As filed with the Securities and Exchange Commission on January 31, 1996
1933 Act Registration No. 2-86271
1940 Act File No. 811-3838
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |_|
Pre-Effective Amendment No. ____ |_|
Post-Effective Amendment No. 13 |X|
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |_|
Amendment No. 19 |X|
--------------------
STATE STREET RESEARCH CAPITAL TRUST
-------------------------------------
(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (617) 357-1200
Francis J. McNamara, III
Senior Vice President, Secretary & General Counsel
State Street Research & Management Company
One Financial Center
Boston, Massachusetts 02111
Thomas J. Kelly, Esq.
Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02111
(Name and Address of Agent for Service)
It is proposed that this filing will become effective under Rule 485:
|_| Immediately upon filing pursuant to paragraph (b),
|X| On February 1, 1996 pursuant to paragraph (b),
|_| 60 days after filing pursuant to paragraph (a)(1),
|_| On ______________ pursuant to paragraph (a)(1),
|_| 75 days after filing pursuant to paragraph (a)(2),
|_| On ______________ pursuant to paragraph (a)(2).
If appropriate, check the following box:
|_| This post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
-------------------------------------
The Registrant hereby declares that, pursuant to Rule 24f-2 promulgated under
the Investment Company Act of 1940, as amended (the "1940 Act"), it has
registered an indefinite number of shares of beneficial interest, par value
$.001 per share, in each of the State Street Research Capital Fund series, the
State Street Research Small Capitalization Growth Fund series and the State
Street Research Small Capitalization Value Fund series of the Registrant, which
shares are designated as Class A shares, Class B shares, Class C shares and
Class D shares. A Rule 24f-2 Notice for the fiscal year ended September 30, 1995
was filed on or about November 29, 1995.
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<PAGE>
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
Pursuant to Rule 481(a)
-----------------------
Part A
------
CAPTION OR LOCATION CAPTION OR LOCATION
CAPTION OR LOCATION IN PROSPECTUS FOR IN PROSPECTUS FOR
IN PROSPECTUS FOR STATE STREET RESEARCH STATE STREET
STATE STREET SMALL CAPITALIZATION RESEARCH SMALL
FORM N-1A ITEM NO. RESEARCH CAPITAL FUND GROWTH FUND CAPITALIZATION VALUE FUND
- ------------------ ---------------------- ------------------------- -------------------------
<S> <C> <C> <C>
1. Cover Page Same Same Same
2. Synopsis Table of Expenses Table of Expenses Table of Expenses
3. Condensed Financial Financial Highlights; Financial Highlights; Financial Highlights;
Information Calculation of Performance Data Calculation of Performance Data Calculation of Performance Data
4. General Description The Funds' Investments; Limiting The Fund's Investments; The Fund's Investments;
of Registrant Investment Risk; The Fund Limiting Investment Risk; Limiting Investment Risk;
and its Shares The Fund and its Shares The Fund and its Shares
5. Management of the Management of the Fund; Management of the Fund; Management of the Fund;
Fund Purchase of Shares; Purchase of Shares; Purchase of Shares;
Shareholder Services Shareholder Services Shareholder Services
5A. Management's [To be included in Annual [To be included in Annual [To be included in Annual
Discussion of Fund Reports to Shareholders] Reports to Shareholders] Reports to Shareholders]
Performance
6. Capital Stock and The Fund and its Shares; The Fund and its Shares; The Fund and its Shares;
Other Securities Management of the Fund; Management of the Fund; Management of the Fund;
Dividends and Distributions; Dividends and Distributions; Dividends and Distributions;
Taxes; Shareholder Services Taxes; Shareholder Services Taxes; Shareholder Services
7. Purchase of Purchase of Shares; Purchase of Shares; Purchase of Shares;
Securities Being Shareholder Services Shareholder Services Shareholder Services
Offered
8. Redemption or Redemption of Shares; Redemption of Shares; Redemption of Shares;
Repurchase Shareholder Services Shareholder Services Shareholder Services
9. Legal Proceedings Not Applicable Not Applicable Not Applicable
10. Cover Page Same Same Same
11. Table of Contents Same Same Same
12. General Information Not Applicable Not Applicable Not Applicable
and History
13. Investment Additional Investment Additional Investment Investment Policies and
Objectives Policies and Restrictions; Policies and Restrictions; Restrictions; Additional
and Policies Additional Information Additional Information Information Concerning
Concerning Certain Concerning Certain Certain Investment
Investment Techniques; Investment Techniques; Techniques; Debt
Money Market Instrument and Debt Instruments and Instruments and Permitted
Permitted Cash Investments; Permitted Cash Investments; Cash Investments;
Rating Categories of Debt Rating Categories of Debt Portfolio Transactions
Securities; Portfolio Transactions Securities; Portfolio Transactions
2
<PAGE>
<CAPTION>
Part B
------
CAPTION OR LOCATION CAPTION OR LOCATION
IN STATEMENT OF IN STATEMENT OF
CAPTION OR LOCATION ADDITIONAL INFORMATION ADDITIONAL INFORMATION
IN STATEMENT OF FOR STATE STREET FOR STATE STREET
ADDITIONAL INFORMATION RESEARCH RESEARCH SMALL
FOR STATE STREET SMALL CAPITALIZATION CAPITALIZATION
FORM N-1A ITEM NO. RESEARCH CAPITAL FUND GROWTH FUND VALUE FUND
- ------------------ ---------------------- ------------------------- -----------------------
<S> <C> <C> <C>
14. Management of the Trustees and Officers Trustees and Officers Trustees and Officers
Registrant
15. Control Persons and Trustees and Officers Trustees and Officers Trustees and Officers
Principal Holders of
Securities
16. Investment Investment Advisory Services; Investment Advisory Services; Investment Advisory Services;
Advisory and Custodian; Independent Custodian; Independent Custodian; Independent
Other Services Accountants; Distribution of Accountants; Distribution of Accountants; Distribution of
Shares of the Fund Shares of the Fund Shares of the Fund
17. Brokerage Allocation Portfolio Transactions Portfolio Transactions Portfolio Transactions
18. Capital Stock and Not Applicable (Description in Not Applicable (Description Not Applicable (Description
Other Securities Prospectus) in Prospectus) in Prospectus)
19. Purchase, Redemption Purchase and Shares; Redemption Purchase of Shares; Redemption Purchase of Shares; Redemption
and Pricing of of Shares; Net Asset Value of Shares; Net Asset Value of Shares; Net Asset Value
Securities Being
Offered
20. Tax Status Certain Tax Matters Certain Tax Matters Certain Tax Matters
21. Underwriters Distribution of Shares of the Distribution of Shares of the Distribution of Shares of the
Fund Fund Fund
22. Calculation of Calculation of Performance Calculation of Performance Calculation of Performance
Performance Data Data Data Data
23. Financial Statements Financial Statements Financial Statements Financial Statements
</TABLE>
3
<PAGE>
The Prospectuses and Statements of Additional Information of State Street
Research Small Capitalization Growth Fund and State Street Research Small
Capitalization Value Fund are included herein. The Prospectus and Statement of
Additional Information of the State Street Research Capital Fund are
included in Post-Effective Amendment No. 12.
4
<PAGE>
State Street Research Small
Capitalization Growth Fund
Prospectus
February 1, 1996
The investment objective of State Street Research Small Capitalization Growth
Fund (the "Fund") is to provide growth of capital. In seeking to achieve its
investment objective, the Fund invests primarily in the equity securities of
emerging growth and small capitalization companies.
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.
Shares of the Fund are currently available only to existing shareholders of
the Fund through reinvestment of dividends and distributions, additional
investments or exchanges into their existing accounts.
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. In addition, the Fund may suspend the
offering of its shares at any time because of the limited availability of
investments which meet the Fund's investment parameters.
This Prospectus sets forth concisely the information a prospective investor
ought to know about the Fund before investing. It should be retained for
future reference. A Statement of Additional Information about the Fund dated
February 1, 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.
<TABLE>
<CAPTION>
Table of Contents Page
<S> <C>
Table of Expenses ................................ 2
Financial Highlights ............................. 4
The Fund's Investments ........................... 4
Limiting Investment Risk ......................... 7
Purchase of Shares ............................... 8
Redemption of Shares ............................. 16
Shareholder Services ............................. 18
The Fund and its Shares .......................... 22
Management of the Fund ........................... 23
Dividends and Distributions; Taxes ............... 23
Calculation of Performance Data .................. 24
</TABLE>
<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 (i) to a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made
within five years of purchase and (ii) annual distribution and service fees
of 1% of the average daily net asset value of such shares. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after purchase. No contingent deferred sales charge
applies after the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1%
if redeemed within one year following purchase and (ii) annual distribution
and service fees of 1% of the average daily net asset value of such shares.
Table of Expenses
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Class C Class D
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses (1)
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) .............. 4.5% None None None
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering
price) ........................................... None None None None
Maximum Deferred Sales Charge (as a
percentage
of original purchase price or redemption
proceeds, as applicable) ......................... None (2) 5% None 1%
Redemption Fees (as a percentage of amount
redeemed, if applicable) ......................... None None None None
Exchange Fees ..................................... None None None None
</TABLE>
- -----------
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
thereafter and no contingent deferred sales charge is imposed after the fifth
year. Class D shares are subject to a 1% contingent deferred sales charge on
any portion of the purchase redeemed within one year of the sale. Long-term
investors in a class of shares with a distribution fee may, over a period of
years, pay more than the economic equivalent of the maximum sales charge
permissible under applicable rules. See "Purchase of Shares."
(2) Purchases of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption. See
"Purchase of Shares."
2
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C Class D
------- ------- ------- -------
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees ................................. 0.75% 0.75% 0.75% 0.75%
12b-1 Fees ...................................... 0.25% 1.00% None 1.00%
Other Expenses .................................. 1.03% 1.03% 1.03% 1.03%
Less Voluntary Reduction ....................... (0.68%) (0.68%) (0.68%) (0.68%)
------ ------ ------ ------
Total Fund Operating Expenses
(after voluntary reduction) ................... 1.35% 2.10% 1.10% 2.10%
===== ===== ===== =====
</TABLE>
Example:
You would pay the following expenses on a $1,000 investment including, for
Class A shares, the maximum applicable initial sales charge and assuming (1)
5% annual return and (2) redemption of the entire investment at the end of
each time period:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A shares.......... $ 58 $86 $116 $200
Class B shares (1)...... $ 71 $96 $133 $224
Class C shares.......... $ 11 $35 $ 61 $134
Class D shares.......... $ 31 $66 $113 $243
</TABLE>
You would pay the following expenses on the same investment, assuming no
redemption:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
Class B shares (1)...... $21 $66 $113 $224
Class D shares.......... $21 $66 $113 $243
</TABLE>
(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 above 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."
The Fund has been advised that the Distributor and its affiliates may from
time to time and in varying amounts voluntarily assume some portion of fees
or expenses relating to the Fund. The Fund presently expects such assistance
to be provided for the next 12 months or until the Fund's net assets reach
$100 million, whichever first occurs. However, the Fund has not received any
firm commitment that such assistance will in fact be provided. For the fiscal
year ended September 30, 1995, Total Fund Operating Expenses as a percentage
of average net assets of Class A, Class B, Class C and Class D shares of the
Fund would have been 2.03%, 2.78%, 1.76% and 2.78%, respectively, in the
absence of the voluntary assumption of fees or expenses by the Distributor
and its affiliates, which amounted to 0.68%, 0.68%, 0.66% and 0.68% of
average net assets of each of the Class A, Class B, Class C and Class D
shares of the Fund, respectively. The amount of fees or expenses assumed
during the fiscal year ended September 30, 1995 differed among classes
because of fluctuations during the year in the relative levels of assets in
each class and in expenses before reimbursement.
3
<PAGE>
Financial Highlights
The data set forth below has been examined by Coopers & Lybrand L.L.P.,
independent accountants, and their report thereon is included in the
Statement of Additional Information. For further information about the
performance of the Fund, see "Financial Statements" in the Statement of
Additional Information.
<TABLE>
<CAPTION>
Class A Class B Class C Class D
------- ------- ------- -------
Year Year Year Year
ended ended ended ended
September September September September
30, 30, 30, 30,
1995**** 1994** 1995**** 1994** 1995**** 1994*** 1995**** 1994**
-------- ------ -------- ------- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset
value,
beginning of
year $ 8.56 $ 9.45 $ 8.52 $ 9.45 $ 8.60 $ 9.55 $ 8.52 $ 9.45
Net
investment
loss* (.08) (.02) (.14) (.06) (.06) (.06) (.14) (.06)
Net realized
and
unrealized
gain (loss)
on
investments 1.21 (.87) 1.20 (.87) 1.23 (.89) 1.20 (.87)
-------- ------- ------- ------- ------- ------- ------ --------
Net asset
value, end
of year $ 9.69 $ 8.56 $ 9.58 $ 8.52 $ 9.77 $ 8.60 $ 9.58 $ 8.52
======== ======= ======= ======= ======= ======== ====== =======
Total return 13.20%+ (9.42)%+++ 12.44%+ (9.84)%+++ 13.60%+ (9.95)%+++ 12.44%+ (9.84)%+++
Net assets at
end of year
(000s) $21,480 $21,986 $26,489 $29,287 $12,380 $7,033 $7,391 $10,032
Ratio of
operating
expenses to
average net
assets* 1.35% 1.35%++ 2.10% 2.10%++ 1.10% 1.10%++ 2.10% 2.10%++
Ratio of net
investment
loss to
average net
assets* (0.93)% (0.58)%++ (1.67)% (1.32)%++ (0.71)% (0.68)%++ (1.67)% (1.32)%++
Portfolio
turnover
rate 178.60% 83.61% 178.60% 83.61% 178.60% 83.61% 178.60% 83.61%
* Reflects
voluntary
assumption
of fees or
expenses per
share in
each year $.06 $.02 $.06 $.02 $.06 $.04 $.06 $.02
</TABLE>
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
+++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
** February 1, 1994 (commencement of share class designations) to September
30, 1994.
*** October 4, 1993 (commencement of operations) to September 30, 1994.
**** Per-share figures have been calculated using the average shares method.
The Fund's Investments
The Fund's investment objective is to provide growth of capital. The
investment objective is a fundamental policy that may not be changed without
approval of the Fund's shareholders.
In seeking to achieve its investment objective, the Fund invests at least
65% of its total assets under normal circumstances in the equity securities
of small capitalization companies and companies in the emerging growth stage
of development. A company's market
4
<PAGE>
capitalization is the total market value of its publicly traded equity
securities. The Fund currently invests in companies with market
capitalizations of up to $700 million, although this figure may fluctuate
over time because of market conditions, inflation, etc. While a company's
market capitalization may be small at the time the Fund first invests in the
company, the Fund may continue to hold and acquire shares of a company after
its market capitalization increases.
The 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. In selecting 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 equity securities in which the Fund will invest consist of commons
stocks, or securities (preferred stock, bonds and debentures) convertible
into common stocks, or which carry the right to acquire equity securities
(warrants). The Fund anticipates that more than half of the total value, at
the time of investment, of the equity securities held by the Fund will be
included on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") system or listed on a major securities exchange.
Under normal circumstances, the Fund expects to be fully invested in equity
securities as described above. However, the Fund may, consistent with its
investment objective, also invest at any time up to 35% of its total assets
in other equity and debt securities, such as those issued by larger
capitalization, more mature, or special situation companies, and U.S.
Government securities. A special situation company is one which, because of
unique circumstances such as, for example, a particular business niche it
fills, is an attractive investment even though it is not a small
capitalization issuer or in the emerging growth stage. 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 by 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.
Because the Fund invests primarily in small capitalization and emerging
growth companies, an investment in the Fund involves greater than average
risks and the value of the Fund's shares may fluctuate more widely than the
value of shares of a fund that invests in larger, more established companies.
Securities held by the Fund, particularly those traded over-the-counter, may
have limited marketability and may be subject to more abrupt or erratic
market movements over time than securities of larger, more seasoned companies
or the market as a whole. The issuers of over-the-counter securities may have
limited product lines, markets and financial resources, may be dependent on
entrepreneurial management, typically reinvest most of their net income in
the enterprise and typically do not pay dividends.
Other Investments and Risk Considerations
Foreign Investments
The Fund reserves the right to invest without limitation in securities of
non-U.S. issuers directly, or indirectly in the form of American Depositary
Receipts ("ADRs"), 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
5
<PAGE>
EDRs facilitates trading in foreign securities, it does not mitigate all the
risks associated with investing in foreign securities.
ADRs are available through facilities which may be either "sponsored" or
"unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and usually agrees to
provide shareholder communications. In an unsponsored arrangement, the
foreign issuer is not involved, and the ADR holders pay the fees of the
depository. Sponsored ADRs are generally more advantageous to the ADR holders
and the issuer than are unsponsored ADRs. More and higher fees are generally
charged in an unsponsored program compared to a sponsored facility. Only
sponsored ADRs may be listed on the New York or American Stock Exchanges.
Unsponsored ADRs may prove to be more risky due to (a) the additional costs
involved to the Fund; (b) the relative illiquidity of the issue in U.S.
markets; and (c) the possibility of higher trading costs in the
over-the-counter market as opposed to exchange-based trading. The Fund will
take these and other risk considerations into account before making an
investment in an unsponsored ADR.
The risks associated with investments in foreign securities include those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks
of nationalization or expropriation, the possible imposition of currency
exchange blockages, higher operating expenses, foreign withholding and other
taxes which may reduce investment return, reduced availability of public
information concerning issuers, 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 most of the foreign investments of the Fund will
consist of securities of issuers in countries with developed economies.
However, the Fund may also invest in the securities of issuers in countries
with less developed economies as deemed appropriate by the Investment
Manager, although the Fund does not presently expect to invest more than 5%
of its total assets in issuers in such less developed countries. Such
countries include countries that have an emerging stock market that trades a
small number of securities; countries with low- to middle-income economies;
and/or countries with economies that are based on only a few industries.
Eastern European countries are considered to have less developed capital
markets.
For further information regarding foreign investments, see the Statement of
Additional Information.
Currency Transactions
In order to protect against the effect of uncertain future exchange rates on
securities denominated in foreign currencies, the Fund may engage in currency
exchange transactions either on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market or by entering into forward
contracts to purchase or sell currencies. Although such contracts tend to
minimize the risk of loss resulting from a correctly predicted decline in
value of hedged currency, they tend to limit any potential gain that might
result should the value of such currency increase. In entering a forward
currency transaction, the Fund is dependent upon the creditworthiness and
good faith of the counterparty. The Fund attempts to reduce the risks of
nonperformance by 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
6
<PAGE>
received from loaning portfolio securities invovles leverage which magnifies
the potential for gain or loss on monies invested and, therefore, results in
an increase in the volatility of the Fund's outstanding securities. Such
loans may be terminated at any time.
The Fund will retain most rights of ownership including rights to dividends,
interest or other distributions on the loaned securities. Voting rights pass
with the lending, although the Fund may call loans to vote proxies if
desired. Should the borrower of the securities fail financially, there is a
risk of delay in recovery of the securities or loss of rights in the
collateral. Loans are made only to borrowers which are deemed by the
Investment Manager to be of good financial standing.
To aid in achieving its investment objective, the Fund may, subject to
certain limitations, buy and sell options, futures contracts and options on
futures contracts on securities, securities indices and currencies, 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 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 total 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 anticipates that its portfolio turnover rate will generally not
exceed 125% under normal conditions. The Fund does, however, reserve full
freedom with respect to portfolio turnover. In periods when there are rapid
changes in economic conditions or security price levels or when investment
strategy changes significantly, portfolio turnover may be higher than during
times of economic and market price stability or when investment strategy
remains relatively constant. An actual portfolio turnover rate of 100% or
more may result in greater transaction costs, relative to other funds in
general, and may have tax and other consequences as well. See the Statement
of Additional Information.
Limiting Investment Risk
In seeking to lessen investment risk, the Fund operates under certain
fundamental and nonfundamental investment restrictions. Under the fundamental
investment restrictions, the Fund may not (a) purchase a security of any one
issuer (other than securities issued or guaranteed as to principal or
interest by the U.S. Government or its agencies or instrumentalities or
mixed-ownership Government corporations), if such purchase would, with
respect to 75% of the Fund's total assets, cause more than 5% of the Fund's
total assets to be invested in the securities of such issuer; (b) purchase
for its portfolio a security of any one issuer if such purchase would cause
more than 10% of the voting securities of such issuer to be held by the Fund;
or (c) invest more than 25% of the Fund's total assets in securities of
issuers principally engaged in any one industry 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 total assets in illiquid securities including
repurchase agreements extending for more than seven days and may not invest
more than 5% of the Fund's total assets in restricted securities excluding
securities eligible for resale under Rule 144A under the Securities Act of
1933. Although many illiquid securities may also be restricted, and vice
versa, compliance with each of these policies will be determined
independently. The foregoing nonfundamental investment restriction may be
changed without a shareholder vote.
7
<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 8 to 22 below.
- -------------------------------------------------------------------------------
The Fund is available for investment by many kinds of investors including
participants investing through 401(k) or other retirement plan sponsors,
employees investing through savings plans sponsored by employers, Individual
Retirement Accounts ("IRAs"), trusts, corporations, individuals, etc. The
applicability of the general information and administrative procedures set
forth below accordingly will vary depending on the investor and the
recordkeeping system established for a shareholder's investment in the Fund.
Participants in 401(k) and other plans should first consult with the
appropriate person at their employer or refer to the plan materials before
following any of the procedures below. For more information or assistance,
anyone may call 1-800-562-0032.
- -------------------------------------------------------------------------------
Purchase of Shares
Methods of Purchase
Through Dealers
Shares of the Fund are continuously offered through securities dealers who
have entered into sales agreements with the Distributor. Purchases through
dealers are confirmed at the offering price, which is the net asset value
plus the applicable sales charge, next determined after the order is duly
received by State Street Research Shareholder Services ("Shareholder
Services"), a division of State Street Research Investment Services, Inc.,
from the dealer. ("Duly received" for purposes herein means in accordance
with the conditions of the applicable method of purchase as described below.)
The dealer is responsible for transmitting the order promptly to Shareholder
Services in order to permit the investor to obtain the current price. See
"Purchase of Shares--Net Asset Value" herein.
By Mail
Initial investments in the Fund may be made by mailing or delivering to the
investor's securities dealer a completed Application (accompanying this
Prospectus), together with a check for the total purchase price payable to
the Fund. The dealer must forward the Application and check in accordance
with the instructions on the Application.
Additional shares may be purchased by mailing to Shareholder Services a
check payable to the Fund in the amount of the total purchase price together
with any one of the following: (i) an Application; (ii) the stub from 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
8
<PAGE>
Trust Company, which also serves as the Trust's custodian (the "Custodian"),
as set forth below. Prior to making an investment by wire, an investor must
notify Shareholder Services at 1-800-521-6548 and obtain a control number and
instructions. Following such notification, Federal Funds should be wired
through the Federal Reserve System to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF = State Street Research
Small Capitalization Growth Fund
and class of shares
(A, B, C or D)
AC = 99029761
OBI = Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street Research Shareholder Services)
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make
such investment by 12 noon Boston time on the day of his or her investment;
and (ii) the wire must be received by 4 P.M. Boston time that same day.
An investor making an initial investment by wire must promptly complete the
Application accompanying this Prospectus and deliver it to his or her
securities dealer, who should forward it as required. No redemptions will be
effected until the Application has been duly processed.
The Fund may in its discretion discontinue, suspend or change the practice
of accepting orders by any of the methods described above. Orders for the
purchase of shares are subject to acceptance by the Fund. The Fund reserves
the right to reject any purchase order, including orders in connection with
exchanges, for any reason which the Fund in its sole discretion deems
appropriate. The Fund reserves the right to suspend the sale of shares.
Minimum Investment
<TABLE>
<CAPTION>
Class of Shares
----------------------------------
A B C D
----- ------ --- ------
<S> <C> <C> <C> <C>
Minimum Initial Investment
By Wire.................... $5,000 $5,000 (a) $5,000
IRAs....................... $2,000 $2,000 (a) $2,000
By Investamatic............ $1,000 $1,000 (a) $1,000
All other.................. $2,500 $2,500 (a) $2,500
Minimum Subsequent Investment
By Wire.................... $5,000 $5,000 (a) $5,000
IRAs....................... $50 $50 (a) $50
By Investamatic............ $50 $50 (a) $50
All other.................. $50 $50 (a) $50
</TABLE>
(a) Special conditions apply; contact the Distributor.
The Fund reserves the right to vary the minimums for initial or subsequent
investments from time to time as in the case of, for example, exchanges and
investments under various retirement and employee benefit plans, sponsored
arrangements involving group solicitations of the members of an organization,
or other investment plans such as for reinvestment of dividends and
distributions or for periodic investments (e.g., Investamatic Check Program).
Alternative Purchase Program
General
Alternative classes of shares permit investors to select a purchase program
which they believe will be the most advantageous for them, given the amount
of their purchase, the length of time they anticipate holding Fund shares, or
the flexibility they desire in this regard, and other relevant circumstances.
Investors will be able to determine whether in their particular circumstances
it is more advantageous to incur an initial sales charge and not be subject
to certain ongoing charges or to have their entire initial purchase price
invested in the Fund with the investment being subject thereafter to ongoing
service fees and distribution fees.
As described in greater detail below, securities dealers are paid differing
amounts of commissions and other compensation depending on which class of
shares they sell.
9
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
Class A Class B Class C Class D
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales Charges Initial sales Contingent None Contingent
charge at time of deferred sales deferred sales
investment of up charge of 5% to charge of 1%
to 4.5% depending 2% applies to any applies to any
on amount of shares redeemed shares redeemed
investment within first five within one year
years following following their
their purchase; purchase
no contingent
deferred sales
charge after five
years
On investments of
$1 million or
more, no initial
sales charge; but
contingent
deferred sales
charge of 1%
applies to any
shares redeemed
within one year
following their
purchase
Distribution 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
</TABLE>
$1 million or
more, 0.25% to 1%
paid to dealer by
Distributor
10
<PAGE>
In deciding which class of shares to purchase, the investor should consider
the amount of the investment, the length of time the investment is expected
to be held, and the ongoing service fee and distribution fee, among other
factors.
Class A shares are sold at net asset value plus an initial sales charge of
up to 4.5% of the public offering price. Because of the sales charge, not all
of an investor's purchase amount is invested unless the purchase equals
$1,000,000 or more. Class B shareholders pay no initial sales charge, but a
contingent deferred sales charge of up to 5% generally applies to shares
redeemed within five years of purchase. Class D shareholders also pay no
initial sales charge, but a contingent deferred sales charge of 1% generally
applies to redemptions made within one year of purchase. For Class B and
Class D shareholders, therefore, the entire purchase amount is immediately
invested in the Fund.
An investor who qualifies for a significantly reduced initial sales charge,
or a complete waiver of the sales charge on investments of $1,000,000 or
more, on the purchase of Class A shares might elect that option to take
advantage of the lower ongoing service and distribution fees that
characterize Class A shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. Class B shares are assessed an annual
distribution fee of 0.75% of daily net assets for an eight-year period
following the date of purchase and are then automatically converted to Class
A shares. Class D shares are assessed an annual distribution fee of 0.75% of
daily net assets for as long as the shares are held. The prospective investor
should consider these fees plus the initial or contingent deferred sales
charges in estimating the costs of investing in the various classes of Fund
shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are allocated to dealers (see
"Distribution Plan" below). In addition, the Distributor will, at its
expense, provide additional cash and noncash incentives to securities dealers
that sell shares. Such incentives may be extended only to those dealers that
have sold or may sell significant amounts of shares and/or meet other
conditions established by the Distributor; for example, the Distributor may
sponsor special promotions to develop particular distribution channels or to
reach certain investor groups. The incentives may include merchandise and
trips to and attendance at sales seminars at resorts.
Class A Shares--Initial Sales Charges
Sales Charges
The purchase price of a Class A share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar
amount of the shares purchased as set forth in the table below. A major
portion of this sales charge is reallowed by the Distributor to the
securities dealer responsible for the sale.
<TABLE>
<CAPTION>
Sales Sales
Charge Charge
Paid by Paid by Dealer
Dollar Investor Investor Concession
Amount of As % of As % of As % of
Purchase Purchase Net Asset Purchase
Transaction Price Value Price
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 or above but less than $250,000 3.50% 3.63% 3.00%
$250,000 or above but less than $500,000 2.50% 2.56% 2.00%
$500,000 or above but less than
$1 million 2.00% 2.04% 1.75%
See
following
$1 million and above 0% 0% discussion
</TABLE>
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
a commission based on the aggregate of such sales as follows:
11
<PAGE>
<TABLE>
<CAPTION>
Amount of Sale Commission
-------------- ----------
<S> <C>
(a) $1 million to $3 million............. 1.00%
(b) Next $2 million...................... 0.50%
(c) Amount over $5 million............... 0.25%
</TABLE>
On such sales of $1,000,000 or more, the investor is subject to a 1%
contingent deferred sales charge on any portion of the purchase redeemed
within one year of the sale. However, such redeemed shares will not be
subject to the contingent deferred sales charge to the extent that their
value represents (1) capital appreciation or (2) reinvestment of dividends or
capital gains distributions. In addition, the contingent deferred sales
charge will be waived for certain other redemptions as described under
"Contingent Deferred Sales Charge Waivers" below (as otherwise applicable to
Class B shares).
Class A shares of the Fund that are purchased without a sales charge may be
exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption
within one year of the Class A shares which are acquired through such
exchange. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any contingent
deferred sales charge will be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement
of Additional Information, of $100,000 or more of Class A shares of the Fund
or a combination of "Eligible Funds." "Eligible Funds" include the Fund and
other funds so designated by the Distributor from time to time. Class B,
Class C and Class D shares may also be included in the combination under
certain circumstances. Securities dealers should call Shareholder Services
for details concerning the other Eligible Funds and any persons who may
qualify for reduced sales charges and related information. See the Statement
of Additional Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A
shares of the Fund and any other Eligible Funds within a 13-month period.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances. Additional information on a Letter of Intent is
available from dealers, or from the Distributor, and also appears in the
Statement of Additional Information.
Right of Accumulation
Investors may purchase Class A shares of the Fund or a combination of shares
of the Fund and other Eligible Funds at reduced sales charges pursuant to a
Right of Accumulation. Under the Right of Accumulation, the sales charge is
determined by combining the current purchase with the value of the Class A
shares of other Eligible Funds held at the time of purchase. Class B, Class C
and Class D shares may also be included in the combination under certain
circumstances. See the Statement of Additional Information and call
Shareholder Services for details concerning the Right of Accumulation.
Other Programs
Class A shares of the Fund may be sold 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.
12
<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 redemptions of Class B
shares as described below.
The Distributor will pay securities dealers at the time of sale a 4%
commission for selling Class B shares. The proceeds of the contingent
deferred sales charge and the distribution fee are used to offset
distribution expenses and thereby permit the sale of Class B shares without
an initial sales charge.
Class B shares that are redeemed within a five-year period after their
purchase will not be subject to a contingent deferred sales charge to the
extent that the value of such shares represents (1) capital appreciation of
Fund assets or (2) reinvestment of dividends or capital gains distributions.
The amount of any applicable contingent deferred sales charge will be
calculated by multiplying the net asset value of such shares at the time of
redemption or at the time of purchase, whichever is lower, by the applicable
percentage shown in the table below:
<TABLE>
<CAPTION>
Contingent
Deferred
Sales Charge
As A Percentage Of
Net Asset Value
Redemption During At Redemption
- ----------------- -------------
<S> <C>
1st Year Since Purchase............... 5%
2nd Year Since Purchase............... 4%
3rd Year Since Purchase............... 3%
4th Year Since Purchase............... 3%
5th Year Since Purchase............... 2%
6th Year Since Purchase and
Thereafter........................ None
</TABLE>
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first
of those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of 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.
13
<PAGE>
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic withdrawal plan which meets certain
conditions. In addition, the contingent deferred sales charge will be waived
for: (i) redemptions made within one year of the death or total disability,
as defined by the Social Security Administration, of all shareholders of an
account; (ii) redemptions made after attainment of a specific age in an
amount which represents the minimum distribution required at such age under
Section 401(a)(9) of the Internal Revenue Code for retirement accounts or
plans (e.g., age 70-1/2 for IRAs and Section 403(b) plans), calculated solely
on the basis of assets invested in the Fund or other Eligible Funds; and
(iii) a redemption resulting from a tax-free return of an excess contribution
to an IRA. (The foregoing waivers do not apply to a tax-free rollover or
transfer of assets out of the Fund.) The Fund 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 1, 1994 are deemed to be Class C shares. 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 appli-
14
<PAGE>
cable to Class B shares). For federal income tax purposes, the amount of the
contingent deferred sales charge will reduce the gain or increase the loss,
as the case may be, on the amount realized on redemption. The amount of any
contingent deferred sales charge will be paid to the Distributor.
Net Asset Value
The Fund's per share net asset values are determined Monday through Friday as
of the close of the New York Stock Exchange (the "NYSE") exclusive of days on
which the NYSE is closed. The NYSE ordinarily closes at 4 P.M. New York City
time. Assets held by the Fund are valued at the last reported sale price as
of the 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:
<TABLE>
<CAPTION>
Class Service Fee Distribution Fee
- ----- ----------- ----------------
<S> <C> <C>
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
</TABLE>
Some or all of the service fees are used to reimburse securities dealers
(including securities dealers that are affiliates of the Distributor) for
personal services and/or the maintenance of shareholder accounts. A portion
of any initial commission paid to dealers for the sale of shares of 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.
15
<PAGE>
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which the Fund may incur under the
Distribution Plan to 1%, of which 0.75% may be used to pay distribution
expenses and 0.25% may be used to pay shareholder service fees. The NASD rule
also limits the aggregate amount which the Fund may pay for such distribution
costs to 6.25% of gross share sales of a class since the inception of any
asset-based sales charge plus interest at the prime rate plus 1% on unpaid
amounts thereof (less any contingent deferred sales charges). Such limitation
does not apply to shareholder service fees. Payments to the Distributor or to
dealers funded under the Distribution Plan may be discontinued at any time by
the Trustees of the Trust.
Redemption of Shares
Shareholders may redeem all or any portion of their accounts on any day the
NYSE is open for business. Redemptions will be effective at the applicable
net asset value per share next determined (see "Purchase of Shares--Net Asset
Value" herein) after receipt of the redemption request, in accordance with
the requirements described below, by Shareholder Services and delivery of the
request by Shareholder Services to the Transfer Agent. To allow time for the
clearance of checks used for the purchase of any shares which are tendered
for redemption shortly after purchase, the remittance of the redemption
proceeds for such shares could be delayed for 15 days or more after the
purchase. Shareholders who anticipate a potential need for immediate access
to their investments should, therefore, purchase shares by wire. Except as
noted, redemption proceeds 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 (see "Shareholder Services--Telephone Services" herein),
the Trust's custodian will wire redemption proceeds to the shareholder's
predesignated bank account. To make the request, the shareholder should call
1-800-521-6548 prior to 4 P.M. Boston time. A $7.50 charge against the
shareholder's account will be imposed for each wire redemption. This charge
is subject to change without notice. The shareholder's bank may also impose a
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charge for receiving wires of redemption proceeds. The minimum redemption by
wire is $5,000.
Request to Dealer to Repurchase
For the convenience of shareholders, the Fund has authorized the Distributor
as its agent to accept orders from dealers by wire or telephone for the
repurchase of shares by the Distributor from the dealer. The Fund may revoke
or suspend this authorization at any time. The repurchase price is the net
asset value for the applicable shares next determined following the time at
which the shares are offered for repurchase by the dealer to the Distributor.
The dealer is responsible for promptly transmitting a shareholder's order to
the Distributor. Payment of the repurchase proceeds is made to the dealer who
placed the order promptly upon delivery of certificates for shares in proper
form for transfer or, for Open Accounts, upon the receipt of a stock power
with signatures guaranteed as described below, and, if required, any
supporting documents. Neither the Fund nor the Distributor imposes any charge
upon such a repurchase. However, a dealer may impose a charge as agent for a
shareholder in the repurchase of his or her shares.
The Fund has reserved the right to change, modify or terminate the services
described above at any time.
Additional Information
Because of the relatively high cost of maintaining small shareholder
accounts, the Fund reserves the right to involuntarily redeem at its option
any shareholder account which remains below $1,500 for a period of 60 days
after notice is mailed to the applicable shareholder, 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 for the Fund fairly to determine the value of its
net assets; or (3) during such other periods as the Securities and Exchange
Commission may by order permit for the protection of investors; and (b) the
payment of redemption proceeds may be postponed as 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
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exchange, or other eligible guarantor institution. The Transfer Agent will
not accept guarantees (or notarizations) from notaries public. The above
requirements may be waived in certain instances. Please contact Shareholder
Services at 1-800-562-0032 for specific requirements relating to your
account.
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 by shareholders 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
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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 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
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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
reinvestment privilege may be exercised with respect to an Eligible Fund only
in those states where shares of the relevant other Eligible Fund may legally
be sold.
Investment Plans
The 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.
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Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing the shareholder to make telephone redemptions for
amounts up to $50,000 to be mailed to the shareholder's address of record
is available automatically;
(2) The privilege allowing the shareholder or his or her dealer to make
telephone exchanges is available automatically;
(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
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<PAGE>
require some form of personal identification prior to acting upon
instructions received by telephone. Written confirmation of each transaction
will be provided.
The Fund and its Shares
The Fund commenced operations in October 1993 as an additional 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. The Trust is registered with the Securities and Exchange
Commission under the 1940 Act as an open-end management investment company.
The fiscal year end 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,
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 A, Class B and Class D shares
bear the expenses of the deferred sales arrangement and any expenses
(including the higher service and distribution fees) resulting from such
sales arrangement, and certain other incremental expenses related to a class.
Each class will have exclusive voting rights with respect to provisions of
the Rule 12b-1 distribution plan pursuant to which the service and
distribution fees, if any, are paid. Although the legal rights of holders of
each class of shares are identical, it is likely that the different expenses
borne by each class will result in different net asset values and dividends.
The different classes of shares of the Fund also have different exchange
privileges.
The rights of holders of shares may be modified by the Trustees at any time,
so long as such modifications do not have a material adverse effect on the
rights of any shareholder. On any matter submitted to the shareholders, the
holder of each Fund share is entitled to one vote per share (with
proportionate voting for fractional shares) regardless of the relative net
asset value thereof.
Under the Master Trust Agreement of the Trust, no annual or regular meeting
of shareholders is required. Thus, there will ordinarily be no shareholder
meetings unless required by the 1940 Act. Except as otherwise provided under
said Act, the Board of Trustees will be a self-perpetuating body until fewer
than two thirds of the Trustees serving as such are Trustees who were elected
by shareholders of the Trust. In the event less than a majority of the
Trustees serving as such were elected by shareholders of the Trust, a meeting
of shareholders will be called to elect Trustees. Under the Master Trust
Agreement, any Trustee may be removed by vote of two thirds of the
outstanding Trust shares; holders of 10% or more of the outstanding Trust
shares can require that the Trustees call a meeting of 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.
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Management of the Fund
Under the provisions of the Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees.
The Fund's investment manager is State Street Research & Management Company.
The Investment Manager is charged with the overall responsibility for
managing the investments and business affairs of the Fund, subject to the
authority of the Board of Trustees.
