Supplement No. 3 dated October 23, 1995
(Supplanting Supplement No. 2 dated July 17, 1995)
to
Prospectus dated February 1, 1995
for
STATE STREET RESEARCH SMALL CAPITALIZATION VALUE FUND
a series of State Street Research Capital Trust
Share Classes Available
At the present time, only Class A shares are generally available for
purchase.
For information on the availability of other classes of shares, contact the
Distributor.
Financial Highlights (Unaudited)
This information should be read in conjunction with the unaudited
financial statements and notes thereto included in the Statement of Additional
Information.
For a share outstanding from February 13, 1995 (commencement of
operations) to September 30, 1995:
Class A Class B Class C Class D
------- ------- ------- -------
Net asset value,
beginning of period $ 9.55 $ 9.55 $ 9.55 $ 9.55
Net investment income* .07 .02 .09 .02
Net unrealized gain
on investments 1.51 1.51 1.51 1.51
------ ------ ------ ------
Net asset value,
end of period $11.13 $11.08 $11.15 $11.08
====== ====== ====== ======
Total return+ 16.54% 16.02% 16.75% 16.02%
Net assets at end
of period (000s) $5,782 $116 $117 $116
Ratio of operating
expenses to average
net assets* 1.45%++ 2.20%++ 1.20%++ 2.20%++
Ratio of net investment
income to average
net assets* 1.05%++ 0.32%++ 1.32%++ 0.32%++
Portfolio turnover rate 47.34% 47.34% 47.34% 47.34%
__________________
* Reflects voluntary
assumption of fees
or expenses per
share in each period $0.15 $0.15 $0.15 $0.15
+ Represents aggregate return for the period without annualization and
does not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
++Annualized.
Table of Expenses
The last sentence of the second paragraph under the caption "Table of Expenses"
at page 5 of the Prospectus is hereby revised as follows:
"For the period February 13, 1995 (commencement of operations) through September
30, 1995, Total Fund Operating expenses as a percentage of average net assets of
Class A, Class B, Class C and Class D shares of the Fund would have been 3.69%,
4.44%, 3.44% and 4.44%, respectively, in the absence of the voluntary assumption
of fees or expenses by the Distributor and its affiliates, which amounted to
2.24%, 2.24%, 2.24% and 2.24%, respectively."
Minimum Investment
The section under the caption "Purchase of Shares -- Minimum Investment"
at page 14 of the Prospectus is 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 19 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
26 of the Prospectus, the first paragraph is 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.
To cover the cost of additional compliance administration, a $20 fee will
be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws".
Investment Plans
The section captioned "Shareholder Services -- Investment Plans" at page 30
of the Prospectus is revised in its entirety to read as follows:
"The Investamatic Check Program is available to Class A, Class B and
Class D shareholders. Under this Program, shareholders may make regular
investments by authorizing withdrawals from their bank accounts each month
or quarter on the Application available from Shareholder Services.
The Distributor also offers IRAs and tax-sheltered retirement plans,
including prototype and other employee benefit plans for employees, sole
proprietors, partnerships and corporations. Details of these investment
plans and their availability may be obtained from securities dealers
or from Shareholder Services".
<PAGE>
State Street Research
Small Capitalization Value Fund
Prospectus
February 1, 1995
The investment objective of State Street Research Small Capitalization
Value Fund (the "Fund") is to provide high total return consisting principally
of capital appreciation. In seeking to achieve its investment objective, the
Fund invests primarily in the equity securities of small capitalization
companies which are trading at prices believed to be below the true values of
such securities. For further information, see "The Fund's Investments."
State Street Research & Management Company (the "Investment Manager")
serves as investment adviser to the Fund. As of December 31, 1994, the
Investment Manager had assets of approximately $23.2 billion under management.
State Street Research Investment Services, Inc. serves as distributor (the
"Distributor") for the Fund.
There are risks in any investment program, including the risk of changing
economic and market conditions, and there is no assurance that the Fund will
achieve its investment objective. The net asset value of the Fund's shares
fluctuates as market conditions change.
Because of the Fund's investment policies, the Fund is subject to
above-average risks; it may invest substantial amounts in foreign securities and
special situation companies and have a high portfolio turnover rate. The Fund
generally is designed for investors who want an aggressive investment and can
tolerate volatility and possible losses. An investment in the Fund should be
part of a balanced investment program which includes more conservative
investments. For further information, see "The Fund's Investments -- Other
Investments and Risk Considerations." In addition, the Fund may suspend the
offering of its shares at any time because of the limited availability of
investments which meet the Fund's investment parameters.
This Prospectus sets forth concisely the information a prospective
investor ought to know about the Fund before investing. It should be retained
for future reference. A Statement of Additional Information about the Fund dated
February 1, 1995 has been filed with the Securities and Exchange Commission and
is incorporated by reference into this Prospectus. It is available at no charge
upon request to the Fund at the address indicated on the cover or by calling
1-800-562-0032.
The Fund is a diversified series of State Street Research Capital Trust
(the "Trust"), an open-end management investment company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
CONTROL NUMBER: 2146-950220(0396)SSR-LD SCV-175E-295IBS
<PAGE>
Shareholders may have their shares redeemed directly by the Fund at net
asset value plus the applicable contingent deferred sales charge, if any;
redemptions processed through securities dealers may be subject to processing
charges.
Table of Contents Page
Table of Expenses ...................................................... 3
The Fund's Investments ................................................. 5
Limiting Investment Risk ............................................... 10
Purchase of Shares ..................................................... 11
Redemption of Shares ................................................... 24
Shareholder Services ................................................... 27
The Fund and its Shares ................................................ 33
Management of the Fund ................................................. 35
Dividends and Distributions; Taxes ..................................... 36
Calculation of Performance Data ........................................ 38
The Fund offers four classes of shares which may be purchased at the next
determined net asset value per share plus, in the case of all classes except
Class C shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a deferred
basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5%
and (ii) an annual service fee of 0.25% of the average daily net asset value of
the Class A shares.
Class B shares are subject (i) to a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made within
five years of purchase and (ii) annual distribution and service fees of 1% of
the average daily net asset value of such shares. Class B shares automatically
convert into Class A shares (which pay lower ongoing expenses) at the end of
eight years after purchase. No contingent deferred sales charge applies after
the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and
large institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1%
if redeemed within one year following purchase and (ii) annual distribution and
service fees of 1% of the average daily net asset value of such shares.
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Table of Expenses
<TABLE>
<CAPTION>
Class A Class B Class C Class D
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses(1)
Maximum Sales Charge Imposed on Purchases (as
percentage of offering price) ............... 4.5% None None None
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering price) None None None None
Maximum Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, as applicable) ......... None(2) 5% None 1%
Redemption Fees (as a percentage of amount
redeemed, if applicable) .................... None None None None
Exchange Fees ................................. None None None None
</TABLE>
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
annually through the fifth year, and no contingent deferred sales charge
is imposed after the fifth year. Class D shares are subject to a 1%
contingent deferred sales charge on any portion of the purchase redeemed
within one year of the sale. Long-term investors in a class of shares with
a distribution fee may, over a period of years, pay more than the economic
equivalent of the maximum sales charge permissible under applicable rules.
See "Purchase of Shares."
(2) Purchases of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption.
See "Purchase of Shares."
3
<PAGE>
Class A Class B Class C Class D
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees ............... 0.85% 0.85% 0.85% 0.85%
12b-1 Fees .................... 0.25% 1.00% None 1.00%
Other Expenses ................ 1.05% 1.05% 1.05% 1.05%
Less Voluntary Reduction ..... (0.70%) (0.70%) (0.70%) (0.70%)
------- ------- ------- -------
Total Fund Operating Expenses
(after voluntary reduction) 1.45% 2.20% 1.20% 2.20%
======= ======= ======= =======
Example: 1 Year 3 Years
You would pay the following expenses on a $1,000 investment including, for Class
A shares, the maximum applicable initial sales charge and assuming (1) 5%
annual return and (2) redemption of the entire investment at the end of each
time period:
Class A shares .................................. $59 $89
Class B shares .................................. $72 $99
Class C shares .................................. $12 $38
Class D shares .................................. $32 $69
You would pay the following expenses on the same investment, assuming no
redemption:
Class B shares .................................. $22 $69
Class D shares .................................. $22 $69
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than shown.
The purpose of the table above is to assist the investor in understanding
the various costs and expenses that an investor will bear directly or
indirectly. Because the Fund is newly organized, the percentage expense levels
shown in the table as "Other Expenses" are based on estimated amounts for the
current year. Actual expense levels for the current fiscal year and future years
may vary from the amounts shown. The table does not reflect charges for optional
services elected by certain shareholders, such as the $7.50 fee for remittance
of redemption proceeds by wire. For further information on sales charges, see
"Purchase of Shares -- Alternative Purchase Program"; for further information on
management fees, see "Management of the Fund"; and for further information on
12b-1 fees, see "Purchase of Shares -- Distribution Plan."
4
<PAGE>
The Fund has been advised that the Distributor and its affiliates may from
time to time and in varying amounts voluntarily assume some portion of fees or
expenses relating to the Fund. The Fund presently expects such assistance to be
provided for the next 12 months or until the Fund's net assets reach $100
million, whichever first occurs. However, the Fund has not received any firm
commitment that such assistance will in fact be provided. For the current fiscal
year, Total Fund Operating Expenses for the Fund are estimated to be 2.15%,
2.90%, 1.90% and 2.90% for Class A, Class B, Class C and Class D shares,
respectively, in the absence of the voluntary assumption of expenses by the
Distributor and its affiliates.
The Fund's Investments
The Fund's investment objective is to provide high total return consisting
principally of capital appreciation. The investment objective is a fundamental
policy that may not be changed without approval of the Fund's shareholders.
In seeking to achieve its investment objective, the Fund invests at least
65% of its total assets under normal circumstances in the equity securities of
small capitalization companies which are trading at prices believed by the
Investment Manager to be below the true values of such securities. A company's
market capitalization is the total market value of its publicly traded equity
securities. The Fund currently invests in companies with market capitalizations
of up to $1 billion, although this figure may fluctuate over time because of
market conditions, inflation, etc. While a company's market capitalization may
be small at the time the Fund first invests in the company, the Fund may
continue to hold and acquire shares of a company after its market capitalization
increases. The definition of a "small capitalization company" may be revised by
the Investment Manager from time to time.
In selecting investments, the Investment Manager considers a variety of
factors, any one or more of which may be determinative. These include a
company's expected growth in earnings, relative financial condition and cash
flow, competitive position, management and business strategy, overall potential
as an enterprise, entrepreneurial character, and new or innovative products,
services or processes. In assessing a security's value in comparison to its
current price the Investment Manager analyzes such measurements as price to
earnings ratio, price to cash flow ratio, price to book value ratio, price to
replacement cost ratio and price to private market value ratio.
The equity securities in which the Fund will invest consist of common and
preferred stocks, convertible securities (e.g., preferred stock, bonds and
debentures) and warrants. Preferred stocks are stocks which have preferences,
such as payment of dividends, over common stocks; debentures are debt securities
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<PAGE>
subject to protective covenants such as the maintenance of minimum financial
conditions; convertible securities are securities which may be converted into
different securities, such as a preferred stock being converted into a common
stock; and warrants are rights to acquire other securities. The Fund anticipates
that more than half of the total value, at the time of investment, of the equity
securities held by the Fund will be included on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") system or listed on a major
securities exchange.
Under normal circumstances, the Fund expects to be fully invested in
equity securities as described above. However, the Fund may, consistent with its
investment objective, also invest at any time up to 35% of its total assets in
other equity and debt securities, such as those issued by larger capitalization,
more mature, or special situation companies, and U.S. Government securities. A
special situation company is one which, because of unique circumstances such as,
for example, a particular business niche it fills, is an attractive investment
even though it is not a small capitalization issuer. The Fund will generally
purchase investment grade debt securities (i.e., rated at the time of purchase
AAA, AA, A or BBB by Standard & Poor's Corporation ("S&P") or Aaa, Aa, A or Baa
by Moody's Investors Service, Inc. ("Moody's")), or securities that are not
rated but considered by the Investment Manager to be of equivalent investment
quality; bonds rated Baa by Moody's, or equivalent, may have speculative
characteristics. The Fund may, however, invest up to 5% of its total assets in
debt securities rated as low as C by S&P and Moody's. The debt securities, which
may have differing maturities and fixed or floating interest rates, generally
will be U.S. Government securities or issued by larger capitalization issuers.
For more information on debt ratings and the risks of lower rated debt
securities, see the Statement of Additional Information.
Because the Fund invests primarily in small capitalization companies, an
investment in the Fund involves greater than average risks and the value of the
Fund's shares may fluctuate more widely than the value of shares of a fund that
invests in larger, more established companies. Securities held by the Fund,
particularly those traded over-the-counter, may have limited marketability and
may be subject to more abrupt or erratic market movements over time than
securities of larger, more seasoned companies or the market as a whole. The
issuers of over-the-counter securities may have limited product lines, markets
and financial resources, may be dependent on entrepreneurial management,
typically reinvest most of their net income in the enterprise and typically do
not pay dividends.
6
<PAGE>
Other Investments and Risk Considerations
Foreign Investments
The Fund reserves the right to invest without limitation in securities of
non-U.S. issuers directly, or indirectly in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Under current
policy, however, the Fund limits such investments, including ADRs and EDRs, to a
maximum of 35% of its total assets.
ADRs are receipts, typically issued by a U.S. bank or trust company, which
evidence ownership of underlying securities issued by a foreign corporation or
other entity. EDRs are receipts issued in Europe which evidence a similar
ownership arrangement. Generally, ADRs in registered form are designed for use
in U.S. securities markets and EDRs are designed for use in European securities
markets. The underlying securities are not always denominated in the same
currency as the ADRs or EDRs. Although investment in the form of ADRs or EDRs
facilitates trading in foreign securities, it does not mitigate all the risks
associated with investing in foreign securities.
ADRs are available through facilities which may be either "sponsored" or
"unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and usually agrees to
provide shareholder communications. In an unsponsored arrangement, the foreign
issuer is not involved, and the ADR holders pay the fees of the depository.
Sponsored ADRs are generally more advantageous to the ADR holders and the issuer
than are unsponsored ADRs. More and higher fees are generally charged in an
unsponsored program compared to a sponsored facility. Only sponsored ADRs may be
listed on the New York or American Stock Exchanges. Unsponsored ADRs may prove
to be more risky due to (a) the additional costs involved to the Fund; (b) the
relative illiquidity of the issue in U.S. markets; and (c) the possibility of
higher trading costs in the over-the-counter market as opposed to exchange-based
trading. The Fund will take these and other risk considerations into account
before making an investment in an unsponsored ADR.
The risks associated with investments in foreign securities include those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks of
nationalization or expropriation, the possible imposition of currency exchange
blockages, higher operating expenses, foreign withholding and other taxes which
may reduce investment return, reduced availability of public information
concerning issuers and the fact that foreign issuers are not generally subject
to uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to domestic
issuers. Moreover, securities of many
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<PAGE>
foreign issuers may be less liquid and their prices more volatile than those of
securities of comparable domestic issuers.
It is anticipated that most of the foreign investments of the Fund will
consist of securities of issuers in countries with developed economies. However,
the Fund may also invest in the securities of issuers in countries with less
developed economies as deemed appropriate by the Investment Manager, although
the Fund does not presently expect to invest more than 5% of its total assets in
issuers in such less developed countries. Such countries include countries that
have an emerging stock market that trades a small number of securities;
countries with low- to middle-income economies; and/or countries with economies
that are based on only a few industries. Eastern European countries are
considered to have less developed capital markets.
For further information regarding foreign investments, see the Statement
of Additional Information.
Currency Transactions
In order to protect against the effect of uncertain future exchange rates
on securities denominated in foreign currencies, the Fund may engage in currency
exchange transactions either on a spot (i.e., cash) basis at the rate prevailing
in the currency exchange market or by entering into forward contracts to
purchase or sell currencies. Although such contracts tend to minimize the risk
of loss resulting from a correctly predicted decline in value of hedged
currency, they tend to limit any potential gain that might result should the
value of such currency increase. In entering a forward currency transaction, the
Fund is dependent upon the creditworthiness and good faith of the counterparty.
