Registration No. 333-____
As filed with the Securities and Exchange Commission on April 4, 1997
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. __ [ ] Post-Effective Amendment No. __
----------------------
STATE STREET RESEARCH CAPITAL TRUST
(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111-2690
(Address of Principal Executive Offices)
(617) 357-1200
(Registrant's Telephone Number, including Area Code)
Francis J. McNamara, III, Esq.
Executive Vice President, Secretary and General Counsel
State Street Research & Management Company
One Financial Center
Boston, Massachusetts 02111-2690
(Name and Address of Agent for Service)
Copies of Communications to:
Geoffrey R.T. Kenyon, Esq.
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109-2881
----------------------
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
It is proposed that this filing will become effective May 4, 1997 pursuant to
Rule 488 under the Securities Act of 1933, as amended, or such earlier date as
the Commission may determine and as specifically set forth in a further
amendment, if required, to this Registration Statement.
----------------------
Pursuant to Rule 24f-2(a)(1) under the Investment Company Act of 1940,
as amended, the Registrant previously has filed a declaration registering an
indefinite number of shares of beneficial interest on Form N-1A (Registration
Nos. 2-86271, 811-3838). Accordingly, no filing fee is due in connection with
this Registration Statement. A copy of the Registrant's earlier Declaration
pursuant to Rule 24f-2 is filed herewith as an exhibit. On or about November 22,
1996, the Registrant filed the notice required by Rule 24f-2 for its fiscal year
ended September 30, 1996. Pursuant to Rule 429, this Registration Statement
relates to the above-referenced Registration Statement on Form N-1A.
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<PAGE>
STATE STREET RESEARCH CAPITAL TRUST
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following pages and documents:
Front Cover
Contents of Registration Statement
Cross-Reference Sheet
Letter to Shareholders of State Street Research Capital Appreciation Fund
Notice of Special Meeting of Shareholders of State Street Research
Capital Appreciation Fund
Part A - Joint Prospectus/Proxy Statement Concerning Acquisition of the
Assets of State Street Research Capital Appreciation Fund
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
(i)
<PAGE>
STATE STREET RESEARCH CAPITAL TRUST
CROSS REFERENCE SHEET
Pursuant to Rule 481(a)
Part A
Caption or Location in Joint
Form N-14 Item No. and Caption Prospectus/Proxy Statement
- --------------------------------------------------------------------------------
1. Beginning of Registration Statement Cover Page; Cross Reference Sheet
and Outside Front Cover Page of
Prospectus
2. Beginning and Outside Back Table of Contents
Cover Page of Prospectus
3. Synopsis and Risk Factors Summary; Risk Factors; Comparison of
Investment Objectives and Policies
4. Information about the Transaction Summary; Reasons for the
Reorganization; Information About the
Reorganization; Comparative
Information on Shareholder Rights;
Exhibit A (Agreement and Plan of
Reorganization and Liquidation)
5. Information about the Registrant Cover Page; Summary; Information
About the Reorganization; Comparison
of Investment Objectives and
Policies; Performance; Comparative
Information on Shareholder Rights;
Management; Additional Information
About The Funds; Prospectus of State
Street Research Capital
Fund dated February 1, 1997
6. Information about the Company Summary; Information About the
Being Acquired Reorganization; Comparison of
Investment Objectives and Policies;
Comparative Information on
Shareholder Rights; Additional
Information About The Funds;
Prospectus of State Street Research
Capital Appreciation Fund dated
November 1, 1996
7. Voting Information Summary; Information About the
Reorganization; Comparative
Information on Shareholder Rights;
Voting Information
8. Interest of Certain Persons Information About the Reorganization
and Experts
9. Additional Information Required Not Applicable
for Reoffering By Persons Deemed
to be Underwriters
(ii)
<PAGE>
Caption or Location in Statement
Form N-14 Item No. and Caption of Additional Information
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Part B
10. Cover Page Cover Page
11. Table of Contents Cover Page
12. Additional Information about the Cover Page; Statement of Additional
Registrant Information of State Street Research
Capital Fund dated February 1, 1997
13. Additional Information about the Cover Page; Statement of Additional
Company Being Acquired Information of State Street Research
Capital Appreciation Fund dated
November 1, 1996
14. Financial Statements Statement of Additional Information
of State Street Research Capital
Fund dated February 1, 1997;
Statement of Additional Information
of State Street Research Capital
Appreciation Fund dated November 1,
1996
(iii)
<PAGE>
STATE STREET RESEARCH CAPITAL APPRECIATION FUND
a series of
State Street Research Equity Trust
One Financial Center
Boston, Massachusetts 02111
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
the State Street Research Capital Appreciation Fund (the "Capital Appreciation
Fund"), a series of State Street Research Equity Trust (the "Equity Trust"), to
be held at the offices of the Equity Trust at One Financial Center, 31st Floor,
Boston, Massachusetts 02111 on __________________ at 4:00 p.m. local time.
At this important meeting you will be asked to consider and approve an
Agreement and Plan of Reorganization and Liquidation between the Capital
Appreciation Fund and State Street Research Capital Fund (the "Capital Fund"), a
series of the State Street Research Capital Trust ("Capital Trust").
If the proposal is approved by the shareholders of the Capital Appreciation
Fund, the Capital Fund would acquire substantially all of the assets and certain
liabilities of the Capital Appreciation Fund. As a result of this transaction,
you would receive, in exchange for your shares of the Capital Appreciation Fund,
shares of the corresponding class of the Capital Fund with an aggregate value
equivalent to the aggregate net asset value of your Capital Appreciation Fund
investment at the time of the transaction. The transaction is conditioned upon
the receipt of an opinion of counsel to the effect that the transaction would be
free from federal income taxes to you and your Fund.
The Board of Trustees of the Equity Trust has determined that the proposed
reorganization should provide benefits to shareholders of the Capital
Appreciation Fund due to the enhanced economies of scale and more efficient
operations which are expected to result from combining funds with the same
investment objective, the same investment manager, the same multiple class
structure, the same sales load structure and similar investment policies.
I thank you for your participation as a shareholder and urge you to please
exercise your right to vote by completing, dating and signing the enclosed proxy
card. A self-addressed, postage-paid envelope has been enclosed for your
convenience. We look forward to receiving your vote.
IT IS VERY IMPORTANT THAT YOUR VOTING INSTRUCTIONS BE RECEIVED NO LATER
THAN _______________________, 1997.
Instructions for shares held of record in the name of a nominee, such as
a broker-dealer, may be subject to earlier cut-off dates established by such
intermediaries to facilitate a timely response.
Sincerely,
Ralph F. Verni
Chairman of the Board,
President and Chief Executive Officer
________________, 1997
<PAGE>
STATE STREET RESEARCH CAPITAL APPRECIATION FUND
a series of
State Street Research Equity Trust
One Financial Center
Boston, Massachusetts 02111
NOTICE OF SPECIAL MEETING
OF SHAREHOLDERS
To Be Held On ______________, 1997
A Special Meeting of Shareholders of State Street Research Capital
Appreciation Fund (the "Capital Appreciation Fund"), a portfolio series of State
Street Research Equity Trust, a Massachusetts business trust (the "Equity
Trust"), will be held at the offices of the Equity Trust, One Financial Center,
31st Floor, Boston, Massachusetts 02111, on ______________, 1997, at 4:00 p.m.
local time (the "Meeting") for the following purposes:
1. To consider and act upon an Agreement and Plan of Reorganization and
Liquidation providing for the transfer of the assets of the Capital Appreciation
Fund (subject to certain liabilities) to the State Street Research Capital Fund
(the "Capital Fund") in exchange for Class A, Class B, Class C and Class D
shares of the Capital Fund, the distribution of such shares to shareholders of
the Capital Appreciation Fund and the subsequent termination of the Capital
Appreciation Fund; and
2. To consider and act upon any matter incidental to the foregoing and to
transact such other business as may properly come before the Meeting and any
adjournments thereof.
The close of business on __________________, 1997 has been fixed as the
record date for the determination of shareholders entitled to notice of, and to
vote at, the Meeting and any adjournments thereof.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE SIZE OF YOUR HOLDINGS IN THE FUND.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE COMPLETE AND SIGN
THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH
NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU DESIRE TO VOTE IN PERSON
AT THE MEETING, YOU MAY REVOKE YOUR PROXY.
By Order of the Trustees
FRANCIS J. MCNAMARA, III
Secretary
________________, 1997
Date of Notice
1
<PAGE>
JOINT PROSPECTUS/PROXY STATEMENT
--------------------------------
Concerning the Acquisition of the Assets of
STATE STREET RESEARCH CAPITAL APPRECIATION FUND
a series of the State Street Research Equity Trust
By and in Exchange for Shares of
STATE STREET RESEARCH CAPITAL FUND
a series of State Street Research Capital Trust
One Financial Center
Boston, Massachusetts 02111
(800) 562-0032
--------------------------------
This Joint Prospectus/Proxy Statement relates to the proposed transfer of
the assets and certain liabilities of the State Street Research Capital
Appreciation Fund (the "Capital Appreciation Fund"), a series of the State
Street Research Equity Trust (the "Equity Trust"), a Massachusetts business
trust, to the State Street Research Capital Fund (the "Capital Fund"), a series
of the State Street Research Capital Trust (the "Capital Trust"), in exchange
for Class A, Class B, Class C and Class D shares of beneficial interest, $.001
par value per share, of the Capital Fund ("Capital Fund Shares"). Following such
transfer, Capital Fund Shares will be distributed to shareholders of the Capital
Appreciation Fund in liquidation of the Capital Appreciation Fund. As a result
of the proposed transaction, each shareholder will receive in exchange for his
or her shares of the Capital Appreciation Fund shares of the corresponding class
of the Capital Fund with an aggregate value equal to the value of such
shareholder's shares of the Capital Appreciation Fund, calculated as of the
close of business on the business day immediately prior to the exchange.
This Joint Prospectus/Proxy Statement is furnished to the shareholders of
the Capital Appreciation Fund in connection with the solicitation of proxies by
and on behalf of the Equity Trust's Board of Trustees to be used at a Special
Meeting of Shareholders of the Capital Appreciation Fund to be held at the
offices of the Trust, One Financial Center, 31st Floor, Boston, Massachusetts
02111, at 4:00 p.m. local time on ______________, 1997 and at any adjournments
thereof (the "Meeting"). This document also serves as a Prospectus of the
Capital Fund and covers the proposed issuance of Capital Fund Shares. The
Capital Appreciation Fund and the Capital Fund may hereinafter be referred to
collectively as the "Funds" and individually as a "Fund." The Board of Trustees
of the Equity Trust and the Board of Trustees of the Capital Trust may
hereinafter be referred to collectively as the "Boards of Trustees."
2
<PAGE>
The Equity Trust and the Capital Trust may be hereinafter referred to
collectively as the "Trusts" and individually as a "Trust."
The investment objective of the Capital Fund, a diversified series of the
Capital Trust, an open-end management investment company, is to seek maximum
capital appreciation by investing primarily in common stocks (and preferred
stocks and debt securities convertible into or carrying the right to acquire
common stocks) of emerging growth companies and of companies considered to be
undervalued special situations, as determined by the Capital Fund's investment
manager.
This Joint Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information that a shareholder of the
Capital Appreciation Fund should know before investing. This Joint
Prospectus/Proxy Statement is accompanied by the Prospectus of the Capital Fund
dated February 1, 1997, which is incorporated by reference herein. The
Prospectus of the Capital Appreciation Fund dated November 1, 1996 is
incorporated by reference herein. A Statement of Additional Information dated
______________, 1997 containing additional information relevant to the proposed
transaction has been filed with the Securities and Exchange Commission and is
incorporated by reference into this Joint Prospectus/Proxy Statement. A copy of
such Statement and a copy of the Prospectus of the Capital Appreciation Fund may
be obtained without charge by writing to the Secretary, Capital Appreciation
Trust Shareholder Meeting, 31st Floor, One Financial Center, Boston,
Massachusetts 02111 or by calling 1-800-562-0032.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
SHARES OF THE CAPITAL FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
AGENCY, AND INVOLVE INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL
AMOUNT INVESTED.
3
<PAGE>
QUESTIONS AND ANSWERS
Q. Why is this material being sent to shareholders and what are they supposed to
do with it?
A. This material is being sent to shareholders of the Capital Appreciation Fund
to ask them to vote on an important recommendation by the Trustees of the Fund
that will affect their interest in the Fund. As a shareholder, you should read
the material, mark your vote on the enclosed Proxy Form and send it back. Call
1-800-562-0032 for help with your questions.
Q. What is the recommendation on Proposal 1?
A. Proposal 1 is asking shareholders of the Capital Appreciation Fund to, in
effect, change to another mutual fund. Shares of the Capital Appreciation Fund
will be exchanged for shares of the Capital Fund. This transaction is being
proposed because of the economies of scale and portfolio diversification that
can result from the combination, given that the two Funds have the same
investment objective, the same investment manager and similar investment
policies and portfolios.
The Trustees recommend that you vote FOR the proposal.
- --------------------------------------------------------------------------------
Important additional information about the proposal is set forth in the
accompanying Joint Prospectus/Proxy Statement. Please read it carefully.
- --------------------------------------------------------------------------------
4
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY.................................................................
RISK FACTORS............................................................
REASONS FOR THE REORGANIZATION..........................................
INFORMATION ABOUT THE REORGANIZATION....................................
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES........................
COMPARATIVE INFORMATION ON DISTRIBUTION ARRANGEMENTS....................
COMPARATIVE INFORMATION ON SHAREHOLDER SERVICES.........................
FISCAL YEAR.............................................................
PERFORMANCE.............................................................
COMPARATIVE INFORMATION ON SHAREHOLDER RIGHTS...........................
MANAGEMENT..............................................................
ADDITIONAL INFORMATION ABOUT THE FUNDS..................................
VOTING INFORMATION......................................................
EXPERTS.................................................................
OTHER MATTERS...........................................................
Exhibit A: Agreement and Plan of Reorganization
and Liquidation....................................................
5
<PAGE>
SUMMARY
The following is a summary of certain information contained in or
incorporated by reference in this Joint Prospectus/Proxy Statement. This summary
is not intended to be a complete statement of all material features of the
proposed Reorganization (as hereinafter defined) and is qualified in its
entirety by reference to the full text of this Joint Prospectus/Proxy Statement
and the documents referred to herein.
Proposed Transaction. The Board of Trustees of the Equity Trust has
approved an Agreement and Plan of Reorganization and Liquidation (the "Plan of
Reorganization") providing for the transfer of all of the assets of the Capital
Appreciation Fund to the Capital Fund (subject to the assumption by the Capital
Fund of those liabilities of the Capital Appreciation Fund reflected on a
statement of assets and liabilities of that Fund as of the close of business on
the Valuation Date, as hereinafter defined) in exchange for Capital Fund Shares
at a closing to be held following the satisfaction of the conditions to the
Reorganization (the "Closing"). The aggregate net asset value of full and
fractional Capital Fund Shares to be issued to shareholders of the Capital
Appreciation Fund will equal the value of the aggregate net assets of the
Capital Appreciation Fund as of the close of business on the business day
immediately prior to the Closing (the "Valuation Date"). The number of Class A,
Class B, Class C and Class D shares (which may hereinafter be referred to
collectively as the "shares" or individually as a "share") to be issued to the
Capital Appreciation Fund will be determined by dividing (a) the aggregate net
assets attributable to each class of shares of the Capital Appreciation Fund by
(b) the net asset value per Class A, Class B, Class C and Class D share,
respectively, of the Capital Fund, each computed as of the close of business on
the Valuation Date. Capital Fund Shares will be distributed to shareholders of
the Capital Appreciation Fund in liquidation of the Capital Appreciation Fund,
and the Capital Appreciation Fund will be terminated. The proposed transaction
described above is referred to in this Joint Prospectus/Proxy Statement as the
"Reorganization."
As a result of the Reorganization, each shareholder will receive, in
exchange for his or her shares of the Capital Appreciation Fund, shares of the
corresponding class of the Capital Fund with an aggregate value equal to the
value of such shareholder's shares of the Capital Appreciation Fund, calculated
as of the close of business on the Valuation Date. For example, Class A
shareholders of the Capital Appreciation Fund would receive Class A shares of
the Capital Fund.
6
<PAGE>
In addition, at or prior to the Closing, the Capital Appreciation Fund
shall declare a dividend or dividends which, together with all previous such
dividends, shall have the effect of distributing to the Capital Appreciation
Fund's shareholders all of the Capital Appreciation Fund's investment company
income for all taxable years ending at or prior to the Closing (computed without
regard to any deduction for dividends paid) and all of its net capital gains
realized (after reduction for any capital loss carry-forward) in all taxable
years ending at or prior to the Closing.
The Boards of Trustees of the Equity Trust and the Capital Trust, including
the Trustees who are not "interested persons" as defined in the Investment
Company Act of 1940, as amended (the "1940 Act"), have determined that the
interests of existing shareholders of the Capital Appreciation Fund and the
Capital Fund, respectively, will not be diluted as a result of the transactions
contemplated by the Reorganization and that the Reorganization would be in the
best interests of the shareholders of the Capital Appreciation Fund and the
Capital Fund, respectively. See "Information About the Reorganization."
The Board of Trustees of the Equity Trust recommends that the shareholders
of the Capital Appreciation Fund vote FOR approval of the Plan of
Reorganization.
Approval of the Plan of Reorganization by the shareholders of the Capital
Appreciation Fund is being sought before consummation of the Reorganization. The
Equity Trust is using its best efforts to obtain the affirmative vote of the
holders of a majority of the outstanding voting shares of such Fund (within the
meaning of the 1940 Act), voting together as a single class, to approve the Plan
of Reorganization on behalf of such Fund. A "majority" vote is defined in the
1940 Act as the vote of the holders of the lesser of (a) 67% or more of the
voting shares of the Fund, voting together as a single class, present at the
Meeting, if the holders of more than 50% of the outstanding voting shares are
present or represented by proxy, or (b) more than 50% of the outstanding voting
shares of the Fund, voting together as a single class. If such an approval vote
is not obtained, the Board of Trustees has discretion under the Master Trust
Agreement of the Equity Trust to take such further action as it determines to be
in the best interests of shareholders of the Capital Appreciation Fund. The
Trustees of the Equity Trust have discretion under the Master Trust Agreement of
the Trust to complete the reorganization even though the above described
affirmative vote is not obtained. See "Voting Information."
Tax Consequences. Counsel to the Capital Appreciation Fund and the Capital
Fund has opined in part that, subject to customary assumptions and
representations, upon consummation of the Reorganization and the transfer of
substantially all of the assets of the Capital Appreciation Fund to the Capital
Fund, neither of the Trusts nor any Fund shareholder will recognize
7
<PAGE>
gain or loss on the exchange of their shares. The receipt of such opinions upon
the Closing is a condition to the Reorganization. See "Information About the
Reorganization."
Investment Objectives and Policies. The investment objectives, policies and
restrictions of the Capital Appreciation Fund and the Capital Fund are
substantially similar.
The investment objective of the Capital Appreciation Fund is to achieve
maximum capital appreciation by investing primarily in common stocks (and equity
and debt securities convertible into or carrying the right to acquire common
stocks) of emerging growth companies and of companies considered to be
undervalued special situations.
The investment objective of the Capital Fund is to seek maximum capital
appreciation by investing primarily in common stocks (and equity and debt
securities convertible into or carrying the right to acquire common stocks) of
emerging growth companies and of companies considered to be undervalued special
situations, as determined by the Capital Fund's investment manager.
There are, however, differences in the policies and restrictions of the
Funds that shareholders should consider. To the extent that there are
differences, these differences are discussed below under "Comparison of
Investment Objectives and Policies."
Management and Other Service Providers. The business affairs of the Equity
Trust and the Capital Trust are managed by their respective Board of Trustees.
For each of the Funds, State Street Research & Management Company (the
"Investment Manager") serves as investment adviser, State Street Research
Investment Services, Inc. serves as distributor (the "Distributor") and State
Street Bank and Trust Company serves as custodian and as transfer agent and
dividend paying agent ("SSBT").
8
<PAGE>
The Investment Manager and the Distributor are indirect wholly-owned
subsidiaries of Metropolitan Life Insurance Company ("Metropolitan Life"). SSBT
is not affiliated with the Investment Manager, the Distributor, Metropolitan
Life, the Trusts or the Funds. See "Management."
Advisory Fees and Expenses. The following tables summarize the shareholder
transaction expenses applicable to each Fund and the annual operating expenses
for the Funds on an individual basis and for the Capital Fund on a pro forma
basis after giving effect to the Reorganization. This table is followed by an
example illustrating the effect of these expenses on a $1,000 investment in each
Fund.
Shareholder Transaction Expenses Applicable to Capital Fund and Capital
Appreciation Fund
Class A Class B Class C Class D
------- ------- ------- -------
Shareholder Transaction Expenses(1)
Maximum Sales Charge Imposed
on Purchases
(as a percentage of offering price)..... 4.5% None None None
Maximum Deferred Sales Charge
(as a percentage of net asset
value at time of purchase or
redemption, whichever is lower)......... None(2) 5% None 1%
Maximum Deferred Sales Charge
Imposed on Reinvested Dividends
(as a percentage of offering price) .... None None None None
Redemption Fees
(as a percentage of amount
redeemed, if applicable)................ None None None None
Exchange Fees............................... None None None None
(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 Class A, Class B or Class D shares may, over a period of years, pay
more than the economic equivalent of the maximum sales charge permissible under
applicable rules.
(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.
9
<PAGE>
Table of Expenses of Capital Fund (individually and on a pro forma basis) and
Capital Appreciation Fund (based on the fiscal year ended September 30, 1996 for
Capital Fund and on the fiscal year ended June 30, 1996 for Capital Appreciation
Fund).
<TABLE>
<CAPTION>
Capital Fund Capital Appreciation Fund
------------ -------------------------
Class A Class B Class C Class D Class A Class B Class C Class D
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <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% 0.75% 0.75% 0.75% 0.75%
12b-1 Fees.......................0.25% 1.00% None 1.00% 0.25% 1.00% None 1.00%
Other Expenses...................0.26% 0.26% 0.26% 0.26% 0.40% 0.40% 0.40% 0.40%
----- ----- ----- ----- ----- ----- ----- -----
Total Fund Operating Expenses 1.26% 2.01% 1.01% 2.01% 1.40% 2.15% 1.15% 2.15%
===== ===== ===== ===== ===== ===== ===== =====
Pro Forma Capital Fund
----------------------
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% .75%
12b-1 Fees.......................0.25% 1.00% None 1.00%
Other Expenses...................0.28% 0.28% 0.28% .28%
----- ----- ----- ----
Total Fund Operating Expenses 1.28% 2.03% 1.03% 2.03%
===== ===== ===== ====
</TABLE>
Example:
You would pay the following expenses on a $1,000 investment including, for
Class A shares, the maximum initial sales charge and assuming (1) 5% annual
return and (2) redemption of the entire investment at the end of each time
period:
Capital Fund
------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Class A shares.................. $ 57 $ 83 $ 111 $ 190
Class B shares(1)............... $ 70 $ 93 $ 128 $ 214
Class C shares.................. $ 10 $ 32 $ 56 $ 124
Class D shares.................. $ 30 $ 63 $ 108 $ 234
Capital Appreciation Fund
-------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Class A shares.................. $ 59 $ 87 $ 118 $ 205
Class B shares(1)............... $ 72 $ 97 $ 135 $ 229
Class C shares.................. $ 12 $ 37 $ 63 $ 140
Class D shares.................. $ 32 $ 67 $ 115 $ 248
Pro Forma Capital Fund
----------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Class A shares.................. $ 57 $ 84 $ 112 $ 193
Class B shares(1)............... $ 71 $ 94 $ 129 $ 217
Class C shares.................. $ 11 $ 33 $ 57 $ 126
Class D shares.................. $ 31 $ 64 $ 109 $ 236
10
<PAGE>
You would pay the following expenses on the same investment, assuming no
redemption:
Capital Fund
------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Class B shares(1)............... $ 20 $ 63 $ 108 $ 214
Class D shares.................. $ 20 $ 63 $ 108 $ 234
Capital Appreciation Fund
-------------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Class B shares(1)............... $ 22 $ 67 $ 115 $ 229
Class D shares.................. $ 22 $ 67 $ 115 $ 248
Pro Forma Capital Fund
----------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Class B shares(1)............... $ 21 $ 64 $ 109 $ 217
Class D shares.................. $ 21 $ 64 $ 109 $ 236
(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.
Multiple Class Structure; Distribution Arrangements. Each Fund has
outstanding and offers four classes of shares, which may be purchased through
securities dealers which have entered into sales agreements with the Distributor
at the next determined net asset value per share plus, in the case of all
classes except the 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). In the proposed
Reorganization, shareholders of the Capital Appreciation Fund will receive the
corresponding class of shares of the Capital Fund which they currently hold in
the Capital Appreciation Fund. The Class A, Class B, Class C and Class D shares
of the Capital Fund have identical arrangements with respect to the imposition
of initial and contingent deferred sales charges and distribution and service
fees as the comparable class of shares of the Capital Appreciation Fund. Because
the Reorganization will be effected at net asset value without the imposition of
a sales charge, Capital Fund Shares acquired by shareholders of the Capital
Appreciation Fund pursuant to the proposed Reorganization would not be subject
to any initial sales charge or contingent deferred sales charge as a result of
the Reorganization. However, holders of the Capital Fund Shares acquired as a
result of the Reorganization would continue to be subject to a contingent
deferred sales charge upon subsequent
11
<PAGE>
redemption to the same extent as if they had continued to hold their shares of
the Capital Appreciation Fund. For purposes of computing the contingent deferred
sales charge that may be payable upon disposition of any acquired Class A, Class
B and Class D shares of the Capital Fund, the holding period of the redeemed
shares is "tacked" to the holding period of the Capital Appreciation Fund. See
"Comparative Information on Distribution Arrangements."
Dividends and Distributions. The Capital Fund's policy is to declare
annually a dividend from net investment income and pay such dividend, if any,
after year end. Distributions by the Capital Fund of capital gain net income
will generally be made after the end of the fiscal year or as otherwise required
for compliance with applicable tax regulations. The Capital Appreciation Fund's
policy is to declare and pay twice each year a dividend from net investment
income, if any. Distributions of capital gain net income, if any, are generally
made after the end of the fiscal year or as otherwise required for compliance
with applicable tax regulations. For both Funds, dividends from net investment
income and distributions of capital gain net income are declared and paid to
shareholders in additional shares of the Fund at net asset value (except in the
case of shareholders who elect a different distribution method).
After the closing of the Reorganization, Capital Appreciation Fund
shareholders who currently have dividends reinvested will continue to have
dividends reinvested in the Capital Fund and those shareholders who currently
have capital gains reinvested will continue to have capital gains reinvested in
the Capital Fund. The number of shares received in connection with any such
reinvestment will be based upon the net asset value per share of the applicable
class of shares of the Capital Fund in effect on the record date. See
"Comparative Information on Shareholder Services."
Exchange Rights. Each Fund currently has identical exchange privileges.
Shareholders of the Capital Appreciation Fund may exchange their shares for
shares of a corresponding class of shares, when available, of certain funds as
determined by the Distributor, 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 such fund may
similarly exchange their shares for shares of an available corresponding class
of the Capital Appreciation Fund. See "Comparative Information on Shareholder
Services."
Redemption Procedures. Each Fund offers the same redemption features,
including the acceptance of redemption requests by mail, telephone and wire,
provided that applicable conditions are met. Any request to redeem shares of the
Capital Appreciation Fund received and processed prior to the Reorganization
will be treated as a redemption of shares of the Capital Appreciation Fund. Any
request to redeem shares received or processed after
12
<PAGE>
the Reorganization will be treated as a request to redeem shares of the Capital
Fund. See "Comparative Information on Shareholder Services."
Minimum Account Size. Each Fund reserves the right to redeem an account if
the aggregate value of the shares in such account is less than $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. Currently, the
maintenance fee is $18 annually. The Capital Fund shareholder accounts
established pursuant to the Reorganization with a value of less than $1,500 will
therefore be subject to redemption upon 60 days' prior notice or the annual
maintenance fee; provided, however, that if a Capital Appreciation Fund
shareholder has received such notice prior to the Reorganization, no additional
notice will be sent by the Capital Fund and the 60-day notice period initiated
by the Capital Appreciation Fund will not be tolled. During such 60-day period,
a shareholder will have the option of avoiding such redemption or maintenance
fee by increasing the value of the account to $1,500 or more.
RISK FACTORS
The investment risks of both Funds are generally similar because of the
similarities of investment objectives and policies of the Funds. See "Comparison
of Investment Objectives and Policies." Such risks are more fully discussed
under the caption "The Fund's Investments" in the Prospectus of the Capital Fund
enclosed with this Joint Prospectus/Proxy Statement and under the caption "The
Fund's Investments" in the Prospectus of the Capital Appreciation Fund
(available upon request).
There are risks in any investment program, and there is no assurance that
either Fund will achieve its investment objective. Because of the Funds'
investment policies, the Funds are subject to above-average risks. The Funds
generally are designed for investors who want an aggressive investment and can
tolerate volatility and possible losses. An investment in either Fund should be
part of a balanced investment program which includes more conservative
investments.
Because the Funds invest primarily in emerging growth and special situation
companies, the value of the Funds' shares may fluctuate more widely than the
value of shares of a mutual fund that invests in more established companies.
Securities held by the Funds, 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.
13
<PAGE>
REASONS FOR THE REORGANIZATION
In reaching the decision to recommend that the shareholders of the Capital
Appreciation Fund vote to approve the Reorganization, the Board of Trustees of
the Equity Trust, including the Trustees who are not interested persons of the
Equity Trust, concluded that the Reorganization would be in the best interests
of the Capital Appreciation Fund and that the interests of existing shareholders
of the Capital Appreciation Fund will not be diluted as a consequence thereof.
Similarly, the Board of Trustees of the Capital Trust, including the Trustees
who are not interested persons of the Capital Trust, concluded that the
Reorganization would be in the best interests of the Capital Fund and that the
interests of existing shareholders of the Capital Fund will not be diluted as a
consequence thereof. In making these determinations, each Board of Trustees
considered a number of factors, including the efficiencies resulting from
combining the operations of two separate funds with the same investment
objective, the same investment manager, similar portfolios, the same multiple
class structure, the same sales load structure and similar investment
restrictions and policies.
Because each of the Funds proposed to be combined has the same investment
objective and substantially similar investment restrictions and policies,
combining the assets of the two Funds, could, over time, produce economies of
scale. In particular, greater portfolio diversification and more efficient
portfolio management could result from a larger asset base. Greater
diversification is expected to be beneficial to shareholders because it may
reduce the negative effect which the adverse performance of any one portfolio
security may have on the performance of the portfolio as a whole. Because each
Fund has the same investment adviser, custodian and distributor, combining the
Funds could, over time, produce administrative economies of scale resulting in
net benefits to the Funds' shareholders. Each Board of Trustees considered,
among other things, the benefit to the Funds of elimination of the duplication
of certain shareholder services, such as producing separate prospectuses and
shareholder reports.
The Board of Trustees of the Equity Trust believes that the proposed
Reorganization is in the best interests of the shareholders of the Capital
Appreciation Fund and recommends that shareholders of the Capital Appreciation
Fund vote FOR the Reorganization.
INFORMATION ABOUT THE REORGANIZATION
At a meeting held on February 5, 1997, the Boards of Trustees of each Trust
approved the Plan of Reorganization substantially in the form set forth as
Exhibit A to this Joint Prospectus/Proxy Statement.
14
<PAGE>
Plan of Reorganization. The Plan of Reorganization provides that, at the
Closing, the Capital Fund will acquire all of the assets of the Capital
Appreciation Fund (subject to the assumption by the Capital Fund of certain of
the liabilities of the Capital Appreciation Fund, including those liabilities
reflected on an unaudited statement of assets and liabilities) in exchange for
Capital Fund Shares. The aggregate net asset value of full and fractional
Capital Fund Shares to be issued to shareholders of the Capital Appreciation
Fund will equal the value of the aggregate net assets of the Capital
Appreciation Fund as of the close of business on the Valuation Date. The number
of Class A, Class B, Class C and Class D shares to be issued to the Capital
Appreciation Fund will be determined by dividing (a) the aggregate net assets in
each class of shares of the Capital Appreciation Fund by (b) the net asset value
per Class A, Class B, Class C and Class D share, respectively, of the Capital
Fund, each computed as of the close of business on the Valuation Date. Portfolio
securities of the Capital Appreciation Fund and the Capital Fund will be valued
in accordance with the valuation practices of the Capital Fund which are
described under the caption "Purchase of Shares" in the Capital Fund Prospectus
and which are substantially identical to those of the Capital Appreciation Fund.
The Capital Fund will assume certain liabilities, including all expenses,
costs, charges and reserves reflected on an unaudited statement of assets and
liabilities of the Capital Appreciation Fund prepared as of the close of
business on the Valuation Date in accordance with generally accepted accounting
principles consistently applied from the prior audited period. Such statement of
assets and liabilities will reflect all liabilities known to the Capital
Appreciation Fund and the Capital Fund as of the date thereof. At or prior to
the Closing, the Capital Appreciation Fund shall declare a dividend or dividends
which, together with all prior such dividends, shall have the effect of
distributing to the Capital Appreciation Fund's shareholders all of the Capital
Appreciation Fund's investment company income for all taxable years ending at or
prior to the Closing (computed without regard to any deduction for dividends
paid) and all of its net capital gains realized (after reduction for any capital
loss carry-forward) in all taxable years ending at or prior to the Closing.
At or as soon as practicable after the Closing, the Capital Appreciation
Fund will liquidate and distribute pro rata to its shareholders of record as of
the close of business on the Valuation Date the full and fractional Capital Fund
Shares received by the Capital Appreciation Fund. Such liquidation and
distribution will be accomplished by the establishment of shareholder accounts
on the share records of the Capital Fund in the name of each such shareholder of
the Capital Appreciation Fund, representing the respective pro rata number of
full and fractional Capital Fund Shares due such shareholder. All of the Capital
Fund's future distributions attributable to the shares
15
<PAGE>
issued in the Reorganization will be paid to shareholders in cash or invested in
additional shares of the Capital Fund at the price in effect as described in the
Capital Fund's Prospectus on the respective payment dates in accordance with
instructions previously given by the shareholder to the Capital Appreciation
Fund's transfer agent. As of the Closing, each outstanding certificate which,
prior to the Closing, represented shares of the Capital Appreciation Fund will
be deemed for all purposes to evidence ownership of the number of Capital Fund
Shares issuable with respect thereto pursuant to the Reorganization. After the
Closing, certificates originally representing shares of Class A or Class C of
the Capital Appreciation Fund will be rendered null and void and nonnegotiable;
upon special request and surrender of such certificates to SSBT as transfer
agent, holders of these nonnegotiable certificates shall be entitled to receive
certificates representing the number of Capital Fund Shares issuable with
respect thereto. All Class B and Class D shares of the Capital Fund are held of
record in book entry form and no certificates for such shares will be issued.
Notwithstanding approval by shareholders of the Capital Appreciation Fund,
the Plan of Reorganization may be terminated at any time prior to the
consummation of the Reorganization without liability on the part of either party
or its respective Board of Trustees, officers or shareholders, by either party
on written notice to the other party if circumstances should develop that, in
the opinion of either of the Trusts, make proceeding with the Reorganization
inadvisable. The Plan of Reorganization may be amended, waived or supplemented
in such manner as may be mutually agreed upon by the authorized officers of the
Equity Trust and the Capital Trust; provided, however, that following the
Meeting, no such amendment, waiver or supplement may have the effect of changing
the provision for determining the number of Capital Fund Shares to be issued to
the Capital Appreciation Fund shareholders to the detriment of such shareholders
without their further approval. The expenses incurred in connection with
entering into and carrying out the provisions of the Plan of Reorganization,
whether or not the Reorganization is consummated, will be shared evenly by the
two Funds.
Description of Capital Fund Shares. Full and fractional shares of the
Capital Fund will be issued to the Capital Appreciation Fund shareholders in
accordance with the procedures under the Plan of Reorganization as described
above. Each share will be fully paid and nonassessable by the Capital Trust when
issued and transferable without restrictions and will have no preemptive or
cumulative voting rights and have only such conversion or exchange rights as the
Board of Trustees of the Capital Trust may grant in its discretion.
Federal Income Tax Consequences. Counsel to the Capital Appreciation Fund
and the Capital Fund, Goodwin, Procter & Hoar LLP has opined that, subject to
customary assumptions and representations, on the basis of the existing
provisions of the
16
<PAGE>
Internal Revenue Code (the "Code"), the Treasury Regulations promulgated
thereunder and current administrative and judicial interpretations thereof, for
federal income tax purposes: (a) the transfer of all or substantially all of the
Capital Appreciation Fund's assets solely in exchange for the Capital Fund
Shares and the assumption by the Capital Fund of certain liabilities of the
Capital Appreciation Fund, and the distribution of such shares to the
shareholders of the Capital Appreciation Fund, will constitute a
"reorganization" within the meaning of Section 368(a)(1)(C); the Capital Fund
and the Capital Appreciation Fund will each be a "party to a reorganization"
within the meaning of Section 368(b); (b) no gain or loss will be recognized by
the Capital Appreciation Fund on the transfer of the Capital Appreciation Fund's
assets to the Capital Fund in exchange for the Capital Fund Shares and the
assumption by the Capital Fund of certain liabilities of the Capital
Appreciation Fund or upon the distribution of the Capital Fund Shares to the
Capital Appreciation Fund's shareholders in exchange for their shares of the
Capital Appreciation Fund; (c) the tax basis of the Capital Appreciation Fund's
assets acquired by the Capital Fund will be the same to the Capital Fund as the
tax basis of such assets to the Capital Appreciation Fund immediately prior to
the Reorganization, and the holding period of the assets of the Capital
Appreciation Fund in the hands of the Capital Fund will include the period
during which those assets were held by the Capital Appreciation Fund; (d) no
gain or loss will be recognized by the Capital Fund upon the receipt of the
assets of the Capital Appreciation Fund solely in exchange for the Capital Fund
Shares and the assumption by the Capital Fund of certain liabilities of the
Capital Appreciation Fund; (e) no gain or loss will be recognized by
shareholders of the Capital Appreciation Fund upon the receipt of the Capital
Fund Shares by such shareholders, provided such shareholders receive solely
Capital Fund Shares (including fractional shares) in exchange for their Capital
Appreciation Fund's shares; (f) the aggregate tax basis of the Capital Fund
Shares, including any fractional shares, received by each shareholder of the
Capital Appreciation Fund pursuant to the Reorganization will be the same as the
aggregate tax basis of the Capital Appreciation Fund's shares held by such
shareholder immediately prior to the Reorganization, and the holding period of
the Capital Fund shares including fractional shares, to be received by each
shareholder of the Capital Appreciation Fund will include the period during
which the Capital Appreciation Fund's shares exchanged therefor were held by
such shareholder (provided that the Capital Appreciation Fund's shares were held
as a capital asset on the date of the Reorganization.) The receipt of such
opinions upon the Closing is a condition to the consummation of the
Reorganization. If the transfer of the assets of the Capital Appreciation Fund
in exchange for Capital Fund Shares and the assumption by the Capital Fund of
the liabilities of the Capital Appreciation Fund do not constitute a tax-free
reorganization, each Capital Appreciation Fund shareholder will recognize gain
or loss equal to the difference between the value of Capital Fund Shares such
17
<PAGE>
shareholder acquires and the tax basis of such shareholder's Capital
Appreciation Fund shares.
Shareholders of the Funds should consult their tax advisers regarding the
effect, if any, of the proposed Reorganization in light of their individual
circumstances. Since the foregoing discussion relates only to the federal income
tax consequences of the Reorganization, shareholders of the Funds should also
consult their tax advisers as to state and local tax consequences, if any, of
the Reorganization.
Capitalization. The following table sets forth the capitalization of the
Capital Appreciation Fund and the Capital Fund as of January 31, 1997, and on a
pro forma basis as of that date giving effect to the proposed acquisition of
assets at net asset value. The pro forma data reflects an exchange ratio of
0.88676, 0.88873, 0.88936 and 0.90269 for Class A, Class B, Class C and Class D
shares, respectively, of the Capital Fund issued for each Class A, Class B,
Class C and Class D share, respectively, of the Capital Appreciation Fund.
18
<PAGE>
<TABLE>
<CAPTION>
Capital Fund Capital Appreciation Fund Combined After
------------ ------------------------- Reorganization(1)
-----------------
<S> <C> <C> <C>
Net assets (in millions) $756.0 $ 760.1 $ 1,516.1
Net asset value per share
Class A $13.71 $12.16 $13.71
Class B $13.31 $11.83 $13.31
Class C $13.89 $12.35 $13.89
Class D $13.33 $11.87 $13.33
Shares outstanding
Class A 8,843,918 32,715,718 37,854,894
Class B 30,516,200 16,411,349 45,101,409
Class C 2,599,960 13,156,962 14,301,224
Class D 14,425,346 479,068 14,851,873
</TABLE>
(1) The table set forth above should not be relied on to reflect the number
of shares to be received in the Reorganization; the actual number of shares to
be received will depend upon the net asset value and number of shares
outstanding of each Fund at the time of the Reorganization.
The Boards of Trustees of the Equity Trust and the Capital Trust do not
know of any person who owned of record or beneficially 5% or more of the total
outstanding shares of either Fund as of ________________, 1997. As of
__________________, 1997, the Trustees and principal officers of the Equity
Trust as a group owned less than 1% of the outstanding shares of the Capital
Appreciation Fund. Also as of such date, the Trustees and principal officers of
the Capital Trust as a group owned less than 1% of the outstanding shares of the
Capital Fund.
The Investment Manager and its affiliates have indicated to the Equity
Trust that with respect to their shares of the Capital Appreciation Fund, they
intend to vote for and against the proposal in the same relative proportion as
do the other shareholders of the Capital Appreciation Fund who cast votes at the
Meeting.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
Information about the investment objectives and policies of the Capital
Appreciation Fund and the Capital Fund is summarized below. More complete
information regarding the same is set forth in the Prospectus of the Capital
Fund dated February 1, 1997 which is incorporated by reference herein and
enclosed herewith, the Prospectus of the Capital Appreciation Fund dated
November 1, 1996 which is incorporated by reference herein, and in the Statement
of Additional Information which has been filed with the Securities and Exchange
Commission in connection with the Reorganization. Shareholders should consult
such Prospectuses and the Statement of Additional Information for a more
thorough comparison.
19
<PAGE>
Investment Objectives. The investment objective of the Capital Appreciation
Fund is to achieve maximum capital appreciation by investing primarily in common
stocks (and equity and debt securities convertible into or carrying the right to
acquire common stocks) of emerging growth companies and of companies considered
to be undervalued special situations.
The investment objective of the Capital Fund is to seek maximum capital
appreciation by investing primarily in common stocks (and equity and debt
securities convertible into or carrying the right to acquire common stocks) of
emerging growth companies and of companies considered to be undervalued special
situations, as determined by the Capital Fund's investment manager.
Although the language used by each Fund to define its respective investment
objective differs slightly, the investment objective of each Fund and the
investment strategies used in seeking to achieve such objective are
substantially similar. Both Funds generally invest in common stocks of emerging
growth companies and of companies considered to be undervalued special
situations, pursue substantially similar strategies of achieving their
investment objective and are subject to similar investment restrictions.
Investment Restrictions. While the investment restrictions of the Capital
Appreciation Fund are similar in certain respects to those of the Capital Fund,
there are subtle differences. Set forth below are the existing investment
restrictions of the Capital Appreciation Fund and the investment restrictions of
the Capital Fund. Additional information on the investment restrictions and
policies of each Fund is set forth in each Fund's Statement of Additional
Information. The investment objective of each Fund and certain of the investment
restrictions of each Fund are deemed fundamental, which means that they may not
be changed without the approval of a majority of such Fund's outstanding voting
securities (as defined in the 1940 Act). Investment restrictions which are not
deemed fundamental may be changed without shareholder approval.
Capital Fund Capital Appreciation Fund
------------ -------------------------
Diversification Fundamental Fundamental
restriction which restriction which
prohibits the prohibits the
Capital Fund from Capital Appreciation
purchasing a Fund from purchasing
security of any a security if the
issuer if such transaction would
purchase at the time result in more than
thereof would cause 5% of the Capital
more than five Appreciation Fund's
percent (5%) of the total assets being
total assets of the invested in any one
Capital Fund to be issuer, except that
invested in the this restriction
securities of any does not apply to
20
<PAGE>
one issuer; but this investments in
restriction shall securities issued or
not apply to guaranteed by the
obligations of the U.S. Government or
government of the its agencies or
United States of instrumentalities.
America or to
obligations of any
corporation
organized under a
general Act of
Congress if such
corporation is an
instrumentality of
the United States.
Fundamental Fundamental
restriction which restriction which
prohibits the prohibits the
Capital Fund from Capital Appreciation
purchasing the Fund from investing
securities of any in a security if the
issuer if such transaction would
purchase at the time result in the
thereof would cause Capital Appreciation
more than ten Fund's owning more
percent (10%) of any than 10% of the
class of securities outstanding voting
of such issuer (as securities of an
disclosed by the issuer, except that
last available this restriction
financial statement does not apply to
of such issuer) to investments in
be held by the securities issued or
Capital Fund. guaranteed by the
U.S. Government or
its agencies or
instrumentalities.
Unseasoned Nonfundamental Same.
Issuers restriction which
prohibits the
Capital Fund from
investing more than
5% of its total
assets in securities
of private companies
including
predecessors with
less than three
years' continuous
operations, except
(a) securities
guaranteed or backed
by an affiliate of
the issuer with
three years'
continuous
operations, (b)
securities issued or
guaranteed as to
principal or
interest by the U.S.
Government, or its
agencies or
21
<PAGE>
instrumentalities,
or a mixed-ownership
Government
corporation, (c)
securities of
issuers with debt
securities rated at
least "BBB" by
Standard & Poor's
Corporation or "Baa"
by Moody's
Investor's Service,
Inc. (or their
equivalent by any
other nationally
recognized
statistical rating
organization) or
securities of
issuers considered
by the Investment
Manager to be
equivalent, (d)
securities issued by
a holding company
with at least 50% of
its assets invested
in companies with
three years of
continuous
operations including
predecessors, and
(e) securities which
generate income
which is exempt from
local, state or
federal taxes;
provided that the
Capital Fund may
invest up to 15% in
such issuers so long
as such investments
plus investments in
restricted
securities (other
than those which are
eligible for resale
under Rule 144A,
Regulation S or
other exemptive
provisions) do not
exceed 15% of the
Capital Fund's total
assets.
Senior Fundamental Same.
Securities restriction which
- ---------- prohibits the
Capital Fund
from issuing senior securities.
Underwriting Fundamental Fundamental
restriction which restriction which
prohibits the prohibits the
Capital Fund from Capital Appreciation
underwriting or Fund from
participating in the underwriting or
marketing of participating in the
22
<PAGE>
securities of other marketing of
issuers, although securities of other
the Capital Fund issuers, although
may, acting alone or the Capital
in syndicates or Appreciation Fund
groups purchase or may, acting alone or
otherwise acquire in syndicates or
securities of other groups, if
issuers for determined by the
investment either Equity Trust's Board
from the issuers or of Trustees,
from persons in a purchase or
control relationship otherwise acquire
with the issuers or securities of other
from underwriters of issuers for
such securities [as investment, either
a matter of from the issuers or
interpretation, from persons in a
which is not part of control relationship
the fundamental with the issuers or
policy, this from underwriters of
restriction does not such securities [as
apply to the extent a matter of
that, in connection interpretation,
with the disposition which is not part of
of the Capital the fundamental
Fund's securities, policy, this
the Capital Fund may restriction does not
be deemed to be an apply to the extent
underwriter under that, in connection
certain federal with the disposition
securities laws]. of the Capital
Appreciation Fund's
securities, the
Capital Appreciation
Fund may be deemed
to be an underwriter
under certain
federal securities
laws].
Real Estate Fundamental Fundamental
restriction which restriction which
prohibits the prohibits the
Capital Fund from Capital Appreciation
investing in real Fund from purchasing
property or real or selling real
estate mortgage estate in fee simple
loans. or real estate
mortgage loans.
Commodities Fundamental Same.
restriction which
prohibits the
Capital Fund from
investing in
physical commodities
or physical
commodity contracts
or options in excess
of 10% of the
Capital Fund's total
assets, except that
investments in
essentially
financial items or
arrangements such
as, but not limited
to, swap
arrangements,
hybrids, currencies,
23
<PAGE>
currency and other
forward contracts,
futures contracts
and options on
futures contracts on
securities,
securities indices,
interest rates and
currencies shall not
be deemed
investments in
commodities or
commodities
contracts.
Margin Nonfundamental Nonfundamental
Purchases, restriction which restriction which
Short Sales prohibits the prohibits the
and Capital Fund from Capital Appreciation
Options purchasing Fund from purchasing
securities on margin securities on
or making short margin, making a
sales of securities short sale of any
except for short securities or
sales "against the purchasing or
box"; provided that dealing in puts,
the Capital Fund may calls, straddles or
make short sales if spreads with respect
such positions are to any security,
fully collateralized except in connection
and if not more than with the purchase or
5% of the Capital writing of options,
Fund's net assets including options on
(taken at current financial futures,
value) are held as and futures
collateral for such contracts to the
short sales at any extent set forth in
time; and, for the the Equity Trust's
purpose of this Prospectus and
restriction, escrow Statement of
or custodian Additional
receipts or letters, Information.
margin or
safekeeping
accounts, or similar
arrangements used in
the industry in
connection with the
trading of futures,
options and forward
commitments are not
deemed to involve
the purchase of
securities on
margin.
Nonfundamental
restriction which
prohibits the
Capital Fund from
engaging in
transactions in
options except that
investments in
essentially
financial items or
arrangements such
24
<PAGE>
as, but not limited
to, options on
securities,
securities indices,
interest rates and
currencies, and
options on futures
on securities,
securities indices,
interest rates and
currencies shall not
be deemed
investments in
options.
Lending Fundamental Same.
restriction which
prohibits the
Capital Fund from
lending money;
however, the Capital
Fund may lend
portfolio securities
and purchase bonds,
debentures, notes
and similar
obligations (and
enter into
repurchase
agreements with
respect thereto).
Illiquid Nonfundamental Same.
