State Street Research
Intermediate Bond Fund
Prospectus
September 1, 1995
The investment objective of State Street Research Intermediate Bond Fund (the
"Fund") is to provide total return, consisting primarily of current income
and secondarily of capital appreciation, commensurate with reasonable
investment risk. In seeking to achieve this investment objective, the Fund
invests primarily in a diversified portfolio of debt securities considered
investment grade by one or more nationally recognized rating agencies or of
comparable quality by the Fund's investment manager.
State Street Research & Management Company serves as investment adviser for
the Fund (the "Investment Manager"). As of June 30, 1995, the Investment
Manager had approximately $26.2 billion of assets under management. State
Street Research Investment Services, Inc. serves as distributor (the
"Distributor") for the Fund.
Shareholders may have their shares redeemed directly by the Fund at net asset
value plus the applicable contingent deferred sales charge, if any;
redemptions processed through securities dealers may be subject to processing
charges.
There are risks in any investment program, including the risk of changing
economic and market conditions, and there is no assurance that the Fund will
achieve its investment objective. The net asset value of a share of the Fund
will fluctuate as market conditions change.
This Prospectus sets forth concisely the information a prospective investor
ought to know about the Fund before investing. It should be retained for
future reference. A Statement of Additional Information about the Fund dated
September 1, 1995 has been filed with the Securities and Exchange Commission
and is incorporated by reference in this Prospectus. It is available, at no
charge, upon request to the Fund at the address indicated on the back cover
or by calling 1-800-562-0032.
The Fund is a diversified series of State Street Research Securities Trust
(the "Trust"), an open-end management investment company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Page
Table of Expenses 2
Financial Highlights 4
The Fund's Investments 5
Risk Factors and Investment Practices 6
Limiting Investment Risk 8
Purchase of Shares 9
Redemption of Shares 17
Shareholder Services 19
The Fund and its Shares 22
Management of the Fund 23
Dividends and Distributions; Taxes 24
Calculation of Performance Data 25
Appendix--Description of Debt/Bond Ratings 27
</TABLE>
1
<PAGE>
The Fund offers four classes of shares which may be purchased at the next
determined net asset value per share plus, in the case of all classes except
Class C shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5% and
(ii) an annual service fee of 0.25% of the average daily net asset value of
the Class A shares.
Class B shares are subject to (1) a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made
within five years of purchase and (ii) annual distribution and service fees
of 1% of the average daily net asset value of such shares. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after purchase. No contingent deferred sales charge
applies after the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1% if
redeemed within one year following purchase and (ii) annual distribution and
service fees of 1% of the average daily net asset value of such shares.
Table of Expenses
<TABLE>
<CAPTION>
Class A Class B Class C Class D
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses (1)
Maximum Sales Charge Imposed on
Purchases (as a percentage of offering
price) 4.5% None None None
Maximum Sales Charge Imposed on
Reinvested Dividends (as a percentage of
offering price) None None None None
Maximum Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, as applicable) None (2) 5% None 1%
Redemption Fees (as a percentage of
amount redeemed, if applicable) None None None None
Exchange Fees None None None None
</TABLE>
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
thereafter and no contingent deferred sales charge is imposed after the fifth
year. Class D shares are subject to a 1% contingent deferred sales charge on
any portion of the purchase redeemed within one year of the sale. Long-term
investors in a class of shares with a distribution fee may, over a period of
years, pay more than the economic equivalent of the maximum sales charge
permissible under applicable rules. See "Purchase of Shares."
(2) Purchases of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption. See
"Purchase of Shares."
2
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C Class D
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses (as a
percentage of average net assets)
Management Fees 0.55% 0.55% 0.55% 0.55%
12b-1 Fees 0.25% 1.00% None 1.00%
Other Expenses 1.39% 1.39% 1.39% 1.39%
Less Voluntary Reduction (1.19%) (1.19%) (1.19%) (1.19%)
------ ------ ------ ------
Total Fund Operating Expenses
(after voluntary reduction) 1.00% 1.75% 0.75% 1.75%
====== ====== ====== ======
</TABLE>
Example:
You would pay the following expenses on a $1,000 investment including, for
Class A shares, the maximum applicable initial sales charge, and assuming
(1) 5% annual return and (2) redemption of the entire investment at the end
of each time period:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
Class A shares $55 $75 $ 98 $162
Class B shares $68 $85 $115 $186
Class C shares $ 8 $24 $ 42 $ 93
Class D shares $28 $55 $ 95 $206
</TABLE>
You would pay the following expenses on the same investment, assuming no
redemption:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1 Year 3 Years 5 Years 10 Years
Class B shares $18 $55 $95 $186
Class D shares $18 $55 $95 $206
</TABLE>
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 period ended April 30, 1995.
Actual expense levels for the current fiscal year and future years may vary
from the amounts shown. The table does not reflect charges for optional
services elected by certain shareholders, such as the $7.50 fee for
remittance of redemption proceeds by wire. For further information on sales
charges, see "Purchase of Shares--Alternative Purchase Program"; for further
information on management fees, see "Management of the Fund"; and for further
information on 12b-1 fees, see "Purchase of Shares--Distribution Plan."
The Fund has 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 the Fund. The Fund presently expects such assistance
to be provided for the next 12 months or until the Fund's net assets reach
$100 million, whichever first occurs. However, the Fund has not received any
firm commitment that such assistance will in fact be provided.
For the fiscal period ended April 30, 1995, Total Fund Operating Expenses as
a percentage of average net assets of Class A and Class C shares, would have
been 2.19% and 1.83%, respectively, 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 1.19%
and 1.08% of the Class A and Class C shares of the Fund, respectively. The
amount of fees or expenses assumed during the fiscal period ended April 30,
1995 differed among classes because of fluctuations during the year in
relative levels of assets in each class and in expenses before reimbursement.
3
<PAGE>
Financial Highlights
The data set forth below has been audited by Coopers & Lybrand L.L.P.,
independent accountants, and their report thereon is included in the
Statement of Additional Information. For further information about the
performance of the Fund, see "Financial Statements" in the Statement of
Additional Information. Financial information is not presented for Class B
and Class D shares of the Fund because no shares of those classes were
outstanding during the period presented.
<TABLE>
<CAPTION>
Class A Class C
May 16, 1994 May 16, 1994
(Commencement of (Commencement of
Operations) to Operations) to
April 30, 1995 April 30, 1995
<S> <C> <C>
Net asset value, beginning of period $ 9.55 $ 9.55
Net investment income* .54 .56
Net realized and unrealized gain on investments,
foreign currency and forward contracts .01 .02
Dividends from net investment income (.44) (.46)
------- -------
Net asset value, end of period $ 9.66 $ 9.67
======= =======
Total return+++ 5.96% 6.30%
Net assets at end of period (000s) $10,222 $ 3,738
Ratio of operating expenses to average net assets* 1.00%++ 0.75%++
Ratio of net investment income to average net assets* 5.92%++ 6.17%++
Portfolio turnover rate 157.75% 157.75%
*Reflects voluntary assumption of fees or expenses
per share $ 0.11 $ 0.10
</TABLE>
++Annualized.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total return
would be lower if the Distributor and its affiliates had not voluntarily
assumed a portion of the Fund's expenses.
4
<PAGE>
The Fund's Investments
The Fund's investment objective is to provide total return, consisting
primarily of current income and secondarily of capital appreciation,
commensurate with reasonable investment risk. The investment objective may
not be changed without shareholder approval.
In seeking to achieve this investment objective, the Fund follows certain
investment policies, as described below, which may be changed without
shareholder approval.
Under normal conditions, at least 65% of the Fund's total assets will consist
of a broad range of U.S. Government securities, corporate bonds and notes,
mortgage-related securities, asset-backed securities, zero coupon securities,
stripped securities, pay in kind ("PIK") securities, indexed securities,
commercial paper, and foreign government securities which are considered
investment grade by one or more nationally recognized rating agencies such as
Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc.
("Moody's"), i.e. rated BBB or higher by S&P or Baa or higher by Moody's, or
considered by the Investment Manager to be equivalent to investment grade.
The Fund may invest in debt instruments which are split rated; that is, rated
investment grade by one rating agency, but lower than investment grade by the
other. A maximum of 25% of the Fund's total assets may be invested in
securities which are rated BBB by S&P or Baa by Moody's, or considered by the
Investment Manager to be equivalent. For information concerning the ratings
of debt securities, see "Appendix--Description of Debt/Bond Ratings" herein.
Under normal conditions, at least 65% of the Fund's total assets will be
invested in bonds, i.e., debt securities with an original stated maturity of
one year or more. Overall, the Fund is expected to have a dollar weighted
effective maturity of three to ten years. The securities can have stated or
remaining maturities at the time of purchase which vary widely, from a few
months to thirty years. In the case of mortgage-related securities, the
remaining maturity is based on the long-term prepayment outlook for the
securities as determined by independent, widely accepted bond market sources.
For example, mortgage loans in a pool could have stated maturities of up to
30 years, yet the actual average life or effective maturity of the interest
in the pool can be substantially less because the underlying mortgages will
be subject to normal principal amortization and may be prepaid prior to
maturity.
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 Fund invests include, among others, direct
obligations of the U.S. Treasury, i.e., U.S. Treasury bills, notes,
certificates and bonds; obligations of U.S. Government agencies or
instrumentalities such as the Federal National Mortgage Association, the
Government National Mortgage Association and the Federal Home Loan Mortgage
Corporation; obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation and separate principal and interest components
issued by the U.S. Treasury for selected securities. See the Statement of
Additional Information.
Corporate bonds and notes are debt securities issued by domestic and foreign
issuers and include long- and short-term fixed income securities, notes,
debentures, convertible debt and similar instruments. The issuers can range
across the full spectrum of industries and can vary in size and be in
different stages of development.
Mortgage-related securities 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 U.S. Government agencies,
instrumentalities or mixed-ownership corporations, and the securities may or
may not be supported by the credit of such entities. Mortgage-related
securities may also 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 backed by the same pool of mortgages.
The senior securities have priority to the interest and/or principal payments
on the mortgages in the
5
<PAGE>
pool; the subordinate securities have a lower priority with respect to such
payments on the mortgages in the pool. The Fund does not presently expect to
invest in mortgage pool residuals. The possibility of prepayment of the
underlying mortgages which might be motivated, for instance, by declining
interest rates could lessen the potential for total return in mortgage-backed
securities. When prepayments of mortgages occur during periods of declining
interest rates, the Fund will have to reinvest the proceeds in instruments
with lower effective interest rates.
Stripped securities are issued by governmental or private issuers. Stripped
securities include mortgage- related securities which have been divided into
separate interest and principal components. Holders of the interest
components will receive payments of the interest on the mortgages, 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, the Fund will 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,
the 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.
Stripped securities are extremely volatile and only government-issued IOs and
POs may be deemed to be liquid.
Asset-backed (other than mortgage-related) securities represent interests in
pools of consumer loans such as credit card receivables, automobile loans and
leases, leases on equipment such as computers and other financial
instruments. These securities provide a flow-through of interest and
principal payments as payments are received on the loans or leases and may be
supported by letters of credit or similar guarantees of payment by a
financial institution. These securities are subject to the risks of
nonpayment of the underlying loans as well as the risks of prepayment.
Zero coupon securities 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 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 reporting of interest for
PIK securities is similar to the reporting of interest for zero coupon
securities. The Fund will be required to distribute all or substantially all
of such amounts annually to its shareholders. These distributions may cause
the Fund to liquidate portfolio assets in order to make such distributions at
a time when the Fund may have otherwise chosen not to sell such securities.
Liquidating portfolio assets to make distributions is likely to reduce the
Fund's assets and may thereby increase its expense ratio, may decrease its
rate of return, and may result in additional taxes for the shareholder. The
amount of the discount fluctuates with such securities market value 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.
Risk Factors and Investment Practices
Foreign Investments
The Fund reserves the right to invest without limitation in debt securities
of non-U.S. governmental and corporate issuers. Under current policy,
however, the Fund limits such investments to 25% or less of its total assets.
It is anticipated that most of the foreign investments of the Fund will
consist of securities of issuers in countries with developed economies.
However, the Fund may also invest in the securities of issuers in
6
<PAGE>
countries with new or developing capital markets as deemed appropriate by the
Investment Manager, although the Fund does not presently expect to invest
more than 5% of its total assets in issuers in such less developed countries.
Such countries include countries that have an emerging stock market that
trades a small number of securities; countries with low- to middle-income
economies; and/or countries with economies that are based on only a few
industries. Eastern European countries are considered to have less developed
capital markets.
The risks associated with investments in foreign securities include those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments including the risks of
nationalization or expropriation, the possible imposition of currency
exchange blockages, higher operating expenses for the Fund, foreign
withholding and other taxes which may reduce investment return, reduced
availability of public information concerning issuers and the fact that
foreign issuers are not generally subject to uniform accounting, auditing and
financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic issuers. Moreover,
securities of many foreign issuers may be less liquid and their prices more
volatile than those of securities of comparable domestic issuers. 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, the Fund may engage in currency
exchange transactions either on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market or by entering into forward
contracts to purchase or sell currencies. Although such contracts tend to
minimize the risk of loss resulting from a correctly predicted decline in
value of hedged currency, they tend to limit any potential gain that might
result should the value of such currency increase. In entering a forward
currency transaction, the Fund is dependent upon the creditworthiness and
good faith of the counterparty. The Fund attempts to reduce the risks of
nonperformance by the counterparty by dealing only with established, large
institutions with which the Investment Manager has done substantial business
in the past. See the Statement of Additional Information.
Other Investment Policies
The Fund may invest in restricted securities in accordance with Rule 144A
under the Securities Act of 1933 ("Rule 144A Securities"), which allows for
the resale of such securities among certain qualified institutional buyers.
Rule 144A Securities may be determined to be liquid by or in accordance with
guidelines established by the Board of Trustees for purposes of complying
with the Fund's investment restrictions applicable to investments in illiquid
securities. The Fund may invest up to 15% of its net assets in Rule 144A
Securities determined to be liquid. Because the market for such securities is
still developing, such securities could possibly become illiquid in
particular circumstances. See the Statement of Additional Information.
The Fund may invest in certain derivative securities. To aid in achieving its
investment objective, the Fund may, subject to certain limitations, buy and
sell options, futures contracts and options on futures contracts on
securities and securities indices. The Fund may not establish a position in a
commodity futures contract or purchase or sell a commodity option contract
for other than bona fide hedging purposes if immediately thereafter the sum
of the amount of initial margin deposits and premiums required to establish
such positions for such nonhedging purposes would exceed 5% of the market
value of the Fund's net assets. Similar policies apply to options which are
not commodities. The Fund may also enter various forms of swap arrangements
with respect to interest rates, currency rates and indices, although the Fund
does not presently expect to invest more than 5% of its total assets in such
items. See the Statement of Additional Information.
The Fund may lend portfolio securities with a value of up to 33-1/3% of its
total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of
the current market value of the loaned securities plus accrued interest.
Collateral
7
<PAGE>
received by the Fund will generally be held in the form tendered, although
cash may be invested in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, irrevocable stand-by letters
of credit issued by a bank, or any combination thereof. The investing of cash
collateral received from loaning portfolio securities involves leverage which
magnifies the potential for gain or loss on monies invested and, therefore,
results in an increase in the volatility of the Fund's outstanding
securities. Such loans may be terminated at any time.
The Fund will retain most rights of ownership including rights to dividends,
interest or other distributions on the loaned securities. Voting rights pass
with the lending, although the Fund may call loans to vote proxies if
desired. Should the borrower of the securities fail financially, there is a
risk of delay in recovery of the securities or loss of rights in the
collateral. Loans are made only to borrowers which are deemed by the
Investment Manager to be of good financial standing.
For debt rated BBB 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 Baa by Moody's lack outstanding investment
characteristics and in fact have speculative characteristics as well. Lower
rated debt securities (i.e., bonds rated BB or lower by S&P or Ba or lower by
Moody's or equivalent as determined by the Investment Manager) generally
involve more credit risk than higher rated securities and are considered by
S&P and Moody's to be predominantly speculative. Changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity of the issuers of lower rated securities to make principal and
interest payments than in the case of higher grade bonds. Lower rated
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. When interest rates increase, the value of debt securities
and shares of the Fund can be expected to decline.
The Fund may also enter into repurchase agreements and purchase securities on
a "when-issued" basis.
