STATE STREET RESEARCH
CAPITAL FUND
Prospectus
February 1, 1997
The investment objective of State Street Research Capital Fund (the "Fund") is
to seek maximum capital appreciation by investing primarily in common stocks
(and preferred stocks and debt securities convertible into or carrying the right
to acquire common stocks) of emerging growth companies and of companies
considered to be undervalued special situations, as determined by the Fund's
investment manager.
State Street Research & Management Company (the "Investment Manager")
serves as investment adviser to the Fund. As of November 30, 1996, the
Investment Manager had assets of approximately $42.5 billion under
management. State Street Research Investment Services, Inc. serves as
distributor (the "Distributor") for the Fund.
Shareholders may have their shares redeemed directly by the Fund at net asset
value plus the applicable contingent deferred sales charge, if any; redemptions
processed through securities dealers may be subject to processing charges.
There are risks in any investment program, including the risk of changing
economic and market conditions, and there is no assurance that the Fund will
achieve its investment objective. The net asset value of the Fund's shares
fluctuates as market conditions change.
Because of the Fund's investment policies, the Fund is subject to
above-average risks. The Fund generally is designed for investors who want an
aggressive investment and can tolerate volatility and possible losses. An
investment in the Fund should be part of a balanced investment program which
includes more conservative investments.
This Prospectus sets forth concisely the information a prospective investor
ought to know about the Fund before investing. It should be retained for future
reference. A Statement of Additional Information about the Fund dated February
1, 1997 has been filed with the Securities and Exchange Commission and is
incorporated by reference into this Prospectus. It is available at no charge
upon request to the Fund at the address indicated on the cover or by calling
1-800-562-0032.
The Fund is a diversified series of State Street Research Capital Trust (the
"Trust"), an open-end management investment company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE FUND MAY ENGAGE IN SHORT-TERM TRADING, WHICH MAY BE CONSIDERED A
SPECULATIVE ACTIVITY AND INVOLVE GREATER RISK AND ADDITIONAL COST TO THE
FUND.
SHARES OF THE 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.
Table of Contents Page
- ---------------------------------------------------
Table of Expenses 2
Financial Highlights 4
The Fund's Investments 6
Limiting Investment Risk 8
Purchase of Shares 9
Redemption of Shares 18
Shareholder Services 20
The Fund and its Shares 24
Management of the Fund 25
Dividends and Distributions; Taxes 25
Calculation of Performance Data 26
- ---------------------------------------------------
<PAGE>
The Fund offers four classes of shares which may be purchased at the next
determined net asset value per share plus, in the case of all classes except
Class C shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a deferred
basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5% and
(ii) an annual service fee of 0.25% of the average daily net asset value of the
Class A shares.
Class B shares are subject to (i) a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made within
five years of purchase, and (ii) annual distribution and service fees of 1% of
the average daily net asset value of such shares. Class B shares automatically
convert into Class A shares (which pay lower ongoing expenses) at the end of
eight years after purchase. No contingent deferred sales charge applies after
the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or redemption
of Class C shares. Class C shares do not pay any distribution or service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1% if
redeemed within one year following purchase and (ii) annual distribution and
service fees of 1% of the average daily net asset value of such shares.
Table of Expenses
<TABLE>
<CAPTION>
Class A Class B Class C Class D
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses(1)
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.5% None None None
Maximum 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 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 Fee None None None None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.75% 0.75% 0.75% 0.75%
12b-1 Fees 0.25% 1.00% None 1.00%
Other Expenses 0.26% 0.26% 0.26% 0.26%
------------ ------------ ------------ ------------
Total Fund Operating Expenses 1.26% 2.01% 1.01% 2.01%
============ ============ ============ ============
</TABLE>
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
thereafter and no contingent deferred sales charge is imposed after the
fifth year. Class D shares are subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the sale.
Long-term investors in Class A, Class B or Class D shares with a
distribution fee may, over a period of years, pay more than the economic
equivalent of the maximum sales charge permissible under applicable rules.
See "Purchase of Shares."
(2) Purchases of Class A shares of $1 million or more are not subject to a sales
charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption.
See "Purchase of Shares."
2
<PAGE>
Example:
You would pay the following expenses on a $1,000 investment including, for Class
A shares, the maximum applicable initial sales charge and assuming (1) 5% annual
return and (2) redemption of the entire investment at the end of each time
period:
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- -----------
Class A shares $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
You would pay the following expenses on the same investment, assuming no
redemption:
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- -----------
Class B shares (1) $20 $63 $108 $214
Class D shares $20 $63 $108 $234
(1) Ten-year figures assume conversion of Class B shares to Class A shares at
the end of eight years.
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than shown.
The purpose of the table above is to assist the investor in understanding the
various costs and expenses that an investor will bear directly or indirectly.
The percentage expense levels shown in the table are based on experience with
expenses for the fiscal year ended September 30, 1996; actual expense levels for
the current fiscal year and future years may vary from the amounts shown. The
table does not reflect charges for optional services elected by certain
shareholders, such as the $7.50 fee for remittance of redemption proceeds by
wire. For further information on sales charges, see "Purchase of
Shares--Alternative Purchase Program"; for further information on management
fees, see "Management of the Fund"; and for further information on 12b-1 fees,
see "Purchase of Shares--Distribution Plan."
3
<PAGE>
Financial Highlights
The data set forth below has been examined by Coopers & Lybrand L.L.P.,
independent accountants, and their report thereon for the latest five years is
included in the Statement of Additional Information. For further information
about the performance of the Fund, see "Financial Statements" in the Statement
of Additional Information. The Fund's registration under the Investment Company
Act of 1940 was effective in March 1984 and its registration under the
Securities Act of 1933 was effective in November 1987.
<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 (.05) (.04) (.04) (.03)
Net realized and unrealized gain on
investments 1.30 3.69 .28 2.43
Distributions from net realized
gains (1.02) (.04) (.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 (.14) (.12) (.08) (.04)
Net realized and unrealized gain on
investments 1.27 3.63 .25 1.76
Distributions from net realized
gains (1.02) (.04) (.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>
** Per-share figures have been calculated using the average shares method.
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges.
+++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges.
@ Average commission rate per share paid for security trades for fiscal years
beginning on or after October 1, 1995.
4
<PAGE>
<TABLE>
<CAPTION>
Class C
-------------------------------------------------------------------
Year ended September 30
-------------------------------------------------------------------
1996** 1995** 1994 1993 1992 1991
------------------------------ --------- --------- --------- ----------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 13.66 $ 9.99 $ 10.46 $ 7.96 $ 7.74 $ 5.03
Net investment loss (.01) (.01) (.03) (.06) (.06) (.08)
Net realized and
unrealized gain (loss)
on investments 1.31 3.72 .31 3.90 .63 2.79
Distributions from net
realized gains (1.02) (.04) (.75) (1.34) (.35) --
--------- --------- --------- ----------- ----------------------
Net asset value, end of year $ 13.94 $ 13.66 $ 9.99 $ 10.46 $ 7.96 $ 7.74
========= ========= ========= =========== ======================
Total return+ 10.41% 37.30% 2.91% 55.46% 7.34% 53.88%
Net assets at end
of year (000s) $34,835 $47,553 $23,967 $18,342 $11,654 $10,939
Ratio of expenses to
average net assets 1.01% 1.08% 1.16% 2.11% 1.54% 1.88%
Ratio of net investment
loss to average net assets (0.08)% (0.07)% (0.32)% (1.30)% (0.86)% (1.14)%
Portfolio turnover rate 215.07% 214.59% 167.08% 129.57% 124.94% 219.62%
Average commission rate@ $0.0278 -- -- -- -- --
</TABLE>
Class C
-------------------------------------------
Year ended September 30
-------------------------------------------
1990 1989 1988 1987
------------------------------ --------- --------- --------- -----------
Net asset value,
beginning of year $ 6.72 $ 5.00 $ 8.99 $ 8.57
Net investment loss (.03) (.01) (.01) (.05)
Net realized and
unrealized gain (loss)
on investments (1.31) 1.73 (1.80) 2.88
Distributions from net
realized gains (.35) -- (2.18) (2.41)
--------- --------- --------- -----------
Net asset value, end of year $ 5.03 $ 6.72 $ 5.00 $ 8.99
========= ========= ========= ===========
Total return+ (20.81)% 33.93% (13.96)% 42.63%
Net assets at end
of year (000s) $ 7,440 $ 9,479 $ 7,422 $10,556
Ratio of expenses to
average net assets 1.93% 1.98% 1.98% 1.67%
Ratio of net investment
loss to average net assets (0.54)% (0.14)% (0.17)% (0.70)%
Portfolio turnover rate 259.27% 242.88% 272.09% 268.00%
Average commission rate@ -- -- -- --
<TABLE>
<CAPTION>
Class D
-----------------------------------------------------
March 15, 1993
Year ended September 30 (Commencement
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 (.14) (.12) (.09) (.04)
Net realized and unrealized gain on
investments 1.27 3.64 .28 1.75
Distributions from net realized gains (1.02) (.04) (.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>
** Per-share figures have been calculated using the average shares method.
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges.
+++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges.
@ Average commission rate per share paid for security trades for fiscal years
beginning on or after October 1, 1995.
5
<PAGE>
The Fund's Investments
The Fund's investment objective is to seek maximum capital appreciation by
investing primarily in common stocks (and preferred stocks and debt securities
convertible into or carrying the right to acquire common stocks) of emerging
growth companies and of companies considered to be undervalued special
situations, as determined by the Fund's investment manager. The investment
objective is a fundamental policy that may not be changed without approval of
the Fund's shareholders.
In seeking to achieve its investment objective, the Fund invests at least 65%
of its total assets under normal circumstances in the common stock (and
preferred stocks and debt securities convertible into or carrying the right to
acquire common stocks) of emerging growth companies and companies considered to
be undervalued special situations. The Investment Manager considers emerging
growth companies to be those companies which are less mature and have the
potential to grow substantially faster than the economy. The Investment Manager
considers undervalued special situations to include common stocks of companies,
such as larger, more mature companies, which trade at prices believed by the
Investment Manager to be below the companies' intrinsic values and which
therefore offer the potential for above-average investment returns. A special
situation company is one which, because of unique circumstances such as, for
example, a particular business niche it fills, is an attractive investment even
though it is not in the emerging growth stage. In selecting such investments,
the Investment Manager considers a variety of factors, any one of which may be
determinative. These include a company's expected growth in earnings, relative
financial condition and cash flow, competitive position, management and business
strategy, overall potential as an enterprise, entrepreneurial character, and new
or innovative products, services or processes. The capitalization of the
companies in which the Fund invests can range across the full spectrum from
small to large capitalization, with varying or high proportions from time to
time in different capitalization segments.
Under normal circumstances, the Fund expects to be fully invested in equity
securities as described above. However, the Fund may, consistent with its
investment objective, also invest at any time up to 35% of its total assets in
other equity and debt securities, such as those issued by more mature companies
which are not special situation companies, and U.S. Government securities. The
Fund will purchase investment grade debt securities (i.e., rated at the time of
purchase within the AAA, AA, A or BBB categories by Standard & Poor's
Corporation ("S&P") or Aaa, Aa, A or Baa categories by Moody's Investors
Service, Inc. ("Moody's")), or securities that are not rated but considered by
the Investment Manager to be of equivalent investment quality. The debt
securities, which may have differing maturities and fixed or floating interest
rates, will be U.S. Government securities or issued by larger capitalization
issuers. For more information on debt ratings, see the Statement of Additional
Information.
Investment Practices
Foreign Investments
The Fund reserves the right to invest without limitation in securities of
non-U.S. issuers directly, or indirectly in the form of American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") or similar securities
representing interests in the securities of foreign issuers. Under current
policy, however, the Fund limits such investments, including ADRs and
EDRs, to a maximum of 35% of its total assets.
ADRs are receipts, typically issued by a U.S. bank or trust company, which
evidence ownership of underlying securities issued by a foreign corporation or
other entity. EDRs are receipts issued in Europe which evidence a similar
ownership arrangement. Generally, ADRs in registered form are designed for use
in U.S. securities markets and EDRs are designed for use in European securities
markets. The underlying securities are not always denominated in the same
currency as the ADRs or EDRs. Although investment in the form of ADRs or EDRs
facilitates trading in foreign securities, it does not mitigate all the risks
associated with investing in foreign securities.
ADRs are available through facilities which may be either "sponsored" or
"unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and
6
<PAGE>
usually agrees to provide shareholder communications. In an unsponsored
arrangement, the foreign issuer is not involved, and the ADR holders pay the
fees of the depository. Sponsored ADRs are generally more advantageous to the
ADR holders and the issuer than are unsponsored ADRs. More and higher fees are
generally charged in an unsponsored program compared to a sponsored facility.
Only sponsored ADRs may be listed on the New York or American Stock Exchanges.
Unsponsored ADRs may prove to be more risky due to (a) the additional costs
involved to the Fund; (b) the relative illiquidity of the issue in U.S. markets;
and (c) the possibility of higher trading costs in the over-the-counter market
as opposed to exchange based trading. The Fund will take these and other risk
considerations into account before making an investment in an unsponsored ADR.
The risks associated with investments in foreign securities include those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks of
nationalization or expropriation, the possible imposition of currency exchange
blockages, higher operating expenses, foreign withholding and other taxes which
may reduce investment return, reduced availability of public information
concerning issuers, the difficulties in obtaining and enforcing a judgment
against a foreign issuer and the fact that foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements comparable to those applicable to
domestic issuers. Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of securities of comparable
domestic issuers.
It is anticipated that a majority of the foreign investments by the Fund will
consist of securities of issuers in countries with developed economies. However,
the Fund may also invest in the securities of issuers in countries with less
developed economies as deemed appropriate by the Investment Manager, although
the Fund does not presently expect to invest more than 5% of its total assets in
issuers in such less developed countries. Such countries include countries that
have an emerging stock market that trades a small number of securities;
countries with low- to middle-income economies; and/or countries with economies
that are based on only a few industries. Eastern European countries are
considered to have less developed capital markets.
For further information regarding foreign investments, see the Statement of
Additional Information.
Currency Transactions
In order to protect against the effect of uncertain future exchange rates on
securities denominated in foreign currencies, the Fund may engage in currency
exchange transactions either on a spot (i.e., cash) basis at the rate prevailing
in the currency exchange market or by entering into forward contracts to
purchase or sell currencies. Although such contracts tend to minimize the risk
of loss resulting from a correctly predicted decline in value of hedged
currency, they tend to limit any potential gain that might result should the
value of such currency increase. In entering a forward currency transaction, the
Fund is dependent upon the creditworthiness and good faith of the counterparty.
The Fund attempts to reduce the risks of nonperformance by a counterparty by
dealing only with established, large institutions with which the Investment
Manager has done substantial business in the past. For further information, see
the Statement of Additional Information.
Other Investment Policies
The Fund may lend portfolio securities with a value of up to 33-1/3% of its
total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of the loaned securities plus accrued interest. Collateral
received by the Fund will generally be held in the form tendered, although cash
may be invested in securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, irrevocable stand-by letters of credit issued by
a bank, or any combination thereof. The investing of cash collateral received
from loaning portfolio securities involves leverage which magnifies the
potential for gain or loss on monies invested and, therefore, results in an
increase in the volatility of the Fund's outstanding securities. Such loans may
be terminated at any time.
7
<PAGE>
The Fund will retain most rights of ownership including rights to dividends,
interest or other distributions on the loaned securities. Voting rights pass
with the lending, although the Fund may call loans to vote proxies if desired.
Should the borrower of the securities fail financially, there is a risk of delay
in recovery of the securities or loss of rights in the collateral. Loans are
made only to borrowers which are deemed by the Investment Manager to be of good
financial standing.
The Fund may, subject to certain limitations, buy and sell options, futures
contracts and options on futures contracts on securities and securities indices,
enter into repurchase agreements and purchase securities on a "when issued" or
forward commitment basis. The Fund may not establish a position in a commodity
futures contract or purchase or sell a commodity option contract for other than
bona fide hedging purposes if immediately thereafter the sum of the amount of
initial margin deposits and premiums on open positions with respect to futures
and options used for such nonhedging purposes would exceed 5% of the market
value of the Fund's net assets; similar policies apply to options which are not
commodities. The Fund may enter various forms of swap arrangements, which have
simultaneously the characteristics of a security and a futures contract,
although the Fund does not presently expect to invest more than 5% of its total
assets in such items. These swap arrangements include interest rate swaps,
currency swaps and index swaps. See the Statement of Additional Information.
The Fund may invest in restricted securities in accordance with Rule 144A
under the Securities Act of 1933, which allows for the resale of such securities
among certain qualified institutional buyers. Because the market for such
securities is still developing, such securities could possibly become illiquid
in particular circumstances. See the Statement of Additional Information.
The Fund may engage in short-term trading of securities and reserves full
freedom with respect to portfolio turnover. In periods when there are rapid
changes in economic conditions or security price levels or when investment
strategy changes significantly, portfolio turnover may be higher than during
times of economic and market price stability or when investment strategy remains
relatively constant. The Fund's portfolio turnover rate involves greater
transaction costs, relative to other funds in general, and may have tax and
other consequences as well. See the Statement of Additional Information.
Because the Fund invests primarily in emerging growth and special situation
companies, an investment in the Fund involves greater than average risks and the
value of the Fund's shares may fluctuate more widely than the value of shares of
a fund that invests in more established companies. Securities held by the Fund,
particularly those traded over-the-counter, may have limited marketability and
may be subject to more abrupt or erratic market movements over time than
securities of larger, more seasoned companies or the market as a whole. The
issuers of over-the-counter securities may have limited product lines, markets
and financial resources, may be dependent on entrepreneurial management,
typically reinvest most of their net income in the enterprise and typically do
not pay dividends.
Limiting Investment Risk
In seeking to lessen investment risk, the Fund operates under certain
fundamental and nonfundamental investment restrictions. Under the fundamental
restrictions the Fund may not (a) purchase a security of any one issuer (other
than securities issued by the U.S. Government or its instrumentalities), if such
purchase would cause more than 5% of the Fund's total assets to be invested in
the securities of such issuer; (b) purchase for its portfolio a security of any
one issuer if such purchase would cause more than 10% of any class of securities
of such issuer to be held by the Fund; or (c) invest more than 25% of the Fund's
total assets in securities of issuers principally engaged in any one industry
with certain designated exceptions such as in the case of the U.S. Government.
The foregoing fundamental investment restrictions may not be changed except
by vote of the holders of a majority of the outstanding voting securities of the
Fund. The vote of a majority of the outstanding voting securities of the Fund
means the vote (A) of 67
8
<PAGE>
per centum or more of the voting securities present at a meeting, if the holders
of more than 50 per centum of the outstanding voting securities of the Fund are
present or represented by proxy; or (B) of more than 50 per centum of the
outstanding voting securities of the Fund, whichever is less.
Under the nonfundamental investment restrictions, the Fund may not invest
more than 15% of the Fund's net assets in illiquid securities including
repurchase agreements extending for more than seven days and may not invest more
than 5% of the Fund's net assets in restricted securities excluding securities
eligible for resale under Rule 144A under the Securities Act of 1933. Although
many illiquid securities may also be restricted, and vice versa, compliance with
each of these policies will be determined independently. The foregoing
nonfundamental investment restrictions may be changed without a shareholder
vote.
For further information on the above and other fundamental and
nonfundamental investment restrictions, see the Statement of Additional
Information.
The Fund may hold up to 100% of its assets in cash or certain short-term
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Investment Manager, such a
position is more likely to provide protection against adverse market conditions
than adherence to the Fund's other investment policies. To the extent that the
Fund's assets are held in a temporary defensive position, the Fund will not be
achieving its investment objective. The types of short-term instruments in which
the Fund may invest for such purposes are, as more fully described in the
Statement of Additional Information: U.S. Government securities, custodial
receipts, certificates of deposit, time deposits and bankers' acceptances of
certain qualified financial institutions and corporate commercial paper rated at
least "A" by S&P or "Prime" by Moody's (or, if not rated, issued by companies
having an outstanding long-term unsecured debt issue rated at least "A" by S&P
or Moody's). See the Statement of Additional Information.
Information on the Purchase of Shares, Redemption of Shares and Shareholder
Services is set forth on pages 9 to 24 below.
The Fund is available for investment by many kinds of investors including
participants investing through 401(k) or other retirement plan sponsors,
employees investing through savings plans sponsored by employers, Individual
Retirement Accounts ("IRAs"), trusts, corporations, individuals, etc. The
applicability of the general information and administrative procedures set forth
below accordingly will vary depending on the investor and the recordkeeping
system established for a shareholder's investment in the Fund. Participants in
401(k) and other plans should first consult with the appropriate person at their
employer or refer to the plan materials before following any of the procedures
below. For more information or assistance, anyone may call 1-800-562-0032.
Purchase of Shares
Methods of Purchase
Through Dealers and Others
Shares of the Fund are continuously offered through securities dealers,
financial institutions and others (collectively referred to herein as securities
dealers or dealers) who have entered into sales agreements with the Distributor.
Purchases through dealers are confirmed at the offering price, which is the net
asset value plus the applicable sales charge, next determined after the order is
duly received by State Street Research Shareholder Services ("Shareholder
Services"), a division of State Street Research Investment Services, Inc., from
the dealer. ("Duly received" for purposes herein means in accordance with the
conditions of the applicable method of purchase as described below.) The dealer
is responsible for transmitting the order promptly to Shareholder Services in
order to permit the investor to obtain the current price. See "Purchase of
Shares--Net Asset Value" herein.
9
<PAGE>
By Mail
Initial investments in the Fund may be made by mailing or delivering to the
investor's dealer a completed Application (accompanying this Prospectus),
together with a check for the total purchase price payable to the Fund. The
dealer must forward the Application and check in accordance with the
instructions on the Application.
Additional shares may be purchased by mailing to Shareholder Services a check
payable to the Fund in the amount of the total purchase price together with any
one of the following: (i) an Application; (ii) the stub from the shareholder's
account statement; or (iii) a letter setting forth the name of the Fund, the
class of shares and the account name and number. Shareholder Services will
deliver the purchase order to the transfer agent and dividend paying agent,
State Street Bank and Trust Company (the "Transfer Agent").
If the check is not honored for its full amount, the purchaser could be
subject to additional charges to cover collection costs and any investment loss,
and the purchase may be cancelled.
By Wire
An investor may purchase shares by wiring Federal Funds of not less than $5,000
to State Street Bank and Trust Company, which also serves as the Trust's
custodian (the "Custodian"), as set forth below. Prior to making an investment
by wire, an investor must notify Shareholder Services at 1-800-562-0032 and
obtain a control number and instructions. Following such notification, Federal
Funds should be wired through the Federal Reserve System to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF =State Street Research Capital Fund
and class of shares (A, B, C or D)
AC = 99029761
OBI = Shareholder Name
Shareholder Account Number
Control #K (assigned by State
Street Research Shareholder Services)
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make such
investment by 12 noon Boston time on the day of his or her investment; and (ii)
the wire must be received by 4 P.M. Boston time that same day.
An investor making an initial investment by wire must promptly complete the
Application accompanying this Prospectus and deliver it to his or her securities
dealer, who should forward it as required. No redemptions will be effected until
the Application has been duly processed.
The Fund may in its discretion discontinue, suspend or change the practice of
accepting orders by any of the methods described above. Orders for the purchase
of shares are subject to acceptance by the Fund. The Fund reserves the right to
suspend the sale of shares, or to reject any purchase order, including orders in
connection with exchanges, for any reason.
Minimum Investment
Class of Shares
-----------------------------------
A B C D
-------- -------- --------------
Minimum Initial Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $2,000 $2,000 (a) $2,000
By Investamatic $1,000 $1,000 (a) $1,000
All other $2,500 $2,500 (a) $2,500
Minimum Subsequent
Investment:
By Wire $5,000 $5,000 (a) $5,000
IRAs $50 $50 (a) $50
By Investamatic $50 $50 (a) $50
All other $50 $50 (a) $50
(a) Special conditions apply; contact the Distributor.
The Fund reserves the right to vary the minimums for initial or subsequent
investments as in the case of, for example, exchanges and investments under
various retirement and employee benefit plans, sponsored arrangements involving
group solicitations of the members of an organization, or other investment plans
for reinvestment of dividends and distributions or for periodic investments
(e.g., Investamatic Check Program).
10
<PAGE>
Alternative Purchase Program
General
Alternative classes of shares permit investors to select a purchase program
which they believe will be the most advantageous for them, given the amount of
their purchase, the length of time they anticipate holding shares or the
flexibility they desire in this regard, and other relevant circumstances.
Investors will be able to determine whether in their particular circumstances it
is more advantageous to incur an initial sales charge and not be subject to
certain ongoing charges or to have their entire initial purchase price invested
in the Fund with the investment being subject thereafter to ongoing service fees
and distribution fees.
As described in greater detail below, dealers are paid differing amounts of
commission and other compensation depending on which class of shares they sell.
The major differences among the various classes of shares are as follows:
11
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C Class D
---------------------- ------------------------- ---------- ---------------------
<S> <C> <C> <C> <C>
Sales Charges Initial sales charge Contingent deferred sales None Contingent deferred
at time of investment charge of 5% to 2% sales charge of 1%
of up to 4.5% applies to any shares applies to any shares
depending on amount of redeemed within first redeemed within one
investment five years following year following their
their purchase; no purchase
contingent deferred sales
charge after five years
On investments of $1
million or more, no
initial sales
charge; but
contingent deferred
sales charge of 1%
applies to any
shares redeemed
within one year
following their
purchase
Distribution Fee None 0.75% for first eight None 0.75% each year
years; Class B shares
convert automatically to
Class A shares after
eight years
Service Fee 0.25% each year 0.25% each year None 0.25% each year
Initial Commission Above described 4% None 1%
Received by initial sales charge
Selling Dealers less 0.25% to 0.50%
retained by
Distributor On
investments of $1
million or more,
0.25% to 1% paid to
dealer by
Distributor
</TABLE>
12
<PAGE>
In deciding which class of shares to purchase, the investor should consider
the amount of the investment, the length of time the investment is expected to
be held, and the ongoing service fee and distribution fee, among other factors.
Class A shares are sold at net asset value plus an initial sales charge of up
to 4.5% of the public offering price. Because of the sales charge, not all of an
investor's purchase amount is invested unless the purchase equals $1,000,000 or
more. Class B shareholders pay no initial sales charge, but a contingent
deferred sales charge of up to 5% generally applies to shares redeemed within
five years of purchase. Class D shareholders also pay no initial sales charge,
but a contingent deferred sales charge of 1% generally applies to redemptions
made within one year of purchase. For Class B and Class D shareholders,
therefore, the entire purchase amount is immediately invested in the Fund.
An investor who qualifies for a significantly reduced initial sales charge,
or a complete waiver of the sales charge on investments of $1,000,000 or more,
on the purchase of Class A shares might elect that option to take advantage of
the lower ongoing service and distribution fees that characterize Class A shares
compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. In addition, Class B shares are assessed an
annual distribution fee of 0.75% of daily net assets for an eight-year period
following the date of purchase and are then automatically converted to Class A
shares. Class D shares are assessed an annual distribution fee of 0.75% of daily
net assets for as long as the shares are held. The prospective investor should
consider these fees plus the initial or contingent deferred sales charges in
estimating the costs of investing in the various classes of the Fund's shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are allocated to dealers (see
"Distribution Plan" below). In addition, the Distributor will, at its expense,
provide additional cash and noncash incentives to dealers that sell shares. Such
incentives may be extended only to those dealers that have sold or may sell
significant amounts of shares and/or meet other conditions established by the
Distributor; for example, the Distributor may sponsor special promotions to
develop particular distribution channels or to reach certain investor groups.
The Distributor may also compensate those dealers with clients who maintain
their investments in a Fund over a period of years. The incentives may include
merchandise and trips to and attendance at sales seminars at resorts.
Class A Shares--Initial Sales Charges
Sales Charges
The purchase price of a Class A share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar amount
of the shares purchased as set forth in the table below. A major portion of this
sales charge is reallowed by the Distributor to the dealer responsible for the
sale.
Sales Sales
Charge Charge
Paid By Paid Dealer
Dollar Investor By Investor Concession
Amount of As % of As % of As % of
Purchase Purchase Net Asset Purchase
Transaction Price Value Price
Less than
$100,000 4.50% 4.71% 4.00%
$100,000 or
above but
less than
$250,000 3.50% 3.63% 3.00%
$250,000 or
above but
less than
$500,000 2.50% 2.56% 2.00%
$500,000 or
above but
less than
$1 million 2.00% 2.04% 1.75%
See
$1 million following
and above 0% 0% discussion
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor
13
<PAGE>
will pay the authorized dealer a commission based on the aggregate of such
sales as follows:
Amount of Sale Commission
------------------------------- -------------
(a) $1 million to $3 million 1.00%
(b) Next $2 million 0.50%
(c) Amount over $5 million 0.25%
On such sales of $1,000,000 or more, unless the above commission is waived by
the dealer, the investor is subject to a 1% contingent deferred sales charge on
any portion of the purchase redeemed within one year of the sale. However, such
redeemed shares will not be subject to the contingent deferred sales charge to
the extent that their value represents (1) capital appreciation or (2)
reinvestment of dividends or capital gains distributions. In addition, the
contingent deferred sales charge will be waived for certain other redemptions as
described under "Contingent Deferred Sales Charge Waivers" below (as otherwise
applicable to Class B shares).
Class A shares of the Fund that are purchased without a sales charge may be
exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption within
one year of the Class A shares which are acquired through such exchange. For
federal income tax purposes, the amount of the contingent deferred sales charge
will reduce the gain or increase the loss, as the case may be, on the amount
realized on redemption. The amount of any contingent deferred sales charge will
be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement of
Additional Information, of $100,000 or more of Class A shares of the Fund or a
combination of "Eligible Funds." "Eligible Funds" include the Fund and other
funds so designated by the Distributor from time to time. Class B, Class C and
Class D shares may also be included in the combination under certain
circumstances. Dealers should call Shareholder Services for details concerning
the other Eligible Funds and any persons who may qualify for reduced sales
charges and related information. See the Statement of Additional Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A shares
of the Fund and any other Eligible Funds within a 13-month period. Class B,
Class C and Class D shares may also be included in the combination under certain
circumstances. Additional information on a Letter of Intent is available from
dealers, or from the Distributor, and also appears in the Statement of
Additional Information.
Right of Accumulation
Investors may purchase Class A shares of the Fund or a combination of shares of
the Fund and other Eligible Funds at reduced sales charges pursuant to a Right
of Accumulation. Under the Right of Accumulation, the sales charge is determined
by combining the current purchase with the value of the Class A shares of other
Eligible Funds held at the time of purchase. Class B, Class C and Class D shares
may also be included in the combination under certain circumstances. See the
Statement of Additional Information and call Shareholder Services for details
concerning the Right of Accumulation.
Other Programs
Class A shares of the Fund may be sold at a reduced sales charge or without a
sales charge pursuant to certain sponsored arrangements, which include programs
under which a company, employee benefit plan or other organization makes
recommendations to, or permits group solicitation of, its employees, members or
participants, except any organization created primarily for the purpose of
obtaining shares of the Fund at a reduced sales charge or without a sales
charge. Sales without a sales charge, or with a reduced sales charge, may also
be made through brokers, financial planners, institutions, and others, under
managed fee-based programs (e.g., "wrap fee" or similar programs) which meet
certain requirements established from time to time by the Distributor, in the
event the Distributor determines to implement such arrangements. Information on
such arrangements and further conditions and limitations is available from the
Distributor.
14
<PAGE>
In addition, no sales charge is imposed in connection with the sale of Class
A shares of the Fund to the following entities and persons: (A) the Investment
Manager, Distributor, or any affiliated entities, including any direct or
indirect parent companies and other subsidiaries of such parents (collectively
"Affiliated Companies"); (B) employees, officers, sales representatives or
current or retired directors or trustees of the Affiliated Companies or any
investment company managed by any of the Affiliated Companies, any relatives of
any such individuals whose relationship is directly verified by such individuals
to the Distributor, or any beneficial account for such relatives or individuals;
and (C) employees, officers, sales representatives or directors of dealers and
other entities with a selling agreement with the Distributor to sell shares of
any aforementioned investment company, any spouse or child of such person, or
any beneficial account for any of them. The purchase must be made for investment
and the shares purchased may not be resold except through redemption. This
purchase program is subject to such administrative policies, regarding the
qualification of purchasers, minimum investments by various groups of eligible
persons and any other matters, as may be adopted by the Distributor from time to
time.
Class B Shares--Contingent Deferred
Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is duly received, as defined herein. No
sales charge is imposed at the time of purchase; thus the full amount of the
investor's purchase payment will be invested in the Fund. However, a contingent
deferred sales charge may be imposed upon certain redemptions of Class B shares
as described below.
The Distributor will pay dealers at the time of sale a 4% commission for
selling Class B shares. The proceeds of the contingent deferred sales charge and
the distribution fee are used to offset distribution expenses and thereby permit
the sale of Class B shares without an initial sales charge.
Class B shares that are redeemed within a five-year period after their
purchase will not be subject to a contingent deferred sales charge to the extent
that the value of such shares represents (1) capital appreciation of Fund assets
or (2) reinvestment of dividends or capital gains distributions. The amount of
any applicable contingent deferred sales charge will be calculated by
multiplying the net asset value of such shares at the time of redemption or at
the time of purchase, whichever is lower, by the applicable percentage shown in
the table below:
Contingent Deferred Sales
Charge As A Percentage
Redemption During Of Net Asset Value
- ----------------------- ------------------------------
1st Year Since Purchase 5%
2nd Year Since Purchase 4%
3rd Year Since Purchase 3%
4th Year Since Purchase 3%
5th Year Since Purchase 2%
6th Year Since Purchase
and Thereafter None
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first of
those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of the Fund acquired through an exchange from another
Eligible Fund will be measured from the date that such shares were initially
acquired in the other Eligible Funds, and Class B shares being redeemed will be
considered to represent, as applicable, capital appreciation or dividend and
capital gains distribution reinvestments in such other Eligible Fund. These
determinations will result in any contingent deferred sales charge being imposed
at the lowest possible rate. For federal income tax purposes, the amount of the
contingent deferred sales charge will reduce the gain or increase the loss, as
the case may be, on the amount realized on redemption. The amount of any
contingent deferred sales charge will be paid to the Distributor.
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic with-
15
<PAGE>
drawal plan which meets certain conditions. In addition, the contingent deferred
sales charge will be waived for: (i) redemptions made within one year of the
death or total disability, as defined by the Social Security Administration, of
all shareholders of an account; (ii) redemptions made after attainment of a
specific age in an amount which represents the minimum distribution required at
such age under Section 401(a)(9) of the Internal Revenue Code for retirement
accounts or plans (e.g., age 70-1/2 for IRAs and Section 403(b) plans),
calculated solely on the basis of assets invested in the Fund or other Eligible
Funds; and (iii) a redemption resulting from a tax-free return of an excess
contribution to an IRA. (The foregoing waivers do not apply to a tax-free
rollover or transfer of assets out of the Fund.) The Fund may modify or
terminate the waivers described above at any time; for example, the Fund may
limit the application of multiple waivers and establish other conditions for
employee benefit plans.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends or
distributions with respect to such shares, will automatically convert to Class A
shares of the Fund at the end of eight years following the issuance of such
Class B shares; consequently, they will no longer be subject to the higher
expenses borne by Class B shares. The conversion rate will be determined on the
basis of the relative per share net asset values of the two classes and may
result in a shareholder receiving either a greater or fewer number of Class A
shares than the Class B shares so converted. As noted above, holding periods for
Class B shares received in exchange for Class B shares of other Eligible Funds
will be counted toward the eight-year period.