Securities and restriction which
Restricted prohibits the
Securities Capital Fund from
purchasing any
security or entering
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).
Nonfundamental
restriction which
prohibits the
Capital Fund from
investing 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).
25
<PAGE>
Oil and Gas Fundamental Same.
restriction which
prohibits the
Capital Fund from
investing in oil,
gas or other mineral
exploration or
development programs
(provided that the
Capital Fund may
invest in securities
issued by or which
are based directly
or indirectly, on
the credit of
companies which
invest in or sponsor
such programs).
Industry Fundamental Same.
Concentration restriction which
prohibits the
Capital Fund from
making any
investment which
would cause more
than 25% of the
value of the Capital
Fund's total assets
to be invested in
securities of
issuers principally
engaged in any one
industry (for
purposes of this
restriction (a)
utilities will be
divided according to
their services so
that, for example,
gas, gas
transmission,
electric and
telephone companies
will each be deemed
in a separate
industry, (b) oil
and oil related
companies will be
divided by type so
that, for example,
oil production
companies, oil
service companies
and refining and
marketing companies
will each be deemed
in a separate
industry and (c)
securities issued or
guaranteed by the
U.S. Government or
its agencies or
instrumentalities
shall be excluded).
26
<PAGE>
Borrowing Fundamental Fundamental
restriction which restriction which
prohibits the prohibits the
Capital Fund from Capital Appreciation
borrowing money Fund from borrowing
(through reverse money (through
repurchase reverse repurchase
agreements or agreements or
otherwise) except otherwise) except
for extraordinary for extraordinary
and emergency and emergency
purposes, such as purposes, such as
permitting permitting
redemption requests redemption requests
to be honored, and to be honored, and
then not in an then not in an
amount in excess of amount in excess of
10% of the value of 10% of the value of
its net assets, its total assets,
provided that provided that
additional additional
investments will be investments will be
suspended during any suspended during any
period when period when
borrowings exceed 5% borrowings exceed 5%
of the Capital of the Capital
Fund's net assets, Appreciation Fund's
and provided further total assets, and
that reverse provided further
repurchase that reverse
agreements shall not repurchase
exceed 5% of the agreements shall not
Capital Fund's net exceed 5% of the
assets. The Board of Capital Appreciation
Trustees of the Fund's total assets.
Capital Trust may Reverse repurchase
authorize the agreements occur
borrowing of money when the Capital
only on an unsecured Appreciation Fund
basis for the sells money market
general purposes of securities and
the Capital Fund and agrees to repurchase
may authorize the such securities at
issue therefor of an agreed-upon
notes or debentures price, date and
of the Capital Fund, interest payment.
but no money shall The Capital
be borrowed by the Appreciation Fund
Capital Fund except would use its
pursuant to the proceeds from the
authority of such transaction to buy
Board of Trustees, other money market
and no borrowings by securities, which
the Capital Fund are either maturing
shall be authorized or under the terms
to an aggregate of a resale
amount greater than agreement, on the
ten percent, as same day as (or day
noted, of the net prior to) the
assets of the expiration of the
Capital Fund. reverse repurchase
agreement, and would
employ a reverse
repurchase agreement
when interest income
from investing the
proceeds of the
transaction is
greater than the
interest expense of
the reverse
repurchase
transaction.
27
<PAGE>
Issues Held by Fundamental Nonfundamental
Directors, restriction which restriction which
Officers or prohibits the prohibits the
Affiliates Capital Fund from Capital Appreciation
purchasing for, or Fund from purchasing
retaining in, its or retaining any
portfolio any security of an
security of an issuer if, to the
issuer if, to the knowledge of the
knowledge of the Equity Trust, those
Capital Fund, those of its officers and
of its officers and Trustees and
directors and officers and
officers and directors of its
directors of its investment advisers
investment adviser who individually own
who individually own more than 1/2 of 1%
beneficially more of the securities of
than 1/2 of 1% of such issuer, when
the securities of combined, own more
such issuer, when than 5% of the
combined, own securities of such
beneficially more issuer taken at
than 5% of the market.
securities of such
issuer taken at
market.
Pledging Nonfundamental Same.
restriction which
prohibits the
Capital Fund from
hypothecating,
mortgaging or
pledging any of its
assets except as may
be necessary in
connection with
permitted borrowings
and then not in
excess of 15% of the
Capital Fund's total
assets, taken at
cost (for the
purpose of this
restriction
financial futures,
options on financial
futures and forward
currency exchange
contracts are not
deemed to involve a
pledge of assets).
Control Nonfundamental Same.
restriction which
prohibits the
Capital Fund from
28
<PAGE>
investing in
companies for the
purpose of
exercising control
over their
management, although
the Capital Fund may
from time to time
present its views on
various matters to
the management of
issuers in which it
holds investments.
Other Nonfundamental Nonfundamental
Investment restriction which restriction which
Companies prohibits the prohibits the
Capital Fund from Capital Appreciation
purchasing a Fund from acquiring
security issued by any security issued
another investment by any other
company, except to investment company
the extent permitted (the "acquired
under the 1940 Act company") if
or except by immediately after
purchases in the such acquisition the
open market Capital Fund and all
involving only companies controlled
customary brokers' by the Capital Fund,
commissions, or if any, would own in
securities acquired the aggregate (i)
as dividends or more than 3% of the
distributions or in outstanding voting
connection with a stock of the
merger, acquired company,
consolidation or (ii) securities
similar transaction issued by the
or other exchange. acquired company
having an aggregate
value in excess of
5% of the Capital
Appreciation Fund's
total assets or
(iii) securities
issued by the
acquired company and
all other investment
companies (other
than treasury stock
of the Capital
Appreciation Fund)
having an aggregate
value in excess of
10% of the Capital
Appreciation Fund's
total assets, except
to complete a
merger,
consolidation or
other acquisition of
assets.
Warrants Nonfundamental Same.
restriction which
prohibits the
Capital Fund from
investing in
29
<PAGE>
warrants more than
5% of the value of
its total assets,
taken at the lower
of cost or market
value (warrants
initially attached
to securities and
acquired by the
Capital Fund upon
original issuance
thereof shall be
deemed to be without
value).
Arbitrage No restriction. Fundamental
Transactions restriction which
prohibits the
Capital Appreciation
Fund from conducting
arbitrage
transactions
(provided that
investments in
futures and options
for hedging purposes
shall not be deemed
arbitrage
transactions).
COMPARATIVE INFORMATION ON DISTRIBUTION ARRANGEMENTS
Class A shares of each Fund 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 of each Fund are subject to (i) a contingent deferred sales
charge (declining from 5% to 2%), which will be imposed on most redemptions made
within five years of purchase and (ii) annual distribution and service fees of
1% of the average daily net asset value of these 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 of each Fund 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 of each Fund 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.
Because the Reorganization will be effected at net asset value without the
imposition of a sales charge, Capital Fund
30
<PAGE>
Shares acquired by shareholders of the Capital Appreciation Fund pursuant to the
proposed Reorganization would not be subject to any initial sales charge or
contingent deferred sales charge as a result of the Reorganization. However,
holders of the Capital Fund Shares acquired as a result of the Reorganization
would continue to be subject to a contingent deferred sales charge upon
subsequent redemption to the same extent as if they had continued to hold their
shares of the Capital Appreciation Fund.
Each Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (a
"Distribution Plan") in accordance with the regulations promulgated under the
1940 Act. Under the provisions of each Fund's 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 of Shares
of Each Fund 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 pay or reimburse securities
dealers, financial institutions and others (collectively referred to herein as
securities dealers or dealers) (including dealers that are affiliates of the
Distributor) for personal services and/or the maintenance or servicing of
shareholder accounts. In addition, the Distributor generally pays an initial
commission to dealers for the sale of shares of each Fund with a portion of such
commission representing payment for personal services and/or the maintenance or
servicing of shareholder accounts by such dealers. Dealers who have sold Class A
shares of a Fund are eligible for further reimbursement commencing as of the
time of such sale. Dealers who have sold Class B or Class D shares of a Fund 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/or the maintenance or
servicing of shareholder accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to dealers for selling such shares. Any distribution fees
received by the Distributor and not allocated to dealers may be applied by the
Distributor in connection with sales or marketing efforts, including special
promotional fees and cash and noncash incentives based upon sales by dealers.
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 to affiliates by a Fund), have
also
31
<PAGE>
been authorized pursuant to the Distribution Plan.
Class A shares of the Funds may be purchased without a sales charge by
certain Trustees, directors, officers, employees, their relatives and other
persons directly or indirectly related to the Funds or affiliated entities.
Class A shares of the Funds may also be sold at a reduced sales charge or
without a sales charge pursuant to certain sponsored arrangements or managed
fee-based programs.
COMPARATIVE INFORMATION ON SHAREHOLDER SERVICES
Each Fund offers the same shareholder services, including the Open Account
System, reinvestment privileges, a systematic withdrawal plan, a dividend
allocation plan, telephone purchases, telephone exchanges, telephone redemptions
and access to the Investamatic Program, an automatic investment program. The
number of shares received in connection with any reinvestment of dividends will
be based upon the net asset value per share of the applicable class of shares of
such Fund in effect on the record date.
Each Fund currently has identical exchange privileges. Shareholders of the
Capital Appreciation Fund may exchange their shares for shares of a
corresponding class of shares, when available, of certain mutual funds as
determined by the Distributor, 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 such fund may
similarly exchange their shares for shares of an available corresponding class
of the Capital Appreciation Fund.
Each Fund offers the same redemption features, including the acceptance of
redemption request by mail, telephone and wire, provided that applicable
conditions are met. Any request to redeem shares of the acquired Fund received
and processed prior to the Reorganization will be treated as a redemption of
shares of the Capital Appreciation Fund. Any request to redeem shares received
or processed after the Reorganization will be treated as a request to redeem
shares of the Capital Fund.
Because each Fund currently offers the same shareholder services, after the
closing of the proposed Reorganization the same services will continue to be
available to the shareholders of the Capital Appreciation Fund but only as
Capital Fund shareholders.
FISCAL YEAR
The Capital Fund operates on a fiscal year ending September 30, while
the fiscal year of the Capital Appreciation Fund is June 30.
32
<PAGE>
PERFORMANCE
Capital Fund
- ------------
A discussion of the performance of the Capital Fund for the fiscal
year ended September 30, 1996, plus updated data through the period ended
December 31, 1996, are set forth below:
33
<PAGE>
Change In Value Of $10,000 Based on The Standard & Poor's 500 Composite Index
Compared to Change in Value of $10,000 Invested in the Capital Fund
[plot points for line chart]
Class A Shares
Average Annual Total Return
1 Year 5 Years 10 Years
+5.16% +19.69% +17.27%
9/86 9550 10000
9/87 13622 14342
9/88 11720 12565
9/89 15697 16706
9/90 12430 15162
9/91 19126 19876
9/92 20529 22071
9/93 31824 24933
9/94 32622 25850
9/95 44677 33529
9/96 49197 40343
[end of plot points for line chart]
[plot points for line chart]
Class B Shares
Average Annual Total Return
1 Year 5 Years 10 Years
+4.33% +20.04% +17.54%
9/86 10000 10000
9/87 14263 14342
9/88 12272 12565
9/89 16436 16706
9/90 13015 15162
9/91 20028 19876
9/92 21497 22071
9/93 33266 24933
9/94 33862 25850
9/95 46018 33529
9/96 50313 40343
[end of plot points for line chart]
[plot points for line chart]
Class C Shares
Average Annual Total Return
1 Year 5 Years 10 Years
+10.41% +21.09% +17.95%
9/86 10000 10000
9/87 14263 14342
9/88 12272 12565
9/89 16436 16706
9/90 13015 15162
9/91 20028 19876
9/92 21497 22071
9/93 33420 24933
9/94 34392 25850
9/95 47219 33529
9/96 52134 40343
[end of plot points for line chart]
[plot points for line chart]
Class D Shares
Average Annual Total Return
1 Year 5 Years 10 Years
+8.23% +20.26% +17.55%
9/86 10000 10000
9/87 14263 14342
9/88 12272 12565
9/89 16436 16706
9/90 13015 15162
9/91 20028 19876
9/92 21497 22071
9/93 33234 24933
9/94 33898 25850
9/95 46125 33529
9/96 50384 40343
[end of plot points for line chart]
[solid line] Capital Fund
[dotted line] S&P 500
During the fiscal year ended September 30, 1996, the Capital Fund's
short-term performance was hindered somewhat by the decline in technology stocks
in the fall of 1995 as well as by the July 1996 correction, which was led by a
sell-off in smaller, more aggressive growth stocks. The Capital Fund's
performance rebounded following both events.
The Capital Fund benefited from holdings in a number of industry sectors,
most notably, retail, computer software and service, business service, and hotel
and restaurant stocks. The Capital Fund underperformed its peer group, but
proved to be a stronger performer in the second half of the period, beating the
average total return for its Lipper category (without taking sales charges into
account).
Management made a number of changes to the Capital Fund, including reducing
its overall position in technology stocks but focusing holdings in the area of
computer software and service. As of September 30, 1996, software and service
stocks represented 12.3% of the portfolio.
34
<PAGE>
Management added to the Capital Fund's position in retail and business
service stocks. Retail, as of September 30, 1996, made up 14.2% of the
portfolio. Business service stocks accounted for another 7.8% of the portfolio.
Management also added to the portfolio's hotel and restaurant stocks, which
represented 10.7% of the portfolio as of September 30, 1996.
Average Annual Total Return for periods ended December 31, 1996 for the
Capital Fund:
1 year 5 years 10 years
------ ------- --------
Class A 2.72% 13.66% 16.13%
Class B 1.78% 13.89% 16.37%
Class C 7.81% 14.99% 16.81%
Class D 5.76% 14.16% 16.39%
Capital Appreciation Fund
- -------------------------
Average Annual Total Return for periods ended December 31, 1996 for the
Capital Appreciation Fund:
1 year 5 years 10 years
------ ------- --------
Class A 1.06% 11.61% 15.90%
Class B 0.10% 11.88% 16.17%
Class C 6.10% 12.94% 16.59%
Class D 4.18% 12.19% 16.20%
Supplemental Information on Performance for Both Funds
- ------------------------------------------------------
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in the
Funds will fluctuate and shares, when redeemed, may be worth more or less than
their original cost. During the periods prior to 1993 that shares were not
offered to the general public, the Capital Fund was not subject to the cash
inflows and higher level of redemptions and expenses that have occurred during
the Fund's current, continuous public offering. All returns assume reinvestment
of capital gain distributions and income dividends. Performance for a specified
class includes periods prior to 1993, when the Funds adopted multiple class
shares, which resulted in new or increased 12b-1 fees of up to 1% per class, and
which will reduce subsequent performance. Returns reflect maximum Class A 4.5%
front-end sales charge and Class B 5% or Class D 1% contingent deferred sales
charge, where applicable. "C" shares, offered without a sales charge, are
available only to certain employee benefit plans and large institutions. The
Standard & Poor's 500 Composite Index includes 500 widely traded common stocks
and is a commonly used measure of U.S. stock market performance. The index is
35
<PAGE>
unmanaged and does not take transaction charges into consideration. Direct
investment in the index is not possible; results are for illustrative purposes
only.
Further information about each Fund's performance is contained in each
Fund's annual and semiannual reports, which may be obtained without charge by
writing to the Funds at One Financial Center, Boston, Massachusetts 02111, or by
calling (800) 562-0032.
COMPARATIVE INFORMATION ON SHAREHOLDER RIGHTS
The following is a summary of certain provisions of each Trust's master
trust agreement and by-laws. Shareholders should refer directly to the
provisions of those documents for their full text.
General. The Equity Trust and the Capital Appreciation Fund series thereof
were established in 1986 under the laws of The Commonwealth of Massachusetts and
are governed by a First Amended and Restated Master Trust Agreement date June 1,
1993, as further amended thereafter. The Capital Fund, originally organized as a
Massachusetts corporation in 1967, and the Capital Trust are governed by a First
Amended and Restated Master Trust Agreement dated February 5, 1993, as further
amended thereafter. As Massachusetts business trusts, the operations of the
Equity Trust and the Capital Trust are governed by their respective Master Trust
Agreements and applicable federal and Massachusetts laws. The above-referenced
Master Trust Agreements may hereinafter be referred to individually as the
"Master Trust Agreement" and collectively as the "Master Trust Agreements."
Shares of the Capital Appreciation Fund and the Capital Fund. The
beneficial interests in each of the Capital Appreciation Fund and the Capital
Fund are represented by transferable shares, par value $.001 per share. The
Master Trust Agreement of each Trust permits the Trustees of such Trusts to
issue an unlimited number of shares and to divide such shares into an unlimited
number of series. As of the date hereof, the Equity Trust has four operating
series: the Capital Appreciation Fund, the State Street Research Equity
Investment Fund, the State Street Research Equity Income Fund and the State
Street Research Global Resources Fund. The Capital Trust has established three
operating series: the Capital Fund, State Street Research Emerging Growth Fund
and State Street Research Aurora Fund. Each share of any Equity Trust series and
any Capital Trust series represents an equal proportionate interest in the
assets and liabilities, excluding differences in class expenses, belonging to
that series. As such, each share is entitled to dividends and distributions out
of the income (after expenses) belonging to that series as declared by the Board
of Trustees.
Voting Requirements. Generally, the provisions of the Master
36
<PAGE>
Trust Agreement of each Trust may be amended at any time, so long as such
amendment does not adversely affect the rights of any shareholder with respect
to which such amendment is or purports to be applicable and so long as such
amendment is not in contravention of applicable law, by an instrument in writing
signed by a majority of the then Trustees (or by an officer of such Trust
pursuant to the vote of a majority of such Trustees). Generally, any amendment
to the Trust's Master Trust Agreement that adversely affects the rights of
shareholders of one or more series may be adopted by a majority of the then
Trustees of the Trust when authorized by shareholders holding a majority of the
shares entitled to vote.
Voting Rights. The Master Trust Agreement of each Trust provides that
special meetings of shareholders for any purpose requiring action by
shareholders under such Master Trust Agreement or the Trust's By-laws shall be
called upon the written request of holders of at least ten percent of the
outstanding shares of the Trust or, as the context may require, a series
thereof. The Master Trust Agreement of each Trust provides in general that
shareholders have the power to vote only on the following matters, each as more
fully described in such Master Trust Agreements: (i) the election or removal of
Trustees as provided in the Master Trust Agreement; (ii) with respect to certain
contracts, such as contracts for investment advisory or management services, to
the extent required as provided in the Master Trust Agreement as a whole; (iii)
with respect to any termination of the Trust; (iv) an amendment of the Master
Trust Agreement that has a material adverse effect on the rights of any
shareholder, as provided in the Master Trust Agreement; (v) to the same extent
as the stockholders of a Massachusetts business corporation as to whether or not
a court action, proceeding or claim should or should not be brought or
maintained derivatively or as a class action on behalf of the Trust, any
Sub-Trust thereof or its stockholders; and (vi) with respect to such additional
matters relating to the Trust as may be required by the 1940 Act, the Master
Trust Agreement, the By-laws or any registration of the Trust with the
Securities and Exchange Commission (or any successor agency) or any state, or as
the Trustees may consider necessary or desirable. Certain of the foregoing
matters will involve separate votes of one or more series of a Trust, while
others will require a vote of a Trust's shareholders as a whole.
Shareholder Liability. Under Massachusetts law, shareholders of a
Massachusetts business 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 each Trust. The Master Trust Agreement of each Trust provides for
indemnification, under certain circumstances, out of Trust property for all
losses and expenses of any shareholder held personally liable by virtue of his
status as such, and not because of such shareholder's acts or omissions or for
some other
37
<PAGE>
reason, for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is considered by
each Trust to be remote since it is limited to circumstances in which a
disclaimer is inoperative and the Trust itself would be unable to meet its
obligations.
Liability of Trustees and Officers. Under the Master Trust Agreement of
each Trust, Trustees and officers will be indemnified, under certain
circumstances, for all liabilities, including the expenses of litigation,
against them unless their conduct is determined to constitute willful
misfeasance, bad faith, gross negligence or reckless disregard of their duties,
such determination to be based upon the outcome of a court action or
administrative proceeding or a reasonable determination, following a review of
the facts, by (a) a vote of a majority of a quorum of the Trustees who are
neither "interested persons" of the Trust, as defined in the 1940 Act, nor
parties to the proceeding or (b) an independent legal counsel in a written
opinion. The Trust may also advance money for these expenses provided that the
Trustee or officer undertakes to repay the Trust if his or her conduct is later
determined to preclude indemnification and certain other conditions are met. It
should be noted that it is the view of the staff of the Securities and Exchange
Commission that to the extent that any provisions such as those described above
are inconsistent with the 1940 Act including Section 17 thereof, the provisions
of the 1940 Act are preemptive.
MANAGEMENT
The investment manager for each of the Funds is State Street Research &
Management Company. The Investment Manager is charged with the overall
responsibility for managing the investments and business affairs of the Funds,
subject to the authority of the Board of Trustees. As of _______________, 1997,
the Investment Manager had assets of approximately $____ billion under
management.
The portfolio manager for both the Capital Appreciation Fund and the
Capital Fund is Frederick R. Kobrick. Mr. Kobrick has managed the Capital
Appreciation Fund since 1986 and has managed the Capital Fund since 1985. Mr.
Kobrick's principal occupation is currently, and during the past five years has
been, Senior Vice President of State Street Research & Management Company.
ADDITIONAL INFORMATION ABOUT THE FUNDS
Information about the Capital Fund is included in its current Prospectus
dated February 1, 1997, a copy of which is included herewith and incorporated by
reference herein. Additional information about the Capital Fund is included in
the Fund's Statement of Additional Information dated February 1, 1997. This
Statement of Additional Information has been filed with the Securities and
Exchange Commission and is incorporated
38
<PAGE>
by reference herein. Copies of this Statement may be obtained without charge by
writing to State Street Research Capital Fund, One Financial Center, Boston,
Massachusetts 02111, or by calling (800) 562-0032.
Information about the Capital Appreciation Fund is included in its current
Prospectus dated November 1, 1996, which is incorporated by reference herein.
Additional information about the Capital Appreciation Fund is included in the
Fund's Statement of Additional Information dated November 1, 1996. This
Statement of Additional Information has been filed with the Securities and
Exchange Commission and is incorporated by reference herein. Copies of this
Statement may be obtained without charge by writing to State Street Research
Capital Appreciation Fund, One Financial Center, Boston, Massachusetts 02111 or
by calling (800) 562-0032.
Each Fund is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the 1940 Act, and in accordance therewith
files proxy material, reports and other information with the Securities and
Exchange Commission. These reports can be inspected and copied at the Public
Reference Facilities maintained by the Securities and Exchange Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549, as well as at the
following regional offices: New York Regional Office, 75 Park Place, Room 1228,
New York, NY 10007; and Chicago Regional Office, Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago IL 60661. Copies of such material can
also be obtained from the Public Reference Branch, Office of Consumer Affairs
and Information Services, Securities and Exchange Commission, Judiciary Plaza,
450 Fifth Street, N.W., Washington DC 20549 at prescribed rates.
VOTING INFORMATION
Any shareholder who has given a proxy has the right to revoke it at any
time prior to its exercise by attending the Meeting and voting his or her shares
in person or by submitting a written notice of revocation or a later-dated proxy
to the Trust at the address of the Trust set forth on the cover page of this
Joint Prospectus/Proxy Statement prior to the date of the Meeting. Shareholders
of record of the Capital Appreciation Fund at the close of business on
______________, 1997 (the "Record Date") will be entitled to notice of, and to
vote at, the Meeting of the Fund or to vote at any adjournments thereof. This
Joint Prospectus/Proxy Statement, proxies and accompanying Notice of Meeting
were first sent or given to shareholders of the Funds on or about
_______________, 1997.
As of the Record Date, there were approximately ____________, ____________,
____________ and ____________ issued and outstanding Class A, Class B, Class C
and Class D shares, respectively, of the Capital Appreciation Fund. Each share
of
39
<PAGE>
such Fund is entitled to one vote, with a proportionate vote for each fractional
share.
If the enclosed proxy is properly executed and returned in time to be voted
at the Meeting, the shares represented thereby will be voted in accordance with
the instructions on the proxy. Unless instructions to the contrary are marked
thereon, the proxy will be voted for the proposal described herein and, in the
discretion of the persons named herein as proxies, to take such further action
as they may determine appropriate in connection with any other matter which may
properly come before the Meeting or any adjournments thereof. The Board of
Trustees does not currently know of any matter to be considered at the Meeting
other than the proposal to approve the Plan of Reorganization.
The Equity Trust is using its best efforts to obtain the affirmative vote
of the holders of a majority of the outstanding voting shares of the Capital
Appreciation Fund (within the meaning of the 1940 Act), voting together as a
single class, to approve the Plan of Reorganization on behalf of such Fund.
Under the 1940 Act, the vote of a majority of the outstanding voting shares
means the vote of the lesser of (a) 67% or more of the voting shares of a Fund,
voting together as a single class, present at the Meeting, if the holders of
more than 50% of the outstanding voting shares are present or represented by
proxy, or (b) more than 50% of the outstanding voting shares of a Fund, voting
together as a single class. If the Reorganization is not approved, the Board of
Trustees of the Equity Trust and the Board of Trustees of the Capital Trust may
determine to continue the Capital Appreciation Fund and the Capital Fund as
separate funds, or may consider other alternatives in the best interests of each
Fund's shareholders. The Trustees of the Equity Trust have discretion under the
Master Trust Agreement of the Trust to complete the reorganization even though
the above described affirmative vote is not obtained.
The holders of a majority of the shares entitled to vote of the Capital
Appreciation Fund outstanding at the close of business on the Record Date
present in person or represented by proxy constitute a quorum for the Meeting;
however, as noted above, the Equity Trust is using its best efforts to obtain
the affirmative vote of a majority of the voting shares of such Fund, voting
together as a single class (within the meaning of the 1940 Act) to approve the
Reorganization. In the event a quorum is not present at the Meeting or in the
event a quorum is present at the Meeting but sufficient votes to approve the
Plan of Reorganization are not received, the persons named as proxies may
propose one or more adjournments, without further notice to shareholders, of the
Meeting to permit further solicitation of proxies provided such persons
determine, after consideration of all relevant factors, including the nature of
the proposal, the percentage of votes then cast, the percentage of negative
votes then cast, the nature of the proposed solicitation activities and the
nature of the reasons for such further solicitation, that an
40
<PAGE>
adjournment and additional solicitation is reasonable and in the interests of
shareholders.
For purposes of determining the presence of a quorum for transacting
business at the Meeting and for determining whether sufficient votes have been
received for approval of the proposal to be acted upon at the Meeting,
abstentions and broker "non-votes" (that is, proxies from brokers or nominees
indicating that such persons have not received instructions from the beneficial
owner or other persons entitled to vote shares on a particular matter with
respect to which the brokers or nominees do not have, or choose not to exercise,
discretionary power) may in the discretion of the Equity Trust be treated as
present at the Meeting and entitled to vote on the matter, but which have not
been voted. For this reason, abstentions and broker non-votes could assist the
Capital Appreciation Fund in obtaining a quorum; both have the practical effect
of a "no" vote for purposes of obtaining the requisite vote for approval of the
proposals to be acted upon at the Meeting.
Expenses of the Reorganization will be shared evenly between the Capital
Fund and the Capital Appreciation Fund. Such expenses include costs of
preparing, printing and mailing the enclosed proxy, accompanying notice and
Joint Prospectus/Proxy Statement and all other costs in connection with
solicitation of proxies, including any additional solicitation by letter,
telephone or telegraph. In addition to solicitation of proxies by mail, officers
of the Equity Trust and officers and regular employees of the Investment
Manager, affiliates of the Investment Manager, or other representatives of the
Trusts may also solicit proxies by telephone or telegram or in person. A proxy
solicitation firm may also be retained to assist in any special, personal
solicitation of proxies. The costs of retaining such a firm is not expected to
exceed $____________.
THE TRUSTEES OF THE EQUITY TRUST, INCLUDING THE INDEPENDENT TRUSTEES OF SUCH
TRUST, RECOMMEND APPROVAL OF THE PLAN OF REORGANIZATION.
EXPERTS
The financial statements of the Capital Fund for the fiscal year ended
September 30, 1996, included in the Capital Fund's Statement of Additional
Information dated February 1, 1997, have been incorporated herein by reference
in reliance on the reports of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing. The
financial statements of the Capital Appreciation Fund for the fiscal year ended
June 30, 1996, included in the Capital Appreciation Fund's Statement of
Additional Information dated November 1, 1996, have been incorporated herein by
reference in reliance on the reports of Price Waterhouse LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing. Certain legal matters with respect to
41
<PAGE>
the issuance of the shares of the Capital Trust will be passed upon by the
Trust's counsel.
OTHER MATTERS
The Board of Trustees of the Capital Trust does not intend to present any
other business at the Meeting, nor are they aware that any shareholder intends
to do so. If, however, any other matters are properly brought before the
Meeting, the persons named in the accompanying proxy will vote thereon in
accordance with their judgment.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE FILL IN, DATE AND SIGN THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. NO POSTAGE IS
NECESSARY IF IT IS MAILED IN THE UNITED STATES.
, 1997
- --------------------------
Date of Joint Prospectus/Proxy Statement
42
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION
AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION dated as of
__________________, 1997 by and between State Street Research Equity Trust, a
Massachusetts business trust (the "Equity Trust"), on behalf of the State Street
Research Capital Appreciation Fund series of the Equity Trust (the "Capital
Appreciation Fund"), and State Street Research Capital Trust, a Massachusetts
business trust (the "Capital Trust") on behalf of the State Street Research
Capital Fund series of the Capital Trust (the "Capital Fund").
W I T N E S S E T H:
WHEREAS, each of the Equity Trust and the Capital Trust is an open-end
management investment company registered under the Investment Company Act of
1940, as amended (the "1940 Act");
WHEREAS, this Agreement is intended to be and is adopted as a plan of
reorganization and liquidation within the meaning of Section 368(a)(1)(C) of the
Internal Revenue Code of 1986, as amended, such reorganization to consist of the
transfer of all of the assets of the Capital Appreciation Fund in exchange
solely for Class A, Class B, Class C and Class D shares of beneficial interest,
$.001 par value per share, of the Capital Fund ("Capital Fund Shares") and the
assumption by the Capital Fund of certain of the liabilities of the Capital
Appreciation Fund and the distribution, after the Closing hereinafter referred
to, of Capital Fund Shares to the shareholders of the Capital Appreciation Fund
in liquidation of the Capital Appreciation Fund, all upon the terms and
conditions hereinafter set forth in this Agreement (collectively, the
"Reorganization"); and
WHEREAS, the Board of Trustees of the Equity Trust and the Board of
Trustees of the Capital Trust, including with respect to each Trust a majority
of the Trustees and the Trustees who are not interested persons, have determined
that participating in the transactions contemplated by this Agreement is in the
best interests of each of the Funds.
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the parties hereto agree as follows:
1. Transfer of Assets. Subject to the terms and conditions set forth
herein, at the closing provided for in Section 5 (herein referred to as the
"Closing") the Equity Trust on behalf of the Capital Appreciation Fund shall
transfer all of the assets of the Capital Appreciation Fund, and assign all
Assumed Liabilities (as hereinafter defined) to the Capital Fund, and the
Capital Trust on behalf of the Capital Fund shall acquire all such assets, and
shall assume all such Assumed Liabilities, upon delivery to the Equity Trust on
behalf of the Capital Appreciation Fund of Capital Fund Shares having a net
asset value equal to the value of the net assets of the Capital Appreciation
Fund transferred (the "New
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Shares"). "Assumed Liabilities" shall mean those liabilities, including all
expenses, costs, charges and reserves, reflected in an unaudited statement of
assets and liabilities of the Capital Appreciation Fund as of the close of
business on the Valuation Date (as hereinafter defined), determined in
accordance with generally accepted accounting principles consistently applied
from the prior audited period. The net asset value of the New Shares and the
value of the net assets of the Capital Appreciation Fund to be transferred shall
be determined as of the close of regular trading on the New York Stock Exchange
on the business day next preceding the Closing (the "Valuation Date") using the
valuation procedures set forth in the then current prospectus and statement of
additional information of the Capital Fund. All Assumed Liabilities of the
Capital Appreciation Fund, to the extent that they exist at or after the
Closing, shall after the Closing attach to the Capital Fund and may be enforced
against the Capital Fund to the same extent as if the same had been incurred by
the Capital Fund.
2. Liquidation of the Capital Appreciation Fund. At or as soon as
practicable after the Closing, the Capital Appreciation Fund will be liquidated
and the New Shares delivered to the Equity Trust on behalf of the Capital
Appreciation Fund will be distributed to shareholders of the Capital
Appreciation Fund, each shareholder to receive the number of New Shares of the
corresponding class and equal to the pro rata portion of shares of beneficial
interest of the Capital Appreciation Fund held by such shareholder as of the
close of business on the Valuation Date. Such liquidation and distribution will
be accompanied by the establishment of an open account on the share records of
the Capital Fund in the name of each shareholder of the Capital Appreciation
Fund and representing the respective pro rata number of New Shares due such
shareholder. As soon as practicable after the Closing, the Equity Trust shall
take all other steps necessary to effect a complete liquidation and dissolution
of the Capital Appreciation Fund. As of the Closing, each outstanding
certificate which, prior to the Closing, represented shares of the Capital
Appreciation Fund will be deemed for all purposes to evidence ownership of the
number of Capital Fund Shares issuable with respect thereto pursuant to the
Reorganization. After the Closing, certificates originally representing shares
of Class A or Class C of the Capital Appreciation Fund will be rendered null and
void and nonnegotiable; upon special request and surrender of such certificates
to State Street Bank and Trust Company as transfer agent, holders of these
nonnegotiable certificates shall be entitled to receive certificates
representing the number of Capital Fund Shares issuable with respect thereto.
All Class B and Class D shares of record of the Capital Fund are held in book
entry form and no certificates for such shares will be issued.
3. Representations and Warranties.
(a) The Equity Trust hereby represents and warrants to the Capital
Trust as follows:
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(i) the Equity Trust is duly organized, validly existing and in
good standing under the laws of The Commonwealth of Massachusetts and has full
power and authority to conduct its business as presently conducted;
(ii) the Equity Trust has full power and authority to execute,
deliver and carry out the terms of this Agreement;
(iii) the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby are duly authorized and no
other proceedings on the part of the Equity Trust or the shareholders of the
Capital Appreciation Fund (other than as contemplated in Section 4(h)) are
necessary to authorize this Agreement and the transactions contemplated hereby;
(iv) this Agreement has been duly executed by the Equity Trust
and constitutes its valid and binding obligation, enforceable in accordance with
its terms, subject to applicable bankruptcy, reorganization, insolvency,
moratorium and other rights affecting creditors' rights generally, and general
equitable principles;
(v) neither the execution and delivery of this Agreement by the
Equity Trust, nor the consummation by the Equity Trust of the transactions
contemplated hereby will conflict with, result in a breach or violation of or
constitute (or with notice, lapse of time or both constitute) a breach of or
default under, the Master Trust Agreement or By-Laws of the Equity Trust, or any
statute, regulation, order, judgment or decree, or any instrument, contract or
other agreement to which the Equity Trust is a party or by which the Equity
Trust or any of its assets is subject or bound; and
(vi) no authorization, consent or approval of any governmental or
other public body or authority or any other party is necessary for the execution
and delivery of this Agreement by the Equity Trust or the consummation of any
transactions contemplated hereby by the Equity Trust, other than as shall be
obtained at or prior to the Closing.
(b) The Capital Trust hereby represents and warrants to the Equity
Trust as follows:
(i) The Capital Trust is duly organized, validly existing and in
good standing under the laws of The Commonwealth of Massachusetts and has full
power and authority to conduct its business as presently conducted;
(ii) The Capital Trust has full power and authority to execute,
deliver and carry out the terms of this Agreement;
(iii) the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby are duly authorized and no
other proceedings on the part of the Capital Trust or the shareholders of the
Capital
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Fund are necessary to authorize this Agreement and the transactions contemplated
hereby;
(iv) this Agreement has been duly executed by the Capital Trust
and constitutes its valid and binding obligation, enforceable in accordance with
its terms, subject to applicable bankruptcy, reorganization, insolvency,
moratorium and other rights affecting creditors' rights generally, and general
equitable principles;
(v) neither the execution and delivery of this Agreement by the
Capital Trust, nor the consummation by the Capital Trust of the transaction
contemplated hereby will conflict with, result in a breach or violation of or
constitute (or with notice, lapse of time or both constitute) a breach of or
default under, the Master Trust Agreement or By-Laws of the Capital Trust, or
any statute, regulation, order, judgment or decree, or any instrument, contract
or other agreement to which the Capital Trust is a party or by which the Capital
Trust or any of its assets is subject or bound; and
(vi) no authorization, consent or approval of any governmental or
other public body or authority or any other party is necessary for the execution
and delivery of this Agreement by the Capital Trust or the consummation of any
transactions contemplated hereby by the Capital Trust, other than as shall be
obtained at or prior to the Closing.
4. Conditions Precedent. The obligations of the Equity Trust and the
Capital Trust to effectuate the plan of reorganization and liquidation hereunder
shall be subject to the satisfaction of the following conditions:
(a) At or immediately prior to the Closing, the Equity Trust shall
have declared and paid a dividend or dividends which, together with all previous
such dividends, shall have the effect of distributing to the shareholders of the
Capital Appreciation Fund all of such Fund's investment company taxable income
for taxable years ending at or prior to the Closing (computed without regard to
any deduction for dividends paid) and all of its net capital gain, if any,
realized in taxable years ending at or prior to the Closing (after reduction for
any capital loss carry-forward).
(b) A registration statement of the Capital Fund on Form N-14 under
the Securities Act of 1933, as amended (the "Securities Act"), registering the
New Shares under the Securities Act, and such amendment or amendments thereto as
are determined by the Board of Trustees of the Capital Trust to be necessary and
appropriate to effect such registration of the New Shares (the "Registration
Statement"), shall have been filed with the Commission and the Registration
Statement shall have become effective, and no stop-order suspending the
effectiveness of such Registration Statement shall have been issued, and no
proceeding for that purpose shall have been initiated or threatened by the
Commission (and not withdrawn or terminated);
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(c) The New Shares shall have been duly qualified for offering to the
public in all states in which such qualification is required for consummation of
the transactions contemplated hereunder;
(d) All representations and warranties of the Capital Trust contained
in this Agreement shall be true and correct in all material respects as of the
date hereof and as of the Closing, with the same force and effect as if then
made, and the Capital Trust shall have received a certificate of an officer of
the Equity Trust to that effect in form and substance reasonably satisfactory to
the Capital Trust;
(e) All representations and warranties of the Capital Trust contained
in this Agreement shall be true and correct in all material respects as of the
date hereof and as of the Closing, with the same force and effect as if then
made, and the Equity Trust shall have received a certificate of an officer of
the Capital Trust to that effect in form and substance reasonably satisfactory
to the Equity Trust;
(f) The Equity Trust and the Capital Trust shall have received an
opinion from Goodwin, Procter & Hoar LLP regarding tax matters in connection
with the Reorganization;
(g) The Capital Trust on behalf of the Capital Fund shall have certain
agreed upon procedures performed by independent auditors, selected by the Trust,
on the unaudited statement of assets and liabilities described in Section 1 of
this Agreement, and shall have received a report thereon in accordance with
established accounting standards; and
(h) The Equity Trust shall use its best efforts to obtain a vote
approving this Agreement and the Reorganization contemplated hereby by at least
a majority of the outstanding voting Class A, Class B, Class C and Class D
shares of beneficial interest of the Capital Appreciation Fund (within the
meaning of the 1940 Act), voting together as a single class, entitled to vote at
the special meeting of shareholders of the Capital Appreciation Fund duly called
for such purpose.
5. Closing. The Closing shall be held at the offices of the Equity Trust
and shall occur (a) immediately prior to the opening of business on the first
Monday following receipt of all necessary regulatory approvals and the final
adjournment of the meeting of shareholders of the Capital Appreciation Fund at
which this Agreement is considered or (b) such later time as the parties may
agree. All acts taking place at the Closing shall be deemed to take place
simultaneously unless otherwise provided. At, or as soon as may be practicable
following the Closing, the Capital Fund shall distribute the New Shares to the
Capital Appreciation Fund Record Holders (as herein defined) by instructing the
Capital Fund to
A-5
<PAGE>
register the appropriate number of New Shares in the names of the Capital
Appreciation Fund's shareholders and the Capital Fund agrees promptly to comply
with said instruction. The shareholders of record of the Capital Appreciation
Fund as of the close of business on the Valuation Date shall be certified by the
Equity Trust's transfer agent (the "Capital Appreciation Fund Record Holders").
6. Expenses. The expenses incurred in connection with the transactions
contemplated by this Agreement, whether or not the transactions contemplated
hereby are consummated, will be shared evenly by the two Funds. Such expenses
include, without limitation, (i) expenses incurred in connection with the
entering into and the carrying out of the provisions of this Agreement; (ii)
expenses associated with the preparation and filing of the registration
statement on Form N-14 contemplated hereby; (iii) registration or qualification
fees and expenses of preparing and filing such forms as are necessary to qualify
the New Shares under applicable blue sky laws; (iv) postage; (v) printing; (vi)
accounting fees; (vii) legal fees; and (viii) solicitation costs of the
transaction.
7. Termination. This Agreement and the transactions contemplated hereby may
be terminated and abandoned by resolution of the Board of Trustees of the Equity
Trust or by the Board of Trustees of the Capital Trust, at any time prior to the
Closing, if circumstances should develop that, in the opinion of either of such
Boards of Trustees, in its sole discretion, make proceeding with this Agreement
inadvisable. In the event of any such termination, there shall be no liability
for damages on the part of either the Capital Appreciation Fund or the Capital
Fund, or their respective trustees or officers, to the other party or its
trustees or officers.
8. Amendments. This Agreement may be amended, waived or supplemented in
such manner as may be mutually agreed upon in writing by the authorized officers
of the Equity Trust and by the authorized officers of the Capital Trust;
provided, however, that following the meeting of the Capital Appreciation Fund
shareholders called by the Equity Trust pursuant to Section 4(h) of this
Agreement, no such amendment, waiver or supplement may have the effect of
changing the provisions for determining the number of Capital Fund Shares to be
issued to the Capital Appreciation Fund shareholders under this Agreement to the
detriment of such shareholders without their further approval.
9. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of The Commonwealth of Massachusetts, except as to
matters of conflicts of laws.
10. Further Assurances. The Equity Trust and the Capital Trust shall take
such further action, prior to, at, and after the Closing, as may be necessary or
desirable and proper to consummate the transactions contemplated hereby.
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11. Limitations of Liability. The term "Equity Trust" means and refers to
the trustees from time to time serving under the Master Trust Agreement of the
Equity Trust, as the same may subsequently thereto have been, or subsequently
hereto be, amended. It is expressly agreed that the obligations of the Equity
Trust hereunder shall not be binding upon any of the Trustees, shareholders,
nominees, officers, agents or employees of the Equity Trust, personally, but
bind only the assets and property of the Capital Appreciation Fund series of the
Equity Trust, as provided in the Master Trust Agreement of the Equity Trust. The
execution and delivery of this Agreement have been authorized by the Trustees of
the Equity Trust and signed by an authorized officer of the Equity Trust, acting
as such, and neither such authorization nor such execution and delivery shall be
deemed to have been made individually or to impose any personal liability, but
shall bind only the trust property of the Equity Trust as provided in its Master
Trust Agreement. The Master Trust Agreement of the Equity Trust provides, and it
is expressly agreed, that each Sub-Trust of the Equity Trust shall be charged
with the liabilities in respect of that Sub-Trust and all expenses, costs,
charges or reserves belonging to that Sub-Trust.
The term "Capital Trust" means and refers to the trustees from time to time
serving under the Master Trust Agreement of the Capital Trust, as the same may
subsequently thereto have been, or subsequently hereto be, amended. It is
expressly agreed that the obligations of the Capital Trust hereunder shall not
be binding upon any of the Trustees, shareholders, nominees, officers, agents or
employees of the Capital Trust, personally, but bind only the assets and
property of the Capital Fund series of the Capital Trust, as provided in the
Master Trust Agreement of the Capital Trust. The execution and delivery of this
Agreement have been authorized by the Trustees of the Capital Trust and signed
by an authorized officer of the Capital Trust, acting as such, and neither such
authorization nor such execution and delivery shall be deemed to have been made
individually or to impose any personal liability, but shall bind only the trust
property of the Capital Trust as provided in its Master Trust Agreement. The
Master Trust Agreement of the Capital Trust provides, and it is expressly
agreed, that each Sub-Trust of the Capital Trust shall be charged with the
liabilities in respect of that Sub-Trust and all expenses, costs, charges or
reserves belonging to that Sub-Trust.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first set forth above by their duly authorized
representatives.
STATE STREET RESEARCH EQUITY TRUST,
on behalf of its State Street Research
Capital Appreciation Fund series
ATTEST:
/s/ By: /s/
- ------------------------------- -------------------------------------
STATE STREET RESEARCH CAPITAL TRUST,
on behalf of its State Street Research
Capital Fund series
ATTEST:
/s/ By: /s/
- ------------------------------- -------------------------------------
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Acquisition of the Assets of
STATE STREET RESEARCH CAPITAL APPRECIATION FUND
a series of
State Street Research Equity Trust
One Financial Center
Boston, Massachusetts 02111
(800) 562-0032
By and in Exchange for Shares of
STATE STREET RESEARCH CAPITAL FUND
a series of
State Street Research Capital Trust
One Financial Center
Boston, Massachusetts 02111
(800) 562-0032
This Statement of Additional Information, relating specifically to the
proposed transfer of the assets and certain liabilities of State Street Research
Capital Appreciation Fund (the "Capital Appreciation Fund"), a series of State
Street Research Equity Trust, to State Street Research Capital Fund (the
"Capital Fund"), a series of State Street Research Capital Trust, in exchange
for Class A, Class B, Class C and Class D shares of beneficial interest, $.001
par value per share, of the Capital Fund, consists of this cover page and the
following described documents, each of which is attached hereto and incorporated
by reference herein:
(1) the Statement of Additional Information of the Capital Fund dated
February 1, 1997;
(2) the Statement of Additional Information of the Capital
Appreciation Fund dated November 1, 1996;
(3) the Semiannual Report of the State Street Research Capital
Appreciation Fund for the period ended December 31, 1996; and
(4) Pro Forma Financial Statements.
This Statement of Additional Information, which is not a prospectus,
supplements and should be read in conjunction with the Joint Prospectus/Proxy
Statement of the Capital Fund and the Capital Appreciation Fund dated
[___________], 1997. A copy of the Joint Prospectus/Proxy Statement may be
obtained without charge by calling or writing the Capital Fund or the Capital
Appreciation Fund at the address set forth above or by calling toll-free (800)
562-0032.
The date of this Statement of Additional Information is [___________],
1997.
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STATE STREET RESEARCH CAPITAL FUND
a Series of
STATE STREET RESEARCH CAPITAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1997
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS..................... 2
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT
TECHNIQUES......................................................... 5
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS.....................14
RATING CATEGORIES OF DEBT SECURITIES................................17
TRUSTEES AND OFFICERS...............................................20
INVESTMENT ADVISORY SERVICES........................................25
PURCHASE AND REDEMPTION OF SHARES...................................26
NET ASSET VALUE.....................................................28
PORTFOLIO TRANSACTIONS..............................................30
CERTAIN TAX MATTERS.................................................33
DISTRIBUTION OF SHARES OF THE FUND..................................35
CALCULATION OF PERFORMANCE DATA.....................................39
CUSTODIAN...........................................................41
INDEPENDENT ACCOUNTANTS.............................................41
FINANCIAL STATEMENTS................................................42
The following Statement of Additional Information is not a Prospectus.
It should be read in conjunction with the Prospectus of State Street Research
Capital Fund (the "Fund") dated February 1, 1997, which may be obtained without
charge from the offices of State Street Research Capital Trust (the "Trust") or
State Street Research Investment Services, Inc. (the "Distributor"), One
Financial Center, Boston, Massachusetts 02111-2690.
CONTROL NUMBER: 1285C-970131(0298)SSR-LD CF-879D-0197
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth in part under "The Fund's Investments" and "Limiting
Investment Risk" in the Fund's Prospectus, the Fund has adopted certain
investment restrictions.
All of the Fund's fundamental investment restrictions are set forth
below. These fundamental investment restrictions may not be changed except by
the affirmative vote of a majority of the Fund's outstanding voting securities
as defined in the Investment Company Act of 1940, as amended (the "1940 Act").
(Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at a meeting of security holders duly called, (i) of
67% or more of the voting securities present at a meeting if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy or (ii) of more than 50% of the outstanding voting securities, whichever
is less.) Under these restrictions, it is the Fund's policy:
(1) not to purchase the securities of any issuer if such purchase
at the time thereof would cause more than five percent (5%) of
the total assets of the Fund to be invested in the securities
of any one issuer; but this restriction shall not apply to
obligations of the government of the United States of America
or to obligations of any corporation organized under a general
Act of Congress if such corporation is an instrumentality of
the United States;
(2) not to purchase the securities of any issuer if such purchase
at the time thereof would cause more than ten percent (10%) of
any class of securities of such issuer (as disclosed by the
last available financial statement of such issuer) to be held
by the Fund;
(3) not to lend money; however, the Fund may lend portfolio
securities and purchase bonds, debentures, notes and similar
obligations (and enter into repurchase agreements with respect
thereto);
(4) not to underwrite or participate in the marketing of
securities of other issuers, although the Fund may, acting
alone or in syndicates or groups purchase or otherwise acquire
securities of other issuers for investment either from the
issuers or from persons in a control relationship with the
issuers or from underwriters of such securities [as a matter
of interpretation, which is not part of the fundamental
policy, this restriction does not apply to the extent that, in
connection with the disposition of the Fund's securities, the
Fund may be deemed to be an underwriter under certain federal
securities laws];
(5) not to make any investment in real property or real estate
mortgage loans;
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<PAGE>
(6) not to invest in physical commodities or physical commodity
contracts or options in excess of 10% of the Fund's total
assets, except that investments in essentially financial items
or arrangements such as, but not limited to, swap
arrangements, hybrids, currencies, currency and other forward
contracts, futures contracts and options on futures contracts
on securities, securities indices, interest rates and
currencies shall not be deemed investments in commodities or
commodities contracts;
(7) not to purchase for, or retain in, its portfolio any security
of an issuer if, to the knowledge of the Fund, those of its
officers and directors and officers and directors of its
investment adviser who individually own beneficially more than
1/2 of 1% of the securities of such issuer, when combined, own
beneficially more than 5% of the securities of such issuer
taken at market;
(8) not to issue senior securities;
(9) not to invest in oil, gas or other mineral exploration or
development programs (provided that the Fund may invest in
securities issued by or which are based directly or
indirectly, on the credit of companies which invest in or
sponsor such programs);
(10) not to make any investment which would cause more than 25% of
the value of the Fund's total assets to be invested in
securities of issuers principally engaged in any one industry
(for purposes of this restriction (a) utilities will be
divided according to their services so that, for example, gas,
gas transmission, electric and telephone companies will each
be deemed in a separate industry, (b) oil and oil related
companies will be divided by type so that, for example, oil
production companies, oil service companies and refining and
marketing companies will each be deemed in a separate industry
and (c) securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities shall be excluded); and
(11) not to borrow money (through reverse repurchase agreements or
otherwise) except for extraordinary and emergency purposes,
such as permitting redemption requests to be honored, and then
not in an amount in excess of 10% of the value of its net
assets, provided that additional investments will be suspended
during any period when borrowings exceed 5% of the Fund's net
assets, and provided further that reverse repurchase
agreements shall not exceed 5% of the Fund's net assets. The
Board of Trustees may authorize the borrowing of money only on
an unsecured basis for the general purposes of the Fund and
may authorize the issue therefor of notes or debentures of the
Fund, but no money shall be borrowed by the Fund except
pursuant to the authority of the Board of Trustees, and no
borrowings by the Fund shall be authorized to an aggregate
amount greater than ten percent, as noted, of the net assets
of the Fund.