The Fund anticipates that its portfolio turnover rate will generally not
exceed 125% under normal conditions. The Fund does, however, reserve 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, the Fund operates under certain
investment restrictions which may not be changed with respect to the Fund
except by a vote of the shareholders of the Fund. Under these restrictions
the Fund may not invest in a security if the transaction would result in: (a)
with respect to 75% of its total assets, more than 5% of the Fund's total
assets being invested in any one issuer or the Fund's owning more than 10% of
the outstanding voting securities of an issuer; or (b) more than 25% of the
Fund's total assets being invested in any one industry. These restrictions do
not apply to investments in U.S. Government securities.
The Fund operates under other investment restrictions which may be changed
without shareholder approval. Under these restrictions the Fund may not
invest more than 15% of its net assets in illiquid securities including
repurchase agreements extending for more than seven days. An illiquid
portfolio may affect the ability of the 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.
The Fund may hold up to 100% of its assets in cash or short-term debt
securities for temporary
8
<PAGE>
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 unfavorable 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, U.S. Government securities,
certificates of deposit, time deposits and bankers' acceptances of certain
qualified financial institutions and corporate commercial paper rated at the
time of purchase at least "A" by S&P or "Prime" by Moody's (or, if not rated,
issued by companies having an outstanding long-term unsecured debt issue
rated at least "A" by S&P or Moody's). See the Statement of Additional
Information.
Information on the Purchase of Shares, Redemption of Shares and Shareholder
Services is set forth on pages 9 to 22 below.
The Fund is available for investment by many kinds of investors including
participants investing through 401(k) or other retirement plan sponsors,
employees investing through savings plans sponsored by employers, Individual
Retirement Accounts ("IRAs"), trusts, corporations, individuals, etc. The
applicability of the general information and administrative procedures set
forth below 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 the Fund.
Participants in 401(k) and other plans should first consult with the
appropriate person at their employer or refer to the plan materials before
following any of the procedures below. For more information or assistance,
anyone may call 1-800-562-0032.
Purchase of Shares
Methods of Purchase
Through Dealers
Shares of the Fund are continuously offered through securities dealers who
have entered into sales agreements with the Distributor. Purchases through
dealers are confirmed at the offering price, which is the net asset value
plus the applicable sales charge, next determined after the order is duly
received by State Street Research Shareholder Services ("Shareholder
Services"), a division of State Street Research Investment Services, Inc.,
from the dealer. ("Duly received" for purposes herein means in accordance
with the conditions of the applicable method of purchase as described below.)
The dealer is responsible for transmitting the order promptly to Shareholder
Services in order to permit the investor to obtain the current price. See
"Purchase of Shares--Net Asset Value" herein.
By Mail
Initial investments in the Fund may be made by mailing or delivering to the
investor's securities dealer a completed Application (accompanying this
Prospectus), together with a check for the total purchase price payable to
the Fund. The dealer must forward the Application and check in accordance
with the instructions on the Application.
Additional shares may be purchased by mailing to Shareholder Services a check
payable to the Fund in the amount of the total purchase price together with
any one of the following: (i) an Application; (ii) the stub from a
shareholder's account statement; or (iii) a letter setting forth the name of
the Fund, the class of shares and the shareholder's account name and number.
Shareholder Services will deliver the purchase order to the transfer agent
and dividend paying agent, State Street Bank and Trust Company (the "Transfer
Agent").
If a check is not honored for its full amount, the purchaser could be subject
to additional charges to cover collection costs and any investment loss, and
the purchase may be cancelled.
By Wire
An investor may purchase shares by wiring Federal Funds of not less than
$5,000 to State Street Bank and Trust Company, which also serves as the
Trust's custodian (the "Custodian"), as set forth below. Prior to making an
investment by wire, an investor must notify Shareholder Services at
1-800-521-6548 and obtain a control number and instructions. Following
9
<PAGE>
such notification, Federal Funds should be wired through the Federal Reserve
System to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF =State Street Research Intermediate Bond
Fund and class of shares
(A, B, C or D)
AC =99029761
OBI =Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street
Research Shareholder Services)
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make
such investment by 12 noon Boston time on the day of his or her investment;
and (ii) the wire must be received by 4 P.M. Boston time that same day.
An investor making an initial investment by wire must promptly complete the
Application accompanying this Prospectus and deliver it to his or her
securities dealer, who should forward it as required. No redemptions will be
effected until the Application has been duly processed.
The Fund may in its discretion discontinue, suspend or change the practice of
accepting orders by any of the methods described above. Orders for the
purchase of shares are subject to acceptance by the Fund. The Fund reserves
the right to reject any purchase order, including orders in connection with
exchanges, for any reason which the Fund in its sole discretion deems
appropriate. The Fund reserves the right to suspend the sale of shares.
Minimum Investment
<TABLE>
<CAPTION>
Class of Shares
A B C D
<S> <C> <C> <C> <C>
Minimum Initial Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $2,000 $2,000 (a) $2,000
By Investamatic $1,000 $1,000 (a) $1,000
All other $2,500 $2,500 (a) $2,500
Minimum Subsequent Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $ 50 $ 50 (a) $ 50
By Investamatic $ 50 $ 50 (a) $ 50
All other $ 50 $ 50 (a) $ 50
</TABLE>
(a) Special conditions apply; contact the Distributor.
The Fund reserves the right to vary the minimums for initial or subsequent
investments from time to time as in the case of, for example, exchanges and
investments under various retirement and employee benefit plans, sponsored
arrangements involving group solicitations of the members of an organization,
or other investment plans such as for reinvestment of dividends and
distributions or for periodic investments (e.g., Investamatic Check Program).
Alternative Purchase Program
General
Alternative classes of shares permit investors to select a purchase program
which they believe will be the most advantageous for them, given the amount
of their purchase, the length of time they anticipate holding Fund shares or
the flexibility they desire in this regard, and other relevant circumstances.
Investors will be able to determine whether in their particular circumstances
it is more advantageous to incur an initial sales charge and not be subject
to certain ongoing charges or to have their entire initial purchase price
invested in the Fund with the investment being subject thereafter to ongoing
service fees and distribution fees.
As described in greater detail below, securities dealers are paid differing
amounts of commission and other compensation depending on which class of
shares they sell.
10
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
<S> <C> <C> <C> <C>
Sales Initial sales charge at Contingent deferred sales None Contingent deferred sales
Charges time of investment of up charge of 5% to 2% charge of 1% applies to any
to 4.5% applies to any shares shares redeemed within one
depending on amount of redeemed within first year following their
investment five years following purchase
their purchase; no
contingent deferred sales
charge after five years
On investments of $1
million or more, no
initial sales charge; but
contingent deferred sales
charge of 1% applies to
any shares redeemed
within one year following
their purchase
Distribution None 0.75% for first eight None 0.75% each year
Fee years; Class B shares
convert automatically to
Class A shares after
eight years
Service Fee 0.25% each year 0.25% each year None 0.25% each year
Initial Above described 4% None 1%
Commission initial sales charge
Received by less 0.25% to 0.50%
Selling retained by
Securities Distributor
Dealer
On investments of $1
million or more, 0.25% to
0.70% paid to dealer by
Distributor
</TABLE>
11
<PAGE>
In deciding which class of shares to purchase, the investor should consider
the amount of the investment, the length of time the investment is expected
to be held, and the ongoing service fee and distribution fee, among other
factors.
Class A shares are sold at net asset value plus an initial sales charge of up
to 4.5% of the public offering price. Because of the sales charge, not all of
an investor's purchase amount is invested unless the purchase equals
$1,000,000 or more. Class B shareholders pay no initial sales charge, but a
contingent deferred sales charge of up to 5% generally applies to shares
redeemed within five years of purchase. Class D shareholders also pay no
initial sales charge, but a contingent deferred sales charge of 1% generally
applies to redemptions made within one year of purchase. For Class B and
Class D shareholders, therefore, the entire purchase amount is immediately
invested in the Fund.
An investor who qualifies for a significantly reduced initial sales charge,
or a complete waiver of the sales charge on investments of $1,000,000 or
more, on the purchase of Class A shares might elect that option to take
advantage of the lower ongoing service and distribution fees that
characterize Class A shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. Class B shares are assessed an annual
distribution fee of 0.75% of daily net assets for an eight-year period
following the date of purchase and are then automatically converted to Class
A shares. Class D shares are assessed an annual distribution fee of 0.75% of
daily net assets for as long as the shares are held. The prospective investor
should consider these fees plus the initial or contingent deferred sales
charges in estimating the costs of investing in the various classes of the
Fund's shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are allocated to dealers (see
"Distribution Plan" below). In addition, the Distributor will, at its
expense, provide additional cash and noncash incentives to securities dealers
that sell shares. Such incentives may be extended only to those dealers that
have sold or may sell significant amounts of shares and/or meet other
conditions established by the Distributor; for example, the Distributor may
sponsor special promotions to develop particular distribution channels or to
reach certain investor groups. The incentives may include merchandise and
trips to and attendance at sales seminars at resorts.
Class A Shares--Initial Sales Charges
Sales Charges
The purchase price of a Class A share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar
amount of the shares purchased as set forth in the table below. A major
portion of this sales charge is reallowed by the Distributor to the
securities dealer responsible for the sale.
<TABLE>
<CAPTION>
Sales
Sales Charge
Charge Paid
Paid By By Dealer
Dollar Investor Investor Concession
Amount of As % of As % of As % of
Purchase Purchase Net Asset Purchase
Transaction Price Value Price
<S> <C> <C> <C>
Less than
$100,000 4.50% 4.71% 4.00%
$100,000 or
above but less
than $250,000 3.50% 3.63% 3.00%
$250,000 or
above but less
than $500,000 2.50% 2.56% 2.00%
$500,000 or
above but less
than $1 million 2.00% 2.04% 1.75%
$1 million and See
above following
0% 0% discussion
</TABLE>
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
a commission as follows:
12
<PAGE>
<TABLE>
<CAPTION>
Amount of Sale Commission
<S> <C>
(a) $1 million to $3 million 0.70%
(b) Next $2 million 0.50%
(c) Amount over $5 million 0.25%
</TABLE>
On such sales of $1,000,000 or more, the investor is subject to a 1%
contingent deferred sales charge on any portion of the purchase redeemed
within one year of the sale. However, such redeemed shares will not be
subject to the contingent deferred sales charge to the extent that their
value represents (1) capital appreciation or (2) reinvestment of dividends or
capital gains distributions. In addition, the contingent deferred sales
charge will be waived for certain other redemptions as described under
"Contingent Deferred Sales Charge Waivers" below (as otherwise applicable to
Class B shares).
Class A shares of the Fund that are purchased without a sales charge may be
exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption
within one year of the Class A shares which are acquired through such
exchange. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any contingent
deferred sales charge will be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement
of Additional Information, of $100,000 or more of Class A shares of the Fund
or a combination of "Eligible Funds." "Eligible Funds" include the Fund and
other funds so designated by the Distributor from time to time. Class B,
Class C and Class D shares may also be included in the combination under
certain circumstances. Securities dealers should call Shareholder Services
for details concerning the other Eligible Funds and any persons who may
qualify for reduced sales charges and related information. See the Statement
of Additional Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A
shares of the Fund and any other Eligible Funds within a 13-month period.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances. Additional information on a Letter of Intent is
available from dealers, or from the Distributor, and also appears in the
Statement of Additional Information.
Right of Accumulation
Investors may purchase Class A shares of the Fund or a combination of shares
of the Fund and other Eligible Funds at reduced sales charges pursuant to a
Right of Accumulation. Under the Right of Accumulation, the sales charge is
determined by combining the current purchase with the value of the Class A
shares of other Eligible Funds held at the time of purchase. Class B, Class C
and Class D shares may also be included in the combination under certain
circumstances. See the Statement of Additional Information and call
Shareholder Services for details concerning the Right of Accumulation.
Other Programs
Class A shares of the Fund may be sold or issued in an exchange at a reduced
sales charge or without a sales charge pursuant to certain sponsored
arrangements, which include programs under which a company, employee benefit
plan or other organization makes recommendations to, or permits group
solicitation of, its employees, members or participants, except any
organization created primarily for the purpose of obtaining shares of the
Fund at a reduced sales charge or without a sales charge. Sales without a
sales charge, or with a reduced sales charge, may also be made through
brokers, financial planners, institutions, and others, under managed
fee-based programs (e.g., "wrap fee" or similar programs) which meet certain
requirements established from time to time by the Distributor, in the event
the Distributor determines to implement such arrangements. Information on
such arrangements and further conditions and limitations is available from
the Distributor.
13
<PAGE>
In addition, no sales charge is imposed in connection with the sale of Class
A shares of the Fund to the following entities and persons: (A) the
Investment Manager, the Distributor, or any affiliated entities, including
any direct or indirect parent companies and other subsidiaries of such
parents (collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated
Companies, any relatives of any such individuals whose relationship is
directly verified by such individuals to the Distributor, or any beneficial
account for such relatives or individuals; and (C) employees, officers, sales
representatives or directors of dealers and other entities with a selling
agreement with the Distributor to sell shares of any aforementioned
investment company, any spouse or child of such person, or any beneficial
account for any of them. The purchase must be made for investment and the
shares purchased may not be resold except through redemption. This purchase
program is subject to such administrative policies, regarding the
qualification of purchasers and any other matters, as may be adopted by the
Distributor from time to time.
Class B Shares--Contingent Deferred Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is duly received, as defined herein.
No sales charge is imposed at the time of purchase; thus the full amount of
the investor's purchase payment will be invested in the Fund. However, a
contingent deferred sales charge may be imposed upon redemptions of Class B
shares as described below.
The Distributor will pay securities dealers at the time of sale a 4%
commission for selling Class B shares. The proceeds of the contingent
deferred sales charge and the distribution fee are used to offset
distribution expenses and thereby permit the sale of Class B shares without
an initial sales charge.
Class B shares that are redeemed within a five-year period after their
purchase will not be subject to a contingent deferred sales charge to the
extent that the value of such shares represents (1) capital appreciation of
Fund assets or (2) reinvestment of dividends or capital gains distributions.
The amount of any applicable contingent deferred sales charge will be
calculated by multiplying the net asset value of such shares at the time of
redemption or at the time of purchase, whichever is lower, by the applicable
percentage shown in the table below:
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge As A
Redemption During Percentage Of Net Asset Value At Redemption
<S> <C>
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
</TABLE>
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first
of those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of a Fund acquired through an exchange from another
Eligible Fund will be measured from the date that such shares were initially
acquired in the other Eligible Fund, and Class B shares being redeemed will
be considered to represent, as applicable, capital appreciation or dividend
and capital gains distribution reinvestments in such other Eligible Fund.
These determinations will result in any contingent deferred sales charge
being imposed at the lowest possible rate. For federal income tax purposes,
the amount of the contingent deferred sales charge will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption.
The amount of any contingent deferred sales charge will be paid to the
Distributor.
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
14
<PAGE>
addition, the contingent deferred sales charge will be waived for: (i)
redemptions made within one year of the death or total disability, as defined
by the Social Security Administration, of all shareholders of an account;
(ii) redemptions made after attainment of a specific age in an amount which
represents the minimum distribution required at such age under Section
401(a)(9) of the Internal Revenue Code for retirement accounts or plans
(e.g., age 70-1/2 for IRAs and Section 403(b) plans), calculated solely on
the basis of assets invested in the Fund or other Eligible Funds; and (iii) a
redemption resulting from a tax-free return of an excess contribution to an
IRA. (The foregoing waivers do not apply to a tax-free rollover or transfer
of assets out of the Fund.) The Fund may modify or terminate the waivers
described above at any time; for example, the Fund may limit the application
of multiple waivers.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends or
distributions with respect to such shares, will automatically convert to
Class A shares of the Fund at the end of eight years following the issuance
of the Class B shares; consequently, they will no longer be subject to the
higher expenses borne by Class B shares. The conversion rate will be
determined on the basis of the relative per share net asset values of the two
classes and may result in a shareholder receiving either a greater or fewer
number of Class A shares than the Class B shares so converted. As noted
above, holding periods for Class B shares received in exchange for Class B
shares of other Eligible Funds will be counted toward the eight-year period.
Class C Shares--Institutional; No Sales Charge
The purchase price of a Class C share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase or
redemption. The Fund will receive the full amount of the investor's purchase
payment.
Class C shares are only available for new investments by certain employee
benefit plans and large institutions. See the Statement of Additional
Information. Information on the availability of Class C shares and further
conditions and limitations with respect thereto is available from the
Distributor.
Class C shares may be also issued in connection with mergers and acquisitions
involving the Fund, and under certain other circumstances as described in
this Prospectus (e.g., see "Shareholder Services-- Exchange Privilege").
Class D Shares--Spread Sales Charges
The purchase price of a Class D share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase; thus the
full amount of the investor's purchase payment will be invested in the Fund.