Class C Shares--Institutional; No Sales Charge
The purchase price of a Class C share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase or
redemption. The Fund will receive the full amount of the investor's purchase
payment.
In general, Class C shares are only available for new investments by certain
large institutions and, employee benefit plans which acquire shares through
programs or products sponsored by Metropolitan Life Insurance Company
("Metropolitan") and/or its affiliates, for which Class C shares have been
designated. Information on the availability of Class C shares and further
conditions and limitations is available from the Distributor.
Shares held prior to February 17, 1993 are deemed to be Class C shares, but
shareholders thereof may not acquire additional Class C shares except through
reinvestment of dividends and distributions. Class C shares may have also been
issued directly or through exchanges to those shareholders of the Fund or other
Eligible Funds who previously held shares not subject to any future sales charge
or service fees or distribution fees.
Class D Shares--Spread Sales Charges
The purchase price of a Class D share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase; thus, the
full amount of the investor's purchase payment will be invested in the Fund.
Class D shares are subject to a 1% contingent deferred sales charge on any
portion of the purchase redeemed within one year of the sale. The contingent
deferred sales charge will be 1% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. The Distributor
pays dealers a 1% commission for selling Class D shares at the time of purchase.
The proceeds of the contingent deferred sales charge and the distribution fee
are used to offset distribution expenses and thereby permit the sale of Class D
shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will not be
subject to the contingent deferred sales charge to the extent that the value of
such shares represents (1) capital appreciation of Fund assets or (2)
reinvestment of dividends or capital gains distributions. In addition, the
contingent deferred sales charge will be waived for certain other redemptions as
described under "Contingent Deferred Sales Charge Waivers" above (as otherwise
applicable to Class B shares). For federal income tax purposes, the amount of
16
<PAGE>
the contingent deferred sales charge will reduce the gain or increase the loss,
as the case may be, on the amount realized on redemption. The amount of any
contingent deferred sales charge will be paid to the Distributor.
Net Asset Value
The Fund's per share net asset values are determined Monday through Friday as of
the close of the New York Stock Exchange (the "NYSE") exclusive of days on which
the NYSE is closed. The NYSE ordinarily closes at 4 P.M. New York City time.
Assets held by the Fund are valued at the last reported sale price as of the
close of business on the valuation date, except that securities and assets for
which market quotations are not readily available are valued as determined in
good faith by or under the authority of the Trustees of the Trust. In
determining the value of certain assets for which market quotations are not
readily available, the Fund may use one or more pricing services. The pricing
services utilize information with respect to market transactions, quotations
from dealers and various relationships among securities in determining value and
may provide prices determined as of times prior to the close of the NYSE. The
Trustees have authorized the use of the amortized cost method to value
short-term debt instruments issued with a maturity of one year or less that have
a remaining maturity of 60 days or less when the value obtained is fair value.
Further information with respect to the valuation of the Fund's assets is
included in the Statement of Additional Information.
Distribution Plan
The Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the provisions of the
Distribution Plan, the Fund makes payments to the Distributor based on an annual
percentage of the average daily value of the net assets of each class of shares
as follows:
Class Service Fee Distribution Fee
- ---------- ---------------- ----------------------
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) or others for
personal services and/or the maintenance of shareholder accounts. A portion of
any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance or servicing of
shareholder accounts by such dealers. Dealers who have sold Class A shares are
eligible for further reimbursement commencing as of the time of such sale.
Dealers who have sold Class B and Class D shares are eligible for further
reimbursement after the first year during which such shares have been held of
record by such dealer as nominee for its clients (or by such clients directly).
Any service fees received by the Distributor and not allocated to dealers may be
applied by the Distributor in reduction of expenses incurred by it directly for
personal services and the maintenance 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.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs similar
expenses on behalf of, such other funds. When expenses of the Distributor cannot
be identified as relating to a specific fund, the Distributor allocates expenses
among the funds in a manner deemed fair and equitable to each fund.
Commissions and other cash and noncash incentives and payments to dealers, to
the extent payable out of the general profits, revenues or other sources of the
Distributor (including the advisory fees paid by the Fund), have also been
authorized pursuant to the Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which the Fund may incur under the Distribution
Plan to 1%, of which 0.75% may be used to pay distribution expenses and 0.25%
may be used to pay shareholder
17
<PAGE>
service fees. The NASD rule also limits the aggregate amount which the Fund may
pay for such distribution costs to 6.25% of gross share sales of a class since
the inception of any asset-based sales charge plus interest at the prime rate
plus 1% on unpaid amounts thereof (less any contingent deferred sales charges).
Such limitation does not apply to shareholder service fees. Payments to the
Distributor or to dealers funded under the Distribution Plan may be discontinued
at any time by the Trustees of the Trust.
Redemption of Shares
Shareholders may redeem all or any portion of their accounts on any day the NYSE
is open for business. Redemptions will be effective at the applicable net asset
value per share next determined (see "Purchase of Shares--Net Asset Value"
herein) after receipt of the redemption request, in accordance with the
requirements described below, by Shareholder Services and delivery of the
request by Shareholder Services to the Transfer Agent. To allow time for the
clearance of checks used for the purchase of any shares which are tendered for
redemption shortly after purchase, the remittance of the redemption proceeds for
such shares could be delayed for 15 days or more after the purchase.
Shareholders who anticipate a potential need for immediate access to their
investments should, therefore, purchase shares by wire. Except as noted,
redemption proceeds from the Fund are normally remitted within seven days after
receipt of the redemption request by the Fund and any necessary documents in
good order.
Methods of Redemption
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed to
the shareholder or wired to a predesignated bank account (see "Proceeds By Wire"
below), by sending to State Street Research Shareholder Services, P.O. Box 8408,
Boston, Massachusetts 02266-8408: (1) a written request for redemption signed by
the registered owner(s) of the shares, exactly as the account is registered; (2)
an endorsed stock power in good order with respect to the shares or, if issued,
the share certificates for the shares endorsed for transfer or accompanied by an
endorsed stock power; (3) any required signature guarantees (see "Redemption of
Shares--Signature Guarantees" below); and (4) any additional documents which may
be required for redemption in the case of corporations, trustees, etc., such as
certified copies of corporate resolutions, governing instruments, powers of
attorney, and the like. The Transfer Agent will not process requests for
redemption until it has received all necessary documents in good order. A
shareholder will be notified promptly if a redemption request cannot be
accepted. Shareholders having any questions about the requirements for
redemption should call Shareholder Services toll-free at 1-800-562-0032.
Request By Telephone
Shareholders may request redemption by telephone with proceeds to be transmitted
by check or by wire (see "Proceeds By Wire" below). A shareholder can request a
redemption for $50,000 or less to be transmitted by check. Such check for the
proceeds will be made payable to the shareholder of record and will be mailed to
the address of record. There is no fee for this service. It is not available for
shares held in certificate form or if the address of record has been changed
within 30 days of the redemption request. The Fund may revoke or suspend the
telephone redemption privilege at any time and without notice. See "Shareholder
Services--Telephone Services" for a discussion of the conditions and risks
associated with Telephone Privileges.
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder has
Telephone Privileges, the Trust's custodian will wire redemption proceeds to the
shareholder's predesignated bank account. To make the request, the shareholder
should call 1-800-562-0032 prior to 4 P.M. Boston time. A $7.50 charge against
the shareholder's account will be imposed for each wire redemption. This charge
is subject to change without notice. The shareholder's bank may also impose a
charge for receiving wires of redemption proceeds. The minimum redemption by
wire is $5,000.
18
<PAGE>
Request to Dealer to Repurchase
For the convenience of shareholders, the Fund has authorized the Distributor as
its agent to accept orders from dealers by wire or telephone for the repurchase
of shares by the Distributor from the dealer. The Fund may revoke or suspend
this authorization at any time. The repurchase price is the net asset value for
the applicable shares next determined following the time at which the shares are
offered for repurchase by the dealer to the Distributor. The dealer is
responsible for promptly transmitting a shareholder's order to the Distributor.
Payment of the repurchase proceeds is made to the dealer who placed the order
promptly upon delivery of certificates for shares in proper form for transfer
or, for Open Accounts, upon the receipt of a stock power with signatures
guaranteed as described below, and, if required, any supporting documents.
Neither the Fund nor the Distributor imposes any charge upon such a repurchase.
However, a dealer may impose a charge as agent for a shareholder in the
repurchase of his or her shares.
The Fund has reserved the right to change, modify or terminate the services
described above at any time.
Additional Information
Because of the relatively high cost of maintaining small shareholder accounts,
the Fund reserves the right to involuntarily redeem at its option any
shareholder account which remains below $1,500 for a period of 60 days after
notice is mailed to the applicable shareholder, or to impose a maintenance fee
on such account after 60 days' notice. Such involuntary redemptions will be
subject to applicable sales charges, if any. The Fund may increase such minimum
account value above such amount in the future after notice to affected
shareholders. Involuntarily redeemed shares will be priced at the net asset
value on the date fixed for redemption by the Fund, and the proceeds of the
redemption will be mailed promptly to the affected shareholder at the address of
record. Currently, the maintenance fee is $18 annually, which is paid to the
Transfer Agent. The fee does not apply to certain retirement accounts or if the
shareholder has more than an aggregate $50,000 invested in the Fund and other
Eligible Funds combined. Imposition of a maintenance fee on a small account
could, over time, exhaust the assets of such account.
To cover the cost of additional compliance administration, a $20 fee will be
charged against any shareholder account that has been determined to be subject
to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date of
payment of redemption proceeds for more than seven days, except that (a) it may
elect to suspend the redemption of shares or postpone the date of payment of
redemption proceeds: (1) during any period that the NYSE is closed (other than
customary weekend and holiday closings) or trading on the NYSE is restricted;
(2) during any period in which an emergency exists as a result of which disposal
of portfolio securities is not reasonably practicable or it is not reasonably
practicable to fairly determine the Fund's net asset values; or (3) during such
other periods as the Securities and Exchange Commission may by order permit for
the protection of investors; and (b) the payment of redemption proceeds may be
postponed as otherwise provided under "Redemption of Shares" herein.
Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Fund, the Investment
Manager and the Distributor from possible fraud, signature guarantees are
required for certain redemptions. Signature guarantees help the Transfer Agent
to determine that the person who has authorized a redemption from the account
is, in fact, the shareholder. Signature guarantees are required for, among other
things: (1) written requests for redemptions for more than $50,000; (2) written
requests for redemptions for any amount if the proceeds are transmitted to other
than the current address of record (unchanged in the past 30 days); (3) written
requests for redemptions for any amount submitted by corporations and certain
fiduciaries and other intermediaries; and (4) requests to transfer the
registration of shares to another owner. Signatures must be guaranteed by a
bank, a member firm of a national stock exchange, or other eligible guarantor
institution. The Transfer Agent will not accept guarantees (or notarizations)
from notaries public. The above requirements
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may be waived in certain instances. Please contact Shareholder Services at
1-800-562-0032 for specific requirements relating to your account.
Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of the Fund owned by
shareholders are credited to their accounts by the Transfer Agent, State Street
Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110.
Certificates representing Class B or Class D shares will not be issued, while
certificates representing Class A or Class C shares will only be issued if
specifically requested in writing and, in any case, will only be issued for full
shares, with any fractional shares to be carried on the shareholder's account.
Shareholders will receive periodic statements of transactions in their accounts.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through dealers, by
wire or by mailing a check, payable to the Fund, to Shareholder Services
under the terms set forth above under "Purchase of Shares."
2. The following methods of receiving dividends from investment income and
distributions from capital gains are available:
(a) All income dividends and capital gains distributions reinvested in
additional shares of the Fund.
(b) All income dividends in cash; all capital gains distributions reinvested
in additional shares of the Fund.
(c) All income dividends and capital gains distributions in cash.
(d) All income dividends and capital gains distributions invested in any
one available Eligible Fund designated by the shareholder as
described below. See "Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, the account will automatically be coded for reinvestment of all
dividends and distributions in additional shares of the same class of the Fund.
Selections may be changed at any time by telephone or written notice to
Shareholder Services. Dividends and distributions are reinvested at net asset
value without a sales charge.
Exchange Privilege
Shareholders of the Fund may exchange their shares for available shares with
corresponding characteristics of any of the other Eligible Funds at any time on
the basis of the relative net asset values of the respective shares to be
exchanged, subject to compliance with applicable securities laws. Shareholders
of any other Eligible Fund may similarly exchange their shares for Fund shares
with corresponding characteristics. Prior to making an exchange, shareholders
should obtain the Prospectus of the Eligible Fund into which they are
exchanging. Under the Direct Program, subject to certain conditions,
shareholders may make arrangements for regular exchanges from the Fund into
other Eligible Funds. To effect an exchange, Class A, Class B and Class D shares
may be redeemed without the payment of any contingent deferred sales charge that
might otherwise be due upon an ordinary redemption of such shares. The State
Street Research Money Market Fund issues Class E shares which are sold without
any sales charge. Exchanges of State Street Research Money Market Fund Class E
shares into Class A shares of the Fund or any other Eligible Fund are subject to
the initial sales charge or contingent deferred sales charge applicable to an
initial investment in such Class A shares, unless a prior Class A sales charge
has been paid directly or indirectly with respect to the shares redeemed. For
purposes of computing the contingent deferred sales charge that may be payable
upon disposition of the acquired Class A, Class B and Class D shares, the
holding period of the redeemed shares is "tacked" to the holding period of the
acquired shares. The period any Class E shares are held is not tacked to the
holding period of any acquired shares. No exchange transaction fee is currently
imposed on any exchange.
Shares of the Fund may also be acquired or redeemed in exchange for shares
of the Summit Cash
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Reserves Fund ("Summit Cash Reserves") by customers of Merrill Lynch, Pierce,
Fenner & Smith Incorporated (subject to completion of steps necessary to
implement the program). The Fund and Summit Cash Reserves are related mutual
funds for purposes of investment and investor services. Upon the acquisition of
shares of Summit Cash Reserves by exchange for redeemed shares of the Fund, (a)
no sales charge is imposed by Summit Cash Reserves, (b) no contingent deferred
sales charge is imposed by the Fund on the Fund shares redeemed, and (c) any
applicable holding period of the Fund shares redeemed is "tolled," that is, the
holding period clock stops running pending further transactions. Upon the
acquisition of shares of the Fund by exchange for redeemed shares of Summit Cash
Reserves, (a) the acquisition of Class A shares shall be subject to the initial
sales charges or contingent deferred sales charges applicable to an initial
investment in such Class A shares, unless a prior Class A sales charge has been
paid indirectly, and (b) the acquisition of Class B or Class D shares of the
Fund shall restart any holding period previously tolled, or shall be subject to
the contingent deferred sales charge applicable to an initial investment in such
shares.
For the convenience of its shareholders who have Telephone Privileges, the
Fund permits exchanges by telephone request from either the shareholder or his
or her dealer. Shares may be exchanged by telephone provided that the
registration of the two accounts is the same. The toll-free number for exchanges
is 1-800-562-0032. See "Telephone Services" herein for a discussion of
conditions and risks associated with Telephone Privileges.
The exchange privilege may be exercised only in those states where shares of
the relevant other Eligible Fund may legally be sold. For tax purposes, each
exchange actually represents the sale of shares of one fund and the purchase of
shares of another. Accordingly, exchanges may produce a capital gain or loss for
tax purposes. The exchange privilege may be terminated or suspended or its terms
changed at any time, subject, if required under applicable regulations, to 60
days' prior notice. New accounts established for investments upon exchange from
an existing account in another fund will have the same Telephone Privileges as
the existing account, unless Shareholder Services is instructed otherwise.
Related administrative policies and procedures may also be adopted with regard
to a series of exchanges, street name accounts, sponsored arrangements and other
matters.
The exchange privilege is not designed for use in connection with short-term
trading or market timing strategies. To protect the interests of shareholders,
the Fund reserves the right to temporarily or permanently terminate the exchange
privilege for any person who makes more than six exchanges out of or into the
Fund per calendar year. Accounts under common ownership or control, including
accounts with the same taxpayer identification number, may be aggregated for
purposes of the six exchange limit. Notwithstanding the six exchange limit, the
Fund reserves the right to refuse exchanges by any person or group if, in the
Investment Manager's judgment, the Fund would be unable to invest effectively in
accordance with its investment objective and policies, or would otherwise
potentially be adversely affected. Exchanges may be restricted or refused if the
Fund receives or anticipates simultaneous orders affecting significant portions
of the Fund's assets. In particular, a pattern of exchanges that coincides with
a "market timing" strategy may be disruptive to the Fund. The Fund may impose
these restrictions at any time. The exchange limit may be modified for accounts
in certain institutional retirement plans because of plan exchange limits,
Department of Labor regulations or administrative and other considerations.
Subject to the foregoing, if an exchange request in good order is received by
Shareholder Services and delivered by Shareholder Services to the Transfer Agent
by 12 noon Boston time on any business day, the exchange usually will occur that
day. For further information regarding the exchange privilege, shareholders
should contact Shareholder Services.
Reinvestment Privilege
A shareholder of the Fund who has redeemed shares or had shares repurchased at
his or her request may reinvest all or any portion of the proceeds (plus that
amount necessary to acquire a fractional share to round off his or her
reinvestment to full shares) in shares, of the same class as the shares
redeemed, of
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<PAGE>
the Fund or any other Eligible Fund at net asset value and without subjecting
the reinvestment to an initial sales charge, provided such reinvestment is made
within 120 calendar days after a redemption or repurchase. Upon such
reinvestment, the shareholder will be credited with any contingent deferred
sales charge previously charged with respect to the amount reinvested. The
redemption of shares is, for federal income tax purposes, a sale on which the
shareholder may realize a gain or loss. If a redemption at a loss is followed by
a reinvestment within 30 days, the transaction may be a "wash sale" resulting in
a denial of the loss for federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by Shareholder
Services of such shareholder's written purchase request and delivery of the
request by Shareholder Services to the Transfer Agent. A shareholder may
exercise this reinvestment privilege only once per 12-month period with respect
to his or her shares of the Fund. No charge is imposed by the Fund for such
reinvestments; however, dealers may charge fees in connection with the
reinvestment privilege. The reinvestment privilege may be exercised with
respect to an Eligible Fund only in those states where shares of the relevant
other Eligible Fund may legally be sold.
Investment Plans
The Investamatic Program is available to Class A, Class B and Class D
shareholders. Under this Program, shareholders may make regular investments by
authorizing withdrawals from their bank accounts each month or quarter on the
Application available from Shareholder Services.
The Distributor also offers IRAs and tax-sheltered retirement plans,
including prototype and other employee benefit plans for employees, sole
proprietors, partnerships and corporations. Details of these investment plans
and their availability may be obtained from securities dealers or from
Shareholder Services.
Systematic Withdrawal Plan
A shareholder who owns noncertificated Class A or Class C shares with a value of
$5,000 or more, or Class B or Class D shares with a value of $10,000 or more,
may elect by participating in the Fund's Systematic Withdrawal Plan to have
periodic checks issued for specified amounts. These amounts may not be less than
certain minimums, depending on the class of shares held. The Plan provides that
all income dividends and capital gains distributions of the Fund shall be
credited to participating shareholders in additional shares of the Fund. Thus,
the withdrawal amounts paid can only be realized by redeeming shares of the Fund
under the Plan. To the extent such amounts paid exceed dividends and
distributions from the Fund, a shareholder's investment will decrease and may
eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales charges,
no such charges will be imposed on withdrawals of up to 8% annually of either
(a) the value, at the time the Plan is initiated, of the shares then in the
account or (b) the value, at the time of a withdrawal, of the same number of
shares as in the account when the Plan was initiated, whichever is higher.
Expenses of the Plan are borne by the Fund. A participating shareholder may
withdraw from the Plan and the Fund may terminate the Plan at any time on
written notice. Purchase of additional shares while a shareholder is receiving
payments under a Plan is ordinarily disadvantageous because of duplicative sales
charges. For this reason, a shareholder may not participate in the Investamatic
Check Program and the Systematic Withdrawal Plan at the same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all of their
dividends and any other distributions from the Fund or any Eligible Fund
automatically invested at net asset value in one other such Eligible Fund
designated by the shareholder, provided the account into which the dividends and
distributions are directed is initially funded with the requisite minimum
amount. The number of shares purchased will be determined as of the dividend
payment date. The Dividend Allocation Plan is subject to
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<PAGE>
state securities law requirements, to suspension at any time, and to such
policies, limitations and restrictions, as, for instance, may be applicable to
street name or master accounts, that may be adopted from time to time.
Automatic Bank Connection
A shareholder may elect, by participating in the Fund's Automatic Bank
Connection ("ABC"), to have dividends and other distributions, including
Systematic Withdrawal Plan payments, automatically deposited in the
shareholder's bank account by electronic funds transfer. Some contingent
deferred sales charges may apply. See "Systematic Withdrawal Plan" herein.
Reports
Reports for the Fund will be sent to shareholders of record at least
semiannually. These reports will include a list of the securities owned by the
Fund as well as the Fund's financial statements.
Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing the shareholder to make telephone redemptions for
amounts up to $50,000 to be mailed to the shareholder's address of record is
available automatically;
(2) the privilege allowing the shareholder or his or her dealer to make
telephone exchanges is available automatically;
(3) the privilege allowing the shareholder to make telephone redemptions for
amounts over $5,000, to be remitted by wire to the shareholder's
predesignated bank account, is available by election on the Application
accompanying this Prospectus. A current shareholder who did not previously
request such telephone wire privilege on his or her original Application may
request the privilege by completing a Telephone Redemption-by-Wire Form
which may be obtained by calling 1-800-562-0032. The Telephone
Redemption-by-Wire Form requires a signature guarantee; and
(4) the privilege allowing the shareholder to make telephone purchases or
redemptions, transmitted via the Automated Clearing House system, into or
from the shareholder's predesignated bank account, is available upon
completion of the requisite initial documentation. For details and forms,
call 1-800-562-0032. The documentation requires a signature guarantee.
A shareholder may decline the automatic Telephone Privileges set forth in (1)
and (2) above by so indicating on the Application accompanying this Prospectus.
A shareholder may discontinue any Telephone Privilege at any time by advising
Shareholder Services that the shareholder wishes to discontinue the use of such
privileges in the future.
Unless such Telephone Privileges are declined, a shareholder is deemed to
authorize Shareholder Services and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder to redeem,
or purporting to be the shareholder or the shareholder's dealer to exchange,
shares from any account; and (2) honor any written instructions for a change of
address regardless of whether such request is accompanied by a signature
guarantee. All telephone calls will be recorded. None of the Fund, the other
Eligible Funds, the Transfer Agent, the Investment Manager or the Distributor
will be liable for any loss, expense or cost arising out of any request,
including any fraudulent or unauthorized requests. Shareholders assume the risk
to the full extent of their accounts that telephone requests may be
unauthorized. Reasonable procedures will be followed to confirm that
instructions communicated by telephone are genuine. The shareholder will not be
liable for any losses arising from unauthorized or fraudulent instructions if
such procedures are not followed.
Shareholders may redeem or exchange shares by calling toll-free
1-800-562-0032. Although it is unlikely, during periods of extraordinary market
conditions, a shareholder may have difficulty in reaching Shareholder Services
at such telephone number. In that event, the shareholder should contact
Shareholder Services at 1-800-562-0032 or otherwise at its main office at One
Financial Center, Boston, Massachusetts 02111-2690.
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<PAGE>
Shareholder Account Inquiries:
Please call 1-800-562-0032
Call this number for assistance in answering general questions on your account,
including account balance, available shareholder services, statement information
and performance of the Fund. Account inquiries may also be made in writing to
State Street Research Shareholder Services, P.O. Box 8408, Boston, Massachusetts
02266-8408. A fee of up to $10 will be charged against an account for providing
additional account transcripts or photocopies of paid redemption checks or for
researching records in response to special requests.
Shareholder Telephone Transactions:
Please call 1-800-562-0032
Call this number for assistance in purchasing shares by wire and for telephone
redemptions or telephone exchange transactions. Shareholder Services will
require some form of personal identification prior to acting upon instructions
received by telephone. Written confirmation of each transaction will be
provided.
The Fund and its Shares
The Fund, originally organized as a Massachusetts corporation in 1967, is a
diversified series of State Street Research Capital Trust, a Massachusetts
business trust, formed in 1988. The Trustees have authorized shares of the Fund
to be issued in four classes: Class A, Class B, Class C and Class D shares. The
Trust is registered with the Securities and Exchange Commission under the 1940
Act as an open-end management investment company. The fiscal year of the Fund is
September 30.
Except for those differences between the classes of shares described below
and elsewhere in the Prospectus, each share of the Fund has equal dividend,
redemption and liquidation rights with other shares of the Fund and when issued
is fully paid and nonassessable. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common usage of terms which may develop in the mutual fund
industry. For example, Class C shares may be redesignated as Class Y shares and
Class D shares may be redesignated as Class C shares. Any redesignation would
not affect any substantive rights respecting the shares.
Each share of each class of shares represents an identical legal interest in
the same portfolio of investments of the Fund, has the same rights and is
identical in all respects, except that Class B and Class D shares bear the
expenses of the deferred sales arrangement and any expenses (including the
higher service and distribution fees) resulting from such sales arrangement, and
certain other incremental expenses related to a class. Each class will have
exclusive voting rights with respect to provisions of the Rule 12b-1
distribution plan pursuant to which the service and distribution fees, if any,
are paid. Although the legal rights of holders of each class of shares are
identical, it is likely that the different expenses borne by each class will
result in different net asset values and dividends. The different classes of
shares of the Fund also have different exchange privileges.
The rights of holders of shares may be modified by the Trustees at any time,
so long as such modifications do not have a material adverse effect on the
rights of any shareholder. On any matter submitted to the shareholders, the
holder of each Fund share is entitled to one vote per share (with proportionate
voting for fractional shares) regardless of the relative net asset value
thereof.
Under the Master Trust Agreement of the Trust, no annual or regular meeting
of shareholders is required. Thus, there will ordinarily be no shareholder
meetings unless required by the 1940 Act. Except as otherwise provided under
said Act, the Board of Trustees will be a self-perpetuating body until fewer
than two thirds of the Trustees serving as such are Trustees who were elected by
shareholders of the Trust. In the event less than a majority of the Trustees
serving as such were elected by shareholders of the Trust, a meeting of
shareholders will be called to elect Trustees. Under the Master Trust Agreement,
any Trustee may be removed by vote of two thirds of the outstanding Trust
shares; holders of 10% or more of the outstanding Trust shares can require that
the Trustees call a meeting of shareholders for purposes of voting on the
removal of one or more Trustees. In connection with such meetings called by
shareholders, shareholders will be assisted in shareholder communications to the
extent required by applicable law.
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Under Massachusetts law, the shareholders of the Trust could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Master Trust Agreement of the Trust disclaims shareholder liability
for acts or obligations of the Trust and provides for indemnification for all
losses and expenses of any shareholder of the Fund held personally liable for
the obligations of the Trust. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Fund would be unable to meet its obligations. The Investment
Manager believes that, in view of the above, the risk of personal liability to
shareholders is remote.
Management of the Fund
Under the provisions of the Master Trust Agreement and the laws of
Massachusetts, primary responsibility for the management and supervision of the
Fund rests with the Trustees.
The Fund's investment manager is State Street Research & Management Company.
The Investment Manager is charged with the overall responsibility for managing
the investments and business affairs of the Fund, subject to the authority of
the Board of Trustees.
The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve as investment adviser to one of the nation's first mutual
funds, presently known as State Street Research Investment Trust, which they had
formed in 1924. Their investment management philosophy, which continues to this
day, emphasized comprehensive fundamental research and analysis, including
meetings with the management of companies under consideration for investment.
The Investment Manager's portfolio management group has extensive investment
industry experience managing equity and debt securities. In managing debt
securities, if any, for a portfolio, the Investment Manager may consider yield
curve positioning, sector rotation and duration, among other factors.
The Investment Manager and the Distributor are indirect wholly-owned
subsidiaries of Metropolitan Life Insurance Company, and both are located at One
Financial Center, Boston, Massachusetts 02111-2690.
Under its Advisory Agreement with the Trust, the Investment Manager receives
a monthly investment advisory fee equal to 0.75% (on an annual basis) of the
average daily value of the net assets of the Fund. Such fee is higher than that
charged by most mutual funds, but is believed by the Trustees to be justified
given the considerable analysis and research necessary to manage the Fund in
light of its investment objective and policies. The Fund bears all costs of its
operation other than those incurred by the Investment Manager under the Advisory
Agreement. In particular, the Fund pays investment advisory fees, and the
compensation and expenses of the Trustees who are not otherwise currently
affiliated with the Trust, the Investment Manager or any of its affiliates. The
Fund also incurs expenses payable to various states in connection with the offer
and sale of the Fund's shares, and expenses for legal, custodian and transfer
agent services, among other costs. Under the Advisory Agreement, the Investment
Manager provides the Fund with office space, facilities and personnel. The
Investment Manager compensates Trustees of the Trust if such persons are
employees or affiliates of the Investment Manager or its affiliates.
The Fund is managed by Frederick R. Kobrick.
Mr. Kobrick has managed the Fund since 1985. Mr. Kobrick's principal
occupation currently is, and during the past five years has been, Senior Vice
President of State Street Research & Management Company. Mr. Kobrick has
investment discretion over the entire portfolio of the Fund. The portfolio
manager may use a team approach on behalf of the Fund and delegate purchase
and sale authority for portions of the portfolio to other officers of the
Investment Manager.
Subject to the policy of seeking best overall price and execution, sales of
shares of the Fund may be considered by the Investment Manager in the selection
of broker or dealer firms for the Fund's portfolio transactions.
The Investment Manager has a Code of Ethics governing personal securities
transactions of certain of its employees; see the Statement of Additional
Information.
Dividends and Distributions; Taxes
The Fund has qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code for its most recent
fiscal year and intends to qualify as such in future fiscal years, although it
cannot give complete assurance that
25
<PAGE>
it will do so. As long as it so qualifies and satisfies certain distribution
requirements, it will not be subject to federal income taxes on its income
(including capital gains, if any) distributed to its shareholders. Consequently,
the Fund intends to distribute annually to its shareholders substantially all of
its net investment income and any capital gain net income (capital gains net of
capital losses).
The Fund declares dividends from net investment income annually and pays such
dividends, if any, after year end. Distributions of capital gain net income will
generally be made after the end of the fiscal year or as otherwise required for
compliance with applicable tax regulations. Both dividends from net investment
income and distributions of capital gain net income will be declared and paid to
shareholders in additional shares of the Fund at net asset value (except in the
case of shareholders who elect a different available distribution method).
The Fund will provide its shareholders of record with annual information on a
timely basis concerning the federal tax status of dividends and distributions
during the preceding calendar year.
Dividends paid by the Fund from taxable net investment income and
distributions of net short-term capital gains, whether paid in cash or
reinvested in additional shares, will be taxable for federal income tax purposes
to shareholders as ordinary income, and a portion may be eligible for the 70%
dividends-received deduction for corporations. The percentage of the Fund's
dividends eligible for such tax treatment may be less than 100% to the extent
that less than 100% of the Fund's gross income consists of qualifying dividends
of domestic corporations. Distributions of net capital gains (the excess of net
long-term capital gains over net short-term capital losses) which are
designated as capital gains distributions, whether paid in cash or reinvested in
additional shares, will be taxable for federal income tax purposes to
shareholders as long-term capital gains, regardless of how long shareholders
have held their shares, and are not eligible for the dividends-received
deduction. If shares of the Fund which are sold at a loss have been held six
months or less, the loss will be considered as a long-term capital loss to the
extent of any capital gains distributions received.
Dividends and other distributions and proceeds of redemptions of Fund shares
paid to individuals and other nonexempt payees will be subject to a 31% federal
backup withholding tax if the Transfer Agent is not provided with the
shareholder's correct taxpayer identification number and certification that the
shareholder is not subject to such backup withholding.
The foregoing discussion relates only to generally applicable federal income
tax provisions in effect as of the date of this Prospectus. Therefore,
prospective shareholders are urged to consult their own tax advisers regarding
tax matters, including state and local tax consequences.
Calculation of Performance Data
From time to time, in advertisements or in communications to shareholders or
prospective investors, the Fund may compare the performance of its Class A,
Class B, Class C and Class D shares to that of other mutual funds with similar
investment objectives, to certificates of deposit and/or to other financial
alternatives. The Fund may also compare the performance of such classes to
appropriate indices such as the NASDAQ Composite Average, the Russell 2000
Index, the Russell 2000 Growth Index, the Russell 3000 Index, the Small Stock
Index, Standard & Poor's 500 Stock Index (the "S&P 500"), Consumer Price Index
and Dow Jones Industrial Average and/or to appropriate rankings and averages,
such as the Lipper Capital Appreciation Fund Group average, compiled by Lipper
Analytical Services, Inc., or to those compiled by Morningstar, Inc., Money
Magazine, Business Week, Forbes Magazine, the Wall Street Journal and Investor's
Daily.
Total return is computed separately for each class of shares of the Fund. The
average annual total return ("standard total return") for shares of the Fund is
computed by determining the average annual compounded rate of return for a
designated historical period as applied to a hypothetical $1,000 initial
investment, which is redeemed in total at the end of such period. In making the
calculation, all dividends and distributions are assumed to be reinvested, and
all recurring expenses, including management and distribution fees, are
recognized. The calculation also reflects the highest applicable initial or
contingent deferred sales charge, determined as of the assumed
26
<PAGE>
date of initial investment or the assumed date of redemption, as the case may
be. Standard total return may be accompanied by nonstandard total return
information computed in the same manner, but for differing periods and with or
without annualizing the total return or taking sales charges into account.
The standard total return results take sales charges into account, if
applicable, but do not take into account recurring and nonrecurring charges for
optional services which only certain shareholders elect and which involve
nominal fees, such as the $7.50 fee for remittance of redemption proceeds by
wire. Where sales charges are not applicable and therefore not taken into
account in the calculation of standard total return, the results will be
increased. Any voluntary waiver of fees or assumption of expenses by the Fund's
affiliates will also increase performance results.
The Fund commenced operations as a registered investment company in 1984.
Shares of the Fund were first publicly available, to institutions and existing
shareholders only, in 1987. The Fund commenced a continuous offering to the
general public on February 17, 1993. During the period that shares of the Fund
were not offered to the general public, the Fund was not subject to the cash
inflows or higher level of redemptions or expenses that could occur when shares
are continuously offered to the general public.
Performance information may be useful in evaluating the Fund and for
providing a basis for comparison with other financial alternatives. Because the
performance of the Fund varies in response to fluctuations in economic and
market conditions, interest rates and Fund expenses, among other things, no
performance quotation should be considered a representation as to the Fund's
performance for any future period. In addition, the net asset value of shares of
the Fund will fluctuate, with the result that shares of the Fund, when redeemed,
may be worth more or less than their original cost. Neither an investment in the
Fund nor the Fund's performance is insured or guaranteed; such lack of insurance
or guarantees should accordingly be given appropriate consideration when
comparing the Fund to financial alternatives which have such features.
Shares of the Fund had no class designations until February 17, 1993, when
Class A and Class C designations were assigned, and March 15, 1993 when Class B
and Class D designations were assigned, based on the pricing and Rule 12b-1 fees
applicable to shares sold thereafter. Performance data for periods prior to such
dates do not reflect additional Rule 12b-1 Distribution Plan fees, if any, of up
to 1% per year depending on the class of shares, which will adversely affect
performance results for periods after such dates. Performance data or rankings
for a given class of shares should be interpreted carefully by investors who
hold or may invest in a different class of shares.
