Supplement No. 2 dated October 5, 1995
(Supplanting Supplement No. 1 dated July 17, 1995)
to
Prospectus dated February 1, 1995
for
STATE STREET RESEARCH CAPITAL FUND
a series of State Street Research Capital Trust
Other Investment Policies
Immediately after the caption "The Fund's Investments--Investment
Practices--Other Investment Policies" at page 6 of the Prospectus, the following
paragraphs are added:
"The Fund may lend portfolio securities with a value of up to 33 1/3% of its
total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of
the current market value of the loaned securities plus accrued interest.
Collateral received by the Fund will generally be held in the form tendered,
although cash may be invested in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, irrevocable stand-by letters
of credit issued by a bank, or any combination thereof. The investing of cash
collateral received from loaning portfolio securities involves leverage which
magnifies the potential for gain or loss on monies invested and, therefore,
results in an increase in the volatility of the Fund's outstanding securities.
Such loans may be terminated at any time.
The Fund will retain most rights of ownership including rights to dividends,
interest or other distributions on the loaned securities. Voting rights pass
with the lending, although the Fund may call loans to vote proxies if desired.
Should the borrower of the securities fail financially, there is a risk of
delay in recovery of the securities or loss of rights in the collateral. Loans
are made only to borrowers which are deemed by the Investment Manager to be of
good financial standing."
Limiting Investment Risk
Under the caption, "Limiting Investment Risk" at page 7 of the Prospectus, the
first paragraph is hereby revised in its entirety as follows:
"In seeking to lessen investment risk, the Fund operates under certain
fundamental and nonfundamental investment restrictions. Under the fundamental
investment restrictions, the Fund may not (a) purchase a security of any one
issuer (other than securities issued by the U.S. Government or its
instrumentalities), if such purchase would cause more than 5% of the Fund's
total assets to be invested in the securities of such issuer; (b) purchase for
its portfolio a security of any one issuer if such purchase would cause more
than 10% of any class of securities of such issuer to be held by the Fund; or
(c) invest more than 25% of the Fund's total assets in securities of issuers
principally engaged in any one industry with certain designated exceptions
such as in the case of the U.S. Government. Under the nonfundamental
investment restrictions, the Fund may not invest more than 15% of the Fund's
net assets in illiquid securities including repurchase agreements extending
for more than seven days and may not invest more than 5% of the Fund's net
assets in restricted securities excluding securities eligible for resale under
Rule 144A under the Securities Act of 1933. Although many illiquid securities
may also be restricted, and vice versa, compliance with each of these policies
will be determined independently."
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Minimum Investment
The section under the caption "Purchase of Shares--Minimum Investment" at page
9 of the Prospectus is hereby revised in its entirety as follows:
"Class of Shares
------------------------------------
A B C D
------ ------ --- ------
Minimum Initial Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $2,000 $2,000 (a) $2,000
By Investamatic $1,000 $1,000 (a) $1,000
All other $2,500 $2,500 (a) $2,500
Minimum Subsequent Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $ 50 $ 50 (a) $ 50
By Investamatic $ 50 $ 50 (a) $ 50
All other $ 50 $ 50 (a) $ 50
(a) Special conditions apply; contact the Distributor.
The Fund reserves the right to vary the minimums for initial or subsequent
investments from time to time as in the case of, for example, exchanges and
investments under various retirement and employee benefit plans, sponsored
arrangements involving group solicitations of the members of an organization, or
other investment plans such as for reinvestment of dividends and distributions
or for periodic investments (e.g., Investamatic Check Program)."
Other Programs
Immediately after the first sentence of the first paragraph under the caption
"Purchase of Shares--Class A Shares--Initial Sales Charges--Other Programs" at
page 12 of the Prospectus, the following is added:
"Sales without a sales charge, or with a reduced sales charge, may also be
made through brokers, financial planners, institutions, and others, under
managed fee-based programs (e.g., "wrap fee" or similar programs) which meet
certain requirements established from time to time by the Distributor, in the
event the Distributor determines to implement such arrangements."
Additional Information
Under the caption "Redemption of Shares--Additional Information" at page 17 of
the Prospectus, the first paragraph is hereby revised in its entirety as
follows:
"Because of the relatively high cost of maintaining small shareholder
accounts, the Fund reserves the right to involuntarily redeem at its option
any shareholder account which remains below $1,500 for a period of 60 days
after notice is mailed to the applicable shareholder, or to impose a
maintenance fee on such account after 60 days' notice. Such involuntary
redemptions will be subject to applicable sales charges, if any. The Fund may
increase such minimum account value above such amount in the future after
notice to affected shareholders. Involuntarily redeemed shares will be priced
at the net asset value on the date fixed for redemption by the Fund, and the
proceeds of the redemption will be mailed to the affected shareholder at the
address of record. Currently, the maintenance fee is $18 annually, which is
paid to the Transfer Agent. The fee does not apply to certain retirement
accounts or if the shareholder has more than an aggregate $50,000 invested in
the Fund and other Eligible Funds combined. Imposition of a maintenance fee on
a small account could, over time, exhaust the assets of such account."
Investment Plans
The first paragraph under the caption "Shareholder Services--Investment Plans"
at page 19 of the Prospectus is revised in its entirety to read as follows:
"The Fund offers Class A, Class B and Class D shareholders the Investamatic
Check Program. Under this Program, shareholders may make regular investments
by authorizing withdrawals from their bank accounts each month or quarter on
the Investamatic application form available from Shareholder Services."
CONTROL NUMBER: 2650-951003(1196)SSR-LD CF-308E-10951BS
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
a Series of
STATE STREET CAPITAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1995
(As Supplemented October 5, 1995) (a)
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS........................... 2
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT
TECHNIQUES............................................................... 5
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS...........................14
RATING CATEGORIES OF DEBT SECURITIES......................................17
TRUSTEES AND OFFICERS.....................................................19
INVESTMENT ADVISORY SERVICES..............................................23
PURCHASE AND REDEMPTION OF SHARES.........................................24
NET ASSET VALUE...........................................................26
PORTFOLIO TRANSACTIONS....................................................27
CERTAIN TAX MATTERS.......................................................29
DISTRIBUTION OF SHARES OF THE FUND........................................31
CALCULATION OF PERFORMANCE DATA...........................................35
CUSTODIAN.................................................................37
INDEPENDENT ACCOUNTANTS...................................................37
FINANCIAL STATEMENTS......................................................38
The following Statement of Additional Information is not a Prospectus. It
should be read in conjunction with the Prospectus of State Street Research
Capital Fund (the "Fund") dated February 1, 1995, which may be obtained without
charge from the offices of State Street Capital Trust (the "Trust") or State
Street Research Investment Services, Inc. (the "Distributor"), One Financial
Center, Boston, Massachusetts 02111-2690.
- ------------------------------
(a) Updated text denoted by #
CONTROL NUMBER: 1285C - 951010(1196)SSR-LD CF-879D-1095
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth in part under "The Fund's Investments" and "Limiting
Investment Risk" in the Fund's Prospectus, the Fund has adopted certain
investment restrictions.
All of the Fund's fundamental investment restrictions are set forth below.
These fundamental investment restrictions may not be changed except by the
affirmative vote of a majority of the Fund's outstanding voting securities as
defined in the Investment Company Act of 1940, as amended (the "1940 Act").
(Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at a meeting of security holders duly called, (i) of
67% or more of the voting securities present at a meeting if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy or (ii) of more than 50% of the outstanding voting securities, whichever
is less.) Under these restrictions, it is the Fund's policy:
(1) not to purchase the securities of any issuer if such purchase at the
time thereof would cause more than five percent (5%) of the total
assets of the Fund to be invested in the securities of any one
issuer; but this restriction shall not apply to obligations of the
government of the United States of America or to obligations of any
corporation organized under a general Act of Congress if such
corporation is an instrumentality of the United States;
(2) not to purchase the securities of any issuer if such purchase at the
time thereof would cause more than ten percent (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 lend money; however, the Fund may lend portfolio securities
and purchase bonds, debentures, notes and similar obligations (and
enter into repurchase agreements with respect thereto);
(4) not to underwrite or participate in the marketing of securities of
other issuers, although 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;
(5) not to make any investment in real property or real estate
mortgage loans;
# (6) not to invest in physical commodities or physical commodity
contracts or options in excess of 10% of the Fund's total assets,
except that investments in essentially financial items or
arrangements such as, but not limited to, swap arrangements,
hybrids, currencies, currency and other forward contracts, futures
contracts and options on futures contracts on securities, securities
indices, interest rates and currencies shall not be deemed
investments in commodities or commodities contracts;
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(7) not to purchase for, or retain in, its portfolio any security of an
issuer if, to the knowledge of the Fund, those of its officers and
directors and officers and directors of its investment adviser who
individually own beneficially more than 1/2 of 1% of the securities
of such issuer, when combined, own beneficially more than 5% of the
securities of such issuer taken at market;
(8) not to issue senior securities;
(9) not to invest in oil, gas or other mineral exploration or
development programs (provided that the Fund may invest in
securities issued by or which are based directly or indirectly, on
the credit of companies which invest in or sponsor such programs);
(10) not to make any investment which would cause more than 25% of the
value of the Fund's total assets to be invested in securities of
issuers principally engaged in any one industry (for purposes of
this restriction (a) utilities will be divided according to their
services so that, for example, gas, gas transmission, electric and
telephone companies will each be deemed in a separate industry, (b)
oil and oil related companies will be divided by type so that, for
example, oil production companies, oil service companies and
refining and marketing companies will each be deemed in a separate
industry and (c) securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities shall be excluded);
and
(11) not to borrow money (through reverse repurchase agreements or
otherwise) except for extraordinary and emergency purposes, such as
permitting redemption requests to be honored, and then not in an
amount in excess of 10% of the value of its net assets, provided
that additional investments will be suspended during any period when
borrowings exceed 5% of the Fund's net assets, and provided further
that reverse repurchase agreements shall not exceed 5% of the Fund's
net assets. The Board of Trustees may authorize the borrowing of
money only on an unsecured basis for the general purposes of the
Fund and may authorize the issue therefor of notes or debentures of
the Fund, but no money shall be borrowed by the Fund except pursuant
to the authority of the Board of Trustees, and no borrowings by the
Fund shall be authorized to an aggregate amount greater than ten
percent, as noted, of the net assets of the Fund.
The following nonfundamental investment restrictions may be changed
with respect to the Fund by a vote of a majority of the Trustees. Under
these restrictions, it is the Fund's policy:
(1) not to hypothecate, mortgage or pledge any of its assets except as
may be necessary in connection with permitted borrowings and then
not in excess of 15% of the Fund's total assets, taken at cost (for
the purpose of this restriction financial futures, options on
financial futures and forward currency exchange contracts are not
deemed to involve a pledge of assets);
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(2) not to invest in warrants more than 5% of the value of its total
assets, taken at the lower of cost or market value (warrants
initially attached to securities and acquired by the Fund upon
original issuance thereof shall be deemed to be without value);
(3) 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;
# (4) not invest more than 5% of its total assets in securities of
private companies including predecessors with less than three years'
continuous operations except (a) securities guaranteed or backed by
an affiliate of the issuer with three years' continuous operations,
(b) securities issued or guaranteed as to principal or interest by
the U.S. Government, or its agencies or instrumentalities, or a
mixed-ownership Government corporation, (c) securities of issuers
with debt securities rated at least "BBB" by Standard & Poor's
Corporation or "Baa" by Moody's Investor's Service, Inc. (or their
equivalent by any other nationally recognized statistical rating
organization) or securities of issuers considered by the Investment
Manager to be equivalent, (d) securities issued by a holding company
with at least 50% of its assets invested in companies with three
years of continuous operations including predecessors, and (e)
securities which generate income which is exempt from local, state
or federal taxes; provided that the Fund may invest up to 15% in
such issuers so long as such investments plus investments in
restricted securities (other than those which are eligible for
resale under Rule 144A, Regulation S or other exemptive provisions)
do not exceed 15% of the Fund's total assets;
# (5) 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);
# (6) not to invest more than 15% of its net assets in restricted
securities of all types (including not more than 5% of its net
assets in restricted securities which are not eligible for resale
pursuant to Rule 144A, Regulation S or other exemptive provisions
under the Securities Act of 1933);
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<PAGE>
# (7) not to purchase securities on margin or make short sales of
securities except for short sales "against the box"; provided that
the Fund may make short sales if such positions are fully
collateralized and if not more than 5% of the Fund's net assets
(taken at current value) are held as collateral for such short sales
at any time; and, for the purpose of this restriction, escrow or
custodian receipts or letters, margin or safekeeping accounts, or
similar arrangements used in the industry in connection with the
trading of futures, options and forward commitments are not deemed
to involve the purchase of securities on margin;
# (8) not to engage in transactions in options except that investments
in essentially financial items or arrangements such as, but not
limited to, options on securities, securities indices, interest
rates and currencies, and options on futures on securities,
securities indices, interest rates and currencies shall not be
deemed investments in options; and
# (9) 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.
ADDITIONAL INFORMATION CONCERNING
ADDITIONAL INFORMATION CONCERNINGCERTAIN INVESTMENT TECHNIQUES
Among other investments described below, the Fund may buy and sell
domestic and foreign options, futures contracts, and options on futures
contracts with respect to securities, securities indices, and currencies, and
may enter into closing transactions with respect to each of the foregoing, and
invest in other derivatives, under circumstances in which the use of such
techniques is expected by State Street Research & Management Company (the
"Investment Manager") to aid in achieving the investment objective of the Fund.
The Fund on occasion may also purchase instruments with characteristics of both
futures and securities (e.g., debt instruments with interest and principal
payments determined by reference to the value of a commodity or a currency at a
future time) and which, therefore, possess the risks of both futures and
securities investments.
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell underlying
assets, such as certain securities, currencies, or an index of securities, at a
future time at a specified price. A contract to buy establishes a "long"
position while a contract to sell establishes a "short" position.
The purchase of a futures contract on securities or an index of securities
normally enables a buyer to participate in the market movement of the underlying
asset or index after paying a
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transaction charge and posting margin in an amount equal to a small
percentage of the value of the underlying asset or index. The Fund will
initially be required to deposit with the Trust's custodian or the broker
effecting the futures transaction an amount of "initial margin" in cash or
U.S. Treasury obligations.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying assets fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will terminate
the Fund's position in the futures contract. A final determination of
maintenance margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. While futures
contracts with respect to securities do provide for the delivery and acceptance
of such securities, such delivery and acceptance are seldom made.
Futures contracts will be executed primarily (a) to establish a short
position, and thus protect the Fund from experiencing the full impact of an
expected decline in market value of portfolio holdings without requiring the
sale of holdings, or (b) to establish a long position, and thus to participate
in an expected rise in market value of securities or currencies which the Fund
intends to purchase. Subject to the limitations described below, the Fund may
also enter into futures contracts for purposes of enhancing return. In
transactions establishing a long position in a futures contract, money market
instruments equal to the face value of the futures contract will be identified
by the Fund to the Trust's custodian for maintenance in a separate account to
insure that the use of such futures contracts is unleveraged. Similarly, a
representative portfolio of securities having a value equal to the aggregate
face value of the futures contract will be identified with respect to each short
position. The Fund will employ any other appropriate method of cover which is
consistent with applicable regulatory and exchange requirements.
Options on Securities
The Fund may use options on securities to implement its investment
strategy. A call option on a security, for example, gives the purchaser of the
option the right to buy, and the writer the obligation to sell, the underlying
asset at the exercise price during the option period. Conversely, a put option
on a security gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying asset at the exercise price during the option
period.
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Purchased options have defined risk, i.e., the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset.
Written options have varying degrees of risk. An uncovered written call
option theoretically carries unlimited risk, as the market price of the
underlying asset could rise far above the exercise price before its expiration.
This risk is tempered when the call option is covered, i.e., when the option
writer owns the underlying asset. In this case, the writer runs the risk of the
lost opportunity to participate in the appreciation in value of the asset rather
than the risk of an out-of-pocket loss. A written put option has defined risk,
i.e., the difference between the agreed-upon price that the Fund must pay to the
buyer upon exercise of the put and the value, which could be zero, of the asset
at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
his obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Options on Securities Indices
The Fund may engage in transactions in call and put options on securities
indices. For example, the Fund may purchase put options on indices of securities
in anticipation of or during a market decline to attempt to offset the decrease
in market value of its securities that might otherwise result.
Put options on indices of securities are similar to put options on the
securities themselves except that the delivery requirements are different.
Instead of giving the right to make delivery of a security at a specified price,
a put option on an index of securities gives the holder the right to receive an
amount of cash upon exercise of the option if the value of the underlying index
has fallen below the exercise price. The amount of cash received will be equal
to the difference between the closing price of the index and the exercise price
of the option expressed in dollars times a specified multiple. As with options
on securities, the Fund may offset its position in index options prior to
expiration by entering into a closing transaction on an exchange or it may let
the option expire unexercised.
A securities index assigns relative values to the securities included in
the index and the index options are based on a broad market index. Although
there are at present few available options on indices of fixed income
securities, other than tax-exempt securities, or futures and related options
based on such indices, such instruments may become available in the future. In
connection with the use of such options, the Fund may cover its position by
identifying a representative portfolio of securities having a value equal to the
aggregate face value of the option position taken. However, the Fund may employ
any appropriate method to cover its positions that is consistent with applicable
regulatory and exchange requirements.
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Options on Futures Contracts
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
Options Strategy
A basic option strategy for protecting the Fund against a decline in
securities prices could involve (a) the purchase of a put -- thus "locking in"
the selling price of the underlying securities or securities indices -or (b) the
writing of a call on securities or securities indices held by the Fund --
thereby generating income (the premium paid by the buyer) by giving the holder
of such call the option to buy the underlying asset at a fixed price. The
premium will offset, in whole or in part, a decline in portfolio value; however,
if prices of the relevant securities or securities indices rose instead of
falling, the call might be exercised, thereby resulting in a potential loss of
appreciation in the underlying securities or securities indices.
A basic option strategy when a rise in securities prices is anticipated is
the purchase of a call -- thus "locking in" the purchase price of the underlying
security or other asset. In transactions involving the purchase of call options
by the Fund, money market instruments equal to the aggregate exercise price of
the options will be identified by the Fund to the Trust's custodian to insure
that the use of such investments is unleveraged.
The Fund may write options in connection with buy-and-write transactions;
that is, the Fund may purchase a security and concurrently write a call option
against that security. If the call option is exercised in such a transaction,
the Fund's maximum gain will be the premium received by it for writing the
option, adjusted upward or downward by the difference between the Fund's
purchase price of the security and the exercise price of the option. If the
option is not exercised and the price of the underlying security declines, the
amount of such decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund's return will be the premium received from
writing the put option minus the amount by which the market price of the
security is below the exercise price.
8
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Limitations and Risks of Options and Futures Activity
The Fund will engage in transactions in futures contracts or options only
as a hedge against changes resulting from market conditions which produce
changes in the values of its securities or the securities which it intends to
purchase (e.g., to replace portfolio securities which will mature in the near
future) or subject to the limitations described below, to enhance return. The
Fund will not purchase any futures contract or purchase any call option if,
immediately thereafter, more than one third of the Fund's net assets would be
represented by long futures contracts or call options. The Fund will not write a
covered call or put option if, immediately thereafter, the aggregate value of
the assets (securities in the case of written calls and cash or cash equivalents
in the case of written puts) underlying all such options, determined as of the
dates such options were written, would exceed 25% of the Fund's net assets. In
addition, the Fund may not establish a position in a commodity futures contract
or purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such nonhedging
purposes would exceed 5% of the market value of the Fund's net assets.
Although effective hedging can generally capture the bulk of a desired
risk adjustment, no hedge is completely effective. The Fund's ability to hedge
effectively through transactions in futures and options depends on the degree to
which price movements in its holdings correlate with price movements of the
futures and options.
Some positions in futures and options may be closed out only on an
exchange which provides a secondary market therefor. There can be no assurance
that a liquid secondary market will exist for any particular futures contract or
option at any specific time. Thus, it may not be possible to close such an
option or futures position prior to maturity. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
effectively hedge its securities and might in some cases require the Fund to
deposit cash to meet applicable margin requirements. The Fund will enter into an
option or futures position only if it appears to be a liquid investment.
The Fund has undertaken with a state securities authority that, for so
long as its shares are required to be registered for sale in such state, the
Fund will invest only in options and futures that are issued by the Options
Clearing Corporation or offered through the facilities of a national securities
association or listed on a national securities or commodities exchange, except
that the Fund may invest in unlisted options or futures when the desired options
or futures are unavailable on a national securities or commodities exchange.
Furthermore, the Fund will engage in such transactions in unlisted options or
futures only with dealers who have high credit standing as determined by the
Investment Manager.
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Foreign Investments
To the extent the Fund invests in securities of issuers in less developed
countries or emerging foreign markets, it will be subject to a variety of
additional risks, including risks associated with political instability,
economies based on relatively few industries, lesser market liquidity, high
rates of inflation, significant price volatility of portfolio holdings and high
levels of external debt in the relevant country.
Although the Fund may invest in securities denominated in foreign
currencies, the Fund values its securities and other assets in U.S. dollars. As
a result, the net asset value of the Fund's shares may fluctuate with U.S.
dollar exchange rates as well as with price changes of the Fund's securities in
the various local markets and currencies. Thus, an increase in the value of the
U.S. dollar compared to the currencies in which the Fund makes its investments
could reduce the effect of increases and magnify the effect of decreases in the
prices of the Fund's securities in their local markets. Conversely, a decrease
in the value of the U.S. dollar will have the opposite effect of magnifying the
effect of increases and reducing the effect of decreases in the prices of the
Fund's securities in the local markets.
Currency Transactions
The Fund may engage in currency exchange transactions in order to protect
against the effect of uncertain future exchange rates on securities denominated
in foreign currencies. The Fund will conduct its currency exchange transactions
either on a spot (i.e., cash) basis at the rate prevailing in the currency
exchange market, or by entering into forward contracts to purchase or sell
currencies. The Fund's dealings in forward currency exchange contracts will be
limited to hedging involving either specific transactions or aggregate portfolio
positions. A forward currency contract involves an obligation to purchase or
sell a specific currency at a 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 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.