The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve as investment adviser to one of the nation's first
mutual funds, presently known as State Street Research Investment Trust,
which they had formed in 1924. Their investment management philosophy, which
continues to this day, emphasized comprehensive fundamental research and
analysis, including meetings with the management of companies under
consideration for investment. The Investment Manager's portfolio management
group has extensive investment industry experience 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, among
other expenses, investment advisory fees, certain distribution expenses under
the Fund's Distribution Plan and the compensation and expenses of the
Trustees who are not otherwise currently affiliated with the Investment
Manager or any of its affiliates. The Fund also incurs expenses payable to
various states in connection with the offer and sale of the Fund's shares,
and expenses for legal, custodian and transfer agent services, among other
costs. The Investment Manager will reduce its management fee payable by the
Fund up to the amount of any expenses (excluding permissible items, such as
brokerage commissions, Rule 12b-1 payments, interest, taxes and litigation
expenses) paid or incurred in any year in excess of the most restrictive
expense limitation imposed by any state in which the Fund sells shares, if
any. Under the Advisory Agreement, the Investment Manager provides the Fund
with office space, facilities and personnel. The Investment Manager
compensates Trustees of the Trust if such persons are employees or affiliates
of the Investment Manager or its affiliates.
The Fund is managed by Charles S. Glovsky. Mr. Glovsky has managed the Fund
since its inception. Mr. Glovsky's principal occupation currently 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.
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 intends to qualify and elect to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code, although it cannot
give complete assurance that it will do so. As long as it so qualifies and
satisfies certain distribution requirements, it will not be subject to
federal income taxes on its
23
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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 and distributions of
net capital gains annually and pays such dividends and distributions, if any,
after year end or as otherwise required for compliance with applicable tax
regulations. Both dividends from net investment income and distributions of
capital gain net income will be declared and paid to shareholders in
additional shares of the Fund at net asset value on the record date of that
dividend or distribution, except in the case of shareholders who elect a
different available distribution method.
The Fund will provide its shareholders of record with annual information on
a timely basis concerning the federal tax status of dividends and
distributions during the preceding calendar year.
Dividends paid by the Fund from taxable net investment income and
distributions of net short-term capital gains, whether paid in cash or
reinvested in additional shares, will be taxable for federal income tax
purposes to shareholders as ordinary income, and a portion may be eligible
for the 70% dividends-received deduction for corporations. The percentage of
the Fund's dividends eligible for such tax treatment may be less than 100% to
the extent that less than 100% of the Fund's gross income consists of
qualifying dividends of domestic corporations. Distributions of net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) which are designated as capital gains distributions, whether paid in
cash or reinvested in additional shares, will be taxable for federal income
tax purposes to shareholders as long-term capital gains, regardless of how
long shareholders have held their shares, and are not eligible for the
dividends-received deduction. If shares of the Fund which are sold at a loss
have been held six months or less, the loss will be considered as a long-term
capital loss to the extent of any capital gains distributions received.
Dividends and other distributions and proceeds of redemptions of Fund shares
paid to individuals and other nonexempt payees will be subject to a 31%
federal backup withholding tax if State Street Bank and Trust Company, the
Fund's transfer agent, is not provided with the shareholder's correct
taxpayer identification number and certification that the shareholder is not
subject to such backup withholding.
The foregoing discussion relates only to generally applicable federal income
tax provisions in effect as of the date of this Prospectus. Therefore,
prospective shareholders are urged to consult their own tax advisers
regarding tax matters, including state and local tax consequences.
Calculation of Performance Data
From time to time, in advertisements or in communications to shareholders or
prospective investors, the Fund may compare the performance of its Class A,
Class B, Class C and Class D shares to that of other mutual funds with
similar investment objectives, to certificates of deposit and/or to other
financial alternatives. The Fund may also compare its performance to
appropriate indices such as the NASDAQ Composite Average, Small Stock Index,
Russell 2000 Index, Standard & Poor's 500 Stock Index (the "S&P 500"),
Consumer Price Index and Dow Jones Industrial Average and/or to appropriate
rankings and averages, such as the Lipper Small Company Growth Funds average,
compiled by Lipper Analytical Services, Inc., or to those compiled by
Morningstar, Inc., Money Magazine, Business Week, Forbes Magazine, the Wall
Street Journal and Investor's Daily.
Total return is computed separately for each class of shares of the Fund.
The average annual total return ("standard total return") for shares of the
Fund is computed by determining the average annual compounded rate of return
for a designated period that, if applied to a hypothetical $1,000 initial
investment (less the maximum initial or contingent deferred sales charge, if
applicable), would produce the redeemable value of that investment at the end
of the period, assuming reinvestment of all dividends and distributions and
with recognition of all recurring charges. Standard total return will be
calculated for the periods specified in applicable regulations and may be
accompanied by nonstandard total return information
24
<PAGE>
for differing periods computed in the same manner 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 management fees or assumption of expenses
by the Fund's affiliates will also increase performance results.
Performance information may be useful in evaluating the Fund and for
providing a basis for comparison with other financial alternatives. Since the
performance of the Fund varies in response to fluctuations in economic and
market conditions, interest rates and Fund expenses, among other things, no
performance quotation should be considered a representation as to the Fund's
performance for any future period. In addition, the net asset value of shares
of the Fund will fluctuate, with the result that shares of the Fund, when
redeemed, may be worth more or less than their original cost. Neither an
investment in the 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 1, 1994, when
designations were assigned based on the pricing and Rule 12b-1 fees
applicable to shares sold thereafter. Performance data for a specified class
includes periods prior to the adoption of class designations. Performance
data for periods prior to February 1, 1994 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 date. 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.
25
<PAGE>
[cover]
STATE STREET RESEARCH
SMALL CAPITALIZATION
GROWTH FUND
One Financial Center
Boston, MA 02111
INVESTMENT ADVISER
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
DISTRIBUTOR
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
SHAREHOLDER SERVICES
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
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
SCG-769D-296IBS CONTROL NUMBER: 2976-960201(0397)SSR-LD
[logo] STATE STREET RESEARCH
State Street Research
Small Capitalization
Growth Fund
February 1, 1996
P R O S P E C T U S
<PAGE>
Supplement No. 1 dated
February 1, 1996
to
Prospectus dated February 1, 1996
for
STATE STREET RESEARCH
SMALL CAPITALIZATION VALUE FUND
a series of State Street Research Capital Trust
At the present time, only Class A shares are
generally available for purchase.
For information on the availability of other
classes of shares, contact the Distributor.
CONTROL NUMBER: 2983-960201(0397)SSR-LD SCV-260E-296IBS
<PAGE>
State Street Research
Small Capitalization Value Fund
Prospectus
February 1, 1996
The investment objective of State Street Research Small Capitalization
Value Fund (the "Fund") is to provide high total return consisting principally
of capital appreciation. In seeking to achieve its investment objective, the
Fund invests primarily in the equity securities of small capitalization
companies which are trading at prices believed to be below the true values of
such securities. For further information, see "The Fund's Investments."
State Street Research & Management Company (the "Investment Manager")
serves as investment adviser to the Fund. As of 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.
There are risks in any investment program, including the risk of
changing economic and market conditions, and there is no assurance that the Fund
will achieve its investment objective. The net asset value of the Fund's shares
fluctuates as market conditions change.
Because of the Fund's investment policies, the Fund is subject to
above-average risks; it may invest substantial amounts in foreign securities and
special situation companies and have a high portfolio turnover rate. The Fund
generally is designed for investors who want an aggressive investment and can
tolerate volatility and possible losses. An investment in the Fund should be
part of a balanced investment program which includes more conservative
investments. For further information, see "The Fund's Investments -- Other
Investments and Risk Considerations." In addition, the Fund may suspend the
offering of its shares at any time because of the limited availability of
investments which meet the Fund's investment parameters.
This Prospectus sets forth concisely the information a prospective
investor ought to know about the Fund before investing. It should be retained
for future reference. A Statement of Additional Information about the Fund dated
February 1, 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.
CONTROL NUMBER: 2982-960201(0397)SSR-LD SCV-175E-296IBS
<PAGE>
Shareholders may have their shares redeemed directly by the Fund at net
asset value plus the applicable contingent deferred sales charge, if any;
redemptions processed through securities dealers may be subject to processing
charges.
Table of Contents Page
Table of Expenses .......................................... 3
Financial Highlights........................................ 6
The Fund's Investments ..................................... 6
Limiting Investment Risk ................................... 11
Purchase of Shares ......................................... 13
Redemption of Shares ....................................... 25
Shareholder Services ....................................... 29
The Fund and its Shares .................................... 35
Management of the Fund ..................................... 37
Dividends and Distributions; Taxes ......................... 38
Calculation of Performance Data ............................ 39
The Fund offers four classes of shares which may be purchased at the
next determined net asset value per share plus, in the case of all classes
except Class C shares, a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5%
and (ii) an annual service fee of 0.25% of the average daily net asset value of
the Class A shares.
Class B shares are subject (i) to a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made within
five years of purchase and (ii) annual distribution and service fees of 1% of
the average daily net asset value of such shares. Class B shares automatically
convert into Class A shares (which pay lower ongoing expenses) at the end of
eight years after purchase. No contingent deferred sales charge applies after
the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and
large institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees.
Class D shares are subject to (i) a contingent deferred sales charge of
1% if redeemed within one year following purchase and (ii) annual distribution
and service fees of 1% of the average daily net asset value of such shares.
2
<PAGE>
Table of Expenses
<TABLE>
<CAPTION>
Class A Class B Class C Class D
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses(1)
Maximum Sales Charge Imposed on Purchases (as
percentage of offering price) ......................... 4.5% None None None
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering price) ......... None None None None
Maximum Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, as applicable) ................... None(2) 5% None 1%
Redemption Fees (as a percentage of amount
redeemed, if applicable) .............................. None None None None
Exchange Fees ............................................ None None None None
</TABLE>
(1) Reduced sales charge purchase plans are available for Class A shares.
The maximum 5% contingent deferred sales charge on Class B shares
applies to redemptions during the first year after purchase; the charge
declines 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."
3
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C Class D
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees .............................. 0.85% 0.85% 0.85% 0.85%
12b-1 Fees ................................... 0.25% 1.00% None 1.00%
Other Expenses ............................... 2.59% 2.59% 2.59% 2.59%
Less Voluntary Reduction ................... (2.24%) (2.24%) (2.24%) (2.24%)
------- ------- ------- -------
Total Fund Operating Expenses
(after voluntary reduction) ........... 1.45% 2.20% 1.20% 2.20%
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Example: 1 Year 3 Years
<S> <C> <C>
You would pay the following expenses on a $1,000 investment including, for Class
A shares, the maximum applicable initial sales charge and assuming (1) 5%
annual return and (2) redemption of the entire investment at the end of each
time period:
Class A shares .......................................................... $59 $89
Class B shares .......................................................... $72 $99
Class C shares .......................................................... $12 $38
Class D shares .......................................................... $32 $69
You would pay the following expenses on the same investment, assuming no
redemption:
Class B shares .......................................................... $22 $69
Class D shares .......................................................... $22 $69
</TABLE>
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than shown.
The purpose of the table above is to assist the investor in
understanding the various costs and expenses that an investor will bear directly
or indirectly. Because the Fund is newly organized, the percentage expense
levels shown in the table as "Other Expenses" are based on experience with
expenses during the fiscal period 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."
4
<PAGE>
The Fund has been advised that the Distributor and its affiliates may
from time to time and in varying amounts voluntarily assume some portion of fees
or expenses relating to the Fund. The Fund presently expects such assistance to
be provided for the next 12 months or until the Fund's net assets reach $100
million, whichever first occurs. However, the Fund has not received any firm
commitment that such assistance will in fact be provided.
For the fiscal period ended September 30, 1995, Total Fund Operating
Expenses as a percentage of average net assets of Class A, Class B, Class C and
Class D shares of the Fund would have been 3.69%, 4.44%, 3.44% and 4.44%,
respectively, in the absence of the voluntary assumption of fees or expenses by
the Distributor and its affiliates, which amounted to 2.24%, 2.24%, 2.24% and
2.24%, respectively. The amount of fees or expenses assumed during the fiscal
period ended September 30, 1995, differed among classes because of fluctuations
during the year in relative levels of assets in each class and in expenses
before reimbursement.
5
<PAGE>
Financial Highlights
The data set forth below has been examined by Coopers & Lybrand L.L.P.,
independent accountants, and their report thereon is included in the Statement
of Additional Information. For further information about the performance of the
Fund, see "Financial Statements" in the Statement of Additional Information.
<TABLE>
<CAPTION>
Class A** Class B** Class C** Class D**
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net asset value,
beginning of period $ 9.55 $ 9.55 $ 9.55 $ 9.55
Net investment income* .07 .02 .09 .02
Net unrealized gain
on investments 1.51 1.51 1.51 1.51
---- ---- ---- ----
Net asset value,
end of period $11.13 $11.08 $11.15 $11.08
====== ====== ====== ======
Total return+ 16.54% 16.02% 16.75% 16.02%
Net assets at end
of period (000s) $5,782 $116 $ 117 $ 116
Ratio of operating
expenses to average
net assets* 1.45%++ 2.20%++ 1.20%++ 2.20%++
Ratio of net investment
income to average
net assets* 1.05%++ 0.32%++ 1.32%++ 0.32%++
Portfolio turnover rate 47.34% 47.34% 47.34% 47.34%
- -----------------------
<FN>
* Reflects voluntary
assumption of fees
or expenses per
share in each period $ .15 $ .15 $ .15 $ .15
** February 13, 1995 (commencement of operations) to September 30, 1995.
+ Represents aggregate return for the period without annualization and
does not reflect any front-end or contingent deferred sales charges.
Total return would be lower if the Distributor and its affiliates had
not voluntarily assumed a portion of the Fund's expenses.
++ Annualized.
- ------------------------------------------------------------------------------
</FN>
</TABLE>
The Fund's Investments
The Fund's investment objective is to provide high total return
consisting principally of capital appreciation. The investment objective is a
fundamental policy that may not be changed without approval of the Fund's
shareholders.
In seeking to achieve its investment objective, the Fund invests at
least 65% of its total assets under normal circumstances in the equity
securities of small capitalization companies
6
<PAGE>
which are trading at prices believed by the Investment Manager to be below
the true values of such securities. A company's market capitalization is the
total market value of its publicly traded equity securities. The Fund currently
invests in companies with market capitalizations of up to $1 billion, although
this figure may fluctuate over time because of market conditions, inflation,
etc. While a company's market capitalization may be small at the time the Fund
first invests in the company, the Fund may continue to hold and acquire shares
of a company after its market capitalization increases. The definition of a
"small capitalization company" may be revised by the Investment Manager from
time to time.
In selecting investments, the Investment Manager considers a variety of
factors, any one or more of which may be determinative. These include a
company's expected growth in earnings, relative financial condition and cash
flow, competitive position, management and business strategy, overall potential
as an enterprise, entrepreneurial character, and new or innovative products,
services or processes. In assessing a security's value in comparison to its
current price the Investment Manager analyzes such measurements as price to
earnings ratio, price to cash flow ratio, price to book value ratio, price to
replacement cost ratio and price to private market value ratio.
The equity securities in which the Fund will invest consist of common
and preferred stocks, convertible securities (e.g., preferred stock, bonds and
debentures) and warrants. Preferred stocks are stocks which have preferences,
such as payment of dividends, over common stocks; debentures are debt securities
subject to protective covenants such as the maintenance of minimum financial
conditions; convertible securities are securities which may be converted into
different securities, such as a preferred stock being converted into a common
stock; and warrants are rights to acquire other securities. The Fund anticipates
that more than half of the total value, at the time of investment, of the equity
securities held by the Fund will be included on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") system or listed on a major
securities exchange.
Under normal circumstances, the Fund expects to be fully invested in
equity securities as described above. However, the Fund may, consistent with its
investment objective, also invest at any time up to 35% of its total assets in
other equity and debt securities, such as those issued by larger capitalization,
more mature, or special situation companies, and U.S. Government securities. A
special situation company is one which, because of unique circumstances such as,
for example, a particular business niche it fills, is an attractive investment
even though it is not a small capitalization issuer. The Fund will generally
purchase investment grade debt securities (i.e., rated at the time of purchase
AAA, AA, A or BBB by Standard & Poor's Corporation ("S&P") or Aaa, Aa, A or Baa
by Moody's Investors Service, Inc.
7
<PAGE>
("Moody's")), or securities that are not rated but considered by the
Investment Manager to be of equivalent investment quality; bonds rated Baa by
Moody's, or equivalent, may have speculative characteristics. The Fund may,
however, invest up to 5% of its total assets in debt securities rated as low as
C by S&P and Moody's. The debt securities, which may have differing maturities
and fixed or floating interest rates, generally will be U.S. Government
securities or issued by larger capitalization issuers. For more information on
debt ratings and the risks of lower rated debt securities, see the Statement of
Additional Information.
Because the Fund invests primarily in small capitalization companies,
an investment in the Fund involves greater than average risks and the value of
the Fund's shares may fluctuate more widely than the value of shares of a fund
that invests in larger, more established companies. Securities held by the Fund,
particularly those traded over-the-counter, may have limited marketability and
may be subject to more abrupt or erratic market movements over time than
securities of larger, more seasoned companies or the market as a whole. The
issuers of over-the-counter securities may have limited product lines, markets
and financial resources, may be dependent on entrepreneurial management,
typically reinvest most of their net income in the enterprise and typically do
not pay dividends.
Other Investments and Risk Considerations
Foreign Investments
The Fund reserves the right to invest without limitation in securities
of non-U.S. issuers directly, or indirectly in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Under current
policy, however, the Fund limits such investments, including ADRs and EDRs, to a
maximum of 35% of its total assets.
ADRs are receipts, typically issued by a U.S. bank or trust company,
which evidence ownership of underlying securities issued by a foreign
corporation or other entity. EDRs are receipts issued in Europe which evidence a
similar ownership arrangement. Generally, ADRs in registered form are designed
for use in U.S. securities markets and EDRs are designed for use in European
securities markets. The underlying securities are not always denominated in the
same currency as the ADRs or EDRs. Although investment in the form of ADRs or
EDRs facilitates trading in foreign securities, it does not mitigate all the
risks associated with investing in foreign securities.
ADRs are available through facilities which may be either "sponsored"
or "unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and usually agrees to
provide shareholder communications. In an unsponsored arrangement, the foreign
issuer is
8
<PAGE>
not involved, and the ADR holders pay the fees of the depository. Sponsored
ADRs are generally more advantageous to the ADR holders and the issuer than are
unsponsored ADRs. More and higher fees are generally charged in an unsponsored
program compared to a sponsored facility. Only sponsored ADRs may be listed on
the New York or American Stock Exchanges. Unsponsored ADRs may prove to be more
risky due to (a) the additional costs involved to the Fund; (b) the relative
illiquidity of the issue in U.S. markets; and (c) the possibility of higher
trading costs in the over-the-counter market as opposed to exchange-based
trading. The Fund will take these and other risk considerations into account
before making an investment in an unsponsored ADR.
The risks associated with investments in foreign securities include
those resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks of
nationalization or expropriation, the possible imposition of currency exchange
blockages, higher operating expenses, foreign withholding and other taxes which
may reduce investment return, reduced availability of public information
concerning issuers and the fact that foreign issuers are not generally subject
to uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to domestic
issuers. Moreover, securities of many foreign issuers may be less liquid and
their prices more volatile than those of securities of comparable domestic
issuers.
It is anticipated that most of the foreign investments of the Fund will
consist of securities of issuers in countries with developed economies. However,
the Fund may also invest in the securities of issuers in countries with less
developed economies as deemed appropriate by the Investment Manager, although
the Fund does not presently expect to invest more than 5% of its total assets in
issuers in such less developed countries. Such countries include countries that
have an emerging stock market that trades a small number of securities;
countries with low- to middle-income economies; and/or countries with economies
that are based on only a few industries. Eastern European countries are
considered to have less developed capital markets.
For further information regarding foreign investments, see the
Statement of Additional Information.
Currency Transactions
In order to protect against the effect of uncertain future exchange
rates on securities denominated in foreign currencies, the Fund may engage in
currency exchange transactions either on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market or by entering into forward contracts
to purchase or sell currencies. Although such contracts tend to minimize the
risk of loss resulting from a correctly predicted decline in value of hedged
currency, they tend to limit any potential gain
9
<PAGE>
that might result should the value of such currency increase. In entering a
forward currency transaction, the Fund is dependent upon the creditworthiness
and good faith of the counterparty. The Fund attempts to reduce the risks of
nonperformance by the counterparty by dealing only with established, large
institutions with which the Investment Manager has done substantial business in
the past. For further information, see the Statement of Additional Information.
Other Investment Policies
The Fund may lend portfolio securities with a value of up to 33-1/3% of
its total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of the loaned securities plus accrued interest. Collateral
received by the Fund will generally be held in the form tendered, although cash
may be invested in securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, irrevocable stand-by letters of credit issued by
a bank, or any combination thereof. The investing of cash collateral received
from loaning portfolio securities involves leverage which magnifies the
potential for gain or loss on monies invested and, therefore, results in an
increase in the volatility of the Fund's outstanding securities. Such loans may
be terminated at any time.
The Fund will retain most rights of ownership including rights to
dividends, interest or other distributions on the loaned securities. Voting
rights pass with the lending, although the Fund may call loans to vote proxies
if desired. Should the borrower of the securities fail financially, there is a
risk of delay in recovery of the securities or loss of rights in the collateral.
Loans are made only to borrowers which are deemed by the Investment Manager to
be of good financial standing.
The Fund may, subject to certain percentage limitations below, buy and
sell options, futures contracts and options on futures contracts on securities,
securities indices and currencies; such instruments are commonly known as
derivatives because they derive their value from underlying assets, such as the
securities on which they are based. The Fund may not establish a position in a
commodity futures contract or purchase or sell a commodity option contract for
other than bona fide hedging purposes if immediately thereafter the sum of the
amount of initial margin deposits and premiums required to establish such
derivative positions for nonhedging purposes would exceed 5% of the market value
of the Fund's net assets; similar policies apply to options which are not
commodities. The Fund may also invest in derivatives through various forms of
swap arrangements, 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 derivatives. These swap arrangements
include interest rate swaps, currency
10
<PAGE>
swaps and index swaps. For a more detailed discussion of derivatives, see
the Statement of Additional Information. The Fund may also enter into repurchase
agreements, reverse repurchase agreements and purchase securities on a
"when-issued" or forward commitment basis. See the Statement of Additional
Information.
The Fund may invest in restricted securities in accordance with Rule
144A under the Securities Act of 1933, which allows for the resale of such
securities among certain qualified institutional buyers. Because the market for
such securities is still developing, such securities could possibly become
illiquid in particular circumstances. See the Statement of Additional
Information.
The Fund anticipates that its portfolio turnover rate will generally
not exceed 125% under normal conditions. The Fund does, however, reserve full
freedom with respect to portfolio turnover. In periods when there are rapid
changes in economic conditions or security price levels or when investment
strategy changes significantly, portfolio turnover may be higher than during
times of economic and market price stability or when investment strategy remains
relatively constant. An actual portfolio turnover rate of 100% or more may
result in greater transaction costs, relative to other funds in general, and may
have tax and other consequences as well.
See the Statement of Additional Information.
Limiting Investment Risk
In seeking to lessen investment risk, the Fund operates under certain
fundamental and nonfundamental investment restrictions. Under the fundamental
investment restrictions, the Fund may not (a) purchase a security of any one
issuer (other than securities issued or guaranteed as to principal or interest
by the U.S. Government or its agencies or instrumentalities or mixed-ownership
Government corporations), if such purchase would, with respect to 75% of the
Fund's total assets, cause more than 5% of the Fund's total assets to be
invested in the securities of such issuer; (b) purchase for its portfolio a
security of any one issuer if such purchase would cause more than 10% of the
voting securities of such issuer to be held by the Fund; or (c) invest more than
25% of the Fund's total assets in securities of issuers principally engaged in
any one industry as set forth in the Statement of Additional Information.
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
11
<PAGE>
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 total assets in illiquid securities including
repurchase agreements extending for more than seven days and may not invest more
than 5% of the Fund's total assets in restricted securities excluding securities
eligible for resale under Rule 144A under the Securities Act of 1933. Although
many illiquid securities may also be restricted, and vice versa, compliance with
each of these policies will be determined independently. The foregoing
nonfundamental investment restriction may be changed without a shareholder vote.
For further information on the above and other fundamental and
nonfundamental investment restrictions, see the Statement of Additional
Information.
The Fund may hold up to 100% of its assets in cash or certain short-term
securities for temporary defensive purposes. The Fund will adopt a
temporary defensive position when, in the opinion of the Investment Manager,
such a position is more likely to provide protection against adverse market
conditions. To the extent that the Fund's assets are held in a temporary
defensive position, the Fund will not be achieving its investment objective. The
types of short-term instruments in which the Fund may invest for such purposes
are, as more fully described in the Statement of Additional Information: U.S.
Government securities (including STRIPS, as defined below), custodial receipts,
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 unsecured debt issue rated at least "A" by S&P or Moody's). Under
the Separate Trading of Registered Interest and Principal of Securities
("STRIPS") program, the principal and interest components of selected U.S.
Government securities are traded independently. Custodial receipts are
instruments that evidence ownership of future interest payments, principal
payments or both on certain U.S. Treasury notes or bonds and are known by
various names, including "Treasury Investment Growth Receipts" ("TIGRs") and
"Certificates of Accrual on Treasury Securities" ("CATS"). See the Statement of
Additional Information.
12
<PAGE>
- -------------------------------------------------------------------------------
Information on the Purchase of Shares, Redemption of Shares and Shareholder
Services is set forth on pages 13 to 35 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.
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
13
<PAGE>
and number. Shareholder Services will deliver the purchase order to the
transfer agent and dividend paying agent, State Street Bank and Trust Company
(the "Transfer Agent").
If the check is not honored for its full amount, the purchaser could be
subject to additional charges to cover collection costs and any investment loss,
and the purchase may be cancelled.
By Wire
An investor may purchase shares by wiring Federal Funds of not less
than $5,000 to State Street Bank and Trust Company, which also serves as the
Trust's custodian (the "Custodian"), as set forth below. Prior to making an
investment by wire, an investor must notify Shareholder Services at
1-800-521-6548 and obtain a control number and instructions. Following such
notification, Federal Funds should be wired through the Federal Reserve System
to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF = State Street Research
Small Capitalization Value Fund
and class of shares
(A, B, C or D)
AC = 99029761
OBI = Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street
Research Shareholder Services)
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make such
investment by 12 noon Boston time on the day of his or her investment; and (ii)
the wire must be received by 4 P.M. Boston time that same day.
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.
14
<PAGE>
Minimum Investment
<TABLE>
<CAPTION>
Class of Shares
---------------------------------------------------------------------------------
A B C D
---------------- ------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Minimum Initial Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $2,000 $2,000 (a) $2,000
By Investamatic $1,000 $1,000 (a) $1,000
All other $2,500 $2,500 (a) $2,500
Minimum Subsequent Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $50 $50 (a) $50
By Investamatic $50 $50 (a) $50
All other $50 $50 (a) $50
</TABLE>
(a) Special conditions apply; contact the Distributor.
The Fund reserves the right to vary the minimums for initial or subsequent
investments from time to time as in the case of, for example, exchanges and
investments under various retirement and employee benefit plans, sponsored
arrangements involving group solicitations of the members of an organization, or
other investment plans such as for reinvestment of dividends and distributions
or for periodic investments (e.g., Investamatic Check Program).
Alternative Purchase Program
General
Alternative classes of shares permit investors to select a purchase
program which they believe will be the most advantageous for them, given the
amount of their purchase, the length of time they anticipate holding Fund
shares, or the flexibility they desire in this regard, and other relevant
circumstances. Investors will be able to determine whether in their particular
circumstances it is more advantageous to incur an initial sales charge and not
be subject to certain ongoing charges or to have their entire initial purchase
price invested in the Fund with the investment being subject thereafter to
ongoing service fees and distribution fees. As described in greater detail
below, securities dealers are paid differing amounts of commissions and other
compensation depending on which class of shares they sell.
15
<PAGE>
The major differences among the various classes of shares are as
follows:
<TABLE>
<CAPTION>
Class A Class B Class C Class D
<S> <C> <C> <C> <C>
Sales Charges Initial sales charge Contingent deferred None Contingent deferred
at time of sales charge of 5% to sales charge of 1%
investment of up to 2% applies to any applies to any
4.5% depending on shares redeemed shares redeemed
amount of investment within first five within one year
years following their following 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 eight None 0.75% each year
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 charge
Selling Securities less 0.25% to 0.50%
Dealers retained by
Distributor
On investments of $1
million or more,
0.25% to 1% paid to
dealer by Distributor
</TABLE>
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.
16
<PAGE>
Class A shares are sold at net asset value plus an initial sales charge
of up to 4.5% of the public offering price. Because of the sales charge, not all
of an investor's purchase amount is invested unless the purchase equals
$1,000,000 or more. Class B shareholders pay no initial sales charge, but a
contingent deferred sales charge of up to 5% generally applies to shares
redeemed within five years of purchase. Class D shareholders also pay no initial
sales charge, but a contingent deferred sales charge of 1% generally applies to
redemptions made within one year of purchase. For Class B and Class D
shareholders, therefore, the entire purchase amount is immediately invested in
the Fund.
An investor who qualifies for a significantly reduced initial sales
charge, or a complete waiver of the sales charge on investments of $1,000,000 or
more, on the purchase of Class A shares might elect that option to take
advantage of the lower ongoing service and distribution fees that characterize
Class A shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee
of 0.25% of average daily net assets. Class B shares are assessed an annual
distribution fee of 0.75% of daily net assets for an eight-year period following
the date of purchase and are then automatically converted to Class A shares.
Class D shares are assessed an annual distribution fee of 0.75% of daily net
assets for as long as the shares are held. The prospective investor should
consider these fees plus the initial or contingent deferred sales charges in
estimating the costs of investing in the various classes of Fund shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are allocated to dealers (see
"Distribution Plan" below). In addition, the Distributor will, at its expense,
provide additional cash and noncash incentives to securities dealers that sell
shares. Such incentives may be extended only to those dealers who have sold or
may sell significant amounts of shares and/or meet other conditions established
by the Distributor; for example, the Distributor may sponsor special promotions
to develop particular distribution channels or to reach certain investor groups.
The incentives may include merchandise and trips to and attendance at sales
seminars at resorts.
17
<PAGE>
Class A Shares -- Initial Sales Charges
Sales Charges
The purchase price of a Class A share of the Fund is the Fund's per
share net asset value next determined after the purchase order is duly received,
as defined herein, plus a sales charge which varies depending on the dollar
amount of the shares purchased as set forth in the table below. A major portion
of this sales charge is reallowed by the Distributor to the securities dealer
responsible for the sale.
<TABLE>
<CAPTION>
Dollar Sales Sales Dealer
Amount of Charge Charge Concession
Purchase Paid by Paid by As % of
Transaction Investor Investor Purchase
As % of As % of Price
Purchase Net Asset
Price Value
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 or above 3.50% 3.63% 3.00%
but less than
$250,000
$250,000 or above 2.50% 2.56% 2.00%
but less than
$500,000
$500,000 or above 2.00% 2.04% 1.75%
but less than
$1 million
$1 million and above 0% 0% See following discussion
</TABLE>
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer a
commission 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
18
<PAGE>
redeemed shares will not be subject to the contingent deferred sales charge
to the extent that their value represents (1) capital appreciation or (2)
reinvestment of dividends or capital gains distributions. In addition, the
contingent deferred sales charge will be waived for certain other redemptions as
described under "Contingent Deferred Sales Charge Waivers" below (as otherwise
applicable to Class B shares).
Class A shares of the Fund that are purchased without a sales charge
may be exchanged for Class A shares of certain other Eligible Funds, as
described below, without the imposition of a contingent deferred sales charge,
although contingent deferred sales charges may apply upon a subsequent
redemption within one year of the Class A shares which are acquired through such
exchange. For federal income tax purposes, the amount of the contingent deferred
sales charge will reduce the gain or increase the loss, as the case may be, on
the amount realized on redemption. The amount of any contingent deferred sales
charge will be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable
to purchases made at any one time by any "person," as defined in the Statement
of Additional Information, of $100,000 or more of Class A shares of the Fund or
a combination of "Eligible Funds." "Eligible Funds" include the Fund and other
funds so designated by the Distributor from time to time. Class B, Class C and
Class D shares may also be included in the combination under certain
circumstances. Securities dealers should call Shareholder Services for details
concerning the other Eligible Funds and any persons who may qualify for reduced
sales charges and related information. See the Statement of Additional
Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced
sales charge on purchases of no less than an aggregate of $100,000 of Class A
shares of the Fund and any other Eligible Funds within a 13-month period. Class
B, Class C and Class D shares may also be included in the combination under
certain circumstances. Additional information on a Letter of Intent is available
from dealers, or from the Distributor, and also appears in the Statement of
Additional Information.
Right of Accumulation
Investors may purchase Class A shares of the Fund or a combination of
shares of the Fund and other Eligible Funds at reduced sales charges pursuant to
a Right of Accumulation. Under
19
<PAGE>
the Right of Accumulation, the sales charge is determined by combining the
current purchase with the value of the Class A shares of other Eligible Funds
held at the time of purchase. Class B, Class C and Class D shares may also be
included in the combination under certain circumstances. See the Statement of
Additional Information and call Shareholder Services for details concerning the
Right of Accumulation.
Other Programs
Class A shares of the Fund may be sold at a reduced sales charge or
without a sales charge pursuant to certain sponsored arrangements, which include
programs under which a company, employee benefit plan or other organization
makes recommendations to, or permits group solicitation of, its employees,
members or participants, except any organization created primarily for the
purpose of obtaining shares of the Fund at a reduced sales charge or without a
sales charge. 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.
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.
20
<PAGE>
Class B Shares -- Contingent Deferred Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per
share next determined after the purchase order is duly received, as defined
herein. No sales charge is imposed at the time of purchase; thus the full amount
of the investor's purchase payment will be invested in the Fund. However, a
contingent deferred sales charge may be imposed upon redemptions of Class B
shares as described below.
The Distributor will pay securities dealers at the time of sale a 4%
commission for selling Class B shares. The proceeds of the contingent deferred
sales charge and the distribution fee are used to offset distribution expenses
and thereby permit the sale of Class B shares without an initial sales charge.
Class B shares that are redeemed within a five-year period after their
purchase will not be subject to a contingent deferred sales charge to the extent
that the value of such shares represents (1) capital appreciation of Fund assets
or (2) reinvestment of dividends or capital gains distributions. The amount of
any applicable contingent deferred sales charge will be calculated by
multiplying the net asset value of such shares at the time of redemption or at
the time of purchase, whichever is lower, by the applicable percentage shown in
the table below:
Contingent
Deferred
Sales Charge
As A Percentage Of
Net Asset Value
Redemption During At Redemption
1st Year Since Purchase 5%
2nd Year Since Purchase 4%
3rd Year Since Purchase 3%
4th Year Since Purchase 3%
5th Year Since Purchase 2%
6th Year Since Purchase
and Thereafter None
In determining the applicability and rate of any contingent deferred
sales charge, it will be assumed that a redemption of Class B shares is made
first of those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of the Fund acquired through an exchange from another
Eligible Fund will be measured from the date that such shares were initially
acquired in the other Eligible Funds, and Class B shares being redeemed will be
21
<PAGE>
considered to represent, as applicable, capital appreciation or dividend and
capital gains distribution reinvestments in such other Eligible Fund. These
determinations will result in any contingent deferred sales charge being imposed
at the lowest possible rate. For federal income tax purposes, the amount of the
contingent deferred sales charge will reduce the gain or increase the loss, as
the case may be, on the amount realized on redemption. The amount of any
contingent deferred sales charge will be paid to the Distributor.
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic withdrawal plan which meets certain conditions.
In 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
22
<PAGE>
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").
Class C shares may be issued directly or through exchanges to those
shareholders of the Fund or other Eligible Funds who previously held shares not
subject to any future sales charge or service fees or distribution fees.
Class D Shares -- Spread Sales Charges
The purchase price of a Class D share of the Fund is the Fund's per
share net asset value next determined after the purchase order is duly received,
as defined herein. No sales charge is imposed at the time of purchase; thus the
full amount of the investor's purchase payment will be invested in the Fund.
Class D shares are subject to a 1% contingent deferred sales charge on any
portion of the purchase redeemed within one year of the sale. The contingent
deferred sales charge will be 1% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. The Distributor
pays securities dealers a 1% commission for selling Class D shares at the time
of purchase. The proceeds of the contingent deferred sales charge and the
distribution fee are used to offset distribution expenses and thereby permit the
sale of Class D shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will
not be subject to the contingent deferred sales charge to the extent that the
value of such shares represents (1) capital appreciation of Fund assets or (2)
reinvestment of dividends or capital gains distributions. In addition, the
contingent deferred sales charge will be waived for certain other redemptions as
described under "Contingent Deferred Sales Charge Waivers" above (as otherwise
applicable to Class B shares). For federal income tax purposes, the amount of
the contingent deferred sales charge will reduce the gain or increase the loss,
as the case may be, on the amount realized on redemption. The amount of any
contingent deferred sales charge will be paid to the Distributor.
23
<PAGE>
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
24
<PAGE>
directly). Any service fees received by the Distributor and not allocated
to dealers may be applied by the Distributor in reduction of expenses incurred
by it directly for personal services and the maintenance of shareholder
accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to securities dealers for selling such shares. Any distribution
fees received by the Distributor and not allocated to dealers may be applied by
the Distributor in connection with sales or marketing efforts, including special
promotional fees and cash and noncash incentives based upon sales by securities
dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs similar
expenses on behalf of, such other funds. When expenses of the Distributor cannot
be identified as relating to a specific fund, the Distributor allocates expenses
among the funds in a manner deemed fair and equitable to each fund.
Commissions and other cash and noncash incentives and payments to
dealers, to the extent payable out of the general profits, revenues or other
sources of the Distributor (including the advisory fees paid by the Fund), have
also been authorized pursuant to the Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which the Fund may incur under the Distribution
Plan to 1%, of which 0.75% may be used to pay distribution expenses and 0.25%
may be used to pay shareholder service fees. The NASD rule also limits the
aggregate amount which the Fund may pay for such distribution costs to 6.25% of
gross share sales of a class since the inception of any asset-based sales charge
plus interest at the prime rate plus 1% on unpaid amounts thereof (less any
contingent deferred sales charges). Such limitation 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
25
<PAGE>
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.
26
<PAGE>
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder
has Telephone Privileges (see "Shareholder Services -- Telephone Services"
herein), the Trust's custodian will wire redemption proceeds to the
shareholder's predesignated bank account. To make the request, the shareholder
should call 1-800-521-6548 prior to 4 P.M. Boston time. A $7.50 charge against
the shareholder's account will be imposed for each wire redemption. This charge
is subject to change without notice. The shareholder's bank may also impose a
charge for receiving wires of redemption proceeds. The minimum redemption by
wire is $5,000.
Request to Dealer to Repurchase
For the convenience of shareholders, the Fund has authorized the
Distributor as its agent to accept orders from dealers by wire or telephone for
the repurchase of shares by the Distributor from the dealer. The Fund may revoke
or suspend this 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
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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 for the Fund fairly to determine the value of its net assets; or (3)
during such other periods as the Securities and Exchange Commission may by order
permit for the protection of investors; and (b) the payment of redemption
proceeds may be postponed as 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
certain instances. Please contact Shareholder Services at 1-800-562-0032 for
specific requirements relating to your account.