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<PAGE>
The following nonfundamental investment restrictions may be changed
with respect to the Fund by a vote of a majority of the Trustees. Under these
restrictions, it is the Fund's policy:
(1) not to hypothecate, mortgage or pledge any of its assets
except as may be necessary in connection with permitted
borrowings and then not in excess of 15% of the Fund's total
assets, taken at cost (for the purpose of this restriction
financial futures, options on financial futures and forward
currency exchange contracts are not deemed to involve a pledge
of assets);
(2) not to invest in warrants more than 5% of the value of its
total assets, taken at the lower of cost or market value
(warrants initially attached to securities and acquired by the
Fund upon original issuance thereof shall be deemed to be
without value);
(3) not to invest in companies for the purpose of exercising
control over their management, although the Fund may from time
to time present its views on various matters to the management
of issuers in which it holds investments;
(4) not invest more than 5% of its total assets in securities of
private companies including predecessors with less than three
years' continuous operations except (a) securities guaranteed
or backed by an affiliate of the issuer with three years'
continuous operations, (b) securities issued or guaranteed as
to principal or interest by the U.S. Government, or its
agencies or instrumentalities, or a mixed-ownership Government
corporation, (c) securities of issuers with debt securities
rated at least "BBB" by Standard & Poor's Corporation or "Baa"
by Moody's Investor's Service, Inc. (or their equivalent by
any other nationally recognized statistical rating
organization) or securities of issuers considered by the
Investment Manager to be equivalent, (d) securities issued by
a holding company with at least 50% of its assets invested in
companies with three years of continuous operations including
predecessors, and (e) securities which generate income which
is exempt from local, state or federal taxes; provided that
the Fund may invest up to 15% in such issuers so long as such
investments plus investments in restricted securities (other
than those which are eligible for resale under Rule 144A,
Regulation S or other exemptive provisions) do not exceed 15%
of the Fund's total assets;
(5) not to purchase any security or enter into a repurchase
agreement if as a result more than 15% of its net assets would
be invested in securities that are illiquid (including
repurchase agreements not entitling the holder to payment of
principal and interest within seven days);
(6) not to invest more than 15% of its net assets in restricted
securities of all types
4
<PAGE>
(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);
(7) not to purchase securities on margin or make short sales of
securities except for short sales "against the box"; provided
that the Fund may make short sales if such positions are fully
collateralized and if not more than 5% of the Fund's net
assets (taken at current value) are held as collateral for
such short sales at any time; and, for the purpose of this
restriction, escrow or custodian receipts or letters, margin
or safekeeping accounts, or similar arrangements used in the
industry in connection with the trading of futures, options
and forward commitments are not deemed to involve the purchase
of securities on margin;
(8) not to engage in transactions in options except that
investments in essentially financial items or arrangements
such as, but not limited to, options on securities, securities
indices, interest rates and currencies, and options on futures
on securities, securities indices, interest rates and
currencies shall not be deemed investments in options; and
(9) not to purchase a security issued by another investment
company, except to the extent permitted under the 1940 Act or
except by purchases in the open market involving only
customary brokers' commissions, or securities acquired as
dividends or distributions or in connection with a merger,
consolidation or similar transaction or other exchange.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Among other investments described below, the Fund may buy and sell
domestic and foreign options, futures contracts, and options on futures
contracts with respect to securities, securities indices, and currencies, and
may enter into closing transactions with respect to each of the foregoing, and
invest in other derivatives, under circumstances in which such instruments and
techniques are expected by State Street Research & Management Company (the
"Investment Manager") to aid in achieving the investment objective of the Fund.
The Fund on occasion may also purchase instruments with characteristics of both
futures and securities (e.g., debt instruments with interest and principal
payments determined by reference to the value of a commodity or a currency at a
future time) and which, therefore, possess the risks of both futures and
securities investments.
5
<PAGE>
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 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
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<PAGE>
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 security at a specified price,
a put option on an index of securities gives the holder the right to receive an
amount of cash upon exercise of the option if the value of the underlying index
has fallen below the exercise price. The amount of cash received will be equal
to the difference between the closing price of the index and the exercise price
of the option expressed in dollars times a specified multiple. As with options
on securities, the Fund
7
<PAGE>
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.
8
<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
only as a hedge against changes resulting from market conditions which produce
changes in the values of its securities or the securities which it intends to
purchase (e.g., to replace portfolio securities which will mature in the near
future) or subject to the limitations described below, to enhance return. The
Fund will not purchase any futures contract or purchase any call option if,
immediately thereafter, more than one third of the Fund's net assets would be
represented by long futures contracts or call options. The Fund will not write a
covered call or put option if, immediately thereafter, the aggregate value of
the assets (securities in the case of written calls and cash or cash equivalents
in the case of written puts) underlying all such options, determined as of the
dates such options were written, would exceed 25% of the Fund's net assets. In
addition, the Fund may not establish a position in a commodity futures contract
or purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such nonhedging
purposes would exceed 5% of the market value of the Fund's net assets.
Although effective hedging can generally capture the bulk of a desired
risk adjustment, no hedge is completely effective. The Fund's ability to hedge
effectively through transactions in futures and options depends on the degree to
which price movements in its holdings correlate with price movements of the
futures and options.
Some positions in futures and options may be closed out only on an
exchange which provides a secondary market therefor. There can be no assurance
that a liquid secondary market will exist for any particular futures contract or
option at any specific time. Thus, it may not be possible to close such an
option or futures position prior to maturity. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
effectively hedge its securities and might in some cases require the Fund to
deposit cash to meet applicable margin requirements. The Fund will enter into an
option or futures position only if it appears to be a liquid investment.
The Fund has undertaken with a state securities authority that, for so
long as its shares are required to be registered for sale in such state, the
Fund will invest only in options and futures that are issued by the Options
Clearing Corporation or offered through the facilities of a national securities
association or listed on a national securities or commodities exchange, except
that the Fund may invest in unlisted options or futures when the desired options
or
9
<PAGE>
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 liquidity, high
rates of inflation, significant price volatility of portfolio holdings and high
levels of external debt in the relevant country.
Although the Fund may invest in securities denominated in foreign
currencies, the Fund values its securities and other assets in U.S. dollars. As
a result, the net asset value of the Fund's shares may fluctuate with U.S.
dollar exchange rates as well as with price changes of the Fund's securities in
the various local markets and currencies. Thus, an increase in the value of the
U.S. dollar compared to the currencies in which the Fund makes its investments
could reduce the effect of increases and magnify the effect of decreases in the
prices of the Fund's securities in their local markets. Conversely, a decrease
in the value of the U.S. dollar will have the opposite effect of magnifying the
effect of increases and reducing the effect of decreases in the prices of the
Fund's securities in the local markets.
Currency Transactions
The Fund's dealings in forward currency exchange contracts will be
limited to hedging involving either specific transactions or aggregate portfolio
positions. A forward currency contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are not commodities and are entered into
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. Although spot and forward contracts
will be used primarily to protect the Fund from adverse currency movements, they
also involve the risk that anticipated currency movements will not be accurately
predicted, which may result in losses to the Fund. This method of protecting the
value of the Fund's portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange that can be achieved at
some future point in time. Although such contracts tend to minimize the risk of
loss due to a decline in the value of hedged currency, they tend to limit any
potential gain that might result should the value of such currency increase.
10
<PAGE>
Repurchase Agreements
The Fund may enter into repurchase agreements. Repurchase agreements
occur when the Fund acquires a security and the seller, which may be either (i)
a primary dealer in U.S. Government securities or (ii) an FDIC-insured bank
having gross assets in excess of $500 million, simultaneously commits to
repurchase it at an agreed-upon price on an agreed-upon date within a specified
number of days (usually not more than seven) from the date of purchase. The
repurchase price reflects the purchase price plus an agreed-upon market rate of
interest which is unrelated to the coupon rate or maturity of the acquired
security. The Fund will only enter into repurchase agreements involving U.S.
Government securities. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
Repurchase agreements will be limited to 30% of the Fund's total assets, except
that repurchase agreements extending for more than seven days when combined with
other illiquid securities will be limited to 10% of the Fund's total assets.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. However, the
Fund may not engage in reverse repurchase agreements in excess of 5% of the
Fund's total assets. In a reverse repurchase agreement the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed-upon rate. The ability to use reverse
repurchase agreements may enable, but does not ensure the ability of, the Fund
to avoid selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
11
<PAGE>
Swap Arrangements
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below. In an
interest rate swap the Fund could agree for a specific period to pay a bank or
investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an assumed figure selected by the parties for this
purpose) in exchange for agreement by the bank or investment banker to pay the
Fund a fixed rate of interest on the notional principal amount. In a currency
swap the Fund would agree with the other party to exchange cash flows based on
the relative differences in values of a notional amount of two (or more)
currencies; in an index swap, the Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices. Purchase
of a cap entitles the purchaser to receive payments from the seller on a
notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an agreed
upon interest rate or amount. A collar combines a cap and a floor.
Most swaps entered into by the Fund will be on a net basis; for
example, in an interest rate swap, amounts generated by application of the fixed
rate and the floating rate to the notional principal amount would first offset
one another, with the Fund either receiving or paying the difference between
such amounts. In order to be in a position to meet any obligations resulting
from swaps, the Fund will set up a segregated custodial account to hold
appropriate liquid assets, including cash; for swaps entered into on a net
basis, assets will be segregated having a daily net asset value equal to any
excess of the Fund's accrued obligations over the accrued obligations of the
other party, while for swaps on other than a net basis assets will be segregated
having a value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a portion of the Fund's portfolio.
However, the Fund may enter into such arrangements for income purposes to the
extent permitted by the Commodities Futures Trading Commission for entities
which are not commodity pool operators, such as the Fund. In entering a swap
arrangement, the Fund is dependent upon the creditworthiness and good faith of
the counterparty. The Fund attempts to reduce the risks of nonperformance by the
counterparty by dealing only with established, reputable institutions. The swap
market is still relatively new and emerging; positions in swap arrangements may
become illiquid to the extent that nonstandard arrangements with one
counterparty are not readily transferable to another counterparty or if a market
for the transfer of swap positions does not develop. The use of interest rate
swaps is a highly specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio securities
transactions. If the Investment Manager is incorrect in its forecasts of market
values, interest rates and other applicable factors, the investment performance
of the Fund would diminish compared with what it would have been if these
investment techniques were not used. Moreover, even if the Investment Manager is
correct in its forecast, there is a risk that the swap position may correlate
imperfectly with the price of the asset or liability being hedged.
12
<PAGE>
When-Issued Securities
The Fund may purchase "when-issued" equity securities, which are traded
on a price basis prior to actual issuance. Such purchases will be made only to
achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year or
more; during this period dividends on equity securities are not payable. No
income accrues to the Fund prior to the time it takes delivery. A frequent form
of when-issued trading occurs when corporate securities to be created by a
merger of companies are traded prior to the actual consummation of the merger.
Such transactions may involve a risk of loss if the value of the securities fall
below the price committed to prior to the actual issuance. The Trust's custodian
will establish a segregated account for the Fund when it purchases securities on
a when-issued basis consisting of cash or liquid securities equal to the amount
of the when-issued commitments. Securities transactions involving delayed
deliveries or forward commitments are frequently characterized as when-issued
transactions and are similarly treated by the Fund.
Rule 144A Securities
Subject to the percentage limitation on illiquid and restricted
securities noted above, the Fund may buy or sell restricted securities in
accordance with Rule 144A under the Securities Act of 1933 ("Rule 144A
Securities"). Securities may be resold pursuant to Rule 144A under certain
circumstances only to qualified institutional buyers as defined in the rule, and
the markets and trading practices for such securities are relatively new and
still developing; depending on the development of such markets, such Rule 144A
Securities may be deemed to be liquid as determined by or in accordance with
methods adopted by the Trustees. Under such methods the following factors are
considered, among others: the frequency of trades and quotes for the security,
the number of dealers and potential purchasers in the market, marketmaking
activity, and the nature of the security and marketplace trades. Investments in
Rule 144A Securities could have the effect of increasing the level of the Fund's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing such securities. Also, the Fund may be
adversely impacted by the possible illiquidity and subjective valuation of such
securities in the absence of a market for them.
The Fund has undertaken with a state securities authority that, for so
long as the Fund's shares are required to be registered for sale in such state,
the Fund's investments in restricted securities, excluding restricted securities
eligible for resale pursuant to Rule 144A or Regulation S under the Securities
Act of 1933, will be limited to 5% of total assets.
Industry Classifications
In determining how much of the Fund's portfolio is invested in a given
industry, the following industry classifications are currently used. Securities
issued or guaranteed as to principal or interest by the U.S. Government or its
agencies or instrumentalities or mixed-ownership Government corporations or
sponsored enterprises (including repurchase agreements involving U.S. Government
securities to the extent excludable under relevant regulatory
13
<PAGE>
interpretations) are excluded. Securities issued by foreign governments are also
excluded. 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 and credit card receivables. "Asset-backed--Mortgages"
includes private pools of nongovernment backed mortgages.
<TABLE>
<CAPTION>
Basic Industries Consumer Staple Science & Technology
- ---------------- --------------- --------------------
<S> <C> <C>
Chemical Business Service Aerospace
Diversified Container Computer Software & 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 Airline
Gas Marketing Automotive
Gas Transmission Oil Production Building
Telephone Oil Service Hotel & Restaurant
Photography
Other Finance Recreation
Trust Certificates - Bank Retail Trade
Government Related Lending Financial Service Textile & Apparel
Asset-backed--Mortgages Insurance
Asset-backed--Credit Card
Receivables
</TABLE>
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:
14
<PAGE>
(bullet) direct obligations of the U.S. Treasury, i.e., U.S. Treasury bills,
notes, certificates and bonds;
(bullet) obligations of U.S. Government agencies or instrumentalities such as
the Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal
National Mortgage Association, the Government National Mortgage
Association and the Federal Home Loan Mortgage Corporation; and
(bullet) obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a
variety of ways by the U.S. Government, its agencies or instrumentalities. Some
of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. Other obligations, such as those of the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government to
purchase certain obligations of agencies or instrumentalities, although the U.S.
Government has no legal obligation to do so. Obligations such as those of the
Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation are backed
by the credit of the agency or instrumentality issuing the obligations. Certain
obligations of Resolution Funding Corporation, a mixed-ownership Government
corporation, are backed with respect to interest payments by the U.S. Treasury,
and with respect to principal payments by U.S. Treasury obligations held in a
segregated account with a Federal Reserve Bank. Except for certain
mortgage-related securities, the Fund will only invest in obligations issued by
mixed-ownership Government corporations where such securities are guaranteed as
to payment of principal or interest by the U.S. Government or a U.S. Government
agency or instrumentality, and any unguaranteed principal or interest is
otherwise supported by U.S. Government obligations held in a segregated account.
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
15
<PAGE>
Growth Receipts" ("TIGRs") and "Certificates of Accrual on Treasury Securities"
("CATS"), and may not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Bank Money Investments. Bank money investments include but are not
limited to certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are generally short-term (i.e., less than one year),
interest-bearing negotiable certificates issued by commercial banks or savings
and loan associations against funds deposited in the issuing institution. A
banker's acceptance is a time draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods). A banker's acceptance may be
obtained from a domestic or foreign bank, including a U.S. branch or agency of a
foreign bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. The Fund will not invest
in any such bank money investment unless the investment is issued by a U.S. bank
that is a member of the Federal Deposit Insurance Corporation ("FDIC"),
including any foreign branch thereof, a U.S. branch or agency of a foreign bank,
a foreign branch of a foreign bank, or a savings bank or savings and loan
association that is a member of the FDIC and which at the date of investment has
capital, surplus and undivided profits (as of the date of its most recently
published financial statements) in excess of $50 million. The Fund will not
invest in time deposits maturing in more than seven days and will not invest
more than 10% of its total assets in time deposits maturing in two to seven
days.
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under state law. U.S. federal branches or agencies
of foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such branches elect FDIC insurance. Unlike U.S. branches of foreign banks,
U.S. agencies of foreign banks may not accept deposits and thus are not eligible
for FDIC insurance. Both branches and agencies can maintain credit balances,
which are funds received by the office incidental to or 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
16
<PAGE>
company or the affiliated bank is unconditionally liable for the debt
instrument. Commercial paper is usually sold on a discounted basis and has a
maturity at the time of issuance not exceeding nine months.
Commercial Paper Ratings. Commercial paper investments at the time of
purchase will be rated A by Standard & Poor's Corporation ("S&P") or Prime by
Moody's Investor's Service, Inc. ("Moody's"), or, if not rated, issued by
companies having an outstanding long-term unsecured debt issue rated at least A
by S&P or by Moody's. The money market investments in corporate bonds and
debentures (which must have maturities at the date of settlement of one year or
less) must be rated at the time of purchase at least A by S&P or by Moody's.
Commercial paper rated A (highest quality) by S&P is issued by entities which
have liquidity ratios which are adequate to meet cash requirements. Long-term
senior debt is rated A or better, although in some cases BBB credits may be
allowed. The issuer has access to at least two additional channels of borrowing.
Basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances. Typically, the issuer's industry is well established and
the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. The relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1, A-2
or A-3. (Those A-1 issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.
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.
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A: Debt rated A has a strong capacity to pay interest and
repay principal, although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher rated
categories.
BBB: Debt rated BBB is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories.
Plus (+) or Minus (-): The ratings from AA to BBB may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to noncredit risks created by the terms of the
obligation, such as securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only (IO) and principal only (PO) mortgage securities.
Set forth below is a description of Moody's corporate bond and
debenture ratings for securities which are deemed to be investment grade:
Aaa: Bonds which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in the case of Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than in Aaa securities.
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.
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<PAGE>
1, 2 or 3: The ratings from Aa through Baa may be modified by the
addition of a numeral indicating a bond's rank within its rating category.
In the event applicable rating agencies lower the ratings of debt
instruments held by the Fund and the action results in a material decline in the
overall quality of the Fund's portfolio, the situation will be reviewed and
necessary action, if any, will be taken, including changes in the composition of
the portfolio.
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<PAGE>
TRUSTEES AND OFFICERS
The Trustees and principal officers of the Trust, their addresses, and
their principal occupations and positions with certain affiliates of the
Investment Manager are set forth below.
*+Peter C. Bennett, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 58. 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 of State
Street Research & Management Company. Mr. Bennett's other principal business
affiliation is Director, State Street Research Investment Services, Inc.
*+Jesus A. Cabrera, One Financial Center, Boston, MA 02111 serves as
Vice President of the Trust. He is 35. His principal occupation is Vice
President of State Street Research & Management Company. During the past five
years he has also served as Vice President at First Chicago Investment
Management Company.
*+Michael Carmen, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 35. His principal occupation is Vice
President of State Street Research & Management Company. During the past five
years he has also served as a portfolio manager at Montgomery Asset Management,
and as an analyst at State Street Research & Management Company.
*+Rudolph K. Kluiber, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 37. 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 53. 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 70. 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.
- ------------------------------------
* or + See footnotes on page 22
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<PAGE>
+Robert A. Lawrence, Saltonstall & Co., 50 Congress Street, Boston, MA
02109, serves as Trustee of the Trust. He is 70. 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 45. His principal occupation is Executive Vice
President, Treasurer, Chief Financial Officer 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.
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111,
serves as Secretary and General Counsel of the Trust. He is 41. His principal
occupation is Executive Vice President, General Counsel and Secretary of State
Street Research & Management Company. During the past five years he has also
served as Senior Vice President of State Street Research & Management Company
and as Senior Vice President, General Counsel and Assistant Secretary of The
Boston Company, Inc., Boston Safe Deposit and Trust Company and The Boston
Company Advisors, Inc. Mr. McNamara's other principal business affiliations
include Senior Vice President, Clerk and General Counsel of State Street
Research Investment Services, Inc.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 64. 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 72. 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 58. 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.
- -----------------------------------
* or + See footnotes on page 22
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<PAGE>
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
59. 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 54. 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 of New England Mutual Life Insurance Company. Mr. Verni's other
principal business affiliations include Chairman of the Board and Director of
State Street Research Investment Services, Inc., and until February, 1996, prior
positions as President and Chief Executive Officer.
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 72. 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.
*+James M. Weiss, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 50. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as President and Chief Investment Officer of IDS
Advisory Group, Inc. and as Senior Vice President of Stein, Roe & Farnham.
- ---------------------------------
* 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, State Street Research Financial Trust,
State Street Research Income Trust, State Street Research Money Market
Trust, State Street Research Tax-Exempt Trust, State Street Research
Capital Trust, State Street Research Exchange Trust, State Street
Research Growth Trust, State Street Research Master Investment Trust,
State Street Research Securities Trust, State Street Research
Portfolios, Inc. and Metropolitan Series Fund, Inc.
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<PAGE>
As of December 31, 1996, the following persons or entities were the
record and/or beneficial owners of the approximate amounts of each class of
shares of the Fund as set forth beside their names:
Shareholder %
----------- -
Class A Merrill Lynch 30.1
Class B Merrill Lynch 56.1
Class C Chase Manhattan Bank, N.A. 46.7
G. F. Bennett 13.8
D. F. Wade 7.8
Class D Merrill Lynch 55.2
The full name and address of each of the above persons or entities are
as follows:
Merrill Lynch, Pierce, Fenner & Smith, Inc. (a)
One Liberty Plaza
165 Broadway
New York, New York 10080
G. F. Bennett
c/o State Street Research
Shareholder Services
One Financial Center
Boston, Massachusetts 02111
D. F. Wade
c/o State Street Research
Shareholder Services
One Financial Center
Boston, Massachusetts 02111
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<PAGE>
Chase Manhattan Bank, N.A. (a)(b)
770 Broadway
New York, New York 10003
- ----------------------------------
(a) The Fund believes that such entity does not have beneficial ownership of
such shares.
(b) Chase Manhattan Bank, N.A. holds such shares as trustee or custodian under
certain employee benefit plans serviced by Metropolitan.
As of December 31, 1996, the Trustees and principal officers of the
Trust as a group owned approximately 3.1% and 1.6%, respectively, of the
Fund's outstanding Class A and Class C shares.
Ownership of 25% or more of a voting security is deemed "control" as
defined in the 1940 Act. So long as 25% of a class of the Fund's shares is so
owned, such owners will be presumed to be in control of such class of shares for
purposes of voting on certain matters submitted to a vote of shareholders, such
as any Distribution Plan for a given class.
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<PAGE>
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 $7,800 $ 59,375
Robert A. Lawrence $7,800 $ 92,125
Dean O. Morton $8,400 $ 96,125
Thomas L. Phillips $7,800 $ 59,375
Toby Rosenblatt $7,800 $ 59,375
Michael S. Scott Morton $9,000 $100,325
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $8,400 $ 63,375
(a) For the Fund's fiscal year ended September 30, 1996. Includes compensation
from multiple Series of the Trust. See "Distribution of Shares" for a
listing of series.
(b) Includes compensation on behalf of 31 Funds representing all series of
investment companies for which the Investment Manager serves as the primary
investment adviser, series of Metropolitan Series Fund, Inc. for which the
Investment Manager serves as sub-investment adviser, and series of State
Street Research Portfolios, Inc., for which State Street Research
Investment Services, Inc. serves as distributor. "Total Compensation from
Trust and Complex Paid to Trustees" is for the 12 months ended December 31,
1996. The Trust does not provide any pension or retirement benefits for the
Trustees.
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Advisory
Agreement provides that the Investment Manager shall furnish the Fund with an
investment program, suitable office space and facilities and such investment
advisory, research and administrative services as may be required from time to
time. The Investment Manager compensates all executive and clerical personnel
and Trustees of the Trust if such persons are employees of the Investment
Manager or its affiliates. The Investment Manager is an indirect wholly owned
subsidiary of Metropolitan.
The advisory fee payable monthly by the Fund to the Investment Manager
is computed as a percentage of the average of the value of the net assets of the
Fund, as determined at the close of the New York Stock Exchange (the "NYSE") on
each day the NYSE is open for
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<PAGE>
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 fiscal years ended September 30, 1994, 1995 and 1996, the Fund's investment
advisory fee prior to the assumption of fees or expenses was $813,880,
$1,750,735 and $4,024,320, respectively. For the same periods, the voluntary
reduction of fees or assumption of expenses amounted to $26,269, $0 and $0,
respectively.
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund from year to year as long as it is approved at least
annually both (i) by a vote of a majority of the outstanding voting securities
of the Fund (as defined in the 1940 Act) or by the Trustees of the Trust, and
(ii) in either event by a vote of a majority of the Trustees who are not parties
to the Advisory Agreement or "interested persons" of any party thereto, cast in
person at a meeting called for the purpose of voting on such approval. The
Advisory Agreement may be terminated on 60 days written notice by either party
and will terminate automatically in the event of its assignment, as defined
under the 1940 Act and regulations thereunder. Such regulations provide that a
transaction which does not result in a change of actual control or management of
an adviser is not deemed an assignment.
Under a Shareholders' Administrative Services Agreement between the
Trust and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Fund, and is entitled to
reimbursements of its costs for providing such services. Under certain
arrangements for Metropolitan to provide subadministration services,
Metropolitan may receive a fee for the maintenance of certain share ownership
records for participants in sponsored arrangements, such as employee benefit
plans, through or under which the Fund's shares may be purchased.
Under the Code of Ethics of the Investment Manager, its employees in
Boston, where investment management operations are conducted, are only permitted
to engage in personal securities transactions in accordance with certain
conditions relating to an employee's position, the identity of the security, the
timing of the transaction, and similar factors. Such employees must report their
personal securities transactions quarterly and supply broker confirmations of
such transactions to the Investment Manager.
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.
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<PAGE>
Public Offering Price. The public offering price for each class of
shares of the Fund is based on their net asset value determined as of the close
of the NYSE on the day the purchase order is received by State Street Research
Shareholder Services provided that the order is received prior to the close of
the NYSE on that day; otherwise the net asset value used is that determined as
of the close of the NYSE on the next day it is open for unrestricted trading.
When a purchase order is placed through a dealer, that dealer is responsible for
transmitting the order promptly to State Street Research Shareholder Services in
order to permit the investor to obtain the current price. Any loss suffered by
an investor which results from a dealer's failure to transmit an order promptly
is a matter for settlement between the investor and the dealer.
Reduced Sales Charges. For purposes of determining whether a purchase
of Class A shares qualifies for reduced sales charges, the term "person"
includes: (i) an individual, or an individual combining with his or her spouse
and their children and purchasing for his, her or their own account; (ii) a
"company" as defined in Section 2(a)(8) of the 1940 Act; (iii) a trustee or
other fiduciary purchasing for a single trust estate or single fiduciary account
(including a pension, profit sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code);
(iv) a tax-exempt organization under Section 501(c)(3) or (13) of the Internal
Revenue Code; and (v) an employee benefit plan of a single employer or of
affiliated employers.
Investors may purchase Class A shares of the Fund at reduced sales
charges by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds" as
designated by the Distributor within a 13-month period. The sales charge
applicable to each purchase made pursuant to a Letter of Intent will be that
which would apply if the total dollar amount set forth in the Letter of Intent
were being bought in a single transaction. Purchases made within a 90-day period
prior to the execution of a Letter of Intent may be included therein; in such
case the date of the earliest of such purchases marks the commencement of the
13-month period.
An investor may include toward completion of a Letter of Intent the
value (at the current public offering price) of all of his or her Class A shares
of the Fund and of any of the other Class A shares of Eligible Funds held of
record as of the date of his or her Letter of Intent, plus the value (at the
current offering price) as of such date of all of such shares held by any
"person" described herein as eligible to join with the investor in a single
purchase. 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
27
<PAGE>
by the investor. All dividends and capital gains distributions with respect to
the escrowed shares will be credited to the investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the Fund and Class A shares of
the other Eligible Funds owned as of the purchase date by the investor plus the
value (at the current public offering price) of all such shares owned as of such
date by any "person" described herein as eligible to join with the investor in a
single purchase. Class B, Class C and Class D shares may also be included in the
combination under certain circumstances. Investors must submit sufficient
information to show that they qualify for the Right of Accumulation.
Class C Shares. Class C shares are currently available to certain
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants (currently a minimum of 100 eligible
employees), service arrangements, or similar factors; insurance companies;
investment companies; endowment funds of nonprofit organizations with
substantial minimum assets (currently a minimum of $10,000,000); 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.
NET ASSET VALUE
The net asset values of the shares of the Fund are determined once
daily as of the close of the New York Stock Exchange ("NYSE"), ordinarily 4 P.M.
New York City time, Monday through Friday, on each day during which the NYSE is
open for unrestricted trading. The NYSE is currently closed for New Year's Day,
Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is computed by dividing the
sum of the market value of the securities held by the Fund plus any cash or
other assets minus all
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<PAGE>
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 with the use of such pricing services as may be deemed appropriate or
methodologies approved by the Trustees.
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.
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<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
fiscal years ended September 30, 1995 and 1996 were 214.59% and 215.07%,
respectively.
Brokerage Allocation
The Investment Manager's policy is to seek for its clients, including
the Fund, what in the Investment Manager's judgment will be the best overall
execution of purchase or sale orders and the most favorable net prices in
securities transactions consistent with its judgment as to the business
qualifications of the various broker or dealer firms with whom the Investment
Manager may do business, and the Investment Manager may not necessarily choose
the broker offering the lowest available commission rate. Decisions with respect
to the market where the transaction is to be completed, to the form of
transaction (whether principal or agency), and to the allocation of orders among
brokers or dealers are made in accordance with this policy. In selecting brokers
or dealers to effect portfolio transactions, consideration is given to their
proven integrity and financial responsibility, their demonstrated execution
experience and capabilities both generally and with respect to particular
markets or securities, the competitiveness of their commission rates in agency
transactions (and their net prices in principal transactions), their willingness
to commit capital, and their clearance and settlement capability. The Investment
Manager makes every effort to keep informed of commission rate structures and
prevalent bid/ask spread characteristics of the markets and securities in which
transactions for the Fund occur. Against this background, the Investment Manager
evaluates the reasonableness of a commission or a net price with respect to a
particular transaction by considering such factors as difficulty of execution or
security positioning by the executing firm. The Investment Manager may or may
not solicit competitive bids based on its judgment of the expected benefit or
harm to the execution process for that transaction.
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<PAGE>
When it appears that a number of firms could satisfy the required
standards in respect of a particular transaction, consideration may also be
given to services other than execution services which certain of such firms have
provided in the past or may provide in the future. Negotiated commission rates
and prices, however, are based upon the Investment Manager's judgment of the
rate which reflects the execution requirements of the transaction without regard
to whether the broker provides services in addition to execution. Among such
other services are the supplying of supplemental investment research; general
economic, political and business information; analytical and statistical data;
relevant market information, quotation equipment and services; reports and
information about specific companies, industries and securities; purchase and
sale recommendations for stocks and bonds; portfolio strategy services;
historical statistical information; market data services providing information
on specific issues and prices; financial publications; proxy voting data and
analysis services; technical analysis of various aspects of the securities
markets, including technical charts; computer hardware used for brokerage and
research purposes; computer software and databases, including those used for
portfolio analysis and modeling; and portfolio evaluation services and relative
performance of accounts.
Certain nonexecution services provided by broker-dealers may in turn be
obtained by the broker-dealers from third parties who are paid for such services
by the broker-dealers. The Investment Manager has an investment of less than ten
percent of the outstanding equity of one such third party which provides
portfolio analysis and modeling and other research and investment
decision-making services integrated into a trading system developed and licensed
by the third party to others. The Investment Manager could be said to benefit
indirectly if in the future it allocates brokerage to a broker-dealer who in
turn pays this third party for services to be provided to the Investment
Manager.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. Some services may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Investment Manager allocates the cost
of such services to determine the appropriate proportion of the cost which is
allocable to purposes other than research or investment decision-making and is
therefore paid directly by the Investment Manager. Some research and execution
services may benefit the Investment Manager's clients as a whole, while others
may benefit a specific segment of clients. Not all such services will
necessarily be used exclusively in connection with the accounts which pay the
commissions to the broker-dealer producing the services.
The Investment Manager has no fixed agreements or understanding with
any broker-dealer as to the amount of brokerage business which that firm may
expect to receive for services supplied to the Investment Manager or otherwise.
There may be, however, understandings with certain firms that in order for such
firms to be able to continuously supply certain services, they need to receive
allocation of a specified amount of brokerage business. These understandings are
honored to the extent possible in accordance with the policies set forth above.
31
<PAGE>
It is not the Investment Manager's policy to intentionally pay a firm a
brokerage commission higher that that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided. However, the Investment Manager is aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, the Investment Manager relies on the provisions of
Section 28(e) of the Securities Act of 1934, to the extent applicable. Brokerage
commissions paid by the Fund in secondary trading during the fiscal years ended
September 30, 1994, 1995 and 1996, amounted to $431,000, $990,000 and
$2,032,000, respectively. The Investment Manager believes that the amounts of
brokerage commissions paid by the Fund for the two most recent fiscal years were
significantly higher than during the previous year because of the investment of
proceeds from the increased sale of Fund shares, and general investment activity
for a larger portfolio during a volatile period for the kinds of securities held
by the Fund, when both profit taking and purchase opportunities were presented.
During and at the end of its most recent fiscal year, the Fund held in its
portfolio no securities of any entity that might be deemed to be a regular
broker-dealer of the Fund as defined under the 1940 Act.
In the case of the purchase of fixed income securities in underwriting
transactions, the Investment Manager follows any instructions received from its
clients as to the allocation of new issue discounts, selling concessions and
designations to brokers or dealers which provide the client with research,
performance evaluation, master trustee and other services. In the absence of
instructions from the client, the Investment Manager may make such allocations
to broker-dealers which have provided the Investment Manager with research and
brokerage services.
When more than one client of the Investment Manager is seeking to buy
or sell the same security, the sale or purchase is carried out in a manner which
is considered fair and equitable to all accounts. In allocating investments
among various clients (including in what sequence orders for trades are placed),
the Investment Manager will use its best business judgment and will take into
account such factors as the investment objectives of the clients, the amount of
investment funds available to each, the amount already committed for each client
to a specific investment and the relative risks of the investments, all in order
to provide on balance a fair and equitable result to each client over time.
Although sharing in large transactions may sometimes affect price or volume of
shares acquired or sold, overall it is believed there may be an advantage in
execution. The Investment Manager may follow the practice of grouping orders of
various clients for execution to get the benefit of lower prices or commission
rates. In certain cases where the aggregate order may be executed in a series of
transactions at various prices, the transactions are allocated as to amount and
price in a manner considered equitable to each so that each receives, to the
extent practicable, the average price of such transactions. Exceptions may be
made based on such factors as the size of the account and the size of the trade.
For example, the Investment Manager may not aggregate trades where it believes
that it is in the best interests of clients not to do so, including situations
where aggregation might result in a large number of small transactions with
consequent increased custodial and other transactional costs which may
disproportionately impact smaller
32
<PAGE>
accounts. Such disaggregation, depending on the circumstances, may or may not
result in such accounts receiving more or less favorable execution relative to
other clients.
CERTAIN TAX MATTERS
Federal Income Taxation of the Fund
The Fund intends to qualify and elect to be treated each taxable year
as a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), although it cannot give complete
assurance that it will do so. Accordingly, the Fund must, among other things,
(a) derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of the
following held for less than three months (the "30% test"): (i) stock or
securities; (ii) options, futures, or forward contracts (other than options,
futures, or forward contracts on foreign currencies) or (iii) foreign currencies
(or options, futures, or forward contracts on foreign currencies) but only if
such currencies (or options, futures, or forward contracts) are not directly
related to the Fund's principal business of investing in stocks or securities
(or options and futures with respect to stocks or securities); (c) satisfy
certain diversification requirements and (d) in order to be entitled to utilize
the dividends paid deduction, distribute annually at least 90% of its investment
company taxable income (determined without regard to the deduction for dividends
paid).
The 30% test will limit the extent to which the Fund may sell
securities held for less than three months, write options which expire in less
than three months, and effect closing transactions with respect to call or put
options that have been written or purchased within the preceding three months.
(If the Fund purchases a put option for the purpose of hedging an underlying
portfolio security, the acquisition of the option is treated as a short sale of
the underlying security unless, for purposes only of the 30% test, the option
and the security are acquired on the same date). Finally, as discussed below,
this requirement may also limit investments by the Fund in options on stock
indices, listed options on nonconvertible debt securities, futures contracts,
options on interest rate futures contracts and certain foreign currency
contracts.
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of the Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in
33
<PAGE>
excess of current or accumulated earnings and profits, would receive a return of
capital that would reduce the basis of their shares of the Fund.
The Fund will be liable for a nondeductible 4% excise tax on amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement. To avoid the tax, during each calendar year the Fund
must distribute an amount equal to at least 98% of the sum of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, and its capital gain net income for the 12-month period ending on October
31, in addition to any undistributed portion of the respective balances from the
prior year. The Fund intends to make sufficient distributions to avoid this 4%
excise tax.
Federal Income Taxation of the Fund's Investments
Original Issue Discount. For federal income tax purposes, debt
securities purchased by the Fund may be treated as having original issue
discount. Original issue discount represents interest for federal income tax
purposes and can generally be defined as the excess of the stated redemption
price at maturity of a debt obligation over the issue price. Original issue
discount is treated for federal income tax purposes as income earned by the
Fund, whether or not any income is actually received, and therefore is subject
to the distribution requirements of the Code. Generally, the amount of original
issue discount is determined on the basis of a constant yield to maturity which
takes into account the compounding of accrued interest. Under section 1286 of
the Code, an investment in a stripped bond or stripped coupon may result in
original issue discount.
Debt securities may be purchased by the Fund at a discount that exceeds
the original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for income tax
purposes. In the case of any debt security issued after July 18, 1984, having a
fixed maturity date of more than one year from the date of issue and having
market discount, the gain realized on disposition will be treated as interest
income to the extent it does not exceed the accrued market discount on the
security (unless the Fund elects to include such accrued market discount in
income in the tax year to which it is attributable). Generally, market discount
is accrued on a daily basis. The Fund may be required to capitalize, rather than
deduct currently, part or all of any direct interest expense incurred to
purchase or carry any debt security having market discount, unless the Fund
makes the election to include market discount currently. Because the Fund must
include original issue discount in income, it will be more difficult for the
Fund to make the distributions required to maintain its status as a regulated
investment company under Subchapter M of the Code and to avoid the 4% excise tax
described above.
Options and Futures Transactions. Certain of the Fund's investments may
be subject to provisions of the Code that (i) require inclusion of unrealized
gains or losses in the Fund's income for purposes of the 90% test, the 30% test,
the excise tax and the distribution requirements applicable to regulated
investment companies; (ii) defer recognition of realized losses; and (iii)
characterize both realized and unrealized gain or loss as short-term or
long-
34
<PAGE>
term gain or loss. Such provisions generally apply to, among other investments,
options on debt securities, indices on securities and futures contracts.
Federal Income Taxation of Shareholders
Dividends paid by the Fund may be eligible for the 70%
dividends-received deduction for corporations. The percentage of the Fund's
dividends eligible for such tax treatment may be less than 100% to the extent
that less than 100% of the Fund's gross income may be from qualifying dividends
of domestic corporations. Any dividend declared in October, November or December
and made payable to shareholders of record in any such month is treated as
received by such shareholders on December 31, provided that the Fund pays the
dividend during January of the following calendar year.
Distributions by the Fund result in a reduction in the fair market
value of the Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as ordinary income or long-term capital gain, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
DISTRIBUTION OF SHARES OF THE FUND
State Street Research Capital Trust is currently comprised of the
following series: State Street Research Capital Fund, State Street Research
Emerging Growth Fund (formerly, State Street Research Small Capitalization
Growth Fund) and State Street Research Aurora Fund (formerly, 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,
35
<PAGE>
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class D shares). The Distributor may reallow all
or portions of such sales charges as concessions to dealers. For the fiscal
years ended September 30, 1994, 1995, and 1996, total sales charges on Class A
shares paid to the Distributor amounted to $392,042, $799,572 and $1,597,620,
respectively. For the same periods the Distributor retained $18,627, $92,294 and
$188,067, respectively, after reallowance of concessions to dealers.
The differences in the price at which the Fund's Class A shares are
offered due to scheduled variations in sales charges, as described in the Fund's
Prospectus, result from cost savings inherent in economies of scale. Management
believes that the cost of sales efforts of the Distributor and broker-dealers
tends to decrease as the size of purchases increases, or does not involve any
incremental sales expenses as in the case of, for example, exchanges,
reinvestments or dividend investments at net asset value. Similarly, no
significant sales effort is necessary for sales of shares at net asset value to
certain Directors, Trustees, officers, employees, their relatives and other
persons directly or indirectly related to the Fund or associated entities. Where
shares of the Fund are offered at a reduced sales charge or without a sales
charge pursuant to sponsored arrangements and managed fee-based programs, the
amount of the sales charge reduction will similarly reflect the anticipated
reduction in sales expenses associated with such arrangements. The reduction in
sales expenses, and therefore the reduction in sales charges, will vary
depending on factors such as the size and other characteristics of the
organization or program, and the nature of its membership or the participants.
The Fund reserves the right to make variations in, or eliminate, sales charges
at any time or to revise the terms of or to suspend or discontinue sales
pursuant to sponsored arrangements at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission based on the aggregate of such sales. Such
commission also is payable to authorized securities dealers upon sales of Class
A shares made pursuant to a Letter of Intent to purchase shares having a net
asset value of $1,000,000 or more. Shares sold with such commissions payable are
subject to a one-year contingent deferred sales charge of 1% 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:
36
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended September 30, 1996 Ended September 30, 1995 Ended September 30, 1994
------------------------ ------------------------ ------------------------
Contingent Commissions Contingent Commissions Contingent Commissions
Deferred Paid to Deferred Paid to Deferred Paid to
Sales Charges Dealers Sales Charges Dealers Sales Charges Dealers
------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Class A $ 0 $ 1,409,553 $ 0 $ 707,278 $ 0 $ 373,415
Class B $312,620 $ 6,661,535 $192,789 $3,836,570 $ 9,484 $ 2,308,457
Class D $ 29,193 $ 929,607 $ 9,688 $ 410,729 $ 343 $ 343,572
</TABLE>
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "Distribution Plan") under which the Fund may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of Class A, Class B and Class D shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to underwriters, securities dealers
and others engaged in the sale of shares, including payments to the Distributor
to be used to pay commissions and/or reimbursement to securities dealers (which
securities dealers may be affiliates of the Distributor) engaged in the
distribution and marketing of shares and furnishing assistance to investors on
an ongoing basis, (2) reimbursement of direct out-of-pocket expenditures
incurred by the Distributor in connection with the distribution and marketing of
shares including expenses relating to the formulation and implementation of
marketing strategies and promotional activities such as direct mail promotions
and television, radio, newspaper, magazine and other mass media advertising, the
preparation, printing and distribution of Prospectuses of the Fund and reports
for recipients other than existing shareholders of the Fund, and obtaining such
information, analyses and reports with respect to marketing and promotional
activities and investor accounts as the Fund may, from time to time, deem
advisable, and (3) reimbursement of expenses incurred by the Distributor in
connection with the servicing of shareholder accounts including payments to
securities dealers and others in consideration of the provision of personal
services to investors and/or the maintenance or servicing of shareholder
accounts and expenses associated with the provision of personal services by the
Distributor directly to investors. In addition, the Distribution Plan is deemed
to authorize the Distributor and the Investment Manager to make payments out of
general profits, revenues and other sources to underwriters, securities dealers
and others in connection with sales of shares, to the extent, if any, that such
payments may be deemed to be within the scope of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class D shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class D
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class D shares (as the case may be) to make payments for personal
services and/or the maintenance or servicing 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
37
<PAGE>
rendering service to shareholders on an ongoing basis. Such amounts are based on
the net asset value of shares of the Fund held by such dealers as nominee for
their customers or which are owned directly by such customers for so long as
such shares are outstanding and the Distribution Plan remains in effect with
respect to the Fund. Any amounts received by the Distributor and not so
allocated may be applied by the Distributor as reimbursement for expenses
incurred in connection with the servicing of investor accounts. The distribution
and servicing expenses of a particular class will be borne solely by that class.
During the fiscal year ended September 30, 1996, the Fund paid the
Distributor fees under the Distribution Plan and the Distributor allocated such
payments on behalf of the Fund as follows:
Class A Class B Class D
-------- ---------- ----------
Advertising $ 0 $ 35,147 $ 2,882
Printing and mailing
of prospectuses to
other than current
shareholders 0 13,583 1,114
Compensation to dealers 202,813 2,514,505 1,364,294
Compensation to sales
personnel 0 152,173 12,480
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses: marketing; general 0 84,598 6,938
Carryforward 0 22,098 0
-------- ---------- ----------
Total fees $202,813 $2,822,104 $1,387,708
======== ========== ==========
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.
38
<PAGE>
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Fund will make alternative
arrangements for such services for shareholders who acquired shares through such
institutions.
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") of the Class
A, Class B, Class C and Class D shares of the Fund will be calculated as set
forth below. Total return is computed separately for each class of shares of the
Fund. Performance data for a specified class includes periods prior to the
adoption of class designations. Shares of the Fund had no class designations
until February 17, 1993, when Class A and Class C designations were assigned,
and March 15, 1993, when Class B and Class D designations were assigned based on
the pricing and Rule 12b-1 fees applicable to shares sold thereafter.
The performance data reflects Rule 12b-1 fees and sales charges as set
forth below:
<TABLE>
<CAPTION>
Rule 12b-1 Fees Sales Charges
----------------------------------------------- -----------------------------------------
Class Amount Period
- ----- ------ ------
<S> <C> <C> <C>
A 0.25% February 17, 1993 Maximum 4.5% sales charge reflected
to present; fee will reduce
performance for periods after
February 17, 1993
B 1.00% March 15, 1993 to present; fee 1- and 5-year periods reflect a 5% and a
will reduce performance for 2% contingent deferred sales charge,
periods after March 15, 1993 respectively
C 0.00% Since commencement of None
operations to present
D 1.00% March 15, 1993 to present; fee 1-year period reflects a 1% contingent
will reduce performance for deferred sales charge
periods after March 15, 1993
</TABLE>
All calculations of performance data in this section reflect the
voluntary measures, if any, by the Fund's affiliates to reduce fees or expenses
relating to the Fund; see "Accrued Expenses" later in this section.
39
<PAGE>
Total Return
The standard total return of each class of the Fund's shares were as
follows:
Five Years One Year
Ten Years Ended Ended Ended
September 30, 1996 September 30, 1996 September 30, 1996
------------------ ------------------ ------------------
Class A 17.27% 19.69% 5.16%
Class B 17.54% 20.04% 4.33%
Class C 17.95% 21.09% 10.41%
Class D 17.55% 20.26% 8.23%
Standard total return is computed separately for each class of shares
by determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value in accordance with the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the
designated period assuming a
hypothetical $1,000 payment made at the
beginning of the designated period
The calculation is based on the further assumptions that the maximum
initial or contingent deferred sales charge applicable to the investment is
deducted, and that all dividends and distributions by the Fund are reinvested at
net asset value on the reinvestment dates during the periods. All accrued
expenses and recurring charges are also taken into account as described later
herein.
Accrued Expenses
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return results take sales charges, if applicable, into account,
although the results do not take into account recurring and nonrecurring charges
for optional services which only certain shareholders elect and which involve
nominal fees, such as the $7.50 fee for wire orders.
40
<PAGE>
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 one, five and
ten years before. In addition, the Fund may provide nonstandardized total return
results for differing periods, such as for the period since the effectiveness of
the Fund's Registration Statement under the Investment Company Act of 1940
(March 25, 1984) and/or without taking sales charges into account. Such
nonstandardized total return is computed as otherwise described under "Total
Return" except the result may or may not be annualized, and as noted, any
applicable sales charge may not be taken into account and therefore not deducted
from the hypothetical initial payment of $1,000 or ending value. For example,
the Fund's nonstandardized total returns for the six months ended September 30,
1996, without taking sales charges into account, were as follows:
Class A 8.86%
Class B 8.50%
Class C 9.08%
Class D 8.49%
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. One Post Office Square, Boston, Massachusetts
02109, serves as the Trust's independent accountants, providing professional
services including (1) audits of certain financial statements, (2) assistance
and consultation in connection with Securities and Exchange Commission filings
and (3) review of the annual income tax returns filed on behalf of the Fund.
41
<PAGE>
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a semiannual
basis, other supplementary financial reports may be made available from time to
time and holders of record may request a copy of a current supplementary report,
if any, by calling State Street Research Shareholder Services.