The Fund attempts to reduce the risks of nonperformance by the counterparty by
dealing only with established, large institutions with which the Investment
Manager has done substantial business in the past. For further information, see
the Statement of Additional Information.
Other Investment Policies
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
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outstanding securities. Such loans may be terminated at any time.
The Fund will retain most rights of ownership including rights to
dividends, interest or other distributions on the loaned securities. Voting
rights pass with the lending, although the Fund may call loans to vote proxies
if desired. Should the borrower of the securities fail financially, there is a
risk of delay in recovery of the securities or loss of rights in the collateral.
Loans are made only to borrowers which are deemed by the Investment Manager to
be of good financial standing.
The Fund may, subject to certain percentage limitations below, buy and
sell options, futures contracts and options on futures contracts on securities,
securities indices and currencies; such instruments are commonly known as
derivatives because they derive their value from underlying assets, such as the
securities on which they are based. 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
derivative positions for nonhedging purposes would exceed 5% of the market value
of the Fund's net assets; similar policies apply to options which are not
commodities. The Fund may also invest in derivatives through various forms of
swap arrangements with respect to interest rates, currency rates and indices;
the Fund does not expect to invest more than 5% of its total assets in such
derivatives. For a more detailed discussion of derivatives, see the Statement of
Additional Information. The Fund may also enter into repurchase agreements,
reverse repurchase agreements and purchase securities on a "when-issued" basis.
See the Statement of Additional Information.
The Fund may invest in restricted securities in accordance with Rule 144A
under the Securities Act of 1933, which allows for the resale of such securities
among certain qualified institutional buyers. Because the market for such
securities is still developing, such securities could possibly become illiquid
in particular circumstances. See the Statement of Additional Information.
The Fund anticipates that its portfolio turnover rate will generally not
exceed 125% under normal conditions. The Fund does, however, reserve full
freedom with respect to portfolio turnover. In periods when there are rapid
changes in economic conditions or security price levels or when investment
strategy changes significantly, portfolio turnover may be higher than during
times of economic and market price stability or when investment strategy remains
relatively constant. An actual portfolio turnover rate of 100% or more may
result in greater transaction costs, relative to other funds in general, and may
have tax and
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<PAGE>
other consequences as well. See the Statement of Additional Information.
Limiting Investment Risk
In seeking to lessen investment risk, the Fund operates under certain
fundamental and nonfundamental investment restrictions. Under the fundamental
investment restrictions, the Fund may not (a) purchase a security of any one
issuer (other than securities issued or guaranteed as to principal or interest
by the U.S. Government or its agencies or instrumentalities or mixed-ownership
Government corporations), if such purchase would, with respect to 75% of the
Fund's total assets, cause more than 5% of the Fund's total assets to be
invested in the securities of such issuer; (b) purchase for its portfolio 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; or (c) invest more than
25% of the Fund's total assets in securities of issuers principally engaged in
any one industry as set forth in the Statement of Additional Information. Under
the nonfundamental investment restrictions, the Fund may not invest more than
15% of the Fund's total assets in illiquid securities including repurchase
agreements extending for more than seven days and may not invest more than 5% of
the Fund's total 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.
The foregoing fundamental investment restrictions may not be changed
except by vote of the holders of a majority of the outstanding voting securities
of the Fund. The vote of a majority of the outstanding voting securities of the
Fund means the vote (A) of 67 per centum or more of the voting securities
present at a meeting, if the holders of more than 50 per centum of the
outstanding voting securities of the Fund are present or represented by proxy;
or (B) of more than 50 per centum of the outstanding voting securities of the
Fund, whichever is less. The foregoing nonfundamental investment restriction may
be changed without a shareholder vote. For further information on the above and
other fundamental and nonfundamental investment restrictions, see the Statement
of Additional Information.
The Fund may hold up to 100% of its assets in cash or certain short-term
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Investment Manager, such a
position is more likely to provide protection against adverse market conditions.
To the extent that the Fund's assets are held in a temporary defensive position,
the Fund will not be achieving its investment objective. The types of short-term
instruments in which the Fund may invest for such purposes are, as more fully
described in the Statement of Additional Information: U.S. Government securities
(including STRIPS, as defined below), custodial receipts, cer-
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tificates of deposit, time deposits and bankers' acceptances of certain
qualified financial institutions and corporate commercial paper rated at least
"A" by S&P or "Prime" by Moody's (or, if not rated, issued by companies having
an outstanding unsecured debt issue rated at least "A" by S&P or Moody's). Under
the Separate Trading of Registered Interest and Principal of Securities
("STRIPS") program, the principal and interest components of selected U.S.
Government securities are traded independently. Custodial receipts are
instruments that evidence ownership of future interest payments, principal
payments or both on certain U.S. Treasury notes or bonds and are known by
various names, including "Treasury Investment Growth Receipts" ("TIGRs") and
"Certificates of Accrual on Treasury Securities" ("CATS"). See the Statement of
Additional Information.
Information on the Purchase of Shares, Redemption of Shares and Shareholder
Services is set forth on pages 11 to 33 below.
The Fund is available for investment by many kinds of investors including
participants investing through 401(k) or other retirement plan sponsors,
employees investing through savings plans sponsored by employers, Individual
Retirement Accounts ("IRAs"), trusts, corporations, individuals, etc. The
applicability of the general information and administrative procedures set forth
below accordingly will vary depending on the investor and the recordkeeping
system established for a shareholder's investment in the Fund. Participants in
401(k) and other plans should first consult with the appropriate person at their
employer or refer to the plan materials before following any of the procedures
below. For more information or assistance, anyone may call 1-800-562-0032.
Purchase of Shares
Methods of Purchase
Through Dealers
Shares of the Fund are continuously offered through securities dealers who
have entered into sales agreements with the Distributor. Purchases through
dealers are confirmed at the offering price, which is the net asset value plus
the applicable sales charge, next determined after the order is duly received by
State Street Research Shareholder Services ("Shareholder Services"), a division
of State Street Research Investment Services, Inc., from the dealer. ("Duly
received" for purposes herein means in accordance with the conditions of the
applicable method of purchase as described below.) The dealer is responsible for
transmitting the order promptly to Shareholder Services in order to permit the
investor to obtain the current price. See "Purchase of Shares -- Net Asset
Value" herein.
11
<PAGE>
By Mail
Initial investments in the Fund may be made by mailing or delivering to
the investor's securities dealer a completed Application (accompanying this
Prospectus), together with a check for the total purchase price payable to the
Fund. The dealer must forward the Application and check in accordance with the
instructions on the Application. Additional shares may be purchased by mailing
to Shareholder Services a check payable to the Fund in the amount of the total
purchase price together with any one of the following: (i) an Application; (ii)
the stub from the shareholder's account statement; or (iii) a letter setting
forth the name of the Fund, the class of shares and the account name and number.
Shareholder Services will deliver the purchase order to the transfer agent and
dividend paying agent, State Street Bank and Trust Company (the "Transfer
Agent").
If the check is not honored for its full amount, the purchaser could be
subject to additional charges to cover collection costs and any investment loss,
and the purchase may be cancelled.
By Wire
An investor may purchase shares by wiring Federal Funds of not less than
$5,000 to State Street Bank and Trust Company, which also serves as the Trust's
custodian (the "Custodian"), as set forth below. Prior to making an investment
by wire, an investor must notify Shareholder Services at 1-800-521-6548 and
obtain a control number and instructions. Following such notification, Federal
Funds should be wired through the Federal Reserve System to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF = State Street Research
Small Capitalization Value Fund
and class of shares
(A, B, C or D)
AC = 99029761
OBI = Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street
Research Shareholder Services)
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make such
investment by 12 noon Boston time on the day of his or her investment; and (ii)
the wire must be received by 4 P.M. Boston time that same day.
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<PAGE>
An investor making an initial investment by wire must promptly complete
the Application accompanying this Prospectus and deliver it to his or her
securities dealer, who should forward it as required. No redemptions will be
effected until the Application has been duly processed.
The Fund may in its discretion discontinue, suspend or change the practice
of accepting orders by any of the methods described above. Orders for the
purchase of shares are subject to acceptance by the Fund. The Fund reserves the
right to reject any purchase order, including orders in connection with
exchanges, for any reason which the Fund in its sole discretion deems
appropriate. The Fund reserves the right to suspend the sale of shares.
13
<PAGE>
Minimum Investment
Class of Shares
A B C D
Minimum Initial
Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $2,000 $2,000 (a) $2,000
All other $2,500 $2,500 (a) $2,500
Minimum Subsequent
Investment $5,000 $5,000 $5,000 $5,000
By Wire $50 $50 $50 $50
All other
(a) Special conditions apply; contact 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 pursuant to various retirement, dividend and other investment plans,
or sponsored arrangements involving group solicitations of the members of an
organization. The Fund also reserves the right at any time to suspend the
offering of shares or to reject any specific purchase order for shares.
Alternative Purchase Program
General
Alternative classes of shares permit investors to select a purchase
program which they believe will be the most advantageous for them, given the
amount of their purchase, the length of time they anticipate holding Fund
shares, or the flexibility they desire in this regard, and other relevant
circumstances. Investors will be able to determine whether in their particular
circumstances it is more advantageous to incur an initial sales charge and not
be subject to certain ongoing charges or to have their entire initial purchase
price invested in the Fund with the investment being subject thereafter to
ongoing service fees and distribution fees. As described in greater detail
below, securities dealers are paid differing amounts of commissions and other
compensation depending on which class of shares they sell.
14
<PAGE>
The major differences among the various classes of shares are as follows:
Class A Class B Class C Class D
Sales Initial sales Contingent None Contingent
Charges charge at time deferred sales deferred sales
of investment charge of 5% charge of 1%
of up to 4.5% to 2% applies applies to any
depending on to any shares shares
amount of redeemed redeemed
investment within first within one
five years year following
following their purchase
their
purchase; no
contingent
deferred sales
charge after
five years
On investments
of $1 million
or more, no
initial sales
charge; but
contingent
deferred sales
charge of 1%
applies to any
shares redeemed
within one year
following their
purchase
Distribution None 0.75% for None 0.75% each year
Fee first eight
years; Class B
shares convert
automatically
to Class A
shares after
eight years
Service Fee 0.25% each year 0.25% each year None 0.25% each year
Initial Above 4% None 1%
Commission described
Received by initial sales
Selling charge less
Securities 0.25% to 0.50%
Dealers retained by
Distributor
On investments
of $1 million
or more, 0.25%
to 1% paid to
dealer by
Distributor
In deciding which class of shares to purchase, the investor should
consider the amount of the investment, the length of time the investment is
expected to be held, and the ongoing service fee and distribution fee, among
other factors.
15
<PAGE>
Class A shares are sold at net asset value plus an initial sales charge of
up to 4.5% of the public offering price. Because of the sales charge, not all of
an investor's purchase amount is invested unless the purchase equals $1,000,000
or more. Class B shareholders pay no initial sales charge, but a contingent
deferred sales charge of up to 5% generally applies to shares redeemed within
five years of purchase. Class D shareholders also pay no initial sales charge,
but a contingent deferred sales charge of 1% generally applies to redemptions
made within one year of purchase. For Class B and Class D shareholders,
therefore, the entire purchase amount is immediately invested in the Fund.
An investor who qualifies for a significantly reduced initial sales
charge, or a complete waiver of the sales charge on investments of $1,000,000 or
more, on the purchase of Class A shares might elect that option to take
advantage of the lower ongoing service and distribution fees that characterize
Class A shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. Class B shares are assessed an annual
distribution fee of 0.75% of daily net assets for an eight-year period following
the date of purchase and are then automatically converted to Class A shares.
Class D shares are assessed an annual distribution fee of 0.75% of daily net
assets for as long as the shares are held. The prospective investor should
consider these fees plus the initial or contingent deferred sales charges in
estimating the costs of investing in the various classes of Fund shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are allocated to dealers (see
"Distribution Plan" below). In addition, the Distributor will, at its expense,
provide additional cash and noncash incentives to securities dealers that sell
shares. Such incentives may be extended only to those dealers who have sold or
may sell significant amounts of shares and/or meet other conditions established
by the Distributor; for example, the Distributor may sponsor special promotions
to develop particular distribution channels or to reach certain investor groups.
The incentives may include merchandise and trips to and attendance at sales
seminars at resorts.
16
<PAGE>
Class A Shares -- Initial Sales Charges
Sales Charges
The purchase price of a Class A share of the Fund is the Fund's per share
net asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar amount
of the shares purchased as set forth in the table below. A major portion of this
sales charge is reallowed by the Distributor to the securities dealer
responsible for the sale.
Dollar Sales Sales Dealer
Amount of Charge Charge Concession
Purchase Paid by Paid by As % of
Transaction Investor Investor Purchase
As % of As % of Price
Purchase Net Asset
Price Value
Less than 4.50% 4.71% 4.00%
$100,000
$100,000 or 3.50% 3.63% 3.00%
above but less
than $250,000
$250,000 or 2.50% 2.56% 2.00%
above but less
than $500,000
$500,000 or 2.00% 2.04% 1.75%
above but less
than
$1 million
$1 million and 0% 0% See following discussion
above
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer a
commission at the time of sale as follows:
Amount of Sale Commission
(a) $1 million to $3 million 1.00%
(b) Next $2 million 0.50%
(c) Amount over $5 million 0.25%
On such sales of $1,000,000 or more, the investor is subject to a 1%
contingent deferred sales charge on any portion of the purchase redeemed within
one year of the sale. However, such
17
<PAGE>
redeemed shares will not be subject to the contingent deferred sales charge to
the extent that their value represents (1) capital appreciation or (2)
reinvestment of dividends or capital gains distributions. In addition, the
contingent deferred sales charge will be waived for certain other redemptions as
described under "Contingent Deferred Sales Charge Waivers" below (as otherwise
applicable to Class B shares).
Class A shares of the Fund that are purchased without a sales charge may
be exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption within
one year of the Class A shares which are acquired through such exchange. For
federal income tax purposes, the amount of the contingent deferred sales charge
will reduce the gain or increase the loss, as the case may be, on the amount
realized on redemption. The amount of any contingent deferred sales charge will
be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement of
Additional Information, of $100,000 or more of Class A shares of the Fund or a
combination of "Eligible Funds." "Eligible Funds" include the Fund and other
funds so designated by the Distributor from time to time. Class B, Class C and
Class D shares may also be included in the combination under certain
circumstances. Securities dealers should call Shareholder Services for details
concerning the other Eligible Funds and any persons who may qualify for reduced
sales charges and related information. See the Statement of Additional
Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced
sales charge on purchases of no less than an aggregate of $100,000 of Class A
shares of the Fund and any other Eligible Funds within a 13-month period. Class
B, Class C and Class D shares may also be included in the combination under
certain circumstances. Additional information on a Letter of Intent is available
from dealers, or from the Distributor, and also appears in the Statement of
Additional Information.
Right of Accumulation
Investors may purchase Class A shares of the Fund or a combination of
shares of the Fund and other Eligible Funds at reduced sales charges pursuant to
a Right of Accumulation. Under
18
<PAGE>
the Right of Accumulation, the sales charge is determined by combining the
current purchase with the value of the Class A shares of other Eligible Funds
held at the time of purchase. Class B, Class C and Class D shares may also be
included in the combination under certain circumstances. See the Statement of
Additional Information and call Shareholder Services for details concerning the
Right of Accumulation.