27
<PAGE>
State Street Research
Emerging Growth Fund
Prospectus
February 1, 1997
The investment objective of State Street Research Emerging Growth Fund (the
"Fund") is to provide growth of capital. In seeking to achieve its investment
objective, the Fund invests primarily in the equity securities of emerging
growth and small capitalization companies.
State Street Research & Management Company (the "Investment Manager")
serves as investment adviser to the Fund. As of November 30, 1996, the
Investment Manager had assets of approximately $42.5 billion under
management. State Street Research Investment Services, Inc. serves as
distributor (the "Distributor") for the Fund.
Shareholders may have their shares redeemed directly by the Fund at net
asset value plus the applicable contingent deferred sales charge, if any;
redemptions processed through securities dealers may be subject to processing
charges.
There are risks in any investment program, including the risk of changing
economic and market conditions, and there is no assurance that the Fund will
achieve its investment objective. The net asset value of the Fund's shares
fluctuates as market conditions change.
Because of the Fund's investment policies, the Fund is subject to
above-average risks. The Fund generally is designed for investors who want an
aggressive investment and can tolerate volatility and possible losses. An
investment in the Fund should be part of a balanced investment program which
includes more conservative investments. In addition, the Fund may suspend the
offering of its shares at any time because of the limited availability of
investments which meet the Fund's investment parameters.
This Prospectus sets forth concisely the information a prospective
investor ought to know about the Fund before investing. It should be retained
for future reference. A Statement of Additional Information about the Fund
dated February 1, 1997 has been filed with the Securities and Exchange
Commission and is incorporated by reference into this Prospectus. It is
available at no charge upon request to the Fund at the address indicated on
the cover or by calling 1-800-562-0032.
The Fund is a diversified series of State Street Research Capital Trust
(the "Trust"), an open-end management investment company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION 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 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.
<TABLE>
<CAPTION>
Table of Contents Page
---------------------------------------------------
<S> <C>
Table of Expenses 2
Financial Highlights 4
The Fund's Investments 5
Limiting Investment Risk 7
Purchase of Shares 8
Redemption of Shares 16
Shareholder Services 18
The Fund and its Shares 22
Management of the Fund 23
Dividends and Distributions; Taxes 24
Calculation of Performance Data 24
---------------------------------------------------
</TABLE>
<PAGE>
The Fund offers four classes of shares which may be purchased at the next
determined net asset value per share plus, in the case of all classes except
Class C shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5%
and (ii) an annual service fee of 0.25% of the average daily net asset value
of the Class A shares.
Class B shares are subject (i) to a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made
within five years of purchase and (ii) annual distribution and service fees
of 1% of the average daily net asset value of such shares. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after purchase. No contingent deferred sales charge
applies after the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and
large institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1%
if redeemed within one year following purchase and (ii) annual distribution
and service fees of 1% of the average daily net asset value of such shares.
Table of Expenses
<TABLE>
<CAPTION>
Class A Class B Class C Class D
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses(1)
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price) 4.5% None None None
Maximum 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 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
</TABLE>
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
thereafter and no contingent deferred sales charge is imposed after the
fifth year. Class D shares are subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the
sale. Long-term investors in Class A, Class B or Class D shares with a
distribution fee may, over a period of years, pay more than the economic
equivalent of the maximum sales charge permissible under applicable
rules. See "Purchase of Shares."
(2) Purchases of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption.
See "Purchase of Shares."
2
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C Class D
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.75% 0.75% 0.75% 0.75%
12b-1 Fees 0.25% 1.00% None 1.00%
Other Expenses 0.74% 0.74% 0.74% 0.74%
Less Voluntary Reduction (0.39%) (0.39%) (0.39%) (0.39%)
--------- --------- --------- ----------
Total Fund Operating Expenses
(after voluntary reduction) 1.35% 2.10% 1.10% 2.10%
========= ========= ========= ==========
</TABLE>
Example:
You would pay the following expenses on a $1,000 investment including, for
Class A shares, the maximum applicable initial sales charge and assuming (1)
5% annual return and (2) redemption of the entire investment at the end of
each time period:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- -----------
<S> <C> <C> <C> <C>
Class A shares $58 $86 $116 $200
Class B shares (1) $71 $96 $133 $224
Class C shares $11 $35 $ 61 $134
Class D shares $31 $66 $113 $243
</TABLE>
You would pay the following expenses on the same investment, assuming no
redemption:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- -----------
<S> <C> <C> <C> <C>
Class B shares (1) $21 $66 $113 $224
Class D shares $21 $66 $113 $243
</TABLE>
(1) Ten-year figures assume conversion of Class B shares to Class A shares at
the end of eight years.
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than
shown.
The purpose of the table above is to assist the investor in understanding
the various costs and expenses that an investor will bear directly or
indirectly. The percentage expense levels shown in the table above are based
on experience with expenses for the fiscal year ended September 30, 1996;
actual expense levels for the current fiscal year and future years may vary
from the amounts shown. The table does not reflect charges for optional
services elected by certain shareholders, such as the $7.50 fee for
remittance of redemption proceeds by wire. For further information on sales
charges, see "Purchase of Shares--Alternative Purchase Program"; for further
information on management fees, see "Management of the Fund"; and for further
information on 12b-1 fees, see "Purchase of Shares--Distribution Plan."
The Fund has been advised that the Distributor and its affiliates may from
time to time and in varying amounts voluntarily assume some portion of fees
or expenses relating to the Fund. The Fund presently expects such assistance
to be provided for the next 12 months or until the Fund's net assets reach
$100 million, whichever first occurs. However, the Fund has not received any
firm commitment that such assistance will in fact be provided. For the fiscal
year ended September 30, 1996, Total Fund Operating Expenses as a percentage
of average net assets of Class A, Class B, Class C and Class D shares of the
Fund would have been 1.74%, 2.49%, 1.49% and 2.51%, respectively, in the
absence of the voluntary assumption of fees or expenses by the Distributor
and its affiliates, which amounted to 0.39%, 0.39%, 0.39% and 0.41% of
average net assets of each of the Class A, Class B, Class C and Class D
shares of the Fund, respectively. The amount of fees or expenses assumed
during the fiscal year ended September 30, 1996 differed among classes
because of fluctuations during the year in the relative levels of assets in
each class and in expenses before reimbursement.
3
<PAGE>
Financial Highlights
The data set forth below has been examined by Coopers & Lybrand L.L.P.,
independent accountants, and their report thereon is included in the
Statement of Additional Information. For further information about the
performance of the Fund, see "Financial Statements" in the Statement of
Additional Information.
<TABLE>
<CAPTION>
Class A Class B
-----------------------------------------------------------------------
Year ended September 30, Year ended September 30,
1996**** 1995**** 1994** 1996****] 1995****] 1994**
---------------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 9.69 $ 8.56 $ 9.45 $ 9.58 $ 8.52 $ 9.45
Net investment loss* (0.09) (.08) (.02) (0.17) (.14) (.06)
Net realized and unrealized gain
(loss) on investments 1.73 1.21 (.87) 1.70 1.20 (.87)
Net asset value, end of year $ 11.33 $ 9.69 $ 8.56 $ 11.11 $ 9.58 $ 8.52
====================== ============ =========== =========== ============
Total return 16.92%+ 13.20%+ (9.42)%+++ 15.97%+ 12.44%+ (9.84)%+++
Net assets at end of year (000s) $19,791 $21,480 $21,986 $23,656 $26,489 $29,287
Ratio of operating expenses to
average net assets* 1.35% 1.35% 1.35%++ 2.10% 2.10% 2.10%++
Ratio of net investment loss to
average net assets* (0.96)% (0.93)% (0.58)%++ (1.71)% (1.67)% (1.32)%++
Portfolio turnover rate 155.85% 178.60% 83.61% 155.85% 178.60% 83.61%
Average commission rate@ $ .0159 -- -- $ .0159 -- --
* Reflects voluntary assumption
of fees or expenses per share
in each year $ .04 $ .06 $ .02 $ .04 $ .06 $ .02
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
-----------------------------------------------------------------------
Year ended September 30, Year ended September 30,
1996****] 1995****] 1994*** 1996****] 1995****] 1994**
---------------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 9.77 $ 8.60 $ 9.55 $ 9.58 $ 8.52 $ 9.45
Net investment loss* (0.07) (.06) (.06) (0.16) (.14) (.06)
Net realized and unrealized gain
(loss) on investments 1.74 1.23 (.89) 1.68 1.20 (.87)
Net asset value, end of year $ 11.44 $ 9.77 $ 8.60 $ 11.10 $ 9.58 $ 8.52
Total return 17.09%+ 13.60%+ (9.95)%+++ 15.87%+ 12.44%+ (9.84)%+++
Net assets at end of year (000s) $13,311 $12,380 $ 7,033 $ 4,503 $ 7,391 $10,032
Ratio of operating expenses to
average net assets* 1.10% 1.10% 1.10%++ 2.10% 2.10% 2.10%++
Ratio of net investment loss to
average net assets* (0.71)% (0.71)% (0.68)%++ (1.71)% (1.67)% (1.32)%++
Portfolio turnover rate 155.85% 178.60% 83.61% 155.85% 178.60% 83.61%
Average commission rate@ $ .0159 -- -- $ .0159 -- --
* Reflects voluntary assumption
of fees or expenses per share
in each year $ .04 $ .06 $ .04 $ .04 $ .06 $ .02
</TABLE>
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
+++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
**February 1, 1994 (commencement of share class designations) to September
30, 1994.
***October 4, 1993 (commencement of operations) to September 30, 1994.
****Per-share figures have been calculated using the average shares method.
@ Average commission rate per share paid for security trades for fiscal
years beginning on or after October 1, 1995.
4
<PAGE>
The Fund's Investments
The Fund's investment objective is to provide growth of capital. The
investment objective is a fundamental policy that may not be changed without
approval of the Fund's shareholders.
In seeking to achieve its investment objective, the Fund invests at least
65% of its total assets under normal circumstances in the equity securities
of small capitalization companies and companies in the emerging growth stage
of development. A company's market capitalization is the total market value
of its publicly traded equity securities. The Fund invests in companies with
market capitalizations ranging as high as those included in the Russell 2000
Growth Index, although the capitalizations or index could vary over time
because of market conditions, changes in the parameters of indices, etc.
While a company's market capitalization may be small at the time the Fund
first invests in the company, the Fund may continue to hold and acquire
shares of a company after its market capitalization increases.
The Investment Manager considers emerging growth companies to be those
companies which are less mature and have the potential to grow substantially
faster than the economy. In selecting investments, the Investment Manager
considers a variety of factors, any one of which may be determinative. These
include a company's expected growth in earnings, relative financial condition
and cash flow, competitive position, management and business strategy,
overall potential as an enterprise, entrepreneurial character, and new or
innovative products, services or processes.
The equity securities in which the Fund will invest consist of commons
stocks, or securities (preferred stock, bonds and debentures) convertible
into common stocks, or which carry the right to acquire equity securities
(warrants). The Fund anticipates that more than half of the total value, at
the time of investment, of the equity securities held by the Fund will be
included on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") system or listed on a major securities exchange.
Under normal circumstances, the Fund expects to be fully invested in equity
securities as described above. However, the Fund may, consistent with its
investment objective, also invest at any time up to 35% of its total assets in
other equity and debt securities, such as those issued by larger capitalization,
more mature, or special situation companies, and U.S. Government securities. A
special situation company is one which, because of unique circumstances such as,
for example, a particular business niche it fills, is an attractive investment
even though it is not a small capitalization issuer or in the emerging growth
stage. The Fund will purchase investment grade debt securities (i.e., rated at
the time of purchase within the AAA, AA, A or BBB categories by Standard &
Poor's Corporation ("S&P") or Aaa, Aa, A or Baa categories by Moody's Investors
Service, Inc. ("Moody's")), or securities that are not rated by considered by
the Investment Manager to be of equivalent investment quality. The debt
securities, which may have differing maturities and fixed or floating interest
rates, will be U.S. Government securities or issued by larger capitalization
issuers. For more information on debt ratings, see the Statement of Additional
Information.
Because the Fund invests primarily in small capitalization and emerging
growth companies, an investment in the Fund involves greater than average
risks and the value of the Fund's shares may fluctuate more widely than the
value of shares of a fund that invests in larger, more established companies.
Securities held by the Fund, particularly those traded over-the-counter, may
have limited marketability and may be subject to more abrupt or erratic
market movements over time than securities of larger, more seasoned companies
or the market as a whole. The issuers of over-the-counter securities may have
limited product lines, markets and financial resources, may be dependent on
entrepreneurial management, typically reinvest most of their net income in
the enterprise and typically do not pay dividends.
Other Investments and Risk Considerations
Foreign Investments
The Fund reserves the right to invest without limitation in securities of
non-U.S. issuers directly, or indirectly in the form of American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") or similar
securities representing interests in the securities of for-
5
<PAGE>
eign issuers. Under current policy, however, the Fund limits such
investments, including ADRs and EDRs, to a maximum of 35% of its total
assets.
ADRs are receipts, typically issued by a U.S. bank or trust company, which
evidence ownership of underlying securities issued by a foreign corporation
or other entity. EDRs are receipts issued in Europe which evidence a similar
ownership arrangement. Generally, ADRs in registered form are designed for
use in U.S. securities markets and EDRs are designed for use in European
securities markets. The underlying securities are not always denominated in
the same currency as the ADRs or EDRs. Although investment in the form of
ADRs or EDRs facilitates trading in foreign securities, it does not mitigate
all the risks associated with investing in foreign securities.
ADRs are available through facilities which may be either "sponsored" or
"unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and usually agrees to
provide shareholder communications. In an unsponsored arrangement, the
foreign issuer is not involved, and the ADR holders pay the fees of the
depository. Sponsored ADRs are generally more advantageous to the ADR holders
and the issuer than are unsponsored ADRs. More and higher fees are generally
charged in an unsponsored program compared to a sponsored facility. Only
sponsored ADRs may be listed on the New York or American Stock Exchanges.
Unsponsored ADRs may prove to be more risky due to (a) the additional costs
involved to the Fund; (b) the relative illiquidity of the issue in U.S.
markets; and (c) the possibility of higher trading costs in the
over-the-counter market as opposed to exchange-based trading. The Fund will
take these and other risk considerations into account before making an
investment in an unsponsored ADR.
The risks associated with investments in foreign securities include those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks
of nationalization or expropriation, the possible imposition of currency
exchange blockages, higher operating expenses, foreign withholding and other
taxes which may reduce investment return, reduced availability of public
information concerning issuers, the difficulties in obtaining and enforcing a
judgment against a foreign issuer and the fact that foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to
those applicable to domestic issuers. Moreover, securities of many foreign
issuers may be less liquid and their prices more volatile than those of
securities of comparable domestic issuers.
It is anticipated that most of the foreign investments of the Fund will
consist of securities of issuers in countries with developed economies.
However, the Fund may also invest in the securities of issuers in countries
with less developed economies as deemed appropriate by the Investment
Manager, although the Fund does not presently expect to invest more than 5%
of its total assets in issuers in such less developed countries. Such
countries include countries that have an emerging stock market that trades a
small number of securities; countries with low- to middle-income economies;
and/or countries with economies that are based on only a few industries.
Eastern European countries are considered to have less developed capital
markets.
For further information regarding foreign investments, see the Statement
of Additional Information.
Currency Transactions
In order to protect against the effect of uncertain future exchange rates on
securities denominated in foreign currencies, the Fund may engage in currency
exchange transactions either on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market or by entering into forward
contracts to purchase or sell currencies. Although such contracts tend to
minimize the risk of loss resulting from a correctly predicted decline in
value of hedged currency, they tend to limit any potential gain that might
result should the value of such currency increase. In entering a forward
currency transaction, the Fund is dependent upon the creditworthiness and
good faith of the counterparty. The Fund attempts to reduce the risks of
nonperformance by a counterparty by dealing only with established, large
institutions with which
6
<PAGE>
the Investment Manager has done substantial business in the past. For further
information, see the Statement of Additional Information.
Other Investment Policies
The Fund may lend portfolio securities with a value of up to 33-1/3% of its
total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of
the current market value of the loaned securities plus accrued interest.
Collateral received by the Fund will generally be held in the form tendered,
although cash may be invested in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, irrevocable stand-by letters
of credit issued by a bank, or any combination thereof. The investing of cash
collateral received from loaning portfolio securities involves leverage which
magnifies the potential for gain or loss on monies invested and, therefore,
results in an increase in the volatility of the Fund's outstanding
securities. Such loans may be terminated at any time.
The Fund will retain most rights of ownership including rights to
dividends, interest or other distributions on the loaned securities. Voting
rights pass with the lending, although the Fund may call loans to vote
proxies if desired. Should the borrower of the securities fail financially,
there is a risk of delay in recovery of the securities or loss of rights in
the collateral. Loans are made only to borrowers which are deemed by the
Investment Manager to be of good financial standing.
To aid in achieving its investment objective, the Fund may, subject to
certain limitations, buy and sell options, futures contracts and options on
futures contracts on securities, securities indices and currencies, enter
into repurchase agreements and purchase securities on a "when-issued" or
forward commitment basis. The Fund may not establish a position in a
commodity futures contract or purchase or sell a commodity option contract
for other than hedging purposes if immediately thereafter the sum of the
amount of initial margin deposits and premiums on open positions with respect
to futures and options used for such nonhedging purposes would exceed 5% of
the market value of the Fund's total assets; similar policies apply to
options which are not commodities. The Fund may enter various forms of swap
arrangements, which have simultaneously the characteristics of a security and
a futures contract, although the Fund does not presently expect to invest
more than 5% of its total assets in such items. These swap arrangements
include interest rate swaps, currency swaps and index swaps. See the
Statement of Additional Information.
The Fund reserves full freedom with respect to portfolio turnover. In
periods when there are rapid changes in economic conditions or security price
levels or when investment strategy changes significantly, portfolio turnover
may be higher than during times of economic and market price stability or
when investment strategy remains relatively constant. An actual portfolio
turnover rate of 100% or more may result in greater transaction costs,
relative to other funds in general, and may have tax and other consequences
as well. See the Statement of Additional Information.
Limiting Investment Risk
In seeking to lessen investment risk, the Fund operates under certain
fundamental and nonfundamental investment restrictions. Under the fundamental
investment restrictions, the Fund may not (a) purchase a security of any one
issuer (other than securities issued or guaranteed as to principal or
interest by the U.S. Government or its agencies or instrumentalities or
mixed-ownership Government corporations), if such purchase would, with
respect to 75% of the Fund's total assets, cause more than 5% of the Fund's
total assets to be invested in the securities of such issuer; (b) purchase
for its portfolio a security of any one issuer if such purchase would cause
more than 10% of the voting securities of such issuer to be held by the Fund;
or (c) invest more than 25% of the Fund's total assets in securities of
issuers principally engaged in any one industry with certain designated
exceptions such as in the case of the U.S. Government.
The foregoing fundamental investment restrictions may not be changed
except by vote of the holders of a majority of the outstanding voting
securities of the Fund. The vote of a majority of the outstanding voting
securities of the Fund means the vote (A) of 67
7
<PAGE>
per centum or more of the voting securities present at a meeting, if the
holders of more than 50 per centum of the outstanding voting securities of
the Fund are present or represented by proxy; or (B) of more than 50 per
centum of the outstanding voting securities of the Fund, whichever is less.
Under the nonfundamental investment restrictions, the Fund may not invest
more than 15% of the Fund's total assets in illiquid securities including
repurchase agreements extending for more than seven days and may not invest
more than 5% of the Fund's total assets in restricted securities excluding
securities eligible for resale under Rule 144A under the Securities Act of
1933. Although many illiquid securities may also be restricted, and vice
versa, compliance with each of these policies will be determined
independently. The foregoing nonfundamental investment restriction may be
changed without a shareholder vote.
For further information on the above and other fundamental and
nonfundamental investment restrictions, see the Statement of Additional
Information.
The Fund may hold up to 100% of its assets in cash or certain short-term
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Investment Manager, such a
position is more likely to provide protection against adverse market
conditions than adherence to the Fund's other investment policies. To the
extent that the Fund's assets are held in a temporary defensive position, the
Fund will not be achieving its investment objective. The types of short-term
instruments in which the Fund may invest for such purposes are, as more fully
described in the Statement of Additional Information: U.S. Government
securities, custodial receipts, certificates of deposit, time deposits and
bankers' acceptances of certain qualified financial institutions and
corporate commercial paper rated at least "A" by S&P or "Prime" by Moody's
(or, if not rated, issued by companies having an outstanding long-term
unsecured debt issue rated at least "A" by S&P or Moody's). See the Statement
of Additional Information.
Information on the Purchase of Shares, Redemption of Shares and Shareholder
Services is set forth on pages 8 to 22 below.
The Fund is available for investment by many kinds of investors including
participants investing through 401(k) or other retirement plan sponsors,
employees investing through savings plans sponsored by employers, Individual
Retirement Accounts ("IRAs"), trusts, corporations, individuals, etc. The
applicability of the general information and administrative procedures set
forth below accordingly will vary depending on the investor and the
recordkeeping system established for a shareholder's investment in the Fund.
Participants in 401(k) and other plans should first consult with the
appropriate person at their employer or refer to the plan materials before
following any of the procedures below. For more information or assistance,
anyone may call 1-800-562-0032.
Purchase of Shares
Methods of Purchase
Through Dealers and Others
Shares of the Fund are continuously offered through securities dealers,
financial institutions and others (collectively referred to herein as
securities dealers or dealers) who have entered into sales agreements with
the Distributor. Purchases through dealers are confirmed at the offering
price, which is the net asset value plus the applicable sales charge, next
determined after the order is duly received by State Street Research
Shareholder Services ("Shareholder Services"), a division of State Street
Research Investment Services, Inc., from the dealer. ("Duly received" for
purposes herein means in accordance with the conditions of the applicable
method of purchase as described below.) The dealer is responsible for
transmitting the order promptly to Shareholder Services in order to permit
the investor to obtain the current price. See "Purchase of Shares--Net Asset
Value" herein.
By Mail
Initial investments in the Fund may be made by mailing or delivering to the
investor's dealer a completed Application (accompanying this Prospectus),
together with a check for the total purchase price payable to the Fund.
8
<PAGE>
The dealer must forward the Application and check in accordance with the
instructions on the Application.
Additional shares may be purchased by mailing to Shareholder Services a
check payable to the Fund in the amount of the total purchase price together
with any one of the following: (i) an Application; (ii) the stub from the
shareholder's account statement; or (iii) a letter setting forth the name of
the Fund, the class of shares and the account name and number. Shareholder
Services will deliver the purchase order to the transfer agent and dividend
paying agent, State Street Bank and Trust Company (the "Transfer Agent").
If the check is not honored for its full amount, the purchaser could be
subject to additional charges to cover collection costs and any investment
loss, and the purchase may be cancelled.
By Wire
An investor may purchase shares by wiring Federal Funds of not less than
$5,000 to State Street Bank and Trust Company, which also serves as the
Trust's custodian (the "Custodian"), as set forth below. Prior to making an
investment by wire, an investor must notify Shareholder Services at
1-800-562-0032 and obtain a control number and instructions. Following such
notification, Federal Funds should be wired through the Federal Reserve
System to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF = State Street Research
Emerging Growth Fund
and class of shares
(A, B, C or D)
AC = 99029761
OBI = Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street Research Shareholder Services)
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make
such investment by 12 noon Boston time on the day of his or her investment;
and (ii) the wire must be received by 4 P.M. Boston time that same day.
An investor making an initial investment by wire must promptly complete
the Application accompanying this Prospectus and deliver it to his or her
dealer, who should forward it as required. No redemptions will be effected
until the Application has been duly processed.
The Fund may in its discretion discontinue, suspend or change the practice
of accepting orders by any of the methods described above. Orders for the
purchase of shares are subject to acceptance by the Fund. The Fund reserves
the right to suspend the sale of shares, or to reject any purchase order,
including orders in connection with exchanges, for any reason.
Minimum Investment
<TABLE>
<CAPTION>
Class of Shares
-----------------------------------
A B C D
-------- -------- ---- ------
<S> <C> <C> <C> <C>
Minimum Initial Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $2,000 $2,000 (a) $2,000
By Investamatic $1,000 $1,000 (a) $1,000
All other $2,500 $2,500 (a) $2,500
Minimum Subsequent Investment
By Wire $5,000 $5,000 (a) $5,000
IRAs $ 50 $ 50 (a) $ 50
By Investamatic $ 50 $ 50 (a) $ 50
All other $ 50 $ 50 (a) $ 50
</TABLE>
(a) Special conditions apply; contact the Distributor.
The Fund reserves the right to vary the minimums for initial or subsequent
investments as in the case of, for example, exchanges and investments under
various retirement and employee benefit plans, sponsored arrangements
involving group solicitations of the members of an organization, or other
investment plans for reinvestment of dividends and distributions or for
periodic investments (e.g., Investamatic Check Program).
Alternative Purchase Program
General
Alternative classes of shares permit investors to select a purchase program
which they believe will be the most advantageous for them, given the amount
of their purchase, the length of time they anticipate holding Fund shares, or
the flexibility they desire in this regard, and other relevant circumstances.
Investors will be able to determine whether in their particular circumstances
it is more advantageous to incur an initial sales charge and not be subject
to certain ongoing charges or to have their entire initial purchase price
invested in the Fund with the investment being subject thereafter to ongoing
service fees and distribution fees.
As described in greater detail below, dealers are paid differing amounts
of commissions and other compensation depending on which class of shares they
sell.
9
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
Class A Class B Class C Class D
------------------------ ----------------------- ------------ -----------------------
<S> <C> <C> <C> <C>
Sales Charges Initial sales charge at Contingent deferred None Contingent deferred
time of investment of sales charge of 5% to sales charge of 1%
up to 4.5% depending on 2% applies to any applies to any shares
amount of investment shares redeemed within redeemed within one
first five years year following their
following their purchase
purchase; no contingent
deferred sales charge
after five years
On investments of $1
million or more, no
initial sales charge;
but contingent deferred
sales charge of 1%
applies to any shares
redeemed within one year
following their purchase
Distribution Fee None 0.75% for first eight None 0.75% each year
years; Class B shares
convert automatically
to Class A shares after
eight years
Service Fee 0.25% each year 0.25% each year None 0.25% each year
Initial Commission Above described initial 4% None 1%
Received by Selling sales charge less 0.25%
Dealers to 0.50% retained by
Distributor
On investments of $1
million or more, 0.25%
to 1% paid to dealer by
Distributor
</TABLE>
10
<PAGE>
In deciding which class of shares to purchase, the investor should
consider the amount of the investment, the length of time the investment is
expected to be held, and the ongoing service fee and distribution fee, among
other factors.
Class A shares are sold at net asset value plus an initial sales charge of
up to 4.5% of the public offering price. Because of the sales charge, not all
of an investor's purchase amount is invested unless the purchase equals
$1,000,000 or more. Class B shareholders pay no initial sales charge, but a
contingent deferred sales charge of up to 5% generally applies to shares
redeemed within five years of purchase. Class D shareholders also pay no
initial sales charge, but a contingent deferred sales charge of 1% generally
applies to redemptions made within one year of purchase. For Class B and
Class D shareholders, therefore, the entire purchase amount is immediately
invested in the Fund.
An investor who qualifies for a significantly reduced initial sales
charge, or a complete waiver of the sales charge on investments of $1,000,000
or more, on the purchase of Class A shares might elect that option to take
advantage of the lower ongoing service and distribution fees that
characterize Class A shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. Class B shares are assessed an annual
distribution fee of 0.75% of daily net assets for an eight-year period
following the date of purchase and are then automatically converted to Class
A shares. Class D shares are assessed an annual distribution fee of 0.75% of
daily net assets for as long as the shares are held. The prospective investor
should consider these fees plus the initial or contingent deferred sales
charges in estimating the costs of investing in the various classes of Fund
shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are allocated to dealers (see
"Distribution Plan" below). In addition, the Distributor will, at its
expense, provide additional cash and noncash incentives to securities dealers
that sell shares. Such incentives may be extended only to those dealers that
have sold or may sell significant amounts of shares and/or meet other
conditions established by the Distributor; for example, the Distributor may
sponsor special promotions to develop particular distribution channels or to
reach certain investor groups. The Distributor may also compensate those
dealers with clients who maintain their investments in the Fund over a period
of years. The incentives may include merchandise and trips to and attendance
at sales seminars at resorts.
Class A Shares--Initial Sales Charges
Sales Charges
The purchase price of a Class A share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar
amount of the shares purchased as set forth in the table below. A major
portion of this sales charge is reallowed by the Distributor to the dealer
responsible for the sale.
<TABLE>
<CAPTION>
Sales Sales
Charge Charge
Paid by Paid by Dealer
Dollar Investor Investor Concession
Amount of As % of As % of As % of
Purchase Purchase Net Asset Purchase
Transaction Price Value Price
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 or above but
less than $250,000 3.50% 3.63% 3.00%
$250,000 or above but
less than $500,000 2.50% 2.56% 2.00%
$500,000 or above but
less than
$1 million 2.00% 2.04% 1.75%
$1 million and above See
following
0% 0% discussion
</TABLE>
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor
11
<PAGE>
will pay the authorized dealer a commission based on the aggregate of such
sales as follows:
<TABLE>
<CAPTION>
Amount of Sale Commission
------------------------------- -------------
<S> <C>
(a) $1 million to $3 million 1.00%
(b) Next $2 million 0.50%
(c) Amount over $5 million 0.25%
</TABLE>
On such sales of $1,000,000 or more, unless the above commission is waived
by the dealer, the investor is subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the sale.
However, such redeemed shares will not be subject to the contingent deferred
sales charge to the extent that their value represents (1) capital
appreciation or (2) reinvestment of dividends or capital gains distributions.
In addition, the contingent deferred sales charge will be waived for certain
other redemptions as described under "Contingent Deferred Sales Charge
Waivers" below (as otherwise applicable to Class B shares).
Class A shares of the Fund that are purchased without a sales charge may
be exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption
within one year of the Class A shares which are acquired through such
exchange. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any contingent
deferred sales charge will be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement
of Additional Information, of $100,000 or more of Class A shares of the Fund
or a combination of "Eligible Funds." "Eligible Funds" include the Fund and
other funds so designated by the Distributor from time to time. Class B,
Class C and Class D shares may also be included in the combination under
certain circumstances. Securities dealers should call Shareholder Services
for details concerning the other Eligible Funds and any persons who may
qualify for reduced sales charges and related information. See the Statement
of Additional Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A
shares of the Fund and any other Eligible Funds within a 13-month period.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances. Additional information on a Letter of Intent is
available from dealers, or from the Distributor, and also appears in the
Statement of Additional Information.
Right of Accumulation
Investors may purchase Class A shares of the Fund or a combination of shares
of the Fund and other Eligible Funds at reduced sales charges pursuant to a
Right of Accumulation. Under the Right of Accumulation, the sales charge is
determined by combining the current purchase with the value of the Class A
shares of other Eligible Funds held at the time of purchase. Class B, Class C
and Class D shares may also be included in the combination under certain
circumstances. See the Statement of Additional Information and call
Shareholder Services for details concerning the Right of Accumulation.
Other Programs
Class A shares of the Fund may be sold at a reduced sales charge or without a
sales charge pursuant to certain sponsored arrangements, which include
programs under which a company, employee benefit plan or other organization
makes recommendations to, or permits group solicitation of, its employees,
members or participants, except any organization created primarily for the
purpose of obtaining shares of the Fund at a reduced sales charge or without
a sales charge. Sales without a sales charge, or with a reduced sales charge,
may also be made through brokers, financial planners, institutions, and
others, under managed fee-based programs (e.g., "wrap fee" or similar
programs) which meet certain requirements established from time to time by
the Distributor, in the event the Distributor determines to implement
12
<PAGE>
such arrangements. Information on such arrangements and further conditions
and limitations is available from the Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and persons: (A) the
Investment Manager, Distributor, or any affiliated entities, including any
direct or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated
Companies, any relatives of any such individuals whose relationship is
directly verified by such individuals to the Distributor, or any beneficial
account for such relatives or individuals; and (C) employees, officers, sales
representatives or directors of dealers and other entities with a selling
agreement with the Distributor to sell shares of any aforementioned
investment company, any spouse or child of such person, or any beneficial
account for any of them. The purchase must be made for investment and the
shares purchased may not be resold except through redemption. This purchase
program is subject to such administrative policies, regarding the
qualification of purchasers, minimum investments by various groups of
eligible persons and any other matters, as may be adopted by the Distributor
from time to time.
Class B Shares--Contingent Deferred Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is duly received, as defined herein.
No sales charge is imposed at the time of purchase; thus the full amount of
the investor's purchase payment will be invested in the Fund. However, a
contingent deferred sales charge may be imposed upon redemptions of Class B
shares as described below.
The Distributor will pay dealers at the time of sale a 4% commission for
selling Class B shares. The proceeds of the contingent deferred sales charge
and the distribution fee are used to offset distribution expenses and thereby
permit the sale of Class B shares without an initial sales charge.
Class B shares that are redeemed within a five-year period after their
purchase will not be subject to a contingent deferred sales charge to the
extent that the value of such shares represents (1) capital appreciation of
Fund assets or (2) reinvestment of dividends or capital gains distributions.
The amount of any applicable contingent deferred sales charge will be
calculated by multiplying the net asset value of such shares at the time of
redemption or at the time of purchase, whichever is lower, by the applicable
percentage shown in the table below:
<TABLE>
<CAPTION>
Contingent
Deferred
Sales Charge
As A Percentage Of
Redemption During Net Asset Value
--------------------------------- -----------------------
<S> <C>
1st Year Since Purchase 5%
2nd Year Since Purchase 4%
3rd Year Since Purchase 3%
4th Year Since Purchase 3%
5th Year Since Purchase 2%
6th Year Since Purchase and
Thereafter None
</TABLE>
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first
of those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of the Fund acquired through an exchange from
another Eligible Fund will be measured from the date that such shares were
initially acquired in the other Eligible Funds, and Class B shares being
redeemed will be considered to represent, as applicable, capital appreciation
or dividend and capital gains distribution reinvestments in such other
Eligible Fund. These determinations will result in any contingent deferred
sales charge being imposed at the lowest possible rate. For federal income
tax purposes, the amount of the contingent deferred sales charge will reduce
the gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any contingent deferred sales charge will be paid
to the Distributor.
13
<PAGE>
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic withdrawal plan which meets certain
conditions. In addition, the contingent deferred sales charge will be waived
for: (i) redemptions made within one year of the death or total disability,
as defined by the Social Security Administration, of all shareholders of an
account; (ii) redemptions made after attainment of a specific age in an
amount which represents the minimum distribution required at such age under
Section 401(a)(9) of the Internal Revenue Code for retirement accounts or
plans (e.g., age 70-1/2 for IRAs and Section 403(b) plans), calculated solely
on the basis of assets invested in the Fund or other Eligible Funds; and
(iii) a redemption resulting from a tax-free return of an excess contribution
to an IRA. (The foregoing waivers do not apply to a tax-free rollover or
transfer of assets out of the Fund.) The Fund may modify or terminate the
waivers described above at any time; for example, the Fund may limit the
application of multiple waivers and establish other conditions for employee
benefit plans.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends or
distributions with respect to such shares, will automatically convert to
Class A shares of the Fund at the end of eight years following the issuance
of such Class B shares; consequently, they will no longer be subject to the
higher expenses borne by Class B shares. The conversion rate will be
determined on the basis of the relative per share net asset values of the two
classes and may result in a shareholder receiving either a greater or fewer
number of Class A shares than the Class B shares so converted. As noted
above, holding periods for Class B shares received in exchange for Class B
shares of other Eligible Funds will be counted toward the eight-year period.
