[STATE STREET RESEARCH LOGO]
Growth Fund
[GRAPHIC OF TALL BUILDING]
This prospectus has information you should know before you invest. Please read
it carefully and keep it with your investment records.
Although these securities have been registered with the Securities and Exchange
Commission, the commission has not judged them for investment merit and does not
guarantee the accuracy or adequacy of the information in this prospectus. Anyone
who informs you otherwise is committing a federal crime.
A stock fund investing for long-term growth of capital.
Prospectus
May 1, 1998
<PAGE>
Who May Want to Invest
- -------------------------------------------------------------------------------
State Street Research Growth Fund is designed for investors who seek one or more
of the following:
[bullet] a stock fund for a long-term goal
[bullet] a fund to complement a portfolio of more conservative investments
[bullet] a fund that uses a growth-oriented strategy
The fund is NOT appropriate for investors who:
[bullet] want to avoid high volatility or possible losses
[bullet] are making short-term investments
[bullet] are investing emergency reserve money
[bullet] are seeking regular income
The fund's shares will rise and fall in value. There is a risk that you could
lose money by investing in the fund.
The fund cannot be certain that it will achieve its goal.
Fund shares are not bank deposits and are not guaranteed, endorsed or insured by
any financial institution, government entity or the FDIC.
<PAGE>
Contents 1
- --------------------------------------------------------------------------------
2 The Fund
--------
The fund's goal and strategy, main
risks, expenses and performance,
plus financial highlights
12 Your Account
------------
Managing your State Street Research investments
12 Opening an Account
12 Choosing a Share Class
14 Sales Charges
16 Policies for Buying Shares
18 Policies for Selling Shares
20 Account Policies
21 Distributions and Taxes
23 Investor Services
24 Fund Details
------------
The fund's business structure
and dealer compensation, plus
additional policies
26 Other Securities and Risks
--------------------------
Information on additional
portfolio securities and
practices, and the risks
associated with them
Back Cover For Additional Information
<PAGE>
2 The Fund
- --------------------------------------------------------------------------------
[Graphic of Horse's Head] Goal and Strategy
Fundamental Goal The fund seeks to provide long-term growth of capital.
Strategy Under normal market conditions, the fund invests at least 65% of total
assets in stocks and convertible securities that have long-term growth
potential.
In selecting stocks, the fund first attempts to identify the industries that
over the long term will grow faster than the economy as a whole. It then looks
for companies within those industries that appear most capable of sustained
growth. While the fund tends to emphasize established companies, from time to
time it may emphasize other sizes or types of companies, including small,
emerging growth companies. Current income is not a significant factor in stock
selection.
The fund reserves the right to invest up to 35% of net assets in other
securities. These may include U.S. government securities, as well as corporate
bonds rated investment-grade at the time of purchase and their unrated
equivalents.
The fund may adjust the composition of its portfolio as market conditions and
economic outlooks change. For more information about the fund's investments and
practices, see page 26.
<PAGE>
3
------------
[Graphic of Arrow] Portfolio Risks
Because the fund invests primarily in stocks, its major risks are those of stock
investing, including sudden, unpredictable drops in value and the potential for
periods of lackluster performance.
As a general rule, growth stocks often are more sensitive to market movements
than other types of stocks, because their market prices tend to reflect future
expectations. At times when it appears these expectations may not be met, growth
stock prices typically fall.
In addition, there are particular risks associated with investing in companies
of a given size. Larger, more established companies are generally not nimble and
may be unable to respond quickly to competitive challenges, such as changes in
technology and consumer tastes. Smaller companies may be particularly sensitive
to market movements. Stocks of these companies may be thinly traded and the
companies may be less able to withstand hard times.
Because of these and other risks, the fund may underperform certain other stock
funds (those emphasizing value stocks, for example) during periods when growth
stocks are out of favor. The success of the fund's investment strategy depends
largely on the portfolio manager's skill in assessing the potential of the
stocks the fund buys.
[Graphic of Magnifying Glass] Growth Investing
A fund that uses a growth-oriented strategy seeks to invest in stocks of
companies that are growing faster than the economy as a whole. Often, these
companies are in expanding industries, such as computers and pharmaceuticals.
While the size of a company is not necessarily a factor in determining whether
its stock is suitable for a growth fund, a growth strategy that focuses on
larger companies is generally considered less aggressive than one that focuses
on smaller companies.
Many stocks owned by growth funds do not pay dividends and can be more volatile
than other types of investments. As a result, growth funds are appropriate for
investors who have long-term investment horizons.
<PAGE>
4 The Fund continued
- -------------------------------------------------------------------------------
The fund's management approach, which may include short-term trading, could
cause the fund's portfolio turnover rate to be above average for a stock fund.
High turnover will increase the fund's transaction costs and may increase your
tax liability.
Information on other securities and risks appears on page 26.
A "snapshot" of the fund's investments may be found in the current annual or
semiannual report (see back cover).
[Graphic of Thinking Man] Investment Management
The fund's investment manager is State Street Research & Management Company. The
firm traces its heritage back to 1924 and the founding of one of America's first
mutual funds. Today the firm has more than $51 billion in assets under
management (as of March 31, 1998), including more than $16 billion in mutual
funds.
Kennard Woodworth, Jr. has been responsible for the fund's day-to-day portfolio
management since August 1997. A senior vice president, he joined the firm in
1986 and has worked as an investment professional since 1961.
<PAGE>
Investor Expenses 5
- --------------------------------------------------------------------------------
Shareholder fees are paid directly by investors.
Annual fund expenses are deducted from fund assets.
Example Here is what you would pay if you invested $1,000 over the years
indicated. The example is for comparison only and does not represent the fund's
actual expenses, either past or future(5).
(1) Not charged on reinvestments or exchanges.
(2) Before November 1, 1997, Class C shares were designated Class D and Class S
shares were designated Class C.
(3) Except for investments of $1 million or more; see page 14.
<TABLE>
<CAPTION>
Class descriptions begin on page 12
-----------------------------------------------
Shareholder Fees (% of offering price)(1) Class A Class B Class C(2) Class S(2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum front-end sales charge 4.50 0.00 0.00 0.00
Maximum deferred sales charge 0.00(3) 5.00 1.00 0.00
Annual Fund Expenses (% of average net assets) Class A Class B Class C(2) Class S(2)
- --------------------------------------------------------------------------------------------------
Management fee 0.475 0.475 0.475 0.475
Marketing/service (12b-1) fees(4) 0.250 1.000 1.000 0.000
Other expenses 0.205 0.205 0.205 0.205
----- ------ ----- ------
Total annual fund expenses 0.930 1.680 1.680 0.680
===== ===== ===== =====
Year Class A Class B(6) Class C(6) Class S
- --------------------------------------------------------------------------------------------------
1 $54 $67/$17 $27/$17 $7
3 $73 $83/$53 $53/$53 $22
5 $94 $111/$91 $91/$91 $38
10 $154 $179/$179 $199/$199 $85
</TABLE>
(4) For share classes that have marketing/service (12b-1) fees, long-term
shareholders may pay more than the equivalent of the regulatory maximum
sales charge.
(5) Example assumes dividend reinvestment, hypothetical 5% annual return,
maximum applicable sales charges and conversion of Class B shares to Class A
after eight years.
(6) The first number assumes you sold all your shares at the end of the period,
the second assumes you stayed in the fund.
<PAGE>
6 Financial Highlights
- --------------------------------------------------------------------------------
The information in these tables has been audited by Coopers & Lybrand L.L.P.,
the fund's independent accountants. The top section of each table shows
information for a single share of the fund. Total return figures assume
reinvestment of all distributions.
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------------------------
Class A 1993(1) 1994 1995(2) 1996(2) 1997(2)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 9.63 8.50 7.09 7.02 7.17
---- ---- ---- ---- ----
Net investment income (loss) ($) 0.06 0.05 0.01 (0.03) (0.00)
Net realized and unrealized
gain (loss) on investments ($) 0.37 (0.38) 2.30 0.93 0.68
---- ---- ---- ---- ----
Total from investment operations ($) 0.43 (0.33) 2.31 0.90 0.68
---- ---- ---- ---- ----
Dividends from net investment income ($) (0.08) (0.05) (0.02) -- --
Distributions from capital gains ($) (1.48) (1.03) (2.36) (0.75) (0.78)
---- ---- ---- ---- ----
Total distributions ($) (1.56) (1.08) (2.38) (0.75) (0.78)
---- ---- ---- ---- ----
Net asset value, end of year ($) 8.50 7.09 7.02 7.17 7.07
==== ==== ==== ==== ====
Total return (%)(3) 4.52(4) (3.83) 32.57 12.65 10.14
Ratios/supplemental data:
Net assets at end of year ($ thousands) 602 719 2,379 15,181 16,470
Expense ratio (%) 0.96(5) 0.90 0.89 0.90 0.93
Ratio of net investment income (loss)
to average net assets (%) 0.48(5) 0.54 0.12 (0.34) (0.05)
Portfolio turnover rate (%) 68.36 57.18 234.43 237.85 258.99
Average commission rate ($)(6) n/a n/a n/a 0.0331 0.0383
</TABLE>
<PAGE>
7
--------
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------------------------------------------
Class B 1993(1) 1994 1995(2) 1996(2) 1997(2)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 9.56 8.46 7.02 6.89 6.96
---- ----- ----- ----- -----
Net investment income (loss) ($) 0.03 (0.00) (0.06) (0.08) (0.06)
Net realized and unrealized
gain (loss) on investments ($) 0.42 (0.41) 2.29 0.90 0.67
---- ----- ----- ----- -----
Total from investment operations ($) 0.45 (0.41) 2.23 0.82 0.61
---- ----- ----- ----- -----
Dividends from net investment income ($) (0.07) -- -- -- --
Distributions from capital gains ($) (1.48) (1.03) (2.36) (0.75) (0.78)
---- ----- ----- ----- -----
Total distributions ($) (1.55) (1.03) (2.36) (0.75) (0.78)
---- ----- ----- ----- -----
Net asset value, end of year ($) 8.46 7.02 6.89 6.96 6.79
==== ===== ===== ===== ====
Total return (%)(3) 4.64(4) (4.80) 31.71 11.73 9.44
Ratios/supplemental data:
Net assets at end of year ($ thousands) 986 1,544 10,684 31,119 36,442
Expense ratio (%) 1.71(5) 1.63 1.63 1.65 1.68
Ratio of net investment loss
to average net assets (%) (0.36)(5) (0.20) (0.69) (1.07) (0.82)
Portfolio turnover rate (%) 68.36 57.18 234.43 237.85 258.99
Average commission rate ($)(6) n/a n/a n/a 0.0331 0.0383
</TABLE>
(1) Commencement of share class designations (March 16, 1993 for Class A and
March 18, 1993 for Class B) to December 31, 1993.
(2) Per-share figures have been calculated using the average shares method.
(3) Does not reflect any front-end or contingent deferred sales charges.
(4) Not annualized.
(5) Annualized.
(6) Average commission rate per share paid by the fund for security trades on
which commissions are charged beginning with the fiscal year ended December
31, 1996.
<PAGE>
8 Financial Highlights continued
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------------------------------------
Class C (formerly Class D) 1993(1) 1994 1995(2) 1996(2) 1997(2)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 9.56 8.45 7.02 6.88 6.95
---- ---- ---- ---- ----
Net investment income (loss) ($) 0.03 (0.00) (0.06) (0.08) (0.06)
Net realized and unrealized
gain (loss) on investments ($) 0.41 (0.40) 2.28 0.90 0.67
---- ---- ---- ---- ----
Total from investment operations ($) 0.44 (0.40) 2.22 0.82 0.61
---- ---- ---- ---- ----
Dividends from net investment income ($) (0.07) -- -- -- --
Distributions from capital gains ($) (1.48) (1.03) (2.36) (0.75) (0.78)
---- ---- ---- ---- ----
Total distributions ($) (1.55) (1.03) (2.36) (0.75) (0.78)
---- ---- ---- ---- ----
Net asset value, end of year ($) 8.45 7.02 6.88 6.95 6.78
==== ==== ==== ==== ====
Total return (%)(3) 4.59(4) (4.68) 31.57 11.89 9.30
Ratios/supplemental data:
Net assets at end of year ($ thousands) 242 384 2,117 5,584 4,562
Expense ratio (%) 1.71(5) 1.63 1.63 1.65 1.68
Ratio of net investment loss
to average net assets (%) (0.34)(5) (0.20) (0.67) (1.07) (0.79)
Portfolio turnover rate (%) 68.36 57.18 234.43 237.85 258.99
Average commission rate ($)(6) n/a n/a n/a 0.0331 0.0383
</TABLE>
<PAGE>
9
---------
<TABLE>
<CAPTION>
Years ended December 31
------------------------------------------------------------------------------------------------
Class S (formerly Class C) 1988 1989 1990 1991 1992 1993 1994 1995(2) 1996(2) 1997(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year ($) 6.05 6.23 8.23 7.44 9.14 9.26 8.51 7.08 7.02 7.18
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net investment income (loss) ($) 0.23 0.20 0.20 0.17 0.14 0.09 0.07 0.04 (0.00) 0.01
Net realized and unrealized
gain (loss) on investments ($)* 0.18 2.14 (0.78) 1.71 0.15 0.74 (0.40) 2.29 0.92 0.70
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total from investment operations ($) 0.41 2.34 (0.58) 1.88 0.29 0.83 (0.33) 2.33 0.92 0.71
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Dividends from net investment
income ($) (0.23) (0.20) (0.21) (0.18) (0.14) (0.10) (0.07) (0.03) (0.01) --
Distributions from capital
gains ($) -- (0.14) -- -- (0.03) (1.48) (1.03) (2.36) (0.75) (0.78)
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total distributions ($) (0.23) (0.34) (0.21) (0.18) (0.17) (1.58) (1.10) (2.39) (0.76) (0.78)
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net asset value, end of year ($) 6.23 8.23 7.44 9.14 9.26 8.51 7.08 7.02 7.18 7.11
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
Total return (%)(3) 9.27 39.83 (6.16) 26.77 5.71 8.94 (3.82) 33.02 12.74 10.54
Ratios/supplemental data:
Net assets at end of year
($ thousands) 228,071 284,940 234,338 273,607 263,781 250,786 186,108 186,689 177,147 164,689
Expense ratio (%) 0.60 0.56 0.55 0.56 0.57 0.66 0.64 0.64 0.65 0.68
Ratio of net investment income
(loss) to average net assets (%) 3.55 2.60 2.42 2.02 1.56 0.92 0.78 0.43 (0.06) 0.19
Portfolio turnover rate (%) 42.18 28.48 16.09 31.89 35.60 68.36 57.18 234.43 237.85 258.99
Average commission rate ($)(6) n/a n/a n/a n/a n/a n/a n/a n/a 0.0331 0.0383
*Net of federal taxes paid
on retained capital gains ($) 0.15 0.13 0.08 0.12 0.22 -- -- -- -- --
</TABLE>
(1) Commencement of share class designations (March 18, 1993) to December 31,
1993.
(2) Per-share figures have been calculated using the average shares method.
(3) Does not reflect any front-end or contingent deferred sales charges.
(4) Not annualized.
(5) Annualized.
(6) Average commission rate per share paid by the fund for security trades on
which commissions are charged beginning with the fiscal year ended December
31, 1996.
<PAGE>
10 Performance and Volatility
- -------------------------------------------------------------------------------
As of December 31, 1997
--------------------------------------
Average Annual Total Return(1) 1 Year 5 Years 10 Years
- -------------------------------------------------------------------------------
Class A (%) 5.18 10.42 12.17
Class B (%) 4.56 10.42 12.27
Class C (%) 8.32 10.61 12.27
Class S (%) 10.54 11.67 12.81
Russell 1000 Growth Index (%) 30.49 18.42 17.94
S&P 500 Index (%) 33.35 20.25 18.02
Lipper Growth Funds Index (%) 28.08 17.08 16.08
<TABLE>
<CAPTION>
Years ended December 31
-------------------------------------------------------------------------------------
Class A Year-by-Year Total Return(1) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
40% 9.27 39.83 (6.16) 26.77 5.71 8.68 (3.83) 32.57 12.65 10.14
30%
20%
10%
0%
(10%)
</TABLE>
(1) Fund returns include performance from before the creation of share classes
in 1993. Because Classes A, B and C involve higher marketing/service (12b-1)
fees (as described on page 5), performance since that time is somewhat lower
for these classes.
<PAGE>
11
---------
[Graphic of Understanding
magnifying Performance
glass] and Volatility
The information on the opposite page is designed to show two aspects of the
fund's track record:
[bullet] Average annual total return is a measure of the fund's performance over
time. It is determined by taking the fund's performance over a given
period and expressing it as an average annual rate. Average annual
total return includes the effects of fund expenses and maximum sales
charges for each class, and assumes that you sold your shares at the
end of the period.
[bullet] The graph of the year-by-year returns shows how volatile the fund has
been: how much the difference has been, historically, between its best
years and worst years. In general, funds with higher average annual
total returns will also have higher volatility. The graph includes the
effects of fund expenses, but not sales charges.
Also included are three independent measures of performance. Two are unmanaged
stock indices: the S&P 500 (officially, the "Standard & Poor's 500 Composite
Stock Price Index"), which includes 500 domestic stocks, and the Russell 1000
Growth Index, which contains only those stocks within the complete Russell 1000
Index (a large company index) that show above-average growth. The Lipper Growth
Funds Index shows the performance of a category of mutual funds with similar
goals. This index, which is unmanaged, shows you how well the fund has done
compared to competing funds.
While the fund does not seek to match the returns or the volatility of any
index, these indices can be used as rough guides when gauging the return of this
and other investments. When making comparisons, keep in mind that none of the
indices includes the effect of sales charges. Also, even if your stock portfolio
were identical to the S&P 500 or the Russell 1000 Growth, your returns would
always be lower, because these indices don't include brokerage and
administrative expenses.
<PAGE>
12 Your Account
- --------------------------------------------------------------------------------
[Graphic of a Key] Opening an Account
If you are opening an account through a financial professional, he or she can
assist you with all phases of your investment.
If you are investing through a large retirement plan or other special program,
follow the instructions in your program materials.
To open an account without the help of a financial professional, please use the
instructions on these pages.
[Graphic of a checklist] Choosing a Share Class
The fund offers four share classes, each with its own sales charge and expense
structure.
If you are investing a substantial amount and plan to hold your shares for a
long period, Class A shares may make the most sense for you. If you are
investing a lesser amount, you
Class A -- Front Load
[bullet] Initial sales charge of 4.5% or less; schedule on page 14
[bullet] Lower sales charges for larger investments; see sidebar on facing page
and sales charge schedule
[bullet] Lower annual expenses than Class B or C shares due to lower
marketing/service (12b-1) fee of 0.25%
Class B -- Back Load
[bullet] No initial sales charge
[bullet] Deferred sales charge of 5% or less on shares you sell within five
years; schedule on page 14
[bullet] Annual marketing/service (12b-1) fee
[bullet] Automatic conversion to Class A shares after eight years, reducing
future annual expenses
Class C(1) -- Level Load
[bullet] No initial sales charge
[bullet] Deferred sales charge of 1%, paid if you sell shares within one year of
purchase
[bullet] Lower deferred sales charge than Class B shares
[bullet] Annual marketing/service (12b-1) fee
[bullet] No conversion to Class A shares after eight years, so annual expenses
do not decrease
(1) Before November 1, 1997, these were designated
Class D.
<PAGE>
13
-----------
may want to consider Class B shares (if investing for at least five years) or
Class C shares (if investing for less than five years). If you are investing
through a special program, such as a large employer-sponsored retirement plan or
certain programs available through brokers, you may be eligible to purchase
Class S shares.
Because all future investments in your account will be made in the share class
you designate when opening the account, you should make your decision carefully.
Your financial professional can help you choose the share class that makes the
most sense for you.
[Graphic of magnifying glass]
Class A Sales
Charge Reductions
and Waivers
[bullet] Substantial investments receive lower sales charge rates; see
information on the following page.
[bullet] The "right of accumulation" allows you to include your existing State
Street Research investments (except Money Market Fund Class E shares)
as part of your current investment for sales charge purposes.
[bullet] A "letter of intent" allows you to count all investments in this or
other State Street Research funds over the next 13 months as if you
were making them all at once, for purposes of calculating sales
charges.
To take advantage of right of accumulation or letter of intent waivers, consult
your financial professional or State Street Research.
Class S(2) -- No Load
[bullet] No sales charges of any kind
[bullet] No marketing/service (12b-1) fees; annual expenses are lower than other
share classes
[bullet] Available through certain retirement accounts, advisory accounts of the
investment manager and special programs, including broker programs with
recordkeeping and other services; these programs usually involve
special conditions and separate fees (contact your financial
professional for information).
(2) Before November 1, 1997, these were designated Class C.