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<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 total assets, except that
repurchase agreements extending for more than seven days when combined with
other illiquid securities will be limited to 10% of the Fund's total assets.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. However, the Fund
may not engage in reverse repurchase agreements in excess of 5% of the Fund's
total assets. In a reverse repurchase agreement the Fund transfers possession of
a portfolio instrument to another person, such as a financial institution,
broker or dealer, in return for a percentage of 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.
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Swap Arrangements
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below. In an
interest rate swap the Fund could agree for a specific period to pay a bank or
investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an assumed figure selected by the parties for this
purpose) in exchange for agreement by the bank or investment banker to pay the
Fund a fixed rate of interest on the notional principal amount. In a currency
swap the Fund would agree with the other party to exchange cash flows based on
the relative differences in values of a notional amount of two (or more)
currencies; in an index swap, the Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices. Purchase
of a cap entitles the purchaser to receive payments from the seller on a
notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an agreed
upon interest rate or amount. A collar combines a cap and a floor.
Most swaps entered into by the Fund will be on a net basis; for example,
in an interest rate swap, amounts generated by application of the fixed rate and
the floating rate to the notional principal amount would first offset one
another, with the Fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, the Fund will set up a segregated custodial account to hold appropriate
liquid assets, including cash; for swaps entered into on a net basis, assets
will be segregated having a daily net asset value equal to any excess of the
Fund's accrued obligations over the accrued obligations of the other party,
while for swaps on other than a net basis assets will be segregated having a
value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a portion of the Fund's portfolio.
However, the Fund may 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 forecast, there is a risk that the swap position may correlate
imperfectly with the price of the asset or liability being hedged.
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When-Issued Securities
The Fund may purchase "when-issued" equity securities, which are traded on
a price 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 up to a month or more; during
this period dividends on equity securities are not payable. No income accrues to
the Fund prior to the time it takes delivery. A frequent form of when-issued
trading occurs when corporate securities to be created by a merger of companies
are traded prior to the actual consummation of the merger. Such transactions may
involve a risk of loss if the value of the securities fall below the price
committed to prior to the actual issuance. The Trust's custodian will establish
a segregated account for the Fund when it purchases securities on a when-issued
basis consisting of cash or liquid securities equal to the amount of the
when-issued commitments.
Rule 144A Securities
Subject to the percentage limitation on illiquid and restricted securities
noted above, the Fund may buy or sell restricted securities in accordance with
Rule 144A under the Securities Act of 1933 ("Rule 144A Securities"). Securities
may be resold pursuant to Rule 144A under certain circumstances only to
qualified institutional buyers as defined in the rule, and the markets and
trading practices for such securities are relatively new and still developing;
depending on the development of such markets, such Rule 144A Securities may be
deemed to be liquid as determined by or in accordance with methods adopted by
the Trustees. Under such methods the following factors are considered, among
others: the frequency of trades and quotes for the security, the number of
dealers and potential purchasers in the market, marketmaking activity, and the
nature of the security and marketplace trades. Investments in Rule 144A
Securities could have the effect of increasing the level of the Fund's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing such securities. Also, the Fund may be
adversely impacted by the possible illiquidity and subjective valuation of such
securities in the absence of a market for them.
The Fund has undertaken with a state securities authority that, for so
long as the Fund's shares are required to be registered for sale in such state,
the Fund's investments in restricted securities, excluding restricted securities
eligible for resale pursuant to Rule 144A or Regulation S under the Securities
Act of 1933, will be limited to 5% of total assets.
Other Investment Limitations
Pursuant to the policies of certain state securities authorities, the Fund
will not invest in real estate limited partnerships, oil, gas or mineral
development limited partnerships, or in oil, gas or mineral leases for so long
as Fund shares are required to be registered for sale in the relevant state.
The Fund has undertaken with a state securities authority that, for so
long as the Fund's shares are required to be registered for sale in such state,
the Fund's investment in warrants, valued at the lower of cost or market, may
not exceed 5% of its net assets and included within
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that amount, but not to exceed 2% of the value of its net assets, may be
warrants which are not listed on the New York or American Stock Exchange.
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
As indicated in the Fund's Prospectus, the Fund may invest in long-term
and short-term debt securities. The Fund may invest in cash and short-term
securities for temporary defensive purposes when, in the opinion of the
Investment Manager, such a position is more likely to provide protection against
unfavorable market conditions than adherence to other investment policies.
Certain debt securities and money market instruments in which the Fund may
invest are described below.
U.S. Government and Related Securities. U.S. Government securities are
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S.
Government securities in which the Fund invests include, among others:
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 Farmers Home
Administration, the Federal Farm Credit Banks, the Federal
National Mortgage Association, the Government National
Mortgage Association and the Federal Home Loan Mortgage
Corporation; and
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 and obligations of the Farmers Home Administration, 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 Farmers Home
Administration, the Federal Farm Credit Banks, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation are backed by the
credit of the agency or instrumentality issuing the obligations. Certain
obligations of Resolution Funding Corporation, a mixed-ownership Government
corporation, are backed with respect to interest payments by the U.S. Treasury,
and with respect to principal payments by U.S. Treasury obligations held in a
segregated account with a Federal Reserve Bank. Except for certain
mortgage-related securities, the Fund will only invest in obligations issued by
mixed-ownership Government corporations where such securities are guaranteed as
to payment of principal or interest by the U.S. Government or a U.S. Government
agency or instrumentality, and any unguaranteed principal or interest is
otherwise supported by U.S. Government obligations held in a segregated account.
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<PAGE>
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Bank Money Investments. Bank money investments include but are not limited
to certificates of deposit, bankers' acceptances and time deposits. Certificates
of deposit are generally short-term (i.e., less than one year), interest-bearing
negotiable certificates issued by commercial banks or savings and loan
associations against funds deposited in the issuing institution. A banker's
acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods). A banker's acceptance may be obtained
from a domestic or foreign bank, including a U.S. branch or agency of a foreign
bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. The Fund will not invest
in any such bank money investment unless the investment is issued by a U.S. bank
that is a member of the Federal Deposit Insurance Corporation ("FDIC"),
including any foreign branch thereof, a U.S. branch or agency of a foreign bank,
a foreign branch of a foreign bank, or a savings bank or savings and loan
association that is a member of the FDIC and which at the date of investment has
capital, surplus and undivided profits (as of the date of its most recently
published financial statements) in excess of $50 million. The Fund will not
invest in time deposits maturing in more than seven days and will not invest
more than 10% of its total assets in time deposits maturing in two to seven
days.
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under state law. U.S. federal branches or
agencies of foreign banks are chartered and regulated by the
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<PAGE>
Comptroller of the Currency, while state branches and agencies are chartered
and regulated by authorities of the respective states or the District of
Columbia. U.S. branches of foreign banks may accept deposits and thus are
eligible for FDIC insurance; however, not all such branches elect FDIC
insurance. Unlike U.S. branches of foreign banks, U.S. agencies of foreign banks
may not accept deposits and thus are not eligible for FDIC insurance. Both
branches and agencies can maintain credit balances, which are funds received by
the office incidental to or arising out of the exercise of their banking powers
and can exercise other commercial functions, such as lending activities.
Short-Term Corporate Debt Instruments. Short-term corporate debt
instruments include commercial paper to finance short-term credit needs (i.e.,
short-term, unsecured promissory notes) issued by corporations including but not
limited to (a) domestic or foreign bank holding companies or (b) their
subsidiaries or affiliates where the debt instrument is guaranteed by the bank
holding company or an affiliated bank or where the bank holding company or the
affiliated bank is unconditionally liable for the debt instrument. Commercial
paper is usually sold on a discounted basis and has a maturity at the time of
issuance not exceeding nine months.
Commercial Paper Ratings. Commercial paper investments at the time of
purchase will be rated A by Standard & Poor's Corporation ("S&P") or Prime by
Moody's Investor's Service, Inc. ("Moody's"), or, if not rated, issued by
companies having an outstanding long-term unsecured debt issue rated at least A
by S&P or by Moody's. The money market investments in corporate bonds and
debentures (which must have maturities at the date of settlement of one year or
less) must be rated at the time of purchase at least A by S&P or by Moody's.
Commercial paper rated A (highest quality) by S&P is issued by entities which
have liquidity ratios which are adequate to meet cash requirements. Long-term
senior debt is rated A or better, although in some cases BBB credits may be
allowed. The issuer has access to at least two additional channels of borrowing.
Basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances. Typically, the issuer's industry is well established and
the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. The relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1, A-2
or A-3. (Those A-1 issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.
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<PAGE>
RATING CATEGORIES OF DEBT SECURITIES
Set forth below is a description of S&P corporate bond and debenture
ratings 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 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 known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in the case of Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
Aaa securities.
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<PAGE>
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 rating category.
In the event applicable rating agencies lower the ratings of debt
instruments held by the Fund and the action results in a material decline in the
overall quality of the Fund's portfolio, the situation will be reviewed and
necessary action, if any, will be taken, including changes in the composition of
the portfolio.
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<PAGE>
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust, their addresses, and their
principal occupations and positions with certain affiliates of the Investment
Manager are set forth below.
*+Peter C. Bennett, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. He is 57. His principal occupation is Executive Vice
President and Director of State Street Research & Management Company. During the
past five years he has also served as Senior Vice President and as Vice
President of State Street Research & Management Company. Mr. Bennett's other
principal business affiliations include Director, State Street Research
Investment Services, Inc. and Gefinor Securities S.A.
*Charles S. Glovsky, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 43. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as Vice President of State Street Research & Management
Company.
# *+Francis J. McNamara, III, One Financial Center, Boston, MA 02111, has
served as Secretary and General Counsel of the Trust since May 1995. He is 40.
His principal occupation is Senior Vice President and General Counsel of State
Street Research & Management Company. During the past five years has also served
as Senior Vice President, General Counsel and Assistant Secretary of The Boston
Company Inc., Boston Safe Deposit and Trust Company and The Boston Company
Advisors, Inc. Mr. McNamara's other principal business affiliations include
Senior Vice President, Clerk and General Counsel of State Street Research
Investment Services, Inc.; Secretary and General Counsel of SSRM Holdings, Inc.;
and Director, Clerk and General Counsel of State Street Research Energy, Inc.
*+Frederick R. Kobrick, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 52. His principal occupation is currently,
and during the past five years has been, Senior Vice President of State Street
Research & Management Company.
# +Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791,
serves as Trustee of the Trust. He is 68. He is engaged principally in
private investments and civic affairs, and is an author of business history.
Previously, he was with Morgan Guaranty Trust Company of New York.
+Robert A. Lawrence, Saltonstall & Co., 50 Congress Street, Boston, MA
02109, serves as Trustee of the Trust. He is 68. His principal occupation during
the past five years has been Partner, Saltonstall & Co., a private investment
firm.
* or + See footnotes on page 21
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<PAGE>
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 44. His principal occupation is Executive Vice
President, Treasurer and Director of State Street Research & Management Company.
During the past five years he has also served as Executive Vice President and
Chief Financial Officer of New England Investment Companies and as Senior Vice
President and Vice President of New England Mutual Life Insurance Company. Mr.
Maus's other principal business affiliations include Executive Vice President,
Treasurer, Chief Financial Officer and Director of State Street Research
Investment Services, Inc.
*+Thomas P. Moore, Jr., One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 57. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as Vice President of State Street Research & Management
Company.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 63. He is retired, having served during the past
five years, until October 1992, as Executive Vice President, Chief Operating
Officer and Director of Hewlett-Packard Company.
+Thomas L. Phillips, 141 Spring Street, Lexington, MA 02173, serves as
Trustee of the Trust. He is 71. He is retired and was formerly Chairman of the
Board and Chief Executive Officer of Raytheon Company, of which he remains a
Director.
# +Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves
as Trustee of the Trust. He is 57. His principal occupations during the past
five years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
57. 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 52. His principal occupation is Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research & Management
Company. During the past five years he also served as President and Chief
Executive Officer of New England Investment Companies and as Chief Investment
Officer of New England Mutual Life Insurance Company. Mr. Verni's other
principal business affiliations include Chairman of the Board, President, Chief
Executive Officer and Director of State Street Research Investment Services,
Inc.
* or + See footnotes on page 21
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<PAGE>
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 70. He is retired and was formerly Of Counsel for
the law firm Choate, Hall & Stewart. He was a partner of that firm from 1960 to
1987.
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the 1940 Act because of their affiliations
with the Fund's investment adviser.
+ Serves as a Trustee and/or officer of one or more of the following
investment companies, each of which has an advisory relationship with
the Investment Manager or its affiliates: MetLife - State Street
Equity Trust, MetLife - State Street Financial Trust, MetLife - State
Street Income Trust, MetLife - State Street Money Market Trust, MetLife
- State Street Tax-Exempt Trust, State Street Capital Trust, State
Street Exchange Trust, State Street Growth Trust, State Street Master
Investment Trust, State Street Research Securities Trust, MetLife
Portfolios, Inc. and Metropolitan Series Fund, Inc.
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<PAGE>
As of October 31, 1994, the following persons or entities were the record
and/or beneficial owners of the approximate amounts of each class of shares of
the Fund as set forth beside their names:
Shareholder % (tentative)
Class A James E. Anthony 5.1
Merrill Lynch 24.3
Class B Merrill Lynch 50.6
Class C George F. Bennett 13.4
Dudley F. Wade 7.5
Metropolitan Life 45.0
Paul C. Cabot, Jr. 6.7
Class D Merrill Lynch 36.4
The full name and address of each of the above persons or entities are as
follows:
James E. Anthony
c/o State Street Research
Shareholder Services
One Financial Center
Boston, Massachusetts 02111
Merrill Lynch, Pierce, Fenner & Smith, Inc. (b)
One Liberty Plaza
165 Broadway
New York, New York 10080
George F. Bennett
c/o State Street Research
Shareholder Services
One Financial Center
Boston, Massachusetts 02111
Dudley F. Wade
c/o State Street Research
Shareholder Services
One Financial Center
Boston, Massachusetts 02111
Metropolitan Life Insurance Company (a)
One Madison Avenue
New York, New York 10010
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<PAGE>
Paul C. Cabot, Jr.
c/o State Street Research
Shareholder Services
One Financial Center
Boston, Massachusetts 02111
- ---------------
(a) Metropolitan Life Insurance Company ("Metropolitan"), a New York
corporation, was the record and/or beneficial owner, directly or
indirectly through its subsidiaries or affiliates, of such shares.
(b) The Fund believes that Merrill Lynch does not have beneficial ownership of
such shares.
As of October 31, 1994, the Trustees and officers of the Fund as a group
owned approximately 4.6% and 2.4%, respectively, of the Fund's outstanding Class
A and Class C shares.
Ownership of 25% or more of a voting security is deemed "control" as
defined in the 1940 Act. So long as 25% of a class of the Fund's 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.
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Advisory
Agreement provides that the Investment Manager shall furnish the Fund with an
investment program, suitable office space and facilities and such investment
advisory, research and administrative services as may be required from time to
time. The Investment Manager compensates all executive and clerical personnel
and Trustees of the Trust if such persons are employees of the Investment
Manager or its affiliates. The Investment Manager is an indirect wholly-owned
subsidiary of Metropolitan.
The advisory fee payable monthly by the Fund to the Investment Manager is
computed as a percentage of the average of the value of the net assets of the
Fund, as determined at the close of the New York Stock Exchange (the "NYSE") on
each day the NYSE is open for trading, at the annual rate of 0.75% of the net
assets of the Fund. The Fund has been advised that the Distributor and its
affiliates may from time to time and in varying amounts voluntarily assume some
portion of fees or expenses relating to the Fund. For the fiscal years ended
September 30, 1992, 1993 and 1994, the Fund's investment advisory fee prior to
the assumption of fees or expenses was $90,103, $145,523 and $813,880,
respectively. For the same periods, the voluntary reduction of fees or
assumption of expenses amounted to $0, $0 and $26,269 respectively.
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<PAGE>
Further, to the extent required under applicable state regulatory
requirements, the Investment Manager will reduce its management fee up to the
amount of any expenses (excluding permissible items, such as brokerage
commissions, Rule 12b-1 Distribution Plan payments, interest, taxes and
litigation expenses) paid or incurred by the Fund in any fiscal year which
exceed specified percentages of the average daily net assets of the Fund for
such fiscal year. The most restrictive of such percentage limitations is
currently 2.5% of the first $30 million of average net assets, 2.0% of the next
$70 million of average net assets and 1.5% of the remaining average net assets.
These commitments may be amended or rescinded in response to changes in the
requirements of the various states by the Trustees without shareholder approval.
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund 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 Agreement or "interested persons" of any party thereto, cast in
person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated on 60 days written notice by either party
and will terminate automatically in the event of its assignment, as defined
under the 1940 Act and regulations thereunder. Such regulations provide that a
transaction which does not result in a change of actual control or management of
an adviser is not deemed an assignment.
Under a 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.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by the Distributor. The Fund offers
four classes of shares which may be purchased at the next determined net asset
value per share plus, in the case of all classes except Class C shares, a sales
charge which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B and Class
D shares). General information on how to buy shares of the Fund, as well as
sales charges involved, are set forth under "Purchase of Shares" in the
Prospectus. The following supplements that information.
Public Offering Price. The public offering price for each class of
shares of the Fund is based on their net asset value determined as of the
close of the NYSE on the day the purchase order is received by State Street
Research Shareholder Services provided that the order is received prior to
the close of the NYSE on that day; otherwise the net asset value used is that
determined as of the close of the NYSE on the next day it is open for
unrestricted trading. When
24
<PAGE>
a purchase order is placed through a dealer, that dealer is responsible for
transmitting the order promptly to State Street Research Shareholder Services in
order to permit the investor to obtain the current price. Any loss suffered by
an investor which results from a dealer's failure to transmit an order promptly
is a matter for settlement between the investor and the dealer.
Reduced Sales Charges. For purposes of determining whether a purchase of
Class A shares qualifies for reduced sales charges, the term "person" includes:
(i) an individual, or an individual combining with his or her spouse and their
children and purchasing for his, her or their own account; (ii) a "company" as
defined in Section 2(a)(8) of the 1940 Act; (iii) a trustee or other fiduciary
purchasing for a single trust estate or single fiduciary account (including a
pension, profit sharing or other employee benefit trust created pursuant to a
plan qualified under Section 401 of the Internal Revenue Code); (iv) a
tax-exempt organization under Section 501(c)(3) or (13) of the Internal Revenue
Code; and (v) an employee benefit plan of a single employer or of affiliated
employers.
Investors may purchase Class A shares of the Fund at reduced sales charges
by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds" as
designated by the Distributor within a 13-month period. The sales charge
applicable to each purchase made pursuant to a Letter of Intent will be that
which would apply if the total dollar amount set forth in the Letter of Intent
were being bought in a single transaction. Purchases made within a 90-day period
prior to the execution of a Letter of Intent may be included therein; in such
case the date of the earliest of such purchases marks the commencement of the
13-month period.
An investor may include toward completion of a Letter of Intent the value
(at the current public offering price) of all of his or her Class A shares of
the Fund and of any of the other Class A shares of Eligible Funds held of record
as of the date of his or her Letter of Intent, plus the value (at the current
offering price) as of such date of all of such shares held by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the Fund and 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
25
<PAGE>
herein as eligible to join with the investor in a single purchase. Class B,
Class C and Class D shares may also be included in the combination under certain
circumstances. Investors must submit sufficient information to show that they
qualify for the Right of Accumulation.
Class C Shares - Class C shares are currently available to (i) benefit
plans such as qualified retirement plans, other than individual retirement
accounts and self-employed retirement plans, which meet certain criteria
relating to minimum assets, minimum participants, service agreements, or similar
factors; (ii) tax-exempt retirement plans of the Investment Manager and its
affiliates, including the retirement plans of the Investment Manager's
affiliated brokers; (iii) unit investment trusts sponsored by the Investment
Manager or its affiliates; (iv) banks and insurance companies purchasing for
their own accounts; (v) investment companies not affiliated with the Investment
Manager; and (vi) endowment funds of nonprofit organizations with substantial
minimum assets. The entities included in categories (i), (iv) and (vi) may not
be affiliates of the Investment Manager.
Reorganizations. In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, the Fund may issue its shares at net asset value (or
more) to such entities or to their security holders.
Redemptions. The Fund reserves the right to pay redemptions in kind with
portfolio securities in lieu of cash. In accordance with its election pursuant
to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of redemption
proceeds paid in cash. Although it has no present intention to do so, the Fund
may, under unusual circumstances, limit redemptions in cash with respect to each
shareholder during any ninety-day period to the lesser of (i) $250,000 or (ii)
1% of the net asset value of the Fund at the beginning of such period. In
connection with any redemptions paid in kind with portfolio securities,
brokerage and other costs may be incurred by the redeeming shareholder in the
sale of the securities received.
NET ASSET VALUE
The net asset values of the shares of the Fund are determined once daily
as of the close of the New York Stock Exchange ("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 for New Year's Day,
Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is computed by dividing the sum
of the market 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 the portfolio assets as provided below, the
Trustees may 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 may provide prices determined as of times prior to the close of the
NYSE.
26
<PAGE>
In general, securities are valued as follows. Securities which are listed
or traded on the New York or American Stock Exchange are valued at the price of
the last quoted sale on the respective exchange for that day. Securities which
are listed or traded on a national securities exchange or exchanges, but not on
the New York or American Stock Exchange, are valued at the price of the last
quoted sale on the exchange for that day prior to the close of the NYSE.
Securities not listed on any national securities exchange which are traded "over
the counter" and for which quotations are available on the National Association
of Securities Dealers' NASDAQ System, or other system, are valued at the closing
price supplied through such system for that day at the close of the NYSE. Other
securities are, in general, valued at the mean of the bid and asked quotations
last quoted prior to the close of the NYSE if there are market quotations
readily available, or in the absence of such market quotations, then at the fair
value thereof as determined by or under authority of the Trustees of the Trust
utilizing such pricing services as may be deemed appropriate. Securities deemed
restricted as to resale are valued at the fair value thereof as determined by or
in accordance with methods adopted by the Trustees of the Trust.