Class C Shares--Institutional; No Sales Charge
The purchase price of a Class C share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase or
redemption. The Fund will receive the full amount of the investor's purchase
payment.
In general, Class C shares are only available for new investments by
certain large institutions, and employee benefit plans which acquire shares
through programs or products sponsored by Metropolitan Life Insurance Company
("Metropolitan") and/or it affiliates, for which Class C shares have been
designated. Information on the availability of Class C shares and further
conditions and limitations is available from the Distributor.
Shares held prior to February 1, 1994 are deemed to be Class C shares.
Class C shares may have also been issued directly or through exchanges to
those shareholders of the Fund or other Eligible Funds who previously held
shares not subject to any future sales charge or service fees or distribution
fees.
Class D Shares--Spread Sales Charges
The purchase price of a Class D share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase; thus the
full amount of the investor's purchase payment will be invested in the Fund.
Class D shares are subject to a 1% contingent deferred sales charge on any
portion of the purchase redeemed within one year of the sale. The contingent
deferred sales charge will be 1% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. The Distributor
pays dealers a 1% commission for selling Class D shares at the time of
purchase. The proceeds of the contingent deferred sales charge and the
distribution fee are used to offset distribution expenses and thereby permit
the sale of Class D shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will not
be subject to the contingent deferred sales charge to the extent that the
value of such shares represents (1) capital appreciation of Fund assets or
(2) reinvestment of dividends or capital gains distributions. In addition,
the contingent deferred sales charge will be waived for certain other
redemptions as described under "Contingent Deferred
14
<PAGE>
Sales Charge Waivers" above (as otherwise applicable to Class B shares). For
federal income tax purposes, the amount of the contingent deferred sales
charge will reduce the gain or increase the loss, as the case may be, on the
amount realized on redemption. The amount of any contingent deferred sales
charge will be paid to the Distributor.
Net Asset Value
The Fund's per share net asset values are determined Monday through Friday as
of the close of the New York Stock Exchange (the "NYSE") exclusive of days on
which the NYSE is closed. The NYSE ordinarily closes at 4 P.M. New York City
time. Assets held by the Fund are valued at the last reported sale price as
of the close of business on the valuation date, except that securities and
assets for which market quotations are not readily available are valued as
determined in good faith by or under the authority of the Trustees of the
Trust. In determining the value of certain assets for which market quotations
are not readily available, the Fund may use one or more pricing services. The
pricing services utilize information with respect to market transactions,
quotations from dealers and various relationships among securities in
determining value and may provide prices determined as of times prior to the
close of the NYSE. The Trustees have authorized the use of the amortized cost
method to value short-term debt instruments issued with a maturity of one
year or less that have a remaining maturity of 60 days or less when the value
obtained is fair value. Further information with respect to the valuation of
the Fund's assets is included in the Statement of Additional Information.
Distribution Plan
The Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the provisions of the
Distribution Plan, the Fund makes payments to the Distributor based on an
annual percentage of the average daily value of the net assets of each class
of shares as follows:
<TABLE>
<CAPTION>
Class Service Fee Distribution Fee
- ---------- ---------------- ----------------------
<S> <C> <C>
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
</TABLE>
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) or others for
personal services and/or the maintenance of shareholder accounts. A portion
of any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance or servicing
of shareholder accounts by such dealers. Dealers who have sold Class A shares
are eligible for further reimbursement commencing as of the time of such
sale. Dealers who have sold Class B and Class D shares are eligible for
further reimbursement after the first year during which such shares have been
held of record by such dealer as nominee for its clients (or by such clients
directly). Any service fees received by the Distributor and not allocated to
dealers may be applied by the Distributor in reduction of expenses incurred
by it directly for personal services and the maintenance 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.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs
similar expenses on behalf of, such other funds. When expenses of the
Distributor cannot be identified as relating to a specific fund, the
Distributor allocates expenses among the funds in a manner deemed fair and
equitable to each fund.
Commissions and other cash and noncash incentives and payments to dealers,
to the extent payable out of the general profits, revenues or other sources
of the Distributor (including the advisory fees paid by the Fund), have also
been authorized pursuant to the Distribution Plan.
15
<PAGE>
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which the Fund may incur under the
Distribution Plan to 1%, of which 0.75% may be used to pay distribution
expenses and 0.25% may be used to pay shareholder service fees. The NASD rule
also limits the aggregate amount which the Fund may pay for such distribution
costs to 6.25% of gross share sales of a class since the inception of any
asset-based sales charge plus interest at the prime rate plus 1% on unpaid
amounts thereof (less any contingent deferred sales charges). Such limitation
does not apply to shareholder service fees. Payments to the Distributor or to
dealers funded under the Distribution Plan may be discontinued at any time by
the Trustees of the Trust.
Redemption of Shares
Shareholders may redeem all or any portion of their accounts on any day the
NYSE is open for business. Redemptions will be effective at the applicable
net asset value per share next determined (see "Purchase of Shares--Net Asset
Value" herein) after receipt of the redemption request, in accordance with
the requirements described below, by Shareholder Services and delivery of the
request by Shareholder Services to the Transfer Agent. To allow time for the
clearance of checks used for the purchase of any shares which are tendered
for redemption shortly after purchase, the remittance of the redemption
proceeds for such shares could be delayed for 15 days or more after the
purchase. Shareholders who anticipate a potential need for immediate access
to their investments should, therefore, purchase shares by wire. Except as
noted, redemption proceeds from the Fund are normally remitted within seven
days after receipt of the redemption request by the Fund and any necessary
documents in good order.
Methods of Redemption
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed to
the shareholder or wired to a predesignated bank account (see "Proceeds By
Wire" below), by sending to State Street Research Shareholder Services, P.O.
Box 8408, Boston, Massachusetts 02266-8408: (1) a written request for
redemption signed by the registered owner(s) of the shares, exactly as the
account is registered; (2) an endorsed stock power in good order with respect
to the shares or, if issued, the share certificates for the shares endorsed
for transfer or accompanied by an endorsed stock power; (3) any required
signature guarantees (see "Redemption of Shares--Signature Guarantees"
below); and (4) any additional documents which may be required for redemption
in the case of corporations, trustees, etc., such as certified copies of
corporate resolutions, governing instruments, powers of attorney, and the
like. The Transfer Agent will not process requests for redemption until it
has received all necessary documents in good order. A shareholder will be
notified promptly if a redemption request cannot be accepted. Shareholders
having any questions about the requirements for redemption should call
Shareholder Services toll-free at 1-800-562-0032.
Request By Telephone
Shareholders may request redemption by telephone with proceeds to be
transmitted by check or by wire (see "Proceeds By Wire" below). A shareholder
can request a redemption for $50,000 or less to be transmitted by check. Such
check for the proceeds will be made payable to the shareholder of record and
will be mailed to the address of record. There is no fee for this service. It
is not available for shares held in certificate form or if the address of
record has been changed within 30 days of the redemption request. The Fund
may revoke or suspend the telephone redemption privilege at any time and
without notice. See "Shareholder Services--Telephone Services" for a
discussion of the conditions and risks associated with Telephone Privileges.
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder has
Telephone Privileges (see "Shareholder Services--Telephone Services" herein),
the Trust's custodian will wire redemption proceeds to the shareholder's
predesignated bank account. To make the request, the shareholder should call
1-800-562-0032 prior to 4 P.M. Boston time. A $7.50 charge against the
shareholder's account will be imposed for each wire redemption. This charge
is subject to change without notice. The shareholder's bank may also impose a
16
<PAGE>
charge for receiving wires of redemption proceeds. The minimum redemption by
wire is $5,000.
Request to Dealer to Repurchase
For the convenience of shareholders, the Fund has authorized the Distributor
as its agent to accept orders from dealers by wire or telephone for the
repurchase of shares by the Distributor from the dealer. The Fund may revoke
or suspend this authorization at any time. The repurchase price is the net
asset value for the applicable shares next determined following the time at
which the shares are offered for repurchase by the dealer to the Distributor.
The dealer is responsible for promptly transmitting a shareholder's order to
the Distributor. Payment of the repurchase proceeds is made to the dealer who
placed the order promptly upon delivery of certificates for shares in proper
form for transfer or, for Open Accounts, upon the receipt of a stock power
with signatures guaranteed as described below, and, if required, any
supporting documents. Neither the Fund nor the Distributor imposes any charge
upon such a repurchase. However, a dealer may impose a charge as agent for a
shareholder in the repurchase of his or her shares.
The Fund has reserved the right to change, modify or terminate the
services described above at any time.
Additional Information
Because of the relatively high cost of maintaining small shareholder
accounts, the Fund reserves the right to involuntarily redeem at its option
any shareholder account which remains below $1,500 for a period of 60 days
after notice is mailed to the applicable shareholder, or to impose a
maintenance fee on such account after 60 days' notice. Such involuntary
redemptions will be subject to applicable sales charges, if any. The Fund may
increase such minimum account value above such amount in the future after
notice to affected shareholders. Involuntarily redeemed shares will be priced
at the net asset value on the date fixed for redemption by the Fund, and the
proceeds of the redemption will be mailed promptly to the affected
shareholder at the address of record. Currently, the maintenance fee is $18
annually, which is paid to the Transfer Agent. The fee does not apply to
certain retirement accounts or if the shareholder has more than an aggregate
$50,000 invested in the Fund and other Eligible Funds combined. Imposition of
a maintenance fee on a small account could, over time, exhaust the assets of
such account.
To cover the cost of additional compliance administration, a $20 fee will
be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date of
payment of redemption proceeds for more than seven days, except that (a) it
may elect to suspend the redemption of shares or postpone the date of payment
of redemption proceeds: (1) during any period that the NYSE is closed (other
than customary weekend and holiday closings) or trading on the NYSE is
restricted; (2) during any period in which an emergency exists as a result of
which disposal of portfolio securities is not reasonably practicable or it is
not reasonably practicable for the Fund fairly to determine the value of its
net assets; or (3) during such other periods as the Securities and Exchange
Commission may by order permit for the protection of investors; and (b) the
payment of redemption proceeds may be postponed as otherwise provided under
"Redemption of Shares" herein.
Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Fund, the Investment
Manager and the Distributor from possible fraud, signature guarantees are
required for certain redemptions. Signature guarantees help the Transfer
Agent to determine that the person who has authorized a redemption from the
account is, in fact, the shareholder. Signature guarantees are required for,
among other things: (1) written requests for redemptions for more than
$50,000; (2) written requests for redemptions for any amount if the proceeds
are transmitted to other than the current address of record (unchanged in the
past 30 days); (3) written requests for redemptions for any amount submitted
by corporations and certain fiduciaries and other intermediaries; and (4)
requests to transfer the registration of shares to another owner. Signatures
must be guaranteed by a bank, a member firm of a national stock exchange, or
other eligible guarantor institution. The
17
<PAGE>
Transfer Agent will not accept guarantees (or notarizations) from notaries
public. The above requirements may be waived in certain instances. Please
contact Shareholder Services at 1-800-562-0032 for specific requirements
relating to your account.
Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of the Fund owned by
shareholders are credited to their accounts by the Transfer Agent, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110. Certificates representing Class B or Class D shares will not be
issued, while certificates representing Class A or Class C shares will only
be issued if specifically requested by shareholders in writing and, in any
case, will only be issued for full shares, with any fractional shares to be
carried on the shareholder's account. Shareholders will receive periodic
statements of transactions in their accounts.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through dealers,
by wire or by mailing a check, payable to the Fund, to Shareholder
Services under the terms set forth above under "Purchase of Shares."
2. The following methods of receiving dividends from investment income and
distributions from capital gains are available:
(a) All income dividends and capital gains distributions reinvested in
additional shares of the Fund.
(b) All income dividends in cash; all capital gains distributions
reinvested in additional shares of the Fund.
(c) All income dividends and capital gains distributions in cash.
(d) All income dividends and capital gains distributions invested in
any one available Eligible Fund designated by the shareholder as
described below. See "Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, the account will automatically be coded for reinvestment of all
dividends and distributions in additional shares of the same class of the
Fund. Selections may be changed at any time by telephone or written notice to
Shareholder Services. Dividends and distributions are reinvested at net asset
value without a sales charge.
Exchange Privilege
Shareholders of the Fund may exchange their shares for available shares with
corresponding characteristics of any of the other Eligible Funds at any time
on the basis of the relative net asset values of the respective shares to be
exchanged, subject to compliance with applicable securities laws.
Shareholders of any other Eligible Fund may similarly exchange their shares
for Fund shares with corresponding characteristics. Prior to making an
exchange, shareholders should obtain the Prospectus of the Eligible Fund into
which they are exchanging. Under the Direct Program, subject to certain
conditions, shareholders may make arrangements for regular exchanges from the
Fund into other Eligible Funds. To effect an exchange, Class A, Class B and
Class D shares may be redeemed without the payment of any contingent deferred
sales charge that might otherwise be due upon an ordinary redemption of such
shares. The State Street Research Money Market Fund issues Class E shares
which are sold without any sales charge. Exchanges of State Street Research
Money Market Fund Class E shares into Class A shares of the Fund or any other
Eligible Fund are subject to the initial sales charge or contingent deferred
sales charge applicable to an initial investment in such Class A shares,
unless a prior Class A sales charge has been paid directly or indirectly with
respect to the shares redeemed. For purposes of computing the contingent
deferred sales charge that may be payable upon disposition of the acquired
Class A, Class B and Class D shares, the holding period of the redeemed
shares is "tacked" to
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<PAGE>
the holding period of the acquired shares. The period any Class E shares are
held is not tacked to the holding period of any acquired shares. No exchange
transaction fee is currently imposed on any exchange.
Shares of the Fund may also be acquired or redeemed in exchange for shares
of the Summit Cash Reserves Fund ("Summit Cash Reserves") by customers of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (subject to completion of
steps necessary to implement the program). The Fund and Summit Cash Reserves
are related mutual funds for purposes of investment and investor services.
Upon the acquisition of shares of Summit Cash Reserves by exchange for
redeemed shares of the Fund, (a) no sales charge is imposed by Summit Cash
Reserves, (b) no contingent deferred sales charge is imposed by the Fund on
the Fund shares redeemed, and (c) any applicable holding period of the Fund
shares redeemed is "tolled," that is, the holding period clock stops running
pending further transactions. Upon the acquisition of shares of the Fund by
exchange for redeemed shares of Summit Cash Reserves, (a) the acquisition of
Class A shares shall be subject to the initial sales charges or contingent
deferred sales charges applicable to an initial investment in such Class A
shares, unless a prior Class A sales charge has been paid indirectly, and (b)
the acquisition of Class B or Class D shares of the Fund shall restart any
holding period previously tolled, or shall be subject to the contingent
deferred sales charge applicable to an initial investment in such shares.
For the convenience of its shareholders who have Telephone Privileges, the
Fund permits exchanges by telephone request from either the shareholder or
his or her dealer. Shares may be exchanged by telephone provided that the
registration of the two accounts is the same. The toll-free number for
exchanges is 1-800-562-0032. See "Telephone Services" herein for a discussion
of conditions and risks associated with Telephone Privileges.
The exchange privilege may be exercised only in those states where shares
of the relevant other Eligible Fund may legally be sold. For tax purposes,
each exchange actually represents the sale of shares of one fund and the
purchase of shares of another. Accordingly, exchanges may produce a capital
gain or loss for tax purposes. The exchange privilege may be terminated or
suspended or its terms changed at any time, subject, if required under
applicable regulations, to 60 days' prior notice. New accounts established
for investments upon exchange from an existing account in another fund will
have the same Telephone Privileges as the existing account, unless
Shareholder Services is instructed otherwise. Related administrative policies
and procedures may also be adopted with regard to a series of exchanges,
street name accounts, sponsored arrangements and other matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer
identification number, may be aggregated for purposes of the six exchange
limit. Notwithstanding the six exchange limit, the Fund reserves the right to
refuse exchanges by any person or group if, in the Investment Manager's
judgment, the Fund would be unable to invest effectively in accordance with
its investment objective and policies, or would otherwise potentially be
adversely affected. Exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincides with
a "market timing" strategy may be disruptive to the Fund. The Fund may impose
these restrictions at any time. The exchange limit may be modified for
accounts in certain institutional retirement plans because of plan exchange
limits, Department of Labor regulations or administrative and other
considerations. Subject to the foregoing, if an exchange request in good
order is received by Shareholder Services and delivered by Shareholder
Services to the Transfer Agent by 12 noon Boston time on any business day,
the exchange usually will occur that day. For further information regarding
the exchange privilege, shareholders should contact Shareholder Services.
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<PAGE>
Reinvestment Privilege
A shareholder of the Fund who has redeemed shares or had shares repurchased
at his or her request may reinvest all or any portion of the proceeds (plus
that amount necessary to acquire a fractional share to round off his or her
reinvestment to full shares) in shares, of the same class as the shares
redeemed, of the Fund or any other Eligible Fund at net asset value and
without subjecting the reinvestment to an initial sales charge, provided such
reinvestment is made within 120 calendar days after a redemption or
repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the
amount reinvested. The redemption of shares is, for federal income tax
purposes, a sale on which the shareholder may realize a gain or loss. If a
redemption at a loss is followed by a reinvestment within 30 days, the
transaction may be a "wash sale" resulting in a denial of the loss for
federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by Shareholder
Services of such shareholder's written purchase request and delivery of the
request by Shareholder Services to the Transfer Agent. A shareholder may
exercise this reinvestment privilege only once per 12-month period with
respect to his or her shares of the Fund. No charge is imposed by the Fund
for such reinvestments; however, dealers may charge fees in connection with
the reinvestment privilege. The reinvestment privilege may be exercised with
respect to an Eligible Fund only in those states where shares of the relevant
other Eligible Fund may legally be sold.
Investment Plans
The Investamatic Program is available to Class A, Class B and Class D
shareholders. Under this Program, shareholders may make regular investments
by authorizing withdrawals from their bank accounts each month or quarter on
the Application available from Shareholder Services.
The Distributor also offers IRAs and tax-sheltered retirement plans,
including prototype and other employee benefit plans for employees, sole
proprietors, partnerships and corporations. Details of these investment plans
and their availability may be obtained from securities dealers or from
Shareholder Services.
Systematic Withdrawal Plan
A shareholder who owns noncertificated Class A or Class C shares with a value
of $5,000 or more, or Class B or Class D shares with a value of $10,000 or
more, may elect, by participating in the Fund's Systematic Withdrawal Plan,
to have periodic checks issued for specified amounts. These amounts may not
be less than certain minimums, depending on the class of shares held. The
Plan provides that all income dividends and capital gains distributions of
the Fund shall be credited to participating shareholders in additional shares
of the Fund. Thus, the withdrawal amounts paid can only be realized by
redeeming shares of the Fund under the Plan. To the extent such amounts paid
exceed dividends and distributions from the Fund, a shareholder's investment
will decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually
of either (a) the value, at the time the Plan is initiated, of the shares
then in the account or (b) the value, at the time of a withdrawal, of the
same number of shares as in the account when the Plan was initiated,
whichever is higher.
Expenses of the Plan are borne by the Fund. A participating shareholder
may withdraw from the Plan and the Fund may terminate the Plan at any time on
written notice. Purchase of additional shares while a shareholder is
receiving payments under a Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate
in the Investamatic Check Program and the Systematic Withdrawal Plan at the
same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all of
their dividends and any other distributions from the Fund or any Eligible
Fund
20
<PAGE>
automatically invested at net asset value in one other such Eligible Fund
designated by the shareholder, provided the account into which the dividends
and distributions are directed is initially funded with the requisite minimum
amount. The number of shares purchased will be determined as of the dividend
payment date. The Dividend Allocation Plan is subject to state securities law
requirements, to suspension at any time, and to such policies, limitations
and restrictions, as, for instance, may be applicable to street name or
master accounts, that may be adopted from time to time.
Automatic Bank Connection
A shareholder may elect, by participating in the Fund's Automatic Bank
Connection ("ABC"), to have dividends and other distributions, including
Systematic Withdrawal Plan payments, automatically deposited in the
shareholder's bank account by electronic funds transfer. Some contingent
deferred sales charges may apply. See "Systematic Withdrawal Plan" herein.
Reports
Reports for the Fund will be sent to shareholders of record at least
semiannually. These reports will include a list of the securities owned by
the Fund as well as the Fund's financial statements.
Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing the shareholder to make telephone redemptions
for amounts up to $50,000 to be mailed to the shareholder's address of
record is available automatically;
(2) The privilege allowing the shareholder or his or her dealer to make
telephone exchanges is available automatically;
(3) the privilege allowing the shareholder to make telephone redemptions
for amounts over $5,000, to be remitted by wire to the shareholder's
predesignated bank account, is available by election on the
Application accompanying this Prospectus. A current shareholder who
did not previously request such telephone wire privilege on his or her
original Application may request the privilege by completing a
Telephone Redemption-by-Wire Form which may be obtained by calling
1-800-562-0032. The Telephone Redemption-by-Wire Form requires a
signature guarantee; and
(4) the privilege allowing the shareholder to make telephone purchases or
redemptions, transmitted via the Automated Clearing House system, into
or from the shareholder's predesignated bank account, is available
upon completion of the requisite initial documentation. For details
and forms, call 1-800-562-0032. The documentation requires a signature
guarantee.
A shareholder may decline the automatic Telephone Privileges set forth in
(1) and (2) above by so indicating on the Application accompanying this
Prospectus.
A shareholder may discontinue any Telephone Privilege at any time by
advising Shareholder Services that the shareholder wishes to discontinue the
use of such privileges in the future.
Unless such Telephone Privileges are declined, a shareholder is deemed to
authorize Shareholder Services and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder to
redeem, or purporting to be the shareholder or the shareholder's dealer to
exchange, shares from any account; and (2) honor any written instructions for
a change of address regardless of whether such request is accompanied by a
signature guarantee. All telephone calls will be recorded. None of the Fund,
the other Eligible Funds, the Transfer Agent, the Investment Manager or the
Distributor will be liable for any loss, expense or cost arising out of any
request, including any fraudulent or unauthorized requests. Shareholders
assume the risk to the full extent of their accounts that telephone requests
may be unauthorized. Reasonable procedures will be followed to confirm that
instructions communicated by telephone are genuine. The shareholder will not
be liable for any losses arising from unauthorized or fraudulent instructions
if such procedures are not followed.
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<PAGE>
Shareholders may redeem or exchange shares by calling toll-free
1-800-562-0032. Although it is unlikely, during periods of extraordinary
market conditions, a shareholder may have difficulty in reaching Shareholder
Services at such telephone number. In that event, the shareholder should
contact Shareholder Services at 1-800-562-0032 or otherwise at its main
office at One Financial Center, Boston, Massachusetts 02111-2690.
Shareholder Account Inquiries:
Please call 1-800-562-0032
Call this number for assistance in answering general questions on your
account, including account balance, available shareholder services, statement
information and performance of the Fund. Account inquiries may also be made
in writing to State Street Research Shareholder Services, P.O. Box 8408,
Boston, Massachusetts 02266-8408. A fee of up to $10 will be charged against
an account for providing additional account transcripts or photocopies of
paid redemption checks or for researching records in response to special
requests.
Shareholder Telephone Transactions:
Please call 1-800-562-0032
Call this number for assistance in purchasing shares by wire and for
telephone redemptions or telephone exchange transactions. Shareholder
Services will require some form of personal identification prior to acting
upon instructions received by telephone. Written confirmation of each
transaction will be provided.
The Fund and its Shares
The Fund commenced operations in October 1993 as an additional series of
State Street Research Capital Trust, a Massachusetts business trust, formed
in 1988. The Fund was originally known as State Street Research Small
Capitalization Growth Fund and changed its name to State Street Research
Emerging Growth Fund in 1997. The Trustees have authorized shares of the Fund
to be issued in four classes: Class A, Class B, Class C and Class D. The
Trust is registered with the Securities and Exchange Commission under the
1940 Act as an open-end management investment company. The fiscal year end of
the Fund is September 30.
Except for those differences between the classes of shares described below
and elsewhere in the Prospectus, each share of the Fund has equal dividend,
redemption and liquidation rights with other shares of the Fund and when
issued is fully paid and nonassessable. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common usage of terms which may develop in the mutual fund
industry. For example, Class C shares may be redesignated as Class Y shares
and Class D shares may be redesignated as Class C shares. Any redesignation
would not affect any substantive rights respecting the shares.
Each share of each class of shares represents an identical legal interest
in the same portfolio of investments of the Fund, has the same rights and is
identical in all respects, except that Class A, Class B and Class D shares
bear the expenses of the deferred sales arrangement and any expenses
(including the higher service and distribution fees) resulting from such
sales arrangement, and certain other incremental expenses related to a class.
Each class will have exclusive voting rights with respect to provisions of
the Rule 12b-1 distribution plan pursuant to which the service and
distribution fees, if any, are paid. Although the legal rights of holders of
each class of shares are identical, it is likely that the different expenses
borne by each class will result in different net asset values and dividends.
The different classes of shares of the Fund also have different exchange
privileges.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have a material adverse effect on
the rights of any shareholder. On any matter submitted to the shareholders,
the holder of each Fund share is entitled to one vote per share (with
proportionate voting for fractional shares) regardless of the relative net
asset value thereof.
Under the Master Trust Agreement of the Trust, no annual or regular
meeting of shareholders is required. Thus, there will ordinarily be no
shareholder meetings unless required by the 1940 Act. Except as otherwise
provided under said Act, the Board of Trustees will be a self-perpetuating
body until fewer than two
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<PAGE>
thirds of the Trustees serving as such are Trustees who were elected by
shareholders of the Trust. In the event less than a majority of the Trustees
serving as such were elected by shareholders of the Trust, a meeting of
shareholders will be called to elect Trustees. Under the Master Trust
Agreement, any Trustee may be removed by vote of two thirds of the
outstanding Trust shares; holders of 10% or more of the outstanding Trust
shares can require that the Trustees call a meeting of shareholders for
purposes of voting on the removal of one or more Trustees. In connection with
such meetings called by shareholders, shareholders will be assisted in
shareholder communications to the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations of the
Trust. However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for
indemnification for all losses and expenses of any shareholder of the Fund
held personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund would be unable to meet its
obligations. The Investment Manager believes that, in view of the above, the
risk of personal liability to shareholders is remote.
Management of the Fund
Under the provisions of the Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees.
The Fund's investment manager is State Street Research & Management
Company. The Investment Manager is charged with the overall responsibility
for managing the investments and business affairs of the Fund, subject to the
authority of the Board of Trustees.
The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve as investment adviser to one of the nation's first
mutual funds, presently known as State Street Research Investment Trust,
which they had formed in 1924. Their investment management philosophy, which
continues to this day, emphasized comprehensive fundamental research and
analysis, including meetings with the management of companies under
consideration for investment. The Investment Manager's portfolio management
group has extensive investment industry experience managing equity and debt
securities. In managing debt securities, if any, for a portfolio, the
Investment Manager may consider yield curve positioning, sector rotation and
duration, among other factors.
The Investment Manager and the Distributor are indirect wholly owned
subsidiaries of Metropolitan Life Insurance Company, and both are located at
One Financial Center, Boston, Massachusetts 02111-2690.
Under its Advisory Agreement with the Trust, the Investment Manager
receives a monthly investment advisory fee equal to 0.75% (on an annual
basis) of the average daily value of the net assets of the Fund. Such fee is
higher than that charged by most mutual funds, but is believed by the
Trustees to be justified given the considerable analysis and research
necessary to manage the Fund in light of its investment objective and
policies. The Fund bears all costs of its operation other than those incurred
by the Investment Manager under the Advisory Agreement. In particular, the
Fund pays, among other expenses, investment advisory fees, certain
distribution expenses under the Fund's Distribution Plan and the compensation
and expenses of the Trustees who are not otherwise currently affiliated with
the Investment Manager or any of its affiliates. The Fund also incurs
expenses payable to various states in connection with the offer and sale of
the Fund's shares, and expenses for legal, custodian and transfer agent
services, among other costs. Under the Advisory Agreement, the Investment
Manager provides the Fund with office space, facilities and personnel. The
Investment Manager compensates Trustees of the Trust if such persons are
employees or affiliates of the Investment Manager or its affiliates.
The Fund is managed by Michael Carmen. Mr. Carmen has managed the Fund
since December 1996. His principal occupation currently is Vice President of
State Street Research & Management Company. During the past five years he has
also served as a
23
<PAGE>
portfolio manager at Montgomery Asset Management, and as an analyst at State
Street Research & Management Company. Mr. Carmen has investment discretion
over the entire portfolio of the Fund. The portfolio manager may use a team
approach on behalf of the Fund and delegate purchase and sale authority for
portions of the portfolio to other officers of the Investment Manager.
Subject to the policy of seeking best overall price and execution, sales
of shares of the Fund may be considered by the Investment Manager in the
selection of broker or dealer firms for the Fund's portfolio transactions.
The Investment Manager has a Code of Ethics governing personal securities
transactions of certain of its employees; see the Statement of Additional
Information.
Dividends and Distributions; Taxes
The Fund has qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code, although it cannot
give complete assurance that it will do so. As long as it so qualifies and
satisfies certain distribution requirements, it will not be subject to
federal income taxes on its income (including capital gains, if any)
distributed to its shareholders. Consequently, the Fund intends to distribute
annually to its shareholders substantially all of its net investment income
and any capital gain net income (capital gains net of capital losses).
The Fund declares dividends from net investment income and distributions
of net capital gains annually and pays such dividends and distributions, if
any, after year end or as otherwise required for compliance with applicable
tax regulations. Both dividends from net investment income and distributions
of capital gain net income will be declared and paid to shareholders in
additional shares of the Fund at net asset value on the record date of that
dividend or distribution, except in the case of shareholders who elect a
different available distribution method.
The Fund will provide its shareholders of record with annual information
on a timely basis concerning the federal tax status of dividends and
distributions during the preceding calendar year.
Dividends paid by the Fund from taxable net investment income and
distributions of net short-term capital gains, whether paid in cash or
reinvested in additional shares, will be taxable for federal income tax
purposes to shareholders as ordinary income, and a portion may be eligible
for the 70% dividends-received deduction for corporations. The percentage of
the Fund's dividends eligible for such tax treatment may be less than 100% to
the extent that less than 100% of the Fund's gross income consists of
qualifying dividends of domestic corporations. Distributions of net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) which are designated as capital gains distributions, whether paid in
cash or reinvested in additional shares, will be taxable for federal income
tax purposes to shareholders as long-term capital gains, regardless of how
long shareholders have held their shares, and are not eligible for the
dividends-received deduction. If shares of the Fund which are sold at a loss
have been held six months or less, the loss will be considered as a long-term
capital loss to the extent of any capital gains distributions received.
Dividends and other distributions and proceeds of redemptions of Fund
shares paid to individuals and other nonexempt payees will be subject to a
31% federal backup withholding tax if State Street Bank and Trust Company,
the Fund's transfer agent, is not provided with the shareholder's correct
taxpayer identification number and certification that the shareholder is not
subject to such backup withholding.
The foregoing discussion relates only to generally applicable federal
income tax provisions in effect as of the date of this Prospectus. Therefore,
prospective shareholders are urged to consult their own tax advisers
regarding tax matters, including state and local tax consequences.
Calculation of Performance Data
From time to time, in advertisements or in communications to shareholders or
prospective investors, the Fund may compare the performance of its Class A,
Class B, Class C and Class D shares to that of other mutual funds with
similar investment objectives, to certificates of deposit and/or to other
financial alternatives. The Fund may also compare its performance
24
<PAGE>
to appropriate indices such as the NASDAQ Composite Average, Small Stock
Index, Russell 2000 Index, Russell 2000 Growth Index, Standard & Poor's 500
Stock Index (the "S&P 500"), Consumer Price Index and Dow Jones Industrial
Average and/or to appropriate rankings and averages, such as the Lipper Small
Company Growth Funds average, compiled by Lipper Analytical Services, Inc.,
or to those compiled by Morningstar, Inc., Money Magazine, Business Week,
Forbes Magazine, the Wall Street Journal and Investor's Daily.
Total return is computed separately for each class of shares of the Fund.
The average annual total return ("standard total return") for shares of the
Fund is computed by determining the average annual compounded rate of return
for a designated historical period as applied to a hypothetical $1,000
initial investment, which is redeemed in total at the end of such period. In
making the calculation, all dividends and distributions are assumed to be
reinvested, and all recurring expenses, including management and distribution
fees, are recognized. The calculation also reflects the highest applicable
initial or contingent deferred sales charge, determined as of the assumed
date of initial investment or the assumed date of redemption, as the case may
be. Standard total return will be calculated for the periods specified in
applicable regulations and may be accompanied by nonstandard total return
information for differing periods computed in the same manner with or without
annualizing the total return or taking sales charges into account.
The standard total return results take sales charges into account, if
applicable, but do not take into account recurring and nonrecurring charges
for optional services which only certain shareholders elect and which involve
nominal fees, such as the $7.50 fee for remittance of redemption proceeds by
wire. Where sales charges are not applicable and therefore not taken into
account in the calculation of standard total return, the results will be
increased. Any voluntary waiver of management fees or assumption of expenses
by the Fund's affiliates will also increase performance results.
Performance information may be useful in evaluating the Fund and for
providing a basis for comparison with other financial alternatives. Since the
performance of the Fund varies in response to fluctuations in economic and
market conditions, interest rates and Fund expenses, among other things, no
performance quotation should be considered a representation as to the Fund's
performance for any future period. In addition, the net asset value of shares
of the Fund will fluctuate, with the result that shares of the Fund, when
redeemed, may be worth more or less than their original cost. Neither an
investment in the Fund nor the Fund's performance is insured or guaranteed;
such lack of insurance or guarantees should accordingly be given appropriate
consideration when comparing the Fund to financial alternatives which have
such features.
Shares of the Fund had no class designations until February 1, 1994, when
designations were assigned based on the pricing and Rule 12b-1 fees
applicable to shares sold thereafter. Performance data for a specified class
includes periods prior to the adoption of class designations. Performance
data for periods prior to February 1, 1994 do not reflect additional Rule
12b-1 Distribution Plan fees, if any, of up to 1% per year depending on the
class of shares, which will adversely affect performance results for periods
after such date. Performance data or rankings for a given class of shares
should be interpreted carefully by investors who hold or may invest in a
different class of shares.
25
<PAGE>
State Street Research
Aurora Fund
Prospectus
February 1, 1997
The investment objective of State Street Research Aurora Fund (the "Fund")
is to provide high total return consisting principally of capital
appreciation. In seeking to achieve its investment objective, the Fund
invests primarily in the equity securities of small capitalization companies
which are trading at prices believed to be below the true values of such
securities. For further information, see "The Fund's Investments."
State Street Research & Management Company (the "Investment Manager")
serves as investment adviser to the Fund. As of November 30, 1996, the
Investment Manager had assets of approximately $42.5 billion under
management. State Street Research Investment Services, Inc. serves as
distributor (the "Distributor") for the Fund.
Shareholders may have their shares redeemed directly by the Fund at net
asset value plus the applicable contingent deferred sales charge, if any;
redemptions processed through securities dealers may be subject to processing
charges.