<PAGE>
14 Your Account continued
- --------------------------------------------------------------------------------
Sales Charges
Class A -- Front Load
when you invest this % is which equals
this amount deducted this % of
for sales your net
charges investment
- ---------------------------------------------------------------
Up to $99,999 4.50 4.71
$100,000 - $249,999 3.50 3.63
$250,000 - $499,999 2.50 2.56
$500,000 - $999,999 2.00 2.04
$1 million or more see next column
With Class A shares, you pay a sales charge only when you buy shares.
If you are investing $1 million or more (either as a lump sum or through any of
the methods described on the previous page), you can purchase Class A shares
without any sales charge. However, you may be charged a "contingent deferred
sales charge" (CDSC) if you sell any shares you have held for less than one
year. Policies regarding the calculation of the CDSC are the same as for Class
B.
Class A shares are also offered with low or no sales charges through various
wrap-fee programs and other sponsored arrangements (contact your financial
professional for information).
Class B -- Back Load
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
- -------------------------------------------------------------
First year 5.00
Second year 4.00
Third year 3.00
Fourth year 3.00
Fifth year 2.00
Sixth year or later None
With Class B shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for five years or less, as described in the table above. Any shares
acquired through reinvestment are not subject to the CDSC. There is no CDSC on
exchanges into other State Street Research funds, and the
<PAGE>
15
--------
date of your initial investment will continue to be used as the basis for CDSC
calculations when you exchange. To ensure that you pay the lowest CDSC possible,
the fund will always use the shares with the lowest CDSC to fill your sell
requests.
The CDSC is waived on shares sold for mandatory retirement distributions or
because of disability or death. Consult your financial professional or the State
Street Research Service Center.
Class B shares automatically convert to Class A shares after eight years,
lowering your annual expenses from that time on.
Class C (Formerly Class D) -- Level Load
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
- -------------------------------------------------------------
First year 1.00
Second year or later None
With Class C shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for one year or less, as described in the table above. Policies
regarding the calculation of the CDSC are the same as for Class B.
Class C shares currently have the same annual expenses as Class B shares, but
never convert to Class A shares (with their lower annual expenses).
Class S (Formerly Class C) -- No Load
Class S shares have no sales charges or CDSC.
<PAGE>
16 Your Account continued
- --------------------------------------------------------------------------------
[Graphic of Cash Register]
Policies for
Buying Shares
Once you have chosen a share class, the next step is to determine the amount you
want to invest.
Minimum Initial Investments:
[bullet] $1,000 for accounts that use the Investamatic program
[bullet] $2,000 for Individual Retirement Accounts
[bullet] $2,500 for all other accounts
Minimum Additional Investments:
[bullet] $50 for any account
Complete the enclosed application. You can avoid future inconvenience by signing
up now for any services you might later use.
Timing of Requests All requests received by State Street Research before 4:00
p.m. eastern time will be executed the same day, at that day's closing share
price. Orders received after 4:00 p.m. will be executed the following day, at
that day's closing share price.
Wire Transactions Funds may be wired between 8:00 a.m. and 4:00 p.m. eastern
time. To make a same-day wire investment, please notify State Street Research by
12:00 noon of your intention to wire funds, and make sure your wire arrives by
4:00 p.m. Your bank may charge a fee for wiring money.
<PAGE>
Buying Shares 17
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
[Graphic of Briefcase] To Open an Account To Add to an Account
Through a Contact your financial professional. Contact your financial professional.
Financial
Professional
By Mail Make your check payable to "State Street Fill out the investment stub from an
[Graphic of Mailbox] Research Funds." Forward the check and account statement, or indicate the fund
your application to State Street name and account number on your check.
Research. Make your check payable to "State Street
Research Funds." Forward the check and
stub to State Street Research.
[Graphic of Building] Forward your application to State Street Call State Street Research to obtain a
Research, then call to obtain an account control number. Instruct your bank to
By Federal number. Wire funds using the wire funds to:
Funds Wire instructions at right. [bullet] State Street Bank and Trust Company, Boston, MA
[bullet] ABA: 011000028
[bullet] BNF: fund name and share class you want to buy
[bullet] AC: 99029761
[bullet] OBI: your name and your account number
[bullet] Control: the number given to you
by State Street Research
[Graphic of Plug] Verify that your bank is a member of the Call State Street Research to verify
ACH (Automated Clearing House) system. that the necessary bank information is
By Electronic Forward your application to State Street on file for your account. If it is, you
Funds Transfer Research. Please be sure to include the may request a transfer with the same
(ACH) appropriate bank information. Call State phone call. If not, please ask State
Street Research to request a purchase. Street Research to provide you with an
EZ Trader application.
[Graphic of an Forward your application, with all Call State Street Research to verify
application] appropriate sections completed, to State that Investamatic is in place on your
By Investamatic Street Research, along with a check for account, or to request a form to add it.
your initial investment payable to Investments are automatic once
"State Street Research Funds." Investamatic is in place.
By Exchange Call State Street Research or visit our Call State Street Research or visit our
[Graphic of Arrows] Web site. Web site.
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408 Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m., eastern time)
</TABLE>
<PAGE>
18 Your Account continued
- --------------------------------------------------------------------------------
[Graphic of Adding Machine]
Policies for
Selling Shares
Circumstances that Require Written Requests Please submit instructions in
writing when any of the following apply:
[bullet] you are selling more than $100,000 worth of shares
[bullet] the name or address on the account has changed within the last 30 days
[bullet] you want the proceeds to go to a name or address not on the account
registration
[bullet] you are transferring shares to an account with a different registration
or share class
[bullet] you are selling shares held in a corporate or fiduciary account; for
these accounts, additional documents are required:
corporate accounts: certified copy of a corporate resolution
fiduciary accounts: copy of power of attorney or other governing
document
To protect your account against fraud, all signatures on these documents must be
guaranteed. You may obtain a signature guarantee at most banks and securities
dealers. A notary public cannot provide a signature guarantee.
Incomplete Sell Requests State Street Research will attempt to notify you
promptly if any information necessary to process your request is missing.
Timing of Requests All requests received in good order by State Street Research
before 4:00 p.m. eastern time will be executed the same day, at that day's
closing share price. Requests received after 4:00 p.m. will be executed the
following day, at that day's closing share price.
Wire Transactions Proceeds sent by federal funds wire must total at least
$5,000. A fee of $7.50 will be deducted from all proceeds sent by wire, and your
bank may charge an additional fee to receive wired funds.
Selling Recently Purchased Shares If you sell shares before the check or
electronic funds transfer (ACH) for those shares has been collected, you will
not receive the proceeds until your initial payment has cleared. This may take
up to 15 days after your purchase was recorded (in rare cases, longer). If you
open an account with shares purchased by wire, you cannot sell those shares
until your application has been processed.
<PAGE>
Selling Shares 19
- --------------------------------------------------------------------------------
To Sell Some or All of Your Shares
[Graphic of Briefcase]
Contact your financial professional.
Through a
Financial
Professional
By Mail Send a letter of instruction, an endorsed stock
[Graphic of Mailbox] power or share certificates (if you hold
certificate shares) to State Street Research.
Specify the fund, the account number and the
dollar value or number of shares. Be sure to
include all necessary signatures and any
additional documents, as well as signature
guarantees if required (see facing page).
[Graphic of Building] Check with State Street Research to make sure that
By Federal a wire redemption privilege, including a bank
Funds Wire designation, is in place on your account. Once
this is established, you may place your request to
sell shares with State Street Research. Proceeds
will be wired to your pre-designated bank account.
(See "Wire Transactions" on facing page.)
[Graphic of Plug] Check with State Street Research to make sure
By Electronic that the EZ Trader feature, including a bank
Funds Transfer designation, is in place on your account. Once
(ACH) this is established, you may place your request to
sell shares with State Street Research. Proceeds
will be sent to your pre-designated bank account.
[Graphic of Phone] As long as the transaction does not require a
By Telephone written request (see facing page), you or your
financial professional can sell shares by calling
State Street Research. A check will be mailed to
you on the following business day.
By Exchange Read the prospectus for the fund into which you
[Graphic of Arrows] are exchanging. Call State Street Research or
visit our Web site.
[Graphic of Calendar] See plan information on page 23.
By Systematic
Withdrawal Plan
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408
Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m., eastern
time)
<PAGE>
20 Your Account continued
- --------------------------------------------------------------------------------
[Graphic of papers] Account Policies
The Fund's Business Hours The fund is open the same days as the New York Stock
Exchange (generally Monday through Friday). Fund representatives are available
from 8:00 a.m. to 6:00 p.m. eastern time on these days.
Calculating Share Price The fund calculates its net asset value per share (NAV)
every business day at the close of regular trading on the New York Stock
Exchange (usually at 4:00 p.m. eastern time). Each class's share price is
calculated by dividing its net assets by the number of its shares outstanding.
Telephone Requests When you open an account you automatically receive telephone
privileges, allowing you to place requests on your account by telephone. Your
financial professional can also use these privileges to request exchanges on
your account and, with your written permission, redemptions. For your
protection, all telephone calls are recorded.
As long as State Street Research takes certain measures to authenticate
telephone requests on your account, you may be held responsible for unauthorized
requests. Unauthorized telephone requests are rare, but if you want to protect
yourself completely, you can decline the telephone privilege on your
application. The fund may suspend or eliminate the telephone privilege at any
time.
Exchange Privileges There is no fee to exchange shares among State Street
Research funds. Your new fund shares will be the equivalent class as your
current shares. Any contingent deferred sales charges will continue to be
calculated from the date of your initial investment.
Frequent exchanges can interfere with fund management and drive up costs for all
shareholders. Because of this, the fund currently limits each account, or group
of accounts under common ownership or control, to six exchanges per calendar
year. The fund may change or eliminate the exchange privilege at any time, may
<PAGE>
21
-------
limit or cancel any shareholder's exchange privilege and may refuse to accept
any exchange request, particularly those associated with "market timing"
strategies.
For Merrill Lynch customers, exchange privileges extend to Summit Cash Reserves
Fund, which is related to the fund for purposes of investment and investor
services.
Accounts with Low Balances If the value of your account falls below $1,500,
State Street Research may mail you a notice asking you to bring the account back
up to $1,500 or close it out. If you do not take action within 60 days, State
Street Research may either sell your shares and mail the proceeds to you at the
address of record or may deduct an annual maintenance fee (currently $18).
Reinstating Recently Sold Shares For 120 days after you sell shares, you have
the right to "reinstate" your investment by putting some or all of the proceeds
into any currently available State Street Research fund at net asset value. Any
CDSC you paid on the amount you are reinstating will be credited to your
account. You may only use this privilege once in any twelve-month period with
respect to your shares of a given fund.
[Graphic of Uncle Sam] Distributions and Taxes
Income and Capital Gains Distributions The fund typically distributes its net
income and net capital gains, if any, around the end of the fund's fiscal year,
which is December 31.
You may have your distributions reinvested in the fund, invested in a different
State Street Research fund, deposited in a bank account, or mailed out by check.
If you do not give State Street Research other instructions, your distributions
will automatically be reinvested in the fund.
<PAGE>
22 Your Account continued
- --------------------------------------------------------------------------------
[Graphic of magnifying glass] Tax Considerations
Unless your investment is in a tax-deferred account, you may want to avoid:
[bullet] investing a large amount in the fund close to the end of its fiscal
year (if the fund makes a capital gains distribution, you will receive
some of your investment back as a taxable distribution)
[bullet] selling shares at a loss for tax purposes and investing in a
substantially identical investment within 30 days before or after that
sale (such a transaction is usually considered a "wash sale," and you
will not be allowed to claim a tax loss)
Tax Effects of Distributions and Transactions In general, any dividends and
short-term capital gain distributions you receive from the fund are taxable as
ordinary income. Distributions of other capital gains are generally taxable as
capital gains. This is true no matter how long you have owned your shares and
whether you reinvest your distributions or take them in cash.
Every year, the fund will send you information detailing the amount of ordinary
income and capital gains distributed to you for the previous year.
The sale of shares in your account may produce a gain or loss, and is a taxable
event. For tax purposes, an exchange is the same as a sale.
Your investment in the fund could have additional tax consequences. Please
consult your tax professional for assistance.
Backup Withholding By law, the fund must withhold 31% of your distributions
and proceeds if you have not provided complete, correct taxpayer information.
<PAGE>
23
-------
[Graphic of hands] Investor Services
Investamatic Program Use Investamatic to set up regular automatic investments in
the fund from your bank account. You determine the frequency and amount of your
investments, and you can skip an investment with three days notice. Not
available with Class S shares.
Systematic Withdrawal Plan This plan is designed for retirees and other
investors who want regular withdrawals from a fund account. The plan is free and
allows you to withdraw up to 8% of your fund assets a year without incurring any
contingent deferred sales charges. Certain terms and minimums apply.
Dividend Allocation Plan This plan automatically invests your distributions from
the fund into another fund of your choice, without any fees or sales charges.
Automatic Bank Connection This plan lets you route any distributions or
Systematic Withdrawal Plan payments directly to your bank account.
State Street Research also offers a full range of prototype retirement plans for
individuals, sole proprietors, partnerships, corporations and employees. Call
1-800-562-0032 for information on retirement plans or any of the services
described above.
<PAGE>
24 Fund Details
- --------------------------------------------------------------------------------
[Graphic of pillar] Business Structure
Originally formed in 1960, the fund was reorganized in 1989 as a diversified
series of State Street Research Growth Trust, an open-end management investment
company that is organized as a Massachusetts business trust. The fund began
offering its shares to the public on a continuous basis in 1993.
A board of trustees representing shareholder interests oversees the fund's
operations, including the hiring of the investment manager and other service
providers. The fund does not hold regular shareholder meetings, but may call
meetings when matters arise that require shareholder approval. These may include
amendments to the investment management agreement, the election of trustees or
proposed changes in the fund's fundamental goal, which cannot be changed without
shareholder approval.
The investment manager is responsible for the fund's investment and business
activities, and receives the management fee (0.475% of fund assets, annually) as
compensation.
The investment manager and the distributor are subsidiaries of Metropolitan Life
Insurance Company.
Brokers for Portfolio Trades
When placing trades for the fund's portfolio, State Street Research chooses
brokers that provide the best execution (a term defined by service as well as
price), but may also consider a broker's sales of fund shares.
Investment Manager
State Street Research & Management Company
One Financial Center, Boston, MA 02111
Distributor
State Street Research Investment Services, Inc.
One Financial Center, Boston, MA 02111
Service Center
State Street Research Service Center
P.O. Box 8408, Boston, MA 02266
Custodian
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
<PAGE>
25
------
[Graphic of check] Dealer Compensation
Dealers who sell shares of the fund and perform services for fund investors
receive sales commissions and annual fees. These are paid by the fund's
distributor, using money from sales charges, marketing/service (12b-1) fees and
its other resources.
Maximum Dealer Compensation Class A Class B Class C Class S
- -------------------------------------------------------------------------------
Initial commission (%) -- 4.00 1.00 0.00
Investments up to $100,000 (%) 4.00 -- -- --
$100,000 - $249,999 (%) 3.00 -- -- --
$250,000 - $499,999 (%) 2.00 -- -- --
$500,000 - $999,999 (%) 1.75 -- -- --
First $1-3 million (%) 1.00(1) -- -- --
Next $2 million (%) 0.50(1) -- -- --
Next $1 and above (%) 0.25(1) -- -- --
Annual fee (%) 0.25 0.25 0.90 0.00
Additional Policies Please note that the fund maintains additional policies and
reserves certain rights, including:
[bullet] The fund may vary its initial or additional investments in the case of
exchanges, reinvestments, periodic investment plans, retirement and
employee benefit plans, sponsored arrangements and other similar
programs.
[bullet] All orders to purchase shares are subject to acceptance by the fund.
[bullet] At any time, the fund may change or discontinue its sales charge
waivers and any of its order acceptance practices, and may suspend the
sale of its shares.
[bullet] To permit investors to obtain the current price, dealers are
responsible for transmitting all orders to the State Street Research
Service Center promptly.
[bullet] Dealers may impose a transaction fee on the purchase or sale of shares
by shareholders.
[bullet] The distributor may pay its affiliate MetLife Securities, Inc.
additional compensation of up to 0.25% of certain sales or assets.
(1) If your broker declines this commission, the one-year CDSC on your
investment is waived.
<PAGE>
26 Other Securities and Risks
- --------------------------------------------------------------------------------
[Graphic of security]
Other Securities
and Risks
Each of the fund's portfolio securities and investment practices offers certain
opportunities and carries various risks. Major investments and risk factors are
outlined in the fund description starting on page 2. Below are brief
descriptions of other securities and practices, along with their associated
risks. A table of limitations follows.
Foreign Investments Foreign securities are generally more volatile than their
domestic counterparts, in part because of higher political and economic risks,
lack of reliable information, and fluctuations in currency exchange rates. These
risks are usually higher in less developed countries. The fund may use foreign
currencies and related instruments to hedge its foreign investments.
In addition, foreign securities may be more difficult to resell and the markets
for them less efficient than for comparable U.S. securities. Even where a
foreign security increases in price in its local currency, the appreciation may
be diluted by the negative effect of exchange rates when the security's value is
converted to U.S. dollars. Foreign withholding taxes also may apply and errors
and delays may occur in the settlement process for foreign securities.
Derivatives Derivatives, a category that includes options and futures, are
financial instruments whose value derives from another security or an index. The
fund may use derivatives for hedging (attempting to offset a potential loss in
one position by establishing an interest in an opposite
<PAGE>
27
------
position). The fund may also use derivatives for speculation (investing for
potential income or capital gain).
While hedging can guard against potential risks, it adds to the fund's expenses
and can eliminate some opportunities for gains. There is also a risk that a
derivative intended as a hedge may not perform as expected.
The main risk with derivatives is that some types can amplify a gain or loss,
potentially earning or losing substantially more money than the actual cost of
the derivative.
With all derivatives, whether used for hedging or speculation, there is also the
risk that the counterparty may fail to honor its contract terms, causing a loss
for the fund.
Securities Lending The fund may seek additional income by lending portfolio
securities to qualified institutions. By reinvesting the collateral it receives
in these transactions, the fund could magnify any gain or loss it realizes on
the underlying investment. If the borrower fails to return the securities and
the collateral is insufficient to cover the loss, the fund could lose money.
When-issued Securities The fund may invest in securities prior to the date of
their issue. These securities could fall in value prior to the time they are
actually issued, which may be anytime from a few days to over a year.
Restricted and Illiquid Securities Any securities that are thinly traded or
whose resale is restricted can be difficult to sell at a desired time and price.
Some of these securities are new and complex, and trade only among institutions;
the markets for these securities are still developing, and may not function as
efficiently as established markets. Owning a large percentage of restricted and
illiquid securities could hamper the fund's ability to raise cash to meet
redemptions. Also, because there may not be an established market price for
these securities, the fund may have to estimate their value, which means that
their valuation (and, to a much smaller extent, the valuation of the fund) may
have a subjective element.
<PAGE>
28 Other Securities and Risks continued
- --------------------------------------------------------------------------------
Repurchase Agreements The fund may buy securities with the understanding that
the seller will buy them back with interest at a later date. If the seller is
unable to honor its commitment to repurchase the securities, the fund could lose
money.
Bonds The value of any bonds held by the fund is likely to decline when interest
rates rise; the risk is greater for bonds with longer maturities. A less
significant risk is that a bond issuer could default on principal or interest
payments, causing a loss for the fund.
Defensive Investing During unusual market conditions, the fund may place up to
100% of total assets in cash or quality short-term debt securities.
Investment Limitations
<TABLE>
<CAPTION>
Limitations at the time of investment
-------------------------------------
Practice % of total assets % of net assets
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Investing in securities of any given issuer
(other than the U.S. government and its agencies)(1) 5(2) --
Investing in any given industry(1) 25 --
Lending securities 33-1\3 --
Lending money(1) Prohibited --
Repurchase agreements -- 30
Swap arrangements -- 5
Security
- ----------------------------------------------------------------------------------------
Commodity futures contracts and options contracts
(for non-hedging purposes) -- 5(3)
Other options contracts (for non-hedging purposes) -- 5(3)
Illiquid securities -- 15(4)
Restricted securities 10(5) --
Foreign securities 35(6) --
</TABLE>
(1) Fundamental policy; may not be changed without shareholder approval.
(2) Applies only to 75% of fund's total assets. The fund is also prohibited from
investing in more than 10% of an issuer's securities.
(3) Initial margin deposits plus premiums may not exceed 5% of the market value
of the fund's net assets in non-hedging transactions. No limits apply when
used in hedging strategies.
(4) Includes repurchase agreements extending over more than seven days.
(5) Does not include Rule 144A securities.
(6) Applies to all direct and indirect interests in securities of non-U.S.
issuers.