Short-term debt instruments issued with a maturity of one year or less
which have a remaining maturity of 60 days or less are valued using the
amortized cost method, provided that during any period in which more than 25% of
the Fund's total assets is invested in short-term debt securities the current
market value of such securities will be used in calculating net asset value per
share in lieu of the amortized cost method. The amortized cost method is used
when the value obtained is fair value. Under the amortized cost method of
valuation, the security is initially valued at cost on the date of purchase (or
in the case of short-term debt instruments purchased with more than 60 days
remaining to maturity, the market value on the 61st day prior to maturity), and
thereafter a constant amortization to maturity of any discount or premium is
assumed regardless of the impact of fluctuating interest rates on the market
value of the security.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
The Fund's portfolio turnover rate is determined by dividing the lesser of
securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The Fund reserves full freedom with respect to portfolio
turnover, as described in the Prospectus. The portfolio turnover rates for the
fiscal years ended September 30, 1993 and 1994 were 129.57% and 167.08%,
respectively. The Investment Manager believes the portfolio turnover rate for
the fiscal year ended September 30, 1994 was significantly higher than that for
the previous fiscal year because of sales of portfolio securities which had
reached attractive levels or to shift from one industry sector to another,
consistent with changes in the Fund's view of the economy.
27
<PAGE>
Brokerage Allocation
The Fund and the Investment Manager seek the best overall execution of
purchase or sale orders and the most favorable net price in securities
transactions consistent with their judgment as to the business qualifications of
the various broker or dealer firms with which the Fund may do business.
Decisions with respect to the market in which the transaction is to be
completed, and to the allocation of orders among brokers or dealers, are made in
accordance with this policy. In selecting brokers or dealers to effect portfolio
transactions, consideration is given to the performance, integrity and financial
responsibility of the various firms as well as to their demonstrated execution
experience and capability generally and in regard to particular markets or
securities and, in agency transactions, to the competitiveness of the commission
rates (or in principal transactions of the net prices) they charge. The
Investment Manager keeps current as to the range of rates or prices charged by
various firms and against this background evaluates the reasonableness of a
commission or price charged with respect to a particular transaction by
considering such factors as difficulty of execution or security positioning by
the executing firm.
When it appears that a number of firms can satisfy the required standards
in respect of a particular transaction, consideration may also be given to
services other than execution services which such firms have provided in the
past or may provide in the future. Among such other services are the supplying
of supplemental investment research, general economic and political information,
analytical and statistical data, relevant market information and daily market
quotations for computation of net asset value. In this connection it should be
noted that a substantial portion of brokerage commissions paid, or principal
transactions entered, by the Fund may be with brokers and investment banking
firms which, in the normal course of business, publish statistical, research and
other material which is received by the Investment Manager and which may or may
not prove useful to the Investment Manager, the Fund or other clients of the
Investment Manager.
Neither the Fund nor the Investment Manager has any definite agreements
with any firm as to the amount of business which that firm may expect to receive
for services supplied or otherwise. There may be, however, understandings with
certain firms that in order for such firms to be able to continuously supply
certain services, they need to receive allocation of a specified amount of
business. These understandings are honored to the extent possible in accordance
with the policy set forth above. Neither the Fund nor the Investment Manager
intends to pay a firm in excess of that which another would charge for handling
the same transaction in recognition of services (other than execution services)
provided. However, the Fund and the Investment Manager are aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, rely on the provisions of Section 28(e) of the
Securities Exchange Act of 1934, to the extent applicable. Brokerage commissions
paid by the Fund during the fiscal years ended September 30, 1994, 1993 and 1992
amounted to approximately $431,000, $60,000 and $28,000 respectively. The
Investment Manager believes that the increase in brokerage commissions for the
fiscal year ended September 30, 1994, compared to the prior two fiscal years is
attributed to the investment of proceeds from the increased sale of Fund shares
and general investment activity for a larger portfolio.
28
<PAGE>
Occasions may arise when the Investment Manager determines that an
investment in a particular security, or the disposition of a particular
security, is simultaneously a proper investment decision for the Fund as well as
for the portfolio of one or more of its other clients. In this event, a purchase
or sale, as the case may be, of any such security on any given day will be
normally averaged as to price and allocated as to amount among the several
clients in a manner deemed equitable to each client.
On occasions when the Investment Manager deems the purchase or sale of a
security to be in the best interests of the Fund as well as other clients of the
Investment Manager, the Investment Manager, to the extent permitted by
applicable laws and regulations, may aggregate such securities to be sold or
purchased for the Fund with those to be sold or purchased for other customers in
order to obtain best execution and lower brokerage commissions, if any. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Investment Manager in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to all such customers, including the Fund. In some instances, this
procedure may affect the price and size of the positions obtainable for the
Fund.
CERTAIN TAX MATTERS
Federal Income Taxation of the Fund
The Fund intends to qualify and elect to be treated each taxable year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), although it cannot give complete assurance
that it will do so. Accordingly, the Fund must, among other things, (a) derive
at least 90% of its gross income in each taxable year from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of the
following held for less than three months (the "30% test"): (i) stock or
securities; (ii) options, futures, or forward contracts (other than options,
futures, or forward contracts on foreign currencies) or (iii) foreign currencies
(or options, futures, or forward contracts on foreign currencies) but only if
such currencies (or options, futures, or forward contracts) are not directly
related to the Fund's principal business of investing in stocks or securities
(or options and futures with respect to stocks or securities); (c) satisfy
certain diversification requirements and (d) in order to be entitled to utilize
the dividends paid deduction, distribute annually at least 90% of its investment
company taxable income (determined without regard to the deduction for dividends
paid).
The 30% test will limit the extent to which the Fund may sell securities
held for less than three months, write options which expire in less than three
months, and effect closing transactions with respect to call or put options that
have been written or purchased within the preceding three months. (If the Fund
purchases a put option for the purpose of hedging an underlying portfolio
security, the acquisition of the option is treated as a short sale of the
underlying security unless,
29
<PAGE>
for purposes only of the 30% test, the option and the security are acquired on
the same date). Finally, as discussed below, this requirement may also limit
investments by the Fund in options on stock indices, listed options on
nonconvertible debt securities, futures contracts, options on interest rate
futures contracts and certain foreign currency contracts.
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of the Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of the
Fund.
The Fund will be liable for a nondeductible 4% excise tax on amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement. To avoid the tax, during each calendar year the Fund must
distribute an amount equal to at least 98% of the sum of its ordinary income
(not taking into account any capital gains or losses) for the calendar year, and
its capital gain net income for the 12-month period ending on October 31, in
addition to any undistributed portion of the respective balances from the prior
year. The Fund intends to make sufficient distributions to avoid this 4% excise
tax.
Federal Income Taxation of the Fund's Investments
Original Issue Discount. For federal income tax purposes, debt securities
purchased by the Fund may be treated as having original issue discount. Original
issue discount represents interest for federal income tax purposes and can
generally be defined as the excess of the stated redemption price at maturity of
a debt obligation over the issue price. Original issue discount is treated for
federal income tax purposes as income earned by the Fund, whether or not any
income is actually received, and therefore is subject to the distribution
requirements of the Code. Generally, the amount of original issue discount is
determined on the basis of a constant yield to maturity which takes into account
the compounding of accrued interest. Under section 1286 of the Code, an
investment in a stripped bond or stripped coupon may result in original issue
discount.
Debt securities may be purchased by the Fund at a discount that exceeds
the original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for income tax
purposes. In the case of any debt security issued after July 18, 1984, having a
fixed maturity date of more than one year from the date of issue and having
market discount, the gain realized on disposition will be treated as interest
income to the extent it does not exceed the accrued market discount on the
security (unless the Fund elects to include such accrued market discount in
income in the tax year to which it is attributable). Generally, market discount
is accrued on a daily basis. The Fund may be required to capitalize, rather than
deduct currently, part or all of any direct interest expense incurred to
purchase or carry any debt security having market discount, unless the Fund
makes the election to include market discount currently.
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<PAGE>
Because the Fund must include original issue discount in income, it will be more
difficult for the Fund to make the distributions required to maintain its status
as a regulated investment company under Subchapter M of the Code and to avoid
the 4% excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may be
subject to provisions of the Code that (i) require inclusion of unrealized gains
or losses in the Fund's income for purposes of the 90% test, the 30% test, the
excise tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and (iii) characterize
both realized and unrealized gain or loss as short-term or long-term gain or
loss. Such provisions generally apply to, among other investments, options on
debt securities, indices on securities and futures contracts.
Federal Income Taxation of Shareholders
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 shareholders on December 31, provided that the Fund pays the dividend
during January of the following calendar year.
Distributions by the Fund result in a reduction in the fair market value
of the Fund's shares. Should a distribution reduce the fair market value below a
shareholder's cost basis, such distribution nevertheless may be taxable to the
shareholder as ordinary income or long-term capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
DISTRIBUTION OF SHARES OF THE FUND
State Street Capital Trust is currently comprised of the following series:
State Street Research Capital Fund, State Street Research Small Capitalization
Growth Fund and State Street Research Small Capitalization Value Fund. The
Trustees have authorized shares of the Fund to be issued in four classes: Class
A, Class B, Class C and Class D shares. The Trustees of the Trust have authority
to issue an unlimited number of shares of beneficial interest of separate
series, $.001 par value per share. A "series" is a separate pool of assets of
the Trust which is separately managed and has a different investment objective
and different investment policies from those of another series. The Trustees
have authority, without the necessity of a shareholder vote, to create any
number of new series or classes or to commence the public offering of shares of
any previously established series or classes.
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<PAGE>
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class D shares). The Distributor may reallow all
or portions of such sales charges as concessions to dealers. For the fiscal year
ended September 30, 1992, no sales charges were paid with respect to the Fund.
For the fiscal years ended September 30, 1993 and 1994, total sales charges on
Class A shares paid to the Distributor amounted to $144,385 and $392,042,
respectively. For the same periods the Distributor retained $1,314 and $18,627,
respectively, after reallowance of concessions to dealers.
The differences in the price at which the Fund's Class A shares are
offered due to scheduled variations in sales charges, as described in the Fund's
Prospectus, result from cost savings inherent in economies of scale. Management
believes that the cost of sales efforts of the Distributor and broker-dealers
tends to decrease as the size of purchases increases, or does not involve any
incremental sales expenses as in the case of, for example, exchanges,
reinvestments or dividend investments at net asset value. Similarly, no
significant sales effort is necessary for sales of shares at net asset value to
certain Directors, Trustees, officers, employees, their relatives and other
persons directly or indirectly related to the Fund or associated entities. Where
shares of the Fund are offered at a reduced sales charge or without a sales
charge pursuant to sponsored arrangements, the amount of the sales charge
reduction will similarly reflect the anticipated reduction in sales expenses
associated with such sponsored arrangements. The reduction in sales expenses,
and therefore the reduction in sales charges, will vary depending on factors
such as the size and stability of the organization, the term of the
organization's existence and certain characteristics of its members. The Fund
reserves the right to make variations in, or eliminate, sales charges at any
time or to revise the terms of or to suspend or discontinue sales pursuant to
sponsored arrangements at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission on the shares sold as described in the Prospectus.
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% 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.
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<PAGE>
For the periods shown below, the Distributor received contingent deferred
sales charges upon redemption of Class B and Class D shares of the Fund and paid
initial commissions to securities dealers for sales of such Class B and Class D
shares as follows;
Fiscal Year Ended September 30
------------------------------
1994 1993
---- ----
Contingent Commissions Contingent Commissions
Deferred Paid to Deferred Paid to
Sales Charges Dealers Sales Charges Dealers
------------- ----------- ------------- -----------
Class B $9,484 $2,308,457 $0 $63,093
Class D $ 343 $343,572 $0 $5,207
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1" (the
"Distribution Plan") under which the Fund may engage, directly or indirectly, in
financing any activities primarily intended to result in the sale of Class A,
Class B and Class D shares, including, but not limited to, (1) the payment of
commissions and/or reimbursement to underwriters, securities dealers and others
engaged in the sale of shares, including payments to the Distributor to be used
to pay commissions and/or reimbursement to securities dealers (which securities
dealers may be affiliates of the Distributor) engaged in the distribution and
marketing of shares and furnishing assistance to investors on an ongoing basis,
(2) reimbursement of direct out-of-pocket expenditures incurred by the
Distributor in connection with the distribution and marketing of shares
including expenses relating to the formulation and implementation of marketing
strategies and promotional activities such as direct mail promotions and
television, radio, newspaper, magazine and other mass media advertising, the
preparation, printing and distribution of Prospectuses of the Fund and reports
for recipients other than existing shareholders of the Fund, and obtaining such
information, analyses and reports with respect to marketing and promotional
activities and investor accounts as the Fund may, from time to time, deem
advisable, and (3) reimbursement of expenses incurred by the Distributor in
connection with the servicing of shareholder accounts including payments to
securities dealers and others in consideration of the provision of personal
services to investors and/or the maintenance of shareholder accounts and
expenses associated with the provision of personal services by the Distributor
directly to investors. In addition, the Distribution Plan is deemed to authorize
the Distributor and the Investment Manager to make payments out of general
profits, revenues and other sources to underwriters, securities dealers and
others in connection with sales of shares, to the extent, if any, that such
payments may be deemed to be within the scope of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class D shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class D
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class D shares (as the case may be) to make payments for personal
services and/or the maintenance of shareholder accounts. Proceeds from the
service fee will be used by the Distributor to compensate securities
33
<PAGE>
dealers and others selling shares of the Fund for rendering service to
shareholders on an ongoing basis. Such amounts are based on the net asset value
of shares of the Fund held by such dealers as nominee for their customers or
which are owned directly by such customers for so long as such shares are
outstanding and the Distribution Plan remains in effect with respect to the
Fund. Any amounts received by the Distributor and not so allocated may be
applied by the Distributor as reimbursement for expenses incurred in connection
with the servicing of investor accounts. The distribution and servicing expenses
of a particular class will be borne solely by that class.
During the fiscal year ended September 30, 1994, the Fund paid the
Distributor fees under the Distribution Plan and the Distributor used all of
such payments for expenses incurred on behalf of the Fund as follows:
Class A Class B Class D
------- ------- -------
Advertising $ 0 $ 0 $ 0
Printing and mailing
of prospectuses to
other than current
shareholders 0 0 0
Compensation to dealers 39,573 452,001 260,173
Compensation to sales
personnel 0 0 0
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses 0 0 0
------- -------- --------
Total fees $39,573 $452,001 $260,173
======= ======== ========
The Distributor may have also used additional resources of its own for
further expenses on behalf of the Fund.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Fund will make alternative
arrangements for such services for shareholders who acquired shares through such
institutions.
34
<PAGE>
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") of the Class A,
Class B, Class C and Class D 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. Shares of the Fund had no class designations until February
17, 1993, when Class A and Class C designations were assigned, and March 15,
1993, when Class B and Class D designations were assigned based on the pricing
and Rule 12b-1 fees applicable to shares sold thereafter.
The performance data reflects Rule 12b-1 fees and sales charges as set
forth below:
<TABLE>
<CAPTION>
Rule 12b-1 Fees Sales Charges
--------------- --------------
Class Amount Period
<S> <C> <C> <C>
A 0.25% February 17, 1993 Maximum 4.5% sales charge reflected
to present
B 1.00% March 15, 1993 to present; fee 1- and 5-year periods reflect a 5% and a
will reduce performance for 2% contingent deferred sales charge,
periods after March 15, 1993 respectively
C 0.00% Since commencement of None
operations to present
D 1.00% March 15, 1993 to present; fee 1-year period reflects a 1% contingent
will reduce performance for deferred sales charge
periods after March 15, 1993
</TABLE>
All calculations of performance data in this section reflect the voluntary
measures by the Fund's affiliates to reduce fees or expenses relating to the
Fund; see "Accrued Expenses" later in this section.
Total Return
The average annual total returns ("standard total return") of each class
of the Fund's shares were as follows:
35
<PAGE>
Five Years One Year
Ten Years Ended Ended Ended
September 30, 1994 September 30, 1994 September 30, 1994
------------------ ------------------ ------------------
Class A 17.19% 14.69% -2.11%
Class B 17.63% 15.33% -3.21%
Class C 17.81% 15.91% 2.91%
Class D 17.64% 15.58% 1.00%
Standard total return is computed separately for each class of shares by
determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value in accordance with the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated
period assuming a hypothetical $1,000 payment made at the
beginning of the designated period
The calculation is based on the further assumptions that the maximum
initial or contingent deferred sales charge applicable to the investment is
deducted, and that all dividends and distributions by the Fund are reinvested at
net asset value on the reinvestment dates during the periods. All accrued
expenses and recurring charges are also taken into account as described later
herein.
Accrued Expenses
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return 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 will be lower.
36
<PAGE>
Nonstandardized Total Return
The Fund may provide the above described standard total return results for
Class A, Class B, Class C and Class D shares for periods which end no earlier
than the most recent calendar quarter end and which begin one, five and ten
years before. In addition, the Fund may provide nonstandardized total return
results for differing periods, such as for the period since the effectiveness of
the Fund's Registration Statement under the Investment Company Act of 1940
(March 25, 1984) and/or without taking sales charges into account. Such
nonstandardized total return is computed as otherwise described under "Total
Return" except the result may or may not be annualized, and as noted, any
applicable sales charge may not be taken into account and therefore not deducted
from the hypothetical initial payment of $1,000 or ending value. For example,
the Fund's nonstandardized total returns for the six months ended September 30,
1994, without taking sales charges into account, were as follows:
Class A 4.42%
Class B 4.14%
Class C 4.72%
Class D 4.13%
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. One Post Office Square, Boston, Massachusetts
02109, serves as the Trust's independent accountants, providing professional
services including (1) audits of certain financial statements, (2) assistance
and consultation in connection with Securities and Exchange Commission filings
and (3) review of the annual income tax returns filed on behalf of the Fund.
37
<PAGE>
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a
semiannual basis, other supplementary financial reports may be made available
from time to time and holders of record may request a copy of a current
supplementary report, if any, by calling State Street Research Shareholder
Services.
