of securities or maintain a short position
except for short sales "against the box";
(4) not to hypothecate, mortgage or pledge any of its
assets except as may be necessary in connection with
permitted borrowings (for the purpose of this
restriction, futures, 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);
(5) not to purchase a security issued by another
investment company, except to the extent permitted
under the 1940 Act or except by purchases in the open
market involving only customary brokers' commissions,
or securities acquired as dividends or distributions
or in connection with a merger, consolidation or
similar transaction or other exchange; and
(6) not to invest in companies for the purpose of
exercising control over their management, although
the Fund may from time to time present its views on
various matters to the management of issuers in which
it holds investments.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Derivatives
Each Fund may buy and sell certain types of derivatives, such as
options, futures contracts, options on futures contracts and swaps under
circumstances in which such instruments 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.
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Funds to take both "short" positions (positions
which anticipate a decline in the market value of a particular asset or index)
and "long" positions (positions which anticipate an increase in the market value
of a particular asset or index). The
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Funds may also use strategies which involve simultaneous short and long
positions in response to specific market conditions, such as where the
Investment Manager anticipates unusually high or low market volatility.
The Investment Manager may enter into derivative positions for the Fund
for either hedging or non-hedging purposes. The term hedging is applied to
defensive strategies designed to protect a Fund from an expected decline in the
market value of an asset or group of assets that the Fund owns (in the case of a
short hedge) or to protect a Fund from an expected rise in the market value of
an asset or group of assets which it intends to acquire in the future (in the
case of a long or "anticipatory" hedge). Non-hedging strategies include
strategies designed to produce incremental income (such as the option writing
strategy described below) or "speculative" strategies, which are undertaken to
profit from (i) an expected decline in the market value of an asset or group of
assets which a Fund does not own or (ii) expected increases in the market value
of an asset which it does not plan to acquire. Information about specific types
of instruments is provided below.
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell an
underlying asset or group of assets, such as a currency or an index of
securities, at a future time at a specified price. A contract to buy establishes
a long position while a contract to sell establishes a short position.
The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or index after paying a transaction charge and posting
margin in an amount equal to a small percentage of the value of the underlying
asset or index. 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 securities, as permitted under applicable regulatory
policies.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when 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.
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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.
In transactions establishing a long position in a futures contract,
assets equal to the face value of the futures contract will be identified by the
Fund to the Trust's custodian for maintenance in a separate account to insure
that the use of such futures contracts is unleveraged. Similarly, assets having
a value equal to the aggregate face value of the futures contract will be
identified with respect to each short position. Each Fund will utilize such
assets and methods of cover as appropriate under applicable exchange and
regulatory policies.
Options
Each Fund may use options to implement its investment strategy. There
are two basic types of options: "puts" and "calls." Each type of option can
establish either a long or a short position, depending upon whether the Fund is
the purchaser or the writer of the option. A call option on a security, for
example, gives the purchaser of the option the right to buy, and the writer the
obligation to sell, the underlying asset at the exercise price during the option
period. Conversely, a put option on a security gives the purchaser the right to
sell, and the writer the obligation to buy, the underlying asset at the exercise
price during the option period.
Purchased options have defined risk, that is the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset. In general, a purchased put increases in value
as the value of the underlying security falls and a purchased call increases in
value as the value of the underlying security rises.
The principal reason to write options is to generate extra income (the
premium paid by the buyer). Written options have varying degrees of risk. An
uncovered written call option theoretically carries unlimited risk, as the
market price of the underlying asset could rise far above the exercise price
before its expiration. This risk is tempered when the call option is covered,
that is, when the option writer owns the underlying asset. In this case, the
writer runs the risk of the lost opportunity to participate in the appreciation
in value of the asset rather than the risk of an out-of-pocket loss. A written
put option has defined risk, that is, the difference between the agreed-upon
price that the Fund must pay to the buyer upon exercise of the put and the
value, which could be zero, of the asset at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
its obligation to deliver the
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underlying asset in the case of a call option, or to pay for the underlying
asset in the case of a put option, a covered writer is required to deposit in
escrow the underlying security or other assets in accordance with the rules of
the applicable clearing corporation and exchanges.
Among the options which a Fund may enter are options on securities
indices. In general, options on indices of securities are similar to options on
the securities themselves except that delivery requirements are different. For
example, a put option on an index of securities does not give the holder the
right to make actual delivery of a basket of securities but instead gives the
holder the right to receive an amount of cash upon exercise of the option if the
value of the underlying index has fallen below the exercise price. The amount of
cash received will be equal to the difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple. As with options on equity securities or futures contracts, 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. In
connection with the use of such options, a Fund may cover its position by
identifying assets having a value equal to the aggregate face value of the
option position taken.
Options on Futures Contracts
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
Limitations and Risks of Options and Futures Activity
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. The Funds
apply a similar policy to options that are not commodities.
As noted above, the Funds may engage in both hedging and non-hedging
strategies. 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.
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<PAGE>
Nonhedging strategies typically involve special risks. The
profitability of a Fund's nonhedging strategies will depend on the ability of
the Investment Manager to analyze both the applicable derivatives market and the
market for the underlying asset or group of assets. Derivatives markets are
often more volatile than corresponding securities markets and a relatively small
change in the price of the underlying asset or group of assets can have a
magnified effect upon the price of a related derivative instrument.
Derivatives markets also are often less liquid than the market for the
underlying asset or group of assets. Some positions in futures and options may
be closed out only on an exchange which provides a secondary market therefor.
There can be no assurance that a liquid secondary market will exist for any
particular futures contract or option at any specific time. Thus, it may not be
possible to close such an option or futures position prior to maturity. The
inability to close options and futures positions also could have an adverse
impact on the 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.
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 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.
A Fund may enter credit protection swap arrangements involving the sale
by the Fund of a put option on a debt security which is exercisable by the buyer
upon certain events, such as a default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
Most swaps entered into by 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
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<PAGE>
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, as noted above, 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.
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
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<PAGE>
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. 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 net 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 net assets. None of the Funds presently intend to engage in
repurchase agreements in excess of 5% of its net 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.
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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
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.
Restricted Securities
It is each Fund's policy not to make an investment in restricted
securities, including restricted securities sold in accordance with Rule 144A
under the Securities Act of 1933 ("Rule 144A Securities") if, as a result, more
than 35% of the Fund's total assets are invested in restricted securities
provided not more than 10% of the Fund's total assets are invested in restricted
securities other than Rule 144A Securities.
Securities may be resold pursuant to Rule 144A under certain
circumstances only to qualified institutional buyers as defined in the rule, and
the markets and trading practices for such securities are relatively new and
still developing; depending on the development of such markets, Rule 144A
Securities may be deemed to be liquid as determined by or in accordance with
methods adopted by the Trustees. Under such methods the following factors are
considered, among others: the frequency of trades and quotes for the security,
the number of dealers and potential purchasers in the market, market making
activity, and the nature of the security and marketplace trades. Investments in
Rule 144A Securities could have the effect of increasing the level of 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 subjective valuation of such securities in the absence of a
market for them. Restricted securities that are not resalable under Rule 144A
may be subject to risks of illiquidity and subjective valuations to a greater
degree than Rule 144A Securities.
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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.
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.
Securities Lending
Collateral received by a Fund will generally be invested in
unaffiliated mutual funds with quality short-term portfolios, securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities,
irrevocable stand-by letters of credit issued by a bank, or repurchase
agreements or other similar investments. 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
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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 may be classified according to
the industries of their parent or sponsor companies or industries that otherwise
most affect such financing companies. Issuers of asset-backed pools will be
classified as separate industries based on the nature of the underlying assets,
such as mortgages and credit card receivables. "Asset-backed -- Mortgages"
includes pools of nongovernment backed mortgages.
<TABLE>
<S> <C> <C>
Aerospace Electronic Components Oil Service
Airline Electronic Equipment Paper Products
Asset-backed -- Mortgages Entertainment Personal Care
Asset-backed -- Credit Card Financial Service Photography
Receivables Food & Beverage Plastics
Automotive Forest Products Printing & Publishing
Automotive Parts Gaming & Lodging Railroad
Bank Gas Real Estate & Building
Building Gas Transmission Recreation
Business Service Grocery Retail Trade
Cable Healthcare & Hospital Savings & Loan
Capital Goods & Equipment Management Shipping & Transportation
Chemical Hospital Supply Technology & Communications
Computer Software & Service Hotel & Restaurant Telephone
Conglomerate Insurance Textile & Apparel
Consumer Goods & Services Machinery Tobacco
Container Media Truckers
Cosmetics Metal & Mining Trust Certificates -
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
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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.
Managing Volatility. In administering a Fund's portfolio, the
Investment Manager attempts to manage volatility in part by managing the
duration and weighted average maturity of the Fund's bond position.
Duration is an indicator of the expected volatility of a bond position
in response to changes in interest rates. In calculating duration, a Fund
measures the average time required to receive all cash flows associated with
those debt securities held in the Fund's portfolio -- representing payments of
principal and interest -- by considering the timing, frequency and amount of
payment expected from each portfolio security. The higher the duration, the
greater the gains and losses when interest rates change. Duration generally is a
more accurate measure of potential volatility with a portfolio composed of
high-quality debt securities, such as U.S. Government securities, municipal
securities and high-grade U.S. corporate bonds, than with lower-grade
securities.
The Investment Manager may use several methods to manage the duration
of a Fund's bond position in order to increase or decrease its exposure to
changes in interest rates. First, the Investment Manager may adjust portfolio
duration by adjusting the mix of debt securities held by a Fund. For example, if
the Investment Manager intends to shorten duration, it may sell debt instruments
that individually have a long duration and purchase other debt instruments that
individually have a shorter duration. Among the factors that will affect a debt
security's duration are the length of time to maturity, the timing of interest
and principal payments, and whether the terms of the security give the issuer of
the security the right to call the security prior to maturity. Second, the
Investment Manager may adjust bond portfolio duration using derivative
transactions, especially with interest rate futures and options contracts. For
example, if the Investment Manager wants to lengthen the duration of a Fund's
bond position, it could purchase interest rate futures contracts instead of
buying longer-term bonds or selling shorter-term bonds. Similarly, during
periods of lower interest rate volatility, the Investment Manager may use a
technique to extend duration in the event rates rise by writing an out-of-the-
money put option and receiving premium income with the expectation that the
option could be exercised. In managing duration, the use of such derivatives may
be faster and more efficient than trading specific portfolio securities.
Weighted average maturity is another indicator of potential volatility
used by the Investment Manager with respect to a Fund's bond portfolio, although
for certain types of debt securities, such as high-quality debt securities, it
is not as accurate as duration in quantifying potential volatility. Weighted
average maturity is the average of all maturities of the individual debt
securities held by a Fund, weighted by the market value of each security.
Generally, the longer the weighted average maturity, the more bond prices will
vary in response to changes in interest rates.
U.S. Government and Related Securities. U.S. Government securities are
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S. Government
securities in which the Funds invest include, among others:
o direct obligations of the U.S. Treasury, i.e., U.S. Treasury bills,
notes, certificates and bonds;
o obligations of U.S. Government agencies or instrumentalities such
as the Federal Home Loan Banks, the Federal Farm Credit Banks, the
Federal National Mortgage Association, the Government National
Mortgage Association and the Federal Home Loan Mortgage
Corporation; and
o obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the 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
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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.
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
15
<PAGE>
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.
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
within the "A" category by S&P or by Moody's. The money market investments in
corporate bonds and debentures (which must have maturities at the date of
settlement of one year or less) must be rated at the time of purchase at least
within the "A" category by S&P or within the "Prime" category by Moody's.
Commercial paper rated (highest quality) by S&P is issued by entities
which have liquidity ratios which are adequate to meet cash requirements.
Long-term senior debt is rated within the "A" category or better, although in
some cases credits within the BBB category may be allowed. The issuer has access
to at least two additional channels of borrowing. Basic earnings and cash flow
have an upward trend with allowance made for unusual circumstances. Typically,
the issuer's industry is well established and the issuer has a strong position
within the industry. The reliability and quality of management are unquestioned.
The relative strength or weakness of the above factors determines whether the
issuer's commercial paper is rated A-1, A-2 or A-3. (Those A-1 issues determined
to possess overwhelming safety characteristics are denoted with a plus (+) sign:
A-1+.)
The rating Prime is the highest commercial paper rating 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
16
<PAGE>
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.
In the event the lowering of ratings of debt instruments held by a Fund
by applicable rating agencies results in a material decline in the overall
quality of the Fund's portfolio, the Trustees of the Trust will review the
situation and take such action as they deem in the best interests of the Fund's
shareholders, including, if necessary, changing the composition of the
portfolio.
17
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and principal officers of the Trust, their addresses, and
their principal occupations and positions with certain affiliates of the
Investment Manager are set forth below.
*+Peter C. Bennett, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 59. His principal occupation is currently,
and during the past five years has been, Executive Vice President and Director
of State Street Research & Management Company. Mr. Bennett's other principal
business affiliations include Director, State Street Research Investment
Services, Inc. and Executive Vice President, GFM International Investors, Inc.
+Steve A. Garban, The Pennsylvania State University, 210 Old Main,
University Park, PA 16802, serves as Trustee of the Trust. He is 60. He is
retired and was formerly Senior Vice President Finance and Operations and
Treasurer of The Pennsylvania State University.
+Malcolm T. Hopkins, 14 Brookside Road, Biltmore Forest, Asheville, NC
28803, serves as Trustee of the Trust. He is 69. He is engaged principally in
private investments. Previously, he was Vice Chairman of the Board and Chief
Executive Officer of St. Regis Corp.
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 57. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as portfolio manager for State Street Research &
Management Company.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791,
serves as Trustee of the Trust. He is 71. He is engaged principally in private
investments and civic affairs, and is an author of business history. Previously,
he was with an affiliate of J.P. Morgan & Co. in New York.
+Robert A. Lawrence, 175 Federal Street, Boston, MA 02110, serves as
Trustee of the Trust. He is 71. He is retired and was formerly a Partner in
Saltonstall & Co., a private investment firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 46. His principal occupation is currently, and
during the past five years has been, Executive Vice President, Treasurer, Chief
Financial Officer and Director of State Street
- ------------------------
* or + See footnotes on page 20.
18
<PAGE>
Research & Management Company. Mr. Maus's other principal business affiliations
include Executive Vice President, Treasurer, Chief Financial Officer and
Director of State Street Research Investment Services, Inc. and Executive Vice
President, Chief Financial Officer, Administrative Officer and Director, GFM
International Investors, Inc.
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111 has
served as Secretary and General Counsel of the Trust. He is 42. His principal
occupation is Executive Vice President, General Counsel and Secretary of State
Street Research & Management Company. During the past five years he has also
served as Senior Vice President of State Street Research & Management Company
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. and Executive Vice President and General
Counsel, GFM International Investors, Inc.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 65. He is retired and was formerly Executive Vice
President, Chief Operating Officer and Director of Hewlett-Packard Company.
+Thomas L. Phillips, 141 Spring Street, Lexington, MA 02173 serves as
Trustee of the Trust. He is 73. He is retired and was formerly Chairman of the
Board and Chief Executive Officer of Raytheon Company, of which he remains a
Director.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves
as Trustee of the Trust. He is 59. His principal occupations during the past
five years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
60. His principal occupation during the past five years has been Jay W.
Forrester Professor of Management at Sloan School of Management, Massachusetts
Institute of Technology.
*+Thomas A. Shively, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 43. His principal occupation is Executive
Vice President and Director of State Street Research & Management Company.
During the past five years he has
- ------------------------
* or + See footnotes on page 20.
19
<PAGE>
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 55. His principal occupation is currently, and during the past five
years has been, Chairman of the Board, President, Chief Executive Officer and
Director of State Street Research & Management Company. Mr. Verni's other
principal business affiliations include Chairman of the Board and Director of
State Street Research Investment Services, Inc. (and until February 1996, prior
positions as President and Chief Executive Officer of that company) and Chairman
of the Board, President, Chief Executive Officer and Director of GFM
International Investors, Inc.
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 73. 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/Director and/or officer of one or more of the
following investment companies, each of which has an advisory
relationship with the Investment Manager or its parent, Metropolitan
Life Insurance Company ("Metropolitan"): State Street Research Equity
Trust, State Street Research Financial Trust, State Street Research
Income Trust, State Street Research Money Market Trust, State Street
Research Tax-Exempt Trust, State Street Research Capital Trust, State
Street Research Exchange Trust, State Street Research Growth Trust,
State Street Research Master Investment Trust, State Street Research
Securities Trust, State Street Research Portfolios, Inc. and
Metropolitan Series Fund, Inc.
20
<PAGE>
As of January 31, 1998, the Trustees and principal officers of the
Trust as a group owned none of the outstanding shares of the Funds.
As of January 31, 1998, the following persons or entities were the
record and/or beneficial owners of the approximate amounts of the Funds' Class
S shares as set forth beside their names:
<TABLE>
<CAPTION>
Strategic Portfolios Strategic Portfolios Strategic Portfolios
Aggressive Moderate Conservative
-------------------- -------------------- ----------------
Holder % of Class Holder % of Class Holder % of Class
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Metropolitan Life 52.3 Metropolitan Life 35.7 Metropolitan Life 66.0
Chase Manhattan 47.7 Chase Manhattan 52.8 Chase Manhattan 34.0
Bank, N.A. Bank, N.A. Bank, N.A.
State Street Bank 10.6
</TABLE>
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
- ------------------
(a) 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 benefits plans serviced by Metropolitan.
(c) The respective Funds believe that each named recordholder does not have
beneficial ownership of such shares.
21
<PAGE>
Ownership of 25% or more of a voting security is deemed "control" as
defined in the 1940 Act. So long as 25% of a class of shares is so owned, such
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.
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 $ 5,459 $ 75,899
Malcolm T. Hopkins $ 6,059 $ 78,499
Edward M. Lamont $ 9,700 $ 68,741
Robert A. Lawrence $ 10,100 $ 93,125
Dean O. Morton $ 10,900 $ 97,125
Thomas L. Phillips $ 9,100 $ 68,275
Toby Rosenblatt $ 9,700 $ 68,741
Michael S. Scott Morton $ 12,100 $103,625
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $ 11,300 $ 74,475
(a) For the Funds' fiscal year ended October 31, 1997. Includes
compensation received from multiple series of the Trust. See
"Distribution of Shares" for a listing of series.
(b) Includes compensation received on behalf of all series of 12 investment
companies for which the Investment Manager or its parent, Metropolitan,
served as investment adviser. "Total Compensation from Trust and
Complex Paid to Trustees" is for the 12 months ended December 31, 1997.
The Trust does not provide any pension or retirement benefits for the
Trustees.