Other Programs
Class A shares of the Fund may be sold at a reduced sales charge or
without a sales charge pursuant to certain sponsored arrangements, which include
programs under which a company, employee benefit plan or other organization
makes recommendations to, or permits group solicitation of, its employees,
members or participants, except any organization created primarily for the
purpose of obtaining shares of the Fund at a reduced sales charge or without a
sales charge. Information on such arrangements and further conditions and
limitations is available from the Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and persons: (A) the
Investment Manager, Distributor, or any affiliated entities, including any
direct or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated Companies,
any relatives of any such individuals whose relationship is directly verified by
such individuals to the Distributor, or any beneficial account for such
relatives or individuals; and (C) employees, officers, sales representatives or
directors of dealers and other entities with a selling agreement with the
Distributor to sell shares of any aforementioned investment company, any spouse
or child of such person, or any beneficial account for any of them. The purchase
must be made for investment and the shares purchased may not be resold except
through redemption. This purchase program is subject to such administrative
policies, regarding the qualification of purchasers and any other matters, as
may be adopted by the Distributor from time to time.
Class B Shares -- Contingent Deferred Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per
share next determined after the purchase order is duly received, as defined
herein. No sales charge is imposed at the time of purchase; thus the full amount
of the investor's purchase
19
<PAGE>
payment will be invested in the Fund. However, a contingent deferred sales
charge may be imposed upon redemptions of Class B shares as described below.
The Distributor will pay securities dealers at the time of sale a 4%
commission for selling Class B shares. The proceeds of the contingent deferred
sales charge and the distribution fee are used to offset distribution expenses
and thereby permit the sale of Class B shares without an initial sales charge.
Class B shares that are redeemed within a five-year period after their
purchase will not be subject to a contingent deferred sales charge to the extent
that the value of such shares represents (1) capital appreciation of Fund assets
or (2) reinvestment of dividends or capital gains distributions. The amount of
any applicable contingent deferred sales charge will be calculated by
multiplying the net asset value of such shares at the time of redemption or at
the time of purchase, whichever is lower, by the applicable percentage shown in
the table below:
Contingent
Deferred
Sales Charge
As A Percentage Of
Net Asset Value
Redemption During At Redemption
1st Year Since Purchase 5%
2nd Year Since Purchase 4%
3rd Year Since Purchase 3%
4th Year Since Purchase 3%
5th Year Since Purchase 2%
6th Year Since Purchase
and Thereafter None
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first of
those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of the Fund acquired through an exchange from another
Eligible Fund will be measured from the date that such shares were initially
acquired in the other Eligible Funds, and Class B shares being redeemed will be
considered to represent, as applicable, capital appreciation or dividend and
capital gains distribution reinvestments in such other Eligible Fund. These
determinations will result in any contingent deferred sales charge being imposed
at the lowest possible rate. For federal income tax purposes, the amount of the
contingent deferred sales charge will reduce the gain or increase the loss, as
the case may be, on the amount realized on
20
<PAGE>
redemption. The amount of any contingent deferred sales charge will be paid to
the Distributor.
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic withdrawal plan which meets certain conditions.
In addition, the contingent deferred sales charge will be waived for: (i)
redemptions made within one year of the death or total disability, as defined by
the Social Security Administration, of all shareholders of an account; (ii)
redemptions made after attainment of a specific age in an amount which
represents the minimum distribution required at such age under Section 401(a)(9)
of the Internal Revenue Code for retirement accounts or plans (e.g., age 70 1/2
for IRAs and Section 403(b) plans), calculated solely on the basis of assets
invested in the Fund or other Eligible Funds; and (iii) a redemption resulting
from a tax-free return of an excess contribution to an IRA. (The foregoing
waivers do not apply to a tax-free rollover or transfer of assets out of the
Fund.) The Fund has reserved the right to change, modify or terminate the
waivers described above at any time.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends
or distributions with respect to such shares, will automatically convert to
Class A shares of the Fund at the end of eight years following the issuance of
such Class B shares; consequently, they will no longer be subject to the higher
expenses borne by Class B shares. The conversion rate will be determined on the
basis of the relative per share net asset values of the two classes and may
result in a shareholder receiving either a greater or fewer number of Class A
shares than the Class B shares so converted. As noted above, holding periods for
Class B shares received in exchange for Class B shares of other Eligible Funds
will be counted toward the eight-year period.
Class C Shares -- Institutional; No Sales Charge
The purchase price of a Class C share of the Fund is the Fund's per share
net asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase or
redemption. The Fund will receive the full amount of the investor's purchase
payment.
Class C shares are only available for new investments by certain employee
benefit plans and large institutions. See the Statement of Additional
Information. Information on the
21
<PAGE>
availability of Class C shares and further conditions and limitations is
available from the Distributor.
Class C shares may be also issued in connection with mergers and
acquisitions involving the Fund, and under certain other circumstances as
described in this Prospectus (e.g., see "Shareholder Services -- Exchange
Privilege").
Class C shares may be issued directly or through exchanges to those
shareholders of the Fund or other Eligible Funds who previously held shares not
subject to any future sales charge or service fees or distribution fees.
Class D Shares -- Spread Sales Charges
The purchase price of a Class D share of the Fund is the Fund's per share
net asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase; thus the
full amount of the investor's purchase payment will be invested in the Fund.
Class D shares are subject to a 1% contingent deferred sales charge on any
portion of the purchase redeemed within one year of the sale. The contingent
deferred sales charge will be 1% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. The Distributor
pays securities dealers a 1% commission for selling Class D shares at the time
of purchase. The proceeds of the contingent deferred sales charge and the
distribution fee are used to offset distribution expenses and thereby permit the
sale of Class D shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will not
be subject to the contingent deferred sales charge to the extent that the value
of such shares represents (1) capital appreciation of Fund assets or (2)
reinvestment of dividends or capital gains distributions. In addition, the
contingent deferred sales charge will be waived for certain other redemptions as
described under "Contingent Deferred Sales Charge Waivers" above (as otherwise
applicable to Class B shares). For federal income tax purposes, the amount of
the contingent deferred sales charge will reduce the gain or increase the loss,
as the case may be, on the amount realized on redemption. The amount of any
contingent deferred sales charge will be paid to the Distributor.
Net Asset Value
The Fund's per share net asset values are determined Monday through Friday
as of the close of the New York Stock Exchange (the "NYSE") exclusive of days on
which the NYSE is closed. The NYSE ordinarily closes at 4 P.M. New York City
time. Assets held by the Fund are valued at the last reported sale price as of
the
22
<PAGE>
close of business on the valuation date, except that securities and assets for
which market quotations are not readily available are valued as determined in
good faith by or under the authority of the Trustees of the Trust. In
determining the value of certain assets for which market quotations are not
readily available, the Fund may use one or more pricing services. The pricing
services utilize information with respect to market transactions, quotations
from dealers and various relationships among securities in determining value and
may provide prices determined as of times prior to the close of the NYSE. The
Trustees have authorized the use of the amortized cost method to value
short-term debt instruments issued with a maturity of one year or less that have
a remaining maturity of 60 days or less when the value obtained is fair value.
Further information with respect to the valuation of the Fund's assets is
included in the Statement of Additional Information.
Distribution Plan
The Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the provisions of the
Distribution Plan, the Fund makes payments to the Distributor based on an annual
percentage of the average daily value of the net assets of each class of shares
as follows:
Class Service Fee Distribution Fee
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
Some or all of the service fees are used to reimburse securities dealers
(including securities dealers that are affiliates of the Distributor) for
personal services and/or the maintenance of shareholder accounts. A portion of
any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance of shareholder
accounts by such dealers. Dealers who have sold Class A shares are eligible for
further reimbursement commencing as of the time of such sale. Dealers who have
sold Class B and Class D shares are eligible for further reimbursement after the
first year during which such shares have been held of record by such dealer as
nominee for its clients (or by such clients directly). Any service fees received
by the Distributor and not allocated to dealers may be applied by the
Distributor in reduction of expenses incurred by it directly for personal
services and the maintenance of shareholder accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to securities dealers for selling
23
<PAGE>
such shares. Any distribution fees received by the Distributor and not allocated
to dealers may be applied by the Distributor in connection with sales or
marketing efforts, including special promotional fees and cash and noncash
incentives based upon sales by securities dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs similar
expenses on behalf of, such other funds. When expenses of the Distributor cannot
be identified as relating to a specific fund, the Distributor allocates expenses
among the funds in a manner deemed fair and equitable to each fund.
Commissions and other cash and noncash incentives and payments to dealers,
to the extent payable out of the general profits, revenues or other sources of
the Distributor (including the advisory fees paid by the Fund), have also been
authorized pursuant to the Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which the Fund may incur under the Distribution
Plan to 1%, of which 0.75% may be used to pay distribution expenses and 0.25%
may be used to pay shareholder service fees. The NASD rule also limits the
aggregate amount which the Fund may pay for such distribution costs to 6.25% of
gross share sales of a class since the inception of any asset-based sales charge
plus interest at the prime rate plus 1% on unpaid amounts thereof (less any
contingent deferred sales charges). Such limitation does not apply to
shareholder service fees. Payments to the Distributor or to dealers funded under
the Distribution Plan may be discontinued at any time by the Trustees of the
Trust.
Redemption of Shares
Shareholders may redeem all or any portion of their accounts on any day
the NYSE is open for business. Redemptions will be effective at the applicable
net asset value per share next determined (see "Purchase of Shares -- Net Asset
Value" herein) after receipt of the redemption request, in accordance with the
requirements described below, by Shareholder Services and delivery of the
request by Shareholder Services to the Transfer Agent. To allow time for the
clearance of checks used for the purchase of any shares which are tendered for
redemption shortly after purchase, the remittance of the redemption proceeds for
such shares could be delayed for 15 days or more after the purchase.
Shareholders who anticipate a potential need for immediate access to their
investments should, therefore, purchase shares by wire. Except as noted,
redemption proceeds are normally remitted within seven days after receipt of the
redemption request and any necessary documents in good order.
24
<PAGE>
Methods of Redemption
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed
to the shareholder or wired to a predesignated bank account (see "Proceeds By
Wire" below), by sending to State Street Research Shareholder Services, P.O. Box
8408, Boston, Massachusetts 02266-8408: (1) a written request for redemption
signed by the registered owner(s) of the shares, exactly as the account is
registered; (2) an endorsed stock power in good order with respect to the shares
or, if issued, the share certificates for the shares endorsed for transfer or
accompanied by an endorsed stock power; (3) any required signature guarantees
(see "Redemption of Shares -- Signature Guarantees" below); and (4) any
additional documents which may be required for redemption in the case of
corporations, trustees, etc., such as certified copies of corporate resolutions,
governing instruments, powers of attorney, and the like. The Transfer Agent will
not process requests for redemption until it has received all necessary
documents in good order. A shareholder will be notified promptly if a redemption
request cannot be accepted. Shareholders having any questions about the
requirements for redemption should call Shareholder Services toll-free at
1-800-562-0032.
Request By Telephone
Shareholders may request redemption by telephone with proceeds to be
transmitted by check or by wire (see "Proceeds By Wire" below). A shareholder
can request a redemption for $50,000 or less to be transmitted by check. Such
check for the proceeds will be made payable to the shareholder of record and
will be mailed to the address of record. There is no fee for this service. It is
not available for shares held in certificate form or if the address of record
has been changed within 30 days of the redemption request. The Fund may revoke
or suspend the telephone redemption privilege at any time and without notice.
See "Shareholder Services -- Telephone Services" for a discussion of the
conditions and risks associated with Telephone Privileges.
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder
has Telephone Privileges (see "Shareholder Services -- Telephone Services"
herein), the Trust's custodian will wire redemption proceeds to the
shareholder's predesignated bank account. To make the request, the shareholder
should call 1-800-521-6548 prior to 4 P.M. Boston time. A $7.50 charge against
the shareholder's account will be imposed for each wire redemption. This charge
is subject to change without notice. The
25
<PAGE>
shareholder's bank may also impose a charge for receiving wires of redemption
proceeds. The minimum redemption by wire is $5,000.
Request to Dealer to Repurchase
For the convenience of shareholders, the Fund has authorized the
Distributor as its agent to accept orders from dealers by wire or telephone for
the repurchase of shares by the Distributor from the dealer. The Fund may revoke
or suspend this authorization at any time. The repurchase price is the net asset
value for the applicable shares next determined following the time at which the
shares are offered for repurchase by the dealer to the Distributor. The dealer
is responsible for promptly transmitting a shareholder's order to the
Distributor. Payment of the repurchase proceeds is made to the dealer who placed
the order promptly upon delivery of certificates for shares in proper form for
transfer or, for Open Accounts, upon the receipt of a stock power with
signatures guaranteed as described below, and, if required, any supporting
documents. Neither the Fund nor the Distributor imposes any charge upon such a
repurchase. However, a dealer may impose a charge as agent for a shareholder in
the repurchase of his or her shares. The Fund has reserved the right to change,
modify or terminate the services described above at any time.
Additional Information
Because of the relatively high cost of maintaining small shareholder
accounts, the Fund reserves the right to involuntarily redeem at its option any
shareholder account which remains below $1,500 for a period of 60 days after
notice is mailed to the applicable shareholder. Such involuntary redemptions
will be subject to applicable sales charges, if any. The Fund may increase such
minimum account value above such amount in the future after notice to affected
shareholders. Involuntarily redeemed shares will be priced at the net asset
value on the date fixed for redemption by the Fund, and the proceeds of the
redemption will be mailed promptly to the affected shareholder at the address of
record. To cover the cost of additional compliance administration, a $20 fee
will be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date of
payment of redemption proceeds for more than seven days, except that (a) it may
elect to suspend the redemption of shares or postpone the date of payment of
redemption proceeds: (1) during any period that the NYSE is closed (other than
customary weekend and holiday closings) or trading on the NYSE is restricted;
(2) during any period in which an emergency exists as a result of which disposal
of portfolio securities is not reasonably practicable or it is not reasonably
practicable for
26
<PAGE>
the Fund fairly to determine the value of its net assets; or (3) during such
other periods as the Securities and Exchange Commission may by order permit for
the protection of investors; and (b) the payment of redemption proceeds may be
postponed as provided under "Redemption of Shares."
Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Fund, the
Investment Manager and the Distributor from possible fraud, signature guarantees
are required for certain redemptions. Signature guarantees enable the Transfer
Agent to be certain that the person who has authorized a redemption from the
account is, in fact, the shareholder. Signature guarantees are required for: (1)
all redemptions requested by mail; and (2) requests to transfer the registration
of shares to another owner. Signatures must be guaranteed by a bank, a member
firm of a national stock exchange, or other eligible guarantor institution. The
Transfer Agent will not accept guarantees (or notarizations) from notaries
public. The above requirements may be waived by the Fund in certain instances.
Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of the Fund owned
by shareholders are credited to their accounts by the Transfer Agent, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110.
Certificates representing shares will not be issued. Shareholders will receive
periodic statements of transactions in their accounts.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through
dealers, by wire or by mailing a check, payable to the Fund, to
Shareholder Services under the terms set forth above under "Purchase
of Shares."
2. The following methods of receiving dividends from investment income
and distributions from capital gains are available:
(a) All income dividends and capital gains distributions
reinvested in additional shares of the Fund.
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<PAGE>
(b) All income dividends in cash; all capital gains distributions
reinvested in additional shares of the Fund.
(c) All income dividends and capital gains distributions in
cash.
(d) All income dividends and capital gains distributions invested
in any one available Eligible Fund designated by the
shareholder as described below. See "Dividend Allocation Plan"
herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, the account will automatically be coded for reinvestment of all
dividends and distributions in additional shares of the same class of the Fund.
Selections may be changed at any time by telephone or written notice to
Shareholder Services. Dividends and distributions are reinvested at net asset
value without a sales charge.
Exchange Privilege
Shareholders of the Fund may exchange their shares for available shares
with corresponding characteristics of any of the other Eligible Funds at any
time on the basis of the relative net asset values of the respective shares to
be exchanged, subject to compliance with applicable securities laws.