<PAGE>
Notes 29
- --------------------------------------------------------------------------------
<PAGE>
For Additional Information
- -------------------------------------------------------------------------------
You can obtain a free copy of the
current annual/semiannual report
or SAI by contacting:
[STATE STREET RESEARCH LOGO]
Service Center
P.O. Box 8408, Boston, MA 02266
Telephone: 1-800-562-0032
Internet: www.ssrfunds.com
Or you can visit the SEC Web site at:
www.sec.gov
Control Number: xxxx-xxxxxx(xxxx)SSR-LD
You can find additional information on the fund's structure and its performance
in the following documents:
Annual/Semiannual Reports While the prospectus describes the fund's potential
investments, these reports detail the fund's actual investments as of the
report date. Reports include a discussion by fund management of recent economic
and market trends and fund performance. The annual report also includes the
report of the fund's independent accountants.
Statement of Additional Information (SAI) A supplement to the prospectus, the
SAI contains further information about the fund and its investment limitations
and policies. It also includes the most recent annual report and the independent
accountants' report. A current SAI for this fund is on file with the Securities
and Exchange Commission and is incorporated by reference (is legally part of
this prospectus).
prospectus
- --------------
EIN-xxxx-xxxxx
<PAGE>
STATE STREET RESEARCH GROWTH FUND
a Series of
STATE STREET RESEARCH GROWTH TRUST
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1998
TABLE OF CONTENTS
Page
----
INVESTMENT OBJECTIVE................................................2
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS.....................2
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES...................................5
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS....................15
THE TRUST, THE FUND AND ITS SHARES.................................20
TRUSTEES AND OFFICERS..............................................22
INVESTMENT ADVISORY SERVICES.......................................26
PURCHASE AND REDEMPTION OF SHARES..................................27
SHAREHOLDER ACCOUNTS...............................................33
NET ASSET VALUE....................................................37
PORTFOLIO TRANSACTIONS.............................................39
CERTAIN TAX MATTERS................................................42
DISTRIBUTION OF SHARES OF THE FUND.................................44
CALCULATION OF PERFORMANCE DATA....................................50
CUSTODIAN..........................................................53
INDEPENDENT ACCOUNTANTS............................................54
FINANCIAL STATEMENTS...............................................54
The following Statement of Additional Information is not a Prospectus.
It should be read in conjunction with the Prospectus of State Street Research
Growth Fund (the "Fund") dated May 1, 1998, which may be obtained without charge
from the offices of State Street Research Growth Trust (the "Trust") or State
Street Research Investment Services, Inc. (the "Distributor"), One Financial
Center, Boston, Massachusetts 02111-2690.
CONTROL NUMBER:
<PAGE>
INVESTMENT OBJECTIVE
As set forth under "The Fund--Goal and Strategy--Fundamental Goal" in
the Prospectus of State Street Research Growth Fund (the "Fund"), the Fund's
investment goal, which is to provide long-term growth of capital, is fundamental
and may not be changed by the Fund except by the affirmative vote of a majority
of the outstanding voting securities of the Fund, as defined in the Investment
Company Act of 1940, as amended (the "1940 Act"). (Under the 1940 Act, a "vote
of the majority of the outstanding voting securities" means the vote, at the
annual or a special meeting of security holders duly called, (i) of 67% or more
of the voting securities present at the meeting if the holders of more than 50%
of the outstanding voting securities are present or represented by proxy or (ii)
of more than 50% of the outstanding voting securities, whichever is less.)
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under "Growth Fund--Portfolio Risks" and "Other Securities
and Risks" in the Fund's Prospectus, the Fund has adopted certain investment
restrictions, and those investment restrictions are either fundamental or not
fundamental. Fundamental restrictions may not be changed by the Fund except by
the affirmative vote of a majority of the outstanding voting securities of the
Fund. Restrictions that are not fundamental may be changed by a vote of a
majority of the Trustees of the Trust.
The Fund's fundamental investment restrictions are set forth below.
Under these restrictions, it is the Fund's policy:
(1) not to purchase for its portfolio the securities of any issuer if
such purchase at the time thereof would cause less than seventy
five percent (75%) of the total assets of the Fund to be invested
in cash and cash items including receivables), government
securities, securities of other investment companies, and other
securities limited in respect of any one issuer to an amount not
greater in value than five percent (5%) of said total assets of
the Fund;
(2) not to purchase for its portfolio the securities of any one
issuer if such purchase at the time thereof would cause more than
10% of any class of securities of such issuer (as disclosed by
the last available financial statement of such issuer) to be held
by the Fund;
(3) not to issue senior securities except that this restriction shall
not apply to the establishment of multiple classes of shares of
the Fund or other issuance of any
2
<PAGE>
securities or related actions that may be construed to involve
senior securities otherwise permitted by law and regulatory
authorities;
(4) not to underwrite or participate in the marketing of securities
of other issuers, except 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 [as a matter of interpretation,
which is not part of the fundamental policy, this restriction
does not apply 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];
(5) not to invest in or hold for investment any real property [as a
matter of interpretation, which is not part of the fundamental
policy, this restriction does not apply to the extent the Fund
purchases or sells 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];
(6) not to invest in commodities or commodity contracts in excess of
10% of the Fund's total assets, except that investments in
foreign currencies, forward contracts, futures contracts and
options on futures contracts on securities, securities indices
and foreign currencies shall not be deemed an investment in
commodities or commodities contracts;
(7) not to lend money, except that the Fund may lend portfolio
securities and purchase bonds, debentures, notes and similar
obligations (and enter into repurchase agreements with respect
thereto);
(8) not to make any investment which would cause more than 25% of the
Fund's total assets, taken at market value, to be invested in any
one industry [as a matter of interpretation, which is not part of
the fundamental policy, under this restriction, (a) utilities
will be divided according to their services so that, for example,
gas, gas transmission, electric and telephone companies will each
be deemed in a separate industry, (b) oil and oil related
companies will be divided by type so that, for example, oil
production companies, oil service companies and refining and
marketing companies will each be deemed in a separate industry,
(c) finance companies will be classified according to the
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)
shall be excluded];
3
<PAGE>
(9) not to borrow money, except that the Board of Trustees may
authorize the borrowing of money on an unsecured basis for the
general purposes of the Fund and may authorize the issue therefor
of notes or debentures, but no money shall be borrowed for the
Fund except pursuant to the authority of the Board of Trustees,
and no borrowings for the Fund shall be authorized to an
aggregate amount greater than 10% of the net assets of the Fund
[as a matter of interpretation, which is not part of the
fundamental policy, this restriction is deemed to include reverse
repurchase agreements, and as a current nonfundamental policy,
the Fund will not borrow money except from banks for
extraordinary and emergency purposes, such as to permit
redemption requests to be honored, and except the use of funds in
the clearance of portfolio transactions may be regarded as
borrowing];
(10) not to purchase securities on margin or make a short sale of any
securities;
(11) not to purchase for its portfolio securities of companies which
have a record of less than three (3) years' continuous operation
if such purchase at the time thereof would cause more than 5% of
the total assets of the Fund to be invested in the securities of
such company or companies; such period of three years may include
the operation of any predecessor company or companies,
partnership or individual enterprise, if the company whose
securities are taken as an investment for funds of the Fund, has
come into existence as a result of a merger, consolidation,
reorganization, or the purchase of substantially all the assets
of such predecessor company or companies, partnership or
individual enterprise; and
(12) not to purchase for, or retain in, its portfolio any securities
issued by an issuer any of whose officers, directors or security
holders is an Officer, Trustee or Director of the Trust or of the
investment adviser of the Fund if, to the knowledge of the Trust,
one or more of the Officers, Trustees or Directors of the Trust
or of its investment adviser own beneficially more than one-half
of one percent (0.5%) of the shares or securities or both (taken
at market value) of such issuer and all such Officers and
Directors owning more than one-half of one percent (0.5%) of such
shares or securities together own beneficially more than five
percent (5%) of such shares or securities or both (taken at
market value); and if the Secretary of the Trust shall have
requested all Officers, Trustees and Directors of the Trust and
of its investment adviser to notify the Trust at least quarter
annually as to their ownership interest in the securities held by
the Fund, then the Fund shall not be charged with knowledge of
any such ownership interest in the absence of receiving such
notice.
The following investment restrictions are not fundamental. Under these
restrictions, it is the Fund's policy:
4
<PAGE>
(1) not to purchase any security or enter into a repurchase agreement
if as a result more than 15% of its net assets would be invested
in securities that are illiquid (including repurchase agreements
not entitling the holder to payment of principal and interest
within seven days);
(2) not to engage in transactions in options except in connection
with options on securities, securities indices and foreign
currencies, and options on futures contracts on securities,
securities indices and foreign currencies;
(3) not to hypothecate, mortgage or pledge any of its assets except
as may be necessary in connection with permitted borrowings (for
the purpose of this restriction, futures, options and forward
commitments, and related escrow or custodian receipts or letters,
margin or safekeeping accounts, or similar arrangements used in
the industry in connection with the trading of such investments,
are not deemed to involve a hypothecation, mortgage or pledge of
assets);
(4) not to purchase a security issued by another investment company,
except to the extent permitted under the 1940 Act or except by
purchases in the open market involving only customary brokers'
commissions, or securities acquired as dividends or distributions
or in connection with a merger, consolidation or similar
transaction or other exchange; and
(5) not to invest in companies for the purpose of exercising control
over their management, although the Fund may from time to time
present its views on various matters to the management of issuers
in which it holds investments.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Derivatives
The Fund may buy and sell certain types of derivatives, such as options,
futures contracts, options on futures contracts, and swaps under circumstances
in which such instruments are expected by State Street Research & Management
Company (the "Investment Manager") to aid in achieving the Fund's investment
objective. The Fund may also purchase instruments with characteristics of both
futures and securities (e.g., debt instruments with interest and principal
payments determined by reference to the value of a commodity or a currency at a
future time) and which, therefore, possess the risks of both futures and
securities investments.
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Fund to take both "short" positions (positions
which anticipate a decline in the market
5
<PAGE>
value of a particular asset or index) and "long" positions (positions which
anticipate an increase in the market value of a particular asset or index). The
Fund may also use strategies which involve simultaneous short and long positions
in response to specific market conditions, such as where the Investment Manager
anticipates unusually high or low market volatility.
The Investment Manager may enter into derivative positions for the Fund
for either hedging or non-hedging purposes. The term hedging is applied to
defensive strategies designed to protect the Fund from an expected decline in
the market value of an asset or group of assets that the Fund owns (in the case
of a short hedge) or to protect the Fund from an expected rise in the market
value of an asset or group of assets which it intends to acquire in the future
(in the case of a long or "anticipatory" hedge). Non-hedging strategies include
strategies designed to produce incremental income (such as the option writing
strategy described below) or "speculative" strategies, which are undertaken to
profit from (i) an expected decline in the market value of an asset or group of
assets which the Fund does not own or (ii) expected increases in the market
value of an asset which it does not plan to acquire. Information about specific
types of instruments is provided below.
Futures Contracts. Futures contracts are publicly traded contracts to
buy or sell an underlying asset or group of assets, such as a currency or an
index of securities, at a future time at a specified price. A contract to buy
establishes a long position while a contract to sell establishes a short
position.
The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or index after paying a transaction charge and posting
margin in an amount equal to a small percentage of the value of the underlying
asset or index. The Fund will initially be required to deposit with the Trust's
custodian or the broker effecting the futures transaction an amount of "initial
margin" in cash or securities, as permitted under applicable regulatory
policies.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
6
<PAGE>
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will terminate
the Fund's position in the futures contract. A final determination of
maintenance margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. While futures
contracts with respect to securities do provide for the delivery and acceptance
of such securities, such delivery and acceptance are seldom made.
In transactions establishing a long position in a futures contract,
assets equal to the face value of the futures contract will be identified by the
Fund to the Trust's custodian for maintenance in a separate account to insure
that the use of such futures contracts is unleveraged. Similarly, assets having
a value equal to the aggregate face value of the futures contract will be
identified with respect to each short position. The Fund will utilize such
assets and methods of cover as appropriate under applicable exchange and
regulatory policies.
Options. The Fund may use options to implement its investment strategy.
There are two basic types of options: "puts" and "calls." Each type of option
can establish either a long or a short position, depending upon whether the Fund
is the purchaser or the writer of the option. A call option on a security, for
example, gives the purchaser of the option the right to buy, and the writer the
obligation to sell, the underlying asset at the exercise price during the option
period. Conversely, a put option on a security gives the purchaser the right to
sell, and the writer the obligation to buy, the underlying asset at the exercise
price during the option period.
Purchased options have defined risk, that is, the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset. In general, a purchased put increases in value
as the value of the underlying security falls and a purchased call increases in
value as the value of the underlying security rises.
The principal reason to write options is to generate extra income (the
premium paid by the buyer). Written options have varying degrees of risk. An
uncovered written call option theoretically carries unlimited risk, as the
market price of the underlying asset could rise far above the exercise price
before its expiration. This risk is tempered when the call option is covered,
that is, when the option writer owns the underlying asset. In this case, the
writer runs the risk of the lost opportunity to participate in the appreciation
in value of the asset rather than the risk of an out-of-pocket loss. A written
put option has defined risk, that is, the difference between the agreed-upon
price that the Fund must pay to the buyer upon exercise of the put and the
value, which could be zero, of the asset at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
its obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put
7
<PAGE>
option, a covered writer is required to deposit in escrow the underlying
security or other assets in accordance with the rules of the applicable clearing
corporation and exchanges.
Among the options which the Fund may enter are options on securities
indices. In general, options on indices of securities are similar to options on
the securities themselves except that delivery requirements are different. For
example, a put option on an index of securities does not give the holder the
right to make actual delivery of a basket of securities but instead gives the
holder the right to receive an amount of cash upon exercise of the option if the
value of the underlying index has fallen below the exercise price. The amount of
cash received will be equal to the difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple. As with options on equity securities, or futures contracts,
a Fund may offset its position in index options prior to expiration by entering
into a closing transaction on an exchange or it may let the option expire
unexercised.
A securities index assigns relative values to the securities included in
the index and the index options are based on a broad market index. In connection
with the use of such options, the Fund may cover its position by identifying
assets having a value equal to the aggregate face value of the option position
taken.
Options on Futures Contracts. An option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put) at a specified exercise price at any time during the
period of the option.
Limitations and Risks of Options and Futures Activity. The Fund may not
establish a position in a commodity futures contract or purchase or sell a
commodity option contract for other than bona fide hedging purposes if
immediately thereafter the sum of the amount of initial margin deposits and
premiums required to establish such positions for such nonhedging purposes would
exceed 5% of the market value of the Fund's net assets. The Fund applies a
similar policy to options that are not commodities.
As noted above, the Fund may engage in both hedging and nonhedging
strategies. Although effective hedging can generally capture the bulk of a
desired risk adjustment, no hedge is completely effective. The Fund's ability to
hedge effectively through transactions in futures and options depends on the
degree to which price movements in its holdings correlate with price movements
of the futures and options.
Nonhedging strategies typically involve special risks. The profitability
of the Fund's nonhedging strategies will depend on the ability of the Investment
Manager to analyze both the applicable derivatives market and the market for the
underlying asset or group of assets. Derivatives markets are often more volatile
than corresponding securities markets and a
8
<PAGE>
relatively small change in the price of the underlying asset or group of assets
can have a magnified effect upon the price of a related derivative instrument.
Derivatives markets also are often less liquid than the market for the
underlying asset or group of assets. Some positions in futures and options may
be closed out only on an exchange which provides a secondary market therefor.
There can be no assurance that a liquid secondary market will exist for any
particular futures contract or option at any specific time. Thus, it may not be
possible to close such an option or futures position prior to maturity. The
inability to close options and futures positions also could have an adverse
impact on the Fund's ability to effectively carry out their derivative
strategies and might, in some cases, require a Fund to deposit cash to meet
applicable margin requirements. The Fund will enter into an option or futures
position only if it appears to be a liquid investment.
Swaps. 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.
The Fund may enter credit protection swap arrangements involving the
sale by the Fund of a put option on a debt security which is exercisable by the
buyer upon certain events, such as a default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
Most swaps entered into by the Fund will be on a net basis; for example,
in an interest rate swap, amounts generated by application of the fixed rate and
the floating rate to the notional principal amount would first offset one
another, with the Fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, the Fund will set up a segregated custodial account to hold appropriate
liquid assets, including cash; for swaps entered into on a net basis, assets
will be segregated having a daily net asset value equal to any excess of the
Fund's accrued obligations over the accrued obligations of the other party,
while for swaps on other than a net basis assets will be segregated having a
value equal to the total amount of the Fund's obligations.
9
<PAGE>
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a portion of the Fund's portfolio.
However, the Fund may, as noted above, enter into such arrangements for income
purposes to the extent permitted by the Commodities Futures Trading Commission
for entities which are not commodity pool operators, such as the Fund. In
entering a swap arrangement, the Fund is dependent upon the creditworthiness and
good faith of the counterparty. The Fund attempts to reduce the risks of
nonperformance by the counterparty by dealing only with established, reputable
institutions. The swap market is still relatively new and emerging; positions in
swap arrangements may become illiquid to the extent that nonstandard
arrangements with one counterparty are not readily transferable to another
counterparty or if a market for the transfer of swap positions does not develop.
The use of interest rate swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Investment Manager is incorrect in its
forecasts of market values, interest rates and other applicable factors, the
investment performance of the Fund would diminish compared with what it would
have been if these investment techniques were not used. Moreover, even if the
Investment Manager is correct in its forecasts, there is a risk that the swap
position may correlate imperfectly with the price of the asset or liability
being hedged.
Currency Transactions
The Fund may engage in currency exchange transactions in order to
protect against the effect of uncertain future exchange rates on securities
denominated in foreign currencies. The Fund will conduct its currency exchange
transactions either on a spot (i.e., cash) basis at the rate prevailing in the
currency exchange market, or by entering into forward contracts to purchase or
sell currencies. The Fund's dealings in forward currency exchange contracts will
be limited to hedging involving either specific transactions or aggregate
portfolio positions. A forward currency contract involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are not commodities and
are entered into in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. In entering a
forward currency contract, the Fund is dependent upon the creditworthiness and
good faith of the counterparty. The Fund attempts to reduce the risks of
nonperformance by the counterparty by dealing only with established, reputable
institutions. Although spot and forward contracts will be used primarily to
protect the Fund from adverse currency movements, they also involve the risk
that anticipated currency movements will not be accurately predicted, which may
result in losses to the Fund. This method of protecting the value of the Fund's
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange that can be achieved at some future point in
time. Although such contracts tend to minimize the risk of loss due to a decline
in the value of hedged currency, they tend to limit any potential gain that
might result should the value of such currency increase.
10
<PAGE>
Repurchase Agreements
The Fund may enter into repurchase agreements. Repurchase agreements
occur when the Fund acquires a security and the seller, which may be either (i)
a primary dealer in U.S. Government securities or (ii) an FDIC-insured bank
having gross assets in excess of $500 million, simultaneously commits to
repurchase it at an agreed-upon price on an agreed-upon date within a specified
number of days (usually not more than seven) from the date of purchase. The
repurchase price reflects the purchase price plus an agreed-upon market rate of
interest which is unrelated to the coupon rate or maturity of the acquired
security. The Fund will only enter into repurchase agreements involving U.S.
Government securities. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
Repurchase agreements will be limited to 30% of the Fund's net assets, except
that repurchase agreements extending for more than seven days when combined with
any other illiquid securities held by the Fund will be limited to 15% of the
Fund's net assets.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. However, the Fund
may not engage in reverse repurchase agreements in excess of 5% of the Fund's
total assets. In a reverse repurchase agreement the Fund transfers possession of
a portfolio instrument to another person, such as a financial institution,
broker or dealer, in return for a percentage of the instrument's market value in
cash, and agrees that on a stipulated date in the future the Fund will
repurchase the portfolio instrument by remitting the original consideration plus
interest at an agreed-upon rate. The ability to use reverse repurchase
agreements may enable, but does not ensure the ability of, the Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
When-Issued Securities
The Fund may purchase "when-issued" securities, which are traded on a
price or yield basis prior to actual issuance. Such purchases will be made only
to achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs when corporate securities
to be created by a merger of companies are traded prior to the actual
consummation of the merger. Such transactions may involve a risk of loss if the
value of the securities falls below the price committed to prior to actual
issuance. The Trust's custodian will establish a segregated
11
<PAGE>
account when the Fund purchases securities on a when-issued basis consisting of
cash or liquid securities equal to the amount of the when-issued commitments.
Securities transactions involving delayed deliveries or forward commitments are
frequently characterized as when-issued transactions and are similarly treated
by the Fund.
Restricted Securities
It is the Fund's policy not to make an investment in restricted
securities, including restricted securities sold in accordance with Rule 144A
under the Securities Act of 1933 ("Rule 144A Securities") if, as a result, more
than 35% of the Fund's total assets are invested in restricted securities,
provided not more than 10% of the Fund's total assets are invested in restricted
securities other than Rule 144A Securities.