The following financial statements are for the Fund's fiscal year ended
September 30, 1996:
42
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
INVESTMENT PORTFOLIO
September 30, 1996
Value
Shares (Note 1)
--------------------------------------------- --------- -----------------
COMMON STOCKS 97.6%
Basic Industries 2.1%
Chemical 0.5%
Rhone-Poulenc SA ADR* 126,700 $ 3,547,600
-----------------
Diversified 0.4%
AlliedSignal Inc. 50,500 3,326,688
-----------------
Machinery 1.0%
Thermo Fibergen Inc. Unit* 66,800 843,350
Wolverine Tube Inc.* 150,000 6,450,000
-----------------
7,293,350
-----------------
Metal & Mining 0.2%
Oregon Metallurgical Corp.* 37,200 1,209,000
-----------------
Total Basic Industries 15,376,638
-----------------
Consumer Cyclical 36.0%
Automotive 0.6%
Danaher Corp. 24,800 1,026,100
Dura Automotive Systems Inc.* 12,000 223,500
Penske Motorsports Inc.* 12,500 439,062
Team Rental Group, Inc. Cl. A* 126,000 2,394,000
-----------------
4,082,662
-----------------
Hotel & Restaurant 10.7%
Extended Stay America Inc.* 797,400 16,346,700
HFS Inc.* 522,700 34,955,562
Lone Star Steakhouse & Saloon Inc.* 60,100 1,829,294
Mirage Resorts Inc.* 150,900 3,866,813
Planet Hollywood International, Inc. Cl. A* 15,100 422,800
Rainforest Cafe Inc.* 120,150 3,724,650
Renaissance Hotel Group NV* 42,600 852,000
Sun International Hotels Ltd.* 87,800 4,499,750
Trump Hotels & Casino Resorts Inc.* 485,600 11,290,200
-----------------
77,787,769
-----------------
Recreation 6.4%
Action Performance Companies Inc.* 25,300 325,738
American Radio Systems Corp. Cl. A* 131,200 4,887,200
Ascent Entertainment Group Inc.* 126,200 2,997,250
Chancellor Broadcasting Co. Cl. A* 38,000 1,577,000
Clear Channel Communications Inc.* 105,300 9,319,050
Cox Radio Inc. Cl. A* 28,400 624,800
Evergreen Media Corp. Cl. A 367,650 11,489,062
Gemstar Group Ltd.* 58,300 1,719,850
Golden Bear Golf, Inc. Cl. A* 49,500 977,625
Lin Television Corp.* 89,100 3,653,100
Marker International Inc.* 83,000 809,250
Oakley Inc.* 188,100 7,994,250
Silver King Communications Inc.* 17,000 399,500
-----------------
46,773,675
-----------------
Retail Trade 14.2%
Abercrombie & Fitch Co. Cl. A* 16,400 $ 401,800
Borders Group Inc.* 169,500 6,313,875
BT Office Products International Inc.* 172,900 2,355,763
Corporate Express Inc.* 255,000 9,913,125
Federated Department Stores Inc.* 182,300 6,107,050
Gucci Group NV* 307,300 22,279,250
Home Depot Inc. 225,600 12,831,000
Industrie Natuzzi SPA ADR 37,200 1,729,800
J.C. Penney Inc. 60,400 3,269,150
Just For Feet Inc.* 138,050 6,919,756
Loehmann's, Inc.* 10,800 289,575
Melville Corp. 183,100 8,079,287
Micro Warehouse Inc.* 59,600 1,534,700
Saks Holdings Inc.* 139,100 4,868,500
Staples Inc.* 134,250 2,978,672
Sunglass Hut International Inc.* 821,300 13,089,469
-----------------
102,960,772
-----------------
Textile & Apparel 4.1%
Authentic Fitness Corp. 30,500 373,625
Designer Holdings Ltd.* 17,000 444,125
Fila Holdings SPA ADR 81,000 7,786,125
Men's Wearhouse, Inc.* 388,225 9,705,625
Nautica Enterprises Inc.* 171,900 5,543,775
Tag Heuer International SA ADR* 91,400 1,805,150
Tommy Hilfiger Corp.* 71,000 4,206,750
-----------------
29,865,175
-----------------
Total Consumer Cyclical 261,470,053
-----------------
Consumer Staple 19.3%
Business Service 7.8%
Apache Medical Systems Inc.* 51,600 696,600
HBO & Co. 220,600 14,725,050
Metromail Corp.* 28,900 624,963
Outdoor Systems Inc.* 34,000 1,598,000
Republic Industries Inc.* 704,100 20,418,900
Republic Industries Inc.++* 395,000 11,012,837
Teletech Holdings Inc.* 120,200 4,387,300
Universal Outdoor Holdings Inc.* 79,200 2,851,200
Xeikon NV ADR* 17,500 175,273
-----------------
56,490,123
-----------------
Drug 1.7%
Applied Analytical Industries Inc.* 8,300 188,825
Cephalon Inc.* 143,500 3,461,937
Entremed Inc.* 93,900 1,525,875
Express Scripts Inc. Cl. A* 34,500 1,250,625
Liposome Company, Inc.* 246,800 4,658,350
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
Value
Shares (Note 1)
--------------------------------------------- --------- -----------------
Drug (cont'd)
Magainin Pharmaceuticals Inc.* 67,200 $ 789,600
Matrix Pharmaceuticals Inc.* 37,300 298,400
Myriad Genetics Inc.* 13,100 334,050
-----------------
12,507,662
-----------------
Food & Beverage 2.6%
Pete's Brewing Co.* 8,300 64,325
Starbucks Corp.* 298,200 9,840,600
Boston Beer Company, Inc. Cl. A* 4,100 79,437
Boston Chicken Inc.* 251,800 8,875,950
-----------------
18,860,312
-----------------
Hospital Supply 5.8%
CardioThoracic Systems Inc.* 17,700 360,638
Guidant Corp. 59,500 3,287,375
MedPartners Inc.* 601,483 13,683,738
Medtronic Inc. 46,600 2,988,225
Neopath Inc.* 128,700 2,477,475
Oxford Health Plans Inc.* 116,200 5,780,950
PacifiCare Health Systems, Inc. Cl. B* 77,200 6,677,800
United Healthcare Corp. 175,400 7,301,025
-----------------
42,557,226
-----------------
Personal Care 0.3%
Gargoyles Inc.* 24,800 527,000
Polymer Group Inc.* 99,000 1,386,000
-----------------
1,913,000
-----------------
Printing & Publishing 1.0%
CKS Group Inc.* 4,100 96,863
Hollinger International Inc. Cl. A* 380,800 4,284,000
Hollinger International, Inc. Cv. Pfd. 171,400 1,906,825
World Color Press Inc.* 46,400 1,032,400
-----------------
7,320,088
-----------------
Tobacco 0.1%
Consolidated Cigar Holdings Inc. Cl. A* 24,400 747,250
-----------------
Total Consumer Staple 140,395,661
-----------------
Energy 5.5%
Oil 2.8%
Chesapeake Energy Corp. 25,000 1,565,625
Noble Affiliates Inc. 216,700 9,155,575
Total SA Cl. B ADR 250,500 9,800,812
-----------------
20,522,012
-----------------
Oil Service 2.7%
Ensco International Inc.* 103,500 3,363,750
Newpark Resources, Inc.* 39,500 1,436,813
Oil Service (cont'd)
Noble Drilling Corp.* 407,200 $ 6,158,900
Reading & Bates Corp.* 130,100 3,528,962
Rowan Companies, Inc.* 197,200 3,672,850
Varco International Inc.* 58,300 1,027,538
-----------------
19,188,813
-----------------
Total Energy 39,710,825
-----------------
Finance 4.8%
Bank 1.5%
Bank United Corp. Cl. A* 38,000 945,250
Citicorp 107,300 9,724,062
-----------------
10,669,312
-----------------
Financial Service 2.4%
Associates First Capital Corp. Cl. A 91,700 3,759,700
E*Trade Group Inc.* 73,400 967,962
First USA Paymentech Inc.* 6,900 280,313
Green Tree Financial Corp. 100,600 3,948,550
Hambrecht & Quist Group Inc.* 23,800 461,125
Money Store Inc. 166,500 4,412,250
Starwood Lodging Trust 88,000 3,685,000
-----------------
17,514,900
-----------------
Insurance 0.9%
Everest Reinsurance Holdings Inc. 220,400 5,454,900
W.R. Berkley Corp. 21,900 1,001,925
-----------------
6,456,825
-----------------
Total Finance 34,641,037
-----------------
Science & Technology 26.4%
Aerospace 1.4%
Boeing Co. 105,500 9,969,750
-----------------
Computer Software & Service 12.3%
Ascend Communications Inc.* 124,300 8,219,337
Aware Inc.* 31,500 531,563
C/Net, Inc.* 6,200 116,250
Cascade Communications Corp.* 58,600 4,775,900
CCC Information Services Group Inc.* 27,100 569,100
Check Point Software Technologies Ltd.* 32,600 1,100,250
CheckFree Corp.* 13,300 266,000
Cisco Systems Inc.* 162,900 10,109,981
Compuserve Corp.* 29,400 396,900
Computer Associates International Inc. 58,500 3,495,375
Dassault Systemes SA ADR* 19,900 833,312
Datastream Systems Inc.* 72,300 2,187,075
Excalibur Technologies Corp.* 5,200 88,400
Fore Systems Inc.* 137,400 5,684,925
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
INVESTMENT PORTFOLIO (cont'd)
Value
Shares (Note 1)
--------------------------------------------- --------- -----------------
Computer Software & Service (cont'd)
Geoworks* 199,800 $ 5,194,800
International Network Services* 6,100 214,263
Microsoft Corp.* 78,300 10,325,812
OneWave Inc.* 177,700 2,687,712
Open Market Inc.* 9,100 131,950
Open Text Corp.* 193,800 1,162,800
OpenVision Technologies Inc.* 23,400 216,450
Parametric Technology Corp.* 137,400 6,784,125
SS&C Technologies Inc.* 7,500 75,938
Synopsys Inc.* 89,800 4,142,025
Triple P NV* 105,800 416,588
Westell Technologies Cl. A* 161,100 7,128,675
Western Digital Corp.* 129,800 5,208,225
Wind River Systems Inc.* 103,800 4,593,150
Xionics Document Technologies, Inc.* 23,900 358,500
Xylan Corp.* 24,700 1,339,975
Yahoo!, Inc.* 56,200 1,194,250
-----------------
89,549,606
-----------------
Electronic Components 5.8%
Affymetrix Inc.* 5,300 92,750
CHS Electronics Inc.* 43,600 594,050
Cymer Inc.* 10,500 186,375
Intel Corp. 79,400 7,577,738
Micron Technology Inc. 320,700 9,781,350
Sanmina Corp.* 319,800 12,871,950
Texas Instruments Inc. 204,700 11,284,087
-----------------
42,388,300
-----------------
Electronic Equipment 2.3%
Advanced Fibre Communications, Inc.* 5,600 140,000
Lucent Technologies Inc.* 261,000 11,973,375
Octel Communications Corp.* 134,800 3,909,200
Thermo Optek Corp.* 37,000 536,500
-----------------
16,559,075
-----------------
Office Equipment 4.6%
3Com Corp.* 142,400 8,552,900
Hewlett-Packard Co. 144,500 7,044,375
Orckit Communications Ltd.* 44,700 821,363
Sun Microsystems Inc.* 194,600 12,089,525
U.S. Robotics Corp.* 77,800 5,027,825
-----------------
33,535,988
-----------------
Total Science & Technology 192,002,719
-----------------
Utility 3.5%
Natural Gas 0.5%
Calpine Corp.* 211,500 $ 3,384,000
-----------------
Telephone 3.0%
ADC Telecommunications Inc.* 104,700 6,700,800
Brooks Fiber Properties Inc.* 19,900 572,125
Excel Communications, Inc.* 16,500 521,813
McLeod, Inc.* 41,500 1,369,500
Newbridge Networks Corp.* 24,800 1,581,000
Omnipoint Corp.* 67,900 1,977,587
Telefonica del Peru SA Cl. B ADR 325,000 7,434,375
Teleport Communications Group, Inc. Cl. A* 83,200 1,965,600
-----------------
22,122,800
-----------------
Total Utility 25,506,800
-----------------
Total Common Stocks (Cost $575,296,004) 709,103,733
-----------------
Principal Maturity
Amount Date
------------------------------- -------------- ------------- ---------------
SHORT-TERM OBLIGATIONS 3.1%
Associates Corp. of North
America, 5.25% $15,294,000 10/01/1996 15,294,000
Ford Motor Credit Co., 5.36% 1,828,000 10/02/1996 1,828,000
Ford Motor Credit Co., 5.25% 4,929,000 10/03/1996 4,929,000
---------------
Total Short-Term Obligations (Cost $22,051,000) 22,051,000
---------------
Total Investments (Cost $597,347,004)--100.7% 731,154,733
Cash and Other Assets, Less Liabilities--(0.7%) (4,854,999)
---------------
Net Assets--100.0% $726,299,734
===============
Federal Income Tax Information:
At September 30, 1996, the net unrealized appreciation of investments based on
cost for Federal income tax purposes of $598,142,139 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost $147,862,860
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value (14,850,266)
---------------
$133,012,594
===============
* Nonincome-producing securities
ADR stands for American Depositary Receipt, representing ownership of foreign
securities.
++ Security valued under consistently applied procedures established by the
Trustees. Security restricted as to public resale. The total cost and market
value of restricted securities owned at September 30, 1996 were $7,998,750
and $11,012,837 (1.52% of net assets), respectively.
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1996
Assets
Investments, at value (Cost $597,347,004) (Note 1) $731,154,733
Cash 174
Receivable for securities sold 12,823,082
Receivable for fund shares sold 3,193,991
Dividends and interest receivable 179,790
Other assets 27,541
---------------
747,379,311
Liabilities
Payable for securities purchased 19,251,692
Payable for fund shares redeemed 590,906
Accrued transfer agent and shareholder services
(Note 2) 235,645
Accrued management fee (Note 2) 405,478
Accrued distribution and service fees (Note 4) 450,860
Accrued trustees' fees (Note 2) 7,502
Other accrued expenses 137,494
---------------
21,079,577
---------------
Net Assets $726,299,734
===============
Net Assets consist of:
Unrealized appreciation of investments $133,807,729
Accumulated net realized loss (2,079,183)
Shares of beneficial interest 594,571,188
---------------
$726,299,734
===============
Net Asset Value and redemption price per share
of Class A shares ($114,247,043 / 8,300,931
shares of beneficial interest) $13.76
===============
Maximum Offering Price per share of Class A
shares ($13.76 / .955) $14.41
===============
Net Asset Value and offering price per share of
Class B shares ($386,899,013 / 28,872,901
shares of beneficial interest)* $13.40
===============
Net Asset Value, offering price and redemption
price per share of Class C shares ($34,834,999
/ 2,499,112 shares of beneficial interest) $13.94
===============
Net Asset Value and offering price per share of
Class D shares ($190,318,679 / 14,180,375
shares of beneficial interest)* $13.42
===============
-------------------------------------------------------------------
* Redemption price per share for Class B and Class D is equal to net asset value
less any applicable contingent deferred sales charge.
STATEMENT OF OPERATIONS
For the year ended September 30, 1996
Investment Income
Dividends, net of foreign taxes of $63,219 $ 2,227,719
Interest 2,525,316
--------------
4,753,035
Expenses
Management fee (Note 2) 4,024,320
Transfer agent and shareholder services (Note 2) 805,247
Custodian fee 180,669
Reports to shareholders 138,308
Distribution fee--Class A (Note 4) 202,813
Distribution and service fees--Class B (Note 4) 2,822,104
Distribution and service fees--Class D (Note 4) 1,387,708
Registration fees 180,166
Audit fee 28,368
Trustees' fees (Note 2) 30,194
Legal fees 20,268
Miscellaneous 34,999
--------------
9,855,164
--------------
Net investment loss (5,102,129)
--------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized loss on investments (Notes 1 and 3) (2,073,183)
Net unrealized appreciation of investments 70,731,585
--------------
Net gain on investments 68,658,402
--------------
Net increase in net assets resulting from operations $63,556,273
==============
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
STATEMENT OF CHANGES IN NET ASSETS
Year ended September 30
-------------------------------
1996 1995
-------------------------------------------------------- ---------------
Increase (Decrease) in Net Assets
Operations:
Net investment loss $ (5,102,129) $ (2,022,509)
Net realized gain (loss) on investments* (2,073,183) 32,914,544
Net unrealized appreciation of
investments 70,731,585 52,115,081
--------------- ---------------
Net increase resulting from operations 63,556,273 83,007,116
--------------- ---------------
Distributions from net realized gains:
Class A (4,170,914) (92,618)
Class B (15,632,187) (320,406)
Class C (3,556,781) (93,107)
Class D (7,349,181) (164,154)
--------------- ---------------
(30,709,063) (670,285)
--------------- ---------------
Net increase from fund share transactions
(Note 5) 291,406,436 164,713,294
--------------- ---------------
Total increase in net assets 324,253,646 247,050,125
Net Assets
Beginning of year 402,046,088 154,995,963
--------------- ---------------
End of year $726,299,734 $402,046,088
=============== ===============
*Net realized gain (loss) for Federal
income tax purposes (Note 1) $ (928,280) $ 32,687,493
=============== ===============
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
Note 1
State Street Research Capital Fund (the "Fund"), is a series of State Street
Research Capital Trust (the "Trust"), which is a Massachusetts business trust
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Trust was organized in
November, 1988 as a successor to State Street Capital Fund, Inc., a
Massachusetts corporation. The Trust consists presently of three separate funds:
State Street Research Capital Fund, State Street Research Small Capitalization
Growth Fund and State Street Research Small Capitalization Value Fund.
The investment objective of the Fund is to seek maximum capital appreciation by
investing primarily in common stocks of emerging growth companies and of
companies considered to be undervalued special situations, as determined by the
Fund's investment manager.
The Fund offers four classes of shares. Class A shares are subject to an initial
sales charge of up to 4.50% and pay an annual service fee equal to 0.25% of
average daily net assets. Class B shares are subject to a contingent deferred
sales charge on certain redemptions made within five years of purchase and pay
annual distribution and service fees of 1.00%. Class B shares automatically
convert into Class A shares (which pay lower ongoing expenses) at the end of
eight years after the issuance of the Class B shares. Class C shares are only
offered to certain employee benefit plans and large institutions. Class D shares
are subject to a contingent deferred sales charge of 1.00% on any shares
redeemed within one year of their purchase. Class D shares also pay annual
distribution and service fees of 1.00%. The Fund's expenses are borne pro-rata
by each class, except that each class bears expenses, and has exclusive voting
rights with respect to provisions of the Plan of Distribution, related
specifically to that class. The Trustees declare separate dividends on each
class of shares.
The following significant policies are consistently followed by the Fund in
preparing its financial statements, and such policies are in conformity with
generally accepted accounting principles for investment companies.
A. Investments in Securities
Values for listed securities represent the last sale on national securities
exchanges quoted prior to the close of the New York Stock Exchange.
Over-the-counter securities quoted on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") system are valued at the closing price
supplied through such system. In the absence of recorded sales and for those
over-the-counter securities not quoted on the NASDAQ system, valuations are at
the mean of the closing bid and asked quotations, except for certain securities
that may be restricted as to public resale, which are valued in accordance with
methods adopted by the Trustees. Security transactions are accounted for on the
trade date (date the order to buy or sell is executed), and dividends declared
but not received are accrued on the ex-dividend date. Interest income is
determined on the accrual basis. Realized gains and losses from security
transactions are reported on the basis of identified cost of securities
delivered for both financial reporting and Federal income tax purposes.
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
B. Federal Income Taxes
No provision for Federal income taxes is necessary since the Fund has elected to
qualify under Subchapter M of the Internal Revenue Code and its policy is to
distribute all of its taxable income, including net realized capital gains,
within the prescribed time periods. At September 30, 1996, the Fund had a
capital loss carryforward of $928,280 available, to the extent provided in
regulations, to offset future capital gains, if any, which expires on September
30, 2004.
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, 1995 through September 30, 1996, the
Fund incurred net capital losses of approximately $356,000 and intends to defer
and treat such losses as arising in the fiscal year ended September 30, 1997.
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. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
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 $30,194 during the year ended September 30, 1996.
State Street Research Shareholder Services, a division of State Street Research
Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. During the year ended September 30, 1996, the amount of such
expenses was $459,704.
Note 3
For the year ended September 30, 1996, exclusive of short-term investments and
U.S. Government obligations, purchases and sales of securities aggregated
$1,345,994,338 and $1,070,302,394, respectively.
Note 4
The Trust has adopted a Plan of Distribution pursuant to Rule 12b-1 (the "Plan")
under the Investment Company Act of 1940. Under the Plan, the Fund pays annual
service fees to the Distributor at a rate of 0.25% of average daily net assets
for Class A, Class B and Class D shares. In addition, the Fund pays annual
distribution fees of 0.75% of average daily net assets for Class B and Class D
shares. The Distributor uses such payments for personal services and/or the
maintenance or servicing of shareholder accounts, to reimburse securities
dealers for distribution and marketing services, to furnish ongoing assistance
to investors and to defray a portion of its distribution and marketing expenses.
For the year ended September 30, 1996, fees pursuant to such plan amounted to
$202,813, $2,822,104 and $1,387,708 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 $188,067 and $295,942, respectively, on sales of Class A shares of
the Fund during the year ended September 30, 1996, and that MetLife Securities,
Inc. earned commissions aggregating $678,831 on sales of Class B shares, and
that the Distributor collected contingent deferred sales charges of $312,620 and
$29,193 on redemptions of Class B and Class D shares, respectively, during the
same period.
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
NOTES (cont'd)
Note 5
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended September 30
--------------------------------------------------------------
1996 1995
------------------------------- ------------------------------
Class A Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 4,999,832 $ 62,467,171 2,826,294 $ 32,048,209
Issued upon reinvestment of distributions from net
realized gains 302,993 3,738,939 8,771 82,615
Shares repurchased (1,085,442) (13,577,652) (756,484) (8,537,685)
-------------- ---------------- -------------- ---------------
Net increase 4,217,383 $ 52,628,458 2,078,581 $ 23,593,139
============== ================ ============== ===============
Class B Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------
Shares sold 14,984,596 $183,598,870 9,420,000 $106,150,791
Issued upon reinvestment of distributions from net
realized gains 1,171,523 14,187,153 31,685 294,989
Shares repurchased (2,587,886) (31,537,100) (1,616,639) (17,716,667)
-------------- ---------------- -------------- ---------------
Net increase 13,568,233 $166,248,923 7,835,046 $ 88,729,113
============== ================ ============== ===============
Class C Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------
Shares sold 822,474 $ 10,670,766 1,284,385 $ 16,174,374
Issued upon reinvestment of distributions from net
realized gains 267,147 3,331,325 8,899 84,452
Shares repurchased (2,072,769) (26,820,873) (211,276) (2,192,278)
-------------- ---------------- -------------- ---------------
Net increase (decrease) (983,148) $(12,818,782) 1,082,008 $ 14,066,548
============== ================ ============== ===============
Class D Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------
Shares sold 7,893,265 $ 96,528,582 4,045,991 $ 46,180,380
Issued upon reinvestment of distributions from net
realized gains 561,501 6,811,002 16,713 155,761
Shares repurchased (1,469,595) (17,991,747) (710,067) (8,011,647)
-------------- ---------------- -------------- ---------------
Net increase 6,985,171 $ 85,347,837 3,352,637 $ 38,324,494
============== ================ ============== ===============
</TABLE>
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------
February 17, 1993
(Commencement
Year ended September 30 of Share Class
-------------------------------- Designations) to
1996** 1995** 1994 September 30, 1993
----------------------------------------------------- --------- --------- --------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $13.53 $ 9.92 $ 10.43 $ 8.03
Net investment loss (0.05) (0.04) (0.04) (0.03)
Net realized and unrealized gain on
investments 1.30 3.69 0.28 2.43
Distributions from net realized gains (1.02) (0.04) (0.75) --
----------- --------- --------- --------------------
Net asset value, end of year $13.76 $13.53 $ 9.92 $10.43
=========== ========= ========= ====================
Total return 10.12%+ 36.95%+ 2.51%+ 24.61%+++
Net assets at end of year (000s) $114,247 $55,250 $19,891 $7,251
Ratio of expenses to average net assets 1.26% 1.33% 1.41% 2.43%++
Ratio of net investment loss to average
net assets (0.39)% (0.34)% (0.55)% (1.43)%++
Portfolio turnover rate 215.07% 214.59% 167.08% 129.57%
Average commission rate@ $0.0278 -- -- --
</TABLE>
<TABLE>
<CAPTION>
Class B
------------------------------------------------------
March 15, 1993
(Commencement
Year ended September 30 of Share Class
--------------------------------- Designations) to
1996** 1995** 1994 September 30, 1993
----------------------------------------------------- ----------- --------- --------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 13.29 $ 9.82 $ 10.40 $ 8.68
Net investment loss (0.14) (0.12) (0.08) (0.04)
Net realized and unrealized gain on
investments 1.27 3.63 0.25 1.76
Distributions from net realized gains (1.02) (0.04) (0.75) --
----------- ----------- --------- --------------------
Net asset value, end of year $ 13.40 $ 13.29 $ 9.82 $ 10.40
=========== =========== ========= ====================
Total return 9.33%+ 35.90%+ 1.79%+ 19.82%+++
Net assets at end of year (000s) $386,899 $203,446 $73,354 $16,044
Ratio of expenses to average net assets 2.01% 2.08% 2.16% 3.16%++
Ratio of net investment loss to average
net assets (1.13)% (1.10)% (1.28)% (2.15%)++
Portfolio turnover rate 215.07% 214.59% 167.08% 129.57%
Average commission rate@ $ 0.0278 -- -- --
</TABLE>
<TABLE>
<CAPTION>
Class C
-----------------------------------------------------
Year ended September 30
-----------------------------------------------------
1996** 1995** 1994 1993 1992
------------------------------------------ --------- --------- --------- -------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $13.66 $ 9.99 $10.46 $ 7.96 $7.74
Net investment loss (0.01) (0.01) (0.03) (0.06) (0.06)
Net realized and unrealized gain on
investments 1.31 3.72 0.31 3.90 0.63
Distributions from net realized gains (1.02) (0.04) (0.75) (1.34) (0.35)
------- ------- ------- ------- -------
Net asset value, end of year $13.94 $13.66 $ 9.99 $10.46 $7.96
======= ======= ======= ======= =======
Total return 10.41%+ 37.30%+ 2.91%+ 55.46%+ 7.34%+
Net assets at end of year (000s) $34,835 $47,553 $23,967 $18,342 $11,654
Ratio of expenses to average net assets 1.01% 1.08% 1.16% 2.11% 1.54%
Ratio of net investment loss to average
net assets (0.08)% (0.07)% (0.32)% (1.30)% (0.86)%
Portfolio turnover rate 215.07% 214.59% 167.08% 129.57% 124.94%
Average commission rate@ $0.0278 -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
Class D
-----------------------------------------------------
March 15, 1993
(Commencement
Year ended September 30 of Share Class
-------------------------------- Designations) to
1996** 1995** 1994 September 30, 1993
----------------------------------------------------- --------- --------- --------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $13.31 $ 9.83 $10.39 $ 8.68
Net investment loss (0.14) (0.12) (0.09) (0.04)
Net realized and unrealized gain on
investments 1.27 3.64 0.28 1.75
Distributions from net realized gains (1.02) (0.04) (0.75) --
----------- ----------- --------- --------------------
Net asset value, end of year $13.42 $13.31 $ 9.83 $10.39
=========== =========== ========= ====================
Total return 9.23%+ 36.07%+ 2.00%+ 19.70%+++
Net assets at end of year (000s) $190,319 $95,797 $37,783 $5,011
Ratio of expenses to average net assets 2.01% 2.08% 2.16% 3.16%++
Ratio of net investment loss to average
net assets (1.13)% (1.09)% (1.28%) (2.16)%++
Portfolio turnover rate 215.07% 214.59% 167.08% 129.57%
Average commission rate@ $0.0278 -- - --
------------------------------------------------------------------------------------------------
</TABLE>
++ Annualized
** Per-share figures have been calculated using the average shares method.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges.
+++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges.
@ For fiscal years beginning on or after October 1, 1995, the Fund is required
to disclose its average commission rate per share paid for security trades.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of State Street Research
Capital Trust and Shareholders of
State Street Research Capital Fund
We have audited the accompanying statement of assets and liabilities of State
Street Research Capital Fund, including the schedule of portfolio investments,
as of September 30, 1996, and the related statement of operations for the year
then ended, the statement of changes in net assets for each of the two years in
the period then ended and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of State
Street Research Capital Fund as of September 30, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the periods indicated therein, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 8, 1996
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
Capital Fund's short-term performance was hindered somewhat by the decline in
technology stocks in the fall of 1995 as well as by the July 1996 correction,
which was led by a sell-off in smaller, more aggressive growth stocks. The
Fund's performance rebounded following both events.
The Fund benefited from holdings in a number of industry sectors, most notably,
retail, computer software and service, business service, and hotel and
restaurant stocks. Capital Fund underperformed its peer group, but proved to be
a stronger performer in the second half of the period, beating the average total
return for its Lipper category.
Fund management made a number of changes to the Fund, including reducing its
overall position in technology stocks but focusing holdings in the area of
computer software and service. As of September 30, 1996, software and service
stocks represented 12.3% of the portfolio.
Capital Fund's management added to the Fund's position in retail and business
service stocks. Retail, as of September 30, 1996, made up 14.2% of the
portfolio. Business service stocks accounted for another 7.8% of the portfolio.
Fund management also added to the portfolio's hotel and restaurant stocks, which
represented 10.7% of the portfolio as of September 30, 1996.
September 30, 1996
All returns represent past performance, which is no guarantee of future results.
The investment return and principal value of an investment made in the Fund will
fluctuate and shares, when redeemed, may be worth more or less than their
original cost. All returns assume reinvestment of capital gain distributions and
income dividends. During the periods prior to 1993 that shares were not offered
to the general public, the Fund was not subject to the cash inflows and higher
level of redemptions and expenses that have occurred during the Fund's current,
continuous public offering. Performance for a class includes periods prior to
the adoption of class designations. "C" shares, offered without a sales charge,
are available only to certain employee benefit plans and large institutions.
Performance prior to 1993 class designations does not reflect annual 12b-1 fees
of .25% for "A" shares and 1% for "B" and "D" shares, which will reduce
subsequent performance. Performance reflects maximum 4.5% "A" share front-end
sales charge or 5% "B" share or 1% "D" share contingent deferred sales charges,
where applicable. The Standard & Poor's 500 Composite Index (S&P 500) includes
500 widely traded common stocks and is a commonly used measure of U.S. stock
market performance. The index is unmanaged and does not take sales charges into
consideration. Direct investment in the index is not possible; results are for
illustrative purposes only.
Change In Value Of $10,000
Based On The S&P 500 Compared To Change
In Value of $10,000 Invested In Capital Fund
[plot points for line chart]
Class A Shares
Average Annual Total Return
1 Year 5 Years 10 Years
+5.16% +19.69% +17.27%
9/86 9550 10000
9/87 13622 14342
9/88 11720 12565
9/89 15697 16706
9/90 12430 15162
9/91 19126 19876
9/92 20529 22071
9/93 31824 24933
9/94 32622 25850
9/95 44677 33529
9/96 49197 40343
[end of plot points for line chart]
[plot points for line chart]
Class B Shares
Average Annual Total Return
1 Year 5 Years 10 Years
+4.33% +20.04% +17.54%
9/86 10000 10000
9/87 14263 14342
9/88 12272 12565
9/89 16436 16706
9/90 13015 15162
9/91 20028 19876
9/92 21497 22071
9/93 33266 24933
9/94 33862 25850
9/95 46018 33529
9/96 50313 40343
[end of plot points for line chart]
[plot points for line chart]
Class C Shares
Average Annual Total Return
1 Year 5 Years 10 Years
+10.41% +21.09% +17.95%
9/86 10000 10000
9/87 14263 14342
9/88 12272 12565
9/89 16436 16706
9/90 13015 15162
9/91 20028 19876
9/92 21497 22071
9/93 33420 24933
9/94 34392 25850
9/95 47219 33529
9/96 52134 40343
[end of plot points for line chart]
[plot points for line chart]
Class D Shares
Average Annual Total Return
1 Year 5 Years 10 Years
+8.23% +20.26% +17.55%
9/86 10000 10000
9/87 14263 14342
9/88 12272 12565
9/89 16436 16706
9/90 13015 15162
9/91 20028 19876
9/92 21497 22071
9/93 33234 24933
9/94 33898 25850
9/95 46125 33529
9/96 50384 40343
[end of plot points for line chart]
[solid line] Capital Fund
[dotted line] S&P 500
<PAGE>
State Street Research Capital Appreciation Fund
State Street Research Equity Investment Fund
State Street Research Equity Income Fund
Series of
State Street Research Equity Trust
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1996
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS.......................2
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT TECHNIQUES.......5
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS......................13
TRUSTEES AND OFFICERS................................................17
INVESTMENT ADVISORY SERVICES.........................................22
PURCHASE AND REDEMPTION OF SHARES....................................24
NET ASSET VALUE......................................................27
PORTFOLIO TRANSACTIONS...............................................28
CERTAIN TAX MATTERS..................................................31
DISTRIBUTION OF SHARES OF THE FUNDS..................................34
CALCULATION OF PERFORMANCE DATA......................................40
CUSTODIAN............................................................46
INDEPENDENT ACCOUNTANTS..............................................46
FINANCIAL STATEMENTS.................................................46
The following Statement of Additional Information is not a Prospectus.
It should be read in conjunction with the Prospectus of State Street Research
Capital Appreciation Fund, State Street Research Equity Investment Fund and
State Street Research Equity Income Fund dated November 1, 1996, which may be
obtained without charge from the offices of State Street Research Equity Trust
(the "Trust") or State Street Research Investment Services, Inc. (the
"Distributor"), One Financial Center, Boston, Massachusetts 02111-2690.
CONTROL NUMBER: 1285B-96102996(1197)SSR-LD ET-879D-1196
1
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under "The Funds' Investments" and "Limiting Investment
Risk" in the Funds' Prospectus, State Street Research Capital Appreciation Fund
(the "Capital Appreciation Fund" or the "Fund"), State Street Research Equity
Investment Fund (the "Equity Investment Fund" or the "Fund") and State Street
Research Equity Income Fund (the "Equity Income Fund" or the "Fund") have
adopted certain investment restrictions.
All of the Funds' fundamental investment restrictions are set forth
below. These fundamental restrictions may not be changed by a Fund except by the
affirmative vote of a majority of the outstanding voting securities of that Fund
as defined in the Investment Company Act of 1940, as amended (the "1940 Act").
(Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at the annual or a special meeting of security
holders duly called, (i) of 67% or more of the voting securities present at the
meeting if the holders of more than 50% of the outstanding voting securities are
present or represented by proxy or (ii) of more than 50% of the outstanding
voting securities, whichever is less.) Under these restrictions, it is each
Fund's policy:
(1) Equity Investment Fund and Equity Income Fund only: to invest
at least 65% of its assets in equity securities and equity
convertibles into equity securities;
(2) not to invest in a security if the transaction would result in
more than 5% of a Fund's total assets being invested in any
one issuer, except that this restriction does not apply to
investments in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities;
(3) not to invest in a security if the transaction would result in
a Fund's owning more than 10% of the outstanding voting
securities of an issuer, except that this restriction does not
apply to investments in securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities;
(4) not to issue senior securities;
(5) not to underwrite or participate in the marketing of
securities of other issuers, although a Fund may, acting alone
or in syndicates or groups, if determined by the Trust's Board
of Trustees, purchase or otherwise acquire securities of other
issuers for investment, either from the issuers or from
persons in a control relationship with the issuers or from
underwriters of such securities [as a matter of
interpretation, which is not part of the fundamental policy,
this restriction does not apply to the extent that, in
connection with the disposition of the Fund's securities, the
Fund may be deemed to be an underwriter under certain federal
securities laws];
(6) not to purchase or sell real estate in fee simple or real
estate mortgage loans;
2
<PAGE>
(7) not to invest in physical commodities or physical commodity
contracts or options in excess of 10% of the Fund's total
assets, except that investments in essentially financial items
or arrangements such as, but not limited to, swap
arrangements, hybrids, currencies, currency and other forward
contracts, futures contracts and options on futures contracts
on securities, securities indices, interest rates and
currencies shall not be deemed investments in commodities or
commodities contracts;
(8) not to lend money; however, a Fund may lend portfolio
securities and purchase bonds, debentures, notes and similar
obligations (and enter into repurchase agreements with respect
thereto);
(9) not to conduct arbitrage transactions (provided that
investments in futures and options for hedging purposes shall
not be deemed arbitrage transactions);
(10) not to invest in oil, gas or other mineral exploration or
development programs (provided that a Fund may invest in
securities issued by or which are based, directly or
indirectly, on the credit of companies which invest in or
sponsor such programs);
(11) not to make any investment which would cause more than 25% of
the value of a Fund's total assets to be invested in
securities of issuers principally engaged in any one industry
(for purposes of this restriction, (a) utilities will be
divided according to their services so that, for example, gas,
gas transmission, electric and telephone companies will each
be deemed in a separate industry, (b) oil and oil related
companies will be divided by type so that, for example, oil
production companies, oil service companies and refining and
marketing companies will each be deemed in a separate industry
and (c) securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities shall be excluded); and
(12) not to borrow money (through reverse repurchase agreements or
otherwise) except for extraordinary and emergency purposes,
such as permitting redemption requests to be honored, and then
not in an amount in excess of 10% of the value of its total
assets, provided that additional investments will be suspended
during any period when borrowings exceed 5% of a Fund's total
assets, and provided further that reverse repurchase
agreements shall not exceed 5% of a Fund's total assets.
Reverse repurchase agreements occur when a Fund sells money
market securities and agrees to repurchase such securities at
an agreed-upon price, date and interest payment. A Fund would
use the proceeds from the transaction to buy other money
market securities, which are either maturing or under the
terms of a resale agreement, on the same day as (or day prior
to) the expiration of the reverse repurchase agreement, and
would employ a reverse repurchase agreement when interest
income from investing the proceeds of the transaction is
greater than the interest expense of the reverse repurchase
transaction.
3
<PAGE>
The following investment restrictions may be changed with respect to
any Fund by a vote of a majority of the Trustees. Under these restrictions, it
is each 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 companies including predecessors with less than
three years' continuous operations except (a) securities
guaranteed or backed by an affiliate of the issuer with three
years of continuous operations, (b) securities issued or
guaranteed as to principal or interest by the U.S. Government,
or its agencies or instrumentalities, or a mixed-ownership
Government corporation, (c) securities of issuers with debt
securities rated at least "BBB" by Standard & Poor's
Corporation or "Baa" by Moody's Investor's Service, Inc. (or
their equivalent by any other nationally recognized
statistical rating organization) or securities of issuers
considered by the Investment Manager to be equivalent, (d)
securities issued by a holding company with at least 50% of
its assets invested in companies with three years of
continuous operations including predecessors, and (e)
securities which generate income which is exempt from local,
state or federal taxes; provided that the Fund may invest up
to 15% in such issuers so long as such investments plus
investments in restricted securities (other than those which
are eligible for resale under Rule 144A, Regulation S or other
exemptive provisions) do not exceed 15% of the Fund's total
assets;
(4) not to purchase securities on margin, make a short sale of any
securities or purchase or deal in puts, calls, straddles or
spreads with respect to any security, except in connection
with the purchase or writing of options, including options on
financial futures, and futures contracts to the extent set
forth in the Trust's Prospectus and Statement of Additional
Information;
(5) not to hypothecate, mortgage or pledge any of its assets
except as may be necessary in connection with permitted
borrowings and then not in excess of 15% of such Fund's total
assets, taken at cost (for the purpose of this restriction
financial futures, options on financial futures and forward
currency exchange contracts are not deemed to involve a pledge
of assets);
4
<PAGE>
(6) not to acquire any security issued by any other investment
company (the "acquired company") if immediately after such
acquisition the Fund and all companies controlled by the Fund,
if any, would own in the aggregate (i) more than 3% of the
outstanding voting stock of the acquired company, (ii)
securities issued by the acquired company having an aggregate
value in excess of 5% of the Fund's total assets or (iii)
securities issued by the acquired company and all other
investment companies (other than treasury stock of the Fund)
having an aggregate value in excess of 10% of the Fund's total
assets, except to complete a merger, consolidation or other
acquisition of assets;
(7) not to purchase or retain any security of an issuer if, to the
knowledge of the Trust, 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 in warrants more than 5% of the value of its
total assets, taken at the lower of cost or market value
(warrants initially attached to securities and acquired by the
Fund upon original issuance thereof shall be deemed to be
without value); and
(9) not to invest in companies for the purpose of exercising
control over their management, although the Trust may from
time to time present its views on various matters to the
management of issuers in which it holds investments.
At the present time, notwithstanding clause (8) above, the Capital Appreciation
Fund and the Equity Investment Fund may not invest in any warrants. Also, the
Equity Income Fund has undertaken with a state securities authority that, for so
long as such Fund's shares are required to be registered for sale in such state,
the Fund's investment in warrants, valued at the lower of cost or market, may
not exceed 5% of its net assets and included within that amount, but not to
exceed 2% of the value of its net assets, may be warrants which are not listed
on the New York or American Stock Exchange.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Among other investments described below, each Fund may buy and sell
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 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
objectives of a Fund. Each 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.
5
<PAGE>
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 an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or index after paying a transaction charge and posting
margin in an amount equal to a small percentage of the value of the underlying
asset or index. Each 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 a 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, a 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 a 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 which a Fund intends to
purchase. 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
6
<PAGE>
position. Each Fund will employ any other appropriate method of cover which is
consistent with applicable regulatory and exchange requirements.
Options on Securities
Each Fund may use options on equity 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 a 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
Each Fund may engage in transactions in call and put options on
securities indices. For example, a 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 equity 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 equity securities or
7
<PAGE>
futures contracts, a Fund may offset its position in index options prior to
expiration by entering into a closing transaction on an exchange or it may let
the option expire unexercised.
A securities index assigns relative values to the securities included
in the index and the index options are based on a broad market index. 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, a 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, a 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 a 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 a 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 a Fund, money market instruments equal to the aggregate exercise
price of the options will be identified by that Fund to the Trust's custodian to
insure that the use of such investments is unleveraged.
A Fund may write options in connection with buy-and-write transactions;
that is, a 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.
8
<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 Funds will engage in transactions in futures contracts or options
only as a hedge against changes resulting from market conditions which produce
changes in the values of their securities or the securities which they intend 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. No
Fund will 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. No Fund will 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. In
addition, no Fund may 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. Each 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 Funds' ability to
effectively hedge their securities and might, in some cases, require a Fund to
deposit cash to meet applicable margin requirements. Each Fund will enter into
an option or futures position only if it appears to be a liquid investment.
Currency Transactions
The Funds may engage in currency exchange transactions in order to
protect against the effect of uncertain future exchange rates on securities
denominated in foreign currencies. Each Fund will conduct its currency exchange
transactions either on a spot (i.e., cash) basis at the
9
<PAGE>
rate prevailing in the currency exchange market, or by entering into forward
contracts to purchase or sell currencies. Each Fund's dealings in forward
currency exchange contracts will be limited to hedging involving either specific
transactions or aggregate portfolio positions. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These contracts are
not commodities and are entered into in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
In entering a forward currency contract, a Fund is dependent upon the
creditworthiness and good faith of the counterparty. Each Fund attempts to
reduce the risks of nonperformance by the counterparty by dealing only with
established, reputable institutions. Although spot and forward contracts will be
used primarily to protect a 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 such 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 Funds may enter into repurchase agreements. Repurchase agreements
occur when a 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 Funds
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 a
Fund's ability to dispose of the underlying securities. Repurchase agreements
will be limited to 30% of a Fund's total assets, except that repurchase
agreements extending for more than seven days when combined with any other
illiquid securities held by a Fund will be limited to 10% of a Fund's total
assets.
When-Issued Securities
Each Fund may purchase "when-issued" securities, which are traded on a
price or yield basis prior to actual issuance. Such purchases will be made only
to achieve a Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs when corporate
10
<PAGE>
securities to be created by a merger of companies are traded prior to the actual
consummation of the merger. Such transactions may involve a risk of loss if the
value of the securities falls below the price committed to prior to actual
issuance. The Trust's custodian will establish a segregated account when a Fund
purchases securities on a when-issued basis consisting of cash or liquid
securities equal to the amount of the when-issued commitments. Securities
transactions involving delayed deliveries or forward commitments are frequently
characterized as when-issued transactions and are similarly treated by the Fund.
Rule 144A Securities
Subject to the limitations on illiquid and restricted securities noted
above, a 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, Rule 144A Securities may be deemed to be
liquid as determined by or in accordance with methods adopted by the Trustees.
Under such methods the following factors are considered, among others: the
frequency of trades and quotes for the security, the number of dealers and
potential purchasers in the market, market making activity, and the nature of
the security and marketplace trades. Investments in Rule 144A Securities could
have the effect of increasing the level of a Fund's illiquidity to the extent
that qualified institutional buyers become, for a time, uninterested in
purchasing such securities. Also, a Fund may be adversely impacted by the
subjective valuation of such securities in the absence of a market for them.
Swap Arrangements
Each 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 a 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 such
Fund a fixed rate of interest on the notional principal amount. In a currency
swap a 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, a 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 a 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
11
<PAGE>
notional principal amount would first offset one another, with a Fund either
receiving or paying the difference between such amounts. In order to be in a
position to meet any obligations resulting from swaps, a 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 a 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 a
Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a portion of a Fund's portfolio.
However, a Fund may enter into such arrangements for income purposes to the
extent permitted by the Commodities Futures Trading Commission for entities
which are not commodity pool operators, such as the Fund. In entering a swap
arrangement, a Fund is dependent upon the creditworthiness and good faith of the
counterparty. Each 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 a 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 a Fund's portfolio is invested in a given
industry, the following industry classifications are currently used. Securities
issued or guaranteed as to principal or interest by the U.S. Government or its
agencies or instrumentalities or mixed-ownership Government corporations or
sponsored enterprises (including repurchase agreements involving U.S. Government
securities to the extent excludable under relevant regulatory interpretations)
are excluded. Securities issued by foreign governments are also excluded.
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 and credit card receivables. "Asset-backed-Mortgages" includes
private pools of nongovernment backed mortgages.
12
<PAGE>
Basic Industries Consumer Staple Science & Technology
- ---------------- --------------- --------------------
Chemical Business Service Aerospace
Diversified Container Computer Software
Electrical Equipment Drug & Service
Forest Products Food & Beverage Electronic Components
Machinery Hospital Supply Electronic Equipment
Metal & Mining Personal Care Office Equipment
Railroad Printing & Publishing
Truckers Tobacco
Utility Energy Consumer Cyclical
- ------- ------ -----------------
Electric Oil Refining & Marketing Airline
Gas Oil Production Automotive
Gas Transmission Oil Service Building
Telephone Hotel & Restaurant
Photography
Other Finance Recreation
- ----- ------- Retail Trade
Trust Certificates- Bank Textile & Apparel
Government Related Lending Financial Service
Asset-backed--Mortgages Insurance
Asset-backed--Credit
Card Receivables
Other Investment Limitations
Each Fund has undertaken with a state securities authority that, for so
long as a Fund's shares are required to be registered for sale in such state, a
Fund will not purchase real estate limited partnerships or make investments in
oil, gas or mineral leases.
DEBT INSTRUMENTS AND
PERMITTED CASH INVESTMENTS
As indicated in the Funds' Prospectus, the Funds may invest in
long-term and short-term debt securities. The Funds 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
Funds 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
13
<PAGE>
as described herein. The U.S. Government securities in which the Fund invests
include, among others:
o direct obligations of the U.S. Treasury, i.e., U.S. Treasury bills,
notes, certificates and bonds;
o obligations of U.S. Government agencies or instrumentalities such
as the Federal Home Loan Banks, the Federal Farm Credit Banks, the
Federal National Mortgage Association, the Government National
Mortgage Association and the Federal Home Loan Mortgage
Corporation; and
o obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which a 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, a
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 a 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
14
<PAGE>
connection with programs sponsored by banks and brokerage firms. Such notes and
bonds are held in custody by a bank on behalf of the owners of the receipts.
These custodial receipts are known by various names, including "Treasury
Receipts" ("TRs"), "Treasury Investment Growth Receipts" ("TIGRs") and
"Certificates of Accrual on Treasury Securities" ("CATS"), and may not be deemed
U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Bank Money Investments. Bank money investments include but are not
limited to certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are generally short-term (i.e., less than one year),
interest-bearing negotiable certificates issued by commercial banks or savings
and loan associations against funds deposited in the issuing institution. A
banker's acceptance is a time draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods). A banker's acceptance may be
obtained from a domestic or foreign bank, including a U.S. branch or agency of a
foreign bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. A 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. A 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.
15
<PAGE>
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+.)
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
Equity Income Fund by applicable rating agencies results in a material decline
in the overall quality of such Fund's portfolio, the Trustees of the Trust will
review the situation and take such action as they deem in the best interests of
such Fund's shareholders, including, if necessary, changing the composition of
the portfolio.
16
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and principal officers of the Trust, their addresses, and
their principal occupations and positions with certain affiliates of the
Investment Manager are set forth below.
*+Peter C. Bennett, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 58. 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 of State
Street Research & Management Company. Mr. Bennett's other principal business
affiliation is Director, State Street Research Investment Services, Inc.
*+Bartlett R. Geer, One Financial Center, Boston, MA 02111 serves as
Vice President of the Trust. He is 41. 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.
*+Frederick R. Kobrick, One Financial Center, Boston, MA 02111, serves
as Vice President of the Trust. He is 53. 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 70. 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 45. His principal occupation is Executive Vice
President, Treasurer, Chief Financial Officer 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.
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111
serves as Secretary and General Counsel of the Trust. He is 41. His principal
occupation is Executive Vice President, General Counsel and Secretary of State
Street Research & Management Company. During the past five years he has also
served as Senior Vice President of State Street Research & Management Company
and as Senior Vice President, General Counsel and
- -------------------------
* or +, see footnotes on page 19.
17
<PAGE>
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 58. His principal occupation currently,
and during the past five years has been, Senior 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 64. 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 72. He is retired and was formerly Chairman of the
Board and Chief Executive Officer of Raytheon Company, of which he remains a
Director.
