State Street Research
Capital Fund
Prospectus
January 29, 1996
The investment objective of State Street Research Capital Fund (the "Fund")
is to seek maximum capital appreciation by investing primarily in common
stocks (and preferred stocks and debt securities convertible into or carrying
the right to acquire common stocks) of emerging growth companies and of
companies considered to be undervalued special situations, as determined by
the Fund's investment manager.
State Street Research & Management Company (the "Investment Manager") serves
as investment adviser to the Fund. As of November 30, 1995, the Investment
Manager had assets of approximately $28.3 billion under management. State
Street Research Investment Services, Inc. serves as distributor (the
"Distributor") for the Fund.
Shareholders may have their shares redeemed directly by the Fund at net
asset value plus the applicable contingent deferred sales charge, if any;
redemptions processed through securities dealers may be subject to processing
charges.
There are risks in any investment program, including the risk of changing
economic and market conditions, and there is no assurance that the Fund will
achieve its investment objective. The net asset value of the Fund's shares
fluctuates as market conditions change.
Because of the Fund's investment policies, the Fund is subject to
above-average risks. 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.
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
January 29, 1996 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.
THE FUND MAY ENGAGE IN SHORT-TERM TRADING, WHICH MAY BE CONSIDERED A
SPECULATIVE ACTIVITY AND INVOLVE GREATER RISK AND ADDITIONAL COST TO THE
FUND.
Table of Contents Page
- -------------------------------------- -------
Table of Expenses 2
Financial Highlights 4
The Fund's Investments 6
Limiting Investment Risk 8
Purchase of Shares 9
Redemption of Shares 18
Shareholder Services 20
The Fund and its Shares 23
Management of the Fund 24
Dividends and Distributions; Taxes 25
Calculation of Performance Data 26
- -------------------------------------- -----
<PAGE>
The Fund offers four classes of shares which may be purchased at the next
determined net asset value per share plus, in the case of all classes except
Class C shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5% and
(ii) an annual service fee of 0.25% of the average daily net asset value of
the Class A shares.
Class B shares are subject to (i) a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made
within five years of purchase, and (ii) annual distribution and service fees
of 1% of the average daily net asset value of such shares. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after purchase. No contingent deferred sales charge
applies after the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1%
if redeemed within one year following purchase and (ii) annual distribution
and service fees of 1% of the average daily net asset value of such shares.
Table of Expenses
<TABLE>
<CAPTION>
Class A Class B Class C Class D
---------- -------- -------- ----------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses (1)
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.5% None None None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None None None None
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 Fee None None None None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.75% 0.75% 0.75% 0.75%
12b-1 Fees 0.25% 1.00% None 1.00%
Other Expenses 0.33% 0.33% 0.33% 0.33%
-------- ------ ------ -------
Total Fund Operating Expenses 1.33% 2.08% 1.08% 2.08%
======== ====== ====== ========
</TABLE>
- ----------------
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
thereafter and no contingent deferred sales charge is imposed after the
fifth year. Class D shares are subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the
sale. Long-term investors in a class of shares with a distribution fee
may, over a period of years, pay more than the economic equivalent of the
maximum sales charge permissible under applicable rules. See "Purchase of
Shares."
(2) Purchases of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption.
See "Purchase of Shares."
2
<PAGE>
Example:
You would pay the following expenses on a $1,000 investment including, for
Class A shares, the maximum applicable initial sales charge and assuming (1)
5% annual return and (2) redemption of the entire investment at the end of
each time period:
1 Year 3 Years 5 Years 10 Years
-------- -------- -------- ----------
Class A shares $58 $85 $115 $198
Class B shares (1) $71 $95 $132 $222
Class C shares $11 $34 $ 60 $132
Class D shares $31 $65 $112 $241
You would pay the following expenses on the same investment, assuming no
redemption:
1 Year 3 Years 5 Years 10 Years
-------- -------- -------- ----------
Class B shares (1) $21 $65 $112 $222
Class D shares $21 $65 $112 $241
- ----------------
(1) Ten-year figures assume conversion of Class B shares to Class A shares at
the end of eight years.
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than
shown.
The purpose of the table above is to assist the investor in understanding
the various costs and expenses that an investor will bear directly or
indirectly. The percentage expense levels shown in the table are based on
experience with expenses for the fiscal year ended September 30, 1995; actual
expense levels for the current fiscal year and future years may vary from the
amounts shown. The table does not reflect charges for optional services
elected by certain shareholders, such as the $7.50 fee for remittance of
redemption proceeds by wire. For further information on sales charges, see
"Purchase of Shares--Alternative Purchase Program"; for further information
on management fees, see "Management of the Fund"; and for further information
on 12b-1 fees, see "Purchase of Shares--Distribution Plan."
3
<PAGE>
Financial Highlights
The data set forth below has been examined by Coopers & Lybrand L.L.P.,
independent accountants, and their report thereon for the latest five years is
included in the Statement of Additional Information. For further information
about the performance of the Fund, see "Financial Statements" in the Statement
of Additional Information. The Fund's registration under the Investment Company
Act of 1940 was effective in March 1984 and its registration under the
Securities Act of 1933 was effective in November 1987.
Class C
Year ended September 30
----------------------------------------
1995** 1994 1993 1992
- -------------------------------------------------------------------------
Net asset value,
beginning of year $ 9.99 $ 10.46 $ 7.96 $ 7.74
Net investment
income (loss) (.01) (.03) (.06) (.06)
Net realized and
unrealized gain (loss)
on investments 3.72 .31 3.90 .63
Dividends from net
investment income -- -- -- --
Distributions from net
realized gains (.04) (.75) (1.34) (.35)
---- ---- ----- -------
Net asset value, end of year $ 13.66 $ 9.99 $ 10.46 $ 7.96
==== ==== ===== =======
Total return+ 37.30% 2.91% 55.46% 7.34%
Net assets at end
of year (000s) $47,553 $23,967 $18,342 $11,654
Ratio of expenses to
average net assets 1.08% 1.16% 2.11% 1.54%
Ratio of net investment
income (loss) to
average net assets (0.07)% (0.32)% (1.30)% (0.86)%
Portfolio turnover rate 214.59% 167.08% 129.57% 124.94%
<TABLE>
<CAPTION>
Class C
Year ended September 30
----------------------------------------------------------------
1991 1990 1989 1988 1987 1986
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 5.03 $ 6.72 $ 5.00 $ 8.99 $ 8.57 $ 6.39
Net investment
income (loss)* (.08) (.03) (.01) (.01) (.05) (.07)
Net realized and
unrealized gain (loss)
on investments 2.79 (1.31) 1.73 (1.80) 2.88 2.29
Dividends from net
investment income -- -- -- -- -- (.02)
Distributions from net
realized gains -- (.35) -- (2.18) (2.41) (.02)
----- ----- ----- ----- ----- -------
Net asset value, end of year $ 7.74 $ 5.03 $ 6.72 $ 5.00 $ 8.99 $ 8.57
===== ===== ===== ===== ===== =======
Total return+ 53.88% (20.81)% 33.93% (13.96)% 42.63% 34.70%
Net assets at end
of year (000s) $10,939 $ 7,440 $ 9,479 $ 7,422 $10,556 $ 7,633
Ratio of expenses to
average net assets 1.88% 1.93% 1.98% 1.98% 1.67% 1.59%
Ratio of net investment
income (loss) to
average net assets (1.14)% (0.54)% (0.14)% (0.17)% (0.70)% (0.78)%
Portfolio turnover rate 219.62% 259.27% 242.88% 272.09% 268.00% 162.80%
</TABLE>
- -------------
** Per-share figures have been calculated using the average shares method.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges.
4
<PAGE>
<TABLE>
<CAPTION>
Class A Class B
-------------------------------------- ------------------------------------------
February 17, 1993 March 15, 1993
Year ended (Commencement Year ended (Commencement
September 30 of Share Class September 30 of Share Class
---------------- Designations) to ----------------- Designations) to
1995** 1994 September 30, 1993 1995** 1994 September 30, 1993
------ ------ ------------------ ------- ------ ---------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 9.92 $ 10.43 $ 8.03 $ 9.82 $ 10.40 $ 8.68
Net investment loss (.04) (.04) (.03) (.12) (.08) (.04)
Net realized and unrealized gain on
investments 3.69 .28 2.43 3.63 .25 1.76
Distributions from net realized gains (.04) (.75) -- (.04) (.75) --
---- ---- ----------------- ----- ---- -------------------
Net asset value, end of year $ 13.53 $ 9.92 $ 10.43 $ 13.29 $ 9.82 $ 10.40
==== ==== ================= ===== ==== ===================
Total return 36.95%+ 2.51%+ 24.61%++ 35.90%+ 1.79%+ 19.82%+++
Net assets at end of year (000s) $55,250 $19,891 $ 7,251 $203,446 $73,354 $16,044
Ratio of expenses to average net assets 1.33% 1.41% 2.43%++ 2.08% 2.16% 3.16%++
Ratio of net investment loss to average
net assets (0.34)% (0.55)% (1.43)%++ (1.10)% (1.28)% (2.15)%++
Portfolio turnover rate 214.59% 167.08% 129.57% 214.59% 167.08% 129.57%
</TABLE>
Class D
-------------------------------------
March 15, 1993
Year ended (Commencement
September 30 of Share Class
---------------- Designations) to
1995** 1994 September 30, 1993
------ ------ ------------------
Net asset value, beginning of year $ 9.83 $ 10.39 $ 8.68
Net investment loss (.12) (.09) (.04)
Net realized and unrealized gain on
investments 3.64 .28 1.75
Distributions from net realized gains (.04) (.75) --
---- ---- -----------------
Net asset value, end of year $ 13.31 $ 9.83 $ 10.39
==== ==== =================
Total return 36.07%+ 2.00%+ 19.70%+++
Net assets at end of year (000s) $95,797 $37,783 $ 5,011
Ratio of expenses to average net assets 2.08% 2.16% 3.16%++
Ratio of net investment loss to average
net assets (1.09)% (1.28)% (2.16)%++
Portfolio turnover rate 214.59% 167.08% 129.57%
- --------------
** Per-share figures have been calculated using the average shares method.
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges.
+++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges.
5
<PAGE>
The Fund's Investments
The Fund's investment objective is to seek maximum capital appreciation by
investing primarily in common stocks (and preferred stocks and debt
securities convertible into or carrying the right to acquire common stocks)
of emerging growth companies and of companies considered to be undervalued
special situations, as determined by the Fund's investment manager. 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 common stock (and
preferred stocks and debt securities convertible into or carrying the right to
acquire common stocks) of emerging growth companies and companies considered to
be undervalued special situations. The Investment Manager considers emerging
growth companies to be those companies which are less mature and have the
potential to grow substantially faster than the economy. The Investment Manager
considers undervalued special situations to include common stocks of companies,
such as larger, more mature companies, which trade at prices believed by the
Investment Manager to be below the companies' intrinsic values and which
therefore offer the potential for above-average investment returns. 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 in the emerging growth stage. In selecting such investments,
the Investment Manager considers a variety of factors, any one 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. The capitalization of the
companies in which the Fund invests can range across the full spectrum from
small to large capitalization, with varying or high proportions from time to
time in different capitalization segments.
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 more mature
companies which are not special situation companies, and U.S. Government
securities. The Fund will 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. The debt
securities, which may have differing maturities and fixed or floating
interest rates, will be U.S. Government securities or issued by larger
capitalization issuers. For more information on debt ratings, see the
Statement of Additional Information.
Investment Practices
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"), European Depositary Receipts ("EDRs") or similar
securities representing interests in the securities of foreign issuers. 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
6
<PAGE>
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, the difficulties in obtaining and enforcing a
judgment against a foreign issuer and the fact that foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to
those applicable to domestic issuers. Moreover, securities of many foreign
issuers may be less liquid and their prices more volatile than those of
securities of comparable domestic issuers.
It is anticipated that a majority of the foreign investments by the Fund
will consist of securities of issuers in countries with developed economies.
However, the Fund may also invest in the securities of issuers in countries
with less developed economies as deemed appropriate by the Investment
Manager, although the Fund 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 a 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 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
7
<PAGE>
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 limitations, buy and sell options, futures
contracts and options on futures contracts on securities and securities indices,
enter into repurchase agreements and purchase securities on a "when issued" or
forward commitment basis. 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 on open positions with respect to futures
and options used for such nonhedging purposes would exceed 5% of the market
value of the Fund's net assets; similar policies apply to options which are not
commodities. The Fund may enter various forms of swap arrangements, which have
simultaneously the characteristics of a security and a futures contract,
although the Fund does not presently expect to invest more than 5% of its total
assets in such items. These swap arrangements include interest rate swaps,
currency swaps and index swaps. 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 may engage in short-term trading of securities and reserves full
freedom with respect to portfolio turnover. In periods when there are rapid
changes in economic conditions or security price levels or when investment
strategy changes significantly, portfolio turnover may be higher than during
times of economic and market price stability or when investment strategy
remains relatively constant. The Fund's portfolio turnover rate involves
greater transaction costs, relative to other funds in general, and may have
tax and other consequences as well. See the Statement of Additional
Information.
Because the Fund invests primarily in emerging growth and special situation
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 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.
Limiting Investment Risk
In seeking to lessen investment risk, the Fund operates under certain
fundamental and nonfundamental investment restrictions. Under the fundamental
restrictions the Fund may not (a) purchase a security of any one issuer
(other than securities issued by the U.S. Government or its
instrumentalities), if such purchase would cause more than 5% of the Fund's
total assets to be invested in the securities of such issuer; (b) purchase
for its portfolio a security of any one issuer if such purchase would cause
more than 10% of any class of securities of such issuer to be held by the
Fund; or (c) invest more than 25% of the Fund's total assets in securities of
issuers principally engaged in any one industry with certain designated
exceptions such as in the case of the U.S. Government.
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.
Under the nonfundamental investment restrictions, the Fund may not invest more
than 15% of the Fund's net assets in illiquid securities including repurchase
agreements extending for more than seven days and may not invest more than 5% of
the Fund's net assets in restricted securities excluding securities eligible for
resale under Rule 144A under the Securities Act of 1933. Although many illiquid
securities may also be restricted, and vice versa, compliance with each of these
policies will be determined independently. The foregoing nonfundamental
investment restrictions may be changed without a shareholder vote.
8
<PAGE>
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 than adherence to the Fund's other investment policies. 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, custodial receipts, certificates 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 long-term
unsecured debt issue rated at least "A" by S&P or Moody's). See the Statement
of Additional Information.
-----------------------------------------------------------------------------
Information on the Purchase of Shares, Redemption of Shares and Shareholder
Services is set forth on pages 9 to 23 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.
9
<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 Capital Fund
and class of shares (A, B, C or D)
AC = 99029761
OBI = Shareholder Name
Shareholder Account Number
Control #K (assigned by State
Street Research Shareholder Services)
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make
such investment by 12 noon Boston time on the day of his or
her investment; and (ii) the wire must be received by
4 P.M. Boston time that same day.
An investor making an initial investment by wire must promptly complete the
Application accompanying this Prospectus and deliver it to his or her
securities dealer, who should forward it as required. No redemptions will be
effected until the Application has been duly processed.
The Fund may in its discretion discontinue, suspend or change the practice
of accepting orders by any of the methods described above. Orders for the
purchase of shares are subject to acceptance by the Fund. The Fund reserves
the right to reject any purchase order, including orders in connection with
exchanges, for any reason which the Fund in its sole discretion deems
appropriate. The Fund reserves the right to suspend the sale of shares.
Minimum Investment
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).
10
<PAGE>
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 shares or the
flexibility they desire in this regard, and other relevant circumstances.