The following financial statements are for the Fund's fiscal year ended
September 30, 1994:
45247.c4
2/3/95 10:13 am
38
<PAGE>
State Street Research Capital Fund
Investment Portfolio
September 30, 1994
<TABLE>
<CAPTION>
Shares Value (Note 1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stocks 90.4%
Basic Industries 14.7%
Chemical 51,300 Atlantic Richfield Co. $ 1,539,000
4.6% 26,300 Eastman Chemical Co. 1,430,062
5,100 Mississippi Chemical Corp.* 96,900
14,600 P.T. Tripolyta Indonesia ADS* 396,025
86,400 Praxair, Inc. 2,106,000
45,400 Union Carbide Corp. 1,543,600
---------------
7,111,587
---------------
Diversified 0.9% 4,000 Coltec Industries, Inc.* 76,000
25,400 Johnson Controls, Inc. 1,263,650
8,100 Thermedics, Inc.* 122,512
---------------
1,462,162
---------------
Electrical 27,100 Whirlpool Corp. 1,392,263
Equipment ---------------
0.9%
Forest 39,400 Champion International Corp. 1,526,750
Product 9,900 Georgia-Pacific Corp. 757,350
2.5% 20,400 Grupo Industrial Durango S.A. de CV* 479,400
20,000 St. Laurent Paperboard, Inc.* 266,632
16,900 Weyerhaeuser Co. 754,162
---------------
3,784,294
---------------
Machinery 18,900 AGCO Corp. 947,363
2.9% 2,500 CBI Industries, Inc. 67,812
19,300 Detroit Diesel Corp.* 525,925
28,800 Elsag Bailey Process Automation N.V.* 752,400
16,400 Illinois Tool Works Co. 701,100
4,000 Millipore Corp. 215,000
36,000 Varity Corp.* 1,345,500
---------------
4,555,100
---------------
Metal & 44,900 Alcan Aluminium Ltd. 1,184,238
Mining 17,300 Aluminum Company of America 1,466,175
2.4% 26,700 Companhia Siderurgica de Tubarao ADS* 1,047,975
---------------
3,698,388
---------------
Railroad 42,000 Southern Pacific Rail Corp.* 787,500
0.5% ---------------
Total Basic Industries 22,791,294
---------------
Consumer Cyclical 30.2%
Automotive 12,400 Danaher Corp. 551,800
1.1% 30,200 Lear Seating Corp.* 554,925
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
Investment Portfolio (con't)
Shares Value (Note 1)
- --------------------------------------------------------------------------------------------------------------------
Automotive 32,600 Team Rental Group, Inc. Cl. A* $ 383,050
(cont'd) 30,200 TOFAS, Inc. ADS*+ 90,600
7,500 Tower Automotive, Inc.* 87,188
---------------
1,667,563
---------------
Building 80,300 Stimsonite Corp.* 963,600
0.6% ---------------
Hotel & 132,800 Hospitality Franchise Systems, Inc.* 4,166,600
Restaurant 10,950 La Quinta Inns, Inc. 392,831
5.2% 31,700 MGM Grand, Inc.* 986,663
31,000 Primadonna Resorts, Inc.* 953,250
45,200 Promus Companies, Inc.* 1,519,850
---------------
8,019,194
---------------
Investment Portfolio 7,500 Cobra Golf, Inc.* 415,312
(cont'd)Recreation 27,100 Comcast U.K. Cable Partners Ltd.* 518,288
2.8%
32,200 EZ Communications, Inc.* 394,450
19,000 Gaylord Entertainment Co. C1. A 432,250
26,550 Infinity Broadcasting Corp. C1. A* 809,775
40,400 LodgeNet Entertainment Corp.* 343,400
7,700 Preferred Entertainment, Inc.* 161,700
17,250 Sodak Gaming, Inc.* 323,438
20,000 Starsight Telecast, Inc.* 255,000
47,000 United International Holdings Inc. C1. A.* 713,812
---------------
4,367,425
---------------
Retail Trade 60,100 Best Buy Co., Inc.* 2,351,412
17.6% 28,000 Caldor Corp.* 864,500
14,000 Cyrk, Inc.* 429,625
24,900 Department 56, Inc.* 971,100
18,100 Dollar General Corp. 470,600
70,100 EZ Corp., Inc. C1. A* 876,250
12,400 First Alert, Inc.* 477,400
38,700 Gap, Inc. 1,272,263
65,400 General Nutrition Centers, Inc.* 1,455,150
10,000 Grow Biz International, Inc.* 152,500
41,400 Gymboree Corp.* 1,231,650
24,800 Industrie Natuzzi SPA ADR 771,900
37,700 Intelligent Electronics, Inc. 638,544
46,300 Merisel, Inc.* 468,787
34,500 Michaels Stores Inc.* 1,429,594
51,200 Micro Warehouse, Inc.* 1,625,600
17,800 Nine West Group, Inc.* 473,925
102,650 Office Depot, Inc.* 2,668,900
52,400 J.C. Penney, Inc. 2,705,150
47,200 Petsmart, Inc.* 1,793,600
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
Shares Value (Note 1)
- -------------------------------------------------------------------------------------------------------------------
Retail Trade 2,400 Sam & Libby, Inc.* $ 3,000
(cont'd) 38,700 Spiegel, Inc. Cl. A 701,437
29,250 Sports & Recreation, Inc.* 760,500
52,900 Sunglass Hut International, Inc.* 1,996,975
13,300 Tandy Corp. 571,900
8,100 Westpoint Stevens, Inc.* 117,450
---------------
27,279,712
---------------
Textile & 28,800 Authentic Fitness Corp.* 446,400
Apparel 68,950 Men's Wearhouse, Inc.* 1,379,000
2.9% 39,300 Mohawk Industries, Inc.* 599,325
4,600 Nautica Enterprises, Inc.* 141,708
51,200 Tommy Hilfiger Corp.* 1,990,400
---------------
4,556,833
---------------
Total Consumer Cyclical 46,854,327
---------------
Consumer Staple 12.0%
Business 21,600 Career Horizons, Inc.* 351,000
Service 3,600 Dynasty Classics Corp.* 450
4.7% 6,400 Insurance Auto Auctions, Inc.* 219,200
43,400 Microage, Inc.* 542,500
29,400 Norrell Corp. 527,362
59,900 Pyxis Corp.* 1,467,550
75,600 Sonic Solutions, Inc.* 888,300
16,100 Tech Data Corp.* 309,925
1,800 Timberline Software Corp.* 12,600
55,700 Viking Office Products, Inc.* 1,684,925
43,500 WMX Technologies, Inc. 1,256,063
---------------
7,259,875
---------------
Drug 26,500 Autoimmune, Inc.* 132,500
0.9% 31,600 Cephalon, Inc.* 337,725
3,466 Healthdyne Technologies, Inc.* 37,693
3,300 Imclone Systems, Inc.* 5,775
24,200 Perceptive Biosystems, Inc.* 343,337
3,700 Pharmaceutical Marketing Services Inc.* 37,000
36,200 Vertex Pharmaceuticals, Inc.* 515,850
---------------
1,409,880
---------------
Hospital Supply 24,200 American Medical Response, Inc.* 608,025
5.4% 22,100 Apogee, Inc.* 381,225
28,000 Arbor Health Care Co.* 581,000
21,400 Coastal Healthcare Group, Inc.* 700,850
44,000 Coram Healthcare Corp.* 819,500
60,200 Coventry Corp.* 1,414,700
18,800 FHP International Corp.* 549,900
18,200 Genesis Health Ventures, Inc.* 516,425
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
Investment Portfolio (con't)
Shares Value (Note 1)
- --------------------------------------------------------------------------------------------------------------------
Hospital Supply 47,300 Haemonetics Corp.* $ 857,312
(cont'd) 1,800 Integrated Health Services, Inc.* 63,900
1,700 Mariner Health Group, Inc.* 35,594
29,000 Medisense, Inc.* 511,125
14,000 Sun Healthcare, Inc.* 306,250
15,500 Theratx, Inc.* 270,281
17,100 U.S. Healthcare, Inc. 796,219
3,700 Vision Sciences Inc.* 24,975
---------------
8,437,281
---------------
Personal Care 21,900 Interim Services, Inc.* 533,813
0.8% 7,700 Oxford Health Plans, Inc.* 592,900
8,600 Robert Half International, Inc.* 164,475
---------------
1,291,188
---------------
Printing & 22,000 American Publishing Co. Cl. A* 269,500
Publishing ---------------
0.2% Total Consumer Staple 18,667,724
---------------
Energy 2.3%
Oil 5,700 Anadarko Petroleum Corp. 255,075
2.1% 39,400 Noble Affiliates, Inc. 1,053,950
48,900 Occidental Petroleum Corp. 1,026,900
138,900 Ranger Oil Ltd. 868,125
---------------
3,204,050
---------------
Oil Service 77,000 Global Marine, Inc.* 327,250
0.2% ---------------
Total Energy 3,531,300
---------------
Finance 0.5%
Financial Service 36,000 Foot Hill Group, Inc. 535,500
0.4% 8,533 Mercury Finance Co. 123,728
---------------
659,228
---------------
Insurance 10,000 American Eagle Group, Inc. 113,750
0.1% ---------------
Total Finance 772,978
---------------
Science & Technology 25.1%
Computer 12,500 Affiliated Computer Services, Inc. Cl. A* 249,219
Software 52,600 BMC Software, Inc.* 2,367,000
& Service 87,900 Borland International, Inc.* 972,394
12.2% 37,600 Centigram Communications Corp.* 620,400
56,600 Computervision Corp.* 176,875
36,000 DSP Group, Inc.* 798,750
150,000 Geoworks* 1,162,500
80,600 Informix Corp.* 2,236,650
10,100 Integrated Silicon Systems, Inc.* 291,637
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
Shares Value (Note 1)
- -------------------------------------------------------------------------------------------------------------------
Computer 26,100 Intuit, Inc.* $ 1,141,875
Software 86,100 Lotus Development Corp.* 3,164,175
& Service 25,000 Mattson Technologies, Inc.* 425,000
(cont'd) 17,600 Oracle Systems Corp.* 756,800
33,200 Synopsys, Inc.* 1,502,300
36,000 Wave Systems Corp.* 180,000
88,300 Western Digital Corp.* 1,313,462
14,000 Wonderware Corp.* 297,500
23,800 Xilinx, Inc.* 1,190,000
---------------
18,846,537
---------------
Electronic 72,000 Analog Devices Inc.* 2,376,000
9.8% 45,600 Applied Materials, Inc.* 2,131,800
20,400 Cirrus Logic, Inc.* 571,200
3,700 Electroglas, Inc.* 184,075
57,000 Flextronics International Ltd.* 833,625
6,500 Hewlett-Packard Co. 567,938
22,100 Lam Research Corp.* 889,525
73,000 LSI Logic Corp.* 2,728,375
26,300 Motorola, Inc. 1,387,325
11,600 Novellus Systems, Inc.* 548,100
2,400 O'Sullivan Industries Holdings, Inc.* 28,800
48,300 Sanmina Holdings, Inc.* 1,171,275
89,100 Telxon Corp. 1,225,125
1,200 Vicor Corp.* 30,900
47,900 VLSI Technology, Inc.* 526,900
---------------
15,200,963
---------------
Office 47,200 Compaq Computer Corp.* 1,539,900
Equipment 48,200 Gateway 2000, Inc.* 897,725
3.1% 27,300 Hutchinson Technology, Inc.* 750,750
600 Precision Systems, Inc.* 1,575
55,500 Seagate Technology* 1,332,000
14,500 Xpedite Systems, Inc.* 319,000
---------------
4,840,950
---------------
Total Science & Technology 38,888,450
---------------
Utility 5.6%
Natural Gas 107,700 Nova Corp. of Alberta 1,184,700
0.8% 3,200 Seagull Energy Corp.* 74,800
---------------
1,259,500
---------------
Telephone 7,500 A-Plus Communications, Inc.* 97,969
4.8% 50,000 Active Voice Corp.* 1,056,250
35,000 Applied Signal Technology, Inc.* 170,625
27,800 Cidco, Inc.* 734,962
4,500 Grupo Iusacell S.A. de C.V. Series D ADR* 128,250
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
Investment Portfolio (con't)
Shares Value (Note 1)
- -------------------------------------------------------------------------------------------------------------------
Telephone 10,500 Grupo Iusacell S.A. de C.V. Series L ADR* $ 312,375
(cont'd) 33,150 IDB Communications Group, Inc.* 298,350
32,600 Intermedia Communication of Florida* 395,275
4,700 MFS Communications, Inc.* 160,975
31,900 Newbridge Networks Corp.* 1,020,800
43,000 Nokia Corp. ADS 2,515,500
5,300 Pittencrieff Communications, Inc.* 60,950
12,300 Vodafone Group PLC ADR 385,913
---------------
7,338,194
---------------
Total Utility 8,597,694
---------------
Total Common Stocks (Cost $129,142,704) 140,103,767
---------------
</TABLE>
<TABLE>
<CAPTION>
Principal Amount Maturity Date
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial Paper 9.4%
$4,917,000 American Express Credit Corp., 4.00% 10/03/1994 4,917,000
114,000 American Express Credit Corp., 4.85% 10/05/1994 114,000
5,010,000 Chevron Oil Finance Co., 4.60% 10/05/1994 5,010,000
332,000 Ford Motor Credit Co., 4.83% 10/05/1994 332,000
4,259,000 General Electric Capital Corp., 4.70% 10/11/1994 4,259,000
-------------
Total Commercial Paper (Cost $14,632,000) 14,632,000
-------------
Total Investments (Cost $143,774,704)--99.8% 154,735,767
Cash and Other Assets, Less Liabilities--0.2% 260,196
-------------
Net Assets--100.0% $154,995,963
=============
Federal Income Tax Information:
At September 30, 1994, the net unrealized
appreciation of investments based on
cost for Federal income tax purposes
of $143,966,402 was as follows:
Aggregate gross unrealized appreciation
for all investments in which there is an
excess of value over tax cost $ 17,038,740
Aggregate gross unrealized depreciation
for all investments in which there is an
excess of tax cost over value (6,269,375)
-------------
$ 10,769,365
=============
</TABLE>
* Nonincome-producing securities
ADS and ADR stand for American Depositary Share and American Depositary
Receipt, representing ownership of foreign securities.
+ Security restricted in accordance with Rule 144A under the Securities Act
of 1933, which allows for the resale of such securities among certain
qualified institutional buyers. The total cost and market value of Rule
144A securities owned at September 30, 1994 were $249,150 and $90,600
(0.06% of net assets), respectively.
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
State Street Research Capital Fund
Statement of Assets and Liabilities
September 30, 1994
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assets Investments, at value (Cost $143,774,704) (Note 1) $154,735,767
Cash 163
Receivable for securities sold 14,094,530
Receivable for fund shares sold 1,675,373
Dividends and interest receivable 74,151
Receivable from Distributor (Note 3) 1,387
Other assets 13,839
-------------
170,595,210
Liabilities Payable for securities purchased $15,143,057
Payable for fund shares redeemed 209,484
Accrued distribution fee (Note 5) 94,643
Accrued management fee (Note 2) 91,292
Accrued transfer agent and shareholder services 16,536
Accrued trustees' fees (Note 2) 3,933
Other accrued expenses 40,302 15,599,247
---------- -------------
Net Assets $154,995,963
=============
Net Assets consist of:
Unrealized appreciation of investments $10,961,063
Accumulated net realized gain 474,945
Shares of beneficial interest (Note 5) 143,559,955
-------------
$154,995,963
=============
Net Asset Value and redemption price per share of Class A shares
($19,891,384 / 2,004,967 shares of beneficial interest) $ 9.92
======
Maximum Offering Price per share of Class A shares ($9.92 / .955) $10.39
======
Net Asset Value and offering price per share of Class B shares
($73,353,959 / 7,469,622 shares of beneficial interest)* $ 9.82
======
Net Asset Value, offering price and redemption price per share of
Class C shares ($23,967,362 / 2,400,252 shares of beneficial
interest) $ 9.99
======
Net Asset Value and offering price per share of Class D shares
($37,783,258 / 3,842,567 shares of beneficial interest)* $ 9.83
======
- --------------------------------------------------------------------------------------------------
</TABLE>
*Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
State Street Research Capital Fund
Statement of Operations
For the year ended September 30, 1994
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Dividends, net of foreign taxes of $3,366 $ 515,822
Income Interest 434,694
-----------
950,516
Expenses Management fee (Note 2) $ 813,880
Transfer agent and shareholder services 140,830
Custodian fee 121,561
Registration fees 120,547
Reports to shareholders 40,461
Distribution fee--Class A (Note 5) 39,573
Distribution fee--Class B (Note 5) 452,001
Distribution fee--Class D (Note 5) 260,173
Legal fees 22,058
Trustees' fees (Note 2) 15,427
Audit fee 14,143
Miscellaneous 7,028
--------
2,047,682
Expenses borne by the Distributor (Note 3) (26,269) 2,021,413
-------- ------------
Net investment loss (1,070,897)
------------
Realized and Net realized gain on investments (Notes 1 and 4) 1,127,123
Unrealized Net unrealized appreciation of investments 3,083,463
Gain on ------------
Investments Net gain on investments 4,210,586
------------
Net increase in net assets resulting from operations $ 3,139,689
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
State Street Research Capital Fund Year ended September 30
Statement of Changes in Net Assets ---------------------------
1994 1993
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase Operations:
(Decrease) Net investment loss $ (1,070,897) $ (284,377)
in Net Assets Net realized gain on investments* 1,127,123 3,300,645
Net unrealized appreciation of investments 3,083,463 6,225,135
----------- ------------
Net increase resulting from operations 3,139,689 9,241,403
----------- ------------
Distributions from net realized gains:
Class A (575,640) --
Class B (1,273,467) --
Class C (1,330,595) (1,966,072)
Class D (477,827) --
----------- ------------
(3,657,529) (1,966,072)
----------- ------------
Net increase from fund share transactions 108,866,368 27,718,411
(Note 6)
----------- ------------
Total increase in net assets 108,348,528 34,993,742
Net Assets Beginning of year 46,647,435 11,653,693
----------- ------------
End of year $154,995,963 $46,647,435
=========== ============
*Net realized gain for Federal income tax
purposes (Note 1) $ 1,269,665 $ 3,337,233
=========== ============
</TABLE>
12
<PAGE>
State Street Research Capital Fund
Notes to Financial Statements
September 30, 1994
Note 1
State Street Research Capital Fund (the "Fund"), is a series of State Street
Capital Trust (the "Trust"), which is a Massachusetts business trust
registered under the Investment Company Act of 1940, as amended, as a
diversified, open- end management investment company. The Trust was organized
in November, 1988 as a successor to State Street Capital Fund, Inc., a
Massachusetts corporation. The Trust consists presently of two separate
funds: State Street Research Capital Fund and State Street Research Small
Capitalization Growth Fund.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and pay an annual 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 only offered to certain employee benefit plans and large
institutions. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro-rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant policies are consistently followed by the Fund in
preparing its financial statements, and such policies are in conformity with
generally accepted accounting principles for investment companies.
A. Investment 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 certain
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 identified cost of
securities delivered for both financial reporting and Federal income tax
purposes.
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 its policy is
to distribute all of its taxable income, including net realized capital
gains, within the prescribed time periods.
C. Dividends
Dividends from net investment income, if any, are declared and paid or
reinvested annually. Net realized capital gains, if any, are distributed
annually, unless additional distributions are required for compliance with
applicable tax regulations. For the year ended September 30, 1994, the Fund
has designated as long-term 65% of the distributions from net realized gains.
13
<PAGE>
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly-owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser
earns monthly fees equal to 1/16 of 1% (3/4 of 1% on an annual basis) of
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. The fees of the Trustees not
currently affiliated with the Adviser amounted to $15,427 during the year
ended September 30, 1994.
Note 3
State Street Research Investment Services, Inc., the Trust's principal
underwriter (the "Distributor"), an indirect wholly-owned subsidiary of
Metropolitan, and its affiliates may from time to time and in varying amounts
voluntarily assume some portion of fees or expenses relating to the Fund.
During the year ended September 30, 1994, the amount of such expenses assumed
by the Distributor and its affiliates was $26,269.
Note 4
For the year ended September 30, 1994, exclusive of short-term investments
and U.S. Govern- ment obligations, purchases and sales of securities
aggregated $257,198,639 and $158,564,881, respectively.
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940. Under the Plan, the Fund
pays annual service fees to the Distributor at a rate of 0.25% of average
daily net assets for Class A, Class B and Class D shares. In addition, the
Fund pays annual distribution fees of 0.75% of average daily net assets for
Class B and Class D shares. The Distributor uses such payments for personal
services and/or the maintenance of shareholder accounts, to reimburse
securities dealers for distribution and marketing services, to furnish
ongoing assistance to investors and to defray a portion of its distribution
and marketing expenses. For the year ended September 30, 1994, fees pursuant
to such plan amounted to $39,573, $452,001 and $260,173 for Class A, Class B
and Class D, respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly-owned subsidiary of Metropolitan, earned initial sales charges
aggregating $18,627 and $7,733, respectively, on sales of Class A shares of
the Fund during the year ended September 30, 1994, and that MetLife
Securities, Inc. earned commissions aggregating $16,607 and $1,448 on sales
of Class B and Class D shares, respectively, and that the Distributor
collected contingent deferred sales charges aggregating $9,484 and $343 on
redemptions of Class B and Class D shares, respectively, during the same
period.
14
<PAGE>
Note 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At September 30, 1994,
Metropolitan held of record 1,080,373 Class C shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
February 17, 1993
(Commencement of
Share Class
Year ended Designations)
September 30, 1994 to September 30, 1993
---------------------- ------------------------
Class A Shares Amount Shares Amount
- ---------------------------------------- -------- ---------- -------- ------------
<S> <C> <C> <C> <C>
Shares sold 1,741,014 $16,876,522 712,751 $ 6,645,117
Issued upon reinvestment of 45,553 443,337 --
distribution from net realized gains --
Shares repurchased (477,056) (4,581,945) (17,295) (145,197)
-------- ---------- -------- ------------
Net increase 1,309,511 $12,737,914 695,456 $ 6,499,920
======== ========== ======== ============
March 15, 1993
(Commencement of
Share Class
Designations)
to September 30, 1993
------------------------
Class B Shares Amount Shares Amount
- ---------------------------------------- -------- ---------- -------- ------------
Shares sold 6,253,883 $59,862,105 1,551,074 $14,509,248
Issued upon reinvestment of 56,834 551,032 --
distribution from net realized gains --
Shares repurchased (384,236) (3,668,935) (7,933) (81,777)
-------- ---------- -------- ------------
Net increase 5,926,481 $56,744,202 1,543,141 $14,427,471
======== ========== ======== ============
Year ended
September 30, 1993
------------------------
Class C Shares Amount Shares Amount
- ---------------------------------------- -------- ---------- -------- ------------
Shares sold 601,695 $ 6,274,545 49,561 $ 489,061
Issued upon reinvestment of 131,398 1,284,834 243,939
distributions from net realized gains 1,790,512
Shares repurchased (87,138) (849,817) (2,364) (22,546)
-------- ---------- -------- ------------
Net increase 645,955 $ 6,709,562 291,136 $ 2,257,027
======== ========== ======== ============
March 15, 1993
(Commencement of
Share Class
Designations)
to September 30, 1993
------------------------
Class D Shares Amount Shares Amount
- ---------------------------------------- -------- ---------- -------- ------------
Shares sold 3,746,426 $36,243,191 486,678 $ 4,576,434
Issued upon reinvestment of 22,846 220,144 --
distribution from net realized gains --
Shares repurchased (408,826) (3,788,645) (4,557) (42,441)
-------- ---------- -------- ------------
Net increase 3,360,446 $32,674,690 482,121 $ 4,533,993
======== ========== ======== ============
</TABLE>
15
<PAGE>
State Street Research Capital Fund
Financial Highlights
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Class B
------------------------------ --------------------------------
Year ended Year ended
September 30, 1994 1993* September 30, 1994 1993**
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 10.43 $ 8.03 $ 10.40 $ 8.68
Net investment loss*** (.04) (.03) (.08) (.04)
Net realized and unrealized gain on investments .28 2.43 .25 1.76
Distributions from net realized gains (.75) -- (.75) --
------------------- ------- ------------------- ---------
Net asset value, end of year $ 9.92 $ 10.43 $ 9.82 $ 10.40
=================== ======= =================== =========
Total return 2.51%+ 24.61%+++ 1.79%+ 19.82%+++
Net assets at end of year (000s) $19,891 $ 7,251 $73,354 $16,044
Ratio of expenses to average net assets*** 1.41% 2.43%++ 2.16% 3.16%++
Ratio of net investment loss to average net assets*** (0.55)% (1.43)%++ (1.28)% (2.15)%++
Portfolio turnover rate 167.08% 129.57% 167.08% 129.57%
*** Reflects voluntary assumption of fees or expenses per $ .00 -- $ .00 --
share in each year. (Note 3)
</TABLE>
+ Annualized
* February 17, 1993 (commencement of share class designations) to September
30, 1993.
** March 15, 1993 (commencement of share class designations) to September
30, 1993.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges.
++ Represents aggregate return for the period without annualization and
does not reflect any front-end or contingent deferred sales charges.