Class D shares are subject to a 1% contingent deferred sales charge on any
portion of the purchase redeemed within one year of the sale. The contingent
deferred sales charge will be 1% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. The Distributor
pays securities dealers a 1% commission for selling Class D shares at the
time of purchase. The proceeds of the contingent deferred sales charge and
the distribution fee are used to offset distribution expenses and thereby
permit the sale of Class D shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will not be
subject to the contingent deferred sales charge to the extent that the value
of such shares represents (1) capital appreciation of Fund assets or (2)
reinvestment of dividends or capital gains distributions. In addition, the
contingent deferred sales charge will be waived for certain other redemptions
as described under "Contingent Deferred Sales Charge Waivers" above (as
otherwise applicable to Class B shares). For federal income tax purposes, the
amount of the contingent deferred sales charge will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption.
The amount of any contingent deferred sales charge will be paid to the
Distributor.
Net Asset Value
The Fund's per share net asset values are determined Monday through Friday as
of the close of the New York Stock Exchange (the "NYSE") exclusive of
15
<PAGE>
days on which the NYSE is closed. The NYSE ordinarily closes at 4 P.M. New
York City time. The Fund uses one or more pricing services to value its
portfolio securities. The pricing services utilize information with respect
to market transactions, quotations from dealers and various relationships
among securities in determining value and may provide prices determined as of
times prior to the close of the NYSE. Assets for which quotations are readily
available are valued as of the close of business on the valuation date.
Securities for which there is no pricing service valuation or last reported
sale price are valued as determined in good faith by or under the authority
of the Trustees of the Trust. The Trustees have authorized the use of the
amortized cost method to value short-term debt instruments issued with a
maturity of one year or less and having a remaining maturity of 60 days or
less when the value obtained is fair value. Further information with respect
to the valuation of the Fund's assets is included in the Statement of
Additional Information.
Distribution Plan
The Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the provisions of the
Distribution Plan, the Fund makes payments to the Distributor based on an
annual percentage of the average daily value of the net assets of each class
of shares as follows:
<TABLE>
<CAPTION>
Class Service Fee Distribution Fee
<S> <C> <C>
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
</TABLE>
Some or all of the service fees are used to reimburse securities dealers
(including securities dealers that are affiliates of the Distributor) 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 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 further reimbursement commencing as of the time of such
sale. Dealers who have sold Class B and Class D shares are eligible for
further reimbursement after the first year during which such shares have been
held of record by such dealer as nominee for its clients (or by such clients
directly). Any service fees received by the Distributor and not allocated to
dealers may be applied by the Distributor in reduction of expenses incurred
by it directly for personal services and the maintenance of shareholder
accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to securities 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 securities dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs
similar expenses on behalf of, such other funds. When expenses of the
Distributor cannot be identified as relating to a specific fund, the
Distributor allocates expenses among the funds in a manner deemed fair and
equitable to each fund.
Commissions and other cash and noncash incentives and payments to dealers, to
the extent payable out of the general profits, revenues or other sources of
the Distributor (including the advisory fees paid by the Fund), have also
been authorized pursuant to the Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which the Fund may incur under the
Distribution Plan to 1%, of which 0.75% may be used to pay distribution
expenses and 0.25% may be used to pay shareholder service fees. The NASD rule
also limits the aggregate amount which the Fund may pay for such distribution
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
16
<PAGE>
does not apply to shareholder service fees. Payments to the Distributor or to
dealers funded under the Distribution Plan may be discontinued at any time by
the Trustees of the Trust.
Redemption of Shares
Shareholders may redeem all or any portion of their accounts on any day the
NYSE is open for business. Redemptions will be effective at the net asset
value per share next determined (see "Purchase of Shares-- Net Asset Value"
herein) after receipt of the redemption request, in accordance with the
requirements described below, by Shareholder Services and delivery of the
request by Shareholder Services to the Transfer Agent. To allow time for the
clearance of checks used for the purchase of any shares which are tendered
for redemption shortly after purchase, the remittance of the redemption
proceeds for such shares could be delayed for 15 days or more after the
purchase. Shareholders who anticipate a potential need for immediate access
to their investments should, therefore, purchase shares by wire. Except as
noted, redemption proceeds are normally remitted within seven days after
receipt of the redemption request and any necessary documents in good order.
Methods of Redemption
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed to
the shareholder or wired to a predesignated bank account (see "Proceeds By
Wire" below), by sending to State Street Research Shareholder Services, P.O.
Box 8408, Boston, Massachusetts 02266-8408: (1) a written request for
redemption signed by the registered owner(s) of the shares, exactly as the
account is registered; (2) an endorsed stock power in good order with respect
to the shares or, if issued, the share certificates for the shares endorsed
for transfer or accompanied by an endorsed stock power; (3) any required
signature guarantees (see "Redemption of Shares--Signature Guarantees"
below); and (4) any additional documents which may be required for redemption
in the case of corporations, trustees, etc., such as certified copies of
corporate resolutions, governing instruments, powers of attorney, and the
like. The Transfer Agent will not process requests for redemption until it
has received all necessary documents in good order. A shareholder will be
notified promptly if a redemption request cannot be accepted. Shareholders
having any questions about the requirements for redemption should call
Shareholder Services toll-free at 1-800-562-0032.
Request By Telephone
Shareholders may request redemption by telephone with proceeds to be
transmitted by check or by wire (see "Proceeds By Wire" below). A shareholder
can request a redemption for $50,000 or less to be transmitted by check. Such
check for the proceeds will be made payable to the shareholder of record and
will be mailed to the address of record. There is no fee for this service. It
is not available for shares held in certificate form or if the address of
record has been changed within 30 days of the redemption request. The Fund
may revoke or suspend the telephone redemption privilege at any time and
without notice. See "Shareholder Services--Telephone Services" for a
discussion of the conditions and risks associated with Telephone Privileges.
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder has
Telephone Privileges (see "Shareholder Services--Telephone Services" herein),
the Trust's custodian will wire redemption proceeds to the shareholder's
predesignated bank account. To make the request, the shareholder should call
1-800- 521-6548 prior to 4 P.M. Boston time. A $7.50 charge against the
shareholder's account will be imposed for each wire redemption. This charge
is subject to change without notice. The shareholder's bank may also impose a
charge for receiving wires of redemption proceeds. The minimum redemption by
wire is $5,000.
Request to Dealer to Repurchase
For the convenience of shareholders, the Fund has authorized the Distributor
as its agent to accept orders from dealers by wire or telephone for the
repurchase of shares by the Distributor from the dealer. The Fund may revoke
or suspend this authori
17
<PAGE>
zation 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 by the dealer for repurchase by the Distributor. The dealer is
responsible for promptly transmitting a shareholder's order to the
Distributor. Payment of the repurchase proceeds is made to the dealer who
placed the order promptly upon delivery of certificates for shares in proper
form for transfer or, for Open Accounts, upon the receipt of a stock power
with signatures guaranteed as described below, and, if required, any
supporting documents. Neither the Fund nor the Distributor imposes any charge
upon such a repurchase. However, a dealer may impose a charge as agent for a
shareholder in the repurchase of his or her shares.
The Fund has reserved the right to change, modify or terminate the services
described above at any time.
Additional Information
Because of the relatively high cost of maintaining small shareholder
accounts, the Fund reserves the right to involuntarily redeem at its option
any shareholder account which remains below $1,500 for a period of 60 days
after notice is mailed to the applicable shareholder, or to impose a
maintenance fee on such account after 60 days' notice. Such involuntary
redemptions will be subject to applicable sales charges, if any. The Fund may
increase such minimum account value above such amount in the future after
notice to affected shareholders. Involuntarily redeemed shares will be priced
at the net asset value on the date fixed for redemption by the Fund, and the
proceeds of the redemption will be mailed to the affected shareholder at the
address of record. Currently, the maintenance fee is $18 annually, which is
paid to the Transfer Agent. The fee does not apply to certain retirement
accounts or if the shareholder has more than an aggregate $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 closing) 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
may by order permit for the protection of investors; and (b) the payment of
redemption proceeds may be postponed as otherwise provided under "Redemption
of Shares" herein.
Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Fund, the Investment
Manager and the Distributor from possible fraud, signature guarantees are
required for certain redemptions. Signature guarantees help the Transfer
Agent to determine that the person who has authorized a redemption from the
account is, in fact, the shareholder. Signature guarantees are required for:
(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. Please contact Shareholder Services at 1-800-562-0032 for
specific requirements relating to your account.
18
<PAGE>
Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of the Fund owned by
shareholders are credited to their accounts by the Transfer Agent, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110. Certificates representing shares will not be issued. Shareholders will
receive periodic statements of transactions in their accounts.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through dealers, by
wire or by mailing a check, payable to the Fund, to Shareholder Services
under the terms set forth above under "Purchase of Shares."
2. The following methods of receiving dividends from investment income and
distributions from capital gains are available:
(a) All income dividends and capital gains distributions reinvested in
additional shares of the Fund.
(b) All income dividends in cash; all capital gains distributions
reinvested in additional shares of the Fund.
(c) All income dividends and capital gains distributions in cash.
(d) All income dividends and capital gains distributions invested in any
one available Eligible Fund designated by the shareholder as described below.
See "Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will automatically be coded for reinvestment of all
dividends and distributions in additional shares of the same class of the
Fund. Selections may be changed at any time by telephone or written notice to
Shareholder Services. Dividends and distributions are reinvested at net asset
value without a sales charge.
Exchange Privilege
Shareholders of the Fund may exchange their shares for available shares with
corresponding characteristics of any of the other Eligible Funds at any time
on the basis of the relative net asset values of the respective shares to be
exchanged, subject to compliance with applicable securities laws.
Shareholders of any other Eligible Fund may similarly exchange their shares
for Fund shares with corresponding characteristics. Prior to making an
exchange, shareholders should obtain the Prospectus of the Eligible Fund into
which they are exchanging. Under the Direct Program, subject to certain
conditions, shareholders may make arrangements for regular exchanges from the
Fund into other Eligible Funds. To effect an exchange, Class A, Class B and
Class D shares may be redeemed without the payment of any contingent deferred
sales charge that might otherwise be due upon an ordinary redemption of such
shares. The State Street Research Money Market Fund issues Class E shares
which are sold without any sales charge. Exchanges of State Street Research
Money Market Fund Class E shares into Class A shares of the Fund or any other
Eligible Fund are subject to the initial sales charge or contingent deferred
sales charge applicable to an initial investment in such Class A shares,
unless a prior Class A sales charge has been paid directly or indirectly with
respect to the shares redeemed. For purposes of computing the contingent
deferred sales charge that may be payable upon disposition of the acquired
Class A, Class B and Class D shares, the holding period of the redeemed
shares is "tacked" to the holding period of the acquired shares. The period
any Class E shares are held is not tacked to the holding period of any
acquired shares. No exchange transaction fee is currently imposed on any
exchange.
For the convenience of the shareholders who have Telephone Privileges, the
Fund permits exchanges by telephone request from either the shareholder or
his or her dealer. Shares may be exchanged by telephone provided that the
registration of the two accounts is the same. The toll-free number for
exchanges is 1-800-521-6548. See "Telephone Services" herein for a discussion
of conditions and risks associated with Telephone Privileges.
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<PAGE>
The exchange privilege may be exercised only in those states where shares of
the relevant other Eligible Fund may legally be sold. For tax purposes, each
exchange actually represents the sale of shares of one fund and the purchase
of shares of another. Accordingly, exchanges may produce a capital gain or
loss for tax purposes. The exchange privilege may be terminated or suspended
or its terms changed at any time, subject, if required under applicable
regulations, to 60 days' prior notice. New accounts established for
investments upon exchange from an existing account in another fund will have
the same Telephone Privileges as the existing account, unless Shareholder
Services is instructed otherwise. Related administrative policies and
procedures may also be adopted with regard to a series of exchanges, street
name accounts, sponsored arrangements and other matters.
The exchange privilege is not designed for use in connection with short-term
trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer
identification number, may be aggregated for purposes of the six exchange
limit. Notwithstanding the six exchange limit, the Fund reserves the right to
refuse exchange redemptions or purchases by any person or group if, in the
Investment Manager's judgment, the Fund would be unable to invest effectively
in accordance with its investment objective and policies, or would otherwise
potentially be adversely affected. Exchanges may be restricted or refused if
the Fund receives or anticipates simultaneous orders affecting significant
portions of the Fund's assets. In particular, a pattern of exchanges that
coincides with a "market timing" strategy may be disruptive to the Fund. The
Fund may impose these restrictions at any time. The exchange limit may be
modified for accounts in certain institutional retirement plans because of
plan exchange limits, Department of Labor regulations or administrative and
other considerations. Subject to the foregoing, if an exchange request in
good order is received by Shareholder Services and delivered by Shareholder
Services to the Transfer Agent by 12 noon Boston time on any business day,
the exchange usually will occur that day. For further information regarding
the exchange privilege, shareholders should contact Shareholder Services.
Reinvestment Privilege
A shareholder of the Fund who has redeemed shares or had shares repurchased
at his or her request may reinvest all or any portion of the proceeds (plus
that amount necessary to acquire a fractional share to round off his or her
reinvestment to full shares) in shares, of the same class as the shares
redeemed, of the Fund or any other Eligible Fund at net asset value and
without subjecting the reinvestment to an initial sales charge, provided such
reinvestment is made within 120 calendar days after a redemption or
repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the
amount reinvested. The redemption of shares is, for federal income tax
purposes, a sale on which the shareholder may realize a gain or loss. If a
redemption at a loss is followed by a reinvestment within 30 days, the
transaction may be a "wash sale" resulting in a denial of the loss for
federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by Shareholder
Services of such shareholder's written purchase request and delivery of the
request by Shareholder Services to the Transfer Agent. A shareholder may
exercise this reinvestment privilege only once per twelve month period with
respect to his or her shares of the Fund. No charge is imposed by the Fund
for such reinvestments; however, dealers may charge fees in connection with
the reinvestment privilege. The reinvestment privilege may be exercised with
respect to an Eligible Fund only in those states where shares of the relevant
other Eligible Fund may legally be sold.
20
<PAGE>
Investment Plans
The Fund offers Class A, Class B and Class D shareholders the Investamatic
Check Program. Under this Program, shareholders may make regular investments
by authorizing withdrawals from their bank accounts each month or quarter on
the Application available from Shareholder Services.
The Fund also offers tax-sheltered retirement plans, including prototype and
other employee benefit plans for employees, sole proprietors, partnerships
and corporations and IRAs. Details of these investment plans and their
availability may be obtained from securities dealers or from Shareholder
Services.
Systematic Withdrawal Plan
A shareholder who owns noncertificated Class A or Class C shares with a value
of $5,000 or more, or Class B or Class D shares with a value of $10,000 or
more, may elect, by participating in the Fund's Systematic Withdrawal Plan,
to have periodic checks issued for specified amounts. These amounts may not
be less than certain minimums, depending on the class of shares held. The
Plan provides that all income dividends and capital gains distributions of
the Fund shall be credited to participating shareholders in additional shares
of the Fund. Thus, the withdrawal amounts paid can only be realized by
redeeming shares of the Fund under the Plan. To the extent such amounts paid
exceed dividends and distributions from the Fund, a shareholder's investment
will decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales charges,
no such charges will be imposed on withdrawals of up to 8% annually of either
(a) the value, at the time the Plan is initiated, of the shares then in the
account, or (b) the value, at the time of a withdrawal, of the same number of
shares as in the account when the plan was initiated, whichever is higher.
Expenses of the Plan are borne by the Fund. A participating shareholder may
withdraw from the Plan, and the Fund may terminate the Plan at any time on
written notice. Purchase of additional shares while a shareholder is
receiving payments under a Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate
in the Investamatic Check Program and the Systematic Withdrawal Plan at the
same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all their
dividends and any other distributions from the Fund or any Eligible Fund
automatically invested at net asset value in one other such Eligible Fund
designated by the shareholder, provided the account into which the investment
is made is initially funded with the requisite minimum account. The number of
shares purchased will be determined as of the dividend payment date. The
Dividend Allocation Plan is subject to state securities law requirements, to
suspension at any time, and to such policies, limitations and restrictions,
as, for instance, may be applicable to street name or master accounts, that
may be adopted from time to time.
Automatic Bank Connection
A shareholder may elect, by participating in the Fund's Automatic Bank
Connection ("ABC"), to have dividends and other distributions, including
Systematic Withdrawal Plan payments, automatically deposited in the
shareholder's bank account by electronic funds transfer. Some contingent
deferred sales charges may apply. See "Systematic Withdrawal Plan" herein.
Reports
Reports for the Fund will be sent to shareholders of record at least
semiannually. These reports will include a list of the securities owned by
the Fund as well as the Fund's financial statements.
Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing the shareholder to make telephone redemptions for
amounts up to $50,000 to be mailed to the shareholder's address of record is
available automatically;
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<PAGE>
(2) the privilege allowing the shareholder or his or her dealer to make
telephone exchanges is available automatically; and
(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 1-800-521-6548. The Telephone Redemption-by-Wire
Form requires a signature guarantee.
A shareholder may decline the automatic Telephone Privileges set forth in (1)
and (2) above by so indicating on the Application accompanying this
Prospectus.
A shareholder may discontinue any Telephone Privilege at any time by advising
Shareholder Services that the shareholder wishes to discontinue the use of
such privileges in the future.
Unless such Telephone Privileges are declined, a shareholder is deemed to
authorize Shareholder Services and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder to
redeem, or purporting to be the shareholder or the shareholder's dealer to
exchange, shares from any account; and (2) honor any written instructions for
a change of address regardless of whether such request is accompanied by a
signature guarantee. All telephone calls will be recorded. None of the Fund,
the other Eligible Funds, the Transfer Agent, the Investment Manager or the
Distributor will be liable for any loss, expense or cost arising out of any
request, including any fraudulent or unauthorized requests. Shareholders
assume the risk to the full extent of their accounts that telephone requests
may be unauthorized. Reasonable procedures will be followed to confirm that
instructions communicated by telephone are genuine. The shareholder will not
be liable for any losses arising from unauthorized or fraudulent instructions
if such procedures are not followed.
Shareholders may redeem or exchange shares by calling toll-free
1-800-521-6548. Although it is unlikely, during periods of extraordinary
market conditions, a shareholder may have difficulty in reaching Shareholder
Services at such telephone number. In that event, the shareholder should
contact Shareholder Services at 1-800-562-0032, 1-617-357-7805 or otherwise
at its main office at One Financial Center, Boston, Massachusetts 02111-2690.
Shareholder Account Inquiries:
Please call 1-800-562-0032
Call this number for assistance in answering general questions on your
account, including account balance, available shareholder services, statement
information and performance of the Fund. Account inquiries may also be made
in writing to State Street Research Shareholder Services, P.O. Box 8408,
Boston, Massachusetts 02266-8408. A fee of up to $10 will be charged against
an account for providing additional account transcripts or photocopies of
paid redemption checks or for researching records in response to special
requests.
Shareholder Telephone Transactions:
Please call 1-800-521-6548
Call this number for assistance in purchasing shares by wire and for
telephone redemptions or telephone exchange transactions. Shareholder
Services will require some form of personal identification prior to acting
upon instructions received by telephone. Written confirmation of each
transaction will be provided.
The Fund and its Shares
The Fund was organized in 1994 as a series of State Street Research
Securities Trust, a Massachusetts business trust. The Trustees have
authorized shares of the Fund to be issued in four classes: Class A, Class B,
Class C and Class D shares. The Trust is registered with the Securities and
Exchange Commission as an open-end management investment company. The fiscal
year end of the Fund is April 30.
Except for those differences between the classes of shares described below
and elsewhere in the Prospectus, each share of the Fund has equal dividend,
22
<PAGE>
redemption and liquidation rights with other shares of the Fund and when
issued is fully paid and nonassessable. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common usage of terms which may develop in the mutual fund
industry. For example, Class C shares may be redesignated as Class Y shares
and Class D shares may be redesignated as Class C shares. Any redesignations
would not affect any substantive rights respecting the shares.
Each share of each class of shares represents an identical legal interest in
the same portfolio of investments of the Fund, has the same rights and is
identical in all respects, except that Class A, Class B and Class D shares
bear the expenses of the deferred sales arrangement and any expenses
(including the higher service and distribution fees) resulting from such
sales arrangement, and certain other incremental expenses related to a class.
Each class will have exclusive voting rights with respect to provisions of
the Rule 12b-1 distribution plan pursuant to which the service and
distribution fees, if any, are paid. Although the legal rights of holders of
each class of shares are identical, it is likely that the different expenses
borne by each class will result in different net asset values and dividends.
The different classes of shares of the Fund also have different exchange
privileges.
The rights of holders of shares may be modified by the Trustees at any time,
so long as such modifications do not have a material, adverse effect on the
rights of any shareholder. On any matter submitted to the shareholders, the
holder of a Fund share is entitled to one vote per share (with proportionate
voting for fractional shares) regardless of the relative net asset value
thereof.
Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder
meetings unless required by the 1940 Act. Except as otherwise provided under
said Act, the Board of Trustees will be a self-perpetuating body until fewer
than two thirds of the Trustees serving as such are Trustees who were elected
by shareholders of the Trust. In the event less than a majority of the
Trustees serving as such were elected by shareholders of the Trust, a meeting
of shareholders will be called to elect Trustees. Under the Master Trust
Agreement, any Trustee may be removed by vote of two thirds of the
outstanding Trust shares; holders of 10% or more of the outstanding shares of
the Trust can require that the Trustees call a meeting of shareholders for
purposes of voting on the removal of one or more Trustees. In connection with
such meetings called by shareholders, shareholders will be assisted in
shareholder communications to the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for
indemnification for all losses and expenses of any shareholder of the Fund
held personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund would be unable to meet its
obligations. The Investment Manager believes that, in view of the above, the
risk of personal liability to shareholders is remote.
As of July 31, 1995 Metropolitan Life Insurance Company ("Metropolitan") was
the record and/or beneficial owner of approximately 100% and 70% of Class A
and Class C, respectively, and may be deemed to be in control of such classes
of shares of the Fund. 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 are 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.
Management of the Fund
Under the provisions of the Trust's Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees.
The Fund's investment manager is State Street Research & Management Company.
The Investment Manager is charged with the overall responsibility for
23
<PAGE>
managing the investments and business affairs of the Fund, subject to the
authority of the Board of Trustees.
The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve as investment adviser to one of the nation's first
mutual funds, presently known as State Street Research Investment Trust,
which they had formed in 1924. Their investment management philosophy, which
continues to this day, emphasized comprehensive fundamental research and
analysis, including meetings with the management of companies under
consideration for investment. The Investment Manager's portfolio management
group has extensive investment industry experience. In managing debt
securities 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 are located at One Financial Center, Boston,
Massachusetts 02111-2690.
The Investment Manager has entered into an Advisory Agreement with the Trust
pursuant to which investment research and management, administrative
services, office facilities and personnel are provided for the Fund in
consideration of a fee from the Fund.
Under its Advisory Agreement with the Trust, the Investment Manager receives
a monthly investment advisory fee equal to 0.55% (on an annual basis) of the
average daily value of the net assets of the Fund. The Fund bears all costs
of its operation other than those incurred by the Investment Manager under
the Advisory Agreement. In particular, the Fund pays, among other expenses,
investment advisory fees, certain distribution expenses under the Fund's
Distribution Plan and the compensation and expenses of the Trustees who are
not otherwise currently affiliated with the Investment Manager or any of its
affiliates. The Investment Manager will reduce its management fee payable by
the Fund up to the amount of any expenses (excluding permissible items, such
as brokerage commissions, Rule 12b-1 payments, interest, taxes and litigation
expenses) paid or incurred in any year in excess of the most restrictive
expense limitation imposed by any state in which the Fund sells shares, if
any. The Investment Manager compensates Trustees of the Trust if such persons
are employees or affiliates of the Investment Manager or its affiliates.
The Fund is managed by John H. Kallis. Mr. Kallis has managed the Fund since
its inception in May 1994. Mr. Kallis's principal occupation currently is
Senior Vice President of State Street Research & Management Company. During
the past five years he has also served as a portfolio manager for State
Street Research & Management Company.
Subject to the policy of seeking best overall price and execution, sales of
shares of the Fund may be considered by the Investment Manager in the
selection of broker or dealer firms for the Fund's portfolio transactions.
The Investment Manager has a Code of Ethics governing personal securities
transactions of certain of its employees; see the Statement of Additional
Information.
Dividends and Distributions; Taxes
The Fund qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code for its most recent
fiscal year end and it intends to qualify as such in future fiscal years
although it cannot give complete assurance that it will do so. As long as it
so qualifies and satisfies certain distribution requirements, it will not be
subject to federal income tax on its taxable income (including capital gains,
if any) distributed to its shareholders. Consequently, the Fund intends to
distribute annually to its shareholders substantially all of its net
investment income and any capital gain net income (capital gains net of
capital losses).
Dividends from net investment income of the 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 addi
24
<PAGE>
tional shares of the Fund at net asset value (except in the case of
shareholders who elect a different available distribution method).
The Fund will provide its shareholders with annual information on a timely
basis concerning the federal tax status of dividends and distributions during
the preceding calendar year.
Dividends paid by the Fund from taxable net investment income and
distributions of net short-term capital gains, whether paid in cash or
reinvested in additional shares, will be taxable for federal income tax
purposes to shareholders as ordinary income. Distributions of net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) which are designated as capital gains distributions, whether paid in
cash or reinvested in additional shares, will be taxable for federal income
tax purposes to shareholders as long-term capital gains, regardless of how
long shareholders have held their shares. If shares of the Fund which are
sold at a loss have been held six months or less, the loss will be considered
as a long-term capital loss to the extent of any capital gains distributions
received.
Dividends and other distributions and proceeds of redemption of Fund shares
paid to individuals and other nonexempt payees will be subject to a 31%
federal backup withholding tax if the Transfer Agent is not provided with the
shareholder's correct taxpayer identification number or certification that
the shareholder is not subject to such backup withholding.
The foregoing discussion relates only to generally applicable federal income
tax provisions in effect as of the date of this Prospectus. Therefore,
prospective shareholders are urged to consult their own tax advisers
regarding tax matters, including state and local tax consequences.
Calculation of Performance Data
From time to time, in advertisements or in communications to shareholders or
prospective investors, the Fund may compare the performance of its Class A,
Class B, Class C or Class D shares to that of other mutual funds with similar
investment objectives, to certificates of deposit and/or to other financial
alternatives. The Fund may also compare its performance to appropriate
indices such as the Lehman Intermediate Government/Corporate Bond Index
and/or to appropriate rankings or averages such as the Intermediate
Investment Grade Debt Funds category compiled by Lipper Analytical Services,
Inc. or to those compiled by Morningstar, Inc., Money Magazine, Business
Week, Forbes Magazine, The Wall Street Journal and Investor's Daily.
Total return is computed separately for each class of shares of the Fund. The
average annual total return ("standard total return") for shares of the Fund
is computed by determining the average annual compounded rate of return for a
designated period that, if applied to a hypothetical $1,000 initial
investment (less the maximum initial or contingent deferred sales charge, if
applicable), would produce the redeemable value of that investment at the end
of the period, assuming reinvestment of all dividends and distributions and
with recognition of all recurring charges. Standard total return may be
accompanied with nonstandard total return information computed in the same
manner, but for differing periods and with or without annualizing the total
return or taking sales charges into account.
The Fund's yield is computed separately for each class of shares by dividing
the net investment income, after recognition of all recurring charges, per
share earned during the most recent month or other specified thirty-day
period by the applicable maximum offering price per share on the last day of
such period and annualizing the result.
The standard total return and yield results take sales charges into account,
if applicable, but do not take into account recurring and nonrecurring
charges for optional services which only certain shareholders elect and which
involve nominal fees, such as the $7.50 fee for remittance of redemption
proceeds by wire. Where sales charges are not applicable and therefore not
taken into account in the calculation of standard total return and yield, the
results will be increased. Any voluntary waiver of fees or assumption of
expenses by the Fund's affiliates will also increase performance results.
25
<PAGE>
The Fund's distribution rate is calculated separately for each class of
shares by annualizing the latest distribution and dividing the result by the
maximum offering price per share as of the end of the period to which the
distribution relates. The distribution rate is not computed in the same
manner as the above described yield, and, therefore, can be significantly
different from it. In its supplemental sales literature, the Fund may quote
its distribution rate together with the above described standard total return
and yield information. The use of such distribution rates would be subject to
an appropriate explanation of how the components of the distribution rate
differ from the above described yield.
Performance information may be useful in evaluating the Fund and for
providing a basis for comparison with other financial alternatives. Since the
performance of the Fund varies in response to fluctuations in economic and
market conditions, interest rates and Fund expenses, among other things, no
performance quotation should be considered a representation as to the Fund's
performance for any future period. In addition, the net asset value of shares
of the Fund will fluctuate, with the result that shares of the Fund, when
redeemed, may be worth more or less than their original cost. Neither an
investment in the Fund nor its performance is insured or guaranteed; such
lack of insurance or guarantees should accordingly be given appropriate
consideration when comparing the Fund to financial alternatives which have
such features.
26
<PAGE>
APPENDIX
Description of Debt/Bond Ratings
Standard & Poor's Corporation
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated categories.
Plus (+) or Minus (-): The ratings may be modified by the addition of a plus
or minus sign to show relative standing within the major rating categories.
S&P may attach the "r" symbol to derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high
variability in expected returns due to noncredit risks created by the terms
of the obligation, such as securities whose principal or interest return is
indexed to equities, commodities, or currencies; certain swaps and options;
and interest only (IO) and principal only (PO) mortgage securities.
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
1, 2 or 3: The ratings may be modified by the addition of a numeral
indicating a bond's rank within its rating category.
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[back cover}
STATE STREET RESEARCH
INTERMEDIATE BOND FUND
One Financial Center
Boston, MA 02111
INVESTMENT ADVISER
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
DISTRIBUTOR
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
SHAREHOLDER SERVICES
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
800-562-0032
CUSTODIAN
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02110
IB-008E-995IBS CONTROL NUMBER 2545-950828(0996)SSR-LD
[state street logo] State Street Research
State Street Research
Intermediate Bond Fund
September 1, 1995
P R O S P E C T U S
<PAGE>
STATE STREET RESEARCH INTERMEDIATE BOND FUND
a series of
STATE STREET RESEARCH SECURITIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
September 1, 1995
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS ............................ 2
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT TECHNIQUES ............ 5
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS ............................ 12
TRUSTEES AND OFFICERS ...................................................... 15
INVESTMENT ADVISORY SERVICES ............................................... 18
PURCHASE AND REDEMPTION OF SHARES .......................................... 19
NET ASSET VALUE ............................................................ 20
PORTFOLIO TRANSACTIONS ..................................................... 21
CERTAIN TAX MATTERS ........................................................ 23
DISTRIBUTION OF SHARES OF THE FUND ......................................... 25
CALCULATION OF PERFORMANCE DATA ............................................ 27
CUSTODIAN .................................................................. 31
INDEPENDENT ACCOUNTANTS .................................................... 31
FINANCIAL STATEMENTS ....................................................... 31
The following Statement of Additional Information is not a Prospectus. It
should be read in conjunction with the Prospectus of State Street Research
Intermediate Bond Fund dated September 1, 1995, which may be obtained without
charge from the offices of State Street Research Securities Trust (the "Trust")
or State Street Research Investment Services, Inc. (the "Distributor"), One
Financial Center, Boston, Massachusetts 02111-2690.
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth in part under "The Fund's Investments" and "Limiting
Investment Risk" in the Fund's Prospectus, the Fund has adopted certain
investment restrictions.
The fundamental and nonfundamental policies of the Fund do not apply to
any matters involving the issuance of multiple classes of shares of the Fund or
the creation of a structure allowing the Fund to invest substantially all its
assets in a related collective investment vehicle for similar funds or allowing
the Fund to serve as such a collective investment vehicle for other similar
funds, to the extent permitted by law and regulatory authorities.
All of the Fund's 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 Fund's outstanding voting securities as
defined in the Investment Company Act of 1940, as amended (the "1940 Act").
(Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at a meeting of security holders duly called, (i) of
67% or more of the voting securities present at a meeting if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy or (ii) of more than 50% of the outstanding voting securities, whichever
is less.) Under these restrictions, it is the Fund's policy:
(1) not to purchase a security of any one issuer (other than
securities issued or guaranteed as to principal or interest by the
U.S. Government or its agencies or instrumentalities or
mixed-ownership Government corporations) if such purchase would,
with respect to 75% of the Fund's total assets, cause more than 5%
of the Fund's total assets to be invested in the securities of such
issuer or cause more than 10% of the voting securities of such
issuer to be held by the Fund;
(2) not to issue senior securities as defined in the 1940 Act,
except as permitted by 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;
(4) not to purchase fee simple interests in real estate unless
acquired as a result of ownership of securities or other
instruments, 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
essentially financial items such as swap arrangements, hybrids,
currencies, futures contracts and options on futures contracts on
securities, securities indices and currencies shall not be deemed
investments in commodities or commodities contracts;*
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<PAGE>
(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, including reverse repurchase agreements in
so far as such agreements may be regarded as borrowings, except for
borrowings not in an amount in excess of 33 1/3% of the value of its
total assets.