There are risks in any investment program, including the risk of changing
economic and market conditions, and there is no assurance that the Fund will
achieve its investment objective. The net asset value of the Fund's shares
fluctuates as market conditions change.
Because of the Fund's investment policies, the Fund is subject to
above-average risks; it may invest substantial amounts in foreign securities
and special situation companies and have a high portfolio turnover rate. The
Fund generally is designed for investors who want an aggressive investment
and can tolerate volatility and possible losses. An investment in the Fund
should be part of a balanced investment program which includes more
conservative investments. For further information, see "The Fund's
Investments--Other Investments and Risk Considerations." In addition, the
Fund may suspend the offering of its shares at any time because of the
limited availability of investments which meet the Fund's investment
parameters.
This Prospectus sets forth concisely the information a prospective
investor ought to know about the Fund before investing. It should be retained
for future reference. A Statement of Additional Information about the Fund
dated February 1, 1997 has been filed with the Securities and Exchange
Commission and is incorporated by reference into this Prospectus. It is
available at no charge upon request to the Fund at the address indicated on
the cover or by calling 1-800-562-0032.
The Fund is a diversified series of State Street Research Capital Trust
(the "Trust"), an open-end management investment company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION 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 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.
Table of Contents Page
Table of Expenses 2
Financial Highlights 4
The Fund's Investments 5
Limiting Investment Risk 8
Purchase of Shares 9
Redemption of Shares 17
Shareholder Services 19
The Fund and its Shares 23
Management of the Fund 24
Dividends and Distributions; Taxes 25
Calculation of Performance Data 25
<PAGE>
The Fund offers four classes of shares which may be purchased at the next
determined net asset value per share plus, in the case of all classes except
Class C shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5%
and (ii) an annual service fee of 0.25% of the average daily net asset value
of the Class A shares.
Class B shares are subject (i) to a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made
within five years of purchase and (ii) annual distribution and service fees
of 1% of the average daily net asset value of such shares. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after purchase. No contingent deferred sales charge
applies after the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and
large institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1%
if redeemed within one year following purchase and (ii) annual distribution
and service fees of 1% of the average daily net asset value of such shares.
Table of Expenses
<TABLE>
<CAPTION>
Class A Class B Class C Class D
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses(1)
Maximum Sales Charge Imposed on Purchases
(as 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 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
</TABLE>
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
thereafter and no contingent deferred sales charge is imposed after the
fifth year. Class D shares are subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the
sale. Long-term investors in 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. See "Purchase of
Shares."
(2) Purchases of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption.
See "Purchase of Shares."
2
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C Class D
--------- --------- -------------------
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses (as a percentage
of average net assets)
Management Fees 0.85% 0.85% 0.85% 0.85%
12b-1 Fees 0.25% 1.00% None 1.00%
Other Expenses 2.92% 2.92% 2.92% 2.92%
Less Voluntary Reduction (2.57%) (2.57%) (2.57%) (2.57%)
--------- --------- -------------------
Total Fund Operating Expenses
(after voluntary reduction) 1.45% 2.20% 1.20% 2.20%
========= ========= ===================
</TABLE>
Example:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment including,
for Class A shares, the maximum applicable initial sales charge and
assuming (1) 5% annual return and (2) redemption of the entire
investment at the end of each time period:
Class A shares $59 $89 $121 $211
Class B shares $72 $99 $138 $234
Class C shares $12 $38 $ 66 $145
Class D shares $32 $69 $118 $253
You would pay the following expenses on the same investment, assuming no
redemption:
Class B shares $22 $69 $118 $234
Class D shares $22 $69 $118 $253
</TABLE>
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than
shown.
The purpose of the table above is to assist the investor in understanding
the various costs and expenses that an investor will bear directly or
indirectly. The percentage expense levels shown in the table are based on
experience with expenses for the fiscal year ended September 30, 1996; actual
expense levels for the current fiscal year and future years may vary from the
amounts shown. The table does not reflect charges for optional services elected
by certain shareholders, such as the $7.50 fee for remittance of redemption
proceeds by wire. For further information on sales charges, see "Purchase of
Shares--Alternative Purchase Program"; for further information on management
fees, see "Management of the Fund"; and for further information on 12b-1 fees,
see "Purchase of Shares--Distribution Plan."
The Fund has been advised that the Distributor and its affiliates may from
time to time and in varying amounts voluntarily assume some portion of fees
or expenses relating to the Fund. The Fund presently expects such assistance
to be provided for the next 12 months or until the Fund's net assets reach
$100 million, whichever first occurs. However, the Fund has not received any
firm commitment that such assistance will in fact be provided.
For the fiscal year ended September 30, 1996, Total Fund Operating
Expenses as a percentage of average net assets of Class A, Class B, Class C
and Class D shares of the Fund would have been 3.51%, 4.88%, 4.36% and 4.88%,
respectively, in the absence of the voluntary assumption of fees or expenses
by the Distributor and its affiliates, which amounted to 2.06%, 2.68%, 3.16%
and 2.68%, respectively. The amount of fees or expenses assumed during the
fiscal year ended September 30, 1996, differed among classes because of
fluctuations during the year in relative levels of assets in each class and
in expenses before reimbursement.
3
<PAGE>
Financial Highlights
The data set forth below has been examined by Coopers & Lybrand L.L.P.,
independent accountants, and their report thereon is included in the
Statement of Additional Information. For further information about the
performance of the Fund, see "Financial Statements" in the Statement of
Additional Information.
<TABLE>
<CAPTION>
Class A Class B
----------------------------------- ------------------------------------
February 13, 1995 February 13, 1995
Year ended (Commencement Year ended (Commencement
September 30, of Operations) to September 30, of Operations) to
1996** September 30, 1995 1996** September 30, 1995
--------------------------------------------------- ---------------------------------- --------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 11.13 $ 9.55 $ 11.08 $ 9.55
Net investment income (loss)* (0.06) 0.07 (0.17) 0.02
Net realized and unrealized gain on
investments 4.66 1.51 4.65 1.51
Dividend from net investment income (0.09) -- (0.04) --
Distribution from net realized gains (0.50) -- (0.50) --
--------------- ---------------------------------- --------------------
Net asset value, end of year $ 15.14 $11.13 $ 15.02 $11.08
=============== ================================== ====================
Total return 43.63%+ 16.54%+++ 42.52%+ 16.02%+++
Net assets at end of year (000s) $ 1,110 $5,782 $ 165 $ 116
Ratio of operating expenses to
average net assets* 1.45% 1.45%++ 2.20% 2.20%++
Ratio of net investment income
(loss) to average net assets* (0.56)% 1.05%++ (1.38)% 0.32%++
Portfolio turnover rate 124.79% 47.34% 124.79% 47.34%
Average commission rate@ $ .0174 -- $ .0174 --
*Reflects voluntary assumption of
fees or expenses per share in
each year $ 0.32 $ 0.15 $ 0.32 $ 0.15
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
----------------------------------- ------------------------------------
February 13, 1995 February 13, 1995
Year ended (Commencement Year ended (Commencement
September 30, of Operations) to September 30, of Operations) to
1996** September 30, 1995 1996** September 30, 1995
--------------------------------------------------- ---------------------------------- --------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 11.15 $ 9.55 $ 11.08 $ 9.55
Net investment income (loss)* (0.06) 0.09 (0.17) 0.02
Net realized and unrealized gain on
investments 4.70 1.51 4.65 1.51
Dividend from net investment income (0.11) -- (0.04) --
Distribution from net realized gains (0.50) -- (0.50) --
--------------- ---------------------------------- --------------------
Net asset value, end of year $ 15.18 $11.15 $ 15.02 $11.08
=============== ================================== ====================
Total return 43.95%+ 16.75%+++ 42.52%+ 16.02%+++
Net assets at end of year (000s) $ 7,752 $ 117 $ 165 $ 116
Ratio of operating expenses to
average net assets* 1.20% 1.20%++ 2.20% 2.20%++
Ratio of net investment income
(loss) to average net assets* (0.43)% 1.32%++ (1.38)% 0.32%++
Portfolio turnover rate 124.79% 47.34% 124.79% 47.34%
Average commission rate@ $ .0174 -- $ .0174 --
*Reflects voluntary assumption of
fees or expenses per share in each
year $ 0.32 $ 0.15 $ 0.32 $ 0.15
</TABLE>
++ Annualized.
** Per-share figures have been calculated using the average shares method.
+ Total return figures do no 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.
@ Average commission rate per share paid for security trades for fiscal
years beginning on or after October 1, 1995.
4
<PAGE>
The Fund's Investments
The Fund's investment objective is to provide high total return consisting
principally of capital appreciation. The investment objective is a
fundamental policy that may not be changed without approval of the Fund's
shareholders.
In seeking to achieve its investment objective, the Fund invests at least
65% of its total assets under normal circumstances in the equity securities
of small capitalization companies which are trading at prices believed by the
Investment Manager to be below the true values of such securities. A
company's market capitalization is the total market value of its publicly
traded equity securities. The Fund currently invests in companies with market
capitalizations of up to $1 billion, although this figure may fluctuate over
time because of market conditions, inflation, etc. While a company's market
capitalization may be small at the time the Fund first invests in the
company, the Fund may continue to hold and acquire shares of a company after
its market capitalization increases. The definition of a "small
capitalization company" may be revised by the Investment Manager from time to
time.
In selecting investments, the Investment Manager considers a variety of
factors, any one or more of which may be determinative. These include a
company's expected growth in earnings, relative financial condition and cash
flow, competitive position, management and business strategy, overall
potential as an enterprise, entrepreneurial character, and new or innovative
products, services or processes. In assessing a security's value in
comparison to its current price the Investment Manager analyzes such
measurements as price to earnings ratio, price to cash flow ratio, price to
book value ratio, price to replacement cost ratio and price to private market
value ratio.
The equity securities in which the Fund will invest consist of common and
preferred stocks, convertible securities (e.g., preferred stock, bonds and
debentures) and warrants. Preferred stocks are stocks which have preferences,
such as payment of dividends, over common stocks; debentures are debt
securities subject to protective covenants such as the maintenance of minimum
financial conditions; convertible securities are securities which may be
converted into different securities, such as a preferred stock being
converted into a common stock; and warrants are rights to acquire other
securities. The Fund anticipates that more than half of the total value, at
the time of investment, of the equity securities held by the Fund will be
included on the National Association of Securities Dealers Automated
Quotation ("NASDAQ") system or listed on a major securities exchange.
Under normal circumstances, the Fund expects to be fully invested in equity
securities as described above. However, the Fund may, consistent with its
investment objective, also invest at any time up to 35% of its total assets in
other equity and debt securities, such as those issued by larger capitalization,
more mature, or special situation companies, and U.S. Government securities. A
special situation company is one which, because of unique circumstances such as,
for example, a particular business niche it fills, is an attractive investment
even though it is not a small capitalization issuer. The Fund will generally
purchase investment grade debt securities (i.e., rated at the time of purchase
within the AAA, AA, A or BBB categories by Standard & Poor's Corporation ("S&P")
or Aaa, Aa, A or Baa categories by Moody's Investors Service, Inc. ("Moody's")),
or securities that are not rated but considered by the Investment Manager to be
of equivalent investment quality; bonds rated Baa by Moody's, or equivalent, may
have speculative characteristics. The Fund may, however, invest up to 5% of its
total assets in debt securities rated as low as C by S&P and Moody's. The debt
securities, which may have differing maturities and fixed or floating interest
rates, generally will be U.S. Government securities or issued by larger
capitalization issuers. For more information on debt ratings and the risks of
lower rated debt securities, see the Statement of Additional Information.
Because the Fund invests primarily in small capitalization companies, an
investment in the Fund involves greater than average risks and the value of
the Fund's shares may fluctuate more widely than the value of shares of a
fund that invests in larger, more established companies. Securities held by
the Fund, particularly those traded over-the-counter, may have limited
marketability and may be subject to more
5
<PAGE>
abrupt or erratic market movements over time than securities of larger, more
seasoned companies or the market as a whole. The issuers of over-the-counter
securities may have limited product lines, markets and financial resources,
may be dependent on entrepreneurial management, typically reinvest most of
their net income in the enterprise and typically do not pay dividends.
Other Investments and Risk Considerations
Foreign Investments
The Fund reserves the right to invest without limitation in securities of
non-U.S. issuers directly, or indirectly in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Under current
policy, however, the Fund limits such investments, including ADRs and EDRs,
to a maximum of 35% of its total assets.
ADRs are receipts, typically issued by a U.S. bank or trust company, which
evidence ownership of underlying securities issued by a foreign corporation
or other entity. EDRs are receipts issued in Europe which evidence a similar
ownership arrangement. Generally, ADRs in registered form are designed for
use in U.S. securities markets and EDRs are designed for use in European
securities markets. The underlying securities are not always denominated in
the same currency as the ADRs or EDRs. Although investment in the form of
ADRs or EDRs facilitates trading in foreign securities, it does not mitigate
all the risks associated with investing in foreign securities.
ADRs are available through facilities which may be either "sponsored" or
"unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and usually agrees to
provide shareholder communications. In an unsponsored arrangement, the
foreign issuer is not involved, and the ADR holders pay the fees of the
depository. Sponsored ADRs are generally more advantageous to the ADR holders
and the issuer than are unsponsored ADRs. More and higher fees are generally
charged in an unsponsored program compared to a sponsored facility. Only
sponsored ADRs may be listed on the New York or American Stock Exchanges.
Unsponsored ADRs may prove to be more risky due to (a) the additional costs
involved to the Fund; (b) the relative illiquidity of the issue in U.S.
markets; and (c) the possibility of higher trading costs in the
over-the-counter market as opposed to exchange-based trading. The Fund will
take these and other risk considerations into account before making an
investment in an unsponsored ADR.
The risks associated with investments in foreign securities include those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks
of nationalization or expropriation, the possible imposition of currency
exchange blockages, higher operating expenses, foreign withholding and other
taxes which may reduce investment return, reduced availability of public
information concerning issuers and the fact that foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to
those applicable to domestic issuers. Moreover, securities of many foreign
issuers may be less liquid and their prices more volatile than those of
securities of comparable domestic issuers.
It is anticipated that most of the foreign investments of the Fund will
consist of securities of issuers in countries with developed economies.
However, the Fund may also invest in the securities of issuers in countries
with less developed economies as deemed appropriate by the Investment
Manager, although the Fund does not presently expect to invest more than 5%
of its total assets in issuers in such less developed countries. Such
countries include countries that have an emerging stock market that trades a
small number of securities; countries with low- to middle-income economies;
and/or countries with economies that are based on only a few industries.
Eastern European countries are considered to have less developed capital
markets.
For further information regarding foreign investments, see the Statement
of Additional Information.
Currency Transactions
In order to protect against the effect of uncertain future exchange rates on
securities denominated in
6
<PAGE>
foreign currencies, the Fund may engage in currency exchange transactions
either on a spot (i.e., cash) basis at the rate prevailing in the currency
exchange market or by entering into forward contracts to purchase or sell
currencies. Although such contracts tend to minimize the risk of loss
resulting from a correctly predicted decline in value of hedged currency,
they tend to limit any potential gain that might result should the value of
such currency increase. In entering a forward currency transaction, the Fund
is dependent upon the creditworthiness and good faith of the counterparty.
The Fund attempts to reduce the risks of nonperformance by the counterparty
by dealing only with established, large institutions with which the
Investment Manager has done substantial business in the past. For further
information, see the Statement of Additional Information.
Other Investment Policies
The Fund may lend portfolio securities with a value of up to 33-1/3% of its
total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of
the current market value of the loaned securities plus accrued interest.
Collateral received by the Fund will generally be held in the form tendered,
although cash may be invested in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, irrevocable stand-by letters
of credit issued by a bank, or any combination thereof. The investing of cash
collateral received from loaning portfolio securities involves leverage which
magnifies the potential for gain or loss on monies invested and, therefore,
results in an increase in the volatility of the Fund's outstanding
securities. Such loans may be terminated at any time.
The Fund will retain most rights of ownership including rights to
dividends, interest or other distributions on the loaned securities. Voting
rights pass with the lending, although the Fund may call loans to vote
proxies if desired. Should the borrower of the securities fail financially,
there is a risk of delay in recovery of the securities or loss of rights in
the collateral. Loans are made only to borrowers which are deemed by the
Investment Manager to be of good financial standing.
The Fund may, subject to certain percentage limitations below, buy and
sell options, futures contracts and options on futures contracts on
securities, securities indices and currencies; such instruments are commonly
known as derivatives because they derive their value from underlying assets,
such as the securities on which they are based. The Fund may not establish a
position in a commodity futures contract or purchase or sell a commodity
option contract for other than bona fide hedging purposes if immediately
thereafter the sum of the amount of initial margin deposits and premiums
required to establish such derivative positions for nonhedging purposes would
exceed 5% of the market value of the Fund's net assets; similar policies
apply to options which are not commodities. The Fund may also invest in
derivatives through various forms of swap arrangements, which have
simultaneously the characteristics of a security and a futures contract,
although the Fund does not presently expect to invest more than 5% of its
total assets in such derivatives. These swap arrangements include interest
rate swaps, currency swaps and index swaps. For a more detailed discussion of
derivatives, see the Statement of Additional Information. The Fund may also
enter into repurchase agreements, reverse repurchase agreements and purchase
securities on a "when-issued" or forward commitment basis. See the Statement
of Additional Information.
The Fund may invest in restricted securities in accordance with Rule 144A
under the Securities Act of 1933, which allows for the resale of such
securities among certain qualified institutional buyers. Because the market
for such securities is still developing, such securities could possibly
become illiquid in particular circumstances. See the Statement of Additional
Information.
The Fund reserves full freedom with respect to portfolio turnover. In
periods when there are rapid changes in economic conditions or security price
levels or when investment strategy changes significantly, portfolio turnover
may be higher than during times of economic and market price stability or
when investment strategy remains relatively constant. An actual portfolio
turnover rate of 100% or more may result in greater transaction costs,
relative to other funds in
7
<PAGE>
general, and may have tax and other consequences as well. See the Statement
of Additional Information.
Limiting Investment Risk
In seeking to lessen investment risk, the Fund operates under certain
fundamental and nonfundamental investment restrictions. Under the fundamental
investment restrictions, the Fund may not (a) purchase a security of any one
issuer (other than securities issued or guaranteed as to principal or
interest by the U.S. Government or its agencies or instrumentalities or
mixed-ownership Government corporations), if such purchase would, with
respect to 75% of the Fund's total assets, cause more than 5% of the Fund's
total assets to be invested in the securities of such issuer or cause more
than 10% of the voting securities of such issuer to be held by the Fund; or
(b) invest more than 25% of the Fund's total assets in securities of issuers
principally engaged in any one industry as set forth in the Statement of
Additional Information.
The foregoing fundamental investment restrictions may not be changed
except by vote of the holders of a majority of the outstanding voting
securities of the Fund. The vote of a majority of the outstanding voting
securities of the Fund means the vote (A) of 67 per centum or more of the
voting securities present at a meeting, if the holders of more than 50 per
centum of the outstanding voting securities of the Fund are present or
represented by proxy; or (B) of more than 50 per centum of the outstanding
voting securities of the Fund, whichever is less.
Under the nonfundamental investment restrictions, the Fund may not invest
more than 15% of the Fund's total assets in illiquid securities including
repurchase agreements extending for more than seven days and may not invest
more than 5% of the Fund's total assets in restricted securities excluding
securities eligible for resale under Rule 144A under the Securities Act of
1933. Although many illiquid securities may also be restricted, and vice
versa, compliance with each of these policies will be determined
independently. The foregoing nonfundamental investment restriction may be
changed without a shareholder vote.
For further information on the above and other fundamental and
nonfundamental investment restrictions, see the Statement of Additional
Information.
The Fund may hold up to 100% of its assets in cash or certain short-term
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Investment Manager, such a
position is more likely to provide protection against adverse market
conditions. To the extent that the Fund's assets are held in a temporary
defensive position, the Fund will not be achieving its investment objective.
The types of short-term instruments in which the Fund may invest for such
purposes are, as more fully described in the Statement of Additional
Information: U.S. Government securities (including STRIPS, as defined below),
custodial receipts, certificates of deposit, time deposits and bankers'
acceptances of certain qualified financial institutions and corporate
commercial paper rated at least "A" by S&P or "Prime" by Moody's (or, if not
rated, issued by companies having an outstanding unsecured debt issue rated
at least "A" by S&P or Moody's). Under the Separate Trading of Registered
Interest and Principal of Securities ("STRIPS") program, the principal and
interest components of selected U.S. Government securities are traded
independently. Custodial receipts are instruments that evidence ownership of
future interest payments, principal payments or both on certain U.S. Treasury
notes or bonds and are known by various names, including "Treasury Investment
Growth Receipts" ("TIGRs") and "Certificates of Accrual on Treasury
Securities" ("CATS"). See the Statement of Additional Information.
8
<PAGE>
Information on the Purchase of Shares, Redemption of Shares and Shareholder
Services is set forth on pages 9 to 23 below.
The Fund is available for investment by many kinds of investors including
participants investing through 401(k) or other retirement plan sponsors,
employees investing through savings plans sponsored by employers, Individual
Retirement Accounts ("IRAs"), trusts, corporations, individuals, etc. The
applicability of the general information and administrative procedures set
forth below accordingly will vary depending on the investor and the
recordkeeping system established for a shareholder's investment in the Fund.
Participants in 401(k) and other plans should first consult with the
appropriate person at their employer or refer to the plan materials before
following any of the procedures below. For more information or assistance,
anyone may call 1-800-562-0032.
Purchase of Shares
Methods of Purchase
Through Dealers and Others
Shares of the Fund are continuously offered through securities dealers,
financial institutions and others (collectively referred to herein as
securities dealers or dealers) who have entered into sales agreements with
the Distributor. Purchases through dealers are confirmed at the offering
price, which is the net asset value plus the applicable sales charge, next
determined after the order is duly received by State Street Research
Shareholder Services ("Shareholder Services"), a division of State Street
Research Investment Services, Inc., from the dealer. ("Duly received" for
purposes herein means in accordance with the conditions of the applicable
method of purchase as described below.) The dealer is responsible for
transmitting the order promptly to Shareholder Services in order to permit
the investor to obtain the current price. See "Purchase of Shares--Net Asset
Value" herein.
By Mail
Initial investments in the Fund may be made by mailing or delivering to the
investor's dealer a completed Application (accompanying this Prospectus),
together with a check for the total purchase price payable to the Fund. The
dealer must forward the Application and check in accordance with the
instructions on the Application. Additional shares may be purchased by
mailing to Shareholder Services a check payable to the Fund in the amount of
the total purchase price together with any one of the following: (i) an
Application; (ii) the stub from the shareholder's account statement; or (iii)
a letter setting forth the name of the Fund, the class of shares and the
account name and number. Shareholder Services will deliver the purchase order
to the transfer agent and dividend paying agent, State Street Bank and Trust
Company (the "Transfer Agent").
If the check is not honored for its full amount, the purchaser could be
subject to additional charges to cover collection costs and any investment
loss, and the purchase may be cancelled.
By Wire
An investor may purchase shares by wiring Federal Funds of not less than
$25,000 to State Street Bank and Trust Company, which also serves as the
Trust's custodian (the "Custodian"), as set forth below. Prior to making an
investment by wire, an investor must notify Shareholder Services at
1-800-562-0032 and obtain a control number and instructions. Following such
notification, Federal Funds should be wired through the Federal Reserve
System to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF = State Street Research Aurora Fund and class of shares (A, B, C or D)
AC = 99029761
OBI = Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street
Research Shareholder Services)
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make
such investment by 12 noon Boston time on the day of his or
9
<PAGE>
her investment; and (ii) the wire must be received by 4 P.M. Boston time that
same day.
An investor making an initial investment by wire must promptly complete
the Application accompanying this Prospectus and deliver it to his or her
dealer, who should forward it as required. No redemptions will be effected
until the Application has been duly processed.
The Fund may in its discretion discontinue, suspend or change the practice
of accepting orders by any of the methods described above. Orders for the
purchase of shares are subject to acceptance by the Fund. The Fund reserves
the right to suspend the sale of shares, or to reject any purchase order,
including orders in connection with exchanges, for any reason.
Minimum Investment
<TABLE>
<CAPTION>
Class of Shares
--------------------------------------
A B C D
--------- --------- ---------------
<S> <C> <C> <C> <C>
Minimum Initial Investment
By Wire $25,000 $25,000 (a) $25,000
IRAs $ 2,000 $ 2,000 (a) $ 2,000
By Investamatic $10,000 $10,000 (a) $10,000
All other $25,000 $25,000 (a) $25,000
Minimum Subsequent Investment
By Wire $ 5,000 $ 5,000 (a) $ 5,000
IRAs $ 1,000 $ 1,000 (a) $ 1,000
By Investamatic $ 50 $ 50 (a) $ 50
All other $ 50 $ 50 (a) $ 50
</TABLE>
(a) Special conditions apply; contact the Distributor.
The Fund reserves the right to vary the minimums for initial or subsequent
investments as in the case of, for example, exchanges and investments under
various retirement and employee benefit plans, sponsored arrangements
involving group solicitations of the members of an organization, or other
investment plans for reinvestment of dividends and distributions or for
periodic investments (e.g., Investamatic Program).
Alternative Purchase Program
General
Alternative classes of shares permit investors to select a purchase program
which they believe will be the most advantageous for them, given the amount
of their purchase, the length of time they anticipate holding Fund shares, or
the flexibility they desire in this regard, and other relevant circumstances.
Investors will be able to determine whether in their particular circumstances
it is more advantageous to incur an initial sales charge and not be subject
to certain ongoing charges or to have their entire initial purchase price
invested in the Fund with the investment being subject thereafter to ongoing
service fees and distribution fees.
As described in greater detail below, dealers are paid differing amounts
of commissions and other compensation depending on which class of shares they
sell.
10
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
------------------------ ----------------------- ------------ -----------------------
<S> <C> <C> <C> <C>
Sales Charges Initial sales Contingent deferred None Contingent deferred
charge at time of sales charge of 5% sales charge of 1%
investment of up to 2% applies to applies to any shares
to 4.5% depending any shares redeemed redeemed within one
on amount of within first five years year following
investment following their their purchase
purchase; no
contingent deferred
sales charge
after five years
On investments of
$1 million or more, no
initial sales charge;
but contingent
deferred sales
charge of 1% applies
to any shares
redeemed within
one year following
their purchase
Distribution Fee None 0.75% for first None 0.75% each year
eight years;
Class B shares
convert auto-
matically to
Class A shares
after eight years
Service Fee 0.25% each year 0.25% each year None 0.25% each year
Initial Commission Above described 4% None 1%
Received by Selling initial sales charge
Dealers less 0.25% to 0.50%
retained by
Distributor
On investments of
$1 million or more,
0.25% to 1% paid
to dealer by
Distributor
</TABLE>
11
<PAGE>
In deciding which class of shares to purchase, the investor should
consider the amount of the investment, the length of time the investment is
expected to be held, and the ongoing service fee and distribution fee, among
other factors.
Class A shares are sold at net asset value plus an initial sales charge of
up to 4.5% of the public offering price. Because of the sales charge, not all
of an investor's purchase amount is invested unless the purchase equals
$1,000,000 or more. Class B shareholders pay no initial sales charge, but a
contingent deferred sales charge of up to 5% generally applies to shares
redeemed within five years of purchase. Class D shareholders also pay no
initial sales charge, but a contingent deferred sales charge of 1% generally
applies to redemptions made within one year of purchase. For Class B and
Class D shareholders, therefore, the entire purchase amount is immediately
invested in the Fund.
An investor who qualifies for a significantly reduced initial sales
charge, or a complete waiver of the sales charge on investments of $1,000,000
or more, on the purchase of Class A shares might elect that option to take
advantage of the lower ongoing service and distribution fees that
characterize Class A shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. Class B shares are assessed an annual
distribution fee of 0.75% of daily net assets for an eight-year period
following the date of purchase and are then automatically converted to Class
A shares. Class D shares are assessed an annual distribution fee of 0.75% of
daily net assets for as long as the shares are held. The prospective investor
should consider these fees plus the initial or contingent deferred sales
charges in estimating the costs of investing in the various classes of Fund
shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are allocated to dealers (see
"Distribution Plan" below). In addition, the Distributor will, at its
expense, provide additional cash and noncash incentives to dealers that sell
shares. Such incentives may be extended only to those dealers who have sold
or may sell significant amounts of shares and/or meet other conditions
established by the Distributor; for example, the Distributor may sponsor
special promotions to develop particular distribution channels or to reach
certain investor groups. The Distributor may also compensate those dealers
with clients who maintain their investments in a Fund over a period of years.
The incentives may include merchandise and trips to and attendance at sales
seminars at resorts.
Class A Shares--Initial Sales Charges
Sales Charges
The purchase price of a Class A share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar
amount of the shares purchased as set forth in the table below. A major
portion of this sales charge is reallowed by the Distributor to the dealer
responsible for the sale.
<TABLE>
<CAPTION>
Sales Sales
Charge Charge
Paid by Paid by Dealer
Investor Investor Concession
Dollar Amount As % of As % of As % of
of Purchase Purchase Net Asset Purchase
Transaction Price Value Price
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 or above but
less than $250,000 3.50% 3.63% 3.00%
$250,000 or above but
less than $500,000 2.50% 2.56% 2.00%
$500,000 or above but
less than
$1 million 2.00% 2.04% 1.75%
$1 million and above See following
0% 0% discussion
</TABLE>
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized dealer a
commission based on the aggregate of such sales as follows:
12
<PAGE>
<TABLE>
<CAPTION>
Amount of Sale Commission
------------------------------- -------------
<S> <C>
(a) $1 million to $3 million 1.00%
(b) Next $2 million 0.50%
(c) Amount over $5 million 0.25%
</TABLE>
On such sales of $1,000,000 or more, unless the above commission is waived
by the dealer, the investor is subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the sale.
However, such redeemed shares will not be subject to the contingent deferred
sales charge to the extent that their value represents (1) capital
appreciation or (2) reinvestment of dividends or capital gains distributions.
In addition, the contingent deferred sales charge will be waived for certain
other redemptions as described under "Contingent Deferred Sales Charge
Waivers" below (as otherwise applicable to Class B shares).
Class A shares of the Fund that are purchased without a sales charge may
be exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption
within one year of the Class A shares which are acquired through such
exchange. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any contingent
deferred sales charge will be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement
of Additional Information, of $100,000 or more of Class A shares of the Fund
or a combination of "Eligible Funds." "Eligible Funds" include the Fund and
other funds so designated by the Distributor from time to time. Class B,
Class C and Class D shares may also be included in the combination under
certain circumstances. Securities dealers should call Shareholder Services
for details concerning the other Eligible Funds and any persons who may
qualify for reduced sales charges and related information. See the Statement
of Additional Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A
shares of the Fund and any other Eligible Funds within a 13-month period.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances. Additional information on a Letter of Intent is
available from dealers, or from the Distributor, and also appears in the
Statement of Additional Information.
Right of Accumulation
Investors may purchase Class A shares of the Fund or a combination of shares
of the Fund and other Eligible Funds at reduced sales charges pursuant to a
Right of Accumulation. Under the Right of Accumulation, the sales charge is
determined by combining the current purchase with the value of the Class A
shares of other Eligible Funds held at the time of purchase. Class B, Class C
and Class D shares may also be included in the combination under certain
circumstances. See the Statement of Additional Information and call
Shareholder Services for details concerning the Right of Accumulation.
Other Programs
Class A shares of the Fund may be sold at a reduced sales charge or without a
sales charge pursuant to certain sponsored arrangements, which include
programs under which a company, employee benefit plan or other organization
makes recommendations to, or permits group solicitation of, its employees,
members or participants, except any organization created primarily for the
purpose of obtaining shares of the Fund at a reduced sales charge or without
a sales charge. Sales without a sales charge, or with a reduced sales charge,
may also be made through brokers, financial planners, institutions, and
others, under managed fee-based programs (e.g., "wrap fee" or similar
programs) which meet certain requirements established from time to time by
the Distributor. Information on such arrangements and further conditions and
limitations is available from the Distributor.
13
<PAGE>
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and persons: (A) the
Investment Manager, Distributor, or any affiliated entities, including any
direct or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated
Companies, any relatives of any such individuals whose relationship is
directly verified by such individuals to the Distributor, or any beneficial
account for such relatives or individuals; and (C) employees, officers, sales
representatives or directors of dealers and other entities with a selling
agreement with the Distributor to sell shares of any aforementioned
investment company, any spouse or child of such person, or any beneficial
account for any of them. The purchase must be made for investment and the
shares purchased may not be resold except through redemption. This purchase
program is subject to such administrative policies, regarding the
qualification of purchasers, minimum investments by various groups of eligible
persons and any other matters, as may be adopted by the Distributor from
time to time.
Class B Shares--Contingent Deferred Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is duly received, as defined herein.
No sales charge is imposed at the time of purchase; thus the full amount of
the investor's purchase payment will be invested in the Fund. However, a
contingent deferred sales charge may be imposed upon redemptions of Class B
shares as described below.
The Distributor will pay dealers at the time of sale a 4% commission for
selling Class B shares. The proceeds of the contingent deferred sales charge
and the distribution fee are used to offset distribution expenses and thereby
permit the sale of Class B shares without an initial sales charge.
Class B shares that are redeemed within a five-year period after their
purchase will not be subject to a contingent deferred sales charge to the
extent that the value of such shares represents (1) capital appreciation of
Fund assets or (2) reinvestment of dividends or capital gains distributions.
The amount of any applicable contingent deferred sales charge will be
calculated by multiplying the net asset value of such shares at the time of
redemption or at the time of purchase, whichever is lower, by the applicable
percentage shown in the table below:
<TABLE>
<CAPTION>
Contingent Deferred Sales
Charge As A Percentage Of
Redemption During Net Asset Value
- ----------------------- ------------------------------
<S> <C>
1st Year Since Purchase 5%
2nd Year Since Purchase 4%
3rd Year Since Purchase 3%
4th Year Since Purchase 3%
5th Year Since Purchase 2%
6th Year Since Purchase and
Thereafter None
</TABLE>
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first
of those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of the Fund acquired through an exchange from
another Eligible Fund will be measured from the date that such shares were
initially acquired in the other Eligible Funds, and Class B shares being
redeemed will be considered to represent, as applicable, capital appreciation
or dividend and capital gains distribution reinvestments in such other
Eligible Fund. These determinations will result in any contingent deferred
sales charge being imposed at the lowest possible rate. For federal income
tax purposes, the amount of the contingent deferred sales charge will reduce
the gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any contingent deferred sales charge will be paid
to the Distributor.
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic
14
<PAGE>
withdrawal plan which meets certain conditions. In addition, the contingent
deferred sales charge will be waived for: (i) redemptions made within one
year of the death or total disability, as defined by the Social Security
Administration, of all shareholders of an account; (ii) redemptions made
after attainment of a specific age in an amount which represents the minimum
distribution required at such age under Section 401(a)(9) of the Internal
Revenue Code for retirement accounts or plans (e.g., age 701/2 for IRAs and
Section 403(b) plans), calculated solely on the basis of assets invested in
the Fund or other Eligible Funds; and (iii) a redemption resulting from a
tax-free return of an excess contribution to an IRA. (The foregoing waivers
do not apply to a tax-free rollover or transfer of assets out of the Fund.)