Securities may be resold pursuant to Rule 144A under certain
circumstances only to qualified institutional buyers as defined in the rule, and
the markets and trading practices for such securities are relatively new and
still developing; depending on the development of such markets, Rule 144A
Securities may be deemed to be liquid as determined by or in accordance with
methods adopted by the Trustees. Under such methods the following factors are
considered, among others: the frequency of trades and quotes for the security,
the number of dealers and potential purchasers in the market, market making
activity, and the nature of the security and marketplace trades. Investments in
Rule 144A Securities could have the effect of increasing the level of the Fund's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing such securities. Also, the Fund may be
adversely impacted by the subjective valuation of such securities in the absence
of a market for them. Restricted securities that are not resalable under Rule
144A may be subject to risks of illiquidity and subjective valuations to a
greater degree than Rule 144A Securities.
Foreign Investments
The Fund reserves the right to invest without limitation in securities
of non-U.S. issuers directly, or indirectly in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Under current
policy, however, the Fund limits such investments, including ADRs and EDRs, to a
maximum of 35% of its total assets.
ADRs are receipts, typically issued by a U.S. bank or trust company,
which evidence ownership of underlying securities issued by a foreign
corporation or other entity. EDRs are receipts issued in Europe which evidence a
similar ownership arrangement. Generally, ADRs in registered form are designed
for use in U.S. securities markets and EDRs are designed for use in European
securities markets. The underlying securities are not always denominated in the
same currency as the ADRs or EDRs. Although investment in the form of ADRs or
EDRs facilitates trading in foreign securities, it does not mitigate all the
risks associated with investing in foreign securities.
12
<PAGE>
ADRs are available through facilities which may be either "sponsored" or
"unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and usually agrees to
provide shareholder communications. In an unsponsored arrangement, the foreign
issuer is not involved, and the ADR holders pay the fees of the depository.
Sponsored ADRs are generally more advantageous to the ADR holders and the issuer
than are unsponsored ADRs. More and higher fees are generally charged in an
unsponsored program compared to a sponsored facility. Only sponsored ADRs may be
listed on the New York or American Stock Exchanges. Unsponsored ADRs may prove
to be more risky due to (a) the additional costs involved to the Fund; (b) the
relative illiquidity of the issue in U.S. markets; and (c) the possibility of
higher trading costs in the over-the-counter market as opposed to exchange based
tradings. The Fund will take these and other risk considerations into account
before making an investment in an unsponsored ADR.
The risks associated with investments in foreign securities include
those resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks of
nationalization or expropriation, the possible imposition of currency exchange
blockages, higher operating expenses, foreign withholding and other taxes which
may reduce investment return, reduced availability of public information
concerning issuers, the difficulties in obtaining and enforcing a judgment
against a foreign issuer and the fact that foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements comparable to those applicable to
domestic issuers. Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of securities of comparable
domestic issuers.
These risks are usually higher in less-developed countries. Such
countries include countries that have an emerging stock market on which trade a
small number of securities and/or countries with economies that are based on
only a few industries. The Fund may invest in the securities of issuers in
countries with less developed economies as deemed appropriate by the Investment
Manager. However, it is anticipated that a majority of the foreign investments
by the Fund will consist of securities of issuers in countries with developed
economies.
Securities Lending
The Fund may lend portfolio securities with a value of up to 33-1/3% of
its total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of any loaned securities plus accrued interest. Collateral
received by the Fund will generally be held in the form tendered, although cash
may be invested in unaffiliated mutual funds with quality short-term portfolios,
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities or certain unaffiliated mutual funds, irrevocable stand-by
letters of credit issued by a bank, or
13
<PAGE>
repurchase agreements, or other similar investments. The investing of cash
collateral received from loaning portfolio securities involves leverage which
magnifies the potential for gain or loss on monies invested and, therefore,
results in an increase in the volatility of the Fund's outstanding securities.
Such loans may be terminated at any time.
The Fund will retain rights to dividends, interest or other
distributions, on the loaned securities. Voting rights pass with the lending,
although the Fund may call loans to vote proxies if desired. Should the borrower
of the securities fail financially, there is a risk of delay in recovery of the
securities or loss of rights in the collateral. Loans are made only to borrowers
which are deemed by the Investment Manager or its agents to be of good financial
standing.
Short-Term Trading
The Fund may engage in short-term trading of securities and reserves
full freedom with respect to portfolio turnover. In periods where there are
rapid changes in economic conditions and security price levels or when
reinvestment strategy changes significantly, portfolio turnover may be higher
than during times of economic and market price stability or when investment
strategy remains relatively constant. The Fund's portfolio turnover rate may
involve greater transaction costs, relative to other funds in general, and may
have tax and other consequences.
Temporary and Defensive Investments
The Fund may hold up to 100% of its assets in cash or short-term debt
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Investment Manager, such a
position is more likely to provide protection against adverse market conditions
than adherence to the Fund's other investment policies. The types of short-term
instruments in which the Fund may invest for such purposes include short-term
money market securities, such as repurchase agreements, and securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
certificates of deposit, time deposits and bankers' acceptances of certain
qualified financial institutions and corporate commercial paper, which at the
time of purchase are rated at least within the "A" major rating category by
Standard & Poor's Corporation ("S&P") or the "Prime" major rating category by
Moody's Investor's Service, Inc. ("Moody's"), or, if not rated, issued by
companies having an outstanding long-term unsecured debt issued rated at least
within the "A" category by S&P or Moody's.
Industry Classifications
In determining how much of the Fund's portfolio is invested in a given
industry, the following industry classifications are currently used. Securities
issued or guaranteed as to principal or interest by the U.S. Government or its
agencies or instrumentalities or mixed-ownership Government corporations or
sponsored enterprises (including repurchase agreements involving U.S. Government
securities to the extent excludable under relevant
14
<PAGE>
regulatory interpretations) are excluded. Securities issued by foreign
governments are also excluded. Companies engaged in the business of financing
may be classified according to the industries of their parent or sponsor
companies or industries that otherwise most affect such financing companies.
Issuers of asset-backed pools will be classified as separate industries based on
the nature of the underlying assets, such as mortgages and credit card
receivables. "Asset-backed-Mortgages" includes private pools of nongovernment
backed mortgages.
<TABLE>
<CAPTION>
Basic Industries Consumer Staple Science & Technology
- --------------- --------------- --------------------
<S> <C> <C>
Chemical Business Service Aerospace
Diversified Container Computer Software
Electrical Equipment Drug & Service
Forest Products Food & Beverage Electronic Components
Machinery Hospital Supply Electronic Equipment
Metal & Mining Personal Care Office Equipment
Railroad Printing & Publishing
Truckers Tobacco
Utility Energy Consumer Cyclical
- ------ ------ -----------------
Electric Oil Refining & Marketing Airline
Gas Oil Production Automotive
Gas Transmission Oil Service Building
Telephone Hotel & Restaurant
Photography
Other Finance Recreation
- ----- ------- Retail Trade
Trust Certificates-- Bank Textile & Apparel
Government Related Lending Financial Service
Asset-backed--Mortgages Insurance
Asset-backed--Credit Card
Receivables
</TABLE>
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
The Fund may invest in long-term and short-term debt securities.
Certain debt securities and money market instruments in which the Fund may
invest are described below.
Managing Volatility. In administering the Fund's portfolio, the
Investment Manager attempts to manage volatility in part by managing the
duration and weighted average maturity of the Fund's bond position.
Duration is an indicator of the expected volatility of a bond position
in response to changes in interest rates. In calculating duration, the Fund
measures the average time required to receive all cash flows associated with
those debt securities held in the Fund's portfolio -- representing payments of
principal and interest -- by considering the timing, frequency and amount of
payment expected from each portfolio security. The higher the duration, the
greater the gains and losses when interest rates change. Duration generally is a
more accurate measure of potential volatility with a portfolio composed of
high-quality debt securities, such as U.S. government securities, municipal
securities and high-grade U.S. corporate bonds, than with lower-grade
securities.
The Investment Manager may use several methods to manage the duration
of the Fund's bond position in order to increase or decrease its exposure to
changes in interest rates. First, the Investment Manager may adjust portfolio
duration by adjusting the mix of debt securities held by the Fund. For example,
if the Investment Manager intends to shorten duration, it may sell debt
instruments that individually have a long duration and purchase other debt
instruments that individually have a shorter duration. Among the factors that
will affect a debt security's duration are the length of time to maturity, the
timing of interest and principal payments, and whether the terms of the security
give the issuer of the security the right to call the security prior to
maturity. Second, the Investment Manager may adjust bond portfolio duration
using derivative transactions, especially with interest rates futures and
options contracts. For example, if the Investment Manager wants to lengthen the
duration of the Fund's bond position, it could purchase interest rate futures
contracts instead of buying longer-term bonds or selling shorter-term bonds.
Similarly, during periods of lower interest rate volatility, the Investment
Manager may use a technique to extend duration in the event rates rise by
writing an out-of-the-money put option and receiving premium income with the
expectation that the option could be exercised. In managing duration, the use of
such derivatives may be faster and more efficient than trading specific
portfolio securities.
Weighted average maturity is another indicator of potential volatility
used by the Investment Manager with respect to the Fund's bond portfolio,
although for certain types of debt securities, such as high quality debt
securities, it is not as accurate as duration in quantifying potential
volatility. Weighted average maturity is the average of all maturities of the
individual debt securities held by the Fund, weighted by the market value of
each security. Generally, the longer the weighted average maturity, the more
bond prices will vary in response to changes in interest rates.
U.S. Government and Related Securities. U.S. Government securities are
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S.
15
<PAGE>
Government agency or instrumentality, or certain mixed-ownership Government
corporations as described herein. The U.S. Government securities in which the
Fund invests include, among others:
o direct obligations of the U.S. Treasury, i.e., U.S. Treasury
bills, notes, certificates and bonds;
o obligations of U.S. Government agencies or instrumentalities, such
as the Federal Home Loan Banks, the Federal Farm Credit Banks, the
Federal National Mortgage Association, the Government National
Mortgage Association and the Federal Home Loan Mortgage
Corporation; and
o obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a
variety of ways by the U.S. Government, its agencies or instrumentalities. Some
of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. Other obligations, such as those of the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government to
purchase certain obligations of agencies or instrumentalities, although the U.S.
Government has no legal obligation to do so. 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.
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.
16
<PAGE>
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
17
<PAGE>
arising out of the exercise of their banking powers and can exercise other
commercial functions, such as lending activities.
Short-Term Corporate Debt Instruments. Short-term corporate debt
instruments include commercial paper to finance short-term credit needs (i.e.,
short-term, unsecured promissory notes) issued by corporations including but not
limited to (a) domestic or foreign bank holding companies or (b) their
subsidiaries or affiliates where the debt instrument is guaranteed by the bank
holding company or an affiliated bank or where the bank holding company or the
affiliated bank is unconditionally liable for the debt instrument. Commercial
paper is usually sold on a discounted basis and has a maturity at the time of
issuance not exceeding nine months.
Commercial Paper Ratings. Commercial paper investments at the time of
purchase will be rated within the "A" major rating category by S&P or within the
"Prime" major rating category by Moody's, or, if not rated, issued by companies
having an outstanding long-term unsecured debt issue rated at least within the
"A" category by S&P or by Moody's. The money market investments in corporate
bonds and debentures (which must have maturities at the date of settlement of
one year or less) must be rated at the time of purchase at least within the "A"
category by S&P or within the "Prime" category by Moody's.
Commercial paper rated within the "A" category (highest quality) by S&P
is issued by entities which have liquidity ratios which are adequate to meet
cash requirements. Long-term senior debt is rated within the "A" category or
better, although in some cases credits within the "BBB" category may be allowed.
The issuer has access to at least two additional channels of borrowing. Basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances. Typically, the issuer's industry is well established and the
issuer has a strong position within the industry. The reliability and quality of
management are unquestioned. The relative strength or weakness of the above
factors determines whether the issuer's commercial paper is rated A-1, A-2 or
A-3. (Those A-1 issues determined to possess overwhelming safety characteristics
are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating category
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: evaluation of the management of the issuer; economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; evaluation of the
issuer's products in relation to competition and customer acceptance; liquidity;
amount and quality of long-term debt; trend of earnings over a period of 10
years; financial management of obligations which may be present or may arise as
a result of public interest questions and preparations to meet such obligations.
These factors are all considered in determining whether the commercial paper is
rated Prime-1, Prime-2 or Prime-3.
In the event the lowering of ratings of debt instruments held by the
Fund by applicable rating agencies results in a material decline in the overall
quality of the Fund's portfolio, the
18
<PAGE>
Trustees of the Trust will review the situation and take such action as they
deem in the best interests of the Fund's shareholders, including, if necessary,
changing the composition of the portfolio.
Rating Categories of Debt Securities. Set forth below is a description
of S&P corporate bond and debenture rating categories for securities which are
deemed to be investment grade:
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 from AA to BBB may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high 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.
Set forth below is a description of Moody's corporate bond and
debenture ratings categories for securities which are deemed to be investment
grade:
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 know as
high-grade bonds. They are rated
19
<PAGE>
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 then 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 from Aa through Baa may be modified by the
addition of a numeral indicating a bond's rank within its major rating category.
THE TRUST, THE FUND AND ITS SHARES
State Street Research Growth Trust is currently comprised of only one
series: State Street Research Growth Fund. The Trustees of the Trust have
authority to issue an unlimited number of shares of beneficial interest of
separate series, $.001 par value per share. The Trustees also have authority,
without the necessity of a shareholder vote, to create any number of new series
or classes or to commence the public offering of shares of any previously
established series or classes. A "series" is a separate pool of assets of the
Trust which is separately managed and has a different investment objective and
different investment policies from those of another series.
The Trustees have authorized shares of the Fund to be issued in four
classes: Class A, Class B, Class C and Class S shares. Prior to November 1,
1997, the Fund's current Class C shares were designated as Class D shares and
the Fund's current Class S shares were designated as Class C shares.
Each share of each class of shares represents an identical legal
interest in the same portfolio of investments of the Fund, has the same rights
and is identical in all respects, except that Class A, Class B and Class C
shares bear the expenses of the deferred sales arrangement and any expenses
(including the higher service and distribution fees) resulting from such sales
arrangement, and certain other incremental expenses related to a class. Each
class will have exclusive voting rights with respect to provisions of the Rule
12b-1 distribution plan pursuant to which the service and distribution fees, if
any, are paid. Although the legal rights of holders of each class of shares are
identical, it is likely that the different expenses borne by each class will
20
<PAGE>
result in different net asset values and dividends. The different classes of
shares of the Fund also have different exchange privileges. Except for those
differences between classes of shares described above, in the Fund's Prospectus
and otherwise this Statement of Additional Information, each share of the Fund
has equal dividend, redemption and liquidation rights with other shares of the
Fund, and when issued, is fully paid and nonassessable by the Fund.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have a material, adverse effect on
the rights of any shareholder. On any matter submitted to the shareholders, the
holder of a Fund share is entitled to one vote per share (with proportionate
voting for fractional shares) regardless of the relative net asset value
thereof.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there ordinarily will be no shareholder meetings
unless required by the 1940 Act. Except as otherwise provided under the 1940
Act, the Board of Trustees will be a self-perpetuating body until fewer than
two-thirds of the Trustees serving as such are Trustees who were elected by
shareholders of the Trust. In the event less than a majority of the Trustees
serving as such were elected by shareholders of the Trust, a meeting of
shareholders will be called to elect Trustees. Under the Master Trust Agreement,
any Trustee may be removed by vote of two-thirds of the outstanding Trust
shares; holders of 10% or more of the outstanding shares of the Trust can
require that the Trustees call a meeting of shareholders for purposes of voting
on the removal of one or more Trustees. In connection with such meetings called
by shareholders, shareholders will be assisted in shareholder communications to
the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations for the
Trust. However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for indemnification
for all losses and expenses of any shareholder of the Fund held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which 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.
21
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and principal officers of the Trust, their addresses, and
their principal occupations and positions with certain affiliates of the
Investment Manager are set forth below.
*+Peter C. Bennett, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 59. His principal occupation is currently,
and during the past five years has been, Executive Vice President of State
Street Research & Management Company. Mr. Bennett is also a Director of State
Street Research & Management Company. Mr. Bennett's other principal business
affiliations include Director, State Street Research Investment Services, Inc.
and Executive Vice President, GFM International Investors, Inc.
+Steve A. Garban, The Pennsylvania State University, 210 Old Main,
University Park, PA 16802, serves as Trustee of the Trust. He is 60. He is
retired and was formerly Senior Vice President for Finance and Operations and
Treasurer of The Pennsylvania State University.
+Malcolm T. Hopkins, 14 Brookside Road, Biltmore Forest, Asheville, NC
28803, serves as Trustee of the Trust. He is 70. He is engaged principally in
private investments. Previously, he was Vice Chairman of the Board and Chief
Financial Officer of St. Regis Corp.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791,
serves as Trustee of the Trust. He is 71. He is engaged principally in private
investments and civic affairs and is an author of business history. Previously,
he was with an affiliate of J.P. Morgan & Co. in New York.
+Robert A. Lawrence, 175 Federal Street, Boston, MA 02110, serves as
Trustee of the Trust. He is 71. He is retired and was formerly a Partner in
Saltonstall & Co., a private investment firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 47. His principal occupation is currently, and
during the past five years has been, Executive Vice President, Treasurer, Chief
Financial Officer and Director of State Street Research & Management Company.
Mr. Maus's other principal business affiliations include Executive Vice
President, Treasurer, Chief Financial Officer and Director of State Street
Research Investment Services, Inc. and Executive Vice President, Chief Financial
Officer, Administrative Officer and Director, GFM International Investors, Inc.
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111,
serves as Secretary and General Counsel of the Trust. He is 42. His principal
occupation is Executive Vice President, General Counsel and Secretary of State
Street Research & Management
- -------------------
* or +, see footnotes on page 24.
22
<PAGE>
Company. During the past five years he has also served as Senior Vice President
of State Street Research & Management Company and as Senior Vice President,
General Counsel and Assistant Secretary of The Boston Company, Inc., Boston Safe
Deposit and Trust Company and The Boston Company Advisors, Inc. Mr. McNamara's
other principal business affiliations include Senior Vice President, Clerk and
General Counsel of State Street Research Investment Services, Inc. and Executive
Vice President and General Counsel, GFM International Investors, Inc.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 66. 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.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves
as Trustee of the Trust. He is 59. His principal occupations during the past
five years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
60. His principal occupation during the past five years has been Jay W.
Forrester Professor of Management at Sloan School of Management, Massachusetts
Institute of Technology.
*+Ralph F. Verni, One Financial Center, Boston, MA 02111, serves as
Chairman of the Board, President, Chief Executive Officer and Trustee of the
Trust. He is 55. His principal occupation is currently, and during the past five
years has been, Chairman of the Board, President, Chief Executive Officer and
Director of State Street Research & Management Company. Mr. Verni's other
principal business affiliations include Chairman of the Board and Director of
State Street Research Investment Services, Inc. (and until February 1996, prior
positions as President and Chief Executive Officer of that company) and Chairman
of the Board, President, Chief Executive Officer and Director of GFM
International Investors, Inc.
*+Dudley F. Wade, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 79. His principal occupation during the past
five years has been Senior Vice President of State Street Research & Management
Company.
*+James M. Weiss, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 51. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as President and Chief Investment Officer of IDS
Advisory Group, Inc.
- -------------------
* or +, see footnotes on page 24.
23
<PAGE>
*+Kennard Woodworth, Jr., One Financial Center, Boston, MA 02111,
serves as Vice President of the Trust. He is 59. His principal occupation is
Senior Vice President of State Street Research & Management Company.
- -----------------
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the 1940 Act because of their affiliations
with the Fund's investment adviser.
+ Serves as a Trustee/Director and/or officer of one or more of the
following investment companies, each of which has an advisory
relationship with the Investment Manager or its parent, Metropolitan
Life Insurance Company ("Metropolitan"): State Street Research Equity
Trust, State Street Research Financial Trust, State Street Research
Income Trust, State Street Research Money Market Trust, State Street
Research Tax-Exempt Trust, State Street Research Capital Trust, State
Street Research Exchange Trust, State Street Research Growth Trust,
State Street Research Master Investment Trust, State Street Research
Securities Trust, State Street Research Portfolios, Inc. and
Metropolitan Series Fund, Inc.
24
<PAGE>
As of January 31, 1998, the Trustees and principal officers of the
Trust owned as a group approximately 1.3% of the outstanding Class A shares of
the Fund and less than 1% of the outstanding Class S shares of the Fund. The
Trustees and principal officers owned none of the Fund's outstanding Class B or
Class C shares.