* In connection with clause (5), the Fund has undertaken with a
state securities authority that, for so long as the Fund's shares
are required to be registered for sale in that state, the Fund will
restrict its investment in those commodities which are subject to
the 10% limit of the Fund's total assets, to precious metals.
The following nonfundamental investment restrictions may be changed
without shareholder approval. Under these restrictions, it is the Fund's
policy:
(1) not to purchase any security or enter into a repurchase agreement if
as a result more than 15% of its net assets would be invested in
securities that are illiquid (including repurchase agreements not
entitling the holder to payment of principal and interest within
seven days);
(2) not to invest more than 15% of its net assets in restricted
securities of all types (including not more than 5% of its net
assets in restricted securities which are not eligible for resale
pursuant to Rule 144A, Regulation S or other exemptive provisions
under the Securities Act of 1933);
(3) not to invest more than 5% of its total assets in securities of
private issuers including predecessors with less than three years'
continuous operations (except (a) securities guaranteed or backed by
an affiliate of the issuer with three years of continuous
operations, (b) securities issued or guaranteed as to principal or
interest by the U.S. Government, or its agencies or
instrumentalities, or a mixed-ownership Government corporation, (c)
securities of issuers with debt securities rated at least "BBB" by
Standard & Poor's Corporation or "Baa" by Moody's Investor's
Service, Inc., or their equivalent by any other nationally
recognized statistical rating organization, or securities of issuers
considered by the Investment Manager to be equivalent, (d)
securities issued by a holding company with at least 50% of its
assets invested in companies with three years of continuous
operations including predecessors, and (e) securities which generate
income which is exempt from local, state or federal taxes); provided
that the Fund may invest up to 15% in such issuers
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<PAGE>
so long as such investments plus investments in restricted
securities (other than those which are eligible for resale under
Rule 144A, Regulations S or other exemptive provisions) do not
exceed 15% of the Fund's total assets;
(4) not to engage in transactions in options except in connection with
options on securities, securities indices and currencies, and
options on futures on securities, securities indices and currencies;
(5) not to purchase securities on margin or make short sales of
securities or maintain a short position except for short sales
"against the box" (as a matter of current operating policy, the Fund
will not make short sales or maintain a short position unless not
more than 5% of the Fund's net assets (taken at current value) are
held as collateral for such sales at any time; and for the purpose
of this restriction, escrow or custodian receipts or letters, margin
or safekeeping accounts, or similar arrangements used in the
industry in connection with the trading of futures, options and
forward commitments are not deemed to involve the use of margin);
(6) 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;
(7) not to purchase or retain any security of an issuer if, to the
knowledge of the Fund, those of its officers and Trustees and
officers and directors of its investment adviser who individually
own more than 1/2 of 1% of the securities of such issuer, when
combined, own more than 5% of the securities of such issuer taken at
market;
(8) not to invest directly as a joint venturer or general partner in
oil, gas or other mineral exploration or development joint ventures
or general partnerships (provided that the Fund may invest in
securities issued by companies which invest in or sponsor such
programs and in securities indexed to the price of oil, gas or other
minerals);
(9) not to invest in warrants in excess of 5% of the value, at the lower
of cost or market, of its net assets, provided that warrants not
listed on the New York or American Stock Exchange shall be further
limited to 2% of the Fund's net assets (warrants initially attached
to securities and acquired by the Fund upon original issuance
thereof shall be deemed to be without value); and
(10) not to purchase any security while borrowings, including reverse
repurchase agreements, representing more than 5% of the Fund's total
assets are outstanding.
Compliance with the above nonfundamental investment restrictions (1) and
(2) will be determined independently.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Among other investments described below, the Fund may buy and sell
domestic and foreign options, futures contracts, and options on futures
contracts, with respect to securities, securities indices, and
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currencies, and may enter into closing transactions with respect to each of the
foregoing under circumstances in which the use of such techniques is expected
by State Street Research & Management Company (the "Investment Manager") to aid
in achieving the investment objective of the Fund. In most cases, only futures
and options listed and traded on national securities exchanges or registered
commodities exchanges or which are readily marketable will be used. The Fund on
occasion may also purchase instruments with characteristics of both futures and
securities (e.g., debt instruments with interest and principal payments
determined by reference to the value of a commodity or a currency at a future
time) and which, therefore, possess the risks of both futures and securities
investments.
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell underlying
assets, such as certain securities, currencies, or an index of securities, at a
future time at a specified price. A contract to buy establishes a "long"
position while a contract to sell establishes a "short" position.
The purchase of a futures contract on securities or an index of securities
normally enables a buyer to participate in the market movement of the underlying
asset or index after paying a transaction charge and posting margin in an amount
equal to a small percentage of the value of the underlying asset or index. The
Fund will initially be required to deposit with the Trust's custodian or the
broker effecting the futures transaction an amount of "initial margin" in cash
or U.S. Treasury obligations.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will terminate
the Fund's position in the futures contract. A final determination of
maintenance margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. While futures
contracts with respect to securities do provide for the delivery and acceptance
of such securities, such delivery and acceptance are seldom made.
Futures contracts will be executed primarily (a) to establish a short
position, and thus protect the Fund from experiencing the full impact of an
expected decline in market value of portfolio holdings without requiring the
sale of holdings, or (b) to establish a long position, and thus to participate
in an expected rise in market value of securities or currencies which the Fund
intends to purchase. Subject to the limitations described below, the Fund may
also enter into futures contracts for purposes of enhancing return. In
transactions establishing a long position in a futures contract, money market
instruments equal to the face value of the futures contract will be identified
by the Fund to the Trust's custodian for maintenance in a separate account to
insure that the use of such futures contracts is unleveraged. Similarly, a
representative portfolio of securities having a value equal to the aggregate
face value of the futures contract will be identified with respect to each short
position. The Fund will employ any other appropriate method of cover which is
consistent with applicable regulatory and exchange requirements.
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<PAGE>
Options on Securities
The Fund may use options on securities to implement its investment
strategy. A call option on a security, for example, gives the purchaser of the
option the right to buy, and the writer the obligation to sell, the underlying
asset at the exercise price during the option period. Conversely, a put option
on a security gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying asset at the exercise price during the option
period.
Purchased options have defined risk, i.e., the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset.
Written options have varying degrees of risk. An uncovered written call
option theoretically carries unlimited risk, as the market price of the
underlying asset could rise far above the exercise price before its expiration.
This risk is tempered when the call option is covered, i.e., when the option
writer owns the underlying asset. In this case, the writer runs the risk of the
lost opportunity to participate in the appreciation in value of the asset rather
than the risk of an out-of-pocket loss. A written put option has defined risk,
i.e., the difference between the agreed-upon price that the Fund must pay to the
buyer upon exercise of the put and the value, which could be zero, of the asset
at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
his obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Options on Securities Indices
The Fund may engage in transactions in call and put options on securities
indices. For example, the Fund may purchase put options on indices of securities
in anticipation of or during a market decline to attempt to offset the decrease
in market value of its securities that might otherwise result.
Put options on indices of securities are similar to put options on the
securities themselves except that the delivery requirements are different.
Instead of giving the right to make delivery of a security at a specified price,
a put option on an index of securities gives the holder the right to receive an
amount of cash upon exercise of the option if the value of the underlying index
has fallen below the exercise price. The amount of cash received will be equal
to the difference between the closing price of the index and the exercise price
of the option expressed in dollars times a specified multiple. As with options
on securities or 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. Although
there are at present few available options on indices of fixed income
securities, other than tax-exempt securities, or futures and related options
based on such indices, such instruments may become available in the future. In
connection with the use of such options, the Fund may cover its position by
identifying a representative portfolio of securities having a value equal to the
aggregate face value of the option position taken. However, the Fund may employ
any appropriate method to cover its positions that is consistent with applicable
regulatory and exchange requirements.
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Options on Futures Contracts
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
Options Strategy
A basic option strategy for protecting the Fund against a decline in
securities prices could involve (a) the purchase of a put -- thus "locking in"
the selling price of the underlying securities or securities indices -- or (b)
the writing of a call on securities or securities indices held by the Fund --
thereby generating income (the premium paid by the buyer) by giving the holder
of such call the option to buy the underlying asset at a fixed price. The
premium will offset, in whole or in part, a decline in portfolio value; however,
if prices of the relevant securities or securities indices rose instead of
falling, the call might be exercised, thereby resulting in a potential loss of
appreciation in the underlying securities or securities indices.
A basic option strategy when a rise in securities prices is anticipated is
the purchase of a call -- thus "locking in" the purchase price of the underlying
security or other asset. In transactions involving the purchase of call options
by the Fund, money market instruments equal to the aggregate exercise price of
the options will be identified by the Fund to the Trust's custodian to insure
that the use of such investments is unleveraged.
The Fund may write options in connection with buy-and-write transactions;
that is, the Fund may purchase a security and concurrently write a call option
against that security. If the call option is exercised in such a transaction,
the Fund's maximum gain will be the premium received by it for writing the
option, adjusted upward or downward by the difference between the Fund's
purchase price of the security and the exercise price of the option. If the
option is not exercised and the price of the underlying security declines, the
amount of such decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund's return will be the premium received from
writing the put option minus the amount by which the market price of the
security is below the exercise price.
Limitations and Risks of Options and Futures Activity
The Fund will engage in transactions in futures contracts or options as a
hedge against changes resulting from market conditions which produce changes in
the values of their securities or the securities which it intends to purchase
(e.g., to replace portfolio securities which will mature in the near future)
and, subject to the limitations described below, to enhance return. The Fund
will not purchase any futures contract or purchase any call option if,
immediately thereafter, more than one third of the Fund's net assets would be
represented by long futures contracts or call options. The Fund will not write a
covered call or put option if, immediately thereafter, the aggregate value of
the assets (securities in the case of written calls and cash or cash equivalents
in the case of written puts) underlying all such options, determined as of the
dates such options were written, would exceed 25% of that Fund's net assets. 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
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<PAGE>
premiums required to establish such positions for such nonhedging purposes would
exceed 5% of the market value of the Fund's net assets.
Although effective hedging can generally capture the bulk of a desired
risk adjustment, no hedge is completely effective. The Fund's ability to hedge
effectively through transactions in futures and options depends on the degree to
which price movements in its holdings correlate with price movements of the
futures and options.
Some positions in futures and options may be closed out only on an
exchange which provides a secondary market therefor. There can be no assurance
that a liquid secondary market will exist for any particular futures contract or
option at any specific time. Thus, it may not be possible to close such an
option or futures position prior to maturity. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
effectively hedge its securities and might in some cases require the Fund to
deposit cash to meet applicable margin requirements. The Fund will enter into an
option or futures position only if it appears to be a liquid investment.
Foreign Investments
The Fund reserves the right to invest without limitation in debt
securities of non-U.S. issuers. 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, the
possible imposition of currency exchange blockages, higher operating expenses,
expropriation of the Fund's assets by a foreign government, foreign withholding
and other taxes which may reduce investment return, reduced availability of
public information concerning issuers and the fact that foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to those
applicable to domestic issuers. Moreover, securities of many foreign issuers may
be less liquid and their prices more volatile than those of securities of
comparable domestic issuers. Finally, to the extent the Fund invests in
securities of issuers in less developed countries or emerging foreign markets,
it will be subject to a variety of additional risks, including risks associated
with political instability, economies based on relatively few industries, lesser
market liquidity, high rates of inflation, significant price volatility of
portfolio holdings and high levels of external debt in the relevant country.
Although the Fund may invest in securities denominated in foreign
currencies, the Fund values its securities and other assets in U.S. dollars. As
a result, the net asset value of the Fund's shares may fluctuate with U.S.
dollar exchange rates as well as with price changes of the Fund's securities in
the various local markets and currencies. Thus, an increase in the value of the
U.S. dollar compared to the currencies in which the Fund makes its investments
could reduce the effect of increases and magnify the effect of decreases in the
prices of the Fund's securities in their local markets. Conversely, a decrease
in the value of the U.S. dollar will have the opposite effect of magnifying the
effect of increases and reducing the effect of decreases in the prices of the
Fund's securities in the local markets.
Currency Transactions
The Fund may engage in currency exchange transactions. The Fund will
conduct its currency exchange transactions either on a spot (i.e., cash) basis
at the rate prevailing in the currency exchange market, or by entering into
forward contracts to purchase or sell currencies. The Fund's dealings in forward
currency exchange contracts will be limited to hedging involving either specific
transactions or aggregate portfolio positions. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract
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<PAGE>
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 transactions involving forward currency exchange
contracts, cash or marketable securities equal to the price of the contract
will be identified for segregation by the Fund to the Trust's custodian to
ensure that the use of such instruments is unleveraged. 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
other illiquid securities will be limited to 15% of the Fund's net assets.
Currently, the Fund does not expect to invest more than 5% of its net assets in
repurchase agreements.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. However, the Fund
has no present intention of engaging in reverse repurchase agreements in excess
of 5% of the Fund's total assets. In a reverse repurchase agreement the Fund
transfers a portfolio instrument to another person, such as a financial
institution, broker or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed-upon rate. The ability to use reverse
repurchase agreements may enable, but does not ensure the ability of, the Fund
to avoid selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
When-Issued Securities
The Fund may purchase "when-issued" equity securities, which are traded on
a price basis prior to actual issuance. Currently, the Fund does not expect to
invest more than 5% of its net assets in when-issued securities. Such purchases
will be made only to achieve the Fund's investment objective and not for
leverage. The when-issued trading period generally lasts from a few days to up
to a month or more; during
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this period dividends on equity securities are not payable. No income accrues
to the Fund prior to the time it takes delivery. A frequent form of when-issued
trading occurs when corporate securities to be created by a merger of companies
are traded prior to the actual consummation of the merger. Such transactions
may involve a risk of loss if the value of the securities fall below the price
committed to prior to the actual issuance. The Trust's custodian will establish
a segregated account for the Fund when it purchases securities on a when-issued
basis consisting of cash or liquid securities equal to the amount of the
when-issued commitments.
Rule 144A Securities
The Fund may buy or sell restricted securities in accordance with Rule
144A under the Securities Act of 1933 ("Rule 144A Securities"). Securities may
be resold pursuant to Rule 144A under certain circumstances only to qualified
institutional buyers as defined in the rule, and the markets and trading
practices for such securities are relatively new and still developing; depending
on the development of such markets, Rule 144A Securities may be deemed to be
liquid as determined by or in accordance with methods adopted by the Trustees.
Under such methods the following factors are considered, among others: the
frequency of trades and quotes for the security, the number of dealers and
potential purchasers in the market, market making activity, and the nature of
the security and marketplace trades. Investments in Rule 144A Securities could
have the effect of increasing the level of the Fund's illiquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing such securities. Also, the Fund may be adversely impacted by the
possible illiquidity and subjective valuation of such securities in the absence
of a market for them.
Indexed Securities
The Fund may purchase securities the value of which is indexed to interest
rates, foreign currencies and various indices and financial indicators. These
securities are generally short- to intermediate-term debt securities. The
interest rates or values at maturity fluctuate with the index to which they are
connected and may be more volatile than such index.
Swap Arrangements
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below. In an
interest rate swap the Fund could agree for a specified period to pay a bank or
investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an assumed figure selected by the parties for this
purpose) in exchange for agreement by the bank or investment banker to pay the
Fund a fixed rate of interest on the notional principal amount. In a currency
swap, the Fund would agree with the other party to exchange cash flows based on
the relative differences in values of a notional amount of two (or more)
currencies; in an index swap, the Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices. Purchase
of a cap entitles the purchaser to receive payments from the seller on a
notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an
agreed-upon interest rate or amount. A collar combines a cap and a floor.
Most swaps entered into by the Fund will be on a net basis; for example,
in an interest rate swap, amounts generated by application of the fixed rate and
the floating rate to the notional principal amount would first offset one
another, with the Fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, the Fund will set up a
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segregated custodial account to hold appropriate liquid assets, including cash;
for swaps entered into on a net basis, assets will be segregated having a daily
net asset value equal to any excess of the Fund's accrued obligations over the
accrued obligations of the other party, while for swaps on other than a net
basis assets will be segregated having a value equal to the total amount of
the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a part of the Fund's portfolio.
However, the Fund may enter into such arrangements for income purposes to the
extent permitted by the 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.