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Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of the Fund
owned by shareholders are credited to their accounts by the Transfer Agent,
State Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110. Certificates representing shares will not be issued. Shareholders will
receive periodic statements of transactions in their accounts.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made
through dealers, by wire or by mailing a check, payable to
the Fund, to Shareholder Services under the terms set forth
above under "Purchase of Shares."
2. The following methods of receiving dividends from investment
income and distributions from capital gains are available:
(a) All income dividends and capital gains distributions
reinvested in additional shares of the Fund.
(b) All income dividends in cash; all capital gains
distributions reinvested in additional shares of
the Fund.
(c) All income dividends and capital gains
distributions in cash.
(d) All income dividends and capital gains distributions
invested in any one available Eligible Fund
designated by the shareholder as described below. See
"Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, 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
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<PAGE>
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 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
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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
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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 reinvestment
privilege may be exercised with respect to an Eligible Fund only in those states
where shares of the relevant other Eligible Fund may legally be sold.
Investment Plans
The 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
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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;
(2) the privilege allowing the shareholder or his or her dealer
to make telephone exchanges is available automatically;
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<PAGE>
(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 must be followed to confirm that
instructions communicated by telephone are genuine. The shareholder will not be
liable for any losses due to unauthorized or fraudulent instructions if such
procedures are not followed.
Shareholders may redeem or exchange shares by calling toll-free
1-800-521-6548. Although it is unlikely, during periods of extraordinary market
conditions, a shareholder may have difficulty in reaching Shareholder Services
at such telephone number. In that event, the shareholder should contact
Shareholder Services at 1-800-562-0032, 1-617-357-7805 or otherwise at its
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main office at One Financial Center, Boston, Massachusetts 02111-2690.
Shareholder Account Inquiries:
Please call 1-800-562-0032
Call this number for assistance in answering general questions on your
account, including account balance, available shareholder services, statement
information and performance of the Fund. Account inquiries may also be made in
writing to State Street Research Shareholder Services, P.O. Box 8408, Boston,
Massachusetts 02266-8408. A fee of up to $10 will be charged against an account
for providing additional account transcripts or photocopies of paid redemption
checks or for researching records in response to special requests.
Shareholder Telephone Transactions:
Please call 1-800-521-6548
Call this number for assistance in purchasing shares by wire and for
telephone redemptions or telephone exchange transactions. For more information
and/or requisite authorization forms for telephone redemption and exchange
privileges call 1-800-562-0032. Shareholder Services will require some form of
personal identification prior to acting upon instructions received by telephone.
Written confirmation of each transaction will be provided.
The Fund and its Shares
The Fund commenced operations in February 1995 as an additional series
of State Street Research Capital Trust (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. The Trust is registered with the Securities and Exchange Commission
under the Investment Company Act of 1940, as amended (the "1940 Act"), as an
open-end management investment company. The fiscal year end of the Fund is
September 30.
Except for those differences between the classes of shares described
below and elsewhere in the Prospectus, each share of the Fund has equal
dividend, redemption and liquidation rights with other shares of the Fund and
when issued is fully paid and nonassessable. 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.
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<PAGE>
Each share of each class of shares represents an identical legal
interest in the same portfolio of investments of the Fund, has the same rights
and is identical in all respects, except that Class A, Class B and Class D
shares bear the expenses of the deferred sales arrangement and any expenses
(including the higher service and distribution fees) resulting from such sales
arrangement, and certain other incremental expenses related to a class. Each
class will have exclusive voting rights with respect to provisions of the Rule
12b-1 distribution plan pursuant to which the service and distribution fees, if
any, are paid. Although the legal rights of holders of each class of shares are
identical, it is likely that the different expenses borne by each class will
result in different net asset values and dividends. The different classes of
shares of the Fund also have different exchange privileges.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have a material adverse effect on the
rights of any shareholder. On any matter submitted to the shareholders, the
holder of each Fund share is entitled to one vote per share (with proportionate
voting for fractional shares) regardless of the relative net asset value
thereof.
Under the Master Trust Agreement of the Trust, no annual or regular
meeting of shareholders is required. Thus, there will ordinarily be no
shareholder meetings unless required by the 1940 Act. Except as otherwise
provided under said Act, the Board of Trustees will be a self-perpetuating body
until fewer than two thirds of the Trustees serving as such are Trustees who
were elected by shareholders of the Trust. In the event less than a majority of
the Trustees serving as such were elected by shareholders of the Trust, a
meeting of shareholders will be called to elect Trustees. Under the Master Trust
Agreement, any Trustee may be removed by vote of two thirds of the outstanding
Trust shares; holders of 10% or more of the outstanding Trust shares can require
that the Trustees call a meeting of 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
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<PAGE>
Manager believes that, in view of the above, the risk of personal liability to
shareholders is remote.
As of the approximate time of this Prospectus, the Investment Manager,
the Distributor and/or Metropolitan Life Insurance Company ("Metropolitan"),
their indirect parent, were the beneficial owners of all or a substantial amount
of the outstanding shares of the Fund, and may be deemed to be in control of the
Fund as "control" is defined in the 1940 Act. Such owners may acquire additional
shares of the Fund. Although sales of the Fund's shares to other investors will
reduce their percentage ownership, so long as 25% of the Fund's shares are so
owned, such owners will be presumed to be in control of the Fund for purposes of
voting on certain matters submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
Management of the Fund
Under the provisions of the Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees. The Fund's investment manager is State Street Research
& Management Company. The Investment Manager is charged with the overall
responsibility for managing the investments and business affairs of the Fund,
subject to the authority of the Board of Trustees.
The Investment Manager was founded by Paul Cabot, Richard Saltonstall
and Richard Paine to serve as investment adviser to one of the nation's first
mutual funds, presently known as State Street Research Investment Trust, which
they had formed in 1924. Their investment management philosophy, which continues
to this day, emphasized comprehensive fundamental research and analysis,
including meetings with the management of companies under consideration for
investment. The Investment Manager's portfolio management group has extensive
investment industry experience 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, and both are located at One Financial Center,
Boston, Massachusetts 02111-2690.
Under its Advisory Agreement with the Trust, the Investment Manager
receives a monthly investment advisory fee equal to 0.85% (on an annual basis)
of the average daily value of the net assets of the Fund. Such fee is higher
than that charged by most mutual funds, but is believed by the Trustees to be
justified given the considerable analysis and research necessary to manage the
Fund in light of its investment objective and policies. The Fund bears all costs
of its operation other than those incurred by the Investment Manager under the
Advisory Agreement. In particular,
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<PAGE>
the Fund pays, among other expenses, investment advisory fees, certain
distribution expenses under the Fund's Distribution Plan and the compensation
and expenses of the Trustees who are not otherwise currently affiliated with the
Investment Manager or any of its affiliates. The Fund also incurs expenses
payable to various states in connection with the offer and sale of the Fund's
shares, and expenses for legal, custodian and transfer agent services, among
other costs. The Investment Manager will reduce its management fee payable by
the Fund up to the amount of any expenses (excluding permissible items, such as
brokerage commissions, Rule 12b-1 payments, interest, taxes and litigation
expenses) paid or incurred in any year in excess of the most restrictive expense
limitation imposed by any state in which the Fund sells shares, if any. Under
the Advisory Agreement, the Investment Manager provides the Fund with office
space, facilities and personnel. The Investment Manager compensates Trustees of
the Trust if such persons are employees or affiliates of the Investment Manager
or its affiliates.
The Fund is managed by Rudolph K. Kluiber. Mr. Kluiber has managed the Fund
since its inception. Mr. Kluiber's principal occupation currently is Vice
President of State Street Research & Management Company. During the past five
years he has also served as an analyst for State Street Research & Management
Company.
Subject to the policy of seeking best overall price and execution,
sales of shares of the Fund may be considered by the Investment Manager in the
selection of broker or dealer firms for the Fund's portfolio transactions.
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 intends to qualify and elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code, although it
cannot give complete assurance that it will do so. As long as it so qualifies
and satisfies certain distribution requirements, it will not be subject to
federal income taxes on its income (including capital gains, if any) distributed
to its shareholders. Consequently, the Fund intends to distribute annually to
its shareholders substantially all of its net investment income and any capital
gain net income (capital gains net of capital losses). The Fund declares
dividends from net investment income and distributions of net capital gains
annually and pays such dividends and distributions, if any, after year end or as
otherwise required for compliance with applicable tax regulations. Both
dividends from net investment income and distributions of capital gain net
income will be declared and paid to shareholders in additional shares of the
Fund at net asset value on the record date of that dividend
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<PAGE>
or distribution, except in the case of shareholders who elect a different
available distribution method.
The Fund will provide its shareholders of record with annual
information on a timely basis concerning the federal tax status of dividends and
distributions during the preceding calendar year.
Dividends paid by the Fund from taxable net investment income and
distributions of net short-term capital gains, whether paid in cash or
reinvested in additional shares, will be taxable for federal income tax purposes
to shareholders as ordinary income, and a portion may be eligible for the 70%
dividends-received deduction for corporations. The percentage of the Fund's
dividends eligible for such tax treatment may be less than 100% to the extent
that less than 100% of the Fund's gross income consists of qualifying dividends
of domestic corporations. Distributions of net capital gains (the excess of net
long-term capital gains over net short-term capital losses) which are designated
as capital gains distributions, whether paid in cash or reinvested in additional
shares, will be taxable for federal income tax purposes to shareholders as
long-term capital gains, regardless of how long shareholders have held their
shares, and are not eligible for the dividends-received deduction. If shares of
the Fund which are sold at a loss have been held six months or less, the loss
will be considered as a long-term capital loss to the extent of any capital
gains distributions received.
Dividends and other distributions and proceeds of redemptions of Fund
shares paid to individuals and other nonexempt payees will be subject to a 31%
federal backup withholding tax if State Street Bank and Trust Company, the
Fund's transfer agent, is not provided with the shareholder's correct taxpayer
identification number and certification that the shareholder is not subject to
such backup withholding.
The foregoing discussion relates only to generally applicable federal
income tax provisions in effect as of the date of this Prospectus. Therefore,
prospective shareholders are urged to consult their own tax advisers regarding
tax matters, including state and local tax consequences.
Calculation of Performance Data
From time to time, in advertisements or in communications to
shareholders or prospective investors, the Fund may compare the performance of
its Class A, Class B, Class C and Class D shares to that of other mutual funds
with similar investment objectives, to certificates of deposit and/or to other
financial alternatives. The Fund may also compare its performance to appropriate
indices such as the NASDAQ Composite Average, Small Stock Index, Russell 2000
Value Index, Standard & Poor's 500 Stock Index (the "S&P 500"), Consumer Price
Index and Dow Jones
39
<PAGE>
Industrial Average and/or to appropriate rankings and averages, such as the
Lipper Small Company Growth Funds average, compiled by Lipper Analytical
Services, Inc., or to those compiled by Morningstar, Inc., Money Magazine,
Business Week, Forbes Magazine, the Wall Street Journal and Investor's Daily.
Total return is computed separately for each class of shares of the Fund. The
average annual total return ("standard total return") for shares of the Fund is
computed by determining the average annual compounded rate of return for a
designated period that, if applied to a hypothetical $1,000 initial investment
(less the maximum initial or contingent deferred sales charge, if applicable),
would produce the redeemable value of that investment at the end of the period,
assuming reinvestment of all dividends and distributions and with recognition of
all recurring charges. Standard total return will be calculated for the periods
specified in applicable regulations and may be accompanied by nonstandard total
return information for differing periods computed in the same manner with or
without annualizing the total return or taking sales charges into account.
During the first year of operations, the Fund may also advertise its aggregate
total return without annualization.
The standard total return results take sales charges into account, if
applicable, but do not take into account recurring and nonrecurring charges for
optional services which only certain shareholders elect and which involve
nominal fees, such as the $7.50 fee for remittance of redemption proceeds by
wire. Where sales charges are not applicable and therefore not taken into
account in the calculation of standard total return, the results will be
increased. Any voluntary waiver of management fees or assumption of expenses by
the Fund's affiliates will also increase performance results.
Performance information may be useful in evaluating the Fund and for
providing a basis for comparison with other financial alternatives. Since the
performance of the Fund varies in response to fluctuations in economic and
market conditions, interest rates and Fund expenses, among other things, no
performance quotation should be considered a representation as to the Fund's
performance for any future period. In addition, the net asset value of shares of
the Fund will fluctuate, with the result that shares of the Fund, when redeemed,
may be worth more or less than their original cost. Neither an investment in the
Fund nor the Fund's performance is insured or guaranteed; such lack of insurance
or guarantees should accordingly be given appropriate consideration when
comparing the Fund to financial alternatives which have such features.
Performance data or rankings for a given class of shares should be interpreted
carefully by investors who hold or may invest in a different class of shares.
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State Street Research
Small Capitalization
Value Fund
February 1, 1996
P R O S P E C T U S
STATE STREET RESEARCH
SMALL CAPITALIZATION
VALUE FUND
One Financial Center
Boston, MA 02111
INVESTMENT ADVISER
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
DISTRIBUTOR
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
SHAREHOLDER SERVICES
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266
1-800-562-0032
CUSTODIAN
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
LEGAL COUNSEL
Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02111
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
CT\value
41
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
a Series of
STATE STREET RESEARCH CAPITAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS........................................................... 2
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES............................................................................. 5
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS........................................................... 14
RATING CATEGORIES OF DEBT SECURITIES...................................................................... 17
TRUSTEES AND OFFICERS..................................................................................... 20
INVESTMENT ADVISORY SERVICES.............................................................................. 24
PURCHASE AND REDEMPTION OF SHARES......................................................................... 26
NET ASSET VALUE........................................................................................... 28
PORTFOLIO TRANSACTIONS.................................................................................... 29
CERTAIN TAX MATTERS....................................................................................... 30
DISTRIBUTION OF SHARES OF THE FUND........................................................................ 33
CALCULATION OF PERFORMANCE DATA........................................................................... 37
CUSTODIAN................................................................................................. 39
INDEPENDENT ACCOUNTANTS................................................................................... 40
FINANCIAL STATEMENTS...................................................................................... 40
</TABLE>
The following Statement of Additional Information is not a Prospectus.
It should be read in conjunction with the Prospectus of State Street Research
Small Capitalization Growth Fund (the "Fund") dated February 1, 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: 1285N-960201(0397)SSR-LD SCG-879D-296
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth in part under "The Fund's Investments" and "Limiting
Investment Risk" in the Fund's Prospectus, the Fund has adopted certain
investment restrictions.
All of the Fund's fundamental investment restrictions are set forth
below. These fundamental investment restrictions may not be changed except by
the affirmative vote of a majority of the Fund's outstanding voting securities
as defined in the Investment Company Act of 1940, as amended (the "1940 Act").
(Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at a meeting of security holders duly called, (i) of
67% or more of the voting securities present at a meeting if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy or (ii) of more than 50% of the outstanding voting securities, whichever
is less.) Under these restrictions, it is the Fund's policy:
(1) not to purchase a security of any one issuer (other than
securities issued or guaranteed as to principal or interest by
the U.S. Government or its agencies or instrumentalities or
mixed-ownership Government corporations) if such purchase
would, with respect to 75% of the Fund's total assets, cause
more than 5% of the Fund's total assets to be invested in the
securities of such issuer, except in connection with
investments in other investment companies to the extent
permitted by law and regulatory authorities;
(2) not to purchase a security of any one issuer if such purchase
would cause more than 10% of the voting securities of such
issuer to be held by the Fund, except in connection with
investments in other investment companies to the extent
permitted by law and regulatory authorities;
(3) not to issue senior securities;
(4) not to underwrite or participate in the marketing of
securities of other issuers, except (a) the Fund may, acting
alone or in syndicates or groups, purchase or otherwise
acquire securities of other issuers for investment, either
from the issuers or from persons in a control relationship
with the issuers or from underwriters of such securities; and
(b) to the extent that, in connection with the disposition of
the Fund's securities, the Fund may be deemed to be an
underwriter under certain federal securities laws;
(5) not to purchase or sell fee simple interests in real estate,
although the Fund may purchase and sell other interests in
real estate including securities which are secured by real
estate, or securities of companies which own or invest or deal
in real estate;
(6) not to invest in commodities or commodity contracts in excess
of 10% of the Fund's total assets, except that investments in
currencies, futures contracts and
2
<PAGE>
options on futures contracts on securities, securities
indices and currencies shall not be deemed an investment in
commodities or commodities contracts;
(7) not to make loans, except that the Fund may lend portfolio
securities and purchase bonds, debentures, notes and similar
obligations (and enter into repurchase agreements with respect
thereto);
(8) not to make any investment which would cause more than 25% of
the value of the Fund's total assets to be invested in
securities of issuers principally engaged in any one industry
[for purposes of this restriction, (a) utilities will be
divided according to their services so that, for example, gas,
gas transmission, electric and telephone companies will each
be deemed in a separate industry, (b) oil and oil related
companies will be divided by type so that, for example, oil
production companies, oil service companies and refining and
marketing companies will each be deemed in a separate
industry, (c) finance companies will be classified according
to the industries of their parent companies, and (d)
securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities (including repurchase agreements
involving such U.S. Government securities to the extent
excludable under relevant regulatory interpretations) shall be
excluded]; and
(9) not to borrow money except for borrowings from banks for
extraordinary and emergency purposes, such as permitting
redemption requests to be honored, and then not in an amount
in excess of 25% of the value of its total assets, and except
insofar as reverse repurchase agreements may be regarded as
borrowing.
The following nonfundamental investment restrictions may be changed by
a vote of a majority of the Trustees. Under these restrictions, it is the Fund's
policy:
(1) not to purchase any security or enter into a repurchase
agreement if as a result more than 15% of its total assets
would be invested in (a) securities that are illiquid because
of the absence of a readily available market or because such
securities are restricted securities (i.e., subject to legal
or contractual restrictions on resale), provided that such
restricted securities, excluding restricted securities
eligible for resale pursuant to Rule 144A or Regulation S
under the Securities Act of 1933, shall be limited to 5% of
total assets, and (b) repurchase agreements not entitling the
holder to payment of principal and interest within seven days
[subject to such higher percentage limits or other
modifications as may be allowed or required under applicable
regulatory policies in the future].*
(2) not to invest more than 5% of its total assets in securities
of issuers including predecessors with less than three years
continuous operations, except securities guaranteed or backed
by an affiliate of the issuer with three years of continuous
operations or securities issued or guaranteed as to principal
or interest by the U.S. Government, or its agencies or
instrumentalities, provided that the Fund may invest up to 10%
in such issuers so long as such investments plus investments
in
3
<PAGE>
restricted securities (other than those which are eligible
for resale under Rule 144A or Regulation S as noted above) do
not exceed 10% of the Fund's total assets;*
(3) not to engage in transactions in options except in connection
with options on securities, securities indices and currencies,
and options on futures on securities, securities indices and
currencies;
(4) not to purchase securities on margin or make short sales of
securities or maintain a short position except for short sales
"against the box" [as a matter of current operating policy,
the Fund will not make short sales or maintain a short
position unless not more than 5% of the Fund's net assets
(taken at current value) is held as collateral for such sales
at any time];
(5) not to hypothecate, mortgage or pledge any of its assets
except as may be necessary in connection with permitted
borrowings (for the purpose of this restriction, futures,
options and forward commitments, and related escrow or
custodian receipts or letters, margin or safekeeping accounts,
or similar arrangements used in the industry in connection
with the trading of such investments, are not deemed to
involve a hypothecation, mortgage or pledge of assets);
(6) not to purchase a security issued by another investment
company if, immediately after such purchase, the Fund would
own, in the aggregate, (i) more than 3% of the total
outstanding voting securities of such other investment
company; (ii) securities issued by such other investment
company having an aggregate value in excess of 5% of the value
of the Fund's total assets; or (iii) securities issued by such
other investment company and all other investment companies
(other than treasury stock of the Fund) having an aggregate
value in excess of 10% of the value of the Fund's total
assets; provided, however, that the Fund may purchase
investment company securities without limit for the purpose of
completing a merger, consolidation or other acquisition of
assets and may purchase securities issued by another
investment company to the extent otherwise permitted by law
and regulatory authorities;*
(7) not to purchase or retain any security of an issuer if, to the
knowledge of the Fund, those of its officers and Trustees and
officers and directors of its investment advisers who
individually own more than 1/2 of 1% of the securities of such
issuer, when combined, own more than 5% of the securities of
such issuer taken at market;
(8) not to invest directly as a joint venturer or general partner
in oil, gas or other mineral exploration or development joint
ventures or general partnerships (provided that the Fund may
invest in securities issued by companies which invest in or
sponsor such programs and in securities indexed to the price
of oil, gas or other minerals);
4
<PAGE>
(9) not to invest in warrants more than 5% of the value, at the
lower of cost or market, of its net assets, provided that
warrants not listed on the New York or American Stock Exchange
shall be further limited to 2% of the Fund's net assets
(warrants initially attached to securities and acquired by the
Fund upon original issuance thereof shall be deemed to be
without value); and
(10) not to invest in companies for the purpose of exercising
control over their management, although the Fund may from time
to time present its views on various matters to the management
of issuers in which it holds investments.
* In connection with clauses (1) and (2), the Fund has undertaken with a
state securities authority that, for so long as its shares are required to be
registered in such state and such investment restriction remains in effect, the
Fund will not invest more than 15% of its total assets in the securities of
issuers with less than three years' continuous operations, as described above,
and restricted securities of all types.
In connection with clause (6), the Fund has undertaken with a state
securities authority that, for so long as its shares are required to be
registered in such state and such investment restriction remains in effect, the
Fund will not acquire any security issued by another investment company, except
by purchase in the open market involving only customary brokers' commissions, or
except when the securities are acquired as dividends or distributions or when
the purchase is part of a plan of merger, consolidation, reorganization or
acquisition.
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.
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.
6
<PAGE>
Conversely, a put option on a security gives the purchaser the right to
sell, and the writer the obligation to buy, the underlying asset at the exercise
price during the option period.
Purchased options have defined risk, i.e., the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset.
Written options have varying degrees of risk. An uncovered written call
option theoretically carries unlimited risk, as the market price of the
underlying asset could rise far above the exercise price before its expiration.
This risk is tempered when the call option is covered, i.e., when the option
writer owns the underlying asset. In this case, the writer runs the risk of the
lost opportunity to participate in the appreciation in value of the asset rather
than the risk of an out-of-pocket loss. A written put option has defined risk,
i.e., the difference between the agreed-upon price that the Fund must pay to the
buyer upon exercise of the put and the value, which could be zero, of the asset
at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
his obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Options on Securities Indices
- -----------------------------
The Fund may engage in transactions in call and put options on
securities indices. For example, the Fund may purchase put options on indices of
securities in anticipation of or during a market decline to attempt to offset
the decrease in market value of its securities that might otherwise result.
Put options on indices of securities are similar to put options on the
securities themselves except that the delivery requirements are different.
Instead of giving the right to make delivery of a security at a specified price,
a put option on an index of securities gives the holder the right to receive an
amount of cash upon exercise of the option if the value of the underlying index
has fallen below the exercise price. The amount of cash received will be equal
to the difference between the closing price of the index and the exercise price
of the option expressed in dollars times a specified multiple. As with options
on securities or futures contracts, the Fund may offset its position in index
options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
A securities index assigns relative values to the securities included
in the index and the index options are based on a broad market index. Although
there are at present few available options on indices of fixed income
securities, other than tax-exempt securities, or futures and related options
based on such indices, such instruments may become available in the future. In
connection with the use of such options, the Fund may cover its position by
identifying a representative portfolio of securities having a value equal to the
aggregate face value of the option
7
<PAGE>
position taken. However, the Fund may employ any appropriate method to
cover its positions that is consistent with applicable regulatory and exchange
requirements.
Options on Futures Contracts
- ----------------------------
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
Options Strategy
- ----------------
A basic option strategy for protecting the Fund against a decline in
securities prices could involve (a) the purchase of a put -- thus "locking in"
the selling price of the underlying securities or securities indices -- or (b)
the writing of a call on securities or securities indices held by the Fund --
thereby generating income (the premium paid by the buyer) by giving the holder
of such call the option to buy the underlying asset at a fixed price. The
premium will offset, in whole or in part, a decline in portfolio value; however,
if prices of the relevant securities or securities indices rose instead of
falling, the call might be exercised, thereby resulting in a potential loss of
appreciation in the underlying securities or securities indices.
A basic option strategy when a rise in securities prices is anticipated
is the purchase of a call -- thus "locking in" the purchase price of the
underlying security or other asset. In transactions involving the purchase of
call options by the Fund, money market instruments equal to the aggregate
exercise price of the options will be identified by the Fund to the Trust's
custodian to insure that the use of such investments is unleveraged.
The Fund may write options in connection with buy-and-write
transactions; that is, the Fund may purchase a security and concurrently write a
call option against that security. If the call option is exercised in such a
transaction, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upward or downward by the difference between the
Fund's purchase price of the security and the exercise price of the option. If
the option is not exercised and the price of the underlying security declines,
the amount of such decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund's return will be the premium received from
writing the put option minus the amount by which the market price of the
security is below the exercise price.
8
<PAGE>
Limitations and Risks of Options and Futures Activity
- -----------------------------------------------------
The Fund will generally engage in transactions in futures contracts or
options as a hedge against changes resulting from market conditions which
produce changes in the values of its securities or the securities which it
intends to purchase (e.g., to replace portfolio securities which will mature in
the near future and, subject to the limitations described below, to enhance
return). The Fund will not purchase any futures contract or purchase any call
option if, immediately thereafter, more than one third of the Fund's net assets
would be represented by long futures contracts or call options. The Fund will
not write a covered call or put option if, immediately thereafter, the aggregate
value of the assets (securities in the case of written calls and cash or cash
equivalents in the case of written puts) underlying all such options, determined
as of the dates such options were written, would exceed 25% of the Fund's net
assets. In addition, the Fund may not establish a position in a commodity
futures contract or purchase or sell a commodity option contract for other than
bona fide hedging purposes if immediately thereafter the sum of the amount of
initial margin deposits and premiums required to establish such positions for
such nonhedging purposes would exceed 5% of the market value of the Fund's total
assets.
Although effective hedging can generally capture the bulk of a desired
risk adjustment, no hedge is completely effective. The Fund's ability to hedge
effectively through transactions in futures and options depends on the degree to
which price movements in its holdings correlate with price movements of the
futures and options.
Some positions in futures and options may be closed out only on an
exchange which provides a secondary market therefor. There can be no assurance
that a liquid secondary market will exist for any particular futures contract or
option at any specific time. Thus, it may not be possible to close such an
option or futures position prior to maturity. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
effectively hedge its securities and might in some cases require the Fund to
deposit cash to meet applicable margin requirements. The Fund will enter into an
option or futures position only if it appears to be a liquid investment.
The Fund has undertaken with a state securities authority that, for so
long as its shares are required to be registered for sale in such state, the
Fund will invest only in options and futures that are issued by the Options
Clearing Corporation or offered through the facilities of a national securities
association or listed on a national securities or commodities exchange, except
that the Fund may invest in unlisted options or futures when the desired options
or futures are unavailable on a national securities or commodities exchange.
Furthermore, the Fund will engage in such transactions in unlisted options or
futures only with dealers who have high credit standing as determined by the
Investment Manager.
Foreign Investments
- -------------------
To the extent the Fund invests in securities of issuers in less
developed countries or emerging foreign markets, it will be subject to a variety
of additional risks, including risks associated with political instability,
economies based on relatively few industries, lesser market
9
<PAGE>
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.
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.
10
<PAGE>
Reverse Repurchase Agreements
- -----------------------------
The Fund may enter into reverse repurchase agreements. However, the
Fund has no present intention of engaging in reverse repurchase agreements in
excess of 5% of the Fund's total assets. In a reverse repurchase agreement the
Fund transfers possession of a portfolio instrument to another person, such as a
financial institution, broker or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed-upon rate. The ability to use
reverse repurchase agreements may enable, but does not ensure the ability of,
the Fund to avoid selling portfolio instruments at a time when a sale may be
deemed to be disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
When-Issued Securities
- ----------------------
The Fund may purchase "when-issued" equity securities, which are traded
on a price basis prior to actual issuance. Such purchases will be made only to
achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to 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 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
11
<PAGE>
institutional buyers become, for a time, uninterested in purchasing
such securities. Also, the Fund may be adversely impacted by the possible
illiquidity and subjective valuation of such securities in the absence of a
market for them.
Indexed Securities
- ------------------
The Fund may purchase securities the value of which is indexed to
interest rates, foreign currencies and various indices and financial indicators.
These securities are generally short- to intermediate-term debt securities. The
interest rates or values at maturity fluctuate with the index to which they are
connected and may be more volatile than such index.
Swap Arrangements
- -----------------
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below. In an
interest rate swap the Fund could agree for a specified period to pay a bank or
investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an assumed figure selected by the parties for this
purpose) in exchange for agreement by the bank or investment banker to pay the
Fund a fixed rate of interest on the notional principal amount. In a currency
swap the Fund would agree with the other party to exchange cash flows based on
the relative differences in values of a notional amount of two (or more)
currencies; in an index swap, the Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices. Purchase
of a cap entitles the purchaser to receive payments from the seller on a
notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an
agreed-upon interest rate or amount. A collar combines a cap and a floor.
Most swaps entered into by the Fund will be on a net basis; for
example, in an interest rate swap, amounts generated by application of the fixed
rate and the floating rate to the notional principal amount would first offset
one another, with the Fund either receiving or paying the difference between
such amounts. In order to be in a position to meet any obligations resulting
from swaps, the Fund will set up a segregated custodial account to hold
appropriate liquid assets, including cash; for swaps entered into on a net
basis, assets will be segregated having a daily net asset value equal to any
excess of the Fund's accrued obligations over the accrued obligations of the
other party, while for swaps on other than a net basis assets will be segregated
having a value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a part of the Fund's portfolio.
However, the Fund may enter into such arrangements for income purposes to the
extent permitted by the CFTC for entities which are not commodity pool
operators, such as the Fund. In entering a swap arrangement, the Fund is
dependent upon the creditworthiness and good faith of the counterparty. The Fund
attempts to reduce the risks of nonperformance by the counterparty by dealing
only with established, reputable institutions. The swap market is still
relatively new and emerging; positions in swap
12
<PAGE>
arrangements may become illiquid to the extent that nonstandard arrangements
with one counterparty are not readily transferable to another counterparty
or if a market for the transfer of swap positions does not develop. The
use of interest rate swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the Investment Manager is incorrect in its
forecasts of market values, interest rates and other applicable factors, the
investment performance of the Fund would diminish compared with what it would
have been if these investment techniques were not used. Moreover, even if the
Investment Manager is correct in its forecasts, there is a risk that the swap
position may correlate imperfectly with the price of the asset or liability
being hedged.
Securities Lending
- ------------------
The Fund may lend portfolio securities with a value of up to 33-1/3% of
its total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of the loaned securities plus accrued interest. The
Investment Manager will continuously monitor the value of the collateral to
ensure that it at all times remains equal to at least 100% of the current market
value of the loaned securities plus accrued interest, marking the collateral to
market daily.
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.
13
<PAGE>
<TABLE>
<S> <C> <C>
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
Photography
Other Finance Recreation
- ----- ------- Retail Trade
Trust Certificates -- Bank Textile & Apparel
Government Related Lending Financial Service
Asset-backed -- Mortgages Insurance
Asset-backed -- Credit
Card Receivables
</TABLE>
Other Investment Limitations
- ----------------------------
Pursuant to the policies of certain state securities authorities, the
Fund will not invest in real estate limited partnerships, oil, gas or mineral
development limited partnerships, or in oil, gas or mineral leases for so long
as Fund shares are required to be registered for sale in the relevant state.
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
As indicated in the Fund's Prospectus, the Fund may invest in long-term
and short-term debt securities. The Fund may invest in cash and short-term
securities for temporary defensive purposes when, in the opinion of the
Investment Manager, such a position is more likely to provide protection against
unfavorable market conditions than adherence to other investment policies.
Certain debt securities and money market instruments in which the Fund may
invest are described below.
U.S. Government and Related Securities. U.S. Government securities are
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S. Government
securities in which the Fund invests include, among others:
(bullet) direct obligations of the U.S. Treasury, i.e., U.S. Treasury
bills, notes, certificates and bonds;
14
<PAGE>
(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-backed securities, the Fund will only invest in obligations issued by
mixed-ownership Government corporations where such securities are guaranteed as
to payment of principal or interest by the U.S. Government or a U.S. Government
agency or instrumentality, and any unguaranteed principal or interest is
otherwise supported by U.S. Government obligations held in a segregated account.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("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.
15
<PAGE>
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Bank Money Investments. Bank money investments include but are not
limited to certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are generally short-term (i.e., less than one year),
interest-bearing negotiable certificates issued by commercial banks or savings
and loan associations against funds deposited in the issuing institution. A
banker's acceptance is a time draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods). A banker's acceptance may be
obtained from a domestic or foreign bank, including a U.S. branch or agency of a
foreign bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. The Fund will not invest
in any such bank money investment unless the investment is issued by a U.S. bank
that is a member of the Federal Deposit Insurance Corporation ("FDIC"),
including any foreign branch thereof, a U.S. branch or agency of a foreign bank,
a foreign branch of a foreign bank, or a savings bank or savings and loan
association that is a member of the FDIC and which at the date of investment has
capital, surplus and undivided profits (as of the date of its most recently
published financial statements) in excess of $50 million. The Fund will not
invest in time deposits maturing in more than seven days and will not invest
more than 10% of its total assets in time deposits maturing in two to seven
days.
U.S. branches and agencies of foreign banks are offices of foreign banks
and are not separately incorporated entities. They are chartered and regulated
either federally or under state law. U.S. federal branches or agencies of
foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such branches elect FDIC insurance. Unlike U.S. branches of foreign banks,
U.S. agencies of foreign banks may not accept deposits and thus are not eligible
for FDIC insurance. Both branches and agencies can maintain credit balances,
which are funds received by the office incidental to or arising out of the
exercise of their banking powers and can exercise other commercial functions,
such as lending activities.
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.
16
<PAGE>
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.
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.
17
<PAGE>
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Plus (+) or Minus (-): The ratings from AA to BBB may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to noncredit risks created by the terms of the
obligation, such as securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only (IO) and principal only (PO) mortgage securities.
Set forth below is a description of Moody's corporate bond and
debenture ratings for securities which are deemed to be investment grade:
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in the case of Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
Aaa securities.
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.
18
<PAGE>
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 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 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, Secretary 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 and Director of New England Mutual Life Insurance Company. Mr. Verni's
other principal business affiliations include Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research Investment
Services, Inc.
- ------------------------
* or + See footnotes on page 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.
22
<PAGE>
As of December 31, 1995, the Trustees and officers of the Trust as a
group owned approximately 4.6% of the outstanding Class A shares of the Fund.
As of December 31, 1995, the following entities were the record and/or
beneficial owners of the approximate amounts of each class of shares of the Fund
as set forth beside their names:
Shareholder %
----------- -
Class A Merrill Lynch 9.7
Class B Merrill Lynch 23.4
Class C United States Trust Company 26.8
Bank of America 13.5
Bank of New York 55.1
Class D Merrill Lynch 46.6
The full name and address of the above entities are as follows:
Merrill Lynch, Pierce, Fenner & Smith, Inc. (a)
One Liberty Plaza
165 Broadway
New York, New York 10080
United States Trust Company (a)(b)
770 Broadway
New York, New York 10003
Bank of America (a)
P.O. Box 94627
Pasadena, California 91109
Bank of New York (a)
One Wall Street
New York, New York 10286
- ---------------
(a) The Fund believes that each named record-holder does not have
beneficial ownership of such shares.
(b) United States Trust Company holds such shares as trustee or custodian
under certain employee benefit plans serviced by Metropolitan Life
Insurance Company.
Ownership of 25% or more of a voting security is deemed "control" as
defined in the 1940 Act. So long as 25% of a class of shares is so owned, such
owners will be presumed to be in control of such class of shares for purposes of
voting on certain matters submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
23
<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
24
<PAGE>
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 affiliates have from time to time and in varying amounts
voluntarily assumed some portion of fees or expenses relating to the Fund. For
the period October 4, 1993 (commencement of operations) through September 30,
1994 and for the fiscal year ended September 30, 1995, the Fund's investment
advisory fee prior to the assumption of fees or expenses was $267,184 and
$501,000, respectively. For the same periods, the voluntary reduction of fees or
assumption of expenses amounted to $186,448 and $453,010, 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 payments, interest, taxes and litigation expenses) paid
or incurred by the Fund in any fiscal year which exceed specified percentages of
the average daily net assets of the Fund for such fiscal year. The most
restrictive of such percentage limitations is currently 2.5% of the first $30
million of average net assets, 2.0% of the next $70 million of average net
assets and 1.5% of the remaining average net assets. These commitments may be
amended or rescinded in response to changes in the requirements of the various
states by the Trustees without shareholder approval.
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund for a period of two years after its initial effectiveness
and will continue from year to year thereafter as long as it is approved at
least annually both (i) by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act) or by the Trustees of the
Trust, and (ii) in either event by a vote of a majority of the Trustees who are
not parties to the Advisory Agreement or "interested persons" of any party
thereto, cast in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement may be terminated on 60 days' written notice by
either party and will terminate automatically in the event of its assignment, as
defined under the 1940 Act and regulations thereunder. Such regulations provide
that a transaction which does not result in a change of actual control or
management of an adviser is not deemed an assignment.
Under a Shareholders' Administrative Services Agreement between the
Trust and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Fund, and is entitled to
reimbursements of its costs for providing such services. Under certain
arrangements for Metropolitan to provide such administrative services,
Metropolitan may receive a fee for the maintenance of certain share ownership
records for participants in sponsored arrangements, such as employee benefit
plans, through or under which the Fund's shares may be purchased.
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
25
<PAGE>
report their personal securities transactions quarterly and supply broker
confirmations of such transactions to the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by the Distributor. The Fund offers
four classes of shares which may be purchased at the next determined net asset
value per share plus, in the case of all classes except Class C shares, a sales
charge which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B and Class
D shares). General information on how to buy shares of the Fund, as well as
sales charges involved, is set forth under "Purchase of Shares" in the
Prospectus. The following supplements that information.
Public Offering Price. The public offering price for each class of
shares of the Fund is based on their net asset value determined as of the close
of the NYSE on the day the purchase order is received by State Street Research
Shareholder Services provided that the order is received prior to the close of
the NYSE on that day; otherwise the net asset value used is that determined as
of the close of the NYSE on the next day it is open for unrestricted trading.
When a purchase order is placed through a dealer, that dealer is responsible for
transmitting the order promptly to State Street Research Shareholder Services in
order to permit the investor to obtain the current price. Any loss suffered by
an investor which results from a dealer's failure to transmit an order promptly
is a matter for settlement between the investor and the dealer.
Reduced Sales Charges. For purposes of determining whether a purchase
of Class A shares qualifies for reduced sales charges, the term "person"
includes: (i) an individual, or an 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
26
<PAGE>
A shares of Eligible Funds held of record as of the date of his or her
Letter of Intent, plus the value (at the current offering price) as of such date
of all of such shares held by any "person" described herein as eligible to join
with the investor in a single purchase. Class B, Class C and Class D shares may
also be included in the combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is upon notice, remitted by the investor. All dividends and capital gains
distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
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.