Record ownership of shares of the Fund as of January 31, 1998 was as
follows:
Class Holder % of Class
- ---- ------ ----------
B Merrill Lynch 28.60
C(a) Merrill Lynch 60.20
The full name and address of the above person or institution is:
Merrill Lynch, Pierce, Fenner & Smith Incorporated (b)
4800 Deerlake Drive East
Jacksonville, FL 32246
Ownership of 25% or more of a voting security is deemed "control," as
defined in the 1940 Act. So long as 25% of a class of shares is so owned, such
owners will be presumed to be in control of such class of shares for purposes of
voting on certain matters submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
- -------------------
(a) Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
(b) The Fund believes that each named recordholder does not have beneficial
ownership of such shares.
25
<PAGE>
The Trustees were compensated as follows:
Total
Compensation
Aggregate From Trust
Name of Compensation and Complex Paid
Trustee From Trust(a) to Trustees (b)
------- ------------ ----------------
Steve A. Garban $3,165 $ 75,899
Malcolm T. Hopkins $3,465 $ 78,499
Edward M. Lamont $4,000 $ 68,741
Robert A. Lawrence $4,100 $ 93,125
Dean O. Morton $4,300 $ 97,125
Toby Rosenblatt $4,000 $ 68,741
Michael S. Scott Morton $4,600 $103,625
Ralph F. Verni $ 0 $ 0
(a) For the Fund's fiscal year ended December 31, 1997. See "The Trust, the
Fund and its Shares" in this Statement of Additional Information for a
listing of series.
(b) Includes compensation on behalf of all series of 12 investment
companies for which the Investment Manager or its parent, Metropolitan
served as investment adviser. "Total Compensation from Trust and
Complex Paid to Trustees" for the 12 months ended December 31, 1997.
The Trust does not provide any pension or retirement benefits for the
Trustees.
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Investment
Manager was founded by Paul Cabot, Richard Saltonstall and Richard Paine to
serve as investment adviser to one of the nation's first mutual funds, presently
known as State Street Research Investment Trust, which they had formed in 1924.
Their investment management philosophy emphasized comprehensive
fundamental research and analysis, including meetings with the management of
companies under consideration for investment. The Investment Manager's portfolio
management group has extensive investment industry experience managing equity
and debt securities. In managing debt securities, if any, for a portfolio, the
Investment Manager may consider yield curve positioning, sector rotation and
duration, among other factors.
The Advisory Agreement provides that the Investment Manager shall
furnish the Fund with an investment program, office facilities and such
investment advisory, research and administrative services as may be required
from time to time. The Investment Manager compensates all executive and clerical
personnel and Trustees of the Trust if such persons are
26
<PAGE>
employees of the Investment Manager or its affiliates. The Investment Manager is
an indirect wholly-owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan").
The advisory fee payable monthly by the Fund to the Investment Manager
is computed as a percentage of the average of the value of the net assets of the
Fund as determined at the close of regular trading on the New York Stock
Exchange (the "NYSE") on each day the NYSE is open for trading, at the annual
rate of 0.475% of the net assets of the Fund.
The advisory fees paid by the Fund to the Investment Manager for the
last three fiscal years, prior to the assumption of fees or expenses, were as
follows: 1997, $1,125,505; 1996, $1,100,839; and 1995, $1,089,143.
The Advisory Contract provides that it will continue from year to year
as long as it is approved at least annually both (i) by a vote of a majority of
the outstanding voting securities of the Fund (as defined in the 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 Contract or "interested
persons" of any party thereto, cast in person at a meeting called for the
purpose of voting on such approval. The Advisory Contract 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 Shareholders' Administrative Services Agreement between the
Trust and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Fund, and is entitled to
reimbursements of its costs for providing such services. Under certain
arrangements for Metropolitan to provide subadministration services,
Metropolitan may receive a fee for the maintenance of certain share ownership
records for participants in sponsored arrangements, such as employee benefit
plans, through or under which the Fund's shares may be purchased.
Under the Code of Ethics of the Investment Manager, personnel are only
permitted to engage in personal securities transactions in accordance with
certain conditions relating to such person's position, the identity of the
security, the timing of the transaction, and similar factors. Such personnel
must report their personal securities transactions quarterly and supply broker
confirmations of such transactions to the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by State Street Research Investment
Services, Inc., the Distributor. The Fund offers four classes of shares which
may be purchased at the next
27
<PAGE>
determined net asset value per share plus, in the case of all classes except
Class S shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a deferred
basis (the Class B and Class C shares). General information on how to buy shares
of the Fund, as well as sales charges involved, are set forth under "Your
Account" in the Prospectus. The following supplements that information.
Public Offering Price. The public offering price for each class of
shares is based on their net asset value determined as of the close of regular
trading on the NYSE on the day the purchase order is received by State Street
Research Service Center (the "Service Center"), provided that the order is
received prior to the close of regular trading on the NYSE on that day;
otherwise the net asset value used is that determined as of the close of the
NYSE on the next day it is open for unrestricted trading. When a purchase order
is placed through a dealer, that dealer is responsible for transmitting the
order promptly to the Service Center in order to permit the investor to obtain
the current price. Any loss suffered by an investor which results from a
dealer's failure to transmit an order promptly is a matter for settlement
between the investor and the dealer.
Class A Shares--Reduced Sales Charges. The reduced sales charges set
forth under "Your Account--Class A Sales Charge Reductions and Waivers" in the
Fund's Prospectus apply to purchases made at any one time by any "person," which
includes: (i) an individual, or an individual combining with his or her spouse
and their children and purchasing for his, her or their own account; (ii) a
"company" as defined in Section 2(a)(8) of the 1940 Act; (iii) a trustee or
other fiduciary purchasing for a single trust estate or single fiduciary account
(including a pension, profit sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code);
(iv) a tax-exempt organization under Section 501(c)(3) or (13) of the Internal
Revenue Code; and (v) an employee benefit plan of a single employer or of
affiliated employers.
Investors may purchase Class A shares of the Fund at reduced sales
charges by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds"
(which include the Fund and other funds as designated by the Distributor from
time to time) within a 13-month period. The sales charge applicable to each
purchase made pursuant to a Letter of Intent will be that which would apply if
the total dollar amount set forth in the Letter of Intent were being bought in a
single transaction. Purchases made within a 90-day period prior to the execution
of a Letter of Intent may be included therein; in such case the date of the
earliest of such purchases marks the commencement of the 13-month period.
An investor may include toward completion of a Letter of Intent the
value (at the current public offering price) of all of his or her Class A shares
of the Fund and of any of the other Class A shares of Eligible Funds held of
record as of the date of his or her Letter of Intent, plus the value (at the
current offering price) as of such date of all of such shares held by
28
<PAGE>
any "person" described herein as eligible to join with the investor in a single
purchase. Class B, Class C and Class S shares may also be included in the
combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class S shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Other Programs Related to Class A Shares. Class A shares of the Fund
may be sold or issued in an exchange at a reduced sales charge or without sales
charge pursuant to certain sponsored arrangements, which include programs under
which a company, employee benefit plan or other organization makes
recommendations to, or permits group solicitation of, its employees, members or
participants, except any organization created primarily for the purpose of
obtaining shares of the Fund at a reduced sales charge or without a sales
charge. Sales without a sales charge, or with a reduced sales charge, may also
be made through brokers, registered investment advisers, financial planners,
institutions, and others, under managed fee-based programs (e.g., "wrap fee" or
similar programs) which meet certain requirements established from time to time
by the Distributor. Information on such arrangements and further conditions and
limitations is available from the Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and person: (A) the
Investment Manager, Distributor or any affiliated entities, including any direct
or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated Companies,
any relatives of any such
29
<PAGE>
individuals whose relationship is directly verified by such individuals to the
Distributor, or any beneficial account for such relatives or individuals; and
(C) employees, officers, sales representatives or directors of dealers and other
entities with a selling agreement with the Distributor to sell shares of any
aforementioned investment company, any spouse or child of such person, or any
beneficial account for any of them. The purchase must be made for investment and
the shares purchased may not be resold except through redemption. This purchase
program is subject to such administrative policies, regarding the qualification
of purchasers and any other matters, as may be adopted by the Distributor from
time to time.
Conversion of Class B Shares to Class A Shares. A shareholder's Class B
shares of the Fund, including all shares received as dividends or distributions
with respect to such shares, will automatically convert to Class A shares of the
Fund at the end of eight years following the issuance of such Class B shares;
consequently, they will no longer be subject to the higher expenses borne by
Class B shares. The conversion rate will be determined on the basis of the
relative per share net asset values of the two classes and may result in a
shareholder receiving either a greater or fewer number of Class A shares than
the Class B shares so converted. As noted above, holding periods for Class B
shares received in exchange for Class B shares of other Eligible Funds will be
counted toward the eight-year period.
Contingent Deferred Sales Charges. The amount of any contingent
deferred sales charge paid on Class A shares (on sales of $1 million or more and
which do not involve an initial sales charge) or on Class B or Class C shares of
the Fund will be paid to the Distributor. The Distributor will pay dealers at
the time of sale a 4% commission for selling Class B shares and a 1% commission
for selling Class C shares. In certain cases, a dealer may elect to waive the 4%
commission on Class B shares and receive in lieu thereof a 1% annual fee with
respect to such outstanding shares until the shares convert to Class A shares.
The proceeds of the contingent deferred sales charges and the distribution fees
are used to offset distribution expenses and thereby permit the sale of Class B
and Class C shares without an initial sales charge.
In determining the applicability and rate of any contingent deferred
sales charge of Class B or Class C shares, it will be assumed that a redemption
of the shares is made first of those shares having the greatest capital
appreciation, next of shares representing reinvestment of dividends and capital
gains distributions and finally of remaining shares held by shareholder for the
longest period of time. Class B shares that are redeemed within a five-year
period after their purchase, and Class C shares that are redeemed within a
one-year period after their purchase, will not be subject to a contingent
deferred sales charge to the extent that the value of such shares represents (1)
capital appreciation of Fund assets or (2) reinvestment of dividends or capital
gains distributions. The holding period for purposes of applying a contingent
deferred sales charge for a particular class of shares of the Fund acquired
through an exchange from another Eligible Fund will be measured from the date
that such shares were initially acquired in the other Eligible Fund, and shares
of the same class being redeemed will
30
<PAGE>
be considered to represent, as applicable, capital appreciation or dividend and
capital gains distribution reinvestments in such other Eligible Fund. These
determinations will result in any contingent deferred sales charge being imposed
at the lowest possible rate. For federal income tax purposes, the amount of the
contingent deferred sales charge will reduce the gain or increase the loss, as
the case may be, on the amount realized on redemption.
Contingent Deferred Sales Charge Waivers. With respect to Class A
shares (on sales of $1 million or more and which do not involve an initial sales
charge), and Class B and Class C shares of the Fund, the contingent deferred
sales charge does not apply to exchanges or to redemptions under a systematic
withdrawal plan which meets certain conditions. In addition, the contingent
deferred sales charge will be waived for: (i) redemptions made within one year
of the death or total disability, as defined by the Social Security
Administration, of all shareholders of an account; (ii) redemptions made after
attainment of a specific age in an amount which represents the minimum
distribution required at such age under Section 401(a)(9) of the Internal
Revenue Code of 1986, as amended, for retirement accounts or plans (e.g., age 70
70-1/2 for Individual Retirement Accounts and Section 403(b) plans), calculated
solely on the basis of assets invested in the Fund or other Eligible Funds; and
(iii) a redemption resulting from a tax-free return of an excess contribution to
an Individual Retirement Account. (The foregoing waivers do not apply to a
tax-free rollover or transfer of assets out of the Fund). The Fund may modify or
terminate the waivers at any time; for example, the Fund may limit the
application of multiple waivers and establish other conditions for employee
benefit plans.
Class S Shares. Class S shares are currently available to certain
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants, service arrangements, or similar factors;
insurance companies; investment companies; advisory accounts of the Investment
Manager; endowment funds of nonprofit organizations with substantial minimum
assets (currently a minimum of $10 million); and other similar institutional
investors. Class S shares may be acquired through programs or products sponsored
by Metropolitan, its affiliates, or both for which Class S shares have been
designated. In addition, Class S shares are available through programs under
which, for example, investors pay an asset-based fee and/or a transaction fee to
intermediaries. Class S share availability is determined by the Distributor and
intermediaries based on the overall direct and indirect costs of a particular
program, expected assets, account sizes and similar considerations.
Reorganizations. In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, the Fund may issue its shares at net asset value (or
more) to such entities or to their security holders.
31
<PAGE>
Redemptions. The Fund reserves the right to pay redemptions in kind
with portfolio securities in lieu of cash. In accordance with its election
pursuant to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of
redemption proceeds paid in cash. Although it has no present intention to do so,
the Fund may, under unusual circumstances, limit redemptions in cash with
respect to each shareholder during any ninety-day period to the lesser of (i)
$250,000 or (ii) 1% of the net asset value of the Fund at the beginning of such
period. In connection with any redemptions paid in kind with portfolio
securities, brokerage and other costs may be incurred by the redeeming
shareholder in the sale of the securities received.
Systematic Withdrawal Plan. A shareholder who owns noncertificated
Class A or Class S shares with a value of $5,000 or more, or Class B or Class C
shares with a value of $10,000 or more, may elect, by participating in the
Fund's Systematic Withdrawal Plan, to have periodic checks issued for specified
amounts. These amounts may not be less than certain minimums, depending on the
class of shares held. The Plan provides that all income dividends and capital
gains distributions of the Fund shall be credited to participating shareholders
in additional shares of the Fund. Thus, the withdrawal amounts paid can only be
realized by redeeming shares of the Fund under the Plan. To the extent such
amounts paid exceed dividends and distributions from the Fund, a shareholder's
investment will decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually of
either (a) the value, at the time the Systematic Withdrawal Plan is initiated,
of the shares then in the account or (b) the value, at the time of a withdrawal,
of the same number of shares as in the account when the Systematic Withdrawal
Plan was initiated, whichever is higher.
Expenses of the Systematic Withdrawal Plan are borne by the Fund. A
participating shareholder may withdraw from the Systematic Withdrawal Plan, and
the Fund may terminate the Systematic Withdrawal Plan at any time on written
notice. Purchase of additional shares while a shareholder is receiving payments
under a Systematic Withdrawal Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate in
the Investamatic Program (see "Your Account--Investor Services--Investamatic
Program" in the Fund's Prospectus) and the Systematic Withdrawal Plan at the
same time.
Request to Dealer to Repurchase. For the convenience of shareholders,
the Fund has authorized the Distributor as its agent to accept orders from
dealers by wire or telephone for the repurchase of shares by the Distributor
from the dealer. The Fund may revoke or suspend this authorization at any time.
The repurchase price is the net asset value for the applicable shares next
determined following the time at which the shares are offered for repurchase by
the dealer to the Distributor. The dealer is responsible for promptly
transmitting a shareholder's order to the Distributor.
32
<PAGE>
Signature Guarantees. Signature guarantees are required for, among
other things: (1) written requests for redemptions for more than $100,000; (2)
written requests for redemptions for any amount if the proceeds are transmitted
to other than the current address of record (unchanged in the past 30 days); (3)
written requests for redemptions for any amount submitted by corporations and
certain fiduciaries and other intermediaries; and (4) requests to transfer the
registration of shares to another owner. Signatures must be guaranteed by a
bank, a member firm of a national stock exchange, or other eligible guarantor
institution. The Transfer Agent will not accept guarantees (or notarizations)
from notaries public. The above requirements may be waived in certain instances.
Dishonored Checks. If a purchaser's check is not honored for its full
amount, the purchaser could be subject to additional charges to cover collection
costs and any investment loss, and the purchase may be canceled.
Processing Charges. Purchases and redemptions processed through
securities dealers may be subject to processing charges imposed by the
securities dealer in addition to sales charges that may be imposed by the Fund
or the Distributor.
SHAREHOLDER ACCOUNTS
General information on shareholder accounts is included in the Fund's
Prospectus under "Your Account." The following supplements that information.
Maintenance Fees and Involuntary Redemption. Because of the relatively
high cost of maintaining small shareholder accounts, the Fund reserves the right
to redeem at its option any shareholder account which remains below $1,500 for a
period of 60 days after notice is mailed to the applicable shareholder, or to
impose a maintenance fee on such account after 60 days' notice. Such
involuntarily redemptions will be subject to applicable sales charges, if any.
The Fund may increase such minimum account value above such amount in the future
after notice to affected shareholders. Involuntarily redeemed shares will be
priced at the net asset value on the date fixed for redemption by the Fund, and
the proceeds of the redemption will be mailed to the affected shareholder at the
address of record. Currently, the maintenance fee is $18 annually, which is paid
to the Transfer Agent. The fee does not apply to certain retirement accounts or
if the shareholder has more than an aggregate $50,000 invested in the Fund and
other Eligible Funds combined. Imposition of a maintenance fee on a small
account could, over time, exhaust the assets of such account.
To cover the cost of additional compliance administration, a $20 fee
will be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
33
<PAGE>
The Fund may not suspend the right of redemption or postpone the date
of payment of redemption proceeds for more than seven days, except that (a) it
may elect to suspend the redemption of shares or postpone the date of payment of
redemption proceeds: (1) during any period that the NYSE is closed (other than
customary weekend and holiday closings) or trading on the NYSE is restricted;
(2) during any period in which an emergency exists as a result of which disposal
of portfolio securities is not reasonably practicable or it is not reasonably
practicable to fairly determine the Fund's net asset values; or (3) during such
other periods as the Securities and Exchange Commission (the "SEC") may by order
permit for the protection of investors; and (b) the payment of redemption
proceeds may be postponed as otherwise provided under "Purchase and Redemption
of Shares" in this Statement of Additional Information.
The Open Account System. Under the Open Account System full and
fractional shares of the Fund owned by shareholders are credited to their
accounts by the Transfer Agent, State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110. Certificates representing Class B
or Class C shares will not be issued, while certificates representing Class A or
Class S shares will only be issued if specifically requested in writing and, in
any case, will only be issued for full shares, with any fractional shares to be
carried on the shareholder's account. Shareholders will receive periodic
statements of transactions in their accounts.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through
dealers, by wire or by mailing a check payable to "State
Street Research Funds" under the terms set forth above under
"Purchase and Redemption of Shares" in this Statement of
Additional Information.
2. The following methods of receiving dividends from investment
income and distributions from capital gains generally are
available:
(a) All income dividends and capital gains distributions
reinvested in additional shares of the Fund.
(b) All income dividends and capital gains distributions
in cash.
(c) All income dividends and capital gains distributions
invested in any one available Eligible Fund
designated by the shareholder as described below. See
"--Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will be
34
<PAGE>
automatically coded for reinvestment of all dividends and distributions in
additional shares of the same class of the Fund. Selections may be changed at
any time by telephone or written notice to the Service Center. Dividends and
distributions are reinvested at net asset value without a sales charge.
Exchange Privileges. Shareholders of the Fund may exchange their shares
for available shares with corresponding characteristics of any of the other
Eligible Funds at any time on the basis of the relative net asset values of the
respective shares to be exchanged, subject to compliance with applicable
securities laws. Shareholders of any other Eligible Fund may similarly exchange
their shares for Fund shares with corresponding characteristics. Prior to making
an exchange, shareholders should obtain the Prospectus of the Eligible Fund into
which they are exchanging. Under the Direct Program, subject to certain
conditions, shareholders may make arrangements for regular exchanges from the
Fund into other Eligible Funds. To effect an exchange, Class A, Class B and
Class C shares may be redeemed without the payment of any contingent deferred
sales charge that might otherwise be due upon an ordinary redemption of such
shares. The State Street Research Money Market Fund issues Class E shares which
are sold without any sales charge. Exchanges of State Street Research Money
Market Fund Class E shares into Class A shares of the Fund or any other Eligible
Fund are subject to the initial sales charge or contingent deferred sales charge
applicable to an initial investment in such Class A shares, unless a prior Class
A sales charge has been paid directly or indirectly with respect to the shares
redeemed. For purposes of computing the contingent deferred sales charge that
may be payable upon disposition of any acquired Class A, Class B and Class C
shares, the holding period of the redeemed shares is "tacked" to the holding
period of any acquired shares. No exchange transaction fee is currently imposed
on any exchange.
Shares of the Fund may also be acquired or redeemed in exchange for
shares of the Summit Cash Reserves Fund ("Summit Cash Reserves") by customers of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (subject to completion of
steps necessary to implement the program). The Fund and Summit Cash Reserves are
related mutual funds for purposes of investment and investor services. Upon the
acquisition of shares of Summit Cash Reserves by exchange for redeemed shares of
the Fund, (a) no sales charge is imposed by Summit Cash Reserves, (b) no
contingent deferred sales charge is imposed by the Fund on the Fund shares
redeemed, and (c) any applicable holding period of the Fund shares redeemed is
"tolled," that is, the holding period clock stops running pending further
transactions. Upon the acquisition of shares of the Fund by exchange for
redeemed shares of Summit Cash Reserves, (a) the acquisition of Class A shares
shall be subject to the initial sales charges or contingent deferred sales
charges applicable to an initial investment in such Class A shares, unless a
prior Class A sales charge has been paid indirectly, and (b) the acquisition of
Class B or Class C shares of the Fund shall restart any holding period
previously tolled, or shall be subject to the contingent deferred sales charge
applicable to an initial investment in such shares.