The Fund may modify or terminate the waivers described above at any time; for
example, the Fund may limit the application of multiple waivers and establish
other conditions for employee benefit plans.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends or
distributions with respect to such shares, will automatically convert to
Class A shares of the Fund at the end of eight years following the issuance
of such Class B shares; consequently, they will no longer be subject to the
higher expenses borne by Class B shares. The conversion rate will be
determined on the basis of the relative per share net asset values of the two
classes and may result in a shareholder receiving either a greater or fewer
number of Class A shares than the Class B shares so converted. As noted
above, holding periods for Class B shares received in exchange for Class B
shares of other Eligible Funds will be counted toward the eight-year period.
Class C Shares--Institutional; No Sales Charge
The purchase price of a Class C share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase or
redemption. The Fund will receive the full amount of the investor's purchase
payment.
In general, Class C shares are only available for new investments by
certain large institutions and employee benefit plans which acquire shares
through programs or products sponsored by Metropolitan Life Insurance Company
("Metropolitan") and/or its affiliates, for which Class C shares have been
designated. See the Statement of Additional Information. Information on the
availability of Class C shares and further conditions and limitations is
available from the Distributor.
Class C shares may be issued directly or through exchanges to those
shareholders of the Fund or other Eligible Funds who previously held shares
not subject to any future sales charge or service fees or distribution fees.
Class D Shares--Spread Sales Charges
The purchase price of a Class D share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase; thus the
full amount of the investor's purchase payment will be invested in the Fund.
Class D shares are subject to a 1% contingent deferred sales charge on any
portion of the purchase redeemed within one year of the sale. The contingent
deferred sales charge will be 1% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. The Distributor
pays dealers a 1% commission for selling Class D shares at the time of
purchase. The proceeds of the contingent deferred sales charge and the
distribution fee are used to offset distribution expenses and thereby permit
the sale of Class D shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will not
be subject to the contingent deferred sales charge to the extent that the
value of such shares represents (1) capital appreciation of Fund assets or
(2) reinvestment of dividends or capital gains distributions. In addition,
the contingent deferred sales charge will be waived for certain other
redemptions as described under "Contingent Deferred Sales Charge Waivers"
above (as otherwise applicable to Class B shares). For federal income tax
purposes, the amount of the contingent deferred sales charge will reduce the
gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any contingent deferred sales charge will be paid
to the Distributor.
15
<PAGE>
Net Asset Value
The Fund's per share net asset values are determined Monday through Friday as
of the close of the New York Stock Exchange (the "NYSE") exclusive of days on
which the NYSE is closed. The NYSE ordinarily closes at 4 P.M. New York City
time. Assets held by the Fund are valued at the last reported sale price as
of the close of business on the valuation date, except that securities and
assets for which market quotations are not readily available are valued as
determined in good faith by or under the authority of the Trustees of the
Trust. In determining the value of certain assets for which market quotations
are not readily available, the Fund may use one or more pricing services. The
pricing services utilize information with respect to market transactions,
quotations from dealers and various relationships among securities in
determining value and may provide prices determined as of times prior to the
close of the NYSE. The Trustees have authorized the use of the amortized cost
method to value short-term debt instruments issued with a maturity of one
year or less that have a remaining maturity of 60 days or less when the value
obtained is fair value. Further information with respect to the valuation of
the Fund's assets is included in the Statement of Additional Information.
Distribution Plan
The Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the provisions of the
Distribution Plan, the Fund makes payments to the Distributor based on an
annual percentage of the average daily value of the net assets of each class
of shares as follows:
<TABLE>
<CAPTION>
Class Service Fee Distribution Fee
- ---------- ---------------- ----------------------
<S> <C> <C>
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
</TABLE>
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) for personal
services and/or the maintenance of shareholder accounts. A portion of any
initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance or servicing
of shareholder accounts by such dealers. Dealers who have sold Class A shares
are eligible for further reimbursement commencing as of the time of such
sale. Dealers who have sold Class B and Class D shares are eligible for
further reimbursement after the first year during which such shares have been
held of record by such dealer as nominee for its clients (or by such clients
directly). Any service fees received by the Distributor and not allocated to
dealers may be applied by the Distributor in reduction of expenses incurred
by it directly for personal services and the maintenance 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.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs
similar expenses on behalf of, such other funds. When expenses of the
Distributor cannot be identified as relating to a specific fund, the
Distributor allocates expenses among the funds in a manner deemed fair and
equitable to each fund.
Commissions and other cash and noncash incentives and payments to dealers,
to the extent payable out of the general profits, revenues or other sources
of the Distributor (including the advisory fees paid by the Fund), have also
been authorized pursuant to the Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which the Fund may incur under the
Distribution Plan to 1%, of which 0.75% may be used to pay distribution
expenses and 0.25% may be used to pay shareholder service fees. The NASD rule
also limits the aggregate amount which the Fund may pay for such distribution
costs to 6.25% of gross share sales of a class since the inception of any
asset-based sales charge plus interest at
16
<PAGE>
the prime rate plus 1% on unpaid amounts thereof (less any contingent
deferred sales charges). Such limitation does not apply to shareholder
service fees. Payments to the Distributor or to dealers funded under the
Distribution Plan may be discontinued at any time by the Trustees of the
Trust.
Redemption of Shares
Shareholders may redeem all or any portion of their accounts on any day the
NYSE is open for business. Redemptions will be effective at the applicable
net asset value per share next determined (see "Purchase of Shares--Net Asset
Value" herein) after receipt of the redemption request, in accordance with
the requirements described below, by Shareholder Services and delivery of the
request by Shareholder Services to the Transfer Agent. To allow time for the
clearance of checks used for the purchase of any shares which are tendered
for redemption shortly after purchase, the remittance of the redemption
proceeds for such shares could be delayed for 15 days or more after the
purchase. Shareholders who anticipate a potential need for immediate access
to their investments should, therefore, purchase shares by wire. Except as
noted, redemption proceeds from the Fund are normally remitted within seven
days after receipt of the redemption request by the Fund and any necessary
documents in good order.
Methods of Redemption
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed to
the shareholder or wired to a predesignated bank account (see "Proceeds By
Wire" below), by sending to State Street Research Shareholder Services, P.O.
Box 8408, Boston, Massachusetts 02266-8408: (1) a written request for
redemption signed by the registered owner(s) of the shares, exactly as the
account is registered; (2) an endorsed stock power in good order with respect
to the shares or, if issued, the share certificates for the shares endorsed
for transfer or accompanied by an endorsed stock power; (3) any required
signature guarantees (see "Redemption of Shares--Signature Guarantees"
below); and (4) any additional documents which may be required for redemption
in the case of corporations, trustees, etc., such as certified copies of
corporate resolutions, governing instruments, powers of attorney, and the
like. The Transfer Agent will not process requests for redemption until it
has received all necessary documents in good order. A shareholder will be
notified promptly if a redemption request cannot be accepted. Shareholders
having any questions about the requirements for redemption should call
Shareholder Services toll-free at 1-800-562-0032.
Request By Telephone
Shareholders may request redemption by telephone with proceeds to be
transmitted by check or by wire (see "Proceeds By Wire" below). A shareholder
can request a redemption for $50,000 or less to be transmitted by check. Such
check for the proceeds will be made payable to the shareholder of record and
will be mailed to the address of record. There is no fee for this service. It
is not available for shares held in certificate form or if the address of
record has been changed within 30 days of the redemption request. The Fund
may revoke or suspend the telephone redemption privilege at any time and
without notice. See "Shareholder Services--Telephone Services" for a
discussion of the conditions and risks associated with Telephone Privileges.
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder has
Telephone Privileges (see "Shareholder Services--Telephone Services" herein),
the Trust's custodian will wire redemption proceeds to the shareholder's
predesignated bank account. To make the request, the shareholder should call
1-800-562-0032 prior to 4 P.M. Boston time. A $7.50 charge against the
shareholder's account will be imposed for each wire redemption. This charge
is subject to change without notice. The shareholder's bank may also impose a
charge for receiving wires of redemption proceeds. The minimum redemption by
wire is $5,000.
Request to Dealer to Repurchase
For the convenience of shareholders, the Fund has authorized the Distributor
as its agent to accept orders from dealers by wire or telephone for the
17
<PAGE>
repurchase of shares by the Distributor from the dealer. The Fund may revoke
or suspend this authorization at any time. The repurchase price is the net
asset value for the applicable shares next determined following the time at
which the shares are offered for repurchase by the dealer to the Distributor.
The dealer is responsible for promptly transmitting a shareholder's order to
the Distributor. Payment of the repurchase proceeds is made to the dealer who
placed the order promptly upon delivery of certificates for shares in proper
form for transfer or, for Open Accounts, upon the receipt of a stock power
with signatures guaranteed as described below, and, if required, any
supporting documents. Neither the Fund nor the Distributor imposes any charge
upon such a repurchase. However, a dealer may impose a charge as agent for a
shareholder in the repurchase of his or her shares. The Fund has reserved the
right to change, modify or terminate the services described above at any
time.
Additional Information
Because of the relatively high cost of maintaining small shareholder
accounts, the Fund reserves the right to involuntarily redeem at its option
any shareholder account which remains below $1,500 for a period of 60 days
after notice is mailed to the applicable shareholder, or to impose a
maintenance fee on such account after 60 days' notice. Such involuntary
redemptions will be subject to applicable sales charges, if any. The Fund may
increase such minimum account value above such amount in the future after
notice to affected shareholders. Involuntarily redeemed shares will be priced
at the net asset value on the date fixed for redemption by the Fund, and the
proceeds of the redemption will be mailed promptly to the affected
shareholder at the address of record. Currently, the maintenance fee is $18
annually, which is paid to the Transfer Agent. The fee does not apply to
certain retirement accounts or if the shareholder has more than an aggregate
$50,000 invested in the Fund and other Eligible Funds combined. Imposition of
a maintenance fee on a small account could, over time, exhaust the assets of
such account.
To cover the cost of additional compliance administration, a $20 fee will
be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date of
payment of redemption proceeds for more than seven days, except that (a) it
may elect to suspend the redemption of shares or postpone the date of payment
of redemption proceeds: (1) during any period that the NYSE is closed (other
than customary weekend and holiday closings) or trading on the NYSE is
restricted; (2) during any period in which an emergency exists as a result of
which disposal of portfolio securities is not reasonably practicable or it is
not reasonably practicable for the Fund fairly to determine the value of its
net assets; or (3) during such other periods as the Securities and Exchange
Commission may by order permit for the protection of investors; and (b) the
payment of redemption proceeds may be postponed as otherwise provided under
"Redemption of Shares" herein.
Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Fund, the Investment
Manager and the Distributor from possible fraud, signature guarantees are
required for certain redemptions. Signature guarantees help the Transfer
Agent to determine that the person who has authorized a redemption from the
account is, in fact, the shareholder. Signature guarantees are required for,
among other things: (1) written requests for redemptions for more than
$50,000; (2) written requests for redemptions for any amount if the proceeds
are transmitted to other than the current address of record (unchanged in the
past 30 days); (3) written requests for redemptions for any amount submitted
by corporations and certain fiduciaries and other intermediaries; and (4)
requests to transfer the registration of shares to another owner. Signatures
must be guaranteed by a bank, a member firm of a national stock exchange, or
other eligible guarantor institution. The Transfer Agent will not accept
guarantees (or notarizations) from notaries public. The above requirements
may be waived in certain instances. Please contact Shareholder Services at
1-800-562-0032 for specific requirements relating to your account.
18
<PAGE>
Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of the Fund owned by
shareholders are credited to their accounts by the Transfer Agent, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110. Certificates representing shares will not be issued. Shareholders will
receive periodic statements of transactions in their accounts.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through dealers,
by wire or by mailing a check, payable to the Fund, to Shareholder
Services under the terms set forth above under "Purchase of Shares."
2. The following methods of receiving dividends from investment income and
distributions from capital gains are available:
(a) All income dividends and capital gains distributions reinvested in
additional shares of the Fund.
(b) All income dividends in cash; all capital gains distributions
reinvested in additional shares of the Fund.
(c) All income dividends and capital gains distributions in cash.
(d) All income dividends and capital gains distributions invested in
any one available Eligible Fund designated by the shareholder as
described below. See "Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, the account will automatically be coded for reinvestment of all
dividends and distributions in additional shares of the same class of the
Fund. Selections may be changed at any time by telephone or written notice to
Shareholder Services. Dividends and distributions are reinvested at net asset
value without a sales charge.
Exchange Privilege
Shareholders of the Fund may exchange their shares for available shares with
corresponding characteristics of any of the other Eligible Funds at any time
on the basis of the relative net asset values of the respective shares to be
exchanged, subject to compliance with applicable securities laws.
Shareholders of any other Eligible Fund may similarly exchange their shares
for Fund shares with corresponding characteristics. Prior to making an
exchange, shareholders should obtain the Prospectus of the Eligible Fund into
which they are exchanging. Under the Direct Program, subject to certain
conditions, shareholders may make arrangements for regular exchanges from the
Fund into other Eligible Funds. To effect an exchange, Class A, Class B and
Class D shares may be redeemed without the payment of any contingent deferred
sales charge that might otherwise be due upon an ordinary redemption of such
shares. The State Street Research Money Market Fund issues Class E shares
which are sold without any sales charge. Exchanges of State Street Research
Money Market Fund Class E shares into Class A shares of the Fund or any other
Eligible Fund are subject to the initial sales charge or contingent deferred
sales charge applicable to an initial investment in such Class A shares,
unless a prior Class A sales charge has been paid directly or indirectly with
respect to the shares redeemed. For purposes of computing the contingent
deferred sales charge that may be payable upon disposition of the acquired
Class A, Class B and Class D shares, the holding period of the redeemed
shares is "tacked" to the holding period of the acquired shares. The period
any Class E shares are held is not tacked to the holding period of any
acquired shares. No exchange transaction fee is currently imposed on any
exchange.
Shares of the Fund may also be acquired or redeemed in exchange for shares
of the Summit Cash Reserves Fund ("Summit Cash Reserves") by customers of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (subject to completion of
steps necessary to implement the program). The Fund and Summit Cash Reserves
are related mutual funds for purposes of investment and investor services.
Upon the acquisition of shares of Summit Cash Reserves by exchange for
redeemed shares of the Fund, (a) no
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<PAGE>
sales charge is imposed by Summit Cash Reserves, (b) no contingent deferred
sales charge is imposed by the Fund on the Fund shares redeemed, and (c) any
applicable holding period of the Fund shares redeemed is "tolled," that is,
the holding period clock stops running pending further transactions. Upon the
acquisition of shares of the Fund by exchange for redeemed shares of Summit
Cash Reserves, (a) the acquisition of Class A shares shall be subject to the
initial sales charges or contingent deferred sales charges applicable to an
initial investment in such Class A shares, unless a prior Class A sales
charge has been paid indirectly, and (b) the acquisition of Class B or Class
D shares of the Fund shall restart any holding period previously tolled, or
shall be subject to the contingent deferred sales charge applicable to an
initial investment in such shares.
For the convenience of its shareholders who have Telephone Privileges, the
Fund permits exchanges by telephone request from either the shareholder or
his or her dealer. Shares may be exchanged by telephone provided that the
registration of the two accounts is the same. The toll-free number for
exchanges is 1-800-562-0032. See "Telephone Services" herein for a discussion
of conditions and risks associated with Telephone Privileges.
The exchange privilege may be exercised only in those states where shares
of the relevant other Eligible Fund may legally be sold. For tax purposes,
each exchange actually represents the sale of shares of one fund and the
purchase of shares of another. Accordingly, exchanges may produce a capital
gain or loss for tax purposes. The exchange privilege may be terminated or
suspended or its terms changed at any time, subject, if required under
applicable regulations, to 60 days' prior notice. New accounts established
for investments upon exchange from an existing account in another fund will
have the same Telephone Privileges as the existing account, unless
Shareholder Services is instructed otherwise. Related administrative policies
and procedures may also be adopted with regard to a series of exchanges,
street name accounts, sponsored arrangements and other matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer
identification number, may be aggregated for purposes of the six exchange
limit. Notwithstanding the six exchange limit, the Fund reserves the right to
refuse exchanges by any person or group if, in the Investment Manager's
judgment, the Fund would be unable to invest effectively in accordance with
its investment objective and policies, or would otherwise potentially be
adversely affected. Exchanges may be restricted or refused if the Fund
receives or anticipates simultaneous orders affecting significant portions of
the Fund's assets. In particular, a pattern of exchanges that coincides with
a "market timing" strategy may be disruptive to the Fund. The Fund may impose
these restrictions at any time. The exchange limit may be modified for
accounts in certain institutional retirement plans because of plan exchange
limits, Department of Labor regulations or administrative and other
considerations. Subject to the foregoing, if an exchange request in good
order is received by Shareholder Services and delivered by Shareholder
Services to the Transfer Agent by 12 noon Boston time on any business day,
the exchange usually will occur that day. For further information regarding
the exchange privilege, shareholders should contact Shareholder Services.
Reinvestment Privilege
A shareholder of the Fund who has redeemed shares or had shares repurchased
at his or her request may reinvest all or any portion of the proceeds (plus
that amount necessary to acquire a fractional share to round off his or her
reinvestment to full shares) in shares, of the same class as the shares
redeemed, of the Fund or any other Eligible Fund at net asset value and
without subjecting the reinvestment to an initial sales charge, provided such
reinvestment is made within 120 calendar days after a redemption or
repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the
amount reinvested. The redemption of shares is, for federal
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<PAGE>
income tax purposes, a sale on which the shareholder may realize a gain or
loss. If a redemption at a loss is followed by a reinvestment within 30 days,
the transaction may be a "wash sale" resulting in a denial of the loss for
federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by Shareholder
Services of such shareholder's written purchase request and delivery of the
request by Shareholder Services to the Transfer Agent. A shareholder may
exercise this reinvestment privilege only once per 12-month period with
respect to his or her shares of the Fund. No charge is imposed by the Fund
for such reinvestments; however, dealers may charge fees in connection with
the reinvestment privilege. The reinvestment privilege may be exercised with
respect to an Eligible Fund only in those states where shares of the relevant
other Eligible Fund may legally be sold.
Investment Plans
The Investamatic Program is available to Class A, Class B and Class D
shareholders. Under this Program, shareholders may make regular investments
by authorizing withdrawals from their bank accounts each month or quarter on
the Application available from Shareholder Services.
The Distributor also offers IRAs and tax-sheltered retirement plans,
including prototype and other employee benefit plans for employees, sole
proprietors, partnerships and corporations. Details of these investment plans
and their availability may be obtained from securities dealers or from
Shareholder Services.
Systematic Withdrawal Plan
A shareholder who owns noncertificated Class A or Class C shares with a value
of $5,000 or more, or Class B or Class D shares with a value of $10,000 or
more, may elect, by participating in the Fund's Systematic Withdrawal Plan,
to have periodic checks issued for specified amounts. These amounts may not
be less than certain minimums, depending on the class of shares held. The
Plan provides that all income dividends and capital gains distributions of
the Fund shall be credited to participating shareholders in additional shares
of the Fund. Thus, the withdrawal amounts paid can only be realized by
redeeming shares of the Fund under the Plan. To the extent such amounts paid
exceed dividends and distributions from the Fund, a shareholder's investment
will decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually
of either (a) the value, at the time the Plan is initiated, of the shares
then in the account or (b) the value, at the time of a withdrawal, of the
same number of shares as in the account when the Plan was initiated,
whichever is higher.
Expenses of the Plan are borne by the Fund. A participating shareholder
may withdraw from the Plan and the Fund may terminate the Plan at any time on
written notice. Purchase of additional shares while a shareholder is
receiving payments under a Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate
in the Investamatic Program and the Systematic Withdrawal Plan at the same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all of
their dividends and any other distributions from the Fund or any Eligible
Fund automatically invested at net asset value in one other such Eligible
Fund designated by the shareholder, provided the account into which the
dividends and distributions are directed is initially funded with the
requisite minimum amount. The number of shares purchased will be determined
as of the dividend payment date. The Dividend Allocation Plan is subject to
state securities law requirements, to suspension at any time, and to such
policies, limitations and restrictions, as, for instance, may be applicable
to street name or master accounts, that may be adopted from time to time.
Automatic Bank Connection
A shareholder may elect, by participating in the Fund's Automatic Bank
Connection ("ABC"), to have
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<PAGE>
dividends and other distributions, including Systematic Withdrawal Plan
payments, automatically deposited in the shareholder's bank account by
electronic funds transfer. Some contingent deferred sales charges may apply.
See "Systematic Withdrawal Plan" herein.
Reports
Reports for the Fund will be sent to shareholders of record at least
semiannually. These reports will include a list of the securities owned by
the Fund as well as the Fund's financial statements.
Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing the shareholder to make telephone redemptions
for amounts up to $50,000 to be mailed to the shareholder's address of
record is available automatically;
(2) the privilege allowing the shareholder or his or her dealer to make
telephone exchanges is available automatically;
(3) the privilege allowing the shareholder to make telephone redemptions
for amounts over $5,000,
to be remitted by wire to the shareholder's predesignated bank
account, is available by election on the Application accompanying this
Prospectus. A current shareholder who did not previously request such
telephone wire privilege on his or her original Application may
request the privilege by completing a Telephone Redemption-by-Wire
Form which may be obtained by calling 1-800-562-0032. The Telephone
Redemption-by-Wire form requires a signature guarantee; and
(4) the privilege allowing the shareholder to make telephone purchases or
redemptions, transmitted via the Automated Clearing House system, into
or from the shareholder's predesignated bank account, is available
upon completion of the requisite initial documentation. For details
and forms, call 1-800-562-0032. The documentation requires a signature
guarantee.
A shareholder may decline the automatic Telephone Privileges set forth in
(1) and (2) above by so indicating on the Application accompanying this
Prospectus.
A shareholder may discontinue any Telephone Privilege at any time by
advising Shareholder Services that the shareholder wishes to discontinue the
use of such privileges in the future.
Unless such Telephone Privileges are declined, a shareholder is deemed to
authorize Shareholder Services and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder to
redeem, or purporting to be the shareholder or the shareholder's dealer to
exchange, shares from any account; and (2) honor any written instructions for
a change of address regardless of whether such request is accompanied by a
signature guarantee. All telephone calls will be recorded. None of the Fund,
the other Eligible Funds, the Transfer Agent, the Investment Manager or the
Distributor will be liable for any loss, expense or cost arising out of any
request, including any fraudulent or unauthorized requests. Shareholders
assume the risk to the full extent of their accounts that telephone requests
may be unauthorized. Reasonable procedures must be followed to confirm that
instructions communicated by telephone are genuine. The shareholder will not
be liable for any losses due to unauthorized or fraudulent instructions if
such procedures are not followed.
Shareholders may redeem or exchange shares by calling toll-free
1-800-562-0032. Although it is unlikely, during periods of extraordinary
market conditions, a shareholder may have difficulty in reaching Shareholder
Services at such telephone number. In that event, the shareholder should
contact Shareholder Services at 1-800-562-0032 or otherwise at its main
office at One Financial Center, Boston, Massachusetts 02111-2690.
Shareholder Account Inquiries:
Please call 1-800-562-0032
Call this number for assistance in answering general questions on your
account, including account balance, available shareholder services, statement
information and performance of the Fund. Account inquiries may
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<PAGE>
also be made in writing to State Street Research Shareholder Services, P.O.
Box 8408, Boston, Massachusetts 02266-8408. A fee of up to $10 will be
charged against an account for providing additional account transcripts or
photocopies of paid redemption checks or for researching records in response
to special requests.
Shareholder Telephone Transactions:
Please call 1-800-562-0032
Call this number for assistance in purchasing shares by wire and for
telephone redemptions or telephone exchange transactions. Shareholder
Services will require some form of personal identification prior to acting
upon instructions received by telephone. Written confirmation of each
transaction will be provided.
The Fund and its Shares
The Fund commenced operations in February 1995 as an additional series of
State Street Research Capital Trust, a Massachusetts business trust, formed
in 1988. The Fund was originally known as State Street Research Small
Capitalization Value Fund, and changed its name to State Street Research
Aurora Fund in 1996. The Trustees have authorized shares of the Fund to be
issued in four classes: Class A, Class B, Class C and Class D. The Trust is
registered with the Securities and Exchange Commission 1940 Act as an open-end
management investment company. The fiscal year end of the Fund is September 30.
Except for those differences between the classes of shares described below
and elsewhere in the Prospectus, each share of the Fund has equal dividend,
redemption and liquidation rights with other shares of the Fund and when
issued is fully paid and nonassessable. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common usage of terms which may develop in the mutual fund
industry. For example, Class C shares may be redesignated as Class Y shares
and Class D shares may be redesignated as Class C shares. Any redesignation
would not affect any substantive rights respecting the shares.
Each share of each class of shares represents an identical legal interest in
the same portfolio of investments of the Fund, has the same rights and is
identical in all respects, except that Class A, Class B and Class D shares
bear the expenses of the deferred sales arrangement and any expenses
(including the higher service and distribution fees) resulting from such
sales arrangement, and certain other incremental expenses related to a class.
Each class will have exclusive voting rights with respect to provisions of
the Rule 12b-1 distribution plan pursuant to which the service and
distribution fees, if any, are paid. Although the legal rights of holders of
each class of shares are identical, it is likely that the different expenses
borne by each class will result in different net asset values and dividends.
The different classes of shares of the Fund also have different exchange
privileges.
The rights of holders of shares may be modified by the Trustees at any time,
so long as such modifications do not have a material adverse effect on the
rights of any shareholder. On any matter submitted to the shareholders, the
holder of each Fund share is entitled to one vote per share (with
proportionate voting for fractional shares) regardless of the relative net
asset value thereof.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder
meetings unless required by the 1940 Act. Except as otherwise provided under
said Act, the Board of Trustees will be a self-perpetuating body until fewer
than two thirds of the Trustees serving as such are Trustees who were elected
by shareholders of the Trust. In the event less than a majority of the
Trustees serving as such were elected by shareholders of the Trust, a meeting
of shareholders will be called to elect Trustees. Under the Master Trust
Agreement, any Trustee may be removed by vote of two thirds of the
outstanding Trust shares; holders of 10% or more of the outstanding Trust
shares can require that the Trustees call a meeting of shareholders for
purposes of voting on the removal of one or more Trustees. In connection with
such meetings called by shareholders, shareholders will be assisted in
shareholder communications to the extent required by applicable law.
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<PAGE>
Under Massachusetts law, the shareholders of the Trust could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Master Trust Agreement disclaims shareholder liability for acts
or obligations of the Trust and provides for indemnification for all losses
and expenses of any shareholder of the Fund held personally liable for the
obligations of the Trust. Thus, the risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circumstances in which
the Fund would be unable to meet its obligations. The Investment Manager
believes that, in view of the above, the risk of personal liability to
shareholders is remote.
As of December 31, 1996, Metropolitan was the record and/or beneficial owner,
directly or indirectly through its subsidiaries or affiliates, of approximately
99.8%, 99.9% and 99.8% of the outstanding Class B, Class C and Class D shares of
the Fund, respectively, and may be deemed to be in control of such shares as
"control" is defined in the 1940 Act. Ownership of 25% or more of a voting
security is deemed "control" as defined in the 1940 Act. So long as 25% of a
class of shares is so owned, such owners will be presumed to be in control of
such class of shares for purposes of voting on certain matters, such as any
Distribution Plan for a given class.
Management of the Fund
Under the provisions of the Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees. The Fund's investment manager is State Street
Research & Management Company. The Investment Manager is charged with the
overall responsibility for managing the investments and business affairs of
the Fund, subject to the authority of the Board of Trustees.
The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve as investment adviser to one of the nation's first
mutual funds, presently known as State Street Research Investment Trust,
which they had formed in 1924. Their investment management philosophy, which
continues to this day, emphasized comprehensive fundamental research and
analysis, including meetings with the management of companies under
consideration for investment. The Investment Manager's portfolio management
group has extensive investment industry experience managing equity and debt
securities. In managing debt securities, if any, for a portfolio, the
Investment Manager may consider yield curve positioning, sector rotation and
duration, among other factors.
The Investment Manager and the Distributor are indirect wholly-owned
subsidiaries of Metropolitan, and both are located at One Financial Center,
Boston, Massachusetts 02111-2690.
Under its Advisory Agreement with the Trust, the Investment Manager receives
a monthly investment advisory fee equal to 0.85% (on an annual basis) of the
average daily value of the net assets of the Fund. Such fee is higher than
that charged by most mutual funds, but is believed by the Trustees to be
justified given the considerable analysis and research necessary to manage
the Fund in light of its investment objective and policies. The Fund bears
all costs of its operation other than those incurred by the Investment
Manager under the Advisory Agreement. In particular, the Fund pays, among
other expenses, investment advisory fees, certain distribution expenses under
the Fund's Distribution Plan and the compensation and expenses of the
Trustees who are not otherwise currently affiliated with the Investment
Manager or any of its affiliates. The Fund also incurs expenses payable to
various states in connection with the offer and sale of the Fund's shares,
and expenses for legal, custodian and transfer agent services, among other
costs. Under the Advisory Agreement, the Investment Manager provides the Fund
with office space, facilities and personnel. The Investment Manager
compensates Trustees of the Trust if such persons are employees or affiliates
of the Investment Manager or its affiliates.
The Fund is managed by Rudolph K. Kluiber. Mr. Kluiber has managed the Fund
since its inception. Mr. Kluiber's principal occupation currently is Vice
President of State Street Research & Management Company. During the past five
years he has also served as an analyst for State Street Research & Management
Company.
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<PAGE>
Subject to the policy of seeking best overall price and execution, sales of
shares of the Fund may be considered by the Investment Manager in the
selection of broker or dealer firms for the Fund's portfolio transactions.
The Investment Manager has a Code of Ethics governing personal securities
transactions of certain of its employees; see the Statement of Additional
Information.
Dividends and Distributions; Taxes
The Fund has qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code for its most recent
fiscal year and intends to qualify as such in future fiscal years, although it
cannot give complete assurance that it will do so. As long as it so qualifies
and satisfies certain distribution requirements, it will not be subject to
federal income taxes on its income (including capital gains, if any) distributed
to its shareholders. Consequently, the Fund intends to distribute annually to
its shareholders substantially all of its net investment income and any capital
gain net income (capital gains net of capital losses). The Fund declares
dividends from net investment income and distributions of net capital gains
annually and pays such dividends and distributions, if any, after year end or as
otherwise required for compliance with applicable tax regulations. Both
dividends from net investment income and distributions of capital gain net
income will be declared and paid to shareholders in additional shares of the
Fund at net asset value on the record date of that dividend or distribution,
except in the case of shareholders who elect a different available distribution
method.
The Fund will provide its shareholders of record with annual information
on a timely basis concerning the federal tax status of dividends and
distributions during the preceding calendar year.
Dividends paid by the Fund from taxable net investment income and
distributions of net short-term capital gains, whether paid in cash or
reinvested in additional shares, will be taxable for federal income tax
purposes to shareholders as ordinary income, and a portion may be eligible
for the 70% dividends- received deduction for corporations. The percentage of
the Fund's dividends eligible for such tax treatment may be less than 100% to
the extent that less than 100% of the Fund's gross income consists of
qualifying dividends of domestic corporations. Distributions of net capital
gains (the excess of net long- term capital gains over net short-term capital
losses) which are designated as capital gains distributions, whether paid in
cash or reinvested in additional shares, will be taxable for federal income
tax purposes to shareholders as long-term capital gains, regardless of how
long shareholders have held their shares, and are not eligible for the
dividends-received deduction. If shares of the Fund which are sold at a loss
have been held six months or less, the loss will be considered as a long-term
capital loss to the extent of any capital gains distributions received.
Dividends and other distributions and proceeds of redemptions of Fund
shares paid to individuals and other nonexempt payees will be subject to a
31% federal backup withholding tax if State Street Bank and Trust Company,
the Fund's transfer agent, is not provided with the shareholder's correct
taxpayer identification number and certification that the shareholder is not
subject to such backup withholding.
The foregoing discussion relates only to generally applicable federal
income tax provisions in effect as of the date of this Prospectus. Therefore,
prospective shareholders are urged to consult their own tax advisers
regarding tax matters, including state and local tax consequences.
Calculation of Performance Data
From time to time, in advertisements or in communications to shareholders or
prospective investors, the Fund may compare the performance of its Class A,
Class B, Class C and Class D shares to that of other mutual funds with
similar investment objectives, to certificates of deposit and/or to other
financial alternatives. The Fund may also compare its performance to
appropriate indices such as the NASDAQ Composite Average, Small Stock Index,
Russell 2000 Value Index, Russell 2000 Index, Russell 2000 Growth Index,
Standard & Poor's 500 Stock Index (the "S&P 500"), Consumer Price Index and
Dow Jones Industrial Average and/or to appropriate rankings and averages,
such as the Lipper Small Company Growth Funds average, compiled by Lipper
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<PAGE>
Analytical Services, Inc., or to those compiled by Morningstar, Inc., Money
Magazine, Business Week, Forbes Magazine, the Wall Street Journal and
Investor's Daily.
Total return is computed separately for each class of shares of the Fund.
The average annual total return ("standard total return") for shares of the
Fund is computed by determining the average annual compounded rate of return
for a designated historical period as applied to a hypothetical $1,000
initial investment, which is redeemed in total at the end of such period. In
making the calculation, all dividends and distributions are assumed to be
reinvested, and all recurring expenses, including management and distribution
fees, are recognized. The calculation also reflects the highest applicable
initial or contingent deferred sales charge, determined as of the assumed
date of initial investment or the assumed date of redemption, as the case may
be. Standard total return may be accompanied with nonstandard total return
information computed in the same manner, but for differing periods and with
or without annualizing the total return or taking sales charges into account.
The standard total return results take sales charges into account, if
applicable, but do not take into account recurring and nonrecurring charges
for optional services which only certain shareholders elect and which involve
nominal fees, such as the $7.50 fee for remittance of redemption proceeds by
wire. Where sales charges are not applicable and therefore not taken into
account in the calculation of standard total return, the results will be
increased. Any voluntary waiver of management fees or assumption of expenses
by the Fund's affiliates will also increase performance results.
Performance information may be useful in evaluating the Fund and for
providing a basis for comparison with other financial alternatives. Since the
performance of the Fund varies in response to fluctuations in economic and
market conditions, interest rates and Fund expenses, among other things, no
performance quotation should be considered a representation as to the Fund's
performance for any future period. In addition, the net asset value of shares
of the Fund will fluctuate, with the result that shares of the Fund, when
redeemed, may be worth more or less than their original cost. Neither an
investment in the Fund nor the Fund's performance is insured or guaranteed;
such lack of insurance or guarantees should accordingly be given appropriate
consideration when comparing the Fund to financial alternatives which have
such features. Performance data or rankings for a given class of shares
should be interpreted carefully by investors who hold or may invest in a
different class of shares.
26
<PAGE>
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;
2
<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.
3
<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
6
<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
28
<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.
29
<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.
30
<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&S 500
<PAGE>
STATE STREET RESEARCH EMERGING GROWTH 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............................................... 19
INVESTMENT ADVISORY SERVICES........................................ 23
PURCHASE AND REDEMPTION OF SHARES................................... 24
NET ASSET VALUE..................................................... 26
PORTFOLIO TRANSACTIONS.............................................. 27
CERTAIN TAX MATTERS................................................. 30
DISTRIBUTION OF SHARES OF THE FUND.................................. 33
CALCULATION OF PERFORMANCE DATA..................................... 37
CUSTODIAN........................................................... 39
INDEPENDENT ACCOUNTANTS............................................. 40
FINANCIAL STATEMENTS................................................ 40
The following Statement of Additional Information is not a Prospectus.