27
<PAGE>
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily
as of the close of the NYSE, ordinarily 4 P.M. New York City time, Monday
through Friday, on each day during which the NYSE is open for unrestricted
trading. The NYSE is currently closed for New Year's Day, Presidents Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
The net asset value per share of the Fund is computed by dividing the
sum of the market value of the securities held by the Fund plus any cash or
other assets minus all liabilities by the total number of outstanding shares of
the Fund at such time. Any expenses, except for extraordinary or nonrecurring
expenses, borne by the Fund, including the investment management fee payable to
the Investment Manager, are accrued daily.
In determining the values of the portfolio assets as provided below,
the Trustees may utilize one or more pricing services in lieu of market
quotations for certain securities which are not readily available on a daily
basis. Such services may provide prices determined as of times prior to the
close of the NYSE.
In general, securities are valued as follows. Securities which are
listed or traded on the New York or American Stock Exchange are valued at the
price of the last quoted sale on the respective exchange for that day.
Securities which are listed or traded on a national securities exchange or
exchanges, but not on the New York or American Stock Exchange, are valued at the
price of the last quoted sale on the exchange for that day prior to the close of
the NYSE. Securities not listed on any national securities exchange which are
traded "over the counter" and for which quotations are available on the National
Association of Securities Dealers' NASDAQ System, or other system, are valued at
the closing price supplied through such system for that day at the close of the
NYSE. Other securities are, in general, valued at the mean of the bid and asked
quotations last quoted prior to the close of the NYSE if there are market
quotations readily available, or in the absence of such market quotations, then
at the fair value thereof as determined by or under authority of the Trustees of
the Trust utilizing such pricing services as may be deemed appropriate.
Securities deemed restricted as to resale are valued at the fair value thereof
as determined by or in accordance with methods adopted by the Trustees of the
Trust.
Short-term debt instruments issued with a maturity of one year or less
which have a remaining maturity of 60 days or less are valued using the
amortized cost method, provided that during any period in which more than 25% of
the Fund's total assets is invested in short-term debt securities the current
market value of such securities will be used in calculating net asset value per
share in lieu of the amortized cost method. The amortized cost method is used
when the value obtained is fair value. Under the amortized cost method of
valuation, the security is initially valued at cost on the date of purchase (or
in the case of short-term debt instruments purchased with more than 60 days
remaining to maturity, the market value on the 61st day prior to maturity), and
thereafter a constant amortization to maturity of any discount or premium is
assumed regardless of the impact of fluctuating interest rates on the market
value of the security.
28
<PAGE>
PORTFOLIO TRANSACTIONS
Portfolio Turnover
- ------------------
The Fund's portfolio turnover rate is determined by dividing the lesser
of securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The Fund reserves full freedom with respect to portfolio
turnover, as described in the Prospectus. The portfolio turnover rates for the
period October 4, 1993 (commencement of operations) through September 30, 1994
and for the fiscal year ended September 30, 1995, were 83.61% and 178.60%,
respectively.
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 a shift in sector weightings, reflecting changes
in market leadership, and some profit-taking in light of the appreciation of
certain securities beyond target levels.
Brokerage Allocation
- --------------------
The Fund and the Investment Manager seek the best overall execution of
purchase or sale orders and the most favorable net price in securities
transactions consistent with their judgment as to the business qualifications of
the various broker or dealer firms with which the Fund may do business.
Decisions with respect to the market where the transaction is to be completed,
and to the allocation of orders among brokers or dealers, are made in accordance
with this policy. In selecting brokers or dealers to effect portfolio
transactions, consideration is given to the performance, integrity and financial
responsibility of the various firms as well as to their demonstrated execution
experience and capability generally and in regard to particular markets or
securities and, in agency transactions, to the competitiveness of the commission
rates (or in principal transactions of the net prices) they charge. The
Investment Manager keeps current as to the range of rates or prices charged by
various firms and against this background evaluates the reasonableness of a
commission or price charged with respect to a particular transaction by
considering such factors as difficulty of execution or security positioning by
the executing firm.
When it appears that a number of firms can satisfy the required
standards in respect of a particular transaction, consideration may also be
given to services other than execution services which such firms have provided
in the past or may provide in the future. Among such other services are the
supplying of supplemental investment research, general economic and political
information, analytical and statistical data, relevant market information and
daily market quotations for computation of net asset value. In this connection
it should be noted that a substantial portion of brokerage commissions paid, or
principal transactions entered, by the Fund may be with brokers and investment
banking firms which, in the normal course of business, publish statistical,
research and other material which is received by the Investment Manager and
which may or may not prove useful to the Investment Manager, the Fund or other
clients of the Investment Manager.
29
<PAGE>
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 in secondary trading during the period October 4, 1993
(commencement of operations) through September 30, 1994 and during the fiscal
year ended September 30, 1995 amounted to approximately $89,000 and $169,000,
respectively.
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 customers, including the Fund. In some instances, this
procedure may affect the price and size of the positions obtainable for the
Fund.
CERTAIN TAX MATTERS
Federal Income Taxation of the Fund -- In General
- -------------------------------------------------
The Fund intends to qualify and elect to be treated each taxable year
as a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), although it cannot give complete
assurance that it will do so. Accordingly, the
30
<PAGE>
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 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.
31
<PAGE>
Federal Income Taxation of the Fund's Investments
- -------------------------------------------------
Original Issue Discount. For federal income tax purposes, debt
securities purchased by the Fund may be treated as having original issue
discount. Original issue discount represents interest for federal income tax
purposes and can generally be defined as the excess of the stated redemption
price at maturity of a debt obligation over the issue price. Original issue
discount is treated for federal income tax purposes as income earned by the
Fund, whether or not any income is actually received, and therefore is subject
to the distribution requirements of the Code. Generally, the amount of original
issue discount is determined on the basis of a constant yield to maturity which
takes into account the compounding of accrued interest. Under section 1286 of
the Code, an investment in a stripped bond or stripped coupon may result in
original issue discount.
Debt securities may be purchased by the Fund at a discount that exceeds
the original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for income tax
purposes. In the case of any debt security issued after July 18, 1984, having a
fixed maturity date of more than one year from the date of issue and having
market discount, the gain realized on disposition will be treated as interest to
the extent it does not exceed the accrued market discount on the security
(unless the Fund elects to include such accrued market discount in income in the
tax year to which it is attributable). Generally, market discount is accrued on
a daily basis. The Fund may be required to capitalize, rather than deduct
currently, part or all of any direct interest expense incurred to purchase or
carry any debt security having market discount, unless the Fund makes the
election to include market discount currently. Because the Fund must include
original issue discount in income, it will be more difficult for the Fund to
make the distributions required for the Fund to maintain its status as a
regulated investment company under Subchapter M of the Code or to avoid the 4%
excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may
be subject to provisions of the Code that (i) require inclusion of unrealized
gains or losses in the Fund's income for purposes of the 90% test, the 30% test,
the excise tax and the distribution requirements applicable to regulated
investment companies; (ii) defer recognition of realized losses; and (iii)
characterize both realized and unrealized gain or loss as short-term or
long-term gain or loss. Such provisions generally apply to, among other
investments, options on debt securities, indices on securities and futures
contracts.
Federal Income Taxation of 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.
32
<PAGE>
Distributions by the Fund can result in a reduction in the fair market
value of the Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as ordinary income or long-term capital gain, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
DISTRIBUTION OF SHARES OF THE FUND
State Street 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 Class B and Class D shares). The Distributor may reallow all
or portions of such sales charges as concessions to dealers. For the period
October 4, 1993 (commencement of operations) through September 30, 1994 and for
the fiscal year ended September 30, 1995, total sales charges on Class A shares
paid to the Distributor amounted to $514,638 and $84,789, respectively. For the
same periods, the Distributor retained $62,866 and $9,616, 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
33
<PAGE>
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. Such commission also is
payable to authorized securities dealers upon sales of Class A shares made
pursuant to a Letter of Intent to purchase shares having a net asset value of
$1,000,000 or more. Shares sold with such commissions payable are subject to a
one-year contingent deferred sales charge of 1.00% on any portion of such shares
redeemed within one year following their sale. After a particular purchase of
Class A shares is made under the Letter of Intent, the commission will be paid
only in respect of that particular purchase of shares. If the Letter of Intent
is not completed, the commission paid will be deducted from any discounts or
commissions otherwise payable to such dealer in respect of shares actually sold.
If an investor is eligible to purchase shares at net asset value on account of
the Right of Accumulation, the commission will be paid only in respect of the
incremental purchase at net asset value.
For the 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:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Period Ended
September 30, 1995 September 30, 1994
------------------ ------------------
Contingent Commissions Contingent Commissions
Deferred Paid to Deferred Paid to
Sales Charges Dealers Sales Charges Dealers
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Class A $ 0 $ 75,173 $ 0 $ 451,772
Class B $ 128,068 $ 133,801 $ 1,331 $ 1,227,898
Class D $ 6,586 $ 6,453 $ 0 $ 111,232
</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
34
<PAGE>
primarily intended to result in the sale of Class A, Class B and Class D
shares, including, but not limited to, (1) the payment of commissions and/or
reimbursement to underwriters, securities dealers and others engaged in the sale
of shares, including payments to the Distributor to be used to pay commissions
and/or reimbursement to securities dealers (which securities dealers may be
affiliates of the Distributor) engaged in the distribution and marketing of
shares and furnishing ongoing assistance to investors, (2) reimbursement of
direct out-of-pocket expenditures incurred by the Distributor in connection with
the distribution and marketing of shares and the servicing of investor accounts
including expenses relating to the formulation and implementation of marketing
strategies and promotional activities such as direct mail promotions and
television, radio, newspaper, magazine and other mass media advertising, the
preparation, printing and distribution of Prospectuses of the Fund and reports
for recipients other than existing shareholders of the Fund, and obtaining such
information, analyses and reports with respect to marketing and promotional
activities and investor accounts as the Fund may, from time to time, deem
advisable, and (3) reimbursement of expenses incurred by the Distributor in
connection with the servicing of shareholder accounts including payments to
securities dealers and others in consideration of the provision of personal
services to investors and/or the maintenance of shareholder accounts and
expenses associated with the provision of personal services by the Distributor
directly to investors. In addition, the Distribution Plan is deemed to authorize
the Distributor and the Investment Manager to make payments out of general
profits, revenues or other sources to underwriters, securities dealers and
others in connection with sales of shares, to the extent, if any, that such
payments may be deemed to be within the scope of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class D shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class D
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class D shares (as the case may be) to make payments for personal
services 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.
35
<PAGE>
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:
<TABLE>
<CAPTION>
Class A Class B Class D
------- ------- -------
<S> <C> <C> <C>
Advertising $ 421 $13,556 $ 6,956
Printing and mailing of
prospectuses to other
than current shareholders 179 5,756 2,953
Compensation to dealers 51,887 175,758 33,940
Compensation to sales personnel 1,542 49,622 25,464
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses: marketing;
general 1,030 33,130 17,001
---------- ----------- --------
Total fees $ 55,059 $277,822 $86,314
======== ======== =======
</TABLE>
The Distributor may have also used additional resources of its own for further
expenses on behalf of the Fund.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Fund will attempt to make
alternative arrangements for such services for shareholders who acquired shares
through such institutions.
36
<PAGE>
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") of the Class
A, Class B, Class C and Class D shares of the Fund will be calculated as set
forth below. Total return is computed separately for each class of shares of the
Fund. Performance data for a specified class includes periods prior to the
adoption of class designations. Shares of the Fund had no class designations
until February 1, 1994, when designations were assigned based on the pricing and
Rule 12b-1 fees applicable to shares sold thereafter.
The performance data reflects Rule 12b-1 fees and sales charges as set
forth below:
<TABLE>
<CAPTION>
Rule 12b-1 Fees Sales Charges
------------------------------------------------------ ---------------------------
Class Amount Period
- ----- ------ ------
<S> <C> <C> <C>
A 0.25% February 1, 1994 to present; fee Maximum 4.5% sales
will reduce performance for charge reflected
periods after February 1, 1994
B 1.00% February 1, 1994 to present; fee 1- and 5-year periods reflect
will reduce performance for a 5% and a 2% contingent
periods after February 1, 1994 deferred sales charge,
respectively
C 0.00% Since commencement of None
operations to present
D 1.00% February 1, 1994 to present; fee 1-year period reflects a 1%
will reduce performance for contingent deferred sales
periods after February 1, 1994 charge
The Fund's performance is shown below, and where noted, reflects the
voluntary measures by the Fund's affiliates to reduce fees or expenses relating
to the Fund; see "Accrued Expenses" later in this section.
</TABLE>
37
<PAGE>
Total Return
- ------------
The total returns ("standard total return") of each class of the Fund's
shares were as follows:
<TABLE>
<CAPTION>
Commencement of
Operations (October 4, 1993) One Year Ended
to September 30, 1995 September 30, 1995
--------------------- ------------------
With Subsidy Without Subsidy With Subsidy Without Subsidy
------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Class A -1.57% -2.10% 8.11% 7.35%
Class B -1.87% -2.42% 7.44% 6.64%
Class C 1.15% 0.57% 13.60% 12.81%
Class D 0.16% -0.39% 11.44% 10.64%
</TABLE>
Standard total return is computed separately for each class of shares
by determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value in accordance with the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the
designated period assuming a hypothetical
$1,000 payment made at the beginning of
the designated period
The calculation is based on the further assumptions that the maximum
initial or contingent deferred sales charge applicable to the investment is
deducted, and that all dividends and distributions by the Fund are reinvested at
net asset value on the reinvestment dates during the periods. All accrued
expenses are also taken into account as described later herein.
38
<PAGE>
Accrued Expenses
- ----------------
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return results take sales charges, if applicable, into account,
although the results do not take into account recurring and nonrecurring charges
for optional services which only certain shareholders elect and which involve
nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by
affiliates of fees or expenses during the subject period. In the absence of such
subsidization, the performance of the Fund will be lower.
Nonstandardized Total Return
- ----------------------------
The Fund may provide the above described standard total return results
for Class A, Class B, Class C and Class D shares for periods which end no
earlier than the most recent calendar quarter end and which begin twelve months
before and at the time of commencement of the Fund's operations. In addition,
the Fund may provide nonstandardized total return results for differing periods,
such as for the most recent six months. Such nonstandardized total return is
computed as otherwise described under "Total Return" except the result may or
may not be annualized, and as noted any applicable sales charge may not be taken
into account and therefore not deducted from the hypothetical initial payment of
$1,000 or ending value. For example, the nonstandardized total returns for the
six months ended September 30, 1995 without taking sales charges into account,
were follows:
With Subsidy Without Subsidy
------------ ---------------
Class A 17.74% 17.34%
Class B 17.40% 17.00%
Class C 18.14% 17.74%
Class D 17.40% 17.00%
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.
39
<PAGE>
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as the Trust's independent accountants, providing professional
services including (1) an audit of the annual financial statements, (2)
assistance and consultation in connection with Securities and Exchange
Commission filings and (3) review of the annual income tax returns filed on
behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a
semiannual basis, other supplementary financial reports may be made available
from time to time and holders of record may request a copy of a current
supplementary report, if any, by calling State Street Research Shareholder
Services.
The following financial statements are for the Fund's fiscal year ended
September 30, 1995.
40
ct\SCGsai96
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
INVESTMENT PORTFOLIO
September 30, 1995
<TABLE>
<CAPTION>
Value
Shares (Note 1)
- ------------------------------------- ------ ------------
<S> <C> <C>
COMMON STOCKS 95.4%
Basic Industries 0.7%
Chemical 0.7%
Cambrex Corp. 11,900 $ 478,975
----------
Total Basic Industries 478,975
----------
Consumer Cyclical 26.8%
Airline 0.6%
Midwest Express Holdings, Inc.* 17,000 382,500
----------
Automotive 3.8%
Exide Corp. 18,100 905,000
Federal-Mogul Corp. 31,500 602,438
Lear Seating Corp.* 36,500 1,072,187
----------
2,579,625
----------
Hotel & Restaurant 5.0%
Au Bon Pain Company, Inc.* 40,600 314,650
Main Street and Main, Inc.* 53,700 234,938
Outback Steakhouse, Inc.* 19,950 613,462
Primadonna Resorts, Inc.* 48,100 733,525
Red Lion Hotels, Inc.* 11,000 231,000
Station Casinos, Inc.* 59,300 911,737
Studio Plus Hotels, Inc.* 15,300 351,900
----------
3,391,212
----------
Recreation 4.9%
Emmis Broadcasting Corp. Cl. A* 12,200 382,775
Hollywood Entertainment Corp.* 47,300 1,013,994
Infinity Broadcasting Corp. Cl. A* 19,025 623,069
Renaissance Communications Corp.* 26,700 934,500
Sodak Gaming, Inc.* 16,700 346,525
----------
3,300,863
----------
Retail Trade 7.1%
Department 56, Inc.* 26,600 1,243,550
Gymboree Corp.* 47,100 1,418,888
Sports Authority, Inc.* 13,800 381,225
Tiffany & Co. 22,900 958,937
Viking Office Products, Inc.* 19,600 818,300
----------
4,820,900
----------
Textile & Apparel 5.4%
Authentic Fitness Corp. 61,000 1,372,500
Norton McNaughton, Inc.* 41,900 932,275
Warnaco Group, Inc. Cl. A 45,000 1,080,000
Wolverine World Wide, Inc. 11,200 306,600
----------
3,691,375
----------
Total Consumer Cyclical 18,166,475
----------
Consumer Staple 24.1%
Business Service 8.4%
Computer Horizons Corp.* 31,700 $ 634,000
Eltron International, Inc.* 30,100 850,325
Global DirectMail Corp.* 36,200 891,425
Medic Computer Systems, Inc.* 15,800 801,850
Personnel Group of America, Inc. 61,100 855,400
Premenos Technologies, Corp. 12,100 393,250
Scientific Games Holdings Corp. 5,200 194,350
Syncronys Softcorp* 22,400 336,000
3D Systems Corp.* 44,300 742,025
----------
5,698,625
----------
Drug 2.1%
Arris Pharmaceutical Corp.* 69,200 899,600
CytoTherapeutics, Inc.* 54,000 526,500
----------
1,426,100
----------
Hospital Supply 13.2%
American Homepatient, Inc.* 29,200 744,600
American Medical Response, Inc.* 26,600 754,775
Community Care of America, Inc. 47,900 664,613
Community Health Systems, Inc.* 25,300 1,021,487
GranCare, Inc.* 27,200 472,600
HealthCare COMPARE Corp.* 39,700 1,538,375
Lincare Holdings, Inc.* 16,900 435,175
Mariner Health Group, Inc.* 70,000 988,750
Maxicare Health Plans, Inc.* 46,000 856,750
Multicare Companies, Inc.* 17,200 399,900
Pediatrix Medical Group, Inc. 3,800 77,900
Rotech Medical Corp.* 32,900 818,388
Sierra Health Services, Inc.* 6,500 162,500
----------
8,935,813
----------
Personal Care 0.4%
U.S.A. Detergents, Inc.* 11,400 236,550
----------
Total Consumer Staple 16,297,088
----------
Energy 6.7%
Oil 5.7%
Abacan Resource Corp.* 114,300 289,130
Tom Brown, Inc.* 27,500 374,688
Global Natural Resources, Inc.* 34,500 340,687
Nuevo Energy Co.* 36,200 814,500
Plains Resources, Inc.* 38,600 306,388
Ranger Oil Ltd. 132,600 795,600
Swift Energy Co.* 106,200 969,075
----------
3,890,068
----------
The accompanying notes are an integral part of the financial statements.
41
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
Value
Shares (Note 1)
- ------------------------------------- ------ ------------
Oil Service 1.0%
Landmark Graphics Corp.* 23,600 $ 665,225
----------
Total Energy 4,555,293
----------
Finance 6.7%
Financial Service 3.2%
BancTec, Inc.* 21,600 464,400
Jayhawk Acceptance Corp.* 6,200 90,675
The Money Store, Inc. 23,550 1,115,681
United Companies Financial Corp. 7,680 524,160
----------
2,194,916
----------
Insurance 3.5%
Mutual Risk Management Ltd. 23,300 920,350
NAC Re Corp. 17,200 623,500
National Re Corp. 23,100 817,163
----------
2,361,013
----------
Total Finance 4,555,929
----------
Science & Technology 28.5%
Computer Software & Service 16.7%
Avid Technology, Inc.* 31,900 1,371,700
Boca Research, Inc.* 8,000 194,000
Cheyenne Software, Inc.* 63,200 1,264,000
Datastream Systems, Inc.* 22,000 500,500
HPR, Inc.* 2,500 58,125
Harbinger Corp.* 800 11,000
Hyperion Software Corp.* 20,400 1,157,700
Inference, Inc. Cl. A* 35,900 538,500
Information Storage Devices, Inc.* 4,700 106,338
Intersolv, Inc.* 85,800 1,726,725
Mattson Technologies, Inc.* 12,900 548,250
OnTechnologies Corp.* 39,000 682,500
Phamis, Inc.* 10,100 276,487
Plasma Materials Technologies, Inc.* 4,400 77,550
Shiva Corp.* 3,800 232,750
Simware, Inc. 10,700 107,000
Smith Micro Software, Inc.* 4,000 39,500
Softkey International, Inc.* 55,000 2,433,750
----------
11,326,375
----------
Electronic Components 2.5%
C.P. Clare Corp.* 20,800 530,400
Dovatron International, Inc.* 5,300 183,513
Telcom Semiconductor, Inc.* 1,600 18,400
US Order, Inc.* 51,200 947,200
----------
1,679,513
----------
Electronic Equipment 4.5%
Electroglas, Inc.* 10,800 $ 735,750
Itron, Inc.* 14,500 402,375
Tekelec, Inc.* 45,100 1,014,750
Tencor Instruments* 19,800 876,150
----------
3,029,025
----------
Office Equipment 4.8%
Broadway & Seymour, Inc.* 33,600 840,000
FileNet Corp.* 17,600 778,800
SCI Systems, Inc. 27,000 931,500
Sequent Computer Systems, Inc.* 35,500 705,562
----------
3,255,862
----------
Total Science & Technology 19,290,775
----------
Utility 1.9%
Telephone 1.9%
Allen Group, Inc. 24,600 891,750
Tel-Save Holdings, Inc.* 25,100 385,912
----------
1,277,662
----------
Total Utility 1,277,662
----------
Total Common Stocks (Cost $53,644,148) 64,622,197
----------
</TABLE>
<TABLE>
<CAPTION>
Principal Maturity
Amount Date
- ----------------------------------- --------- -------- -----------
<S> <C> <C> <C>
COMMERCIAL PAPER 5.4%
Ford Motor Credit Co., 5.77% $1,519,000 10/4/1995 1,519,000
Household Finance Corp., 5.75% 301,000 10/2/1995 301,000
Philip Morris Companies, Inc. 6.60% 1,862,317 10/2/1995 1,862,317
---------
Total Commercial Paper (Cost $3,682,317) 3,682,317
---------
Total Investments (Cost $57,326,465)--100.8% 68,304,514
Cash and Other Assets, Less Liabilities--(0.8)% (564,771)
---------
Net Assets--100.0% $67,739,743
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
42
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
INVESTMENT PORTFOLIO (cont'd)
<TABLE>
<S> <C>
Federal Income Tax Information:
At September 30, 1995, the net unrealized
appreciation of investments based on cost
for Federal income tax purposes of
$57,330,054 was as follows:
Aggregate gross unrealized appreciation for
all investments in which there is an
excess of value over tax cost $12,836,492
Aggregate gross unrealized depreciation for
all investments in which there is an
excess of tax cost over value (1,862,032)
----------
$10,974,460
==========
</TABLE>
* Nonincome-producing securities
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1995
<TABLE>
<S> <C>
Assets
Investments, at value (Cost $57,326,465) (Note 1) $68,304,514
Cash 31,640
Receivable for securities sold 1,900,195
Receivable from Distributor (Note 3) 24,868
Dividends and interest receivable 9,672
Deferred organization costs and other assets (Note 1) 22,225
----------
70,293,114
Liabilities
Payable for securities purchased 2,208,372
Payable for fund shares redeemed 146,459
Accrued management fee (Note 2) 41,712
Accrued distribution fee (Note 5) 32,556
Accrued trustees' fees (Note 2) 6,567
Other accrued expenses 117,705
----------
2,553,371
----------
Net Assets $67,739,743
==========
Net Assets consist of:
Unrealized appreciation of investments $10,978,049
Accumulated net realized loss (6,159,873)
Shares of beneficial interest (Note 6) 62,921,567
----------
$67,739,743
==========
Net Asset Value and redemption price per share of
Class A shares ($21,479,765 / 2,216,062 shares of
beneficial interest) $9.69
==========
Maximum Offering Price per share of Class A shares
($9.69 / .955) $10.15
==========
Net Asset Value and offering price per share of
Class B shares ($26,489,022 / 2,766,405 shares
of beneficial interest)* $9.58
==========
Net Asset Value, offering price and redemption price
per share of Class C shares ($12,379,730 / 1,267,435
shares of beneficial interest) $9.77
==========
Net Asset Value and offering price per share of
Class D shares ($7,391,226 / 771,686 shares
of beneficial interest)* $9.58
==========
</TABLE>
*Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements.
43
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
STATEMENT OF OPERATIONS
For the year ended September 30, 1995
<TABLE>
<S> <C>
Investment Income
Interest $ 184,282
Dividends, net of foreign taxes of $3,157 97,753
----------
282,035
Expenses
Management fee (Note 2) 501,000
Transfer agent and shareholder services (Note 2) 298,779
Custodian fee 171,195
Registration fees 95,255
Distribution fee--Class A (Note 5) 55,059
Distribution fee--Class B (Note 5) 277,822
Distribution fee--Class D (Note 5) 86,314
Reports to shareholders 42,947
Legal fees 24,495
Audit fee 18,980
Trustees' fees (Note 2) 14,366
Amortization of organization costs (Note 1) 6,529
Miscellaneous 14,423
----------
1,607,164
Expenses borne by the Distributor (Note 3) (453,010)
----------
1,154,154
----------
Net investment loss (872,119)
----------
Realized and Unrealized Gain (Loss) on Investments
Net realized loss on investments (Notes 1 and 4) (3,364,808)
Net unrealized appreciation of investments 11,482,443
----------
Net gain on investments 8,117,635
----------
Net increase in net assets resulting from operations $ 7,245,516
==========
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
October 4, 1993
(Commencement of
Year ended Operations) to
September 30, September 30,
1995 1994
- ----------------------------------- --------------- -----------------
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment loss $ (872,119) $ (356,585)
Net realized loss on investments* (3,364,808) (2,795,065)
Net unrealized appreciation
(depreciation) of investments 11,482,443 (504,394)
------------- ---------------
Net increase (decrease) resulting
from operations 7,245,516 (3,656,044)
------------- ---------------
Net increase (decrease) from fund
share transactions (Note 6) (7,844,245) 71,994,516
------------- ---------------
Total increase (decrease) in net
assets (598,729) 68,338,472
Net Assets
Beginning of year 68,338,472 --
------------- ---------------
End of year $67,739,743 $68,338,472
============= ===============
</TABLE>
* Net realized loss for Federal
income tax purposes
(Note 1) $(2,682,827) $ (10,835)
============= ===============
The accompanying notes are an integral part of the financial statements.
44
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 1995
Note 1
State Street Research Small Capitalization Growth Fund (the "Fund"), is a
series of State Street Research Capital Trust (the "Trust"), formerly State
Street Capital Trust, which is a Massachusetts business trust registered
under the Investment Company Act of 1940, as amended, as a diversified,
open-end management investment company. The Trust was organized in November,
1988 as a successor to State Street Capital Fund, Inc., a Massachusetts
corporation. The Trust consists presently of three separate funds: State
Street Research Small Capitalization Growth Fund, State Street Research
Capital Fund and State Street Research Small Capitalization Value Fund.
The Fund offers four classes of shares. Shares of the Fund had no class
designations until February 1, 1994. Class A shares are subject to an initial
sales charge of up to 4.50% and pay an annual service fee equal to 0.25% of
average daily net assets. Class B shares are subject to a contingent deferred
sales charge on certain redemptions made within five years of purchase and
pay annual distribution and service fees of 1.00%. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after the issuance of the Class B shares. Class C
shares are only offered to certain employee benefit plans and large
institutions. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro-rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant policies are consistently followed by the Fund in
preparing its financial statements, and such policies are in conformity with
generally accepted accounting principles for investment companies.
A. 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.
B. Federal Income Taxes
No provision for Federal income taxes is necessary since the Fund intends to
qualify under Subchapter M of the Internal Revenue Code and its policy is to
distribute all of its taxable income, including net realized capital gains,
if any, within the prescribed time periods. At September 30, 1995, the Fund
had a capital loss carryforward of $2,693,662 available, to the extent
provided in regulations, to offset future capital gains, if any, of which
$10,835 and $2,682,827 expire on September 30, 2002 and 2003, respectively.
In order to meet certain excise tax distribution requirements under Section
4982 of the Internal Revenue Code, the Fund is required to measure and
distribute annually, if necessary, net capital gains realized during a
twelve-month period ending October 31. In this connection, the Fund is
permitted to defer into its next fiscal year any net capital losses incurred
between each November 1 and the end of its fiscal year. From November 1, 1993
through September 30, 1994, the Fund incurred net capital losses of
$2,454,661 and has deferred and treated such losses as arising in the fiscal
year ending September 30, 1995. From November 1, 1994 through September 30,
1995, the Fund incurred net capital losses of approximately $3,463,000 and
intends to defer and treat such losses as arising in the fiscal year ending
September 30, 1996.
C. Dividends
Dividends from net investment income, if any, are declared and paid or
reinvested annually. Net realized capital gains, if any, are distributed
annually, unless additional distributions are required for compliance with
applicable tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
D. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and are being amortized under the straight-line method over a
period of five years.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser
earns monthly fees equal to 1/16 of 1% (3/4 of 1% on an annual basis) of
average daily net assets. In consideration of these fees, the Adviser
furnishes the Fund with management, investment advisory, statistical and
research facilities and services. The Adviser also pays all salaries, rent
and certain other expenses of management. The fees of the Trustees not
currently affiliated with the Adviser amounted to $14,366 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
45
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
to the purchase and redemption of shares of the Fund. In addition,
Metropolitan receives a fee for maintenance of the accounts of certain
shareholders who are participants in sponsored arrangements, employee benefit
plans and similar programs or plans, through or under which shares of the
Fund may be purchased. During the year ended September 30, 1995, the amount
of such shareholder servicing and account maintenance expenses was
$72,975.
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended September 30, 1995, the amount of such expenses
assumed by the Distributor and its affiliates was $453,010.
Note 4
For the year ended September 30, 1995, exclusive of short-term investments
and U.S. Government obligations, purchases and sales of securities aggregated
$113,097,415 and $122,362,902, respectively.
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940. Under the Plan, the Fund
pays annual service fees to the Distributor at a rate of 0.25% of average
daily net assets for Class A, Class B and Class D shares. In addition, the
Fund pays annual distribution fees of 0.75% of average daily net assets for
Class B and Class D shares. The Distributor uses such payments for personal
services and/or the maintenance of shareholder accounts, to reimburse
securities dealers for distribution and marketing services, to furnish
ongoing assistance to investors and to defray a portion of its distribution
and marketing expenses. For the year ended September 30, 1995, fees pursuant
to such plan amounted to $55,059, $277,822 and $86,314 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 $9,616 and $42,175, 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 $50,489 on sales of Class B
shares, and that the Distributor collected contingent deferred sales charges
aggregating $128,068 and $6,586 on redemptions of Class B and Class D shares,
respectively during the same period.
46
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH 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, the Distributor owned one Class C share of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
February 1, 1994
(Commencement of
Share Class
Year ended Designations)
September 30, 1995 to September 30, 1994
------------------------- ------------------------
Class A Shares Amount Shares Amount
- ----------------------- ---------- ----------- -------- ------------
<S> <C> <C> <C> <C>
Shares sold 585,876 $ 4,916,956 2,793,089 $24,869,158
Shares redeemed (937,567) (7,864,550) (225,336) (1,967,087)
-------- --------- ------ ----------
Net increase (decrease) (351,691) $(2,947,594) 2,567,753 $22,902,071
======== ========= ====== ==========
Class B Shares Amount Shares Amount
- ----------------------- -------- --------- ------ ----------
Shares sold 477,595 $ 3,977,732 3,606,689 $32,666,242
Shares redeemed (1,148,744) (9,420,297) (169,135) (1,476,529)
-------- --------- ------ ----------
Net increase (decrease) (671,149) $(5,442,565) 3,437,554 $31,189,713
======== ========= ====== ==========
</TABLE>
<TABLE>
<CAPTION>
October 4, 1993
(Commencement of
Operations) to
September 30, 1994
---------------------------
Class C Shares Amount Shares Amount
- --------------- -------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Shares sold 836,117 $ 7,366,455 1,914,962 $ 17,425,844
Shares redeemed (386,614) (3,415,989) (1,097,030) (10,337,651)
------ -------- -------- -----------
Net increase 449,503 $ 3,950,466 817,932 $ 7,088,193
====== ======== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
February 1, 1994
(Commencement of
Share Class
Designations)
to September 30, 1994
------------------------
Class D Shares Amount Shares Amount
- ----------------------- -------- ----------- -------- ------------
<S> <C> <C> <C> <C>
Shares sold 85,008 $ 686,924 1,290,249 $11,826,451
Shares redeemed (490,937) (4,091,476) (112,634) (1,011,912)
------ --------- ------ ----------
Net increase (decrease) (405,929) $(3,404,552) 1,177,615 $10,814,539
====== ========= ====== ==========
</TABLE>
47
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Class B Class C Class D
----------------------- ----------------------- ----------------------- -------------------------
Year ended Year ended Year ended Year ended
September September September September
30, 30, 30, 30,
1995**** 1994** 1995**** 1994** 1995**** 1994*** 1995**** 1994**
---------------- ----------- -------- ----------- -------- ----------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
year $8.56 $9.45 $8.52 $9.45 $8.60 $9.55 $8.52 $9.45
Net investment
loss* (.08) (.02) (.14) (.06) (.06) (.06) (.14) (.06)
Net realized and
unrealized gain
(loss) on
investments 1.21 (.87) 1.20 (.87) 1.23 (.89) 1.20 (.87)
--------- ------ --------- ------ --------- ------ --------- --------
Net asset value,
end of year $9.69 $8.56 $9.58 $8.52 $9.77 $8.60 $9.58 $8.52
========= ====== ========= ====== ========= ====== ========= ========
Total return 13.20%+ (9.42)%+++ 12.44%+ (9.84)%+++ 13.60%+ (9.95)%+++ 12.44%+ (9.84)%+++
Net assets at
end of year
(000s) $21,480 $21,986 $26,489 $29,287 $12,380 $7,033 $7,391 $10,032
Ratio of
operating
expenses to
average net
assets* 1.35% 1.35%++ 2.10% 2.10%++ 1.10% 1.10%++ 2.10% 2.10%++
Ratio of net
investment loss
to average net
assets* (0.93)% (0.58)%++ (1.67)% (1.32)%++ (0.71)% (0.68)%++ (1.67)% (1.32)%++
Portfolio
turnover rate 178.60% 83.61% 178.60% 83.61% 178.60% 83.61% 178.60% 83.61%
*Reflects
voluntary
assumption of
fees or
expenses per
share in each
year (Note 3). $.06 $.02 $.06 $.02 $.06 $.04 $.06 $.02
</TABLE>
++Annualized
+Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
+++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
**February 1, 1994 (commencement of share class designations) to September
30, 1994.
***October 4, 1993 (commencement of operations) to September 30, 1994.
****Per-share figures have been calculated using the average shares method.
48
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of State Street Research
Capital Trust and Shareholders of
State Street Research Small Capitalization Growth Fund
We have audited the accompanying statement of assets and liabilities of State
Street Research Small Capitalization Growth Fund, including the schedule of
portfolio investments, as of September 30, 1995, and the related statement of
operations for the year then ended, the statement of changes in net assets
for the year then ended and the period October 4, 1993 (commencement of
operations) to September 30, 1994 and the financial highlights for the year
then ended and the period February 1, 1994 (commencement of share class
designations) to September 30, 1994 for Class A, Class B and Class D and for
the year then ended and the period October 4, 1993 (commencement of
operations) to September 30, 1994 for Class C. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our 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 Small Capitalization Growth Fund as of September 30,
1995, the results of its operations for the year then ended, the changes in
its net assets for the year then ended and the period October 4, 1993
(commencement of operations) to September 30, 1994, and the financial
highlights for the year then ended and the period February 1, 1994
(commencement of share class designations) to September 30, 1994 for Class A,
Class B and Class D and for the year then ended and the period October 4,
1993 (commencement of operations) to September 30, 1994 for Class C, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 3, 1995
49
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
For the twelve months ended September 30, 1995, Small Capitalization Growth
Fund significantly trailed the average gain for Lipper Analytical Services'
Small Company Growth Fund category (does not reflect sales charges.)
The Fund's underperformance was the result of several factors. First, too
much of the portfolio was invested in consumer-related stocks and too little
in technology--we have corrected that. Second, the Fund was hurt by a heavy
position in health-care stocks.
The Fund increased its focus on technology. Technology stocks in various
industries stood at 28% of the portfolio on September 30, 1995, up from 8% a
year earlier. Currently, we are targeting the stocks of computer software
companies offering productivity-enhancing products.
We reduced holdings in consumer stocks, especially in hotel and restaurant,
recreation, business service, and hospital-supply stocks. We retained smaller
positions in each area, focusing on individual stocks with compelling
potential. We maintained our position in retail stocks. Health-care stocks
were disappointing, as Congress's moves to balance the budget have resulted
in serious confusion in the health-care area. Our health-care focus is on
health maintenance organizations (HMOs) and nursing home stocks.
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. 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 does not reflect
annual 12b-1 fees of .25% for "A" shares and 1% for "B" shares, which will
reduce subsequent performance.
Comparison Of Change In Value Of
A $10,000 Investment In Small
Capitalization Growth Fund and The S&P 500
[typeset representation of line charts]
Class A Shares
Average Annual Total Return
1 Year Life of Fund
+8.11%/+7.35% -1.57%/-2.10%
Small Capitalization Growth S&P 500
10/4/93 10,000.0 10,000.0
9/30/94 8,921.0 10,368.0
9/30/95 9,690.0 13,448.0
Class B Shares
Average Annual Total Return
1 Year Life of Fund
+7.44%/+6.64% -1.87%/-2.42%
Small Capitalization Growth S&P 500
10/4/93 10,000.0 10,000.0
9/30/94 8,921.0 10,368.0
9/30/95 9,631.0 13,448.0
Class C Shares
Average Annual Total Return
1 Year Life of Fund
+13.60%/+12.81% +1.15%/+0.57%
Small Capitalization Growth S&P 500
10/4/93 10,000.0 10,000.0
9/30/94 8,921.0 10,368.0
9/30/95 10,230.0 13,448.0
Class D Shares
Average Annual Total Return
1 Year Life of Fund
+11.44%/+10.64% +0.16%/-0.39%
Small Capitalization Growth S&P 500
10/4/93 10,000.0 10,000.0
9/30/94 8,921.0 10,368.0
9/30/95 10,031.0 13,448.0
50
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
REPORT ON SPECIAL MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of the State Street Research Small
Capitalization Growth 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. Class C shares of the Fund will now be included under the Fund's Plan of Distribution Pursuant
to Rule 12b-1. 0.8 0.02 0.2
3. 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
4. The selection of Coopers & Lybrand L.L.P. as the Trust's independent accountants was ratified. 15.0 0.1 1.2
</TABLE>
51
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION VALUE FUND
a series of
STATE STREET RESEARCH CAPITAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1996
TABLE OF CONTENTS
Page
----
INVESTMENT POLICIES AND RESTRICTIONS ...................................... 2
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT TECHNIQUES............ 5
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS............................ 12
TRUSTEES AND OFFICERS...................................................... 19
INVESTMENT ADVISORY SERVICES............................................... 22
PURCHASE AND REDEMPTION OF SHARES.......................................... 24
NET ASSET VALUE............................................................ 25
PORTFOLIO TRANSACTIONS..................................................... 26
CERTAIN TAX MATTERS........................................................ 28
DISTRIBUTION OF SHARES OF THE FUND......................................... 30
CALCULATION OF PERFORMANCE DATA............................................ 33
CUSTODIAN.................................................................. 36
INDEPENDENT ACCOUNTANTS.................................................... 36
FINANCIAL STATEMENTS....................................................... 36
The following Statement of Additional Information is not a Prospectus. It
should be read in conjunction with the Prospectus of State Street Research Small
Capitalization Value Fund, dated February 1, 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: 1285R-960201(0397)SSR-LD SCV-879D-296
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
As set forth in part under "The Fund's Investments" and "Limiting
Investment Risk" in the Fund's Prospectus, the Fund has adopted certain
investment restrictions.