22
<PAGE>
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the 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 regular trading 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:
Fiscal Year Ended October 31
-------------------------------------
1997 1996 1995
-------- -------- --------
Strategic Portfolios: Moderate $315,798 $302,408 $216,199
Strategic Portfolios: Conservative $213,881 $201,690 $162,835
Strategic Portfolios: Aggressive $521,687 $526,134 $414,353
For the same period, the voluntary reduction of fees or assumption of expenses
were as follows:
Fiscal Year Ended October 31
-------------------------------------
1997 1996 1995
-------- -------- --------
Strategic Portfolios: Moderate $298,215 $234,376 $244,843
Strategic Portfolios: Conservative $172,748 $197,940 $124,191
Strategic Portfolios: Aggressive $122,711 $142,848 $119,174
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
23
<PAGE>
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 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 and selected other persons elsewhere involved in investment operations,
are only permitted to engage in personal securities transactions in accordance
with certain conditions relating to such person's position, the identity of the
security, the timing of the transaction, and similar factors. Such persons 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 S shares, a sales
charge which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B and Class
C shares). General information on how to buy shares of the Funds, as well as
sales charges involved, are set forth under "Purchase of Shares" in the
Prospectus. The following supplements that information.
24
<PAGE>
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 the State Street Research
Service Center (the "Service Center") 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 the Service Center
in order to permit the investor to obtain the current price. Any loss suffered
by an investor which results from a dealer's failure to transmit an order
promptly is a matter for settlement between the investor and the dealer.
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 S shares may also be included in the
combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within
25
<PAGE>
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 under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class S shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Class S Shares - Class S shares are currently available to certain
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants (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.
26
<PAGE>
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, Martin
Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of 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
27
<PAGE>
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
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:
Fiscal Year Ended October 31
-------------------------------
1996 1997
------ -------
Strategic Portfolios: Moderate 127.59% 136.17%
Strategic Portfolios: Conservative 126.41% 117.66%
Strategic Portfolios: Aggressive 145.59% 136.48%
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
28
<PAGE>
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
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 in conjunction with certain trading systems and
including software providing investment personnel with efficient access to
current and historical data from a variety of internal and external sources);
and portfolio evaluation services and relative performance of accounts. Certain
of the 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.
In the case of the Funds and other registered investment companies
advised by the Investment Manager or its affiliates, the above services may
include data relating to performance, expenses and fees of those investment
companies and other investment companies; this information is used by the
Trustees or Directors of the investment companies to fulfill their
responsibility to oversee the quality of the Investment Manager's advisory
contracts between the investment companies and the Investment Manager. The
Investment Manager considers these investment company services only in
connection with the execution of transactions on behalf of its investment
company clients and not its other clients.
29
<PAGE>
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. Among other measures, the Investment Manager's
investment management personnel seek to evaluate the quality of research and
other services received, and the results of this effort are made available to
the equity trading department, which sometimes uses this information as a
consideration in the selection of brokers to execute portfolio transactions.
Some services furnished by broker-dealers may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Investment Manager allocates the cost
of such services to determine the appropriate proportion of the cost which is
allocable to purposes other than research or investment decision-making and the
Investment Manager pays for that portion directly from its own funds. Some
research and execution services may benefit the Investment Manager's clients as
a whole, while others may benefit a specific segment of clients. Not all such
services will necessarily be used exclusively in connection with the accounts
which pay the commissions to the broker-dealer producing the services.
The Investment Manager has no fixed agreements or understandings with
any broker-dealer as to the amount of brokerage business which that firm may
expect to receive for services supplied to the Investment Manager or otherwise.
There may be, however, understandings with certain firms that in order for such
firms to be able to continuously supply certain services, they need to receive
allocation of a specified amount of brokerage business. These understandings are
honored to the extent possible in accordance with the policies set forth above.
It is not the Investment Manager's policy to intentionally pay a firm a
brokerage commission higher than that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided. However, the 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, the Investment Manager relies on the
provisions of Section 28(e) of the Securities Exchange Act of 1934, to the
extent applicable. Brokerage commissions paid by the Funds for the periods shown
below were as follows:
30
<PAGE>
Fiscal Years Ended October 31
-------------------------------------
1997 1996 1995
-------- -------- -------
Strategic Portfolios: Moderate $ 71,000 $ 93,000 $37,000
Strategic Portfolios: Conservative $ 26,000 $ 38,000 $16,000
Strategic Portfolios: Aggressive $145,000 $204,000 $90,000
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.
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.
31
<PAGE>
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) satisfy certain diversification
requirements; and (c) 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).
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 to the extent thereof. Any distribution in excess of a shareholder's basis
in the shareholder's shares would be taxable as gain realized from the sale of
such shares.
A Fund will be liable for a nondeductible 4% excise tax on amounts not
distributed (or deemed 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 (or be deemed to have distributed) an amount equal
to at least 98% of the sum of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, and its capital gain net income
for the 12-month period ending on October 31, in addition to any undistributed
portion of the respective balances from the prior year. For that purpose, any
income or gain retained by a Fund that is subject to corporate tax will be
considered to have been distributed by year end. 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 interest for federal income tax purposes and
can generally be defined as the excess of the stated
32
<PAGE>
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 federal
income tax purposes. In the case of any debt security issued after July 18,
1984, having a fixed maturity date of more than one year from the date of issue
and having market discount, the gain realized on disposition will be treated as
interest to the extent it does not exceed the accrued market discount on the
security (unless 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 or
continued 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,
medium-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.
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,
33
<PAGE>
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 S shares. Prior to November 1, 1997, Class S
shares were designated Class C shares and Class C shares were designated 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 C shares). The
Distributor may reallow all or portions of such sales charges as concessions to
dealers. The Distributor may also pay its affiliate MetLife Securities, Inc.
additional sales compensation of up to 0.25% of certain sales or assets.
For the fiscal years ended October 31, 1997, 1996 and 1995, no sales
charges on Class A shares of any of the Funds 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 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,
34
<PAGE>
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, managed fee-based programs and
so-called mutual fund supermarkets, among other programs, the amount of the
sales charge reduction will similarly reflect the anticipated reduction in sales
expenses associated with such arrangements. The reductions in sales expenses,
and therefore the reduction in sales 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
or similar programs at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission based on the aggregate of such sales. Such
commission also is payable to authorized securities dealers upon sales of Class
A shares made pursuant to a Letter of Intent to purchase shares having a net
asset value of $1,000,000 or more. Shares sold with such commissions payable are
subject to a one-year contingent deferred sales charge of 1.00% on any portion
of such shares redeemed within one year following their sale. After a particular
purchase of Class A shares is made under the Letter of Intent, the commission
will be paid only in respect of that particular purchase of shares. If the
Letter of Intent is not completed, the commission paid will be deducted from any
discounts or commissions otherwise payable to such dealer in respect of shares
actually sold. If an investor is eligible to purchase shares at net asset value
on account of the Right of Accumulation, the commission will be paid only in
respect of the incremental purchase at net asset value.
For the fiscal years ended October 31, 1997, 1996 and 1995, the
Distributor received no contingent deferred sales charges upon redemption of
Class A, Class B and Class C shares of any of the Funds 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 C shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to underwriters, securities dealers
and others engaged in the sale of shares, including payments to the Distributor
to be used to pay commissions and/or reimbursement to securities dealers (which
securities dealers may be affiliates of the Distributor) engaged in the
distribution and marketing of shares and furnishing ongoing assistance to
investors, (2) reimbursement of direct out-of-pocket expenditures incurred by
the Distributor in connection with the distribution and marketing of shares and
the servicing of investor accounts including expenses relating to the
formulation and implementation of marketing strategies and promotional
activities such as
35
<PAGE>
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 service 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 C shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class C
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class C shares (as the case may be) to make payments for personal
services and/or the maintenance or servicing of shareholder accounts. 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, 1997, Strategic Portfolios:
Moderate paid the Distributor no fees under the Distribution Plan. During the
period November 1, 1996 to March 27, 1997, Strategic Portfolios: Conservative
and Strategic Portfolios: Aggressive paid the Distributor fees under the
Distribution Plan and the Distributor used all of such payments for expenses
incurred on behalf of the Funds as follows:
Class A
-------
Strategic Portfolios: Strategic Portfolios
Conservative Aggressive
------------ ----------
Advertising $ 0 $ 0
Printing and mailing of
prospectuses to
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<PAGE>
other than current shareholders 0 0
Compensation to dealers 0 0
Compensation to sales personnel
Interest 0 0
Carrying or other financing
charges 0 0
Other expenses: marketing;
general 212 266
------ ------
Total fees $ 212 $ 266
======= =======
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 S 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 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.
Total Return
The total return ("standard total return") of each Fund's Class S
shares was as follows:
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<PAGE>
Commencement
of Operations One Year
(September 28, 1993) Ended
to October 31, 1997 October 31, 1997
-------------------- ----------------
Strategic Portfolios: Moderate
10.84% 17.83%
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<PAGE>
Commencement
of Operations One Year
(May 16, 1994) Ended
to October 31, 1997 October 31, 1997
-------------------- ----------------
Strategic Portfolios: Conservative 12.12% 14.11%
Strategic Portfolios: Aggressive 16.70% 22.54%
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 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 Fund's Class S shares, based on the month
of October 1997, was as follows:
Strategic Portfolios: Conservative 4.32%
Strategic Portfolios: Moderate 2.84%
Strategic Portfolios: Aggressive 1.33%
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
39
<PAGE>
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]
c d
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.
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<PAGE>
Shareholders should remember that yield is a function of the kind and quality of
the instruments in the Fund's portfolio, portfolio maturity and operating
expenses and market conditions.
Accrued Expenses
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return and yield results take sales charges, if applicable, into
account, although the results do not take into account recurring and
nonrecurring charges for optional services which only certain shareholders elect
and which involve nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by
affiliates of fees or expenses during the subject period. In the absence of such
subsidization, the performance of the 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 S 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 return of each Fund's Class S shares
for the six months ended October 31, 1997, without taking sales charges into
account, were as follows:
Strategic Portfolios: Moderate 12.86%
Strategic Portfolios: Conservative 9.66%
Strategic Portfolios: Aggressive 17.13%
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
41
<PAGE>
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.
The distribution rate of each Fund's Class S shares, based on the month
ended October 31, 1997, was as follows:
Strategic Portfolios: Conservative 3.53%
Strategic Portfolios: Moderate 3.32%
Strategic Portfolios: Aggressive 1.21%
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.
42
<PAGE>
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a
semiannual basis, other supplementary financial reports may be made available
from time to time through electronic or other media. Shareholders with
substantial holdings in one or more State Street Research Funds may also receive
reports and other information which reflect or analyze their positions in a
consolidated manner. For more information, call State Street Research Service
Center.
The following financial statements are for the Funds' fiscal year ended
October 31, 1997.
43
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
October 31, 1997
- --------------------------------------------------------------------------------
VALUE
SHARES (NOTE 1)
- --------------------------------------------------------------------------------
EQUITY SECURITIES 47.6%
BASIC INDUSTRIES 7.4%
CHEMICAL 2.3%
Agrium Inc. ............................ 29,900 $ 334,506
Cabot Corp. ............................ 11,500 282,469
Cambrex Corp. .......................... 1,050 50,334
Ciba Specialty Chemicals AG* ........... 300 29,459
E.I. Du Pont De Nemours & Co. .......... 2,800 159,250
H.B. Fuller Co. ........................ 500 23,625
Indus International Inc.* .............. 1,100 15,538
JLM Industries Inc.* ................... 1,300 14,788
OM Group Inc. .......................... 800 30,200
Thiokol Corp. .......................... 3,000 274,687
----------
1,214,856
----------
DIVERSIFIED 0.6%
Hoya Corp. ............................. 3,000 104,196
Johnson Controls Inc. .................. 5,100 228,863
----------
333,059
----------
ELECTRICAL EQUIPMENT 0.9%
Asia Pacific Wire & Cable Corp. Ltd.* .. 13,600 125,800
Essex International Inc.* .............. 500 16,563
General Electric Co. ................... 3,800 245,337
Sony Corp.* ............................ 1,000 83,008
----------
470,708
----------
FOREST PRODUCT 0.9%
Abitibi-Consolidated Inc. .............. 15,400 219,450
Aracruz Celulose SA ADR ................ 4,250 63,750
Stone Container Corp. .................. 15,800 190,587
----------
473,787
----------
MACHINERY 1.2%
Hanover Compressor Co.* ................ 800 17,300
ITEQ Inc.* ............................. 4,300 53,750
Sundstrand Corp. ....................... 5,300 288,187
Tyco International Ltd. ................ 4,800 181,200
US Filter Corp.* ....................... 2,800 112,350
----------
652,787
----------
METAL & MINING 1.5%
Alumax Inc.* ........................... 8,200 266,500
General Cable Corp.* ................... 1,500 48,563
Kennametal Inc. ........................ 7,300 354,050
RTZ Corp.* ............................. 4,574 58,937
Wyman-Gordon Co.* ...................... 2,500 60,312
----------
788,362
----------
TRUCKERS 0.0%
CNF Transportation Inc. ................ 400 17,850
----------
Total Basic Industries ................................. 3,951,409
----------
CONSUMER CYCLICAL 7.4%
AIRLINE 0.2%
China Southern Airlines Co. Ltd.* ...... 220,500 97,680
----------
AUTOMOTIVE 1.6%
Budget Group Inc. Cl. A* ............... 400 14,000
Excelsior-Henderson Motorcycle
Manufacturing Co.* .................. 1,100 6,050
Exide Corp. ............................ 14,000 326,375
Lear Corp.* ............................ 8,600 413,338
Renault SA* ............................ 3,400 94,604
----------
854,367
----------
BUILDING 0.3%
Lafarge Corp. .......................... 4,500 136,687
----------
HOTEL & RESTAURANT 0.8%
Apple South Inc. ....................... 1,400 26,075
CKE Restaurants Inc.* .................. 400 15,975
Fine Host Corp.* ....................... 500 14,000
Harrah's Entertainment Inc.* ........... 17,800 350,437
Motels of America Inc.*+ ............... 75 750
----------
407,237
----------
RECREATION 1.2%
American Radio Systems Corp. Cl. A* .... 700 34,125
Chancellor Media Corp. ................. 700 38,413
Cox Communications Inc.* ............... 6,200 190,650
International Game Technology Inc. ..... 5,300 135,481
Panavision Inc.* ....................... 700 17,456
TCA Cable TV Inc.* ..................... 500 20,625
US West Inc.* .......................... 9,300 234,825
----------
671,575
----------
RETAIL TRADE 3.3%
Carson Pirie Scott & Co.* .............. 800 38,550
Dominick's Supermarkets Inc.* .......... 1,400 51,100
Global DirectMail Corp.* ............... 700 12,863
Hannaford Brothers Co. ................. 7,300 276,031
Home Depot Inc. ........................ 3,000 166,875
InaCom Corp.* .......................... 400 12,325
Kroger Co.* ............................ 16,300 531,787
Rite Aid Corp. ......................... 4,300 255,313
Sothebys Holdings Inc. Cl. A ........... 900 16,875
Staples Inc.* .......................... 12,400 325,500
Wal-Mart Stores, Inc. .................. 2,200 77,275
----------
1,764,494
----------
TEXTILE & APPAREL 0.0%
Samsonite Corp.* ....................... 300 13,913
----------
Total Consumer Cyclical ................................ 3,945,953
----------
CONSUMER STAPLE 10.3%
BUSINESS SERVICE 1.0%
Avis Rent A Car, Inc.* ................. 500 13,719
Carriage Services, Inc. Cl. A* ......... 900 15,075
HBO & Co. .............................. 4,000 174,000
Maximus Inc.* .......................... 1,000 28,000
Microage Inc.* ......................... 500 11,000
Norrell Corp. .......................... 1,000 29,125
Pameco Corp.* .......................... 2,500 42,500
Philip Services Corp.* ................. 1,222 21,385
Shared Medical Systems Corp. ........... 400 21,900
Staff Leasing Inc.* .................... 1,000 24,625
USA Waste Services Inc.* ............... 2,000 74,000