Industry Classifications
In determining how much of the portfolio is invested in a given industry,
the following industry classifications, grouped by sectors, are currently used:
BASIC INDUSTRIES CONSUMER STAPLE SCIENCE & TECHNOLOGY
---------------- --------------- --------------------
Chemical Business Service Aerospace
Diversified Container Computer Software & Service
Electrical Equipment Drug Electronic Components
Forest Products Food & Beverage Electronic Equipment
Machinery Hospital Supply Office Equipment
Metal & Mining Personal Care
Railroad Printing & Publishing
Truckers Tobacco
CONSUMER CYCLICAL ENERGY UTILITY
----------------- ------ -------
Airline Oil Electric
Automotive Oil Service Natural Gas
Building Telephone
Hotel & Restaurant FINANCE Miscellaneous
Photography -------
Recreation Bank
Retail Trade Financial Service
Textile & Apparel Insurance
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Other Investment Limitations
Pursuant to the policies of certain state securities authorities, the Fund
will not invest in real estate limited partnerships, oil, gas or mineral
development limited partnerships, or in oil, gas or mineral leases for so long
as Fund shares are required to be registered for sale in the relevant state.
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
As indicated in the Fund's Prospectus, the Fund may invest in long-term
and short-term debt securities. The Fund may invest in cash and short-term
securities for temporary defensive purposes when, in the opinion of the
Investment Manager, such a position is more likely to provide protection against
unfavorable market conditions than adherence to other investment policies.
Certain debt securities and money market instruments in which the Fund may
invest are described below.
U.S. Government and Related Securities
U.S. Government securities are securities which are issued or guaranteed
as to principal or interest by the U.S. Government, a U.S. Government agency or
instrumentality, or certain mixed-ownership Government corporations as described
herein. The U.S. Government securities in which the Fund invests include, among
others:
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 Farmers Home
Administration, the Federal Farm Credit Banks, the Federal National
Mortgage Association, the Government National Mortgage Association
and the Federal Home Loan Mortgage Corporation; and
obligations of mixed-ownership Government corporations such
as Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a variety
of ways by the U.S. Government, its agencies or instrumentalities. Some of these
obligations, such as Government National Mortgage Association mortgage-backed
securities, are backed by the full faith and credit of the U.S. Treasury. Other
obligations, such as those of the Federal National Mortgage Association, are
backed by the discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities, although the U.S. Government has
no legal obligation to do so. Obligations such as those of the Federal Home Loan
Banks, the Federal Farm Credit Banks, the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation are backed by the credit of the
agency or instrumentality issuing the obligations. Certain obligations of
Resolution Funding Corporation, a mixed-ownership Government corporation, are
backed with respect to interest payments by the U.S. Treasury, and with respect
to principal payments by U.S. Treasury obligations held in a segregated account
with a Federal Reserve Bank. Except for certain mortgage-related securities, the
Fund will only invest in obligations issued by mixed-ownership Government
corporations where such securities are guaranteed as to payment of principal or
interest by the U.S. Government or a U.S. Government agency or instrumentality,
and any unguaranteed principal or interest is otherwise supported by U.S.
Government obligations held in a segregated account.
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<PAGE>
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Bank Money Investments
Bank money investments include but are not limited to certificates of
deposit, bankers' acceptances and time deposits. Certificates of deposit are
generally short-term (i.e., less than one year), interest-bearing negotiable
certificates issued by commercial banks or savings and loan associations against
funds deposited in the issuing institution. A banker's acceptance is a time
draft drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction (to finance the import, export, transfer or
storage of goods). A banker's acceptance may be obtained from a domestic or
foreign bank, including a U.S. branch or agency of a foreign bank. The borrower
is liable for payment as well as the bank, which unconditionally guarantees to
pay the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity. Time deposits are nonnegotiable deposits for a fixed period of time at
a stated interest rate. The Fund will not invest in any such bank money
investment unless the investment is issued by a U.S. bank that is a member of
the Federal Deposit Insurance Corporation ("FDIC"), including any foreign branch
thereof, a U.S. branch or agency of a foreign bank, a foreign branch of a
foreign bank, or a savings bank or savings and loan association that is a member
of the FDIC and which at the date of investment has capital, surplus and
undivided profits (as of the date of its most recently published financial
statements) in excess of $50 million. The Fund will not invest in time deposits
maturing in 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.
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<PAGE>
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 A by S&P or by Moody's. The money
market investments in corporate bonds and debentures (which must have maturities
at the date of settlement of one year or less) must be rated at the time of
purchase at least A by S&P or by Moody's.
Commercial paper rated A (highest quality) by S&P is issued by entities
which have liquidity ratios which are adequate to meet cash requirements.
Long-term senior debt is rated A or better, although in some cases BBB credits
may be allowed. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. The relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1, A-2
or A-3. (Those A-1 issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.
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<PAGE>
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust, their addresses, and their
principal occupations and positions with certain affiliates of the Investment
Manager are set forth below.
*+John H. Kallis, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. His principal occupation is Senior Vice President of
State Street Research & Management Company. He is 54. 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 engaged principally in private investments and
civic affairs, and is an author of business history. He is 68. Previously, he
was with Morgan Guaranty Trust Company of New York.
+Robert A. Lawrence, Saltonstall & Co., 50 Congress Street, Boston, MA
02109, serves as Trustee of the Trust. He is 69. His principal occupation during
the past five years has been Partner, Saltonstall & Co., a private investment
firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. His principal occupation is Executive Vice President,
Treasurer and Director of State Street Research & Management Company. He is 44.
During the past five years he has also served as Executive Vice President and
Chief Financial Officer of New England Investment Companies and as Senior Vice
President and Vice President of New England Mutual Life Insurance Company. Mr.
Maus's other principal business affiliations include Executive Vice President,
Treasurer, Chief Financial Officer and Director of State Street Research
Investment Services, Inc.
*+Francis J. McNamara, III, has served as Secretary and General Counsel of
the Trust since May 1995. He is 40. His principal occupation is Senior Vice
President, Secretary and General Counsel of the Investment Manager. During the
past five years he has also served as Senior Vice President, General Counsel and
Assistant Secretary of The Boston Company, Inc., Boston Safe Deposit and Trust
Company and The Boston Company Advisors, Inc. Mr. McNamara's other principal
business affiliations include Senior Vice President, Clerk and General Counsel
of State Street Research Investment Services, Inc.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 63. He is retired, having served during the past
five years, until October 1992, as Executive Vice President, Chief Operating
Officer and Director of Hewlett-Packard Company.
*Kim M. Peters, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. His principal occupation is Vice President of State
Street Research & Management Company. He is 42. During the past five years he
has also served as Vice President of State Street Research Investment Services,
Inc.
+Thomas L. Phillips, 141 Spring Street, Lexington, MA 02173, serves as
Trustee of the Trust. He is 71. 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 57. His principal occupations during the past five
years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
- -------------------
* or + See footnotes on page 16.
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<PAGE>
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust.
He is 58. 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. His principal occupation is Executive Vice
President and Director of State Street Research & Management Company. He is 41.
During the past five years he has also served as Senior Vice President of State
Street Research & Management Company. Mr. Shively's other 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 52. His principal occupation is Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research & Management
Company. During the past five years he has also served as President and Chief
Executive Officer of New England Investment Companies and as Chief Investment
Officer and Director of New England Mutual Life Insurance Company. Mr. Verni's
other principal business affiliations include Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research Investment
Services, Inc.
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 70. He is retired and was formerly Of Counsel for
the law firm Choate, Hall & Stewart. He was a partner of that firm from 1960
to 1987.
As of July 31, 1995, the Trustees and officers of the Trust as a group
owned none of the Fund's outstanding shares.
As of July 31, 1995, Metropolitan Life Insurance Company ("Metropolitan"),
a New York corporation having its principal offices at One Madison Avenue, New
York, NY 10010, was the record and/or beneficial owner, directly or indirectly
through its subsidiaries or affiliates, of approximately 99.0% and 70.1% of the
outstanding Class A and Class C shares of the Fund, respectively. As of the same
date, United States Trust Company, 770 Broadway, New York, NY 10003, was the
record owner of approximately 29.9% of the Fund's outstanding Class C shares.
United States Trust Company holds such shares as a 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 are so owned, such
owner 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.
- --------------------
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the 1940 Act because of their affiliations with
the Fund's investment adviser.
+ Serves as a Trustee and/or officer of one or more of the following investment
companies, each of which has an advisory relationship with the Investment
Manager or its affiliates: MetLife - State Street Equity Trust, MetLife -
State Street 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>
During the last fiscal year of the Fund, the Trustees were compensated as
follows:
- -------------------------------------------------------------------------------
Aggregate Total Compensation
Name of Compensation From Trust and Complex
Trustee From Trust Paid to Trustees (a)
- -------------------------------------------------------------------------------
Edward M. Lamont $ 1,900 $ 58,011
Robert A. Lawrence $ 1,900 $ 82,525
Dean. O. Morton $ 2,200 $ 93,275
Thomas L. Phillips $ 2,100 $ 65,425
Toby Rosenblatt $ 1,900 $ 58,011
Michael S. Scott Morton $ 2,400 $ 90,025
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $ 1,800 $ 67,025
- ---------------------
(a) Includes compensation from Metropolitan Series Fund, Inc., for which the
Investment Manager serves as sub-investment adviser, State Street Research
Portfolios, Inc., for which State Street Research Investment Services,
Inc. serves as distributor, and all investment companies for which the
Investment Manager serves as primary investment adviser, comprising a
total of 30 series. 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 Advisory
Agreement provides that the Investment Manager shall furnish the Fund 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 of the Investment
Manager or its affiliates. The Investment Manager is an indirect wholly-owned
subsidiary of Metropolitan.
The advisory fee payable monthly by the Fund to the Investment Manager is
computed as a percentage of the average of the value of the net assets of the
Fund, as determined at the close of the New York Stock Exchange (the "NYSE") on
each day the NYSE is open for trading, at the annual rate of 0.55% of the net
assets of the Fund. The Fund has 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 the Fund. For the period May 16, 1994
(commencement of operations) through April 30, 1995 the Fund's investment
advisory fee prior to the assumption of fees or expenses was $72,084. For the
same period, the voluntary reduction of fees or assumption of expenses amounted
to $151,957.
Further, to the extent required under applicable state regulatory
requirements, the Investment Manager will reduce its management fee up to the
amount of any expenses (excluding permissible items, such as brokerage
commissions, Rule 12b-1 payments, interest, taxes and litigation expenses) paid
or incurred by the Fund in any fiscal year which exceed specified percentages
of the average daily net assets of the Fund for such fiscal year. The most
restrictive of such percentage limitations is currently 2.5% of the first $30
million of average net assets, 2.0% of the next $70 million of average net
assets and 1.5% of the remaining average net assets. These commitments may be
amended or rescinded in response to changes in the requirements of the various
states by the Trustees without shareholder approval.
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund for a period of two years after its initial effectiveness
and will continue from year to year thereafter as long as it is approved at
least annually both (i) by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act) or by the Trustees of the
Trust, and (ii) in either event by a vote of a majority of the Trustees who are
not parties to the Advisory Agreement or "interested persons" of any party
thereto, cast in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement may be terminated on 60 days written notice by
either party and will terminate automatically in the event of its assignment, as
defined under the 1940 Act and regulations thereunder. Such regulations provide
that a transaction which does not result in a change of actual control or
management of an adviser is not deemed an assignment.
Under 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 Fund 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, employee benefit plans, and
similar programs or plans, through or under which the Fund's shares may be
purchased.
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<PAGE>
Under the Code of Ethics of the Investment Manager, its employees in Boston
where investment management operations are conducted, are only permitted to
engage in personal securities transactions in accordance with certain conditions
relating to an employee's position, the identity of the security, the timing of
the transaction, and similar factors. Such employees must report their personal
securities transactions quarterly and supply broker confirmations to the
Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by the Distributor. The Fund offers
four classes of shares which may be purchased at the next determined net asset
value per share plus, in the case of all classes except Class C shares, a sales
charge which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B and Class
D shares). General information on how to buy shares of the Fund, as well as
sales charges involved, are set forth under "Purchase of Shares" in the
Prospectus. The following supplements that information.
Public Offering Price
The public offering price for each class of shares of the Fund is based on
their net asset value determined as of the close of the NYSE on the day the
purchase order is received by State Street Research Shareholder Services
provided that the order is received prior to the close of the NYSE on that day;
otherwise the net asset value used is that determined as of the close of the
NYSE on the next day it is open for unrestricted trading. When a purchase order
is placed through a dealer, that dealer is responsible for transmitting the
order promptly to State Street Research Shareholder Services in order to permit
the investor to obtain the current price. Any loss suffered by an investor which
results from a dealer's failure to transmit an order promptly is a matter for
settlement between the investor and the dealer.
Reduced Sales Charges
For purposes of determining whether a purchase of Class A shares qualifies
for reduced sales charges, the term "person" includes: (i) an individual, or an
individual combining with his or her spouse and their children and purchasing
for his, her or their own account; (ii) a "company" as defined in Section
2(a)(8) of the 1940 Act; (iii) a trustee or other fiduciary purchasing for a
single trust estate or single fiduciary account (including a pension, profit
sharing or other employee benefit trust created pursuant to a plan qualified
under Section 401 of the Internal Revenue Code); (iv) a tax-exempt organization
under Section 501(c)(3) or (13) of the Internal Revenue Code; and (v) an
employee benefit plan of a single employer or of affiliated employers.
Investors may purchase Class A shares of the Fund at reduced sales charges
by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or 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
19
<PAGE>
with the investor in a single purchase. Class B, Class C and Class D shares
may also be included in the combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Class C Shares - Class C shares are currently available to certain benefit
plans such as qualified retirement plans, other than individual retirement
accounts and self-employed retirement plans, which meet criteria relating to
level of assets, number of participants, service agreements, or similar factors;
banks and insurance companies; endowment funds of nonprofit organizations with
substantial minimum assets; 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, the Fund may issue its shares at net asset value (or more)
to such entities or to their security holders.
Redemptions
The Fund reserves the right to pay redemptions in kind with portfolio
securities in lieu of cash. In accordance with its election pursuant to Rule
18f-1 under the 1940 Act, the Fund may limit the amount of redemption proceeds
paid in cash. Although it has no present intention to do so, the Fund may, under
unusual circumstances, limit redemptions in cash with respect to each
shareholder during any ninety-day period to the lesser of (i) $250,000 or (ii)
1% of the net asset value of the Fund at the beginning of such period. In
connection with any redemptions paid in kind with portfolio securities,
brokerage and other costs may be incurred by the redeeming shareholder in the
sale of the securities received.
NET ASSET VALUE
The net asset values of the shares of the Fund is determined once daily as
of the close of the NYSE, ordinarily 4 P.M. New York City time, Monday through
Friday, on each day during which the NYSE is open for unrestricted trading. The
NYSE is currently closed on New Year's Day, Presidents Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
20
<PAGE>
The net asset value per share of the Fund is computed by dividing the sum
of the value of the securities held by the Fund plus any cash or other assets
minus all liabilities by the total number of outstanding shares of the Fund at
such time. Any expenses, except for extraordinary or nonrecurring expenses,
borne by the Fund, including the investment management fee payable to the
Investment Manager, are accrued daily.
In determining the values of portfolio assets, the Trustees utilize one or
more pricing services to value certain securities for which market quotations
are not readily available on a daily basis. Most debt securities are valued on
the basis of data provided by such pricing services. Since the Fund is comprised
substantially of debt securities under normal circumstances, most of the Fund's
assets are therefore valued on the basis of such data from the pricing services.
The pricing services may provide prices determined as of times prior to the
close of the NYSE.
In general, securities are valued as follows. Securities which are listed
or traded on the New York or American Stock Exchange are valued at the price of
the last quoted sale on the respective exchange for that day. Securities which
are listed or traded on a national securities exchange or exchanges, but not on
the New York or American Stock Exchange, are valued at the price of the last
quoted sale on the exchange for that day prior to the close of the NYSE.
Securities not listed on any national securities exchange which are traded "over
the counter" 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
utilizing such pricing services as may be deemed appropriate as described above.
Securities deemed restricted as to resale are valued at the fair value thereof
as determined by or in accordance with methods adopted by the Trustees of the
Trust.
Short-term debt instruments issued with a maturity of one year or less
which have a remaining maturity of 60 days or less are valued using the
amortized cost method, provided that during any period in which more than 25% of
the Fund's total assets is invested in short-term debt securities the current
market value of such securities will be used in calculating net asset value per
share in lieu of the amortized cost method. The amortized cost method is used
when the value obtained is fair value. Under the amortized cost method of
valuation, the security is initially valued at cost on the date of purchase (or
in the case of short-term debt instruments purchased with more than 60 days
remaining to maturity, the market value on the 61st day prior to maturity), and
thereafter a constant amortization to maturity of any discount or premium is
assumed regardless of the impact of fluctuating interest rates on the market
value of the security.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
The Fund's portfolio turnover rate is determined by dividing the lesser of
securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The Fund reserves full freedom with respect to portfolio
turnover, as described in the Prospectus. For the period May 16, 1994
(commencement of operations) through April 30, 1995 the portfolio turnover rate
was 157.75%. The turnover rate was higher than expected because of unusual
changes in interest rates during the period.