*Daniel J. Rice III, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 44. 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.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves
as Trustee of the Trust. He is 58. 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
59. 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 and Director
of State Street Research Investment Services, Inc.
- -------------------------
* or +, see footnotes on page 19.
18
<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.
*+James M. Weiss, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 50. His principal occupation is President and
Chief Investment Officer of State Street Research & Management Company. During
the past five years he has also served as President and Chief Investment
Officer of IDS Advisory Group, Inc. and as Senior Vice President of Stein,
Roe & Farnham.
*+John T. Wilson, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 33. His principal occupation is Vice
President of State Street Research & Management Company. During the past five
years he has also served as an analyst and portfolio manager at Phoenix Home
Life Mutual Insurance Company and, from 1995 to 1996, as a Vice President of
Phoenix Investment Counsel, Inc.
- -------------------------
* 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 Funds' 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, State Street Research Financial Trust,
State Street Research Income Trust, State Street Research Money Market
Trust, State Street Research Tax-Exempt Trust, State Street Research
Capital Trust, State Street Research Exchange Trust, State Street
Research Growth Trust, State Street Research Master Investment Trust,
State Street Research Securities Trust, State Street Research
Portfolios, Inc. and Metropolitan Series Fund, Inc.
19
<PAGE>
Record ownership of shares of the Funds as of September 30, 1996 was as
follows:
<TABLE>
<CAPTION>
Capital Appreciation Equity Investment Equity Income
-------------------- ----------------- -------------
% of % of % of
Class Holder Class Holder Class Holder Class
- ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
B Merrill Lynch 8.4
C Chase Manhattan 96.9 Chase Manhattan 84.4 Chase Manhattan 93.7
Bank, N.A. Bank, N.A. Bank, N.A.
Bank of New York 7.1
D PaineWebber 8.7 Metropolitan Life 76.7
Merrill Lynch 42.1 Merrill Lynch 11.6 Merrill Lynch 46.5
Donaldson Lufkin 6.1 Bear Stearns 12.9
</TABLE>
The full name and address of the above institutions are:
Metropolitan Life Insurance Company (a)
One Madison Avenue
New York, New York 10010
Chase Manhattan Bank, N.A.(b)(c)
770 Broadway
New York, New York 10003
Merrill Lynch, Pierce, Fenner & Smith, Inc. (c)
One Liberty Plaza, 165 Broadway
New York, New York 10080
Donaldson Lufkin Jenrette
Securities Corporation, Inc. (c)
P.O. Box 2052
Jersey City, New Jersey 07303
Bear Stearns Securities Corp. (c)
1 Metrotech Center North
Brooklyn, NY 11201
Bank of New York (c)
52 William Street
New York, NY 10005
PaineWebber
P.O. Box 3321
Weehawken, NJ 07087
20
<PAGE>
- ---------------------------------
(a) Metropolitan Life Insurance Company ("Metropolitan"), a New York
corporation, was the record and/or beneficial owner, directly or
indirectly through its subsidiaries or affiliates, of such shares.
(b) Chase Manhattan Bank, N.A. holds such shares as trustee under certain
employee benefit plans serviced by Metropolitan.
(c) The respective Funds believe that each named recordholder does not have
beneficial ownership of such shares.
Ownership of 25% or more of a voting security is deemed "control" as
defined in the 1940 Act. So long as 25% of a class of shares is so owned, such
owners will be presumed to be in control of such class of shares for purposes of
voting on certain matters submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
As of September 30, 1996, the Trustees and principal officers of the
Trust as a group owned the approximate amounts of the outstanding shares of each
Fund as set forth below:
Class A Class B Class C Class D
Capital Appreciation [less than]1% None None None
Equity Investment None None None None
Equity Income 1.8% None None None
21
<PAGE>
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 $ 9,700 $59,375
Robert A. Lawrence $ 9,700 $88,875
Dean O. Morton $10,100 $92,875
Thomas L. Phillips $ 9,700 $59,375
Toby Rosenblatt $ 9,700 $59,375
Michael S. Scott Morton $10,900 $96,875
Ralph F.Verni $ 0 $ 0
Jeptha H. Wade $ 9,500 $63,375
(a) For the Funds' fiscal year ended June 30, 1996. Includes compensation
from multiple Series of the Trust. See "Distribution of Shares" for a
listing of series.
(b) Includes compensation from 31 series, including series of 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. "Total Compensation from
Trust and Complex" is estimated for the 12 months ended December 31,
1996. 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 each Fund. The Advisory
Agreement provides that the Investment Manager shall furnish each Fund with an
investment program, office facilities and such investment advisory, research and
administrative services as may be required from time to time. The Investment
Manager compensates all executive and clerical personnel and Trustees of the
Trust if such persons are 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 each Fund to the Investment Manager
is computed as a percentage of the average of the value of the net assets of
such Fund as determined at the
22
<PAGE>
close of the New York Stock Exchange (the "NYSE") on each day the NYSE is open
for trading, at the annual rate of 0.65% of the net assets of the Equity
Investment Fund and the Equity Income Fund and 0.75% of the net assets of the
Capital Appreciation Fund. The Distributor and its affiliates may from time to
time and in varying amounts voluntarily assumed some portion of fees or expenses
relating to each Fund.
The advisory fees paid by each Fund to the Investment Manager for the
last three fiscal years, prior to the assumption of fees or expenses, were as
follows:
Year ended June 30
1996 1995 1994
---- ---- ----
Capital Appreciation Fund $4,634,817 $3,124,753 $2,338,561
Equity Investment Fund $676,177 $486,807 $385,472
Equity Income Fund $649,578 $521,730 $415,128
The voluntary reduction of fees or assumption of expenses for the same
periods were as follows:
Year ended June 30
1996 1995 1994
---- ---- ----
Capital Appreciation Fund $ 0 $1,056,327* $985,266
Equity Investment Fund $220,240 $362,010 $303,297
Equity Income Fund $267,958 $333,725 $328,184
- ------------------
* For the period of July 1, 1994 through March 9, 1995; on March 10, 1995, the
Distributor eliminated the voluntary assumption of fees or expenses incurred by
the Capital Appreciation Fund.
Further, to the extent required under applicable state regulatory
requirements, the Investment Manager will reduce its management fee for a Fund
up to the amount of any expenses (excluding permissible items, such as Rule
12b-1 Distribution Plan payments, brokerage commissions, interest, taxes and
litigation expenses) paid or incurred by such Fund in any fiscal year which
exceed specified percentages of the average daily net assets of such 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
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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 from
year to year with respect to each Fund as long as it is approved at least
annually both (i) by a vote of a majority of the outstanding voting securities
of such 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 Funds, 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 a Fund's shares may be purchased.
Under the Code of Ethics of the Investment Manager, its employees in
Boston, where investment management operations are conducted, are only permitted
to engage in personal securities transactions in accordance with certain
conditions relating to an employee's position, the identity of the security, the
timing of the transaction, and similar factors. Such employees must report their
personal securities transactions quarterly and supply broker confirmations of
such transactions to the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Funds are distributed by the Distributor. The Funds offer
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,
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<PAGE>
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 Funds, 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 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 Funds at reduced sales
charges by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of a 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.
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<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 Funds 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
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants (currently a minimum of 100 eligible
employees), service arrangements, or similar factors; insurance companies;
investment companies; endowment funds of nonprofit organizations with
substantial minimum assets (currently a minimum of $10,000,000); 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, as amended, a Fund may issue its shares at net asset
value (or more) to such entities or to their security holders.
Redemptions. The Funds reserve 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, a Fund may limit the amount of
redemption proceeds paid in cash. Although it has no present intention to do so,
a 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 such 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.
26
<PAGE>
NET ASSET VALUE
The net asset value of the shares of each 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 on New Year's Day, Presidents Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
The net asset value per share of a 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 a Fund, including the investment management fee payable to the
Investment Manager, are accrued daily.
In determining the values of portfolio assets as provided below, the
Trustees utilize one or more pricing services in lieu of market quotations for
certain securities which are not readily available on a daily basis. Such
services 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 are valued at the closing price
supplied through such system for that day at the close of the NYSE. Other
securities are, in general, valued at the mean of the bid and asked quotations
last quoted prior to the close of the NYSE if there are market quotations
readily available, or in the absence of such market quotations, then at the fair
value thereof as determined by or under authority of the Trustees of the Trust
with the use of such pricing services as may be deemed appropriate or
methodologies approved by the Trustees.
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
a 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
27
<PAGE>
premium is assumed regardless of the impact of fluctuating interest rates on the
market value of the security.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
A 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 Funds' portfolio turnover rates for the fiscal years ended
June 30, 1995 and 1996, respectively, were as follows: Capital Appreciation
Fund, 217.28% and 279.55%, Equity Investment Fund, 47.93% and 44.44%, and Equity
Income Fund, 67.50% and 111.13%.
The Investment Manager believes the portfolio turnover rate for the
fiscal year ended June 30, 1996, for the Capital Appreciation Fund was
significantly higher than that for the previous fiscal year because of
volalility in the markets for aggressive securities and the resultant
transactions to protect the Fund as well as to take profits and take advantage
of buying opportunities.
The Investment Manager believes the portfolio turnover rate for the
fiscal year ended June 30, 1996 for the Equity Income Fund was significantly
higher than that for the previous fiscal year because of transactions to
reposition the Fund to be more defensive in light of economic expectations as
compared to its more cyclical positioning before.
Brokerage Allocation
The Investment Manager's policy is to seek for its clients, including
the Funds, what in the Investment Manager's judgment will be the best overall
execution of purchase or sale orders and the most favorable net prices in
securities transactions consistent with its judgment as to the business
qualifications of the various broker or dealer firms with whom the Investment
Manager may do business, and the Investment Manager may not necessarily choose
the broker offering the lowest available commission rate. Decisions with respect
to the market where the transaction is to be completed, to the form of
transaction (whether principal or agency), and to the allocation of orders among
brokers or dealers are made in accordance with this policy. In selecting brokers
or dealers to effect portfolio transactions, consideration is given to their
proven integrity and financial responsibility, their demonstrated execution
experience and capabilities both generally and with respect to particular
markets or securities, the competitiveness of their commission rates in agency
transactions (and their net prices in principal transactions), their willingness
to commit capital, and their clearance and settlement capability. The Investment
Manager makes every effort to keep informed of commission rate structures and
prevalent bid/ask spread characteristics of the markets and securities in which
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<PAGE>
transactions for the Funds occur. Against this background, the Investment
Manager evaluates the reasonableness of a commission or a net price with respect
to a particular transaction by considering such factors as difficulty of
execution or security positioning by the executing firm. The Investment Manager
may or may not solicit competitive bids based on its judgment of the expected
benefit or harm to the execution process for that transaction.
When it appears that a number of firms could satisfy the required
standards in respect of a particular transaction, consideration may also be
given to services other than execution services which certain of such firms have
provided in the past or may provide in the future. Negotiated commission rates
and prices, however, are based upon the Investment Manager's judgment of the
rate which reflects the execution requirements of the transaction without regard
to whether the broker provides services in addition to execution. Among such
other services are the supplying of supplemental investment research; general
economic, political and business information; analytical and statistical data;
relevant market information, quotation equipment and services; reports and
information about specific companies, industries and securities; purchase and
sale recommendations for stocks and bonds; portfolio strategy services;
historical statistical information; market data services providing information
on specific issues and prices; financial publications; proxy voting data and
analysis services; technical analysis of various aspects of the securities
markets, including technical charts; computer hardware used for brokerage and
research purposes; computer software and databases, including those used for
portfolio analysis and modeling; and portfolio evaluation services and relative
performance of accounts.
Certain nonexecution services provided by broker-dealers may in turn be
obtained by the broker-dealers from third parties who are paid for such services
by the broker-dealers. The Investment Manager has an investment of less than ten
percent of the outstanding equity of one such third party which provides
portfolio analysis and modeling and other research and investment
decision-making services integrated into a trading system developed and licensed
by the third party to others. The Investment Manager could be said to benefit
indirectly if in the future it allocates brokerage to a broker-dealer who in
turn pays this third party for services to be provided to the Investment
Manager.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. Some services may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Investment Manager allocates the cost
of such services to determine the appropriate proportion of the cost which is
allocable to purposes other than research or investment decision-making and is
therefore paid directly by the Investment Manager. Some research and execution
services may benefit the Investment Manager's clients as a whole, while others
may benefit a specific segment of clients. Not all such services will
necessarily be used exclusively in connection with the accounts which pay the
commissions to the broker-dealer producing the services.
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<PAGE>
The Investment Manager has no fixed agreements or understandings with
any broker-dealer as to the amount of brokerage business which the firm may
expect to receive for services supplied to the Investment Manager or otherwise.
There may be, however, understandings with certain firms that in order for such
firms to be able to continuously supply certain services, they need to receive
allocation of a specified amount of brokerage business. These understandings are
honored to the extent possible in accordance with the policies set forth above.
It is not the Investment Manager's policy to intentionally pay a firm a
brokerage commission higher than that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided. However, the Investment Manager is aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, relies on the provisions of Section 28(e) of the
Securities Exchange Act of 1934, to the extent applicable. Brokerage commissions
paid by the Funds in secondary trading during the last three fiscal years were
as follows:
Fiscal Year ended June 30
1996 1995 1994
---- ---- ----
Capital Appreciation Fund $2,271,335 $2,090,474 $1,119,166
Equity Investment Fund $107,458 $90,811 $95,640
Equity Income Fund $296,364 $175,736 $192,943
The Investment Manager believes the amount of brokerage commissions paid by the
Equity Income Fund during the fiscal year ended June 30, 1996, was significantly
higher than during the previous year because of transactions to reposition the
Fund to be more defensive in light of economic expectations as compared to its
more cyclical positioning before.
During and at the end of its most recent fiscal year, no Fund held in
its portfolio securities of any entity that might be deemed to be a regular
broker-dealer of such Fund as defined under the 1940 Act.
In the case of the purchase of fixed income securities in underwriting
transactions, the Investment Manager follows any instructions received from its
clients as to the allocation of new issue discounts, selling commissions and
designations to brokers or dealers which provide the client with research,
performance evaluation, master trustee and other services. In the absence of
instructions from the client, the Investment Manager may make such allocations
to broker-dealers which have provided the Investment Manager with research and
brokerage services.
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<PAGE>
When more than one client of the Investment Manager is seeking to buy
or sell the same security, the sale or purchase is carried out in a manner which
is considered fair and equitable to all accounts. In allocating investments
among various clients (including in what sequence orders for trades are placed),
the Investment Manager will use its best business judgment and will take into
account such factors as the investment objectives of the clients, the amount of
investment funds available to each, the amount already committed for each client
to a specific investment and the relative risks of the investments, all in order
to provide on balance a fair and equitable result to each client over time.
Although sharing in large transactions may sometimes affect price or volume of
shares acquired or sold, overall it is believed there may be an advantage in
execution. The Investment Manager may follow the practice of grouping orders of
various clients for execution to get the benefit of lower prices or commission
rates. In certain cases where the aggregate order may be executed in a series of
transactions at various prices, the transactions are allocated as to amount and
price in a manner considered equitable to each so that each receives, to the
extent practicable, the average price of such transactions. Exceptions may be
made based on such factors as the size of the account and the size of the trade.
For example, the Investment Manager may not aggregate trades where it believes
that it is in the best interests of clients not to do so, including situations
where aggregation might result in a large number of small transactions with
consequent increased custodial and other transactional costs which may
disproportionately impact smaller accounts. Such disaggregation, depending on
the circumstances, may or may not result in such accounts receiving more or less
favorable execution relative to other clients.
CERTAIN TAX MATTERS
Federal Income Taxation of the Funds -- in General
Each 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 they cannot give complete
assurance that they will do so. Accordingly, a 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
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investment company taxable income (determined without regard to the deduction
for dividends paid).
The 30% test will limit the extent to which a 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 a 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 a 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 a 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 such
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.
A 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 a 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. Each Fund
intends to make sufficient distributions to avoid this 4% excise tax.
Federal Income Taxation of the Funds' Investments
Original Issue Discount. For federal income tax purposes, debt
securities purchased by a 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 a 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
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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 a 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 a Fund purchases the
securities. This additional discount represents market discount for federal
income tax purposes. In the case of any debt security issued after July 18,
1984, having a fixed maturity date of more than one year from the date of issue
and having market discount, the gain realized on disposition will be treated as
interest to the extent it does not exceed the accrued market discount on the
security (unless a 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. A Fund may be required to capitalize, rather than
deduct currently, part or all of any direct interest expense incurred or
continued to purchase or carry any debt security having market discount, unless
a Fund makes the election to include market discount currently. Because each
Fund must include original issue discount in income, it will be more difficult
for such Fund to make the distributions required for such 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 a Fund's investments may
be subject to provisions of the Code that (i) require inclusion of unrealized
gains or losses in a 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 a Fund may be eligible for the 70% dividends-received
deduction for corporations. The percentage of a Fund's dividends eligible for
such tax treatment may be less than 100% to the extent that less than 100% of a
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 such Fund pays the dividend during
January of the following calendar year.
Distributions by a 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
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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 FUNDS
State Street Research Equity Trust is currently comprised of the
following series: State Street Research Capital Appreciation Fund, State Street
Research Equity Investment Fund, State Street Research Equity Income Fund, and
State Street Research Global Resources Fund. The Trustees have authorized shares
of the Funds 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 Funds. Shares of the Funds are
sold through dealers who have entered into sales agreements with the
Distributor. The Distributor distributes shares of the Funds on a continuous
basis at an offering price which is based on the net asset value per share of
the applicable 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 (Class B and Class D shares). The
Distributor may reallow all or portions of such sales charges as concessions to
dealers.
Total sales charges on Class A shares paid to the Distributor for the
last three fiscal years were as follows:
Year ended June 30
1996 1995 1994
---- ---- ----
Capital Appreciation Fund $1,756,768 $1,130,659 $1,714,899
Equity Investment Fund $142,027 $76,485 $89,774
Equity Income Fund $161,679 $97,853 $239,481
For the same periods, the Distributor retained the following amounts
after reallowance of concessions to dealers:
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Year ended June 30
1996 1995 1994
---- ---- ----
Capital Appreciation Fund $206,221 $129,102 $195,517
Equity Investment Fund $17,387 $9,124 $10,445
Equity Income Fund $20,463 $11,212 $28,320
The differences in the price at which the Funds' Class A shares are
offered due to scheduled variations in sales charges, as described in the Funds'
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 Funds or associated entities.
Where shares of the Funds 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 reductions in
sales expenses, and therefore the reduction in sales charge, 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 Funds reserve
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 based on the aggregate of such sales. Such
commission also is payable to authorized securities dealers upon sales of Class
A shares made pursuant to a Letter of Intent to purchase shares having a net
asset value of $1,000,000 or more. Shares sold with such commissions payable are
subject to a one-year contingent deferred sales charge of 1.00% on any portion
of such shares redeemed within one year following their sale. After a particular
purchase of Class A shares is made under the Letter of Intent, the commission
will be paid only in respect of that particular purchase of shares. If the
Letter of Intent is not completed, the commission paid will be deducted from any
discounts or commissions otherwise payable to such dealer in respect of shares
actually sold. If an investor is eligible to purchase shares at net asset value
on account of the Right of Accumulation, the commission will be paid only in
respect of the incremental purchase at net asset value.
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 Funds and paid initial
35
<PAGE>
commissions to securities dealers for sales of such Class A, Class B and Class D
shares as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
June 30, 1996 June 30, 1995 June 30, 1994
----------------------------- ------------------------------ ------------------------------
Contingent Contingent Contingent
Deferred Commissions Deferred Commissions Deferred Commissions
Sales Charges Paid to Dealers Sales Charges Paid to Dealers Sales Charges Paid to Dealers
------------- --------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Capital Appreciation Fund
Class A $ 0 $1,550,547 $ 2,653 $1,001,557 $ 0 $1,519,382
Class B $378,749 $2,284,643 $394,360 $1,033,301 $62,521 $1,424,770
Class D $ 1,900 $ 26,860 $ 305 $ 0 $ 148 $ 19,784
Equity Investment Fund
Class A $ 0 $ 124,640 $ 0 $ 67,361 $ 0 $ 79,329
Class B $ 40,509 $ 220,242 $ 18,766 $ 57,654 $ 3,372 $ 74,304
Class D $ 39 $ 876 $ 260 $ 0 $ 0 $ 586
Equity Income Fund
Class A $ 0 $ 141,216 $ 265 $ 86,641 $ 0 $ 211,161
Class B $ 65,434 $ 271,051 $ 50,949 $ 130,203 $ 7,538 $ 286,536
Class C $ 39 $ 3,592 $ 632 $ 0 $ 0 $ 7,655
</TABLE>
Each Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "Distribution Plan") under which the Funds may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of Class A, Class B and Class D shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to underwriters, securities dealers
and others engaged in the sale of shares, including payments to the Distributor
to be used to pay commissions and/or reimbursement to securities dealers (which
securities dealers may be affiliates of the Distributor) engaged in the
distribution and marketing of shares and furnishing ongoing assistance to
investors, (2) reimbursement of direct out-of-pocket expenditures incurred by
the Distributor in connection with the distribution and marketing of shares and
the servicing of investor accounts including expenses relating to the
formulation and implementation of marketing strategies and promotional
activities such as direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising, the preparation, printing and
distribution of Prospectuses of the Funds and reports for recipients other than
existing shareholders of the Funds, and obtaining such information, analyses and
reports with respect to marketing and promotional activities and investor
accounts as the Funds may, from time to time, deem advisable, and (3)
reimbursement of expenses incurred by the Distributor in connection with the
servicing of shareholder accounts including payments to securities dealers and
others in consideration of the provision of personal service to investors and/or
the maintenance or servicing of shareholder accounts and expenses associated
with the provision of personal service by the Distributor directly to investors.
In addition, the Distribution Plan is deemed to authorize the Distributor and
the Investment Manager to make payments out of general profits, revenues or
other sources to underwriters, securities dealers and others in connection with
sales of shares, to the extent, if any, that such payments may be deemed to be
within the scope of Rule 12b-1 under the 1940 Act.
36
<PAGE>
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 or servicing of shareholder accounts. Proceeds
from the service fee will be used by the Distributor to compensate securities
dealers and others selling shares of the Funds for rendering service to
shareholders on an ongoing basis. Such amounts are based on the net asset value
of shares of the Funds 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
Funds. 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.
37
<PAGE>
During the fiscal year ended June 30, 1996, the Funds paid the
Distributor fees under the Distribution Plan and the Distributor used all of
such payments for expenses incurred on behalf of the Funds as follows:
Capital Appreciation Fund
Class A Class B Class D
-------- ---------- -------
Advertising $ 1,511 $ 29,930 $ 0
Printing and mailing
of prospectuses to
other than current
shareholders 586 11,616 0
Compensation to dealers 852,361 1,063,736 52,599
Compensation to sales 6,393 126,652 0
personnel
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses: marketing; general 3,599 71,298 0
-------- ---------- -------
Total fees $864,450 $1,303,232 $52,599
======== ========== =======
38
<PAGE>
Equity Investment Fund
Class A Class B Class D
-------- -------- --------
Advertising $ 107 $ 1,357 $ 775
Printing and mailing
of prospectuses to
other than current
shareholders 42 528 302
Compensation to dealers 87,245 78,524 1,694
Compensation to sales
personnel 481 6,102 3,485
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses: marketing; general 258 3,268 1,867
-------- -------- --------
Total fees $ 88,133 $ 89,779 $ 8,123
======== ======== ========
Equity Income Fund
Class A Class B Class D
-------- -------- --------
Advertising $ 598 $ 2,002 $ 420
Printing and mailing
of prospectuses to
other than current
shareholders 233 779 164
Compensation to dealers 96,023 185,106 8,683
Compensation to sales
personnel 2,700 9,030 1,896
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses: marketing; general 1,443 4,822 1,013
-------- -------- --------
Total fees $100,997 $201,739 $ 12,176
======== ======== ========
39
<PAGE>
The Distributor may have also used additional resources of its own for
further expenses on behalf of the Funds.
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 Funds 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") and yield of
the Class A, Class B, Class C and Class D shares of the Funds will be calculated
as set forth below. Total return and yield are computed separately for each
class of shares of the Funds. Performance data for a specified class includes
periods prior to the adoption of class designations. Shares of the Funds had no
class designations until June 1, 1993, when designations were assigned based on
the pricing and Rule 12b-1 fees applicable to shares sold thereafter.
The performance data below reflects Rule 12b-1 fees and, where
applicable, sales charges as follows:
<TABLE>
<CAPTION>
Rule 12b-1 Sales Charges
---------------------------------------------------- ---------------------------------
Class Amount Period
----- ------ ------
<S> <C> <C> <C>
A 0.25% 0.50% until March 10, 1995; Maximum 4.5% sales charge
0.25 thereafter reflected
B 1.00% 0.50% until June 1, 1993; 1.00% 1- and 5-year periods reflect
June 1, 1993 to present; fee will reduce a 5% and a 2% contingent
performance for periods after June 1, 1993 deferred sales charge,
respectively
C None 0.50% until June 1, 1993; None
0% thereafter
D 1.00% 0.50% until June 1, 1993; 1.00% 1-year period reflects a 1%
June 1, 1993 to present; fee will reduce contingent deferred sales charge
performance for periods after June 1, 1993
</TABLE>
40
<PAGE>
All calculations of performance data in this section reflect the
voluntary measures by the Funds' affiliates to reduce fees or expenses relating
to the Funds; see "Accrued Expenses" later in this section.
Total Return
The Funds' average annual total returns ("standard total return") of
each class of shares were as follows:
<TABLE>
<CAPTION>
Commencement of
Operations Five Years One Year
(August 25, 1986) Ended Ended
Fund to June 30, 1996 June 30, 1996 June 30, 1996
- ---- ---------------- ------------- -------------
with without with without with without
subsidy subsidy subsidy subsidy subsidy subsidy
------- ------- ------- ------- ------- -------
Capital Appreciation
<S> <C> <C> <C> <C> <C> <C>
Class A N/A* 16.55% N/A 21.95% N/A 18.30%
Class B N/A 16.87% N/A 22.43% N/A 17.97%
Class C N/A 17.25% N/A 23.38% N/A 24.28%
Class D N/A 16.90% N/A 22.66% N/A 22.03%
Equity Investment
Class A 11.64% 11.23% 15.27% 14.94% 19.69% 19.24%
Class B 11.94% 11.53% 15.67% 15.33% 19.39% 18.91%
Class C 12.29% 11.86% 16.60% 16.23% 25.66% 25.18%
Class D 11.93% 11.51% 15.87% 15.50% 23.40% 22.93%
Equity Income
Class A 10.44% N/A 14.64% N/A 16.90% N/A
Class B 10.78% N/A 15.04% N/A 16.60% N/A
Class C 11.14% N/A 15.99% N/A 22.82% N/A
Class D 10.78% N/A 15.26% N/A 20.68% N/A
</TABLE>
* The Fund's returns may have been increased by the voluntary reduction of fees
and/or expenses by the Distributor and/or its affiliates. In the above table
and below, where two figures are given, the first reflects expense reduction;
the second shows what results would have been without subsidization. Where
only one figure is shown, the reduction of fees and expenses was not material
or a fund was not subsidized.
41
<PAGE>
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:
n
P(1+T) = 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 a Fund are reinvested at
net asset value on the reinvestment dates during the periods. All accrued
expenses and recurring charges are also taken into account as described later
herein.
Yield
The annualized yield of each class of shares of the Equity Income Fund
based on the month of June 1996 was as follows:
Class A 1.85%
Class B 1.23%
Class C 2.17%
Class D 1.25%
42
<PAGE>
Yield for the Equity Income Fund's Class A, Class B, Class C and Class
D shares is computed by dividing the net investment income per share earned
during a recent month or other specified 30-day period by the maximum offering
price per share on the last day of the period and annualizing the result in
accordance with the following formula:
a-b 6
YIELD = 2[(--- + 1) -1]
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of voluntary
expense reductions by the Investment Manager)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day
of the period
To calculate interest earned (for the purpose of "a" above) on debt
obligations, the Equity Income Fund computes the yield to maturity of each
obligation held by such Fund based on the market value of the obligation
(including actual accrued interest) at the close of the last business day of the
preceding period, or, with respect to obligations purchased during the period,
the purchase price (plus actual accrued interest). The yield to maturity is then
divided by 360 and the quotient is multiplied by the market value of the
obligation (including actual accrued interest) to determine the interest income
on the obligation for each day of the period that the obligation is in the
portfolio. Dividend income is recognized daily based on published rates.
With respect to the treatment of discount and premium on mortgage or
other receivables-backed obligations which are expected to be subject to monthly
payments of principal and interest ("paydowns"), the Fund accounts for gain or
loss attributable to actual monthly paydowns as realized capital gain or loss
during the period. The Fund has elected not to amortize discount or premium on
such securities.
Undeclared earned income, computed in accordance with generally
accepted accounting principles, may be subtracted from the maximum offering
price. Undeclared earned income is the net investment income which, at the end
of the base period, has not been declared as a dividend, but is reasonably
expected to be declared as a dividend shortly thereafter. The maximum offering
price includes, as applicable, a maximum sales charge of 4.5%.
All accrued expenses are taken into account as described later herein.
Yield information is useful in reviewing the Equity Income Fund's
performance, but because yields fluctuate, such information cannot necessarily
be used to compare an investment
43
<PAGE>
in the Fund's shares with bank deposits, savings accounts and similar investment
alternatives which often are insured and/or provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that yield
is a function of the kind and quality of the instruments in the Fund's
portfolio, portfolio maturity and operating expenses and market conditions.
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 and yield 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 Funds would have been 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, five years before and at the time of commencement of such Fund's
operations. In addition, a 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. For example, the Funds' nonstandardized total returns for the six months
ended June 30, 1996, without taking sales charges into account, were as follows:
44
<PAGE>
with subsidy without subsidy
------------ ---------------
Capital Appreciation Fund
Class A N/A 13.93%
Class B N/A 13.55%
Class C N/A 14.11%
Class D N/A 13.61%
Equity Investment Fund
Class A 10.27% 10.07%
Class B 9.82% 9.62%
Class C 10.41% 10.21%
Class D 9.83% 9.63%
Equity Income Fund
Class A 9.66% N/A
Class B 9.31% N/A
Class C 9.79% N/A
Class D 9.31% N/A
Distribution Rates
A Fund may also quote its distribution rate for each class of shares.
The distribution rate is calculated by annualizing the latest per-share
distribution from ordinary income and dividing the result by the maximum
offering price per share as of the end of the period to which the distribution
relates. A distribution can include gross investment income from debt
obligations purchased at a premium and in effect include a portion of the
premium paid. A distribution can also include nonrecurring, gross short-term
capital gains without recognition of any unrealized capital losses. Further, a
distribution can include income from the sale of options by a Fund even though
such option income is not considered investment income under generally accepted
accounting principles.
Because a distribution can include such premiums, capital gains and
option income, the amount of the distribution may be susceptible to control by
the Investment Manager through transactions designed to increase the amount of
such items. Also, because the distribution rate is calculated in part by
dividing the latest distribution by the offering price, which is based on net
asset value plus any applicable sales charge, the distribution rate will
increase as the net asset value declines. A distribution rate can be greater
than the yield rate calculated as described above.
45
<PAGE>
The distribution rate of each class of the Equity Income Fund, based on
the quarter ended June 30, 1996, was as follows:
Class A 1.93%
Class B 1.33%
Class C 2.25%
Class D 1.36%
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 Funds' cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Funds' investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as the Trust's independent accountants, providing professional services
including (1) audits of the Funds' 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 Funds.
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 Funds' fiscal year ended
June 30, 1996.
314791.c3
10/11/96
46
<PAGE>
STATE STREET RESEARCH CAPITAL APPRECIATION FUND
INVESTMENT PORTFOLIO
June 30, 1996
Value
Shares (Note 1)
------------------------------------------- ------- -------------
COMMON STOCKS 95.4%
Basic Industries 2.1%
Machinery 1.6%
Cincinnati Milacron, Inc. 131,000 $ 3,144,000
UCAR International, Inc.* 204,800 8,524,800
------------
11,668,800
------------
Metal & Mining 0.5%
SGL Carbon AG ADR* 108,000 4,131,000
------------
Total Basic Industries 15,799,800
------------
Consumer Cyclical 53.1%
Airline 5.7%
AMR Corp.* 78,300 7,125,300
Continental Airlines, Inc. Cl. B* 260,400 16,079,700
Delta Air Lines, Inc. 50,700 4,208,100
TransWorld Airlines, Inc. Cv. Pfd.*+ 73,400 3,624,125
UAL Corp.* 214,300 11,518,625
------------
42,555,850
------------
Automotive 1.5%
Autozone, Inc.* 217,700 7,565,075
Danaher Corp. 71,200 3,097,200
Penske Motorsports, Inc.* 15,500 410,750
------------
11,073,025
------------
Hotel & Restaurant 12.5%
Extended Stay America, Inc.* 406,600 12,807,900
HFS, Inc.* 550,700 38,549,000
ITT Corp. 55,900 3,703,375
Lone Star Steakhouse & Saloon, Inc.* 47,100 1,778,025
MGM Grand, Inc.* 79,500 3,170,063
Mirage Resorts, Inc.* 138,400 7,473,600
Planet Hollywood International, Inc. Cl. A* 18,100 488,700
Rainforest Cafe, Inc.* 54,500 2,725,000
Renaissance Hotel Group NV* 63,500 1,365,250
Sun International Hotels Ltd.* 111,100 5,388,350
Trump Hotels & Casino Resorts, Inc.* 540,800 15,412,800
------------
92,862,063
------------
Recreation 7.6%
American Radio Systems Corp.* 172,200 7,404,600
Ascent Entertainment Group, Inc.* 75,700 1,911,425
Chancellor Corp. Cl. A* 43,200 1,350,000
Clear Channel Communications, Inc.* 120,400 9,917,950
Emmis Broadcasting Corp. Cl. A* 39,000 1,950,000
Evergreen Media Corp. Cl. A 281,000 12,012,750
Gemstar International Group Ltd.* 73,600 2,208,000
GTech Holdings Corp.* 92,900 2,752,162
Heftel Broadcasting Corp. Cl. A* 40,200 1,190,925
News Corp. Ltd. ADR 222,000 5,217,000
Recreation (cont'd)
Oakley, Inc.* 214,200 $ 9,746,100
Silver King Communications, Inc.* 24,300 729,000
------------
56,389,912
------------
Retail Trade 19.8%
Ann Taylor Stores Corp.* 337,600 6,836,400
Borders Group, Inc.* 206,000 6,643,500
BT Office Products International, Inc.* 231,900 4,145,213
Corporate Express, Inc.* 356,500 14,260,000
Gucci Group NV* 585,600 37,771,200
Home Depot, Inc.* 140,900 7,608,600
Industrie Natuzzi SPA ADR 97,000 4,971,250
Just For Feet, Inc.* 233,850 12,364,819
Loehmann's, Inc.* 12,700 292,100
Melville Corp. 226,100 9,157,050
Micro Warehouse, Inc.* 77,100 1,542,000
Office Depot, Inc.* 491,700 10,018,387
Price-Costco, Inc.* 226,000 4,887,250
Staples, Inc.* 174,000 3,393,000
Sunglass Hut International, Inc.* 884,100 21,549,937
Western Wireless Corp. Cl. A* 74,300 1,588,163
------------
147,028,869
------------
Textile & Apparel 6.0%
Authentic Fitness Corp. 45,000 838,125
Designer Holdings Ltd.* 20,000 532,500
Fila Holdings SPA ADR* 190,200 16,404,750
Men's Wearhouse, Inc.* 372,950 12,027,637
Nautica Enterprises, Inc.* 130,000 3,737,500
Tommy Hilfiger Corp.* 197,300 10,580,213
------------
44,120,725
------------
Total Consumer Cyclical 394,030,444
------------
Consumer Staple 19.3%
Business Service 7.7%
Apache Medical Systems, Inc.* 55,900 698,750
Fritz Companies, Inc.* 85,000 2,741,250
HBO & Co. 247,000 16,734,250
MetroMail Corp.* 32,600 729,425
Republic Waste Industries, Inc.*++ 420,800 11,782,737
Republic Waste Industries, Inc.* 760,400 22,146,650
U.S. Office Products Co.* 45,500 1,911,000
Xeikon NV ADR* 22,400 254,800
------------
56,998,862
------------
Drug 5.9%
Centocor Corp.* 121,200 3,620,850
Cephalon, Inc.* 147,000 2,903,250
Eli Lilly & Co. 164,300 10,679,500
Entremed, Inc.* 106,600 1,599,000
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STATE STREET RESEARCH CAPITAL APPRECIATION FUND
Value
Shares (Note 1)
------------------------------------------- ------- -------------
Drug (cont'd)
Express Scripts, Inc. Cl. A* 42,100 $ 1,936,600
Liposome Company, Inc.* 305,100 5,720,625
Magainin Pharmaceuticals, Inc.* 112,400 1,180,200
Matrix Pharmaceuticals, Inc.* 55,000 990,000
Myriad Genetics, Inc.* 20,300 507,500
Pfizer, Inc. 202,500 14,453,438
------------
43,590,963
------------
Food & Beverage 2.6%
Boston Beer Company, Inc. Cl. A* 5,600 134,400
Boston Chicken, Inc.* 305,900 9,941,750
Pete's Brewing Co.* 11,900 178,500
Starbucks Corp.* 331,800 9,373,350
------------
19,628,000
------------
Hospital Supply 2.2%
Caremark International, Inc.* 94,400 2,383,600
Cardiothoracic Systems, Inc.* 21,400 283,550
Guidant Corp. 73,700 3,629,725
MedPartners/Mullikin, Inc.* 181,800 3,795,075
Medtronic, Inc. 57,700 3,231,200
Neopath, Inc.* 127,500 3,219,375
------------
16,542,525
------------
Personal Care 0.3%
Polymer Group, Inc.* 117,100 2,049,250
------------
Printing & Publishing 0.6%
CKS Group, Inc.* 5,700 183,825
Hollinger International, Inc.* 176,300 2,005,413
The Providence Journal Co. Cl. A* 58,200 894,825
World Color Press, Inc.* 60,400 1,532,650
------------
4,616,713
------------
Total Consumer Staple 143,426,313
------------
Energy 0.4%
Oil 0.2%
Chesapeake Energy Corp.* 16,200 1,455,975
------------
Oil Service 0.2%
Varco International, Inc.* 67,500 1,223,438
------------
Total Energy 2,679,413
------------
Finance 0.8%
Financial Service 0.1%
First USA Paymentech, Inc.* 8,600 344,000
------------
Insurance 0.7%
W.R. Berkley Corp. 34,500 1,440,375
Everest Reinsurance Holdings, Inc. 152,200 3,938,175
------------
5,378,550
------------
Total Finance 5,722,550
------------
Science & Technology 15.2%
Computer Software & Service 12.1%
ADFlex Solutions, Inc.* 41,000 $ 451,000
Ascend Communications, Inc.* 252,500 14,203,125
Cascade Communications Corp.* 293,600 19,964,800
Checkfree Corp.* 20,500 407,438
Checkpoint Software Technologies Ltd.* 36,700 880,800
CompuServe Corp.* 35,400 747,825
Dassault Systemes S.A. ADR* 22,500 697,500
Datastream Systems, Inc.* 86,700 3,056,175
Fore Systems, Inc.* 176,400 6,372,450
Geoworks* 166,200 5,900,100
Madge Networks NV* 20,500 297,250
Microsoft Corp.* 98,000 11,772,250
Open Market, Inc.* 10,600 258,375
Open Text Corp.* 134,600 1,396,475
OpenVision Technologies, Inc.* 27,800 340,550
Parametric Technology Corp.* 168,300 7,300,012
SS&C Technologies, Inc.* 8,600 131,150
Triple P N.V.* 145,600 891,800
Westell Technologies, Inc.* 182,500 7,163,125
Western Digital Corp.* 274,400 7,168,700
Yahoo, Inc.* 7,300 153,300
------------
89,554,200
------------
Electronic Components 1.4%
Affymetrix, Inc.* 6,100 93,025
CHS Electronics, Inc.* 49,700 670,950
Sanmina Holdings, Inc.* 360,300 9,728,100
------------
10,492,075
------------
Electronic Equipment 0.7%
Lucent Technologies, Inc.* 47,000 1,780,125
Octel Communications Corp.* 159,800 3,156,050
Thermo Optek Corp.* 42,200 548,600
------------
5,484,775
------------
Office Equipment 1.0%
Dell Computer Corp.* 80,200 4,080,175
3Com Corp.* 74,000 3,385,500
------------
7,465,675
------------
Total Science & Technology 112,996,725
------------
Utility 4.5%
Telephone 4.5%
ADC Telecommunications, Inc.* 194,100 8,734,500
Brooks Fiber Properties, Inc.* 24,000 792,000
Excel Communications, Inc.* 19,500 526,500
McLeod, Inc.* 47,200 1,132,800
Newbridge Networks Corp.* 270,800 17,737,400
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STATE STREET RESEARCH CAPITAL APPRECIATION FUND
Value
Shares (Note 1)
----------------------------------------- ------ -----------
Telephone (cont'd)
Omnipoint Corp.* 88,300 $ 2,301,319
Teleport Communications Group Inc. Cl. A* 93,900 1,796,307
----------
33,020,826
----------
Total Utility 33,020,826
----------
Total Common Stocks (Cost $536,597,165) 707,676,071
----------
Principal Maturity
Amount Date
------------------------------------- ---------- -------- -------------
Commercial Paper 6.2%
American Express Credit Corp., 5.39% 5,043,000 7/3/1996 5,043,000
American General Finance Corp., 5.37% 10,000,000 7/2/1996 10,000,000
Chevron Oil Finance Co., 5.35% 10,000,000 7/3/1996 10,000,000
Ford Motor Credit Co., 5.32% 3,845,000 7/1/1996 3,845,000
General Electric Capital Corp., 5.37% 4,226,000 7/8/1996 4,226,000
Philip Morris Cos., Inc., 5.40% 7,991,600 7/8/1996 7,991,600
Wal-Mart Stores, Inc., 5.30% 4,800,000 7/1/1996 4,800,000
------------
Total Commercial Paper
(Cost $45,905,600) 45,905,600
------------
Total Investments (Cost
$582,502,765)--101.6% 753,581,671
Cash and Other Assets, Less
Liabilities--(1.6%) (11,574,323)
------------
Net Assets--100.0% $742,007,348
============
Federal Income Tax Information:
At June 30, 1996, the net unrealized appreciation of
investments based on cost for Federal income tax
purposes of $582,643,711 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value over
tax cost $187,263,790
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost over
value (16,325,830)
------------
$170,937,960
============
*Nonincome-producing securities
ADR stands for American Depositary Receipt, representing ownership of
foreign securities.
+Security restricted in accordance with Rule 144A under the Securities Act
of 1933, which allows for the resale of such securities among certain
qualified institutional buyers. The total cost and market value of Rule
144A securities owned at June 30, 1996 were $3,670,000 and $3,624,125
(0.49% of net assets), respectively.
++Security valued under consistently applied procedures established by the
Trustees. Security restricted as to public resale. At June 30, 1996 there
were no outstanding unrestricted securities of the same class as those
held. The total cost and market value of restricted securities owned at
June 30, 1996 were $8,051,200 and $11,782,737 (1.59% of net assets),
respectively.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996
Assets
Investments, at value (Cost $582,502,765) (Note 1) $ 753,581,671
Cash 2,744
Receivable for fund shares sold 784,827
Dividends and interest receivable 134,897
Receivable for securities sold 3,638
Other assets 10,662
------------
754,518,439
Liabilities
Payable for securities purchased 10,869,382
Accrued transfer agent and shareholder services (Note
2) 460,713
Accrued management fee (Note 2) 439,389
Payable for fund shares redeemed 384,775
Accrued distribution and service fees (Note 4) 222,853
Accrued trustees' fees (Note 2) 9,194
Other accrued expenses 124,785
------------
12,511,091
------------
Net Assets $ 742,007,348
============
Net Assets consist of:
Unrealized appreciation of investments $171,078,906
Accumulated net realized gain 15,502,627
Shares of beneficial interest 555,425,815
------------
$ 742,007,348
============
Net Asset Value and redemption price per share of Class
A shares ($395,050,410 / 30,956,126 shares of
beneficial interest) $12.76
============
Maximum Offering Price per share of Class A shares
($12.76 / .955) $13.36
============
Net Asset Value and offering price per share of
Class B shares ($172,213,335 / 13,791,209 shares of
beneficial interest)* $12.49
============
Net Asset Value, offering price and redemption price
per share of Class C shares ($167,623,763 / 12,954,795
shares of beneficial interest) $12.94
============
Net Asset Value and offering price per share of
Class D shares ($7,119,840 / 568,664 shares
of beneficial interest)* $12.52
============
* 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.
5
<PAGE>
STATE STREET RESEARCH CAPITAL APPRECIATION FUND
STATEMENT OF OPERATIONS
For the year ended June 30, 1996
Investment Income
Dividends, net of foreign taxes of $37,170 $ 2,490,531
Interest 1,253,968
-----------
3,744,499
Expenses
Management fee (Note 2) 4,634,817
Transfer agent and shareholder services (Note 2) 1,920,686
Custodian fee 182,610
Reports to shareholders 159,558
Registration fees 95,313
Service fee--Class A (Note 4) 864,450
Distribution and service fees--Class B (Note 4) 1,303,232
Distribution and service fees--Class D (Note 4) 52,599
Trustees' fees (Note 2) 32,189
Audit fee 26,970
Legal fees 5,763
Miscellaneous 26,497
-----------
9,304,684
-----------
Net investment loss (5,560,185)
-----------
Realized and Unrealized Gain (Loss) on Investments
Net realized gain on investments (Notes 1 and 3) 73,266,361
Net unrealized appreciation of investments 61,608,747
-----------
Net gain on investments 134,875,108
-----------
Net increase in net assets resulting from
operations $129,314,923
===========
STATEMENT OF CHANGES IN NET ASSETS
Year ended June 30
----------------------------
1996 1995
----------------------------- ------------ -------------
Increase (Decrease) in Net Assets
Operations:
Net investment loss $ (5,560,185) $ (3,720,060)
Net realized gain on
investments* 73,266,361 12,149,840
Net unrealized appreciation
of investments and foreign
currency 61,608,747 111,117,329
----------- ------------
Net increase resulting from
operations 129,314,923 119,547,109
----------- ------------
Distributions from net realized gains:
Class A (34,354,819) (11,280,742)
Class B (12,773,915) (2,571,808)
Class C (13,218,452) (3,080,510)
Class D (510,505) (112,508)
----------- ------------
(60,857,691) (17,045,568)
----------- ------------
Net increase from fund share
transactions (Note 5) 173,255,282 52,338,022
----------- ------------
Total increase in net assets 241,712,514 154,839,563
Net Assets
Beginning of year 500,294,834 345,455,271
----------- ------------
End of year $ 742,007,348 $500,294,834
=========== ============
* Net realized gain for
Federal income tax purposes
(Note 1) $ 73,389,253 $ 12,055,176
=========== ============
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
STATE STREET RESEARCH CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
Note 1
State Street Research Capital Appreciation Fund, formerly MetLife-State
Street Research Capital Appreciation Fund (the "Fund"), is a series of State
Street Research Equity Trust, formerly MetLife-State Street Equity Trust (the
"Trust"), which was organized as a Massachusetts business trust in March,
1986 and is registered under the Investment Company Act of 1940, as amended,
as an open-end management investment company. The Trust commenced operations
in August, 1986. The Trust consists presently of four separate funds: State
Street Research Capital Appreciation Fund, State Street Research Equity
Investment Fund, State Street Research Equity Income Fund and State Street
Research Global Resources Fund.
The Fund seeks to achieve maximum capital appreciation by investing primarily
in common stocks of emerging growth companies and of companies considered to
be undervalued special situations. Current income is not a consideration in
the selection of investments for the Fund.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and an annual service fee of 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. 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 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 accounting 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 Valuation
Values for listed securities reflect final sales 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 closing prices
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. Short-term securities
maturing within sixty days are valued at amortized cost. Other securities, if
any, are valued at their fair value as determined in accordance with
established methods consistently applied.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered.
C. Net Investment Income
Interest income is accrued daily as earned. Dividend income is accrued on the
ex-dividend date. The Fund is charged for expenses directly attributable to
it, while indirect expenses are allocated among all funds in the Trust.
D. Dividends
Dividends from net investment income, if any, are declared and paid or
reinvested quarterly. Net realized capital gains, if any, are distributed
annually, unless additional distributions are required for compliance with
applicable tax regulations. For the year ended June 30, 1996, the Fund has
designated as long-term 68% of the distributions from net realized gains.
Income dividends and capital gain distributions are determined in
accordance with Federal income tax regulations which may differ from
generally accepted accounting principles.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund has
elected to qualify under Subchapter M of the Internal Revenue Code and its
policy is to distribute all of its taxable income, including net realized
capital gains, within the prescribed time periods.
F. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the report period. Actual
results could differ from those estimates.
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 0.75% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. During the year ended June 30, 1996, the fees pursuant to such
agreement amounted to $4,634,817.
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. In addition, Metropolitan receives a fee for maintenance
of the accounts of certain shareholders who are
7
<PAGE>
STATE STREET RESEARCH CAPITAL APPRECIATION FUND
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 June 30, 1996, the amount of such
shareholder servicing and account maintenance expenses was $664,771.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $32,189 during the year ended June 30, 1996.
Note 3
For the year ended June 30, 1996, purchases and sales of securities,
exclusive of short-term obligations, aggregated $1,542,111,417 and
$1,459,422,684, respectively.
Note 4
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940, as amended. Under the Plan,
the Fund pays annual service fees to the Distributor at a rate of 0.25% of
average daily net assets for Class A, Class B and Class 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 or servicing of shareholder
accounts, to reimburse securities dealers for distribution and marketing
services, to furnish ongoing assistance to investors and to defray a portion
of its distribution and marketing expenses. For the year ended June 30, 1996,
fees pursuant to such plan amounted to $864,450, $1,303,232 and $52,599 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 $206,221 and $1,397,367, respectively, on sales of Class A shares
of the Fund during the year ended June 30, 1996, and that MetLife Securities,
Inc. earned commissions aggregating $1,991,783 on sales of Class B shares,
and that the Distributor collected contingent deferred sales charges of
$378,749 and $1,900 on redemptions of Class B and Class D shares,
respectively, during the same period.