Shareholders of any other Eligible Fund may similarly exchange their shares for
Fund shares with corresponding characteristics. Prior to making an exchange,
shareholders should obtain the Prospectus of the Eligible Fund into which they
are exchanging. Under the Direct Program, subject to certain conditions,
shareholders may make arrangements for regular exchanges from the Fund into
other Eligible Funds. To effect an exchange, Class A, Class B and Class D shares
may be redeemed without the payment of any contingent deferred sales charge that
might otherwise be due upon an ordinary redemption of such shares. The MetLife
State Street Research Money Market Fund issues Class E shares which are sold
without any sales charge. Exchanges of MetLife - State Street Research Money
Market Fund Class E shares into Class A shares of the Fund or any other Eligible
Fund are subject to the initial sales charge or contingent deferred sales charge
applicable to an initial investment in such Class A shares, unless a prior Class
A sales charge has been paid directly or indirectly with respect to the shares
redeemed. For purposes of computing the contingent deferred sales charge that
may be payable upon disposition of the acquired Class A, Class B and Class D
shares, the holding period of the redeemed shares is "tacked" to the holding
period of the acquired shares. The period any Class E shares are held is not
tacked to the holding period of any acquired shares. No exchange transaction fee
is currently imposed on any exchange.
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<PAGE>
For the convenience of its shareholders who have Telephone Privileges, the
Fund permits exchanges by telephone request from either the shareholder or his
or her dealer. Shares may be exchanged by telephone provided that the
registration of the two accounts is the same. The toll-free number for exchanges
is 1-800-521-6548. See "Telephone Services" herein for a discussion of
conditions and risks associated with Telephone Privileges.
The exchange privilege may be exercised only in those states where shares
of the relevant other Eligible Fund may legally be sold. For tax purposes, each
exchange actually represents the sale of shares of one fund and the purchase of
shares of another. Accordingly, exchanges may produce a capital gain or loss for
tax purposes. The exchange privilege may be terminated or suspended or its terms
changed at any time, subject, if required under applicable regulations, to 60
days' prior notice. New accounts established for investments upon exchange from
an existing account in another fund will have the same Telephone Privileges as
the existing account, unless Shareholder Services is instructed otherwise.
Related administrative policies and procedures may also be adopted with regard
to a series of exchanges, street name accounts, sponsored arrangements and other
matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. In order to limit exchange
activity where the Fund believes doing so would be in the best interests of the
Fund, it reserves the right to revise or terminate the exchange privilege, limit
the amount or number of exchanges or reject any exchange for any person. These
measures may be imposed at any time. Subject to the foregoing, if an exchange
request in good order is received by Shareholder Services and delivered by
Shareholder Services to the Transfer Agent by 12 noon Boston time on any
business day, the exchange usually will occur that day. Consult Shareholder
Services before requesting an exchange or for further information.
Reinvestment Privilege
A shareholder of the Fund who has redeemed shares or had shares
repurchased at his or her request may reinvest all or any portion of the
proceeds (plus that amount necessary to acquire a fractional share to round off
his or her reinvestment to full
29
<PAGE>
shares) in shares, of the same class as the shares redeemed, of the Fund or any
other Eligible Fund at net asset value and without subjecting the reinvestment
to an initial sales charge, provided such reinvestment is made within 30
calendar days after a redemption or repurchase. Upon such reinvestment, the
shareholder will be credited with any contingent deferred sales charge
previously charged with respect to the amount reinvested. The redemption of
shares is, for federal income tax purposes, a sale on which the shareholder may
realize a gain or loss. If a redemption at a loss is followed by a reinvestment
within 30 days, the transaction may be a "wash sale" resulting in a denial of
the loss for federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by Shareholder
Services of such shareholder's written purchase request and delivery of the
request by Shareholder Services to the Transfer Agent. A shareholder may
exercise this reinvestment privilege only once with respect to his or her shares
of the Fund. No charge is imposed by the Fund for such reinvestments; however,
dealers may charge fees in connection with the reinvestment privilege. The
reinvestment privilege may be exercised with respect to an Eligible Fund only in
those states where shares of the relevant other Eligible Fund may legally be
sold.
Investment Plans
The 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. The
Investamatic Check Program is subject to the same minimum initial investment and
subsequent investment requirements for accounts as applicable otherwise. The
Fund also offers tax-sheltered retirement plans, including prototype and other
employee benefit plans for employees, sole proprietors, partnerships and
corporations and IRAs. Details of these investment plans and their availability
may be obtained from securities dealers or from Shareholder Services.
Systematic Withdrawal Plan
A shareholder who owns noncertificated Class A or Class C shares with a
value of $5,000 or more, or Class B or Class D shares with a value of $10,000 or
more, may elect, by participating in the Fund's Systematic Withdrawal Plan, to
have periodic checks issued for specified amounts. These amounts may not be less
than certain minimums, depending on the class of
30
<PAGE>
shares held. The Plan provides that all income dividends and capital gains
distributions of the Fund shall be credited to participating shareholders in
additional shares of the Fund. Thus, the withdrawal amounts paid can only be
realized by redeeming shares of the Fund under the Plan. To the extent such
amounts paid exceed dividends and distributions from the Fund, a shareholder's
investment will decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually of
either (a) the value, at the time the Plan is initiated, of the shares then in
the account or (b) the value, at the time of a withdrawal, of the same number of
shares as in the account when the Plan was initiated, whichever is higher.
Expenses of the Plan are borne by the Fund. A participating shareholder
may withdraw from the Plan and the Fund may terminate the Plan at any time on
written notice. Purchase of additional shares while a shareholder is receiving
payments under a Plan is ordinarily disadvantageous because of duplicative sales
charges. For this reason, a shareholder may not participate in the Investamatic
Check Program and the Systematic Withdrawal Plan at the same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all of
their dividends and any other distributions from the Fund or any Eligible Fund
automatically invested at net asset value in one other such Eligible Fund
designated by the shareholder, provided the account into which the investment is
made is initially funded with the requisite minimum amount. The number of shares
purchased will be determined as of the dividend payment date. The Dividend
Allocation Plan is subject to state securities law requirements, to suspension
at any time, and to such policies, limitations and restrictions, as, for
instance, may be applicable to street name or master accounts, that may be
adopted from time to time.
Automatic Bank Connection
A shareholder may elect, by participating in the Fund's Automatic Bank
Connection ("ABC"), to have dividends and other distributions, including
Systematic Withdrawal Plan payments, automatically deposited in the
shareholder's bank account by electronic funds transfer. Some contingent
deferred sales charges may apply. See "Systematic Withdrawal Plan" herein.
31
<PAGE>
Reports
Reports for the Fund will be sent to shareholders of record at least
semiannually. These reports will include a list of the securities owned by the
Fund as well as the Fund's financial statements.
Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing the shareholder to make telephone redemptions
for amounts up to $50,000 to be mailed to the shareholder's address
of record is available automatically;
(2) the privilege allowing the shareholder or his or her dealer to
make telephone exchanges is available automatically; and
(3) the privilege allowing the shareholder to make telephone redemptions
for amounts over $5,000, to be remitted by wire to the shareholder's
predesignated bank account, is available by election on the
Application accompanying this Prospectus. A current shareholder who
did not previously request such telephone wire privilege on his or
her original Application may request the privilege by completing a
Telephone Redemption-by-Wire Form which may be obtained by calling
1-800-521-6548. The Telephone Redemption-by-Wire form requires a
signature guarantee.
A shareholder may decline the automatic Telephone Privileges set forth in
(1) and (2) above by so indicating on the Application accompanying this
Prospectus.
A shareholder may discontinue any Telephone Privilege at any time by
advising Shareholder Services that the shareholder wishes to discontinue the use
of such privileges in the future.
Unless such Telephone Privileges are declined, a shareholder is deemed to
authorize Shareholder Services and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder to redeem,
or purporting to be the shareholder or the shareholder's dealer to exchange,
shares from any account; and (2) honor any written instructions for a change of
address regardless of whether such request is accompanied by a signature
guarantee. All telephone calls will be recorded. None of the Fund, the other
Eligible Funds, the Transfer Agent, the Investment Manager or the Distributor
will be liable for any loss, expense or cost arising out of any request,
including any fraudulent or unauthorized requests. Shareholders
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<PAGE>
assume the risk to the full extent of their accounts that telephone requests may
be unauthorized. Reasonable procedures must be followed to confirm that
instructions communicated by telephone are genuine. The shareholder will not be
liable for any losses due to unauthorized or fraudulent instructions if such
procedures are not followed.
Shareholders may redeem or exchange shares by calling toll-free
1-800-521-6548. Although it is unlikely, during periods of extraordinary market
conditions, a shareholder may have difficulty in reaching Shareholder Services
at such telephone number. In that event, the shareholder should contact
Shareholder Services at 1-800-562-0032, 1-617-357-7805 or otherwise at its main
office at One Financial Center, Boston, Massachusetts 02111-2690.
Shareholder Account Inquiries:
Please call 1-800-562-0032
Call this number for assistance in answering general questions on your
account, including account balance, available shareholder services, statement
information and performance of the Fund. Account inquiries may also be made in
writing to State Street Research Shareholder Services, P.O. Box 8408, Boston,
Massachusetts 02266-8408. A fee of up to $10 will be charged against an account
for providing additional account transcripts or photocopies of paid redemption
checks or for researching records in response to special requests.
Shareholder Telephone Transactions:
Please call 1-800-521-6548
Call this number for assistance in purchasing shares by wire and for
telephone redemptions or telephone exchange transactions. For more information
and/or requisite authorization forms for telephone redemption and exchange
privileges call 1-800-562-0032. Shareholder Services will require some form of
personal identification prior to acting upon instructions received by telephone.
Written confirmation of each transaction will be provided.
The Fund and its Shares
The Fund commenced operations in February 1995 as an additional series of
State Street Research Capital Trust, a Massachusetts business trust, formed in
1988. The Trust is registered with the Securities and Exchange Commission under
the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company. The fiscal year end of the Fund is September 30.
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<PAGE>
The Fund has received an order from the Securities and Exchange Commission
(the "Commission") permitting the issuance and sale of multiple classes of
shares representing interests in the existing portfolio of any series of the
Trust. Except for those differences between the classes of shares described
below and elsewhere in the Prospectus, each share of the Fund has equal
dividend, redemption and liquidation rights with other shares of the Fund and
when issued is fully paid and nonassessable. The Trustees have authorized the
Fund to offer four classes of shares as described above. In the future, certain
classes may be redesignated, for administrative purposes only, to conform to
standard class designations and common usage of terms which may develop in the
mutual fund industry. For example, Class C shares may be redesignated as Class Y
shares and Class D shares may be redesignated as Class C shares. Any
redesignation would not affect any substantive rights respecting the shares.
Each share of each class of shares represents an identical legal interest
in the same portfolio of investments of the Fund, has the same rights and is
identical in all respects, except that Class A, Class B and Class D shares bear
the expenses of the deferred sales arrangement and any expenses (including the
higher service and distribution fees) resulting from such sales arrangement, and
certain other incremental expenses related to a class. Each class will have
exclusive voting rights with respect to provisions of the Rule 12b-1
distribution plan pursuant to which the service and distribution fees, if any,
are paid. Although the legal rights of holders of each class of shares are
identical, it is likely that the different expenses borne by each class will
result in different net asset values and dividends. The different classes of
shares of the Fund also have different exchange privileges.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have a material adverse effect on the
rights of any shareholder. On any matter submitted to the shareholders, the
holder of each Fund share is entitled to one vote per share (with proportionate
voting for fractional shares) regardless of the relative net asset value
thereof.
Under the Master Trust Agreement of the Trust, no annual or regular
meeting of shareholders is required. Thus, there will ordinarily be no
shareholder meetings unless required by the 1940 Act. Except as otherwise
provided under said Act, the Board of Trustees will be a self-perpetuating body
until fewer than two thirds of the Trustees serving as such are Trustees who
were elected by shareholders of the Trust. In the event less than a majority of
the Trustees serving as such were elected by shareholders of the Trust, a
meeting of shareholders will be called to elect Trustees. Under the Master Trust
Agreement, any Trustee may be removed by vote of two thirds of the outstanding
Trust shares; holders of 10% or more of the outstanding Trust shares can require
that the Trustees call a meeting of
34
<PAGE>
shareholders for purposes of voting on the removal of one or more Trustees. In
connection with such meetings called by shareholders, shareholders will be
assisted in shareholder communications to the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations of the
Trust. However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for indemnification
for all losses and expenses of any shareholder of the Fund held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund would be unable to meet its obligations. The
Investment Manager believes that, in view of the above, the risk of personal
liability to shareholders is remote.
As of the approximate time of this Prospectus, the Investment Manager, the
Distributor and/or Metropolitan Life Insurance Company ("Metropolitan"), their
indirect parent, were the beneficial owners of all or a substantial amount of
the outstanding shares of the Fund, and may be deemed to be in control of the
Fund as "control" is defined in the 1940 Act. Such owners may acquire additional
shares of the Fund. Although sales of the Fund's shares to other investors will
reduce their percentage ownership, so long as 25% of the Fund's shares are so
owned, such owners will be presumed to be in control of the Fund for purposes of
voting on certain matters submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
Management of the Fund
Under the provisions of the Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees. The Fund's investment manager is State Street Research
& Management Company. The Investment Manager is charged with the overall
responsibility for managing the investments and business affairs of the Fund,
subject to the authority of the Board of Trustees.
The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve as investment adviser to one of the nation's first mutual
funds, presently known as State Street Investment Trust, which they had formed
in 1924. Their investment management philosophy, which continues to this day,
emphasized comprehensive fundamental research and analysis, including meetings
with the management of companies under consideration for investment. The
Investment Manager's portfolio management group has extensive investment
industry experience. The Investment Manager is an indirect wholly-owned
subsidiary of Metropolitan, and the Distributor is a wholly-owned subsidiary of
35
<PAGE>
the Investment Manager, and both are located at One Financial Center, Boston,
Massachusetts 02111-2690.
Under its Advisory Agreement with the Trust, the Investment Manager
receives a monthly investment advisory fee equal to 0.85% (on an annual basis)
of the average daily value of the net assets of the Fund. Such fee is higher
than that charged by most mutual funds, but is believed by the Trustees to be
justified given the considerable analysis and research necessary to manage the
Fund in light of its investment objective and policies. The Fund bears all costs
of its operation other than those incurred by the Investment Manager under the
Advisory Agreement. In particular, the Fund pays, among other expenses,
investment advisory fees, certain distribution expenses under the Fund's
Distribution Plan and the compensation and expenses of the Trustees who are not
otherwise currently affiliated with the Investment Manager or any of its
affiliates. The Fund also incurs expenses payable to various states in
connection with the offer and sale of the Fund's shares, and expenses for legal,
custodian and transfer agent services, among other costs. The Investment Manager
will reduce its management fee payable by the Fund up to the amount of any
expenses (excluding permissible items, such as brokerage commissions, Rule 12b-1
payments, interest, taxes and litigation expenses) paid or incurred in any year
in excess of the most restrictive expense limitation imposed by any state in
which the Fund sells shares, if any. Under the Advisory Agreement, the
Investment Manager provides the Fund with office space, facilities and
personnel. The Investment Manager compensates Trustees of the Trust if such
persons are employees or affiliates of the Investment Manager or its affiliates.
The Fund is managed by Rudolph K. Kluiber. Mr. Kluiber has managed the
Fund since its inception. Mr. Kluiber's principal occupation currently is
Vice President of State Street Research & Management Company. During the past
five years he has also served as an analyst for State Street Research &
Management Company.
Subject to the policy of seeking best overall price and execution, sales
of shares of the Fund may be considered by the Investment Manager in the
selection of broker or dealer firms for the Fund's portfolio transactions.
Dividends and Distributions; Taxes
The Fund intends to qualify and elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code, although it
cannot give complete assurance that it will do so. As long as it so qualifies
and satisfies certain distribution requirements, it will not be subject to
federal income taxes on its income (including capital gains, if any) distributed
to its shareholders. Consequently, the Fund intends to distribute annually to
its shareholders substantially all of its net investment income and any capital
gain net income
36
<PAGE>
(capital gains net of capital losses). The Fund declares dividends from net
investment income and distributions of net capital gains annually and pays such
dividends and distributions, if any, after year end or as otherwise required for
compliance with applicable tax regulations. Both dividends from net investment
income and distributions of capital gain net income will be declared and paid to
shareholders in additional shares of the Fund at net asset value on the record
date of that dividend or distribution, except in the case of shareholders who
elect a different available distribution method.