The fundamental and nonfundamental policies of the Fund do not apply to
any matters involving the issuance of multiple classes of shares of the Fund or
the creation or use of a structure allowing the Fund to invest substantially all
its assets in a related collective investment vehicle for similar funds or
allowing the Fund to serve as such a collective investment vehicle for other
similar funds, to the extent permitted by law and regulatory authorities.
All of the Fund's fundamental investment restrictions are set forth
below. These fundamental investment restrictions may not be changed except by
the affirmative vote of a majority of the Fund's outstanding voting securities
as defined in the Investment Company Act of 1940, as amended (the "1940 Act").
(Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at a meeting of security holders duly called, (i) of
67% or more of the voting securities present at a meeting if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy or (ii) of more than 50% of the outstanding voting securities, whichever
is less.) Under these restrictions, it is the Fund's policy:
(1) not to purchase a security of any one issuer (other than
securities issued or guaranteed as to principal or interest by
the U.S. Government or its agencies or instrumentalities or
mixed-ownership Government corporations) if such purchase
would, with respect to 75% of the Fund's total assets, cause
more than 5% of the Fund's total assets to be invested in the
securities of such issuer or cause more than 10% of the voting
securities of such issuer to be held by the Fund;
(2) not to issue senior securities as defined in the 1940 Act,
except as permitted by that Act and the rules thereunder or as
permitted by the Securities and Exchange Commission (the
creation of general liens or security interests under normal
brokerage arrangements for transactions in portfolio assets
are not deemed to involve the issuance of senior securities);
(3) not to underwrite or participate in the marketing of
securities of other issuers, except (a) the Fund may, acting
alone or in syndicates or groups, purchase or otherwise
acquire securities of other issuers for investment, either
from the issuers or from persons in a control relationship
with the issuers or from underwriters of such securities; and
(b) to the extent that, in connection with the disposition of
the Fund's securities, the Fund may be a selling shareholder
in an offering or deemed to be an underwriter under certain
federal securities laws;
(4) not to purchase fee simple interests in real estate unless
acquired as a result of ownership of securities or other
instruments, although the Fund may purchase and sell other
interests in real estate including securities which are
secured by real estate, or securities of companies which make
real estate loans or own, or invest or deal in, real estate;
(5) not to invest in physical commodities or physical commodity
contracts in excess of 10% of the Fund's total assets, except
that investments in essentially financial items
2
<PAGE>
such as, but not limited to, swap arrangements, hybrids,
currencies, currency and other forward contracts, futures
contracts and options on futures contracts on securities,
securities indices and currencies shall not be deemed
investments in commodities or commodities contracts;*
(6) not to lend money; however, the Fund may lend portfolio
securities and purchase bonds, debentures, notes and similar
obligations (and enter into repurchase agreements with respect
thereto);
(7) not to make any investment which would cause more than 25%
of the value of the Fund's total assets to be invested in
securities of issuers principally engaged in any one
industry [for purposes of this restriction, (a) utilities
may be divided according to their services so that,
for example, gas, gas transmission, electric and telephone
companies may each be deemed in a separate industry, (b) oil
and oil related companies may be divided by type so that, for
example, oil production companies, oil service companies and
refining and marketing companies may each be deemed in a
separate industry, (c) finance companies may be classified
according to the industries of their parent companies, and
(d) securities issued or guaranteed as to principal or
interest by the U.S. Government or its agencies or
instrumentalities or mixed-ownership Government corporations
(including repurchase agreements involving such U.S.
Government securities to the extent excludable under
relevant regulatory interpretations) may be excluded]; and
(8) not to borrow money, including reverse repurchase agreements
in so far as such agreements may be regarded as borrowings,
except for borrowings not in an amount in excess of 33-1/3% of
the value of its total assets.
* In connection with clause (5), the Fund has undertaken with a
state securities authority that, for so long as the Fund's
shares are required to be registered for sale in that state,
the Fund will restrict its investment in those commodities
which are subject to the 10% limit of the Fund's total assets,
to precious metals.
The following nonfundamental investment restrictions may be changed
without shareholder approval. Under these restrictions, it is the Fund's policy:
(1) not to purchase any security or enter into a repurchase
agreement if as a result more than 15% of its net assets would
be invested in securities that are illiquid (including
repurchase agreements not entitling the holder to payment of
principal and interest within seven days);
(2) not to invest more than 15% of its net assets in restricted
securities of all types (including not more than 5% of its net
assets in restricted securities which are not eligible for
resale pursuant to Rule 144A, Regulation S or other exemptive
provisions under the Securities Act of 1933);
(3) not to invest more than 5% of its total assets in securities
of private issuers including predecessors with less than
three years' continuous operations (except (a) securities
guaranteed or backed by an affiliate of the issuer with
three years of continuous operations, (b) securities issued
or guaranteed as to principal or interest by the U.S.
3
<PAGE>
Government, or its agencies or instrumentalities, or a
mixed-ownership Government corporation, (c) securities of
issuers with debt securities rated at least "BBB" by Standard
& Poor's Corporation or "Baa" by Moody's Investor's Service,
Inc. or equivalent by any other nationally recognized
statistical rating organization, or securities of issuers
considered by the Investment Manager to be equivalent, (d)
securities issued by a holding company with at least 50% of
its assets invested in companies with three years of
continuous operations including predecessors, and (e)
securities which generate income which is exempt from local,
state or federal taxes); provided that the Fund may invest up
to 15% in such issuers so long as such investments plus
investments in restricted securities (other than those which
are eligible for resale under Rule 144A, Regulation S or other
exemptive provisions as noted above) do not exceed 15% of the
Fund's total assets;
(4) not to engage in transactions in options except in connection
with options on securities, securities indices and currencies,
and options on futures on securities, securities indices and
currencies;
(5) not to purchase securities on margin or make short sales of
securities or maintain a short position except for short
sales "against the box" (as a matter of current operating
policy, the Fund will not make short sales or maintain a
short position unless not more than 5% of the Fund's net
assets (taken at current value) are held as collateral for
such sales at any time; and for the purpose of this
restriction, escrow or custodian receipts or letters, margin
or safekeeping accounts, or similar arrangements used in the
industry in connection with the trading of futures, options
and forward commitments are not deemed to involve the use of
margin);
(6) not to purchase a security issued by another investment
company, except to the extent permitted under the 1940 Act or
except by purchases in the open market involving only
customary brokers' commissions, or securities acquired as
dividends or distributions or in connection with a merger,
consolidation or similar transaction or other exchange;
(7) not to purchase or retain any security of an issuer if those
of its officers and Trustees and officers and directors of its
investment adviser who individually own more than 1/2 of 1% of
the securities of such issuer, when combined, own more than 5%
of the securities of such issuer taken at market;
(8) not to invest directly as a joint venturer or general partner
in oil, gas or other mineral exploration or development joint
ventures or general partnerships (provided that the Fund may
invest in securities issued by companies which invest in or
sponsor such programs and in securities indexed to the price
of oil, gas or other minerals);
(9) not to invest in warrants in excess of 5% of the value, at the
lower of cost or market, of its net assets, provided that
warrants not listed on the New York or American Stock Exchange
shall be further limited to 2% of the Fund's net assets
(warrants initially attached to securities and acquired by the
Fund upon original issuance thereof shall be deemed to be
without value); and
(10) not to purchase any security while borrowings, including
reverse repurchase agreements, representing more than 5% of
the Fund's total assets are outstanding.
4
<PAGE>
Compliance with the above nonfundamental investment restrictions (1)
and (2) will be determined independently.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Among other investments described below, the Fund may buy and sell
domestic and foreign options, futures contracts, and options on futures
contracts, with respect to securities, securities indices, and currencies, and
may enter into closing transactions with respect to each of the foregoing, and
invest in other derivatives, under circumstances in which 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.
The purchase of a futures contract on securities or an index of
securities normally enables a buyer to participate in the market movement of the
underlying asset or index after paying a transaction charge and posting margin
in an amount equal to a small percentage of the value of the underlying asset or
index. The Fund will initially be required to deposit with the Trust's custodian
or the broker effecting the futures transaction an amount of "initial margin" in
cash or U.S. Treasury obligations.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will terminate
the Fund's position in the futures contract. A final determination of
maintenance margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. While futures
contracts with respect to securities do provide for the delivery and acceptance
of such securities, such delivery and acceptance are seldom made.
5
<PAGE>
Futures contracts will be executed primarily (a) to establish a short
position, and thus protect the Fund from experiencing the full impact of an
expected decline in market value of portfolio holdings without requiring the
sale of holdings, or (b) to establish a long position, and thus to participate
in an expected rise in market value of securities or currencies which the Fund
intends to purchase. Subject to the limitations described below, the Fund may
also enter into futures contracts for purposes of enhancing return. In
transactions establishing a long position in a futures contract, money market
instruments equal to the face value of the futures contract will be identified
by the Fund to the Trust's custodian for maintenance in a separate account to
insure that the use of such futures contracts is unleveraged. Similarly, a
representative portfolio of securities having a value equal to the aggregate
face value of the futures contract will be identified with respect to each short
position. The Fund will employ any other appropriate method of cover which is
consistent with applicable regulatory and exchange requirements.
Options on Securities
The Fund may use options on securities to implement its investment
strategy. A call option on a security, for example, gives the purchaser of the
option the right to buy, and the writer the obligation to sell, the underlying
asset at the exercise price during the option period. Conversely, a put option
on a security gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying asset at the exercise price during the option
period.
Purchased options have defined risk, i.e., the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset.
Written options have varying degrees of risk. An uncovered written call
option theoretically carries unlimited risk, as the market price of the
underlying asset could rise far above the exercise price before its expiration.
This risk is tempered when the call option is covered, i.e., when the option
writer owns the underlying asset. In this case, the writer runs the risk of the
lost opportunity to participate in the appreciation in value of the asset rather
than the risk of an out-of-pocket loss. A written put option has defined risk,
i.e., the difference between the agreed-upon price that the Fund must pay to the
buyer upon exercise of the put and the value, which could be zero, of the asset
at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
his obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Options on Securities Indices
The Fund may engage in transactions in call and put options on
securities indices. For example, the Fund may purchase put options on indices of
securities in anticipation of or during a market decline to attempt to offset
the decrease in market value of its securities that might otherwise result.
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
6
<PAGE>
security at a specified price, a put option on an index of securities gives the
holder the right to receive an amount of cash upon exercise of the option if
the value of the underlying index has fallen below the exercise price. The
amount of cash received will be equal to the difference between the closing
price of the index and the exercise price of the option expressed in dollars
times a specified multiple. As with options on securities or futures contracts,
the Fund may offset its position in index options prior to expiration by
entering into a closing transaction on an exchange or it may let the option
expire unexercised.
A securities index assigns relative values to the securities included
in the index and the index options are based on a broad market index. Although
there are at present few available options on indices of fixed income
securities, other than tax-exempt securities, or futures and related options
based on such indices, such instruments may become available in the future. In
connection with the use of such options, the Fund may cover its position by
identifying a representative portfolio of securities having a value equal to the
aggregate face value of the option position taken. However, the Fund may employ
any appropriate method to cover its positions that is consistent with applicable
regulatory and exchange requirements.
Options on Futures Contracts
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
Options Strategy
A basic option strategy for protecting the Fund against a decline in
securities prices could involve (a) the purchase of a put -- thus "locking in"
the selling price of the underlying securities or securities indices -- or (b)
the writing of a call on securities or securities indices held by the Fund --
thereby generating income (the premium paid by the buyer) by giving the holder
of such call the option to buy the underlying asset at a fixed price. The
premium will offset, in whole or in part, a decline in portfolio value; however,
if prices of the relevant securities or securities indices rose instead of
falling, the call might be exercised, thereby resulting in a potential loss of
appreciation in the underlying securities or securities indices.
A basic option strategy when a rise in securities prices is anticipated
is the purchase of a call -- thus "locking in" the purchase price of the
underlying security or other asset. In transactions involving the purchase of
call options by the Fund, money market instruments equal to the aggregate
exercise price of the options will be identified by the Fund to the Trust's
custodian to insure that the use of such investments is unleveraged.
The Fund may write options in connection with buy-and-write
transactions; that is, the Fund may purchase a security and concurrently write a
call option against that security. If the call option is exercised in such a
transaction, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upward or downward by the difference between the
Fund's purchase price of the security and the exercise price of the option. If
the option is not exercised and the price of the underlying security declines,
the amount of such decline will be offset in part, or entirely, by the premium
received.
7
<PAGE>
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund's return will be the premium received from
writing the put option minus the amount by which the market price of the
security is below the exercise price.
Limitations and Risks of Options and Futures Activity
The Fund will engage in transactions in futures contracts or options as
a hedge against changes resulting from market conditions which produce changes
in the values of their securities or the securities which it intends to purchase
(e.g., to replace portfolio securities which will mature in the near future)
and, subject to the limitations described below, to enhance return. The Fund
will not purchase any futures contract or purchase any call option if,
immediately thereafter, more than one third of the Fund's net assets would be
represented by long futures contracts or call options. The Fund will not write a
covered call or put option if, immediately thereafter, the aggregate value of
the assets (securities in the case of written calls and cash or cash equivalents
in the case of written puts) underlying all such options, determined as of the
dates such options were written, would exceed 25% of that Fund's net assets. The
Fund may not establish a position in a commodity futures contract or purchase or
sell a commodity option contract for other than bona fide hedging purposes if
immediately thereafter the sum of the amount of initial margin deposits and
premiums required to establish such positions for such nonhedging purposes would
exceed 5% of the market value of the Fund's net assets.
Although effective hedging can generally capture the bulk of a desired
risk adjustment, no hedge is completely effective. The Fund's ability to hedge
effectively through transactions in futures and options depends on the degree to
which price movements in its holdings correlate with price movements of the
futures and options.
Some positions in futures and options may be closed out only on an
exchange which provides a secondary market therefor. There can be no assurance
that a liquid secondary market will exist for any particular futures contract or
option at any specific time. Thus, it may not be possible to close such an
option or futures position prior to maturity. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
effectively hedge its securities and might, in some cases, require the Fund to
deposit cash to meet applicable margin requirements. The Fund will enter into an
option or futures position only if it appears to be a liquid investment.
Foreign Investments
To the extent the Fund invests in securities of issuers in less
developed countries or emerging foreign markets, it will be subject to a variety
of additional risks, including risks associated with political instability,
economies based on relatively few industries, lesser market liquidity, high
rates of inflation, significant price volatility of portfolio holdings and high
levels of external debt in the relevant country.
Although the Fund may invest in securities denominated in foreign
currencies, the Fund values its securities and other assets in U.S. dollars. As
a result, the net asset value of the Fund's shares may fluctuate with U.S.
dollar exchange rates as well as with price changes of the Fund's securities in
the various local markets and currencies. Thus, an increase in the value of the
U.S. dollar compared to the currencies in which the Fund makes its investments
could reduce the effect of increases and
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<PAGE>
magnify the effect of decreases in the prices of the Fund's securities in their
local markets. Conversely, a decrease in the value of the U.S. dollar will have
the opposite effect of magnifying the effect of increases and reducing the
effect of decreases in the prices of the Fund's securities in the local
markets.
Currency Transactions
The Fund's dealings in forward currency exchange contracts will be
limited to hedging involving either specific transactions or aggregate portfolio
positions. A forward currency contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are not commodities and are entered into
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. Although spot and forward contracts
will be used primarily to protect the Fund from adverse currency movements, they
also involve the risk that anticipated currency movements will not be accurately
predicted, which may result in losses to the Fund. This method of protecting the
value of the Fund's portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange that can be achieved at
some future point in time. Although such contracts tend to minimize the risk of
loss due to a decline in the value of hedged currency, they tend to limit any
potential gain that might result should the value of such currency increase.
Repurchase Agreements
The Fund may enter into repurchase agreements. Repurchase agreements
occur when the Fund acquires a security and the seller, which may be either (i)
a primary dealer in U.S. Government securities or (ii) an FDIC-insured bank
having gross assets in excess of $500 million, simultaneously commits to
repurchase it at an agreed-upon price on an agreed-upon date within a specified
number of days (usually not more than seven) from the date of purchase. The
repurchase price reflects the purchase price plus an agreed-upon market rate of
interest which is unrelated to the coupon rate or maturity of the acquired
security. The Fund will only enter into repurchase agreements involving U.S.
Government securities. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
Repurchase agreements will be limited to 30% of the Fund's total assets, except
that repurchase agreements extending for more than seven days when combined with
other illiquid securities will be limited to 15% of the Fund's net assets.
Currently, the Fund does not expect to invest more than 5% of its net assets in
repurchase agreements.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. However, the
Fund has no present intention of engaging in reverse repurchase agreements in
excess of 5% of the Fund's total assets. In a reverse repurchase agreement the
Fund transfers a portfolio instrument to another person, such as a financial
institution, broker or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed-upon rate. The ability to use reverse
repurchase agreements may enable, but does not ensure the ability of, the Fund
to avoid selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous.
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<PAGE>
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
When-Issued Securities
The Fund may purchase "when-issued" equity securities, which are traded
on a price basis prior to actual issuance. Currently, the Fund does not expect
to invest more than 5% of its net assets in when-issued securities. Such
purchases will be made only to achieve the Fund's investment objective and not
for leverage. The when-issued trading period generally lasts from a few days to
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
The Fund may buy or sell restricted securities in accordance with Rule
144A under the Securities Act of 1933 ("Rule 144A Securities"). Securities may
be resold pursuant to Rule 144A under certain circumstances only to qualified
institutional buyers as defined in the rule, and the markets and trading
practices for such securities are relatively new and still developing; depending
on the development of such markets, such Rule 144A Securities may be deemed to
be liquid as determined by or in accordance with methods adopted by the
Trustees. Under such methods the following factors are considered, among others:
the frequency of trades and quotes for the security, the number of dealers and
potential purchasers in the market, marketmaking activity, and the nature of the
security and marketplace trades. Investments in Rule 144A Securities could have
the effect of increasing the level of the Fund's illiquidity to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
such securities. Also, the Fund may be adversely impacted by the possible
illiquidity and subjective valuation of such securities in the absence of a
market for them.
Indexed Securities
The Fund may purchase securities the value of which is indexed to
interest rates, foreign currencies and various indices and financial indicators.
These securities are generally short- to intermediate-term debt securities. The
interest rates or values at maturity fluctuate with the index to which they are
connected and may be more volatile than such index.
Swap Arrangements
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below. In an
interest rate swap the Fund could agree for a specified period to pay a bank or
investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an
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<PAGE>
assumed figure selected by the parties for this purpose) in exchange for
agreement by the bank or investment banker to pay the Fund a fixed rate of
interest on the notional principal amount. In a currency swap the Fund would
agree with the other party to exchange cash flows based on the relative
differences in values of a notional amount of two (or more) currencies; in an
index swap, the Fund would agree to exchange cash flows on a notional amount
based on changes in the values of the selected indices. Purchase of a cap
entitles the purchaser to receive payments from the seller on a notional amount
to the extent that the selected index exceeds an agreed upon interest rate or
amount whereas purchase of a floor entitles the purchaser to receive such
payments to the extent the selected index falls below an agreed upon interest
rate or amount. A collar combines a cap and a floor.
Most swaps entered into by the Fund will be on a net basis; for
example, in an interest rate swap, amounts generated by application of the fixed
rate and the floating rate to the notional principal amount would first offset
one another, with the Fund either receiving or paying the difference between
such amounts. In order to be in a position to meet any obligations resulting
from swaps, the Fund will set up a segregated custodial account to hold
appropriate liquid assets, including cash; for swaps entered into on a net
basis, assets will be segregated having a daily net asset value equal to any
excess of the Fund's accrued obligations over the accrued obligations of the
other party, while for swaps on other than a net basis assets will be segregated
having a value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a part of the Fund's portfolio.
However, the Fund may enter into such arrangements for income purposes to the
extent permitted by the CFTC for entities which are not commodity pool
operators, such as the Fund. In entering a swap arrangement, the Fund is
dependent upon the creditworthiness and good faith of the counterparty. The Fund
attempts to reduce the risks of nonperformance by the counterparty by dealing
only with established, reputable institutions. The swap market is still
relatively new and emerging; positions in swap arrangements may become illiquid
to the extent that nonstandard arrangements with one counterparty are not
readily transferable to another counterparty or if a market for the transfer of
swap positions does not develop. The use of interest rate swaps is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Investment Manager is incorrect in its forecasts of market values, interest
rates and other applicable factors, the investment performance of the Fund would
diminish compared with what it would have been if these investment techniques
were not used. Moreover, even if the Investment Manager is correct in its
forecasts, there is a risk that the swap position may correlate imperfectly with
the price of the asset or liability being hedged.
Industry Classifications
In determining how much of the Fund's portfolio is invested in a given
industry, the following industry classifications, grouped by sectors, are
currently used. 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.
11
<PAGE>
<TABLE>
<CAPTION>
Basic Industries Consumer Staple Science & Technology
- ---------------- --------------- --------------------
<S> <C> <C>
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
</TABLE>
Other Investment Limitations
Pursuant to the policies of certain state securities authorities, the
Fund will not invest in real estate limited partnerships, oil, gas or mineral
development limited partnerships, or in oil, gas or mineral leases for so long
as Fund shares are required to be registered for sale in the relevant state.
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
As indicated in the Fund's Prospectus, the Fund may invest in long-term
and short-term debt securities. The Fund may invest in cash and short-term
securities for temporary defensive purposes when, in the opinion of the
Investment Manager, such a position is more likely to provide protection against
unfavorable market conditions than adherence to other investment policies.
Certain debt securities and money market instruments in which the Fund may
invest are described below.
U.S. Government and Related Securities
U.S. Government securities are securities which are issued or guaranteed
as to principal or interest by the U.S. Government, a U.S. Government agency or
instrumentality, or certain mixed-ownership Government corporations as described
herein. The U.S. Government securities in which the Fund invests include, among
others:
(bullet) direct obligations of the U.S. Treasury, i.e., U.S. Treasury
bills, notes, certificates and bonds;
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<PAGE>
(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.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
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<PAGE>
Rating Categories of Debt Securities
Set forth below is a description of corporate bond and debenture
ratings of Standard & Poor's Corporation ("S&P"):
AAA: Debt rated AAA has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B: Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
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<PAGE>
CI: The rating CI is reserved for income bonds on which no interest
is being paid.
D: Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to noncredit risks created by the terms of the
obligation, such as securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only (IO) and principal only (PO) mortgage securities.
Set forth below is a description of corporate bond and debenture
ratings of Moody's Investors Service, Inc. ("Moody's"):
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
15
<PAGE>
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with respect to
principal or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
1, 2 or 3: The ratings from Aa through B may be modified by the
addition of a numeral indicating a bond's rank within its rating category.
Risk Factors of Lower Quality Debt Securities
Lower quality debt securities generally involve more credit risk than
higher rated securities and are considered by S&P and Moody's to be speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. Further, such securities may be subject to greater
market fluctuations and risk of loss of income and principal than lower
yielding, higher rated debt securities. Risks of lower quality debt securities,
commonly known as "junk bonds," include (i) limited liquidity and secondary
market support; (ii) substantial market price volatility resulting from changes
in prevailing interest rates and/or investor perceptions; (iii) subordination to
the prior claims of banks and other senior lenders; (iv) the operation of
mandatory sinking fund or call/redemption provisions during periods of declining
interest rates when the Fund may be required to reinvest premature redemption
proceeds in lower yielding portfolio securities; (v) the possibility that
earnings of the issuer may be insufficient to meet its debt service; and (vi)
the issuer's low creditworthiness and potential for insolvency during periods of
rising interest rates and economic downturn.
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
16
<PAGE>
not invest in time deposits maturing in more than seven days and will not invest
more than 10% of its total assets in time deposits maturing in two to seven
days.
U.S. branches and agencies of foreign banks are offices of foreign banks
and are not separately incorporated entities. They are chartered and regulated
either federally or under state law. U.S. federal branches or agencies of
foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however,
not all such branches elect FDIC insurance. Unlike U.S. branches of foreign
banks, U.S. agencies of foreign banks may not accept deposits and thus are not
eligible for FDIC insurance. Both branches and agencies can maintain credit
balances, which are funds received by the office incidental to or arising out
of the exercise of their banking powers and can exercise other commercial
functions, such as lending activities.
Short-Term Corporate Debt Instruments
Short-term corporate debt instruments include commercial paper to
finance short-term credit needs (i.e., short-term, unsecured promissory notes)
issued by corporations including but not limited to (a) domestic or foreign bank
holding companies or (b) their subsidiaries or affiliates where the debt
instrument is guaranteed by the bank holding company or an affiliated bank or
where the bank holding company or the affiliated bank is unconditionally liable
for the debt instrument. Commercial paper is usually sold on a discounted basis
and has a maturity at the time of issuance not exceeding nine months.
Commercial Paper Ratings
Commercial paper investments at the time of purchase will be rated A by
S&P or Prime by Moody's, or, if not rated, issued by companies having an
outstanding long-term unsecured debt issue rated at least A by S&P or by
Moody's. The money market investments in corporate bonds and debentures (which
must have maturities at the date of settlement of one year or less) must be
rated at the time of purchase at least A by S&P or by Moody's.
Commercial paper rated A (highest quality) by S&P is issued by entities
which have liquidity ratios which are adequate to meet cash requirements.
Long-term senior debt is rated A or better, although in some cases BBB credits
may be allowed. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. The relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1, A-2
or A-3. (Those A-1 issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign: A-1+.)
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<PAGE>
The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.
In the event the lowering of ratings of debt instruments held by the
Fund by applicable rating agencies results in a material decline in the overall
quality of the Fund's portfolio, the Trustees of the Trust will review the
situation and take such action as they deem in the best interests of the Fund's
shareholders, including, if necessary, changing the composition of the
portfolio.
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<PAGE>
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust, their addresses, and their
principal occupations and positions with certain affiliates of the Investment
Manager are set forth below.
*+Peter C. Bennett, One Financial Center, Boston, MA 02111, serves as Vice
President of the Trust. He is 57. His principal occupation is Executive Vice
President and Director of State Street Research & Management Company. During the
past five years he has also served as Senior Vice President and as Vice
President of State Street Research & Management Company. Mr. Bennett's other
principal business affiliation is Director, State Street Research Investment
Services, Inc.
*Charles S. Glovsky, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 43. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as Vice President of State Street Research & Management
Company.
*Rudolph K. Kluiber, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 36. His principal occupation currently is
Vice President of State Street Research & Management Company. During the past
five years he has also served as an analyst for State Street Research &
Management Company.
*+Frederick R. Kobrick, One Financial Center, Boston, MA 02111, serves
as Vice President of the Trust. He is 52. His principal occupation during the
past five years has been Senior Vice President of State Street Research &
Management Company.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791, serves as
Trustee of the Trust. He is 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 21.
19
<PAGE>
*+Francis J. McNamara, III has served as Secretary and General Counsel
of the Trust since May 1995. He is 40. His principal occupation is Senior Vice
President, Secretary and General Counsel of the Investment Manager. During the
past five years he has also served as Senior Vice President, General Counsel and
Assistant Secretary of The Boston Company, Inc., Boston Safe Deposit and Trust
Company and The Boston Company Advisors, Inc. Mr. McNamara's other principal
business affiliations include Senior Vice President, Clerk and General Counsel
of State Street Research Investment Services, Inc.
*+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 has also served as President and Chief
Executive Officer of New England Investment Companies and as Chief Investment
Officer and Director of New England Mutual Life Insurance Company. Mr. Verni's
other principal business affiliations include Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research Investment
Services, Inc.
- -----------------------------
* or + See footnotes on page 21.
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<PAGE>
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 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.
As of December 31, 1995, the Trustees and Officers of the Trust as a
group owned approximately 2.6% of the outstanding Class A shares of the Fund.
As of December 31, 1995, the Investment Manager, the Distributor and/or
Metropolitan Life Insurance Company ("Metropolitan"), their indirect parent,
were the beneficial owners of all or a substantial amount of the outstanding
Class A, Class B, Class C and Class D shares of the Fund, and may be deemed to
be in control of the Fund as control is defined in the 1940 Act. Such owners may
acquire additional shares of the Fund. Although sales of the Fund's shares to
other investors will reduce their percentage ownership, so long as 25% of a
class of shares is so owned, such owner will be presumed to be in control of
such class of shares for purposes of voting on certain matters submitted to a
vote of shareholders, such as any Distribution Plan for a given class.
- ----------------------------
* These Trustees and/or officers are or may be deemed to be interested
persons of the Trust under the 1940 Act because of their affiliations with
the Fund's investment adviser.
+ Serves as a Trustee and/or officer of one or more of the following
investment companies, each of which has an advisory or distribution
relationship with the Investment Manager or its affiliates: 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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<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)(c) to Trustees (b)
--------------- ----------------- ---------------
Edward M. Lamont $7,800 $61,271
Robert A. Lawrence $7,800 $88,935
Dean O. Morton $8,700 $97,395
Thomas L. Phillips $8,100 $67,185
Toby Rosenblatt $7,800 $61,271
Michael S. Scott Morton $9,300 $98,835
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $8,700 $69,585
- ---------------------------
(a) Includes compensation from multiple Series of the Trust. See
"Distribution of Shares" for a listing of series.
(b) Includes compensation from Metropolitan Series Fund, Inc., for which the
Investment Manager serves as sub-investment adviser, State Street Research
Portfolios, Inc., for which State Street Research Investment Services, Inc.
serves as distributor, and all investment companies for which the
Investment Manager serves as primary investment adviser, comprising a total
of 29 series. The Trust does not provide any pension or retirement benefits
for the Trustees.
(c) This information includes other series of the Trust through their fiscal
years ended September 30, 1995, and includes estimates of compensation
from the Fund for the current fiscal year ended September 30, 1996. The
Fund commenced operations on February 13, 1995.
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
22
<PAGE>
of 0.85% of the net assets of the Fund. The Distributor and its affiliates have
from time to time and in varying amounts voluntarily assumed some portion of
fees or expenses relating to the Fund. For the period February 13, 1995
(commencement of operations) through September 30, 1995, the Fund's investment
advisory fee prior to the assumption of fees or expenses was $30,298. For the
same period, the voluntary reduction of fees of assumption of expenses amounted
to $80,022.
Further, to the extent required under applicable state regulatory
requirements, the Investment Manager will reduce its management fee up to the
amount of any expenses (excluding permissible items, such as brokerage
commissions, Rule 12b-1 payments, interest, taxes and litigation expenses) paid
or incurred by the Fund in any fiscal year which exceed specified percentages of
the average daily net assets of the Fund for such fiscal year. The most
restrictive of such percentage limitations is currently 2.5% of the first $30
million of average net assets, 2.0% of the next $70 million of average net
assets and 1.5% of the remaining average net assets. These commitments may be
amended or rescinded in response to changes in the requirements of the various
states by the Trustees without shareholder approval.
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund for a period of two years after its initial effectiveness
and will continue from year to year thereafter as long as it is approved at
least annually both (i) by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act) or by the Trustees of the
Trust, and (ii) in either event by a vote of a majority of the Trustees who are
not parties to the Advisory Agreement or "interested persons" of any party
thereto, cast in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement may be terminated on 60 days' written notice by
either party and will terminate automatically in the event of its assignment, as
defined under the 1940 Act and regulations thereunder. Such regulations provide
that a transaction which does not result in a change of actual control or
management of an adviser is not deemed an assignment.
Under a Funds Administration Agreement between the Investment Manager and
the Distributor, the Distributor provides assistance to the Investment Manager
in performing certain fund administration services for the Trust, such as
assistance in determining the daily net asset value of shares of series of the
Trust and in preparing various reports required by regulations.
Under a Shareholders' Administrative Services Agreement between the Trust
and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Fund, and is entitled to
reimbursements of its costs for providing such services. Under certain
arrangements for Metropolitan to provide subadministration services,
Metropolitan may receive a fee for the maintenance of certain share ownership
records for participants in sponsored arrangements, such as employee benefit
plans, through or under which the Fund's shares may be purchased.
Under the Code of Ethics of the Investment Manager, its employees in
Boston, where investment management operations are conducted, are only permitted
to engage in personal securities transactions in accordance with certain
conditions relating to an employee's position, the identity of the security, the
timing of the transactions, and similar factors. Such employees must report
their personal securities transactions quarterly and supply broker confirmations
to the Investment Manager.
23
<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 Funds and of any of the other Class A shares of Eligible Funds held of
record as of the date of his or her Letter of Intent, plus the value (at the
current offering price) as of such date of all of such shares held by any
"person" described herein as eligible to join 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.
24
<PAGE>
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Class C Shares
Class C shares are currently available to certain benefit plans such as
qualified retirement plans 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 similar institutional investors.
Reorganizations
In the event of mergers or reorganizations with other public or private
collective investment entities, including investment companies as defined in the
1940 Act, as amended, the Fund may issue its shares at net asset value (or more)
to such entities or to their security holders.
Redemptions
The Fund reserves the right to pay redemptions in kind with portfolio
securities in lieu of cash. In accordance with its election pursuant to Rule
18f-1 under the 1940 Act, the Fund may limit the amount of redemption proceeds
paid in cash. Although it has no present intention to do so, the Fund may, under
unusual circumstances, limit redemptions in cash with respect to each
shareholder during any ninety-day period to the lesser of (i) $250,000 or (ii)
1% of the net asset value of the Fund at the beginning of such period. In
connection with any redemptions paid in kind with portfolio securities,
brokerage and other costs may be incurred by the redeeming shareholder in the
sale of the securities received.
NET ASSET VALUE
The net asset values of the shares of the Fund are determined once daily as
of the close of the NYSE, ordinarily 4 P.M. New York City time, Monday through
Friday, on each day during which the NYSE is open for unrestricted trading. The
NYSE is currently closed on New Year's Day, Presidents
25
<PAGE>
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
The net asset value per share of the Fund is computed by dividing the sum
of the value of the securities held by the Fund plus any cash or other assets
minus all liabilities by the total number of outstanding shares of the Fund at
such time. Any expenses, except for extraordinary or nonrecurring expenses,
borne by the Fund, including the investment management fee payable to the
Investment Manager, are accrued daily.
In determining the values of portfolio assets as provided below, the
Trustees utilize one or more pricing services to value certain securities for
which market quotations are not readily available on a daily basis. Most debt
securities are valued on the basis of data provided by such pricing services.
The pricing services may provide prices determined as of times prior to the
close of the NYSE.
In general, securities are valued as follows. Securities which are listed
or traded on the New York or American Stock Exchange are valued at the price of
the last quoted sale on the respective exchange for that day. Securities which
are listed or traded on a national securities exchange or exchanges, but not on
the New York or American Stock Exchange, are valued at the price of the last
quoted sale on the exchange for that day prior to the close of the NYSE.
Securities not listed on any national securities exchange which are traded "over
the counter" and for which quotations are available on the National Association
of Securities Dealers' NASDAQ System, or other system, are valued at the closing
price supplied through such system for that day at the close of the NYSE. Other
securities are, in general, valued at the mean of the bid and asked quotations
last quoted prior to the close of the NYSE if there are market quotations
readily available, or in the absence of such market quotations, then at the fair
value thereof as determined by or under authority of the Trustees of the Trust
utilizing such pricing services as may be deemed appropriate as described above.
Securities deemed restricted as to resale are valued at the fair value thereof
as determined by or in accordance with methods adopted by the Trustees of the
Trust.
Short-term debt instruments issued with a maturity of one year or less
which have a remaining maturity of 60 days or less are valued using the
amortized cost method, provided that during any period in which more than 25% of
the Fund's total assets is invested in short-term debt securities the current
market value of such securities will be used in calculating net asset value per
share in lieu of the amortized cost method. The amortized cost method is used
when the value obtained is fair value. Under the amortized cost method of
valuation, the security is initially valued at cost on the date of purchase (or
in the case of short-term debt instruments purchased with more than 60 days
remaining to maturity, the market value on the 61st day prior to maturity), and
thereafter a constant amortization to maturity of any discount or premium is
assumed regardless of the impact of fluctuating interest rates on the market
value of the security.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
The Fund's portfolio turnover rate is determined by dividing the lesser of
securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The Fund reserves full freedom with respect to portfolio
turnover, as described in the
26
<PAGE>
Prospectus. The portfolio turnover rate for the period February 13, 1995
(commencement of operations) through September 30, 1995 was 47.34%.
Brokerage Allocation
The Fund and the Investment Manager seek the best overall execution of
purchase or sale orders and the most favorable net price in securities
transactions consistent with their judgment as to the business qualifications of
the various broker or dealer firms with which the Fund may do business.
Decisions with respect to the market where the transaction is to be completed,
and to the allocation of orders among brokers or dealers, are made in accordance
with this policy. In selecting brokers or dealers to effect portfolio
transactions, consideration is given to the performance, integrity and financial
responsibility of the various firms as well as to their demonstrated execution
experience and capability generally and in regard to particular markets or
securities and, in agency transactions, to the competitiveness of the commission
rates (or in principal transactions of the net prices) they charge. The
Investment Manager keeps current as to the range of rates or prices charged by
various firms and against this background evaluates the reasonableness of a
commission or price charged with respect to a particular transaction by
considering such factors as difficulty of execution or security positioning by
the executing firm.
When it appears that a number of firms can satisfy the required standards
in respect of a particular transaction, consideration may also be given to
services other than execution services which such firms have provided in the
past or may provide in the future. Among such other services are the supplying
of supplemental investment research, general economic and political information,
analytical and statistical data, relevant market information and daily market
quotations for computation of net asset value. In this connection it should be
noted that a substantial portion of brokerage commissions paid, or principal
transactions entered, by the Fund may be with brokers and investment banking
firms which, in the normal course of business, publish statistical, research and
other material which is received by the Investment Manager and which may or may
not prove useful to the Investment Manager, the Fund or other clients of the
Investment Manager.
Neither the Fund nor the Investment Manager has any definite agreements
with any firm as to the amount of business which that firm may expect to receive
for services supplied or otherwise. There may be, however, understandings with
certain firms that in order for such firms to be able to 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 in secondary trading during the period February 13, 1995
(commencement of operations) through September 30, 1995 amounted to
approximately $15,000.