Investors will be able to determine whether in their particular circumstances
it is more advantageous to incur an initial sales charge and not be subject
to certain ongoing charges or to have their entire initial purchase price
invested in the Fund with the investment being subject thereafter to ongoing
service fees and distribution fees.
As described in greater detail below, securities dealers are paid differing
amounts of commission and other compensation depending on which class of
shares they sell.
The major differences among the various classes of shares are as follows:
11
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C Class D
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales Charges Initial sales Contingent None Contingent
charge at time of deferred sales deferred sales
investment of up to charge of 5% to 2% charge of 1%
4.5% depending on applies to any applies to any
amount of shares redeemed shares redeemed
investment within first five within one year
years following following their
their purchase; no purchase
contingent
deferred sales
charge after five
years
On investments of
$1 million or more,
no initial sales
charge; but
contingent deferred
sales charge of 1%
applies to any
shares redeemed
within one year
following their
purchase
Distribution Fee None 0.75% for first None 0.75% each year
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 Commission Above described 4% None 1%
Received by initial sales
Selling Securities charge less 0.25%
Dealers to 0.50% retained
by Distributor
On investments of
$1 million or more,
0.25% to 1% paid to
dealer by
Distributor
</TABLE>
12
<PAGE>
In deciding which class of shares to purchase, the investor should consider
the amount of the investment, the length of time the investment is expected
to be held, and the ongoing service fee and distribution fee, among other
factors.
Class A shares are sold at net asset value plus an initial sales charge of
up to 4.5% of the public offering price. Because of the sales charge, not all
of an investor's purchase amount is invested unless the purchase equals
$1,000,000 or more. Class B shareholders pay no initial sales charge, but a
contingent deferred sales charge of up to 5% generally applies to shares
redeemed within five years of purchase. Class D shareholders also pay no
initial sales charge, but a contingent deferred sales charge of 1% generally
applies to redemptions made within one year of purchase. For Class B and
Class D shareholders, therefore, the entire purchase amount is immediately
invested in the Fund.
An investor who qualifies for a significantly reduced initial sales charge,
or a complete waiver of the sales charge on investments of $1,000,000 or
more, on the purchase of Class A shares might elect that option to take
advantage of the lower ongoing service and distribution fees that
characterize Class A shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. In addition, Class B shares are assessed
an annual distribution fee of 0.75% of daily net assets for an eight-year
period following the date of purchase and are then automatically converted to
Class A shares. Class D shares are assessed an annual distribution fee of
0.75% of daily net assets for as long as the shares are held. The prospective
investor should consider these fees plus the initial or contingent deferred
sales charges in estimating the costs of investing in the various classes of
the Fund's shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are allocated to dealers (see
"Distribution Plan" below). In addition, the Distributor will, at its
expense, provide additional cash and noncash incentives to securities dealers
that sell shares. Such incentives may be extended only to those dealers that
have sold or may sell significant amounts of shares and/or meet other
conditions established by the Distributor; for example, the Distributor may
sponsor special promotions to develop particular distribution channels or to
reach certain investor groups. The incentives may include merchandise and
trips to and attendance at sales seminars at resorts.
Class A Shares--Initial Sales Charges
Sales Charges
The purchase price of a Class A share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar
amount of the shares purchased as set forth in the table below. A major
portion of this sales charge is reallowed by the Distributor to the
securities dealer responsible for the sale.
- ------------------------------------------------------------
Sales Sales
Charge Charge
Paid By Paid Dealer
Dollar Investor By Investor Concession
Amount of As % of As % of As % of
Purchase Purchase Net Asset Purchase
Transaction Price Value Price
- -----------------------------------------------------------
Less than
$100,000 4.50% 4.71% 4.00%
- -----------------------------------------------------------
$100,000 or
above but
less than
$250,000 3.50% 3.63% 3.00%
- -----------------------------------------------------------
$250,000 or
above but
less than
$500,000 2.50% 2.56% 2.00%
- -----------------------------------------------------------
$500,000 or
above but
less than
$1 million 2.00% 2.04% 1.75%
- -----------------------------------------------------------
See
$1 million following
and above 0% 0% discussion
- -----------------------------------------------------------
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor
13
<PAGE>
will pay the authorized securities dealer a commission based on the aggregate of
such sales as follows:
Amount of Sale Commission
- -------------- -----------
(a) $1 million to $3 million 1.00%
(b) Next $2 million 0.50%
(c) Amount over $5 million 0.25%
On such sales of $1,000,000 or more, the investor is subject to a 1%
contingent deferred sales charge on any portion of the purchase redeemed
within one year of the sale. However, such redeemed shares will not be
subject to the contingent deferred sales charge to the extent that their
value represents (1) capital appreciation or (2) reinvestment of dividends or
capital gains distributions. In addition, the contingent deferred sales
charge will be waived for certain other redemptions as described under
"Contingent Deferred Sales Charge Waivers" below (as otherwise applicable to
Class B shares).
Class A shares of the Fund that are purchased without a sales charge may be
exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption
within one year of the Class A shares which are acquired through such
exchange. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any contingent
deferred sales charge will be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement
of Additional Information, of $100,000 or more of Class A shares of the Fund
or a combination of "Eligible Funds." "Eligible Funds" include the Fund and
other funds so designated by the Distributor from time to time. Class B,
Class C and Class D shares may also be included in the combination under
certain circumstances. Securities dealers should call Shareholder Services
for details concerning the other Eligible Funds and any persons who may
qualify for reduced sales charges and related information. See the Statement
of Additional Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A
shares of the Fund and any other Eligible Funds within a 13-month period.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances. Additional information on a Letter of Intent is
available from dealers, or from the Distributor, and also appears in the
Statement of Additional Information.
Right of Accumulation
Investors may purchase Class A shares of the Fund or a combination of shares
of the Fund and other Eligible Funds at reduced sales charges pursuant to a
Right of Accumulation. Under the Right of Accumulation, the sales charge is
determined by combining the current purchase with the value of the Class A
shares of other Eligible Funds held at the time of purchase. Class B, Class C
and Class D shares may also be included in the combination under certain
circumstances. See the Statement of Additional Information and call
Shareholder Services for details concerning the Right of Accumulation.
Other Programs
Class A shares of the Fund may be sold at a reduced sales charge or without a
sales charge pursuant to certain sponsored arrangements, which include
programs under which a company, employee benefit plan or other organization
makes recommendations to, or permits group solicitation of, its employees,
members or participants, except any organization created primarily for the
purpose of obtaining shares of the Fund at a reduced sales charge or without
a sales charge. Sales without a sales charge, or with a reduced sales charge,
may also be made through brokers, financial planners, institutions, and
others, under managed fee-based programs (e.g., "wrap fee" or similar
programs) which meet certain requirements established from time to time by
the Distributor, in the event the Distributor determines to implement such
arrangements. Information on such arrangements and further conditions and
limitations is available from the Distributor.
14
<PAGE>
In addition, no sales charge is imposed in connection with the sale of Class
A shares of the Fund to the following entities and persons: (A) the
Investment Manager, Distributor, or any affiliated entities, including any
direct or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated
Companies, any relatives of any such individuals whose relationship is
directly verified by such individuals to the Distributor, or any beneficial
account for such relatives or individuals; and (C) employees, officers, sales
representatives or directors of dealers and other entities with a selling
agreement with the Distributor to sell shares of any aforementioned
investment company, any spouse or child of such person, or any beneficial
account for any of them. The purchase must be made for investment and the
shares purchased may not be resold except through redemption. This purchase
program is subject to such administrative policies, regarding the
qualification of purchasers and any other matters, as may be adopted by the
Distributor from time to time.
Class B Shares--Contingent Deferred
Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is duly received, as defined herein.
No sales charge is imposed at the time of purchase; thus the full amount of
the investor's purchase payment will be invested in the Fund. However, a
contingent deferred sales charge may be imposed upon certain 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 None
and Thereafter
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
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
15
<PAGE>
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 may
modify or terminate the waivers described above at any time. For example, the
Fund may limit the application of multiple waivers.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends or
distributions with respect to such shares, will automatically convert to
Class A shares of the Fund at the end of eight years following the issuance
of 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 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").
Shares held prior to February 17, 1993 are deemed to be Class C shares, but
shareholders thereof may not acquire additional Class C shares except through
reinvestment of dividends and distributions. Class C shares may have also
been 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
16
<PAGE>
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 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 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
17
<PAGE>
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 from the Fund are normally remitted within seven
days after receipt of the redemption request by the Fund and any necessary
documents in good order.
Methods of Redemption
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed to
the shareholder or wired to a predesignated bank account (see "Proceeds By
Wire" below), by sending to State Street Research 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, the Trust's custodian will wire redemption proceeds to
the shareholder's predesignated bank account. To make the request, the
shareholder should call 1-800-521-6548 prior to 4 P.M. Boston time. A $7.50
charge against the shareholder's account will be imposed for each wire
redemption. This charge is subject to change without notice. The
shareholder's bank may also impose a charge for receiving wires of redemption
proceeds. The minimum redemption by wire is $5,000.
18
<PAGE>
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, 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 promptly to the affected
shareholder at the address of record. Currently, the maintenance fee is $18
annually, which is paid to the Transfer Agent. The fee does not apply to
certain retirement accounts or if the shareholder has more than an aggregate
$50,000 invested in the Fund and other Eligible Funds combined. Imposition of
a maintenance fee on a small account could, over time, exhaust the assets of
such account.
To cover the cost of additional compliance administration, a $20 fee will be
charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date of
payment of redemption proceeds for more than seven days, except that (a) it may
elect to suspend the redemption of shares or postpone the date of payment of
redemption proceeds: (1) during any period that the NYSE is closed (other than
customary weekend and holiday closings) or trading on the NYSE is restricted;
(2) during any period in which an emergency exists as a result of which disposal
of portfolio securities is not reasonably practicable or it is not reasonably
practicable to fairly determine the Fund's net asset values; or (3) during such
other periods as the Securities and Exchange Commission may by order permit for
the protection of investors; and (b) the payment of redemption proceeds may be
postponed as otherwise provided under "Redemption of Shares" herein.
Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Fund, the Investment
Manager and the Distributor from possible fraud, signature guarantees are
required for certain redemptions. Signature guarantees help the Transfer Agent
to determine that the person who has authorized a redemption from the account
is, in fact, the shareholder. Signature guarantees are required for, among other
things: (1) written requests for redemptions for more than $50,000; (2) written
requests for redemptions for any amount if the proceeds are transmitted to other
than the current address of record (unchanged in the past 30 days); (3) written
requests for redemptions for any amount submitted by corporations and certain
fiduciaries and other intermediaries; and (4) requests to transfer the
registration of shares to another owner. Signatures must be guaranteed by a
bank, a member firm of a national stock exchange, or other eligible guarantor
institution. The Transfer Agent will not accept guarantees (or notarizations)
from notaries public. The above requirements may be waived in
19
<PAGE>
certain instances. Please contact Shareholder Services at 1-800-562-0032 for
specific requirements relating to your account.
Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of the Fund owned by
shareholders are credited to their accounts by the Transfer Agent, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110. Certificates representing Class B or Class D shares will not be
issued, while certificates representing Class A or Class C shares will only
be issued if specifically requested in writing and, in any case, will only be
issued for full shares, with any fractional shares to be carried on the
shareholder's account. Shareholders will receive periodic statements of
transactions in their accounts.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through dealers,
by wire or by mailing a check, payable to the Fund, to Shareholder
Services under the terms set forth above under "Purchase of Shares."
2. The following methods of receiving dividends from investment income and
distributions from capital gains are available:
(a) All income dividends and capital gains distributions reinvested in
additional shares of the Fund.
(b) All income dividends in cash; all capital gains distributions
reinvested in additional shares of the Fund.
(c) All income dividends and capital gains distributions in cash.
(d) All income dividends and capital gains distributions invested in any
one available Eligible Fund designated by the shareholder as
described below. See "Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, 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 State Street Research Money Market Fund issues Class E shares
which are sold without any sales charge. Exchanges of State Street Research
Money Market Fund Class E shares into Class A shares of the Fund or any other
Eligible Fund are subject to the initial sales charge or contingent deferred
sales charge applicable to an initial investment in such Class A shares,
unless a prior Class A sales charge has been paid directly or indirectly with
respect to the shares redeemed. For purposes of computing the contingent
deferred sales charge that may be payable upon disposition of the acquired
Class A, Class B and Class D shares, the holding period of the redeemed
shares is "tacked" to the holding period of the acquired shares. The period
any Class E shares are held is not tacked to the holding period of any
acquired shares. No exchange transaction fee is currently imposed on any
exchange.
For the convenience of its shareholders who have Telephone Privileges, the
Fund permits exchanges by
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<PAGE>
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. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer
identification number, may be aggregated for purposes of the six exchange
limit. Notwithstanding the six exchange limit, the Fund reserves the right to
refuse exchanges by any person or group if, in the Investment Manager's
judgment, the Fund would be unable to invest effectively in accordance with
its investment objective and policies, or would otherwise potentially be
adversely affected. Exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincides with
a "market timing" strategy may be disruptive to the Fund. The Fund may impose
these restrictions at any time. The exchange limit may be modified for
accounts in certain institutional retirement plans because of plan exchange
limits, Department of Labor regulations or administrative and other
considerations. Subject to the foregoing, if an exchange request in good
order is received by Shareholder Services and delivered by Shareholder
Services to the Transfer Agent by 12 noon Boston time on any business day,
the exchange usually will occur that day. For further information regarding
the exchange privilege, shareholders should contact Shareholder Services.
Reinvestment Privilege
A shareholder of the Fund who has redeemed shares or had shares repurchased
at his or her request may reinvest all or any portion of the proceeds (plus
that amount necessary to acquire a fractional share to round off his or her
reinvestment to full shares) in shares, of the same class as the shares
redeemed, of the Fund or any other Eligible Fund at net asset value and
without subjecting the reinvestment to an initial sales charge, provided such
reinvestment is made within 120 calendar days after a redemption or
repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the
amount reinvested. The redemption of shares is, for federal income tax
purposes, a sale on which the shareholder may realize a gain or loss. If a
redemption at a loss is followed by a reinvestment within 30 days, the
transaction may be a "wash sale" resulting in a denial of the loss for
federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by Shareholder
Services of such shareholder's written purchase request and delivery of the
request by Shareholder Services to the Transfer Agent. A shareholder may
exercise this reinvestment privilege only once per 12-month period with
respect to his or her shares of the Fund. No charge is imposed by the Fund
for such reinvestments; however, dealers may charge fees in connection with
the reinvestment privilege. The rein-
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vestment privilege may be exercised with respect to an Eligible Fund only in
those states where shares of the relevant other Eligible Fund may legally be
sold.
Investment Plans
The Investamatic 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.
Systematic Withdrawal Plan
A shareholder who owns noncertificated Class A or Class C shares with a value
of $5,000 or more, or Class B or Class D shares with a value of $10,000 or
more, may elect by participating in the Fund's Systematic Withdrawal Plan to
have periodic checks issued for specified amounts. These amounts may not be
less than certain minimums, depending on the class of shares held. The Plan
provides that all income dividends and capital gains distributions of the
Fund shall be credited to participating shareholders in additional shares of
the Fund. Thus, the withdrawal amounts paid can only be realized by redeeming
shares of the Fund under the Plan. To the extent such amounts paid exceed
dividends and distributions from the Fund, a shareholder's investment will
decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually
of either (a) the value, at the time the Plan is initiated, of the shares
then in the account or (b) the value, at the time of a withdrawal, of the
same number of shares as in the account when the Plan was initiated,
whichever is higher.