16
<PAGE>
Financial Highlights (cont'd)
<TABLE>
<CAPTION>
Class C Class D
--------------------------------------------------------- --------------------------------
Year ended September 30
--------------------------------------------------------- Year ended
1994 1993 1992 1991 1990 September 30, 1994 1993**
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $10.46 $ 7.96 $7.74 $5.03 $6.72 $10.39 $ 8.68
Net investment loss*** (.03) (.06) (.06) (.08) (.03) (.09) (.04)
Net realized and
unrealized gain (loss) on
investments .31 3.90 .63 2.79 (1.31) .28 1.75
Distributions from net
realized gains (.75) (1.34) (.35) -- (.35) (.75) --
-------- -------- -------- -------- ---------- ------------------- ---------
Net asset value, end of year $ 9.99 $10.46 $7.96 $7.74 $5.03 $ 9.83 $10.39
======== ======== ======== ======== ========== =================== =========
Total return 2.91%+ 55.46%+ 7.34%+ 53.88%+ (20.81)%+ 2.00%+ 19.70%+++
Net assets at end of year $23,967 $18,342 $11,654 $10,939 $7,440 $37,783 $5,011
Ratio of expenses to
average net assets*** 1.16% 2.11% 1.54% 1.88% 1.93% 2.16% 3.16%++
Ratio of net investment
loss to average net assets*** (0.32)% (1.30)% (0.86)% (1.14)% (0.54)% (1.28)% (2.16)%++
Portfolio turnover rate 167.08% 129.57% 124.94% 219.62% 259.27% 167.08% 129.57%
*** Reflects voluntary
assumption of fees or
expenses per share in each
year. (Note 3) $.00 -- -- -- -- $.00 --
</TABLE>
++ Annualized
** March 15, 1993 (commencement of share class designations) to September
30, 1993.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges.
+++ Represents aggregate return for the period without annualization and
does not reflect any front-end or contingent deferred sales charges.
17
<PAGE>
Report of Independent Accountants
To the Trustees of State Street Capital Trust and
Shareholders of State Street Research Capital Fund:
We have audited the accompanying statement of assets and liabilities of State
Street Research Capital Fund, including the schedule of portfolio
investments, as of September 30, 1994, 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 five years in the period then ended for Class C,
for the year then ended and the period February 17, 1993 (commencement of
share class designations) to September 30, 1993 for Class A, and for the year
then ended and the period March 15, 1993 (commencement of share class
designations) to September 30, 1993 for Class B and Class D, respectively.
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 September 30, 1994, 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 Capital Fund as of September 30, 1994, 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 five years in the period then ended for Class C, for the year
then ended and the period February 17, 1993 (commencement of share class
designations) to September 30, 1993 for Class A, and for the year then ended
and the period March 15, 1993 (commencement of share class designations) to
September 30, 1993 for Class B and Class D, respectively, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 4, 1994
18
<PAGE>
Management's Discussion of Fund Performance
Capital Fund's performance suffered from a weak stock market, the result of
inflation fears, higher rates and the weakening dollar. For the 12 months
ended September 30, 1994, the Fund did outperform the Lipper average for
capital appreciation funds.
The stock market correction provided investment opportunities for the Fund,
allowing increased positions in attractive stocks at lower prices. Examples
include hospital supply stocks, particularly those that might benefit from
indus- try consolidation, and specialty retail stocks, which were hard hit in
the market correction.
The Fund also added stocks of selected paper products, chemicals, and metals
companies that might benefit from higher industrial raw materials prices and
inflationary fears. Technology stocks represented 25% of the portfolio,
reflecting the belief that networking, hardware and software companies were
attractive.
Comparison Of Change In Value Of A $10,000 Investment In Capital Fund And The
S&P 500
- -------------------------------------------------------------------------------
(Plot Points for Performance Charts)
Comparison Of Change In Value Of A $10,000 Investment In
Capital Fund And The S&P 500
Class A Shares
Average Annual Total Return
1 Year 5 Year 10 Year
- -2.11% +14.69% +17.19%
9/84 9550 10000
9/85 10616 11450
9/86 14300 15084
9/87 20397 21633
9/88 17550 18953
9/89 23504 25198
9/90 18612 22870
9/91 28640 29980
9/92 30741 33290
9/93 47654 37808
9/94 48850 38992
Class B Shares
Average Annual Total Return
1 Year 5 Year 10 Year
3.21% +15.33% +17.63%
9/84 10000 10000
9/85 11117 11450
9/86 14974 15084
9/87 21359 21633
9/88 18377 18953
9/89 24612 25198
9/90 19490 22870
9/91 29990 29980
9/92 32190 33290
9/93 49814 37608
9/94 50706 38992
Class C Shares
Average Annual Total Return
1 Year 5 Year 10 Year
+2.91% +15.91% +17.81%
9/84 10000 10000
9/85 11117 11450
9/86 14974 15084
9/87 21359 21633
9/88 18377 18953
9/89 24612 25198
9/90 19490 22870
9/91 29990 29980
9/92 32190 33290
9/93 50044 37608
9/94 51501 38992
Class D Shares
Average Annual Total Return
1 Year 5 Year 10 Year
+1.00% +15.58% +17.64%
9/84 10000 10000
9/85 11117 11450
9/86 14974 15084
9/87 21359 21633
9/88 18377 18953
9/89 24612 25198
9/90 19490 22870
9/91 29990 29980
9/92 32190 33290
9/93 49766 37608
9/94 50761 38992
(End Plot Points)
- ------------------------------------------------------------------------------
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. Although Capital Fund was established as
a personal holding company in October 1967, performance results cover the
period since the Fund commenced operations as a registered investment company
on March 25, 1984. Shares of the Fund were first publicly available in 1987,
to institutions and existing shareholders only. The fund commenced a
continuous offering to the general public on February 17, 1993. During the
period that shares of the Fund were not offered to the public, the Fund was
not subject to the cash inflows and higher level of redemptions or expenses
that could occur when shares are continuously offered to the public.
Shares of the Fund had no class designations until February 17, 1993, when
designations were assigned based on the pricing and 12b-1 fees applicable to
shares sold thereafter. Performance data for a specified class include
periods prior to the adoption of class designations. "A" share returns for
each of the periods reflect the maximum 4.5% sales charge. Performance prior
to February 17, 1993, does not reflect annual 12b-1 fees of .25%, which will
reduce subsequent performance. "B" share returns for the 1- and 5-year
periods reflect a 5% and a 2% contingent deferred sales charge, respectively.
"C" shares, offered without a sales charge, are available only to certain
employee benefit plans and large institutions. "D" share return for the
1-year period reflects a 1% contingent deferred sales charge. Performance for
"B" and "D" shares prior to March 15, 1993, does not reflect annual 12b-1
fees of 1%, which will reduce subsequent performance.
19
<PAGE>
Supplement No. 1 dated October 5, 1995
to
Statement of Additional Information dated February 1, 1995
for
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
a series of STATE STREET RESEARCH CAPITAL TRUST
The following paragraphs are added under the caption "Trustees and
Officers" in the Statement of Additional Information:
"*+Francis J. McNamara, III, One Financial Center,
Boston, MA 02111, has served as Secretary and General
Counsel of the Trust since May 1995. He is 40. His principal
occupation is Senior Vice President and General Counsel of
State Street Research & Management Company. During the past
ive years has also served as Senior Vice President, General
Counsel and Assistant Secretary of The Boston Company Inc.,
Boston Safe Deposit and Trust Company and The Boston Company
Advisors, Inc. Mr. McNamara's other principal business
affiliations include Senior Vice President, Clerk and
General Counsel of State Street Research Investment
Services, Inc.; Secretary and General Counsel of SSRM
Holdings, Inc.; and Director, Clerk and General Counsel of
State Street Research Energy, Inc.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset,
NY 11791, serves as Trustee of the Trust. He is 68. He is
engaged principally in private investments and civic affairs,
and is an author of business history. Previously, he was with
Morgan Guaranty Trust Company of New York.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco,
CA 94118, serves as Trustee of the Trust. He is 57. His
principal occupations during the past five years have been
President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
The fourth paragraph under the caption "Trustees and Officers" in the
Statement of Additional Information is deleted in its entirety."
CONTROL NUMBER: 2670-951010(1196)SSR-LD SCG-340E-1095
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
a Series of
STATE STREET CAPITAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1995
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS............................ 2
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES.............................................. 5
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS............................ 13
RATING CATEGORIES OF DEBT SECURITIES....................................... 17
TRUSTEES AND OFFICERS...................................................... 19
INVESTMENT ADVISORY SERVICES.............................................. 22
PURCHASE AND REDEMPTION OF SHARES......................................... 23
NET ASSET VALUE........................................................... 25
PORTFOLIO TRANSACTIONS.................................................... 26
CERTAIN TAX MATTERS....................................................... 28
DISTRIBUTION OF SHARES OF THE FUND........................................ 30
CALCULATION OF PERFORMANCE DATA........................................... 34
CUSTODIAN.................................................................. 36
INDEPENDENT ACCOUNTANTS.................................................... 37
FINANCIAL STATEMENTS....................................................... 37
The following Statement of Additional Information is not a Prospectus. It
should be read in conjunction with the Prospectus of State Street Research Small
Capitalization Growth Fund (the "Fund") dated February 1, 1995, which may be
obtained without charge from the offices of State Street Capital Trust (the
"Trust") or State Street Research Investment Services, Inc. (the "Distributor"),
One Financial Center, Boston, Massachusetts 02111-2690.
CONTROL NUMBER: 1285N - 950210(0396)SSR-LD SCG-879D-295
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth in part under "The Fund's Investments" and "Limiting
Investment Risk" in the Fund's Prospectus, the Fund has adopted certain
investment restrictions.
All of the Fund's fundamental investment restrictions are set forth below.
These fundamental investment restrictions may not be changed except by the
affirmative vote of a majority of the Fund's outstanding voting securities as
defined in the Investment Company Act of 1940, as amended (the "1940 Act").
(Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at a meeting of security holders duly called, (i) of
67% or more of the voting securities present at a meeting if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy or (ii) of more than 50% of the outstanding voting securities, whichever
is less.) Under these restrictions, it is the Fund's policy:
(1) not to purchase a security of any one issuer (other than
securities issued or guaranteed as to principal or interest by the
U.S. Government or its agencies or instrumentalities or
mixed-ownership Government corporations) if such purchase would,
with respect to 75% of the Fund's total assets, cause more than 5%
of the Fund's total assets to be invested in the securities of such
issuer, except in connection with investments in other investment
companies to the extent permitted by law and regulatory authorities;
(2) not to purchase a security of any one issuer if such purchase
would cause more than 10% of the voting securities of such issuer to
be held by the Fund, except in connection with investments in other
investment companies to the extent permitted by law and regulatory
authorities;
(3) not to issue senior securities;
(4) not to underwrite or participate in the marketing of securities
of other issuers, except (a) the Fund may, acting alone or in
syndicates or groups, purchase or otherwise acquire securities of
other issuers for investment, either from the issuers or from
persons in a control relationship with the issuers or from
underwriters of such securities; and (b) to the extent that, in
connection with the disposition of the Fund's securities, the Fund
may be deemed to be an underwriter under certain federal securities
laws;
(5) not to purchase or sell fee simple interests in real estate,
although the Fund may purchase and sell other interests in real
estate including securities which are secured by real estate, or
securities of companies which own or invest or deal in real estate;
(6) not to invest in commodities or commodity contracts in excess of
10% of the Fund's total assets, except that investments in
currencies, futures contracts and
2
<PAGE>
options on futures contracts on securities, securities indices and
currencies shall not be deemed an investment in commodities or
commodities contracts;
(7) not to make loans, except that the Fund may lend portfolio
securities and purchase bonds, debentures, notes and similar
obligations (and enter into repurchase agreements with respect
thereto);
(8) not to make any investment which would cause more than 25% of
the value of the Fund's total assets to be invested in securities of
issuers principally engaged in any one industry [for purposes of
this restriction, (a) utilities will be divided according to their
services so that, for example, gas, gas transmission, electric and
telephone companies will each be deemed in a separate industry, (b)
oil and oil related companies will be divided by type so that, for
example, oil production companies, oil service companies and
refining and marketing companies will each be deemed in a separate
industry, (c) finance companies will be classified according to the
industries of their parent companies, and (d) securities issued or
guaranteed 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]; and
(9) not to borrow money except for borrowings from banks for
extraordinary and emergency purposes, such as permitting redemption
requests to be honored, and then not in an amount in excess of 25%
of the value of its total assets, and except insofar as reverse
repurchase agreements may be regarded as borrowing.
The following nonfundamental investment restrictions may be changed by a
vote of a majority of the Trustees. Under these restrictions, it is the Fund's
policy:
(1) not to purchase any security or enter into a repurchase
agreement if as a result more than 15% of its total assets would be
invested in (a) securities that are illiquid because of the absence
of a readily available market or because such securities are
restricted securities (i.e., subject to legal or contractual
restrictions on resale), provided that such restricted securities,
excluding restricted securities eligible for resale pursuant to Rule
144A or Regulation S under the Securities Act of 1933, shall be
limited to 5% of total assets, and (b) repurchase agreements not
entitling the holder to payment of principal and interest within
seven days [subject to such higher percentage limits or other
modifications as may be allowed or required under applicable
regulatory policies in the future].
(2) not to invest more than 5% of its total assets in securities of
issuers including predecessors with less than three years continuous
operations, except securities guaranteed or backed by an affiliate
of the issuer with three years of
3
<PAGE>
continuous operations or securities issued or guaranteed as to
principal or interest by the U.S. Government, or its agencies or
instrumentalities, provided that the Fund may invest up to 10% in
such issuers so long as such investments plus investments in
restricted securities (other than those which are eligible for
resale under Rule 144A or Regulation S as noted above) do not exceed
10% of the Fund's total assets;
(3) not to engage in transactions in options except in connection
with options on securities, securities indices and currencies, and
options on futures on securities, securities indices and currencies;
(4) not to purchase securities on margin or make short sales of
securities or maintain a short position except for short sales
"against the box" [as a matter of current operating policy, the Fund
will not make short sales or maintain a short position unless not
more than 5% of the Fund's net assets (taken at current value) is
held as collateral for such sales at any time];
(5) 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);
(6) not to purchase a security issued by another investment company
if, immediately after such purchase, the Fund would own, in the
aggregate, (i) more than 3% of the total outstanding voting
securities of such other investment company; (ii) securities issued
by such other investment company having an aggregate value in excess
of 5% of the value of the Fund's total assets; or (iii) securities
issued by such other investment company and all other investment
companies (other than treasury stock of the Fund) having an
aggregate value in excess of 10% of the value of the Fund's total
assets; provided, however, that the Fund may purchase investment
company securities without limit for the purpose of completing a
merger, consolidation or other acquisition of assets and may
purchase securities issued by another investment company to the
extent otherwise permitted by law and regulatory authorities;
(7) not to purchase or retain any security of an issuer if, to the
knowledge of the Fund, those of its officers and Trustees and
officers and directors of its investment advisers who individually
own more than 1/2 of 1% of the securities of such issuer, when
combined, own more than 5% of the securities of such issuer taken at
market;
4
<PAGE>
(8) not to invest directly as a joint venturer or general partner in
oil, gas or other mineral exploration or development joint ventures
or general partnerships (provided that the Fund may invest in
securities issued by companies which invest in or sponsor such
programs and in securities indexed to the price of oil, gas or other
minerals);
(9) not to invest in warrants more than 5% of the value, at the
lower of cost or market, of its net assets, provided that warrants
not listed on the New York or American Stock Exchange shall be
further limited to 2% of the Fund's net assets (warrants initially
attached to securities and acquired by the Fund upon original
issuance thereof shall be deemed to be without value); and
(10) not to 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
Among other investments described below, the Fund may buy and sell
domestic and foreign options, futures contracts, and options on futures
contracts with respect to securities, securities indices, and currencies, and
may enter into closing transactions with respect to each of the foregoing, and
invest in other derivatives, under circumstances in which the use of such
techniques is expected by the Investment Manager to aid in achieving the
investment objective of the Fund. The Fund on occasion may also purchase
instruments with characteristics of both futures and securities (e.g., debt
instruments with interest and principal payments determined by reference to the
value of a commodity or a currency at a future time) and which, therefore,
possess the risks of both futures and securities investments.
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell underlying
assets, such as certain securities, currencies or an index of securities, at a
future time at a specified price. A contract to buy establishes a "long"
position while a contract to sell establishes a "short" position.
The purchase of a futures contract on securities or an index of securities
normally enables a buyer to participate in the market movement of the underlying
asset or index after paying a transaction charge and posting margin in an amount
equal to a small percentage of the value of the underlying asset or index. The
Fund will initially be required to deposit with the Trust's custodian or the
broker effecting the futures transaction an amount of "initial margin" in cash
or U.S. Treasury obligations.
5
<PAGE>
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 assets fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will terminate
the Fund's position in the futures contract. A final determination of
maintenance margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. While futures
contracts with respect to securities do provide for the delivery and acceptance
of such securities, such delivery and acceptance are seldom made.
Futures contracts will be executed primarily (a) to establish a short
position, and thus protect the Fund from experiencing the full impact of an
expected decline in market value of portfolio holdings without requiring the
sale of holdings, or (b) to establish a long position, and thus to participate
in an expected rise in market value of securities or currencies which the Fund
intends to purchase. Subject to the limitations described below, the Fund may
also enter into futures contracts for purposes of enhancing return. In
transactions establishing a long position in a futures contract, money market
instruments equal to the face value of the futures contract will be identified
by the Fund to the Trust's custodian for maintenance in a separate account to
insure that the use of such futures contracts is unleveraged. Similarly, a
representative portfolio of securities having a value equal to the aggregate
face value of the futures contract will be identified with respect to each short
position. The Fund will employ any other appropriate method of cover which is
consistent with applicable regulatory and exchange requirements.
Options on Securities
The Fund may use options on securities to implement its investment
strategy. A call option on a security, for example, gives the purchaser of the
option the right to buy, and the writer the obligation to sell, the underlying
asset at the exercise price during the option period. Conversely, a put option
on a security gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying asset at the exercise price during the option
period.
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Purchased options have defined risk, i.e., the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset.
Written options have varying degrees of risk. An uncovered written call
option theoretically carries unlimited risk, as the market price of the
underlying asset could rise far above the exercise price before its expiration.
This risk is tempered when the call option is covered, i.e., when the option
writer owns the underlying asset. In this case, the writer runs the risk of the
lost opportunity to participate in the appreciation in value of the asset rather
than the risk of an out-of-pocket loss. A written put option has defined risk,
i.e., the difference between the agreed-upon price that the Fund must pay to the
buyer upon exercise of the put and the value, which could be zero, of the asset
at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
his obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Options on Securities Indices
The Fund may engage in transactions in call and put options on securities
indices. For example, the Fund may purchase put options on indices of securities
in anticipation of or during a market decline to attempt to offset the decrease
in market value of its securities that might otherwise result.
Put options on indices of securities are similar to put options on the
securities themselves except that the delivery requirements are different.
Instead of giving the right to make delivery of a security at a specified price,
a put option on an index of securities gives the holder the right to receive an
amount of cash upon exercise of the option if the value of the underlying index
has fallen below the exercise price. The amount of cash received will be equal
to the difference between the closing price of the index and the exercise price
of the option expressed in dollars times a specified multiple. As with options
on securities or futures contracts, the Fund may offset its position in index
options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
A securities index assigns relative values to the securities included in
the index and the index options are based on a broad market index. Although
there are at present few available options on indices of fixed income
securities, other than tax-exempt securities, or futures and related options
based on such indices, such instruments may become available in the future. In
connection with the use of such options, the Fund may cover its position by
identifying a representative portfolio of securities having a value equal to the
aggregate face
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value of the option position taken. However, the Fund may employ
any appropriate method to cover its positions that is consistent with applicable
regulatory and exchange requirements.
Options on Futures Contracts
An option on a futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
Options Strategy
A basic option strategy for protecting the Fund against a decline in
securities prices could involve (a) the purchase of a put -- thus "locking in"
the selling price of the underlying securities or securities indices -or (b) the
writing of a call on securities or securities indices held by the Fund --
thereby generating income (the premium paid by the buyer) by giving the holder
of such call the option to buy the underlying asset at a fixed price. The
premium will offset, in whole or in part, a decline in portfolio value; however,
if prices of the relevant securities or securities indices rose instead of
falling, the call might be exercised, thereby resulting in a potential loss of
appreciation in the underlying securities or securities indices.
A basic option strategy when a rise in securities prices is anticipated is
the purchase of a call -- thus "locking in" the purchase price of the underlying
security or other asset. In transactions involving the purchase of call options
by the Fund, money market instruments equal to the aggregate exercise price of
the options will be identified by the Fund to the Trust's custodian to insure
that the use of such investments is unleveraged.
The Fund may write options in connection with buy-and-write transactions;
that is, the Fund may purchase a security and concurrently write a call option
against that security. If the call option is exercised in such a transaction,
the Fund's maximum gain will be the premium received by it for writing the
option, adjusted upward or downward by the difference between the Fund's
purchase price of the security and the exercise price of the option. If the
option is not exercised and the price of the underlying security declines, the
amount of such decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund's return will be the premium received from
writing the put option minus the amount by which the market price of the
security is below the exercise price.
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Limitations and Risks of Options and Futures Activity
The Fund will generally engage in transactions in futures contracts or
options as a hedge against changes resulting from market conditions which
produce changes in the values of its securities or the securities which it
intends to purchase (e.g., to replace portfolio securities which will mature in
the near future and, subject to the limitations described below, to enhance
return). The Fund will not purchase any futures contract or purchase any call
option if, immediately thereafter, more than one third of the Fund's net assets
would be represented by long futures contracts or call options. The Fund will
not write a covered call or put option if, immediately thereafter, the aggregate
value of the assets (securities in the case of written calls and cash or cash
equivalents in the case of written puts) underlying all such options, determined
as of the dates such options were written, would exceed 25% of the Fund's net
assets. In addition, the Fund may not establish a position in a commodity
futures contract or purchase or sell a commodity option contract for other than
bona fide hedging purposes if immediately thereafter the sum of the amount of
initial margin deposits and premiums required to establish such positions for
such nonhedging purposes would exceed 5% of the market value of the Fund's total
assets.