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.
27
<PAGE>
Occasions may arise when the Investment Manager determines that an
investment in a particular security, or the disposition of a particular
security, is simultaneously a proper investment decision for the Fund as well as
for the portfolio of one or more of its other clients. In this event, a purchase
or sale, as the case may be, of any such security on any given day will be
normally averaged as to price and allocated as to amount among the several
clients in a manner deemed equitable to each client.
On occasions when the Investment Manager deems the purchase or sale of a
security to be in the best interests of the Fund, as well as other clients of
the Investment Manager, the Investment Manager, to the extent permitted by
applicable laws and regulations, may aggregate such securities to be sold or
purchased for the Fund with those to be sold or purchased for other customers in
order to obtain best execution and lower brokerage commissions, if any. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Investment Manager in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to all such customers, including the Fund. In some instances, this
procedure may affect the price and size of the positions obtainable for the
Fund.
CERTAIN TAX MATTERS
Federal Income Taxation of the Fund -- In General
The Fund intends to qualify and elect to be treated each taxable year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), although it cannot give complete assurance
that it will do so. Accordingly, the Fund must, among other things, (a) derive
at least 90% of its gross income in each taxable year from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of the
following held for less than three months (the "30% test"): (i) stock or
securities, (ii) options, futures, or forward contracts (other than options,
futures or forward contracts on foreign currencies), or (iii) foreign currencies
(or options, futures, or forward contracts on foreign currencies) but only if
such currencies (or options, futures, or forward contracts) are not directly
related to the Fund's principal business of investing in stocks or securities
(or options and futures with respect to stocks or securities); (c) satisfy
certain diversification requirements; and (d) in order to be entitled to utilize
the dividends paid deduction, distribute annually at least 90% of its investment
company taxable income (determined without regard to the deduction for dividends
paid).
The 30% test will limit the extent to which the Fund may sell securities
held for less than three months, write options which expire in less than three
months, and effect closing transactions with respect to call or put options that
have been written or purchased within the preceding three months. (If the Fund
purchases a put option for the purpose of hedging an underlying portfolio
security, the acquisition of the option is treated as a short sale of the
underlying security unless, for purposes only of the 30% test, the option and
the security are acquired on the same date.) Finally, as discussed below, this
requirement may also limit investments by the Fund in options on stock indices,
listed options on nonconvertible debt securities, futures contracts, options on
interest rate futures contracts and certain foreign currency contracts.
28
<PAGE>
If the Fund should fail to qualify as a regulated investment company in any
year, it would lose the beneficial tax treatment accorded regulated investment
companies under Subchapter M of the Code and all of its taxable income would be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of such Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of the
Fund to the extent thereof. Any distribution in excess of a shareholder's basis
in the shareholder's shares would be taxable as gain realized from the sale of
such shares.
The Fund will be liable for a nondeductible 4% excise tax on amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement. To avoid the tax, during each calendar year the Fund must
distribute an amount equal to at least 98% of the sum of its ordinary income
(not taking into account any capital gains or losses) for the calendar year, and
its capital gain net income for the 12-month period ending on October 31, in
addition to any undistributed portion of the respective balances from the prior
year. The Fund intends to make sufficient distributions to avoid this 4% excise
tax.
Federal Income Taxation of the Fund's Investments
Original Issue Discount. For federal income tax purposes, debt securities
purchased by the Fund may be treated as having original issue discount. Original
issue discount represents interest for federal income tax purposes and can
generally be defined as the excess of the stated redemption price at maturity of
a debt obligation over the issue price. Original issue discount is treated for
federal income tax purposes as income earned by the Fund, whether or not any
income is actually received, and therefore is subject to the distribution
requirements of the Code. Generally, the amount of original issue discount is
determined on the basis of a constant yield to maturity which takes into account
the compounding of accrued interest. Under section 1286 of the Code, an
investment in a stripped bond or stripped coupon may result in original issue
discount.
Debt securities may be purchased by the Fund at a discount that exceeds the
original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for income tax
purposes. In the case of any debt security issued after July 18, 1984, having a
fixed maturity date of more than one year from the date of issue and having
market discount, the gain realized on disposition will be treated as interest to
the extent it does not exceed the accrued market discount on the security
(unless the Fund elects to include such accrued market discount in income in the
tax year to which it is attributable). Generally, market discount is accrued on
a daily basis. The Fund may be required to capitalize, rather than deduct
currently, part or all of any direct interest expense incurred to purchase or
carry any debt security having market discount, unless the Fund makes the
election to include market discount currently. Because the Fund must include
original issue discount in income, it will be more difficult for the Fund to
make the distributions required for the Fund to maintain its status as a
regulated investment company under Subchapter M of the Code or to avoid the 4%
excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may be
subject to provisions of the Code that (i) require inclusion of unrealized gains
or losses in the Fund's income for purposes of the 90% test, the 30% test, the
excise tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and (iii) characterize
both realized and
29
<PAGE>
unrealized gain or loss as short-term or long-term gain or loss. Such provisions
generally apply to, among other investments, options on debt securities, indices
on securities and futures contracts.
Federal Income Taxation of Shareholders
Dividends paid by the Fund may be eligible for the 70% dividends-received
deduction for corporations. The percentage of the Fund's dividends eligible for
such tax treatment may be less than 100% to the extent that less than 100% of
the Fund's gross income may be from qualifying dividends of domestic
corporations. Any dividend declared in October, November or December and made
payable to shareholders of record in any such month is treated as received by
such shareholder on December 31, provided that the Fund pays the dividend during
January of the following calendar year.
Distributions by the Fund can result in a reduction in the fair market
value of such Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as ordinary income or long-term capital gain, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
DISTRIBUTION OF SHARES OF THE FUND
State Street Research Capital Trust (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 class.
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class D shares). The Distributor may reallow all
or portions of such sales charges as concessions to dealers. For the period
February 13, 1995 (commencement of operations) through September 30, 1995, total
sales charges on Class A shares paid to the Distributor amounted to $642. For
the same period the Distributor retained $74 after reallowance of concessions to
dealers.
30
<PAGE>
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. Such commission also is
payable to authorized securities dealers upon sales of Class A shares made
pursuant to a Letter of Intent to purchase shares having a net asset value of
$1,000,000 or more. Shares sold with such commissions payable are subject to a
one-year contingent deferred sales charge of 1.00% on any portion of such shares
redeemed within one year following their sale. After a particular purchase of
Class A shares is made under the Letter of Intent, the commission will be paid
only in respect of that particular purchase of shares. If the Letter of Intent
is not completed, the commission paid will be deducted from any discounts or
commissions otherwise payable to such dealer in respect of shares actually sold.
If an investor is eligible to purchase shares at net asset value on account of
the Right of Accumulation, the commission will be paid only in respect of the
incremental purchase at net asset value. For the period February 13, 1995 (
commencement of operations) through September 30, 1995, the Distributor received
contingent deferred sales charges upon redemption of Class A, Class B or Class D
shares of the Fund and paid initial commissions to securities dealers for sales
of such shares as follows:
Contingent Deferred Commissions Paid
Sales Charges to Dealers
------------------- ----------------
Class A $0 $ 568
Class B $0 $4,008
Class D $0 $1,002
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1" (the
"Distribution Plan") under which the Fund may engage, directly or indirectly, in
financing any activities primarily intended to result in the sale of Class A,
Class B and Class D shares, including, but not limited to, (1) the payment of
commissions and/or reimbursement to underwriters, securities dealers and others
engaged in the sale of shares, including payments to the Distributor to be used
to pay commissions and/or reimbursement to securities dealers (which securities
dealers may be affiliates of the Distributor) engaged in the distribution and
marketing of shares and furnishing ongoing assistance to investors, (2)
reimbursement of direct out-of-pocket expenditures incurred by the Distributor
in connection with the distribution and marketing of shares and the servicing of
investor accounts including expenses relating to the formulation and
implementation of marketing strategies and promotional activities such
31
<PAGE>
as direct mail promotions and television, radio, newspaper, magazine and other
mass media advertising, the preparation, printing and distribution of
Prospectuses of the Fund and reports for recipients other than existing
shareholders of the Fund, and obtaining such information, analyses and reports
with respect to marketing and promotional activities and investor accounts as
the Fund may, from time to time, deem advisable, and (3) reimbursement of
expenses incurred by the Distributor in connection with the servicing of
shareholder accounts including payments to securities dealers and others in
consideration of the provision of personal services to investors and/or the
maintenance of shareholder accounts and expenses associated with the provision
of personal services by the Distributor directly to investors. In addition, the
Distribution Plan is deemed to authorize the Distributor to make payments out of
general profits, revenues or other sources to underwriters, securities dealers
and others in connection with sales of shares, to the extent, if any, that such
payments may be deemed to be within the scope of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class D shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class D
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class D shares (as the case may be) to make payments for personal
services and/or the maintenance of shareholder accounts. Proceeds from the
service fee will be used by the Distributor to compensate securities dealers and
others selling shares of the Fund for rendering service to shareholders on an
ongoing basis. Such amounts are based on the net asset value of shares of the
Fund held by such dealers as nominee for their customers or which are owned
directly by such customers for so long as such shares are outstanding and the
Distribution Plan remains in effect with respect to the Fund. Any amounts
received by the Distributor and not so allocated may be applied by the
Distributor as reimbursement for expenses incurred in connection with the
servicing of investor accounts. The distribution and servicing expenses of a
particular class will be borne solely by that class.
For the period February 13, 1995 (commencement of operations) through
September 30, 1995, the Fund paid the Distributor fees under the Distribution
Plan and the Distributor used all of such payments for expenses incurred on
behalf of the Fund as follows:
32
<PAGE>
Class A Class B Class D
------- ------- -------
Advertising $ 905 $ 75 $ 75
Printing and mailing of
prospectuses to other
than current shareholders 500 41 41
Compensation to dealers 0 0 0
Compensation to
sales personnel 4,254 351 351
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses:
marketing; general 2,733 225 225
------ ---- ----
Total fees $8,392 $692 $692
====== ==== ====
The Distributor may also use additional resources of its own for further
expenses on behalf of the Fund.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as prohibiting
banks and other depository institutions from being paid for performing services
under the Distribution Plan, the Fund will make alternative arrangements for
such services for shareholders who acquired shares through such institutions.
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") of the Class A,
Class B, Class C and Class D shares of the Fund will be calculated as set forth
below. Total return is computed separately for each class of shares of the Fund.
The Fund's performance is shown below, and where noted, reflects the
voluntary measures, if any, by the Fund's affiliates to reduce fees or expenses
relating to the Fund; see "Accrued Expenses" later in this section.
33
<PAGE>
Total Return
The total returns ("standard total return") of each class of the Fund's
shares were as follows:
<TABLE>
<CAPTION>
February 13, 1995
(Commencement of Operations) to
September 30, 1995
------------------
SEC Total Return Aggregate Total Return
(Annualized) (Not Annualized)
------------ ----------------
With Subsidy Without Subsidy With Subsidy Without Subsidy
------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Class A 18.52% 15.81% 11.30% 9.69%
Class B 18.05% 15.22% 11.02% 9.34%
Class C 27.87% 24.95% 16.75% 15.07%
Class D 24.87% 21.98% 15.02% 13.34%
</TABLE>
The figures shown above as "SEC Total Return" result from the
"annualization" of actual returns for the approximately 230-day period involved;
annualization presumes that the performance for the 230 days continues for a
full year.
Standard total return is computed separately for each class of shares by
determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value in accordance with the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the
designated period assuming a hypothetical
$1,000 payment made at the beginning of the
designated period
The calculation is based on the further assumptions that the maximum
initial or contingent deferred sales charge applicable to the investment is
deducted, and that all dividends and distributions by the Fund are reinvested at
net asset value on the reinvestment dates during the periods. All accrued
expenses are also taken into account as described later herein.
34
<PAGE>
Accrued Expenses
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return results take sales charges, if applicable, into account,
although the results do not take into account recurring and nonrecurring charges
for optional services which only certain shareholders elect and which involve
nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by affiliates of
fees or expenses relating to the Fund, during the subject period. In the absence
of such subsidization, the performance of the Fund will be lower.
Nonstandardized Total Return
A Fund may provide the above described standard total return results for
Class A, Class B, Class C and Class D shares for periods which end no earlier
than the most recent calendar quarter end and which begin twelve months before
and at the time of commencement of such Fund's operations. In addition, the Fund
may provide nonstandardized total return results for differing periods, such as
for the most recent six months, and/or without taking sales charges into
account. Such nonstandardized total return is computed as otherwise described
under "Total Return" except the result may or may not be annualized, and as
noted any applicable sales charge may not be taken into account and therefore
not deducted from the hypothetical initial payment of $1,000 or ending value.
For example, the nonstandardized total returns for the six months ended
September 30, 1995 without taking sales charges into account, were as follows:
With Subsidy Without Subsidy
------------ ---------------
Class A 13.80% 12.52%
Class B 13.41% 12.13%
Class C 14.01% 12.73%
Class D 13.41% 12.13%
35
<PAGE>
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as the Trust's independent accountants, providing professional
services including (1) audits of the Fund's annual financial statements, (2)
assistance and consultation in connection with Securities and Exchange
Commission filings and (3) review of the annual income tax returns filed on
behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a semiannual
basis, other supplementary financial reports may be made available from time to
time and holders of record may request a copy of a current supplementary report,
if any, by calling State Street Research Shareholder Services.
The following financial statements are for the period February 13, 1995
(commencement of operations) through September 30, 1995:
36
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION VALUE FUND
INVESTMENT PORTFOLIO
September 30, 1995
<TABLE>
<CAPTION>
Value
Shares (Note 1)
- ----------------------------------------- ----- -----------
<S> <C> <C>
COMMON STOCKS 99.6%
Basic Industries 37.6%
Chemical 5.1%
Applied Extrusion Technologies, Inc.* 3,000 $ 55,125
Carlisle Plastics, Inc. Cl. A* 10,000 50,000
McWhorter Technologies, Inc.* 7,000 107,625
Rexene Corp.* 2,500 29,375
Uniroyal Chemical Corp.* 7,500 67,500
---------
309,625
---------
Diversified 5.9%
Alltrista Corp.* 2,000 38,000
Commercial Intertech Corp. 1,500 28,688
Noel Group, Inc. 22,000 137,500
Triton Group Ltd.* 33,300 104,062
Zero Corp. 3,300 53,625
---------
361,875
---------
Forest Product 2.5%
Gaylord Container Corp. Wts.* 18,199 154,694
---------
Machinery 3.6%
Arden Industrial Products, Inc.* 8,000 64,000
Hardinge, Inc. 3,500 91,875
Specialty Equipment Companies, Inc.* 5,000 61,250
---------
217,125
---------
Metal & Mining 19.6%
Algoma Steel, Inc.* 11,000 51,150
Bayou Steel Corp. Cl. A* 3,000 14,813
Carbide/Graphite Group, Inc.* 12,000 169,500
Castech Aluminum Group, Inc.* 7,000 112,875
Chase Brass Industries, Inc.* 8,000 102,000
Commonwealth Aluminum Corp. 1,000 17,500
Easco, Inc. 11,000 82,500
Encore Wire Corp.* 2,000 24,125
Interlake, Inc.* 53,900 128,013
Maxxam, Inc.* 1,000 49,125
Shaw Group, Inc.* 6,000 54,750
Sinter Metals, Inc. Cl. A* 3,000 33,000
Sunshine Mining & Refining Co. Pfd.* 18,000 148,500
Webco Industries, Inc.* 21,000 145,687
Wyman Gordon Co.* 5,000 69,062
---------
1,202,600
---------
Railroad 0.9%
Westinghouse Air Brake Co.* 4,000 57,500
---------
Total Basic Industries 2,303,419
---------
Consumer Cyclical 34.0%
Airline 3.0%
America West Airline, Inc.* 9,000 $ 139,500
Midwest Express Holdings, Inc. 2,000 45,000
---------
184,500
---------
Automotive 7.9%
Borg Warner Automotive, Inc. 1,000 32,000
Federal-Mogul Corp. 5,000 95,625
Harvard Industries, Inc. Cl. B* 1,000 26,750
Lear Seating Corp.* 3,000 88,125
Littelfuse, Inc.* 1,000 32,500
Masland Corp. 7,000 104,125
Tower Automotive, Inc.* 3,000 41,250
Wescast Industries, Inc. Cl. A 6,000 66,000
---------
486,375
---------
Building 8.5%
American Buildings Co.* 2,500 59,062
Cameron Ashley, Inc.* 6,000 57,000
Centex Construction Products, Inc.* 6,500 85,313
Falcon Building Products, Inc.* 5,000 43,750
Miles Homes, Inc.* 20,000 27,500
Nortek, Inc.* 16,000 140,000
Simpson Manufacturing, Inc.* 4,000 48,500
Stimsonite Corp.* 5,000 60,000
---------
521,125
---------
Hotel & Restaurant 2.3%
Hollywood Casino Cl. A* 10,000 70,000
Primadonna Resorts, Inc.* 4,500 68,625
---------
138,625
---------
Recreation 3.8%
Lewis Galoob Toys, Inc. Cv. Pfd.* 5,000 91,875
Granite Broadcasting Co.* 7,000 76,125
HMG Worldwide Corp.* 27,000 64,125
---------
232,125
---------
Retail Trade 8.5%
Bombay Company, Inc.* 5,000 40,625
Cole National Corp. Cl. A* 5,000 60,625
Eastbay, Inc.* 4,500 88,875
Finlay Enterprises, Inc.* 3,000 51,750
Home Shopping Network, Inc.* 3,000 27,750
Rhodes, Inc.* 10,000 115,000
TBC Corp.* 8,000 77,000
Valuevision International, Inc.* 10,000 58,750
---------
520,375
---------
Total Consumer Cyclical 2,083,125
---------
The accompanying notes are an integral part of the financial
statements.
37
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION VALUE FUND
Value
Shares (Note 1)
- ----------------------------------------- ----- -----------
Consumer Staple 11.7%
Business Service 5.3%
Computer Learning Centers, Inc.* 4,000 $ 44,000
Ideon Group, Inc. 5,000 51,250
Protection One, Inc.* 16,000 146,000
Staffing Resources, Inc. 6,500 81,250
---------
322,500
---------
Container 3.8%
Continental Can Company, Inc.* 4,000 78,500
Lufkin Industries, Inc. 3,000 70,500
U.S. Can Corp.* 6,500 86,937
---------
235,937
---------
Drug 0.8%
Martek Biosciences Corp.* 3,000 48,750
---------
Printing & Publishing 1.8%
Katz Media Group, Inc.* 5,500 112,063
---------
Total Consumer Staple 719,250
---------
Energy 5.2%
Oil 4.3%
Crystal Oil Corp.* 3,700 110,075
Gerrity Oil & Gas Corp. Cv. Pfd. 10,000 106,250
Optima Petroleum Corp.* 17,100 49,162
---------
265,487
---------
Oil Service 0.9%
Global Marine, Inc.* 8,000 57,000
---------
Total Energy 322,487
---------
Finance 2.7%
Bank 0.8%
Springfield Institution For Savings Bank* 3,000 46,125
---------
Financial Service 1.9%
Hawthorne Financial Corp.* 20,000 73,750
Midland Financial Group, Inc. 4,000 44,000
---------
117,750
---------
Total Finance 163,875
---------
Science & Technology 7.2%
Aerospace 1.1%
BE Aerospace, Inc.* 8,000 67,000
---------
Computer Software & Service 3.0%
Computational Systems, Inc.* 3,900 63,375
Computervision Corp.* 10,000 121,250
---------
184,625
---------
Electronic Components 3.1%
MEMC Electronic Materials, Inc.* 4,500 $ 122,062
Thermospectra Corp.* 4,000 67,000
---------
189,062
---------
Total Science & Technology 440,687
---------
Utility 1.2%
Natural Gas 1.2%
TransTexas Gas Corp.* 4,000 72,500
---------
Total Utility 72,500
---------
Total Common Stocks (Cost $5,568,938) 6,105,343
---------
</TABLE>
<TABLE>
<CAPTION>
Principal Maturity
Amount Date
- ------------------------------ ------- -------- ----------
<S> <C> <C> <C>
Short-Term Obligations 1.7%
Household Finance Corp., 5.65% $104,000 10/2/1995 104,000
--------
Total Short-Term Obligations (Cost $104,000) 104,000
--------
Total Investments (Cost $5,672,938)--101.3% 6,209,343
Cash and Other Assets, Less Liabilities--(1.3)% (78,070)
--------
Net Assets--100.0% $6,131,273
========
</TABLE>
<TABLE>
<S> <C>
Federal Income Tax Information:
At September 30, 1995, the net unrealized
appreciation of investments based on cost for
Federal income tax purposes of $5,672,938 was as
follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost $ 777,614
Aggregate gross unrealized depreciation for all
investments in which there is an excess of
tax cost over value (241,209)
--------
$ 536,405
========
</TABLE>
* Nonincome-producing securities
The accompanying notes are an integral part of the financial statements.
38
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1995
<TABLE>
<S> <C>
Assets
Investments, at value (Cost $5,672,938) (Note 1) $6,209,343
Cash 19,606
Receivable for securities sold 29,479
Receivable from Distributor (Note 3) 2,177
Dividends and interest receivable 531
Deferred organization costs and other assets (Note 1) 69,733
---------
6,330,869
Liabilities
Payable for securities purchased 136,125
Accrued trustees' fees (Note 2) 9,128
Accrued management fee (Note 2) 4,269
Accrued distribution fee (Note 5) 1,375
Accrued transfer agent and shareholder services (Note 2) 730
Other accrued expenses 47,969
---------
199,596
---------
Net Assets $6,131,273
=========
Net Assets consist of:
Undistributed net investment income $ 36,497
Unrealized appreciation of investments 536,405
Accumulated net realized gain 275,486
Shares of beneficial interest (Note 6) 5,282,885
---------
$6,131,273
=========
Net Asset Value and redemption price per share of Class A
shares ($5,781,809 / 519,451 shares of beneficial
interest) $11.13
=========
Maximum Offering Price per share of Class A shares
($11.13 / .955) $11.65
=========
Net Asset Value and offering price per share of
Class B shares ($116,240 / 10,493 shares of beneficial
interest)* $11.08
=========
Net Asset Value, offering price and redemption price per
share of Class C shares ($116,984 / 10,493 shares of
beneficial interest) $11.15
=========
Net Asset Value and offering price per share of
Class D shares ($116,240 / 10,493 shares of
beneficial interest)* $11.08
=========
</TABLE>
*Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
STATEMENT OF OPERATIONS
For the period February 13, 1995
(commencement of operations) to September 30, 1995
<TABLE>
<S> <C>
Investment Income
Interest $ 78,168
Dividends, net of foreign taxes of $36 10,878
-------
89,046
Expenses
Custodian fee 44,957
Management fee (Note 2) 30,298
Amortization of organization costs (Note 1) 9,230
Trustees' fees (Note 2) 9,128
Reports to shareholders 8,800
Audit fee 8,139
Legal fees 5,584
Registration fees 4,649
Transfer agent and shareholder services (Note 2) 730
Distribution fee--Class A (Note 5) 8,392
Distribution fee--Class B (Note 5) 692
Distribution fee--Class D (Note 5) 692
Miscellaneous 1,280
-------
132,571
Expenses borne by the Distributor (Note 3) (80,022)
-------
52,549
-------
Net investment income 36,497
-------
Realized and Unrealized Gain on Investments
Net realized gain on investments (Notes 1 and 3) 275,486
Net unrealized appreciation of investments 536,405
-------
Net gain on investments 811,891
-------
Net increase in net assets resulting from operations $848,388
=======
</TABLE>
The accompanying notes are an integral part of the financial statements.
39
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION VALUE FUND
STATEMENT OF CHANGES IN NET ASSETS
For the period February 13, 1995
(commencement of operations) to September 30, 1995
<TABLE>
<S> <C>
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 36,497
Net realized gain on investments* 275,486
Net unrealized appreciation of investments 536,405
---------
Net increase resulting from operations 848,388
---------
Net increase from fund share transactions (Note 6) 5,282,885
---------
Total increase in net assets 6,131,273
Net Assets
Beginning of period --
---------
End of period (including undistributed net investment
income of $36,497) $6,131,273
=========
*Net realized gain for Federal income tax purposes
(Note 1) $ 275,486
=========
</TABLE>
NOTES TO FINANCIAL STATEMENTS
September 30, 1995
Note 1
State Street Research Small Capitalization Value Fund (the "Fund"), is a
series of State Street Research Capital Trust (the "Trust"), formerly State
Street Capital Trust, which is a Massachusetts business trust registered
under the Investment Company Act of 1940, as amended, as a diversified,
open-end management investment company. The Trust was organized in November,
1988 as a successor to State Street Capital Fund, Inc., a Massachusetts
corporation. The Trust consists presently of three separate funds: State
Street Research Small Capitalization Value Fund, State Street Research Small
Capitalization Growth Fund and State Street Research Capital Fund.
The Fund is authorized to issue four classes of shares. At the present time,
only Class A shares are generally available for purchase. Class B, Class C
and Class D shares are not being offered at this time. Class A shares are
subject to an initial sales charge of up to 4.50% and pay an annual service
fee equal to 0.25% of average daily net assets. Class B shares are subject to
a contingent deferred sales charge on certain redemptions made within five
years of purchase and pay annual distribution and service fees of 1.00%.
Class B shares automatically convert into Class A shares (which pay lower
ongoing expenses) at the end of eight years after the issuance of the Class B
shares. Class C shares are only offered to certain employee benefit plans and
large institutions. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro-rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant policies are consistently followed by the Fund in
preparing its financial statements, and such policies are in conformity with
generally accepted accounting principles for investment companies.
A. Investment in Securities
Values for listed securities represent the last sale on national securities
exchanges quoted prior to the close of the New York Stock Exchange.
Over-the-counter securities quoted on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") system are valued at the closing price
supplied through such system. In the absence of recorded sales and for those
over-the-counter securities not quoted on the NASDAQ system, valuations are
at the mean of the closing bid and asked quotations, except for certain
securities that may be restricted as to public resale, which are valued in
accordance with methods adopted by the Trustees. Security transactions are
accounted for on the trade date (date the order to buy or sell is executed),
and dividends declared but not received are accrued on the ex-dividend date.
Interest income is determined on the accrual basis. Realized gains and losses
from security transactions are reported on the basis of identified cost of
securities delivered for both financial reporting and Federal income tax
purposes.
The accompanying notes are an integral part of the financial statements.
40
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION VALUE FUND
NOTES (cont'd)
B. Federal Income Taxes
No provision for Federal income taxes is necessary since the Fund intends to
qualify under Subchapter M of the Internal Revenue Code and its policy is to
distribute all of its taxable income, including net realized capital gains,
if any, within the prescribed time periods.
C. Dividends
Dividends from net investment income, if any, are declared and paid or
reinvested annually. Net realized capital gains, if any, are distributed
annually, unless additional distributions are required for compliance with
applicable tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
D. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and are being amortized under the straight-line method over a
period of five years.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser
earns monthly fees at an annual rate of 0.85% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. The fees of the Trustees not currently affiliated with the
Adviser amounted to $9,128 during the period February 13, 1995 (commencement
of operations) to September 30, 1995.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. During the period February 13, 1995 (commencement of
operations) to September 30, 1995, the amount of such expenses was $118.
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the period February 13, 1995 (commencement of operations) to
September 30, 1995, the amount of such expenses assumed by the Distributor
and its affiliates was $80,022.
Note 4
For the period February 13, 1995 (commencement of operations) to September
30, 1995, exclusive of short-term investments and U.S. Government
obligations, purchases and sales of securities aggregated $6,865,944 and
$1,572,492, respectively.
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940. Under the Plan, the Fund
pays annual service fees to the Distributor at a rate of 0.25% of average
daily net assets for Class A, Class B and Class D shares. In addition, the
Fund pays annual distribution fees of 0.75% of average daily net assets for
Class B and Class D shares. The Distributor uses such payments for personal
services and/or the maintenance of shareholder accounts, to reimburse
securities dealers for distribution and marketing services, to furnish
ongoing assistance to investors and to defray a portion of its distribution
and marketing expenses. For the period February 13, 1995 (commencement of
operations) to September 30, 1995, fees pursuant to such plan amounted to
$8,392, $692 and $692 for Class A, Class B and Class D, respectively.
Note 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At September 30, 1995,
Metropolitan owned one share of each of Class A, Class B, Class C and Class D
shares and the Adviser owed 492,146 Class A shares and 10,471 of each of
Class B, Class C and Class D shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
February 13, 1995
(Commencement of
Operations)
to September 30, 1995
---------------------
Class A Shares Amount
- -------------- ------ -----------
<S> <C> <C>
Shares sold 519,451 $4,982,255
---- ---------
Net increase 519,451 $4,982,255
==== =========
Class B Shares Amount
- -------------- ---- ---------
Shares sold 10,493 $ 100,210
---- ---------
Net increase 10,493 $ 100,210
==== =========
Class C Shares Amount
- -------------- ---- ---------
Shares sold 10,493 $ 100,210
---- ---------
Net increase 10,493 $ 100,210
==== =========
Class D Shares Amount
- -------------- ---- ---------
Shares sold 10,493 $ 100,210
---- ---------
Net increase 10,493 $ 100,210
==== =========
</TABLE>
41
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION VALUE FUND
FINANCIAL HIGHLIGHTS
For a share outstanding from February 13, 1995 (commencement of operations)
to September 30, 1995
<TABLE>
<CAPTION>
Class A Class B Class C Class D
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.55 $ 9.55 $ 9.55 $ 9.55
Net investment income* .07 .02 .09 .02
Net unrealized gain on investments 1.51 1.51 1.51 1.51
-------- -------- -------- ----------
Net asset value, end of period $11.13 $11.08 $11.15 $11.08
======== ======== ======== ==========
Total return+ 16.54% 16.02% 16.75% 16.02%
Net assets at end of period (000s) $5,782 $116 $117 $116
Ratio of operating expenses to average net assets* 1.45%++ 2.20%++ 1.20%++ 2.20%++
Ratio of net investment income to average net assets* 1.05%++ 0.32%++ 1.32%++ 0.32%++
Portfolio turnover rate 47.34% 47.34% 47.34% 47.34%
*Reflects voluntary assumption of fees or expenses per share
in each period. (Note 3). $.15 $.15 $.15 $.15
</TABLE>
++Annualized
+Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
42
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of State Street Research
Capital Trust and Shareholders of
State Street Research Small Capitalization Value Fund
We have audited the accompanying statement of assets and liabilities of State
Street Research Small Capitalization Value Fund, including the schedule of
portfolio investments, as of September 30, 1995, and the related statements
of operations and changes in net assets and the financial highlights for the
period February 13, 1995 (commencement of operations) to September 30, 1995.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of September 30, 1995, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant esti mates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
State Street Research Small Capitalization Value Fund as of September 30,
1995, the results of its operations and changes in its net assets and the
financial highlights for the period February 13, 1995 (commencement of
operations) to September 30, 1995, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 3, 1995
43
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION VALUE FUND
REPORT ON SPECIAL MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of the State Street Research Small
Capitalization Value 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 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
3. The selection of Coopers & Lybrand L.L.P. as the Trust's independent accountants was ratified. 15.0 0.1 1.2
</TABLE>
44
<PAGE>
STATE STREET RESEARCH CAPITAL TRUST
PART C
OTHER INFORMATION
-----------------
Item 24: Financial Statements and Exhibits
- ------------------------------------------
(a) Financial Statements
(1) Financial Statements included in PART A (Prospectus) of this
Registration Statement:
Financial Highlights for State Street Research Capital Fund
for the fiscal years ended September 30, 1986 through
September 30, 1995 incorporated by reference from Post-
Effective Amendment No. 12.
Financial Highlights for State Street Research Small
Capitalization Growth Fund for the period October 4, 1993
(commencement of operations) through September 30, 1995.
Financial Highlights for State Street Research Small
Capitalization Value Fund for the period February 13, 1995
(commencement of operations) through September 30, 1995.
(2) Financial Statements included in PART B (Statement of
Additional Information) of this Registration Statement:
For State Street Research Capital Fund for the fiscal
year ended September 30, 1995 (except as provided below)
incorporated by reference from Post-Effective Amendment
No. 12:
Investment Portfolio
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
(fiscal years ended September 30, 1995 and
September 30, 1994)
Notes to Financial Statements
(including financial highlights)
Report of Independent Accountants
Management's Discussion of Fund Performance
Report on Special Meeting of Shareholders
For State Street Research Small Capitalization Growth
Fund for the period October 4, 1993 (commencement of
operations) through September 30, 1995 (except as provided
below):
Investment Portfolio
Statement of Assets and Liabilities
Statement of Operations
C-1
<PAGE>
Statement of Changes in Net Assets (fiscal years ended
September 30, 1995 and September 30, 1994)
Notes to Financial Statements
(including financial highlights)
Report of Independent Accountants
Management's Discussion of Fund Performance
Report on Special Meeting of Shareholders
Financial Statements for State Street Research
Small Capitalization Value Fund for the period February 13,
1995 (commencement of operations) through September 30,
1995.
Investment Portfolio
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
(for the period February 13, 1995 (commencement
of operations) to September 30, 1995)
Notes to Financial Statements
(including financial highlights)
Report of Independent Accountants
Report on Special Meeting of Shareholders
(b) Exhibits
(1)(a) First Amended and Restated Master Trust Agreement, Amendment
No. 1 and Amendment No. 2 (xi)
(1)(b) Amendment No. 3 to First Amended and Restated Master Trust
Agreement (xii)
(2)(a) By-Laws of the Registrant (iii)
(2)(b) Amendment No. 1 to By-Laws, effective September 30, 1992
(vii)
(3) Not Applicable
(4)(a) Specimen Share Certificate -- State Street Capital Fund (iv)
(4)(b) Specimen Share Certificate -- State Street Small Capitalization
Growth Fund (vi)
(5)(a) Investment Advisory Contract with respect to State Street
Capital Fund (iii)
(5)(b) Restated Advisory Agreement with respect to State Street
Research Small Capitalization Growth Fund and Letter Agreement
relating to State Street Research Small Capitalization Value
Fund (xi)
(6)(a) Distribution Agreement with State Street Research Investment
Services, Inc. (viii)
(6)(b) Form of Selected Dealer Agreement, as Supplemented (xi)
(6)(c) Form of Bank and Bank-Affiliated Broker-Dealer Agreement (x)
C-2
<PAGE>
(6)(d) Letter Agreement with respect to the Distribution
Agreement relating to State Street Research Small
Capitalization Value Fund (xi)
(7) Not Applicable
(8)(a) Custodian Contract (iii)
(8)(c) Letter Agreement with respect to the Custodian Contract
relating to State Street Small Capitalization Growth Fund (vii)
(8)(d) Letter Agreement with respect to the Custodian
Contract relating to State Street Research Small
Capitalization Value Fund (xi)
(9) Agreement and Plan of Reorganization and Liquidation (iii)
(10)(a) Consent and Opinion of counsel on legality of shares being
issued with respect to State Street Capital Fund (vii)
(10)(b) Consent and Opinion of counsel on legality of shares
being issued with respect to State Street Small
Capitalization Growth Fund (vi)
(10)(c) Consent and Opinion of counsel on legality of shares
being issued with respect to MetLife - State Street
Research Small Capitalization Value Fund (x)
(11) Consent of Coopers & Lybrand L.L.P.
(12) Not Applicable
(13)(a) Subscription and Investment Letters -- State Street Small
Capitalization Growth Fund (vii)
(13)(b) Subscription and Investment Letters -- State
Street Research Small Capitalization Value Fund (xi)
(14)(a) State Street Research IRA: Disclosure Statement, Forms Booklet
and Transfer of Assets/Direct Rollover Form (xi)
C-3
<PAGE>
(14)(b) State Street Research 403(b): Brochure,
Maximum Salary Reduction Worksheet, Account Application,
Salary Reduction Agreement and Transfer of 403(b) Assets
Form
(15)(a) Plan of Distribution Pursuant to Rule 12b-1 with respect to
State Street Research Capital Fund (x)
(15)(b) Letter Agreement with respect to Plan of Distribution Pursuant
to Rule 12b-1 relating to State Street Research Small
Capitalization Growth Fund (viii)
(15)(c) Letter Agreement with respect to Plan of Distribution
Pursuant to Rule 12b-1 relating to State Street
Research Small Capitalization Value Fund (xi)
(16)(a) Calculation of Performance Data with respect to State Street
Research Capital Fund (ii)
(16)(b) Calculation of Performance Data with respect to State Street
Research Small Capitalization Growth Fund (ix)
(17) Multiple Class Expense Allocation Plan Adopted Pursuant to
Rule 18f-3 (xi)
(18)(a) Powers of Attorney (xii)
(18)(b) Certificate of Board Resolution Respecting Powers of Attorney
(xii)
(19) Application Forms (x)
(27)(a) Financial Data Schedules for State Street Research Small
Capitalization Value Fund
(27)(b) Financial Data Schedules for State Street Research Capital
Fund (xii)
(27)(c) Financial Data Schedules for State Street Research Small
Capitalization Growth Fund
- ----------------
The Series of the Registrant have changed their names at various times.
Documents in this listing of Financial Statements and Exhibits which were
effective prior to the most recent name change accordingly refer to a former
name of such Series.
C-4
<PAGE>
- -------------
Filed as part of the Registration Statement as noted below and incorporated
herein by reference:
Footnote Securities Act of 1933
Reference Registration/Amendment Date Filed
i Initial Registration August 22, 1983
ii Post-Effective Amendment No. 1 July 15, 1988
iii Post-Effective Amendment No. 2 December 2, 1988
iv Post-Effective Amendment No. 3 January 26, 1990
v Post-Effective Amendment No. 4 January 31, 1991
vi Post-Effective Amendment No. 6 May 26, 1992
vii Post-Effective Amendment No. 7 November 25, 1992
viii Post-Effective Amendment No. 8 November 26, 1993
ix Post-Effective Amendment No. 9 January 21, 1994
x Post-Effective Amendment No. 10 November 18, 1994
xi Post-Effective Amendment No. 11 October 11, 1995
xii Post-Effective Amendment No. 12 November 29, 1995
C-5
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant
ORGANIZATIONAL STRUCTURE OF METROPOLITAN AND SUBSIDIARIES
AS OF DECEMBER 31, 1994
The following is a list of subsidiaries of Metropolitan Life Insurance Company
("Metropolitan") as of December 31, 1994. Those entities which are listed at the
left margin (labelled with capital letters) are direct subsidiaries of
Metropolitan. Unless otherwise indicated, each entity which is indented under
another entity is a subsidiary of such indented entity and, therefore, an
indirect subsidiary of Metropolitan. The voting securities (excluding directors'
qualifying shares, if any) of the subsidiaries listed are 100% owned by their
respective parent corporations, unless otherwise indicated. The jurisdiction of
domicile of each subsidiary listed is set forth in the parenthetical following
such subsidiary.