Expenses of the Plan are borne by the Fund. A participating shareholder may
withdraw from the Plan and the Fund may terminate the Plan at any time on
written notice. Purchase of additional shares while a shareholder is
receiving payments under a Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate
in the Investamatic Check Program and the Systematic Withdrawal Plan at the
same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all 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.
Reports
Reports for the Fund will be sent to shareholders of record at least
semiannually. These reports will include a list of the securities owned by
the Fund as well as the Fund's financial statements.
Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing the shareholder to make telephone redemptions for
amounts up to $50,000 to be mailed to the shareholder's address of record
is available automatically;
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<PAGE>
(2) the privilege allowing the shareholder or his or her dealer to make
telephone exchanges is available automatically;
(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; and
(4) the privilege allowing the shareholder to make telephone purchases or
redemptions transmitted via an electronic funds transfer system between the
shareholder's bank and the Fund, is available upon completion of the
requisite initial documentation. For details and forms, call 1-800-521-6548.
The documentation requires a signature guarantee.
A shareholder may decline the automatic Telephone Privileges set forth in
(1) and (2) above by so indicating on the Application accompanying this
Prospectus.
A shareholder may discontinue any Telephone Privilege at any time by
advising Shareholder Services that the shareholder wishes to discontinue the
use of such privileges in the future.
Unless such Telephone Privileges are declined, a shareholder is deemed to
authorize Shareholder Services and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder to
redeem, or purporting to be the shareholder or the shareholder's dealer to
exchange, shares from any account; and (2) honor any written instructions for
a change of address regardless of whether such request is accompanied by a
signature guarantee. All telephone calls will be recorded. None of the Fund,
the other Eligible Funds, the Transfer Agent, the Investment Manager or the
Distributor will be liable for any loss, expense or cost arising out of any
request, including any fraudulent or unauthorized requests. Shareholders
assume the risk to the full extent of their accounts that telephone requests
may be unauthorized. Reasonable procedures will be followed to confirm that
instructions communicated by telephone are genuine. The shareholder will not
be liable for any losses arising from unauthorized or fraudulent instructions
if such procedures are not followed.
Shareholders may redeem or exchange shares by calling toll-free
1-800-521-6548. Although it is unlikely, during periods of extraordinary
market conditions, a shareholder may have difficulty in reaching Shareholder
Services at such telephone number. In that event, the shareholder should
contact Shareholder Services at 1-800-562-0032, 1-617-357-7805 or otherwise
at its main office at One Financial Center, Boston, Massachusetts 02111-2690.
Shareholder Account Inquiries:
Please call 1-800-562-0032
Call this number for assistance in answering general questions on your
account, including account balance, available shareholder services, statement
information and performance of the Fund. Account inquiries may also be made
in writing to State Street Research Shareholder Services, P.O. Box 8408,
Boston, Massachusetts 02266-8408. A fee of up to $10 will be charged against
an account for providing additional account transcripts or photocopies of
paid redemption checks or for researching records in response to special
requests.
Shareholder Telephone Transactions:
Please call 1-800-521-6548
Call this number for assistance in purchasing shares by wire and for
telephone redemptions or telephone exchange transactions. Shareholder
Services will require some form of personal identification prior to acting
upon instructions received by telephone. Written confirmation of each
transaction will be provided.
The Fund and its Shares
The Fund, originally organized as a Massachusetts corporation in 1967, is a
diversified series of State Street Research Capital Trust (formerly, State
Street Capital Trust), a Massachusetts business trust, formed in 1988. The
Trustees have authorized shares of the Fund to be issued in four classes: Class
A, Class B, Class C and Class D shares. The Trust is registered with the
Securities and Exchange Commission under the 1940 Act as an open-end management
investment company. The fiscal year of the Fund is September 30.
Except for those differences between the classes of shares described below
and elsewhere in the Prospectus, each share of the Fund has equal dividend,
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<PAGE>
redemption and liquidation rights with other shares of the Fund and when
issued is fully paid and nonassessable. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common usage of terms which may develop in the mutual fund
industry. For example, Class C shares may be redesignated as Class Y shares
and Class D shares may be redesignated as Class C shares. Any 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 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 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.
Management of the Fund
Under the provisions of the Master Trust Agreement and the laws of
Massachusetts, primary 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 Research Investment Trust,
which they had formed in 1924. Their investment management philosophy, which
continues to this day, emphasized comprehensive fundamental
24
<PAGE>
research and analysis, including meetings with the management of companies
under consideration for investment. The Investment Manager's portfolio
management group has extensive investment industry experience managing equity
and debt securities. In managing debt securities, if any, for a portfolio,
the Investment Manager may consider yield curve positioning, sector rotation
and duration, among other factors.
The Investment Manager and the Distributor are indirect wholly-owned
subsidiaries of Metropolitan Life Insurance Company, 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 0.75% (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 investment
advisory fees, and the compensation and expenses of the Trustees who are not
otherwise currently affiliated with the Trust, 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 Frederick R. Kobrick. Mr. Kobrick has managed the Fund
since 1985. Mr. Kobrick's principal occupation currently is, and during the past
five years has been, Senior Vice President of State Street Research & Management
Company.
Subject to the policy of seeking best overall price and execution, sales of
shares of the Fund may be considered by the Investment Manager in the
selection of broker or dealer firms for the Fund's portfolio transactions.
The Investment Manager has a Code of Ethics governing personal securities
transactions of certain of its employees; see the Statement of Additional
Information.
Dividends and Distributions; Taxes
The Fund qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code for its most recent
fiscal year and intends to qualify as such in future fiscal years, although
it cannot give complete assurance that it will do so. As long as it so
qualifies and satisfies certain distribution requirements, it will not be
subject to federal income 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 (capital gains net of
capital losses).
The Fund declares dividends from net investment income annually and pays
such dividends, if any, after year end. Distributions of capital gain net
income will generally be made after the end of the fiscal year or as
otherwise required for compliance with applicable tax regulations. Both
dividends from net investment income and distributions of capital gain net
income will be declared and paid to shareholders in additional shares of the
Fund at net asset value (except in the case of shareholders who elect a
different available distribution method).
The Fund will provide its shareholders of record with annual information on
a timely basis concerning the federal tax status of dividends and
distributions during the preceding calendar year.
25
<PAGE>
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 the Transfer Agent is not provided with the
shareholder's correct taxpayer identification number and certification that
the shareholder is not subject to such backup withholding.
The foregoing discussion relates only to generally applicable federal income
tax provisions in effect as of the date of this Prospectus. Therefore,
prospective shareholders are urged to consult their own tax advisers
regarding tax matters, including state and local tax consequences.
Calculation of Performance Data
From time to time, in advertisements or in communications to shareholders or
prospective investors, 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 the performance of such
classes to appropriate indices such as the NASDAQ Composite Average, the
Russell 2000 Index, the Small Stock 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 Capital Appreciation
Fund Group 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 may be
accompanied by nonstandard total return information computed in the same
manner, but for differing periods and with or without annualizing the total
return or taking sales charges into account.
The 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 fees or assumption of expenses by the
Fund's affiliates will also increase performance results.
The Fund commenced operations as a registered investment company in 1984.
Shares of the Fund were first publicly available, to institutions and
existing shareholders only, in 1987. The Fund commenced a continuous offering
to the general public on February 17, 1993. During the period that shares of
the Fund were not offered to the general public, the Fund was not subject to
the cash inflows or higher level of redemptions or expenses that could occur
when shares are continuously offered to the general public.
26
<PAGE>
Performance information may be useful in evaluating the Fund and for
providing a basis for comparison with other financial alternatives. Because
the performance of the Fund varies in response to fluctuations in economic
and market conditions, interest rates and Fund expenses, among other things,
no performance quotation should be considered a representation as to the
Fund's performance for any future period. In addition, the net asset value of
shares of the Fund will fluctuate, with the result that shares of the Fund,
when redeemed, may be worth more or less than their original cost. Neither an
investment in the Fund nor 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.
Shares of the Fund had no class designations until February 17, 1993, when
Class A and Class C designations were assigned, and March 15, 1993 when Class
B and Class D designations were assigned, based on the pricing and Rule 12b-1
fees applicable to shares sold thereafter. Performance data for periods prior
to such dates will not reflect additional Rule 12b-1 Distribution Plan fees,
if any, of up to 1% per year depending on the class of shares, which will
adversely affect performance results for periods after such dates.
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.
27
<PAGE>
State Street Research
Capital 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, MA02266
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
[STATE STREET RESEARCH LOGO]
State Street Research
Capital Fund
January 29, 1996
P R O S P E C T U S
CF-522D-296IBS CONTROL NUMBER:
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
a Series of
STATE STREET RESEARCH CAPITAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
January 29, 1996
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS........................... 2
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT
TECHNIQUES............................................................... 5
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS...........................15
RATING CATEGORIES OF DEBT SECURITIES......................................18
TRUSTEES AND OFFICERS.....................................................20
INVESTMENT ADVISORY SERVICES..............................................25
PURCHASE AND REDEMPTION OF SHARES.........................................27
NET ASSET VALUE...........................................................29
PORTFOLIO TRANSACTIONS....................................................30
CERTAIN TAX MATTERS.......................................................32
DISTRIBUTION OF SHARES OF THE FUND........................................34
CALCULATION OF PERFORMANCE DATA...........................................38
CUSTODIAN.................................................................40
INDEPENDENT ACCOUNTANTS...................................................40
FINANCIAL STATEMENTS......................................................41
The following Statement of Additional Information is not a Prospectus. It
should be read in conjunction with the Prospectus of State Street Research
Capital Fund (the "Fund") dated January 29, 1996, 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: 1285C - 960129(0297)SSR-LD CF-879D-0196
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth in part under "The Fund's Investments" and "Limiting
Investment Risk" in the Fund's Prospectus, the Fund has adopted certain
investment restrictions.
All of the Fund's fundamental investment restrictions are set forth below.
These fundamental investment restrictions may not be changed except by the
affirmative vote of a majority of the Fund's outstanding voting securities as
defined in the Investment Company Act of 1940, as amended (the "1940 Act").
(Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at a meeting of security holders duly called, (i) of
67% or more of the voting securities present at a meeting if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy or (ii) of more than 50% of the outstanding voting securities, whichever
is less.) Under these restrictions, it is the Fund's policy:
(1) not to purchase the securities of any issuer if such purchase at the
time thereof would cause more than five percent (5%) of the total
assets of the Fund to be invested in the securities of any one
issuer; but this restriction shall not apply to obligations of the
government of the United States of America or to obligations of any
corporation organized under a general Act of Congress if such
corporation is an instrumentality of the United States;
(2) not to purchase the securities of any issuer if such purchase at the
time thereof would cause more than ten percent (10%) of any class of
securities of such issuer (as disclosed by the last available
financial statement of such issuer) to be held by the Fund;
(3) not to lend money; however, the Fund may lend portfolio
securities and purchase bonds, debentures, notes and similar
obligations (and enter into repurchase agreements with respect
thereto);
(4) not to underwrite or participate in the marketing of securities of
other issuers, although the Fund may, acting alone or in syndicates
or groups purchase or otherwise acquire securities of other issuers
for investment either from the issuers or from persons in a control
relationship with the issuers or from underwriters of such
securities;
(5) not to make any investment in real property or real estate
mortgage loans;
(6) not to invest in physical commodities or physical commodity
contracts or options in excess of 10% of the Fund's total assets,
except that investments in essentially financial items or
arrangements such as, but not limited to, swap arrangements,
hybrids, currencies, currency and other forward contracts, futures
contracts and options on futures contracts on securities, securities
2
<PAGE>
indices, interest rates and currencies shall not be deemed
investments in commodities or commodities contracts;
(7) not to purchase for, or retain in, its portfolio any security of an
issuer if, to the knowledge of the Fund, those of its officers and
directors and officers and directors of its investment adviser who
individually own beneficially more than 1/2 of 1% of the securities
of such issuer, when combined, own beneficially more than 5% of the
securities of such issuer taken at market;
(8) not to issue senior securities;
(9) not to invest in oil, gas or other mineral exploration or
development programs (provided that the Fund may invest in
securities issued by or which are based directly or indirectly, on
the credit of companies which invest in or sponsor such programs);
(10) not to make any investment which would cause more than 25% of the
value of the Fund's total assets to be invested in securities of
issuers principally engaged in any one industry (for purposes of
this restriction (a) utilities will be divided according to their
services so that, for example, gas, gas transmission, electric and
telephone companies will each be deemed in a separate industry, (b)
oil and oil related companies will be divided by type so that, for
example, oil production companies, oil service companies and
refining and marketing companies will each be deemed in a separate
industry and (c) securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities shall be excluded);
and
(11) not to borrow money (through reverse repurchase agreements or
otherwise) except for extraordinary and emergency purposes, such as
permitting redemption requests to be honored, and then not in an
amount in excess of 10% of the value of its net assets, provided
that additional investments will be suspended during any period when
borrowings exceed 5% of the Fund's net assets, and provided further
that reverse repurchase agreements shall not exceed 5% of the Fund's
net assets. The Board of Trustees may authorize the borrowing of
money only on an unsecured basis for the general purposes of the
Fund and may authorize the issue therefor of notes or debentures of
the Fund, but no money shall be borrowed by the Fund except pursuant
to the authority of the Board of Trustees, and no borrowings by the
Fund shall be authorized to an aggregate amount greater than ten
percent, as noted, of the net assets of the Fund.
The following nonfundamental investment restrictions may be changed
with respect to the Fund by a vote of a majority of the Trustees. Under
these restrictions, it is the Fund's policy:
3
<PAGE>
(1) not to hypothecate, mortgage or pledge any of its assets except as
may be necessary in connection with permitted borrowings and then
not in excess of 15% of the Fund's total assets, taken at cost (for
the purpose of this restriction financial futures, options on
financial futures and forward currency exchange contracts are not
deemed to involve a pledge of assets);
(2) not to invest in warrants more than 5% of the value of its total
assets, taken at the lower of cost or market value (warrants
initially attached to securities and acquired by the Fund upon
original issuance thereof shall be deemed to be without value);
(3) not to invest in companies for the purpose of exercising control
over their management, although the Fund may from time to time
present its views on various matters to the management of issuers in
which it holds investments;
(4) not invest more than 5% of its total assets in securities of private
companies including predecessors with less than three years'
continuous operations except (a) securities guaranteed or backed by
an affiliate of the issuer with three years' continuous operations,
(b) securities issued or guaranteed as to principal or interest by
the U.S. Government, or its agencies or instrumentalities, or a
mixed-ownership Government corporation, (c) securities of issuers
with debt securities rated at least "BBB" by Standard & Poor's
Corporation or "Baa" by Moody's Investor's Service, Inc. (or their
equivalent by any other nationally recognized statistical rating
organization) or securities of issuers considered by the Investment
Manager to be equivalent, (d) securities issued by a holding company
with at least 50% of its assets invested in companies with three
years of continuous operations including predecessors, and (e)
securities which generate income which is exempt from local, state
or federal taxes; provided that the Fund may invest up to 15% in
such issuers so long as such investments plus investments in
restricted securities (other than those which are eligible for
resale under Rule 144A, Regulation S or other exemptive provisions)
do not exceed 15% of the Fund's total assets;
(5) not to purchase any security or enter into a repurchase agreement if
as a result more than 15% of its net assets would be invested in
securities that are illiquid (including repurchase agreements not
entitling the holder to payment of principal and interest within
seven days);
(6) not to invest more than 15% of its net assets in restricted
securities of all types (including not more than 5% of its net
assets in restricted securities which are not eligible for resale
pursuant to Rule 144A, Regulation S or other exemptive provisions
under the Securities Act of 1933);
4
<PAGE>
(7) not to purchase securities on margin or make short sales of
securities except for short sales "against the box"; provided that
the Fund may make short sales if such positions are fully
collateralized and if not more than 5% of the Fund's net assets
(taken at current value) are held as collateral for such short sales
at any time; and, for the purpose of this restriction, escrow or
custodian receipts or letters, margin or safekeeping accounts, or
similar arrangements used in the industry in connection with the
trading of futures, options and forward commitments are not deemed
to involve the purchase of securities on margin;
(8) not to engage in transactions in options except that investments in
essentially financial items or arrangements such as, but not limited
to, options on securities, securities indices, interest rates and
currencies, and options on futures on securities, securities
indices, interest rates and currencies shall not be deemed
investments in options; and
(9) not to purchase a security issued by another investment company,
except to the extent permitted under the 1940 Act or except by
purchases in the open market involving only customary brokers'
commissions, or securities acquired as dividends or distributions or
in connection with a merger, consolidation or similar transaction or
other exchange.