Although effective hedging can generally capture the bulk of a desired
risk adjustment, no hedge is completely effective. The Fund's ability to hedge
effectively through transactions in futures and options depends on the degree to
which price movements in its holdings correlate with price movements of the
futures and options.
Some positions in futures and options may be closed out only on an
exchange which provides a secondary market therefor. There can be no assurance
that a liquid secondary market will exist for any particular futures contract or
option at any specific time. Thus, it may not be possible to close such an
option or futures position prior to maturity. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
effectively hedge its securities and might in some cases require the Fund to
deposit cash to meet applicable margin requirements. The Fund will enter into an
option or futures position only if it appears to be a liquid investment.
The Fund has undertaken with a state securities authority that, for so
long as its shares are required to be registered for sale in such state, the
Fund will invest only in options and futures that are issued by the Options
Clearing Corporation or offered through the facilities of a national securities
association or listed on a national securities or commodities exchange, except
that the Fund may invest in unlisted options or futures when the desired options
or futures are unavailable on a national securities or commodities exchange.
Furthermore, the Fund will engage in such transactions in unlisted options or
futures only with dealers who have high credit standing as determined by the
Investment Manager.
Foreign Investments
To the extent the Fund invests in securities of issuers in less developed
countries or emerging foreign markets, it will be subject to a variety of
additional risks, including risks
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associated with political instability, economies based on relatively few
industries, lesser market liquidity, high rates of inflation, significant price
volatility of portfolio holdings and high levels of external debt in the
relevant country.
Although the Fund may invest in securities denominated in foreign
currencies, the Fund values its securities and other assets in U.S. dollars.
As a result, the net asset value of the Fund's shares may fluctuate with U.S.
dollar exchange rates as well as with price changes of the Fund's securities
in the various local markets and currencies. Thus, an increase in the value
of the U.S. dollar compared to the currencies in which the Fund makes its
investments could reduce the effect of increases and magnify the effect of
decreases in the prices of the Fund's securities in their local markets.
Conversely, a decrease in the value of the U.S. dollar will have the
opposite effect of magnifying the effect of increases and reducing the effect
of decreases in the prices of the Fund's securities in the local markets.
Currency Transactions
The Fund may engage in currency exchange transactions in order to protect
against the effect of uncertain future exchange rates on securities denominated
in foreign currencies. The Fund will conduct its currency exchange transactions
either on a spot (i.e., cash) basis at the rate prevailing in the currency
exchange market, or by entering into forward contracts to purchase or sell
currencies. The Fund's dealings in forward currency exchange contracts will be
limited to hedging involving either specific transactions or aggregate portfolio
positions. A forward currency contract involves an obligation to purchase or
sell a specific currency at a 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 entered into in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. In entering a forward currency transaction, the Fund is
dependent upon the creditworthiness and good faith of the counterparty. The Fund
attempts to reduce the risks of nonperformance by the counterparty by dealing
only with established, reputable institutions. Although spot and forward
contracts will be used primarily to protect the Fund from adverse currency
movements, they also involve the risk that anticipated currency movements will
not be accurately predicted, which may result in losses to the Fund. This method
of protecting the value of the Fund's portfolio securities against a decline in
the value of a currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange that can be achieved
at some future point in time. Although such contracts tend to minimize the risk
of loss due to a decline in the value of hedged currency, they tend to limit any
potential gain that might result should the value of such currency increase.
Repurchase Agreements
The Fund may enter into repurchase agreements. Repurchase agreements occur
when the Fund acquires a security and the seller, which may be either (i) a
primary dealer in U.S. Government securities or (ii) an FDIC-insured bank having
gross assets in excess of $500 million, simultaneously commits to repurchase it
at an agreed-upon price on an agreed-upon
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date within a specified number of days (usually not more than seven) from the
date of purchase. The repurchase price reflects the purchase price plus an
agreed-upon market rate of interest which is unrelated to the coupon rate or
maturity of the acquired security. The Fund will only enter into repurchase
agreements involving U.S. Government securities. Repurchase agreements could
involve certain risks in the event of default or insolvency of the other party,
including possible delays or restrictions upon the Fund's ability to dispose of
the underlying securities. Repurchase agreements will be limited to 30% of the
Fund's total assets, except that repurchase agreements extending for more than
seven days when combined with other illiquid securities will be limited to 10%
of the Fund's total assets.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. However, the Fund
has no present intention of engaging in reverse repurchase agreements in excess
of 5% of the Fund's total assets. In a reverse repurchase agreement the Fund
transfers 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" equity securities, which are traded on
a price 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 up to a month or more; during
this period dividends on equity securities are not payable. No income accrues to
the Fund prior to the time it takes delivery. A frequent form of when-issued
trading occurs when corporate securities to be created by a merger of companies
are traded prior to the actual consummation of the merger. Such transactions may
involve a risk of loss if the value of the securities fall below the price
committed to prior to the actual issuance. The Trust's custodian will establish
a segregated account for the Fund when it purchases securities on a when-issued
basis consisting of cash or liquid securities equal to the amount of the
when-issued commitments.
Rule 144A Securities
Subject to the limitation on illiquid and restricted securities noted
above, the Fund may buy or sell restricted securities in accordance with Rule
144A under the Securities Act of 1933 ("Rule 144A Securities"). Securities may
be resold pursuant to Rule 144A under
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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, such
Rule 144A Securities may be deemed to be liquid as determined by or in
accordance with methods adopted by the Trustees. Under such methods the
following factors are considered, among others: the frequency of trades and
quotes for the security, the number of dealers and potential purchasers in the
market, marketmaking activity, and the nature of the security and marketplace
trades. Investments in Rule 144A Securities could have the effect of increasing
the level of the Fund's illiquidity to the extent that qualified institutional
buyers become, for a time, uninterested in purchasing such securities. Also, the
Fund may be adversely impacted by the possible illiquidity and subjective
valuation of such securities in the absence of a market for them.
Indexed Securities
The Fund may purchase securities the value of which is indexed to interest
rates, foreign currencies and various indices and financial indicators. These
securities are generally short- to intermediate-term debt securities. The
interest rates or values at maturity fluctuate with the index to which they are
connected and may be more volatile than such index.
Swap Arrangements
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below. In an
interest rate swap the Fund could agree for a specified period to pay a bank or
investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an assumed figure selected by the parties for this
purpose) in exchange for agreement by the bank or investment banker to pay the
Fund a fixed rate of interest on the notional principal amount. In a currency
swap the Fund would agree with the other party to exchange cash flows based on
the relative differences in values of a notional amount of two (or more)
currencies; in an index swap, the Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices. Purchase
of a cap entitles the purchaser to receive payments from the seller on a
notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an
agreed-upon interest rate or amount. A collar combines a cap and a floor.
Most swaps entered into by the Fund will be on a net basis; for example,
in an interest rate swap, amounts generated by application of the fixed rate and
the floating rate to the notional principal amount would first offset one
another, with the Fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, the Fund will set up a 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
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net basis assets will be segregated having a value equal to the total amount of
the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a part of the Fund's portfolio.
However, the Fund may enter into such arrangements for income purposes to the
extent permitted by the CFTC for entities which are not commodity pool
operators, such as the Fund. In entering a swap arrangement, the Fund is
dependent upon the creditworthiness and good faith of the counterparty. The Fund
attempts to reduce the risks of nonperformance by the counterparty by dealing
only with established, reputable institutions. The swap market is still
relatively new and emerging; positions in swap arrangements may become illiquid
to the extent that nonstandard arrangements with one counterparty are not
readily transferable to another counterparty or if a market for the transfer of
swap positions does not develop. The use of interest rate swaps is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Investment Manager is incorrect in its forecasts of market values, interest
rates and other applicable factors, the investment performance of the Fund would
diminish compared with what it would have been if these investment techniques
were not used. Moreover, even if the Investment Manager is correct in its
forecasts, there is a risk that the swap position may correlate imperfectly with
the price of the asset or liability being hedged.
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 the loaned securities plus accrued interest. The
Investment Manager will continuously monitor the value of the collateral to
ensure that it at all times remains equal to at least 100% of the current market
value of the loaned securities plus accrued interest, marking the collateral to
market daily.
Other Investment Limitations
Pursuant to the policies of certain state securities authorities, the Fund
will not invest in real estate limited partnerships, oil, gas or mineral
development limited partnerships, or in oil, gas or mineral leases for so long
as Fund shares are required to be registered for sale in the relevant state.
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
As indicated in the Fund's Prospectus, the Fund may invest in long-term
and short-term debt securities. The Fund may invest in cash and short-term
securities for temporary defensive purposes when, in the opinion of the
Investment Manager, such a position is more likely to provide protection against
unfavorable market conditions than
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adherence to other investment policies. Certain debt securities and money market
instruments in which the Fund may invest are described below.
U.S. Government and Related Securities. U.S. Government securities are
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S.
Government securities in which the Fund invests include, among others:
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
Farmers Home Administration, the Federal Farm Credit Banks, the
Federal National Mortgage Association, the Government National
Mortgage Association and the Federal Home Loan Mortgage
Corporation; and
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 and obligations of the Farmers Home Administration, 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 Farmers Home
Administration, 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-backed 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
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("STRIPS") program. Under the STRIPS program, the principal and interest
components are individually numbered and separately issued by the U.S. Treasury
at the request of depository financial institutions, which then trade the
component parts independently. Obligations of Resolution Funding Corporation are
similarly divided into principal and interest components and maintained as such
on the book entry records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Bank Money Investments. Bank money investments include but are not limited
to certificates of deposit, bankers' acceptances and time deposits. Certificates
of deposit are generally short-term (i.e., less than one year), interest-bearing
negotiable certificates issued by commercial banks or savings and loan
associations against funds deposited in the issuing institution. A banker's
acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods). A banker's acceptance may be obtained
from a domestic or foreign bank, including a U.S. branch or agency of a foreign
bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. The Fund will not invest
in any such bank money investment unless the investment is issued by a U.S. bank
that is a member of the Federal Deposit Insurance Corporation ("FDIC"),
including any foreign branch thereof, a U.S. branch or agency of a foreign bank,
a foreign branch of a foreign bank, or a savings bank or savings and loan
association that is a member of the FDIC and which at the date of investment has
capital, surplus and undivided profits (as of the date of its most recently
published financial statements) in excess of $50 million. The Fund will not
invest in time deposits maturing in more than seven days and will not invest
more than 10% of its total assets in time deposits maturing in two to seven
days.
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under state law. U.S. federal branches or
agencies of foreign banks are chartered and regulated by the Comptroller of
the Currency, while state branches and agencies are chartered and regulated
by authorities of the respective states or the District of Columbia. U.S.
branches
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of foreign banks may accept deposits and thus are eligible for FDIC
insurance; however, not all such branches elect FDIC insurance. Unlike U.S.
branches of foreign banks, U.S. agencies of foreign banks may not accept
deposits and thus are not eligible for FDIC insurance. Both branches and
agencies can maintain credit balances, which are funds received by the office
incidental to or arising out of the exercise of their banking powers and can
exercise other commercial functions, such as lending activities.
Short-Term Corporate Debt Instruments. Short-term corporate debt
instruments include commercial paper to finance short-term credit needs (i.e.,
short-term, unsecured promissory notes) issued by corporations including but not
limited to (a) domestic or foreign bank holding companies or (b) their
subsidiaries or affiliates where the debt instrument is guaranteed by the bank
holding company or an affiliated bank or where the bank holding company or the
affiliated bank is unconditionally liable for the debt instrument. Commercial
paper is usually sold on a discounted basis and has a maturity at the time of
issuance not exceeding nine months.
Commercial Paper Ratings. Commercial paper investments at the time of
purchase will be rated A by Standard & Poor's Corporation ("S&P") or Prime by
Moody's Investor's Service, Inc. ("Moody's"), or, if not rated, issued by
companies having an outstanding long-term unsecured debt issue rated at least A
by S&P or by Moody's. The money market investments in corporate bonds and
debentures (which must have maturities at the date of settlement of one year or
less) must be rated at the time of purchase at least A by S&P or by Moody's.
Commercial paper rated A (highest quality) by S&P is issued by entities which
have liquidity ratios which are adequate to meet cash requirements. Long-term
senior debt is rated A or better, although in some cases BBB credits may be
allowed. The issuer has access to at least two additional channels of borrowing.
Basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances. Typically, the issuer's industry is well established and
the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. The relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1, A-2
or A-3. (Those A-1 issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.
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RATING CATEGORIES OF DEBT SECURITIES
Set forth below is a description of S&P corporate bond and debenture
ratings 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 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 known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in the case of Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
Aaa securities.
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<PAGE>
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 rating category.
In the event applicable rating agencies lower the ratings of debt
instruments held by the Fund and the action results in a material decline in the
overall quality of the Fund's portfolio, the situation will be reviewed and
necessary action, if any, will be taken, including changes in the composition of
the portfolio.
18
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust, their addresses, and their
principal occupations and positions with certain affiliates of the Investment
Manager are set forth below.
*+Peter C. Bennett, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. His principal occupation is Executive Vice President and
Director of State Street Research & Management Company. During the past five
years he has also served as Senior Vice President and Vice President of State
Street Research & Management Company. Mr. Bennett's other principal business
affiliations include Director, State Street Research Investment Services, Inc.
and Gefinor Securities S.A.
*Charles S. Glovsky, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. His principal occupation is Senior Vice President
of State Street Research & Management Company. During the past five years he has
also served as Vice President of State Street Research & Management Company.
*+Constantine Hutchins, Jr., One Financial Center, Boston, MA 02111,
serves as Secretary and General Counsel of the Trust. His principal occupation
during the past five years has been Senior Vice President, Secretary and General
Counsel of State Street Research & Management Company. Mr. Hutchins's other
principal business affiliations include Senior Vice President, Clerk and General
Counsel, State Street Research Investment Services, Inc.
*+Frederick R. Kobrick, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. His principal occupation is currently, and during
the past five years has been Senior Vice President of State Street Research &
Management Company.
+Robert A. Lawrence, Saltonstall & Co., 50 Congress Street, Boston, MA
02109, serves as Trustee of the Trust. His principal occupation during the past
five years has been Partner, Saltonstall & Co., a private investment firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. His principal occupation is Executive Vice President,
Treasurer and Director of State Street Research & Management Company. During the
past five years he has also served as Executive Vice President and Chief
Financial Officer of New England Investment Companies and as Senior Vice
President and Vice President of New England Mutual Life Insurance Company. Mr.
Maus's other principal business affiliations include Treasurer, Chief Financial
Officer and Director of State Street Research Investment Services, Inc.
- ------------------------
* or + See footnotes on page 20.
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<PAGE>
*+Thomas P. Moore, Jr., One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. His principal occupation is Senior Vice President
of State Street Research & Management Company. During the past five years he has
also served as Vice President of State Street Research & Management Company.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is retired, having served during the past five years,
until October 1992, as Executive Vice President, Chief Operating
Officer and Director of Hewlett-Packard Company.
+Thomas L. Phillips, 141 Spring Street, Lexington, MA 02173, serves as
Trustee of the Trust. He is retired and was formerly Chairman of the Board and
Chief Executive Officer of Raytheon Company, of which he remains a Director.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust.
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. His principal occupation is Chairman of the Board, President, Chief
Executive Officer and Director of State Street Research & Management Company.
During the past five years he also served as President and Chief Executive
Officer of New England Investment Companies and as Chief Investment Officer and
Director of New England Mutual Life Insurance Company. Mr. Verni's other
principal business affiliations include Chairman of the Board, President, Chief
Executive Officer and Director of State Street Research Investment Services,
Inc.
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is retired and was formerly Of Counsel for the law firm
Choate, Hall & Stewart. He was a partner of that firm from 1960 to 1987.
- ------------------------
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the 1940 Act because of their affiliations
with the Fund's investment adviser.
+ Serves as a Trustee and/or officer of one or more of the following
investment companies, each of which has an advisory relationship with
the Investment Manager or its affiliates: MetLife - State Street
Equity Trust, MetLife - State Street Financial Trust, MetLife - State
Street Income Trust, MetLife - State Street Money Market Trust, MetLife
- State Street Tax-Exempt Trust, State Street Capital Trust, State
Street Exchange Trust, State Street Growth Trust, State Street Master
Investment Trust, State Street Research Securities Trust, MetLife
Portfolios, Inc. and Metropolitan Series Fund, Inc.
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<PAGE>
As of October 31, 1994, the Trustees and officers of the Trust as a group
owned approximately 1.9% of the outstanding Class A shares of the Fund.
As of October 31, 1994, the following entities were the record and/or
beneficial owners of the approximate amounts of each class of shares of the Fund
as set forth beside their names:
Shareholder % (tentative)
----------- -------------
Class A Merrill Lynch 18.1
Class B Merrill Lynch 29.5
Class C United States Trust Company 5.7
Metropolitan Life 14.1
Bank of America 20.3
Boatmens Trust Company 47.1
Class D Merrill Lynch 32.3
The full name and address of the above entities are as follows:
Bank of America (c)
P.O. Box 94627
Pasadena, California 91109
Boatmens Trust Company (c)
P.O. Box 14737
St. Louis, Missouri 63178
Merrill Lynch, Pierce, Fenner & Smith, Inc. (c)
One Liberty Plaza
165 Broadway
New York, New York 10080
Metropolitan Life Insurance Company (a)
One Madison Avenue
New York, New York 10010
United States Trust Company (b)(c)
770 Broadway
New York, New York 10003
- ---------------
(a) Metropolitan Life Insurance Company ("Metropolitan"), a New York
corporation, was the record and/or beneficial owner, directly or
indirectly through its subsidiaries or affiliates, of such shares.
21
<PAGE>
(b) United States Trust Company holds such shares as trustee or custodian
under certain employee benefit plans serviced by Metropolitan.
(c) The Fund believes that each named record-holder does not have beneficial
ownership of such shares.
Ownership of 25% or more of a voting security is deemed "control" as
defined in the 1940 Act. So long as 25% of a class of shares is so owned, such
owners will be presumed to be in control of such class of shares for purposes of
voting on certain matters, such as any Distribution Plan for a given class.
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Advisory
Agreement provides that the Investment Manager shall furnish the Fund with an
investment program, suitable office space and facilities and such investment
advisory, research and administrative services as may be required from time to
time. The Investment Manager compensates all executive and clerical personnel
and Trustees of the Trust if such persons are employees of the Investment
Manager or its affiliates. The Investment Manager is an indirect wholly-owned
subsidiary of Metropolitan.
The advisory fee payable monthly by the Fund to the Investment Manager is
computed as a percentage of the average of the value of the net assets of the
Fund, as determined at the close of the New York Stock Exchange (the "NYSE") on
each day the NYSE is open for trading, at the annual rate of 0.75% of the net
assets of the Fund. The Fund has been advised that the Distributor and its
affiliates may from time to time and in varying amounts voluntarily assume some
portion of fees or expenses relating to the Fund. For the period October 4, 1993
(commencement of operations) through September 30, 1994, the Fund's investment
advisory fee prior to the assumption of fees or expenses was $267,184. For the
same period, the voluntary reduction of fees or assumption of expenses amounted
to $186,448.
Further, to the extent required under applicable state regulatory
requirements, the Investment Manager will reduce its management fee up to the
amount of any expenses (excluding permissible items, such as brokerage
commissions, Rule 12b-1 payments, interest, taxes and litigation expenses) paid
or incurred by the Fund in any fiscal year which exceed specified percentages of
the average daily net assets of the Fund for such fiscal year. The most
restrictive of such percentage limitations is currently 2.5% of the first $30
million of average net assets, 2.0% of the next $70 million of average net
assets and 1.5% of the remaining average net assets. These commitments may be
amended or rescinded in response to changes in the requirements of the various
states by the Trustees without shareholder approval.
22
<PAGE>
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund for a period of two years after its initial effectiveness
and will continue from year to year thereafter as long as it is approved at
least annually both (i) by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act) or by the Trustees of the
Trust, and (ii) in either event by a vote of a majority of the Trustees who are
not parties to the Advisory Agreement or "interested persons" of any party
thereto, cast in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement may be terminated on 60 days' written notice by
either party and will terminate automatically in the event of its assignment, as
defined under the 1940 Act and regulations thereunder. Such regulations provide
that a transaction which does not result in a change of actual control or
management of an adviser is not deemed an assignment.
Under a 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 such administrative 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.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by the Distributor. The Fund offers
four classes of shares which may be purchased at the next determined net asset
value per share plus, in the case of all classes except Class C shares, a sales
charge which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B and Class
D shares). General information on how to buy shares of the Fund, as well as
sales charges involved, is set forth under "Purchase of Shares" in the
Prospectus. The following supplements that information.
Public Offering Price. The public offering price for each class of shares
of the Fund is based on their net asset value determined as of the close of the
NYSE on the day the purchase order is received by State Street Research
Shareholder Services provided that the order is received prior to the close of
the NYSE on that day; otherwise the net asset value used is that determined as
of the close of the NYSE on the next day it is open for unrestricted trading.
When a purchase order is placed through a dealer, that dealer is responsible for
transmitting the order promptly to State Street Research Shareholder Services in
order to permit the investor to obtain the current price. Any loss suffered by
an investor which results from a dealer's failure to transmit an order promptly
is a matter for settlement between the investor and the dealer.
Reduced Sales Charges. For purposes of determining whether a purchase of
Class A shares qualifies for reduced sales charges, the term "person" includes:
(i) an individual, or an
23
<PAGE>
individual combining with his or her spouse and their children and purchasing
for his, her or their own account; (ii) a "company" as defined in Section
2(a)(8) of the 1940 Act; (iii) a trustee or other fiduciary purchasing for a
single trust estate or single fiduciary account (including a pension, profit
sharing or other employee benefit trust created pursuant to a plan qualified
under Section 401 of the Internal Revenue Code); (iv) a tax-exempt organization
under Section 501(c)(3) or (13) of the Internal Revenue Code; and (v) an
employee benefit plan of a single employer or of affiliated employers.