35
<PAGE>
The exchange privilege may be terminated or suspended or its terms
changed at any time, subject, if required under applicable regulations, to 60
days' prior notice. New accounts established for investments upon exchange from
an existing account in another fund will have the same telephone privileges with
respect to the Fund (see "Your Account--Account Policies--Telephone Requests" in
the Fund's Prospectus and "--Telephone Privileges," below) as the existing
account unless the Service Center is instructed otherwise. Related
administrative policies and procedures may also be adopted with regard to a
series of exchanges, street name accounts, sponsored arrangements and other
matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer identification
number, may be aggregated for purposes of the six exchange limit.
Notwithstanding the six exchange limit, the Fund reserves the right to refuse
exchanges by any person or group if, in the Investment Manager's judgment, the
Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
Exchanges may be restricted or refused if the Fund receives or anticipates
simultaneous orders affecting significant portions of the Fund's assets. In
particular, a pattern of exchanges that coincides with a "market timing"
strategy may be disruptive to the Fund. The Fund may impose these restrictions
at any time. The exchange limit may be modified for accounts in certain
institutional retirement plans because of plan exchange limits, Department of
Labor regulations or administrative and other considerations. Subject to the
foregoing, if an exchange request in good order is received by the Service
Center and delivered by the Service Center to the Transfer Agent by 12 noon
Boston time on any business day, the exchange usually will occur that day. For
further information regarding the exchange privilege, shareholders should
contact the Service Center.
Reinvestment Privilege. A shareholder of the Fund who has redeemed
shares or had shares repurchased at his or her request may reinvest all or any
portion of the proceeds (plus that amount necessary to acquire a fractional
share to round off his or her reinvestment to full shares) in shares, of the
same class as the shares redeemed, of the Fund or any other Eligible Fund at net
asset value and without subjecting the reinvestment to an initial sales charge,
provided such reinvestment is made within 120 calendar days after a redemption
or repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the amount
reinvested. The redemption of shares is, for federal income tax purposes, a sale
on which the shareholder may realize a gain or loss. If a redemption at a loss
is followed by a reinvestment within 30 days, the transaction may be a "wash
sale" resulting in a denial of the loss for federal income tax purposes.
36
<PAGE>
Any reinvestment pursuant to the reinvestment privilege will be subject
to any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by the Service
Center of such shareholder's written purchase request and delivery of the
request by the Service Center to the Transfer Agent. A shareholder may exercise
this reinvestment privilege only once per 12-month period with respect to his or
her shares of the Fund.
Dividend Allocation Plan. The Dividend Allocation Plan allows
shareholders to elect to have all their dividends and any other distributions
from the Fund or any Eligible Fund automatically invested at net asset value in
one other such Eligible Fund designated by the shareholder, provided the account
into which the dividends and distributions are directed is initially funded with
the requisite minimum amount.
Telephone Privileges. A shareholder with telephone privileges that are
offered with his or her Account (see "Your Account--Account Policies--Telephone
Requests") is deemed to authorize the Service Center and the Transfer Agent to:
(1) act upon the telephone instructions of any person purporting to be the
shareholder or the shareholder's financial professional to exchange, or to
redeem with the shareholder's permission, shares from any account; and (2) honor
any written instructions for a change of address regardless of whether such
request is accompanied by a signature guarantee. All telephone calls will be
recorded. Neither the Fund, the other Eligible Funds, the Transfer Agent, the
Investment Manager nor the Distributor will be liable for any loss, expense or
cost arising out of any request, including any fraudulent or unauthorized
requests. Shareholders assume the risk to the full extent of their accounts that
telephone requests may be unauthorized. Reasonable procedures will be followed
to confirm that instructions communicated by telephone are genuine. The
shareholder will not be liable for any losses arising from unauthorized or
fraudulent instructions if such procedures are not followed.
Alternative Means of Contacting the Fund. It is unlikely, during
periods of extraordinary market conditions, that a shareholder may have
difficulty in reaching the Service Center. In that event, however, the
shareholder should contact the Service Center at 1-800-562-0032, 1-617-357-7800
or otherwise at its main office at One Financial Center, Boston, Massachusetts
02111-2690.
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily
as of the close of regular trading on the NYSE, ordinarily 4 P.M. New York City
time, Monday through Friday, on each day during which the NYSE is open for
unrestricted trading. The NYSE is currently closed on New Year's Day, Martin
Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
37
<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 as provided below, the
Trustees utilize one or more pricing services in lieu of market quotations for
certain securities which are not readily available on a daily basis. Such
services utilize information with respect to market transactions, quotations
from dealers and various relationships among securities in determining value and
may provide prices determined as of times prior to the close of the NYSE.
In general, securities are valued as follows. Securities which are
listed or traded on the New York or American Stock Exchange are valued at the
price of the last quoted sale on the respective exchange for that day.
Securities which are listed or traded on a national securities exchange or
exchanges, but not on the New York or American Stock Exchange, are valued at the
price of the last quoted sale on the exchange for that day prior to the close of
the NYSE. Securities not listed on any national securities exchange which are
traded "over the counter" and for which quotations are available on the National
Association of Securities Dealers, Inc.'s (the "NASD") NASDAQ System are valued
at the closing price supplied through such system for that day at the close of
the NYSE. Other securities are, in general, valued at the mean of the bid and
asked quotations last quoted prior to the close of the NYSE if there are market
quotations readily available, or in the absence of such market quotations, then
at the fair value thereof as determined by or under authority of the Trustees of
the Trust with the use of such pricing services as may be deemed appropriate or
methodologies approved by the Trustees.
The Trustees have authorized the use of the amortized cost method to
value short-term debt instruments issued with a maturity of one year or less and
having a remaining maturity of 60 days or less when the value obtained is fair
value, provided that during any period in which more than 25% of the Fund's
total assets is invested in short-term debt securities the current market value
of such securities will be used in calculating net asset value per share in lieu
of the amortized cost method. Under the amortized cost method of valuation, the
security is initially valued at cost on the date of purchase (or in the case of
short-term debt instruments purchased with more than 60 days remaining to
maturity, the market value on the 61st day prior to maturity), and thereafter a
constant amortization to maturity of any discount or premium is assumed
regardless of the impact of fluctuating interest rates on the market value of
the security.
38
<PAGE>
PORTFOLIO TRANSACTIONS
Portfolio Turnover
The Fund's portfolio turnover rate is determined by dividing the lesser
of securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The Fund's portfolio turnover rates for the fiscal years ended
December 31, 1997 and 1996 were 258.99% and 237.85%, respectively.
Brokerage Allocation
The Investment Manager's policy is to seek for its clients, including
the Fund, what in the Investment Manager's judgment will be the best overall
execution of purchase or sale orders and the most favorable net prices in
securities transactions consistent with its judgment as to the business
qualifications of the various broker or dealer firms with whom the Investment
Manager may do business, and the Investment Manager may not necessarily choose
the broker offering the lowest available commission rate. Decisions with respect
to the market where the transaction is to be completed, to the form of
transaction (whether principal or agency), and to the allocation of orders among
brokers or dealers are made in accordance with this policy. In selecting brokers
or dealers to effect portfolio transactions, consideration is given to their
proven integrity and financial responsibility, their demonstrated execution
experience and capabilities both generally and with respect to particular
markets or securities, the competitiveness of their commission rates in agency
transactions (and their net prices in principal transactions), their willingness
to commit capital, and their clearance and settlement capability. The Investment
Manager makes every effort to keep informed of commission rate structures and
prevalent bid/ask spread characteristics of the markets and securities in which
transactions for the Fund occur. Against this background, the Investment Manager
evaluates the reasonableness of a commission or a net price with respect to a
particular transaction by considering such factors as difficulty of execution or
security positioning by the executing firm. The Investment Manager may or may
not solicit competitive bids based on its judgment of the expected benefit or
harm to the execution process for that transaction.
When it appears that a number of firms could satisfy the required
standards in respect of a particular transaction, consideration may also be
given by the Investment Manager to services other than execution services which
certain of such firms have provided in the past or may provide in the future.
Negotiated commission rates and prices, however, are based upon the Investment
Manager's judgment of the rate which reflects the execution requirements of the
transaction without regard to whether the broker provides services in addition
to execution. Among such other services are the supplying of supplemental
investment research; general economic, political and business information;
analytical and statistical data; relevant market information, quotation
equipment and services; reports and information about specific companies,
industries and
39
<PAGE>
securities; purchase and sale recommendations for stocks and bonds; portfolio
strategy services; historical statistical information; market data services
providing information on specific issues and prices; financial publications;
proxy voting data and analysis services; technical analysis of various aspects
of the securities markets, including technical charts; computer hardware used
for brokerage and research purposes; computer software and databases (including
those contained in certain trading systems and used for portfolio analysis and
modeling and also including software providing investment personnel with
efficient access to current and historical data from a variety of internal and
external sources) and portfolio evaluation services and relative performance of
accounts.
In the case of the Fund and other registered investment companies
advised by the Investment Manager or its affiliates, the above services may
include data relating to performance, expenses and fees of those investment
companies and other investment companies; this information is used by the
Trustees or Directors of the investment companies to fulfill their
responsibility to oversee the quality of the Investment Manager's advisory
contracts between the investment companies and the Investment Manager. The
Investment Manager considers these investment company services only in
connection with the execution of transactions on behalf of its investment
company clients and not its other clients. Certain of the nonexecution services
provided by broker-dealers may in turn be obtained by the broker-dealers from
third parties who are paid for such services by the broker-dealers.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. The Investment Manager's investment management
personnel conduct internal surveys and use other methods to evaluate the quality
of the research and other services provided by various broker-dealer firms, and
the results of these efforts are made available to the equity trading
department, which uses this information as a consideration to the extent
described above in the selection of brokers to execute portfolio transactions.
Some services furnished by broker-dealers may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Investment Manager allocates the cost
of the services to determine the proportion which is allocable to research or
investment decision-making and the proportion allocable to other purposes. The
Investment Manager pays directly from its own funds for portion allocable to
uses other than research or investment decision-making.
40
<PAGE>
Some research and execution services may benefit the Investment Manager's
clients as a whole, while others may benefit a specific segment of clients. Not
all such services will necessarily be used exclusively in connection with the
accounts which pay the commissions to the broker-dealer providing the services.
The Investment Manager has no fixed agreements or understandings with
any broker-dealer as to the amount of brokerage business which the firm may
expect to receive for services supplied to the Investment Manager or otherwise.
There may be, however, understandings with certain firms that in order for such
firms to be able to continuously supply certain services, they need to receive
an allocation of a specified amount of brokerage business. These understandings
are honored to the extent possible in accordance with the policies set forth
above.
It is not the Investment Manager's policy to intentionally pay a firm a
brokerage commission higher than that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided. However, the Investment Manager is aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, the Investment Manager relies on the provisions of
Section 28(e) of the Securities Exchange Act of 1934. Brokerage commissions paid
by the Fund in secondary trading during the last three fiscal years were as
follows: 1997, $1,122,012, 1996, $905,310 and 1995, $981,788. The Investment
Manager believes the amount of brokerage commissions paid by the Fund during the
fiscal year ended December 31, 1997 was significantly higher than during the
previous fiscal year because of increased levels of assets and increased market
volatility, and the Investment Manager's efforts to restructure the portfolio
and to take advantage of the resulting opportunities to purchase certain
securities at attractive prices and to sell certain securities in order to
realize gains.
During and at the end of its most recent fiscal year, the Fund did not
hold in its portfolio securities of any entity that might be deemed to be a
regular broker-dealer of the Fund as defined under the 1940 Act.
In the case of the purchase of fixed income securities in underwriting
transactions, the Investment Manager follows any instructions received from its
clients as to the allocation of new issue discounts, selling commissions and
designations to brokers or dealers which provide the client with research,
performance evaluation, master trustee and other services. In the absence of
instructions from the client, the Investment Manager may make such allocations
to broker-dealers which have provided the Investment Manager with research and
brokerage services.
In some instances, certain clients of the Investment Manager request it
to place all or part of the orders for their account with certain brokers or
dealers, which in some cases provide services to those clients. The Investment
Manager generally agrees to honor these requests to the extent practicable.
Clients may condition their requests by requiring that the Investment Manager
only effect transactions with the specified broker-dealers if the broker-dealers
are competitive as to price and execution. In other cases, the Investment
Manager may be unable to negotiate commissions or obtain volume discounts or
best execution. In addition, a disparity may exist among the commissions charged
to clients who request the Investment Manager to use particular brokers or
dealers, and also between those clients and those who do not make such requests.
A client who requests the use of a particular broker-dealer should understand
that it may lose the possible advantage which non-requesting clients derive from
aggregation of orders for several clients as a single transaction for the
purchase or sale of a particular security. Among other reasons why best
execution may not be achieved with directed brokerage is that, in an effort to
achieve orderly execution of transactions, execution of orders that have
designated particular brokers may, at the discretion of the trading desk, be
delayed until execution of other non-designated orders has been completed.
When more than one client of the Investment Manager is seeking to buy
or sell the same security, the sale or purchase is carried out in a manner which
is considered fair and
41
<PAGE>
equitable to all accounts. In allocating investments among various clients
(including in what sequence orders for trades are placed), the Investment
Manager will use its best business judgment and will take into account such
factors as the investment objectives of the clients, the amount of investment
funds available to each, the size of the order, the amount already committed for
each client to a specific investment and the relative risks of the investments,
all in order to provide on balance a fair and equitable result to each client
over time. Although sharing in large transactions may sometimes affect price or
volume of shares acquired or sold, overall it is believed there may be an
advantage in execution. The Investment Manager may follow the practice of
grouping orders of various clients for execution to get the benefit of lower
prices or commission rates. In certain cases where the aggregate order may be
executed in a series of transactions at various prices, the transactions are
allocated as to amount and price in a manner considered equitable to each so
that each receives, to the extent practicable, the average price of such
transactions. Exceptions may be made based on such factors as the size of the
account and the size of the trade. For example, the Investment Manager may not
aggregate trades where it believes that it is in the best interests of clients
not to do so, including situations where aggregation might result in a large
number of small transactions with consequent increased custodial and other
transactional costs which may disproportionately impact smaller accounts. Such
disaggregation, depending on the circumstances, may or may not result in such
accounts receiving more or less favorable execution relative to other clients.
CERTAIN TAX MATTERS
Federal Income Taxation of Fund--in General
The Fund intends to qualify and elect to be treated each taxable year
as a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), although it cannot give complete
assurance that it will do so. Accordingly, the Fund must, among other things,
(a) derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) satisfy certain diversification
requirements; and (c) in order to be entitled to utilize the dividends paid
deduction, distribute annually at least 90% of its investment company taxable
income (determined without regard to the deduction for dividends paid).
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of the Fund's current or
42
<PAGE>
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of the
Fund to the extent thereof. Any distribution in excess of a shareholder's basis
in the shareholder's shares would be taxable as gain realized from the sale of
such shares.
The Fund will be liable for a nondeductible 4% excise tax on amounts
not distributed (or deemed distributed) on a timely basis in accordance with a
calendar year distribution requirement. To avoid the tax, during each calendar
year the Fund must distribute (or be deemed to have distributed) an amount equal
to at least 98% of the sum of its ordinary income (not taking into account any
capital gains or losses) for the calendar year, and its capital gain net income
for the 12-month period ending on October 31, in addition to any undistributed
portion of the respective balances from the prior year. For that purpose, any
income or gain retained by the Fund that is subject to corporate tax will be
considered to have been distributed by year-end. The Fund intends to make
sufficient distributions to avoid this 4% excise tax.
Federal Income Taxation of the Fund's Investments
Original Issue Discount. For federal income tax purposes, debt
securities purchased by the Fund may be treated as having original issue
discount. Original issue discount represents interest for federal income tax
purposes and can generally be defined as the excess of the stated redemption
price at maturity of a debt obligation over the issue price. Original issue
discount is treated for federal income tax purposes as income earned by the
Fund, whether or not any income is actually received, and therefore is subject
to the distribution requirements of the Code. Generally, the amount of original
issue discount is determined on the basis of a constant yield to maturity which
takes into account the compounding of accrued interest. Under section 1286 of
the Code, an investment in a stripped bond or stripped coupon may result in
original issue discount.
Debt securities may be purchased by the Fund at a discount that exceeds
the original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for federal
income tax purposes. In the case of any debt security issued after July 18,
1984, having a fixed maturity date of more than one year from the date of issue
and having market discount, the gain realized on disposition will be treated as
interest to the extent it does not exceed the accrued market discount on the
security (unless the Fund elects to include such accrued market discount in
income in the tax year to which it is attributable). Generally, market discount
is accrued on a daily basis. The Fund may be required to capitalize, rather than
deduct currently, part or all of any direct interest expense incurred or
continued to purchase or carry any debt security having market discount, unless
the Fund makes the election to include market discount currently. Because the
Fund must include original issue discount in income, it will be more difficult
for the Fund to make the distributions required for the Fund to
43
<PAGE>
maintain its status as a regulated investment company under Subchapter M of the
Code or to avoid the 4% excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may
be subject to provisions of the Code that (i) require inclusion of unrealized
gains or losses in the Fund's income for purposes of the 90% test, the excise
tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and (iii) characterize
both realized and unrealized gain or loss as short-term, medium-term or
long-term gain or loss. Such provisions generally apply to, among other
investments, options on debt securities, indices on securities and futures
contracts.
Federal Income Taxation of Shareholders
Dividends paid by the Fund may be eligible for the 70%
dividends-received deduction for corporations. The percentage of the Fund's
dividends eligible for such tax treatment may be less than 100% to the extent
that less than 100% of the Fund's gross income may be from qualifying dividends
of domestic corporations. Any dividend declared in October, November or December
and made payable to shareholders of record in any such month is treated as
received by such shareholder on December 31, provided that the Fund pays the
dividend during January of the following calendar year.
Distributions by the Fund can result in a reduction in the fair market
value of the Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as ordinary income or capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
DISTRIBUTION OF SHARES OF THE FUND
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis
44
<PAGE>
(Class B and Class C shares). The Distributor may reallow all or portions of
such sales charges as concessions to dealers.
Total sales charges on Class A shares paid to the Distributor for the
last three fiscal years were as follows: 1997, $129,131; 1996, $275,526; and
1995, $26,227.
For the same periods, the Distributor retained the following amounts
after reallowance of concessions to dealers: 1997, $23,824; 1996, $35,003; and
1995, $3,476.
The differences in the price at which the Fund's Class A shares are
offered due to scheduled variations in sales charges, as described in the Fund's
Prospectus, result from cost savings inherent in economies of scale. Management
believes that the cost of sales efforts of the Distributor and broker-dealers
tends to decrease as the size of purchases increases, or does not involve any
incremental sales expenses as in the case of, for example, exchanges,
reinvestments or dividend investments at net asset value. Similarly, no
significant sales effort is necessary for sales of shares at net asset value to
certain Directors, Trustees, officers, employees, their relatives and other
persons directly or indirectly related to the Fund or associated entities. Where
shares of the Fund are offered at a reduced sales charge or without a sales
charge pursuant to sponsored arrangements, managed fee-based programs and
so-called "mutual fund supermarkets," among other programs, the amount of the
sales charge reduction will similarly reflect the anticipated reduction in sales
expenses associated with such arrangements. The reductions in sales expenses,
and therefore the reduction in sales charges, will vary depending on factors
such as the size and other characteristics of the organization or program, and
the nature of its membership or the participants. The Fund reserves the right to
make variations in, or eliminate, sales charges at any time or to revise the
terms of or to suspend or discontinue sales pursuant to sponsored arrangements
or similar programs at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission based on the aggregate of such sales. Such
commission also is payable to authorized securities dealers upon sales of Class
A shares made pursuant to a Letter of Intent to purchase shares having a net
asset value of $1,000,000 or more. Shares sold with such commissions payable are
subject to a one-year contingent deferred sales charge of 1.00% on any portion
of such shares redeemed within one year following their sale. After a particular
purchase of Class A shares is made under the Letter of Intent, the commission
will be paid only in respect of that particular purchase of shares. If the
Letter of Intent is not completed, the commission paid will be deducted from any
discounts or commissions otherwise payable to such dealer in respect of shares
actually sold. If an investor is eligible to purchase shares at net asset value
on account of the Right of Accumulation, the commission will be paid only in
respect of the incremental purchase at net asset value.