ADDITIONAL INFORMATION CONCERNING
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 such instruments and
techniques are 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.
5
<PAGE>
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 assets fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will terminate
the Fund's position in the futures contract. A final determination of
maintenance margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. While futures
contracts with respect to securities do provide for the delivery and acceptance
of such securities, such delivery and acceptance are seldom made.
Futures contracts will be executed primarily (a) to establish a short
position, and thus protect the Fund from experiencing the full impact of an
expected decline in market value of portfolio holdings without requiring the
sale of holdings, or (b) to establish a long position, and thus to participate
in an expected rise in market value of securities or currencies which the Fund
intends to purchase. Subject to the limitations described below, the Fund may
also enter into futures contracts for purposes of enhancing return. In
transactions establishing a long position in a futures contract, money market
instruments equal to the face value of the futures contract will be identified
by the Fund to the Trust's custodian for maintenance in a separate account to
insure that the use of such futures contracts is unleveraged. Similarly, a
representative portfolio of securities having a value equal to the aggregate
face value of the futures contract will be identified with respect to each short
position. The Fund will employ any other appropriate method of cover which is
consistent with applicable regulatory and exchange requirements.
6
<PAGE>
Options on Securities
- ---------------------
The Fund may use options on securities to implement its investment
strategy. A call option on a security, for example, gives the purchaser of the
option the right to buy, and the writer the obligation to sell, the underlying
asset at the exercise price during the option period. Conversely, a put option
on a security gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying asset at the exercise price during the option
period.
Purchased options have defined risk, i.e., the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset.
Written options have varying degrees of risk. An uncovered written call
option theoretically carries unlimited risk, as the market price of the
underlying asset could rise far above the exercise price before its expiration.
This risk is tempered when the call option is covered, i.e., when the option
writer owns the underlying asset. In this case, the writer runs the risk of the
lost opportunity to participate in the appreciation in value of the asset rather
than the risk of an out-of-pocket loss. A written put option has defined risk,
i.e., the difference between the agreed-upon price that the Fund must pay to the
buyer upon exercise of the put and the value, which could be zero, of the asset
at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
his obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Options on Securities Indices
- -----------------------------
The Fund may engage in transactions in call and put options on securities
indices. For example, the Fund may purchase put options on indices of securities
in anticipation of or during a market decline to attempt to offset the decrease
in market value of its securities that might otherwise result.
Put options on indices of securities are similar to put options on the
securities themselves except that the delivery requirements are different.
Instead of giving the right to make delivery of a security at a specified price,
a put option on an index of securities gives the holder the right to receive an
amount of cash upon exercise of the option if the value of the underlying index
has fallen below the exercise price. The amount of cash received will be equal
to the difference between the closing price of the index and the exercise price
of the option expressed in dollars times a specified multiple. As with options
on securities, 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.
7
<PAGE>
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.
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
8
<PAGE>
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 only
as a hedge against changes resulting from market conditions which produce
changes in the values of its securities or the securities which it intends to
purchase (e.g., to replace portfolio securities which will mature in the near
future) or subject to the limitations described below, to enhance return. The
Fund will not purchase any futures contract or purchase any call option if,
immediately thereafter, more than one third of the Fund's net assets would be
represented by long futures contracts or call options. The Fund will not write a
covered call or put option if, immediately thereafter, the aggregate value of
the assets (securities in the case of written calls and cash or cash equivalents
in the case of written puts) underlying all such options, determined as of the
dates such options were written, would exceed 25% of the Fund's net assets. In
addition, the Fund may not establish a position in a commodity futures contract
or purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such nonhedging
purposes would exceed 5% of the market value of the Fund's net assets.
Although effective hedging can generally capture the bulk of a desired
risk adjustment, no hedge is completely effective. The Fund's ability to hedge
effectively through transactions in futures and options depends on the degree to
which price movements in its holdings correlate with price movements of the
futures and options.
Some positions in futures and options may be closed out only on an
exchange which provides a secondary market therefor. There can be no assurance
that a liquid secondary market will exist for any particular futures contract or
option at any specific time. Thus, it may not be possible to close such an
option or futures position prior to maturity. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
effectively hedge its securities and might in some cases require the Fund to
deposit cash to meet applicable margin requirements. The Fund will enter into an
option or futures position only if it appears to be a liquid investment.
The Fund has undertaken with a state securities authority that, for so
long as its shares are required to be registered for sale in such state, the
Fund will invest only in options and futures that are issued by the Options
Clearing Corporation or offered through the facilities of a national securities
association or listed on a national securities or commodities exchange, except
that the Fund may invest in unlisted options or futures when the desired options
or futures are unavailable on a national securities or commodities exchange.
Furthermore, the Fund will engage in such transactions in unlisted options or
futures only with dealers who have high credit standing as determined by the
Investment Manager.
9
<PAGE>
Foreign Investments
- -------------------
To the extent the Fund invests in securities of issuers in less developed
countries or emerging foreign markets, it will be subject to a variety of
additional risks, including risks associated with political instability,
economies based on relatively few industries, lesser market liquidity, high
rates of inflation, significant price volatility of portfolio holdings and high
levels of external debt in the relevant country.
Although the Fund may invest in securities denominated in foreign
currencies, the Fund values its securities and other assets in U.S. dollars. As
a result, the net asset value of the Fund's shares may fluctuate with U.S.
dollar exchange rates as well as with price changes of the Fund's securities in
the various local markets and currencies. Thus, an increase in the value of the
U.S. dollar compared to the currencies in which the Fund makes its investments
could reduce the effect of increases and magnify the effect of decreases in the
prices of the Fund's securities in their local markets. Conversely, a decrease
in the value of the U.S. dollar will have the opposite effect of magnifying the
effect of increases and reducing the effect of decreases in the prices of the
Fund's securities in the local markets.
Currency Transactions
- ---------------------
The Fund'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.
10
<PAGE>
Repurchase Agreements
- ---------------------
The Fund may enter into repurchase agreements. Repurchase agreements occur
when the Fund acquires a security and the seller, which may be either (i) a
primary dealer in U.S. Government securities or (ii) an FDIC-insured bank having
gross assets in excess of $500 million, simultaneously commits to repurchase it
at an agreed-upon price on an agreed-upon date within a specified number of days
(usually not more than seven) from the date of purchase. The repurchase price
reflects the purchase price plus an agreed-upon market rate of interest which is
unrelated to the coupon rate or maturity of the acquired security. The Fund will
only enter into repurchase agreements involving U.S. Government securities.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Fund's ability to dispose of the underlying securities. Repurchase
agreements will be limited to 30% of the Fund's total assets, except that
repurchase agreements extending for more than seven days when combined with
other illiquid securities will be limited to 10% of the Fund's total assets.
Reverse Repurchase Agreements
- -----------------------------
The Fund may enter into reverse repurchase agreements. However, the Fund
may not engage in reverse repurchase agreements in excess of 5% of the Fund's
total assets. In a reverse repurchase agreement the Fund transfers possession of
a portfolio instrument to another person, such as a financial institution,
broker or dealer, in return for a percentage of the instrument's market value in
cash, and agrees that on a stipulated date in the future the Fund will
repurchase the portfolio instrument by remitting the original consideration plus
interest at an agreed-upon rate. The ability to use reverse repurchase
agreements may enable, but does not ensure the ability of, the Fund to avoid
selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
11
<PAGE>
Swap Arrangements
- -----------------
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below. In an
interest rate swap the Fund could agree for a specific period to pay a bank or
investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an assumed figure selected by the parties for this
purpose) in exchange for agreement by the bank or investment banker to pay the
Fund a fixed rate of interest on the notional principal amount. In a currency
swap the Fund would agree with the other party to exchange cash flows based on
the relative differences in values of a notional amount of two (or more)
currencies; in an index swap, the Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices. Purchase
of a cap entitles the purchaser to receive payments from the seller on a
notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an agreed
upon interest rate or amount. A collar combines a cap and a floor.
Most swaps entered into by the Fund will be on a net basis; for example,
in an interest rate swap, amounts generated by application of the fixed rate and
the floating rate to the notional principal amount would first offset one
another, with the Fund either receiving or paying the difference between such
amounts. In order to be in a position to meet any obligations resulting from
swaps, the Fund will set up a segregated custodial account to hold appropriate
liquid assets, including cash; for swaps entered into on a net basis, assets
will be segregated having a daily net asset value equal to any excess of the
Fund's accrued obligations over the accrued obligations of the other party,
while for swaps on other than a net basis assets will be segregated having a
value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a portion of the Fund's portfolio.
However, the Fund may enter into such arrangements for income purposes to the
extent permitted by the Commodities Futures Trading Commission for entities
which are not commodity pool operators, such as the Fund. In entering a swap
arrangement, the Fund is dependent upon the creditworthiness and good faith of
the counterparty. The Fund attempts to reduce the risks of nonperformance by the
counterparty by dealing only with established, reputable institutions. The swap
market is still relatively new and emerging; positions in swap arrangements may
become illiquid to the extent that nonstandard arrangements with one
counterparty are not readily transferable to another counterparty or if a market
for the transfer of swap positions does not develop. The use of interest rate
swaps is a highly specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio securities
transactions. If the Investment Manager is incorrect in its forecasts of market
values, interest rates and other applicable factors, the investment performance
of the Fund would diminish compared with what it would have been if these
investment techniques were not used. Moreover, even if the Investment Manager is
correct in its forecast, there is a risk that the swap position may correlate
imperfectly with the price of the asset or liability being hedged.
12
<PAGE>
When-Issued Securities
- ----------------------
The Fund may purchase "when-issued" equity securities, which are traded on
a price basis prior to actual issuance. Such purchases will be made only to
achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year 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. Securities transactions involving delayed
deliveries or forward commitments are frequently characterized as when-issued
transactions and are similarly treated by the Fund.
Rule 144A Securities
- --------------------
Subject to the percentage limitation on illiquid and restricted securities
noted above, the Fund may buy or sell restricted securities in accordance with
Rule 144A under the Securities Act of 1933 ("Rule 144A Securities"). Securities
may be resold pursuant to Rule 144A under certain circumstances only to
qualified institutional buyers as defined in the rule, and the markets and
trading practices for such securities are relatively new and still developing;
depending on the development of such markets, such Rule 144A Securities may be
deemed to be liquid as determined by or in accordance with methods adopted by
the Trustees. Under such methods the following factors are considered, among
others: the frequency of trades and quotes for the security, the number of
dealers and potential purchasers in the market, marketmaking activity, and the
nature of the security and marketplace trades. Investments in Rule 144A
Securities could have the effect of increasing the level of the Fund's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing such securities. Also, the Fund may be
adversely impacted by the possible illiquidity and subjective valuation of such
securities in the absence of a market for them.
The Fund has undertaken with a state securities authority that, for so
long as the Fund's shares are required to be registered for sale in such state,
the Fund's investments in restricted securities, excluding restricted securities
eligible for resale pursuant to Rule 144A or Regulation S under the Securities
Act of 1933, will be limited to 5% of total assets.
13
<PAGE>
Industry Classifications
- ------------------------
In determining how much of the Fund's portfolio is invested in a given
industry, the industry classifications set forth below, grouped by sectors, are
currently used. Companies engaged in the business of financing will be
classified according to the industries of their parent companies or industries
that otherwise most affect such financing companies. Issuers of asset-backed
pools will be classified as separate industries based on the nature of the
underlying assets, such as mortgages, credit card receivables, etc.
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 Refining and Marketing Airline
Gas Oil Production Automotive
Gas Transmission Oil Service Building
Telephone Hotel & Restaurant
Finance Photography
Other ------- Recreation
- ----- Bank Retail Trade
Trust Certificates -- Financial Service Textile & Apparel
Government Related Lending Insurance
Asset-backed--Mortgages
Asset-backed -- Credit
Card Receivables
Other Investment Limitations
- ----------------------------
Pursuant to the policies of certain state securities authorities, the Fund
will not invest in real estate limited partnerships, oil, gas or mineral
development limited partnerships, or in oil, gas or mineral leases for so long
as Fund shares are required to be registered for sale in the relevant state.
The Fund has undertaken with a state securities authority that, for so
long as the Fund's shares are required to be registered for sale in such state,
the Fund's investment in warrants, valued at the lower of cost or market, may
not exceed 5% of its net assets and included within that amount, but not to
exceed 2% of the value of its net assets, may be warrants which are not listed
on the New York or American Stock Exchange.
14
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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
[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.
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<PAGE>
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Bank Money Investments. Bank money investments include but are not limited
to certificates of deposit, bankers' acceptances and time deposits. Certificates
of deposit are generally short-term (i.e., less than one year), interest-bearing
negotiable certificates issued by commercial banks or savings and loan
associations against funds deposited in the issuing institution. A banker's
acceptance is a time draft drawn on a commercial bank by a borrower, usually in
connection with an international commercial transaction (to finance the import,
export, transfer or storage of goods). A banker's acceptance may be obtained
from a domestic or foreign bank, including a U.S. branch or agency of a foreign
bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. The Fund will not invest
in any such bank money investment unless the investment is issued by a U.S. bank
that is a member of the Federal Deposit Insurance Corporation ("FDIC"),
including any foreign branch thereof, a U.S. branch or agency of a foreign bank,
a foreign branch of a foreign bank, or a savings bank or savings and loan
association that is a member of the FDIC and which at the date of investment has
capital, surplus and undivided profits (as of the date of its most recently
published financial statements) in excess of $50 million. The Fund will not
invest in time deposits maturing in more than seven days and will not invest
more than 10% of its total assets in time deposits maturing in two to seven
days.
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under
16
<PAGE>
state law. U.S. federal branches or agencies of foreign banks are chartered and
regulated by the Comptroller of the Currency, while state branches and agencies
are chartered and regulated by authorities of the respective states or the
District of Columbia. U.S. branches of foreign banks may accept deposits and
thus are eligible for FDIC insurance; however, not all such branches elect FDIC
insurance. Unlike U.S. branches of foreign banks, U.S. agencies of foreign banks
may not accept deposits and thus are not eligible for FDIC insurance. Both
branches and agencies can maintain credit balances, which are funds received by
the office incidental to or arising out of the exercise of their banking powers
and can exercise other commercial functions, such as lending activities.
Short-Term Corporate Debt Instruments. Short-term corporate debt
instruments include commercial paper to finance short-term credit needs (i.e.,
short-term, unsecured promissory notes) issued by corporations including but not
limited to (a) domestic or foreign bank holding companies or (b) their
subsidiaries or affiliates where the debt instrument is guaranteed by the bank
holding company or an affiliated bank or where the bank holding company or the
affiliated bank is unconditionally liable for the debt instrument. Commercial
paper is usually sold on a discounted basis and has a maturity at the time of
issuance not exceeding nine months.