The Fund will provide its shareholders of record with annual information
on a timely basis concerning the federal tax status of dividends and
distributions during the preceding calendar year.
Dividends paid by the Fund from taxable net investment income and
distributions of net short-term capital gains, whether paid in cash or
reinvested in additional shares, will be taxable for federal income tax purposes
to shareholders as ordinary income, and a portion 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 consists of qualifying dividends
of domestic corporations. Distributions of net capital gains (the excess of net
long-term capital gains over net short-term capital losses) which are designated
as capital gains distributions, whether paid in cash or reinvested in additional
shares, will be taxable for federal income tax purposes to shareholders as
long-term capital gains, regardless of how long shareholders have held their
shares, and are not eligible for the dividends-received deduction. If shares of
the Fund which are sold at a loss have been held six months or less, the loss
will be considered as a long-term capital loss to the extent of any capital
gains distributions received.
Dividends and other distributions and proceeds of redemptions of Fund
shares paid to individuals and other nonexempt payees will be subject to a 31%
federal backup withholding tax if State Street Bank and Trust Company, the
Fund's transfer agent, is not provided with the shareholder's correct taxpayer
identification number and certification that the shareholder is not subject to
such backup withholding.
The foregoing discussion relates only to generally applicable federal
income tax provisions in effect as of the date of this Prospectus. Therefore,
prospective shareholders are urged to consult their own tax advisers regarding
tax matters, including state and local tax consequences.
37
<PAGE>
Calculation of Performance Data
From time to time, in advertisements or in communications to shareholders
or prospective investors, the Fund may compare the performance of its Class A,
Class B, Class C and Class D shares to that of other mutual funds with similar
investment objectives, to certificates of deposit and/or to other financial
alternatives. The Fund may also compare its performance to appropriate indices
such as the NASDAQ Composite Average, Small Stock Index, Russell 2000 Value
Index, Standard & Poor's 500 Stock Index (the "S&P 500"), Consumer Price Index
and Dow Jones Industrial Average and/or to appropriate rankings and averages,
such as the Lipper Small Company Growth Funds average, compiled by Lipper
Analytical Services, Inc., or to those compiled by Morningstar, Inc., Money
Magazine, Business Week, Forbes Magazine, the Wall Street Journal and Investor's
Daily. Total return is computed separately for each class of shares of the Fund.
The average annual total return ("standard total return") for shares of the Fund
is computed by determining the average annual compounded rate of return for a
designated period that, if applied to a hypothetical $1,000 initial investment
(less the maximum initial or contingent deferred sales charge, if applicable),
would produce the redeemable value of that investment at the end of the period,
assuming reinvestment of all dividends and distributions and with recognition of
all recurring charges. Standard total return will be calculated for the periods
specified in applicable regulations and may be accompanied by nonstandard total
return information for differing periods computed in the same manner with or
without annualizing the total return or taking sales charges into account.
During the first year of operations, the Fund may also advertise its aggregate
total return without annualization.
The standard total return results take sales charges into account, if
applicable, but do not take into account recurring and nonrecurring charges for
optional services which only certain shareholders elect and which involve
nominal fees, such as the $7.50 fee for remittance of redemption proceeds by
wire. Where sales charges are not applicable and therefore not taken into
account in the calculation of standard total return, the results will be
increased. Any voluntary waiver of management fees or assumption of expenses by
the Fund's affiliates will also increase performance results.
Performance information may be useful in evaluating the Fund and for
providing a basis for comparison with other financial alternatives. Since the
performance of the Fund varies in response to fluctuations in economic and
market conditions, interest rates and Fund expenses, among other things, no
performance quotation should be considered a representation as to the Fund's
performance for any future period. In addition, the net asset value of shares of
the Fund will fluctuate, with the result that shares of the Fund, when redeemed,
may be worth more or less than their original cost. Neither an investment in the
38
<PAGE>
Fund nor the Fund's performance is insured or guaranteed; such lack of insurance
or guarantees should accordingly be given appropriate consideration when
comparing the Fund to financial alternatives which have such features.
Performance data or rankings for a given class of shares should be interpreted
carefully by investors who hold or may invest in a different class of shares.
39
<PAGE>
State Street Research
Small Capitalization
Value Fund
February 1, 1995
P R O S P E C T U S
STATE STREET RESEARCH
SMALL CAPITALIZATION
VALUE FUND
One Financial Center
Boston, MA 02111
INVESTMENT ADVISER
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
DISTRIBUTOR
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
SHAREHOLDER SERVICES
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266
1-800-562-0032
CUSTODIAN
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
LEGAL COUNSEL
Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02111
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
CT\value
40
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION VALUE FUND
a series of
STATE STREET RESEARCH CAPITAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1995
As Supplemented October 23, 1995
TABLE OF CONTENTS
Page
INVESTMENT POLICIES AND RESTRICTIONS 2
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES 5
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS 12
TRUSTEES AND OFFICERS 19
INVESTMENT ADVISORY SERVICES 22
PURCHASE AND REDEMPTION OF SHARES 24
NET ASSET VALUE 25
PORTFOLIO TRANSACTIONS 26
CERTAIN TAX MATTERS 28
DISTRIBUTION OF SHARES OF THE FUND 30
CALCULATION OF PERFORMANCE DATA 33
CUSTODIAN 35
INDEPENDENT ACCOUNTANTS 35
FINANCIAL STATEMENTS 35
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 Value Fund, dated February 1, 1995, as supplemented October 23,
1995, which may be obtained without charge from the offices of State Street
Research Capital Trust (the "Trust") or State Street Research Investment
Services, Inc. (the "Distributor"), One Financial Center, Boston, Massachusetts
02111-2690.
CONTROL NUMBER: 1285R-950220(0396)SSR-LD SCV-879D-295
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
As set forth in part under "The Fund's Investments" and "Limiting
Investment Risk" in the Fund's Prospectus, the Fund has adopted certain
investment restrictions.
The fundamental and nonfundamental policies of the Fund do not apply to
any matters involving the issuance of multiple classes of shares of the Fund or
the creation or use of a structure allowing the Fund to invest substantially all
its assets in a related collective investment vehicle for similar funds or
allowing the Fund to serve as such a collective investment vehicle for other
similar funds, to the extent permitted by law and regulatory authorities.
All of the Fund's fundamental investment restrictions are set forth below.
These fundamental investment restrictions may not be changed except by the
affirmative vote of a majority of the Fund's outstanding voting securities as
defined in the Investment Company Act of 1940, as amended (the "1940 Act").
(Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at a meeting of security holders duly called, (i) of
67% or more of the voting securities present at a meeting if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy or (ii) of more than 50% of the outstanding voting securities, whichever
is less.) Under these restrictions, it is the Fund's policy:
(1) not to purchase a security of any one issuer (other than
securities issued or guaranteed as to principal or interest by
the U.S. Government or its agencies or instrumentalities or
mixed-ownership Government corporations) if such purchase would,
with respect to 75% of the Fund's total assets, cause more than
5% of the Fund's total assets to be invested in the securities of
such issuer or cause more than 10% of the voting securities of
such issuer to be held by the Fund;
(2) not to issue senior securities as defined in the 1940 Act, except as
permitted by that Act and the rules thereunder or as permitted by
the Securities and Exchange Commission (the creation of general
liens or security interests under normal brokerage arrangements for
transactions in portfolio assets are not deemed to involve the
issuance of senior securities);
(3) not to underwrite or participate in the marketing of securities
of other issuers, except (a) the Fund may, acting alone or in
syndicates or groups, purchase or otherwise acquire securities of
other issuers for investment, either from the issuers or from
persons in a control relationship with the issuers or from
underwriters of such securities; and (b) to the extent that, in
connection with the disposition of the Fund's securities, the
Fund may be a selling shareholder in an offering or deemed to be
an underwriter under certain federal securities laws;
(4) not to purchase fee simple interests in real estate unless acquired
as a result of ownership of securities or other instruments,
although the Fund may purchase and sell other interests in real
estate including securities which are secured by real estate, or
securities of companies which make real estate loans or own, or
invest or deal in, real estate;
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<PAGE>
(5) not to invest in physical commodities or physical commodity
contracts in excess of 10% of the Fund's total assets, except
that investments in essentially financial items 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 and currencies shall
not be deemed investments in commodities or commodities
contracts;*
(6) not to lend money; however, the Fund may lend portfolio securities
and purchase bonds, debentures, notes and similar obligations (and
enter into repurchase agreements with respect thereto);
(7) not to make any investment which would cause more than 25% of the
value of the Fund's total assets to be invested in securities of
issuers principally engaged in any one industry [for purposes of
this restriction, (a) utilities may be divided according to their
services so that, for example, gas, gas transmission, electric
and telephone companies may each be deemed in a separate
industry, (b) oil and oil related companies may be divided by
type so that, for example, oil production companies, oil service
companies and refining and marketing companies may each be deemed
in a separate industry, (c) finance companies may be classified
according to the industries of their parent companies, and (d)
securities issued or guaranteed as to principal or interest by
the U.S. Government or its agencies or instrumentalities or
mixed-ownership Government corporations (including repurchase
agreements involving such U.S. Government securities to the
extent excludable under relevant regulatory interpretations) may
be excluded]; and
(8) not to borrow money, including reverse repurchase agreements in so
far as such agreements may be regarded as borrowings, except for
borrowings not in an amount in excess of 33 1/3% of the value of its
total assets.
* In connection with clause (5), the Fund has undertaken with a state
securities authority that, for so long as the Fund's shares are
required to be registered for sale in that state, the Fund will
restrict its investment in those commodities which are subject to
the 10% limit of the Fund's total assets, to precious metals.
The following nonfundamental investment restrictions may be changed
without shareholder approval. Under these restrictions, it is the Fund's policy:
(1) not to purchase any security or enter into a repurchase agreement if
as a result more than 15% of its net assets would be invested in
securities that are illiquid (including repurchase agreements not
entitling the holder to payment of principal and interest within
seven days);
(2) not to invest more than 15% of its net assets in restricted
securities of all types (including not more than 5% of its net
assets in restricted securities which are not eligible for resale
pursuant to Rule 144A, Regulation S or other exemptive provisions
under the Securities Act of 1933);
(3) not to invest more than 5% of its total assets in securities of
private issuers including predecessors with less than three
years' continuous operations (except (a) securities
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<PAGE>
guaranteed or backed by an affiliate of the issuer with three years
of continuous operations, (b) securities issued or guaranteed as to
principal or interest by the U.S. Government, or its agencies or
instrumentalities, or a mixed-ownership Government corporation, (c)
securities of issuers with debt securities rated at least "BBB" by
Standard & Poor's Corporation or "Baa" by Moody's Investor's
Service, Inc. or 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 as noted above) do not exceed 15% of the Fund's
total assets;
(4) not to engage in transactions in options except in connection with
options on securities, securities indices and currencies, and
options on futures on securities, securities indices and currencies;
(5) not to purchase securities on margin or make short sales of
securities or maintain a short position except for short sales
"against the box" (as a matter of current operating policy, the
Fund will not make short sales or maintain a short position
unless not more than 5% of the Fund's net assets (taken at
current value) are held as collateral for such sales at any time;
and for the purpose of this restriction, escrow or custodian
receipts or letters, margin or safekeeping accounts, or similar
arrangements used in the industry in connection with the trading
of futures, options and forward commitments are not deemed to
involve the use of margin);
(6) not to purchase a security issued by another investment company,
except to the extent permitted under the 1940 Act or except by
purchases in the open market involving only customary brokers'
commissions, or securities acquired as dividends or distributions or
in connection with a merger, consolidation or similar transaction or
other exchange;
(7) not to purchase or retain any security of an issuer if those of its
officers and Trustees and officers and directors of its investment
adviser who individually own more than 1/2 of 1% of the securities
of such issuer, when combined, own more than 5% of the securities of
such issuer taken at market;
(8) not to invest directly as a joint venturer or general partner in
oil, gas or other mineral exploration or development joint ventures
or general partnerships (provided that the Fund may invest in
securities issued by companies which invest in or sponsor such
programs and in securities indexed to the price of oil, gas or other
minerals);
(9) not to invest in warrants in excess of 5% of the value, at the
lower of cost or market, of its net assets, provided that
warrants not listed on the New York or American Stock Exchange
shall be further limited to 2% of the Fund's net assets (warrants
initially attached to securities and acquired by the Fund upon
original issuance thereof shall be deemed to be without value);
and
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<PAGE>
(10) not to purchase any security while borrowings, including reverse
repurchase agreements, representing more than 5% of the Fund's total
assets are outstanding.
Compliance with the above nonfundamental investment restrictions (1) and
(2) will be determined independently.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Among other investments described below, the Fund may buy and sell
domestic and foreign options, futures contracts, and options on futures
contracts, with respect to securities, securities indices, and 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 transaction charge and posting margin in an amount
equal to a small percentage of the value of the underlying asset or index. The
Fund will initially be required to deposit with the Trust's custodian or the
broker effecting the futures transaction an amount of "initial margin" in cash
or U.S. Treasury obligations.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will terminate
the Fund's position in the futures contract. A final determination of
maintenance margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. While futures
contracts with respect to securities do provide for the delivery and acceptance
of such securities, such delivery and acceptance are seldom made.
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<PAGE>
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.
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.
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<PAGE>
Put options on indices of securities are similar to put options on the
securities themselves except that the delivery requirements are different.
Instead of giving the right to make delivery of a security at a specified price,
a put option on an index of securities gives the holder the right to receive an
amount of cash upon exercise of the option if the value of the underlying index
has fallen below the exercise price. The amount of cash received will be equal
to the difference between the closing price of the index and the exercise price
of the option expressed in dollars times a specified multiple. As with options
on securities or futures contracts, the Fund may offset its position in index
options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
A securities index assigns relative values to the securities included in
the index and the index options are based on a broad market index. Although
there are at present few available options on indices of fixed income
securities, other than tax-exempt securities, or futures and related options
based on such indices, such instruments may become available in the future. In
connection with the use of such options, the Fund may cover its position by
identifying a representative portfolio of securities having a value equal to the
aggregate face value of the option position taken. However, the Fund may employ
any appropriate method to cover its positions that is consistent with applicable
regulatory and exchange requirements.
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.
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The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund's return will be the premium received from
writing the put option minus the amount by which the market price of the
security is below the exercise price.
Limitations and Risks of Options and Futures Activity
The Fund will engage in transactions in futures contracts or options as a
hedge against changes resulting from market conditions which produce changes in
the values of their securities or the securities which it intends to purchase
(e.g., to replace portfolio securities which will mature in the near future)
and, subject to the limitations described below, to enhance return. The Fund
will not purchase any futures contract or purchase any call option if,
immediately thereafter, more than one third of the Fund's net assets would be
represented by long futures contracts or call options. The Fund will not write a
covered call or put option if, immediately thereafter, the aggregate value of
the assets (securities in the case of written calls and cash or cash equivalents
in the case of written puts) underlying all such options, determined as of the
dates such options were written, would exceed 25% of that Fund's net assets. The
Fund may not establish a position in a commodity futures contract or purchase or
sell a commodity option contract for other than bona fide hedging purposes if
immediately thereafter the sum of the amount of initial margin deposits and
premiums required to establish such positions for such nonhedging purposes would
exceed 5% of the market value of the Fund's net assets.
Although effective hedging can generally capture the bulk of a desired
risk adjustment, no hedge is completely effective. The Fund's ability to hedge
effectively through transactions in futures and options depends on the degree to
which price movements in its holdings correlate with price movements of the
futures and options.
Some positions in futures and options may be closed out only on an
exchange which provides a secondary market therefor. There can be no assurance
that a liquid secondary market will exist for any particular futures contract or
option at any specific time. Thus, it may not be possible to close such an
option or futures position prior to maturity. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
effectively hedge its securities and might, in some cases, require the Fund to
deposit cash to meet applicable margin requirements. The Fund will enter into an
option or futures position only if it appears to be a liquid investment.