45
<PAGE>
For the periods shown below, the Distributor received contingent
deferred sales charges upon redemption of Class A, Class B and Class C shares of
the Fund and paid initial commissions to securities dealers for sales of such
Class A, Class B and Class C shares as follows:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended December 31, 1997 Ended December 31, 1996 Ended December 31, 1995
----------------------- ----------------------- -----------------------
Contingent Commissions Contingent Commissions Contingent Commissions
Deferred Paid to Deferred Paid to Deferred Paid to
Sales Charges Dealers Sales Charges Dealers Sales Charges Dealers
------------- ---------- ------------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Class A $ 0 $112,609 $ 0 $240,523 $ 0 $ 22,751
Class B $66,560 $365,912 $36,816 $737,511 $18,143 $306,316
Class C $ 508 $ 3,969 $ 250 $ 32,916 $ 557 $ 16,698
</TABLE>
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "Distribution Plan") under which the Fund may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of Class A, Class B and Class C shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to underwriters, securities dealers
and others engaged in the sale of shares, including payments to the Distributor
to be used to pay commissions and/or reimbursement to securities dealers (which
securities dealers may be affiliates of the Distributor) engaged in the
distribution and marketing of shares and furnishing ongoing assistance to
investors, (2) reimbursement of direct out-of-pocket expenditures incurred by
the Distributor in connection with the distribution and marketing of shares and
the servicing of investor accounts including expenses relating to the
formulation and implementation of marketing strategies and promotional
activities such as direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising, the preparation, printing and
distribution of Prospectuses of the Fund and reports for recipients other than
existing shareholders of the Fund, and obtaining such information, analyses and
reports with respect to marketing and promotional activities and investor
accounts as the Fund may, from time to time, deem advisable, and (3)
reimbursement of expenses incurred by the Distributor in connection with the
servicing of shareholder accounts including payments to securities dealers and
others in consideration of the provision of personal service to investors and/or
the maintenance or servicing of shareholder accounts and expenses associated
with the provision of personal service by the Distributor directly to investors.
In addition, the Distribution Plan is deemed to authorize the Distributor and
the Investment Manager to make payments out of general profits, revenues or
other sources to underwriters, securities dealers and others in connection with
sales of shares, to the extent, if any, that such payments may be deemed to be
within the scope of Rule 12b-1 under the 1940 Act.
46
<PAGE>
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) or others for
personal services and/or the maintenance of shareholder accounts. A portion of
any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance or servicing of
shareholder accounts by such dealers. Dealers who have sold Class A shares are
eligible for further reimbursement commencing as of the time of such sale.
Dealers who have sold Class B and Class C shares are eligible for further
reimbursement after the first year during which such shares have been held of
record by such dealer as nominee for its clients (or by such clients directly).
Any service fees received by the Distributor and not allocated to dealers may be
applied by the Distributor in reduction of expenses incurred by it directly for
personal services and the maintenance or servicing of shareholder accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to dealers for selling such shares. Any distribution fees
received by the Distributor and not allocated to dealers may be applied by the
Distributor in connection with sales or marketing efforts, including special
promotional fees and cash and noncash incentives based upon sales by dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs similar
expenses on behalf of, such other funds. When expenses of the Distributor cannot
be identified as relating to a specific fund, the Distributor allocates expenses
among the funds in a manner deemed fair and equitable to each fund.
Commissions and other cash and noncash incentives and payments to
dealers, to the extent payable out of the general profits, revenues or other
sources of the Distributor (including the advisory fees paid by the Fund), have
also been authorized pursuant to the Distribution Plan.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class C shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class C
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class C shares (as the case may be) to make payments for personal
services and/or the maintenance or servicing of shareholder accounts. The
distribution and servicing expenses of a particular class will be borne solely
by that class. In addition, a rule of the NASD limits annual expenditures that
the Fund may incur under the Distribution Plan to 1%, of which 0.75% may be used
to pay distribution expenses and 0.25% may be used to pay shareholder service
fees. The NASD rule also limits the aggregate amount that the Fund may pay for
such distribution costs to 6.25% of gross share sales of a class since the
inception of any asset-based
47
<PAGE>
sales charge plus interest at the prime rate plus 1% on unpaid amounts thereof
(less any contingent deferred sales charges). Such limitation does not apply to
shareholder service fees. Payments to the Distributor or to dealers funded under
the Distribution Plan may be discontinued at any time.
The Distributor may pay certain dealers and other intermediaries
additional compensation for sales and administrative services. The Distributor
may provide cash and noncash incentives to intermediaries who, for example, sell
significant amounts of shares or develop particular distribution channels. The
Distributor may compensate dealers with clients who maintain their investments
in the Fund over a period of years. The incentives can include merchandise and
trips to, and attendance at, sales seminars at resorts. The Distributor may pay
for administrative services, such as technological and computer systems support
for the maintenance of pension plan participant records, for subaccounting, and
for distribution through mutual fund supermarkets or similar arrangements.
During the fiscal year ended December 31, 1997, the Fund paid the
Distributor fees under the Distribution Plan and the Distributor used all of
such payments for expenses incurred on behalf of the Fund as follows:
48
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C*
------- ------- --------
<S> <C> <C> <C>
Advertising $ 1,102 $ 8,012 $ 5,754
Printing and mailing of prospectuses to
other than current shareholders 332 2,416 1,735
Compensation to dealers 38,918 327,098 27,477
Compensation to sales
personnel 2,332 16,679 12,328
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses: marketing; general 1,119 8,129 5,852
------- -------- -------
Total fees received $43,803 $362,334 $53,146
======= ======== =======
</TABLE>
- -----------------
* Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares.
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.
49
<PAGE>
CALCULATION OF PERFORMANCE DATA
From time to time, in advertisements or in communications to
shareholders or prospective investors, the Fund may compare the performance of
its Class A, Class B, Class C or Class S shares to the performance of other
mutual funds with similar investment objectives, to certificates of deposit
and/or to other financial alternatives. The Fund may also compare its
performance to appropriate indices, such as Standard & Poor's 500 Index,
Consumer Price Index and Dow Jones Industrial Average and/or to appropriate
rankings and averages such as those compiled by Lipper Analytical Services,
Inc., Morningstar, Inc., Money Magazine, Business Week, Forbes Magazine, The
Wall Street Journal and Investor's Daily. For example, the performance of the
Fund might be compared to the Lipper Capital Appreciation Funds Index.
The average annual total return ("standard total return") of the Class
A, Class B, Class C and Class S shares of the Fund will be calculated as set
forth below. Total return is computed separately for each class of shares of the
Fund. Performance data for a specified class includes periods prior to the
adoption of class designations on March 16, 1993, when designations were
assigned based on the pricing and Rule 12b-1 fees applicable to shares sold
thereafter. The application of the additional Rule 12b-1 fees, if any, of up to
1% will, for periods after March 16, 1993, adversely affect Fund performance
results. Thus, performance data or rankings for a given class of shares should
be interpreted carefully by investors who hold or may invest in a different
class of shares.
The performance data below reflect Rule 12b-1 fees and, where
applicable, sales charges as follows:
50
<PAGE>
<TABLE>
<CAPTION>
Rule 12b-1 Fees Sales Charges
------------------------------- --------------------------------
Class Amount Period
- ----- ------ ------
<S> <C> <C> <C>
A 0.25% March 16, 1993 to present; Maximum 4.5% sales charge
Fee will reduce performance reflected
for periods after March 16,
1993
B 1.00% March 18, 1993 to present; fee 1- and 5-year periods reflect a 5%
will reduce performance for and a 2% contingent deferred sales
periods after March 18, 1993 charge, respectively
C* 1.00% March 18, 1993 to present; fee 1-year period reflects a 1%
will reduce performance for contingent deferred sales charge
periods after March 18, 1993
S* 0.00% Since commencement of None
operations to present
</TABLE>
- --------------------
* Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
All calculations of performance data in this section reflect the
voluntary measures, if any, by the Fund's affiliates to reduce fees or expenses
relating to the Fund; see "--Accrued Expenses and Recurring Charges" later in
this section.
51
<PAGE>
Total Return
The Fund's standard average annual total returns ("standard total
return") of each class of shares were as follows:
Five Years One Year
Ten Years Ended Ended Ended
December 31, 1997 December 31, 1997 December 31, 1997
----------------- ----------------- -----------------
Class A 12.17% 10.42% 5.18%
Class B 12.27% 10.42% 4.56%
Class C* 12.27% 10.61% 8.32%
Class S* 12.81% 11.67% 10.54%
- ----------------
* Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
Standard total return is computed separately for each class of shares
by determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value in accordance with the following formula:
P(1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated period
assuming a hypothetical $1,000 payment made at the beginning
of the designated period
The calculation is based on the further assumptions that the highest
applicable initial or contingent deferred sales charge is deducted, and that all
dividends and distributions by the Fund are reinvested at net asset value on the
reinvestment dates during the periods. All accrued expenses and recurring
charges are also taken into account as described later herein.
52
<PAGE>
Accrued Expenses and Recurring Charges
Accrued expenses include all recurring charges that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return results take sales charges, if applicable, into account,
although the results do not take into account recurring and nonrecurring charges
for optional services which only certain shareholders elect and which involve
nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by
affiliates of fees or expenses during the subject period. In the absence of such
subsidization, the performance of the Fund would have been lower.
Nonstandardized Total Return
The Fund may provide the above described standard total return results
for Class A, Class B, Class C and Class S shares for periods which end no
earlier than the most recent calendar quarter end and which begin twelve months
before, five years before and ten years before. In addition, the Fund may
provide nonstandardized total return results for differing periods, such as for
the period since the Fund commenced operations in 1960, and/or without taking
sales charges into account. Such nonstandardized total return is computed as
otherwise described under "--Total Return" except the result may or may not be
annualized, and as noted any applicable sales charge may not be taken into
account and therefore not deducted from the hypothetical initial payment of
$1,000. For example, the Fund's nonstandardized total returns for the six months
ended December 31, 1997, without taking sales charges into account, were as
follows:
Class A 4.31%
Class B 4.05%
Class C 3.92%
Class S 4.42%
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.
53
<PAGE>
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 SEC filings and (3) review of the
annual income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a
semiannual basis, other supplementary financial reports may be made available
from time to time through electronic or other media. Shareholders with
substantial holdings in one or more State Street Research Funds may also receive
reports and other information which reflect or analyze their positions in a
consolidated manner. For more information, call State Street Research Service
Center.
The following financial statements are for the Fund's fiscal year ended
December 31, 1997 and reflect the Fund's class designations prior to November 1,
1997. Information pertaining to Class C and Class D in the financial statements
now pertains to Class S and Class C, respectively.
DOCSC\601146.3
54
<PAGE>
STATE STREET RESEARCH GROWTH FUND
- -------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------------
December 31, 1997
- -------------------------------------------------------------------------------
Value
Shares (Note 1)
- ------------------------------------------------------------------------------
COMMON STOCKS 99.3%
BASIC INDUSTRIES 5.6%
FOREST PRODUCT 1.5%
IKON Office Solutions Inc. ......................... 117,500 $ 3,304,687
------------
MACHINERY 3.2%
Tyco International Ltd. ............................ 157,200 7,083,825
------------
METAL & MINING 0.9%
Wyman-Gordon Co.* .................................. 100,000 1,962,500
------------
Total Basic Industries ............................. 12,351,012
------------
CONSUMER CYCLICAL 22.0%
AUTOMOTIVE 2.2%
Budget Group Inc. Cl. A* ........................... 143,700 4,966,631
------------
HOTEL & RESTAURANT 0.5%
Extended Stay America Inc.* ........................ 99,700 1,240,019
------------
RECREATION 5.8%
CBS Corp. .......................................... 114,000 3,355,875
Chancellor Media Corp.* ............................ 72,200 5,387,925
Florida Panthers Holdings Inc. Cl. A* .............. 92,800 1,600,800
International Game Technology Inc. ................. 102,300 2,583,075
------------
12,927,675
------------
RETAIL TRADE 11.5%
Borders Group Inc.* ................................ 77,000 2,411,063
Cendant Corp.* ..................................... 335,232 11,523,615
CVS Corp. .......................................... 38,100 2,440,781
Dayton Hudson Corp. ................................ 37,500 2,531,250
Proffitts Inc.* .................................... 69,600 1,979,250
Safeway Inc.* ...................................... 72,600 4,591,950
------------
25,477,909
------------
TEXTILE & APPAREL 2.0%
Men's Wearhouse, Inc.* ............................. 125,400 4,357,650
------------
Total Consumer Cyclical ............................ 48,969,884
------------
CONSUMER STAPLE 21.9%
BUSINESS SERVICE 8.0%
Apollo Group Inc. Cl. A* ........................... 61,000 2,882,250
Caribiner International Inc.* ...................... 125,000 5,562,500
HBO & Co. .......................................... 65,800 3,158,400
Republic Industries Inc.* .......................... 266,200 6,205,788
------------
17,808,938
------------
AIRPORT 1.1%
Trinity Industries Inc. ............................ 52,800 2,356,200
------------
DRUG 4.9%
Schering-Plough Corp. .............................. 75,600 4,696,650
Warner-Lambert Co. ................................. 49,400 6,125,600
------------
10,822,250
------------
FOOD & BEVERAGE 0.5%
Starbucks Corp.* ................................... 32,100 1,231,838
------------
HOSPITAL SUPPLY 5.0%
Guidant Corp. ...................................... 113,600 7,071,600
Tenet Healthcare Corp.* ............................ 62,400 2,067,000
Trigon Healthcare Inc.* ............................ 78,100 2,040,362
------------
11,178,962
------------
PERSONAL CARE 2.4%
Colgate-Palmolive Co. .............................. 73,000 5,365,500
------------
Total Consumer Staple .............................. 48,763,688
------------
ENERGY 3.8%
OIL 2.9%
Seagull Energy Corp.* .............................. 312,000 6,435,000
------------
OIL SERVICE 0.9%
Ensco International Inc. ........................... 20,000 $ 670,000
Schlumberger Ltd. .................................. 15,500 1,247,750
------------
1,917,750
------------
Total Energy ....................................... 8,352,750
------------
FINANCE 11.1%
BANK 3.5%
BankAmerica Corp. .................................. 56,800 4,146,400
H.F. Ahmanson & Co. ................................ 29,100 1,947,881
NationsBank Corp. .................................. 25,900 1,575,044
------------
7,669,325
------------
FINANCIAL SERVICE 2.2%
LaSalle Partners Inc.* ............................. 47,400 1,688,625
Merrill Lynch & Company Inc. ....................... 43,400 3,165,488
------------
4,854,113
------------
INSURANCE 5.4%
Ace Ltd. ........................................... 22,600 2,180,900
AMBAC Inc. ......................................... 95,800 4,406,800
Hartford Financial Services Group, Inc. ............ 14,600 1,366,012
Travelers Group Inc. ............................... 76,650 4,129,519
------------
12,083,231
------------
Total Finance ...................................... 24,606,669
------------
SCIENCE & TECHNOLOGY 30.8%
COMPUTER SOFTWARE & SERVICE 11.3%
Cisco Systems Inc.* ................................ 67,350 3,754,763
Computer Associates International Inc. ............. 93,300 4,933,237
EMC Corp.* ......................................... 62,800 1,723,075
i2 Technologies Inc.* .............................. 22,000 1,160,500
Microsoft Corp.* ................................... 42,800 5,531,900
Oracle Systems Corp.* .............................. 139,200 3,105,900
PeopleSoft Inc.* ................................... 128,000 4,992,000
------------
25,201,375
------------
ELECTRONIC COMPONENTS 4.8%
Analog Devices Inc.* ............................... 52,400 1,450,825
CHS Electronics Inc.* .............................. 81,250 1,391,406
Microchip Technology Inc.* ......................... 17,300 519,000
Sanmina Corp.* ..................................... 39,100 2,649,025
Texas Instruments Inc. ............................. 105,800 4,761,000
------------
10,771,256
------------
ELECTRONIC EQUIPMENT 7.9%
Advanced Fibre Communications, Inc.* ............... 119,800 3,489,175
Applied Materials Inc.* ............................ 70,400 2,120,800
ASM Lithography Holdings NV* ....................... 7,200 486,000
KLA-Tencor Corp.* .................................. 79,000 3,051,375
Tellabs Inc.* ...................................... 60,800 3,214,800
Teradyne Inc.* ..................................... 159,200 5,094,400
------------
17,456,550
------------
OFFICE EQUIPMENT 6.8%
Compaq Computer Corp. .............................. 54,300 3,064,556
Hewlett-Packard Co. ................................ 45,800 2,862,500
International Business Machines Corp. .............. 29,600 3,095,050
Iomega Corp.* ...................................... 237,000 2,947,688
Sun Microsystems Inc.* ............................. 77,400 3,086,325
------------
15,056,119
------------
Total Science & Technology ......................... 68,485,300
------------
UTILITY 4.1%
TELEPHONE 4.1%
Compania Anonima Nacional Telefonos de Venezuela ADR 139,700 5,815,013
WorldCom Inc.* ..................................... 111,300 3,366,825
------------
9,181,838
------------
Total Utility ...................................... 9,181,838
------------
Total Common Stocks (Cost $184,384,142) ............ 220,711,141
------------
- -------------------------------------------------------------------------------
Principal Maturity
Amount Date
- -------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS 0.8%
American Express Credit Corp., 6.45% ..... $1,676,000 1/02/1998 1,676,000
------------
Total Short-Term Obligations (Cost $1,676,000) ................. 1,676,000
------------
Total Investments (Cost $186,060,142) - 100.1% .................. 222,387,141
Cash and Other Assets, Less Liabilities - (0.1)% ................ (224,416)
------------
Net Assets - 100.0% ............................................. $222,162,725
============
Federal Income Tax Information:
At December 31, 1997, the net unrealized appreciation of
investments based on cost for Federal income tax purposes
of $185,761,159 was as follows: Aggregate gross unrealized
appreciation for all investments in which there is an
excess of value over tax cost ................................ $ 44,459,292
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value ............... (7,833,310)
------------
$ 36,625,982
============
- ------------------------------------------------------------------------------
* Nonincome-producing securities.
ADR stands for American Depositary Receipt, representing ownership of foreign
securities.
The accompanying notes are an integral part of the financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- -------------------------------------------------------------------------------
December 31, 1997
ASSETS
Investments, at value (Cost $186,060,142) (Note 1) .............. $222,387,141
Cash ............................................................ 743
Dividends and interest receivable ............................... 85,009
Receivable for fund shares sold ................................. 4,592
Other assets .................................................... 16,588
------------
222,494,073
LIABILITIES
Accrued management fee (Note 2) ................................. 93,158
Payable for fund shares redeemed ................................ 68,894
Accrued transfer agent and shareholder services
(Note 2) ...................................................... 40,513
Accrued distribution and service fees (Note 4) .................. 38,684
Accrued trustees' fees (Note 2) ................................. 11,516
Other accrued expenses .......................................... 78,583
------------
331,348
------------
NET ASSETS ...................................................... $222,162,725
============
Net Assets consist of:
Unrealized appreciation of investments ........................ $ 36,326,999
Accumulated net realized loss ................................. (2,184,593)
Paid-in capital ............................................... 188,020,319
------------
$222,162,725
============
Net Asset Value and redemption price per share of Class A shares
($16,469,693 / 2,329,447 shares).............................. $7.07
=====
Maximum Offering Price per share of Class A shares ($7.07 / .955) $7.40
=====
Net Asset Value and offering price per share of Class B shares
($36,442,111 / 5,369,794 shares)* ............................. $6.79
=====
Net Asset Value and offering price per share of Class C shares
($4,561,904 / 672,596 shares)* ................................ $6.78
=====
Net Asset Value, offering price and redemption price per share
of Class S shares ($164,689,017 / 23,156,129 shares) .......... $7.11
=====
- ------------------------------------------------------------------------------
*Redemption price per share for Class B and Class C is equal to net asset value
less any applicable contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
For the year ended December 31, 1997
INVESTMENT INCOME
Dividends, net of foreign taxes of $215 ...................... $ 1,252,233
Interest (Note 1) ............................................ 812,212
-----------
2,064,445
EXPENSES
Management fee (Note 2) ...................................... 1,125,505
Transfer agent and shareholder services (Note 2) ............. 183,133
Custodian fee ................................................ 141,457
Service fee-Class A (Note 4) ................................. 43,803
Distribution and service fees-Class B (Note 4) ............... 362,334
Distribution and service fees-Class C (Note 4) ............... 53,146
Trustees' fees (Note 2) ...................................... 36,732
Registration fees ............................................ 35,641
Reports to shareholders ...................................... 34,638
Audit fee .................................................... 33,276
Legal fee .................................................... 8,942
Miscellaneous ................................................ 14,130
-----------
2,072,737
-----------
Net investment loss .......................................... (8,292)
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments (Notes 1 and 3) ............. 18,610,792
Net unrealized appreciation of investments ................ 3,969,183
-----------
Net gain on investments ................................... 22,579,975
-----------
Net increase in net assets resulting from operations $22,571,683
===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
----------------------------
1996 1997
- -------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment loss .......................... $ (421,667) $ (8,292)
Net realized gain on investments ............. 25,313,329 18,610,792
Net unrealized appreciation of
investments ................................ 1,008,895 3,969,183
------------ ------------
Net increase resulting from
operations.................................. 25,900,557 22,571,683
------------ ------------
Dividend from net investment income:
Class S .................................... (212,810) --
------------ ------------
Distributions from net realized gains:
Class A .................................... (1,432,492) (1,628,897)
Class B .................................... (3,063,722) (3,791,004)
Class C .................................... (542,316) (470,585)
Class S .................................... (17,829,679) (17,258,290)
------------ ------------
(22,868,209) (23,148,776)
------------ ------------
Net increase (decrease) from fund share
transactions (Note 5) ...................... 24,343,911 (6,291,623)
------------ ------------
Total increase (decrease) in
net assets.................................. 27,163,449 (6,868,716)
NET ASSETS
Beginning of year ............................ 201,867,992 229,031,441
------------ ------------
End of year .................................. $229,031,441 $222,162,725
============ ============
The accompanying notes are an integral part of the financial statements.