Commercial Paper Ratings. Commercial paper investments at the time of
purchase will be rated A by Standard & Poor's Corporation ("S&P") or Prime by
Moody's Investor's Service, Inc. ("Moody's"), or, if not rated, issued by
companies having an outstanding long-term unsecured debt issue rated at least A
by S&P or by Moody's. The money market investments in corporate bonds and
debentures (which must have maturities at the date of settlement of one year or
less) must be rated at the time of purchase at least A by S&P or by Moody's.
Commercial paper rated A (highest quality) by S&P is issued by entities which
have liquidity ratios which are adequate to meet cash requirements. Long-term
senior debt is rated A or better, although in some cases BBB credits may be
allowed. The issuer has access to at least two additional channels of borrowing.
Basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances. Typically, the issuer's industry is well established and
the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. The relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1, A-2
or A-3. (Those A-1 issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.
17
<PAGE>
RATING CATEGORIES OF DEBT SECURITIES
Set forth below is a description of S&P corporate bond and debenture
ratings for securities which are deemed to be investment grade:
AAA: Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
Plus (+) or Minus (-): The ratings from AA to BBB may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to noncredit risks created by the terms of the
obligation, such as securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only (IO) and principal only (PO) mortgage securities.
Set forth below is a description of Moody's corporate bond and debenture
ratings for securities which are deemed to be investment grade:
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in the case of Aaa securities or fluctuation
of protective elements may be of
18
<PAGE>
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
1, 2 or 3: The ratings from Aa through Baa may be modified by the addition
of a numeral indicating a bond's rank within its rating category.
In the event applicable rating agencies lower the ratings of debt
instruments held by the Fund and the action results in a material decline in the
overall quality of the Fund's portfolio, the situation will be reviewed and
necessary action, if any, will be taken, including changes in the composition of
the portfolio.
19
<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 is currently,
and during the past five years has been, Senior Vice President of State Street
Research & Management Company.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791,
serves as Trustee of the Trust. He is 69. 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.
*+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 22
20
<PAGE>
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111, has
served as Secretary and General Counsel of the Trust since May 1995. He is 40.
His principal occupation is Senior Vice President and General Counsel of State
Street Research & Management Company. During the past five years 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.
*+Thomas P. Moore, Jr., One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 57. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as Vice President of State Street Research & Management
Company.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 63. He is retired, having served during the past
five years, until October 1992, as Executive Vice President, Chief Operating
Officer and Director of Hewlett-Packard Company.
+Thomas L. Phillips, 141 Spring Street, Lexington, MA 02173, serves as
Trustee of the Trust. He is 71. He is retired and was formerly Chairman of the
Board and Chief Executive Officer of Raytheon Company, of which he remains a
Director.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves as
Trustee of the Trust. He is 57. His principal occupations during the past five
years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
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 53. His principal occupation is Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research & Management
Company. During the past five years he also served as President and Chief
Executive Officer of New England Investment Companies and as Chief Investment
Officer of New England Mutual Life Insurance Company. Mr. Verni's other
principal business affiliations include Chairman of the Board, President, Chief
Executive Officer and Director of State Street Research Investment Services,
Inc.
- --------------------------------
* or + See footnotes on page 22
21
<PAGE>
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 71. He is retired and was formerly Of Counsel for
the law firm Choate, Hall & Stewart. He was a partner of that firm from 1960 to
1987.
- -----------------------------
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the 1940 Act because of their affiliations
with the Fund's investment adviser.
+ Serves as a Trustee and/or officer of one or more of the following
investment companies, each of which has an advisory or distribution
relationship with the Investment Manager or its affiliates: State
Street Research 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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As of October 31, 1995, the following persons or entities were the record
and/or beneficial owners of the approximate amounts of each class of shares of
the Fund as set forth beside their names:
Shareholder %
----------- ---
Class A Merrill Lynch 33.0
Class B Merrill Lynch 60.1
Class C George F. Bennett 10.4
Dudley F. Wade 5.8
Metropolitan Life 23.0
U.S. Trust Company 20.2
World Cup USA 18.9
Class D Merrill Lynch 45.6
The full name and address of each of the above persons or entities are as
follows:
Merrill Lynch, Pierce, Fenner & Smith, Inc. (b)
One Liberty Plaza
165 Broadway
New York, New York 10080
George F. Bennett
c/o State Street Research
Shareholder Services
One Financial Center
Boston, Massachusetts 02111
Dudley F. Wade
c/o State Street Research
Shareholder Services
One Financial Center
Boston, Massachusetts 02111
Metropolitan Life Insurance Company (a)
One Madison Avenue
New York, New York 10010
United States Trust Company (b)(c)
770 Broadway
New York, New York 10003
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<PAGE>
World Cup USA 1994 Inc.
c/o State Street Research
Shareholder Services
One Financial Center
Boston, Massachusetts 02111
- ------------------------
(a) Metropolitan Life Insurance Company ("Metropolitan"), a New York
corporation, was the record and/or beneficial owner, directly or
indirectly through its subsidiaries or affiliates, of such shares.
(b) The Fund believes that such entity does not have beneficial ownership of
such shares.
(c) United States Trust Company holds such shares as trustee under certain
employee benefit plans serviced by Metropolitan.
As of October 31, 1995, the Trustees and officers of the Fund as a group
owned approximately 5.7% and 1.2%, respectively, of the Fund's outstanding Class
A and Class C shares.
Ownership of 25% or more of a voting security is deemed "control" as
defined in the 1940 Act. So long as 25% of a class of the Fund's shares is so
owned, such owners will be presumed to be in control of such class of shares for
purposes of voting on certain matters submitted to a vote of shareholders, such
as any Distribution Plan for a given class.
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<PAGE>
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 $7,150 $ 88,435
Dean O. Morton $7,750 $100,185
Thomas L. Phillips $6,950 $ 67,285
Toby Rosenblatt $ 0 $ 61,271
Michael S. Scott Morton $8,150 $101,535
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $7,250 $ 73,385
(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.
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Advisory
Agreement provides that the Investment Manager shall furnish the Fund with an
investment program, suitable office space and facilities and such investment
advisory, research and administrative services as may be required from time to
time. The Investment Manager compensates all executive and clerical personnel
and Trustees of the Trust if such persons are employees of the Investment
Manager or its affiliates. The Investment Manager is an indirect wholly-owned
subsidiary of Metropolitan.
The advisory fee payable monthly by the Fund to the Investment Manager is
computed as a percentage of the average of the value of the net assets of the
Fund, as determined at the close of the New York Stock Exchange (the "NYSE") on
each day the NYSE is open for trading, at the annual rate of 0.75% of the net
assets of the Fund. The Distributor and its
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<PAGE>
affiliates have from time to time and in varying amounts voluntarily assumed
some portion of fees or expenses relating to the Fund. For the fiscal years
ended September 30, 1993, 1994 and 1995, the Fund's investment advisory fee
prior to the assumption of fees or expenses was $145,523, $813,880 and
$1,750,735, respectively. For the same periods, the voluntary reduction of fees
or assumption of expenses amounted to $0, $26,269 and $0, respectively.
Further, to the extent required under applicable state regulatory
requirements, the Investment Manager will reduce its management fee up to the
amount of any expenses (excluding permissible items, such as brokerage
commissions, Rule 12b-1 Distribution Plan payments, interest, taxes and
litigation expenses) paid or incurred by the Fund in any fiscal year which
exceed specified percentages of the average daily net assets of the Fund for
such fiscal year. The most restrictive of such percentage limitations is
currently 2.5% of the first $30 million of average net assets, 2.0% of the next
$70 million of average net assets and 1.5% of the remaining average net assets.
These commitments may be amended or rescinded in response to changes in the
requirements of the various states by the Trustees without shareholder approval.
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund from year to year as long as it is approved at least
annually both (i) by a vote of a majority of the outstanding voting securities
of the Fund (as defined in the 1940 Act) or by the Trustees of the Trust, and
(ii) in either event by a vote of a majority of the Trustees who are not parties
to the Advisory Agreement or "interested persons" of any party thereto, cast in
person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated on 60 days written notice by either party
and will terminate automatically in the event of its assignment, as defined
under the 1940 Act and regulations thereunder. Such regulations provide that a
transaction which does not result in a change of actual control or management of
an adviser is not deemed an assignment.
Under a Shareholders' Administrative Services Agreement between the Trust
and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Fund, and is entitled to
reimbursements of its costs for providing such services. Under certain
arrangements for Metropolitan to provide subadministration services,
Metropolitan may receive a fee for the maintenance of certain share ownership
records for participants in sponsored arrangements, such as employee benefit
plans, through or under which the Fund's shares may be purchased.
Under the Code of Ethics of the Investment Manager, its employees in
Boston, where investment management operations are conducted, are only permitted
to engage in personal securities transactions in accordance with certain
conditions relating to an employee's position, the identity of the security, the
timing of the transaction, and similar factors. Such employees must report their
personal securities transactions quarterly and supply broker confirmations of
such transactions to the Investment Manager.
26
<PAGE>
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 Fund and of any of the other Class A shares of Eligible Funds held of record
as of the date of his or her Letter of Intent, plus the value (at the current
offering price) as of such date of all of such shares held by any "person"
described herein as eligible to join with the investor in a single purchase.
27
<PAGE>
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the Fund and Class A shares of
the other Eligible Funds owned as of the purchase date by the investor plus the
value (at the current public offering price) of all such shares owned as of such
date by any "person" described herein as eligible to join with the investor in a
single purchase. Class B, Class C and Class D shares may also be included in the
combination under certain circumstances. Investors must submit sufficient
information to show that they qualify for the Right of Accumulation.
Class C Shares. Class C shares are currently available to certain benefit
plans such as qualified retirement plans which meet criteria relating to
level of assets, number of participants, service agreements, or similar factors;
banks and insurance companies; endowment funds of nonprofit organizations with
substantial minimum assets; and other similar institutional investors.
Reorganizations. In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, the Fund may issue its shares at net asset value (or
more) to such entities or to their security holders.
Redemptions. The Fund reserves the right to pay redemptions in kind with
portfolio securities in lieu of cash. In accordance with its election pursuant
to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of redemption
proceeds paid in cash. Although it has no present intention to do so, the Fund
may, under unusual circumstances, limit redemptions in cash with respect to each
shareholder during any ninety-day period to the lesser of (i) $250,000 or (ii)
1% of the net asset value of the Fund at the beginning of such period. In
connection with any redemptions paid in kind with portfolio securities,
brokerage and other costs may be incurred by the redeeming shareholder in the
sale of the securities received.
28
<PAGE>
NET ASSET VALUE
The net asset values of the shares of the Fund are determined once daily
as of the close of the New York Stock Exchange ("NYSE"), ordinarily 4 P.M. New
York City time, Monday through Friday, on each day during which the NYSE is open
for unrestricted trading. The NYSE is currently closed for New Year's Day,
Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is computed by dividing the sum
of the market value of the securities held by the Fund plus any cash or other
assets minus all liabilities by the total number of outstanding shares of the
Fund at such time. Any expenses, except for extraordinary or nonrecurring
expenses, borne by the Fund, including the investment management fee payable to
the Investment Manager, are accrued daily.
In determining the values of the portfolio assets as provided below, the
Trustees may utilize one or more pricing services in lieu of market quotations
for certain securities which are not readily available on a daily basis. Such
services may provide prices determined as of times prior to the close of the
NYSE.
In general, securities are valued as follows. Securities which are listed
or traded on the New York or American Stock Exchange are valued at the price of
the last quoted sale on the respective exchange for that day. Securities which
are listed or traded on a national securities exchange or exchanges, but not on
the New York or American Stock Exchange, are valued at the price of the last
quoted sale on the exchange for that day prior to the close of the NYSE.
Securities not listed on any national securities exchange which are traded "over
the counter" and for which quotations are available on the National Association
of Securities Dealers' NASDAQ System, or other system, are valued at the closing
price supplied through such system for that day at the close of the NYSE. Other
securities are, in general, valued at the mean of the bid and asked quotations
last quoted prior to the close of the NYSE if there are market quotations
readily available, or in the absence of such market quotations, then at the fair
value thereof as determined by or under authority of the Trustees of the Trust
utilizing such pricing services as may be deemed appropriate. Securities deemed
restricted as to resale are valued at the fair value thereof as determined by or
in accordance with methods adopted by the Trustees of the Trust.
Short-term debt instruments issued with a maturity of one year or less
which have a remaining maturity of 60 days or less are valued using the
amortized cost method, provided that during any period in which more than 25% of
the Fund's total assets is invested in short-term debt securities the current
market value of such securities will be used in calculating net asset value per
share in lieu of the amortized cost method. The amortized cost method is used
when the value obtained is fair value. Under the amortized cost method of
valuation, the security is initially valued at cost on the date of purchase (or
in the case of short-term debt instruments purchased with more than 60 days
remaining to maturity, the market value on the 61st day prior to maturity), and
thereafter a constant amortization to maturity of any discount
29
<PAGE>
or premium is assumed regardless of the impact of fluctuating interest rates on
the market value of the security.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
- ------------------
The Fund's portfolio turnover rate is determined by dividing the lesser of
securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The Fund reserves full freedom with respect to portfolio
turnover, as described in the Prospectus. The portfolio turnover rates for the
fiscal years ended September 30, 1994 and 1995 were 167.08% and 214.59%,
respectively.
The Investment Manager believes the portfolio turnover rate for the fiscal
year ended September 30, 1994 was significantly higher than that for the
previous fiscal year because of sales of portfolio securities which had reached
attractive levels or to shift from one industry sector to another, consistent
with changes in the Fund's view of the economy.
The Investment Manager believes the portfolio turnover rate for the fiscal
year ended September 30, 1995, was significantly higher than that for the
previous fiscal year because of the level of sales of securities that had gained
from the strong performance of the market through the time of such sales and
because of the level of purchases of securities which became attractive at
market lows.
Brokerage Allocation
- --------------------
The Fund and the Investment Manager seek the best overall execution of
purchase or sale orders and the most favorable net price in securities
transactions consistent with their judgment as to the business qualifications of
the various broker or dealer firms with which the Fund may do business.
Decisions with respect to the market in which the transaction is to be
completed, and to the allocation of orders among brokers or dealers, are made in
accordance with this policy. In selecting brokers or dealers to effect portfolio
transactions, consideration is given to the performance, integrity and financial
responsibility of the various firms as well as to their demonstrated execution
experience and capability generally and in regard to particular markets or
securities and, in agency transactions, to the competitiveness of the commission
rates (or in principal transactions of the net prices) they charge. The
Investment Manager keeps current as to the range of rates or prices charged by
various firms and against this background evaluates the reasonableness of a
commission or price charged with respect to a particular transaction by
considering such factors as difficulty of execution or security positioning by
the executing firm.
When it appears that a number of firms can satisfy the required standards
in respect of a particular transaction, consideration may also be given to
services other than execution services which such firms have provided in the
past or may provide in the future. Among
30
<PAGE>
such other services are the supplying of supplemental investment research,
general economic and political information, analytical and statistical data,
relevant market information and daily market quotations for computation of net
asset value. In this connection it should be noted that a substantial portion of
brokerage commissions paid, or principal transactions entered, by the Fund may
be with brokers and investment banking firms which, in the normal course of
business, publish statistical, research and other material which is received by
the Investment Manager and which may or may not prove useful to the Investment
Manager, the Fund or other clients of the Investment Manager.