A. Metropolitan Tower Corp. (Delaware)
1. Metropolitan Property and Casualty Insurance Company (Delaware)
a. Metropolitan Group Property and Casualty Insurance Company
(Delaware)
i. Metropolitan Reinsurance Company (U.K.) Limited (Great
Britain)
b. Metropolitan Casualty Insurance Company (Delaware)
c. Metropolitan General Insurance Company (Delaware)
d. First General Insurance Company (Georgia)
e. Metropolitan P&C Insurance Services, Inc. (California)
f. Metropolitan Lloyds, Inc. (Texas)
2. Metropolitan Insurance and Annuity Company (Delaware)
a. MetLife Europe I, Inc. (Delaware)
b. MetLife Europe II, Inc. (Delaware)
c. MetLife Europe III, Inc. (Delaware)
d. MetLife Europe IV, Inc. (Delaware)
e. MetLife Europe V, Inc. (Delaware)
3. MetLife General Insurance Agency, Inc. (Delaware)
a. MetLife General Insurance Agency of Alabama, Inc. (Alabama)
b. MetLife General Insurance Agency of Kentucky, Inc. (Kentucky)
c. MetLife General Insurance Agency of Mississippi, Inc.
(Mississippi)
d. MetLife General Insurance Agency of Texas, Inc. (Texas)
e. MetLife General Insurance Agency of North Carolina, Inc. (North
Carolina)
C-6
<PAGE>
4. MetLife HealthCare Management Corporation (Delaware)
a. MetLife HealthCare Network of Kansas City, Inc. (Missouri)
b. MetLife HealthCare Network of Northern New Jersey, Inc. (New
Jersey)
c. MetLife HealthCare Network of New York, Inc. (New York)
d. MetLife HealthCare Network of Ohio, Inc. (Ohio)
e. MetLife HealthCare Network of Wisconsin, Inc. (Wisconsin)
f. MetLife HealthCare Network, Inc. (Delaware)
g. MetLife HealthCare Network of Georgia, Inc. (Georgia)
h. MetLife HealthCare Network of Illinois, Inc. (Delaware)
i. MetLife HealthCare Network of Arizona, Inc. (Arizona)
j. MetLife HealthCare Network of Kentucky, Inc. (Kentucky)
k. MetLife HealthCare Network of Massachusetts, Inc. (Massachusetts)
l. MetLife HealthCare Network of Texas, Inc. (Texas)
m. MetLife HealthCare Network of Florida, Inc. (Florida)
n. MetLife HealthCare Network of Colorado, Inc. (Colorado)
o. MetLife HealthCare Network of California, Inc. (California)
5. Corporate Health Strategies, Inc. (Delaware)
6. Metropolitan Asset Management Corporation (Delaware)
a. MetLife Capital Holdings, Inc. (Delaware)
i. MetLife Capital Corporation (Delaware)
(1) Searles Cogeneration, Inc. (Delaware)
(2) MLYC Cogen, Inc. (Delaware)
(3) MCC Yerkes Inc. (Washington)
(4) MetLife Capital, Limited Partnership (Delaware).
Partnership interests in MetLife Capital, Limited
Partnership are held by Metropolitan (90%) and MetLife
Capital Corporation (10%).
(5) MCC Investment Corporation (Delaware)
(a) MetLife Capital Credit L.P. (Delaware).
Partnership interests in MetLife Capital Credit
L.P. are held by Metropolitan (90%) and MCC
Investment Corporation (10%).
(6) MetLife Capital Portfolio Investments, Inc. (Nevada)
(a) MetLife Capital Funding Corp. (Delaware)
ii. MetLife Capital Financial Corporation (Delaware)
C-7
<PAGE>
iii. MetLife Financial Acceptance Corporation (Delaware).
MetLife Capital Holdings, Inc. holds 100% of the voting
preferred stock of MetLife Financial Acceptance Corporation.
Metropolitan Property and Casualty Insurance Company holds
100% of the common stock of MetLife Financial Acceptance
Corporation.
b. MetLife Investment Management Corporation (Delaware)
i. MetLife Investments Limited (United Kingdom). 23rd Street
Investments, Inc. holds one share of MetLife Investments
Limited.
c. MetLife Realty Group, Inc. (Delaware)
d. GFM International Investors Limited (United Kingdom). The common
stock of GFM International Investors Limited ("GFM") is held by
Metropolitan (99.5%) and by an employee of GFM (.5%). GFM is a
sub-investment manager for the International Stock Portfolio of
Metropolitan Series Fund, Inc.
i. GFM Investments Limited (United Kingdom)
7. SSRM Holdings, Inc. (Delaware)
a. State Street Research & Management Company (Delaware). Is a sub-
investment manager for the Growth, Income, Diversified and
Aggressive Growth Portfolios of Metropolitan Series Fund, Inc.
i. State Street Research Energy, Inc. (Massachusetts)
ii. State Street Research Investment Services, Inc.
(Massachusetts)
b. Metric Holdings, Inc. (Delaware)
i. Metric Management Inc. (Delaware)
ii. Metric Realty Corp. (Delaware)
iii. Metric Realty (Illinois). Metric Realty Corp. and Metric
Holdings, Inc. each holds 50% of the common stock of Metric
Realty.
(1) Metric Capital Corporation (California)
(2) Metric Assignor, Inc. (California)
(3) Metric Institutional Realty Advisors, Inc. (California)
(4) Metric Institutional Realty Advisors, L.P.
(California).
Metric Realty holds a 99% limited partnership interest
and Metric Institutional Realty Advisors, Inc. holds a
1%
C-8
<PAGE>
interest as general partner in Metric Institutional
Realty Advisors, L.P.
(5) Metric Realty Services, Inc. (Delaware)
(6) Metric Institutional Apartment Fund II, L.P.
(California). Metric Realty holds a 1% interest as
general partner and Metropolitan holds an approximately
14.6% limited partnership interest in Metric
Institutional Apartment Fund II, L.P.
8. MetLife Holdings, Inc. (Delaware)
a. MetLife Funding, Inc. (Delaware)
b. MetLife Credit Corp. (Delaware)
9. Metropolitan Tower Realty Company, Inc. (Delaware)
10. MetLife Real Estate Advisors, Inc. (California)
B. Metropolitan Tower Life Insurance Company (Delaware)
C. MetLife Security Insurance Company of Louisiana (Louisiana)
D. MetLife Texas Holdings, Inc. (Delaware)
1. Texas Life Insurance Company (Texas)
a. Texas Life Agency Services, Inc. (Texas)
E. MetLife Securities, Inc. (Delaware)
F. 23rd Street Investments, Inc. (Delaware)
G. Metropolitan Life Holdings Limited (Ontario, Canada)
1. Metropolitan Life Financial Services Limited (Ontario, Canada)
a. 810597 Ontario, Inc. (Ontario, Canada)
b. 810660 Ontario Inc. (Canada)
c. 478077 Alberta Ltd. (Alberta, Canada)
2. Metropolitan Life Financial Management Limited (Ontario, Canada)
a. Metropolitan Life Insurance Company of Canada (Canada)
b. Metropolitan Life Operations Limited (Canada)
i. Metropolitan Trust Company of Canada (Canada)
C-9
<PAGE>
3. Morguard Investments Limited (Ontario, Canada)
Shares of Morguard Investments Limited ("Morguard") are held by
Metropolitan Life Holdings Limited (82%) and by employees of Morguard
(18%).
4. Services La Metropolitaine Quebec, Inc. (Quebec, Canada)
5. 167080 Canada, Inc. (Canada)
a. 446068 B.C. Ltd. (British Columbia, Canada)
H. MetLife (UK) Limited (Great Britain)
1. Albany Life Assurance Company Limited (Great Britain)
a. Albany Pension Managers and Trustees Limited (Great Britain)
2. Albany Home Loans Limited (Great Britain)
3. ACFC Corporate Finance Limited (Great Britain)
4. Metropolitan Unit Trust Managers Limited (Great Britain)
5. Albany International Assurance Limited (Isle of Man)
6. MetLife Group Services Limited (Great Britain)
I. Santander Met, S.A. (Spain). Shares of Santander Met, S.A. are held by
Metropolitan (50%) and by an entity (50%) unaffiliated with Metropolitan.
1. Seguros Genesis, S.A. (Spain)
2. Genesis Seguros Generales, Sociedad Anomina de Seguros y Reaseguros
(Spain)
J. Kolon-Met Life Insurance Company (Korea). Shares of Kolon-MetLife Insurance
Company are held by Metropolitan (51%) and by an entity (49%) unaffiliated
with Metropolitan.
C-10
<PAGE>
K. Genesis Seguros de Vida S.A. (Argentina)
L. Genesis Seguros de Retiro S.A. (Argentina). Shares of Genesis Seguros de
Retiro S.A. are held by Metropolitan (10%) and by an entity (90%)
unaffiliated with Metropolitan.
M. 161397 Canada Inc. (Canada)
N. 2945835 Canada Inc. (Canada)
O. Metropolitan Marine Way Investments Limited (British Columbia, Canada)
P. Met Life Holdings Luxembourg (Luxembourg)
Q. Metropolitan Life Holdings, Netherlands BV (Netherlands)
R. MetLife International Holdings, Inc. (Delaware)
S. Century 21 Real Estate Corporation (Delaware)
1. Century 21 of the Pacific, Inc. (California)
2. Century 21 of the West, Inc. (California)
3. Century 21 Great Lakes, Inc. (Michigan)
4. Century 21 of the Southeast, Inc. (Florida)
5. Century 21 Australasia Pty. Ltd. (Australia)
6. Century 21 North Central, Inc. (Illinois)
7. Century 21 South Central States, Inc. (Texas)
8. Western Relocation Management, Inc. (California)
9. Century 21 United Kingdom Limited (United Kingdom)
10. Century 21 of the Northeast, Inc. (New Jersey)
C-11
<PAGE>
T. Metmor Financial, Inc. (California)
1. MetFirst Insurance Agency, Inc. (Delaware)
U. Metropolitan Realty Management, Inc. (Delaware)
1. Edison Supply and Distribution, Inc. (Delaware)
2. Cross & Brown Company (New York)
a. Cross & Brown Residentials, Inc. (New York)
b. Cross & Brown Company of Florida, Inc. (Florida)
c. Cross & Brown Associates of New York, Inc. (New York)
d. Cross & Brown Associates of New Jersey, Inc. (New Jersey)
e. Subrown Corp. (New York)
f. Cross & Brown Construction Corp. (New York)
g. CBNJ, Inc. (New Jersey)
h. Cross & Brown of Connecticut, Inc. (Connecticut)
V. MetPark Funding, Inc. (Delaware)
W. 2154 Trading Corporation (New York)
X. Transmountain Land & Livestock Company (Montana)
Y. Met West Agribusiness, Inc. (Delaware)
Z. Farmers National Company (Nebraska)
1. Farmers National Commodities, Inc. (Nebraska)
C-12
<PAGE>
AA. Nebraska Farms, Inc. (Nebraska)
AB. MetFarm and Ranch Properties, Inc. (Delaware)
AC. MetLife Group Administrator, Inc.
AD. The MetraHealth Companies, Inc. (Delaware). Shares of The Metra Health
Companies, Inc. are held by Metropolitan (50%) and by an entity (50%)
unaffiliated with Metropolitan.
In addition to the entities listed above, Metropolitan (or where indicated an
affiliate) also owns an interest in the following entities, among others:
1) CP&S Communications, Inc., a New York corporation, holds federal radio
communications licenses for equipment used in Metropolitan owned facilities and
airplanes. It is not engaged in any business.
C-13
<PAGE>
2) Quadreal Corp., a New York corporation, is the fee holder of a parcel of real
property subject to a 999 year prepaid lease. It is wholly-owned by
Metropolitan, having been acquired by a wholly-owned subsidiary of Metropolitan
in 1973 for $10 in connection with a real estate investment and transferred to
Metropolitan in 1988.
3) Met Life International Real Estate Equity Shares, Inc., a Delaware
corporation, is a real estate investment trust. Metropolitan owns approximately
18.4% of the outstanding common stock of this company and has the right to
designate 2 of the 5 members of its Board of Directors.
4) Metropolitan Structures is a general partnership in which Metropolitan owns
a 50% interest. Metropolitan Structures owns 100% of the common stock of
Cicero/Cermak Corporation, an Illinois corporation, which owns and manages a
shopping center in Illinois. Metropolitan Structures, Inc., an Illinois
corporation, is a property manager. Metropolitan Structures, Inc. is wholly
owned by Metropolitan Structures. Metropolitan Structures, Inc. is the sole
general partner of MS Management Services, L.P., an Illinois limited partnership
in which Metropolitan has a 49.5% interest as a limited partner.
5) Metropolitan Structures West, Inc. (doing business as MS Management
Services), a California corporation, is a property manager in California.
Metropolitan owns 50% of the capital stock of Metropolitan Structures West, Inc.
6) Seguros Genesis, S.A. (Mexico), is a Mexican insurer in which Metropolitan
and two of its subsidiaries collectively own a 24.5% interest and have the right
to designate 2 of the 9 members of the Board of Directors.
C-14
<PAGE>
7) Interbroker, Correduria de Reaseguros, S.A., is a Spanish insurance brokerage
company in which Santander Met, S.A., a subsidiary of Metropolitan in which
Metropolitan owns a 50% interest, owns a 50% interest and has the right to
designate 2 of the 4 members of the Board of Directors.
8) Met Life Agricultural Limited Partnership, is an Illinois limited
partnership of which Met Farm and Ranch Properties, Inc. has a 1% interest as
general partner and a 57.28% interest as limited partner.
9) Metropolitan owns varying interests in certain mutual funds distributed by
its affiliates. These ownership interests are generally expected to decrease as
shares of the funds are purchased by unaffiliated investors.
10) Metropolitan Lloyds Insurance Company of Texas, an affiliated association,
provides homeowner and related insurance for the Texas market. It is an
association of individuals designated as underwriters. Metropolitan Lloyds,
Inc., a subsidiary of Metropolitan Property and Casualty Insurance Company,
serves as the attorney-in-fact and manages the association.
11) Mezzanine Investment Limited Partnerships ("MILPs"), Delaware limited
partnerships, are investment vehicles through which investments in certain
entities are held. A wholly-owned subsidiary of Metropolitan serves as the
general partner of the limited partnerships and Metropolitan directly owns a 99%
limited partnership interest therein. The MILPs have various ownership interests
in certain companies. The various MILPs own, directly or indirectly, more than
50% of the common stock of the following companies: Braelan Corp., and its
subsidiary, Dan River, Inc.; Lincoln Group Holding Corp.; Igloo Holdings, Inc.
and its subsidiary, Igloo Products Corporation; Blodgett Holdings, Inc., and its
subsidiaries, GS Blodgett Corporation, GS Blodgett International Ltd., GS
Blodgett Inc., Pitco Frialator, Inc., Magikitch'n, Inc., and Cloverleaf
Properties, Inc.; and Briggs Holdings, Inc., and its subsidiary, Briggs Plumbing
Products, Inc.
C-15
<PAGE>
Item 26. Number of Holders of Securities
(1) (2)
Number of
As of Title of Class Record Holders
Shares of Beneficial Interest
12/31/95 State Street Research Capital Fund
Class A 3,043
Class B 6,870
Class C 75
Class D 3,037
12/31/95 State Street Research Small
Capitalization Growth Fund
Class A 2,578
Class B 2,137
Class C 129
Class D 327
12/31/95 State Street Research Small
Capitalization Value Fund
Class A 18
Class B 7
Class C 6
Class D 6
Item 27. Indemnification
Article VI of Registrant's Master Trust Agreement provides: The Trust shall
indemnify (from the assets of the Sub-Trust or Sub-Trusts in question) each of
its Trustees and officers (including persons who serve at the Trust's request as
directors, officers or trustees of another organization in which the Trust has
any interest as a shareholder, creditor or otherwise (hereinafter referred to as
a "Covered Person")) against all liabilities, including but not limited to
amounts paid in satisfaction of judgments, in compromise or as fines and
penalties, and expenses, including reasonable accountants' and counsel fees,
incurred by any Covered Person in connection with the defense or disposition of
any action, suit or other proceeding, whether civil or criminal, before any
court or administrative or legislative body, in which such Covered Person may be
or may have been involved as a party or otherwise or with which such person may
be or may have been threatened, while in office or thereafter, by reason of
being or having been such a Trustee or officer, director or trustee, except with
respect to any matter as to which it has been determined that such Covered
Person had acted with willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such Covered
Person's office (such conduct referred to hereafter as "Disabling Conduct"). A
determination that the Covered Person is entitled to indemnification may be made
by (i) a final decision on the merits by a court or other body before whom the
proceeding was brought that the person to be indemnified was not liable by
reason of Disabling Conduct, (ii) dismissal of a court action or an
administrative proceeding against a Covered Person for insufficiency of evidence
of Disabling Conduct, or (iii) a reasonable determination, based upon a review
of the facts, that the indemnitee was not liable by reason of Disabling Conduct
by (a) a vote of a majority of a quorum of Trustees who are neither "interested
persons" of the Trust as defined in section 2(a)(19) of the 1940 Act nor parties
to the proceeding, or (b) an independent legal counsel in a written opinion.
Under the Distribution Agreement between the Registrant and State Street
Research Investment Services, Inc., the Registrant's distributor, the Registrant
has agreed to indemnify and hold harmless State Street Research Investment
Services, Inc. and each person who has been, is, or may hereafter be an officer,
director, employee or agent of State Street Research Investment Services, Inc.
against any loss, damage or expense reasonably incurred by any of them in
connection with any claim or in connection with any action, suit or proceeding
to which any of them may be a party, which arises out of or is alleged to arise
out of or is based upon a violation of any of its covenants herein contained or
any untrue or alleged untrue statement of material fact, or the omission or
alleged omission to state a material fact necessary to make the statements made
not misleading, in a Registration Statement or Prospectus of the Registrant, or
any amendment or supplement thereto, unless such statement or omission was made
in reliance upon written information furnished by State Street Research
Investment Services, Inc.
C-16
<PAGE>
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 may be permitted to trustees, officers, underwriters
and controlling persons of the Registrant, pursuant to Article VI of the
Registrant's Master Trust Agreement, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such trustee, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
C-17
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
Describe any other business, profession, vocation or employment of a
substantial nature in which each investment adviser of the Registrant, and each
director, officer or partner of any such investment adviser, is or has been, at
any time during the past two fiscal years, engaged for his own account or in the
capacity of director, officer, employee, partner or trustee.
<TABLE>
<CAPTION>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
<S> <C> <C> <C>
State Street Investment Adviser Various investment Boston, MA
Research & advisory clients
Management
Company
Bangs, Linda L. None
Vice President
Barton, Michael E. None
Vice President
Bennett, Peter C. Vice President State Street Research Capital Trust Boston, MA
Director and Vice President State Street Research Exchange Trust Boston, MA
Executive Vice Vice President State Street Research Growth Trust Boston, MA
President Vice President State Street Research Master Investment Trust Boston, MA
Vice President State Street Research Equity Trust
Director State Street Research Investment Services, Inc Boston, MA
Director Boston Private Bank & Trust Co. Boston, MA
President and Director Christian Camps & Conferences, Inc. Boston, MA
Chairman and Trustee Gordon College Wenham, MA
Brown, Susan H. None
Vice President
Burbank, John F. None
Vice President
Canavan, Joseph W. Assistant Treasurer State Street Research Equity Trust Boston, MA
Vice President Assistant Treasurer MetLife - State Street Financial Trust Boston, MA
Assistant Treasurer State Street Research Income Trust Boston, MA
Assistant Treasurer State Street Research Money Market Trust Boston, MA
Assistant Treasurer State Street Research Tax-Exempt Trust Boston, MA
Assistant Treasurer State Street Research Capital Trust Boston, MA
Assistant Treasurer State Street Research Exchange Trust
Assistant Treasurer State Street Research Growth Trust Boston, MA
Assistant Treasurer State Street Research Master Investment Trust Boston, MA
Assistant Treasurer State Street Research Securities Trust Boston, MA
Assistant Controller State Street Research Portfolios, Inc. New York, NY
Carmen, Michael T. None
Vice President
Carstens, Linda C. None
Vice President
Clifford, Jr., Paul J. Vice President State Street Research Tax-Exempt Trust Boston, MA
Vice President Director Avalon, Inc. Boston, MA
DiFazio, Susan M.W. Senior Vice President State Street Research Investment Services, Inc. Boston, MA
Vice President
Dillman, Thomas J. Director of Research Bank of New York New York, NY
Senior Vice President (until 6/95)
Drake, Susan W. Vice President State Street Research Tax-Exempt Trust Boston, MA
Vice President
C-18
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Duggan, Peter J. Vice President New England Mutual Life Insurance Company Boston, MA
Senior Vice (until 8/94)
President
Evans, Gordon Vice President State Street Research Investment Services, Inc. Boston, MA
Vice President
Federoff, Alex G. None
Vice President
Finch, Edward R. None
Senior Vice President
Gardner, Michael D. Partner Prism Group Seattle, WA
Senior Vice President
(Vice President until
6/95)
Geer, Bartlett R. Vice President State Street Research Equity Trust Boston, MA
Senior Vice President Vice President State Street Research Income Trust Boston, MA
Glovsky, Charles S. Vice President State Street Research Capital Trust Boston, MA
Senior Vice President
Hamilton, Jr., William A. Treasurer and Director Ellis Memorial and Eldredge House Boston, MA
Senior Vice President Treasurer and Director Nautical and Aviation Publishing Company, Inc. Baltimore, MD
Treasurer and Director North Conway Institute Boston, MA
Haverty, Jr., Lawrence J. None
Senior Vice President
Heineke, George R. None
Vice President
Jackson, Jr., Trustee Certain trusts of related and
F. Gardner non-related individuals
Senior Vice President Trustee Vincent Memorial Hospital Boston, MA
Jamieson, Frederick H. Vice President and Asst. Treasurer State Street Research Investment Services, Inc. Boston, MA
Senior Vice President Vice President and Asst. Treasurer SSRM Holdings, Inc. Boston, MA
Vice President and Controller MetLife Securities, Inc. New York, NY
Kallis, John H.
Senior Vice President Vice President MetLife - State Street Financial Trust Boston, MA
Vice President State Street Research Income Trust Boston, MA
Vice President State Street Research Tax-Exempt Trust Boston, MA
Vice President State Street Research Securities Trust Boston, MA
Trustee 705 Realty Trust Washington, D.C.
Director and President K&G Enterprises Washington, D.C.
Kasper, M. Katherine None
Vice President
Kluiber, Rudolph K. Vice President State Street Research Capital Trust Boston, MA
Vice President
Kobrick, Frederick R. Vice President State Street Research Equity Trust Boston, MA
Senior Vice Vice President State Street Research Capital Trust Boston, MA
President Vice President State Street Research Growth Trust Boston, MA
Member Harvard Business School Association Cambridge, MA
Member National Alumni Council, Boston University Boston, MA
Leary, Eileen M. None
Vice President
Lintz, Carol None
Vice President
C-19
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
McNamara, III, Francis J. Senior Vice President, Clerk State Street Research Investment Services, Inc. Boston, MA
Senior Vice President, and General Counsel
Secretary and Secretary and General Counsel State Street Research Master Investment Trust Boston, MA
General Counsel Secretary and General Counsel State Street Research Capital Trust Boston, MA
Secretary and General Counsel State Street Research Exchange Trust Boston, MA
Secretary and General Counsel State Street Research Growth Trust Boston, MA
Secretary and General Counsel State Street Research Securities Trust Boston, MA
Secretary and General Counsel State Street Research Equity Trust Boston, MA
Secretary and General Counsel MetLife - State Street Financial Trust Boston, MA
Secretary and General Counsel State Street Research Income Trust Boston, MA
Secretary and General Counsel State Street Research Money Market Trust Boston, MA
Secretary and General Counsel State Street Research Tax-Exempt Trust Boston, MA
Secretary and General Counsel SSRM Holdings, Inc. Boston, MA
Clerk and Director State Street Research Energy, Inc. Boston, MA
Senior Vice President, General The Boston Company, Inc. Boston, MA
Counsel and Assistant Secretary
(until 5/95)
Senior Vice President, General Boston Safe Deposit and Trust Company Boston, MA
Counsel and Assistant Secretary
(until 5/95)
Senior Vice President, General The Boston Company Advisors, Inc. Boston, MA
Counsel and Assistant Secretary
(until 5/95)
Maus, Gerard P. Treasurer State Street Research Equity Trust Boston, MA
Director, Executive Treasurer MetLife - State Street Financial Trust Boston, MA
Vice President Treasurer State Street Research Income Trust Boston, MA
and Treasurer Treasurer State Street Research Money Market Trust Boston, MA
Treasurer State Street Research Tax-Exempt Trust Boston, MA
Treasurer State Street Research Capital Trust Boston, MA
Treasurer State Street Research Exchange Trust Boston, MA
Treasurer State Street Research Growth Trust Boston, MA
Treasurer State Street Research Master Investment Trust Boston, MA
Treasurer State Street Research Securities Trust Boston, MA
Director, Executive Vice President, State Street Research Investment Services, Inc. Boston, MA
Treasurer and Chief Financial Officer
Treasurer and Director State Street Research Energy, Inc. Boston, MA
Director Metric Holdings, Inc. San Francisco, CA
Director Certain wholly-owned subsidiaries
of Metric Holdings, Inc.
Director GFM International Investors, Ltd. London, England
Treasurer and Chief Financial SSRM Holdings, Inc. Boston, MA
Officer
Treasurer MetLife Securities, Inc. New York, NY
Milder, Judith J. None
Senior Vice President
(Vice President
until 6/95)
Miller, Joan D. Senior Vice President State Street Research Investment Services, Inc. Boston, MA
Vice President
Moore, Jr., Thomas P. Director Hibernia Savings Bank Quincy, MA
Senior Vice Vice President State Street Research Capital Trust Boston, MA
President Vice President State Street Research Exchange Trust Boston, MA
Vice President State Street Research Growth Trust Boston, MA
Vice President State Street Research Master Investment Trust Boston, MA
Vice President State Street Research Equity Trust Boston, MA
Mulligan, JoAnne C. Vice President State Street Research Money Market Trust Boston, MA
Vice President
Orr, Stephen C. Member Technology Analysts of Boston Boston, MA
Vice President Member Electro-Science Analysts (of NYC) New York, NY
Pannell, James C. None
Vice President
Peters, Kim M. Vice President State Street Research Securities Trust Boston, MA
Senior Vice President
(Vice President
until 7/94)
C-20
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Pluckhahn, Charles W. None
Vice President
Ragsdale, Easton Senior Vice President Kidder, Peabody, & Co. Incorporated New York, NY
Vice President (until 12/94)
Rawlins, Jeffrey A. None
Vice President
Rice III, Daniel Joseph Vice President MetLife - State Street Equity Trust Boston, MA
Senior Vice President
(Vice President
until 8/93)
Richards, Scott None
Vice President
Romich, Douglas A. Assistant Treasurer State Street Research Equity Trust Boston, MA
Vice President Assistant Treasurer MetLife - State Street Financial Trust Boston, MA
Assistant Treasurer State Street Research Income Trust Boston, MA
Assistant Treasurer State Street Research Money Market Trust Boston, MA
Assistant Treasurer State Street Research Tax-Exempt Trust Boston, MA
Assistant Treasurer State Street Research Capital Trust Boston, MA
Assistant Treasurer State Street Research Exchange Trust
Assistant Treasurer State Street Research Growth Trust Boston, MA
Assistant Treasurer State Street Research Master Investment Trust Boston, MA
Assistant Treasurer State Street Research Securities Trust Boston, MA
Assistant Controller State Street Research Portfolios, Inc. New York, NY
Row, III, Walter A. None
Vice President
Schrage, Michael None
Vice President
Schultz, David C. Director (non-voting) Capital Trust, S.A. Luxembourg
Executive Vice Director Alex Brown Capital, Ltd. Hamilton, Bermuda
President
(Senior Vice President Director and Treasurer Mafraq Hospital Association Mafraq, Jordan
until 12/94, Vice Member Association of Investment
President until Management Sales Executives Atlanta, GA
4/94) Member, Investment Committee Lexington Christian Academy Lexington, MA
Shean, William G. None
Vice President
Shively, Thomas A. Vice President MetLife - State Street Financial Trust Boston, MA
Director and Vice President State Street Research Money Market Trust Boston, MA
Executive Vice Vice President State Street Research Tax-Exempt Trust
President Director State Street Research Investment Services, Inc Boston, MA
Vice President State Street Research Securities Trust Boston, MA
Shoemaker, Richard D. None
Senior Vice President
Strelow, Dan R. None
Senior Vice President
Stuka, Paul U.S. Portfolio Consultant Teton Partners Boston, MA
Senior Vice President (until 4/95)
Swanson, Amy McDermott None
Senior Vice President
Trebino, Anne M. Vice President SSRM Holdings, Inc. Boston, MA
Senior Vice President
(Vice President
until 6/95)
C-21
<PAGE>
Principal business
Name Connection Organization address of organization
- ---- ---------- ------------ -----------------------
Verni, Ralph F. Chairman, President, Chief State Street Research Capital Trust Boston, MA
Chairman, President, Executive Officer and Trustee
Chief Executive Chairman, President, Chief State Street Research Exchange Trust Boston, MA
Officer and Executive Officer and Trustee
Director Chairman, President, Chief State Street Research Growth Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Master Investment Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Securities Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Equity Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief MetLife - State Street Financial Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Income Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Money Market Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Tax-Exempt Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Investment Services, Inc. Boston, MA
Executive Officer and Director
President and Director State Street Research Energy, Inc. Boston, MA
Chairman and Director Metric Holdings, Inc. San Francisco, CA
Director and Officer Certain wholly-owned subsidiaries
of Metric Holdings, Inc.
Chairman of the Board and Director MetLife Securities, Inc. New York, NY
Chairman and Director (until 11/94) GFM International Investors, Ltd. London, England
President, Chief Executive SSRM Holdings, Inc. Boston, MA
Officer and Director
Director CML Group, Inc. Boston, MA
Wade, Dudley Vice President State Street Research Growth Trust Boston, MA
Freeman Vice President State Street Research Master Investment Trust Boston, MA
Senior Vice
President
Wallace, Julie K. None
Vice President
Ward, Geoffrey None
Senior Vice President
Westvold, President and Director Bondurant, Inc. Medfield, MA
Elizabeth McCombs (until 2/94)
Vice President
Wing, Darman A. Senior Vice President and State Street Research Investment Services, Inc. Boston, MA
Vice President, Asst. Clerk (Vice President
Assistant Secretary until 6/95)
and Assistant Assistant Secretary State Street Research Capital Trust Boston, MA
General Counsel Assistant Secretary State Street Research Exchange Trust Boston, MA
Assistant Secretary State Street Research Growth Trust Boston, MA
Assistant Secretary State Street Research Master Investment Trust Boston, MA
Assistant Secretary State Street Research Securities Trust Boston, MA
Assistant Secretary State Street Research Equity Trust Boston, MA
Assistant Secretary MetLife - State Street Financial Trust Boston, MA
Assistant Secretary State Street Research Income Trust Boston, MA
Assistant Secretary State Street Research Money Market Trust Boston, MA
Assistant Secretary State Street Research Tax-Exempt Trust Boston, MA
Assistant Secretary SSRM Holdings, Inc. Boston, MA
Woodbury, Robert S. Employee Metropolitan Life Insurance Company New York, NY
Vice President
Woodworth, Jr., Kennard Vice President State Street Research Exchange Trust Boston, MA
Senior Vice Vice President State Street Research Growth Trust Boston, MA
President
Wu, Norman N. Partner Atlantic-Acton Realty Framingham, MA
Senior Vice President Director Bond Analysts Society of Boston Boston, MA
Yogg, Michael Richard Vice President MetLife - State Street Financial Trust Boston, MA
Senior Vice Vice President State Street Research Income Trust Boston, MA
President
</TABLE>
C-22
<PAGE>
Item 29. Principal Underwriters
(a) State Street Research Investment Services, Inc. serves as principal
underwriter for 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 Growth Trust, State Street Research Master
Investment Trust, State Street Research Securities Trust and State Street
Research Portfolios, Inc.
(b) Directors and Officers of State Street Research Investment
Services, Inc. are as follows:
(1) (2) (3)
Positions Positions
Name and Principal and Offices and Offices
Business Address with Underwriter with Registrant
Ralph F. Verni Chairman of the Chairman of
One Financial Center Board, President, the Board,
Boston, MA 02111 Chief Executive Officer President,
and Director Chief Executive
Officer and
Trustee
Peter C. Bennett Director Vice President
One Financial Center
Boston, MA 02111
Gerard P. Maus Executive Vice Treasurer
One Financial Center President, Treasurer,
Boston, MA 02111 Chief Financial
Officer and Director
Thomas A. Shively Director None
One Financial Center
Boston, MA 02111
George B. Trotta Executive None
One Madison Avenue Vice President
New York, NY 10010
Dennis C. Barghann Senior Vice President None
One Financial Center
Boston, MA 02111
Peter Borghi Senior Vice President None
One Financial Center
Boston, MA 02111
Paul V. Daly Senior Vice President None
One Financial Center
Boston, MA 02111
Susan M.W. DiFazio Senior Vice President None
One Financial Center
Boston, MA 02111
Robert Haeusler Senior Vice President None
One Financial Center
Boston, MA 02111
Gregory R. McMahan Senior Vice President None
One Financial Center
Boston, MA 02111
Francis J. McNamara, III Senior Vice Secretary
One Financial Center President and
Boston, MA 02111 Clerk
Joan D. Miller Senior Vice President None
One Financial Center
Boston, MA 02111
C-23
<PAGE>
Richard P. Samartin Senior Vice President None
One Financial Center
Boston, MA 02111
Darman A. Wing Senior Vice Assistant
One Financial Center President and Secretary
Boston, MA 02111 Assistant Clerk
Gordon Evans Vice President None
One Financial Center
Boston, MA 02111
Linda Grasso Vice President None
One Financial Center
Boston, MA 02111
Frederick H. Jamieson Vice President and None
One Financial Center Assistant Treasurer
Boston, MA 02111
Item 30. Location of Accounts and Records
Gerard P. Maus
State Street Research & Management Company
One Financial Center
Boston, MA 02111
Item 31. Management Services
Inapplicable.
Item 32. Undertakings
(a) Inapplicable.
(b) Deleted.
(c) Deleted.
(d) Deleted.
(e) The Registrant undertakes to hold a special meeting of shareholders of
the Trust for the purpose of voting upon the question of removal of any trustee
or trustees when requested in writing to do so by the record holders of not less
than 10 per centum of the outstanding shares of the Trust and, in connection
with such meeting, to comply with the provisions of Section 16(c) of the
Investment Company Act of 1940 relating to shareholder communications.
(f) The Registrant has elected to include the information required by Item
5A of Form N-1A in its annual report to shareholders. The Registrant undertakes
to furnish each person to whom a prospectus is delivered with a copy of the
applicable fund's latest annual report to shareholders upon request and without
charge.
(g) Deleted.
C-24
<PAGE>
NOTICE
A copy of the Master Trust Agreement of the Registrant is on file with the
Secretary of State of the Commonwealth of Massachusetts and notice is hereby
given that the obligations of the Registrant hereunder, and the authorization,
execution and delivery of this Registration Statement and Amendment, shall not
be binding upon any of the Trustees, shareholders, nominees, officers, agents or
employees of the Registrant as individuals or personally, but shall bind only
the property of the series of the Registrant, as provided in the Master Trust
Agreement. Each series of the Registrant shall be solely and exclusively
responsible for all of its direct or indirect debts, liabilities, and
obligations, and no other series shall be responsible for the same.
C-25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment No. 13 to its Registration Statement on Form N-1A to
be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Boston and the Commonwealth of Massachusetts on the 31st day of
January, 1996.
STATE STREET RESEARCH CAPITAL TRUST
By: ____________________________*________________
Ralph F. Verni
Chief Executive Officer and President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed on the
above date by the following persons in the capacities indicated:
* Trustee, Chairman of the Board
- ---------------------------------- and Chief Executive Officer
Ralph F. Verni (principal executive officer)
* Treasurer (principal financial
- ---------------------------------- and accounting officer)
Gerard P. Maus
*
- ---------------------------------- Trustee
Edward M. Lamont
* Trustee
- ----------------------------------
Robert A. Lawrence
* Trustee
- ----------------------------------
Dean O. Morton
* Trustee
- ----------------------------------
Thomas L. Phillips
*
- ---------------------------------- Trustee
Toby Rosenblatt
* Trustee
- ----------------------------------
Michael S. Scott Morton
* Trustee
- ----------------------------------
Jeptha H. Wade
*By: /s/ Francis J. McNamara, III
Francis J. McNamara, III,
Attorney-in-Fact under Powers of
Attorney dated November 29, 1995,
incorporated by reference from
Post-Effective Amendment No. 12.
<PAGE>
1933 Act Registration No. 2-86271
1940 Act File No. 811-3838
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 |_|
Pre-Effective Amendment No. ___ |_|
Post-Effective Amendment No. 13 |X|
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 |_|
Amendment No. 19 |X|
--------------------
STATE STREET RESEARCH CAPITAL TRUST
(Exact Name of Registrant as Specified in Articles of Organization)
--------------------
EXHIBITS
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
INDEX TO EXHIBITS
(11) Consent of Coopers & Lybrand L.L.P.
(14)(b) State Street Research 403(b): Brochure, Maximum Salary Reduction
Worksheet, Account Application, Salary Reduction Agreement and
Transfer of 403(b) Assets Form
(27)(a) Financial Data Schedules for State Street Research Small
Capitalization Value Fund
(27)(c) Financial Data Schedules for State Street Research Small
Capitalization Growth Fund
EXHIBIT (11)
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of
State Street Research Capital Trust:
We consent to the inclusion in Post-Effective Amendment No. 13 to the
Registration Statement of the State Street Research Capital Trust on Form N-1A
(Securities Act of 1933 File No. 2-86271) of our reports dated November 3, 1995,
on our audits of the financial statements and the financial highlights of State
Street Research Small Capitalization Growth Fund for the year ended September
30, 1995 and the State Street Research Small Capitalization Value Fund for the
period February 13, 1995 (commencement of operations) to September 30, 1995. We
also consent to the reference to our Firm under the captions "Financial
Highlights" and "Independent Accountants" in the Registration Statement.
/s/ Coopers & Lybrand L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
January 30, 1996
Exhibit (14)(b)
[FRONT COVER]
[State Street Research Logo]
403(b)
Retirement--The Key Is Planning Now
As a working person, you have a decision to make--how to protect your current
earnings and provide for a comfortable retirement.
Social Security may not be adequate. Currently, average monthly benefits
are around $675.* And, as the retired population grows in proportion to
the number of workers paying into the fund, Social Security may become
less reliable. In fact, in many places, employees of state or local
governments do not participate in Social Security.
Taxable savings plans may not be adequate either. Both the money you set
aside and the interest it earns are taxed at current rates--just when
you're at peak income levels.
*Source: Social Security Administration.
A Good Way To Plan For Retirement
A State Street Research 403(b) Account is a good way for employees of
private tax-exempt organizations such as hospitals or colleges, and
employees of public schools or colleges, to build financial resources
for retirement. If you are such an employee, you should consider a
403(b) account.
The 403(b) Advantage--Lower Income Taxes
Contributions to your State Street Research 403(b) Account are not
subject to current federal income tax, within the limits allowed by the tax
laws. This reduces your current federal income tax liability and increases your
spendable income, compared to a taxable savings program. Many states
exclude 403(b) contributions from state income taxes as well.
This chart shows the benefits of saving with a 403(b) account. In each
instance, the employee plans to save 10% of income, or $5,000. This
example shows only federal income tax savings. You may also save on
state income taxes.