It should be read in conjunction with the Prospectus of State Street Research
Emerging Growth 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: 1285N-970131(0298)SSR-LD EG-769D-297
<PAGE>
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth in part under "The Fund's Investments" and "Limiting
Investment Risk" in the Fund's Prospectus, the Fund has adopted certain
investment restrictions.
All of the Fund's fundamental investment restrictions are set forth
below. These fundamental investment restrictions may not be changed except by
the affirmative vote of a majority of the Fund's outstanding voting securities
as defined in the Investment Company Act of 1940, as amended (the "1940 Act").
(Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at a meeting of security holders duly called, (i) of
67% or more of the voting securities present at a meeting if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy or (ii) of more than 50% of the outstanding voting securities, whichever
is less.) Under these restrictions, it is the Fund's policy:
(1) not to purchase a security of any one issuer (other than
securities issued or guaranteed as to principal or interest by
the U.S. Government or its agencies or instrumentalities or
mixed-ownership Government corporations) if such purchase
would, with respect to 75% of the Fund's total assets, cause
more than 5% of the Fund's total assets to be invested in the
securities of such issuer, except in connection with
investments in other investment companies to the extent
permitted by law and regulatory authorities;
(2) not to purchase a security of any one issuer if such purchase
would cause more than 10% of the voting securities of such
issuer to be held by the Fund, except in connection with
investments in other investment companies to the extent
permitted by law and regulatory authorities;
(3) not to issue senior securities;
(4) not to underwrite or participate in the marketing of
securities of other issuers, except (a) the Fund may, acting
alone or in syndicates or groups, purchase or otherwise
acquire securities of other issuers for investment, either
from the issuers or from persons in a control relationship
with the issuers or from underwriters of such securities; and
(b) to the extent that, in connection with the disposition of
the Fund's securities, the Fund may be deemed to be an
underwriter under certain federal securities laws;
(5) not to purchase or sell fee simple interests in real estate,
although the Fund may purchase and sell other interests in
real estate including securities which are secured by real
estate, or securities of companies which own or invest or deal
in real estate;
(6) not to invest in commodities or commodity contracts in excess
of 10% of the Fund's total assets, except that investments in
currencies, futures contracts and
2
<PAGE>
options on futures contracts on securities, securities
indices and currencies shall not be deemed an investment in
commodities or commodities contracts;
(7) not to make loans, except that the Fund may lend portfolio
securities and purchase bonds, debentures, notes and similar
obligations (and enter into repurchase agreements with respect
thereto);
(8) not to make any investment which would cause more than 25% of
the value of the Fund's total assets to be invested in
securities of issuers principally engaged in any one industry
[for purposes of this restriction, (a) utilities will be
divided according to their services so that, for example, gas,
gas transmission, electric and telephone companies will each
be deemed in a separate industry, (b) oil and oil related
companies will be divided by type so that, for example, oil
production companies, oil service companies and refining and
marketing companies will each be deemed in a separate
industry, (c) finance companies will be classified according
to the industries of their parent companies, and (d)
securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities (including repurchase agreements
involving such U.S. Government securities to the extent
excludable under relevant regulatory interpretations) shall be
excluded]; and
(9) not to borrow money except for borrowings from banks for
extraordinary and emergency purposes, such as permitting
redemption requests to be honored, and then not in an amount
in excess of 25% of the value of its total assets, and except
insofar as reverse repurchase agreements may be regarded as
borrowing.
The following nonfundamental investment restrictions may be changed by
a vote of a majority of the Trustees. Under these restrictions, it is the Fund's
policy:
(1) not to purchase any security or enter into a repurchase
agreement if as a result more than 15% of its total assets
would be invested in (a) securities that are illiquid because
of the absence of a readily available market or because such
securities are restricted securities (i.e., subject to legal
or contractual restrictions on resale), provided that such
restricted securities, excluding restricted securities
eligible for resale pursuant to Rule 144A or Regulation S
under the Securities Act of 1933, shall be limited to 5% of
total assets, and (b) repurchase agreements not entitling the
holder to payment of principal and interest within seven days
[subject to such higher percentage limits or other
modifications as may be allowed or required under applicable
regulatory policies in the future].
(2) not to invest more than 5% of its total assets in securities
of issuers including predecessors with less than three years
continuous operations, except securities guaranteed or backed
by an affiliate of the issuer with three years of continuous
operations or securities issued or guaranteed as to principal
or interest by the U.S. Government, or its agencies or
instrumentalities, provided that the Fund may invest up to 10%
in such issuers so long as such investments plus investments
in
3
<PAGE>
restricted securities (other than those which are eligible for
resale under Rule 144A or Regulation S as noted above) do not
exceed 10% of the Fund's total assets;
(3) not to engage in transactions in options except in connection
with options on securities, securities indices and currencies,
and options on futures on securities, securities indices and
currencies;
(4) not to purchase securities on margin or make short sales of
securities or maintain a short position except for short sales
"against the box" [as a matter of current operating policy,
the Fund will not make short sales or maintain a short
position unless not more than 5% of the Fund's net assets
(taken at current value) is held as collateral for such sales
at any time];
(5) not to hypothecate, mortgage or pledge any of its assets
except as may be necessary in connection with permitted
borrowings (for the purpose of this restriction, futures,
options and forward commitments, and related escrow or
custodian receipts or letters, margin or safekeeping accounts,
or similar arrangements used in the industry in connection
with the trading of such investments, are not deemed to
involve a hypothecation, mortgage or pledge of assets);
(6) not to purchase a security issued by another investment
company if, immediately after such purchase, the Fund would
own, in the aggregate, (i) more than 3% of the total
outstanding voting securities of such other investment
company; (ii) securities issued by such other investment
company having an aggregate value in excess of 5% of the value
of the Fund's total assets; or (iii) securities issued by such
other investment company and all other investment companies
(other than treasury stock of the Fund) having an aggregate
value in excess of 10% of the value of the Fund's total
assets; provided, however, that the Fund may purchase
investment company securities without limit for the purpose of
completing a merger, consolidation or other acquisition of
assets and may purchase securities issued by another
investment company to the extent otherwise permitted by law
and regulatory authorities;
(7) not to purchase or retain any security of an issuer if, to the
knowledge of the Fund, those of its officers and Trustees and
officers and directors of its investment advisers who
individually own more than 1/2 of 1% of the securities of such
issuer, when combined, own more than 5% of the securities of
such issuer taken at market;
(8) not to invest directly as a joint venturer or general partner
in oil, gas or other mineral exploration or development joint
ventures or general partnerships (provided that the Fund may
invest in securities issued by companies which invest in or
sponsor such programs and in securities indexed to the price
of oil, gas or other minerals);
4
<PAGE>
(9) not to invest in warrants more than 5% of the value, at the
lower of cost or market, of its net assets, provided that
warrants not listed on the New York or American Stock Exchange
shall be further limited to 2% of the Fund's net assets
(warrants initially attached to securities and acquired by the
Fund upon original issuance thereof shall be deemed to be
without value); and
(10) not to invest in companies for the purpose of exercising
control over their management, although the Fund may from time
to time present its views on various matters to the management
of issuers in which it holds investments.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Among other investments described below, the Fund may buy and sell
domestic and foreign options, futures contracts, and options on futures
contracts with respect to securities, securities indices, and currencies, and
may enter into closing transactions with respect to each of the foregoing, and
invest in other derivatives, under circumstances in which such instruments and
techniques are expected by State Street Research & Management Company (the
"Investment Manager") to aid in achieving the investment objective of the Fund.
The Fund on occasion may also purchase instruments with characteristics of both
futures and securities (e.g., debt instruments with interest and principal
payments determined by reference to the value of a commodity or a currency at a
future time) and which, therefore, possess the risks of both futures and
securities investments.
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell
underlying assets, such as certain securities, currencies or an index of
securities, at a future time at a specified price. A contract to buy establishes
a "long" position while a contract to sell establishes a "short" position.
The purchase of a futures contract on securities or an index of
securities normally enables a buyer to participate in the market movement of the
underlying asset or index after paying a transaction charge and posting margin
in an amount equal to a small percentage of the value of the underlying asset or
index. The Fund will initially be required to deposit with the Trust's custodian
or the broker effecting the futures transaction an amount of "initial margin" in
cash or U.S. Treasury obligations.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying assets fluctuates. This process is
known as
5
<PAGE>
"marking to market." For example, when the Fund has taken a long position in a
futures contract and the value of the underlying asset has risen, that position
will have increased in value and the Fund will receive from the broker a
maintenance margin payment equal to the increase in value of the underlying
asset. Conversely, when the Fund has taken a long position in a futures contract
and the value of the underlying instrument has declined, the position would be
less valuable, and the Fund would be required to make a maintenance margin
payment to the broker.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will terminate
the Fund's position in the futures contract. A final determination of
maintenance margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. While futures
contracts with respect to securities do provide for the delivery and acceptance
of such securities, such delivery and acceptance are seldom made.
Futures contracts will be executed primarily (a) to establish a short
position, and thus protect the Fund from experiencing the full impact of an
expected decline in market value of portfolio holdings without requiring the
sale of holdings, or (b) to establish a long position, and thus to participate
in an expected rise in market value of securities or currencies which the Fund
intends to purchase. Subject to the limitations described below, the Fund may
also enter into futures contracts for purposes of enhancing return. In
transactions establishing a long position in a futures contract, money market
instruments equal to the face value of the futures contract will be identified
by the Fund to the Trust's custodian for maintenance in a separate account to
insure that the use of such futures contracts is unleveraged. Similarly, a
representative portfolio of securities having a value equal to the aggregate
face value of the futures contract will be identified with respect to each short
position. The Fund will employ any other appropriate method of cover which is
consistent with applicable regulatory and exchange requirements.
Options on Securities
The Fund may use options on securities to implement its investment
strategy. A call option on a security, for example, gives the purchaser of the
option the right to buy, and the writer the obligation to sell, the underlying
asset at the exercise price during the option period. Conversely, a put option
on a security gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying asset at the exercise price during the option
period.
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
6
<PAGE>
agreed-upon price that the Fund must pay to the buyer upon exercise of the put
and the value, which could be zero, of the asset at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
his obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Options on Securities Indices
The Fund may engage in transactions in call and put options on
securities indices. For example, the Fund may purchase put options on indices of
securities in anticipation of or during a market decline to attempt to offset
the decrease in market value of its securities that might otherwise result.
Put options on indices of securities are similar to put options on the
securities themselves except that the delivery requirements are different.
Instead of giving the right to make delivery of a security at a specified price,
a put option on an index of securities gives the holder the right to receive an
amount of cash upon exercise of the option if the value of the underlying index
has fallen below the exercise price. The amount of cash received will be equal
to the difference between the closing price of the index and the exercise price
of the option expressed in dollars times a specified multiple. As with options
on securities or futures contracts, the Fund may offset its position in index
options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
A securities index assigns relative values to the securities included
in the index and the index options are based on a broad market index. Although
there are at present few available options on indices of fixed income
securities, other than tax-exempt securities, or futures and related options
based on such indices, such instruments may become available in the future. In
connection with the use of such options, the Fund may cover its position by
identifying a representative portfolio of securities having a value equal to the
aggregate face value of the option 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.
7
<PAGE>
Options Strategy
A basic option strategy for protecting the Fund against a decline in
securities prices could involve (a) the purchase of a put -- thus "locking in"
the selling price of the underlying securities or securities indices -- or (b)
the writing of a call on securities or securities indices held by the Fund --
thereby generating income (the premium paid by the buyer) by giving the holder
of such call the option to buy the underlying asset at a fixed price. The
premium will offset, in whole or in part, a decline in portfolio value; however,
if prices of the relevant securities or securities indices rose instead of
falling, the call might be exercised, thereby resulting in a potential loss of
appreciation in the underlying securities or securities indices.
A basic option strategy when a rise in securities prices is anticipated
is the purchase of a call -- thus "locking in" the purchase price of the
underlying security or other asset. In transactions involving the purchase of
call options by the Fund, money market instruments equal to the aggregate
exercise price of the options will be identified by the Fund to the Trust's
custodian to insure that the use of such investments is unleveraged.
The Fund may write options in connection with buy-and-write
transactions; that is, the Fund may purchase a security and concurrently write a
call option against that security. If the call option is exercised in such a
transaction, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upward or downward by the difference between the
Fund's purchase price of the security and the exercise price of the option. If
the option is not exercised and the price of the underlying security declines,
the amount of such decline will be offset in part, or entirely, by the premium
received.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund's return will be the premium received from
writing the put option minus the amount by which the market price of the
security is below the exercise price.
Limitations and Risks of Options and Futures Activity
The Fund will generally engage in transactions in futures contracts or
options as a hedge against changes resulting from market conditions which
produce changes in the values of its securities or the securities which it
intends to purchase (e.g., to replace portfolio securities which will mature in
the near future and, subject to the limitations described below, to enhance
return). The Fund will not purchase any futures contract or purchase any call
option if, immediately thereafter, more than one third of the Fund's net assets
would be represented by long futures contracts or call options. The Fund will
not write a covered call or put option if, immediately thereafter, the aggregate
value of the assets (securities in the case of written calls and cash or cash
equivalents in the case of written puts) underlying all such options, determined
as of the dates such options were written, would exceed 25% of the Fund's net
assets. In addition, the Fund may not establish a position in a commodity
futures contract or purchase or sell a commodity option
8
<PAGE>
contract for other than bona fide hedging purposes if immediately thereafter the
sum of the amount of initial margin deposits and premiums required to establish
such positions for such nonhedging purposes would exceed 5% of the market value
of the Fund's total assets.
Although effective hedging can generally capture the bulk of a desired
risk adjustment, no hedge is completely effective. The Fund's ability to hedge
effectively through transactions in futures and options depends on the degree to
which price movements in its holdings correlate with price movements of the
futures and options.
Some positions in futures and options may be closed out only on an
exchange which provides a secondary market therefor. There can be no assurance
that a liquid secondary market will exist for any particular futures contract or
option at any specific time. Thus, it may not be possible to close such an
option or futures position prior to maturity. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
effectively hedge its securities and might in some cases require the Fund to
deposit cash to meet applicable margin requirements. The Fund will enter into an
option or futures position only if it appears to be a liquid investment.
The Fund has undertaken with a state securities authority that, for so
long as its shares are required to be registered for sale in such state, the
Fund will invest only in options and futures that are issued by the Options
Clearing Corporation or offered through the facilities of a national securities
association or listed on a national securities or commodities exchange, except
that the Fund may invest in unlisted options or futures when the desired options
or futures are unavailable on a national securities or commodities exchange.
Furthermore, the Fund will engage in such transactions in unlisted options or
futures only with dealers who have high credit standing as determined by the
Investment Manager.
Foreign Investments
To the extent the Fund invests in securities of issuers in less
developed countries or emerging foreign markets, it will be subject to a variety
of additional risks, including risks associated with political instability,
economies based on relatively few industries, lesser market 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.
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<PAGE>
Currency Transactions
The Fund's dealings in forward currency exchange contracts will be
limited to hedging involving either specific transactions or aggregate portfolio
positions. A forward currency contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are not commodities and are entered into
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. Although spot and forward contracts
will be used primarily to protect the Fund from adverse currency movements, they
also involve the risk that anticipated currency movements will not be accurately
predicted, which may result in losses to the Fund. This method of protecting the
value of the Fund's portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange that can be achieved at
some future point in time. Although such contracts tend to minimize the risk of
loss due to a decline in the value of hedged currency, they tend to limit any
potential gain that might result should the value of such currency increase.
Repurchase Agreements
The Fund may enter into repurchase agreements. Repurchase agreements
occur when the Fund acquires a security and the seller, which may be either (i)
a primary dealer in U.S. Government securities or (ii) an FDIC-insured bank
having gross assets in excess of $500 million, simultaneously commits to
repurchase it at an agreed-upon price on an agreed-upon date within a specified
number of days (usually not more than seven) from the date of purchase. The
repurchase price reflects the purchase price plus an agreed-upon market rate of
interest which is unrelated to the coupon rate or maturity of the acquired
security. The Fund will only enter into repurchase agreements involving U.S.
Government securities. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
Repurchase agreements will be limited to 30% of the Fund's total assets, except
that repurchase agreements extending for more than seven days when combined with
other illiquid securities will be limited to 10% of the Fund's total assets.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. However, the
Fund has no present intention of engaging in reverse repurchase agreements in
excess of 5% of the Fund's total assets. In a reverse repurchase agreement the
Fund transfers possession of a portfolio instrument to another person, such as a
financial institution, broker or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed-upon rate. The ability to use
reverse repurchase agreements may enable, but does not ensure the ability of,
the Fund to avoid selling portfolio instruments at a time when a sale may be
deemed to be disadvantageous.
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<PAGE>
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
When-Issued Securities
The Fund may purchase "when-issued" equity securities, which are traded
on a price basis prior to actual issuance. Such purchases will be made only to
achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year or
more; during this period dividends on equity securities are not payable. No
income accrues to the Fund prior to the time it takes delivery. A frequent form
of when-issued trading occurs when corporate securities to be created by a
merger of companies are traded prior to the actual consummation of the merger.
Such transactions may involve a risk of loss if the value of the securities fall
below the price committed to prior to the actual issuance. The Trust's custodian
will establish a segregated account for the Fund when it purchases securities on
a when-issued basis consisting of cash or liquid securities equal to the amount
of the when-issued commitments. Securities transactions involving delayed
deliveries or forward commitments are frequently characterized as when-issued
transactions and are similarly treated by the Fund.
Rule 144A Securities
Subject to the limitation on illiquid and restricted securities noted
above, the Fund may buy or sell restricted securities in accordance with Rule
144A under the Securities Act of 1933 ("Rule 144A Securities"). Securities may
be resold pursuant to Rule 144A under certain circumstances only to qualified
institutional buyers as defined in the rule, and the markets and trading
practices for such securities are relatively new and still developing; depending
on the development of such markets, such Rule 144A Securities may be deemed to
be liquid as determined by or in accordance with methods adopted by the
Trustees. Under such methods the following factors are considered, among others:
the frequency of trades and quotes for the security, the number of dealers and
potential purchasers in the market, marketmaking activity, and the nature of the
security and marketplace trades. Investments in Rule 144A Securities could have
the effect of increasing the level of the Fund's illiquidity to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
such securities. Also, the Fund may be adversely impacted by the possible
illiquidity and subjective valuation of such securities in the absence of a
market for them.
Indexed Securities
The Fund may purchase securities the value of which is indexed to
interest rates, foreign currencies and various indices and financial indicators.
These securities are generally short- to intermediate-term debt securities. The
interest rates or values at maturity fluctuate with the index to which they are
connected and may be more volatile than such index.
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<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 specified period to pay a bank or
investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an assumed figure selected by the parties for this
purpose) in exchange for agreement by the bank or investment banker to pay the
Fund a fixed rate of interest on the notional principal amount. In a currency
swap the Fund would agree with the other party to exchange cash flows based on
the relative differences in values of a notional amount of two (or more)
currencies; in an index swap, the Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices. Purchase
of a cap entitles the purchaser to receive payments from the seller on a
notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an
agreed-upon interest rate or amount. A collar combines a cap and a floor.
Most swaps entered into by the Fund will be on a net basis; for
example, in an interest rate swap, amounts generated by application of the fixed
rate and the floating rate to the notional principal amount would first offset
one another, with the Fund either receiving or paying the difference between
such amounts. In order to be in a position to meet any obligations resulting
from swaps, the Fund will set up a segregated custodial account to hold
appropriate liquid assets, including cash; for swaps entered into on a net
basis, assets will be segregated having a daily net asset value equal to any
excess of the Fund's accrued obligations over the accrued obligations of the
other party, while for swaps on other than a net basis assets will be segregated
having a value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a part of the Fund's portfolio.
However, the Fund may enter into such arrangements for income purposes to the
extent permitted by the CFTC for entities which are not commodity pool
operators, such as the Fund. In entering a swap arrangement, the Fund is
dependent upon the creditworthiness and good faith of the counterparty. The Fund
attempts to reduce the risks of nonperformance by the counterparty by dealing
only with established, reputable institutions. The swap market is still
relatively new and emerging; positions in swap arrangements may become illiquid
to the extent that nonstandard arrangements with one counterparty are not
readily transferable to another counterparty or if a market for the transfer of
swap positions does not develop. The use of interest rate swaps is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Investment Manager is incorrect in its forecasts of market values, interest
rates and other applicable factors, the investment performance of the Fund would
diminish compared with what it would have been if these investment techniques
were not used. Moreover, even if the Investment Manager is correct in its
forecasts, there is a risk that the swap position may correlate imperfectly with
the price of the asset or liability being hedged.
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<PAGE>
Securities Lending
The Fund may lend portfolio securities with a value of up to 33 1/3% of
its total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of the loaned securities plus accrued interest. The
Investment Manager will continuously monitor the value of the collateral to
ensure that it at all times remains equal to at least 100% of the current market
value of the loaned securities plus accrued interest, marking the collateral to
market daily.
Industry Classifications
In determining how much of the Fund's portfolio is invested in a given
industry, the 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.
Basic Industries Consumer Staple Science & Technology
- ---------------- --------------- --------------------
Chemical Business Service Aerospace
Diversified Container Computer Software & Service
Electrical Equipment Drug Electronic Components
Forest Products Food & Beverage Electronic Equipment
Machinery Hospital Supply Office Equipment
Metal & Mining Personal Care
Railroad Printing & Publishing
Truckers Tobacco
Utility Energy Consumer Cyclical
Electric Oil Refining and Airline
Gas Marketing Automotive
Gas Transmission Oil Production Building
Telephone Oil Service Hotel & Restaurant
Photography
Other Recreation
Trust Certificates -- Finance Retail Trade
Government Related Bank Textile & Apparel
Lending Financial Service
Asset-backed -- Mortgages Insurance
Asset-backed -- Credit
Card Receivables
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DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
As indicated in the Fund's Prospectus, the Fund may invest in long-term
and short-term debt securities. The Fund may invest in cash and short-term
securities for temporary defensive purposes when, in the opinion of the
Investment Manager, such a position is more likely to provide protection against
unfavorable market conditions than adherence to other investment policies.
Certain debt securities and money market instruments in which the Fund may
invest are described below.
U.S. Government and Related Securities. U.S. Government securities are
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S. Government
securities in which the Fund invests include, among others:
[bullet] direct obligations of the U.S. Treasury, i.e., U.S. Treasury
bills, notes, certificates and bonds;
[bullet] obligations of U.S. Government agencies or instrumentalities
such as the Federal Home Loan Banks, the Federal Farm Credit
Banks, the Federal National Mortgage Association, the
Government National Mortgage Association and the Federal Home
Loan Mortgage Corporation; and
[bullet] obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a
variety of ways by the U.S. Government, its agencies or instrumentalities. Some
of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. Other obligations, such as those of the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government to
purchase certain obligations of agencies or instrumentalities, although the U.S.
Government has no legal obligation to do so. Obligations such as those of the
Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation are backed
by the credit of the agency or instrumentality issuing the obligations. Certain
obligations of Resolution Funding Corporation, a mixed-ownership Government
corporation, are backed with respect to interest payments by the U.S. Treasury,
and with respect to principal payments by U.S. Treasury obligations held in a
segregated account with a Federal Reserve Bank. Except for certain
mortgage-backed securities, the Fund will only invest in obligations issued by
mixed-ownership Government corporations where such securities are guaranteed as
to payment of principal or interest by the U.S. Government or a U.S. Government
agency or instrumentality, and any unguaranteed principal or interest is
otherwise supported by U.S. Government obligations held in a segregated account.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The
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<PAGE>
principal and interest components of selected securities are traded
independently under the Separate Trading of Registered Interest and Principal of
Securities ("STRIPS") program. Under the STRIPS program, the principal and
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently. Obligations of Resolution Funding Corporation
are similarly divided into principal and interest components and maintained as
such on the book entry records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Bank Money Investments. Bank money investments include but are not
limited to certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are generally short-term (i.e., less than one year),
interest-bearing negotiable certificates issued by commercial banks or savings
and loan associations against funds deposited in the issuing institution. A
banker's acceptance is a time draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods). A banker's acceptance may be
obtained from a domestic or foreign bank, including a U.S. branch or agency of a
foreign bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. The Fund will not invest
in any such bank money investment unless the investment is issued by a U.S. bank
that is a member of the Federal Deposit Insurance Corporation ("FDIC"),
including any foreign branch thereof, a U.S. branch or agency of a foreign bank,
a foreign branch of a foreign bank, or a savings bank or savings and loan
association that is a member of the FDIC and which at the date of investment has
capital, surplus and undivided profits (as of the date of its most recently
published financial statements) in excess of $50 million. The Fund will not
invest in time deposits maturing in more than seven days and will not invest
more than 10% of its total assets in time deposits maturing in two to seven
days.
U.S. branches and agencies of foreign banks are offices of foreign banks and are
not separately incorporated entities. They are chartered and regulated either
federally or under state law. U.S. federal branches or agencies of foreign banks
are chartered and regulated by the 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
15
<PAGE>
may accept deposits and thus are eligible for FDIC insurance; however, not all
such branches elect FDIC insurance. Unlike U.S. branches of foreign banks, U.S.
agencies of foreign banks may not accept deposits and thus are not eligible for
FDIC insurance. Both branches and agencies can maintain credit balances, which
are funds received by the office incidental to or arising out of the exercise of
their banking powers and can exercise other commercial functions, such as
lending activities.
Short-Term Corporate Debt Instruments. Short-term corporate debt
instruments include commercial paper to finance short-term credit needs (i.e.,
short-term, unsecured promissory notes) issued by corporations including but not
limited to (a) domestic or foreign bank holding companies or (b) their
subsidiaries or affiliates where the debt instrument is guaranteed by the bank
holding company or an affiliated bank or where the bank holding company or the
affiliated bank is unconditionally liable for the debt instrument. Commercial
paper is usually sold on a discounted basis and has a maturity at the time of
issuance not exceeding nine months.
Commercial Paper Ratings. Commercial paper investments at the time of
purchase will be rated A by Standard & Poor's Corporation ("S&P") or Prime by
Moody's Investor's Service, Inc. ("Moody's"), or, if not rated, issued by
companies having an outstanding long-term unsecured debt issue rated at least A
by S&P or by Moody's. The money market investments in corporate bonds and
debentures (which must have maturities at the date of settlement of one year or
less) must be rated at the time of purchase at least A by S&P or by Moody's.
Commercial paper rated A (highest quality) by S&P is issued by entities which
have liquidity ratios which are adequate to meet cash requirements. Long-term
senior debt is rated A or better, although in some cases BBB credits may be
allowed. The issuer has access to at least two additional channels of borrowing.
Basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances. Typically, the issuer's industry is well established and
the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. The relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1, A-2
or A-3. (Those A-1 issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.
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<PAGE>
RATING CATEGORIES OF DEBT SECURITIES
Set forth below is a description of S&P corporate bond and debenture
ratings for securities which are deemed to be investment grade:
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Plus (+) or Minus (-): The ratings from AA to BBB may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to noncredit risks created by the terms of the
obligation, such as securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only (IO) and principal only (PO) mortgage securities.
Set forth below is a description of Moody's corporate bond and
debenture ratings for securities which are deemed to be investment grade:
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in the case of Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
Aaa securities.
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<PAGE>
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
1, 2 or 3: The ratings from Aa through Baa may be modified by the
addition of a numeral indicating a bond's rank within its rating category.
In the event applicable rating agencies lower the ratings of debt
instruments held by the Fund and the action results in a material decline in the
overall quality of the Fund's portfolio, the situation will be reviewed and
necessary action, if any, will be taken, including changes in the composition of
the portfolio.
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<PAGE>
TRUSTEES AND OFFICERS
The Trustees and 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 21.
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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 21.
20
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+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 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., 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.
21
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As of December 31, 1996, the Trustees and principal officers of the
Trust as a group owned approximately 5.9% of the outstanding Class A shares of
the Fund.
As of December 31, 1996, the following entities were the record and/or
beneficial owners of the approximate amounts of each class of shares of the Fund
as set forth beside their names:
Shareholder %
----------- -
Class A Merrill Lynch 7.6
Class B Merrill Lynch 22.0
Class C Chase Manhattan Bank, N.A. 88.5
Class D Merrill Lynch 38.9
PaineWebber 6.9
The full name and address of the above entities are as follows:
Merrill Lynch, Pierce, Fenner & Smith, Inc. (a)
One Liberty Plaza
165 Broadway
New York, New York 10080
Chase Manhattan Bank, N.A. (a)(b)
770 Broadway
New York, New York 10003
PaineWebber (a)
P.O.Box 3321
Weehawken, NJ 07087
- ---------------
(a) The Fund believes that each named record-holder 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 Life Insurance
Company.
Ownership of 25% or more of a voting security is deemed "control" as
defined in the 1940 Act. So long as 25% of a class of shares is so owned, such
owners will be presumed to be in control of such class of shares for purposes of
voting on certain matters submitted to a vote of shareholders, such as any
Distribution Plan for a given class.
22
<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.
23
<PAGE>
The advisory fee payable monthly by the Fund to the Investment Manager
is computed as a percentage of the average of the value of the net assets of the
Fund, as determined at the close of the New York Stock Exchange (the "NYSE") on
each day the NYSE is open for trading, at the annual rate of 0.75% of the net
assets of the Fund. The Distributor and its affiliates have from time to time
and in varying amounts voluntarily assumed some portion of fees or expenses
relating to the Fund. For the period October 4, 1993 (commencement of
operations) through September 30, 1994 and for the fiscal years ended September
30, 1995 and 1996, the Fund's investment advisory fee prior to the assumption of
fees or expenses was $267,184, $501,000 and $443,318, respectively. For the same
periods, the voluntary reduction of fees or assumption of expenses amounted to
$186,448, $453,010 and $233,624, respectively.
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund for a period of two years after its initial effectiveness
and will continue from year to year thereafter as long as it is approved at
least annually both (i) by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act) or by the Trustees of the
Trust, and (ii) in either event by a vote of a majority of the Trustees who are
not parties to the Advisory Agreement or "interested persons" of any party
thereto, cast in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement may be terminated on 60 days' written notice by
either party and will terminate automatically in the event of its assignment, as
defined under the 1940 Act and regulations thereunder. Such regulations provide
that a transaction which does not result in a change of actual control or
management of an adviser is not deemed an assignment.
Under a Shareholders' Administrative Services Agreement between the
Trust and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Fund, and is entitled to
reimbursements of its costs for providing such services. Under certain
arrangements for Metropolitan to provide such administrative services,
Metropolitan may receive a fee for the maintenance of certain share ownership
records for participants in sponsored arrangements, such as employee benefit
plans, through or under which the Fund's shares may be purchased.
Under the Code of Ethics of the Investment Manager, its employees in
Boston, where investment management operations are conducted, are only permitted
to engage in personal securities transactions in accordance with certain
conditions relating to an employee's position, the identity of the security, the
timing of the transaction, and similar factors. Such employees must 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
24
<PAGE>
of all classes except Class C shares, a sales charge which, at the election of
the investor, may be imposed (i) at the time of purchase (the Class A shares) or
(ii) on a deferred basis (the Class B and Class D shares). General information
on how to buy shares of the Fund, as well as sales charges involved, is set
forth under "Purchase of Shares" in the Prospectus. The following supplements
that information.
Public Offering Price. The public offering price for each class of
shares of the Fund is based on their net asset value determined as of the close
of the NYSE on the day the purchase order is received by State Street Research
Shareholder Services provided that the order is received prior to the close of
the NYSE on that day; otherwise the net asset value used is that determined as
of the close of the NYSE on the next day it is open for unrestricted trading.
When a purchase order is placed through a dealer, that dealer is responsible for
transmitting the order promptly to State Street Research Shareholder Services in
order to permit the investor to obtain the current price. Any loss suffered by
an investor which results from a dealer's failure to transmit an order promptly
is a matter for settlement between the investor and the dealer.
Reduced Sales Charges. For purposes of determining whether a purchase
of Class A shares qualifies for reduced sales charges, the term "person"
includes: (i) an individual, or an individual combining with his or her spouse
and their children and purchasing for his, her or their own account; (ii) a
"company" as defined in Section 2(a)(8) of the 1940 Act; (iii) a trustee or
other fiduciary purchasing for a single trust estate or single fiduciary account
(including a pension, profit sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code);
(iv) a tax-exempt organization under Section 501(c)(3) or (13) of the Internal
Revenue Code; and (v) an employee benefit plan of a single employer or of
affiliated employers.
Investors may purchase Class A shares of the Fund at reduced sales
charges by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds" as
designated by the Distributor within a 13-month period. The sales charge
applicable to each purchase made pursuant to a Letter of Intent will be that
which would apply if the total dollar amount set forth in the Letter of Intent
were being bought in a single transaction. Purchases made within a 90-day period
prior to the execution of a Letter of Intent may be included therein; in such
case the date of the earliest of such purchases marks the commencement of the
13-month period.
An investor may include toward completion of a Letter of Intent the
value (at the current public offering price) of all of his or her Class A shares
of the Fund and of any of the other Class 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
25
<PAGE>
the higher sales charge which would apply if the total purchase is not completed
within the allotted time. The escrowed shares will be released when the Letter
of Intent is completed or, if it is not completed, when the balance of the
higher sales charge is upon notice, remitted by the investor. All dividends and
capital gains distributions with respect to the escrowed shares will be credited
to the investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Class C Shares. Class C shares are currently available to certain
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 value of the shares of the Fund is determined once daily
as of the close of the NYSE, ordinarily 4 P.M. New York City time, Monday
through Friday, on each day during which the NYSE is open for unrestricted
trading. The NYSE is currently closed for New Year's Day, Presidents Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
26
<PAGE>
The net asset value per share of the Fund is computed by dividing the
sum of the market value of the securities held by the Fund plus any cash or
other assets minus all liabilities by the total number of outstanding shares of
the Fund at such time. Any expenses, except for extraordinary or nonrecurring
expenses, borne by the Fund, including the investment management fee payable to
the Investment Manager, are accrued daily.
In determining the values of the portfolio assets as provided below,
the Trustees may utilize one or more pricing services in lieu of market
quotations for certain securities which are not readily available on a daily
basis. Such services may provide prices determined as of times prior to the
close of the NYSE.
In general, securities are valued as follows. Securities which are
listed or traded on the New York or American Stock Exchange are valued at the
price of the last quoted sale on the respective exchange for that day.
Securities which are listed or traded on a national securities exchange or
exchanges, but not on the New York or American Stock Exchange, are valued at the
price of the last quoted sale on the exchange for that day prior to the close of
the NYSE. Securities not listed on any national securities exchange which are
traded "over the counter" and for which quotations are available on the National
Association of Securities Dealers' NASDAQ System, or other system, are valued at
the closing price supplied through such system for that day at the close of the
NYSE. Other securities are, in general, valued at the mean of the bid and asked
quotations last quoted prior to the close of the NYSE if there are market
quotations readily available, or in the absence of such market quotations, then
at the fair value thereof as determined by or under authority of the Trustees of
the Trust 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.
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
27
<PAGE>
turnover, as described in the Prospectus. The portfolio turnover rates for the
fiscal years ended September 30, 1995 and 1996, were 178.60% and 155.85%,
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.
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.
28
<PAGE>
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.
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 period October 4,
1993 (commencement of operations) through September 30, 1994 and during the
fiscal years ended September 30, 1995 and 1996, amounted to $89,000, $169,000
and $133,000, respectively. During and at the end of its most recent fiscal
year, the Fund held in its portfolio no securities of any entity that might be
deemed to be a regular broker-dealer of the Fund as defined under the 1940 Act.