Neither the Fund nor the Investment Manager has any definite agreements
with any firm as to the amount of business which that firm may expect to receive
for services supplied or otherwise. There may be, however, understandings with
certain firms that in order for such firms to be able to continuously supply
certain services, they need to receive allocation of a specified amount of
business. These understandings are honored to the extent possible in accordance
with the policy set forth above. Neither the Fund nor the Investment Manager
intends to pay a firm in excess of that which another would charge for handling
the same transaction in recognition of services (other than execution services)
provided. However, the Fund and the Investment Manager are aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, rely on the provisions of Section 28(e) of the
Securities Exchange Act of 1934, to the extent applicable. Brokerage commissions
paid by the Fund during the fiscal years ended September 30, 1995, 1994 and 1993
amounted to approximately $990,000, $431,000 and $60,000, respectively. The
Investment Manager believes that the increase in brokerage commissions for the
fiscal year ended September 30, 1995, compared to the prior two fiscal years is
attributed to the investment of proceeds from the increased sale of Fund shares
and general investment activity for a larger portfolio during a volatile period
for the kinds of securities held by the Fund, when both profit-taking and
purchase opportunities were presented. During and at the end of its most recent
fiscal year, the Fund held in its portfolio no securities of any entity that
might be deemed to be a regular broker-dealer of the Fund as defined under the
1940 Act.
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
31
<PAGE>
customers, including the Fund. In some instances, this procedure may affect the
price and size of the positions obtainable for the Fund.
CERTAIN TAX MATTERS
Federal Income Taxation of the Fund
- -----------------------------------
The Fund intends to qualify and elect to be treated each taxable year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), although it cannot give complete assurance
that it will do so. Accordingly, the Fund must, among other things, (a) derive
at least 90% of its gross income in each taxable year from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of the
following held for less than three months (the "30% test"): (i) stock or
securities; (ii) options, futures, or forward contracts (other than options,
futures, or forward contracts on foreign currencies) or (iii) foreign currencies
(or options, futures, or forward contracts on foreign currencies) but only if
such currencies (or options, futures, or forward contracts) are not directly
related to the Fund's principal business of investing in stocks or securities
(or options and futures with respect to stocks or securities); (c) satisfy
certain diversification requirements and (d) in order to be entitled to utilize
the dividends paid deduction, distribute annually at least 90% of its investment
company taxable income (determined without regard to the deduction for dividends
paid).
The 30% test will limit the extent to which the Fund may sell securities
held for less than three months, write options which expire in less than three
months, and effect closing transactions with respect to call or put options that
have been written or purchased within the preceding three months. (If the Fund
purchases a put option for the purpose of hedging an underlying portfolio
security, the acquisition of the option is treated as a short sale of the
underlying security unless, for purposes only of the 30% test, the option and
the security are acquired on the same date). Finally, as discussed below, this
requirement may also limit investments by the Fund in options on stock indices,
listed options on nonconvertible debt securities, futures contracts, options on
interest rate futures contracts and certain foreign currency contracts.
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of the Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in
32
<PAGE>
excess of current or accumulated earnings and profits, would receive a return of
capital that would reduce the basis of their shares of the Fund.
The Fund will be liable for a nondeductible 4% excise tax on amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement. To avoid the tax, during each calendar year the Fund must
distribute an amount equal to at least 98% of the sum of its ordinary income
(not taking into account any capital gains or losses) for the calendar year, and
its capital gain net income for the 12-month period ending on October 31, in
addition to any undistributed portion of the respective balances from the prior
year. The Fund intends to make sufficient distributions to avoid this 4% excise
tax.
Federal Income Taxation of the Fund's Investments
- -------------------------------------------------
Original Issue Discount. For federal income tax purposes, debt securities
purchased by the Fund may be treated as having original issue discount. Original
issue discount represents interest for federal income tax purposes and can
generally be defined as the excess of the stated redemption price at maturity of
a debt obligation over the issue price. Original issue discount is treated for
federal income tax purposes as income earned by the Fund, whether or not any
income is actually received, and therefore is subject to the distribution
requirements of the Code. Generally, the amount of original issue discount is
determined on the basis of a constant yield to maturity which takes into account
the compounding of accrued interest. Under section 1286 of the Code, an
investment in a stripped bond or stripped coupon may result in original issue
discount.
Debt securities may be purchased by the Fund at a discount that exceeds
the original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for income tax
purposes. In the case of any debt security issued after July 18, 1984, having a
fixed maturity date of more than one year from the date of issue and having
market discount, the gain realized on disposition will be treated as interest
income to the extent it does not exceed the accrued market discount on the
security (unless the Fund elects to include such accrued market discount in
income in the tax year to which it is attributable). Generally, market discount
is accrued on a daily basis. The Fund may be required to capitalize, rather than
deduct currently, part or all of any direct interest expense incurred to
purchase or carry any debt security having market discount, unless the Fund
makes the election to include market discount currently. Because the Fund must
include original issue discount in income, it will be more difficult for the
Fund to make the distributions required to maintain its status as a regulated
investment company under Subchapter M of the Code and to avoid the 4% excise tax
described above.
Options and Futures Transactions. Certain of the Fund's investments may be
subject to provisions of the Code that (i) require inclusion of unrealized gains
or losses in the Fund's income for purposes of the 90% test, the 30% test, the
excise tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and (iii) characterize
both realized and unrealized gain or loss as short-term or long-
33
<PAGE>
term gain or loss. Such provisions generally apply to, among other investments,
options on debt securities, indices on securities and futures contracts.
Federal Income Taxation of Shareholders
- ---------------------------------------
Dividends paid by the Fund may be eligible for the 70% dividends-received
deduction for corporations. The percentage of the Fund's dividends eligible for
such tax treatment may be less than 100% to the extent that less than 100% of
the Fund's gross income may be from qualifying dividends of domestic
corporations. Any dividend declared in October, November or December and made
payable to shareholders of record in any such month is treated as received by
such shareholders on December 31, provided that the Fund pays the dividend
during January of the following calendar year.
Distributions by the Fund result in a reduction in the fair market value
of the Fund's shares. Should a distribution reduce the fair market value below a
shareholder's cost basis, such distribution nevertheless may be taxable to the
shareholder as ordinary income or long-term capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
DISTRIBUTION OF SHARES OF THE FUND
State Street Research Capital Trust (formerly, State Street Capital Trust)
is currently comprised of the following series: State Street Research Capital
Fund, State Street Research Small Capitalization Growth Fund and State Street
Research Small Capitalization Value Fund. The Trustees have authorized shares of
the Fund to be issued in four classes: Class A, Class B, Class C and Class D
shares. The Trustees of the Trust have authority to issue an unlimited number of
shares of beneficial interest of separate series, $.001 par value per share. A
"series" is a separate pool of assets of the Trust which is separately managed
and has a different investment objective and different investment policies from
those of another series. The Trustees have authority, without the necessity of a
shareholder vote, to create any number of new series or classes or to commence
the public offering of shares of any previously established series or classes.
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the
34
<PAGE>
Class B and Class D shares). The Distributor may reallow all or portions of such
sales charges as concessions to dealers. For the fiscal years ended September
30, 1993, 1994 and 1995, total sales charges on Class A shares paid to the
Distributor amounted to $144,385, $392,042 and $799,572, respectively. For the
same periods the Distributor retained $1,314, $18,627 and $92,294, respectively,
after reallowance of concessions to dealers.
The differences in the price at which the Fund's Class A shares are
offered due to scheduled variations in sales charges, as described in the Fund's
Prospectus, result from cost savings inherent in economies of scale. Management
believes that the cost of sales efforts of the Distributor and broker-dealers
tends to decrease as the size of purchases increases, or does not involve any
incremental sales expenses as in the case of, for example, exchanges,
reinvestments or dividend investments at net asset value. Similarly, no
significant sales effort is necessary for sales of shares at net asset value to
certain Directors, Trustees, officers, employees, their relatives and other
persons directly or indirectly related to the Fund or associated entities. Where
shares of the Fund are offered at a reduced sales charge or without a sales
charge pursuant to sponsored arrangements and managed fee-based programs, the
amount of the sales charge reduction will similarly reflect the anticipated
reduction in sales expenses associated with such arrangements. The reduction in
sales expenses, and therefore the reduction in sales charges, will vary
depending on factors such as the size and other characteristics of the
organization or program, and the nature of its membership or the participants.
The Fund reserves the right to make variations in, or eliminate, sales charges
at any time or to revise the terms of or to suspend or discontinue sales
pursuant to sponsored arrangements at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission on the shares sold as described in the Prospectus.
Such commission also is payable to authorized securities dealers upon sales of
Class A shares made pursuant to a Letter of Intent to purchase shares having a
net asset value of $1,000,000 or more. Shares sold with such commissions payable
are subject to a one-year contingent deferred sales charge of 1% on any portion
of such shares redeemed within one year following their sale. After a particular
purchase of Class A shares is made under the Letter of Intent, the commission
will be paid only in respect of that particular purchase of shares. If the
Letter of Intent is not completed, the commission paid will be deducted from any
discounts or commissions otherwise payable to such dealer in respect of shares
actually sold. If an investor is eligible to purchase shares at net asset value
on account of the Right of Accumulation, the commission will be paid only in
respect of the incremental purchase at net asset value.
For the periods shown below, the Distributor received contingent deferred
sales charges upon redemption of Class A, Class B and Class D shares of the Fund
and paid initial commissions to securities dealers for sales of such shares as
follows:
35
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Period Ended
Ended September 30, 1995 Ended September 30, 1994 September 30, 1993
------------------------ ------------------------ ------------------
Contingent Commissions Contingent Commissions Contingent Commissions
Deferred Paid to Deferred Paid to Deferred Paid to
Sales Charges Dealers Sales Charges Dealers Sales Charges Dealers
------------- ------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Class A $0 $707,278 $0 $373,415 $0 $143,071
Class B $192,789 $3,836,570 $9,484 $2,308,457 $0 $63,093
Class D $9,688 $410,729 $343 $343,572 $0 $5,207
</TABLE>
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1" (the
"Distribution Plan") under which the Fund may engage, directly or indirectly, in
financing any activities primarily intended to result in the sale of Class A,
Class B and Class D shares, including, but not limited to, (1) the payment of
commissions and/or reimbursement to underwriters, securities dealers and others
engaged in the sale of shares, including payments to the Distributor to be used
to pay commissions and/or reimbursement to securities dealers (which securities
dealers may be affiliates of the Distributor) engaged in the distribution and
marketing of shares and furnishing assistance to investors on an ongoing basis,
(2) reimbursement of direct out-of-pocket expenditures incurred by the
Distributor in connection with the distribution and marketing of shares
including expenses relating to the formulation and implementation of marketing
strategies and promotional activities such as direct mail promotions and
television, radio, newspaper, magazine and other mass media advertising, the
preparation, printing and distribution of Prospectuses of the Fund and reports
for recipients other than existing shareholders of the Fund, and obtaining such
information, analyses and reports with respect to marketing and promotional
activities and investor accounts as the Fund may, from time to time, deem
advisable, and (3) reimbursement of expenses incurred by the Distributor in
connection with the servicing of shareholder accounts including payments to
securities dealers and others in consideration of the provision of personal
services to investors and/or the maintenance of shareholder accounts and
expenses associated with the provision of personal services by the Distributor
directly to investors. In addition, the Distribution Plan is deemed to authorize
the Distributor and the Investment Manager to make payments out of general
profits, revenues and other sources to underwriters, securities dealers and
others in connection with sales of shares, to the extent, if any, that such
payments may be deemed to be within the scope of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class D shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or
36
<PAGE>
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.
During the fiscal year ended 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 $ 0 $ 0 $ 0
Printing and mailing
of prospectuses to
other than current
shareholders 0 0 0
Compensation to dealers 81,664 1,159,597 566,144
Compensation to sales
personnel 0 0 0
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses: marketing; general 0 0 0
------- ---------- --------
Total fees $81,664 $1,159,597 $566,144
======= ========== ========
The Distributor may have also used additional resources of its own for further
expenses on behalf of the Fund.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
37
<PAGE>
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Fund will make alternative
arrangements for such services for shareholders who acquired shares through such
institutions.
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") of the Class A,
Class B, Class C and Class D shares of the Fund will be calculated as set forth
below. Total return is computed separately for each class of shares of the Fund.
Performance data for a specified class includes periods prior to the adoption of
class designations. Shares of the Fund had no class designations until February
17, 1993, when Class A and Class C designations were assigned, and March 15,
1993, when Class B and Class D designations were assigned based on the pricing
and Rule 12b-1 fees applicable to shares sold thereafter.
The performance data reflects Rule 12b-1 fees and sales charges as set
forth below:
Rule 12b-1 Fees Sales Charges
-------------------------- --------------------------
Class Amount Period
- ----- ------ ------
A 0.25% February 17, 1993 Maximum 4.5% sales charge
to present; fee will reduce reflected
performance for periods after
February 17, 1993
B 1.00% March 15, 1993 to present; fee 1- and 5-year periods
will reduce performance for reflect a 5% and a
periods after March 15, 1993 2% contingent deferred
sales charge, respectively
C 0.00% Since commencement of None
operations to present
D 1.00% March 15, 1993 to present; fee 1-year period reflects
will reduce performance for a 1% contingent
periods after March 15, 1993 deferred sales charge
All calculations of performance data in this section reflect the voluntary
measures by the Fund's affiliates to reduce fees or expenses relating to the
Fund; see "Accrued Expenses" later in this section.
Total Return
- ------------
The average annual total returns ("standard total return") of each class
of the Fund's shares were as follows:
38
<PAGE>
Five Years One Year
Ten Years Ended Ended Ended
September 30, 1995 September 30, 1995 September 30, 1995
------------------ ------------------ ------------------
Class A 19.66% 27.98% 30.79%
Class B 20.01% 28.59% 30.90%
Class C 20.32% 29.40% 37.30%
Class D 20.04% 28.79% 35.07%
Standard total return is computed separately for each class of shares by
determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value in accordance with the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated
period assuming a hypothetical $1,000 payment made at the
beginning of the designated period
The calculation is based on the further assumptions that the maximum
initial or contingent deferred sales charge applicable to the investment is
deducted, and that all dividends and distributions by the Fund are reinvested at
net asset value on the reinvestment dates during the periods. All accrued
expenses and recurring charges are also taken into account as described later
herein.
Accrued Expenses
- ----------------
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return results take sales charges, if applicable, into account,
although the results do not take into account recurring and nonrecurring charges
for optional services which only certain shareholders elect and which involve
nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by affiliates of
fees or expenses during the subject period. In the absence of such
subsidization, the performance of the Fund will be lower.
39
<PAGE>
Nonstandardized Total Return
- ----------------------------
The Fund may provide the above described standard total return results for
Class A, Class B, Class C and Class D shares for periods which end no earlier
than the most recent calendar quarter end and which begin one, five and ten
years before. In addition, the Fund may provide nonstandardized total return
results for differing periods, such as for the period since the effectiveness of
the Fund's Registration Statement under the Investment Company Act of 1940
(March 25, 1984) and/or without taking sales charges into account. Such
nonstandardized total return is computed as otherwise described under "Total
Return" except the result may or may not be annualized, and as noted, any
applicable sales charge may not be taken into account and therefore not deducted
from the hypothetical initial payment of $1,000 or ending value. For example,
the Fund's nonstandardized total returns for the six months ended September 30,
1995, without taking sales charges into account, were as follows:
Class A 29.72%
Class B 29.15%
Class C 29.85%
Class D 29.19%
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. One Post Office Square, Boston, Massachusetts
02109, serves as the Trust's independent accountants, providing professional
services including (1) audits of certain financial statements, (2) assistance
and consultation in connection with Securities and Exchange Commission filings
and (3) review of the annual income tax returns filed on behalf of the Fund.