Foreign Investments
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
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<PAGE>
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's dealings in forward currency exchange contracts will be limited
to hedging involving either specific transactions or aggregate portfolio
positions. A forward currency contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are not commodities and are entered into
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. Although spot and forward contracts
will be used primarily to protect the Fund from adverse currency movements, they
also involve the risk that anticipated currency movements will not be accurately
predicted, which may result in losses to the Fund. This method of protecting the
value of the Fund's portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange that can be achieved at
some future point in time. Although such contracts tend to minimize the risk of
loss due to a decline in the value of hedged currency, they tend to limit any
potential gain that might result should the value of such currency increase.
Repurchase Agreements
The Fund may enter into repurchase agreements. Repurchase agreements occur
when the Fund acquires a security and the seller, which may be either (i) a
primary dealer in U.S. Government securities or (ii) an FDIC-insured bank having
gross assets in excess of $500 million, simultaneously commits to repurchase it
at an agreed-upon price on an agreed-upon date within a specified number of days
(usually not more than seven) from the date of purchase. The repurchase price
reflects the purchase price plus an agreed-upon market rate of interest which is
unrelated to the coupon rate or maturity of the acquired security. The Fund will
only enter into repurchase agreements involving U.S. Government securities.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities. Repurchase
agreements will be limited to 30% of the Fund's total assets, except that
repurchase agreements extending for more than seven days when combined with
other illiquid securities will be limited to 15% of the Fund's net assets.
Currently, the Fund does not expect to invest more than 5% of its net assets in
repurchase agreements.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. However, the Fund
has no present intention of engaging in reverse repurchase agreements in excess
of 5% of the Fund's total assets. In a reverse repurchase agreement the Fund
transfers a portfolio instrument to another person, such as a financial
institution, broker or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed-upon rate. The ability to use reverse
repurchase agreements may enable, but does not ensure the ability of, the Fund
to avoid selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous.
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When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
When-Issued Securities
The Fund may purchase "when-issued" equity securities, which are traded on
a price basis prior to actual issuance. Currently, the Fund does not expect to
invest more than 5% of its net assets in when-issued securities. Such purchases
will be made only to achieve the Fund's investment objective and not for
leverage. The when-issued trading period generally lasts from a few days to up
to a month or more; during this period dividends on equity securities are not
payable. No income accrues to the Fund prior to the time it takes delivery. A
frequent form of when-issued trading occurs when corporate securities to be
created by a merger of companies are traded prior to the actual consummation of
the merger. Such transactions may involve a risk of loss if the value of the
securities fall below the price committed to prior to the actual issuance. The
Trust's custodian will establish a segregated account for the Fund when it
purchases securities on a when-issued basis consisting of cash or liquid
securities equal to the amount of the when-issued commitments.
Rule 144A Securities
The Fund may buy or sell restricted securities in accordance with Rule
144A under the Securities Act of 1933 ("Rule 144A Securities"). Securities may
be resold pursuant to Rule 144A under certain circumstances only to qualified
institutional buyers as defined in the rule, and the markets and trading
practices for such securities are relatively new and still developing; depending
on the development of such markets, 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.
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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 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 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.
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Securities Lending
The Fund may lend portfolio securities with a value of up to 33 1/3% of its
total assets, although the Fund has no present intention of lending portfolio
securities with a value in excess of 5% 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 of the loaned securities 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.
Industry Classifications
In determining how much of the Fund's portfolio is invested in a given
industry, the following industry classifications, grouped by sectors, are
currently used:
Basic Industries Consumer Staple Science & Technology
- ---------------- --------------- --------------------
Chemical Business Service Aerospace
Diversified Container Computer Software & Service
Electrical Equipment Drug Electronic Components
Forest Products Food & Beverage Electronic Equipment
Machinery Hospital Supply Office Equipment
Metal & Mining Personal Care
Railroad Printing & Publishing
Truckers Tobacco
Utility Energy Consumer Cyclical
- ------- ------ -----------------
Electric Oil Airline
Natural Gas Oil Service Automotive
Telephone Building
Hotel & Restaurant
Miscellaneous Finance Photography
- ------------- ------- Recreation
Bank Retail Trade
Financial Service Textile & Apparel
Insurance
Other Investment Limitations
Pursuant to the policies of certain state securities authorities, the Fund
will not invest in real estate limited partnerships, oil, gas or mineral
development limited partnerships, or in oil, gas or mineral leases for so long
as Fund shares are required to be registered for sale in the relevant state.
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
As indicated in the Fund's Prospectus, the Fund may invest in long-term
and short-term debt securities. The Fund may invest in cash and short-term
securities for temporary defensive purposes when, in the opinion of the
Investment Manager, such a position is more likely to provide protection against
unfavorable market conditions than adherence to other investment policies.
Certain debt securities and money market instruments in which the Fund may
invest are described below.
U.S. Government and Related Securities
U.S. Government securities are securities which are issued or
guaranteed as to principal or interest by the U.S. Government, a U.S.
Government agency or instrumentality, or certain mixed-ownership Government
corporations as described herein. The U.S. Government securities in which
the Fund invests include, among others:
(bullet) direct obligations of the U.S. Treasury, i.e., U.S. Treasury
bills, notes, certificates and bonds;
(bullet) obligations of U.S. Government agencies or instrumentalities such
as the Federal Home Loan Banks, the Federal Farm Credit Banks,
the Federal National Mortgage Association, the Government National
Mortgage Association and the Federal Home Loan Mortgage
Corporation; and
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<PAGE>
(bullet) obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a variety
of ways by the U.S. Government, its agencies or instrumentalities. Some of these
obligations, such as Government National Mortgage Association mortgage-backed
securities, are backed by the full faith and credit of the U.S. Treasury. Other
obligations, such as those of the Federal National Mortgage Association, are
backed by the discretionary authority of the U.S. Government to purchase certain
obligations of agencies or instrumentalities, although the U.S. Government has
no legal obligation to do so. Obligations such as those of the Federal Home Loan
Banks, the Federal Farm Credit Banks, the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation are backed by the credit of the
agency or instrumentality issuing the obligations. Certain obligations of
Resolution Funding Corporation, a mixed-ownership Government corporation, are
backed with respect to interest payments by the U.S. Treasury, and with respect
to principal payments by U.S. Treasury obligations held in a segregated account
with a Federal Reserve Bank. Except for certain mortgage-related securities, the
Fund will only invest in obligations issued by mixed-ownership Government
corporations where such securities are guaranteed as to payment of principal or
interest by the U.S. Government or a U.S. Government agency or instrumentality,
and any unguaranteed principal or interest is otherwise supported by U.S.
Government obligations held in a segregated account.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
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.
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Rating Categories of Debt Securities
Set forth below is a description of corporate bond and debenture ratings
of Standard & Poor's Corporation ("S&P"):
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.
Debt rated BB, B, CCC, CC and C is regarded as having speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B: Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
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CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The D rating also will be used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC 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 corporate bond and debenture
ratings of Moody's Investors Service, Inc. ("Moody's"):
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
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<PAGE>
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
1, 2 or 3: The ratings from Aa through B may be modified by the addition
of a numeral indicating a bond's rank within its rating category.
Risk Factors of Lower Quality Debt Securities
Lower quality debt securities generally involve more credit risk than
higher rated securities and are considered by S&P and Moody's to be speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. Further, such securities may be subject to greater
market fluctuations and risk of loss of income and principal than lower
yielding, higher rated debt securities. Risks of lower quality debt securities,
commonly known as "junk bonds," include (i) limited liquidity and secondary
market support; (ii) substantial market price volatility resulting from changes
in prevailing interest rates and/or investor perceptions; (iii) subordination to
the prior claims of banks and other senior lenders; (iv) the operation of
mandatory sinking fund or call/redemption provisions during periods of declining
interest rates when the Fund may be required to reinvest premature redemption
proceeds in lower yielding portfolio securities; (v) the possibility that
earnings of the issuer may be insufficient to meet its debt service; and (vi)
the issuer's low creditworthiness and potential for insolvency during periods of
rising interest rates and economic downturn.
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<PAGE>
Bank Money Investments
Bank money investments include but are not limited to certificates of
deposit, bankers' acceptances and time deposits. Certificates of deposit are
generally short-term (i.e., less than one year), interest-bearing negotiable
certificates issued by commercial banks or savings and loan associations against
funds deposited in the issuing institution. A banker's acceptance is a time
draft drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction (to finance the import, export, transfer or
storage of goods). A banker's acceptance may be obtained from a domestic or
foreign bank, including a U.S. branch or agency of a foreign bank. The borrower
is liable for payment as well as the bank, which unconditionally guarantees to
pay the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity. Time deposits are nonnegotiable deposits for a fixed period of time at
a stated interest rate. The Fund will not invest in any such bank money
investment unless the investment is issued by a U.S. bank that is a member of
the Federal Deposit Insurance Corporation ("FDIC"), including any foreign branch
thereof, a U.S. branch or agency of a foreign bank, a foreign branch of a
foreign bank, or a savings bank or savings and loan association that is a member
of the FDIC and which at the date of investment has capital, surplus and
undivided profits (as of the date of its most recently published financial
statements) in excess of $50 million. The Fund will not invest in time deposits
maturing in more than seven days and will not invest more than 10% of its total
assets in time deposits maturing in two to seven days.
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under state law. U.S. federal branches or
agencies of foreign banks are chartered and regulated by the Comptroller of
the Currency, while state branches and agencies are chartered and regulated
by authorities of the respective states or the District of Columbia. U.S.
branches of foreign banks may accept deposits and thus are eligible for FDIC
insurance; however, not all such branches elect FDIC insurance. Unlike U.S.
branches of foreign banks, U.S. agencies of foreign banks may not accept
deposits and thus are not eligible for FDIC insurance. Both branches and
agencies can maintain credit balances, which are funds received by the office
incidental to or arising out of the exercise of their banking powers and can
exercise other commercial functions, such as lending activities.
Short-Term Corporate Debt Instruments
Short-term corporate debt instruments include commercial paper to finance
short-term credit needs (i.e., short-term, unsecured promissory notes) issued by
corporations including but not limited to (a) domestic or foreign bank holding
companies or (b) their subsidiaries or affiliates where the debt instrument is
guaranteed by the bank holding company or an affiliated bank or where the bank
holding company or the affiliated bank is unconditionally liable for the debt
instrument. Commercial paper is usually sold on a discounted basis and has a
maturity at the time of issuance not exceeding nine months.
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<PAGE>
Commercial Paper Ratings
Commercial paper investments at the time of purchase will be rated A by
S&P or Prime by Moody's, or, if not rated, issued by companies having an
outstanding long-term unsecured debt issue rated at least A by S&P or 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.
In the event the lowering of ratings of debt instruments held by the Fund
by applicable rating agencies results in a material decline in the overall
quality of the Fund's portfolio, the Trustees of the Trust will review the
situation and take such action as they deem in the best interests of the Fund's
shareholders, including, if necessary, changing the composition of the
portfolio.
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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 affiliation is Director, State Street Research Investment
Services, Inc.
*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.
*Rudolph K. Kluiber, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 36. His principal occupation currently is
Vice President of State Street Research & Management Company. During the past
five years he has also served as an analyst for State Street Research &
Management Company.
*+Frederick R. Kobrick, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 52. His principal occupation 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 69. His principal occupation during
the past five years has been Partner, Saltonstall & Co., a private investment
firm.
*+Francis J. McNamara, III has served as Secretary and General Counsel of
the Trust since May 1995. He is 40. His principal occupation is Senior Vice
President, Secretary and General Counsel of the Investment Manager. During the
past five years he has also served as Senior Vice President, General Counsel and
Assistant Secretary of The Boston Company, Inc., Boston Safe Deposit and Trust
Company and The Boston Company Advisors, Inc. Mr. McNamara's other principal
business affiliations include Senior Vice President, Clerk and General Counsel
of State Street Research Investment Services, Inc.
*+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.
- -----------------------------
* or + See footnotes on page 21.
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<PAGE>
*+Thomas P. Moore, Jr., One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 56. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as 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
58. His principal occupation during the past five years has been Jay W.
Forrester Professor of Management at Sloan School of Management, Massachusetts
Institute of Technology.
*+Ralph F. Verni, One Financial Center, Boston, MA 02111, serves as
Chairman of the Board, President, Chief Executive Officer and Trustee of the
Trust. He is 52. His principal occupation is Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research & Management
Company. During the past five years he has also served as President and Chief
Executive Officer of New England Investment Companies and as Chief Investment
Officer and Director of New England Mutual Life Insurance Company. Mr. Verni's
other principal business affiliations include Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research Investment
Services, Inc.
- -----------------------------
* 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.
As of September 30, 1995, the Investment Manager, the Distributor and/or
Metropolitan Life Insurance Company ("Metropolitan"), their indirect parent,
were the beneficial owners of all or a substantial amount of the outstanding
Class A, Class B, Class C and Class D shares of the Fund, and may be deemed to
be in control of the Fund as control is defined in the 1940 Act. Such owners may
acquire additional shares of the Fund. Although sales of the Fund's shares to
other investors will reduce their percentage ownership, so long as 25% of a
class of shares is so owned, such owner will be presumed to be in control of
such class of shares for purposes of voting on certain matters, such as any
Distribution Plan for a given class.
- ----------------------------
* These Trustees and/or officers are or may be deemed to be interested persons
of the Trust under the 1940 Act because of their affiliations with the Fund's
investment adviser.
+ Serves as a Trustee and/or officer of one or more of the following investment
companies, each of which has an advisory or distribution relationship with
the Investment Manager or its affiliates: MetLife - State Street Equity
Trust, MetLife - State Street Financial Trust, State Street Research Income
Trust, State Street Research Money Market Trust, State Street Research
Tax-Exempt Trust, State Street Research Capital Trust, State Street Research
Exchange Trust, State Street Research Growth Trust, State Street Research
Master Investment Trust, State Street Research Securities Trust, State
Street Research Portfolios, Inc. and Metropolitan Series Fund, Inc.
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During the fiscal year ended September 30, 1995, the Trustees were
compensated as follows:
Total Compensation
Aggregate From Trust and
Compensation Complex Paid
Name of Trustee From Trust(a) to Trustees(b)
Edward M. Lamont $ 0 $61,271
Robert A. Lawrence $8,300 $88,935
Dean O. Morton $9,100 $97,395
Thomas L. Phillips $8,100 $67,185
Toby Rosenblatt $ 0 $61,271
Michael S. Scott Morton $9,700 $98,835
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $8,600 $69,585
(a) Includes compensation from multiple Series of the Trust. See "Distribution
of Shares" for a listing of series.
(b) Includes compensation from Metropolitan Series Fund, Inc., for which the
Investment Manager serves as sub-investment adviser, State Street Research
Portfolios, Inc., for which State Street Research Investment Services, Inc.
serves as distributor, and all investment companies for which the Investment
Manager serves as primary investment adviser, comprising a total of 29
series. The Trust does not provide any pension or retirement benefits for
the Trustees.
(c) This information includes other series of the Trust through their fiscal
years ended September 30, 1995, and includes estimates of compensation from
the Fund for the current fiscal year ended September 30, 1996. The Fund
commenced operations on February 13, 1995.
<PAGE>
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Advisory
Agreement provides that the Investment Manager shall furnish the Fund with an
investment program, suitable office space and facilities and such investment
advisory, research and administrative services as may be required from time to
time. The Investment Manager compensates all executive alnd 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 0.85% 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 February 13,
1995 (commencement of operations) through September 30, 1995, the Fund's
investment advisory fee prior to the assumption of fees or expenses was $30,298.
For the same period, the voluntary reduction of fees or assumption of expenses
amounted to $80,022.
Further, to the extent required under applicable state regulatory
requirements, the Investment Manager will reduce its management fee up to the
amount of any expenses (excluding permissible items, such as brokerage
commissions, Rule 12b-1 payments, interest, taxes and litigation expenses) paid
or incurred by the Fund in any fiscal year which exceed specified percentages of
the average daily net assets of the Fund for such fiscal year. The most
restrictive of such percentage limitations is currently 2.5% of the first $30
million of average net assets, 2.0% of the next $70 million of average net
assets and 1.5% of the remaining average net assets. These commitments may be
amended or rescinded in response to changes in the requirements of the various
states by the Trustees without shareholder approval.