Saving Outside 403(b) Saving With 403(b)
Salary $50,000 Salary $50,000
Income Taxes 9,353 403(b) Savings 5,000
- ---------------------------- -------------------------------
After-Tax Income 40,647 Taxable income 45,000
Savings 5,000 Income Taxes 7,953
- ---------------------------- -------------------------------
Spendable Income $35,647 Spendable Income $37,047
With 403(b), you have $1,400 more in spendable income!
The 403(b) Advantage--Tax-Free Accumulation
The interest and other investment earnings accumulating in your 403(b)
account compound tax deferred until you begin making withdrawals from your
account. This can mean greater overall returns than with taxable
investments.
<PAGE>
------------------------ LINE CHART ------------------------------
Taxable vs. Tax-free Accumulation
The chart at right
illustrates what
happens when monthly investments of $125
grow at 7% and 5%
tax free for 10 years,
versus the same
taxable investments
growing at 7% and 5%
for 10 years in the 28%
tax bracket. All
distributions are
reinvested. Sales
charges, if any are
not reflected.
($ in Thousands)
$21,501 Tax deferred 7%
$19,413 Taxable 7%
$19,375 Tax deferred 5%
$18,018 Taxable 5%
The chart illustrates general advantages of tax-deferral. Returns are
hypothetical and are for illustrative purposes only; they are not
intended to imply or guarantee a rate of return on any mutual fund or
other investment.
----------------------------------------------------------------
State Street Research Mutual Funds
Your 403(b) contributions will be invested in the State Street Research
fund(s) of your choice. State Street Research offers a variety of mutual
funds, each managed to meet a specific investment objective, such as
growth or income.
Corporate Heritage
State Street Research has a history dating to 1924, with the founding of
the nation's second oldest mutual fund. Today the Company manages over
$27 billion in assets.
How To Get Started
The following questions and answers will give you important information
about your State Street Research 403(b) Account. Simply follow the
instructions on the back cover to set up your account.
Questions And Answers About Your
403(b) Account
Eligibility
Who can have a 403(b) account?
Only employees of an organization described in Section 501(c)(3) of the
Internal Revenue Code may have a 403(b) account. These include non-
profit charitable, educational, scientific or religious organizations,
such as hospitals or colleges. Also, an employee of a state or local
government who is employed by a school (for example, a local school
system or state college or university) can have a 403(b) account. Check
with your employer to determine whether you qualify for a 403(b)
account.
<PAGE>
What happens if I change employers?
If your new employer is a qualified employer, you may continue to
contribute to your 403(b) account after changing jobs. If your new
employer is not a qualified organization, you may no longer make
contributions to your 403(b) account, but your account will continue to
accumulate tax free until you begin making withdrawals. Contact
State Street Research Shareholder Services for additional information:
1-800-562-0032.
Contributions
How do I make contributions to my 403(b) account?
Usually, you would enter into a salary reduction agreement with your
employer that specifies the amount you want to contribute. Your
compensation will be reduced by this amount and the money will be
contributed by your employer to your 403(b) account. In some cases, your
employer may make contributions to your 403(b) account as a retirement
benefit for you.
Your employer may already have a salary reduction agreement for you to
use. If not, a form of salary reduction agreement is included in your
State Street Research 403(b) Package. Read the form for an explanation
of IRS restrictions on changing the amount of your salary reduction.
Maximum Contribution
How much can be contributed each year to my 403(b) account?
Determining your maximum 403(b) contribution is complex because several
different tax law limits apply depending on your individual situation.
For most employees, the maximum salary reduction contribution for a
calendar year will be the smaller of 20% of your compensation or $9,500.
In the future, the $9,500 limit may be indexed for inflation each year.
Employees of certain kinds of qualified employers (for example, public
schools and private tax-exempt schools, colleges, hospitals and home-
health agencies) can elect different limits in some situations. Also,
long-service employees (15 or more years of service) of such employers
may have increased limits.
Your employer's benefits or personnel department, or the business
office, may be available to calculate your maximum contribution. If not,
you may use the worksheet enclosed in your State Street Research 403(b)
Package. You may wish to consult an accountant or tax adviser to confirm
your maximum contribution.
What happens if I exceed the maximum for a year?
If you exceed the $9,500 limit for a year, you should request State
Street Research to return the excess contribution to you with earnings.
You should make your request no later than March 1 of the following
year.
<PAGE>
If your contributions for a year exceed any of the other limits, you
must include the excess in your income for federal income tax purposes.
In addition, you may have to pay a penalty tax equal to 6% of the
"excess contribution." The penalty tax also applies to excess
contribution amounts left over from prior years.
You can avoid paying the penalty tax if you withdraw the amount of the
excess from your account before the end of the year in which the excess
contribution was made.
Even if you have to pay the penalty tax in one year, you can avoid paying it in
later years by contributing less than your maximum for the later year; the
excess is reduced by the difference between the maximum and the actual
contribution.
Investments
What are my investment choices?
Contributions to your 403(b) account may be invested in one or more of
the eligible mutual funds distributed by State Street Research.
Also, you can exchange amounts from one fund to another. (You can even
choose telephone exchange privileges when completing your State Street
Research 403(b) Account Application.) There may be minimum investment
amounts for certain funds, or there may be sales charges. Such minimums
or charges are described in the prospectus(es).
Before investing, be sure to read the current prospectus(es) for the
funds in which you are interested so that you can be familiar with the
investment objectives and policies, and the sales charges or other
charges applicable to a Fund.
May I transfer my existing 403(b) to State Street Research?
Yes. Complete the Transfer of 403(b) Assets Form found in your State
Street Research 403(b) Package. Be sure to note the requirements for a
tax-free transfer described in the Form. Consult your personnel or
benefits department or your tax adviser for additional information.
What about an IRA?
You can have an IRA even though you are contributing to a 403(b)
account. Depending on your income level, contributions to an IRA may or
may not be deductible on your federal income tax return. For more
information about our IRAs, call State Street Research Shareholder
Services: 1-800-562-0032.
<PAGE>
Withdrawals From Your Account
When will I begin to receive retirement benefits from my account?
You choose when to make withdrawals from your 403(b) account. However,
withdrawals may not begin until you have retired or terminated
employment with your employer; reached age 59-1/2 (even though you are
still employed by your employer); or died. Earlier withdrawals are
permitted only if you become disabled or suffer a financial hardship
(as defined by IRS regulations). Consult your tax adviser, as tax
penalties may result. You may be requested to verify disability with a
doctor's certificate or a Social Security disability benefits award.
You may be asked to verify financial hardship by a certificate from an
independent person appointed by your employer, and financial hardship
withdrawals are limited to the amount of your salary reduction
contributions (no earnings or investment gains). You must begin making
withdrawals by April 1 of the year following the year when you reach
age 70-1/2. This is required even if you are still working.
Use the Withdrawal Form to notify State Street Research when you wish to
begin making withdrawals from your account.
How will the benefits be paid to me?
Benefits will be paid to you either in a lump-sum payment or in periodic
(monthly, quarterly, or annual) installments. Installment payments may
not extend beyond your life expectancy or the joint life expectancy of
you and your designated beneficiary.
Also, there are minimums on the amount of installments you must receive
after age 70-1/2. There are substantial penalty taxes (up to 50%) if you
do not make the minimum required withdrawals.
What happens to my account if I die?
Your account balance goes to the beneficiary(ies) you designate on the
403(b) application or on another written document you send to State
Street Research Shareholder Services. You can change your
beneficiary(ies) in writing. Naming a beneficiary(ies) can have estate
and tax-planning implications; consult a qualified professional.
Withdrawals by a beneficiary(ies) are also subject to rules relating to
when withdrawals must begin and minimums for installment withdrawals.
Taxes
How will I be taxed on withdrawals from my 403(b)?
Generally, amounts withdrawn from your account are taxed as ordinary
income in the year when received. In addition, with limited exceptions,
such as disability, amounts withdrawn before age 59-1/2 are subject to
an additional 10% penalty tax.
Special five-year averaging, applicable to lump-sum distributions from
certain retirement plans, does not apply to 403(b).
<PAGE>
Certain very large withdrawals (generally over $150,000 in a year--
counting all 403(b) and IRA withdrawals and distributions to you from
qualified retirement plans) may be subject to a 15% penalty tax.
There may be income tax withholding on the amounts you withdraw. If you
withdraw an amount from your State Street Research 403(b) Account that
is eligible for rollover (see next question), mandatory 20% federal
income tax withholding will apply unless the withdrawn amount is rolled
directly to another 403(b) arrangement or to an IRA. If the amount you
withdraw is not eligible for rollover to another 403(b) arrangement or
IRA, 10% withholding of federal income tax will apply unless you elect
no withholding on your Withdrawal Form.
Can I postpone federal income tax on a withdrawal from my 403(b)
account?
In certain situations, you can defer income taxes on withdrawals from
your 403(b) account if all or part of the withdrawal is rolled over to
another 403(b) account or into an IRA either directly by State Street
Research (direct rollover) or by you (regular rollover) within 60 days.
All withdrawals are eligible for rollover (either a direct rollover or a
regular rollover) except minimum required withdrawals after age 70-1/2
and withdrawals over a period of at least 10 years or over the life
expectancy of you (or you and your designated beneficiary).
Caution: Rollovers must meet technical IRS requirements that cannot be
described in detail here. Consult your employer or tax adviser for
assistance in carrying out a rollover.
If a withdrawal is eligible for rollover and if you do not elect a
direct rollover, the Custodian must withhold 20% of your withdrawal for
federal income taxes. The rollover and withholding rules also apply to
your surviving spouse if he or she receives a distribution from your
account upon your death.
Be certain to carefully read the notice on tax treatment and withholding
on withdrawals that accompanies the Withdrawal Form for more
information.
What about other taxes?
Contributions under a salary reduction agreement will be subject to
Social Security withholding if you are covered by Social Security.
State tax treatment varies from state to state. You should consult your
tax adviser with any questions on how a 403(b) account would affect your
state taxes.
IMPORTANT. The preceding questions and answers are general and are
provided for informative purposes only. Always consult your tax adviser
for advice on how the tax laws apply to you and how a State Street
Research 403(b) account will affect your tax situation. More information
is available in IRS Publication 571, Tax-Sheltered Annuity Plans for
Employees of Public Schools and Certain Tax-Exempt Organizations; this
publication is available from the IRS.
<PAGE>
How To Start Your State Street Research 403(b) Account
1. Carefully read the material describing the State Street Research
403(b) Account and the prospectus(es) for the fund(s) in which you plan
to invest. You may want to review the material with your accountant,
lawyer or other tax adviser because the rules under Section 403(b) are
complex and subject to change.
2. If contributions to your 403(b) Account will be made under a salary
reduction agreement, you should fill out, and you and your employer
should sign, a salary reduction agreement. If your employer does not
have a form of salary reduction agreement for use with employees, you
may use the sample Salary Reduction Agreement found in the State Street
Research 403(b) package.
3. Complete and sign the State Street Research 403(b) Account
Application. Be sure to complete the beneficiary section of the
Application.
4. If you are transferring your current 403(b) assets to State Street
Research, complete and sign the Transfer of Assets Form.
5. Mail the completed and signed Application (and the Transfer of Assets
Form, if used) to:
State Street Research Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
Enclose a check in the amount of $10.00 payable to State Street Bank and
Trust Company, Custodian, to cover the first year's annual maintenance
fee for the account; otherwise the fee will be charged to your account.
There is a $10.00 annual maintenance fee for each calendar year (the fee
is not prorated for less than a full calendar year). We will forward the
necessary materials to the Custodian.
This brochure must be preceded or accompanied by the relevant fund
prospectus(es), which includes investment policies, sales charges and
expenses. Please read the prospectus(es) carefully before investing.
[State Street Research logo]
(C)1995 State Street Research Investment Services, Inc. Boston, MA 02111
Control Number: 2717-951025(1196)SSR-LD RP-923C-1095
<PAGE>
[BACK COVER]
(C)1995 State Street Research Investment Services, Inc., Boston, MA 02111
CONTROL NUMBER: 2713-951025(1196)SSR-LD RP-921C-1095
[FRONT COVER]
[State Street Research logo]
403(b)
Maximum Salary
Reduction Worksheet
Maximum Salary Reduction Worksheet
This worksheet will help you compute the maximum amount by which you can reduce
your salary without exceeding any of the limits. Before doing the calculations,
you may wish to check with your Employer's benefits or personnel department or
business office. Often these departments will calculate an employee's 403(b)
maximum.
If you use the worksheet to do your own calculation, read the
information following the worksheet first. After completing the
worksheet, you should consult your accountant, lawyer or other
professional tax adviser to verify your calculation or answer your
questions. The tax laws change often and individual situations can vary.
Also, certain exceptions and rules that apply only in relatively rare
situations are not covered by the worksheet. This worksheet and the
questions and answers following it are not intended to be tax advice,
and you are responsible for meeting the tax law limits
on contributions to your 403(b) account.
To help you, the example demonstrates a typical salary reduction situation and
the worksheet provides spaces for your own computations. This worksheet and the
questions and answers are designed to help you determine your maximum salary
reduction. If your employer will make contributions on your behalf as an
addition to your salary, or if you will contribute by foregoing an increase in
compensation, there are different formulas to determine your maximum. If this
situation applies to you, your Employer should be able to help you calculate the
limits that apply to you.
In the example, a college teacher will earn $40,000 in 1995. She will
have worked for the college 15 years at the end of 1995. The college has
previously contributed $20,000 on her behalf to its 403(b) retirement
plan ($18,000 of which was contributed in the most recent 10 years). The
college will contribute 10% of her salary ($4,000) to its retirement
plan for 1995. In addition, the employee reduced her salary in prior
years by a total of $10,000 for contribution to her 403(b) account. How
much can this employee reduce her salary for 1995?
Step 1 - Determine the Exclusion Allowance
(example) (your computation)
(a) Enter your expected
salary for the current
year before reduction
for contributions to
your 403(b) account. $40,000 ___________________
(b) Enter your number
of years of service
(including whole
and fractional years)
as of the end of the
current year. 15 ____________________
(c) Multiply (a) by (b)
by .20. $120,000 ____________________
(d) Enter the amount of
your salary reduction
contributions and
employer contributions
for you to a 403(b)
retirement plan or to a
qualified retirement plan
in prior years. $ 30,000 _____________________
<PAGE>
(e) Enter amount of
contributions by
your employer
for you to a 403(b)
retirement plan for
the current year. $ 4,000 ______________________
(f) Subtract (d) and (e)
from (c). $ 86,000 ______________________
(g) Multiply your years
of service in (b) by .20
and add 1. 4 ______________________
(h) Divide (f) by (g) to
determine your
exclusion allowance
for the year. $ 21,500 ______________________
Step 2 - Determine the Section 415 General Limitation
(a) Multiply your expected
salary (before reduction
for contributions to your
403(b) account) for the
current year by .20. $ 8,000 ______________________
(b) Multiply amount of
your employer's
expected contributions
for you for the current
year to a 403(b) retire-
ment plan by .80. $ 3,200 ______________________
(c) Subtract (b) from
(a)to determine your
Section 415 general
limitation (but not
in excess of $30,000). $ 4,800 ______________________
Step 3 - Determine the Section 415 Alternatives
Alternative A
Available if employee
terminates service;
same as exclusion
allowance but based
on last ten years of
service with employer,
up to a maximum
of $30,000. $ 16,000 ______________________
Alternative B
(a) Enter the exclusion
allowance determined
in Step 1. $ 21,500 ______________________
(b) Add $3,200 to the Section
415 general limitation
determined in Step 2. $ 8,000 ______________________
(c) Enter $15,000. $ 15,000 $ 15,000
<PAGE>
(d) Your alternative B
limitation is the
smallest of (a),
(b) or (c). $ 8,000 ______________________
Alternative C
Enter the Section 415
general limitation
determined in Step 2. $ 4,800 ______________________
Step 4 - Apply the $9,500 Limit
(a) Enter $9,500. $ 9,500 $9,500
(b) If eligible (see Question 14
below), use the smallest
of the following:
(i) $ 3,000 $ 3,000 $3,000
(ii) $15,000 reduced
by increases to the
$9,500 limit you
used in prior years. $ 15,000 ______________________
(iii) $5,000 multiplied
times years of service,
reduced by all prior
salary reduction
contributions to a
403(b) account or
annuity or to a
401(k) plan. $ 65,000 $_____________________
(c) Add the amount
determined in (b)
to $9,500; this is
your limit for the
year under this step. $ 12,500 $_____________________
Step 5 - Determine the maximum salary reduction
(a) Enter your exclusion
allowance from step 1. $ 21,500 ______________________
(b) Enter your Section 415
general limitation
from step 2. $ 4,800 ______________________
(c) Enter the lesser
of (a) or (b). $ 4,800 ______________________
(d) Enter Alternative A
if applicable. $ 16,000* ______________________
(e) Enter Alternative B. $ 8,000 ______________________
(f) Enter Alternative C. $ 4,800 ______________________
(g) Enter the largest
of items (c), (d),
(e) or (f). $ 8,000* ______________________
<PAGE>
(h) Enter the $9,500
limit (Step 5(c)). $ 12,500 $_____________________
(i) Enter the smaller
of (g) or (h).
This is your maxi-
mum salary reduc-
tion for this year. $ 8,000 ______________________
*Alternative A is not available to the employee in the example because
she is not terminating employment.
For this employee, the Alternative B limit of $8,000 is the largest for
this year. Keep in mind that the alternative election, which appears
most advantageous in this year may not necessarily be the best for you
over the long run. See Questions 9 and 12.
Step 6 - Salary Reduction Agreement
Enter a salary reduction agreement with your Employer, which reduces
your compensation each pay period so that the correct amount is
contributed to your State Street Research 403(b) Account.
QUESTIONS AND ANSWERS ON
CALCULATING YOUR MAXIMUM
Maximum Contribution
1. What is the maximum annual contribution to my 403(b) account?
The maximum contribution you can exclude from your taxable income
(sometimes called your "maximum exclusion allowance"
or "MEA") is the smaller of your "403(b) exclusion allowance" (Questions
2-5) or your "415 limit" (Questions 6-12). Finally, your salary
reduction contributions for a year cannot exceed $9,500; this is
increased for certain employees (Questions 13 and 14).
Exclusion Allowance
2. How do I compute my "exclusion allowance"?
Use the following steps to compute your 403(b) exclusion allowance:
(a) Take 20 percent of your expected salary for the current
year (before reduction for your 403(b) contributions, but
after reduction for salary reduction contributions under a
cafeteria or flexible benefits plan or 401(k) plan if your
employer maintains such a plan).
(b) Multiply (a) by your number of years of service with your
current employer as of the end of the current year.
(c) Subtract the following total from (b):
(bullet) your total 403(b) salary reduction contributions
in previous years (which you excluded from your
income),
(bullet) your employer's contributions in previous years on
your behalf to a 403(b) retirement plan or to a
qualified retirement plan,
<PAGE>
(bullet) your employer's expected contributions to a 403(b)
retirement plan for you for the current year (see
Questions 15 and 16).
(d) Divide (c) by the sum of one plus 20 percent of your years
of service as of the end of the current year.
The resulting figure is the amount of your exclusion allowance for the
current year.
3. What if I do not know how much my employer has contributed in
previous years on my behalf to a retirement plan?
If you cannot learn this from the benefits or personnel office of your
employer, IRS regulations provide a method for determining the amount of
your employer's prior contributions. Consult your employer or tax
adviser for further information.
Years of Service
4. How do I determine my years of service?
Count one year of service for each full year you were a full-time
employee. Count a fraction of a year of service for years in which you
were a part-time employee or did not work a full year. Add your full and
fractional years of service together to determine your total years of
service. Only service with your current employer can be counted.
Part-time Fraction. For part-time work, the fraction is your work
schedule divided by the normal work schedule for a full-time employee
holding the same position. For example, if for a year you taught one
course for six hours per week, and a full-time teacher normally teaches
18 hours per week, your fraction would be one-third of a year.
Partial Year Fraction. If you were a full-time employee for part of the year,
the fraction is the number of weeks or months you worked divided by the number
of weeks or months in your employer's annual work period. For example, if you
taught full-time for four and one-half months and your employer's annual work
period is an academic year of nine months, your fraction would be one-half of a
year.
Part-time, Partial Year Fraction. If you were a part-time employee for
part of a year, calculate one fraction as though you were a part-time
employee for a full year and one fraction as though you were
a full-time employee for a part of a year. Then multiply the two
fractions together to obtain your fractional year of service. For
example, if you taught a course for six hours per week for one semester
at a school where full-time teachers taught 18 hours per week for two
semesters, your fractional year of service would be one-sixth (part-time
fraction of one-third times full-time for part-of-a-year fraction of
one-half).
5. What if I have less than one year of service?
Under the law, you may compute your exclusion allowance based on one
year of service even if you have worked for your employer for less than
a year or if your fractional years of service total less than a year.
<PAGE>
415 Limits
6. What are the 415 limits?
The 415 limits are from Section 415 of the Internal Revenue Code. The
415 limits apply even though your 403(b) exclusion allowance for the
year is greater. Section 415 has a general limit and certain
alternatives that may permit a larger maximum.
7. How do I compute the 415 general limit?
Your 415 general limit is the smaller of:
(a) 20 percent of your compensation for the year (before
reduction for contributions to your 403(b) account, but
after reduction for salary reduction contributions under
any cafeteria or flexible benefits plan or 401(k) plan your
employer maintains); this amount must be reduced by 80% of
your employer's contribution for the year to the 403(b)
retirement plan; or
(b) $30,000. (This $30,000 figure will eventually be indexed
for cost-of-living changes. However, the indexing will not
begin for some years depending on future inflation.)
415 Alternatives
8. What are the 415 alternatives?
In the past, many employees eligible for 403(b) did not enter into
salary reduction agreements because they expected to make large "catch-
up" contributions later. The 415 general limit might prevent those
employees from saving enough for their retirement years. To remedy this
situation, 415 provides certain alternatives.
These alternatives are available only to employees of an educational
organization, a hospital, a home health service agency, a health and
welfare service agency, or a church or association of churches. If you
do not work for such an employer, you can skip Questions 9 through 12.
9. How many alternatives are there?
Section 415 provides three alternatives:
Alternative A may be used only once, in the year you leave the
service of your employer. Under this alternative, the 415
percentage limitation (see Answer 7(a)) is disregarded and you
may calculate your 403(b) exclusion allowance using your years
of service with your employer up to a maximum of ten years. The
$30,000 limit still applies, however, even if your exclusion
allowance is higher.
In other words, under this alternative, you are limited to your
403(b) exclusion allowance based on a maximum of ten years of
service, or $30,000, whichever is less.
Alternative B is the smallest of:
(a) the amount of your 403(b) exclusion allowance;
(b) 20 percent of your compensation (before reduction for
contributions to your 403(b) account) plus $3,200;
(c) $15,000
<PAGE>
Alternative C is to disregard the 403(b) exclusion allowance
altogether. Under this alternative, contributions are subject
only to the 415 general limit described in Answer 7.
Finally, there is a separate alternative available only to an employee
of a church or association of churches: to replace the 415 general limit
with the limit of $10,000 per year (up to a cumulative total
of $40,000).
10. Are there any special rules for electing one of the alternatives?
Yes. You may elect only one of the three alternatives. If you elect one
of the alternatives, you may not elect either of the other
alternatives in any future year.
Alternative A (for the year of separation) may be elected only once. If
you elect this alternative in any year, you may not elect an
alternative at any time in the future.
If you elect an alternative, your election is irrevocable for that year.
However, you may elect either alternative B or C in one year,
choose not to use it in the following year, and then elect the same
alternative again in the third year.
11. How do l elect an alternative?
You elect an alternative simply by computing your income tax
liability in a manner consistent with the alternative.
12. Which alternative is best for me?
This depends upon your current compensation, expected future
compensation, years of service, expected future years of service,
expected ability to make future salary reduction contributions, and so
forth. An alternative which appears advantageous this year may restrict
contributions to your 403(b) account in later years. Only you can decide
which alternative is most advantageous to you.
The $9,500 Cap
13. Where did the $9,500 limit come from?
In the Tax Reform Act of 1986, Congress decided to limit salary
reduction contributions by employees. For 403(b), Congress chose a
$9,500 cap. This $9,500 cap applies as a maximum salary reduction
contribution even though your 403(b) exclusion allowance or 415 limit is
higher. This cap applies only to your salary reduction contributions,
not to employer contributions to a 403(b) retirement plan for you.
The $9,500 cap is indexed for future cost-of-living increases.
However, the cap will not increase for some years; exactly when depends
on future inflation rates.
14. Who qualifies for an increased $9,500 cap?
Congress realized that the $9,500 cap would affect employees who
expected to make "catch-up" contributions. Therefore, an increased cap
is available to some employees.
There are two requirements for an increased cap. First, your employer
must be one of the types listed in Answer 8. Second, you must have 15 or
more years of service with the employer. If you qualify, your $9,500 cap
is increased by the smallest of the following:
(a) $3,000;
<PAGE>
(b) $15,000 (reduced by all amounts by which your $9,500 cap
was increased in prior years under this special rule); or
(c) $5,000 multiplied by your number of years of service, minus
all previous salary reduction contributions under 403(b)
(or under any 401(k) plan in which you participated).
Additional Rules for an Employee with Another Retirement Program
15. If for the current year my employer or any other employer contributes to
another 403(b) account or annuity for me, must such contributions be added to my
salary reduction contributions when determining my maximum contribution?
Yes. To determine your 403(b) exclusion allowance, your 415 limit or one
of the alternatives (but not the $9,500 cap--only your salary reduction
contributions count against the $9,500 cap), your employer's current
contributions to a 403(b) plan or arrangement for you must be included.
(See the Worksheet for an example of this situation). If your employer
has a retirement plan, you should find out whether it is a 403(b) plan.
16. If for the current year my employer makes contributions for me to a
retirement plan that is "qualified" under section 401(a) of the Code,
must such contributions be counted when determining my maximum
contribution?
If this situation applies to you, you should consult your tax adviser.
The following is only a general summary of the rules governing
aggregation of contributions to your 403(b) account with contributions
to a qualified plan.
Contributions for you to a qualified plan during the current year by an
employer are not counted in determining your 403(b) exclusion allowance
this year.
However, for your 415 limit, the answer depends on whether you have
elected one of the 415 alternatives and on whether you
"control" your employer.
If you have not elected an alternative, or if you have elected
alternative A or B, you need not combine contributions to your 403(b)
account with contributions on your behalf to a qualified plan of the
same or any other employer unless you control the employer by owning a
50% or greater interest.
If you have elected alternative C (to disregard the exclusion allowance
entirely), you must count contributions to your 403(b) account with
contributions for you to a qualified retirement plan maintained by any employer
regardless of whether you "control" the employer.
<PAGE>
State Street Research 403(b)
Account Application
How to open your
State Street
Research 403(b)
Account
1. To open a State Street Research 403(b) Account, please complete
this side of the Application.
2. Your investment dealer must complete the dealer information
section of the Application.
What type of State
Street Research
403(b) are you
opening?
[ ] Regular 403(b) [ ] Transfer of Assets [ ] Regular Rollover
or Direct Rollover
Employee
information
Complete the following
information about
yourself. Your account
will be registered in
your name.
Name ___________________________________ Birth date______________________
Street___________________________________________________________________
City_____________________________________State___________ZIP_____________
Social Security #________________________________________________________
Daytime telephone #______________________________________________________
Employer
information
Complete the following
information about your
Employer.
Name_____________________________________________________________________
Street___________________________________________________________________
City_____________________________________State___________ZIP_____________
Name of contact person___________________Daytime telephone #_____________
Which Fund(s)
have you selected
for your 403(b)?
See the State Street
Research 403(b)
brochure and relevant
prospectus(es) for
Fund details.
Name of Fund Class of Shares Percentage
A B D
[ ] [ ] [ ] _______ %
- ---------------------------------------
[ ] [ ] [ ] _______ %
- ---------------------------------------
[ ] [ ] [ ] _______ %
- ---------------------------------------
[ ] [ ] [ ] _______ %
- ---------------------------------------
[ ] [ ] [ ] _______ %
- ---------------------------------------
Total 100%
<PAGE>
Who is the
beneficiary of
your State Street
Research 403(b) Account?
1. Name__________________________________Birth date______________________
Relationship to you___________________________________________________
Street________________________________________________________________
City__________________________________State___________ZIP_____________
Social Security #_____________________________________________________
Percentage to this beneficiary ____%
2. Name__________________________________Birth date______________________
Relationship to you___________________________________________________
Street________________________________________________________________
City__________________________________State___________ZIP_____________
Social Security #_____________________________________________________
Percentage to this beneficiary ____%
Important
Naming a beneficiary(ies) can have estate and tax-planning implications.
Also, if you are married and live in a community property state (AZ, CA,
ID, LA, NM, NV, TX, or WA), you may need your spouse's consent to
designate someone else as beneficiary for more than half of your
Account. Consult your attorney, or other qualified professional, for
additional advice.
Keep a copy of this account application with your other important papers
(such as your will).
Telephone Exchange
The Telephone Exchange Privilege is available only for shares held on
deposit with the Transfer Agent. None of the Transfer Agent, any of the
Funds, State Street Research Shareholder Services, the Investment
Manager or the Distributor will be liable for any loss, injury, damage
or expense as a result of acting upon, and will not be responsible for
the authenticity of, any telephone instructions. I understand that all
telephone calls are tape recorded. My liability shall be subject to the
use of reasonable procedures to confirm that instructions communicated
by telephone are genuine.
<PAGE>
Telephone Exchange
by Shareholder
or Dealer
The Transfer Agent may effect exchanges for my account according
to telephone instructions from me or my Dealer as set forth in the
prospectus, and may register the shares of the Fund to be acquired
exactly the same as my existing account. Authorizing an exchange
constitutes an acknowledgment that the shareholder has received
the current prospectus of the Fund to be acquired. The account will
automatically have this privilege unless it is expressly declined by
providing your initials in the space below.
I DO NOT WANT THE TELEPHONE EXCHANGE PRIVILEGE.
___(Initial here.)
Sign here to
establish the
403(b) Account
I hereby establish a State Street Research 403(b) Account, the terms of
which are contained in this Application and the State Street Research
403(b) Agreement (which I have received and which is incorporated herein
by reference) and appoint State Street Bank and Trust Company as
Custodian. I direct that contributions to my 403(b) Account be invested
as specified above in this Application (until changed by me
in accordance with the Agreement), designate the individual(s) named
above as my beneficiary(ies) (unless I have filed a separate written
designation with the Custodian or its agent), acknowledge that I have
received a current prospectus(es) of the Fund(s) indicated above, and
acknowledge that there is a $10 annual maintenance fee (in addition
to any fees and charges described in the prospectus(es)).
Under penalties of perjury, I certify that (1) the number shown on this
Application is my correct taxpayer identification number (or I am
waiting for a number to be issued to me), and (2) I am not subject to
backup withholding because (a) I am exempt from backup withholding, or
(b) I have not been notified by the Internal Revenue Service that I am
subject to backup withholding as a result of a failure to report all
interest or dividends, or (c) the IRS has notified me that I am no longer
subject to backup withholding.
Certification Instructions--You must cross out item (2) above if you have
been notified by the IRS that you are currently subject to backup
withholding because of underreporting interest or dividends on your
tax return.
Employee signature_____________________________Date___________________
<PAGE>
Dealer information
and signature
guarantee
Please have your
investment dealer
fill out this section.
Dealer firm__________________________________________________________
Home office address_________________City__________State______ZIP_____
Branch office address_______________City__________State______ZIP_____
Telephone #______________Branch #_____________Rep. #_________________
Authorized dealer signature__________________________________________
Investment Dealer's last name________________________________________
If this Application is for an account introduced through the
above-named Dealer, the Dealer further agrees to all applicable
provisions in this Application and in the prospectus(es) of the
Fund(s) selected by the Employee, represents that it has provided a
current prospectus(es) to the Employee and that the Application is
properly executed by a person authorized by the Dealer to guarantee
signatures. The Dealer warrants that this Application is completed in
accordance with the Employee's instructions and agrees to indemnify
the Funds(s), the Distributor, the Investment Manager, State Street
Research Shareholder Services and the Transfer Agent for any loss or
liability from acting or relying upon such instructions and
information. The terms and conditions of the Distributor's currently
effective Selected Dealer Agreement or sales agreement are included by
reference in this section. The Dealer represents that it has a
currently effective Selected Dealer Agreement or sales agreement with
the Distributor authorizing the Dealer to sell shares of the Fund(s),
and that it may lawfully sell shares of the designated Fund(s) in the
state designated as the Employee's address of record.
State Street Bank
and Trust Company,
Custodian
You are hereby authorized and appointed on behalf of the above-signed
dealer to execute purchase transactions in accordance with the terms and
conditions of this Application, and to confirm each purchase.
Acceptance by
the Custodian
This Account will be deemed to have been accepted by the Custodian,
State Street Bank and Trust Company, after all necessary forms, properly
completed, are received by State Street Research Shareholder
Services and delivered by Shareholder Services to the Transfer Agent.
Send completed application to:
State Street Research Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
Control Number: 2709-951025(1196)SSR-LD RP-918C-1095
<PAGE>
State Street Research 403(b)
Salary Reduction Agreement
Parties
Complete the information
about the Employee and
the Employer.
Employee name______________________________________
Social Security #__________________________________
Employer name______________________________________
Check one box.
[ ] Original Agreement [ ] Modification
Agreements
Fill in the dollar amount
or percentage that you
want to contribute in
section 2.
The Employee and the Employer agree as follows:
1. The Employee has signed the State Street Research 403(b) Account
Application establishing the Account for the benefit of the
Employee. The Employee and the Employer are entering into this
salary reduction agreement ("this Agreement") to provide for
contributions to the Account.
2. The Employee requests, and the Employer agrees, to reduce the
compensation of the Employee by $______ or by ______% per pay
period, starting with the first pay period that begins after the
Employee and the Employer have signed this Agreement.
3. As soon as possible after each pay day, the Employer will transmit
the amount by which the Employee's compensation is reduced for that
pay period to the agent for the Custodian of the Employee's
Account, to be credited to the Employee's Account in accordance
with the State Street Research 403(b) Account Agreement. For
federal income tax purposes, such amounts are considered Employer
contributions to the Employee's Account.
Where to send
contributions.
Checks should be made payable to "State Street Bank and Trust Company,
Custodian, FBO __________________________ [insert name of Employee]
403(b) Account." Mail checks to State Street Research, P.O. Box
8408, Boston, MA 02266-8408.
OVER >
<PAGE>
4. This Agreement will be effective only with respect to compensation
not yet earned by the Employee, and not with respect to
compensation already earned by the Employee on the date this
Agreement is signed.
This Agreement is binding and irrevocable with respect to
compensation earned by the Employee while this Agreement is in
effect. The Employer or the Employee may terminate this Agreement
at any time with respect to compensation not yet earned by the
Employee at the date of termination, by giving written notice to
the other party. After termination, the Employee may reinstate this
Agreement (with the same or a different salary reduction amount);
however, the Employee may not reinstate this Agreement during the
same calendar year that the Employee (or Employer) terminated this
Agreement.
The Employee may modify the amount of salary reduction elected in
Paragraph 2 above at any time by giving the Employer signed
instructions specifying the new salary reduction amount. However,
the Employee may not modify this Agreement during the same calendar
year that the Employee originally signed this Agreement or in any
calendar year when the Employee has already modified this Agreement
once during such year.
5. Unless the Employer agrees to calculate the Employee's maximum
403(b) contribution, the Employer has no responsibility for
determining that the amount by which the Employee's compensation is
reduced, as set forth in Paragraph 2 above, does not exceed the
limitations applicable to the Employee under the Internal Revenue
Code. The Employee agrees to indemnify the Employer, State Street
Research Investment Services, Inc., and its affiliates for any and
all charges, expenses, taxes, interest or penalties imposed on the
Employer as a result of any reduction in compensation in excess of
such limitations.
Signatures
In witness whereof, the parties hereto have signed this Agreement
on______________________________, 19_______.
Employee Employer
(Signature)______________ (Name of employer)___________________________
By:_________________________________________
Signature and title of authorized official)
CONTROL NUMBER: 2711-951025(1196)SSR-LD RP-920C-1095
<PAGE>
State Street Research 403(b)
Transfer of 403(b) Assets Form
How to transfer
your existing
403(b) Account
to State Street
Research
(bullet) If you don't have a State Street Research 403(b) Account
yet, complete this transfer form and a State Street Research
403(b) Account Application.
(bullet) If you already have a State Street Research 403(b) Account,
just complete this transfer form.
(bullet) When completed, send this transfer form (and if necessary,
your 403(b) Account Application) to: State Street Research
Shareholder Services, P.O. Box 8408, Boston, MA 02266-8408.
Information
about you
Name______________________________Social Security #__________________
Telephone (day)___________________Telephone (night)__________________
Account number (If you already have a State Street Research 403(b)
Account)_____________________________________________________________
Where is your
403(b) Account
now?
Name of current Custodian/Insurer____________________________________
Address______________________________________________________________
City_____________________________State__________________ZIP__________
Account number_____________________Name of mutual fund or fund family
(if applicable)______________________________________________________
Please tell us
which Fund(s)
you have selected
for your 403(b)
investment
[ ] This is a new State Street Research 403(b) Account. My
investment choices are on my 403(b) Account Application.
[ ] I already have a State Street Research 403(b) Account. Please
invest the amount transferred as follows:
Fund name___________________________Account number____________ _____%
Fund name___________________________Account number____________ _____%
I acknowledge that I have received a current prospectus(es) of the
Fund(s) selected.
OVER >
<PAGE>
Please authorize
transfer of your
current 403(b)
Account to State
Street Research
To my current Custodian/Insurer: Please redeem
[ ] ALL or [ ] PART ($_________) of my current 403(b) and transfer
the proceeds in cash to my State Street Research 403(b) Account.
(For partial transfers, indicate which investments are to be liquidated.)
Your signature______________________________Date____________
Note: Under current IRS rulings, a transfer from another 403(b) account
to a State Street Research 403(b) Account will be a tax-free transaction
as long as the withdrawal restrictions under your existing 403(b) are
not more severe than those under the State Street Research 403(b)
account (see Section 5.2 of the State Street Research 403(b) Agreement).
By signing this form, you are certifying that this transfer will be a
tax-free transaction under the preceding sentence.
Signature
Guarantee
A signature guarantee may be required. Call your current Custodian/
Insurer for requirements.
Signature guaranteed by (name of bank or dealer firm)__________________
Signature and title of officer_________________________________________
PLEASE DO NOT FILL OUT THE FOLLOWING PORTION OF THIS FORM
Directions
to Current
Custodian/Insurer
Please liquidate and transfer on a fiduciary-to-fiduciary basis all or
part of the designated account as instructed above. Make check payable
to State Street Bank and Trust Company, Custodian.
Include the following account number and FBO on the check.
Account number________________________Name____________________________
Mail to: State Street Research Shareholder Services,
P.O. Box 8408, Boston, MA 02266-8408
Include a copy of this Transfer of 403(b) Assets Form with the check for
proper credit to the customer's account. State Street Research
Shareholder Services will deliver the items to Boston Financial Data
Services, Inc., which serves as Agent for the Custodian.
Successor
Custodian
State Street Bank and Trust Company will accept the transfer described
above once this form has been completed by you and the transfer has been
completed by your current 403(b) Custodian/Insurer.
______________________________________________________________________
Authorized signature of acceptance Date
by State Street Research Shareholder
Services on behalf of State Street Bank and Trust Company, Custodian
CONTROL NUMBER: 2707-951025(1196)SSR-LD RP-919C-1095
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