Vestcom International Inc.* ............ 1,600 29,000
Waterlink Inc.* ........................ 2,400 40,950
----------
525,279
----------
CONTAINER 0.3%
Ball Corp. ............................. 4,600 161,000
----------
DRUG 2.5%
Ascent Pediatrics Inc.* ................ 1,700 15,512
Axogen Ltd. ADR* ....................... 1,400 54,600
BioVail Corp.* ......................... 2,700 77,962
Eli Lilly & Co. ........................ 3,800 254,125
Intelligent Polymers Ltd.* ............. 2,600 51,350
Novartis AG ............................ 300 469,845
Pathogenesis Corp.* .................... 500 18,000
Pfizer Inc. ............................ 2,300 162,725
Schering-Plough Corp. .................. 3,900 218,644
----------
1,322,763
----------
FOOD & BEVERAGE 0.9%
H.J. Heinz Co. ......................... 3,800 176,462
Whitman Corp. .......................... 11,200 294,000
----------
470,462
----------
HOSPITAL SUPPLY 2.9%
Aradigm Corp.* ......................... 700 8,225
Aviron Corp.* .......................... 700 15,313
Baxter International Inc. .............. 2,000 92,500
Boston Scientific Corp.* ............... 1,400 63,700
Centennial Healthcare Corp.* ........... 1,600 33,200
Genesis Health Ventures Inc.* .......... 400 9,800
Guidant Corp. .......................... 3,800 218,500
Healthdyne Technologies Inc.* .......... 3,700 74,000
National Surgery Centers Inc.* ......... 1,500 37,500
Pacificare Health Systems, Inc. Cl. A* . 4,500 286,312
Roche Holdings AG* ..................... 35 307,570
Rural/Metro Corp.* ..................... 500 17,375
Tenet Healthcare Corp. ................. 9,300 284,231
Total Renal Care Holdings Inc.* ........ 3,000 92,438
Xomed Surgical Products Inc.* .......... 1,600 33,600
----------
1,574,264
----------
PERSONAL CARE 0.5%
Procter & Gamble Co. ................... 2,000 136,000
Wesley Jessen VisionCare Inc.* ......... 3,500 102,375
----------
238,375
----------
PRINTING & PUBLISHING 1.7%
A.H. Belo Corp. Cl. A .................. 719 33,973
Hollinger International, Inc. Cl. A* ... 28,900 377,506
Torstar Corp.* ......................... 3,200 109,327
Valassis Communications Inc. ........... 13,900 410,050
----------
930,856
----------
TOBACCO 0.5%
Dimon Inc. ............................. 7,600 197,125
Philip Morris Companies, Inc. .......... 1,900 75,288
----------
272,413
----------
Total Consumer Staple .................................. 5,495,412
----------
ENERGY 6.4%
OIL 5.1%
Abacan Resource Corp.* ................. 5,700 17,813
Arakis Energy Corp.* ................... 7,300 24,181
British Petroleum Co. PLC* ............. 7,500 110,228
Energy Africa Ltd.* .................... 55,000 288,571
ENI SPA ADR ............................ 3,800 214,225
Fletcher Challenge Ltd.* ............... 22,500 100,869
Gulf Indonesia Resources Ltd.* ......... 800 16,800
KCS Energy Inc. ........................ 3,200 84,200
Maxx Petroleum Ltd.* ................... 8,800 16,984
Nuevo Energy Co.* ...................... 700 29,006
Oryx Energy Co.* ....................... 15,900 438,244
PTT Exploration & Production Public Co. Ltd.* 900 8,995
Royal Dutch Petroleum Co. .............. 2,800 147,350
Seagull Energy Corp.* .................. 16,812 410,843
Tosco Corp. ............................ 9,200 303,600
Total SA* .............................. 2,049 227,341
Total SA Cl. B ADR ..................... 3,500 194,250
Woodside Petroleum Ltd. ADR* ........... 12,500 105,575
----------
2,739,075
----------
OIL SERVICE 1.3%
Daniel Industries Inc. ................. 800 16,100
Dreco Energy Services Ltd.* ............ 333 25,733
Mapco Inc. ............................. 11,100 366,300
Schlumberger Ltd. ...................... 3,100 271,250
Willbros Group Inc.* ................... 800 15,600
----------
694,983
----------
Total Energy ........................................... 3,434,058
----------
FINANCE 6.6%
BANK 1.8%
BankAmerica Corp. ...................... 3,000 214,500
Commercial Federal Corp. ............... 300 14,550
Fleet Financial Group Inc. ............. 5,600 360,150
Golden State Bancorp Inc. .............. 1,300 43,225
Mellon Bank Corp. ...................... 6,700 345,469
----------
977,894
----------
FINANCIAL SERVICE 0.7%
CMAC Investment Corp. .................. 700 38,281
CRIIMI MAE Inc.* ....................... 800 12,700
Federal National Mortgage Association .. 3,900 188,906
First Industrial Realty Trust Inc. ..... 700 24,238
Homeside Inc.* ......................... 2,400 64,350
INMC Mortgage Holdings Inc. ............ 1,300 30,875
Liberty Property Trust ................. 600 16,800
----------
376,150
----------
INSURANCE 4.1%
Ace Ltd. ............................... 7,100 659,856
AMBAC Inc. ............................. 8,300 350,675
Capital Re Corp.* ...................... 300 17,681
General Re Corp. ....................... 800 157,750
HCC Insurance Holdings Inc.* ........... 1,000 23,375
Mid Ocean Ltd. ......................... 6,100 395,737
Mutual Risk Management Ltd. ............ 1,532 39,736
Penncorp Financial Group Inc.* ......... 1,100 35,819
Travelers Group Inc. ................... 2,200 154,000
Travelers Property Casualty Corp. Cl. A 6,500 234,813
Unum Corp. ............................. 2,300 112,125
----------
2,181,567
----------
Total Finance .......................................... 3,535,611
----------
SCIENCE & TECHNOLOGY 7.6%
AEROSPACE 0.4%
Boeing Co. ............................. 4,318 206,724
First Aviation Services Inc.* .......... 1,600 12,400
----------
219,124
----------
COMPUTER SOFTWARE & SERVICE 1.7%
Boston Technology Inc.* ................ 1,000 27,125
Box Hill Systems Corp.* ................ 600 9,300
Cisco Systems Inc.* .................... 1,600 131,250
Complete Business Solutions Inc.* ...... 800 28,200
Diamond Multimedia Systems Inc.* ....... 1,700 18,275
Industir-Matematik International Corp.* 800 16,050
Mapics Inc.* ........................... 2,200 25,025
Mastech Corp.* ......................... 1,100 36,438
Nintendo Co. Ltd.* ..................... 1,500 129,622
Sema Group PLC* ........................ 5,800 129,908
Transition Systems Inc.* ............... 1,600 32,400
TT Tieto Oy Cl. B* ..................... 600 67,269
Wang Laboratories Inc.* ................ 1,400 32,375
Western Digital Corp.* ................. 5,300 158,669
WM Data AB Cl. B* ...................... 3,000 52,070
Xylan Corp.* ........................... 900 14,400
----------
908,376
----------
ELECTRONIC COMPONENTS 2.1%
AMP Inc. ............................... 3,000 135,000
Hitachi Ltd.* .......................... 15,000 115,289
Intel Corp. ............................ 1,700 130,900
Lernout & Hauspie Speech Products NV ADR* 6,000 291,000
Microtouch Systems Inc.* ............... 800 19,300
MMC Networks Inc.* ..................... 100 2,188
Remec Inc.* ............................ 1,950 49,481
Rohm Co.* .............................. 1,000 98,878
Texas Instruments Inc. ................. 2,100 224,044
Vitesse Semiconductor Corp.* ........... 400 17,350
World Access Inc.* ..................... 1,300 34,450
----------
1,117,880
----------
ELECTRONIC EQUIPMENT 1.9%
Aeroflex Inc.* ......................... 3,300 34,031
Brooks Automation Inc.* ................ 200 4,438
Chicago Miniature Lamp, Inc.* .......... 2,900 92,800
Integrated Process Equipment Corp.* .... 800 17,750
KLA-Tencor Corp.* ...................... 2,000 87,875
L.M. Ericsson Telephone Co. ADR Cl. B* . 5,170 228,772
L.M. Ericsson Telephone Co. Cl. B* ..... 8,769 386,356
MAS Technology Ltd. ADR* ............... 1,200 18,450
Scientific Atlanta Inc. ................ 1,500 27,844
Silicon Valley Group Inc.* ............. 800 23,000
Spectrian Corp.* ....................... 1,600 37,600
Teradyne Inc.* ......................... 1,700 63,644
----------
1,022,560
----------
OFFICE EQUIPMENT 1.5%
Compaq Computer Corp. .................. 1,600 102,000
Hewlett-Packard Co. .................... 1,200 74,025
International Business Machines Corp. .. 1,500 147,094
Quantum Corp.* ......................... 4,400 139,150
Unisys Corp. ........................... 24,100 320,831
----------
783,100
----------
Total Science & Technology ............................. 4,051,040
----------
UTILITY 1.9%
ELECTRIC 1.3%
Edison International Inc. .............. 8,800 225,500
OGE Energy Corp. ....................... 5,100 247,031
Western Resources Inc. ................. 5,700 212,325
----------
684,856
NATURAL GAS 0.0% ----------
Calpine Corp.* ......................... 1,700 26,988
----------
TELEPHONE 0.6%
Allen Telecom Inc.* .................... 100 1,894
China Telecom Hong Kong Ltd. ADR* ...... 1,400 45,325
Clearnet Communications Inc. Wts.* ..... 495 4,702
NEXTLINK Communications Inc. Cl. A* .... 600 13,575
Telecom Italia SPA* .................... 18,700 117,193
WorldCom Inc.* ......................... 4,500 151,312
----------
334,001
----------
Total Utility .......................................... 1,045,845
----------
Total Equity Securities (Cost $21,437,388) 25,459,328
----------
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PRINCIPAL MATURITY VALUE
AMOUNT DATE (NOTE 1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED INCOME SECURITIES 45.5%
U.S. TREASURY 14.0%
U.S. Treasury Bond, 12.00% ........................... $ 400,000 8/15/2013 $ 586,124
U.S. Treasury Bond, 8.75% ............................ 850,000 5/15/2017 1,093,312
U.S. Treasury Bond, 8.125% ........................... 275,000 8/15/2021 339,067
U.S. Treasury Bond, 6.25% ............................ 500,000 8/15/2023 501,795
U.S. Treasury Note, 6.75% ............................ 125,000 5/31/1999 127,070
U.S. Treasury Note, 6.875% ........................... 825,000 8/31/1999 842,275
U.S. Treasury Note, 6.875% ........................... 600,000 3/31/2000 615,750
U.S. Treasury Note, 6.00% ............................ 75,000 8/15/2000 75,598
U.S. Treasury Note, 6.375% ........................... 25,000 3/31/2001 25,477
U.S. Treasury Note, 6.625% ........................... 550,000 7/31/2001 565,983
U.S. Treasury Note, 7.50% ............................ 275,000 11/15/2001 291,929
U.S. Treasury Note, 6.25% ............................ 400,000 2/28/2002 407,124
U.S. Treasury Note, 7.875% ........................... 550,000 11/15/2004 613,162
U.S. Treasury Note, 6.50% ............................ 1,150,000 8/15/2005 1,193,125
U.S. Treasury Note Inflation Indexed, 3.375% 101,526 1/15/2007 100,161
U.S. Treasury STRIPS, 0.00% .......................... 200,000 5/15/2007 112,956
----------
7,490,908
----------
U.S. AGENCY MORTGAGE 8.4%
Federal Home Loan Mortgage Corp., 7.00% 302,735 12/01/2024 305,665
Federal Home Loan Mortgage Corp., 7.50% 507,422 2/01/2027 518,677
Federal Home Loan Mortgage Corp. Series 29-H PAC,
6.50% .............................................. 100,000 3/25/2023 100,218
Federal Home Loan Mortgage Corp. TBA, 7.00% .......... 400,000 12/15/2012 405,000
Federal National Mortgage
Association, 9.50% ................................. 155,432 10/01/2003 162,409
Federal National Mortgage
Association, 7.00% ................................. 152,986 12/01/2007 155,847
Federal National Mortgage
Association, 8.00% ................................. 181,712 4/01/2008 189,948
Federal National Mortgage
Association, 7.50% ................................. 582,870 6/01/2012 597,804
Federal National Mortgage
Association, 7.00% ................................. 214,453 10/01/2025 215,122
Federal National Mortgage
Association REMIC Series 1993-102H, 6.80% .......... 100,000 9/25/2022 101,968
Federal National Mortgage
Association TBA, 7.00% ............................. 175,000 11/20/2004 177,188
Government National Mortgage
Association, 6.50% ................................. 99,835 2/15/2009 100,537
Government National Mortgage
Association, 6.50% ................................. 218,890 5/15/2009 220,462
Government National Mortgage
Association, 8.00% ................................. 43,241 9/15/2017 45,524
Government National Mortgage
Association, 9.00% ................................. 115,926 2/15/2022 124,728
Government National Mortgage
Association, 6.50% ................................. 83,751 12/15/2023 83,070
Government National Mortgage
Association, 6.50% ................................. 275,569 7/15/2024 273,328
Government National Mortgage
Association, 7.00% ................................. 135,030 1/15/2025 136,168
Government National Mortgage
Association, 7.50% ................................. 292,983 11/15/2025 299,756
Government National Mortgage
Association, 7.50% ................................. 141,532 4/15/2026 144,717
Government National Mortgage
Association, 8.00% ................................. 127,583 9/15/2026 132,407
-----------
4,490,543
-----------
TRUST CERTIFICATES 0.3%
Cooperative Utility Trust
Certificates, 10.70% ............................... 125,000 9/15/2017 131,250
-----------
FINANCE/MORTGAGE 10.6%
Advanta Credit Card Master Trust Series
95F-A1, 6.05% ...................................... 75,000 8/01/2003 74,648
AFC Capital Trust, 8.21% ............................. 275,000 2/03/2027 303,666
American Express Credit Account Master
Trust 97-1A, 6.40% ................................. 100,000 4/15/2005 101,000
Amresco Commercial Mortgage Funding
Corp. Series 1997-A1, 6.73% ........................ 123,647 6/17/2029 125,657
Arcadia Automobile Trust 97-C A5, 6.55% 100,000 6/15/2005 101,203
Associates Corp. North America, 6.45% ................ 100,000 10/15/2001 100,635
Associates Corp. North America, 6.50% ................ 200,000 8/15/2002 201,568
AT&T Universal Card Master Trust Series
95-2A, 5.95% ....................................... 200,000 10/17/2002 199,124
Bank of New York Institutional Capital
Trust, 7.78%+ ...................................... 250,000 12/01/2026 254,450
BankAmerica Institutional Capital
Series B, 7.70%+ ................................... 225,000 12/31/2026 229,831
Capital One Bank Note, 7.08% ......................... 150,000 10/30/2001 153,717
CIT Group Holdings Inc., 6.20% ....................... 200,000 10/20/2000 200,322
Citicorp Capital I Sec. Note, 7.93% .................. 225,000 2/15/2027 233,721
Commercial Credit Group Inc. Note, 6.45% 200,000 7/01/2002 203,750
Countrywide Funding Corp. Note, 6.58% ................ 150,000 9/21/2001 151,225
Countrywide Mortgage Inc. Series
1994-2 Class A-7, 6.50% ............................ 109,442 4/25/2008 109,236
CS First Boston Mortgage Securities
Corp., 6.32% ....................................... 100,000 3/25/2005 99,992
Discover Credit Card Trust
Series 1993 A, 6.25% ............................... 104,167 8/16/2000 104,069
First USA Credit Card Master Trust Series 1997-6A,
6.42% .............................................. 200,000 3/17/2005 200,031
Ford Credit Auto Loan Master Trust Series 95-1, 6.50% 200,000 8/15/2002 201,500
Ford Credit Auto Owner Trust Series
1997B-A3, 6.05% .................................... 200,000 4/15/2001 200,891
GE Global Insurance Holding Corp.
Note, 7.00% ........................................ 200,000 2/15/2026 203,348
Household Finance Co. Sr. Note, 6.75% ................ 100,000 6/01/2000 101,160
International Lease Finance Corp.
Note, 6.50% ........................................ 200,000 7/01/2001 201,750
MBNA Corp. Sr. Note, 6.875% .......................... 100,000 11/15/2002 100,907
Morgan Stanley Capital Inc. Series
1997-WF1-A1, 6.83%+ ................................ 98,918 10/15/2006 100,773
NationsBank Credit Card Master Trust
Series 1995-1A, 6.45% .............................. 150,000 4/15/2003 151,264
Prime Credit Card Master Trust Series
1995-1A, 6.75% ..................................... 125,000 11/15/2005 127,148
Prime Credit Card Master Trust Series
1996-1A, 6.70% ..................................... 100,000 7/15/2004 101,437
Prudential Home Mortgage Securities Co. Series 93-29
A-6 PAC, 6.75% ..................................... 56,743 8/25/2008 57,098
Prudential Home Mortgage Securities Co. Series 93-47
A-11 PAC-2, 6.10% .................................. 200,000 12/25/2023 192,312
Railcar Leasing 1997-1 A1, 6.75%+ .................... 161,038 7/15/2006 165,668
Sears Credit Account Master Trust Series
1995-2A, 8.10% ..................................... 100,000 6/15/2004 103,468
Sears Credit Account Master Trust Series
1997-1A, 6.20% ..................................... 100,000 7/16/2007 100,094
Structured Asset Securities Corp. Series
97-LL1-A1, 6.79% ................................... 200,000 10/15/2034 202,790
Zurich Capital Trust, 8.38%+ ......................... 200,000 6/01/2037 213,358
----------
5,672,811
----------
CORPORATE 5.2%
Ameristar Casinos Inc. Sr. Sub.
Note, 10.50%+ ...................................... 100,000 8/01/2004 100,000
Archibald Candy Corp. Sr. Sec.
Notes, 10.25%+ ..................................... 250,000 7/01/2004 262,500
Chevron Corp. Profit Sharing Note, 8.11% 100,000 12/01/2004 106,293
Columbia/HCA Healthcare Corp.
Deb., 7.50% ........................................ 100,000 12/15/2023 99,040
Columbia/HCA Healthcare Corp.
Note, 6.50% ........................................ 200,000 3/15/1999 201,576
Columbia/HCA Healthcare Corp.
Note, 7.69% ........................................ 100,000 6/15/2025 95,191
Edison Mission Energy Funding Corp. Series A Note,
6.77%+ ............................................. 201,410 9/15/2003 203,988
Empire Gas Corp. Sr. Sec. Note, 7.00% to
7/14/99, 12.875% from 7/15/99 to
maturity ........................................... 250,000 7/15/2004 233,750
Envirosource Inc. Note, 9.75% ........................ 125,000 6/15/2003 122,500
Fort James Corp. Sr. Note, 6.625% .................... 200,000 9/15/2004 200,468
Corporate (cont'd)
French Fragrances Inc. Series B Sr.
Note, 10.375% ...................................... 250,000 5/15/2007 258,750
Johnstown America Industries Inc. Series B Sr. Sub.
Note, 11.75%+ ...................................... 125,000 8/15/2005 136,250
Norcal Waste Systems Inc. Series B Sr.
Note, 13.00% to 5/14/97,13.25% from
5/15/97 to 11/14/97, 13.50% from
11/15/97 to maturity ............................... 200,000 11/15/2005 224,000
Outdoor Systems Inc. Sr. Sub. Note, 9.375% 100,000 10/15/2006 103,500
Spanish Broadcasting Systems Inc. Sr.
Note, 7.50% ........................................ 100,000 6/15/2002 115,500
Sun Media Corp. Sr. Sub. Note, 9.50% ................. 100,000 2/15/2007 105,000
Trump Atlantic City Associates First
Mortgage Note, 11.25% .............................. 125,000 5/01/2006 123,125
U.S.A. Mobile Communications Inc. Sr.
Note, 14.00% ....................................... 100,000 11/01/2004 112,000
----------
2,803,431
----------
CANADIAN-YANKEE 1.6%
British Aerospace Finance Inc.
Note, 7.50%+ ....................................... 100,000 7/01/2027 106,414
Petroliam Nasional BHD Note, 6.875%+ ................. 125,000 7/01/2003 125,213
Petroliam Nasional BHD Note, 7.125%+ ................. 100,000 8/15/2005 100,862
Province of Quebec Deb., 7.125% ...................... 200,000 2/09/2024 199,760
Talisman Energy Inc. Deb., 7.125% .................... 125,000 6/01/2007 128,639
Usinor Sacilor ADR Note, 7.25% ....................... 225,000 8/01/2006 232,166
----------
893,054
----------
FOREIGN GOVERNMENT 5.4%
Australian Dollar
Commonwealth of Australia, 9.00% ..................... 950,000 9/15/2004 788,611
Canadian Dollar
Government of Canada, 0.00% .......................... 375,000 2/05/1998 263,499
New Zealand Dollar
Government of New Zealand, 10.00% .................... 300,000 3/15/2002 209,302
Government of New Zealand, 8.00% ..................... 650,000 11/15/2006 443,661
Pound Sterling
United Kingdom Treasury, 8.50% ....................... 625,000 12/07/2005 1,170,820
----------
2,875,893
----------
Total Fixed Income Securities (Cost $23,856,728) ..................................... 24,357,890
----------
SHORT-TERM OBLIGATIONS 7.1%
American Express Credit Corp., 5.60% ................. $ 181,000 11/04/1997 181,000
American Express Credit Corp., 5.55% ................. 2,246,000 11/07/1997 2,246,000
Beneficial Corp., 5.54% .............................. 1,357,000 11/04/1997 1,357,000
----------
Total Short-Term Obligations (Cost $3,784,000) ....................................... 3,784,000
----------
Total Investments (Cost $49,078,116) - 100.2% ........................................ 53,601,218
Cash and Other Assets, Less Liabilities - (0.2)% ..................................... (103,585)
----------
Net Assets - 100.0% .................................................................. $53,497,633
===========
- --------------------------------------------------------------------------------------------------------
Federal Income Tax Information:
AtOctober 31, 1997, the net unrealized appreciation of investments based on
cost for Federal income tax purposes of $49,141,622 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an
excess of value over tax cost ...................................................... $ 5,294,756
Aggregate gross unrealized depreciation for all investments in which there is an
excess of tax cost over value ...................................................... (835,160)
-----------
$ 4,459,596
===========
- --------------------------------------------------------------------------------------------------------
ADR Stands for American Depositary Receipt, representing ownership of foreign
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%.