Note 5
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share.
At June 30, 1996, the Distributor owned 7,172 Class A shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended June 30
--------------------------------------------------------
1996 1995
-------------------------- ---------------------------
Class A Shares Amount Shares Amount
--------------------------------------------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 8,509,488 $ 103,271,609 6,331,406 $ 61,983,784
Issued upon reinvestment of distributions
from net realized gains 3,045,717 33,519,586 1,183,334 10,907,541
Shares repurchased (6,333,177) (77,140,136) (7,177,882) (70,964,079)
---------- ----------- ---------- ------------
Net increase 5,222,028 $ 59,651,059 336,858 $ 1,927,246
========== =========== ========== ============
Class B Shares Amount Shares Amount
--------------------------------------------- ---------- ----------- ---------- ------------
Shares sold 6,634,276 $ 79,295,183 4,108,923 $ 40,145,257
Issued upon reinvestment of distributions
from net realized gains 1,158,748 12,504,495 276,437 2,529,368
Shares repurchased (2,182,710) (26,185,464) (1,642,379) (16,155,301)
---------- ----------- ---------- ------------
Net increase 5,610,314 $ 65,614,214 2,742,981 $ 26,519,324
========== =========== ========== ============
Class C Shares Amount Shares Amount
--------------------------------------------- ---------- ----------- ---------- ------------
Shares sold 6,363,633 $ 78,353,974 4,381,871 $ 43,450,467
Issued upon reinvestment of distributions
from net realized gains 1,187,191 13,211,134 324,761 3,010,459
Shares repurchased (3,763,939) (45,981,872) (2,379,730) (23,674,364)
---------- ----------- ---------- ------------
Net increase 3,786,885 $ 45,583,236 2,326,902 $ 22,786,562
========== =========== ========== ============
Class D Shares Amount Shares Amount
--------------------------------------------- ---------- ----------- ---------- ------------
Shares sold 1,631,034 $ 19,873,515 228,040 $ 2,226,133
Issued upon reinvestment of distributions
from net realized gains 42,662 461,756 11,168 102,407
Shares repurchased (1,461,059) (17,928,498) (125,783) (1,223,650)
---------- ----------- ---------- ------------
Net increase 212,637 $ 2,406,773 113,425 $ 1,104,890
========== =========== ========== ============
</TABLE>
8
<PAGE>
STATE STREET RESEARCH CAPITAL APPRECIATION FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------
Year ended June 30
-----------------------------------------------------
1996** 1995** 1994 1993 1992
------------------------------------ -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 11.52 $ 9.11 $ 10.42 $ 8.33 $ 6.55
Net investment loss* (.10) (.09) (.04) (.05) (.05)
Net realized and unrealized gain
(loss) on investments 2.63 2.95 .09 2.81 1.83
Distributions from net realized
gains (1.29) (.45) (1.36) (.67) --
------- ------- ------- ------- --------
Net asset value, end of year $ 12.76 $ 11.52 $ 9.11 $ 10.42 $ 8.33
======= ======= ======= ======= ========
Total return 23.87%+ 32.56%+ (0.28)%+ 35.78%+ 27.03%+
Net assets at end of year (000s) $395,050 $296,471 $231,356 $183,886 $116,687
Ratio of operating expenses to
average net assets* 1.40% 1.55% 1.50% 1.50% 1.50%
Ratio of net investment loss to
average net assets* (0.79)% (0.87)% (0.81)% (0.63)% (0.71)%
Portfolio turnover rate 279.55% 217.28% 147.73% 135.17% 128.10%
Average commission rate@ $ .0266 -- -- -- --
*Reflects voluntary assumption of
fees or expenses per share in each
year -- $ .03 $ .02 $ .01 $ .01
</TABLE>
<TABLE>
<CAPTION>
Class B
-------------------------------------------------
June 1, 1993
(Commencement
of
Share Class
Year Ended June 30 Designations)
--------------------------------- to
1996** 1995** 1994 June 30, 1993
------------------------------------ ------ ------- ----------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 11.38 $ 9.05 $ 10.41 $ 10.44
Net investment loss* (.22) (.15) (.06) (.00)
Net realized and unrealized gain
(loss) on investments 2.62 2.93 .06 (.03)
Distributions from net realized
gains (1.29) (.45) (1.36) --
------ ------- ----------- -----------
Net asset value, end of year $ 12.49 $ 11.38 $ 9.05 $ 10.41
====== ======= =========== ============
Total return 22.97%+ 31.86%+ (0.83)%+ (0.29)%+++
Net assets at end of year (000s) $172,213 $93,088 $49,236 $2,790
Ratio of operating expenses to
average net assets* 2.15% 2.15% 2.00% 2.00%++
Ratio of net investment loss to
average net assets* (1.53)% (1.47)% (1.29)% (0.95)%++
Portfolio turnover rate 279.55% 217.28% 147.73% 135.17%
Average commission rate@ $ .0266 -- -- --
*Reflects voluntary assumption of
fees or expenses per share in each
year -- $ .02 $ .02 $ .00
</TABLE>
<TABLE>
<CAPTION>
Class C
---------------------------------------------------
Year ended June 30
-----------------------------
June 1, 1993
(Commencement of
Share Class
Designations) to
1996** 1995** 1994 June 30, 1993
--------------------------------- -------- -------- ------- -------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
year $ 11.64 $ 9.16 $ 10.42 $ 10.44
Net investment income (loss)* (.08) (.05) (.02) .00
Net realized and unrealized gain
(loss) on investments 2.67 2.98 .12 (.02)
Distributions from net realized
gains (1.29) (.45) (1.36) --
------- ------- ------ -------
Net asset value, end of year $ 12.94 $ 11.64 $ 9.16 $ 10.42
======= ======= ====== =======
Total return 24.28%+ 33.06%+ 0.25%+ (0.19)%+++
Net assets at end of year (000s) $167,624 $106,675 $62,662 $37,826
Ratio of operating expenses to
average net assets* 1.15% 1.15% 1.00% 1.00%++
Ratio of net investment income
(loss) to average net assets* (0.54)% (0.46)% (0.30)% 0.50%++
Portfolio turnover rate 279.55% 217.28% 147.73% 135.17%
Average commission rate@ $ .0266 -- -- --
*Reflects voluntary assumption of
fees or expenses per share in
each year -- $ .02 $ .02 $ .00
</TABLE>
<TABLE>
<CAPTION>
Class D
---------------------------------------------------
June 1, 1993
(Commencement
of
Share Class
Year Ended June 30 Designations)
--------------------------------- to
1996** 1995** 1994 June 30, 1993
--------------------------------- ------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of
year $ 11.41 $ 9.07 $ 10.41 $ 10.44
Net investment income (loss)* (.21) (.15) (.07) (.01)
Net realized and unrealized gain
(loss) on investments 2.61 2.94 .09 (.02)
Distributions from net realized
gains (1.29) (.45) (1.36) --
------ ------- --------- -------
Net asset value, end of year $ 12.52 $ 11.41 $ 9.07 $ 10.41
====== ======= ========= =======
Total return 23.03%+ 31.79%+ (0.61)%+ (0.29)%+++
Net assets at end of year (000s) $ 7,120 $ 4,061 $ 2,201 $ 623
Ratio of operating expenses to
average net assets* 2.15% 2.15% 2.00% 2.00%++
Ratio of net investment income
(loss) to average net assets* (1.54)% (1.47)% (1.29)% (1.10)%++
Portfolio turnover rate 279.55% 217.28% 147.73% 135.17%
Average commission rate@ $ .0266 -- -- --
*Reflects voluntary assumption of
fees or expenses per share in
each year -- $ .02 $ .02 $ .00
</TABLE>
** Per-share figures have been calculated using the average shares method.
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower for each of the years in the
four year period ended June 30, 1995 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.
@ For the year ended June 30, 1996, the Fund has elected to disclose its
average commission rate per share paid for security trades.
9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of State Street Research
Equity Trust and the Shareholders of
State Street Research Capital Appreciation Fund
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of State Street Research
Capital Appreciation Fund (formerly MetLife-State Street Research Capital
Appreciation Fund) (a series of State Street Research Equity Trust, hereafter
referred to as the "Trust") at June 30, 1996, and the results of its
operations, the changes in its net assets and the financial highlights for
the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Trust's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits,
which included confirmation of securities at June 30, 1996 by correspondence
with the custodian and brokers and the application of alternative procedures
where confirmations from brokers were not received, provide a reasonable
basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
August 9, 1996
10
<PAGE>
STATE STREET RESEARCH CAPITAL APPRECIATION FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
Capital Appreciation Fund's performance was driven by a stock-investing
environment that featured low inflation, strong corporate profits and
economic growth. The Fund benefited from holdings in a number of industry
sectors, most notably, retail and textile/apparel, computer software and
service, hotel and restaurant and recreation, and airline stocks. Returns
were good from a historical standpoint, but the Fund underperformed its peer
group over the past year. Capital Appreciation Fund proved to be a stronger
performer in the second half of the period, beating the average total return
for its Lipper category.
Fund management made a number of changes to the Fund, including reducing its
position in technology stocks but concentrating holdings in the area of
computer software and service. As of June 30, 1996, software and service
stocks represented 12.1% of the portfolio.
Capital Appreciation Fund's management added to the Fund's position in retail
stocks. Retail, as of June 30, 1996, made up 19.8% of the portfolio.
Textile/apparel stocks accounted for another 6% of the portfolio.
Fund management also added to the portfolio's hotel and restaurant stocks,
which represented 12.5% of the portfolio as of this writing.
June 30, 1996
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 in 1993. "C" shares, offered
without a sales charge, are available only to certain employee benefit plans
and large institutions. Performance for "B" and "D" shares prior to class
designations in 1993 reflects annual 12b-1 fees of .50% and performance
thereafter reflects annual 12b-1 fees of 1%, which will reduce subsequent
performance. Performance reflects the maximum 4.5% "A" share front-end, or
5% "B" share or 1% "D" share contingent deferred sales charges. The Standard
& Poor's 500 Composite Index (S&P 500) includes 500 widely traded common
stocks and is a commonly used measure of U.S. stock market performance. The
index is unmanaged and does not take sales charges into consideration. Direct
investment in the index is not possible; results are for illustrative
purposes only.
Change In Value Of $10,000 Based On
The S&P 500 Compared To Change In Value Of $10,000
Invested In Capital Appreciation Fund
Class A Shares
***********[LINE CHARTS]************
Class A Shares
--------------
Average Annual Total Return
--------------------------------
1 Year 5 Years Life of Fund
------- ------- ------------
+18.30% +21.95% +16.55%
-------------------------------
Capital
Appreciation S&P
Fund 500
---- ---
8/86 9550 10000
6/87 12195 12606
6/88 11777 11730
6/89 13896 14135
6/90 16305 16463
6/91 16029 17679
6/92 20362 20048
6/93 27647 22780
6/94 27569 23100
6/95 36544 29112
6/96 45269 36676
======================================
Class B Shares
--------------
Average Annual Total Return
-------------------------------
1 Year 5 Years Life of Fund
------- ------- ------------
+17.97% +22.43% +16.87%
------- ------- ------------
Capital
Appreciation S&P
Fund 500
---- ---
8/86 10000 10000
6/87 12770 12606
6/88 12332 11730
6/89 14562 14135
6/90 17073 16463
6/91 16784 17679
6/92 21321 20048
6/93 28922 22780
6/94 28683 23100
6/95 37822 29112
6/96 46511 36676
======================================
Class C Shares
--------------
Average Annual Total Return
-------------------------------
1 Year 5 Years Life of Fund
------ ------- ------------
+24.28% +23.38% +17.25%
-------------------------------
Capital
Appreciation S&P
Fund 500
---- ---
8/86 10000 10000
6/87 12770 12606
6/88 12332 11730
6/89 14562 14135
6/90 17073 16463
6/91 16784 17679
6/92 21321 20048
6/93 28949 22780
6/94 29021 23100
6/95 38615 29112
6/96 47990 36676
=====================================
Class D Shares
--------------
Average Annual Total Return
-------------------------------
1 Year 5 Years Life of Fund
------ ------- ------------
22.03% +22.66% 16.90%
-------------------------------
Capital
Appreciation S&P
Fund 500
---- ---
8/86 10000 10000
6/87 12770 12606
6/88 12332 11730
6/89 14562 14135
6/90 17073 16463
6/91 16784 17679
6/92 21321 20048
6/93 28922 22780
6/94 28745 23100
6/95 37883 29112
6/96 46606 36676
=====================================
*************************************
11
<PAGE>
STATE STREET RESEARCH CAPITAL APPRECIATION FUND
REPORT ON SPECIAL MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of the State Street Research Capital
Appreciation Fund ("Fund"), along with shareholders of other series of State
Street Research Equity Trust ("Meeting"), was convened on October 20, 1995,
and continued thereafter. The results of the Meeting are set forth below.
Votes (millions
of shares)
----------------
For Withheld
---- ---------
1. The following persons were elected as
Trustees:
Edward M. Lamont 29.4 1.9
Robert A. Lawrence 29.4 1.9
Dean O. Morton 29.4 1.9
Thomas L. Phillips 29.4 1.9
Toby Rosenblatt 29.4 1.9
Michael S. Scott Morton 29.4 1.9
Ralph F. Verni 29.4 1.9
Jeptha H. Wade 29.4 1.9
Votes (millions of
shares)
-------------------
For Against Abstain
--- ----- ------
2. The Fund's following investment policies were
reclassified from fundamental to
nonfundamental:
a. The policy regarding investments in
securities of companies with less than three
(3) years' continuous operation; 17.4 2.1 2.8
b. The policy regarding investments in illiquid
securities; 16.7 2.4 3.3
3. The Fund's fundamental policy regarding
investing in commodities and commodity
contracts was amended. 16.9 2.2 3.3
4. The Fund's fundamental policy on lending was
amended to clarify the permissibility of
securities lending. 17.3 1.9 3.2
5. The Master Trust Agreement was amended to
permit the Trustees to recognize, merge or
liquidate a fund without prior shareholder
approval. 21.1 6.4 3.8
6. The Master Trust Agreement was amended to
eliminate specified time permitted between the
record date and any shareholders meeting. 22.8 4.5 4.1
12
<PAGE>
STATE STREET RESEARCH EQUITY INVESTMENT FUND
INVESTMENT PORTFOLIO
June 30, 1996
Value
Shares (Note 1)
- -------------------------------------- ------ -------------
COMMON STOCKS 95.1%
Basic Industries 16.3%
Chemical 8.8%
Ciba-Geigy AG ADR 38,500 $ 2,343,495
E.I. du Pont de Nemours & Co. 31,200 2,468,700
Monsanto Co. 114,000 3,705,000
Rohm & Haas Co. 38,100 2,390,775
-----------
10,907,970
-----------
Electrical Equipment 2.9%
General Electric Co. 42,000 3,633,000
-----------
Machinery 1.9%
Case Corp. 28,100 1,348,800
Pall Corp. 39,400 950,525
-----------
2,299,325
-----------
Metal & Mining 2.7%
Aluminum Company of America 36,100 2,071,237
Nucor Corp. 25,100 1,270,688
-----------
3,341,925
-----------
Total Basic Industries 20,182,220
-----------
Consumer Cyclical 17.6%
Automotive 4.2%
Ford Motor Co. 68,000 2,201,500
General Motors Corp. 41,900 2,194,513
Magna International, Inc. Cl. A 16,900 777,400
-----------
5,173,413
-----------
Building 1.0%
Owens-Corning Fiberglas Corp.* 29,400 1,264,200
-----------
Hotel & Restaurant 2.0%
Mirage Resorts, Inc.* 46,600 2,516,400
-----------
Recreation 3.2%
Comcast Corp. Cl. A 10,600 194,775
Comcast Corp. Cl. A Special 32,100 593,850
Walt Disney Co. 26,043 1,637,454
Mattel, Inc. 54,288 1,553,994
-----------
3,980,073
-----------
Retail Trade 7.1%
Home Depot, Inc. 57,400 3,099,600
Gucci Group N.V.* 26,900 1,735,050
J.C. Penney Company, Inc. 24,400 1,281,000
Kroger Co.* 35,100 1,386,450
Wal-Mart Stores, Inc. 50,600 1,283,975
-----------
8,786,075
-----------
Total Consumer Cyclical 21,720,161
-----------
Consumer Staple 22.0%
Business Service 2.0%
Interpublic Group of Companies, Inc. 53,800 $ 2,521,875
-----------
Drug 4.5%
American Home Products Corp. 31,600 1,899,950
Eli Lilly & Co. 25,272 1,642,680
Pfizer, Inc. 29,200 2,084,150
-----------
5,626,780
-----------
Food & Beverage 4.6%
Anheuser-Busch, Inc. 33,000 2,475,000
PepsiCo, Inc. 89,200 3,155,450
-----------
5,630,450
-----------
Hospital Supply 5.3%
Baxter International, Inc. 48,000 2,268,000
Columbia/HCA Healthcare Corp.* 26,300 1,403,763
Johnson & Johnson 26,000 1,287,000
United Healthcare Corp. 30,800 1,555,400
-----------
6,514,163
-----------
Personal Care 2.8%
Gillette Co. 20,800 1,297,400
Procter & Gamble Co. 23,400 2,120,625
-----------
3,418,025
-----------
Tobacco 2.8%
Philip Morris Companies, Inc. 33,600 3,494,400
-----------
Total Consumer Staple 27,205,693
-----------
Energy 8.8%
Oil 5.7%
Exxon Corp. 14,300 1,242,313
Royal Dutch Petroleum Co. 24,600 3,782,250
Total S.A. Cl. B ADR 55,129 2,046,664
-----------
7,071,227
-----------
Oil Service 3.1%
Halliburton Co. 16,400 910,200
Schlumberger Ltd. 34,000 2,864,500
-----------
3,774,700
-----------
Total Energy 10,845,927
-----------
Finance 8.1%
Bank 4.4%
BankAmerica Corp. 34,100 2,583,075
Citicorp 35,300 2,916,662
-----------
5,499,737
-----------
The accompanying notes are an integral part of the financial
statements.
3
<PAGE>
Value
Shares (Note 1)
- -------------------------------------- ---- -----------
Financial Service 1.6%
Federal National Mortgage Association 57,900 $ 1,939,650
-----------
Insurance 2.1%
Ace Ltd. 19,100 897,700
American International Group, Inc. 5,650 557,231
Travelers, Inc. 25,050 1,142,906
-----------
2,597,837
-----------
Total Finance 10,037,224
-----------
Science & Technology 18.5%
Aerospace 2.9%
Boeing Co. 21,700 1,890,612
Raytheon Co. 33,000 1,703,625
-----------
3,594,237
-----------
Computer Software & Service 7.4%
Cisco Systems, Inc.* 50,000 2,831,250
Electronic Data Systems Corp. 39,600 2,128,500
First Data Corp. 22,900 1,823,412
Microsoft Corp.* 19,400 2,330,425
-----------
9,113,587
-----------
Electronic Equipment 3.8%
L.M. Ericsson Telephone Co. Cl. B ADR* 96,640 2,077,760
Lucent Technologies, Inc.* 35,300 1,336,987
Perkin-Elmer Corp. 26,800 1,293,100
-----------
4,707,847
-----------
Office Equipment 4.4%
Diebold, Inc. 34,650 1,671,863
Hewlett-Packard Co. 21,700 2,161,862
International Business Machines Corp. 15,800 1,564,200
-----------
5,397,925
-----------
Total Science & Technology 22,813,596
-----------
Utility 3.8%
Electric 0.8%
FPL Group, Inc. 21,800 1,002,800
-----------
Telephone 3.0%
AT&T Corp. 31,700 1,965,400
AirTouch Communications, Inc.* 61,600 1,740,200
-----------
3,705,600
-----------
Total Utility 4,708,400
-----------
Total Common Stocks (Cost $91,187,776) 117,513,221
-----------
Principal Maturity Value
Amount Date (Note 1)
- ------------------------------- --------- --------- ------------
CONVERTIBLE BONDS 1.5%
Equitable Company, Inc. Cv.
Sub. Deb., 6.125% $1,191,000 12/15/2024 $ 1,360,718
Price Co. Cv. Sub. Deb., 5.50% 440,000 2/28/2012 457,600
----------
Total Convertible Bonds (Cost $1,648,785) 1,818,318
----------
COMMERCIAL PAPER 4.0%
American Express Credit Corp.,
5.39% 4,433,000 7/01/1996 4,433,000
Associates Corp. of North
America, 5.36% 568,000 7/03/1996 568,000
----------
Total Commercial Paper (Cost $5,001,000) 5,001,000
----------
Total Investments (Cost $97,837,561)--100.6% 124,332,539
Cash and Other Assets, Less Liabilities--(0.6)% (796,002)
----------
Net Assets--100.0% $123,536,537
==========
Federal Income Tax Information:
At June 30, 1996, the net unrealized appreciation of
investments based on cost for Federal income tax
purposes of $97,899,747 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost $27,210,854
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax
cost over value (778,062)
-----------
$26,432,792
===========
* Nonincome-producing securities.
ADR stands for American Depositary Receipt, representing ownership of
foreign securities.
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
Statement of Assets and Liabilities
June 30, 1996
Assets
Investments, at value (Cost $97,837,561) (Note 1) $124,332,539
Cash 6,590
Dividends and interest receivable 162,471
Receivable for securities sold 143,785
Receivable for fund shares sold 53,821
Receivable from Distributor (Note 3) 53,534
Other assets 5,949
-----------
124,758,689
Liabilities
Payable for securities purchased 904,641
Accrued transfer agent and shareholder services (Note
2) 74,434
Payable for fund shares redeemed 73,086
Accrued management fee (Note 2) 62,922
Accrued distribution and service fees (Note 5) 18,129
Accrued trustees' fees (Note 2) 6,027
Dividends payable 2,310
Other accrued expenses 80,603
-----------
1,222,152
-----------
Net Assets $123,536,537
===========
Net Assets consist of:
Undistributed net investment income $ 671,546
Unrealized appreciation of investments 26,494,978
Accumulated net realized gain 7,707,953
Shares of beneficial interest 88,662,060
-----------
$123,536,537
===========
Net Asset Value and redemption price per share of
Class A shares ($39,300,231 / 2,306,216 shares of
beneficial interest) $17.04
======
Maximum Offering Price per share of Class A shares
($17.04 / .955) $17.84
======
Net Asset Value and offering price per share of
Class B shares ($13,128,567 / 777,751 shares of
beneficial interest)* $16.88
======
Net Asset Value, offering price and redemption price
per share of Class C shares ($70,176,849 / 4,121,645
shares of beneficial interest) $17.03
======
Net Asset Value and offering price per share of
Class D shares ($930,890 / 55,166 shares of
beneficial interest)* $16.87
======
* Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
Statement of Operations
For the year ended June 30, 1996
Investment Income
Dividends, net of foreign taxes of $31,052 $ 1,706,929
Interest 426,882
---------
2,133,811
Expenses
Management fee (Note 2) 676,177
Transfer agent and shareholder services (Note 2) 327,103
Custodian fee 95,721
Reports to shareholders 50,968
Registration fees 47,281
Audit fee 28,954
Trustees' fees (Note 2) 15,680
Service fee--Class A (Note 5) 88,133
Distribution and service fees--Class B (Note 5) 89,779
Distribution and service fees--Class D (Note 5) 8,123
Legal fees 4,694
Miscellaneous 13,934
---------
1,446,547
Expenses borne by the Distributor (Note 3) (220,240)
---------
1,226,307
---------
Net investment income 907,504
---------
Realized and Unrealized Gain on Investments
Net realized gain on investments (Notes 1 and 4) 10,187,786
Net unrealized appreciation of investments 11,825,753
---------
Net gain on investments 22,013,539
---------
Net increase in net assets resulting from
operations $22,921,043
=========
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
Statement of Changes in Net Assets
Year ended June 30
---------------------------
1996 1995
- ------------------------------ ----------- ------------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 907,504 $ 626,508
Net realized gain on
investments* 10,187,786 1,524,460
Net unrealized appreciation of
investments 11,825,753 11,229,657
--------- ----------
Net increase resulting from
operations 22,921,043 13,380,625
--------- ----------
Dividends from net investment income:
Class A (248,210) (111,024)
Class C (571,956) (535,596)
--------- ----------
(820,166) (646,620)
--------- ----------
Distributions from net realized gains:
Class A (1,371,017) (778,560)
Class B (315,045) (112,505)
Class C (2,286,228) (859,567)
Class D (31,975) (15,072)
--------- ----------
(4,004,265) (1,765,704)
--------- ----------
Net increase from fund share
transactions (Note 6) 17,130,921 9,948,321
--------- ----------
Total increase in net assets 35,227,533 20,916,622
Net Assets
Beginning of year 88,309,004 67,392,382
--------- ----------
End of year (including
undistributed net investment
income of $671,546 and
$135,113, respectively) $123,536,537 $88,309,004
========= ==========
* Net realized gain for
Federal income tax purposes
(Note 1) $ 10,179,814 $ 1,567,315
========= ==========
Notes to Financial Statements
June 30, 1996
Note 1
State Street Research Equity Investment Fund, formerly MetLife-State Street
Research Equity Investment Fund (the "Fund") is a series of State Street
Research Equity Trust, formerly MetLife-State Street Equity Trust (the
"Trust"), which was organized as a Massachusetts business trust in March,
1986 and is registered under the Investment Company Act of 1940, as amended,
as an open-end management investment company. The Trust commenced operations
in August, 1986. The Trust consists presently of four separate funds: State
Street Research Equity Investment Fund, State Street Research Capital
Appreciation Fund, State Street Research Equity Income Fund and State Street
Research Global Resources Fund.
The Fund seeks to achieve long-term growth of capital and, secondarily,
long-term growth of income by investing primarily in common stocks of
established companies with above-average prospects for growth.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and an annual service fee of 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. 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 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 Valuation
Values for listed securities reflect final sales 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 closing prices
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. Short-term securities
maturing within sixty days are valued at amortized cost. Other securities, if
any, are valued at their fair value as determined in accordance with
established methods consistently applied.
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered.
C. Net Investment Income
Interest income is accrued daily as earned. Dividend income is accrued on the
ex-dividend date. The Fund is charged for expenses directly attributable to
it, while indirect expenses are allocated among all funds in the Trust.
D. Dividends
Dividends from net investment income, if any, are declared and paid or
reinvested quarterly. 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.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund has
elected to qualify under Subchapter M of the Internal Revenue Code and its
policy is to distribute all of its taxable income, including net realized
capital gains, within the prescribed time periods.
F. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
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 0.65% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. During the year ended June 30, 1996, the fees pursuant to such
agreement amounted to $676,177.
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. 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
June 30, 1996, the amount of such shareholder servicing and account
maintenance expenses was $191,370.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $15,680 during the year ended June 30, 1996.
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 June 30, 1996, the amount of such expenses
assumed by the Distributor and its affiliates was $220,240.
Note 4
For the year ended June 30, 1996, purchases and sales of securities,
exclusive of short-term obligations, aggregated $60,227,860 and $44,463,543,
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, as amended. Under the Plan,
the Fund pays annual service fees to the Distributor at a rate of 0.25% of
average daily net assets for Class A, Class B and Class 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 or servicing of shareholder
accounts, to reimburse securities dealers for distribution and marketing
services, to furnish ongoing assistance to investors and to defray a portion
of its distribution and marketing expenses. For the year ended June 30, 1996,
fees pursuant to such plan amounted to $88,133, $89,779 and $8,123 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 $17,387 and $116,451, respectively on sales of Class A shares of
the Fund during the year ended June 30, 1996, and that MetLife Securities,
Inc. earned commissions aggregating $212,434 on sales of Class B shares, and
that the Distributor collected contingent deferred sales charges of $40,509
and $39 on redemptions of Class B and Class D shares, respectively, during
the same period.
7
<PAGE>
Note 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At June 30, 1996,
Metropolitan owned 42,732 Class D shares of the Fund and the Distributor
owned 3,603 Class A shares of the Fund.
Share transactions were as follows:
Year ended June 30
------------------------------------------------------
1996 1995
------------------------- -------------------------
Class A Shares Amount Shares Amount
------------------ ---------- ----------- -------- -------------
Shares sold 405,624 $ 6,395,709 348,182 $ 4,474,313
Issued upon
reinvestment of:
Distributions
from net realized
gains 89,924 1,331,731 60,210 746,003
Dividends from
net investment
income 14,813 236,859 7,369 105,228
Shares repurchased (387,435) (6,071,101) (630,567) (8,019,412)
-------- --------- ------ -----------
Net increase
(decrease) 122,926 $ 1,893,198 (214,806) $ (2,693,868)
======== ========= ====== ===========
Class B Shares Amount Shares Amount
------------------ -------- --------- ------ -----------
Shares sold 440,639 $ 6,927,207 147,104 $ 1,868,350
Issued upon
reinvestment of
distributions
from net realized
gains 20,913 307,750 9,061 111,547
Shares repurchased (102,902) (1,616,965) (63,119) (791,085)
-------- --------- ------ -----------
Net increase 358,650 $ 5,617,992 93,046 $ 1,188,812
======== ========= ====== ===========
Class C Shares Amount Shares Amount
------------------ -------- --------- ------ -----------
Shares sold 1,692,679 $ 26,954,407 1,589,454 $ 20,294,474
Issued upon
reinvestment of:
Distributions
from net realized
gains 154,432 2,286,228 69,042 859,569
Dividends from
net investment
income 36,260 571,723 24,036 342,993
Shares repurchased (1,302,028) (20,281,019) (784,881) (10,102,310)
-------- --------- ------ -----------
Net increase 581,343 $ 9,531,339 897,651 $ 11,394,726
======== ========= ====== ===========
Class D Shares Amount Shares Amount
------------------ -------- --------- ------ -----------
Shares sold 5,582 $ 87,865 5,152 $ 64,522
Issued upon
reinvestment of
distributions
from net realized
gains 2,081 30,561 1,172 14,429
Shares repurchased (1,906) (30,034) (1,525) (20,300)
-------- --------- ------ -----------
Net increase 5,757 $ 88,392 4,799 $ 58,651
======== ========= ====== ===========
8
<PAGE>
Financial Highlights
For a share outstanding throughout each year:
Class A
------------------------------------------------
Year ended June 30
------------------------------------------------
1996** 1995** 1994 1993 1992
-------------------- ------ ------ ------ ------ --------
Net asset value,
beginning of year $14.28 $12.44 $14.52 $13.16 $11.19
Net investment
income (loss)* .12 .08 .01 .04 .05
Net realized and
unrealized gain
(loss) on
investments 3.38 2.14 .18 2.48 1.99
Distributions from
net investment
income (.11) (.05) -- (.04) (.07)
Distributions from
net realized gains (.63) (.33) (2.27) (1.12) --
---- ---- ---- ---- ------
Net asset value, end
of year $17.04 $14.28 $12.44 $14.52 $13.16
==== ==== ==== ==== ======
Total return 25.33%+ 18.34%+ 0.93%+ 20.37%+ 18.27%+
Net assets at end of
year (000s) $39,300 $31,174 $29,821 $26,933 $48,473
Ratio of operating
expenses to
average net
assets* 1.25% 1.42% 1.50% 1.50% 1.50%
Ratio of net
investment income
(loss) to average
net assets* 0.79% 0.64% 0.08% 0.23% 0.43%
Portfolio turnover
rate 44.44% 47.93% 62.93% 92.35% 81.89%
Average commission
rate@ $.0331 -- -- -- --
*Reflects voluntary
assumption of fees
or expenses per
share in each year
(Note 3). $.03 $.06 $.04 $.02 $.02
Class B
-------------------------------------------
June 1, 1993
(Commencement
of Share
Class
Designations)
Year ended June 30 to
--------------------------
1996** 1995** 1994 June 30, 1993
--------------------------- ------ ------ ------ -------------
Net asset value, beginning
of year $14.16 $12.36 $14.51 $14.78
Net investment income
(loss)* .01 .01 (.02) .00
Net realized and unrealized
gain (loss) on investments 3.34 2.12 .14 (.26)
Distributions from net
investment income -- -- -- (.01)
Distributions from net
realized gains (.63) (.33) (2.27) --
---- ---- ---- -----------
Net asset value, end of
year $16.88 $14.16 $12.36 $14.51
==== ==== ==== ===========
Total return 24.39%+ 17.70%+ 0.37%+ (1.77)%+++
Net assets at end of year
(000s) $13,129 $5,933 $4,029 $663
Ratio of operating expenses
to average net assets* 2.00% 2.00% 2.00% 2.00%++
Ratio of net investment
income (loss) to average
net assets* 0.05% 0.08% (0.39)% 0.03%++
Portfolio turnover rate 44.44% 47.93% 62.93% 92.35%
Average commission rate@ $.0331 -- -- --
*Reflects voluntary
assumption of fees or
expenses per share in each
year (Note 3). $.03 $.06 $.04 $.00
Class C
-------------------------------------------
June 1, 1993
(Commencement
of Share
Class
Designations)
Year ended June 30 to
--------------------------
1996** 1995** 1994 June 30, 1993
--------------------------- ------ ------ ------ -------------
Net asset value, beginning
of year $14.27 $12.48 $14.51 $14.78
Net investment income
(loss)* .17 .14 .07 (.00)
Net realized and unrealized
gain (loss) on investments 3.37 2.15 .17 (.25)
Dividends from net
investment income (.15) (.17) -- (.02)
Distributions from net
realized gains (.63) (.33) (2.27) --
---- ---- ---- -----------
Net asset value, end of
year $17.03 $14.27 $12.48 $14.51
==== ==== ==== ===========
Total return 25.66%+ 18.83%+ 1.41%+ (1.69)%+++
Net assets at end of year
(000s) $70,177 $50,503 $32,991 $18,796
Ratio of operating expenses
to
average net assets* 1.00% 1.00% 1.00% 1.00%++
Ratio of net investment
income (loss) to average
net assets* 1.06% 1.09% 0.59% (0.39)%++
Portfolio turnover rate 44.44% 47.93% 62.93% 92.35%
Average commission rate@ $.0331 -- -- --
*Reflects voluntary
assumption of fees or
expenses per share in each
year (Note 3). $.03 $.06 $.06 $.00
<TABLE>
<CAPTION>
Class D
-------------------------------------------
June 1, 1993
(Commencement
of Share
Class
Designations)
Year ended June 30 to
--------------------------
1996** 1995** 1994 June 30, 1993
- ----------------------------------------- ------ ------ ------ -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $14.15 $12.36 $14.51 $14.78
Net investment income (loss)* .01 .01 (.05) .00
Net realized and unrealized gain (loss)
on investments 3.34 2.11 .17 (.26)
Dividends from net investment income -- -- -- (.01)
Distributions from net realized gains (.63) (.33) (2.27) --
---- ---- ---- -----------
Net asset value, end of year $16.87 $14.15 $12.36 $14.51
==== ==== ==== ===========
Total return 24.40%+ 17.53%+ 0.45%+ (1.77)%+++
Net assets at end of year (000s) $931 $699 $551 $491
Ratio of operating expenses to
average net assets* 2.00% 2.00% 2.00% 2.00%++
Ratio of net investment income (loss) to
average net assets* 0.04% 0.08% (0.41)% 0.12%++
Portfolio turnover rate 44.44% 47.93% 62.93% 92.35%
Average commission rate@ $.0331 -- -- --
* Reflects voluntary assumption of
fees or expenses per share in each
year (Note 3). $.03 $.06 $.06 $.00
</TABLE>
** Per-share figures have been calculated using the average shares method.
++ Annualized
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. 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.
@ For the year ended June 30, 1996, the Fund has elected to disclose its
average commission rate per share paid for security trades.
9
<PAGE>
Report of Independent Accountants
To the Trustees of State Street Research
Equity Trust and the Shareholders of
State Street Research Equity Investment Fund
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of State Street Research Equity
Investment Fund (formerly MetLife-State Street Research Equity Investment
Fund) (a series of State Street Research Equity Trust, hereafter referred to
as the "Trust") at June 30, 1996, and the results of its operations, the
changes in its net assets and the financial highlights for the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at June 30, 1996 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
August 9, 1996
10
<PAGE>
Management's Discussion of Fund Performance
It was a good year for Equity Investment Fund. In 1995, the Fund experienced
it's second best year ever. The first half of 1996 has also brought in strong
performance due to moderate economic growth, low interest rates, and low
inflation. As of June 30, 1996, Class A shares of the Fund were up +25.33%
for the past 12 months (does not reflect sales charge). The Lipper Analytical
Services' Growth and Income category finished up +22.13% for the same time
period.
Technology stocks, which were already overweighted in the portfolio, were
added to over the course of the past year. The Fund's good performance can be
attributed to the earnings growth in this area attributed to the push in U.S.
corporations to increase productivity.
The Fund has also been focused on retail stocks in the consumer cyclical
area. These holdings are coming back after a prolonged stagnant sales period.
We've added to our holdings in this area.
The utilities sector in the portfolio has been underweighted due to
uncertainty resulting from mergers
and regulatory approvals among telephone and electric
companies.
In addition, John Wilson joined State Street Research in July as the new
portfolio manager for Equity Investment Fund.
The Standard & Poor's 500 Composite Index (S&P 500) includes 500 widely
traded common stocks and is a commonly used measure of U.S. stock market
performance. The index is unmanaged and does not take sales charges into
consideration. Direct investment in the index is not possible; results are
for illustrative purposes only. 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 in
1993. Performance reflects maximum 4.5% "A" share front-end sales charge or
5% "B" share or 1% "D" share contingent deferred sales charge. "C" shares,
offered without a sales charge, are available only to certain employee
benefit plans and large institutions. Performance for "B" and "D" shares
prior to class designations in 1993 reflects annual 12b-1 fees of .50% and
performance thereafter reflects annual 12b-1 fees of 1%, which will reduce
subsequent performance.
*************************[LINE CHARTS]***********************
Change in Value of
$10,000 Based on the S&P 500
Compared to Change in Value of $10,000
Invested in the Fund
=============================================================
Class A Shares
- -------------------------------------------------------------
Average Annual Total Return
1 Year 5 Years Life of Fund
+19.69%/+19.24% +15.27%/+14.94% +11.64%/+11.23%
- -------------------------------------------------------------
Equity
Investment
Fund S&P 500
---- -------
8/25/86 9550 10000
6/30/87 12195 12606
6/30/88 11777 11730
6/30/89 13896 14135
6/30/90 16305 16463
6/30/91 16029 17679
6/30/92 20362 20048
6/30/93 27647 22780
6/30/94 27569 23100
6/30/95 36544 29112
6/30/96 45269 36676
=============================================================
Class B Shares
- -------------------------------------------------------------
Average Annual Total Return
1 Year 5 Years Life of Fund
+19.39%/+18.91% +15.67%/+15.33% +11.94%/+11.53%
- -------------------------------------------------------------
Equity
Investment
Fund S&P 500
---- -------
8/25/86 10000 10000
6/30/87 12314 12606
6/30/88 11469 11730
6/30/89 13288 14135
6/30/90 15486 16463
6/30/91 14542 17679
6/30/92 17198 20048
6/30/93 20685 22780
6/30/94 20761 23100
6/30/95 24436 29112
6/30/96 30396 36676
=============================================================
Class C Shares
- -------------------------------------------------------------
Average Annual Total Return
1 Year 5 Years Life of Fund
+25.66%/+25.18% +16.60%/+16.23% +12.29%/+11.86%
- -------------------------------------------------------------
Equity
Investment
Fund S&P 500
---- -------
8/25/86 10000 10000
6/30/87 12314 12606
6/30/88 11469 11730
6/30/89 13288 14135
6/30/90 15486 16463
6/30/91 14542 17679
6/30/92 17198 20048
6/30/93 20701 22780
6/30/94 20992 23100
6/30/95 24945 29112
6/30/96 31345 36676
=============================================================
Class D Shares
- -------------------------------------------------------------
Average Annual Total Return
1 Year 5 Years Life of Fund
+23.40%/+22.93% +15.87%/+15.50% +11.93%/+11.51%
- -------------------------------------------------------------
Equity
Investment
Fund S&P 500
---- -------
8/25/86 10000 10000
6/30/87 12314 12606
6/30/88 11469 11730
6/30/89 13288 14135
6/30/90 15486 16463
6/30/91 14542 17679
6/30/92 17198 20048
6/30/93 20684 22780
6/30/94 20777 23100
6/30/95 24418 29112
6/30/96 30377 36676
************************************************************
11
<PAGE>
Report on Special Meeting of Shareholders
A Special Meeting of Shareholders of the State Street Research Equity
Investment Fund ("Fund"), along with shareholders of other series of State
Street Research Equity Trust ("Meeting"), was convened on October 20, 1995,
and continued thereafter. The results on the proposals are set forth below.
Votes (millions
of shares)
----------------
For Withheld
--- ---------
1. The following persons were elected as
Trustees:
Edward M. Lamont 29.4 1.9
Robert A. Lawrence 29.4 1.9
Dean O. Morton 29.4 1.9
Thomas L. Phillips 29.4 1.9
Toby Rosenblatt 29.4 1.9
Michael S. Scott Morton 29.4 1.9
Ralph F. Verni 29.4 1.9
Jeptha H. Wade 29.4 1.9
Votes (millions of
shares)
-------------------
For Against Abstain
--- ------- ------
2. The Fund's following investment policies were
reclassified from fundamental to nonfundamental:
a. The policy regarding investments in securities
of companies with less than three (3) years'
continuous operation; 2.5 0.6 0.3
b. The policy regarding investments in illiquid
securities. 2.5 0.6 0.3
3. The Fund's fundamental policy regarding investing
in commodities and commodity contracts was
amended. 2.4 0.6 0.4
4. The Fund's fundamental policy on lending was
amended to clarify the permissibility of
securities lending. 2.3 0.3 0.5
5. The Master Trust Agreement was amended to permit
the Trustees to reorganize, merge or liquidate a
fund without prior shareholder approval. 21.1 6.4 3.8
6. The Master Trust Agreement was amended to
eliminate specified time permitted between the
record date and any shareholders meeting. 22.8 4.5 4.1
12
<PAGE>
STATE STREET RESEARCH EQUITY INCOME FUND
Investment Portfolio
The Investment Portfolio is a detailed list of the securities owned by the
Fund. The Portfolio lists the number of shares and the market value of each
security issue and the percentage invested in each classification. Common
stocks are listed first, and broken down by industry, then sub-industry; then
preferred stocks, bonds and commercial paper follow.
Value
Shares (Note 1)
COMMON STOCKS 69.1%
Basic Industries 10.7%
CHEMICAL 4.0%
IMC Global, Inc. 16,700 $ 628,338
Mallinckrodt Group, Inc. 16,100 625,887
Mississippi Chemical Corp.* 45,000 900,000
Potash Corp. of Saskatchewan, Inc. 8,000 530,000
Rohm & Haas Co. 27,100 1,700,525
------------
4,384,750
------------
DIVERSIFIED 1.7%
Johnson Controls, Inc. 8,700 604,650
Mark IV Industries, Inc. 21,000 475,125
Teledyne, Inc. 23,000 830,875
------------
1,910,650
------------
MACHINERY 3.6%
Briggs & Stratton Corp. 17,000 699,125
Cooper Industries, Inc. 127,000 2,127,250
Sundstrand Corp. 32,000 1,172,000
------------
3,998,375
------------
METAL & MINING 1.4%
Alumax, Inc.* 50,000 1,518,750
------------
Total Basic Industries 11,812,525
------------
Consumer Cyclical 12.9%
AUTOMOTIVE 3.2%
Exide Corp. 50,000 1,212,500
Federal Mogul Corp. 47,600 874,650
Ford Motor Co. 29,200 945,350
General Motors Corp. 9,000 471,375
------------
3,503,875
------------
BUILDING 1.6%
LaFarge Corp. 90,000 1,822,500
------------
HOTEL & RESTAURANT 0.0%
Motels of America, Inc.+* 500 40,000
------------
RETAIL TRADE 8.1%
Federated Department Stores, Inc.* 24,000 819,000
Home Shopping Network, Inc.* 144,200 1,730,400
Intimate Brands, Inc. Cl. A 81,000 1,852,875
Kroger Co.* 25,000 987,500
Thrifty Payless Holdings, Inc. Cl. B* 120,000 2,070,000
Vons Companies, Inc.* 40,000 1,495,000
------------
8,954,775
------------
Total Consumer Cyclical 14,321,150
------------
Consumer Staple 10.8%
BUSINESS SERVICE 3.3%
ADT Ltd.* 130,000 $ 2,453,750
Anacomp, Inc.* 10,282 108,604
Moore Corp. Ltd. 46,900 885,238
PageMart Nationwide, Inc.+* 1,750 18,375
Vestar/LPA Investment Corp.+* 3,125 37,500
Viatel, Inc.+* 27,075 108,300
------------
3,611,767
------------
FOOD & BEVERAGE 5.5%
Coca-Cola Enterprises, Inc. 114,000 3,947,250
Whitman Corp. 86,000 2,074,750
------------
6,022,000
------------
HOSPITAL SUPPLY 1.1%
Baxter International, Inc. 26,000 1,228,500
------------
PRINTING & PUBLISHING 0.9%
Hollinger International, Inc. Cl. A* 93,000 1,057,875
------------
Total Consumer Staple 11,920,142
------------
Energy 8.9%
OIL 7.5%
Amerada Hess Corp. 8,300 445,088
Atlantic Richfield Co. 9,200 1,090,200
Oryx Energy Co. 78,400 1,274,000
Repsol S.A. ADR 39,300 1,365,675
Total S.A. ADR 48,900 1,815,413
Tosco Corp. 46,000 2,311,500
------------
8,301,876
------------
OIL SERVICE 1.4%
Baker Hughes, Inc. 13,000 427,375
Mapco, Inc. 20,000 1,127,500
------------
1,554,875
------------
Total Energy 9,856,751
------------
Finance 11.3%
BANK 4.0%
Bank of New York, Inc. 25,000 1,281,250
Chase Manhattan Corp.* 4,160 293,800
Fleet Financial Group, Inc. 49,100 2,135,850
Mellon Bank Corp. 11,000 627,000
South Trust Corp. 4,000 112,500
------------
4,450,400
------------
6 June 1996
<PAGE>
INVESTMENT PORTFOLIO (cont'd)
Value
Shares (Note 1)
FINANCIAL SERVICE 1.2%
Federal National Mortgage Association 40,800 $ 1,366,800
------------
INSURANCE 6.1%
Ace, Ltd. 38,100 1,790,700
AMBAC, Inc. 15,000 781,875
Mid Ocean Ltd. 74,700 3,062,700
PMI Group, Inc. 25,000 1,062,500
------------
6,697,775
------------
Total Finance 12,514,975
------------
Science & Technology 7.4%
AEROSPACE 2.1%
Boeing Co. 19,500 1,698,938
Sequa Corp. Cl. A* 15,000 646,875
------------
2,345,813
------------
COMPUTER SOFTWARE & SERVICE 3.1%
Computervision Corp.* 140,700 1,407,000
Western Digital Corp.* 78,600 2,053,425
------------
3,460,425
------------
ELECTRONIC COMPONENTS 1.1%
AMP, Inc. 15,000 601,875
Thomas & Betts Corp. 16,000 600,000
------------
1,201,875
------------
OFFICE EQUIPMENT 1.1%
Digital Equipment Corp.* 10,000 450,000
Quantum Corp.* 50,000 725,000
------------
1,175,000
------------
Total Science & Technology 8,183,113
------------
Utility 7.1%
ELECTRIC 2.3%
Allegheny Power Systems, Inc. 30,000 926,250
American Electric Power, Inc. 38,000 1,619,750
------------
2,546,000
------------
NATURAL GAS 2.9%
ENSERCH Corp. 125,000 2,718,750
TransTexas Gas Corp.* 48,000 456,000
------------
3,174,750
------------
TELEPHONE 1.9%
Southern New England Telecom Corp. 50,000 2,100,000
------------
Total Utility 7,820,750
------------
Total Common Stocks (Cost $65,562,135) 76,429,406
------------
PREFERRED STOCKS & OTHER 8.4%
Atlantic Richfield Co. Exch. Notes 110,000 $ 2,681,250
Boomtown, Inc. Wts.* 250 13
Crown Packaging Holdings Ltd. Wts.*+ 2,000 250
Gentra, Inc. Series G. Pfd.* 65,000 785,542
Gentra, Inc. Series Q Pfd.* 45,000 395,518
Heartland Wireless Communications, Inc. Wts.* 1,500 11,250
Intelcom Group, Inc. Pfd.#+ 500 517,500
K-III Communications Corp. Series B Exch.
Pfd.# 5,448 539,352
K-III Communications Corp.
Series C Pfd.+* 5,000 495,000
La Petite Holdings Co. Cum. Exch. Pfd.* 45,000 1,417,500
PageMart, Inc. Wts.*+ 3,450 20,700
SDW Holdings Corp. Wts.*+ 27,000 81,000
S.D. Warren Co. Series B Sr. Exch. Pfd.# 27,000 945,000
Sheffield Steel Corp. Wts.* 2,500 3,750
Supermarkets General Holding Corp. Exch.
Pfd.# 55,000 1,416,250
Wireless One, Inc. Wts.* 1,500 12,000
------------
Total Preferred Stocks & Other (Cost $8,836,046) 9,321,875
------------
CONVERTIBLE PREFERRED STOCKS 5.7%
Granite Broadcasting Corp. Cum. Cv. Exch.
Pfd.# 25,000 1,671,484
Salomon, Inc. Cv. Pfd.* 45,000 1,248,750
Station Casinos, Inc. Cv. Pfd.* 30,000 1,725,000
Tyco Toys, Inc. Series C Cv. Pfd.* 300,000 1,687,500
------------
Total Convertible Preferred Stocks
(Cost $4,955,625) 6,332,734
------------
Principal Maturity
Amount Date
CONVERTIBLE BONDS 1.7%
Crown Resources Corp. Cv. Sub.
Deb., 5.75% $600,000 8/27/2001 483,000
Rohr, Inc. Cv. Sub. Note, 7.75% 500,000 5/15/2004 1,000,000
Winstar Communications, Inc.,
Sr. Sub. Cv. Note, 14.00% 650,000 10/15/2005 442,000
-----------
Total Convertible Bonds (Cost $1,373,459) 1,925,000
-----------
7 June 1996
<PAGE>
INVESTMENT PORTFOLIO (cont'd)
Principal Maturity Value
Amount Date (Note 1)
NON-CONVERTIBLE BONDS 14.0%
Anacomp, Inc. Sr. Sub.