40
<PAGE>
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a semiannual
basis, other supplementary financial reports may be made available from time to
time and holders of record may request a copy of a current supplementary report,
if any, by calling State Street Research Shareholder Services.
The following financial statements are for the Fund's fiscal year ended
September 30, 1995:
41
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
September 30, 1995
- --------------------------------------------------------------------------------
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
COMMON STOCKS 90.7%
Basic Industries 5.3%
Chemical 1.9%
Potash Corp. of Saskatchewan, Inc. 79,500 $ 4,948,875
Rohm & Haas Co. 41,400 2,499,525
------------
7,448,400
------------
Diversified 0.0%
Thermedics, Inc.* 8,100 160,988
------------
Electrical Equipment 0.9%
Philips Electronics NV 30,900 1,506,375
Trimble Navigation, Ltd.* 75,900 1,916,475
------------
3,422,850
------------
Machinery 2.5%
AGCO Corp. 87,600 3,985,800
Elsag Bailey Process Automation NV 78,800 2,570,850
UCAR International, Inc.* 55,500 1,512,375
Wolverine Tube, Inc.* 54,800 2,075,550
------------
10,144,575
------------
Metal & Mining 0.0%
Carbide/Graphite Group, Inc.* 9,500 134,187
------------
Total Basic Industries 21,311,000
------------
Consumer Cyclical 27.1%
Airline 4.2%
AMR Corp.* 55,000 3,966,875
Atlas Air, Inc.* 20,000 445,000
British Airways PLC ADR 26,300 1,877,163
KLM Royal Dutch Air Lines 51,400 1,799,000
Northwest Airlines Corp. Cl. A* 110,000 4,675,000
UAL Corp.* 23,900 4,083,912
------------
16,846,950
------------
Automotive 1.4%
Danaher Corp. 24,800 812,200
Exide Corp. 88,300 4,415,000
Team Rental Group, Inc. Cl. A* 32,600 326,000
------------
5,553,200
------------
Building 0.7%
Owens-Corning Fiberglas Corp.* 40,500 1,807,312
Stimsonite Corp.* 80,300 963,600
------------
2,770,912
------------
Hotel & Restaurant 6.3%
Circus Circus Enterprises, Inc.* 18,500 518,000
Doubletree Corp.* 33,600 747,600
Hotel & Restaurant (cont'd)
Harrah's Entertainment, Inc. 138,600 $ 4,054,050
HFS, Inc. 148,200 7,761,975
La Quinta Inns, Inc. 150,125 4,203,500
Lone Star Steakhouse & Saloon, Inc.* 73,600 3,017,600
Renaissance Hotel Group NV 86,500 1,535,375
Station Casinos, Inc.* 50,700 779,512
Trump Hotels & Casino Resorts, Inc.* 173,900 2,956,300
------------
25,573,912
------------
Recreation 1.2%
American Radio Systems Corp.* 15,900 393,525
Anthony Industries, Inc. 37,900 715,363
Oakley, Inc.* 121,800 3,608,325
------------
4,717,213
------------
Retail Trade 7.8%
BT Office Products International, Inc.* 110,300 1,447,688
CompUSA, Inc.* 27,700 1,191,100
Corporate Express, Inc.* 43,500 1,060,313
Department 56, Inc.* 19,300 902,275
General Nutrition Centers, Inc.* 59,200 2,693,600
Industrie Natuzzi SPA ADR 37,200 1,325,250
Just For Feet, Inc.* 181,250 5,573,437
Office Depot Inc.* 95,800 2,885,975
Office Max, Inc.* 7,600 184,300
Petsmart, Inc.* 46,800 1,579,500
Pier 1 Imports, Inc. 22,105 223,813
Sunglass Hut International, Inc.* 245,400 12,270,000
------------
31,337,251
------------
Textile & Apparel 5.5%
Fila Holdings SPA ADR 106,400 3,763,900
Men's Wearhouse, Inc.* 131,350 4,728,600
Nautica Enterprises, Inc.* 126,700 4,339,475
Tommy Hilfiger Corp. 194,700 6,327,750
Wolverine World Wide, Inc. 103,800 2,841,525
------------
22,001,250
------------
Total Consumer Cyclical 108,800,688
------------
Consumer Staple 8.8%
Business Service 3.1%
Black Box Corp. 36,500 675,250
HBO & Co. 110,300 6,893,750
Medaphis Corp.* 148,000 4,144,000
U.S. Office Products Co.* 44,000 665,500
------------
12,378,500
------------
The accompanying notes are an integral part of the financial statements.
42
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
Drug 1.7%
Amerisource Health Corp.* 19,200 $ 518,400
Cephalon, Inc.* 191,300 5,260,750
Magainin Pharmaceuticals, Inc.* 67,200 730,800
Vertex Pharmaceuticals, Inc.* 24,600 461,250
------------
6,971,200
------------
Food & Beverage 0.9%
Starbucks Corp.* 97,800 3,704,175
------------
Printing & Publishing 0.1%
British Sky Broadcasting Group ADR 12,200 440,725
------------
Tobacco 3.0%
Philip Morris Companies, Inc. 120,600 10,070,100
RJR Nabisco Holdings Corp. 61,200 1,981,350
------------
12,051,450
------------
Total Consumer Staple 35,546,050
------------
Finance 7.9%
Bank 3.1%
Bankers Trust New York Corp. 50,800 3,568,700
Chase Manhattan Corp. 32,900 2,011,013
Chemical Banking Corp. 113,300 6,897,137
------------
12,476,850
------------
Financial Service 1.1%
Charles Schwab Corp. 42,800 1,198,400
Countrywide Credit Industries, Inc. 70,000 1,645,000
Franklin Resources, Inc. 26,300 1,515,537
------------
4,358,937
------------
Insurance 3.7%
Aetna Life & Casualty Insurance Co. 52,000 3,815,500
Cigna Corp. 34,500 3,592,313
MBNA Corp. 129,300 5,382,112
Saint Paul Companies, Inc. 38,600 2,253,275
------------
15,043,200
------------
Total Finance 31,878,987
------------
Science & Technology 39.2%
Aerospace 1.4%
Boeing Co. 54,100 3,692,325
United Technologies Corp. 22,400 1,979,600
------------
5,671,925
------------
Computer Software & Service 10.0%
Accom, Inc. 11,100 $ 97,125
Ascend Communications, Inc.* 24,400 1,952,000
Bay Networks, Inc.* 70,100 3,741,588
Cabletron Systems, Inc.* 11,400 750,975
Checkfree Corp. 13,300 266,000
Cisco Systems, Inc.* 83,900 5,789,100
Computer Associates International, Inc. 45,000 1,901,250
Geoworks* 150,000 2,887,500
Intuit, Inc.* 37,600 1,767,200
Microsoft Corp.* 29,500 2,669,750
Peoplesoft, Inc.* 18,200 1,653,925
Plaintree Systems, Inc.* 32,800 278,800
SAP AG ADR+ 45,900 2,518,762
Softkey International, Inc.* 46,200 2,044,350
3Com Corp.* 111,300 5,064,150
Xilinx, Inc.* 138,200 6,650,875
------------
40,033,350
------------
Electronic Components 12.7%
AVX Corp.* 36,100 1,209,350
Altera Corp.* 45,500 2,838,062
Atmel Corp.* 69,900 2,359,125
LSI Logic Corp.* 164,600 9,505,650
MEMC Electronic Materials, Inc.* 51,000 1,383,375
Maxim Integrated Products, Inc.* 32,100 2,375,400
Sanmina Holdings, Inc.* 79,300 3,786,575
Texas Instruments, Inc. 277,900 22,197,263
VLSI Technology, Inc.* 103,100 3,531,175
Vishay Intertechnology, Inc. 46,000 1,932,000
------------
51,117,975
------------
Electronic Equipment 10.8%
ASM Lithography Holdings NV* 66,500 2,917,688
Brooks Automation, Inc.* 30,100 647,150
DSC Communications Corp.* 109,200 6,470,100
Exide Electronics Group, Inc.* 132,700 2,488,125
KLA Instruments Corp.* 47,300 3,795,825
LTX Corp.* 81,400 1,027,675
Lam Research Corp.* 81,200 4,851,700
Nokia Corp. ADR 225,300 15,714,675
Samsung Electronic GDR* 481 34,151
Tencor Instruments, Inc.* 37,800 1,672,650
Teradyne, Inc.* 107,000 3,852,000
------------
43,471,739
------------
The accompanying notes are an integral part of the financial statements.
43
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO (cont'd)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Value
Shares (Note 1)
- --------------------------------------------------------------------------------
Office Equipment 4.3%
Hewlett-Packard Co. 92,000 $ 7,670,500
Komag, Inc.* 47,000 3,072,625
Stormedia, Inc.* 41,800 1,891,450
U.S. Robotics Corp. 55,700 4,748,425
------------
17,383,000
------------
Total Science & Technology 157,677,989
------------
Utility 2.4%
Telephone 2.4%
ADC Telecommunications, Inc.* 34,100 1,551,550
Metrocall, Inc.* 40,700 1,129,425
Nera AS ADR* 12,500 429,687
Total Access Communications Public Co. Ltd.+ 270,500 1,707,667
Vodafone Group PLC ADR 74,700 3,062,700
Worldcom, Inc.* 51,600 1,657,650
------------
9,538,679
------------
Total Utility 9,538,679
------------
Total Common Stocks (Cost $301,677,249) 364,753,393
------------
- --------------------------------------------------------------------------------
Principal Maturity
Amount Date
- --------------------------------------------------------------------------------
COMMERCIAL PAPER 12.6%
American Express Credit Corp., 5.75% $ 4,234,000 10/04/1995 4,234,000
Cargill, Inc., 5.70% 10,000,000 10/06/1995 9,992,083
Commercial Credit Co., 5.74% 6,000,000 10/02/1995 6,000,000
General Electric Capital Corp.,
5.75% 7,168,000 10/06/1995 7,168,000
General Electric Capital Corp.,
5.72% 10,207,000 10/11/1995 10,207,000
Household Finance Corp., 5.75% 2,066,000 10/02/1995 2,066,000
Household Finance Corp., 5.72% 10,955,000 10/02/1995 10,955,000
-----------
Total Commercial Paper (Cost $50,622,083) 50,622,083
-----------
Total Investments (Cost $352,299,332)--103.3% 415,375,476
Cash and Other Assets, Less Liabilities--(3.3)% (13,329,388)
-----------
Net Assets--100.0% $402,046,088
============
Federal Income Tax Information:
At September 30, 1995, the net unrealized appreciation of
investments based on cost for Federal income tax purposes
of $352,305,326 was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost $65,854,672
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value (2,784,522)
------------
$63,070,150
============
- --------------------------------------------------------------------------------
* Nonincome-producing securities
ADR and GDR stand for American Depositary Receipt and Global Depository
Receipt, representing ownership of foreign securities.
+ Security restricted in accordance with Rule 144A under the Securities Act
of 1933, which allows for the resale of such securities among certain
qualified institutional buyers. The total cost and market value of Rule 144A
securities owned at September 30, 1995 were $3,389,633 and $4,226,429 (1.05%
of net assets), respectively.
The accompanying notes are an integral part of the financial statements.
44
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
September 30, 1995
Assets
Investments, at value (Cost $352,299,332) (Note 1) $415,375,476
Cash 418
Receivable for securities sold 14,249,078
Receivable for fund shares sold 4,113,668
Dividends and interest receivable 114,801
Other assets 28,474
-------------
433,881,915
Liabilities
Payable for securities purchased 30,864,547
Payable for fund shares redeemed 354,372
Accrued distribution fee (Note 4) 242,646
Accrued management fee (Note 2) 232,522
Accrued transfer agent and shareholder services
(Note 2) 46,297
Accrued trustees' fees (Note 2) 9,708
Other accrued expenses 85,735
-------------
31,835,827
-------------
Net Assets $402,046,088
=============
Net Assets consist of:
Unrealized appreciation of investments $ 63,076,144
Accumulated net realized gain 30,696,695
Shares of beneficial interest (Note 6) 308,273,249
-------------
$402,046,088
=============
Net Asset Value and redemption price per share of
Class A shares ($55,250,047 / 4,083,548 shares
of beneficial interest) $13.53
=============
Maximum Offering Price per share of Class A shares
($13.53 / .955) $14.17
=============
Net Asset Value and offering price per share of
Class B shares ($203,446,132 / 15,304,668 shares
of beneficial interest)* $13.29
=============
Net Asset Value, offering price and redemption
price per share of Class C shares ($47,553,286 /
3,482,260 shares of beneficial interest) $13.66
=============
Net Asset Value and offering price per share of
Class D shares ($95,796,623 / 7,195,204 shares
of beneficial interest)* $13.31
=============
- --------------------------------------------------------------------------------
* 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 year ended September 30, 1995
Investment Income
Dividends, net of foreign taxes of $32,472 $ 1,046,064
Interest 1,270,329
-------------
2,316,393
Expenses
Management fee (Note 2) 1,750,735
Transfer agent and shareholder services (Note 2) 375,398
Custodian fee 167,784
Reports to shareholders 96,816
Distribution fee--Class A (Note 4) 81,664
Distribution fee--Class B (Note 4) 1,159,597
Distribution fee--Class D (Note 4) 566,144
Registration fees 59,957
Audit fee 31,924
Trustees' fees (Note 2) 22,550
Legal fees 8,106
Miscellaneous 18,227
-------------
4,338,902
-------------
Net investment loss (2,022,509)
-------------
Realized and Unrealized Gain on Investments
Net realized gain on investments (Notes 1 and 3) 32,914,544
Net unrealized appreciation of investments 52,115,081
-------------
Net gain on investments 85,029,625
-------------
Net increase in net assets resulting from
operations $83,007,116
=============
The accompanying notes are an integral part of the financial statements.
45
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Year ended September 30
----------------------------------
1995 1994
- ------------------------------------------------------------------------
Increase (Decrease) in Net Assets
Operations:
Net investment loss $ (2,022,509) $ (1,070,897)
Net realized gain on investments* 32,914,544 1,127,123
Net unrealized appreciation of
investments 52,115,081 3,083,463
-------------- -------------
Net increase resulting from
operations 83,007,116 3,139,689
-------------- -------------
Distributions from net realized
gains:
Class A (92,618) (575,640)
Class B (320,406) (1,273,467)
Class C (93,107) (1,330,595)
Class D (164,154) (477,827)
-------------- -------------
(670,285) (3,657,529)
-------------- -------------
Net increase from fund share
transactions (Note 6) 164,713,294 108,866,368
-------------- -------------
Total increase in net assets 247,050,125 108,348,528
Net Assets
Beginning of year 154,995,963 46,647,435
-------------- -------------
End of year $402,046,088 $154,995,963
============== =============
* Net realized gain for Federal
income tax purposes
(Note 1) $ 32,687,493 $ 1,269,665
============== =============
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
September 30, 1995
Note 1
State Street Research Capital 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 Capital
Fund, State Street Research Small Capitalization Growth Fund and State Street
Research Small Capitalization Value Fund.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and pay an annual service fee equal to
0.25% of average daily net assets. Class B shares are subject to a contingent
deferred sales charge on certain redemptions made within five years of
purchase and pay annual distribution and service fees of 1.00%. Class B
shares automatically convert into Class A shares (which pay lower ongoing
expenses) at the end of eight years after the issuance of the Class B shares.
Class C shares are only offered to certain employee benefit plans and large
institutions. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro-rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant policies are consistently followed by the Fund in
preparing its financial statements, and such policies are in conformity with
generally accepted accounting principles for investment companies.