Investors may purchase Class A shares of the Fund at reduced sales charges
by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds" as
designated by the Distributor within a 13-month period. The sales charge
applicable to each purchase made pursuant to a Letter of Intent will be that
which would apply if the total dollar amount set forth in the Letter of Intent
were being bought in a single transaction. Purchases made within a 90-day period
prior to the execution of a Letter of Intent may be included therein; in such
case the date of the earliest of such purchases marks the commencement of the
13-month period.
An investor may include toward completion of a Letter of Intent the value
(at the current public offering price) of all of his or her Class A shares of
the Fund and of any of the other Class A shares of Eligible Funds held of record
as of the date of his or her Letter of Intent, plus the value (at the current
offering price) as of such date of all of such shares held by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is upon notice, remitted by the investor. All dividends and capital gains
distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
24
<PAGE>
Class C Shares - Class C shares are currently available to (i) benefit
plans such as qualified retirement plans, other than individual retirement
accounts and self-employed retirement plans, which meet certain criteria
relating to minimum assets, minimum participants, service agreements, or similar
factors; (ii) tax-exempt retirement plans of the Investment Manager and its
affiliates, including the retirement plans of the Investment Manager's
affiliated brokers; (iii) unit investment trusts sponsored by the Investment
Manager or its affiliates; (iv) banks and insurance companies purchasing for
their own accounts; (v) investment companies not affiliated with the Investment
Manager; and (vi) endowment funds of nonprofit organizations with substantial
minimum assets. The entities included in categories (i), (iv) and (vi) may not
be affiliates of the Investment Manager.
Reorganizations. In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, the Fund may issue its shares at net asset value (or
more) to such entities or to their security holders.
Redemptions. The Fund reserves the right to pay redemptions in kind with
portfolio securities in lieu of cash. In accordance with its election pursuant
to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of redemption
proceeds paid in cash. Although it has no present intention to do so, the Fund
may, under unusual circumstances, limit redemptions in cash with respect to each
shareholder during any ninety-day period to the lesser of (i) $250,000 or (ii)
1% of the net asset value of the Fund at the beginning of such period. In
connection with any redemptions paid in kind with portfolio securities,
brokerage and other costs may be incurred by the redeeming shareholder in the
sale of the securities received.
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily as
of the close of the NYSE, ordinarily 4 P.M. New York City time, Monday through
Friday, on each day during which the NYSE is open for unrestricted trading. The
NYSE is currently closed for New Year's Day, Presidents Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is computed by dividing the sum
of the market 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 the portfolio assets as provided below, the
Trustees may 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 may provide prices determined as of times prior to the close of the
NYSE.
25
<PAGE>
In general, securities are valued as follows. Securities which are listed
or traded on the New York or American Stock Exchange are valued at the price of
the last quoted sale on the respective exchange for that day. Securities which
are listed or traded on a national securities exchange or exchanges, but not on
the New York or American Stock Exchange, are valued at the price of the last
quoted sale on the exchange for that day prior to the close of the NYSE.
Securities not listed on any national securities exchange which are traded "over
the counter" and for which quotations are available on the National Association
of Securities Dealers' NASDAQ System, or other system, are valued at the closing
price supplied through such system for that day at the close of the NYSE. Other
securities are, in general, valued at the mean of the bid and asked quotations
last quoted prior to the close of the NYSE if there are market quotations
readily available, or in the absence of such market quotations, then at the fair
value thereof as determined by or under authority of the Trustees of the Trust
utilizing such pricing services as may be deemed appropriate. Securities deemed
restricted as to resale are valued at the fair value thereof as determined by or
in accordance with methods adopted by the Trustees of the Trust.
Short-term debt instruments issued with a maturity of one year or less
which have a remaining maturity of 60 days or less are valued using the
amortized cost method, provided that during any period in which more than 25% of
the Fund's total assets is invested in short-term debt securities the current
market value of such securities will be used in calculating net asset value per
share in lieu of the amortized cost method. The amortized cost method is used
when the value obtained is fair value. Under the amortized cost method of
valuation, the security is initially valued at cost on the date of purchase (or
in the case of short-term debt instruments purchased with more than 60 days
remaining to maturity, the market value on the 61st day prior to maturity), and
thereafter a constant amortization to maturity of any discount or premium is
assumed regardless of the impact of fluctuating interest rates on the market
value of the security.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
The Fund's portfolio turnover rate is determined by dividing the lesser of
securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The Fund reserves full freedom with respect to portfolio
turnover, as described in the Prospectus. The portfolio turnover rate for the
period October 4, 1993 (commencement of operations) through September 30, 1994
was 83.61%.
Brokerage Allocation
The Fund and the Investment Manager seek the best overall execution of
purchase or sale orders and the most favorable net price in securities
transactions consistent with their
26
<PAGE>
judgment as to the business qualifications of the various broker or dealer firms
with which the Fund may do business. Decisions with respect to the market where
the transaction is to be completed, and to the allocation of orders among
brokers or dealers, are made in accordance with this policy. In selecting
brokers or dealers to effect portfolio transactions, consideration is given to
the performance, integrity and financial responsibility of the various firms as
well as to their demonstrated execution experience and capability generally and
in regard to particular markets or securities and, in agency transactions, to
the competitiveness of the commission rates (or in principal transactions of the
net prices) they charge. The Investment Manager keeps current as to the range of
rates or prices charged by various firms and against this background evaluates
the reasonableness of a commission or price charged with respect to a particular
transaction by considering such factors as difficulty of execution or security
positioning by the executing firm.
When it appears that a number of firms can satisfy the required standards
in respect of a particular transaction, consideration may also be given to
services other than execution services which such firms have provided in the
past or may provide in the future. Among such other services are the supplying
of supplemental investment research, general economic and political information,
analytical and statistical data, relevant market information and daily market
quotations for computation of net asset value. In this connection it should be
noted that a substantial portion of brokerage commissions paid, or principal
transactions entered, by the Fund may be with brokers and investment banking
firms which, in the normal course of business, publish statistical, research and
other material which is received by the Investment Manager and which may or may
not prove useful to the Investment Manager, the Fund or other clients of the
Investment Manager.
Neither the Fund nor the Investment Manager has any definite agreements
with any firm as to the amount of business which that firm may expect to receive
for services supplied or otherwise. There may be, however, understandings with
certain firms that in order for such firms to be able to continuously supply
certain services, they need to receive allocation of a specified amount of
business. These understandings are honored to the extent possible in accordance
with the policy set forth above. Neither the Fund nor the Investment Manager
intends to pay a firm in excess of that which another would charge for handling
the same transaction in recognition of services (other than execution services)
provided. However, the Fund and the Investment Manager are aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, rely on the provisions of Section 28(e) of the
Securities Exchange Act of 1934, to the extent applicable. Brokerage commissions
paid by the Fund during the period October 4, 1993 (commencement of operations)
through September 30, 1994 amounted to approximately $89,000.
Occasions may arise when the Investment Manager determines that an
investment in a particular security, or the disposition of a particular
security, is simultaneously a proper investment decision for the Fund as well as
for the portfolio of one or more of its other clients. In this event, a purchase
or sale, as the case may be, of any such security on any given day will be
normally averaged as to price and allocated as to amount among the several
clients in a manner deemed equitable to each client.
27
<PAGE>
On occasions when the Investment Manager deems the purchase or sale of a
security to be in the best interests of the Fund as well as other clients of the
Investment Manager, the Investment Manager, to the extent permitted by
applicable laws and regulations, may aggregate such securities to be sold or
purchased for the Fund with those to be sold or purchased for other customers in
order to obtain best execution and lower brokerage commissions, if any. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Investment Manager in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to all such customers, including the Fund. In some instances, this
procedure may affect the price and size of the positions obtainable for the
Fund.
CERTAIN TAX MATTERS
Federal Income Taxation of the Fund -- In General
The Fund intends to qualify and elect to be treated each taxable year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), although it cannot give complete assurance
that it will do so. Accordingly, the Fund must, among other things, (a) derive
at least 90% of its gross income in each taxable year from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of the
following held for less than three months (the "30% test"): (i) stock or
securities; (ii) options, futures, or forward contracts (other than options,
futures, or forward contracts on foreign currencies), or (iii) foreign
currencies (or options, futures, or forward contracts on foreign currencies) but
only if such currencies (or options, futures, or forward contracts) are not
directly related to the Fund's principal business of investing in stocks or
securities (or options and futures with respect to stocks or securities); (c)
satisfy certain diversification requirements and (d) in order to be entitled to
utilize the dividends paid deduction, distribute annually at least 90% of its
investment company taxable income (determined without regard to the deduction
for dividends paid).
The 30% test will limit the extent to which the Fund may sell securities
held for less than three months; write options which expire in less than three
months, and effect closing transactions with respect to call or put options that
have been written or purchased within the preceding three months. (If the Fund
purchases a put option for the purpose of hedging an underlying portfolio
security, the acquisition of the option is treated as a short sale of the
underlying security unless, for purposes only of the 30% test, the option and
the security are acquired on the same date.) Finally, as discussed below, this
requirement may also limit investments by the Fund in options on stock indices,
listed options on nonconvertible debt securities, futures contracts, options on
interest rate futures contracts and certain foreign currency contracts.
28
<PAGE>
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of the Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of the
Fund.
The Fund will be liable for a nondeductible 4% excise tax on amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement. To avoid the tax, during each calendar year the Fund must
distribute an amount equal to at least 98% of the sum of its ordinary income
(not taking into account any capital gains or losses) for the calendar year, and
its capital gain net income for the 12-month period ending on October 31, in
addition to any undistributed portion of the respective balances from the prior
year. The Fund intends to make sufficient distributions to avoid this 4% excise
tax.
Federal Income Taxation of the Fund's Investments
Original Issue Discount. For federal income tax purposes, debt securities
purchased by the Fund may be treated as having original issue discount. Original
issue discount represents interest for federal income tax purposes and can
generally be defined as the excess of the stated redemption price at maturity of
a debt obligation over the issue price. Original issue discount is treated for
federal income tax purposes as income earned by the Fund, whether or not any
income is actually received, and therefore is subject to the distribution
requirements of the Code. Generally, the amount of original issue discount is
determined on the basis of a constant yield to maturity which takes into account
the compounding of accrued interest. Under section 1286 of the Code, an
investment in a stripped bond or stripped coupon may result in original issue
discount.
Debt securities may be purchased by the Fund at a discount that exceeds
the original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for income tax
purposes. In the case of any debt security issued after July 18, 1984, having a
fixed maturity date of more than one year from the date of issue and having
market discount, the gain realized on disposition will be treated as interest to
the extent it does not exceed the accrued market discount on the security
(unless the Fund elects to include such accrued market discount in income in the
tax year to which it is attributable). Generally, market discount is accrued on
a daily basis. The Fund may be required to capitalize, rather than deduct
currently, part or all of any direct interest expense incurred to purchase or
carry any debt security having market discount, unless the Fund makes the
election to include market discount currently. Because the Fund must include
original issue discount in income, it will be more difficult for the Fund to
make the distributions required for the Fund to maintain its status as a
regulated investment company under Subchapter M of the Code or to avoid the 4%
excise tax described above.
29
<PAGE>
Options and Futures Transactions. Certain of the Fund's investments may be
subject to provisions of the Code that (i) require inclusion of unrealized gains
or losses in the Fund's income for purposes of the 90% test, the 30% test, the
excise tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and (iii) characterize
both realized and unrealized gain or loss as short-term or long-term gain or
loss. Such provisions generally apply to, among other investments, options on
debt securities, indices on securities and futures contracts.
Federal Income Taxation of Shareholders
Dividends paid by 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 shareholders on December 31, provided that the Fund pays the dividend
during January of the following calendar year.
Distributions by the Fund can result in a reduction in the fair market
value of the Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as ordinary income or long-term capital gain, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
DISTRIBUTION OF SHARES OF THE FUND
State Street Capital Trust is currently comprised of the following series:
State Street Research Capital Fund, State Street Research Small Capitalization
Growth Fund and State Street Research Small Capitalization Value Fund. The
Trustees have authorized shares of the Fund to be issued in four classes: Class
A, Class B, Class C and Class D shares. The Trustees of the Trust have authority
to issue an unlimited number of shares of beneficial interest of separate
series, $.001 par value per share. A "series" is a separate pool of assets of
the Trust which is separately managed and has a different investment objective
and different investment policies from those of another series. The Trustees
have authority, without the necessity of a shareholder vote, to create any
number of new series or classes or to commence the public offering of shares of
any previously established series or classes.
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
30
<PAGE>
into sales agreements with the Distributor. The Distributor distributes shares
of the Fund on a continuous basis at an offering price which is based on the net
asset value per share of the Fund plus (subject to certain exceptions) a sales
charge which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B and Class
D shares). The Distributor may reallow all or portions of such sales charges as
concessions to dealers. For the period October 4, 1993 (commencement of
operations) through September 30, 1994, total sales charges on Class A shares
paid to the Distributor amounted to $514,638. For the same period, the
Distributor retained $62,866 after reallowance of concessions to dealers.
The differences in the price at which the Fund's Class A shares are
offered due to scheduled variations in sales charges, as described in the Fund's
Prospectus, result from cost savings inherent in economies of scale. Management
believes that the cost of sales efforts of the Distributor and broker-dealers
tends to decrease as the size of purchases increases, or does not involve any
incremental sales expenses as in the case of, for example, exchanges,
reinvestments or dividend investments at net asset value. Similarly, no
significant sales effort is necessary for sales of shares at net asset value to
certain Directors, Trustees, officers, employees, their relatives and other
persons directly or indirectly related to the Fund or associated entities. Where
shares of the Fund are offered at a reduced sales charge or without a sales
charge pursuant to sponsored arrangements, the amount of the sales charge
reduction will similarly reflect the anticipated reduction in sales expenses
associated with such sponsored arrangements. The reductions in sales expenses,
and therefore the reduction in sales charge, will vary depending on factors such
as the size and stability of the organization, the term of the organization's
existence and certain characteristics of its members. The Fund reserves the
right to make variations in, or eliminate, sales charges at any time or to
revise the terms of or to suspend or discontinue sales pursuant to sponsored
arrangements at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission on the shares sold. Such commission also is
payable to authorized securities dealers upon sales of Class A shares made
pursuant to a Letter of Intent to purchase shares having a net asset value of
$1,000,000 or more. Shares sold with such commissions payable are subject to a
one-year contingent deferred sales charge of 1.00% on any portion of such shares
redeemed within one year following their sale. After a particular purchase of
Class A shares is made under the Letter of Intent, the commission will be paid
only in respect of that particular purchase of shares. If the Letter of Intent
is not completed, the commission paid will be deducted from any discounts or
commissions otherwise payable to such dealer in respect of shares actually sold.
If an investor is eligible to purchase shares at net asset value on account of
the Right of Accumulation, the commission will be paid only in respect of the
incremental purchase at net asset value.
31
<PAGE>
For the period February 1, 1994 (commencement of share class designations)
through September 30, 1994, the Distributor received contingent deferred sales
charges upon redemption of Class B and Class D shares of the Fund and paid
initial commissions to securities dealers for sales of such Class B and Class D
shares as follows:
Contingent Commissions
Deferred Paid to
Sales Charges Dealers
------------- -----------
Class B $1,331 $1,227,898
Class D $ 0 $ 111,232
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1" (the
"Distribution Plan") under which the Fund may engage, directly or indirectly, in
financing any activities primarily intended to result in the sale of Class A,
Class B and Class D shares, including, but not limited to, (1) the payment of
commissions and/or reimbursement to underwriters, securities dealers and others
engaged in the sale of shares, including payments to the Distributor to be used
to pay commissions and/or reimbursement to securities dealers (which securities
dealers may be affiliates of the Distributor) engaged in the distribution and
marketing of shares and furnishing ongoing assistance to investors, (2)
reimbursement of direct out-of-pocket expenditures incurred by the Distributor
in connection with the distribution and marketing of shares and the servicing of
investor accounts including expenses relating to the formulation and
implementation of marketing strategies and promotional activities such as direct
mail promotions and television, radio, newspaper, magazine and other mass media
advertising, the preparation, printing and distribution of Prospectuses of the
Fund and reports for recipients other than existing shareholders of the Fund,
and obtaining such information, analyses and reports with respect to marketing
and promotional activities and investor accounts as the Fund may, from time to
time, deem advisable, and (3) reimbursement of expenses incurred by the
Distributor in connection with the servicing of shareholder accounts including
payments to securities dealers and others in consideration of the provision of
personal services to investors and/or the maintenance of shareholder accounts
and expenses associated with the provision of personal services by the
Distributor directly to investors. In addition, the Distribution Plan is deemed
to authorize the Distributor and the Investment Manager to make payments out of
general profits, revenues or other sources to underwriters, securities dealers
and others in connection with sales of shares, to the extent, if any, that such
payments may be deemed to be within the scope of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class D shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class D
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class D shares (as the case may be) to make payments for personal
services
32
<PAGE>
and/or the maintenance of shareholder accounts. Proceeds from the service fee
will be used by the Distributor to compensate securities dealers and others
selling shares of the Fund for rendering service to shareholders on an ongoing
basis. Such amounts are based on the net asset value of shares of the Fund held
by such dealers as nominee for their customers or which are owned directly by
such customers for so long as such shares are outstanding and the Distribution
Plan remains in effect with respect to the Fund. Any amounts received by the
Distributor and not so allocated may be applied by the Distributor as
reimbursement for expenses incurred in connection with the servicing of investor
accounts. The distribution and servicing expenses of a particular class will be
borne solely by that class.
During the period October 4, 1993 (commencement of operations) through
September 30, 1994, 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: Chart looks messed up on monitor but it is
correct.
Class A Class B Class D
------- ------- -------
Advertising $ 0 $ 0 $ 0
Printing and mailing of
prospectuses to other
than current shareholders 0 0 0
Compensation to dealers 23,744 140,521 53,337
Compensation to sales personnel 0 0 0
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses 0 0 0
-------- -------- --------
Total fees $ 23,744 $140,521 $53,337
======== ======== =======
The Distributor may have also used additional resources of its own for further
expenses on behalf of the Fund.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution
33
<PAGE>
Plan, the Fund will attempt to make alternative arrangements for such services
for shareholders who acquired shares through such institutions.
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") of the Class A,
Class B, Class C and Class D 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. Shares of the Fund had no class designations until February
1, 1994, when designations were assigned based on the pricing and Rule 12b-1
fees applicable to shares sold thereafter.
The performance data reflects Rule 12b-1 fees and sales charges as set
forth below:
Rule 12b-1 Fees Sales Charges
----------------------------- -----------------------------------
Current
Class Amount Period
- ----- ------- ------
A 0.25% February 1, 1994 to present; fee will Maximum 4.5% sales
reduce performance for periods charge reflected
after February 1, 1994
B 1.00% February 1, 1994 to present; fee will 1- and 5-year periods
reduce performance for periods reflect a 5% and a
after February 1, 1994 2% contingent deferred
sales charge, respectively
C 0.00% Since commencement of None
operations to present
D 1.00% February 1, 1994 to present; fee 1-year period reflects
will reduce performance for a 1% contingent deferred
periods after February 1, 1994 sales charge
The Fund's performance is shown below, and where noted, reflects the
voluntary measures by the Fund's affiliates to reduce fees or expenses relating
to the Fund; see "Accrued Expenses" later in this section.
34
<PAGE>
Total Return
The total returns ("standard total return") of each class of the Fund's
shares were as follows:
October 4, 1993
(Commencement of Operations) to
September 30, 1994
SEC Total Return Aggregate Total Return
(Annualized) (Not Annualized)
---------------- ----------------------
With Subsidy Without Subsidy With Subsidy Without Subsidy
------------ --------------- ------------ ---------------
Class A - 14.48% - 15.56% -14.40% - 15.47%
Class B - 15.33% - 16.40% - 15.25% - 16.31%
Class C - 10.03% - 11.17% - 9.95% - 11.08%
Class D - 11.76% - 12.88% - 11.68% - 12.79%
The figures shown above as "SEC Total Return" result from the
"annualization" of actual returns for the approximately 361-day period involved;
annualization presumes that the performance for the 361 days continues for a
full year.
Standard total return is computed separately for each class of shares by
determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value in accordance with the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the
designated period assuming a hypothetical $1,000 payment
made at the beginning of the designated period
35
<PAGE>
The calculation is based on the further assumptions that the maximum
initial or contingent deferred sales charge applicable to the investment is
deducted, and that all dividends and distributions by the Fund are reinvested at
net asset value on the reinvestment dates during the periods. All accrued
expenses are also taken into account as described later herein.
Accrued Expenses
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return 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 will be lower.
Nonstandardized Total Return
The Fund may provide the above described standard total return results for
Class A, Class B, Class C and Class D shares for periods which end no earlier
than the most recent calendar quarter end and which begin twelve months before
and at the time of commencement of the Fund's operations. In addition, the Fund
may provide nonstandardized total return results for differing periods, such as
for the most recent six months. Such nonstandardized total return is computed as
otherwise described under "Total Return" except the result may or may not be
annualized, and as noted any applicable sales charge may not be taken into
account and therefore not deducted from the hypothetical initial payment of
$1,000 or ending value. For example, the nonstandardized total returns for the
six months ended September 30, 1994 without taking sales charges into account,
were follows:
With Subsidy Without Subsidy
------------ ---------------
Class A -5.31% - 5.48%
Class B - 5.54% - 5.71%
Class C -5.08% -5.30%
Class D -5.65% -5.82%
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
36
<PAGE>
on the Fund's investments. State Street Bank and Trust Company is not an
affiliate of the Investment Manager or its affiliates.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as the Trust's independent accountants, providing professional
services including (1) an audit of the annual financial statements, (2)
assistance and consultation in connection with Securities and Exchange
Commission filings and (3) review of the annual income tax returns filed on
behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a semiannual
basis, other supplementary financial reports may be made available from time to
time and holders of record may request a copy of a current supplementary report,
if any, by calling State Street Research Shareholder Services.
The following financial statements are for the period October 4, 1993
(commencement of operations) through September 30, 1994.