* 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
buyers. The total cost and market value of Rule 144A securities owned at
October 31, 1997 were $1,940, 274 and $2,000,057 (3.74% of net assets),
respectively.
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE
<TABLE>
<CAPTION>
Forward currency exchange contracts outstanding at October 31, 1997, are as
follows:
UNREALIZED
CONTRACT APPRECIATION DELIVERY
TOTAL VALUE PRICE (DEPRECIATION) DATE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sell Australian dollars, Buy U.S. dollars 500,000 AUD .74214 AUD $ 19,346 11/14/97
Sell Australian dollars, Buy U.S. dollars 300,000 AUD .73289 AUD 8,704 12/10/97
Sell Australian dollars, Buy U.S. dollars 62,000 AUD .73565 AUD 1,997 11/14/97
Sell Australian dollars, Buy U.S. dollars 173,000 AUD .70843 AUD 639 1/23/98
Sell British pounds, Buy U.S. dollars 195,000 GBP 1.62570 GBP (9,713) 12/01/97
Buy British pounds, Sell U.S. dollars 70,000 GBP 1.66430 GBP 785 12/01/97
Sell British pounds, Buy U.S. dollars 450,000 GBP 1.62700 GBP (20,178) 1/23/98
Buy British pounds, Sell U.S. dollars 125,000 GBP 1.61130 GBP 8,026 12/01/97
Sell British pounds, Buy U.S. dollars 110,000 GBP 1.61600 GBP (6,143) 1/23/98
Sell British pounds, Buy U.S. dollars 103,000 GBP 1.62800 GBP (4,516) 1/23/98
Buy Italian lira, Sell U.S. dollars 209,440,000 ITL .00058 ITL 1,853 11/04/97
Buy Japanese yen, Sell U.S. dollars 5,015,875 JPY .00834 JPY (174) 11/05/97
Sell New Zealand dollars, Buy U.S. dollars 621,000 NZD .62400 NZD 2,822 1/23/98
Sell New Zealand dollars, Buy U.S. dollars 430,000 NZD .62414 NZD 2,014 1/23/98
Buy New Zealand dollars, Sell U.S. dollars 68,913 NZD .62240 NZD 17 11/06/97
Buy South African rand, Sell U.S. dollars 223,628 ZAR .20747 ZAR 72 11/03/97
Sell South African rand, Buy U.S. dollars 975,000 ZAR .20362 ZAR 2,279 2/27/98
--------
$ 7,830
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE
- ------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- ------------------------------------------------------------------------------
October 31, 1997
ASSETS
Investments, at value (Cost $49,078,116) (Note 1) ............. $53,601,218
Cash .......................................................... 37,414
Receivable for securities sold ................................ 2,208,285
Interest and dividends receivable ............................. 391,009
Receivable for fund shares sold ............................... 72,748
Receivable for open forward contracts ......................... 48,554
Receivable from Distributor (Note 3) .......................... 22,021
Deferred organization costs and other assets (Note 1) 34,264
-----------
56,415,513
LIABILITIES
Payable for securities purchased .............................. 2,681,393
Accrued transfer agent and shareholder services
(Note 2) .................................................... 55,644
Payable for open forward contracts ............................ 40,724
Accrued management fee (Note 2) ............................... 30,188
Payable for fund shares redeemed .............................. 14,686
Accrued trustees' fees (Note 2) ............................... 6,171
Other accrued expenses ........................................ 89,074
-----------
2,917,880
-----------
NET ASSETS .................................................... $53,497,633
===========
Net Assets consist of:
Undistributed net investment income ......................... $ 449,237
Unrealized appreciation of investments ...................... 4,523,102
Unrealized appreciation of forward contracts and
foreign currency .......................................... 6,478
Accumulated net realized gain ............................... 5,494,910
Shares of beneficial interest ............................... 43,023,906
-----------
$53,497,633
===========
Net Asset Value, offering price and redemption price
per share of Class S shares ($53,497,633 /
4,428,943 shares of beneficial interest) .................... $12.08
======
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the year ended October 31, 1997
INVESTMENT INCOME
Interest, net of foreign taxes of $589 ........................ $1,664,157
Dividends, net of foreign taxes of $7,946 ..................... 292,752
----------
1,956,909
EXPENSES
Management fee (Note 2) ....................................... 315,798
Transfer agent and shareholder services (Note 2) .............. 195,409
Custodian fee ................................................. 119,915
Reports to shareholders ....................................... 53,719
Registration fees ............................................. 25,611
Audit fee ..................................................... 22,279
Trustees' fees (Note 2) ....................................... 17,303
Amortization of organization costs (Note 1) ................... 16,637
Legal fees .................................................... 9,651
Miscellaneous ................................................. 8,095
----------
784,417
Expenses borne by the Distributor (Note 3) .................... (298,215)
----------
486,202
----------
Net investment income ......................................... 1,470,707
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS,
FOREIGN CURRENCY AND FORWARD CONTRACTS
Net realized gain on investments (Notes 1 and 4) .............. 5,563,196
Net realized gain on forward contracts and foreign
currency (Note 1) ........................................... 125,296
----------
Total net realized gain ..................................... 5,688,492
----------
Net unrealized appreciation of investments .................... 716,077
Net unrealized appreciation of forward contracts and
foreign currency ............................................ 12,645
----------
Total net unrealized appreciation ........................... 728,722
----------
Net gain on investments, foreign currency and forward contracts 6,417,214
----------
Net increase in net assets resulting from operations .......... $7,887,921
==========
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31
-------------------------------------
1996 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income ........................................ $ 1,504,079 $ 1,470,707
Net realized gain on investments, foreign currency and forward
contracts .................................................. 3,151,150 5,688,492
Net unrealized appreciation of
investments, foreign currency and
forward contracts .......................................... 1,101,514 728,722
----------- -----------
Net increase resulting from operations 5,756,743 7,887,921
----------- -----------
Dividends from net investment income -- Class S .............. (1,633,976) (1,636,395)
----------- -----------
Distribution from net realized gains -- Class S .............. -- (2,787,815)
----------- -----------
Class S share transactions (Note 6):
Proceeds from sale of shares ............................... 14,756,256 10,637,538
Net asset value of shares issued in payment of:
Dividends from net investment
income ................................................. 510,768 1,010,909
Distribution from net realized gains -- 2,787,811
Cost of shares repurchased ................................. (14,221,849) (9,391,187)
----------- -----------
Net increase from fund share
transactions ............................................... 1,045,175 5,045,071
----------- -----------
Total increase in net assets ................................. 5,167,942 8,508,782
NET ASSETS
Beginning of year ............................................ 39,820,909 44,988,851
----------- -----------
End of year (including undistributed net
investment income of $541,601 and $449,237, respectively) .. $44,988,851 $53,497,633
=========== ===========
Number of Class S shares:
Sold ....................................................... 1,373,024 930,934
Issued upon reinvestment of:
Dividends from net investment
income ................................................. 47,952 90,518
Distribution from net realized gains -- 258,131
Repurchased ................................................ (1,314,427) (837,303)
----------- -----------
Net increase in fund shares ................................ 106,549 442,280
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
October 31, 1997
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. Before November 1, 1997,
Class S shares were designated Class C. Only Class S shares are presently
available for purchase. Class A, Class B and Class C shares are not being
offered at this time. Class A shares are subject to an initial sales charge of
up to 4.50% and an annual service fee of 0.25% of average daily net assets.
Class B shares are subject to a contingent deferred sales charge on certain
redemptions made within five years of purchase and pay annual distribution and
service fees of 1.00%. Class B shares automatically convert into Class A shares
(which pay lower ongoing expenses) at the end of eight years after the issuance
of the Class B shares. Class C shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase. Class
C shares also pay annual distribution and service fees of 1.00%. Class S shares
are only offered through certain retirement accounts, advisory accounts of State
Street Research & Management Company (the "Adviser") and special programs. No
sales charge is imposed at the time of purchase or redemption of Class S shares.
Class S shares do not pay any distribution or service fees. The Fund's expenses
are borne pro-rata by each class, except that each class bears expenses, and has
exclusive voting rights with respect to provisions of the Plan of Distribution,
related specifically to that class. The Trustees declare separate dividends on
each class of shares.
The following significant accounting policies are consistently followed by the
Fund in preparing its financial statements, and such policies are in conformity
with generally accepted accounting principles for investment companies.
A. INVESTMENT VALUATION
Values for listed equity securities reflect final sales on national securities
exchanges quoted prior to the close of the New York Stock Exchange. Over-the-
counter securities quoted on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") system are valued at closing prices supplied
through such system. If not quoted on the NASDAQ system, such securities are
valued at prices obtained from 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.
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 accured 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 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, 1997, the fees
pursuant to such agreement amounted to $315,798.
State Street Research Service Center, a division of State Street Research
Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. In addition, Metropolitan receives a fee for maintenance of
the accounts of certain shareholders who are participants in sponsored
arrangements, employee benefit plans and similar programs or plans, through or
under which shares of the Fund may be purchased. During the year ended October
31, 1997, the amount of such expenses was $167,801.
The fees of the Trustees not currently affiliated with the Adviser amounted to
$17,303 during the year ended October 31, 1997.
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, 1997, the amount of such expenses assumed by the
Distributor and its affiliates was $298,215.
NOTE 4
For the year ended October 31, 1997, purchases and sales of securities,
exclusive of short-term obligations, aggregated $63,620,058 and $61,215,260
(including $23,377,531 and $21,173,242 of U.S. Government securities),
respectively.
NOTE 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the "Plan")
under the Investment Company Act of 1940. Under the Plan, the Fund 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 C shares. In addition, the Fund will pay
annual distribution fees of 0.75% of average daily net assets for Class B and
Class C shares. The Distributor uses such payments for personal service and/or
the maintenance or servicing of shareholder accounts, to reimburse securities
dealers for distribution and marketing services, to furnish ongoing assistance
to investors and to defray a portion of its distribution and marketing expenses.
NOTE 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share.
At October 31, 1997, Metropolitan owned 1,525,372 Class C shares of the Fund and
the Adviser owned one Class C share of the Fund.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------------------------
For a Class S share (formerly Class C) outstanding throughout each year:
YEARS ENDED OCTOBER 31
-----------------------------------------------------------------------------
1993((2)) 1994 1995((1)) 1996((1)) 1997((1))
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 9.55 9.57 9.18 10.26 11.28
-- ---- ---- ----- ----- -----
Net investment income ($)* 0.02 0.28 0.36 0.35 0.35
Net realized and unrealized gain (loss) on
investments, foreign currency and forward
contracts ($) -- (0.45) 1.01 1.07 1.53
-- ---- ---- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.02 (0.17) 1.37 1.42 1.88
-- ---- ---- ----- ----- -----
Dividends from net investment income ($) -- (0.22) (0.29) (0.40) (0.39)
Distributions from net realized gains ($) -- -- -- -- (0.69)
-- ---- ---- ----- ----- -----
TOTAL DISTRIBUTIONS ($) -- (0.22) (0.29) (0.40) (1.08)
-- ---- ---- ----- ----- -----
NET ASSET VALUE, END OF YEAR ($) 9.57 9.18 10.26 11.28 12.08
== ==== ==== ===== ===== =====
Total return(3) (%) 0.21(4) (1.81) 15.24 14.08 17.83
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 25,040 28,494 39,821 44,989 53,498
Ratio of operating expenses to average net assets(%)* 1.00(5) 1.00 1.00 1.00 1.00
Ratio of net investment income to average net
assets (%)* 2.32(5) 3.05 3.68 3.23 3.03
Portfolio turnover rate (%) 0.00 142.86 120.62 127.59 136.17
Average commission rate ($)(6) -- -- -- 0.0258 0.0257
*Reflects voluntary assumption of fees or
expenses per share in each year (Note 3) ($) 0.00 0.05 0.07 0.05 0.07
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Per-share figures have been calculated using the average shares method.
(2) September 28, 1993 (commencement of operations) to October 31, 1993.
(3) Does not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
(4) Not annualized.
(5) Annualized.
(6) Average commission rate per share paid for security trades beginning with
the fiscal year ended October 31, 1996.
</TABLE>
<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, 1997, and the results of
its operations, the changes in its net assets and the financial highlights for
the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1997 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 12, 1997
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: MODERATE
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- -------------------------------------------------------------------------------
The Fund's Class S shares gained 17.83% for the year ended October 31, 1997.
That was slightly lower than its peer group, the Lipper balanced fund average,
which rose 19.51% It was well below the S&P 500, which gained 32.10%. That's not
surprising since the S&P 500 is a measure of common stock performance, and the
Fund has 45% of its assets invested in bonds, which far underperformed the stock
market during the period.
Strategic Portfolios: Moderate seeks both current income and capital
appreciation by investing in a mix of common stocks and bonds. The manager's
strategy is to adjust the asset allocation to take advantage of changing market
conditions.
In general, large company stocks outperformed small and mid-sized company stocks
during the first half of the year. But small and mid-cap stocks came back
stronger in the second half of the year. The Fund benefited from reducing its
exposure to large company stocks and shifting its emphasis to small and mid-cap
stocks as the market began to shift its favor to these groups. However a
decision to cut back on the Fund's equity holdings hurt performance against
competitive funds.
Going forward, we expect a slower year for corporate profits in the U.S. but
relatively stable to declining interest rates. The recent turmoil in Asia makes
further volatility in international markets likely. As a result, we will
continue to underweight U.S. equities, overweight U.S. bonds and focus on
quality.
October 31, 1997
All returns represent past performance, which is no guarantee of future results.
The investment return and principal value of an investment made in the Fund will
fluctuate, and shares, when redeemed, may be worth more or less than their
original cost. All returns assume reinvestment of capital gain distributions and
income dividends. "S" shares, offered without a sales charge, are available
through certain employee benefit plans and special programs. Before November 1,
1997, Class S shares were designated Class C. The Standard & Poor's 500
Composite Index (S&P 500) is a market-value weighted index composed of 500
widely held common stocks. The Lehman Brothers Government/Corporate Bond Index
is a market-value weighted index of U.S. government treasury and agency
securities, corporate and yankee bonds. 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;
without subsidization, performance would have been lower.
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
Strategic Portfolios: S&P Lehman Brothers
Moderate 500 Gov't/Corp Bond
--------------------- ------ ---------------
9/28/93 $ 10,000 $ 10,000 $ 10,000
10/31/93 10,021 10,207 10,041
10/31/94 9,840 10,600 9,575
10/31/95 11,340 13,400 11,123
10/31/96 12,936 16,627 11,722
10/31/97 15,242 21,964 12,755
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
- -------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------------
October 31, 1997
VALUE
SHARES (NOTE 1)
- --------------------------------------------------------------------------
EQUITY SECURITIES 69.9%
BASIC INDUSTRIES 11.4%
CHEMICAL 3.1%
Agrium Inc. ............................ 53,100 $ 594,056
Cabot Corp. ............................ 20,300 498,619
Cambrex Corp. .......................... 4,250 203,734
Ciba Specialty Chemicals AG* ........... 300 29,459
E.I. Du Pont De Nemours & Co. .......... 5,300 301,438
H.B. Fuller Co. ........................ 1,800 85,050
Indus International Inc.* .............. 4,500 63,563
JLM Industries Inc.* ................... 5,200 59,150
OM Group Inc. .......................... 3,100 117,025
Thiokol Corp. .......................... 5,300 485,281
----------
2,437,375
----------
DIVERSIFIED 1.8%
Hoya Corp. ............................. 23,000 798,837
Johnson Controls Inc. .................. 9,000 403,875
Tenma Corp.* ........................... 12,000 157,540
----------
1,360,252
----------
ELECTRICAL EQUIPMENT 1.3%
Asia Pacific Wire & Cable Corp. Ltd.* .. 29,700 274,725
Essex International Inc.* .............. 2,100 69,563
General Electric Co. ................... 7,300 471,306
Sony Corp.* ............................ 2,300 190,918
----------
1,006,512
----------
FOREST PRODUCT 1.1%
Abitibi-Consolidated Inc. .............. 27,400 390,450
Aracruz Celulose SA ADR ................ 10,000 150,000
Stone Container Corp. .................. 28,000 337,750
----------
878,200
----------
MACHINERY 2.0%
Hanover Compressor Co.* ................ 3,300 71,363
ITEQ Inc.* ............................. 17,000 212,500
Sundstrand Corp. ....................... 9,400 511,125
Tyco International Ltd. ................ 9,100 343,525
US Filter Corp.* ....................... 11,100 445,387
----------
1,583,900
----------
METAL & MINING 2.0%
Alumax Inc.* ........................... 14,500 471,250
General Cable Corp.* ................... 6,000 194,250
Kennametal Inc. ........................ 12,900 625,650
Wyman-Gordon Co.* ...................... 9,700 234,012
----------
1,525,162
----------
TRUCKERS 0.1%
CNF Transportation Inc. ................ 1,700 75,863
----------
Total Basic Industries ................................. 8,867,264
----------
CONSUMER CYCLICAL 10.3%
AIRLINE 0.3%
China Southern Airlines Co. Ltd.* ...... 487,000 215,738
----------
AUTOMOTIVE 2.1%
Budget Group Inc. Cl. A* ............... 1,700 59,500
Excelsior-Henderson Motorcycle
Manufacturing Co.* ................... 4,300 23,650
Exide Corp. ............................ 24,800 578,150
Lear Corp.* ............................ 15,200 730,550
Renault SA* ............................ 7,500 208,685
----------
1,600,535
----------
BUILDING 0.3%
Lafarge Corp. .......................... 8,000 243,000
----------
HOTEL & RESTAURANT 1.0%
Apple South Inc. ....................... 5,200 96,850
CKE Restaurants Inc.* .................. 1,600 63,900
Fine Host Corp.* ....................... 1,800 50,400
Harrah's Entertainment Inc.* ........... 30,200 594,563
Motels of America Inc.*+ ............... 175 1,750
----------
807,463
----------
RECREATION 1.9%
American Radio Systems Corp. Cl. A* .... 2,600 126,750
Chancellor Media Corp. ................. 2,800 153,650
Cox Communications Inc. Cl. A* ......... 11,800 362,850
International Game Technology Inc. ..... 10,100 258,181
Panavision Inc.* ....................... 2,700 67,331
TCA Cable TV Inc.* ..................... 2,100 86,625
US West Inc.* .......................... 17,900 451,975
----------
1,507,362
----------
RETAIL TRADE 4.6%
Carson Pirie Scott & Co.* .............. 3,400 163,837
Dominick's Supermarkets Inc.* .......... 5,600 204,400
Global DirectMail Corp.* ............... 3,900 71,663
Hannaford Brothers Co. ................. 12,900 487,781
Home Depot Inc. ........................ 5,800 322,625
InaCom Corp.* .......................... 1,700 52,381
Kroger Co.* ............................ 29,600 965,700
Rite Aid Corp. ......................... 8,200 486,875
Sothebys Holdings Inc. Cl. A ........... 3,700 69,375
Staples Inc.* .......................... 23,800 624,750
Wal-Mart Stores, Inc. .................. 4,300 151,038
----------
3,600,425
----------
TEXTILE & APPAREL 0.1%
Samsonite Corp.* ....................... 1,400 64,925
----------
Total Consumer Cyclical ................................ 8,039,448
----------
CONSUMER STAPLE 14.4%
BUSINESS SERVICE 2.0%
Avis Rent A Car, Inc.* ................. 1,800 49,388
Carriage Services, Inc. Cl. A* ......... 3,600 60,300
HBO & Co. .............................. 7,800 339,300
Maximus Inc.* .......................... 3,700 103,600
Microage Inc.* ......................... 2,000 44,000
Norrell Corp. .......................... 4,000 116,500
Pameco Corp.* .......................... 9,800 166,600
Philip Services Corp.* ................. 4,605 80,582
Shared Medical Systems Corp. ........... 1,500 82,125
Staff Leasing Inc.* .................... 3,900 96,037
USA Waste Services Inc.* ............... 3,900 144,300
Vestcom International Inc.* ............ 6,200 112,375
Waterlink Inc.* ........................ 9,200 156,975
----------
1,552,082
----------
CONTAINER 0.4%
Ball Corp. ............................. 8,100 283,500
----------
DRUG 3.3%
Ascent Pediatrics Inc.* ................ 6,900 62,962
Axogen Ltd. ADR* ....................... 5,500 214,500
BioVail Corp.* ......................... 10,600 306,075
Eli Lilly & Co. ........................ 7,400 494,875
Intelligent Polymers Ltd.* ............. 10,200 201,450
Novartis AG ............................ 300 469,845
Pathogenesis Corp.* .................... 1,800 64,800
Pfizer Inc. ............................ 4,500 318,375
Schering-Plough Corp. .................. 7,500 420,469
----------
2,553,351
----------
FOOD & BEVERAGE 1.1%
Coca-Cola Enterprises Inc. ............. 400 11,250
H.J. Heinz Co. ......................... 7,400 343,638
Whitman Corp. .......................... 19,800 519,750
----------
874,638
----------
HOSPITAL SUPPLY 3.9%
Aradigm Corp.* ......................... 2,500 29,375
Aviron Corp.* .......................... 2,700 59,063
Baxter International Inc. .............. 3,900 180,375
Boston Scientific Corp.* ............... 2,600 118,300
Centennial Healthcare Corp.* ........... 6,400 132,800
Genesis Health Ventures Inc.* .......... 1,700 41,650
Guidant Corp. .......................... 7,400 425,500
Healthdyne Technologies Inc.* .......... 14,700 294,000
National Surgery Centers Inc.* ......... 5,850 146,250
PacifiCare Health Systems, Inc. Cl. A* . 7,900 502,637
Rural/Metro Corp.* ..................... 1,900 66,025
Tenet Healthcare Corp. ................. 16,400 501,225
Total Renal Care Holdings Inc.* ........ 12,333 380,021
Xomed Surgical Products Inc.* .......... 6,200 130,200
----------
3,007,421
----------
PERSONAL CARE 0.8%
Procter & Gamble Co. ................... 4,000 272,000
Wesley Jessen VisionCare Inc.* ......... 13,600 397,800
----------
669,800
----------
PRINTING & PUBLISHING 2.3%
A.H. Belo Corp. Cl. A .................. 3,359 158,713
Hollinger International, Inc. Cl. A* ... 51,100 667,494
Torstar Corp Cl. B* .................... 5,700 194,738
Valassis Communications Inc. ........... 25,200 743,400
----------
1,764,345
----------
TOBACCO 0.6%
Dimon Inc. ............................. 13,500 350,156
Philip Morris Companies, Inc. .......... 3,600 142,650
----------
492,806
----------
Total Consumer Staple .................................. 11,197,943
----------
ENERGY 9.2%
OIL 7.4%
Abacan Resource Corp.* ................. 22,400 70,000
Arakis Energy Corp.* ................... 29,600 98,050
British Petroleum Co. PLC* ............. 16,100 236,623
Energy Africa Ltd.* .................... 118,700 622,790
ENI SPA ADR ............................ 6,300 355,162
Fletcher Challenge Ltd.* ............... 47,200 211,601
Gulf Indonesia Resources Ltd.* ......... 3,100 65,100
KCS Energy Inc. ........................ 13,200 347,325
Maxx Petroleum Ltd.* ................... 34,800 67,163
Nuevo Energy Co.* ...................... 2,800 116,025
Oryx Energy Co.* ....................... 28,000 771,750
PTT Exploration & Production Public Co.