21
<PAGE>
Brokerage Allocation
The Fund and the Investment Manager seek the best overall execution of
purchase or sale orders and the most favorable net price in securities
transactions consistent with their judgment as to the business qualifications of
the various broker or dealer firms with which the Fund may do business.
Decisions with respect to the market where the transaction is to be completed,
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 the performance, integrity and financial
responsibility of the various firms as well as to their demonstrated execution
experience and capability generally and in regard to particular markets or
securities and, in agency transactions, to the competitiveness of the commission
rates (or in principal transactions of the net prices) they charge. The
Investment Manager keeps current as to the range of rates or prices charged by
various firms and against this background evaluates the reasonableness of a
commission or price charged with respect to a particular transaction by
considering such factors as difficulty of execution or security positioning by
the executing firm.
When it appears that a number of firms can satisfy the required standards
in respect of a particular transaction, consideration may also be given to
services other than execution services which such firms have provided in the
past or may provide in the future. Among such other services are the supplying
of supplemental investment research, general economic and political information,
analytical and statistical data, relevant market information and daily market
quotations for computation of net asset value. In this connection it should be
noted that a substantial portion of brokerage commissions paid, or principal
transactions entered, by the Fund may be with brokers and investment banking
firms which, in the normal course of business, publish statistical, research and
other material which is received by the Investment Manager and which may or may
not prove useful to the Investment Manager, the Fund or other clients of the
Investment Manager.
Neither the Fund nor the Investment Manager has any definite agreements
with any firm as to the amount of business which that firm may expect to receive
for services supplied 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
business. These understandings are honored to the extent possible in accordance
with the policy set forth above. Neither the Fund nor the Investment Manager
intends to pay a firm in excess of that which another would charge for handling
the same transaction in recognition of services (other than execution services)
provided. However, the Fund and the Investment Manager are aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, rely on the provisions of Section 28(e) of the
Securities Exchange Act of 1934, to the extent applicable. For the period May
16, 1994 (commencement of operations) through April 30, 1995 the Fund did not
pay brokerage commissions.
Occasions may arise when the Investment Manager determines that an
investment in a particular security, or the disposition of a particular
security, is simultaneously a proper investment decision for the Fund as well as
for the portfolio of one or more of its other clients. In this event, a purchase
or sale, as the case may be, of any such security on any given day will be
normally averaged as to price and allocated as to amount among the several
clients in a manner deemed equitable to each client.
On occasions when the Investment Manager deems the purchase or sale of a
security to be in the best interests of the Fund, as well as other clients of
the Investment Manager, the Investment Manager, to the extent permitted by
applicable laws and regulations, may aggregate such securities to be sold or
purchased for the Fund with those to be sold or purchased for other customers in
order to obtain best execution and lower brokerage commissions, if any. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Investment Manager in
the
22
<PAGE>
manner it considers to be most equitable and consistent with its fiduciary
obligations to all such customers, including the Fund. In some instances, this
procedure may affect the price and size of the positions obtainable for the
Fund.
CERTAIN TAX MATTERS
Federal Income Taxation of the Fund -- In General
The Fund intends to qualify and elect to be treated each taxable year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), although it cannot give complete assurance
that it will do so. Accordingly, the Fund must, among other things, (a) derive
at least 90% of its gross income in each taxable year from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of the
following held for less than three months (the "30% test"): (i) stock or
securities, (ii) options, futures, or forward contracts (other than options,
futures or forward contracts on foreign currencies), or (iii) foreign currencies
(or options, futures, or forward contracts on foreign currencies) but only if
such currencies (or options, futures, or forward contracts) are not directly
related to the Fund's principal business of investing in stocks or securities
(or options and futures with respect to stocks or securities); (c) satisfy
certain diversification requirements; and (d) in order to be entitled to utilize
the dividends paid deduction, distribute annually at least 90% of its investment
company taxable income (determined without regard to the deduction for dividends
paid).
The 30% test will limit the extent to which the Fund may sell securities
held for less than three months, write options which expire in less than three
months, and effect closing transactions with respect to call or put options that
have been written or purchased within the preceding three months. (If the Fund
purchases a put option for the purpose of hedging an underlying portfolio
security, the acquisition of the option is treated as a short sale of the
underlying security unless, for purposes only of the 30% test, the option and
the security are acquired on the same date.) Finally, as discussed below, this
requirement may also limit investments by the Fund in options on stock indices,
listed options on nonconvertible debt securities, futures contracts, options on
interest rate futures contracts and certain foreign currency contracts.
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of such Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of the
Fund.
The Fund will be liable for a nondeductible 4% excise tax on amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement. To avoid the tax, during each calendar year the Fund must
distribute an amount equal to at least 98% of the sum of its ordinary income
(not taking into account any capital gains or losses) for the calendar year, and
its capital gain net income for the 12-month period ending on October 31, in
addition to any undistributed portion of the respective balances from the prior
year. The Fund intends to make sufficient distributions to avoid this 4% excise
tax.
23
<PAGE>
Federal Income Taxation of the Fund's Investments
Original Issue Discount. For federal income tax purposes, debt securities
purchased by the Fund may be treated as having original issue discount. Original
issue discount represents interest for federal income tax purposes and can
generally be defined as the excess of the stated redemption price at maturity of
a debt obligation over the issue price. Original issue discount is treated for
federal income tax purposes as income earned by the Fund, whether or not any
income is actually received, and therefore is subject to the distribution
requirements of the Code. Generally, the amount of original issue discount is
determined on the basis of a constant yield to maturity which takes into account
the compounding of accrued interest. Under section 1286 of the Code, an
investment in a stripped bond or stripped coupon may result in original issue
discount.
Debt securities may be purchased by the Fund at a discount that exceeds
the original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for income tax
purposes. In the case of any debt security issued after July 18, 1984, having a
fixed maturity date of more than one year from the date of issue and having
market discount, the gain realized on disposition will be treated as interest to
the extent it does not exceed the accrued market discount on the security
(unless the Fund elects to include such accrued market discount in income in the
tax year to which it is attributable). Generally, market discount is accrued on
a daily basis. The Fund may be required to capitalize, rather than deduct
currently, part or all of any direct interest expense incurred to purchase or
carry any debt security having market discount, unless the Fund makes the
election to include market discount currently. Because the Fund must include
original issue discount in income, it will be more difficult for the Fund to
make the distributions required for the Fund to maintain its status as a
regulated investment company under Subchapter M of the Code or to avoid the 4%
excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may be
subject to provisions of the Code that (i) require inclusion of unrealized gains
or losses in the Fund's income for purposes of the 90% test, the 30% test, the
excise tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and (iii) characterize
both realized and unrealized gain or loss as short-term or long-term gain or
loss. Such provisions generally apply to, among other investments, options on
debt securities, indices on securities and futures contracts.
Federal Income Taxation of the Shareholders
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 such Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as ordinary income or long-term capital gain, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
24
<PAGE>
DISTRIBUTION OF SHARES OF THE FUND
State Street Research Securities Trust is currently comprised of one
series, State Street Research Intermediate Bond Fund. The Trustees have
authorized shares of the Fund to be issued in four classes: Class A, Class B,
Class C and Class D shares. The Trustees of the Trust have authority to issue an
unlimited number of shares of beneficial interest of separate series, $.001 par
value per share. A "series" is a separate pool of assets of the Trust which is
separately managed and has a different investment objective and different
investment policies from those of another series. The Trustees have authority,
without the necessity of a shareholder vote, to create any number of new series
or classes or to commence the public offering of shares of any previously
established series or class.
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class D shares). The Distributor may reallow all
or portions of such sales charges as concessions to dealers. For the period May
16, 1994 (commencement of operations) through April 30, 1995 total sales charges
on Class A shares paid to the Distributor amounted to $ 0. For the same period,
the Distributor retained $ 0 after reallowance of concessions to dealers.
The differences in the price at which the Fund's Class A shares are
offered due to scheduled variations in sales charges, as described in the Fund's
Prospectus, result from cost savings inherent in economies of scale. Management
believes that the cost of sales efforts of the Distributor and broker-dealers
tends to decrease as the size of purchases increases, or does not involve any
incremental sales expenses as in the case of, for example, exchanges,
reinvestments or dividend investments at net asset value. Similarly, no
significant sales effort is necessary for sales of shares at net asset value to
certain Directors, Trustees, officers, employees, their relatives and other
persons directly or indirectly related to the Fund or associated entities. Where
shares of the Fund are offered at a reduced sales charge or without a sales
charge pursuant to sponsored arrangements, the amount of the sales charge
reduction will similarly reflect the anticipated reduction in sales expenses
associated with such sponsored arrangements. The reductions in sales expenses,
and therefore the reduction in sales charge, will vary depending on factors such
as the size and stability of the organization, the term of the organization's
existence and certain characteristics of its members. The Fund reserves the
right to make variations in, or eliminate, sales charges at any time or to
revise the terms of or to suspend or discontinue sales pursuant to sponsored
arrangements at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission on the shares sold. 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.
25
<PAGE>
For the period May 16, 1994 (commencement of operations) through April 30,
1995, the Distributor received no contingent deferred sales charges upon
redemption of Class A, Class B and Class D shares of the Fund.
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1" (the
"Distribution Plan") under which the Fund may engage, directly or indirectly, in
financing any activities primarily intended to result in the sale of Class A,
Class B and Class D shares, including, but not limited to, (1) the payment of
commissions and/or reimbursement to underwriters, securities dealers and others
engaged in the sale of shares, including payments to the Distributor to be used
to pay commissions and/or reimbursement to securities dealers (which securities
dealers may be affiliates of the Distributor) engaged in the distribution and
marketing of shares and furnishing ongoing assistance to investors, (2)
reimbursement of direct out-of-pocket expenditures incurred by the Distributor
in connection with the distribution and marketing of shares and the servicing of
investor accounts including expenses relating to the formulation and
implementation of marketing strategies and promotional activities such as direct
mail promotions and television, radio, newspaper, magazine and other mass media
advertising, the preparation, printing and distribution of Prospectuses of the
Fund and reports for recipients other than existing shareholders of the Fund,
and obtaining such information, analyses and reports with respect to marketing
and promotional activities and investor accounts as the Fund may, from time to
time, deem advisable, and (3) reimbursement of expenses incurred by the
Distributor in connection with the servicing of shareholder accounts including
payments to securities dealers and others in consideration of the provision of
personal services to investors and/or the maintenance of shareholder accounts
and expenses associated with the provision of personal services by the
Distributor directly to investors. In addition, the Distribution Plan is deemed
to authorize the Distributor to make payments out of general profits, revenues
or other sources to underwriters, securities dealers and others in connection
with sales of shares, to the extent, if any, that such payments may be deemed to
be within the scope of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class D shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class D
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class D shares (as the case may be) to make payments for personal
services and/or the maintenance of shareholder accounts. Proceeds from the
service fee will be used by the Distributor to compensate securities dealers and
others selling shares of the Fund for rendering service to shareholders on an
ongoing basis. Such amounts are based on the net asset value of shares of the
Fund held by such dealers as nominee for their customers or which are owned
directly by such customers for so long as such shares are outstanding and the
Distribution Plan remains in effect with respect to the Fund. Any amounts
received by the Distributor and not so allocated may be applied by the
Distributor as reimbursement for expenses incurred in connection with the
servicing of investor accounts. The distribution and servicing expenses of a
particular class will be borne solely by that class.
26
<PAGE>
For the period May 16, 1994 (commencement of operations) through April 30,
1995 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
Advertising $ 4,164
Printing and mailing of
prospectuses to other
than current shareholders $ 1,198
Compensation to dealers 0
Compensation to sales personnel $ 10,328
Interest 0
Carrying or other
financial charges 0
Other Expenses:
Marketing, general $ 8,418
-------
$24,108
The Distributor may also use additional resources of its own for further
expenses on behalf of the Fund.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Fund will make alternative
arrangements for such services for shareholders who acquired shares through such
institutions.
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") and yield of the
Class A and Class C 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.
The Fund's performance is shown below, and where noted, reflects the
voluntary measures by the Fund's affiliates to reduce fees or expenses relating
to the Fund; see "Accrued Expenses" later in this section.
27
<PAGE>
Total Return
May 16, 1994
(commencement of operations)
to April 30, 1995
----------------------------
SEC Aggregate
Total Return Total Return
(Annualized)* (Not Annualized)*
------------- -----------------
With Subsidy Without Subsidy With Subsidy Without Subsidy
------------ --------------- ------------ ---------------
Class A 1.25% 0.51% 1.19% 0.49%
Class C 6.58% 5.81% 6.30% 5.56%
* Reflects maximum sales charges, if any.
The numbers shown above in the column entitled "SEC Total Return
(Annualized)" result from the "annualization" of actual return for the
approximately 350-day period involved and should be interpreted carefully since
annualization in this instance presumes that the performance for the 350-days
continues for a full year.
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 maximum
initial or contingent deferred sales charge applicable to the investment 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 are also taken into account as described later herein.
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<PAGE>
Yield
The annualized yield of the Class A shares and Class C shares of the Fund,
based on the month of April, 1995, was as follows:
With Subsidy Without Subsidy
------------ ---------------
Class A 6.17% 5.12%
Class C 6.72% 5.60%
Yield is computed separately for each class of shares by dividing the net
investment income per share earned during a recent month or other specified
30-day period by the maximum offering price per share on the last day of the
period and annualizing the result in accordance with the following formula:
YIELD = 2[(a - b + 1)6 -1]
-----
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of voluntary
expense reductions by the Investment Manager)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day
of the period
To calculate interest earned (for the purpose of "a" above) on debt
obligations, the Fund computes the yield to 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.
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.
29
<PAGE>
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
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 relating to the Fund, during the subject period. In the
absence of such subsidization, the performance of the Fund may be lower.
Nonstandardized Total Return
A Fund may provide the above described standard total return results for
Class A, Class B, Class C and Class D shares for periods which end no earlier
than the most recent calendar quarter end and which begin twelve months before
and at the time of commencement of such Fund's operations. In addition, the 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 or ending value.
For example, the nonstandardized total return for the six months ended April 30,
1995, without taking sales charges into account, were as follows:
With Subsidy Without Subsidy
------------ ---------------
Class A 5.52% 4.89%
Class C 5.76% 5.09%
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
30
<PAGE>
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 the Class A shares and Class C shares of the
Fund, based on the month of April, 1995, were as follows:
Class A 3.95%
Class C 4.38%
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
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, 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 Securities and Exchange
Commission filings and (3) review of the annual income tax returns filed on
behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a semiannual
basis, other supplementary financial reports may be made available from time to
time and holders of record may request a copy of a current supplementary report,
if any, by calling State Street Research Shareholder Services.
The following financial statements are for the period May 16, 1994
(commencement of operations) through April 30, 1995:
31
<PAGE>
STATE STREET RESEARCH INTERMEDIATE BOND FUND
INVESTMENT PORTFOLIO
April 30, 1995
Principal Maturity Value
Amount Date (Note 1)
FIXED INCOME SECURITIES 95.6%
U.S. Treasury 49.7%
U.S. Treasury Bond, 8.125% $ 375,000 8/15/2021 $ 402,717
U.S. Treasury Note, 5.875% 1,925,000 5/31/1996 1,914,470
U.S. Treasury Note, 8.50% 1,525,000 5/15/1997 1,579,809
U.S. Treasury Note, 5.125% 150,000 6/30/1998 143,016
U.S. Treasury Note, 5.875% 225,000 3/31/1999 217,757
U.S. Treasury Note, 7.125% 1,125,000 9/30/1999 1,135,721
U.S. Treasury Note, 5.75% 1,675,000 8/15/2003 1,538,906
6,932,396
U.S. Agency Mortgage 16.2%
Federal Home Loan Mortgage Corp.
Gold, 6.50% 320,962 7/01/2008 307,620
Federal Home Loan Mortgage Corp.
Gold, 7.00% 248,751 8/01/2024 236,778
Federal Home Loan Mortgage Corp.