Note, 13.00% $ 177,000 6/04/2002 $169,920
Argosy Gaming Co. First
Mortgage Note, 13.25%+ 500,000 6/01/2004 506,250
Bayou Steel Corp. First
Mortgage Note, 10.25% 150,000 3/01/2001 138,000
Belle Casinos, Inc.
First Mortgage Notes,
12.00%+@ 175,000 10/15/2000 66,500
Carrols Merger Corp. Sr.
Notes, 11.50% 250,000 8/15/2003 252,500
Celcaribe S.A. Units,
0.00% to
3/14/98, 13.50% from
3/15/98 to maturity+ 43,000 3/15/2004 442,900
CHC Helicopter Corp. Sr.
Sub. Notes, 11.50% 442,000 7/15/2002 417,690
Clearnet Communications,
Inc. Units, 0.00% to
12/14/2000, 14.75% from
12/15/2000 to maturity 10,000 12/15/2005 613,750
Crown Packaging Holdings
Ltd. Sr. Sub. Notes,
0.00% to 10/31/2000,
12.25% from 11/1/2000
to maturity 2,000,000 11/01/2003 760,000
Dial Call
Communications, Inc.
Sr. Disc. Notes, 0.00%
to 4/14/99, 12.25% from
4/15/99 to maturity 1,000,000 4/15/2004 640,000
Echostar Communications
Satellite Broadcast Co.
Sr. Sec. Disc. Note,
0.00% to 3/14/2000,
13.125% from 3/15/2000
to maturity+ 500,000 3/15/2004 312,500
Finlay Enterprises, Inc.
Sr. Disc. Deb., 0.00%
to 4/30/98, 12.00% from
5/1/98 to maturity 250,000 5/01/2005 200,313
Haynes International,
Inc. Sr. Sec. Notes,
11.25% 800,000 6/15/1998 808,000
Heartland Wireless
Communications, Inc.
Units, 13.00% $ 250,000 4/15/2003 $273,125
Jitney-Jungle Stores of
America, Inc. Sr. Note,
12.00% 250,000 3/01/2006 254,375
La Petite Holdings Co.
Sr. Sec. Notes, 9.625% 500,000 8/01/2001 460,000
Motels of America, Inc.
Sr. Sub. Notes, 12.00% 500,000 4/15/2004 485,000
NS Group, Inc. Units,
13.50% 250,000 7/15/2003 242,500
Norcal Waste Systems,
Inc. Sr. Sub. Note,
12.75% to 11/14/96,
13.00% from 11/15/96 to
5/14/97, 13.25% from
5/15/97 to 11/14/97,
13.50% from 11/15/97 to
maturity+ 250,000 11/15/2005 260,000
Packaging Resources,
Inc. Sr. Note, 11.625%+ 250,000 5/01/2003 253,750
PageMart, Inc. Sr. Disc.
Notes, 0.00% to
10/31/98, 12.25% from
11/1/98 to maturity 750,000 11/01/2003 570,000
PageMart Nationwide,
Inc. Sr. Disc. Exch.
Notes, 0.00% to
1/31/2000, 15.00% from
2/1/2000 to maturity 500,000 2/01/2005 331,250
Park Newspapers, Inc.
Sr. Note, 11.875%+ 750,000 5/15/2004 757,500
Penn Traffic Co. Sr.
Notes, 8.625% 250,000 12/15/2003 208,750
J.M. Peters, Inc. Sr.
Notes, 12.75% 250,000 5/01/2002 232,500
Plastic Specialties and
Technologies, Inc. Sr.
Note, 11.25% 500,000 12/01/2003 480,000
Presidio Oil Co. Sr.
Sub. Gas Indexed Notes,
13.30%@ 400,000 7/15/2002 297,000
Presidio Oil Co. Sr.
Sec. Notes, 11.50%@ 650,000 9/15/2000 653,250
Ralphs Grocery Co. Sr.
Note, 10.45% 500,000 6/15/2004 490,000
Renco Metals, Inc. Sr.
Note, 11.50% 500,000 7/01/2003 500,000
8 June 1996
<PAGE>
INVESTMENT PORTFOLIO (cont'd)
Seven-Up/RC Bottling Co.
of Southern California,
Inc., 11.50%@ $ 250,000 8/01/1999 $ 168,750
Sheffield Steel Corp.
First Mortgage Note,
12.00% 500,000 11/01/2001 435,000
Spanish Broadcasting
Systems, Inc. Sr. Note,
7.50% 500,000 6/15/2002 500,312
Star Markets Co. Sr.
Sub. Note, 13.00% 250,000 11/01/2004 260,000
TransTexas Gas Corp. Sr.
Notes, 11.50% 500,000 6/15/2002 497,500
U.S.A. Mobile
Communications, Inc.
Sr. Notes, 14.00% 250,000 11/01/2004 285,000
Viatel, Inc. Sr. Disc.
Note, 0.00% to
1/14/2000, 15.00% from
1/15/2000 to maturity 750,000 1/15/2005 420,000
Winstar Communications,
Inc. Units, 0.00% to
10/14/2000, 14.00% from
10/15/2000 to maturity 550,000 10/15/2005 302,500
Wireless One, Inc. Sr.
Disc. Note, 13.00% 500,000 10/15/2003 521,250
---------------
Total Non-Convertible Bonds (Cost $15,612,552) 15,467,635
---------------
COMMERCIAL PAPER 1.9%
American Express Credit
Corp., 5.32% 465,000 7/01/1996 465,000
American Express Credit
Corp., 5.39% 1,445,000 7/03/1996 1,445,000
Household Finance Corp.,
5.25% 146,000 7/01/1996 146,000
---------------
Total Commercial Paper (Cost $2,056,000) 2,056,000
---------------
Total Investments (Cost $98,395,817)--100.8% 111,532,650
Cash and Other Assets, Less Liabilities--(0.8)% (841,758)
---------------
Net Assets--100.0% $110,690,892
===============
Federal Income Tax Information:
At June 30, 1996, the net unrealized
appreciation of investments based on cost for
Federal income tax purposes of $98,469,592
was as follows:
Aggregate gross unrealized appreciation for
all investments in which there is an excess
of value over tax cost $15,519,830
Aggregate gross unrealized depreciation for
all investments in which there is an excess
of tax cost over value (2,456,772)
-----------
$13,063,058
===========
* Nonincome-producing securities.
ADR stands for American Depositary Receipt, representing ownership of
foreign securities.
# Payments of income may be made in cash or in the form of additional
securities.
+ Security restricted in accordance with Rule 144A under the Securities Act
of 1933, which allows for the resale of such securities among certain
qualified institutional buyers. The total cost and market value of Rule
144A securities owned at June 30, 1996 was $3,894,287 and $3,918,025 (3.54%
of net assets), respectively.
@ Security is in default.
9 June 1996
<PAGE>
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996
The Statement of Assets and Liabilities is the Fund's balance sheet. Assets
are anything of value owned by the Fund; liabilities are claims against the
assets of the Fund. The Net Asset Value is the market value of each Fund
share.
ASSETS
Investments, at value (Cost $98,395,817) (Note 1) $111,532,650
Cash 278
Dividends and interest receivable 385,595
Receivable for securities sold 332,500
Receivable for fund shares sold 216,558
Receivable from Distributor (Note 3) 61,743
Other assets 6,491
------------
112,535,815
LIABILITIES
Payable for securities purchased 1,468,875
Accrued transfer agent and shareholder services
(Note 2) 83,831
Payable for fund shares redeemed 76,187
Accrued management fee (Note 2) 56,011
Dividends payable 36,200
Accrued distribution and service fees (Note 5) 30,251
Accrued trustees' fees (Note 2) 5,713
Other accrued expenses 87,855
------------
1,844,923
------------
NET ASSETS $110,690,892
============
Net Assets consist of:
Distribution in excess of net investment income $ (73,770)
Unrealized appreciation of investments 13,136,833
Accumulated net realized gain 15,197,104
Shares of beneficial interest 82,430,725
------------
$110,690,892
============
Net Asset Value and redemption price per share of
Class A shares ($44,463,886 / 3,209,801 shares of
beneficial interest) $13.85
=====
Maximum Offering Price per share of Class A shares
($13.85 / .955) $14.50
=====
Net Asset Value and offering price per share of
Class B shares ($25,543,231 / 1,848,643 shares of
beneficial interest)* $13.82
=====
Net Asset Value, offering price and redemption
price per share of Class C shares ($39,297,798 /
2,838,175 shares of beneficial interest) $13.85
=====
Net Asset Value and offering price per share of
Class D shares ($1,385,977 / 100,310 shares of
beneficial interest)* $13.82
=====
* Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
Statement Of Operations
For the year ended June 30, 1996
The Statement of Operations is the Fund's income statement and shows the
income earned from its investments and its operating costs. It concludes with
the net gains (losses are shown in parentheses) for the period stated.
INVESTMENT INCOME
Dividends, net of foreign taxes of $2,910 $ 1,760,884
Interest, net of foreign taxes of $2,344 1,273,213
----------
3,034,097
EXPENSES
Management fee (Note 2) 649,578
Transfer agent and shareholder services (Note 2) 333,433
Custodian fee 133,408
Reports to shareholders 51,906
Audit fee 28,752
Registration fees 28,005
Trustees' fees (Note 2) 17,085
Service fee--Class A (Note 5) 100,997
Distribution and service fees--Class B (Note 5) 201,739
Distribution and service fees--Class D (Note 5) 12,176
Legal fees 7,508
Miscellaneous 17,634
----------
1,582,221
Expenses borne by the Distributor (Note 3) (267,958)
----------
1,314,263
----------
Net investment income 1,719,834
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments (Notes 1 and 4) 15,234,292
Net unrealized appreciation of investments 2,941,031
----------
Net gain on investments 18,175,323
----------
Net increase in net assets resulting from
operations $19,895,157
==========
The accompanying notes are an integral part of the financial statements.
10 June 1996
<PAGE>
Financial Statements
Statement Of Changes In Net Assets
The Statement of Changes in Net Assets summarizes on a comparative basis
changes in net assets resulting from operations, distributions to
shareholders, and capital share transactions.
Year ended June 30
----------------------------
1996 1995
------------------------------ ------------ -------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income $ 1,719,834 $ 2,054,937
Net realized gain on
investments* 15,234,292 1,155,735
Net unrealized appreciation of
investments 2,941,031 9,032,370
----------- ------------
Net increase resulting from
operations 19,895,157 12,243,042
----------- ------------
Dividends from net investment income:
Class A (882,400) (984,856)
Class B (304,585) (285,324)
Class C (914,329) (808,655)
Class D (17,808) (28,201)
----------- ------------
(2,119,122) (2,107,036)
----------- ------------
Distributions from net realized gains:
Class A (492,304) (2,006,103)
Class B (223,972) (563,723)
Class C (472,914) (1,043,962)
Class D (18,976) (63,626)
----------- ------------
(1,208,166) (3,677,414)
----------- ------------
Net increase from fund share
transactions (Note 6) 4,473,009 10,409,654
----------- ------------
Total increase in net assets 21,040,878 16,868,246
NET ASSETS
Beginning of year 89,650,014 72,781,768
----------- ------------
End of year (including
(overdistributed)
undistributed net investment
income of ($73,770) and
$322,548, respectively) $110,690,892 $ 89,650,014
=========== ============
* Net realized gain for
Federal income tax purposes
(Note 1) $ 15,256,123 $ 1,208,383
=========== ============
Notes to Financial Statements
June 30, 1996
NOTE 1
State Street Research Equity Income Fund, formerly MetLife-State Street
Research Equity Income Fund (the "Fund") is a series of State Street Research
Equity Trust, formerly MetLife-State Street Equity Trust (the "Trust"), which
was organized as a Massachusetts business trust in March, 1986 and is
registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. The Trust commenced operations in
August, 1986. The Trust consists presently of four separate funds: State
Street Research Equity Income Fund, State Street Research Capital
Appreciation Fund, State Street Research Equity Investment Fund and State
Street Research Global Resources Fund.
The Fund seeks to provide a high level of current income and, secondarily,
long-term growth of capital by investing primarily in common stocks offering
above-average dividend yields and in securities convertible into common
stocks. The Fund seeks to provide a higher income yield than that of the
Standard & Poor's 500 Stock Index. The Fund has authority to invest from time
to time in lower rated fixed income securities.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and an annual service fee of 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. 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 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 accounting 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.
The accompanying notes are an integral part of the financial statements.
11 June 1996
<PAGE>
FINANCIAL STATEMENTS
A. Investment Valuation
Values for listed securities reflect final sales 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 closing prices
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. Fixed income securities
are valued by a pricing service, approved by the Trustees, which utilizes
market transactions, quotations from dealers, and various relationships among
securities in determining value. Short-term securities maturing within sixty
days are valued at amortized cost. Other securities, if any, are valued at
their fair value as determined in accordance with established methods
consistently applied.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered.
C. Net Investment Income
Interest income is accrued daily as earned. Dividend income is accrued on the
ex-dividend date. Discount on debt obligations is amortized under the
effective yield method. Certain preferred securities held by the Fund pay
dividends in the form of additional securities (payment-in-kind securities).
Dividend income on payment-in-kind preferred securities is recorded at the
market value of securities received. Differences between the market value of
securities received and the corresponding amounts of income accrued are
recorded as adjustments to income. The Fund is charged for expenses directly
attributable to it, while indirect expenses are allocated among all funds in
the Trust.
D. Dividends
Dividends from net investment income are declared and paid or reinvested
quarterly. Net realized capital gains, if any, are distributed annually,
unless additional distributions are required for compliance with applicable
tax regulations. For the year ended June 30, 1996, the Fund has designated as
long-term 100% of the distributions from net realized gains.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund has
elected to qualify under Subchapter M of the Internal Revenue Code and its
policy is to distribute all of its taxable income, including net realized
capital gains, within the prescribed time periods.
F. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
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 0.65% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. During the year ended June 30, 1996, the fees pursuant to such
agreement amounted to $649,578.
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. 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
June 30, 1996, the amount of such shareholder servicing and account
maintenance expenses was $174,457.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $17,085 during the year ended June 30, 1996.
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 June 30, 1996, the amount of such expenses
assumed by the Distributor and its affiliates was $267,958.
NOTE 4
For the year ended June 30, 1996, purchases and sales of securities,
exclusive of short-term obligations, aggregated $111,585,734 and
$109,813,058, respectively.
12 June 1996
<PAGE>
FINANCIAL STATEMENTS
Notes (cont'd)
NOTE 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940, as amended. Under the Plan,
the Fund pays annual service fees to the Distributor at a rate of 0.25% of
average daily net assets for Class A, Class B and Class 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 or servicing of shareholder
accounts, to reimburse securities dealers for distribution and marketing
services, to furnish ongoing assistance to investors and to defray a portion
of its distribution and marketing expenses. For the year ended June 30, 1996,
fees pursuant to such plan amounted to $100,997, $201,739 and $12,176 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 $20,463 and $106,688, respectively, on sales of Class A shares of
the Fund during the year ended June 30, 1996, and that MetLife Securities,
Inc. earned commissions aggregating $174,802 on sales of Class B shares, and
that the Distributor collected contingent deferred sales charges of $65,434
and $39 on redemptions of Class B and Class D shares, respectively, during
the same period.
Note 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At June 30, 1996, the
Distributor owned 3,614 Class A shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended June 30
----------------------------------------------------
1996 1995
---------------------- ---------------------------
Class A Shares Amount Shares Amount
- ------------------------------------------ ------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 499,172 $ 6,447,619 398,649 $ 4,285,947
Issued upon reinvestment of:
Distributions from net realized gains 37,754 461,359 179,249 1,907,857
Dividends from net investment income 61,647 800,177 82,151 897,184
Shares repurchased (578,171) (7,338,450) (1,195,595) (12,867,093)
----- ----------- ---------- ------------
Net increase (decrease) 20,402 $ 370,705 (535,546) $ (5,776,105)
===== =========== ========== ============
Class B Shares Amount Shares Amount
- ------------------------------------------ ----- ----------- ---------- ------------
Shares sold
670,304 $ 8,719,427 532,548 $ 5,717,454
Issued upon reinvestment of:
Distributions from net realized gains 17,255 210,166 48,954 520,771
Dividends from net investment income 20,749 269,362 23,498 257,756
Shares repurchased
(241,006) (3,101,383) (213,874) (2,294,678)
----- ----------- ---------- ------------
Net increase 467,302 $ 6,097,572 391,126 $ 4,201,303
===== =========== ========== ============
Class C Shares Amount Shares Amount
- ------------------------------------------ ----- ----------- ---------- ------------
Shares sold 887,078 $ 11,446,658 1,452,407 $ 15,677,247
Issued upon reinvestment of:
Distributions from net realized gains 38,732 472,914 98,117 1,043,974
Dividends from net investment income 70,662 914,329 73,413 806,458
Shares repurchased (1,135,981) (14,666,301) (512,040) (5,526,511)
----- ----------- ---------- ------------
Net increase (decrease) (139,509) $ (1,832,400) 1,111,897 $ 12,001,168
===== =========== ========== ============
Class D Shares Amount Shares Amount
- ------------------------------------------ ----- ----------- ---------- ------------
Shares sold 46,515 $ 607,680 24,855 $ 265,512
Issued upon reinvestment of:
Distributions from net realized gains 1,480 18,010 5,541 58,959
Dividends from net investment income 861 11,171 1,154 12,472
Shares repurchased
(65,543) (799,729) (32,405) (353,655)
----- ----------- ---------- ------------
Net decrease $
(16,687) $ (162,868) (855) (16,712)
===== =========== ========== ============
</TABLE>
13 June 1996
<PAGE>
FINANCIAL STATEMENTS
FINANCIAL HIGHLIGHTS
Financial Highlights presents selected per share data, ratios and
supplemental data. The per share data demonstrates on a comparative basis how
the net asset value per share was affected by several factors during each
period.
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A
------------------------------------------------
Year ended June 30
------------------------------------------------
1996** 1995** 1994 1993 1992
------------------------------------ ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 11.70 $ 10.87 $ 10.79 $ 9.19 $ 8.33
Net investment income* .23 .28 .24 .44 .39
Net realized and unrealized gain
(loss) on investments 2.36 1.37 .25 1.52 .83
Dividends from net investment income (.28) (.28) (.26) (.36) (.36)
Distributions from net realized
gains (.16) (.54) (.15) -- --
------ ------ ------ ------ -------
Net asset value, end of year $ 13.85 $ 11.70 $ 10.87 $ 10.79 $ 9.19
====== ====== ====== ====== =======
Total return 22.41%+ 16.12%+ 4.30%+ 21.64%+ 14.81%+
Net assets at end of year (000s) $44,464 $37,327 $40,484 $28,995 $51,585
Ratio of operating expenses to
average net assets* 1.25% 1.42% 1.50% 1.50% 1.50%
Ratio of net investment income to
average net assets* 1.78% 2.55% 2.42% 3.76% 4.27%
Portfolio turnover rate 111.13% 67.50% 73.96% 80.42% 102.39%
Average commission rate@ $ .0140 -- -- -- --
*Reflects voluntary assumption of
fees or expenses per share in each
year (Note 3). $ .03 $ .05 $ .05 $ .01 $ .01
</TABLE>
<TABLE>
<CAPTION>
Class B
--------------------------------------
Year ended June 30
--------------------------------------
1996** 1995** 1994 1993***
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 11.68 $ 10.86 $ 10.79 $ 10.81
Net investment income* .13 .21 .21 .02
Net realized and unrealized gain
(loss) on investments 2.36 1.38 .21 (.02)
Dividends from net investment income (.19) (.23) (.20) (.02)
Distributions from net realized
gains (.16) (.54) (.15) --
------ ------ ------ -------
Net asset value, end of year $13.82 $11.68 $10.86 $ 10.79
====== ====== ====== =======
Total return + 21.60%+ 15.43%+ 3.79%+ 0.05%+++
Net assets at end of year (000s) $25,543 $16,130 $10,752 $ 1,060
Ratio of operating expenses to
average net assets* 2.00% 2.00% 2.00% 2.00%++
Ratio of net investment income to
average net assets* 1.05% 1.95% 1.80% 1.53%++
Portfolio turnover rate 111.13% 67.50% 73.96% 80.42%
Average commission rate@ $ .0140 -- -- --
*Reflects voluntary assumption of
fees or expenses per share in each
year (Note 3). $ .03 $ .05 $ .07 $ .00
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
------------------------------------- -------------------------------------
Year ended June 30 Year ended June 30
------------------------------------- -------------------------------------
1996** 1995** 1994 1993*** 1996** 1995** 1994 1993***
------------------------------------ ------- ------- ------- ------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 11.70 $10.86 $10.79 $10.81 $ 11.67 $10.86 $ 10.79 $ 10.81
Net investment income* .26 .32 .33 .03 .13 .22 .21 .02
Net realized and unrealized gain
(loss) on investments 2.36 1.39 .21 (.02) 2.37 1.36 .21 (.02)
Dividends from net investment income (.31) (.33) (.32) (.03) (.19) (.23) (.20) (.02)
Distributions from net realized
gains (.16) (.54) (.15) -- (.16) (.54) (.15) --
------ ------ ------ ------ ------ ------ ----- -------
Net asset value, end of year $13.85 $11.70 $10.86 $10.79 $ 13.82 $11.67 $10.86 $10.79
====== ====== ====== ====== ====== ====== ===== =======
Total return 22.82%+ 16.64%+ 4.84%+ 0.14%+++ 21.68%+ 15.33%+ 3.78%+ 0.04%+++
Net assets at end of year (000s) $39,298 $34,827 $20,266 $15,988 $1,386 $1,366 $1,280 $628
Ratio of operating expenses to
average net assets* 1.00% 1.00% 1.00% 1.00%++ 2.00% 2.00% 2.00% 2.00%++
Ratio of net investment income to
average net assets* 2.03% 2.93% 2.92% 1.65%++ 1.03% 1.96% 1.88% 1.49%++
Portfolio turnover rate 111.13% 67.50% 73.96% 80.42% 111.13% 67.50% 73.96% 80.42%
Average commission rate@ $ .0140 -- -- -- $ .0140 -- -- --
*Reflects voluntary assumption of
fees or expenses per share in each
year (Note 3). $ .03 $ .05 $ .06 $ .00 $ .03 $ .05 $ .06 $ .00
</TABLE>
** Per-share figures have been calculated using the average shares method.
*** June 1, 1993 (commencement of share class designations) to June 30, 1993.
++ 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.
@ For the year ended June 30, 1996, the Fund has elected to disclose its
average commission rate per share paid for security trades.
14 June 1996
<PAGE>
Report Of Independent Accountants
To the Trustees of State Street Research Equity Trust
and the Shareholders of
State Street Research Equity Income Fund
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of State Street Research Equity
Income Fund (formerly MetLife-State Street Research Equity Income Fund) (a
series of State Street Research Equity Trust, hereafter referred to as the
"Trust"), at June 30, 1996, and the results of its operations, the changes in
its net assets and the financial highlights for the periods indicated, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at June 30, 1996 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable
basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
August 9, 1996
15 June 1996
<PAGE>
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
Equity Income Fund outperformed the average for Lipper Analytical Services'
equity income fund category for the 12 months ended June 30, 1996 (does not
reflect sales charge).
The Fund's portfolio is diversified into dividend-paying common stocks, and
corporate and convertible bonds, which can also provide more income. Stocks,
which represented 69% of the portfolio, are selected on a value basis.
The Fund began to take a defensive position in early 1996 in preparation for
a weakening economy. Cyclical stocks were downweighted along with chemical
and retail holdings. Financial and consumer non-durable stocks experienced
heightened exposure in the portfolio.
Overall, Equity Income Fund was able to participate in the upside of the
market without experiencing too much of the downside. This was largely due to
the stabilizing effect of the bonds in the portfolio.
The Standard & Poor's 500 Composite Index (S&P 500) includes 500 widely
traded common stocks and is a commonly used measure of U.S. stock market
performance. The index is unmanaged and does not take sales charges into
consideration. Direct investment in the index is not possible; results are
for illustrative purposes only. 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 in
1993. Performance reflects maximum 4.5% "A" share front-end sales charge or
5% "B" share or 1% "D" share contingent deferred sales charge. "C" shares,
offered without a sales charge, are available only to certain employee
benefit plans and large institutions. Performance for "B" and "D" shares
prior to class designations in 1993 reflects annual 12b-1 fees of .50% and
performance thereafter reflects annual 12b-1 fees of 1%, which will reduce
future performance.
*********************************[Line Charts]*********************************
Change in Value of $10,000
Based on the S&P 500 Compared
to Change in Value of $10,000
Invested in the Fund
=============================================================
Class A Shares
- -------------------------------------------------------------
Average Annual Total Return
1 Year 5 Years Life of Fund
+16.90% +14.64% +10.44%
- -------------------------------------------------------------
Equity
Income
Fund S&P 500
---- -------
1986 10000 10000
1987 10832 12605
1988 10569 11730
1989 12351 14135
1990 13768 16462
1991 12903 17678
1992 14814 20048
1993 18037 22779
1994 18815 23099
1995 21850 29112
1996 26748 36676
=============================================================
Class B Shares
- -------------------------------------------------------------
Average Annual Total Return
1 Year 5 Years Life of Fund
+16.60% +15.04% +10.78%
- -------------------------------------------------------------
Equity
Income
Fund S&P 500
---- -------
1986 10000 10000
1987 11342 12605
1988 11074 11730
1989 12954 14135
1990 14443 16462
1991 13528 17678
1992 15533 20048
1993 18896 22779
1994 19611 23099
1995 22637 29112
1996 27526 36676
=============================================================
Class C Shares
- -------------------------------------------------------------
Average Annual Total Return
1 Year 5 Years Life of Fund
+22.82% +15.99% +11.14%
- -------------------------------------------------------------
Equity
Income
Fund S&P 500
---- -------
1986 10000 10000
1987 11342 12605
1988 11074 11730
1989 12954 14135
1990 14443 16462
1991 13528 17678
1992 15533 20048
1993 18913 22779
1994 19827 23099
1995 23126 29112
1996 28404 36676
=============================================================
Class D Shares
- -------------------------------------------------------------
Average Annual Total Return
1 Year 5 Years Life of Fund
+20.68% +15.26% +10.78%
- -------------------------------------------------------------
Equity
Income
Fund S&P 500
---- -------
1986 10000 10000
1987 11342 12605
1988 11074 11730
1989 12954 14135
1990 14443 16462
1991 13528 17678
1992 15533 20048
1993 18895 22779
1994 19609 23099
1995 22615 29112
1996 27520 36676
******************************************************************************
16 June 1996
<PAGE>
REPORT ON SPECIAL MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of the State Street Research Equity
Income Fund ("Fund"), along with shareholders of other series of State Street
Research Equity Trust ("Meeting"), was convened on October 20, 1995, and
continued thereafter. The results on the proposals are set forth below.
Votes (millions
of shares)
----------------
For Withheld
---- ---------
1. The following persons were elected as
Trustees:
Edward M. Lamont 29.4 1.9
Robert A. Lawrence 29.4 1.9
Dean O. Morton 29.4 1.9
Thomas L. Phillips 29.4 1.9
Toby Rosenblatt 29.4 1.9
Michael S. Scott Morton 29.4 1.9
Ralph F. Verni 29.4 1.9
Jeptha H. Wade 29.4 1.9
Votes (millions of
shares)
-------------------------
For Against Abstain
---- ------- --------
2. The Fund's following investment
policies were reclassified from
fundamental to nonfundamental:
a. The policy regarding investments
in securities of companies with
less than three (3) years'
continuous operation; 2.8 0.9 0.5
b. The policy regarding investments
in illiquid securities. 3.2 1.0 0.3
3. The Fund's fundamental policy
regarding investing in commodities
and commodity contracts was amended. 3.2 1.0 0.3
4. The Fund's fundamental policy on
lending was amended to clarify the
permissibility of securities lending. 3.3 0.4 0.5
5. The Master Trust Agreement was
amended to permit the Trustees to
reorganize, merge or liquidate a fund
without prior shareholder approval. 21.1 6.4 3.8
6. The Master Trust Agreement was
amended to eliminate specified time
permitted between the record date and
any shareholders meeting. 22.8 4.5 4.1
17 June 1996
<PAGE>
State Street Research Capital Appreciation Fund
- --------------------------------------------------------------------------------
Investment Portfolio
- --------------------------------------------------------------------------------
December 31, 1996 (Unaudited)
Value
Shares (Note 1)
- ----------------------------------------------------------------------
COMMON STOCKS 89.3%
Basic Industries 1.1%
Chemical 0.7%
Rhone-Poulenc SA ADR 135,900 $ 4,603,613
-------------
Machinery 0.4%
Thermo Fibergen Inc.* 65,000 682,500
Thermo Fibergen Inc.* 71,600 179,000
US Filter Corp.* 66,100 2,098,675
-------------
2,960,175
-------------
Total Basic Industries 7,563,788
-------------
Consumer Cyclical 27.6%
Airline 1.5%
Continental Airlines Inc. Cl. B* 376,400 10,633,300
-------------
Automotive 0.8%
Danaher Corp. 71,200 3,319,700
Team Rental Group, Inc. Cl. A* 141,500 2,281,688
-------------
5,601,388
-------------
Hotel & Restaurant 11.8%
Doubletree Corp.* 111,800 5,031,000
Extended Stay America Inc.* 887,400 17,858,925
HFS Inc.* 611,400 36,531,150
Hilton Hotels Corp. 265,300 6,930,962
Interstate Hotels Co.* 258,600 7,305,450
Rainforest Cafe Inc.* 129,150 3,035,025
Sun International Hotels Ltd.* 45,800 1,671,700
Trump Hotels & Casino Resorts Inc.* 544,900 6,538,800
-------------
84,903,012
-------------
Recreation 1.9%
Action Performance Companies Inc.* 27,700 498,600
Ascent Entertainment Group Inc.* 121,200 1,954,350
Coachmen Industries Inc. 67,100 1,903,963
Evergreen Media Corp. Cl. A 46,200 1,155,000
Golden Bear Golf, Inc. Cl. A* 34,900 392,625
Lin Television Corp.* 98,500 4,161,625
Marker International Inc.* 90,800 488,050
Petco Animal Supplies Inc.* 55,300 1,147,475
Ticketmaster Group Inc.* 160,100 1,941,212
-------------
13,642,900
-------------
Retail Trade 8.7%
Abercrombie & Fitch Co. Cl. A* 41,600 686,400
Borders Group Inc.* 206,000 7,390,250
BT Office Products International Inc.* 112,300 996,663
CVS Corp.* 90,700 3,752,712
Dollar Tree Stores Inc.* 43,500 1,663,875
Gucci Group NV* 359,300 22,950,287
Jones Apparel Group Inc.* 241,000 9,007,375
Just For Feet Inc.* 121,600 3,192,000
The accompanying notes are an integral part of the financial statements.
1
<PAGE>
State Street Research Capital Appreciation Fund
- --------------------------------------------------------------------------------
Investment Portfolio (cont'd)
- --------------------------------------------------------------------------------
Retail Trade (cont'd)
Loehmann's, Inc.* 12,700 $ 292,100
Rite-Aid Corp. 94,100 3,740,475
Staples Inc.* 174,000 3,142,875
Sunglass Hut International Inc.* 812,000 5,887,000
-------------
62,702,012
-------------
Textile & Apparel 2.9%
Men's Wearhouse, Inc.* 279,750 6,853,875
Nautica Enterprises Inc.* 188,300 4,754,575
Timberland Co. Cl. A* 59,500 2,261,000
Tommy Hilfiger Corp.* 147,200 7,065,600
-------------
20,935,050
-------------
Total Consumer Cyclical 198,417,662
-------------
Consumer Staple 14.2%
Business Service 7.1%
Apache Medical Systems Inc.* 58,100 620,944
Caribiner International Inc.* 14,400 723,600
Education Management Corp.* 60,500 1,270,500
Outdoor Systems Inc.* 55,350 1,556,719
Prime Service Inc.* 31,100 855,250
Republic Industries Inc.* 1,209,400 37,718,162
Teletech Holdings Inc.* 34,300 891,800
U.S. Office Products Co.* 112,300 3,832,237
Universal Outdoor Holdings Inc.* 146,300 3,438,050
-------------
50,907,262
-------------
Drug 3.2%
Cephalon Inc.* 193,400 3,964,700
Entremed Inc.* 106,600 1,732,250
Ligand Pharmaceuticals Inc. Cl. B* 69,600 1,035,300
Magainin Pharmaceuticals Inc.* 112,400 1,081,850
Novartis AG ADR* 80,641 4,603,425
Warner-Lambert Co. 139,500 10,462,500
-------------
22,880,025
-------------
Food & Beverage 0.8%
Boston Chicken Inc.* 151,400 5,431,475
-------------
Hospital Supply 1.9%
MedPartners Inc.* 405,324 8,511,804
Neopath Inc.* 123,000 2,244,750
Wellpoint Health Networks Inc. Cl. A* 87,900 3,021,562
-------------
13,778,116
-------------
Personal Care 0.2%
Gargoyles Inc.* 65,800 567,525
Polymer Group Inc.* 74,700 1,036,463
-------------
1,603,988
-------------
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
State Street Research Capital Appreciation Fund
- --------------------------------------------------------------------------------
Investment Portfolio (cont'd)
- --------------------------------------------------------------------------------
Printing & Publishing 0.9%
CKS Group Inc.* 5,700 $ 158,888
Hollinger International, Inc. Cl. A* 389,300 4,476,950
Hollinger International, Inc. Cv. Pfd. 181,400 2,086,100
---------------
6,721,938
---------------
Tobacco 0.1%
Swisher International Group Inc. Cl. A* 62,600 993,775
---------------
Total Consumer Staple 102,316,579
---------------
Energy 10.8%
Oil 1.8%
Chesapeake Energy Corp.* 18,100 1,006,812
ENI SPA ADR 217,400 11,223,275
Titan Exploration Inc.* 80,300 963,600
---------------
13,193,687
---------------
Oil Service 9.0%
BJ Services Co.* 162,600 8,292,600
Ensco International Inc.* 141,500 6,862,750
Global Marine Inc.* 626,500 12,921,562
Helmerich & Payne Inc. 162,800 8,485,950
Marine Drilling Companies, Inc.* 138,000 2,716,875
National Oilwell Inc.* 10,800 332,100
Newpark Resources, Inc.* 43,300 1,612,925
Noble Drilling Corp.* 538,800 10,708,650
Reading & Bates Corp.* 141,100 3,739,150
Rowan Companies, Inc.* 317,000 7,172,125
Varco International Inc.* 67,500 1,560,938
---------------
64,405,625
---------------
Total Energy 77,599,312
---------------
Finance 9.0%
Bank 3.2%
Bank United Corp. Cl. A 41,000 1,096,750
Boatmen's Bancshares, Inc. 112,200 7,236,900
Chase Manhattan Corp. 163,000 14,547,750
---------------
22,881,400
---------------
Financial Service 3.9%
Allmerica Financial Corp. 140,700 4,713,450
Beacon Properties Corp. 123,500 4,523,188
First USA Paymentech Inc.* 96,500 3,268,938
Green Tree Financial Corp. 190,100 7,342,612
MoneyGram Payment Systems Inc.* 203,100 2,691,075
Starwood Lodging Trust 97,000 5,347,125
---------------
27,886,388
---------------
Insurance 1.9%
Everest Reinsurance Holdings Inc. 152,200 4,375,750
Progressive Corp. 50,800 3,422,650
TIG Holdings Inc. 137,000 4,640,875
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
State Street Research Capital Appreciation Fund
- --------------------------------------------------------------------------------
Investment Portfolio (cont'd)
- --------------------------------------------------------------------------------
Insurance (cont'd)
W.R. Berkley Corp. 34,500 $ 1,750,875
---------------
14,190,150
---------------
Total Finance 64,957,938
---------------
Science & Technology 24.5%
Computer Software & Service 8.9%
Adflex Solutions Inc.* 41,000 420,250
Ascend Communications Inc.* 207,400 12,884,725
Check Point Software Technologies Ltd.* 36,700 798,225
Datastream Systems Inc.* 42,900 772,200
Excalibur Technologies Corp.* 52,200 822,150
Geoworks* 228,900 5,608,050
Ingram Micro Inc. Cl. A* 62,600 1,439,800
JDA Software Group Inc.* 89,600 2,553,600
OpenVision Technologies Inc.* 5,200 61,100
P-COM, Inc.* 120,200 3,560,925
Parametric Technology Corp.* 168,300 8,646,412
Premiere Technologies Inc.* 26,700 667,500
Puma Technology Inc.* 39,900 688,275
Sabre Group Holdings Inc. Cl. A* 53,700 1,496,888
SS&C Technologies Inc.* 8,600 54,825
Sybase Inc.* 320,500 5,348,344
Synopsys Inc.* 65,500 3,029,375
Ultratech Stepper Inc.* 43,400 1,030,750
Westell Technologies, Inc. Cl. A* 281,900 6,448,463
Western Digital Corp.* 124,900 7,103,687
Wind River Systems Inc.* 16,700 791,163
Xionics Document Technologies, Inc.* 14,200 177,500
---------------
64,404,207
---------------
Electronic Components 7.1%
Affymetrix Inc.* 6,100 123,144
Altera Corp.* 121,200 8,809,725
Applied Magnetics Corp.* 114,000 3,405,750
CHS Electronics Inc.* 49,700 851,112
Cymer Inc.* 111,600 5,370,750
Pairgain Technologies Inc.* 162,800 4,955,225
Sanmina Corp.* 360,300 20,356,950
Texas Instruments Inc. 113,600 7,242,000
---------------
51,114,656
---------------
Electronic Equipment 5.0%
Advanced Fibre Communications, Inc.* 6,100 339,313
Applied Materials Inc.* 208,600 7,496,562
KLA Instruments Corp.* 188,600 6,695,300
Lucent Technologies Inc.* 281,000 12,996,250
Motorola Inc. 50,000 3,068,750
Novellus Systems Inc.* 49,500 2,682,281
Octel Communications Corp.* 26,600 465,500
Tencor Instruments* 71,200 1,877,900
---------------
35,621,856
---------------
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
State Street Research Capital Appreciation Fund
- --------------------------------------------------------------------------------
Investment Portfolio (cont'd)
- --------------------------------------------------------------------------------
Office Equipment 3.5%
3Com Corp.* 74,000 $ 5,429,750
Compaq Computer Corp.* 136,300 10,120,275
Dell Computer Corp.* 83,200 4,420,000
Orckit Communications Ltd.* 5,800 56,550
Read-Rite Corp.* 150,800 3,807,700
Stormedia Inc. Cl. A* 106,000 1,709,250
---------------
25,543,525
---------------
Total Science & Technology 176,684,244
---------------
Utility 2.1%
Natural Gas 0.6%
Calpine Corp.* 227,400 4,548,000
---------------
Telephone 1.5%
Brooks Fiber Properties Inc.* 15,600 397,800
Colt Telecom Group PLC ADR* 91,600 1,763,300
Larscom Inc. Cl. A* 75,300 856,537
Omnipoint Corp.* 88,300 1,699,775
Telecomunicacoes Brasileiras ADR* 70,900 5,423,850
Vimpel Communications ADR* 32,900 777,263
---------------
10,918,525
---------------
Total Utility 15,466,525
---------------
Total Common Stocks (Cost $559,381,363) 643,006,048
---------------
- - -------------------------------------------------------------------
Principal Maturity
Amount Date
- - -------------------------------------------------------------------
REPURCHASE AGREEMENTS 0.2%
State Street Bank and
Trust Company, dated
12/31/96, repurchase
proceeds $1,315,292,
collateralized by
$1,315,000 U.S.
Treasury Bill, 6.125%,
due 3/31/98, market
value $1,342,548 $1,315,000 1/02/1997 1,315,000
---------------
Total Repurchase Agreements (Cost $1,315,000) 1,315,000
---------------
Principal Maturity Value
Amount Date (Note 1)
- - -------------------------- ------------- ------------ ---------------
SHORT-TERM OBLIGATIONS 10.4%
American Express Credit
Corp., 5.90% $ 3,134,000 1/02/1997 $ 3,134,000
American Express Credit
Corp., 6.00% 27,679,000 1/06/1997 27,679,000
Ford Motor Credit Co.,
5.75% 7,968,000 1/02/1997 7,968,000
Ford Motor Credit Co.,
5.72% 20,000,000 1/03/1997 20,000,000
Ford Motor Credit Co.,
5.40% 5,879,000 1/08/1997 5,879,000
Philip Morris Companies,
Inc., 5.60% 10,000,000 1/08/1997 9,989,111
---------------
Total Short-Term Obligations (Cost $74,649,111) 74,649,111
---------------
Total Investments (Cost $635,345,474)--99.9% 718,970,159
Cash and Other Assets, Less Liabilities--0.1% 745,491
---------------
Net Assets--100.0% $719,715,650
===============
Federal Income Tax Information:
At December 31, 1996, the net unrealized appreciation
of investments based on cost for Federal income tax
purposes of $635,345,474 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost $110,614,768
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value (26,990,083)
---------------
$ 83,624,685
===============
-----------------------------------------------------------------------------
* Nonincome-producing securities
ADR stands for American Depositary Receipt, representing ownership of
foreign securities.
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
State Street Research Capital Appreciation Fund
- ------------------------------------------------------------------------------
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
December 31, 1996 (Unaudited)
Assets
Investments, at value (Cost $635,345,474) (Note 1) $718,970,159
Cash 2,848
Receivable for securities sold 8,123,094
Receivable for fund shares sold 745,452
Dividends and interest receivable 220,234
Other assets 88,118
------------
728,149,905
Liabilities
Payable for securities purchased 6,493,457
Accrued transfer agent and shareholder services (Note 2) 611,471
Payable for fund shares redeemed 589,044
Accrued management fee (Note 2) 454,923
Accrued distribution and service fees (Note 4) 238,084
Accrued trustees' fee (Note 2) 9,368
Other accrued expenses 37,908
-----------
8,434,255
------------
Net Assets $719,715,650
============
Net Assets consist of:
Unrealized appreciation of investments $ 83,624,685
Accumulated net realized gain 20,780,997
Shares of beneficial interest 615,309,968
------------
$719,715,650
============
Net Asset Value and redemption price per share of Class A
shares ($374,523,749 / 33,107,224 shares of beneficial
interest) $11.31
======
Maximum Offering Price per share of Class A shares
($11.31 / .955) $11.84
======
Net Asset Value and offering price per share of Class B
shares ($179,572,365 / 16,304,104 shares of beneficial
interest)* $11.01
======
Net Asset Value, offering price and redemption price per
share of Class C shares ($160,398,205 / 13,957,449 shares
of beneficial interest) $11.49
======
Net Asset Value and offering price per share of Class D
shares ($5,221,331 / 472,505 shares of beneficial
interest)* $11.05
======
- ------------------------------------------------------------------------------
* 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 six months ended December 31, 1996 (Unaudited)
Investment Income
Dividends, net of foreign taxes of $52,833 $ 1,178,983
Interest 725,783
------------
1,904,766
Expenses
Management fee (Note 2) 2,738,556
Transfer agent and shareholder services (Note 2) 1,030,082
Reports to shareholders 170,839
Custodian fee 97,223
Registration fees 30,489
Service fee--Class A (Note 4) 479,905
Distribution and service fees--Class B (Note 4) 880,101
Distribution and service fees--Class D (Note 4) 29,275
Trustees' fees (Note 2) 14,474
Audit fee 14,209
Legal fees 13,424
Miscellaneous 17,849
------------
5,516,426
------------
Net investment loss (3,611,660)
-------------
Realized and Unrealized Gain (Loss) on Investments
Net realized gain on investments (Notes 1 and 3) 38,651,768
Net unrealized depreciation of investments (87,454,221)
-------------
Net loss on investments (48,802,453)
-------------
Net decrease in net assets resulting from operations $(52,414,113)
=============
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
State Street Research Capital Appreciation Fund
- ------------------------------------------------------------------------
Statement of Changes in Net Assets
- ------------------------------------------------------------------------
Six months ended
December 31, 1996 Year ended
(Unaudited) June 30, 1996
- ------------------------------------ ----------------- ----------------
Increase (Decrease) in Net Assets
Operations:
Net investment loss $ (3,611,660) $ (5,560,185)
Net realized gain on investments* 38,651,768 73,266,361
Net unrealized appreciation
(depreciation) of investments (87,454,221) 61,608,747
------------- -------------
Net increase (decrease) resulting
from operations (52,414,113) 129,314,923
------------- -------------
Distributions from net realized gains:
Class A (17,442,135) (34,354,819)
Class B (8,308,403) (12,773,915)
Class C (7,364,058) (13,218,452)
Class D (258,802) (510,505)
------------- -------------
(33,373,398) (60,857,691)
------------- -------------
Net increase from fund share
transactions (Note 5) 63,495,813 173,255,282
------------- -------------
Total increase (decrease) in net
assets (22,291,698) 241,712,514
Net Assets
Beginning of period 742,007,348 500,294,834
------------- -------------
End of period $ 719,715,650 $742,007,348
============= =============
*Net realized gain for Federal
income tax purposes (Note 1) $ 38,510,822 $ 73,389,253
============= =============
The accompanying notes are an integral part of the financial statements.
- ------------------------------------------------------------------------
Notes to Unaudited Financial Statements
- ------------------------------------------------------------------------
December 31, 1996
Note 1
State Street Research Capital Appreciation Fund (the "Fund"), is a series of
State Street Research Equity Trust (the "Trust"), which was organized as a
Massachusetts business trust in March, 1986 and is registered under the
Investment Company Act of 1940, as amended, as an open-end management
investment company. The Trust commenced operations in August, 1986. The Trust
consists presently of four separate funds: State Street Research Capital
Appreciation Fund, State Street Research Equity Investment Fund, State Street
Research Equity Income Fund and State Street Research Global Resources Fund.
The Fund seeks to achieve maximum capital appreciation by investing primarily
in common stocks of emerging growth companies and of companies considered to
be undervalued special situations. Current income is not a consideration in
the selection of investments for the Fund.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and an annual service fee of 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. 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 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 accounting 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 Valuation
Values for listed securities reflect final sales 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 closing prices
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. Short-term securities
maturing within sixty days are valued at amortized cost. Other securities, if
any, are valued at their fair value as determined in accordance with
established methods consistently applied.
7
<PAGE>
State Street Research Capital Appreciation Fund
- --------------------------------------------------------------------------------
Notes (cont'd)
- --------------------------------------------------------------------------------
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered.
C. Net Investment Income
Interest income is accrued daily as earned. Dividend income is accrued on the
ex-dividend date. The Fund is charged for expenses directly attributable to
it, while indirect expenses are allocated among all funds in the Trust.
D. Dividends
Dividends from net investment income, if any, are declared and paid or
reinvested semiannually. 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.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund has
elected to qualify under Subchapter M of the Internal Revenue Code and its
policy is to distribute all of its taxable income, including net realized
capital gains, within the prescribed time periods.
F. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the report period. Actual
results could differ from those estimates.
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 0.75% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. During the six months ended December 31, 1996, the fees
pursuant to such agreement amounted to $2,738,556.
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. 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 six months
ended December 31, 1996, the amount of such shareholder servicing and account
maintenance expenses was $354,472.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $14,474 during the six months ended December 31, 1996.
Note 3
For the six months ended December 31, 1996, purchases and sales of
securities, exclusive of short-term obligations, aggregated $747,246,011 and
$763,113,581, respectively.
Note 4
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940, as amended. Under the Plan,
the Fund pays annual service fees to the Distributor at a rate of 0.25% of
average daily net assets for Class A, Class B and Class 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 or servicing of shareholder
accounts, to reimburse securities dealers for distribution and marketing
services, to furnish ongoing assistance to investors and to defray a portion
of its distribution and marketing expenses. For the six months ended December
31, 1996, fees pursuant to such plan amounted to $479,905, $880,101 and
$29,275 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 $85,083 and $551,043, respectively, on sales of Class A shares of
the Fund during the six months ended December 31, 1996, and that MetLife
Securities, Inc. earned commissions aggregating $858,585 on sales of Class B
shares, and that the Distributor collected contingent deferred sales charges
of $198,480 and $2,619 on redemptions of Class B and Class D shares,
respectively, during the same period.