The Advisory Agreement provides that it shall continue in effect with respect
to the Fund for a period of two years after its initial effectiveness and will
continue from year to year thereafter as long as it is approved at least
annually both (i) by a vote of a majority of the outstanding voting securities
of the Fund (as defined in the 1940 Act) or by the Trustees of the Trust, and
(ii) in either event by a vote of a majority of the Trustees who are not parties
to the Advisory Agreement or "interested persons" of any party thereto, cast in
person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated on 60 days' written notice by either party
and will terminate automatically in the event of its assignment, as defined
under the 1940 Act and regulations thereunder. Such regulations provide that a
transaction which does not result in a change of actual control or management of
an adviser is not deemed an assignment.
Under a Funds Administration Agreement between the Investment Manager and the
Distributor, the Distributor provides assistance to the Investment Manager in
performing certain fund administration services for the Trust, such as
assistance in determining the daily net asset value of shares of series of the
Trust and in preparing various reports required by regulations.
Under a Shareholders' Administrative Services Agreement between the Trust and
the Distributor, the Distributor provides shareholders' administrative services,
such as responding to inquiries and instructions from investors respecting the
purchase and redemption of shares of the Fund, and is entitled to reimbursements
of its costs for providing such services. Under certain arrangements for
Metropolitan to provide subadministration services, Metropolitan may receive a
fee for the
22
<PAGE>
maintenance of certain share ownership records for participants in sponsored
arrangements, such as employee benefit plans, through or under which the Fund's
shares may be purchased.
Under the Code of Ethics of the Investment Manager, its employees in Boston
where investment management operations are conducted, are only permitted to
engage in personal securities transactions in accordance with certain conditions
relating to an employee's position, the identity of the security, the timing of
the transactions, and similar factors. Such employees must report their personal
securities transactions quarterly and supply broker confirmations to the
Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by the Distributor. The Fund offers four
classes of shares which may be purchased at the next determined net asset value
per share plus, in the case of all classes except Class C shares, a sales charge
which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B and Class
D shares). General information on how to buy shares of the Fund, as well as
sales charges involved, are set forth under "Purchase of Shares" in the
Prospectus. The following supplements that information.
Public Offering Price
The public offering price for each class of shares of the Fund is based on
their net asset value determined as of the close of the NYSE on the day the
purchase order is received by State Street Research Shareholder Services
provided that the order is received prior to the close of the NYSE on that day;
otherwise the net asset value used is that determined as of the close of the
NYSE on the next day it is open for unrestricted trading. When a purchase order
is placed through a dealer, that dealer is responsible for transmitting the
order promptly to State Street Research Shareholder Services in order to permit
the investor to obtain the current price. Any loss suffered by an investor which
results from a dealer's failure to transmit an order promptly is a matter for
settlement between the investor and the dealer.
Reduced Sales Charges
For purposes of determining whether a purchase of Class A shares qualifies
for reduced sales charges, the term "person" includes: (i) an individual, or an
individual combining with his or her spouse and their children and purchasing
for his, her or their own account; (ii) a "company" as defined in Section
2(a)(8) of the 1940 Act; (iii) a trustee or other fiduciary purchasing for a
single trust estate or single fiduciary account (including a pension, profit
sharing or other employee benefit trust created pursuant to a plan qualified
under Section 401 of the Internal Revenue Code); (iv) a tax-exempt organization
under Section 501(c)(3) or (13) of the Internal Revenue Code; and (v) an
employee benefit plan of a single employer or of affiliated employers.
Investors may purchase Class A shares of the Fund at reduced sales charges by
executing a Letter of Intent to purchase no less than an aggregate of $100,000
of the Fund or any combination of Class A shares of "Eligible Funds" as
designated by the Distributor within a 13-month period. The sales charge
applicable to each purchase made pursuant to a Letter of Intent will be that
which would apply if the total dollar amount set forth in the Letter of Intent
were being bought in a single transaction. Purchases made within a 90-day period
prior to the execution of a Letter of Intent may be included therein; in such
case the date of the earliest of such purchases marks the commencement of the
13-month period.
An investor may include toward completion of a Letter of Intent the value (at
the current public offering price) of all of his or her Class A shares of the
Funds and of any of the other Class A shares of Eligible Funds held of record as
of the date of his or her Letter of Intent, plus the value (at the current
offering price) as of such date of all of such shares held by any "person"
described herein as
23
<PAGE>
eligible to join with the investor in a single purchase. Class B, Class C and
Class D shares may also be included in the combination under certain
circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Class C Shares
Class C shares are currently available to certain benefit plans such as
qualified retirement plans, other than individual retirement accounts and
self-employed retirement plans, which meet criteria relating to level of assets,
number of participants, service agreements, or similar factors; banks and
insurance companies purchasing for their own accounts; endowment funds of
nonprofit organizations with substantial minimum assets; and similar
institutional investors.
Reorganizations
In the event of mergers or reorganizations with other public or private
collective investment entities, including investment companies as defined in the
1940 Act, as amended, the Fund may issue its shares at net asset value (or more)
to such entities or to their security holders.
24
<PAGE>
Redemptions
The Fund reserves the right to pay redemptions in kind with portfolio
securities in lieu of cash. In accordance with its election pursuant to Rule
18f-1 under the 1940 Act, the Fund may limit the amount of redemption proceeds
paid in cash. Although it has no present intention to do so, the Fund may, under
unusual circumstances, limit redemptions in cash with respect to each
shareholder during any ninety-day period to the lesser of (i) $250,000 or (ii)
1% of the net asset value of the Fund at the beginning of such period. In
connection with any redemptions paid in kind with portfolio securities,
brokerage and other costs may be incurred by the redeeming shareholder in the
sale of the securities received.
NET ASSET VALUE
The net asset values of the shares of the Fund are determined once daily as
of the close of the NYSE, ordinarily 4 P.M. New York City time, Monday through
Friday, on each day during which the NYSE is open for unrestricted trading. The
NYSE is currently closed on New Year's Day, Presidents Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is computed by dividing the sum of
the value of the securities held by the Fund plus any cash or other assets minus
all liabilities by the total number of outstanding shares of the Fund at such
time. Any expenses, except for extraordinary or nonrecurring expenses, borne by
the Fund, including the investment management fee payable to the Investment
Manager, are accrued daily.
In determining the values of portfolio assets as provided below, the Trustees
utilize one or more pricing services to value certain securities for which
market quotations are not readily available on a daily basis. Most debt
securities are valued on the basis of data provided by such pricing services.
The pricing services may provide prices determined as of times prior to the
close of the NYSE.
In general, securities are valued as follows. Securities which are listed or
traded on the New York or American Stock Exchange are valued at the price of the
last quoted sale on the respective exchange for that day. Securities which are
listed or traded on a national securities exchange or exchanges, but not on the
New York or American Stock Exchange, are valued at the price of the last quoted
sale on the exchange for that day prior to the close of the NYSE. Securities not
listed on any national securities exchange which are traded "over the counter"
and for which quotations are available on the National Association of Securities
Dealers' NASDAQ System, or other system, are valued at the closing price
supplied through such system for that day at the close of the NYSE. Other
securities are, in general, valued at the mean of the bid and asked quotations
last quoted prior to the close of the NYSE if there are market quotations
readily available, or in the absence of such market quotations, then at the fair
value thereof as determined by or under authority of the Trustees of the Trust
utilizing such pricing services as may be deemed appropriate as described above.
Securities deemed restricted as to resale are valued at the fair value thereof
as determined by or in accordance with methods adopted by the Trustees of the
Trust.
Short-term debt instruments issued with a maturity of one year or less which
have a remaining maturity of 60 days or less are valued using the amortized cost
method, provided that during any period in which more than 25% of the Fund's
total assets is invested in short-term debt securities the
25
<PAGE>
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 February 13, 1995 (commencement of operations) through September 30, 1995
was 47.34%.
Brokerage Allocation
The Fund and the Investment Manager seek the best overall execution of
purchase or sale orders and the most favorable net price in securities
transactions consistent with their judgment as to the business qualifications of
the various broker or dealer firms with which the Fund may do business.
Decisions with respect to the market where the transaction is to be completed,
and to the allocation of orders among brokers or dealers, are made in accordance
with this policy. In selecting brokers or dealers to effect portfolio
transactions, consideration is given to the performance, integrity and financial
responsibility of the various firms as well as to their demonstrated execution
experience and capability generally and in regard to particular markets or
securities and, in agency transactions, to the competitiveness of the commission
rates (or in principal transactions of the net prices) they charge. The
Investment Manager keeps current as to the range of rates or prices charged by
various firms and against this background evaluates the reasonableness of a
commission or price charged with respect to a particular transaction by
considering such factors as difficulty of execution or security positioning by
the executing firm.
When it appears that a number of firms can satisfy the required standards in
respect of a particular transaction, consideration may also be given to services
other than execution services which such firms have provided in the past or may
provide in the future. Among such other services are the supplying of
supplemental investment research, general economic and political information,
analytical and statistical data, relevant market information and daily market
quotations for computation of net asset value. In this connection it should be
noted that a substantial portion of brokerage commissions paid, or principal
transactions entered, by the Fund may be with brokers and investment banking
firms which, in the normal course of business, publish statistical, research and
other material which is received by the Investment Manager and which may or may
not prove useful to the Investment Manager, the Fund or other clients of the
Investment Manager.
Neither the Fund nor the Investment Manager has any definite agreements with
any firm as to the amount of business which that firm may expect to receive for
services supplied or otherwise. There may be, however, understandings with
certain firms that in order for such firms to be able to
26
<PAGE>
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
February 13, 1995 (commencement of operations) through September 30, 1995
amounted to approximately $15,354.
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 -- 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
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<PAGE>
respect to call or put options that have been written or purchased within the
preceding three months. (If the Fund purchases a put option for the purpose of
hedging an underlying portfolio security, the acquisition of the option is
treated as a short sale of the underlying security unless, for purposes only of
the 30% test, the option and the security are acquired on the same date.)
Finally, as discussed below, this requirement may also limit investments by the
Fund in options on stock indices, listed options on nonconvertible debt
securities, futures contracts, options on interest rate futures contracts and
certain foreign currency contracts.
If the Fund should fail to qualify as a regulated investment company in any
year, it would lose the beneficial tax treatment accorded regulated investment
companies under Subchapter M of the Code and all of its taxable income would be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of such Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of the
Fund to the extent thereof. Any distribution in excess of a shareholder's basis
in the shareholder's shares would be taxable as gain realized from the sale of
such shares.
The Fund will be liable for a nondeductible 4% excise tax on amounts not
distributed 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
28
<PAGE>
more difficult for the Fund to make the distributions required for the Fund to
maintain its status as a regulated investment company under Subchapter M of the
Code or to avoid the 4% excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may be
subject to provisions of the Code that (i) require inclusion of unrealized gains
or losses in the Fund's income for purposes of the 90% test, the 30% test, the
excise tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and (iii) characterize
both realized and unrealized gain or loss as short-term or long-term gain or
loss. Such provisions generally apply to, among other investments, options on
debt securities, indices on securities and futures contracts.
Federal Income Taxation of Shareholders
Dividends paid by the Fund may be eligible for the 70% dividends-received
deduction for corporations. The percentage of the Fund's dividends eligible for
such tax treatment may be less than 100% to the extent that less than 100% of
the Fund's gross income may be from qualifying dividends of domestic
corporations. Any dividend declared in October, November or December and made
payable to shareholders of record in any such month is treated as received by
such shareholder on December 31, provided that the Fund pays the dividend during
January of the following calendar year.
Distributions by the Fund can result in a reduction in the fair market value
of such Fund's shares. Should a distribution reduce the fair market value below
a shareholder's cost basis, such distribution nevertheless may be taxable to the
shareholder as ordinary income or long-term capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
DISTRIBUTION OF SHARES OF THE FUND
State Street Research 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 class.
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A
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<PAGE>
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 February 13, 1995 (commencement of operations) through
September 30, 1995, the Fund paid the Distributor no sales charges on Class A
shares.
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. For the period February 13, 1995
(commencement of operations) through September 30, 1995, the Fund paid the
Distributor no contingent deferred sales charges upon redemption of Class A,
Class B or Class D shares.
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
30
<PAGE>
shareholder accounts and expenses associated with the provision of personal
services by the Distributor directly to investors. In addition, the Distribution
Plan is deemed to authorize the Distributor to make payments out of general
profits, revenues or other sources to underwriters, securities dealers and
others in connection with sales of shares, to the extent, if any, that such
payments may be deemed to be within the scope of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not exceed
(i) with respect to Class A shares, an annual rate of 0.25% of the average daily
value of net assets represented by such Class A shares, and (ii) with respect to
Class B and Class D shares, an annual rate of 0.75% of the average daily value
of the net assets represented by such Class B or Class D shares (as the case may
be) to finance sales or promotion expenses and an annual rate of 0.25% of the
average daily value of the net assets represented by such Class B or Class D
shares (as the case may be) to make payments for personal services and/or the
maintenance of shareholder accounts. Proceeds from the service fee will be used
by the Distributor to compensate securities dealers and others selling shares of
the Fund for rendering service to shareholders on an ongoing basis. Such amounts
are based on the net asset value of shares of the Fund held by such dealers as
nominee for their customers or which are owned directly by such customers for so
long as such shares are outstanding and the Distribution Plan remains in effect
with respect to the Fund. Any amounts received by the Distributor and not so
allocated may be applied by the Distributor as reimbursement for expenses
incurred in connection with the servicing of investor accounts. The distribution
and servicing expenses of a particular class will be borne solely by that class.
For the period February 13, 1995 (commencement of operations) through
September 30, 1995, the Fund paid the Distributor fees under the Distribution
Plan and the Distributor used all of such payments for expenses incurred on
behalf of the Fund as follows:
Class A Class B Class D
------- ------- -------
Advertising $ 905 $ 75 $ 75
Printing and mailing of
prospectuses to other
than current shareholders 500 41 41
Compensation to dealers 0 0 0
Compensation to sales
personnel 4,254 351 351
Interest 0 0 0
Carrying or other
financial charges 0 0 0
Other expenses:
marketing; general 2,733 225 225
------ ------ -----
Total fees $8,392 $692 $692
====== ====== =====
The Distributor may also use additional resources of its own for further
expenses on behalf of the Fund.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as prohibiting
banks and other depository institutions from being paid for performing services
under the Distribution Plan, the Fund will make alternative arrangements for
such services for shareholders who acquired shares through such institutions.
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<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.
The Fund's performance is shown below, and where noted, reflects the
voluntary measures, if any, by the Fund's affiliates to reduce fees or expenses
relating to the Fund; see "Accrued Expenses" later in this section.
Total Return
The total returns ("standard total return") of each class of the Fund's
shares were as follows:
February 13, 1995
(Commencement of Operations) to
September 30, 1995
SEC Total Return Aggregate Total Return
(Annualized) (Not Annualized)
------------------------------ ------------------------------
With Subsidy Without Subsidy With Subsidy Without Subsidy
------------ --------------- ------------ ---------------
Class A 18.52% 15.81% 11.30% 9.69%
Class B 18.05% 15.22% 11.02% 9.34%
Class C 27.87% 24.95% 16.75% 15.07%
Class D 24.87% 21.98% 15.02% 13.34%
The figures shown above as "SEC Total Return" result from the "annualization"
of actual returns for the approximately 230-day period involved; annualization
presumes that the performance for the 230 days continues for a full year.
Standard total return is computed separately for each class of shares by
determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value in accordance with the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated
period assuming a hypothetical $1,000 payment made at
the beginning of the designated period
The calculation is based on the further assumptions that the maximum initial
or contingent deferred sales charge applicable to the investment is deducted,
and that all dividends and distributions by the Fund are reinvested at net asset
value on the reinvestment dates during the periods. All accrued expenses are
also taken into account as described later herein.