Ltd.* ............................... 1,900 18,988
Royal Dutch Petroleum Co. .............. 5,300 278,913
Seagull Energy Corp.* .................. 32,824 802,136
Tosco Corp. ............................ 17,600 580,800
Total SA Cl. B* ........................ 4,610 511,490
Total SA Cl. B ADR* .................... 6,700 371,850
Woodside Petroleum Ltd. ADR* ........... 25,600 216,219
----------
5,741,985
----------
OIL SERVICE 1.8%
Daniel Industries Inc. ................. 3,300 66,412
Dreco Energy Services Ltd.* ............ 1,522 117,749
Mapco Inc. ............................. 19,600 646,800
Schlumberger Ltd. ...................... 5,900 516,250
Willbros Group Inc.* ................... 3,100 60,450
----------
1,407,661
----------
Total Energy ........................................... 7,149,646
----------
FINANCE 9.3%
BANK 2.4%
BankAmerica Corp. ...................... 5,700 407,550
Commercial Federal Corp. ............... 1,200 58,200
Fleet Financial Group Inc. ............. 9,900 636,694
Golden State Bancorp Inc. .............. 5,300 176,225
Mellon Bank Corp. ...................... 11,800 608,437
----------
1,887,106
----------
FINANCIAL SERVICE 1.4%
CMAC Investment Corp. .................. 2,600 142,188
CRIIMI MAE Inc.* ....................... 3,200 50,800
Federal National Mortgage Association .. 7,500 363,281
First Industrial Realty Trust Inc. ..... 2,800 96,950
Homeside Inc.* ......................... 9,500 254,719
INMC Mortgage Holdings Inc. ............ 5,000 118,750
Liberty Property Trust ................. 2,400 67,200
----------
1,093,888
----------
INSURANCE 5.5%
Ace Ltd. ............................... 12,900 1,198,894
AMBAC Inc. ............................. 14,700 621,075
Capital Re Corp.* ...................... 1,300 76,619
General Re Corp. ....................... 1,500 295,781
HCC Insurance Holdings Inc.* ........... 4,000 93,500
Mid Ocean Ltd. ......................... 10,800 700,650
Mutual Risk Management Ltd. ............ 6,132 159,049
Penncorp Financial Group Inc.* ......... 4,700 153,044
Travelers Group Inc. ................... 4,200 294,000
Travelers Property Casualty Corp. Cl. A 11,500 415,437
UNUM Corp. ............................. 4,500 219,375
----------
4,227,424
----------
Total Finance .......................................... 7,208,418
----------
SCIENCE & TECHNOLOGY 12.5%
AEROSPACE 0.5%
Boeing Co. ............................. 7,754 371,223
First Aviation Services Inc.* .......... 7,300 56,575
----------
427,798
----------
COMPUTER SOFTWARE & SERVICE 2.8%
Boston Technology Inc.* ................ 4,000 108,500
Box Hill Systems Corp.* ................ 2,200 34,100
Cisco Systems Inc.* .................... 3,000 246,094
Complete Business Solutions Inc.* ...... 3,100 109,275
Diamond Multimedia Systems Inc.* ....... 6,600 70,950
Industir-Matematik International Corp.* 3,200 64,175
Mapics Inc.* ........................... 8,800 100,100
Mastech Corp.* ......................... 4,500 149,062
Nintendo Co. Ltd.* ..................... 3,200 276,527
Sema Group PLC* ........................ 9,300 208,301
Transition Systems Inc.* ............... 6,300 127,575
TT Tieto Oy Cl. B* ..................... 1,000 112,115
Wang Laboratories Inc.* ................ 5,400 124,875
Western Digital Corp.* ................. 9,400 281,412
WM-Data AB Cl. B* ...................... 5,000 86,784
Xylan Corp.* ........................... 3,500 56,000
----------
2,155,845
----------
ELECTRONIC COMPONENTS 3.9%
AMP Inc. ............................... 5,700 256,500
Hitachi Ltd.* .......................... 32,000 245,949
Intel Corp. ............................ 3,200 246,400
Lernout & Hauspie Speech Products NV ADR* 13,000 630,500
Microtouch Systems Inc.* ................ 3,300 79,612
MMC Networks Inc.* ...................... 400 8,750
Remec Inc.* ............................. 8,050 204,269
Rohm Co.* ............................... 7,000 692,148
Texas Instruments Inc. .................. 4,100 437,419
Vitesse Semiconductor Corp.* ............ 1,500 65,062
World Access Inc.* ...................... 5,200 137,800
----------
3,004,409
----------
ELECTRONIC EQUIPMENT 3.5%
Aeroflex Inc.* .......................... 13,200 136,125
Brooks Automation Inc.* ................. 1,000 22,188
Chicago Miniature Lamp, Inc.* ........... 11,500 368,000
Integrated Process Equipment Corp.* ..... 3,000 66,563
KLA-Tencor Corp.* ....................... 3,900 171,356
L.M. Ericsson Telephone Co. ADR Cl. B* .. 9,930 439,402
L.M. Ericsson Telephone Co. Cl. B* ...... 21,920 965,781
MAS Technology Ltd. ADR* ................ 4,700 72,262
Scientific Atlanta Inc. ................. 6,000 111,375
Silicon Valley Group Inc.* .............. 3,200 92,000
Spectrian Corp.* ........................ 6,300 148,050
Teradyne Inc.* .......................... 3,200 119,800
----------
2,712,902
----------
OFFICE EQUIPMENT 1.8%
Compaq Computer Corp. ................... 3,200 204,000
Hewlett-Packard Co. ..................... 2,300 141,881
International Business Machines Corp. ... 2,800 274,575
Quantum Corp.* .......................... 7,900 249,838
Unisys Corp. ............................ 42,800 569,775
----------
1,440,069
----------
Total Science & Technology ............................. 9,741,023
----------
UTILITY 2.8%
ELECTRIC 1.6%
Edison International Corp. .............. 15,600 399,750
OGE Energy Corp. ........................ 9,000 435,938
Western Resources Inc. .................. 10,100 376,225
----------
1,211,913
----------
NATURAL GAS 0.3%
Calpine Corp.* .......................... 6,800 107,950
TransTexas Gas Corp.* ................... 7,900 150,100
----------
258,050
----------
TELEPHONE 0.9%
Allen Telecom Inc.* ..................... 400 7,575
China Telecom Hong Kong Ltd. ADR* ....... 2,900 93,887
Clearnet Communications Inc. Wts.* ...... 990 9,405
NEXTLINK Communications Inc. Cl. A* ..... 2,400 54,300
Telecom Italia SPA* ..................... 40,500 253,813
WorldCom Inc.* .......................... 8,600 289,175
----------
708,155
----------
Total Utility .......................................... 2,178,118
----------
Total Equity Securities (Cost $45,568,925) ............. 54,381,860
----------
<TABLE>
<CAPTION>
PRINCIPAL MATURITY VALUE
AMOUNT DATE (NOTE 1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED INCOME SECURITIES 22.6%
U.S. TREASURY 3.4%
U.S. Treasury Bond, 12.00% ........................... $ 225,000 8/15/2013 $ 329,694
U.S. Treasury Bond, 8.75% ............................ 400,000 5/15/2017 514,500
U.S. Treasury Bond, 8.125% ........................... 175,000 8/15/2021 215,770
U.S. Treasury Note, 6.75% ............................ 75,000 5/31/1999 76,242
U.S. Treasury Note, 6.875% ........................... 100,000 8/31/1999 102,094
U.S. Treasury Note, 6.875% ........................... 25,000 3/31/2000 25,656
U.S. Treasury Note, 6.00% ............................ 100,000 8/15/2000 100,797
U.S. Treasury Note, 6.375% ........................... 125,000 3/31/2001 127,383
U.S. Treasury Note, 6.625% ........................... 175,000 7/31/2001 180,086
U.S. Treasury Note, 6.25% ............................ 250,000 2/28/2002 254,452
U.S. Treasury Note, 7.875% ........................... 350,000 11/15/2004 390,194
U.S. Treasury Note, 6.50% ............................ 200,000 8/15/2005 207,500
U.S. Treasury Note Inflation
Indexed, 3.375% .................................... 50,740 1/15/2007 50,058
U.S. Treasury STRIPS, 0.00% .......................... 150,000 5/15/2007 84,717
-----------
2,659,143
-----------
U.S. AGENCY MORTGAGE 2.4%
Federal Home Loan Mortgage Corp., 7.50% 29,010 3/01/2027 29,653
Federal Home Loan Mortgage Corp.
Gold, 7.00% ........................................ 166,164 12/01/2024 167,773
Federal Home Loan Mortgage Corp.
Gold TBA, 7.00% .................................... 200,000 12/15/2012 202,500
Federal Home Loan Mortgage Corp.
Series 29-H PAC, 6.50% ............................. 50,000 3/25/2023 50,109
Federal National Mortgage
Association, 7.50% ................................. 216,659 7/01/2012 222,210
Federal National Mortgage Association
Remic 93-102-H, 6.80% .............................. 25,000 9/25/2022 25,492
Federal National Mortgage Association
TBA, 7.00% ......................................... 100,000 11/20/2004 101,250
Federal National Mortgage Association
TBA, 7.50% ......................................... 325,000 1/14/2028 330,789
Government National Mortgage
Association, 6.50% ................................. 96,635 7/15/2009 97,329
Government National Mortgage
Association, 6.50% ................................. 39,934 9/15/2009 40,215
Government National Mortgage
Association, 6.50% ................................. 110,639 11/15/2010 110,984
Government National Mortgage
Association, 7.00% ................................. 23,351 1/15/2025 23,548
Government National Mortgage
Association, 8.00% ................................. 145,196 5/15/2025 150,776
Government National Mortgage
Association, 7.50% ................................. 112,686 11/15/2025 115,291
Government National Mortgage
Association, 7.50% ................................. 70,767 4/15/2026 72,359
Government National Mortgage
Association, 8.00% ................................. 46,603 9/15/2026 48,365
Government National Mortgage Association
TBA, 7.50% ......................................... 100,000 11/17/2012 102,875
-----------
1,891,518
-----------
CANADIAN-YANKEE 1.0%
Petroliam Nasional BHD Note, 6.875%+ ................. 125,000 7/01/2003 125,213
Stena AB Sr. Note, 8.75% ............................. 250,000 6/15/2007 251,875
Usinor Sacilor ADR Note, 7.25% ....................... 350,000 8/01/2006 361,147
-----------
738,235
-----------
TRUST CERTIFICATES 0.3%
Cooperative Utility Trust
Certificates, 10.70% ............................... 75,000 9/15/2017 78,750
Deseret Generation Cooperative Trust
Certificates, 10.11% ............................... 75,000 12/15/2017 79,100
Zurich Capital Trust, 8.376%+ ........................ 100,000 6/01/2037 106,679
-----------
264,529
-----------
FOREIGN GOVERNMENT 5.6%
Australian Dollar
Commonwealth of Australia, 9.00% ..................... 1,700,000 9/15/2004 1,411,198
Canadian Dollar
Government of Canada, 0.00% .......................... 425,000 2/05/1998 298,632
New Zealand Dollar
Government of New Zealand, 10.00% .................... 800,000 3/15/2002 557,939
Government of New Zealand, 8.00% ..................... 700,000 11/15/2006 477,789
Pound Sterling
United Kingdom Treasury, 8.50% ....................... 875,000 12/07/2005 1,639,149
-----------
4,384,707
-----------
FINANCE/MORTGAGE 3.4%
American Express Credit Account Master Trust 97-1A,
6.40% .............................................. 50,000 4/15/2005 50,500
Bank of New York Institutional Capital
Trust, 7.78%+ ...................................... 350,000 12/01/2026 356,230
BankAmerica Institutional Capital
Series B, 7.70%+ ................................... 325,000 12/31/2026 331,978
Capital One Bank Sr. Note, 7.08% ..................... 225,000 10/30/2001 230,575
Chemical Master Credit Card Trust Series
1996-1 A, 5.55% .................................... 100,000 9/15/2003 98,430
Countrywide Funding Corp. Note, 6.58% ................ 75,000 9/21/2001 75,613
Countrywide Series 1994-3 Cl. A-7, 6.75% 325,000 3/25/2024 323,069
Discover Credit Card Trust
Series 1993 A, 6.25% ............................... 62,500 8/16/2000 62,441
DLJ Mortgage Acceptance Corp.
97-CF2-A1A, 6.55%+ ................................. 50,000 11/15/2006 50,688
First USA Credit Card Master Trust Series 1997-6A,
6.42% .............................................. 75,000 3/17/2005 75,012
Ford Credit Auto Loan Master Trust Series 95-1, 6.50% 125,000 8/15/2002 125,937
Ford Credit Auto Owner Trust Series
1997B-A3, 6.05% .................................... 75,000 4/15/2001 75,334
Household Affinity Credit Card Master Trust Series
1994-1A, 5.8375% ................................... 50,000 5/15/2001 50,031
MBNA Corp. Sr. Note, 6.875% .......................... 100,000 11/15/2002 100,907
Prime Credit Card Master Trust
1996-1A, 6.70% ..................................... 50,000 7/15/2004 50,719
Prime Credit Card Master Trust Series
1995-1A, 6.75% ..................................... 50,000 11/15/2005 50,859
Sears Credit Trust Series 1995-2A, 8.10% 200,000 6/15/2004 206,936
Structured Asset Securities Corp.
Series 97-LL1-A1, 6.79% ............................ 75,000 10/15/2034 76,046
Trump Atlantic City Associates First
Mortgage Note, 11.25% .............................. 250,000 5/01/2006 246,250
-----------
2,637,555
-----------
CORPORATE 6.5%
Ameristar Casinos Inc. Sr. Sub.
Note, 10.50%+ ...................................... 150,000 8/01/2004 150,000
Arcadia Automobile Trust 97-C A5, 6.55% 50,000 6/15/2005 50,602
Archibald Candy Corp. Sr. Sec.
Notes, 10.25%+ ..................................... 250,000 7/01/2004 262,500
Belden & Blake Corp. Sr. Sub.
Note, 9.875%+ ...................................... 250,000 6/15/2007 252,500
CHC Helicopter Corp. Sr. Sub. Note, 11.50% 250,000 7/15/2002 266,250
Chevron Corp. Profit Sharing Note, 8.11% 75,000 12/01/2004 79,720
Cigna Corp. Deb., 7.875% ............................. 100,000 5/15/2027 105,921
Coleman Escrow Corp. Sr. Sec.
Note, 0.00%+ ....................................... 250,000 5/15/2001 147,500
Columbia/HCA Healthcare Corp.
Deb., 7.50% ........................................ 50,000 12/15/2023 49,520
Columbia/HCA Healthcare Corp.