Gold, 8.00%+ 450,000 6/13/2025 448,031
Federal National Mortgage
Association REMIC Series
93-52-C PAC, 5.00% 175,000 2/25/2001 169,913
Federal National Mortgage
Association, 7.00% 285,235 2/01/2024 271,239
Federal National Mortgage
Association, 7.00% 175,986 11/01/2024 167,350
Government National Mortgage
Association, 6.50% 335,130 4/15/2009 320,780
Government National Mortgage
Association, 7.00% 365,231 1/15/2025 345,713
2,267,424
U.S. Agency 1.4%
Federal National Mortgage
Association, 5.41% 200,000 6/25/1998 191,792
Bank 5.2%
Advanta Credit Card Master Trust
Series 1994-B, 6.405% 150,000 10/15/2001 149,906
Capital One Bank Sr. Note, 8.125% 200,000 3/01/2000 202,528
First Chicago Credit Master Trust
Series 1991-D, 8.40% 225,000 6/15/1998 228,375
Standard Credit Card Master Trust
Series 1994-3A, 6.80% 150,000 4/07/2001 147,655
728,464
Canadian--Yankee 7.4%
Bell Telephone Co. Canada Deb.
Series DJ, 13.375% 125,000 10/15/2010 135,035
British Columbia Hydroelectric
Authority Deb. Series FH,
15.50% 125,000 7/15/2011 144,439
Hydro-Quebec Deb. Series FL,
13.25% 250,000 12/15/2013 304,045
Laidlaw Inc. Deb., 8.75% 75,000 4/15/2025 74,690
Province of Manitoba Global Note,
6.75% 75,000 3/01/2003 71,656
Province of Ontario Deb., 11.50% 175,000 3/10/2013 198,485
Province of Quebec, 8.80% 100,000 4/15/2003 104,959
1,033,309
Finance 11.0%
American General Finance Corp.
Note, 8.00% 100,000 2/15/2000 102,139
Beneficial Corp. Master Trust
Note, 8.17% 200,000 11/09/1999 205,364
Community Program Loan Trust
Series 1987 A-3, 4.50% 160,781 4/01/2002 156,912
Discover Credit Card Trust Series
1993-A, 6.25% 150,000 8/16/2000 146,672
Ford Motor Credit Co. Note, 8.00% 125,000 12/01/1997 127,446
General Electric Capital Corp.
Master Trust Note, 7.625% 175,000 7/24/1996 176,669
General Motors Acceptance Corp.
Master Trust Note, 7.85% 275,000 11/17/1997 278,630
Household Affinity Credit Card
Master Trust Series 1994- 1A,
6.275% 150,000 5/15/2001 149,156
Sears Credit Account Master Trust
Series 1995-2, 8.10% 125,000 6/15/2004 129,258
Tandy Master Trust Certificates
Series 1991-A, 8.25% 57,488 4/15/1999 57,829
1,530,075
Foreign Government 1.0%
Federal Republic of Germany, Deutsche Mark
6.625% 200,000 7/09/2003 140,878
Industrial 2.0%
American Home Products Corp.
Note, 7.70% $ 150,000 2/15/2000 152,469
Chevron Corp. Profit Sharing
Amortized Note, 8.11% 125,000 12/01/2004 129,099
281,568
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STATE STREET RESEARCH INTERMEDIATE BOND FUND
Mortgage 0.7%
American Southwest Financial
Services Corp. Series 94-C2,
8.00% $ 98,184 8/25/2010 $ 98,829
Trust Certificates 1.0%
Rural Electric Cooperative
Grantor Trust Certificates,
10.11% 125,000 12/15/2017 137,816
Total Fixed Income Securities (Cost $13,196,564) 13,342,551
SHORT-TERM OBLIGATIONS 5.7%
American Express Credit Corp.,
5.80% 526,000 5/02/1995 526,000
Chevron Oil Finance Co., 5.92% 278,000 5/04/1995 278,000
Total Short-Term Obligations (Cost $804,000) 804,000
Total Investments (Cost $14,000,564)--101.3% 14,146,551
Cash and Other Assets, Less Liabilities--(1.3)% (186,869)
Net Assets--100.0% $13,959,682
Federal Income Tax Information:
At April 30, 1995, the net unrealized
appreciation of investments based on cost for
Federal income tax purposes of $14,022,104 was
as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of
value over tax cost $198,543
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value (74,096)
$124,447
+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.
Forward currency exchange contract outstanding at April 30, 1995 is as follows:
Contract Unrealized Delivery
Total Value Price Depreciation Date
Sell Deutsche mark
Buy U.S. dollars 192,200 DEM .71721 DEM $(965) 5/24/95
Statement of Assets and Liabilities
April 30, 1995
Assets
Investments, at value (Cost $14,000,564) (Note 1) $14,146,551
Cash 906
Interest receivable 227,363
Receivable from Distributor (Note 3) 21,895
Deferred organization costs and other assets (Note 1) 73,480
14,470,195
Liabilities
Payable for securities purchased 449,091
Accrued management fee (Note 2) 6,288
Accrued trustees' fees (Note 2) 3,872
Accrued distribution fee (Note 5) 2,094
Payable for open forward contract 965
Accrued transfer agent and shareholder services (Note 2) 168
Other accrued expenses 48,035
510,513
Net Assets $13,959,682
Net Assets consist of:
Undistributed net investment income $ 151,627
Unrealized appreciation of investments 145,987
Unrealized depreciation of forward contracts and
foreign currency (923)
Accumulated net realized loss (152,902)
Shares of beneficial interest 13,815,893
$13,959,682
Net Asset Value and redemption price per share of Class
A shares ($10,221,776 [division sign] 1,057,613 shares of
beneficial interest) $ 9.66
Maximum Offering Price per share of Class A shares
($9.66 [division sign] .955) $10.12
Net Asset Value, offering price and redemption price
per share of Class C shares ($3,737,906 [division sign]
386,712 shares of beneficial interest) $ 9.67
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STATE STREET RESEARCH INTERMEDIATE BOND FUND
STATEMENT OF OPERATIONS
For the period May 16, 1994
(commencement of operations) to April 30, 1995
Investment Income
Interest, net of foreign taxes of $5,845 $ 909,169
Expenses
Management fee (Note 2) 72,084
Custodian fee 64,685
Reports to shareholders 29,651
Distribution fee--Class A (Note 5) 24,108
Registration fees 21,900
Amortization of organization costs (Note 1) 16,853
Trustees' fees (Note 2) 14,947
Audit fee 12,174
Legal fees 9,988
Transfer agent and shareholder services (Note 2) 473
Miscellaneous 7,498
274,361
Expenses borne by the Distributor (Note 3) (151,957)
122,404
Net investment income 786,765
Realized and Unrealized Gain (Loss)
on Investments, Forward Contracts
and Foreign Currency
Net realized loss on investments (Notes 1 and 4) (143,780)
Net realized loss on forward contracts and foreign
currency (Note 1) (907)
Total net realized loss (144,687)
Net unrealized appreciation of investments 145,987
Net unrealized depreciation of forward contracts and
foreign currency (923)
Total net unrealized appreciation 145,064
Net gain on investments, foreign currency and forward
contracts 377
Net increase in net assets resulting from operations $ 787,142
STATEMENT OF CHANGES IN NET ASSETS
For the period May 16, 1994
(commencement of operations) to April 30, 1995
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 786,765
Net realized loss on investments, forward contracts
and foreign currency* (144,687)
Net unrealized appreciation of investments, forward
contracts and foreign currency 145,064
Net increase resulting from operations 787,142
Dividends from net investment income:
Class A (465,343)
Class C (178,010)
(643,353)
Net increase from fund share transactions (Note 6) 13,815,893
Total increase in net assets 13,959,682
Net Assets
Beginning of period --
End of period (including undistributed net investment
income of $151,627) $13,959,682
* Net realized loss for Federal income tax purposes
(Note 1) $ (37,239)
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
STATE STREET RESEARCH INTERMEDIATE BOND FUND
NOTES TO FINANCIAL STATEMENTS
April 30, 1995
Note 1
State Street Research Intermediate Bond Fund (the "Fund") is a series of State
Street Research Securities Trust (the "Trust"), which was organized as a
Massachusetts business trust in January, 1994 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 Fund is
presently the only active series of the Trust, although the Trustees have the
authority to create an unlimited number of series.
The Fund is authorized to issue four classes of shares. Only Class A and Class C
shares are presently available for purchase. Class B and Class D shares are not
being offered at this time. Class A shares are subject to an initial sales
charge of up to 4.50% and 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 only offered to
certain employee benefit plans and large institutions. No sales charge is
imposed at the time of purchase or redemption of Class C shares. Class C shares
do not pay any distribution or service fees. Class D shares are subject to a
contingent deferred sales charge of 1.00% on any shares redeemed within one year
of their purchase. Class D shares also pay annual distribution and service fees
of 1.00%. The Fund's expenses are borne pro-rata by each class, except that each
class bears expenses, and has exclusive voting rights with respect to provisions
of the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant accounting policies are consistently followed by the
Fund in preparing its financial statements, and such policies are in conformity
with generally accepted accounting principles for investment companies.
A. Investment Valuation
Securities are valued by a pricing service, which utilizes market transactions,
quotations from dealers, and various relationships among securities in
determining value. Short-term securities maturing within sixty days are valued
at amortized cost.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis of
identified cost of securities delivered.
C. Net Investment Income
Net investment income is determined daily and consists of interest accrued and
discount earned, less the estimated daily expenses of the Fund. Interest income
is accrued daily as earned. Discount on debt obligations is amortized under the
effective yield method.
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 and paydown gains and losses.
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. At April 30, 1995, the Fund had a capital
loss carryforward of $37,239 available, to the extent provided in regulations,
to offset future capital gains, if any, which expires on April 30, 2003.
In order to meet certain excise tax distribution requirements under Section
4982 of the Internal Revenue Code, the Fund is required to measure and
distribute annually, if necessary, net capital gains realized during a
twelve-month period ending October 31. In this connection, the Fund is
permitted to defer into its next fiscal year any net capital losses incurred
between each November 1 and the end of its fiscal year. From November 1, 1994
through April 30, 1995, the Fund incurred net capital losses of approximately
$94,000 and intends to defer and treat such losses as arising in the fiscal
year ending April 30, 1996.
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
6
<PAGE>
STATE STREET RESEARCH INTERMEDIATE BOND FUND
NOTES (cont'd)
transaction rates resulting in unrealized gains or losses. The Fund records
realized gains or losses at the time the forward contracts are extinguished by
entry into a closing contract or by delivery of the currency. Neither spot
transactions nor forward currency exchange contracts eliminate fluctuations in
the prices of the Fund's portfolio securities or in foreign exchange rates, or
prevent loss if the price of these securities should decline.
Securities quoted in foreign currencies are translated into U.S. dollars at the
current exchange rate. Gains and losses that arise from changes in exchange
rates are not segregated from gains and losses that arise from changes in
market prices of investments.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly-owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser earns
monthly fees at an annual rate of 0.55% 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 period ended May 16, 1994 (commencement of operations) to April 30,
1995, the fees pursuant to such agreement amounted to $72,084.
State Street Research Shareholder Services, a division of State Street Research
Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly-owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. During the period May 16, 1994 (commencement of operations)
to April 30, 1995, the amount of such expenses was $89.
The fees of the Trustees not currently affiliated with the Adviser amounted to
$14,947 during the period May 16, 1994 (commencement of operations) to April
30, 1995.
Note 3
The Distributor and its affiliates may from time to time and in varying amounts
voluntarily assume some portion of fees or expenses relating to the Fund.
During the period May 16, 1994 (commencement of operations) to April 30, 1995,
the amount of such expenses assumed by the Distributor and its affiliates was
$151,957.
Note 4
For the period May 16, 1994 (commencement of operations) to April 30, 1995,
purchases and sales of securities, exclusive of short-term obligations,
aggregated $32,912,371 and $19,376,604 (including $24,420,098 and $17,723,077
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 D shares. In addition, the Fund will
pay annual distribution fees of 0.75% of average daily net assets for Class B
and Class D shares. The Distributor uses such payments for personal service
and/or the maintenance 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 May 16, 1994 (commencement of operations) to April 30, 1995,
fees pursuant to such plan amounted to $24,108 for Class A.
Note 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At April 30, 1995, Metropolitan
owned 1,047,121 Class A shares and 386,133 Class C shares of the Fund and the
Adviser owned 10,471 Class A shares of the Fund. Share transactions were as
follows:
May 16, 1994
(Commencement of
Operations) to
April 30, 1995
Class A Shares Amount
Shares sold 1,057,613 $10,100,193
Net increase 1,057,613 $10,100,193
Class C Shares Amount
Shares sold 654,776 $ 6,291,798
Shares repurchased (268,064) (2,576,098)
Net increase 386,712 $ 3,715,700
7
<PAGE>
STATE STREET RESEARCH INTERMEDIATE BOND FUND
FINANCIAL HIGHLIGHTS
For a share outstanding from May 16, 1994
(commencement of operations) to April 30, 1995.
<TABLE>
<CAPTION>
Class A Class C
<S> <C> <C>
Net asset value, beginning of period $9.55 $9.55
Net investment income* .54 .56
Net realized and unrealized gain on investments, foreign currency and forward contracts .01 .02
Dividends from net investment income (.44) (.46)
Net asset value, end of period $9.66 $9.67
Total return+++ 5.96% 6.30%
Net assets at end of period (000s) $10,222 $3,738
Ratio of operating expenses to average net assets* 1.00%++ 0.75%++
Ratio of net investment income to average net assets* 5.92%++ 6.17%++
Portfolio turnover rate 157.75% 157.75%
*Reflects voluntary assumption of fees or expenses per share. (Note 3) $.11 $.10
</TABLE>
++Annualized
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total return
would be lower if the Distributor and its affiliates had not voluntarily
assumed a portion of the Fund's expenses.
8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of State Street Research
Securities Trust and Shareholders of
State Street Research Intermediate Bond Fund:
We have audited the accompanying statement of assets and liabilities of State
Street Research Intermediate Bond Fund, including the schedule of portfolio
investments, as of April 30, 1995, and the related statements of operations and
changes in net assets and the financial highlights for the period May 16, 1994
(commencement of operations) to April 30, 1995. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
April 30, 1995, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of State
Street Research Intermediate Bond Fund as of April 30, 1995, the results of its
operations and changes in its net assets and the financial highlights for the
period May 16, 1994 (commencement of operations) to April 30, 1995, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
June 2, 1995
9
<PAGE>
STATE STREET RESEARCH INTERMEDIATE BOND FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
State Street Research Intermediate Bond Fund performed in line with similar
funds over the past year, as measured by the average total return for Lipper
Analytical Services' intermediate investment grade funds category.
On April 30, 1995, the Fund's assets were allocated as follows: 50% to U.S.
Treasury securities, 29% to corporate bonds, 16% to mortgage securities, 1% in
foreign government bonds, and 4% to cash. The bonds in the portfolio also had a
high average quality of AAA-, as rated by Standard & Poor's or equivalent. On
April 30, 1995, the Fund's portfolio had a duration of 3.5 years, approximately
10% longer than the market average.
U.S. Treasury Securities
The Fund's holdings in U.S. Treasury securities offer the highest possible
credit quality. U.S. Treasury securities respond quickly to interest rate
changes, which benefited the portfolio as bond yields declined over the past
several months.
Mortgage Securities
The portfolio holds high-quality mortgage securities issued by U.S. Government
agencies. Over the past six months, as bond yields declined, we reduced our
holdings in mortgage securities.
Corporate Securities
7% of the portfolio is invested in "Yankee" bonds issued by Canadian provinces
or corporations, but denominated in U.S. dollars. Most of the remainder is
invested in instruments backed by specific assets, such as credit card
receivables.
Comparison of Change In Value Of A $10,000
Investment in Intermediate Bond Fund and The Lehman
Brothers Government/Corporate Intermediate Bond Index
[line graph]
Class A Shares
Aggregate Total Return
Life of Fund
+1.19%/+0.49%
[Intermediate Bond Fund data]
start-5/94-$9,550
end-4/95-$10,119
[LB Gov't/Corporate Intermediate Bond Index data]
start-5/94-$10,000
end-4/95-$10,648
[line chart]
Class C Shares
Aggregate Total Return
Life of Fund
+6.30%/+5.56%
[Intermediate Bond Fund data]
start-5/94-$10,000
end-4/95-$10,630
[LB Gov't/Corporate Intermediate Bond Index data]
start-5/94-$10,000
end-4/95-$10,648
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in the
Fund will fluctuate and shares, when redeemed, may be worth more or less than
their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. "A" share returns reflect the maximum 4.5%
sales charge. "C" shares, offered without a sales charge, are available only to
certain employee benefit plans and large institutions. Performance results for
the Fund are increased by the Distributor's voluntary reduction of fees and
expenses related to the Fund. The first figure reflects expense reduction; the
second shows what results would have been without subsidization. The Lehman
Brothers Government/Corporate Intermediate Bond Index is a commonly-used
measure of intermediate bond performance. The index is unmanaged and does not
take sales charges into consideration. Direct investment in the index is not
possible; results are for illustrative purposes only.
10