8
<PAGE>
State Street Research Capital Appreciation Fund
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Note 5
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At December 31, 1996, the
Adviser held of record 8,330 Class A shares and the Distributor owned 7,172
Class A shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Six months ended
December 31, 1996 Year ended
(Unaudited) June 30, 1996
------------------------------ ------------------------------
Class A Shares Amount Shares Amount
------------------------------------------ --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 4,271,672 $ 50,055,963 8,509,488 $103,271,609
Issued upon reinvestment of
distributions from net
realized gains 1,495,279 16,997,660 3,045,717 33,519,586
Shares repurchased (3,615,853) (42,318,261) (6,333,177) (77,140,136)
----------- ------------- ----------- -------------
Net increase 2,151,098 $ 24,735,362 5,222,028 $ 59,651,059
=========== ============= =========== =============
Class B Shares Amount Shares Amount
------------------------------------------ ------------- ----------- -------------
Shares sold 3,041,283 $ 34,927,596 6,634,276 $ 79,295,183
Issued upon reinvestment of
distributions from net
realized gains 735,944 8,157,377 1,158,748 12,504,495
Shares repurchased (1,264,332) (14,684,638) (2,182,710) (26,185,464)
----------- ------------- ----------- -------------
Net increase 2,512,895 $ 28,400,335 5,610,314 $ 65,614,214
=========== ============= =========== =============
Class C Shares Amount Shares Amount
------------------------------------------ ------------- ----------- -------------
Shares sold 2,880,291 $ 34,519,854 6,363,633 $ 78,353,974
Issued upon reinvestment of
distributions from net
realized gains 637,741 7,358,494 1,187,191 13,211,134
Shares repurchased (2,515,378) (30,336,254) (3,763,939) (45,981,872)
----------- ------------- ----------- -------------
Net increase 1,002,654 $ 11,542,094 3,786,885 $ 45,583,236
=========== ============= =========== =============
Class D Shares Amount Shares Amount
------------------------------------------ ------------- ----------- -------------
Shares sold 521,815 $ 5,736,036 1,631,034 $ 19,873,515
Issued upon reinvestment of
distributions from net
realized gains 21,991 244,613 42,662 461,756
Shares repurchased (639,965) (7,162,627) (1,461,059) (17,928,498)
----------- ------------- ----------- -------------
Net increase (decrease) (96,159) $ (1,181,978) 212,637 $ 2,406,773
=========== ============= =========== =============
</TABLE>
9
<PAGE>
State Street Research Capital Appreciation Fund
- ------------------------------------------------------------------------------
Financial Highlights
- ------------------------------------------------------------------------------
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------------------------
Year ended June 30
Six months ended ----------------------------------------------------------
December 31, 1996
(Unaudited)** 1996** 1995** 1994 1993 1992
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.76 $ 11.52 $ 9.11 $ 10.42 $ 8.33 $ 6.55
Net investment loss* (0.05) (0.10) (0.09) (0.04) (0.05) (0.05)
Net realized and unrealized gain (loss)
on investments (0.85) 2.63 2.95 0.09 2.81 1.83
Distributions from net realized gains (0.55) (1.29) (0.45) (1.36) (0.67) --
---------------------------- ----------- ----------- ----------------------
Net asset value, end of period $ 11.31 $ 12.76 $ 11.52 $ 9.11 $ 10.42 $ 8.33
============================ =========== =========== ======================
Total return (7.12)%+++ 23.87%+ 32.56%+ (0.28)%+ 35.78%+ 27.03%+
Net assets at end of period (000s) $374,524 $395,050 $296,471 $231,356 $183,886 $116,687
Ratio of operating expenses to average
net assets* 1.38%++ 1.40% 1.55% 1.50% 1.50% 1.50%
Ratio of net investment loss to average
net assets* (0.86)%++ (0.79)% (0.87)% (0.81)% (0.63)% (0.71)%
Portfolio turnover rate 107.62% 279.55% 217.28% 147.73% 135.17% 128.10%
Average commission rate @ $ 0.03 $ 0.03 -- -- -- --
*Reflects voluntary assumption of fees
or expenses per share in each period -- -- $ 0.03 $ 0.02 $ 0.01 $ 0.01
</TABLE>
<TABLE>
<CAPTION>
Class B
-----------------------------------------------------------------
Year ended June 30
Six months ended ----------------------------------------------
December 31, 1996
(Unaudited)** 1996** 1995** 1994 1993***
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.49 $ 11.38 $ 9.05 $ 10.41 $ 10.44
Net investment loss* (0.09) (0.22) (0.15) (0.06) (0.00)
Net realized and unrealized gain (loss)
on investments (0.84) 2.62 2.93 0.06 (0.03)
Distributions from net realized gains (0.55) (1.29) (0.45) (1.36) --
---------------------------- ----------- ----------- -----------
Net asset value, end of period $ 11.01 $ 12.49 $ 11.38 $ 9.05 $ 10.41
============================ =========== =========== ===========
Total return (7.44)%+++ 22.97%+ 31.86%+ (0.83)%+ (0.29)%+++
Net assets at end of period (000s) $179,572 $172,213 $93,088 $49,236 $ 2,790
Ratio of operating expenses to average
net assets* 2.13%++ 2.15% 2.15% 2.00% 2.00%++
Ratio of net investment loss to average
net assets* (1.61)%++ (1.53)% (1.47)% (1.29)% (0.95)%++
Portfolio turnover rate 107.62% 279.55% 217.28% 147.73% 135.17%
Average commission rate @ $ 0.03 $ 0.03 -- -- --
*Reflects voluntary assumption of fees
or expenses per share in each period -- -- $ 0.02 $ 0.02 $ 0.00
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
** Per-share figures have been calculated using the average shares method.
*** June 1, 1993 (commencement of share class designations) to June 30, 1993.
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower for each of the years in the
four year period ended June 30, 1995 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 for the period June 1, 1993 (commencement of
share class designations) to June 30, 1993 if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
@ For fiscal years beginning on or after July 1, 1996, the Fund is required
to disclose its average commission rate per share paid for security
trades. For the year ended June 30, 1996, the Fund elected to disclose
its average commission rate per share paid for security trades.
10
<PAGE>
State Street Research Capital Appreciation Fund
<TABLE>
<CAPTION>
Class C
-----------------------------------------------------------------
Year ended June 30
Six months ended ----------------------------------------------
December 31, 1996
(Unaudited)** 1996** 1995** 1994 1993***
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.94 $ 11.64 $ 9.16 $ 10.42 $ 10.44
Net investment loss* (0.04) (0.08) (0.05) (0.02) (0.00)
Net realized and unrealized gain (loss)
on investments (0.86) 2.67 2.98 0.12 (0.02)
Distributions from net realized gains (0.55) (1.29) (0.45) (1.36) --
---------------------------- ----------- ----------- -----------
Net asset value, end of period $ 11.49 $ 12.94 $ 11.64 $ 9.16 $ 10.42
============================ =========== =========== ===========
Total return (7.02)%+++ 24.28%+ 33.06%+ 0.25%+ (0.19)%+++
Net assets at end of period (000s) $160,398 $167,624 $106,675 $62,662 $37,826
Ratio of operating expenses to average
net assets* 1.13%++ 1.15% 1.15% 1.00% 1.00%++
Ratio of net investment loss to average
net assets* (0.61)%++ (0.54)% (0.46)% (0.30)% 0.50%++
Portfolio turnover rate 107.62% 279.55% 217.28% 147.73% 135.17%
Average commission rate @ $ 0.03 $ 0.03 -- -- --
*Reflects voluntary assumption of fees
or expenses per share in each period -- -- $ 0.02 $ 0.02 $ 0.00
</TABLE>
<TABLE>
<CAPTION>
Class D
-----------------------------------------------------------------
Year ended June 30
Six months ended ----------------------------------------------
December 31, 1996
(Unaudited)** 1996** 1995** 1994 1993***
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.52 $ 11.41 $ 9.07 $ 10.41 $ 10.44
Net investment loss* (0.09) (0.21) (0.15) (0.07) (0.01)
Net realized and unrealized gain (loss)
on investments (0.83) 2.61 2.94 0.09 (0.02)
Distributions from net realized gains (0.55) (1.29) (0.45) (1.36) --
---------------------------- ----------- ----------- -----------
Net asset value, end of period $ 11.05 $ 12.52 $ 11.41 $ 9.07 $ 10.41
============================ =========== =========== ===========
Total return (7.42)%+++ 23.03%+ 31.79%+ (0.61)%+ (0.29)%+++
Net assets at end of period (000s) $ 5,221 $ 7,120 $ 4,061 $2,201 $ 623
Ratio of operating expenses to average
net assets* 2.13%++ 2.15% 2.15% 2.00% 2.00%++
Ratio of net investment loss to average
net assets* (1.59)%++ (1.54)% (1.47)% (1.29)% (1.10)%++
Portfolio turnover rate 107.62% 279.55% 217.28% 147.73% 135.17%
Average commission rate @ $ 0.03 $ 0.03 -- -- --
*Reflects voluntary assumption of fees
or expenses per share in each period -- -- $ 0.02 $ 0.02 $ 0.00
- - ----------------------------------------------------------------------------------------------------------
</TABLE>
** Per-share figures have been calculated using the average shares method.
*** June 1, 1993 (commencement of share class designations) to June 30, 1993.
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower for each of the years in the
four year period ended June 30, 1995 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 for the period June 1, 1993 (commencement of share
class designations) to June 30, 1993 if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
@ For fiscal years beginning on or after July 1, 1996, the Fund is required
to disclose its average commission rate per share paid for security
trades. For the year ended June 30, 1996, the Fund elected to disclose
its average commission rate per share paid for security trades.
11
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
- -----------------------------------------------------------------------------
PRO FORMA COMBINING INVESTMENT PORTFOLIO
- -----------------------------------------------------------------------------
January 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Shares Value
------------------------------- -----------------------------------------
Capital Pro Forma Capital Pro Forma
Capital Appreciation Combined Capital Appreciation Combined
- -------------------------------------- -------- ------------ --------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCKS 98.2%
Basic Industries 1.5%
Chemical 1.2%
Rhone-Poulenc SA ADR 253,400 271,800 525,200 $ 8,457,225 $ 9,071,325 $ 17,528,550
------------ ------------ ------------
Machinery 0.3%
US Filter Corp.* 64,500 66,100 130,600 2,475,188 2,536,588 5,011,776
------------ ------------ ------------
Total Basic Industries 10,932,413 11,607,913 22,540,326
------------ ------------ ------------
Consumer Cyclical 22.7%
Airline 1.3%
Continental Airlines Inc. Cl. B* 365,500 376,400 741,900 10,188,313 10,492,150 20,680,463
------------ ------------ ------------
Automotive 0.8%
Danaher Corp. 24,800 71,200 96,000 1,240,000 3,560,000 4,800,000
Team Rental Group, Inc. Cl. A* 126,000 141,500 267,500 3,402,000 3,820,500 7,222,500
------------ ------------ ------------
4,642,000 7,380,500 12,022,500
------------ ------------ ------------
Hotel & Restaurant 9.9%
Doubletree Corp.* 108,600 111,800 220,400 4,479,750 4,611,750 9,091,500
Extended Stay America Inc.* 797,400 887,400 1,684,800 14,452,875 16,084,125 30,537,000
HFS Inc.* 569,900 611,400 1,181,300 39,893,000 42,798,000 82,691,000
Interstate Hotels Co.* 292,400 299,900 592,300 8,808,550 9,034,487 17,843,037
Trump Hotels & Casino Resorts Inc.* 426,900 479,100 906,000 4,482,450 5,030,550 9,513,000
------------ ------------ ------------
72,116,625 77,558,912 149,675,537
------------ ------------ ------------
Recreation 1.2%
Action Performance Companies Inc.* 25,300 27,700 53,000 537,625 588,625 1,126,250
Ascent Entertainment Group Inc.* 107,700 121,200 228,900 1,507,800 1,696,800 3,204,600
Florida Panthers Holdings Inc. 32,900 33,300 66,200 1,056,913 1,069,763 2,126,676
Petco Animal Supplies Inc.* 101,500 103,500 205,000 2,474,062 2,522,812 4,996,874
Ticketmaster Group Inc.* 155,200 160,100 315,300 2,192,200 2,261,413 4,453,613
West Marine Inc. 34,400 35,700 70,100 1,109,400 1,151,325 2,260,725
------------ ------------ ------------
8,878,000 9,290,738 18,168,738
------------ ------------ ------------
Retail Trade 6.6%
Abercrombie & Fitch Co. Cl. A* 39,300 41,600 80,900 540,375 572,000 1,112,375
Borders Group Inc.* 169,500 206,000 375,500 7,563,937 9,192,750 16,756,687
Gucci Group NV* 226,500 277,900 504,400 15,798,375 19,383,525 35,181,900
Jones Apparel Group Inc.* 228,600 241,000 469,600 7,829,550 8,254,250 16,083,800
Just For Feet Inc.* 197,400 201,200 398,600 5,823,300 5,935,400 11,758,700
RDO Equipment Co. 44,800 45,100 89,900 789,600 794,888 1,584,488
Staples Inc.* 134,250 174,000 308,250 2,752,125 3,567,000 6,319,125
Sunglass Hut International Inc.* 661,900 751,000 1,412,900 5,046,988 5,726,375 10,773,363
------------ ------------ ------------
46,144,250 53,426,188 99,570,438
------------ ------------ ------------
The accompanying notes are an integral part of the financial statements.
1
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
- -----------------------------------------------------------------------------
PRO FORMA COMBINING INVESTMENT PORTFOLIO (cont'd)
- -----------------------------------------------------------------------------
Shares Value
------------------------------- -----------------------------------------
Capital Pro Forma Capital Pro Forma
Capital Appreciation Combined Capital Appreciation Combined
- -------------------------------------- -------- ------------ --------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Textile & Apparel 2.9%
Men's Wearhouse, Inc.* 291,225 279,750 570,975 $ 7,753,866 $ 7,448,344 $ 15,202,210
Nautica Enterprises Inc.* 171,900 188,300 360,200 4,039,650 4,425,050 8,464,700
Timberland Co. Cl. A* 56,900 59,500 116,400 2,524,937 2,640,312 5,165,249
Tommy Hilfiger Corp.* 144,300 147,200 291,500 7,395,375 7,544,000 14,939,375
------------ ------------ ------------
21,713,828 22,057,706 43,771,534
------------ ------------ ------------
Total Consumer Cyclical 163,683,016 180,206,194 343,889,210
------------ ------------ ------------
Consumer Staple 12.1%
Business Service 10.1%
Apache Medical Systems Inc.* 38,400 14,200 52,600 216,000 79,875 295,875
Caribiner International Inc.* 58,900 59,700 118,600 2,731,488 2,768,588 5,500,076
Cognos Inc. 221,900 223,100 445,000 6,573,788 6,609,337 13,183,125
Education Management Corp.* 57,900 60,500 118,400 1,172,475 1,225,125 2,397,600
Outdoor Systems Inc.* 51,000 55,350 106,350 1,536,375 1,667,419 3,203,794
Republic Industries Inc.* 752,100 788,600 1,540,700 31,494,187 33,022,625 64,516,812
Republic Industries Inc.++* 395,000 420,800 815,800 16,639,375 17,726,200 34,365,575
U.S. Office Products Co.* 326,800 328,700 655,500 10,825,250 10,888,187 21,713,437
Universal Outdoor Holdings Inc.* 138,200 146,300 284,500 3,869,600 4,096,400 7,966,000
------------ ------------ ------------
75,058,538 78,083,756 153,142,294
------------ ------------ ------------
Drug 1.0%
Cephalon Inc.* 187,700 193,400 381,100 4,868,469 5,016,313 9,884,781
Entremed Inc.* 73,400 81,700 155,100 1,101,000 1,225,500 2,326,500
Ligand Pharmaceuticals Inc. Cl. B* 66,500 69,600 136,100 922,687 965,700 1,888,388
Magainin Pharmaceuticals Inc.* 67,200 112,400 179,600 537,600 899,200 1,436,800
------------ ------------ ------------
7,429,756 8,106,713 15,536,469
------------ ------------ ------------
Hospital Supply 0.5%
Trigon Healthcare Inc. 134,400 135,100 269,500 2,385,600 2,398,025 4,783,625
Wellpoint Health Networks Inc. Cl. A* 32,900 34,000 66,900 1,085,700 1,122,000 2,207,700
------------ ------------ ------------
3,471,300 3,520,025 6,991,325
------------ ------------ ------------
Printing & Publishing 0.5%
Hollinger International, Inc. Cl. A* 267,400 214,700 482,100 3,075,100 2,469,050 5,544,150
Hollinger International, Inc. Cv. Pfd. 163,300 88,100 251,400 1,837,125 991,125 2,828,250
------------ ------------ ------------
4,912,225 3,460,175 8,372,400
------------ ------------ ------------
Total Consumer Staple 90,871,819 93,170,669 184,042,488
------------ ------------ ------------
Energy 9.9%
Oil 0.5%
Noble Affiliates Inc. 70,700 71,200 141,900 3,084,287 3,106,100 6,190,387
Titan Exploration Inc.* 78,700 30,300 109,000 993,588 382,537 1,376,125
------------ ------------ ------------
4,077,875 3,488,637 7,566,512
------------ ------------ ------------
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
- -----------------------------------------------------------------------------
PRO FORMA COMBINING INVESTMENT PORTFOLIO (cont'd)
- -----------------------------------------------------------------------------
Shares Value
------------------------------- -----------------------------------------
Capital Pro Forma Capital Pro Forma
Capital Appreciation Combined Capital Appreciation Combined
- -------------------------------------- -------- ------------ --------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Oil Service 9.4%
BJ Services Co.* 143,100 147,900 291,000 $ 6,618,375 $ 6,840,375 $ 13,458,750
Cooper Cameron Corp. 36,400 36,600 73,000 2,652,650 2,667,225 5,319,875
Ensco International Inc.* 123,300 131,000 254,300 6,796,912 7,221,375 14,018,287
Global Marine Inc.* 593,800 605,600 1,199,400 13,286,275 13,550,300 26,836,575
Helmerich & Payne Inc. 154,400 162,800 317,200 7,469,100 7,875,450 15,344,550
Marine Drilling Companies, Inc.* 221,300 226,000 447,300 3,665,281 3,743,125 7,408,406
Newpark Resources, Inc.* 39,500 43,300 82,800 1,841,688 2,018,863 3,860,551
Noble Drilling Corp.* 640,500 645,700 1,286,200 14,010,937 14,124,687 28,135,624
Reading & Bates Corp.* 130,100 141,100 271,200 3,789,162 4,109,537 7,898,699
Rowan Companies, Inc.* 260,400 265,500 525,900 6,575,100 6,703,875 13,278,975
Varco International Inc.* 58,300 67,500 125,800 1,552,238 1,797,188 3,349,426
Weatherford Enterra Inc. 54,500 54,800 109,300 1,982,438 1,993,350 3,975,788
------------ ------------ ------------
70,240,156 72,645,350 142,885,506
------------ ------------ ------------
Total Energy 74,318,031 76,133,987 150,452,018
------------ ------------ ------------
Finance 17.3%
Bank 3.8%
Bank United Corp. Cl. A 38,000 41,000 79,000 1,030,750 1,112,125 2,142,875
Great Western Financial Corp. 237,200 108,500 345,700 7,501,450 3,431,313 10,932,763
H.F. Ahmanson & Co. 141,500 142,400 283,900 5,306,250 5,340,000 10,646,250
NationsBank Corp. 70,861 73,210 144,071 7,652,988 7,906,680 15,559,668
Washington Mutual Inc. 169,100 170,200 339,300 9,184,244 9,243,987 18,428,231
------------ ------------ ------------
30,675,682 27,034,105 57,709,787
------------ ------------ ------------
Financial Service 10.0%
Advanta Corp. 187,400 187,900 375,300 8,760,950 8,784,325 17,545,275
Allmerica Financial Corp. 159,900 163,100 323,000 5,856,338 5,973,537 11,829,875
American Express Co. 215,100 216,700 431,800 13,416,862 13,516,662 26,933,524
Beacon Properties Corp. 118,900 123,500 242,400 4,250,675 4,415,125 8,665,800
Capital One Financial Corp. 243,100 243,800 486,900 9,724,000 9,752,000 19,476,000
Federal National Mortgage Association 365,500 371,000 736,500 14,437,250 14,654,500 29,091,750
First USA Paymentech Inc.* 94,300 96,500 190,800 3,147,263 3,220,688 6,367,951
Green Tree Financial Corp. 180,500 190,100 370,600 7,016,937 7,390,137 14,407,074
MoneyGram Payment Systems Inc.* 215,700 221,100 436,800 2,911,950 2,984,850 5,896,800
Starwood Lodging Trust 132,000 145,500 277,500 5,395,500 5,947,313 11,342,813
------------ ------------ ------------
74,917,725 76,639,137 151,556,862
------------ ------------ ------------
Insurance 3.5%
Everest Reinsurance Holdings Inc. 220,400 92,500 312,900 6,061,000 2,543,750 8,604,750
MBNA Corp. 188,400 189,000 377,400 6,499,800 6,520,500 13,020,300
Progressive Corp. 46,300 49,000 95,300 3,073,162 3,252,375 6,325,537
TIG Holdings Inc. 142,800 129,800 272,600 4,944,450 4,494,325 9,438,775
Travelers Group Inc. 147,800 148,600 296,400 7,741,025 7,782,925 15,523,950
------------ ------------ ------------
28,319,437 24,593,875 52,913,312
------------ ------------ ------------
Total Finance 133,912,844 128,267,117 262,179,961
------------ ------------ ------------
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
- -----------------------------------------------------------------------------
PRO FORMA COMBINING INVESTMENT PORTFOLIO (cont'd)
- -----------------------------------------------------------------------------
Shares Value
------------------------------- -----------------------------------------
Capital Pro Forma Capital Pro Forma
Capital Appreciation Combined Capital Appreciation Combined
- -------------------------------------- -------- ------------ --------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Science & Technology 32.2%
Computer Software & Service 10.2%
Ascend Communications Inc.* 297,800 309,000 606,800 $ 20,734,325 $ 21,514,125 $ 42,248,450
Bay Networks Inc. 105,700 96,600 202,300 2,298,975 2,101,050 4,400,025
Check Point Software Technologies
Ltd.* 32,600 36,700 69,300 872,050 981,725 1,853,775
Cisco Systems Inc.* 214,300 215,700 430,000 14,947,425 15,045,075 29,992,500
EMC Corp. 96,600 97,200 193,800 3,658,725 3,681,450 7,340,175
Excalibur Technologies Corp.* 50,000 52,200 102,200 662,500 691,650 1,354,150
Geoworks* 235,300 228,900 464,200 5,882,500 5,722,500 11,605,000
P-COM, Inc.* 116,600 120,200 236,800 4,532,825 4,672,775 9,205,600
Parametric Technology Corp.* 137,400 168,300 305,700 7,934,850 9,719,325 17,654,175
Premiere Technologies Inc.* 25,800 26,700 52,500 664,350 687,525 1,351,875
Puma Technology Inc.* 38,500 39,900 78,400 587,125 608,475 1,195,600
Westell Technologies, Inc. Cl. A* 272,100 281,900 554,000 3,945,450 4,087,550 8,033,000
Western Digital Corp.* 121,500 124,900 246,400 8,808,750 9,055,250 17,864,000
------------ ------------ ------------
75,529,850 78,568,475 154,098,325
------------ ------------ ------------
Electronic Components 10.6%
Advanced Micro Devices Inc. 345,700 348,000 693,700 12,099,500 12,180,000 24,279,500
Altera Corp.* 232,400 242,400 474,800 10,051,300 10,483,800 20,535,100
Applied Magnetics Corp.* 118,600 121,600 240,200 6,552,650 6,718,400 13,271,050
CHS Electronics Inc.* 43,600 49,700 93,300 814,775 928,769 1,743,544
Cymer Inc.* 109,300 111,600 220,900 5,628,950 5,747,400 11,376,350
Intel Corp.* 69,700 70,300 140,000 11,308,825 11,406,175 22,715,000
LSI Logic Corp. 202,400 203,500 405,900 7,033,400 7,071,625 14,105,025
Pairgain Technologies Inc.* 159,600 162,800 322,400 6,533,625 6,664,625 13,198,250
Sanmina Corp.* 319,800 352,300 672,100 19,028,100 20,961,850 39,989,950
------------ ------------ ------------
79,051,125 82,162,644 161,213,769
------------ ------------ ------------
Electronic Equipment 7.7%
Applied Materials Inc.* 201,700 208,600 410,300 9,958,937 10,299,625 20,258,562
KLA Instruments Corp.* 185,100 188,600 373,700 7,889,887 8,039,075 15,928,962
Lucent Technologies Inc.* 261,000 281,000 542,000 14,159,250 15,244,250 29,403,500
Motorola Inc. 214,900 216,600 431,500 14,666,925 14,782,950 29,449,875
Novellus Systems Inc.* 48,500 49,500 98,000 3,843,625 3,922,875 7,766,500
Tencor Instruments* 69,900 71,200 141,100 2,848,425 2,901,400 5,749,825
Teradyne Inc.* 135,900 136,700 272,600 4,195,913 4,220,612 8,416,525
------------ ------------ ------------
57,562,962 59,410,787 116,973,749
------------ ------------ ------------
Office Equipment 3.7%
Dell Computer Corp.* 116,600 117,400 234,000 7,710,175 7,763,075 15,473,250
Quantum Corp. 203,200 204,800 408,000 7,721,600 7,782,400 15,504,000
Read-Rite Corp.* 146,400 150,800 297,200 4,831,200 4,976,400 9,807,600
Seagate Technology 118,200 119,200 237,400 6,087,300 6,138,800 12,226,100
Stormedia Inc. Cl. A* 103,200 106,000 209,200 1,728,600 1,775,500 3,504,100
------------ ------------ ------------
28,078,875 28,436,175 56,515,050
------------ ------------ ------------
Total Science & Technology 240,222,812 248,578,081 488,800,893
------------ ------------ ------------
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
- -----------------------------------------------------------------------------
PRO FORMA COMBINING INVESTMENT PORTFOLIO (cont'd)
- -----------------------------------------------------------------------------
Shares Value
------------------------------- -----------------------------------------
Capital Pro Forma Capital Pro Forma
Capital Appreciation Combined Capital Appreciation Combined
- -------------------------------------- -------- ------------ --------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Utility 2.5%
Natural Gas 0.7%
Calpine Corp.* 211,500 227,400 438,900 $ 4,653,000 $ 5,002,800 $ 9,655,800
------------ ------------ ------------
Telephone 1.8%
Colt Telecom Group PLC ADR* 89,300 91,600 180,900 1,830,650 1,877,800 3,708,450
Larscom Inc. Cl. A* 46,900 47,700 94,600 562,800 572,400 1,135,200
Omnipoint Corp.* 67,900 88,300 156,200 1,519,262 1,975,713 3,494,975
Telecomunicacoes Brasileiras ADR* 111,200 111,800 223,000 9,702,200 9,754,550 19,456,750
------------ ------------ ------------
13,614,912 14,180,463 27,795,375
------------ ------------ ------------
Total Utility 18,267,912 19,183,263 37,451,175
------------ ------------ ------------
Total Common Stocks (Cost $620,587,928, $621,772,679 and
$1,242,360,607) 732,208,847 757,147,224 1,489,356,071
------------ ------------ ------------
Principal Amount
-------------------------------
SHORT-TERM OBLIGATIONS 2.7%
Chevron Oil Finance Co., 5.34%,
2/03/1997 $13,120,000 $ 0 $13,120,000 13,120,000 0 13,120,000
Chevron Oil Finance Co., 5.34%,
2/04/1997 10,000,000 0 10,000,000 10,000,000 0 10,000,000
Chevron Oil Finance Co., 5.35%,
2/04/1997 3,523,000 0 3,523,000 3,523,000 0 3,523,000
General Electric Capital Corp., 5.37%,
2/05/1997 7,267,000 0 7,267,000 7,267,000 0 7,267,000
McDonalds Corp., 5.45%, 2/05/1997 0 6,715,000 6,715,000 0 6,712,967 6,712,967
------------ ------------ ------------
Total Short-Term Obligations (Cost $33,910,000, $6,712,967 and
$40,622,967) 33,910,000 6,712,967 40,622,967
------------ ------------ ------------
Total Investments (Cost $654,497,928, $628,485,646 and $1,282,983,574) 766,118,847 763,860,191 1,529,979,038
Cash and Other Assets, Less Liabilities (10,109,628) (3,774,409) (13,884,037)
------------ ------------ ------------
Net Assets $756,009,219 $760,085,782 $1,516,095,001
============ ============ ============
</TABLE>
- ---------------------
* Nonincome-producing securities
ADR stands for American Depositary Receipt, representing ownership of
foreign securities.
++ Security valued under consistently applied procedures established by the
Trustees. Security restricted as to public resale. The total cost of
restricted securities owned at January 31, 1997 was $7,998,750, $8,521,200
and $16,519,950 and the total market value was $16,639,375, $17,726,200
and $34,365,575 (2.20%, 2.33% and 2.27% of net assets), respectively.
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
- -----------------------------------------------------------------------------
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------
January 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Capital Pro Forma
Capital Appreciation Combined
--------------- --------------- ---------------
<S> <C> <C> <C>
Assets
Investments, at value (Cost $654,497,928,
$628,485,646 and $1,282,983,574) $766,118,847 $763,860,191 $1,529,979,038
Cash 666 4,743 5,409
Receivable for securities sold 25,863,363 34,150,474 60,013,837
Receivable for fund shares sold 2,215,060 840,065 3,055,125
Dividends and interest receivable 284,054 279,828 563,882
Other assets 62,137 77,851 139,988
------------- ------------- -------------
794,544,127 799,213,152 1,593,757,279
Liabilities
Payable for securities purchased 35,914,581 36,101,618 72,016,199
Payable for fund shares redeemed 1,304,890 1,572,206 2,877,096
Accrued transfer agent and shareholder services 200,832 609,310 810,142
Accrued management fee 478,943 482,295 961,238
Accrued distribution and service fees 532,512 256,152 788,664
Accrued trustees' fees 10,208 9,498 19,706
Other accrued expenses 92,942 96,291 189,233
------------- ------------- -------------
38,534,908 39,127,370 77,662,278
------------- ------------- -------------
Net Assets $756,009,219 $760,085,782 $1,516,095,001
============= ============= =============
Net Assets consist of:
Unrealized appreciation of investments $111,620,919 $135,374,545 $ 246,995,464
Accumulated net realized gain 7,898,281 40,228,046 48,126,327
Shares of beneficial interest 636,490,019 584,483,191 1,220,973,210
------------- ------------- -------------
$756,009,219 $760,085,782 $1,516,095,001
============= ============= =============
Net Asset Value and redemption price per share of
Class A shares ($121,259,196 / 8,843,918,
$397,740,486 / 32,715,718 and $518,999,682 /
37,854,894) $13.71 $12.16 $13.71
======= ====== ======
Maximum Offering Price per share of Class A shares
($13.71 / .955, $12.16 / .955 and $13.71 / .955) $14.36 $12.73 $14.36
======= ====== ======
Net Asset Value and offering price per share of
Class B shares ($406,268,566 / 30,516,200,
$194,129,128 / 16,411,349 and $600,397,694 /
45,101,409) $13.31 $11.83 $13.31
======= ====== ======
Net Asset Value, offering price and redemption price
per share of Class C shares ($36,124,951 /
2,599,960, $162,530,559 / 13,156,962 and
$198,655,510 / 14,301,224) $13.89 $12.35 $13.89
======= ====== ======
Net Asset Value and offering price per share of
Class D shares
($192,356,506 / 14,425,346, $5,685,609 / 479,068
and $198,042,115 / 14,851,873)* $13.33 $11.87 $13.33
======= ====== ======
</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.
6
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
- -----------------------------------------------------------------------------
PRO FORMA COMBINING STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------
January 31, 1997 (Unaudited)
<TABLE>
<CAPTION>
Capital Pro Forma Pro Forma
Capital Appreciation Adjustments Combined
-------------- --------------- --------------- ---------------
Investment Income
<S> <C> <C> <C> <C>
Dividends, net of foreign taxes $ 2,474,885 $ 2,922,899 $ 5,397,784
Interest 2,733,148 1,646,619 4,379,767
------------- ------------- ------------
5,208,033 4,569,518 9,777,551
Expenses
Management fee 4,808,595 5,310,692 10,119,287
Transfer agent and shareholder services 995,888 2,039,869 3,035,757
Service fee--Class A 249,929 942,367 1,192,296
Distribution and service fees--Class B 3,400,416 1,668,136 5,068,552
Distribution and service fees--Class D 1,672,024 58,745 1,730,769
Custodian fee $ (121,078)
187,892 197,087 (1) 263,901
Registration fees 215,026 68,482 (48,482) (1) 235,026
Reports to shareholders 123,772 263,960 (243,960) (1) 143,772
Audit fee 27,516 32,529 (32,529) (1) 27,516
Trustees' fees 30,510 29,374 (29,374) (1) 30,510
Legal fees 20,070 19,418 (19,418) (1) 20,070
Miscellaneous 34,887 35,636 (20,636) (1) 49,887
------------- ------------- ----------- ------------
11,766,525 10,666,295 (515,477) 21,917,343
------------- ------------- ----------- ------------
Net investment loss (6,558,492) (6,096,777) 515,477 (12,139,792)
------------- ------------- ----------- ------------
Net realized gain on investments 32,272,609 58,533,316 90,805,925
Net unrealized appreciation of
investments 62,388,013 48,746,354 111,134,367
------------- ------------- ----------- ------------
Net gain on investments 94,660,622 107,279,670 201,940,292
------------- ------------- ----------- -----------
Net increase in net assets resulting
from operations $88,102,130 $101,182,893 $ 515,477 $189,800,500
============= ============= ============= =============
------------------------------------------------------------------------------------------------------
(1) Adjustments reflect expected savings when the funds combine.
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
- -----------------------------------------------------------------------------
NOTES TO PRO FORMA STATEMENTS
- -----------------------------------------------------------------------------
For the year ended January 31, 1997 (Unaudited)
1. Basis of Combination
The unaudited Pro Forma Combining Investment Portfolio, the Pro Forma Combining
Statement of Assets and Liabilities and the Pro Forma Combining Statement of
Operations reflect the accounts of State Street Research Capital Fund
("Capital") and State Street Research Capital Appreciation Fund ("Capital
Appreciation") (collectively the "Funds" or a "Fund") at and for the year ended
January 31, 1997. These statements have been derived from the underlying
accounting records utilized in calculating the daily net asset values for the
year ended January 31, 1997 for Capital and Capital Appreciation.
The pro forma statements give effect to the proposed transfer of the assets and
stated liabilities of Capital Appreciation to Capital in exchange for shares of
Capital under generally accepted accounting principles. However, it is possible
that Capital Appreciation will not approve the merger.
The historical cost of investment securities will be carried forward to the
surviving entity and the results of operations of Capital for pre- combination
periods will not be restated. The pro forma statements do not reflect the
expenses of each fund in carrying out its obligations under the Agreement and
Plan of Reorganization and Liquidation, which will be shared evenly by the two
Funds.
The Pro Forma Combining Investment Portfolio, the Pro Forma Combining Statement
of Assets and Liabilities and the Pro Forma Combining Statement of Operations
should be read in conjunction with the historical financial statements of the
funds included or incorporated by reference in the Statement of Additional
Information.
2. Portfolio Valuation
Values for listed securities reflect final sales 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 closing prices
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. Short-term securities maturing
within sixty days are valued at amortized cost. Other securities if any, are
valued at their fair value as determined in accordance with established methods
consistently applied.
3. Capital Shares
The pro forma net asset value per share assumes the issuance of additional
shares of Capital which would have been issued at January 31, 1997 in connection
with the proposed reorganization. The pro forma number of shares outstanding of
37,854,894, 45,101,409, 14,301,224 and 14,851,873 in each of Class A, Class B,
Class C and Class D shares, respectively, includes 29,010,976, 14,585,209,
11,701,264 and 426,527 additional shares from each of Class A, Class B, Class C
and Class D shares, respectively, all of which are assumed to be issued in the
reorganization at January 31, 1997.
<PAGE>
STATE STREET RESEARCH CAPITAL TRUST
PART C
OTHER INFORMATION
Item 15. Indemnification
The response to this item is incorporated by reference to Part A of the
Joint Prospectus/Proxy Statement in this Registration Statement under the
caption "Comparative Information on Shareholder Rights--Liabilities of
Directors, Trustees and Officers."
Item 16: Exhibits
(1)(a) First Amended and Restated Master Trust Agreement, Amendment No. 1
and Amendment No. 2 to the First Amended and Restated Master Trust
Agreement (6)
(1)(b) Amendment No. 3 to First Amended and Restated Master Trust
Agreement (7)
(1)(c) Amendment No. 4 to First Amended and Restated Master Trust
Agreement (8)
(1)(d) Form of Amendment No. 5 to First Amended and Restated Master Trust
Agreement (8)
(2)(a) By-laws of the Registrant (2)
(2)(b) Amendment No. 1 to the By-Laws effective September 30, 1992 (3)
(3) Not applicable
(4) Agreement and Plan of Reorganization and Liquidation (Included as
Exhibit A to the Joint Prospectus/Proxy Statement contained in Part A
of this Registration Statement)
(5) Not applicable
(6)(a) Advisory Agreement with State Street Research & Management Company (2)
(7)(a) Distribution Agreement with State Street Research Investment
Services, Inc. (4)
(7)(b) Form of Selected Dealer Agreement, as Supplemented (8)
(7)(c) Form of Bank and Bank Affiliated Broker-Dealer Agreement (5)
(8) Not applicable
(9) Custodian Contract with State Street Bank and Trust Company (2)
(10) Plan of Distribution Pursuant to Rule 12b-1 (5)
(11) Opinion and Consent of Counsel with respect to legality of shares
being issued
(12) Opinion and Consent of Goodwin, Procter & Hoar LLP with respect to
tax matters relating to acquisition of State Street Research
Capital Appreciation Fund (to be filed by post-effective amendment)
(13) Not applicable
(14) Consents of Independent Accountants
(15) Not applicable
(16)(a) Powers of Attorney
(16)(b) Certificate of Board Resolution Respecting Powers of Attorney
(17)(a) Forms of Proxy Cards for State Street Research Capital Appreciation
Fund
(17)(b) Registrant's Declaration pursuant to Rule 24f-2 is incorporated by
reference from its Initial Registration Statement of February, 1987
- --------------
C-1
<PAGE>
* The series of the Registrant have changed their names at various
times. Documents in this listing of Exhibits which were effective
prior to the most recent name change accordingly refer to a former
name of such series.
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
1 Initial Registration Statement on Form N-1A February, 1987
2 Post-Effective Amendment No. 2 December 2, 1988
3 Post-Effective Amendment No. 7 November 25, 1992
4 Post-Effective Amendment No. 8 November 26, 1993
5 Post-Effective Amendment No. 10 November 18, 1994
6 Post-Effective Amendment No. 11 October 11, 1995
7 Post-Effective Amendment No. 12 November 29, 1995
8 Post-Effective Amendment No. 14 January 21, 1997
Item 17. Undertakings
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus which is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
the reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new registration statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
(3) Registrant undertakes to file, by post-effective amendment, an
opinion of counsel supporting the tax consequences of the proposed
reorganization within a reasonable time after receipt of such opinion.
C-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement on Form N-14 to be signed
on its behalf by the undersigned, thereto duly authorized, in the City of Boston
and The Commonwealth of Massachusetts on the 4th day of April, 1997.
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
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 (principal executive officer)
Ralph F. Verni
* Treasurer (principal financial and accounting
________________________ officer)
Gerard P. Maus
_________________________ Trustee
Steve A. Garban
_________________________ Trustee
Malcolm T. Hopkins
*
________________________ 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 April 4, 1997
filed herein.
<PAGE>
Index To Exhibits
(11) Opinion and Consent of Counsel with respect
to legality of shares being issued
(14) Consents of Independent Accountants
(16)(a) Powers of Attorney
(16)(b) Certificate of Board Resolution Respecting Powers of Attorney
(17)(a) Forms of Proxy Cards for State Street Research Capital Appreciation
Fund
Exhibit (11)
[Letterhead of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.,
One Financial Center, Boston, Massachusetts 02111]
April 4, 1997
State Street Research Capital Trust
One Financial Center
Boston, Massachusetts 02111
Dear Sirs:
We are furnishing this opinion with a view to your filing the same or
duplicates thereof with the Securities and Exchange Commission, Washington,
D.C., in connection with the filing of a Registration Statement on Form N-14
with said Commission with which this opinion or duplicates thereof are to be
filed. Said registration statement is being filed in connection with the
proposed transfer of the assets and certain liabilities of the State Street
Research Capital Appreciation Fund (the "Capital Appreciation Fund"), a series
of the State Street Research Equity Trust (the "Equity Trust"), a Massachusetts
business trust, to the State Street Research Capital Fund (the "Capital Fund"),
a series of the State Street Research Capital Trust (the "Capital Trust"), in
exchange for Class A, Class B, Class C and Class D shares of beneficial
interest, $.001 par value per share, of the Capital Fund ("Capital Fund Shares")
(such proposed transaction referred to in this opinion as the "Transaction").
We act as your legal counsel and have examined all such records, papers and
documents as we believe necessary in order to enable us to render the opinion
set forth below.
On the basis of the foregoing we are of the opinion that:
1. The Capital Trust was duly organized and is a lawfully existing business
trust under the laws of The Commonwealth of Massachusetts.
2. The Capital Trust has authorized capital shares consisting of an
unlimited number of shares of beneficial interest.
3. The Capital Fund Shares to be issued by the Capital Fund under the terms
of the Transaction have been duly authorized and, when such shares of beneficial
interest are issued and delivered in the manner contemplated by the Transaction,
they will be legally and validly issued, fully paid and nonassessable.
Very truly yours,
/s/ Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C.
--------------------------------
MINTZ, LEVIN, COHN, FERRIS,
GLOVSKY AND POPEO, P.C.
Exhibit (14)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Registration Statement on Form N-14 (the "Registration
Statement") of State Street Research Capital Trust of our report dated November
8, 1996 relating to the financial statements and financial highlights of State
Street Research Capital Fund (a series of State Street Research Capital Trust)
for the year ended September 30, 1996, which appears in such Statement of
Additional Information, and to the incorporation by reference of our report into
the Joint Prospectus/Proxy Statement which constitutes part of this Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Joint Prospectus/Proxy Statement, to the reference to us under the heading
"Independent Accountants" in such Statement of Additional Information and to the
reference to us under the heading "Financial Highlights" in the Prospectus of
State Street Research Capital Fund dated February 1, 1997 which is incorporated
by reference into the Joint Prospectus/Proxy Statement.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
April 4, 1997
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the use in the Statement of Additional Information constituting
part of this Registration Statement on Form N-14 (the "Registration Statement")
of State Street Research Capital Trust of our report dated August 9, 1996
relating to the financial statements and financial highlights of State Street
Research Capital Appreciation Fund (a series of State Street Research Equity
Trust) for the year ended June 30, 1996, which appear in such Statement of
Additional Information, and to the incorporation by reference of such report
into the Joint Prospectus/Proxy Statement which constitutes part of this
Registration Statement. We also consent to the reference to us under the heading
"Experts" in such Joint Prospectus/Proxy Statement, to the references to us
under the headings "Independent Accountants" in such Statement of Additional
Information and to the reference to us under the heading "Financial Highlights"
in the Prospectus of the State Street Research Capital Appreciation Fund dated
November 1, 1996, incorporated by reference into the Joint Prospectus/Proxy
Statement.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
April 4, 1997
Exh. (16)(a)
POWERS OF ATTORNEY
We, the undersigned State Street Research Capital Trust (the
"Trust"), a Massachusetts business trust, its trustees, its principal executive
officer and its principal financial and accounting officer, hereby severally
constitute and appoint Francis J. McNamara, III and Darman A. Wing, as our true
and lawful attorneys, with full power to each of them alone to sign for us, and
in our names and in the capacities indicated below, any Registration Statement,
including any Registration Statement on Form N-14, and any and all amendments
thereto, of the Trust filed with the Securities and Exchange Commission and
generally do all such things in our names and in the indicated capacities as are
required to enable the Trust to comply with provisions of the Securities Act of
1933, as amended, and/or the Investment Company Act of 1940, as amended, and all
requirements and regulations of the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they have been and may be signed by
our said attorneys to said Registration Statements, and any and all amendments
thereto.
IN WITNESS WHEREOF, we have hereunto set our hands, on this 4th day
of April, 1997.
SIGNATURES
STATE STREET RESEARCH CAPITAL TRUST
/s/ Ralph F. Verni /s/ Thomas L. Phillips
---------------------------------- ----------------------------------
Ralph F. Verni, Trustee and Thomas L. Phillips, Trustee
principal executive officer
/s/ Gerard P. Maus /s/ Toby Rosenblatt
---------------------------------- ----------------------------------
Gerard P. Maus, Principal financial Toby Rosenblatt, Trustee
and accounting officer
/s/ Edward M. Lamont /s/ Michael S. Scott Morton
---------------------------------- ----------------------------------
Edward M. Lamont, Trustee Michael S. Scott Morton, Trustee
/s/ Robert A. Lawrence /s/ Jeptha H. Wade
---------------------------------- ----------------------------------
Robert A. Lawrence, Trustee Jeptha H. Wade, Trustee
/s/ Dean O. Morton
----------------------------------
Dean O. Morton, Trustee
Exh. (16)(b)
STATE STREET RESEARCH CAPITAL TRUST
Certificate of Resolution
I, the undersigned Amy L. Simmons, hereby certify that I am Assistant
Secretary of State Street Research Capital Trust (the "Trust"), a
Massachusetts business trust duly authorized and validly existing under
Massachusetts law, and that the following is a true, correct and complete
statement of a vote duly adopted by the Trustees of said Trust on February 5,
1997:
"VOTED: That Francis J. McNamara, III and Darman A. Wing
be, and each hereby is, authorized and empowered,
for and on behalf of the Investment Company, its
principal financial and accounting officer, and in
their name, to execute, and file a Power of Attorney
relating to, the Investment Company's Registration
Statements under the Investment Company Act of 1940
and/or the Securities Act of 1933, including any N-14
Registration Statement, and amendments thereto,
the execution and delivery of such Power of Attorney,
Registration Statements and amendments thereto, to
constitute conclusive proof of such authorization."
I further certify that said vote has not been amended or revoked and
that the same is now in full force and effect.
IN WITNESS WHEREOF, I have hereunto set my hand this 4th day of
April, 1997.
/s/ Amy L. Simmons
------------------------
Assistant Secretary
Exh.(17)(a)
STATE STREET RESEARCH CAPITAL APPRECIATION FUND
a series of
State Street Research Equity Trust
PROXY
Special Meeting of Shareholders - ___________________, 1997
The undersigned hereby appoints Ralph F. Verni, Francis J. McNamara, III
and Darman A. Wing, and each of them, as proxies with full power of substitution
to act for and vote on behalf of the undersigned all shares of State Street
Research Capital Appreciation Fund (the "Capital Appreciation Fund"), a
portfolio series of State Street Research Equity Trust (the "Company"), which
the undersigned would be entitled to vote if personally present at the Special
Meeting of Shareholders to be held at________________, _______________,
___________________________, _____________________________________, at p.m. on
______________________, 1997, or at any adjournments thereof, on the following
item as set forth in the Notice of Special Meeting of Shareholders and the
accompanying Joint Prospectus/Proxy Statement.
If a choice is specified for the proposal, this proxy will be voted as
indicated. IF NO CHOICE IS SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSAL.
In their discretion the proxies are authorized to vote upon such other business
as may properly come before the Meeting. The Board of Trustees recommends a vote
FOR the proposal.
The undersigned acknowledges receipt of the Notice of Special Meeting of
Shareholders and the accompanying Joint Prospectus/Proxy Statement dated
_________________, 1997. PLEASE INDICATE ANY CHANGE OF ADDRESS BELOW. This proxy
may be revoked at any time prior to the exercise of the powers conferred
thereby.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
- --------------------------------------------------------------------------------
SEE REVERSE SIDE
- --------------------------------------------------------------------------------
<PAGE>
With respect to the Capital Appreciation Fund:
1. To approve an Agreement and Plan of Reorganization and Liquidation
providing for the transfer of the assets of the Capital Appreciation Fund
(subject to certain of its liabilities) to the State Street Research
Capital Fund (the "Capital Fund") in exchange for Class A, Class B, Class C
and Class D shares of the Capital Fund, the distribution of such shares to
shareholders of the Capital Appreciation Fund and the subsequent
liquidation and dissolution of the Capital Appreciation Fund.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
YES NO
I plan to attend the meeting: [ ] [ ]
IT IS IMPORTANT THAT THIS PROXY BE
SIGNED AND RETURNED IN THE ENCLOSED
ENVELOPE.
NOTE: Please date and sign exactly as name or
names appear hereon and return in the
enclosed envelope, which requires no
postage. When signing as attorney,
executor, trustee, guardian or officer
of a corporation, please give title as such.
Signature: _________________________ Date: _______________
Signature: _________________________ Date: _______________
Exh. (17)(b)
REQUEST TO RECONSIDER
PRIOR [ABSTENTION] ["AGAINST" VOTE]
(date)
To Shareholders of the
Capital Appreciation Fund
Recently we solicited your proxy vote on an important proposal. Because
you returned a proxy form which indicated that you [abstained from voting on]
[voted "against"] the proposal that is still open, we are contacting you again
to ask that you reconsider your [abstention] [vote "against"] and vote in favor
of the proposal. The meeting has been adjourned to allow more time to obtain
votes.
The open proposal is to approve of a reorganization to, in effect,
change to another mutual fund that is similar to the Capital Appreciation Fund.
Your shares of the Capital Appreciation Fund would be exchanged for shares of
the Capital Fund. This transaction is being proposed because of the economies of
scale and portfolio diversification that can result from the combination, given
that the two Funds have the same investment objective, the same investment
manager and similar investment policies and portfolios. The proposal is
described in more detail in the Joint Prospectus/Proxy Statement. Please call
1-800-562-0032 if you need another copy of the Joint Prospectus/Proxy Statement.
Please indicate your vote, sign and return promptly the enclosed
Supplemental Proxy form in the special accompanying envelope which will expedite
processing and does not require any postage from you. (If your return envelope
is for Federal Express, call for free pick-up at 1-800-238-5355.)
You may receive a telephone call urging you to return your Supplemental
Proxy form. If you have any questions, please contact State Street Research
Shareholder Services toll-free nationwide at 1-800-562-0032 between 8 a.m. and 6
p.m. Eastern Standard Time.
Thank you.
State Street Research
Shareholder Services
- ------------------------------------
Note:
In some cases, persons with the same tax identification number and mailing
address may have received proxy solicitation materials for different accounts in
one package.
<PAGE>
State Street Research Capital Appreciation Fund
a series of
State Street Research Equity Trust
SUPPLEMENTAL PROXY
Special Meeting of Shareholders
The undersigned hereby submits this Supplemental Proxy to make the below
indicated changes to the [vote(s)] [abstention(s)] previously submitted by the
undersigned in connection with a Special Meeting of Shareholders as described in
a related Joint Prospectus/Proxy Statement dated _________________________.
If a choice is specified for the proposal, this proxy will be voted as
indicated. The Board of Trustees recommends a vote FOR the proposals.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES.
PLEASE DETACH AND RETURN BOTTOM PORTION IN THE ENCLOSED ENVELOPE
1. To approve an Agreement and Plan of FOR AGAINST ABSTAIN
Reorganization and Liquidation providing [ ] [ ] [ ]
for the transfer of the assets of the
State Street Research Capital
Appreciation Fund (the "Capital
Appreciation Fund") (subject to certain
of its liabilities) to the State Street
Research Capital Fund (the "Capital
Fund") in exchange for Class A, Class B,
Class C and Class D shares of the
Capital Fund, the distribution of such
shares to shareholders of the Capital
Appreciation Fund and the subsequent
liquidation of the Capital Appreciation
Fund.
IT IS IMPORTANT THAT THIS
PROXY BE SIGNED AND RETURNED
IN THE ENCLOSED ENVELOPE.
DATE: ________________ , 1997.
NOTE: Please date and sign
exactly as name or names
appear hereon and return in
the enclosed envelope, which
requires no postage. When
signing as attorney, executor,
trustee, guardian or officer
of a corporation, please give
title as such.
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Signature(s) if held jointly
(Title(s), if required)
Prxcard