Note, 7.69% ........................................ 50,000 6/15/2025 47,596
Columbia/HCA Healthcare Corp.
Trust, 8.12% ....................................... 75,000 8/04/2003 80,143
Edison Mission Energy Funding Corp. Series A Note,
6.77%+ ............................................. 313,305 9/15/2003 317,315
Empire Gas Corp. Sr. Sec. Note, 7.00% to
7/14/99, 12.875% from 7/15/99 to
maturity ........................................... 250,000 7/15/2004 233,750
Envirosource Inc. Sr. Note, 9.75% .................... 500,000 6/15/2003 490,000
French Fragrances Inc. Sr. Note B, 10.375% 250,000 5/15/2007 258,750
Johnstown America Industries Inc. Sr. Sub. Note B,
11.75%+ ............................................ 125,000 8/15/2005 136,250
La Petite Holdings Corp. Sr. Sec.
Notes, 9.625% ...................................... 250,000 8/01/2001 255,000
Norcal Waste Systems Inc. Series B Sr.
Note, 13.00% to 11/14/97, 13.50% from
11/15/97 to maturity ............................... 250,000 11/15/2005 280,000
Outdoor Systems Inc. Sr. Sub. Note, 9.375% 200,000 10/15/2006 207,000
Packaging Resources Inc. Sr. Sec.
Note, 11.625% ...................................... 250,000 5/01/2003 261,875
Rose Hills Co. Sr. Sub. Note, 9.50%+ ................. 250,000 11/15/2004 261,250
Solutia Inc. Note, 6.50% ............................. 100,000 10/15/2002 100,375
Spanish Broadcasting Systems Inc. Sr.
Note, 7.50% ........................................ 250,000 6/15/2002 288,750
Sun Media Corp. Sr. Sub. Note, 9.50% ................. 250,000 2/15/2007 262,500
U.S.A. Mobile Communications Inc.
Sr. Note, 14.00% ................................... 150,000 11/01/2004 169,500
-----------
5,014,567
-----------
Total Fixed Income Securities (Cost $17,340,437) ..................................... 17,590,254
-----------
SHORT-TERM OBLIGATIONS 8.0%
American Express Credit Corp., 5.55% ................. 280,000 11/04/1997 280,000
Chevron Oil Finance Co., 5.55% ....................... 2,350,000 11/04/1997 2,350,000
Ford Motor Credit Co., 5.65% ......................... 2,555,000 11/05/1997 2,555,000
Merrill Lynch & Company Inc., 5.62% .................. 997,000 11/03/1997 996,689
-----------
Total Short-Term Obligations (Cost $6,181,689) ....................................... 6,181,689
-----------
Total Investments (Cost $69,091,051) - 100.5% ........................................ 78,153,803
Cash and Other Assets, Less Liabilities - (0.5%) ..................................... (400,783)
-----------
Net Assets - 100.0% .................................................................. $77,753,020
===========
Federal Income Tax Information:
At October 31, 1997, the net unrealized appreciation of investments based on
cost for Federal income tax purposes of $69,180,248 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an
excess of value over tax cost ...................................................... $10,886,235
Aggregate gross unrealized depreciation for all investments in which there is an
excess of tax cost over value ...................................................... (1,912,680)
-----------
$ 8,973,555
===========
- --------------------------------------------------------------------------------------------------------
ADR Stands for American Depositary Receipt, representing ownership of foreign securities.
* Non-income-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, 1997 were $2,450,936 and $2,499,853 (3.22% of net assets), respectively.
</TABLE>
Forward currency exchange contracts outstanding at October 31, 1997, are as
follows:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACT APPRECIATION DELIVERY
TOTAL VALUE PRICE (DEPRECIATION) DATE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sell Australian dollars, Buy U.S. dollars 124,000 AUD .73565 AUD $ 3,993 11/14/97
Sell Australian dollars, Buy U.S. dollars 183,300 AUD .70850 AUD 709 1/23/98
Sell Australian dollars, Buy U.S. dollars 430,000 AUD .74214 AUD 16,637 11/14/97
Sell Australian dollars, Buy U.S. dollars 430,000 AUD .73289 AUD 12,476 12/10/97
Sell Australian dollars, Buy U.S. dollars 390,000 AUD .73480 AUD 12,061 12/10/97
Sell Australian dollars, Buy U.S. dollars 300,000 AUD .70843 AUD 1,108 1/23/98
Buy British pounds, Sell U.S. dollars 125,000 GBP 1.66430 GBP 1,401 12/01/97
Buy British pounds, Sell U.S. dollars 220,000 GBP 1.61130 GBP 14,126 12/01/97
Sell British pounds, Buy U.S. dollars 767,000 GBP 1.62700 GBP (34,393) 1/23/97
Sell British pounds, Buy U.S. dollars 345,000 GBP 1.62570 GBP (17,185) 12/01/97
Sell British pounds, Buy U.S. dollars 155,000 GBP 1.62800 GBP (6,795) 1/23/98
Buy Italian lira, Sell U.S. dollars 453,600,000 ITL .00058 ITL 4,013 11/04/97
Buy Japanese yen, Sell U.S. dollars 11,034,925 JPY .00834 JPY (382) 11/05/97
Buy New Zealand dollars, Sell U.S. dollars 148,594 NZD .93736 NZD 37 11/06/97
Sell New Zealand dollars, Buy U.S. dollars 760,000 NZD .64200 NZD 17,133 1/23/98
Sell New Zealand dollars, Buy U.S. dollars 858,000 NZD .62400 NZD 3,899 1/23/98
Sell South African rand, Buy U.S. dollars 2,100,000 ZAR .20362 ZAR 4,908 2/27/98
Buy South African rand, Sell U.S. dollars 485,375 ZAR .20747 ZAR 157 11/03/97
--------
$ 33,903
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------
October 31, 1997
ASSETS
Investments, at value (Cost $69,091,051) (Note 1) .............. $78,153,803
Cash ........................................................... 75,487
Receivable for securities sold ................................. 2,276,680
Interest and dividends receivable .............................. 388,920
Receivable for open forward contracts .......................... 92,658
Receivable for fund shares sold ................................ 57,629
Receivable from Distributor (Note 3) ........................... 4,490
Deferred organization costs and other assets (Note 1) 54,017
-----------
81,103,684
LIABILITIES
Payable for securities purchased ............................... 3,096,619
Payable for open forward contracts ............................. 58,755
Accrued management fee (Note 2) ................................ 51,348
Accrued transfer agent and shareholder services
(Note 2) ..................................................... 37,480
Payable for fund shares redeemed ............................... 9,110
Accrued trustees' fees (Note 2) ................................ 6,097
Other accrued expenses ......................................... 91,255
-----------
3,350,664
-----------
NET ASSETS ..................................................... $77,753,020
===========
Net Assets consist of:
Undistributed net investment income .......................... $ 473,826
Unrealized appreciation of investments ....................... 9,062,752
Unrealized appreciation of forward contracts and
foreign currency ........................................... 30,255
Accumulated net realized gain ................................ 11,024,948
Shares of beneficial interest ................................ 57,161,239
-----------
$77,753,020
===========
Net Asset Value, offering price and redemption price per share
of Class S shares ($77,753,020 / 5,900,731 shares of
beneficial interest) ........................................ $13.18
======
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the year ended October 31, 1997
INVESTMENT INCOME
Interest, net of foreign taxes of $195 ...................... $ 1,495,176
Dividends, net of foreign taxes of $14,980 .................. 515,670
-----------
2,010,846
EXPENSES
Management fee (Note 2) ..................................... 521,687
Custodian fee ............................................... 138,308
Transfer agent and shareholder services (Note 2) ............ 113,270
Reports to shareholders ..................................... 36,242
Audit fee ................................................... 27,633
Trustees' fees (Note 2) ..................................... 17,040
Registration fees ........................................... 11,007
Amortization of organization costs (Note 1) ................. 7,483
Legal fees .................................................. 7,081
Service fee-Class A (Note 5) ................................ 266
Miscellaneous ............................................... 7,993
-----------
888,010
Expenses borne by the Distributor (Note 3) .................. (122,711)
-----------
765,299
-----------
Net investment income ....................................... 1,245,547
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS,
FOREIGN CURRENCY AND FORWARD CONTRACTS
Net realized gain on investments (Notes 1 and 4) ............ 11,042,411
Net realized gain on forward contracts and foreign
currency (Note 1) ......................................... 141,527
-----------
Total net realized gain ................................... 11,183,938
-----------
Net unrealized appreciation of investments .................. 1,401,758
Net unrealized appreciation of forward contracts and
foreign currency .......................................... 38,999
-----------
Total net unrealized appreciation ......................... 1,440,757
-----------
Net gain on investments, foreign currency and forward contracts 12,624,695
-----------
Net increase in net assets resulting from operations ........ $13,870,242
===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended October 31
-------------------------------------
1996 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income ......................................... $ 1,192,012 $ 1,245,547
Net realized gain on investments, foreign currency and forward
contracts ................................................... 7,998,701 11,183,938
Net unrealized appreciation of investments, foreign currency
and forward contracts ....................................... 1,718,152 1,440,757
------------ ------------
Net increase resulting from operations......................... 10,908,865 13,870,242
------------ ------------
Dividends from net investment income:
Class A ..................................................... (365,226) (7,266)
Class S ..................................................... (910,584) (1,418,981)
------------ ------------
(1,275,810) (1,426,247)
------------ ------------
Distributions from net realized gains:
Class A ..................................................... (850,522) (80,854)
Class S ..................................................... (463,669) (7,708,753)
------------ ------------
(1,314,191) (7,789,607)
------------ ------------
Net increase (decrease) from fund share transactions (Note 6) . (4,788,166) 9,203,933
------------ ------------
Total increase in net assets................................... 3,530,698 13,858,321
NET ASSETS
Beginning of year ............................................. 60,364,001 63,894,699
------------ ------------
End of year (including undistributed net investment income of
$606,033 and $473,826, respectively) ........................ $ 63,894,699 $ 77,753,020
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
October 31, 1997
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. Before November 1, 1997,
Class S shares were designated Class C. Only Class S shares are presently
available for purchase. Class A, Class B and Class C shares are not being
offered at this time. Effective March 27, 1997, the Fund discontinued offering
Class A shares. Class A shares are subject to an initial sales charge of up to
4.50% and an annual service fee of 0.25% of average daily net assets. Class B
shares 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 subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase. Class
C shares also pay annual distribution and service fees of 1.00%. Class S shares
are only offered through certain retirement accounts, advisory accounts of State
Street Research & Management Company (the "Adviser") and special programs. No
sales charge is imposed at the time of purchase or redemption of Class S shares.
Class S shares do not pay any distribution or service fees. The Fund's expenses
are borne pro-rata by each class, except that each class bears expenses, and has
exclusive voting rights with respect to provisions of the Plan of Distribution,
related specifically to that class. The Trustees declare separate dividends on
each class of shares.
The following significant accounting policies are consistently followed by the
Fund in preparing its financial statements, and such policies are in conformity
with generally accepted accounting principles for investment companies.
A. INVESTMENT VALUATION
Values for listed equity securities reflect final sales on national securities
exchanges quoted prior to the close of the New York Stock Exchange. Over-the-
counter securities quoted on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") system are valued at closing prices supplied
through such system. If not quoted on the NASDAQ system, such securities are
valued at prices obtained from 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.
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 accured 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 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, 1997, the fees
pursuant to such agreement amounted to $521,687.
State Street Research Service Center, a division of State Street Research
Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. In addition, Metropolitan receives a fee for maintenance of
the accounts of certain shareholders who are participants in sponsored
arrangements, employee benefit plans and similar programs or plans, through or
under which shares of the Fund may be purchased. During the year ended October
31, 1997, the amount of such expenses was $98,371.
The fees of the Trustees not currently affiliated with the Adviser amounted to
$17,040 during the year ended October 31, 1997.
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, 1997, the amount of such expenses assumed by the
Distributor and its affiliates was $122,711.
NOTE 4
For the year ended October 31, 1997, purchases and sales of securities,
exclusive of short-term obligations, aggregated $89,692,029 and $87,638,492
(including $15,025,249 and $16,900,880 of U.S. Government securities),
respectively.
NOTE 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the "Plan")
under the Investment Company Act of 1940. Under the Plan, the Fund 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 C shares. In addition, the Fund will pay
annual distribution fees of 0.75% of average daily net assets for Class B and
Class C shares. The Distributor uses such payments for personal service and/or
the maintenance or servicing of shareholder accounts, to reimburse securities
dealers for distribution and marketing services, to furnish ongoing assistance
to investors and to defray a portion of its distribution and marketing expenses.
For the period November 1, 1996 to March 27, 1997, fees pursuant to such plan
amounted to $266 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, 1997,
Metropolitan owned 3,605,965 Class S shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31
----------------------------------------------------------------------
1996 1997
---------------------------------- ----------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold ................... -- $ -- 8,328 $ 101,499
Issued upon reinvestment of:
Dividend from net investment
income ................... -- -- 54 615
Distributions from net
realized gains ........... 78,245 850,522 606 6,845
Shares repurchased ............ (3,647,468) (42,310,619) (59,010) (669,014)
---------- -------------- ------- -----------
Net decrease .................. (3,569,223) $ (41,460,097) (50,022) $ (560,055)
========== ============== ======= ===========
<CAPTION>
CLASS S (FORMERLY CLASS C) SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold ................... 5,031,860 $ 58,556,573 1,008,062 $12,442,073
Issued upon reinvestment of:
Dividends from net investment
income ................... 14,250 168,031 47,450 565,762
Distributions from net
realized gains ........... 42,616 463,669 683,399 7,708,745
Shares repurchased ............ (1,901,217) (22,516,342) (927,982) (10,952,592)
---------- -------------- ------- -----------
Net increase .................. 3,187,509 $ 36,671,931 810,929 $ 9,763,988
========== ============== ======= ===========
</TABLE>
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------
YEARS ENDED OCTOBER 31
------------------------------------------------------ NOVEMBER 1, 1996
1994(2) 1995(1) 1996(1) TO MARCH 27, 1997(1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 9.55 9.74 10.93 12.45
---- ---- ----- -----
Net investment income ($) 0.09 0.20 0.14 0.10
Net realized and unrealized gain on
investments, foreign currency and
forward contracts ($) 0.14 1.19 1.79 0.41
---- ---- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.23 1.39 1.93 0.51
---- ---- ----- -----
Dividends from net investment income ($) (0.04) (0.20) (0.17) (0.13)
Distributions from net realized gains ($) -- -- (0.24) (1.48)
---- ---- ----- -----
TOTAL DISTRIBUTIONS ($) (0.04) (0.20) (0.41) (1.61)
---- ---- ----- -----
NET ASSET VALUE, END OF YEAR ($) 9.74 10.93 12.45 11.35
==== ===== ===== =====
Total return(3) (%) 2.41(4) 14.49 18.05 4.18(4)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 50,999 39,555 623 --
Ratio of operating expenses to average net
assets (%) 1.35(5) 1.35 1.35 1.35(5)
Ratio of net investment income to average
net assets (%) 2.01(5) 1.98 1.43 1.69(5)
Portfolio turnover rate (%) 37.75 127.44 145.59 136.48
Average commission rate ($)(6) -- -- 0.0251 0.0244
*Reflects voluntary assumption of fees or
expenses per share in each year (Note 3)
($) 0.01 0.02 0.01 0.02
<CAPTION>
CLASS S (FORMERLY CLASS C)
-------------------------------------------------------------------
YEARS ENDED OCTOBER 31
-------------------------------------------------------------------
1994(2) 1995(1) 1996(1) 1997(1)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 9.55 9.74 10.94 12.43
---- ---- ----- -----
Net investment income ($) 0.10 0.22 0.22 0.22
Net realized and unrealized gain on investments,
foreign currency and forward contracts ($) 0.14 1.20 1.74 2.27
---- ---- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.24 1.42 1.96 2.49
---- ---- ----- -----
Dividends from net investment income ($) (0.05) (0.22) (0.23) (0.26)
Distributions from net realized gains ($) -- -- (0.24) (1.48)
---- ---- ----- -----
TOTAL DISTRIBUTIONS ($) (0.05) (0.22) (0.47) (1.74)
---- ---- ----- -----
NET ASSET VALUE, END OF YEAR ($) 9.74 10.94 12.43 13.18
==== ===== ===== =====
Total return(3) (%) 2.50(4) 14.85 18.37 22.54
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 102 20,809 63,272 77,753
Ratio of operating expenses to average net assets (%) 1.10(5) 1.10 1.10 1.10
Ratio of net investment income to average net assets(%) 2.26(5) 2.13 1.78 1.79
Portfolio turnover rate (%) 37.75 127.44 145.59 136.48
Average commission rate ($)(6) -- -- 0.0251 0.0244
*Reflects voluntary assumption of fees or expenses per
share in each year (Note 3) ($) 0.01 0.02 0.03 0.02
- -------------------------------------------------------------------------------------------------------------------------------
(1) Per-share figures have been calculated using the average shares method.
(2) May 16,1994 (commencement of operations) to October 31, 1994.
(3) Does not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
(4) Not Annualized.
(5) Annualized.
(6) Average commission rate per share paid for security trades beginning with
the fiscal year ended October 31, 1996.
</TABLE>
<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, 1997, and the results of
its operations, the changes in its net assets and the financial highlights for
the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1997 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 12, 1997
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: AGGRESSIVE
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
The Fund provided shareholders with attractive returns for the year ended
October 31, 1997. Class S shares (formerly Class C) gained 22.54%. That was
higher than its peer group, the Lipper flexible portfolio fund average, which
rose 19.22%. It was below the S&P 500, which gained 32.10%. That's not
surprising since the S&P 500 is a measure of common stock performance, and the
Fund had 30% of its assets invested in bonds and cash.
Strategic Portfolios: Aggressive seeks high total return primarily through
capital appreciation, and secondarily through current income, by investing in
common stocks and bonds. The Manager's strategy is to adjust the asset
allocation to take advantage of changing market conditions.
In general, large company stocks outperformed small and mid-sized company stocks
during the first half of the year. But small and mid-cap stocks came back
stronger in the second half of the year. The Fund benefited from reducing its
exposure to large company stocks and shifting its emphasis to small and mid-cap
stocks as the market began to shift its favor to these groups. A decision to cut
back on the Fund's equity holdings hurt performance. However, adding proceeds to
high yield bonds was a good call. High yield bonds were the best performing
segment in the fixed-income markets during the period.
Going forward, we expect a slower year for corporate profits in the U.S. but
relatively stable to declining interest rates. The recent turmoil in Asia makes
further volatility in international markets likely. As a result, we will
continue to underweight U.S. equities, overweight U.S. bonds and focus on
quality.
October 31, 1997
All returns represent past performance, which is no guarantee of future results.