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 relating to the Fund, during the subject period. In the absence
of such subsidization, the performance of the Fund will be lower.
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<PAGE>
Nonstandardized Total Return
A Fund may provide the above described standard total return results for
Class A, Class B, Class C and Class D shares for periods which end no earlier
than the most recent calendar quarter end and which begin twelve months before
and at the time of commencement of such Fund's operations. In addition, the Fund
may provide nonstandardized total return results for differing periods, such as
for the most recent six months, and/or without taking sales charges into
account. Such nonstandardized total return is computed as otherwise described
under "Total Return" except the result may or may not be annualized, and as
noted any applicable sales charge may not be taken into account and therefore
not deducted from the hypothetical initial payment of $1,000 or ending value.
For example, the nonstandardized total returns for the six months ended
September 30, 1995 without taking sales charges into account, were as follows:
With Subsidy Without Subsidy
------------ ---------------
Class A 13.80% 12.52%
Class B 13.41% 12.13%
Class C 14.01% 12.73%
Class D 13.41% 12.13%
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 the Fund's annual financial statements, (2)
assistance and consultation in connection with Securities and Exchange
Commission filings and (3) review of the annual income tax returns filed on
behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a semiannual
basis, other supplementary financial reports may be made available from time to
time and holders of record may request a copy of a current supplementary report,
if any, by calling State Street Research Shareholder Services.
The following unaudited financial statements are for the period February 13,
1995 (commencement of operations) through September 30, 1995:
33
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION VALUE FUND
INVESTMENT PORTFOLIO
September 30, 1995 (Unaudited)
Value
Shares (Note 1)
- ----------------------------------------------- ------------ --------------
COMMON STOCKS 99.6%
Basic Industries 37.6%
Chemical 5.1%
Applied Extrusion Technologies, Inc.* 3,000 $ 55,125
Carlisle Plastics, Inc. Cl. A* 10,000 50,000
McWhorter Technologies, Inc.* 7,000 107,625
Rexene Corp.* 2,500 29,375
Uniroyal Chemical Corp.* 7,500 67,500
--------------
309,625
--------------
Diversified 5.9%
Alltrista Corp.* 2,000 38,000
Commercial Intertech Corp. 1,500 28,688
Noel Group, Inc.* 22,000 137,500
Triton Group Ltd.* 33,300 104,062
Zero Corp.* 3,300 53,625
--------------
361,875
--------------
Forest Product 2.5%
Gaylord Container Corp. Wts.* 18,199 154,694
--------------
Machinery 3.6%
Arden Industrial Products, Inc.* 8,000 64,000
Hardinge, Inc.* 3,500 91,875
Specialty Equipment Companies, Inc.* 5,000 61,250
--------------
217,125
--------------
Metal & Mining 19.6%
Algoma Steel, Inc.* 11,000 51,150
Bayou Steel Corp. Cl. A* 3,000 14,813
Carbide/Graphite Group, Inc. 12,000 169,500
Castech Aluminum Group, Inc.* 7,000 112,875
Chase Brass Industries, Inc. 8,000 102,000
Commonwealth Aluminum Corp.* 1,000 17,500
Easco, Inc.* 11,000 82,500
Encore Wire Corp.* 2,000 24,125
Interlake, Inc.* 53,900 128,013
Maxxam, Inc.* 1,000 49,125
Shaw Group, Inc.* 6,000 54,750
Sinter Metals, Inc. Cl. A* 3,000 33,000
Sunshine Mining & Refining Co. Pfd.* 18,000 148,500
Webco Industries, Inc.* 21,000 145,687
Wyman Gordon Co.* 5,000 69,062
--------------
1,202,600
--------------
Railroad 0.9%
Westinghouse Air Brake Co. 4,000 57,500
--------------
Total Basic Industries 2,303,419
--------------
Consumer Cyclical 34.0%
Airline 3.0%
America West Airline, Inc.* 9,000 $ 139,500
Midwest Express Holdings, Inc.* 2,000 45,000
--------------
184,500
--------------
Automotive 7.9%
Borg Warner Automotive, Inc. 1,000 32,000
Federal-Mogul Corp. 5,000 95,625
Harvard Industries, Inc. Cl. B* 1,000 26,750
Lear Seating Corp.* 3,000 88,125
Littelfuse, Inc.* 1,000 32,500
Masland Corp.* 7,000 104,125
Tower Automotive, Inc.* 3,000 41,250
Wescast Industries, Inc. Cl. A* 6,000 66,000
--------------
486,375
--------------
Building 8.5%
American Building Co.* 2,500 59,062
Cameron Ashley, Inc.* 6,000 57,000
Centex Construction Products, Inc. 6,500 85,313
Falcon Building Products, Inc.* 5,000 43,750
Miles Homes, Inc.* 20,000 27,500
Nortek, Inc.* 16,000 140,000
Simpson Manufacturing, Inc.* 4,000 48,500
Stimsonite Corp.* 5,000 60,000
--------------
521,125
--------------
Hotel & Restaurant 2.3%
Hollywood Casino Cl. A* 10,000 70,000
Primadonna Resorts, Inc.* 4,500 68,625
--------------
138,625
--------------
Recreation 3.8%
Lewis Galoob Toys, Inc. Cv. Pfd.* 5,000 91,875
Granite Broadcasting Co. 7,000 76,125
HMG Worldwide Corp.* 27,000 64,125
--------------
232,125
--------------
Retail Trade 8.5%
Bombay Company, Inc.* 5,000 40,625
Cole National Corp.* 5,000 60,625
Eastbay, Inc.* 4,500 88,875
Finlay Enterprises, Inc.* 3,000 51,750
Home Shopping Network, Inc.* 3,000 27,750
Rhodes, Inc.* 10,000 115,000
TBC Corp.* 8,000 77,000
Valuevision International, Inc.* 10,000 58,750
--------------
520,375
--------------
Total Consumer Cyclical 2,083,125
--------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION VALUE FUND
INVESTMENT PORTFOLIO (cont'd)
Value
Shares (Note 1)
- ----------------------------------------------- ------------ --------------
Consumer Staple 11.7%
Business Service 5.3%
Computer Learning Centers, Inc.* 4,000 $ 44,000
Ideon Group, Inc. 5,000 51,250
Protection One, Inc.* 16,000 146,000
Staffing Resources, Inc.* 6,500 81,250
--------------
322,500
--------------
Container 3.8%
Continental Can Company, Inc.* 4,000 78,500
Lufkin Industries, Inc. 3,000 70,500
U.S. Can Corp.* 6,500 86,937
--------------
235,937
--------------
Drug 0.8%
Martek Biosciences Corp.* 3,000 48,750
--------------
Printing & Publishing 1.8%
Katz Media Group, Inc.* 5,500 112,063
--------------
Total Consumer Staple 719,250
--------------
Energy 5.2%
Oil 4.3%
Crystal Oil Corp.* 3,700 110,075
Gerrity Oil & Gas Corp. Cv. Pfd. 10,000 106,250
Optima Petroleum Corp.* 17,100 49,162
--------------
265,487
--------------
Oil Service 0.9%
Global Marine, Inc.* 8,000 57,000
--------------
Total Energy 322,487
--------------
Finance 2.7%
Bank 0.8%
Springfield Institution For Savings Bank* 3,000 46,125
--------------
Financial Service 1.9%
Hawthorne Financial Corp.* 20,000 73,750
Midland Financial Group, Inc.* 4,000 44,000
--------------
117,750
--------------
Total Finance 163,875
--------------
Science & Technology 7.2%
Aerospace 1.1%
BE Aerospace, Inc.* 8,000 67,000
--------------
Computer Software & Service 3.0%
Computational Systems, Inc.* 3,900 63,375
Computervision Corp.* 10,000 121,250
--------------
184,625
--------------
Electronic Components 3.1%
MEMC Electronic Materials, Inc.* 4,500 $ 122,062
Thermospectra Corp.* 4,000 67,000
--------------
189,062
--------------
Total Science & Technology 440,687
--------------
Utility 1.2%
Natural Gas 1.2%
TransTexas Gas Corp.* 4,000 72,500
--------------
Total Utility 72,500
--------------
Total Common Stocks (Cost $5,568,938) 6,105,343
--------------
Principal Maturity
Amount Date
- ------------------------------ ------------ ------------ --------------
SHORT-TERM OBLIGATIONS 1.7%
Household Finance Corp., 5.65% $104,000 10/2/1995 104,000
--------------
Total Short-Term Obligations (Cost $104,000) 104,000
--------------
Total Investments (Cost $5,672,938)--101.3% 6,209,343
Cash and Other Assets, Less Liabilities--(1.3)% (78,070)
--------------
Net Assets--100.0% $6,131,273
==============
Federal Income Tax Information:
At September 30, 1995, the net unrealized appreciation of
investments based on cost for Federal income tax purposes of
$5,672,938 was as follows:
Aggregate gross unrealized appreciation for all investments in
which there is an excess of value over tax cost $ 777,614
Aggregate gross unrealized depreciation for all investments in
which there is an excess of tax cost over value (241,209)
-------------
$ 536,405
=============
* Nonincome-producing securities
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1995 (Unaudited)
Assets
Investments, at value (Cost $5,672,938) (Note 1) $6,209,343
Receivable for securities sold 29,479
Cash 19,606
Receivable from Distributor (Note 3) 2,177
Dividends and interest receivable 531
Deferred organization costs and other assets (Note 1) 69,733
-----------
6,330,869
Liabilities
Payable for securities purchased 136,125
Accrued trustees' fees (Note 2) 9,128
Accrued management fee (Note 2) 4,269
Accrued distribution fee (Note 5) 1,375
Accrued transfer agent and shareholder services (Note 2) 730
Other accrued expenses 47,969
-----------
199,596
-----------
Net Assets $6,131,273
===========
Net Assets consist of:
Undistributed net investment income $ 36,497
Unrealized appreciation of investments 536,405
Accumulated net realized gain 275,486
Shares of beneficial interest (Note 6) 5,282,885
-----------
$6,131,273
===========
Net Asset Value and redemption price per share of Class A
shares ($5,781,809 / 519,451 shares of beneficial interest) $11.13
===========
Maximum Offering Price per share of Class A shares ($11.13 /
.955) $11.65
===========
Net Asset Value and offering price per share of
Class B shares ($116,240 / 10,493 shares of beneficial
interest)* $11.08
===========
Net Asset Value, offering price and redemption price per share
of Class C shares ($116,984 / 10,493 shares of beneficial
interest) $11.15
===========
Net Asset Value and offering price per share of
Class D shares ($116,240 / 10,493 shares of beneficial
interest)* $11.08
===========
*Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
STATEMENT OF OPERATIONS
For the period February 13, 1995 (commencement of operations) to September
30, 1995 (Unaudited)
Investment Income
Interest $ 78,168
Dividends, net of foreign taxes of $36 10,878
-----------
89,046
Expenses
Custodian fee 44,957
Management fee (Note 2) 30,298
Amortization of organization costs (Note 1) 9,230
Trustees' fees (Note 2) 9,128
Reports to shareholders 8,800
Audit fee 8,139
Legal fees 5,584
Registration fees 4,649
Transfer agent and shareholder services (Note 2) 730
Distribution fee--Class A (Note 5) 8,392
Distribution fee--Class B (Note 5) 692
Distribution fee--Class D (Note 5) 692
Miscellaneous 1,280
-----------
132,571
Expenses borne by the Distributor (Note 3) (80,022)
-----------
52,549
-----------
Net investment income 36,497
-----------
Realized and Unrealized Gain on Investments
Net realized gain on investments (Notes 1 and 3) 275,486
Net unrealized appreciation of investments 536,405
-----------
Net gain on investments 811,891
-----------
Net increase in net assets resulting from operations $848,388
===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION VALUE FUND
STATEMENT OF CHANGES IN NET ASSETS
For the period February 13, 1995 (commencement of operations) to September
30, 1995 (Unaudited)
- -----------------------------------------------------------------------------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 36,497
Net realized gain on investments* 275,486
Net unrealized appreciation of investments 536,405
-----------
Net increase resulting from operations 848,388
-----------
Net increase from fund share transactions
(Note 6) 5,282,885
-----------
Total increase in net assets 6,131,273
Net Assets
Beginning of period --
-----------
End of period (including undistributed net investment
income of $36,497) $6,131,273
===========
*Net realized gain for Federal income tax purposes (Note 1) $ 275,486
===========
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 1995
Note 1
State Street Research Small Capitalization Value Fund (the "Fund"), is a
series of State Street Research Capital Trust (the "Trust"), formerly State
Street Capital 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 three separate funds: State
Street Research Small Capitalization Value Fund, State Street Research Small
Capitalization Growth Fund and State Street Research Capital Fund.
The Fund is authorized to issue four classes of shares. At the present time,
only Class A shares are generally available for purchase. Class B, Class C
and Class D shares are not being offered at this time. Class A shares are
subject to an initial sales charge of up to 4.50% and 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.
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION VALUE FUND
NOTES (cont'd)
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.
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 at an annual rate of 0.85% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. The fees of the Trustees not currently affiliated with the
Adviser amounted to $9,128 during the period February 13, 1995 (commencement
of operations) to September 30, 1995.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly-owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. During the period February 13, 1995 (commencement of
operations) to September 30, 1995, the amount of such expenses was $118.
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the period February 13, 1995 (commencement of operations) to
September 30, 1995, the amount of such expenses assumed by the Distributor
and its affiliates was $80,022.
Note 4
For the period February 13, 1995 (commencement of operations) to September
30, 1995, exclusive of short-term investments and U.S. Government
obligations, purchases and sales of securities aggregated $6,865,944 and
$1,572,492, 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 13, 1995 (commencement of
operations) to September 30, 1995, fees pursuant to such plan amounted to
$8,392, $692 and $692 for Class A, Class B and Class D, respectively.
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, 1995,
Metropolitan owned one share of each of Class A, Class B, Class C and Class D
shares and the Adviser owed 492,146 Class A shares and 10,471 of each of
Class B, Class C and Class D shares of the Fund.
Share transactions were as follows:
February 13, 1995
(Commencement of Operations)
to September 30, 1995
(Unaudited)
-----------------------------
Class A Shares Amount
-----------------------------------------------------------------
Shares sold 519,451 $4,982,255
------------ --------------
Net increase 519,451 $4,982,255
============ ==============
Class B Shares Amount
-----------------------------------------------------------------
Shares sold 10,493 $ 100,210
------------ --------------
Net increase 10,493 $ 100,210
============ ==============
Class C Shares Amount
-----------------------------------------------------------------
Shares sold 10,493 $ 100,210
------------ --------------
Net increase 10,493 $ 100,210
============ ==============
Class D Shares Amount
-----------------------------------------------------------------
Shares sold 10,493 $ 100,210
------------ --------------
Net increase 10,493 $ 100,210
============ ==============
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION VALUE FUND
FINANCIAL HIGHLIGHTS
For a share outstanding from February 13, 1995 (commencement of operations)
to September 30, 1995 (Unaudited)
<TABLE>
<CAPTION>
Class A Class B Class C Class D
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.55 $ 9.55 $ 9.55 $ 9.55
Net investment income* .07 .02 .09 .02
Net unrealized gain on investments 1.51 1.51 1.51 1.51
---------- ---------- ---------- -----------
Net asset value, end of period $11.13 $11.08 $11.15 $11.08
========== ========== ========== ===========
Total return+ 16.54% 16.02% 16.75% 16.02%
Net assets at end of period (000s) $5,782 $116 $117 $116
Ratio of operating expenses to average net assets* 1.45%++ 2.20%++ 1.20%++ 2.20%++
Ratio of net investment income to average net assets* 1.05%++ 0.32%++ 1.32%++ 0.32%++
Portfolio turnover rate 47.34% 47.34% 47.34% 47.34%
*Reflects voluntary assumption of fees or expenses
per share in each period. (Note 3) $.15 $.15 $.15 $.15
</TABLE>
++Annualized
+ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