19838.c4
2/3/95 10:34 am
37
<PAGE>
State Street Research Small Capitalization Growth Fund
Investment Portfolio
September 30, 1994
<TABLE>
<CAPTION>
Shares Value (Note 1)
<S> <C> <C> <C>
Common Stocks 96.2%
Basic Industries 5.2%
Chemical 14,000 P.T. Tripolyta Indonesia ADS* $ 379,750
0.6% --------------
Electrical 83,600 Union Switch & Signal, Inc.* 1,463,000
Equipment --------------
2.1%
Forest Product 21,500 Caraustar Industries, Inc. 444,782
0.7%
Machinery 35,300 Greenfield Industries, Inc. 847,200
1.2% --------------
Railroad 45,100 MK Rail Corp. 439,725
--------------
0.6% Total Basic Industries 3,574,457
--------------
Consumer Cyclical 38.6%
Airline 31,100 Air Express International Corp. 859,138
1.3% --------------
Automotive 76,600 Lear Seating Corp.* 1,407,525
2.1% --------------
Hotel & 61,800 Au Bon Pain Company, Inc.* 1,031,287
Restaurant 42,100 Boomtown, Inc.* 705,175
11.6% 52,800 Fresh Choice, Inc.* 1,056,000
48,800 IHOP Corp.* 1,354,200
59,950 Outback Steakhouse, Inc.* 1,701,081
42,600 Primadonna Resorts, Inc.* 1,309,950
58,000 Station Casinos, Inc.* 783,000
--------------
7,940,693
--------------
Recreation 13,800 Cobra Golf, Inc.* 764,175
13.5% 28,000 Broadcasting Partners, Inc. Cl. A* 379,750
21,800 GTECH Holdings Corp.* 438,725
40,750 Hollywood Entertainment Corp.* 1,141,000
53,000 Hollywood Park, Inc. 781,750
41,350 Infinity Broadcasting Corp. Cl. A* 1,261,175
55,500 International Game Technology Inc. 1,144,687
78,000 Radica Games Ltd.* 438,750
60,000 Renaissance Communications Corp.* 1,612,500
23,100 Variflex, Inc.* 502,425
56,900 Westcott Communications, Inc.* 778,819
--------------
9,243,756
--------------
The accompanying notes are an integral part of the financial statements.
1
<PAGE>
Retail Trade 62,500 Bombay Co., Inc.* $ 828,125
6.6% 22,800 Ethan Allen Interiors, Inc.* 515,850
56,900 Jos. A. Bank Clothiers, Inc.* 384,075
82,600 SteinMart, Inc.* 1,244,163
19,300 Tiffany & Co. 714,100
18,200 Tractor Supply Co.* 508,462
22,600 Whole Foods Market, Inc.* 339,000
--------------
4,533,775
--------------
Textile & 63,900 Authentic Fitness Corp.* 990,450
Apparel 40,500 Warnaco Group, Inc.* 1,412,438
3.5% --------------
2,402,888
--------------
Total Consumer Cyclical 26,387,775
--------------
Consumer Staple 36.0%
Business 47,500 Digital Biometrics, Inc.* 344,375
Service 37,600 Franklin Quest Co.* 1,410,000
13.0% 60,200 Healthcare Compare Corp.* 1,734,512
31,300 Homedco Group, Inc.* 1,095,500
24,400 Norand Corp.* 902,800
74,500 Pyxis Corp.* 1,825,250
52,000 Viking Office Products, Inc.* 1,573,000
--------------
8,885,437
--------------
Drug 61,100 Arris Pharmaceutical Corp.* 336,050
3.9% 54,000 Cyto Therapeutics, Inc.* 371,250
1,900 Grupo Casa Autrey S.A. de. C.V. ADS 61,988
14,100 Nature's Bounty, Inc.* 148,050
49,200 Perrigo Company, Inc.* 664,200
60,400 Rexall Sundown, Inc.* 577,575
45,100 Vical, Inc.* 462,275
--------------
2,621,388
--------------
Hospital Supply 30,100 American Medical Response, Inc.* 756,262
19.1% 6,200 American White Cross, Inc.* 27,125
35,800 Coastal Healthcare Group, Inc.* 1,172,450
88,700 Community Health Systems, Inc.* 2,306,200
37,600 Coventry Corp.* 883,600
87,300 Haemonetics Corp.* 1,582,313
45,500 Mariner Health Group, Inc.* 952,656
14,700 Medisense, Inc.* 259,088
25,300 Omnicare, Inc. 1,015,162
21,700 Quantum Health Resources, Inc.* 915,469
14,100 Quorum Health Group, Inc.* 267,900
33,700 Rotech Medical Corp.* 775,100
24,900 Sunrise Medical, Inc.* 647,400
2
<PAGE>
Hospital Supply 20,100 United Wisconsin Services, Inc. $ 713,550
(cont'd) 17,600 Vencor, Inc.* 800,800
--------------
13,075,075
--------------
Total Consumer Staple 24,581,900
--------------
Energy 2.2%
Oil 127,700 Ranger Oil Ltd. 798,125
1.2% --------------
Oil Service 46,500 Nowsco Well Service Ltd. 720,750
1.0% --------------
Total Energy 1,518,875
--------------
Finance 3.1%
Insurance 43,900 Mutual Risk Management Ltd. 1,130,425
3.1% 27,800 United Companies Financial Corp. 966,050
--------------
2,096,475
--------------
Total Finance 2,096,475
--------------
Science & Technology 8.3%
Computer 39,800 Cognex Corp.* 731,325
Software 19,700 Dataware Technologies, Inc.* 261,025
& Service 1,700 IPC Information Systems, Inc.* 25,606
3.0% 44,200 QuickResponse Services, Inc.* 685,100
25,500 Wavefront Technologies, Inc.* 331,500
--------------
2,034,556
--------------
Electronic 3,700 Alliance Semiconductor Corp.* 84,175
5.3% 9,900 Aseco Corp.* 81,675
23,700 Electroglas, Inc.* 1,179,075
58,300 Kulicke & Soffa Industries, Inc.* 947,375
7,100 Zebra Technologies Corp. Cl. A* 260,925
32,200 Zilog, Inc.* 1,086,750
--------------
3,639,975
--------------
Total Science & Technology 5,674,531
--------------
Utility 2.8%
Telephone 35,000 ALC Communications Corp.* 1,146,250
2.8% 87,754 IDB Communications Group, Inc.* 789,786
--------------
1,936,036
--------------
Total Utility 1,936,036
--------------
Total Common Stocks (Cost $66,274,443) 65,770,049
--------------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Principal Amount Maturity Date Value (Note 1)
<S> <C> <C> <C>
Commercial Paper 13.7%
$ 492,000 American Express Credit Corp., 4.75% 10/05/1994 $ 492,000
260,000 American General Finance Corp., 4.45% 10/05/1994 260,000
310,000 Beneficial Corp., 4.72% 10/04/1994 310,000
2,000,000 Commercial Credit Co., 4.72% 10/04/1994 2,000,000
343,000 Ford Motor Credit Co., 4.75% 10/05/1994 343,000
2,436,000 Ford Motor Credit Co., 4.83% 10/11/1994 2,436,000
937,000 General Electric Capital Corp., 4.62% 10/04/1994 937,000
2,590,000 Norwest Financial Inc., 4.90% 10/18/1994 2,590,000
-----------------
Total Commercial Paper (Cost $9,368,000) 9,368,000
-----------------
Total Investments (Cost $75,642,443)--109.9% 75,138,049
Cash and Other Assets, Less Liabilities--(9.9)% (6,799,577)
-----------------
Net Assets--100.0% $68,338,472
=================
Federal Income Tax Information:
At September 30, 1994, the net unrealized
depreciation of investments based on
cost for Federal income tax purposes
of $75,972,012 was as follows:
Aggregate gross unrealized appreciation
for all investments in which there is an
excess of value over tax cost $ 4,531,907
Aggregate gross unrealized depreciation
for all investments in which there is an
excess of tax cost over value (5,365,870)
-----------------
$ (833,963)
=================
</TABLE>
* Nonincome-producing securities
ADS stands for American Depositary Share, representing ownership of foreign
securities.
4
<PAGE>
State Street Research Small Capitalization Growth Fund
Statement of Assets and Liabilities
September 30, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Assets Investments, at value (Cost $75,642,443) (Note 1) $75,138,049
Cash 899
Receivable for securities sold 784,500
Receivable for fund shares sold 501,950
Receivable from Distributor (Note 3) 126,145
Dividends and interest receivable 17,659
Deferred organization costs and other assets (Note 1) 58,738
------------
76,627,940
Liabilities Payable for securities purchased $8,083,348
Accrued management fee (Note 2) 42,388
Payable for fund shares redeemed 40,776
Accrued transfer agent and shareholder services 37,314
Accrued distribution fee (Note 5) 36,994
Accrued trustees' fees (Note 2) 4,201
Other accrued expenses 44,447 8,289,468
--------- ------------
Net Assets $68,338,472
============
Net Assets consist of:
Unrealized depreciation of investments $ (504,394)
Accumulated net realized loss (2,795,065)
Shares of beneficial interest (Note 6) 71,637,931
------------
$68,338,472
============
Net Asset Value and redemption price per share of Class A shares
($21,985,991 / 2,567,753 shares of beneficial interest) $8.56
======
Maximum Offering Price per share of Class A shares ($8.56 / .955) $8.96
======
Net Asset Value and offering price per share of Class B shares
($29,287,476 / 3,437,554 shares of beneficial interest)* 8.52
======
Net Asset Value, offering price and redemption price per share of
Class C shares ($7,032,657 / 817,932 shares of beneficial interest) $8.60
======
Net Asset Value and offering price per share of Class D shares
($10,032,348 / 1,177,615 shares of beneficial interest)* $8.52
======
</TABLE>
*Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
5
<PAGE>
State Street Research Small Capitalization Growth Fund
Statement of Operations
For the period October 4, 1993
(commencement of operations) to September 30, 1994
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Investment Interest $ 219,499
Income Dividends, net of foreign taxes of $684 33,288
------------
252,787
Expenses Management fee (Note 2) $ 267,184
Custodian fee 97,489
Transfer agent and shareholder services 85,121
Legal fees 41,526
Distribution fee--Class A (Note 5) 23,744
Distribution fee--Class B (Note 5) 140,521
Distribution fee--Class D (Note 5) 53,337
Reports to shareholders 22,125
Registration fees 21,372
Audit fee 20,213
Trustees' fees (Note 2) 10,851
Amortization of organization costs (Note 1) 5,959
Miscellaneous 6,378
--------
795,820
Expenses borne by the Distributor (Note 3) (186,448) 609,372
-------- ------------
Net investment loss (356,585)
------------
Realized and Net realized loss on investments (Notes 1 and 4) (2,795,065)
Unrealized Net unrealized depreciation of investments (504,394)
Loss on ------------
Investments Net loss on investments (3,299,459)
------------
Net decrease in net assets resulting from operations $(3,656,044)
============
</TABLE>
6
<PAGE>
State Street Research Small Capitalization Growth Fund
Statement of Changes in Net Assets
For the period October 4, 1993
(commencement of operations) to September 30, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
Increase Operations:
(Decrease) Net investment loss $ (356,585)
in Net Assets Net realized loss on investments* (2,795,065)
Net unrealized depreciation of investments (504,394)
------------
Net decrease resulting from operations (3,656,044)
------------
Net increase from fund share transactions (Note 6) 71,994,516
------------
Total increase in net assets 68,338,472
Net Assets Beginning of period --
------------
End of period $68,338,472
============
*Net realized loss for Federal income tax $ (10,835)
purposes (Note 1) ============
</TABLE>
7
<PAGE>
State Street Research Small Capitalization Growth Fund
Notes to Financial Statements
September 30, 1994
Note 1
State Street Research Small Capitalization Growth Fund (the "Fund"), is a
series of State Street Capital Trust (the "Trust"), which is a Massachusetts
business trust registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. The Trust
was organized in November, 1988 as a successor to State Street Capital Fund,
Inc., a Massachusetts corporation. The Trust consists presently of two
separate funds: State Street Research Small Capitalization Growth Fund and
State Street Research Capital Fund.
The Fund offers four classes of shares. Shares of the Fund had no class
designations until February 1, 1994. Class A shares are subject to an initial
sales charge of up to 4.50% and pay an annual 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 only offered to certain employee benefit plans and large
institutions. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro-rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant policies are consistently followed by the Fund in
preparing its financial statements, and such policies are in conformity with
generally accepted accounting principles for investment companies.
A. Investment 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 certain
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 identified cost of
securities delivered for both financial reporting and Federal income tax
purposes.
B. Federal Income Taxes
No provision for Federal income taxes is necessary since the Fund intends to
qualify under Subchapter M of the Internal Revenue Code and its policy is to
distribute all of its taxable income, including net realized capital gains,
if any, within the prescribed time periods. At September 30, 1994, the Fund
had a capital loss carryforward of $10,835 available, to the extent provided
in regulations, to offset future capital gains, if any, which expires on
September 30, 2002.
In order to meet certain excise tax distribution requirements under Section
4982 of the Internal Revenue Code, the Fund is required to
8
<PAGE>
measure and distribute annually, if necessary, net capital gains realized
during a twelve-month period ending October 31. In this connection, the Fund
is permitted to defer into its next fiscal year any net capital losses
incurred between each November 1 and the end of its fiscal year. From
November 1, 1993 through September 30, 1994, the Fund incurred net capital
losses of approximately $2,455,000 and intends to defer and treat such losses
as arising in the fiscal year ending September 30, 1995.
C. Dividends
Dividends from net investment income, if any, are declared and paid or
reinvested annually. Net realized capital gains, if any, are distributed
annually, unless additional distributions are required for compliance with
applicable tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
D. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and are being amortized under the straight-line method over a
period of five years.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly-owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser
earns monthly fees equal to 1/16 of 1% (3/4 of 1% on an annual basis) of
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. The fees of the Trustees not
currently affiliated with the Adviser amounted to $10,851 during the period
October 4, 1993 (commencement of operations) to September 30, 1994.
Note 3
State Street Research Investment Services, Inc., the Trust's principal
underwriter (the "Distributor"), an indirect wholly-owned subsidiary of
Metropolitan, and its affiliates may from time to time and in varying amounts
voluntarily assume some portion of fees or expenses relating to the Fund.
During the period October 4, 1993 (commencement of operations) to September
30, 1994, the amount of such expenses assumed by the Distributor and its
affiliates was $186,448.
Note 4
For the period October 4, 1993 (commencement of operations) to September 30,
1994, exclusive of short-term investments and U.S. Government obligations,
purchases and sales of securities aggregated $95,071,999 and $26,002,491,
respectively.
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940. Under the Plan, the Fund
pays annual service fees to the Distributor at a rate of 0.25% of average
daily net assets for Class A, Class B and Class D shares. In addition, the
Fund pays annual distribution fees of 0.75% of average daily net assets for
Class B and Class D shares. The Distributor uses such payments for personal
services and/or the maintenance of shareholder accounts, to reimburse
securities dealers for distribution and marketing services, to furnish
ongoing assistance to investors and to defray a portion of its distribution
and marketing expenses. For the period February 1, 1994 (commencement of
9
<PAGE>
share class designations) to September 30, 1994, fees pursuant to such plan
amounted to $23,744, $140,521 and $53,337 for Class A, Class B and Class D,
respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc., a
wholly-owned subsidiary of Metropolitan, earned initial sales charges
aggregating $62,866 and $139,035, respectively, on sales of Class A shares of
the Fund during the period February 1, 1994 (commencement of share class
designations) to September 30, 1994, and that MetLife Securities, Inc. earned
commissions aggregating $160,938 and $234 on sales of Class B and Class D
shares, respectively, and that the Distributor collected contingent deferred
sales charges aggregating $1,331 on redemptions of Class B shares during the
same period.
Note 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At September 30, 1994,
Metropolitan held of record 120,500 Class C shares of the Fund.
Share transactions were as follows:
February 1, 1994
(Commencement of
Share Class Designations)
to September 30, 1994
-----------------------------
Class A Shares Amount
- -------------------------------------------------------
Shares sold 2,793,089 $24,869,158
Shares redeemed (225,336) (1,967,087)
------------ --------------
Net increase 2,567,753 $22,902,071
============ ==============
Class B Shares Amount
- -------------------------------------------------------
Shares sold 3,606,689 $32,666,242
Shares redeemed (169,135) (1,476,529)
------------ --------------
Net increase 3,437,554 $31,189,713
============ ==============
October 4, 1993
(Commencement of
Operations) to
September 30, 1994
-----------------------------
Class C Shares Amount
- -------------------------------------------------------
Shares sold 1,914,962 $ 17,425,844
Shares redeemed (1,097,030) (10,337,651)
------------ --------------
Net increase 817,932 $ 7,088,193
============ ==============
February 1, 1994
(Commencement of
Share Class Designations)
to September 30, 1994
-----------------------------
Class D Shares Amount
- -------------------------------------------------------
Shares sold 1,290,249 $11,826,451
Shares redeemed (112,634) (1,011,912)
------------ --------------
Net increase 1,177,615 $10,814,539
============ ==============
10
<PAGE>
State Street Research Small Capitalization Growth Fund
Financial Highlights
For a share outstanding throughout each period
<TABLE>
<CAPTION>
Class A Class B Class C Class D
-------- -------- -------- --------
1994** 1994** 1994*** 1994**
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $9.45 $9.45 $9.55 $9.45
Net investment loss* (.02) (.06) (.06) (.06)
Net realized and unrealized loss on investments (.87) (.87) (.89) (.87)
-------- -------- -------- ----------
Net asset value, end of period $8.56 $8.52 $8.60 $8.52
======== ======== ======== ==========
Total return+ (9.42)% (9.84)% (9.95)% (9.84)%
Net assets at end of period (000s) $21,986 $29,287 $7,033 $10,032
Ratio of operating expenses to average net assets* 1.35%++ 2.10%++ 1.10%++ 2.10%++
Ratio of net investment loss to average net assets* (0.58)%++ (1.32)%++ (0.68)%++ (1.32)%++
Portfolio turnover rate 83.61% 83.61% 83.61% 83.61%
* Reflects voluntary assumption of fees or expenses per share in each $.02 $.02 $.04 $.02
period. (Note 3)
</TABLE>
++ Annualized
+ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges.
** February 1, 1994 (commencement of share class designations) to September
30, 1994.
*** October 4, 1993 (commencement of operations) to September 30, 1994.
11
<PAGE>
Report of Independent Accountants
To the Trustees of State Street Capital Trust and Shareholders of
State Street Research Small Capitalization Growth Fund:
We have audited the accompanying statement of assets and liabilities of State
Street Research Small Capitalization Growth Fund, including the schedule of
portfolio investments, as of September 30, 1994, and the related statements
of operations and changes in net assets for the period October 4, 1993
(commencement of operations) to September 30, 1994 and the financial
highlights for the period February 1, 1994 (commencement of share class
designations) to September 30, 1994 for Class A, Class B and Class D and for
the period October 4, 1993 (commencement of operations) to September 30, 1994
for Class C. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of September 30, 1994, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
State Street Research Small Capitalization Growth Fund as of September 30,
1994, the results of its operations and changes in its net assets for the
period October 4, 1993 (commencement of operations) to September 30, 1994,
and the financial highlights for the period February 1, 1994 (commencement of
share class designations) to September 30, 1994 for Class A, Class B and
Class D and for the period October 4, 1993 (commencement of operations) to
September 30, 1994 for Class C, in conformity with generally accepted
accounting principles.
[SIGNATURE of Coopers & Lybrand L.L.P.]
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 4, 1994
12
<PAGE>
Management's Discussion of Fund Performance
The Fund's performance has suffered because of poor performance in the
overall small-capitalization stock market. Rising interest rates have hurt
stock prices, and made investors more risk averse. Small-cap stock prices did
not begin to recover until August 1994, led by technology and health care
stocks. In addition, the Fund suffered from some poor-performing individual
issues, independent of market difficulties.
The Fund has focused on stocks offering strong earnings growth potential,
particularly in health care. Recent purchases included stocks in the
technology, retail, recreation, and restaurant sectors. Falling prices
allowed us to add positions in stocks we liked at more attractive prices.
Comparison Of Change In Value Of A $10,000 Investment In Small Capitalization
Growth Fund And The S&P 500
Class A Shares
Average Annual Total Return
Life of Fund
-14.40%/-15.47%
Small Capitalization
Growth Fund S&P 500
-------------------- -------
10/04/93 $10,000 $10,000
9/30/94 $ 8,560 $10,368
Class B Shares
Average Annual Total Return
Life of Fund
-15.25%/-16.31%
Small Capitalization
Growth Fund S&P 500
-------------------- -------
10/04/93 $10,000 $10,000
9/30/94 $ 8,475 $10,368
Class C Shares
Average Annual Total Return
Life of Fund
-9.95%/-11.08%
Small Capitalization
Growth Fund S&P 500
-------------------- -------
10/04/93 $10,000 $10,000
9/30/94 $ 9,005 $10,368
Class D Shares
Average Annual Total Return
Life of Fund
-11.68%/-12.79%
Small Capitalization
Growth Fund S&P 500
-------------------- -------
10/04/93 $10,000 $10,000
9/30/94 $ 8,832 $10,368
Performance results for the Fund are increased by the voluntary reduction of
fees and expenses relating to the Fund. The first figure reflects expense
reduction; the second shows what results would have been without
subsidization. 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. Shares of the Fund had no class
designations until February 1, 1994, when designations were assigned based on
the pricing and 12b-1 fees applicable to shares sold thereafter. Performance
data for a specified class include periods prior to the adoption of class
designations. "A" share returns for each of the periods reflect the maximum
4.5% sales charge. Performance prior to February 1, 1994 does not reflect
annual 12b-1 fees of .25%. "B" share return reflects a 5% contingent deferred
sales charge. "C" shares, offered without a sales charge, are available only
to certain employee benefit plans and large institutions. "D" share return
reflects a 1% contingent deferred sales charge. Performance for "B" and "D"
shares prior to February 1, 1994, does not reflect annual 12b-1 fees of 1%,
which will reduce subsequent performance.
13