The investment return and principal value of an investment made in the Fund will
fluctuate, and shares, when redeemed, may be worth more or less than their
original cost. All returns assume reinvestment of capital gain distributions and
income dividends. "S" shares, offered without a sales charge, are available
through certain employee benefit plans and special programs. Before November 1,
1997, Class S shares were designated Class C. The Standard & Poor's 500
Composite Index (S&P 500) is a market-value weighted index composed of 500
widely held common stocks. The Lehman Brothers Government/Corporate Bond Index
is a market-value weighted index of U.S. government treasury and agency
securities, corporate and yankee bonds. 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
S&P 500 AND THE LEHMAN BROTHERS
GOVERNMENT/CORPORATE BOND INDEX COMPARED
TO CHANGE IN VALUE OF $10,000 INVESTED IN
STRATEGIC PORTFOLIOS: AGGRESSIVE
Strategic Portfolios: S&P Lehman Brothers
Aggressive 500 Gov't/Corp Bond
--------------------- ------ ---------------
5/16/94 $ 10,000 $ 10,000 $ 10,000
10/31/94 10,250 10,549 10,006
10/31/95 11,772 13,334 11,622
10/31/96 13,935 16,546 12,250
10/31/97 17,076 21,856 13,329
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE
- --------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- - -------------------------------------------------------------------------
October 31, 1997
- --------------------------------------------------------------------------
VALUE
SHARES (NOTE 1)
- --------------------------------------------------------------------------
EQUITY SECURITIES 25.3%
BASIC INDUSTRIES 4.1%
CHEMICAL 1.3%
Agrium Inc. ............................ 14,800 $ 165,575
Cabot Corp. ............................ 5,600 137,550
Ciba Specialty Chemicals AG* ........... 70 6,874
E.I. Du Pont De Nemours & Co. .......... 1,200 68,250
Thiokol Corp. .......................... 1,400 128,187
-----------
506,436
-----------
DIVERSIFIED 0.4%
Hoya Corp. ............................. 1,000 34,732
Johnson Controls Inc. .................. 2,500 112,188
-----------
146,920
-----------
ELECTRICAL EQUIPMENT 0.3%
Asia Pacific Wire & Cable Corp. Ltd.* .. 3,800 35,150
General Electric Co. ................... 1,600 103,300
-----------
138,450
-----------
ELECTRONIC EQUIPMENT 0.1%
Sony Corp.* ............................ 300 24,902
-----------
FOREST PRODUCT 0.6%
Abitibi-Consolidated Inc. .............. 7,600 108,300
Aracruz Celulose SA ADR ................ 1,650 24,750
Stone Container Corp. .................. 7,800 94,088
-----------
227,138
-----------
MACHINERY 0.6%
Sundstrand Corp. ....................... 2,600 141,375
Tyco International Ltd. ................ 2,100 79,275
-----------
220,650
-----------
METAL & MINING 0.8%
Alumax Inc.* ........................... 4,000 130,000
Kennametal Inc. ........................ 3,600 174,600
RTZ Corp.* ............................. 1,421 18,310
-----------
322,910
-----------
Total Basic Industries ................................. 1,587,406
-----------
CONSUMER CYCLICAL 4.2%
AIRLINE 0.1%
China Southern Airlines Co. Ltd.* ...... 62,400 27,643
-----------
AUTOMOTIVE 1.0%
Exide Corp. ............................ 6,900 160,856
Lear Corp.* ............................ 4,200 201,862
Renault SA* ............................ 1,000 27,825
-----------
390,543
-----------
BUILDING 0.2%
Lafarge Corp. .......................... 2,200 66,825
-----------
Hotel & Restaurant 0.4%
Harrah's Entertainment Inc.* ........... 8,800 173,250
-----------
RECREATION 0.6%
Cox Communications Inc. Cl. A* ......... 2,600 79,950
International Game Technology Inc. ..... 2,300 58,794
US West Inc.* .......................... 3,900 98,475
-----------
237,219
-----------
RETAIL TRADE 1.9%
Hannaford Brothers Co. ................. 3,600 $ 136,125
Home Depot Inc. ........................ 1,300 72,313
Kroger Co.* ............................ 7,300 238,162
Rite Aid Corp. ......................... 1,800 106,875
Staples Inc.* .......................... 5,300 139,125
Wal-Mart Stores, Inc. .................. 1,000 35,125
-----------
727,725
-----------
Total Consumer Cyclical ................................ 1,623,205
-----------
CONSUMER STAPLE 4.9%
AIRPORT 0.2%
Ball Corp. ............................. 2,300 80,500
-----------
BUSINESS SERVICE 0.3%
HBO & Co. .............................. 1,800 78,300
USA Waste Services Inc.* ............... 900 33,300
-----------
111,600
-----------
DRUG 1.0%
Eli Lilly & Co. ........................ 1,600 107,000
Novartis AG ............................ 70 109,631
Pfizer Inc. ............................ 1,000 70,750
Schering-Plough Corp. .................. 1,700 95,306
-----------
382,687
-----------
FOOD & BEVERAGE 0.6%
Coca-Cola Enterprises Inc. ............. 800 22,500
H.J. Heinz Co. ......................... 1,700 78,944
Whitman Corp. .......................... 5,500 144,375
-----------
245,819
-----------
HOSPITAL SUPPLY 1.2%
Baxter International Inc. .............. 900 41,625
Boston Scientific Corp.* ............... 600 27,300
Guidant Corp. .......................... 1,600 92,000
PacifiCare Health Systems, Inc. Cl. A* . 2,200 139,975
Tenet Healthcare Corp. ................. 4,500 137,531
-----------
438,431
-----------
PERSONAL CARE 0.2%
Procter & Gamble Co. ................... 800 54,400
-----------
PRINTING & PUBLISHING 1.1%
Hollinger International, Inc. Cl. A* ... 14,200 185,487
Torstar Corp. Cl. B* ................... 1,600 54,664
Valassis Communications Inc. ........... 6,500 191,750
-----------
431,901
-----------
TOBACCO 0.3%
Dimon Inc. ............................. 3,800 98,562
Philip Morris Companies, Inc. .......... 800 31,700
-----------
130,262
-----------
Total Consumer Staple .................................. 1,875,600
-----------
ENERGY 3.4%
OIL 2.6%
British Petroleum Co. PLC* ............. 2,100 30,864
Energy Africa Ltd.* .................... 15,700 82,374
ENI SPA ADR ............................ 1,000 56,375
Fletcher Challenge Ltd.* ............... 6,600 29,588
Oryx Energy Co.* ....................... 7,800 214,987
PTT Exploration & Production Public Co. Ltd.* 300 2,998
Royal Dutch Petroleum Co. .............. 1,200 63,150
Seagull Energy Corp.* .................. 7,500 183,281
Tosco Corp. ............................ 4,900 161,700
Total SA Cl. B* ........................ 717 79,553
Total SA Cl. B ADR* .................... 1,500 83,250
Woodside Petroleum Ltd. ADR* ........... 3,900 32,940
-----------
1,021,060
-----------
OIL SERVICE 0.8%
Mapco Inc. ............................. 5,500 181,500
Schlumberger Ltd. ...................... 1,300 113,750
-----------
295,250
-----------
Total Energy ........................................... 1,316,310
-----------
FINANCE 3.9%
BANK 1.2%
BankAmerica Corp. ...................... 1,300 92,950
Fleet Financial Group Inc. ............. 2,800 180,075
Mellon Bank Corp. ...................... 3,300 170,156
-----------
443,181
-----------
FINANCIAL SERVICE 0.2%
Federal National Mortgage Association .. 1,700 82,344
-----------
INSURANCE 2.5%
Ace Ltd. ............................... 3,200 297,400
AMBAC Inc. ............................. 4,100 173,225
General Re Corp. ....................... 300 59,156
Mid Ocean Ltd. ......................... 3,000 194,625
Travelers Group Inc. ................... 1,000 70,000
Travelers Property Casualty Corp. Cl. A 3,200 115,600
UNUM Corp. ............................. 1,000 48,750
-----------
958,756
-----------
Total Finance .......................................... 1,484,281
-----------
SCIENCE & TECHNOLOGY 3.6%
AEROSPACE 0.3%
Boeing Co. ............................. 2,126 101,782
-----------
COMPUTER SOFTWARE & SERVICE 0.6%
Cisco Systems Inc.* .................... 700 57,422
Nintendo Co. Ltd.* ..................... 400 34,566
Sema Group PLC* ........................ 1,600 35,837
TT Tieto Oy Cl. B* ..................... 200 22,423
Western Digital Corp.* ................. 2,600 77,837
WM-Data AB Cl. B* ...................... 1,000 17,357
-----------
245,442
-----------
ELECTRONIC COMPONENTS 1.1%
AMP Inc. ............................... 1,300 58,500
Hitachi Ltd. ........................... 4,000 30,744
Intel Corp.* ........................... 700 53,900
Lernout & Hauspie Speech Products NV ADR* 1,700 82,450
Rohm Co.* .............................. 1,000 98,878
Texas Instruments Inc. ................. 900 96,019
-----------
420,491
-----------
ELECTRONIC EQUIPMENT 0.7%
KLA-Tencor Corp.* ...................... 900 $ 39,544
L.M. Ericsson Telephone Co. ADR Cl. B* . 2,190 96,908
L.M. Ericsson Telephone Co. Cl. B* ..... 2,568 113,144
Teradyne Inc.* ......................... 700 26,206
-----------
275,802
-----------
OFFICE EQUIPMENT 0.9%
Compaq Computer Corp. .................. 700 44,625
Hewlett-Packard Co. .................... 500 30,844
International Business Machines Corp. .. 600 58,837
Quantum Corp.* ......................... 2,200 69,575
Unisys Corp. ........................... 11,900 158,419
-----------
362,300
-----------
Total Science & Technology ............................. 1,405,817
-----------
UTILITY 1.2%
ELECTRIC 0.9%
Edison International Corp. ............. 4,300 110,187
OGE Energy Corp. ....................... 2,500 121,094
Western Resources Inc. ................. 2,800 104,300
-----------
335,581
-----------
Natural Gas 0.1%
TransTexas Gas Corp.* .................. 1,800 34,200
-----------
Telephone 0.2%
Telecom Italia SPA* .................... 5,300 33,215
WorldCom Inc.* ......................... 1,900 63,888
-----------
97,103
-----------
Total Utility .......................................... 466,884
-----------
Total Equity Securities (Cost $8,229,749................ 9,759,503
-----------
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PRINCIPAL MATURITY VALUE
AMOUNT DATE (NOTE 1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED INCOME SECURITIES 70.3%
U.S. TREASURY 23.5%
U.S. Treasury Bond, 12.00% .......................... $ 200,000 8/15/2013 293,062
U.S. Treasury Bond, 8.75% ........................... 1,125,000 5/15/2017 1,447,031
U.S. Treasury Bond, 8.125% .......................... 375,000 8/15/2021 462,364
U.S. Treasury Bond, 6.25% ........................... 875,000 8/15/2023 878,141
U.S. Treasury Note, 6.75% ........................... 100,000 5/31/1999 101,656
U.S. Treasury Note, 6.875% .......................... 1,050,000 8/31/1999 1,071,987
U.S. Treasury Note, 7.125% .......................... 850,000 9/30/1999 872,448
U.S. Treasury Note, 6.25% ........................... 175,000 8/31/2000 177,406
U.S. Treasury Note, 6.625% .......................... 675,000 7/31/2001 694,616
U.S. Treasury Note, 7.875% .......................... 850,000 11/15/2004 947,614
U.S. Treasury Note, 6.50% ........................... 1,650,000 8/15/2005 1,711,875
U.S. Treasury Note, 6.875% .......................... 100,000 5/15/2006 106,391
U.S. Treasury Note Inflation
Indexed, 3.375% ................................... 126,850 1/15/2007 125,145
U.S. Treasury STRIPS, 0.00% ......................... 275,000 5/15/2007 155,315
-----------
9,045,051
-----------
U.S. AGENCY MORTGAGE 15.1%
Federal Home Loan Mortgage
Corp., 7.50% ...................................... $ 584,616 2/01/2027 $ 597,583
Federal Home Loan Mortgage Corp.
Gold, 7.00% ....................................... 799,256 6/01/2024 806,993
Federal Home Loan Mortgage Corp.
Gold, 7.50% ....................................... 498,635 8/01/2024 511,101
Federal Home Loan Mortgage Corp.
Series 29-H PAC, 6.50% ............................ 125,000 3/25/2023 125,272
Federal Home Loan Mortgage Corp.
TBA, 7.00% ........................................ 500,000 12/15/2012 506,250
Federal National Mortgage
Association, 7.50% ................................ 457,391 7/01/2012 469,109
Federal National Mortgage Association
Remic 93-102-H PAC, 6.80% ......................... 125,000 9/25/2022 127,460
Federal National Mortgage Association
TBA, 7.00% ........................................ 250,000 11/20/2004 253,125
Government National Mortgage
Association, 6.50% ................................ 119,802 2/15/2009 120,644
Government National Mortgage
Association, 6.50% ................................ 59,660 6/15/2009 60,079
Government National Mortgage
Association, 6.50% ................................ 270,576 7/15/2009 272,519
Government National Mortgage
Association, 8.00% ................................ 118,439 10/15/2017 124,694
Government National Mortgage
Association, 8.00% ................................ 59,837 11/15/2017 62,997
Government National Mortgage
Association, 6.50% ................................ 83,726 12/15/2023 83,046
Government National Mortgage
Association, 6.50% ................................ 423,955 7/15/2024 420,509
Government National Mortgage
Association, 7.00% ................................ 295,912 1/15/2025 298,407
Government National Mortgage
Association, 7.50% ................................ 360,594 11/15/2025 368,931
Government National Mortgage
Association, 7.50% ................................ 188,711 4/15/2026 192,957
Government National Mortgage
Association, 8.00% ................................ 114,040 9/15/2026 118,351
Government National Mortgage
Association TBA, 7.50% ............................ 300,000 11/17/2016 308,625
-----------
5,828,652
-----------
CANADIAN-YANKEE 3.1%
British Aerospace Finance Inc.
Note, 7.50%+ ...................................... 125,000 7/01/2027 133,018
DR Investments Sr. Note, 7.10%+ ..................... 125,000 5/15/2002 129,135
Petroliam Nasional BHD, 7.125%+ ..................... 125,000 8/15/2005 126,078
Petroliam Nasional BHD Note, 6.875%+ ................ 175,000 7/01/2003 175,297
Province of Quebec, 7.125% .......................... 250,000 2/09/2024 249,700
Usinor Sacilor ADR Note, 7.25% ...................... 350,000 8/01/2006 361,147
-----------
1,174,375
-----------
TRUST CERTIFICATES 1.2%
Cooperative Utility Trust
Certificates, 10.70% .............................. 225,000 9/15/2017 236,250
Rural Electric Cooperative Grantor Trust
Certificates, 10.11% .............................. 200,000 12/15/2017 210,934
-----------
447,184
-----------
FOREIGN GOVERNMENT 5.6%
Australian Dollar
Commonwealth of Australia, 9.00% .................... 775,000 9/15/2004 $ 643,340
Canadian Dollar
Government of Canada, 0.00% ......................... 225,000 2/05/1998 158,099
New Zealand Dollar
Government of New Zealand, 10.00% ................... 375,000 3/15/2002 261,534
Government of New Zealand, 8.00% .................... 300,000 11/15/2006 204,767
Pound Sterling
United Kingdom Treasury, 8.50% ...................... 475,000 12/07/2005 889,824
-----------
2,157,564
-----------
FINANCE/MORTGAGE 18.6%
American Express Credit Account Master
Trust 96-1A, 6.80% ................................ $ 250,000 12/15/2003 255,155
American Express Credit Account Master
Trust 97-1A, 6.40% ................................ 125,000 4/15/2005 126,250
Arcadia Automobile Trust
97-B A5, 6.70% .................................... 125,000 2/15/2005 126,875
Arcadia Automobile Trust
97-C A5, 6.55% .................................... 125,000 6/15/2005 126,504
Associates Corp. of North America
Sr. Note, 6.70% ................................... 250,000 5/29/2001 253,505
Associates Corp. of North America
Sr. Note, 6.45% ................................... 125,000 10/15/2001 125,794
Bank of New York Institutional Capital
Trust, 7.78%+ ..................................... 175,000 12/01/2026 178,115
BankAmerica Institutional Capital
Series B, 7.70%+ .................................. 350,000 12/31/2026 357,514
Chase Manhattan Master
Trust 96-3A, 7.04% ................................ 275,000 2/15/2005 282,389
Cigna Corp. Deb., 7.875% ............................ 175,000 5/15/2027 185,362
CIT Group Holdings Inc. Sr.
Note, 6.80% ....................................... 250,000 4/17/2000 253,757
Citicorp Capital Security
Note, 7.93% ....................................... 175,000 2/15/2027 181,783
Commercial Credit Group Inc.
Note, 6.45% ....................................... 250,000 7/01/2002 254,687
Commercial Credit Group Inc.
Sr. Note, 5.55% ................................... 250,000 2/15/2001 244,528
Countrywide Funding Corp.
Note, 6.58% ....................................... 200,000 9/21/2001 201,634
Countrywide Funding Corp.
Note, 6.28% ....................................... 200,000 1/15/2003 200,236
CWMBS Inc. Series
1994-3 A-7, 6.75% ................................. 225,000 3/25/2024 223,664
Discover Credit Card Trust
Series 1993 A, 6.25% .............................. 208,334 8/16/2000 208,138
DLJ Mortgage Acceptance Corp. 97-CF2
A1A, 6.55%+ ....................................... 125,000 11/15/2006 126,719
First USA Credit Card Master Trust
Series 1997-6A, 6.42% ............................. 250,000 3/17/2005 250,039
Ford Credit Auto Loan Master Trust
Series 95-1, 6.50% ................................ 375,000 8/15/2002 377,812
Ford Credit Auto Owner Trust
Series 1997B-A3, 6.05% ............................ 250,000 4/15/2001 251,113
GE Global Insurance Holding Corp.
Note, 7.00% ....................................... 150,000 2/15/2026 152,511
General Motors Acceptance Corp.
Note, 7.85% ....................................... 325,000 11/17/1997 325,231
Household Affinity Master Trust
Series 1994-1A, 5.8375% ........................... 175,000 5/15/2001 175,109
Household Finance Co. Note, 6.75% ................... 125,000 6/01/2000 126,450
MBNA Corp. Sr. Note, 6.875% ......................... 175,000 11/15/2002 176,587
Morgan Stanley Capital Inc.
97-WF1-1A, 6.83%+ ................................. 123,648 10/15/2006 125,967
Prime Credit Card Master Trust
Series 1995-1A, 6.75% ............................. 125,000 11/15/2005 127,148
Prudential Home Mortgage Securities Co.
Series 93-29 A-6 PAC, 6.75% ....................... 188,285 8/25/2008 189,462
Prudential Home Mortgage Securities Co.
Series 93-47 1-11 PAC, 6.10% ...................... 275,000 12/25/2023 264,429
Railcar Leasing LLC Sr. Sec.
Note, 6.75%+ ...................................... 113,004 7/15/2006 116,252
Sears Credit Account Master Trust
Series 1997-1A, 6.20% ............................. 125,000 7/16/2007 125,117
Structured Asset Securities Corp.