A. Investments in Securities
Values for listed securities represent the last sale on national securities
exchanges quoted prior to the close of the New York Stock Exchange.
Over-the-counter securities quoted on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") system are valued at the closing price
supplied through such system. In the absence of recorded sales and for those
over-the-counter securities not quoted on the NASDAQ system, valuations are
at the mean of the closing bid and asked quotations, except for 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.
46
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
B. Federal Income Taxes
No provision for Federal income taxes is necessary since the Fund has elected
to qualify under Subchapter M of the Internal Revenue Code and its policy is
to distribute all of its taxable income, including net realized capital
gains, within the prescribed time periods.
C. Dividends
Dividends from net investment income, if any, are declared and paid or
reinvested annually. Net realized capital gains, if any, are distributed
annually, unless additional distributions are required for compliance with
applicable tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser
earns monthly fees equal to 1/16 of 1% (3/4 of 1% on an annual basis) of
average daily net assets. In consideration of these fees, the Adviser
furnishes the Fund with management, investment advisory, statistical and
research facilities and services. The Adviser also pays all salaries, rent
and certain other expenses of management. The fees of the Trustees not
currently affiliated with the Adviser amounted to $22,550 during the year
ended 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 year ended September 30, 1995, the amount of
such expenses was $206,722.
Note 3
For the year ended September 30, 1995, exclusive of short-term investments
and U.S. Government obligations, purchases and sales of securities aggregated
$599,276,036 and $459,656,035, respectively.
Note 4
The Trust has adopted a Plan of Distribution pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940. Under the Plan, the Fund
pays annual service fees to the Distributor at a rate of 0.25% of average
daily net assets for Class A, Class B and Class D shares. In addition, the
Fund pays annual distribution fees of 0.75% of average daily net assets for
Class B and Class D shares. The Distributor uses such payments for personal
services and/or the maintenance of shareholder accounts, to reimburse
securities dealers for distribution and marketing services, to furnish
ongoing assistance to investors and to defray a portion of its distribution
and marketing expenses. For the year ended September 30, 1995, fees pursuant
to such plan amounted to $81,664, $1,159,597 and $566,144 for Class A, Class
B and Class D, respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly owned subsidiary of Metropolitan, earned initial sales charges
aggregating $92,294 and $719, respectively, on sales of Class A shares of the
Fund during the year ended September 30, 1995, and that MetLife Securities,
Inc. earned commissions aggregating $3,383 and $275 on sales of Class B and
Class D shares, respectively, and that the Distributor collected contingent
deferred sales charges of $192,789 and $9,688 on redemptions of Class B and
Class D shares, respectively, during the same period.
Note 5
The Trustees declared a distribution of all capital gains realized during the
year ended September 30, 1995 (approximately $.91 short-term and $.11
long-term per share), payable October 12, 1995 to shareholders of record on
October 2, 1995.
47
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
- --------------------------------------------------------------------------------
NOTES (cont'd)
- --------------------------------------------------------------------------------
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 held of record 1,084,790 Class C shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended September 30
-----------------------------------------------------------------
1995 1994
------------------------------ --------------------------------
Class A Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,826,294 $ 32,048,209 1,741,014 $16,876,522
Issued upon reinvestment of distributions from net
realized gains 8,771 82,615 45,553 443,337
Shares repurchased (756,484) (8,537,685) (477,056) (4,581,945)
----------- ----------- ----------- -------------
Net increase 2,078,581 $ 23,593,139 1,309,511 $12,737,914
=========== =========== =========== =============
Class B Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------------------------
Shares sold 9,420,000 $106,150,791 6,253,883 $59,862,105
Issued upon reinvestment of distributions from net
realized gains 31,685 294,989 56,834 551,032
Shares repurchased (1,616,639) (17,716,667) (384,236) (3,668,935)
----------- ----------- ----------- -------------
Net increase 7,835,046 $ 88,729,113 5,926,481 $56,744,202
=========== =========== =========== =============
Class C Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------------------------
Shares sold 1,284,385 $ 16,174,374 601,695 $ 6,274,545
Issued upon reinvestment of distributions from net
realized gains 8,899 84,452 131,398 1,284,834
Shares repurchased (211,276) (2,192,278) (87,138) (849,817)
----------- ----------- ----------- -------------
Net increase 1,082,008 $ 14,066,548 645,955 $ 6,709,562
=========== =========== =========== =============
Class D Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------------------------------
Shares sold 4,045,991 $ 46,180,380 3,746,426 $36,243,191
Issued upon reinvestment of distributions from net
realized gains 16,713 155,761 22,846 220,144
Shares repurchased (710,067) (8,011,647) (408,826) (3,788,645)
----------- ----------- ----------- -------------
Net increase 3,352,637 $ 38,324,494 3,360,446 $32,674,690
=========== =========== =========== =============
</TABLE>
48
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Class B
------------------------------------------ ---------------------------------------------
February 17, 1993
(Commencement March 15, 1993
of Share Class (Commencement
Year ended September 30 Designations) to Year ended September 30 of Share Class
----------------------- September 30, ----------------------- Designations) to
1995** 1994 1993 1995** 1994 September 30, 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 9.92 $ 10.43 $ 8.03 $ 9.82 $ 10.40 $ 8.68
Net investment loss (.04) (.04) (.03) (.12) (.08) (.04)
Net realized and unrealized gain
on investments 3.69 .28 2.43 3.63 .25 1.76
Distributions from net realized
gains (.04) (.75) -- (.04) (.75) --
------- ------- ------- -------- ------- -------
Net asset value, end of year $ 13.53 $ 9.92 $ 10.43 $ 13.29 $ 9.82 $ 10.40
======= ======= ======= ======== ======= =======
Total return 36.95%+ 2.51%+ 24.61%+++ 35.90%+ 1.79%+ 19.82%+++
Net assets at end of year (000s) $55,250 $19,891 $ 7,251 $203,446 $73,354 $16,044
Ratio of expenses to average
net assets 1.33% 1.41% 2.43%++ 2.08% 2.16% 3.16%++
Ratio of net investment loss to
average net assets (0.34)% (0.55)% (1.43)%++ (1.10)% (1.28)% (2.15)%++
Portfolio turnover rate 214.59% 167.08% 129.57% 214.59% 167.08% 129.57%
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
---------------------------------------------------- -----------------------------------------
March 15, 1993
Year ended (Commencement
Year ended September 30 September 30 of Share Class
---------------------------------------------------- ------------------ Designations) to
1995** 1994 1993 1992 1991 1995** 1994 September 30, 1993
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 9.99 $ 10.46 $ 7.96 $ 7.74 $ 5.03 $ 9.83 $ 10.39 $ 8.68
Net investment loss (.01) (.03) (.06) (.06) (.08) (.12) (.09) (.04)
Net realized and unrealized
gain on investments 3.72 .31 3.90 .63 2.79 3.64 .28 1.75
Distributions from net
realized gains (.04) (.75) (1.34) (.35) -- (.04) (.75) --
------- ------- ------- ------- ------- ------- ------- --------
Net asset value, end of year $ 13.66 $ 9.99 $ 10.46 $ 7.96 $ 7.74 $ 13.31 $ 9.83 $ 10.39
======= ======= ======= ======= ======= ======= ======= ========
Total return 37.30%+ 2.91%+ 55.46%+ 7.34%+ 53.88%+ 36.07%+ 2.00%+ 19.70%+++
Net assets at end of year
(000s) $47,553 $23,967 $18,342 $11,654 $10,939 $95,797 $37,783 $ 5,011
Ratio of expenses to average
net assets 1.08% 1.16% 2.11% 1.54% 1.88% 2.08% 2.16% 3.16%++
Ratio of net investment loss
to average net assets (0.07)% (0.32)% (1.30)% (0.86)% (1.14)% (1.09)% (1.28)% (2.16)%++
Portfolio turnover rate 214.59% 167.08% 129.57% 124.94% 219.62% 214.59% 167.08% 129.57%
</TABLE>
++Annualized
**Per-share figures have been calculated using the average shares method.
+Total return figures do not reflect any front-end or contingent deferred
sales charges.
++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges.
49
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Trustees of State Street Research
Capital Trust and Shareholders of
State Street Research Capital Fund
We have audited the accompanying statement of assets and liabilities of State
Street Research Capital Fund, including the schedule of portfolio
investments, as of September 30, 1995, and the related statement of
operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended and the financial
highlights for each of the five years in the period then ended for Class C,
for each of the two years in the period then ended and the period February
17, 1993 (commencement of share class designations) to September 30, 1993 for
Class A, and for each of the two years in the period then ended and the
period March 15, 1993 (commencement of share class designations) to September
30, 1993 for Class B and Class D, respectively. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of September 30, 1995, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
State Street Research Capital Fund as of September 30, 1995, the results of
its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended for Class C, for each of
the two years in the period then ended and the period February 17, 1993
(commencement of share class designations) to September 30, 1993 for Class A,
and for each of the two years in the period then ended and the period March
15, 1993 (commencement of share class designations) to September 30, 1993 for
Class B and Class D, respectively, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 3, 1995
50
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
- --------------------------------------------------------------------------------
State Street Research Capital Fund outperformed the average return for Lipper
Analytical Services' Capital Appreciation Fund category for the 12 months
ended September 30, 1995 (does not reflect sales charges).
On September 30, 1995, a substantial portion of the Fund's portfolio was
invested in technology stocks in various industries. Technology stocks, and
particularly semiconductor stocks, have led the stock market in 1995, just as
they did in 1994. Our focus over the past year has been on electronic
equipment and component stocks.
Retail stocks also provided strong performance for the Fund, even though the
overall retail sector performed poorly in 1995. We looked for stocks that
offered high growth rates.
For the twelve months ended September 30, 1995, the Fund's turnover rate
stood at 215%. This higher turnover rate was partly the result of selling
stocks that had gained from this year's strong overall stock performance. In
addition, market declines led the Fund's manager to buy stocks that offered
compelling values.
The Standard & Poor's Composite Index (S&P 500) includes 500 widely traded
common stocks and is a commonly used measure of U.S. stock market
performance. The index is unmanaged and does not take sales charges into
consideration. Direct investment in the index is not possible; results are
for illustrative purposes only.
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. Although the Fund was established as a
personal holding company in 1967, performance results cover the period since
the Fund commenced operations as a registered investment company on March 25,
1984. Shares of the Fund were first publicly available in 1987 to
institutions and existing shareholders only. The Fund commenced a continuous
offering to the general public on February 17, 1993. During the period that
shares were not offered to the general public, the Fund was not subject to
the cash inflows or higher level of redemptions or expenses that could occur
when shares are continuously offered to the public. Performance for a class
includes periods prior to the adoption of class designations. Performance
reflects up to maximum 4.5% front-end or 5% contingent deferred sales
charges. Performance prior to class designations in 1993 does not reflect
annual 12b-1 fees of .25% for "A" shares and 1% for "B" and "D" shares, which
will reduce subsequent performance.
Comparison Of Change In Value Of
A $10,000 Investment In Capital
Fund and The S&P 500
[line chart] Class A Shares
- -------------------------------------------------------------
Average Annual Total Return
---------------------------
1 Year 5 Years 10 Years
- ------ ------- --------
+30.79% +27.98% +19.66%
- -------------------------------------------------------------
Capital S&P
9/85 $ 9,550 $10,000
9/86 12,864 13,174
9/87 18,349 18,894
9/88 15,787 16,553
9/89 21,144 22,007
9/90 16,743 19,974
9/91 25,764 26,184
9/92 27,654 29,075
9/93 42,868 32,846
9/94 43,943 34,054
9/95 60,181 44,171
[line chart] Class B Shares
- -------------------------------------------------------------
Average Annual Total Return
---------------------------
1 Year 5 Years 10 Years
- ------ ------- --------
+30.90% +28.59% +20.01%
- -------------------------------------------------------------
Capital S&P
9/85 $10,000 $10,000
9/86 13,470 13,174
9/87 19,213 18,894
9/88 16,531 16,553
9/89 22,140 22,007
9/90 17,532 19,974
9/91 26,978 26,184
9/92 28,957 29,075
9/93 44,810 32,846
9/94 45,613 34,054
9/95 61,988 44,171
[line chart] Class C Shares
- -------------------------------------------------------------
Average Annual Total Return
---------------------------
1 Year 5 Years 10 Years
- ------ ------- --------
+37.30% +29.40% +20.32%
- -------------------------------------------------------------
Capital S&P
9/85 $10,000 $10,000
9/86 13,470 13,174
9/87 19,213 18,894
9/88 16,531 16,553
9/89 22,140 22,007
9/90 17,532 19,974
9/91 26,978 26,184
9/92 28,957 29,075
9/93 45,017 32,846
9/94 46,328 34,054
9/95 63,606 44,171
[line chart] Class D Shares
- -------------------------------------------------------------
Average Annual Total Return
---------------------------
1 Year 5 Years 10 Years
- ------ ------- --------
+35.07% +28.79% +20.04%
- -------------------------------------------------------------
Capital S&P
9/85 $10,000 $10,000
9/86 13,470 13,174
9/87 19,213 18,894
9/88 16,531 16,553
9/89 22,140 22,007
9/90 17,532 19,974
9/91 26,978 26,184
9/92 28,957 29,075
9/93 44,767 32,846
9/94 45,662 34,054
9/95 62,131 44,171
[legend for line charts]
solid line = Capital Fund
broken rule = S&P 500
51
<PAGE>
- --------------------------------------------------------------------------------
Report on Special Meeting of Shareholders
- --------------------------------------------------------------------------------
A Special Meeting of Shareholders of the State Street Research Capital Fund
("Fund"), along with shareholders of other series of State Street Research
Capital Trust ("Meeting"), was held on August 25, 1995, as continued on
September 22, 1995. The results of the Meeting are set forth below.
<TABLE>
<CAPTION>
Votes (millions)
---------------
For Withheld
--- --------
<S> <C> <C>
1. The following persons were elected as Trustees:
Edward M. Lamont 15.3 1
Robert A. Lawrence 15.3 1
Dean O. Morton 15.4 1
Thomas L. Phillips 15.3 1
Toby Rosenblatt 15.4 1
Michael S. Scott Morton 15.3 1
Ralph F. Verni 15.4 1
Jeptha H. Wade 15.3 1
</TABLE>
<TABLE>
<CAPTION>
Votes (millions)
---------------------
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
2. The Fund's following investment policies were reclassified from
fundamental policies to nonfundamental policies:
a. The policy regarding investments in securities of companies with
less than three (3) years' continuous operation; 9.9 0.7 1.2
b. The policy regarding investments in illiquid securities; 9.8 0.8 1.3
c. The policy regarding purchase of securities on margin and short
sales of securities; 9.8 0.8 1.2
d. The policy regarding transactions in options and futures; and 9.8 0.8 1.3
e. The policy regarding investments in other investment companies. 9.9 0.7 1.3
3. The Fund's fundamental policy regarding investing in commodities and
commodity contracts was amended. 9.7 0.9 1.3
4. The Fund's fundamental policy on lending was amended to clarify the
permissibility of securities lending. 9.9 0.7 1.3
5. Class C shares will now be included under the Fund's Plan of
Distribution Pursuant to Rule 12b-1. 2.2 0.05 0.5
6. The Master Trust Agreement was amended to eliminate the need for a
vote by shareholders of the acquiring fund to approve a merger or
consolidation, or acquisition of assets. 12.8 1.6 1.9
7. The selection of Coopers & Lybrand L.L.P. as the Trust's independent
accountants was ratified. 15.0 0.1 1.2
</TABLE>
52