<PAGE>
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
December 31, 1997
NOTE 1
State Street Research Growth Fund (the "Fund"), is a series of State Street
Research Growth Trust (the "Trust"), which is a Massachusetts business trust
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company. The Fund is presently the only series of the
Trust.
The investment objective of the Fund is to provide long-term growth of capital.
In seeking to achieve its investment objective, the Fund invests primarily in
equity securities believed by the Investment Adviser to have better than average
growth potential over the years.
The Fund offers four classes of shares. Before November 1, 1997, Class C shares
were designated Class D and Class S shares were designated Class C. Class A
shares are subject to an initial sales charge of up to 4.50% and pay a service
fee equal to 0.25% of average daily net assets. Class B shares are subject to a
contingent deferred sales charge on certain redemptions made within five years
of purchase and pay annual distribution and service fees of 1.00%. Class B
shares automatically convert into Class A shares (which pay lower ongoing
expenses) at the end of eight years after the issuance of the Class B shares.
Class C shares are subject to a contingent deferred sales charge of 1.00% on any
shares redeemed within one year of their purchase. Class C shares also pay
annual distribution and service fees of 1.00%. Class S shares are only offered
to certain retirement accounts, advisory accounts of State Street Research &
Management Company (the "Adviser"), an indirect wholly owned subsidiary of
Metropolitan Life Insurance Company ("Metropolitan"), and special programs. No
sales charge is imposed at the time of purchase or redemption of Class S shares.
Class S shares do not pay any distribution or service fees. The Fund's expenses
are borne pro-rata by each class, except that each class bears expenses, and has
exclusive voting rights with respect to provisions of the Plan of Distribution,
related specifically to that class. The Trustees declare separate dividends on
each class of shares.
The following significant 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. INVESTMENTS IN SECURITIES
Values for listed securities represent the last sale on national securities
exchanges quoted prior to the close of the New York Stock Exchange. Over-the-
counter securities quoted on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") system are valued at the closing price supplied
through such system. In the absence of recorded sales and for those
over-the-counter securities not quoted on the NASDAQ system, valuations are at
the mean of the closing bid and asked quotations, except for securities that may
be restricted as to public resale, which are valued in accordance with methods
adopted by the Trustees. Security transactions are accounted for on the trade
date (date the order to buy or sell is executed), and dividends declared but not
received are accrued on the ex-dividend date. Interest income is determined on
the accrual basis. Realized gains and losses from security transactions are
reported on the basis of average cost of securities delivered.
B. FEDERAL INCOME TAXES
No provision for Federal income taxes is necessary since the Fund has elected to
qualify under Subchapter M of the Internal Revenue Code and maintains a policy
to distribute all of its taxable income, including net realized capital gains,
within the prescribed time periods. It is also the intention of the Fund to
distribute an amount sufficient to avoid imposition of any Federal Excise Tax
under Section 4982 of the Internal Revenue Code.
C. DIVIDENDS
Dividends from net investment income, if any, are declared and paid or
reinvested semiannually. Net realized capital gains are distributed annually,
unless additional distributions are required for compliance with applicable tax
regulations. For the year ended December 31, 1997, the Fund has designated its
distributions from net realized gains as $3,209,360 from 20% rate gains and
$10,230,173 from 28% rate gains.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to the disposition of
securities that have different bases for financial reporting and tax purposes.
D. ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
E. SECURITIES LENDING
The Fund may seek additional income by lending portfolio securities to qualified
institutions. The Fund will receive cash or securities as collateral in an
amount equal to at least 100% of the current market value of any loaned
securities plus accrued interest. If the borrower fails to return the securities
and the value of the collateral has declined during the term of the loan, the
Fund will bear the loss. At December 31, 1997, the value of the securities
loaned and the value of collateral were $9,541,913 and $9,751,601, respectively.
NOTE 2
The Trust and the Adviser have entered into a contract that provides for an
annual fee equal to 0.475% of the Fund's average daily net assets. In
consideration of these fees, the Adviser furnishes the Fund with management,
investment advisory, statistical and research facilities and services. The
Adviser also pays all salaries, rent and certain other expenses of management.
During the year ended December 31, 1997, the fees pursuant to such agreement
amounted to $1,125,505.
State Street Research Service Center, a division of State Street Research
Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. In addition, Metropolitan receives a fee for maintenance of
the accounts of certain shareholders who are participants in sponsored
arrangements, employee benefit plans and similar programs or plans, through or
under which shares of the Fund may be purchased. During the year ended December
31, 1997, the amount of such expenses was $44,831.
The fees of the Trustees not currently affiliated with the Adviser amounted to
$36,732 during the year ended December 31, 1997.
NOTE 3
For the year ended December 31, 1997, exclusive of short-term investments and
U.S. Government obligations, purchases and sales of securities aggregated
$585,325,335 and $611,475,453, respectively.
NOTE 4
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 (the "Plan")
under the Investment Company Act of 1940, as amended. Under the Plan, the Fund
pays annual service fees to the Distributor at a rate of 0.25% of average daily
net assets for Class A, Class B and Class C shares. In addition, the Fund pays
annual distribution fees of 0.75% of average daily net assets for Class B and
Class C shares. The Distributor uses such payments for personal services and/or
the maintenance or servicing of shareholder accounts, to reimburse securities
dealers for distribution and marketing services, to furnish ongoing assistance
to investors and to defray a portion of its distribution and marketing expenses.
For the year ended December 31, 1997, fees pursuant to such plan amounted to
$43,803, $362,334 and $53,146 for Class A, Class B and Class C shares,
respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc., a
wholly owned subsidiary of Metropolitan, earned initial sales charges
aggregating $23,824 and $105,414, respectively, on sales of Class A shares of
the Fund during the year ended December 31, 1997, and that MetLife Securities,
Inc. earned commissions aggregating $285,667 on sales of Class B shares, and
that the Distributor collected contingent deferred sales charges of $66,560 and
$508 on redemptions of Class B and Class C shares, respectively, during the same
period.
NOTE 5
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share.
Share transactions were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------------------
1996 1997
-------------------------- --------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold ................... 1,847,928 $ 14,383,066 1,800,180 $ 13,267,551
Issued upon reinvestment of
distributions from net
realized gains .............. 195,417 1,399,231 239,036 1,614,506
Shares redeemed ............... (263,591) (2,062,377) (1,828,511) (13,640,894)
---------- ------------ ---------- ------------
Net increase .................. 1,779,754 $ 13,719,920 210,705 $ 1,241,163
========== ============ ========== ============
<CAPTION>
CLASS B SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold ................... 2,947,485 $ 22,502,916 1,677,391 $ 12,208,831
Issued upon reinvestment of
distributions from net
realized gains .............. 369,233 2,566,243 502,614 3,255,965
Shares redeemed ............... (395,250) (2,996,738) (1,283,390) (9,489,085)
---------- ------------ ---------- ------------
Net increase .................. 2,921,468 $ 22,072,421 896,615 $ 5,975,711
========== ============ ========== ============
<CAPTION>
CLASS C (FORMERLY CLASS D) SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold ................... 462,926 $ 3,510,341 331,641 $ 2,437,190
Issued upon reinvestment of
distributions from net
realized gains .............. 71,693 498,203 69,801 451,609
Shares redeemed ............... (39,411) (298,667) (531,745) (3,958,490)
---------- ------------ ---------- ------------
Net increase (decrease) ....... 495,208 $ 3,709,877 (130,303) $ (1,069,691)
========== ============ ========== ============
<CAPTION>
CLASS S (FORMERLY CLASS C) SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold ................... 114,007 $ 899,665 58,742 $ 441,722
Issued upon reinvestment of:
Distributions from net
realized gains .............. 807,652 5,802,306 1,059,076 7,196,912
Dividend from net investment
income ........................ 4,457 36,774 -- --
Shares redeemed ............... (2,836,294) (21,897,052) (2,628,815) (20,077,440)
---------- ------------ ---------- ------------
Net decrease .................. (1,910,178) $(15,158,307) (1,510,997) $(12,438,806)
========== ============ ========== ============
</TABLE>
<PAGE>
STATE STREET RESEARCH GROWTH FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
---------------------------------------------------------------------------
1993(2) 1994 1995(1) 1996(1) 1997(1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 9.63 8.50 7.09 7.02 7.17
----- ----- ----- ----- -----
Net investment income (loss) ($) 0.06 0.05 0.01 (0.03) (0.00)
Net realized and unrealized gain (loss) on
investments ($) 0.37 (0.38) 2.30 0.93 0.68
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.43 (0.33) 2.31 0.90 0.68
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.08) (0.05) (0.02) -- --
Distributions from net realized gains ($) (1.48) (1.03) (2.36) (0.75) (0.78)
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS ($) (1.56) (1.08) (2.38) (0.75) (0.78)
----- ----- ----- ----- -----
NET ASSET VALUE, END OF YEAR ($) 8.50 7.09 7.02 7.17 7.07
===== ===== ===== ===== =====
Total return(4) (%) 4.52(5) (3.83) 32.57 12.65 10.14
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 602 719 2,379 15,181 16,470
Ratio of operating expenses to average net
assets (%) 0.96(6) 0.90 0.89 0.90 0.93
Ratio of net investment income (loss) to
average net assets (%) 0.48(6) 0.54 0.12 (0.34) (0.05)
Portfolio turnover rate (%) 68.36 57.18 234.43 237.85 258.99
Average commission rate ($)(7) -- -- -- 0.0331 0.0383
<CAPTION>
CLASS B
---------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
---------------------------------------------------------------------------
1993(3) 1994 1995(1) 1996(1) 1997(1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 9.56 8.46 7.02 6.89 6.96
----- ----- ----- ----- -----
Net investment income (loss) ($) 0.03 (0.00) (0.06) (0.08) (0.06)
Net realized and unrealized gain (loss) on
investments ($) 0.42 (0.41) 2.29 0.90 0.67
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.45 (0.41) 2.23 0.82 0.61
----- ----- ----- ----- -----
Dividend from net investment income ($) (0.07) -- -- -- --
Distributions from net realized gains ($) (1.48) (1.03) (2.36) (0.75) (0.78)
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS ($) (1.55) (1.03) (2.36) (0.75) (0.78)
----- ----- ----- ----- -----
NET ASSET VALUE, END OF YEAR ($) 8.46 7.02 6.89 6.96 6.79
===== ===== ===== ===== =====
Total return(4) (%) 4.64(5) (4.80) 31.71 11.73 9.44
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 986 1,544 10,684 31,119 36,442
Ratio of operating expenses to average net
assets (%) 1.71(6) 1.63 1.63 1.65 1.68
Ratio of net investment loss to
average net assets (%) (0.36)(6) (0.20) (0.69) (1.07) (0.82)
Portfolio turnover rate (%) 68.36 57.18 234.43 237.85 258.99
Average commission rate ($)(7) -- -- -- 0.0331 0.0383
- --------------------------------------------------------------------------------------------------------------------------------
(1) Per-share figures have been calculated using the average shares method.
(2) March 16, 1993 (commencement of share class designations) to December 31, 1993.
(3) March 18, 1993 (commencement of share class designations) to December 31, 1993.
(4) Does not reflect any front-end or contingent deferred sales charges.
(5) Not annualized.
(6) Annualized.
(7) Average commission rate per share paid by the Fund for security trades on which commissions are charged beginning with the
fiscal year ended December 31, 1996.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CLASS C (FORMERLY CLASS D)
------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
------------------------------------------------------------------------------------
1993(3) 1994 1995(1) 1996(1) 1997(1)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 9.56 8.45 7.02 6.88 6.95
----- ----- ----- ----- -----
Net investment income (loss) ($) 0.03 (0.00) (0.06) (0.08) (0.06)
Net realized and unrealized gain (loss)
on investments ($) 0.41 (0.40) 2.28 0.90 0.67
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.44 (0.40) 2.22 0.82 0.61
----- ----- ----- ----- -----
Dividend from net investment income ($) (0.07) -- -- -- --
Distributions from net realized gains ($) (1.48) (1.03) (2.36) (0.75) (0.78)
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS ($) (1.55) (1.03) (2.36) (0.75) (0.78)
----- ----- ----- ----- -----
ET ASSET VALUE, END OF YEAR ($) 8.45 7.02 6.88 6.95 6.78
===== ===== ===== ===== =====
Total return(4) (%) 4.59(5) (4.68) 31.57 11.89 9.30
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 242 384 2,117 5,584 4,562
Ratio of operating expenses to average net
assets (%) 1.71(6) 1.63 1.63 1.65 1.68
Ratio of net investment loss to average net
assets (%) (0.34)(6) (0.20) (0.67) (1.07) (0.79)
Portfolio turnover rate (%) 68.36 57.18 234.43 237.85 258.99
Average commission rate ($)(7) -- -- -- 0.0331 0.0383
<CAPTION>
CLASS S (FORMERLY CLASS C)
--------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
-------------------------------------------------------------------------------------
1993 1994 1995(1) 1996(1) 1997(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 9.26 8.51 7.08 7.02 7.18
----- ----- ----- ----- -----
Net investment income (loss) ($) 0.09 0.07 0.04 (0.00) 0.01
Net realized and unrealized gain (loss)
on investments ($) 0.74 (0.40) 2.29 0.92 0.70
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.83 (0.33) 2.33 0.92 0.71
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.10) (0.07) (0.03) (0.01) --
Distributions from net realized gains ($) (1.48) (1.03) (2.36) (0.75) (0.78)
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS ($) (1.58) (1.10) (2.39) (0.76) (0.78)
----- ----- ----- ----- -----
NET ASSET VALUE, END OF YEAR ($) 8.51 7.08 7.02 7.18 7.11
===== ===== ===== ===== =====
Total return(4) (%) 8.94 (3.82) 33.02 12.74 10.54
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 250,786 186,108 186,689 177,147 164,689
Ratio of operating expenses to average net
assets (%) 0.66 0.64 0.64 0.65 0.68
Ratio of net investment income (loss) to
average net assets (%) 0.92 0.78 0.43 (0.06) 0.19
Portfolio turnover rate (%) 68.36 57.18 234.43 237.85 258.99
Average commission rate ($)(7) -- -- -- 0.0331 0.0383
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Per-share figures have been calculated using the average shares method.
(2) March 16, 1993 (commencement of share class designations) to December 31, 1993.
(3) March 18, 1993 (commencement of share class designations) to December 31, 1993.
(4) Does not reflect any front-end or contingent deferred sales charges.
(5) Not annualized.
(6) Annualized.
(7) Average commission rate per share paid by the Fund for security trades on which commissions are charged beginning with
the fiscal year ended December 31, 1996.
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- -------------------------------------------------------------------------------
TO THE TRUSTEES OF STATE STREET RESEARCH GROWTH TRUST AND SHAREHOLDERS OF STATE
STREET RESEARCH GROWTH FUND:
We have audited the accompanying statement of assets and liabilities of State
Street Research Growth Fund, including the schedule of portfolio investments, as
of December 31, 1997, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended and the financial highlights for each of the periods indicated
therein. 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
audits.
We conducted our audits 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
December 31, 1997 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 audits provide 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 Growth Fund as of December 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the periods indicated therein, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 9, 1998
<PAGE>
STATE STREET RESEARCH GROWTH FUND
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- -------------------------------------------------------------------------------
For the year ended December 31, 1997, Class A shares of Growth Fund returned
+10.14% [without sales charge]. That was significantly less than the average
growth fund, which was up 25.30%, according to Lipper Analytical Services.
The Fund invests primarily in small- to medium-sized growth companies.
The Fund's heavy exposure to the sciences and technology sector which includes
industries like computer software and electronics, accounted for much of its
underperformance during the year. And because many of the technology sector
stocks in the Fund involved above-average risk, they suffered even more than the
industry average. However, management continued to hold on to most of its
technology sector position on the belief that many of the companies have rebound
potential. A gradual restructuring is underway, with the goal of managing the
overall volatility of the Fund.
December 31, 1997
All returns represent past performance, which is no guarantee of future results.
The investment return and principal value of an investment made in the Fund will
fluctuate and shares, when redeemed, may be worth more or less than their
original cost. All returns assume reinvestment of capital gain distributions and
income dividends. During the period prior to 1993 that shares of the Fund were
not offered to the general public, the Fund was not subject to the cash inflows
and higher redemptions and expenses that have occurred during the Fund's
current, continuous public offering. Performance for a class may include periods
prior to the adoption of class designations in 1993, which resulted in new or
increased 12b-1 fees of up to 1% per class thereafter and which will reduce
subsequent performance. "S" shares, offered without a sales charge, are
available through certain employee benefit plans and special programs. Before
November 1, 1997, Class C shares were designated Class D, and Class S shares
were designated Class C. Performance reflects maximum 4.5% "A" share front-end
sales charge or 5% "B" share or 1% "C" share contingent deferred sales charges
where applicable. The Standard & Poor's 500 Composite Index (S&P 500) includes
500 widely traded common stocks and is a commonly used measure of U.S. stock
market performance. The 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.
CHANGE IN VALUE OF $10,000
BASED ON THE S&P 500 COMPARED
TO CHANGE IN VALUE OF $10,000
INVESTED IN GROWTH FUND
CLASS A SHARES
- -----------------------------------------
Average Annual Total Return
- -----------------------------------------
1 Year 5 Years 10 Years
- -----------------------------------------
+5.18% +10.42% +12.17%
- -----------------------------------------
Investment Trust S&P 500
- -----------------------------------------
12/87 9,550 10,000
12/88 10,440 11,660
12/89 14,590 15,340
12/90 13,690 14,870
12/91 17,360 19,390
12/92 18,350 20,860
12/93 19,940 22,960
12/94 19,180 23,260
12/95 25,430 31,990
12/96 28,640 39,330
12/97 31,546 52,448
<PAGE>
CLASS B SHARES
- -----------------------------------------
Average Annual Total Return
- -----------------------------------------
1 Year 5 Years 10 Years
- -----------------------------------------
+4.56% +10.42% +12.27%
- -----------------------------------------
Investment Trust S&P 500
- -----------------------------------------
12/87 10,000 10,000
12/88 10,930 11,660
12/89 15,280 15,340
12/90 14,340 14,870
12/91 18,180 19,390
12/92 19,210 20,860
12/93 20,760 22,960
12/94 19,760 23,260
12/95 26,030 31,990
12/96 29,080 39,330
12/97 31,823 52,448
Class C Shares
- -----------------------------------------
Average Annual Total Return
- -----------------------------------------
1 Year 5 Years 10 Years
- -----------------------------------------
+8.32% +10.61% +12.27%
- -----------------------------------------
Investment Trust S&P 500
- -----------------------------------------
12/87 10,000 10,000
12/88 10,930 11,660
12/89 15,280 15,340
12/90 14,340 14,870
12/91 18,180 19,390
12/92 19,210 20,860
12/93 20,750 22,960
12/94 19,770 23,260
12/95 26,020 31,990
12/96 29,110 39,330
12/97 31,816 52,448
Class S Shares
- -----------------------------------------
Average Annual Total Return
- -----------------------------------------
1 Year 5 Years 10 Years
- -----------------------------------------
+10.54% +11.67% +12.81%
- -----------------------------------------
Investment Trust S&P 500
- -----------------------------------------
12/87 10,000 10,000
12/88 10,930 11,660
12/89 15,280 15,340
12/90 14,340 14,870
12/91 18,180 19,390
12/92 19,210 20,860
12/93 20,930 22,960
12/94 20,130 23,260
12/95 26,780 31,990
12/96 30,190 39,330
12/97 33,372 52,448