Note, 6.79% ....................................... 250,000 10/15/2034 253,487
Zurich Capital Trust, 8.376%+ ....................... 200,000 6/01/2037 213,358
-----------
7,162,681
-----------
CORPORATE 3.2%
Chevron Corp. Note, 8.11% ........................... 175,000 12/01/2004 186,013
Columbia/HCA Healthcare Corp.
Note, 6.87% ....................................... 150,000 9/15/2003 151,386
Columbia/HCA Healthcare
Corp. Deb., 7.50% ................................. 125,000 12/15/2023 123,800
Columbia/HCA Healthcare Corp.
Note, 8.12% ....................................... 125,000 8/04/2003 133,572
Columbia/HCA Healthcare Corp.
Note, 7.69% ....................................... 125,000 6/15/2025 118,989
Edison Mission Energy Funding Corp.
Series A Note, 6.77%+ ............................ 156,653 9/15/2003 158,658
Electronic Data Systems Corp.
Note, 6.85%+ ...................................... 250,000 5/15/2000 254,780
Loews Corp. Sr. Note, 7.00% ......................... 125,000 10/15/2023 118,111
-----------
1,245,309
-----------
Total Fixed Income Securities (Cost $26,400,955) .................................... 27,060,816
-----------
SHORT-TERM OBLIGATIONS 6.1%
American Express Credit Corp., 5.48% ................ 452,000 11/05/1997 452,000
American Express Credit Corp., 5.55% ................ 1,000,000 11/05/1997 1,000,000
General Electric Capital Corp., 5.53% ............... 884,000 11/07/1997 884,000
-----------
Total Short-Term Obligations (Cost $2,336,000) ...................................... 2,336,000
-----------
Total Investments (Cost $36,966,704) - 101.7% ....................................... 39,156,319
Cash and Other Assets, Less Liabilities - (1.7%) .................................... (655,620)
-----------
Net Assets - 100.0% ................................................................. $38,500,699
===========
- --------------------------------------------------------------------------------------------------------
Federal Income Tax Information:
AtOctober 31, 1997, the net unrealized appreciation of investments based on
cost for Federal income tax purposes of $37,040,878 was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an
excess of value over tax cost ..................................................... $ 2,530,684
Aggregate gross unrealized depreciation for all investments in which there is an
excess of tax cost over value ..................................................... (415,243)
-----------
$ 2,115,441
===========
</TABLE>
- --------------------------------------------------------------------------------
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 buyers. The total cost and market value of Rule 144A securities
owned at October 31, 1997 were $2,031,297 and $2,094,891 (5.44% of net
assets), respectively.
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.
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- --------------------------------------------------------------------------------
Forward currency exchange contracts outstanding at October 31, 1997, are as
follows:
<TABLE>
<CAPTION>
UNREALIZED
CONTRACT APPRECIATION DELIVERY
TOTAL VALUE PRICE (DEPRECIATION) DATE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sell Australian dollars, Buy U.S. dollars 31,000 AUD .73565 AUD $ 998 11/14/97
Sell Australian dollars, Buy U.S. dollars 57,000 AUD .70850 AUD 215 1/23/98
Sell Australian dollars, Buy U.S. dollars 140,000 AUD .73289 AUD 4,062 12/10/97
Sell Australian dollars, Buy U.S. dollars 236,000 AUD .74214 AUD 9,131 11/14/97
Sell Australian dollars, Buy U.S. dollars 250,000 AUD .73480 AUD 7,731 12/10/97
Sell Australian dollars, Buy U.S. dollars 135,000 AUD .70843 AUD 499 1/23/98
Sell British pounds, Buy U.S. dollars 100,000 GBP 1.62570 GBP (4,981) 12/01/97
Buy British pounds, Sell U.S. dollars 35,000 GBP 1.66430 GBP 392 12/01/97
Buy British pounds, Sell U.S. dollars 65,000 GBP 1.61130 GBP 4,174 12/01/97
Buy British pounds, Sell U.S. dollars 456,000 GBP 1.62700 GBP (20,448) 1/23/98
Sell British pounds, Buy U.S. dollars 52,000 GBP 1.62800 GBP (2,280) 1/23/98
Buy Italian lira, Sell U.S. dollars 59,360,000 ITL .00058 ITL 525 11/04/97
Buy Japanese yen, Sell U.S. dollars 1,003,175 JPY .00834 JPY (35) 11/05/97
Buy New Zealand dollars, Sell U.S. dollars 19,382 NZD .62240 NZD 5 11/06/97
Sell New Zealand dollars, Buy U.S. dollars 270,000 NZD .64200 NZD 6,087 1/23/98
Sell New Zealand dollars, Buy U.S. dollars 401,000 NZD .62400 NZD 1,822 1/23/98
Sell New Zealand dollars, Buy U.S. dollars 50,000 NZD .62414 NZD 234 1/23/98
Sell South African rand, Buy U.S. dollars 275,000 ZAR .20362 ZAR 643 2/27/98
Buy South African rand, Sell U.S. dollars 63,531 ZAR .20747 ZAR 21 11/03/97
--------
$ 8,795
========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE
- -----------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------
October 31, 1997
ASSETS
Investments, at value (Cost $36,966,704) (Note 1) ......... $39,156,319
Cash ...................................................... 32,343
Receivable for securities sold ............................ 1,796,370
Interest and dividends receivable ......................... 381,861
Receivable for open forward contracts ..................... 36,539
Receivable for fund shares sold ........................... 18,074
Receivable from Distributor (Note 3) ...................... 11,777
Deferred organization costs and other assets (Note 1) 35,640
-----------
41,468,923
LIABILITIES
Payable for securities purchased .......................... 2,815,629
Payable for open forward contracts ........................ 27,744
Accrued transfer agent and shareholder services
(Note 2) ................................................ 24,004
Accrued management fee (Note 2) ........................... 19,724
Accrued trustees' fees (Note 2) ........................... 5,412
Payable for fund shares redeemed .......................... 459
Other accrued expenses .................................... 75,252
-----------
2,968,224
-----------
NET ASSETS ................................................ $38,500,699
===========
Net Assets consist of:
Undistributed net investment income ..................... $ 458,790
Unrealized appreciation of investments .................. 2,189,615
Unrealized appreciation of forward contracts and
foreign currency ...................................... 8,562
Accumulated net realized gain ........................... 2,661,943
Shares of beneficial interest ........................... 33,181,789
-----------
$38,500,699
===========
Net Asset Value, offering price and redemption price
per share of Class S shares ($38,500,699 / 3,401,702
shares of beneficial interest) .......................... $11.32
======
- -----------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------
For the year ended October 31, 1997
INVESTMENT INCOME
Interest, net of foreign taxes of $1,252 ................... $1,781,273
Dividends, net of foreign taxes of $2,781 .................. 131,950
-----------
1,913,223
EXPENSES
Management fee (Note 2) .................................... 213,881
Custodian fee .............................................. 104,389
Transfer agent and shareholder services (Note 2) ........... 70,185
Reports to shareholders .................................... 31,511
Trustees' fees (Note 2) .................................... 16,965
Audit fee .................................................. 19,241
Registration fees .......................................... 14,253
Legal fees ................................................. 8,666
Amortization of organization costs (Note 1) ................ 7,482
Service fee-Class A (Note 5) ............................... 212
Miscellaneous .............................................. 7,307
-----------
494,092
Expenses borne by the Distributor (Note 3) ................. (172,748)
-----------
321,344
-----------
Net investment income ...................................... 1,591,879
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS,
FOREIGN CURRENCY AND FORWARD CONTRACTS
Net realized gain on investments (Notes 1 and 4) ........... 2,681,913
Net realized gain on forward contracts and foreign
currency (Note 1) ........................................ 107,196
-----------
Total net realized gain .................................. 2,789,109
-----------
Net unrealized appreciation of investments ................. 288,740
Net unrealized appreciation of forward contracts and
foreign currency ......................................... 11,970
-----------
Total net unrealized appreciation ........................ 300,710
-----------
Net gain on investments, foreign currency and forward
contracts ................................................ 3,089,819
-----------
Net increase in net assets resulting from operations ....... $ 4,681,698
===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended October 31
-------------------------------------
1996 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income ......................................... $ 1,497,872 $ 1,591,879
Net realized gain on investments, foreign currency and forward
contracts ................................................... 1,710,843 2,789,109
Net unrealized appreciation of investments, foreign currency
and forward contracts 90,149 300,710
------------ ------------
Net increase resulting from operations ........................ 3,298,864 4,681,698
------------ ------------
Dividends from net investment income:
Class A ..................................................... (454,334) (9,655)
Class S ..................................................... (970,526) (1,610,768)
------------ ------------
(1,424,860) (1,620,423)
------------ ------------
Distributions from net realized gains:
Class A ..................................................... (651,838) (27,562)
Class S ..................................................... (42,210) (1,688,429)
------------ ------------
(694,048) (1,715,991)
------------ ------------
Net increase from fund share
transactions (Note 6) ....................................... 3,537,654 3,367,965
------------ ------------
Total increase in net assets .................................. 4,717,610 4,713,249
NET ASSETS
Beginning of year ............................................. 29,069,840 33,787,450
------------ ------------
End of year (including undistributed net
investment income of $410,962 and
$458,790, respectively) ..................................... $ 33,787,450 $ 38,500,699
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
October 31, 1997
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. Before November 1, 1997,
Class S shares were designated Class C. Only Class S shares are presently
available for purchase. Class A, Class B and Class C shares are not being
offered at this time. Effective March 27, 1997, the Fund discontinued offering
Class A shares. Class A shares are subject to an initial sales charge of up to
4.50% and an annual service fee of 0.25% of average daily net assets. Class B
shares are subject to a contingent deferred sales charge on certain redemptions
made within five years of purchase and pay annual distribution and service fees
of 1.00%. Class B shares automatically convert into Class A shares (which pay
lower ongoing expenses) at the end of eight years after the issuance of the
Class B shares. Class C shares are subject to a contingent deferred sales charge
of 1.00% on any shares redeemed within one year of their purchase. Class C
shares also pay annual distribution and service fees of 1.00%. Class S shares
are only offered through certain retirement accounts, advisory accounts of State
Street Research & Management Company (the "Adviser") and special programs. No
sales charge is imposed at the time of purchase or redemption of Class S shares.
Class S shares do not pay any distribution or service fees. The Fund's expenses
are borne pro-rata by each class, except that each class bears expenses, and has
exclusive voting rights with respect to provisions of the Plan of Distribution,
related specifically to that class. The Trustees declare separate dividends on
each class of shares.
The following significant accounting policies are consistently followed by the
Fund in preparing its financial statements, and such policies are in conformity
with generally accepted accounting principles for investment companies.
A. INVESTMENT VALUATION
Values for listed equity securities reflect final sales on national securities
exchanges quoted prior to the close of the New York Stock Exchange. Over-the-
counter securities quoted on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") system are valued at closing prices supplied
through such system. If not quoted on the NASDAQ system, such securities are
valued at prices obtained from 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.
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 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, 1997, the fees
pursuant to such agreement amounted to $213,881.
State Street Research Service Center, a division of State Street Research
Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. In addition, Metropolitan receives a fee for maintenance of
the accounts of certain shareholders who are participants in sponsored
arrangements, employee benefit plans and similar programs or plans, through or
under which shares of the Fund may be purchased. During the year ended October
31, 1997, the amount of such expenses was $56,007.
The fees of the Trustees not currently affiliated with the Adviser amounted to
$16,965 during the year ended October 31, 1997.
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, 1997, the amount of such expenses assumed by the
Distributor and its affiliates was $172,748.
NOTE 4
For the year ended October 31, 1997, purchases and sales of securities,
exclusive of short-term obligations, aggregated $43,776,107 and $39,551,568
(including $23,858,714 and $24,265,327 of U.S. Government securities),
respectively.
NOTE 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the "Plan")
under the Investment Company Act of 1940. Under the Plan, the Fund 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 C shares. In addition, the Fund will pay
annual distribution fees of 0.75% of average daily net assets for Class B and
Class C shares. The Distributor uses such payments for personal service and/or
the maintenance or servicing of shareholder accounts, to reimburse securities
dealers for distribution and marketing services, to furnish ongoing assistance
to investors and to defray a portion of its distribution and marketing expenses.
For the period November 1, 1996 to March 27, 1997, fees pursuant to such plan
amounted to $212 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, 1997,
Metropolitan owned 2,223,045 Class S shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31
-------------------------------------------------------------------
1996 1997
---------------------------------- -------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issued upon reinvestment of
distribution from net realized
gains .......................... 62,677 $ 651,777 -- $ --
Shares repurchased ............... (2,630,477) (28,093,497) (50,023) (528,933)
--------- ------------- ------- ----------
Net decrease ..................... (2,567,800) $ (27,441,720) (50,023) $ (528,933)
========= ============= ======= ==========
<CAPTION>
CLASS S (FORMERLY CLASS C) SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold ...................... 3,511,159 $ 37,399,443 473,499 $ 5,172,822
Issued upon reinvestment of:
Dividends from net investment
income ........................... 21,689 229,456 47,885 512,492
Distributions from net realized
gains ............................ 4,058 42,210 161,263 1,688,429
Shares repurchased ............... (632,775) (6,691,735) (320,767) (3,476,845)
--------- ------------- ------- ------------
Net increase ..................... 2,904,131 $ 30,979,374 361,880 $ 3,896,898
========= ============= ======= ============
</TABLE>
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------
YEARS ENDED OCTOBER 31
---------------------------------------------- NOVEMBER 1, 1996
1994)(2)) 1995(1) 1996(1) TO MARCH 27, 1997(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 9.55 9.56 10.56 11.03
---- ---- ----- -----
Net investment income ($) 0.20 0.47 0.42 0.21
Net realized and unrealized gain (loss) on
investments, foreign currency and forward
contracts ($) (0.09) 1.00 0.66 0.08
---- ---- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.11 1.47 1.08 0.29
---- ---- ----- -----
Dividends from net investment income ($) (0.10) (0.47) (0.36) (0.19)
Distributions from net realized gains ($) -- -- (0.25) (0.55)
---- ---- ----- -----
TOTAL DISTRIBUTIONS ($) (0.10) (0.47) (0.61) (0.74)
---- ---- ----- -----
NET ASSET VALUE, END OF YEAR ($) 9.56 10.56 11.03 10.58
==== ===== ===== =====
Total return(3) (%) 1.15(4) 15.84 10.55 2.67(4)
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 25,014 27,637 552 --
Ratio of operating expenses to average net assets (%) 1.15(5) 1.15 1.15 1.15(5)
Ratio of net investment income to average net assets(%) 4.48(5) 4.74 4.35 4.18(5)
Portfolio turnover rate (%) 70.35 132.50 126.41 117.66
Average commission rate ($)(6) -- -- 0.0436 0.0308
*Reflects voluntary assumption of fees or expenses
per share in each year (Note 3) ($) 0.03 0.05 0.07 0.03
<CAPTION>
CLASS S (FORMERLY CLASS C)
-----------------------------------------------------------------------
YEARS ENDED OCTOBER 31
-----------------------------------------------------------------------
1994(2) 1995(1) 1996(1) 1997(1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 9.55 9.56 10.56 10.93
---- ---- ----- -----
Net investment income ($) 0.21 0.52 0.50 0.49
Net realized and unrealized gain (loss) on
investments, foreign currency and forward contracts($) (0.09) 0.97 0.60 0.95
---- ---- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.12 1.49 1.10 1.44
---- ---- ----- -----
Dividends from net investment income ($) (0.11) (0.49) (0.48) (0.50)
Distributions from net realized gains ($) -- -- (0.25) (0.55)
---- ---- ----- -----
TOTAL DISTRIBUTIONS ($) (0.11) (0.49) (0.73) (1.05)
---- ---- ----- -----
NET ASSET VALUE, END OF YEAR ($) 9.56 10.56 10.93 11.32
==== ===== ===== =====
Total return(3) (%) 1.25(4) 16.11 10.82 14.11
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 100 1,433 33,236 38,501
Ratio of operating expenses to average net assets (%) 0.90(5) 0.90 0.90 0.90
Ratio of net investment income to average net assets(%) 4.73(5) 4.91 4.50 4.47
Portfolio turnover rate (%) 70.35 132.50 126.41 117.66
Average commission rate ($)(6) -- -- 0.0436 0.0308
*Reflects voluntary assumption of fees or expenses per
share in each year (Note 3) ($) 0.03 0.05 0.06 0.05
- --------------------------------------------------------------------------------------------------------------------------------
(1) Per-share figures have been calculated using the average shares method.
(2) May 16, 1994 (commencement of operations) to October 31, 1994.
(3) Does not reflect any front-end or contingent deferred sales charges.
Total return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
(4) Not annualized.
(5) Annualized.
(6) Average commission rate per share paid for security trades beginning with
the fiscal year ended October 31, 1996.
</TABLE>
<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, 1997, and the results of
its operations, the changes in its net assets and the financial highlights for
the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at October 31, 1997 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 12, 1997
<PAGE>
STATE STREET RESEARCH STRATEGIC PORTFOLIOS: CONSERVATIVE
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
The Fund provided shareholders with attractive returns for the year ended
October 31, 1997. Class S shares (formerly Class C) gained 14.11%. That was
higher than its peer group, the Lipper flexible income fund average, which rose
8.10%.
Strategic Portfolios: Conservative seeks high current income and secondarily
long term growth of capital by investing in common stocks and bonds. The
manager's strategy is to adjust the asset allocation to take advantage of
changing market conditions.
In general, large company stocks outperformed small and mid-sized company stocks
during the first half of the year. But small and mid-cap stocks came back
stronger in the second half of the year. The Fund benefited from reducing its
exposure to large company stocks and shifting its emphasis to small and mid-cap
stocks as the market began to shift its favor to these groups. A decision to cut
back on equity holdings and add the proceeds to high yield bonds hurt
performance. High yield bonds were the best performing segment in the
fixed-income markets during the period.
Going forward, we expect a slower year for corporate profits in the U.S. but
relatively stable to declining interest rates. The recent turmoil in Asia makes
further volatility in international markets likely. As a result, we will
continue to underweight U.S. equities, overweight U.S. bonds and focus on
quality.
October 31, 1997
All returns represent past performance, which is no guarantee of future results.
The investment return and principal value of an investment made in the Fund will
fluctuate, and shares, when redeemed, may be worth more or less than their
original cost. All returns assume reinvestment of capital gain distributions and
income dividends. "S" shares, offered without a sales charge, are available
through certain employee benefit plans and special programs. Before November 1,
1997, Class S shares were designated Class C. The Standard & Poor's 500
Composite Index (S&P 500) is a market-value weighted index composed of 500
widely held common stocks. The Lehman Brothers Government/Corporate Bond Index
is a market-value weighted index of U.S. government treasury and agency
securities, corporate and yankee bonds. 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;
without subsidization, performance would be lower.
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
Strategic Portfolios: S&P Lehman Brothers
Conservative 500 Gov't/Corp Bond
--------------------- -------- ----------------
5/16/94 $ 10,000 $ 10,000 $ 10,000
10/31/94 10,125 10,549 10,006
10/31/95 11,755 13,334 11,622
10/31/96 13,027 16,546 12,250
10/31/97 14,865 21,856 13,329