29
<PAGE>
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 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 -- In General
The Fund intends to qualify and elect to be treated each taxable year
as a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), although it cannot give complete
assurance that it will do so. Accordingly, the Fund must, among other things,
(a) derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of the
following held
30
<PAGE>
for less than three months (the "30% test"): (i) stock or securities; (ii)
options, futures, or forward contracts (other than options, futures, or forward
contracts on foreign currencies), or (iii) foreign currencies (or options,
futures, or forward contracts on foreign currencies) but only if such currencies
(or options, futures, or forward contracts) are not directly related to the
Fund's principal business of investing in stocks or securities (or options and
futures with respect to stocks or securities); (c) satisfy certain
diversification requirements and (d) in order to be entitled to utilize the
dividends paid deduction, distribute annually at least 90% of its investment
company taxable income (determined without regard to the deduction for dividends
paid).
The 30% test will limit the extent to which the Fund may sell
securities held for less than three months; write options which expire in less
than three months, and effect closing transactions with respect to call or put
options that have been written or purchased within the preceding three months.
(If the Fund purchases a put option for the purpose of hedging an underlying
portfolio security, the acquisition of the option is treated as a short sale of
the underlying security unless, for purposes only of the 30% test, the option
and the security are acquired on the same date.) Finally, as discussed below,
this requirement may also limit investments by the Fund in options on stock
indices, listed options on nonconvertible debt securities, futures contracts,
options on interest rate futures contracts and certain foreign currency
contracts.
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of the Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of the
Fund.
The Fund will be liable for a nondeductible 4% excise tax on amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement. To avoid the tax, during each calendar year the Fund
must distribute an amount equal to at least 98% of the sum of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, and its capital gain net income for the 12-month period ending on October
31, in addition to any undistributed portion of the respective balances from the
prior year. The Fund intends to make sufficient distributions to avoid this 4%
excise tax.
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
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<PAGE>
maturity which takes into account the compounding of accrued interest. Under
section 1286 of the Code, an investment in a stripped bond or stripped coupon
may result in original issue discount.
Debt securities may be purchased by the Fund at a discount that exceeds
the original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for income tax
purposes. In the case of any debt security issued after July 18, 1984, having a
fixed maturity date of more than one year from the date of issue and having
market discount, the gain realized on disposition will be treated as interest to
the extent it does not exceed the accrued market discount on the security
(unless the Fund elects to include such accrued market discount in income in the
tax year to which it is attributable). Generally, market discount is accrued on
a daily basis. The Fund may be required to capitalize, rather than deduct
currently, part or all of any direct interest expense incurred to purchase or
carry any debt security having market discount, unless the Fund makes the
election to include market discount currently. Because the Fund must include
original issue discount in income, it will be more difficult for the Fund to
make the distributions required for the Fund to maintain its status as a
regulated investment company under Subchapter M of the Code or to avoid the 4%
excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may
be subject to provisions of the Code that (i) require inclusion of unrealized
gains or losses in the Fund's income for purposes of the 90% test, the 30% test,
the excise tax and the distribution requirements applicable to regulated
investment companies; (ii) defer recognition of realized losses; and (iii)
characterize both realized and unrealized gain or loss as short-term or
long-term gain or loss. Such provisions generally apply to, among other
investments, options on debt securities, indices on securities and futures
contracts.
Federal Income Taxation of Shareholders
Dividends paid by the Fund may be eligible for the 70%
dividends-received deduction for corporations. The percentage of the Fund's
dividends eligible for such tax treatment may be less than 100% to the extent
that less than 100% of the Fund's gross income may be from qualifying dividends
of domestic corporations. Any dividend declared in October, November or December
and made payable to shareholders of record in any such month is treated as
received by such shareholders on December 31, provided that the Fund pays the
dividend during January of the following calendar year.
Distributions by the Fund can result in a reduction in the fair market
value of the Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as ordinary income or long-term capital gain, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable
32
<PAGE>
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,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class D shares). The Distributor may reallow all
or portions of such sales charges as concessions to dealers. For the period
October 4, 1993 (commencement of operations) through September 30, 1994 and for
the fiscal years ended September 30, 1995 and 1996, total sales charges on Class
A shares paid to the Distributor amounted to $514,638, $84,789 and $17,809,
respectively. For the same periods, the Distributor retained $62,866, $9,616 and
$2,120, 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
33
<PAGE>
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 1.00% on any portion
of such shares redeemed within one year following their sale. After a particular
purchase of Class A shares is made under the Letter of Intent, the commission
will be paid only in respect of that particular purchase of shares. If the
Letter of Intent is not completed, the commission paid will be deducted from any
discounts or commissions otherwise payable to such dealer in respect of shares
actually sold. If an investor is eligible to purchase shares at net asset value
on account of the Right of Accumulation, the commission will be paid only in
respect of the incremental purchase at net asset value.
For the periods shown below, the Distributor received contingent
deferred sales charges upon redemption of Class A, Class B and Class D shares of
the Fund and paid initial commissions to securities dealers for sales of such
shares as follows:
October 4, 1993
(Commencement of
Operations) through
Fiscal Year Ended Fiscal Year Ended Period Ended
September 30, 1996 September 30, 1995 September 30, 1994
---------------------- ---------------------- -----------------------
Contingent Contingent Contingent
Deferred Commissions Deferred Commissions Deferred Commissions
Sales Paid to Sales Paid to Sales Paid to
Charges Dealers Charges Dealers Charges Dealers
------- ------- ------- ------- ------- -------
Class A $ 0 $15,689 $ 0 $ 75,173 $ 0 $ 451,772
Class B $81,122 $20,187 $128,068 $133,801 $1,331 $1,227,898
Class D $ 264 $ 1,054 $ 6,586 $ 6,453 $ 0 $ 111,232
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "Distribution Plan") under which the Fund may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of Class A, Class B and Class D shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to underwriters, securities dealers
and others engaged in the sale of shares, including payments to the Distributor
to be used to pay commissions and/or reimbursement to securities dealers (which
securities dealers may be affiliates of the Distributor) engaged in the
distribution and marketing of shares and furnishing ongoing assistance to
investors, (2) reimbursement of direct out-of-pocket expenditures incurred by
the Distributor in connection with the distribution and marketing of shares and
the servicing of investor accounts including expenses relating to the
formulation and implementation of marketing strategies and promotional
activities such as direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising, the preparation, printing and
distribution
34
<PAGE>
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 or other
sources to underwriters, securities dealers and others in connection with sales
of shares, to the extent, if any, that such payments may be deemed to be within
the scope of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class D shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class D
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class D shares (as the case may be) to make payments for personal
services and/or the maintenance 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 rendering service to
shareholders on an ongoing basis. Such amounts are based on the net asset value
of shares of the Fund held by such dealers as nominee for their customers or
which are owned directly by such customers for so long as such shares are
outstanding and the Distribution Plan remains in effect with respect to the
Fund. Any amounts received by the Distributor and not so allocated may be
applied by the Distributor as reimbursement for expenses incurred in connection
with the servicing of investor accounts. The distribution and servicing expenses
of a particular class will be borne solely by that class.
35
<PAGE>
During the fiscal year ended September 30, 1996, the Fund paid the
Distributor fees under the Distribution Plan and the Distributor used all of
such payments for expenses incurred on behalf of the Fund as follows:
Class A Class B Class D
------- ------- -------
Advertising $ 404 $ 0 $ 1,146
Printing and mailing of
prospectuses to other
than current shareholders 157 0 444
Compensation to dealers 44,306 231,925 41,399
Compensation to sales personnel 1,893 0 5,369
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses: marketing; 981 0 2,785
general
Total fees $47,741 $231,925 $51,143
======= ======== ======
The Distributor may have also used additional resources of its own for further
expenses on behalf of the Fund.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Fund will attempt to make
alternative arrangements for such services for shareholders who acquired shares
through such institutions.
36
<PAGE>
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") of the Class
A, Class B, Class C and Class D shares of the Fund will be calculated as set
forth below. Total return is computed separately for each class of shares of the
Fund. Performance data for a specified class includes periods prior to the
adoption of class designations. Shares of the Fund had no class designations
until February 1, 1994, when designations were assigned based on the pricing and
Rule 12b-1 fees applicable to shares sold thereafter.
The performance data reflects Rule 12b-1 fees and sales charges as set
forth below:
Rule 12b-1 Fees Sales Charges
---------------------------------------- -------------
Class Amount Period
- ----- ------ --------------------------------
A 0.25% February 1, 1994 to present; fee Maximum 4.5% sales
will reduce performance for charge reflected
periods after February 1, 1994
B 1.00% February 1, 1994 to present; fee 1- and 5-year periods reflect
will reduce performance for a 5% and a 2% contingent
periods after February 1, 1994 deferred sales charge,
respectively
C 0.00% Since commencement of None
operations to present
D 1.00% February 1, 1994 to present; fee 1-year period reflects a 1%
will reduce performance for contingent deferred sales
periods after February 1, 1994 charge
The Fund's performance is shown below, and where noted, reflects the
voluntary measures, if any, by the Fund's affiliates to reduce fees or expenses
relating to the Fund; see "Accrued Expenses" later in this section.
37
<PAGE>
Total Return
The standard total return of each class of the Fund's shares were as
follows:
Commencement of
Operations (October 4, 1993) One Year Ended
to September 30, 1996 September 30, 1996
------------------------------ ------------------------------
With Subsidy Without Subsidy With Subsidy Without Subsidy
Class A 4.26% 3.75% 11.66% 11.22%
Class B 4.27% 3.74% 10.97% 10.50%
Class C 6.22% 5.67% 17.09% 16.63%
Class D 5.15% 4.63% 14.87% 14.40%
Standard total return is computed separately for each class of shares
by determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value in accordance with the following formula:
P(1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the
designated period assuming a hypothetical
$1,000 payment made at the beginning of
the designated period
The calculation is based on the further assumptions that the maximum
initial or contingent deferred sales charge applicable to the investment is
deducted, and that all dividends and distributions by the Fund are reinvested at
net asset value on the reinvestment dates during the periods. All accrued
expenses are also taken into account as described later herein.
38
<PAGE>
Accrued Expenses
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return results take sales charges, if applicable, into account,
although the results do not take into account recurring and nonrecurring charges
for optional services which only certain shareholders elect and which involve
nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by
affiliates of fees or expenses during the subject period. In the absence of such
subsidization, the performance of the Fund will be lower.
Nonstandardized Total Return
The Fund may provide the above described standard total return results
for Class A, Class B, Class C and Class D shares for periods which end no
earlier than the most recent calendar quarter end and which begin twelve months
before and at the time of commencement of the Fund's operations. In addition,
the Fund may provide nonstandardized total return results for differing periods,
such as for the most recent six months. Such nonstandardized total return is
computed as otherwise described under "Total Return" except the result may or
may not be annualized, and as noted any applicable sales charge may not be taken
into account and therefore not deducted from the hypothetical initial payment of
$1,000 or ending value. For example, the nonstandardized total returns for the
six months ended September 30, 1996 without taking sales charges into account,
were as follows:
With Subsidy Without Subsidy
------------ ---------------
Class A 15.26% 15.05%
Class B 14.89% 14.68%
Class C 15.44% 15.23%
Class D 14.79% 14.57%
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
39
<PAGE>
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as the Trust's independent accountants, providing professional
services including (1) an audit of the annual financial statements, (2)
assistance and consultation in connection with Securities and Exchange
Commission filings and (3) review of the annual income tax returns filed on
behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a
semiannual basis, other supplementary financial reports may be made available
from time to time and holders of record may request a copy of a current
supplementary report, if any, by calling State Street Research Shareholder
Services.
The following financial statements of State Street Research Small
Capitalization Growth Fund are for the fiscal year ended September 30, 1996.
State Street Research Small Capitalization Growth Fund changed its name to
"State Street Research Emerging Growth Fund" in Feburary 1997.
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
INVESTMENT PORTFOLIO
September 30, 1996
Value
Shares (Note 1)
------------------------------------------------------ -----------
COMMON STOCKS 89.5%
Basic Industries 6.9%
Chemical 2.3%
Cambrex Corp. 25,750 $ 872,281
General Chemical Group Inc. 26,900 534,638
-----------
1,406,919
-----------
Forest Product 0.7%
Buckeye Cellulose Corp.* 15,900 413,400
-----------
Machinery 1.4%
US Filter Corp.* 26,400 900,900
-----------
Metal & Mining 2.2%
Carbide / Graphite Group Inc.* 22,300 409,763
Oregon Metallurgical Corp.* 10,100 328,250
Wyman-Gordon Co.* 26,100 597,037
-----------
1,335,050
-----------
Railroad 0.3%
Genesee & Wyoming Inc. Cl. A* 6,400 174,400
-----------
Total Basic Industries 4,230,669
-----------
Consumer Cyclical 15.5%
Airline 1.9%
Atlas Air Inc.* 27,500 1,175,625
-----------
Automotive 0.9%
Dura Automotive Systems Inc. Cl. A* 1,100 20,488
Lear Corp.* 15,200 501,600
-----------
522,088
-----------
Hotel & Restaurant 1.8%
Outback Steakhouse Inc.* 7,950 191,794
Primadonna Resorts Inc.* 25,200 459,900
Station Casinos Inc.* 38,000 456,000
-----------
1,107,694
-----------
Recreation 4.2%
American Radio Systems Corp. Cl. A* 14,700 547,575
Anchor Gaming* 7,000 435,750
Argyle Television Inc. Cl. A* 11,900 334,687
Cox Radio Inc. Cl. A* 2,400 52,800
EZ Communications Inc.* 4,200 184,800
Lewis Galoob Toys Inc.* 11,600 339,300
Ortel Corp.* 14,700 352,800
Silver King Communications Inc.* 13,500 317,250
-----------
2,564,962
-----------
Retail Trade 6.2%
Abercrombie & Fitch Co. Cl. A* 2,000 $ 49,000
CUC International Inc.* 18,007 718,029
Global DirectMail Corp.* 24,100 1,150,775
Gymboree Corp.* 10,000 303,750
Loehmann's, Inc.* 17,500 469,219
MSC Industrial Direct Inc. Cl. A* 9,200 327,750
Renters Choice Inc.* 15,700 294,375
Viking Office Products Inc.* 16,200 486,000
-----------
3,798,898
-----------
Textile & Apparel 0.5%
Authentic Fitness Corp. 27,600 338,100
-----------
Total Consumer Cyclical 9,507,367
-----------
Consumer Staple 28.1%
Business Service 10.1%
American Pad & Paper Co.* 28,000 595,000
ATC Communications Group Inc.* 37,200 651,000
Career Horizons Inc.* 12,700 493,712
Carriage Services Inc. Cl. A* 32,000 616,000
Commodore Applied Technologies Inc.* 33,300 220,613
Commodore Applied Technologies Inc. Wts.* 33,300 58,275
HA-LO Industries, Inc.* 33,250 964,250
National Media Corp.* 18,000 267,750
Personnel Group of America Inc.* 33,100 860,600
PIA Merchandising Services Inc.* 8,400 107,100
Right Management Consultants Inc.* 9,350 226,738
Strategic Distribution Inc.* 64,900 328,556
Technology Solutions Co.* 23,400 816,075
-----------
6,205,669
-----------
Drug 2.0%
Biovail Corp. International* 26,700 954,525
CytoTherapeutics, Inc.* 34,600 294,100
-----------
1,248,625
-----------
Hospital Supply 12.1%
American Medical Response, Inc.* 16,800 604,800
Atria Communities Inc.* 39,200 490,000
Cytyc Corp.* 6,500 97,500
General Surgical Innovations Inc.* 14,000 154,000
Genesis Health Ventures Inc.* 23,200 652,500
Healthdyne Technologies Inc.* 60,500 506,687
Imagyn Medical Inc.* 49,900 536,425
Karrington Health Inc.* 22,400 291,200
Lincare Holdings Inc.* 19,200 768,000
Mariner Health Group Inc.* 29,100 447,413
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
Value
Shares (Note 1)
------------------------------------------------------ -----------
Hospital Supply (cont'd)
MIM Corp.* 36,800 $ 533,600
Physio-Control International Corp.* 16,500 416,625
Respironics Inc.* 20,000 485,000
Rotech Medical Corp.* 24,200 399,300
Rural / Metro Corp.* 11,300 412,450
Ultra-Fem Inc.* 27,200 629,000
-----------
7,424,500
-----------
Personal Care 1.0%
Gargoyles Inc.* 500 10,625
U.S.A. Detergents Inc.* 14,300 568,425
-----------
579,050
-----------
Printing & Publishing 1.9%
Heritage Media Corp. Cl. A* 22,400 422,800
Providence Journal Co. Cl. A* 24,100 707,937
-----------
1,130,737
-----------
Tobacco 1.0%
Schweitzer-Mauduit International Inc. 18,000 603,000
-----------
Total Consumer Staple 17,191,581
-----------
Energy 5.9%
Oil 5.0%
Abacan Resources Corp.* 101,000 694,375
Global Natural Resources Inc.* 29,000 503,875
Nuevo Energy Co.* 25,900 1,052,187
Plains Resources Inc.* 20,600 285,825
Ranger Oil Ltd.* 65,100 488,250
-----------
3,024,512
-----------
Oil Service 0.9%
Atwood Oceanics Inc.* 4,200 184,800
Dreco Energy Services Ltd. Cl. A* 15,500 377,813
-----------
562,613
-----------
Total Energy 3,587,125
-----------
Finance 6.6%
Bank 0.3%
Bank United Corp. Cl. A* 6,800 169,150
-----------
Financial Service 2.0%
Alex Brown Inc. 8,100 468,787
CMAC Investment Corp.* 7,400 469,900
RAC Financial Group Inc.* 7,300 333,063
-----------
1,271,750
-----------
Insurance 4.3%
American Travellers Corp.* 13,650 $ 452,156
Delphi Financial Group Inc.* 12,600 352,800
Executive Risk Inc.* 8,000 308,000
Mutual Risk Management Ltd. 18,666 541,314
NAC Re Corp. 27,100 975,600
-----------
2,629,870
-----------
Total Finance 4,070,770
-----------
Science & Technology 21.0%
Computer Software & Service 14.0%
ACT Networks Inc.* 9,600 268,800
Applied Graphics Technologies, Inc.* 21,500 319,813
Avant! Corp.* 18,100 543,000
Cerner Corp.* 24,400 378,200
Datastream Systems Inc.* 9,700 293,425
Desktop Data Inc.* 11,800 342,200
Diana Corp.* 7,875 322,875
Integrated Measurement Systems Inc.* 25,900 427,350
Manugistics Group Inc.* 7,400 297,850
National Processing Inc.* 37,000 721,500
Object Design Inc.* 30,500 491,812
Optical Data Systems Inc.* 31,800 540,600
Planning Sciences International PLC ADR* 10,900 160,775
Siebel Systems Inc.* 5,200 216,450
Software 2000 Inc.* 37,000 360,750
SPSS Inc.* 18,100 502,275
SystemSoft Corp.* 16,100 551,425
Ultratech Stepper Inc.* 22,500 424,687
Vantive Corp.* 1,300 84,175
VideoServer Inc.* 18,900 656,775
Wang Laboratories Inc.* 34,300 668,850
-----------
8,573,587
-----------
Electronic Components 4.5%
Augat Inc. 21,700 461,125
DuPont Photomasks Inc.* 13,200 369,600
Encad Inc.* 11,600 485,750
VLSI Technology Inc.* 35,700 580,125
Xicor Inc.* 27,300 317,363
Zebra Technologies Corp. Cl. A* 22,200 568,875
-----------
2,782,838
-----------
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
INVESTMENT PORTFOLIO (cont'd)
Value
Shares (Note 1)
------------------------------------------------------ -----------
Electronic Equipment 1.0%
Advanced Fibre Communications, Inc.* 400 $ 10,000
Berg Electronics Corp.* 21,300 580,425
--------------
590,425
--------------
Office Equipment 1.5%
FileNet Corp.* 26,600 678,300
HMT Technology Corp.* 12,200 265,350
--------------
943,650
--------------
Total Science & Technology 12,890,500
--------------
Utility 5.5%
Natural Gas 0.8%
KCS Energy Inc. 12,900 459,562
--------------
Telephone 4.7%
Allen Group Inc. 25,800 477,300
Geotek Communications Inc.* 63,000 527,625
LCC International Inc. Cl. A* 15,000 273,750
Midcom Communications Inc.* 18,000 247,500
Tel-Save Holdings Inc.* 29,500 848,125
Trescom International Inc.* 40,200 522,600
--------------
2,896,900
--------------
Total Utility 3,356,462
--------------
Total Common Stocks (Cost $45,857,378) 54,834,474
--------------
Principal Maturity
Amount Date
-------------------------------- ------------ ------------- -------------
SHORT-TERM OBLIGATIONS 9.2%
American Express Credit Corp.,
5.00% $ 399,000 10/02/1996 399,000
Chevron Oil Finance Co., 5.28% 2,724,000 10/02/1996 2,724,000
Ford Motor Credit Co., 5.36% 2,487,000 10/04/1996 2,487,000
-------------
Total Short-Term Obligations (Cost $5,610,000) 5,610,000
-------------
Total Investments (Cost $51,467,378)--98.7% 60,444,474
Cash and Other Assets, Less Liabilities--1.3% 815,337
-------------
Net Assets--100.0% $61,259,811
=============
Federal Income Tax Information:
At September 30, 1996, the net unrealized
appreciation of investments based on cost
for Federal income tax purposes of
$51,475,689 was as follows:
Aggregate gross unrealized appreciation for
all investments in which there is an excess
of value over tax cost $12,408,345
Aggregate gross unrealized depreciation for
all investments in which there is an excess
of tax cost over value (3,439,560)
--------------
$ 8,968,785
==============
* Nonincome-producing securities
ADR stands for American Depository Receipt, representing ownership of foreign
securities.
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1996
Assets
Investments, at value (Cost $51,467,378) (Note 1) $60,444,474
Cash 637
Receivable for securities sold 2,203,549
Dividends and interest receivable 7,438
Receivable from Distributor (Note 3) 3,892
Deferred organization costs and other assets (Note 1) 13,139
------------
62,673,129
Liabilities
Payable for securities purchased 1,104,607
Payable for fund shares redeemed 111,396
Accrued transfer agent and shareholder services (Note 2) 64,079
Accrued management fee (Note 2) 34,767
Accrued distribution and service fees (Note 5) 25,184
Accrued trustees' fees (Note 2) 11,017
Other accrued expenses 62,268
------------
1,413,318
------------
Net Assets $61,259,811
============
Net Assets consist of:
Unrealized appreciation of investments $ 8,977,096
Accumulated net realized gain 4,184,442
Shares of beneficial interest 48,098,273
------------
$61,259,811
============
Net Asset Value and redemption price per share of Class
A shares ($19,790,701 / 1,747,342 shares of beneficial
interest) $11.33
============
Maximum Offering Price per share of Class A shares
($11.33 / .955) $11.86
============
Net Asset Value and offering price per share of
Class B shares ($23,655,788 / 2,129,754 shares of
beneficial interest)* $11.11
============
Net Asset Value, offering price and redemption price per
share of Class C shares ($13,310,681 / 1,163,690
shares of beneficial interest) $11.44
============
Net Asset Value and offering price per share of
Class D shares ($4,502,641 / 405,535 shares
of beneficial interest)* $11.10
============
* 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
Interest $ 158,590
Dividends, net of foreign taxes of $1,429 72,828
-------------
231,418
Expenses
Management fee (Note 2) 443,318
Transfer agent and shareholder services (Note 2) 187,322
Custodian fee 116,800
Reports to shareholders 59,081
Service fee-Class A (Note 5) 47,741
Distribution and service fees-Class B (Note 5) 231,925
Distribution and service fees-Class D (Note 5) 51,143
Registration fees 20,997
Audit fee 19,441
Trustees' fees (Note 2) 15,525
Legal fees 3,230
Amortization of organization costs (Note 1) 6,555
Miscellaneous 11,243
-------------
1,214,321
Expenses borne by the Distributor (Note 3) (233,264)
-------------
981,057
-------------
Net investment loss (749,639)
-------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain on investments (Notes 1 and 3) 11,088,837
Net unrealized depreciation of investments (2,000,953)
-------------
Net gain on investments 9,087,884
-------------
Net increase in net assets resulting from
operations $ 8,338,245
=============
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
Year ended September 30
---------------------------
1996 1995
------------------------------- ------------- -------------
Increase (Decrease) in Net Assets
Operations:
Net investment loss $ (749,639) $ (872,119)
Net realized gain (loss) on
investments* 11,088,837 (3,364,808)
Net unrealized appreciation
(depreciation) of investments (2,000,953) 11,482,443
------------- -------------
Net increase resulting from
operations 8,338,245 7,245,516
------------- -------------
Net decrease from fund share
transactions (Note 6) (14,818,177) (7,844,245)
------------- -------------
Total decrease in net assets (6,479,932) (598,729)
Net Assets
Beginning of year 67,739,743 68,338,472
------------- -------------
End of year $ 61,259,811 $67,739,743
============= =============
* Net realized gain (loss) for
Federal income tax purposes
(Note 1) $ 7,630,937 $(2,682,827)
============= =============
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
Note 1
State Street Research Small Capitalization Growth 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 Small Capitalization Growth
Fund, State Street Research Capital Fund and State Street Research Small
Capitalization Value Fund.
The investment objective of the Fund is to provide growth of capital. In
seeking to achieve its investment objective, the Fund invests primarily in
the equity securities of emerging growth and small capitalization companies.
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.
7
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
B. Federal Income Taxes
No provision for Federal income taxes is necessary since the Fund intends to
qualify under Subchapter M of the Internal Revenue Code and its policy is to
distribute all of its taxable income, including net realized capital gains,
if any, within the prescribed time periods.
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, 1994
through September 30, 1995, the Fund incurred net capital losses of
$3,462,622 and has deferred and treated such losses as arising in the fiscal
year ended September 30, 1996.
C. Dividends
Dividends from net investment income, if any, are declared and paid or
reinvested annually. Net realized capital gains, if any, are distributed
annually, unless additional distributions are required for compliance with
applicable tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
D. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and are being amortized under the straight-line method over a
period of five years.
E. 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 $15,525 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. In addition, Metropolitan receives a fee for maintenance
of the accounts of certain shareholders who are participants in sponsored
arrangements, employee benefit plans and similar programs or plans, through
or under which shares of the Fund may be purchased. During the year ended
September 30, 1996, the amount of such shareholder servicing and account
maintenance expenses was $55,149.
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended September 30, 1996, the amount of such expenses
assumed by the Distributor and its affiliates was $233,264.
Note 4
For the year ended September 30, 1996, exclusive of short-term investments
and U.S. Government obligations, purchases and sales of securities aggregated
$88,838,934 and $107,714,541, respectively.
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940. Under the Plan, the Fund
pays annual service fees to the Distributor at a rate of 0.25% of average
daily net assets for Class A, Class B and Class D shares. In addition, the
Fund pays annual distribution fees of 0.75% of average daily net assets for
Class B and Class D shares. The Distributor uses such payments for personal
services and/or the maintenance 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 $47,741, $231,925 and $51,143 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 $2,120 and $8,348, 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 $7,991 on sales of
Class B shares, and that the Distributor collected contingent deferred sales
charges aggregating $81,122 and $264 on redemptions of Class B and Class D
shares, respectively, during the same period.
8
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
NOTES (cont'd)
Note 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At September 30, 1996, the
Adviser owned one Class C share of the Fund.
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 163,674 $ 1,606,790 585,876 $ 4,916,956
Shares redeemed (632,394) (6,137,327) (937,567) (7,864,550)
------------ ------------ ------------ ------------
Net decrease (468,720) $(4,530,537) (351,691) $(2,947,594)
============ ============ ============ ============
Class B Shares Amount Shares Amount
- -------------------------- ------------ ------------ ------------ ------------
Shares sold 84,647 $ 831,719 477,595 $ 3,977,732
Shares redeemed (721,298) (6,831,042) (1,148,744) (9,420,297)
------------ ------------ ------------ ------------
Net decrease (636,651) $(5,999,323) (671,149) $(5,442,565)
============ ============ ============ ============
Class C Shares Amount Shares Amount
- -------------------------- ------------ ------------ ------------ ------------
Shares sold 490,032 $ 5,072,988 836,117 $ 7,366,455
Shares redeemed (593,777) (5,912,012) (386,614) (3,415,989)
------------ ------------ ------------ ------------
Net increase (decrease) (103,745) $ (839,024) 449,503 $ 3,950,466
============ ============ ============ ============
Class D Shares Amount Shares Amount
- -------------------------- ------------ ------------ ------------ ------------
Shares sold 14,475 $ 143,867 85,008 $ 686,924
Shares redeemed (380,626) (3,593,160) (490,937) (4,091,476)
------------ ------------ ------------ ------------
Net decrease (366,151) $(3,449,293) (405,929) $(3,404,552)
============ ============ ============ ============
</TABLE>
9
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Class B
-------------------------------------- --------------------------------------
Year ended September 30 Year ended September 30
-------------------------------------- --------------------------------------
1996**** 1995**** 1994** 1996**** 1995**** 1994**
- --------------------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 9.69 $ 8.56 $ 9.45 $ 9.58 $ 8.52 $ 9.45
Net investment loss* (0.09) (0.08) (0.02) (0.17) (0.14) (0.06)
Net realized and unrealized
gain (loss) on
investments 1.73 1.21 (0.87) 1.70 1.20 (0.87)
------------ ------------ ------------ ------------ ------------ ------------
Net asset value, end of
year $ 11.33 $ 9.69 $ 8.56 $ 11.11 $ 9.58 $ 8.52
============ ============ ============ ============ ============ ============
Total return 16.92%+ 13.20%+ (9.42)%+++ 15.97%+ 12.44%+ (9.84)%+++
Net assets at end of year
(000s) $19,791 $21,480 $21,986 $23,656 $26,489 $29,287
Ratio of operating expenses
to average net assets* 1.35% 1.35% 1.35%++ 2.10% 2.10% 2.10%++
Ratio of net investment
loss to average net
assets* (0.96)% (0.93)% (0.58)%++ (1.71)% (1.67)% (1.32)%++
Portfolio turnover rate 155.85% 178.60% 83.61% 155.85% 178.60% 83.61%
Average commission rate@ $ .0159 -- -- $ .0159 -- --
*Reflects voluntary
assumption of fees or
expenses per share in
each year (Note 3). $ 0.04 $ 0.06 $ 0.02 $ 0.04 $ 0.06 $ 0.02
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
-------------------------------------- --------------------------------------
Year ended September 30 Year ended September 30
-------------------------------------- --------------------------------------
1996**** 1995**** 1994*** 1996**** 1995**** 1994**
- --------------------------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 9.77 $ 8.60 $ 9.55 $ 9.58 $ 8.52 $ 9.45
Net investment loss* (0.07) (0.06) (0.06) (0.16) (0.14) (0.06)
Net realized and unrealized
gain (loss) on
investments 1.74 1.23 (0.89) 1.68 1.20 (0.87)
------------ ------------ ------------ ------------ ------------ ------------
Net asset value, end of
year $ 11.44 $ 9.77 $ 8.60 $ 11.10 $ 9.58 $ 8.52
============ ============ ============ ============ ============ ============
Total return 17.09%+ 13.60%+ (9.95)%+++ 15.87%+ 12.44%+ (9.84)%+++
Net assets at end of year
(000s) $13,311 $12,380 $7,033 $ 4,503 $ 7,391 $10,032
Ratio of operating expenses
to average net assets* 1.10% 1.10% 1.10%++ 2.10% 2.10% 2.10%++
Ratio of net investment
loss to average net
assets* (0.71)% (0.71)% (0.68)%++ (1.71)% (1.67)% (1.32)%++
Portfolio turnover rate 155.85% 178.60% 83.61% 155.85% 178.60% 83.61%
Average commission rate@ $ .0159 -- -- $ .0159 -- --
*Reflects voluntary
assumption of fees or
expenses per share in
each year (Note 3). $ 0.04 $ 0.06 $ 0.04 $ 0.04 $ 0.06 $ 0.02
</TABLE>
++ Annualized.
+ Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
+++ Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total
return would be lower if the Distributor and its affiliates had not
voluntarily assumed a portion of the Fund's expenses.
** February 1, 1994 (commencement of share class designations) to September
30, 1994.
*** October 4, 1993 (commencement of operations) to September 30, 1994.
****Per-share figures have been calculated using the average shares method.
@ 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.
10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of State Street Research
Capital Trust and Shareholders of
State Street Research Small Capitalization Growth Fund
We have audited the accompanying statement of assets and liabilities of State
Street Research Small Capitalization Growth Fund, including the schedule of
portfolio investments, as of September 30, 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 and 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 than 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 disclosure 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 Small Capitalization Growth Fund as of September 30,
1996, the results of its operations for the year then ended, the changes in
its net asset 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
11
<PAGE>
STATE STREET RESEARCH SMALL CAPITALIZATION GROWTH FUND
MANAGEMENTS DISCUSSION OF FUND PERFORMANCE
The past year was good for State Street Research Small Capitalization Growth
Fund. The Fund outperformed the Russell 2000 Growth Index, a benchmark for
small-cap stock performance, for the 12 months ended September 30, 1996.
Small Capitalization Growth Fund underperformed the average return for the
Lipper Analytical Services Small Company Growth Fund category.
Small Capitalization Growth Fund was underweighted in technology stocks in
the past year, which helped Fund performance, as technology stocks
experienced two significant declines in the past 12 months.
Collectively, consumer stocks, in industries including retail, recreation,
business services and others, totaled more than 43% of the portfolio. These
sectors offered good value.
Energy stocks had a strong impact on Small Capitalization Growth Fund's
performance. Generally, the Fund invested in oil and gas exploration and
production companies with rapidly accelerating cash flow. The long-term
supply of oil and gas is low compared to long-term demand, plus technological
advances are helping these companies produce more cheaply. Energy stocks,
which are not widely followed by Wall Street, have offered a combination of
attractive valuations and high growth rates.
September 30, 1996
The Standard & Poor's 500 Composite Index (S&P 500) includes 500 widely
traded 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
1994. "C" shares, offered without a sales charge, are available only to
certain employee benefit plans and large institutions. Performance prior to
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. The first figure
reflects expense reduction; the second shows what results would have been
without subsidization.
Change In Value Of $10,000 Based on the S&P 500 Compared to Change In Value
Of $10,000 Invested In Small Capitalization Growth Fund
[DATA FOR LINE CHARTS]
Class A Shares
Average Annual Total Return
1 Year Life of Fund
+11.66%/+11.22% +4.26%/+3.75%
10/4/93 9550 10000
9/30/94 8560 10368
9/30/95 9690 13448
9/30/96 11330 16181
Class B Shares
Average Annual Total Return
1 Year Life of Fund
+10.97%/+10.50% +4.27%/+3.74%
10/4/93 10000 10000
9/30/94 8921 10368
9/30/95 9631 13448
9/30/96 11334 16181
Class C Shares
Average Annual Total Return
1 Year Life of Fund
+17.09%/+16.63% +6.22%/+5.67%
10/4/93 10000 10000
9/30/94 9005 10368
9/30/95 10230 13448
9/30/96 11979 16181
Class D Shares
Average Annual Total Return
1 Year Life of Fund
+14.87%/+14.40% +5.15%/+4.63%
10/4/93 10000 10000
9/30/94 8921 10368
9/30/95 10031 13448
9/30/96 11623 16181
12
<PAGE>
STATE STREET RESEARCH AURORA FUND
a series of
STATE STREET RESEARCH CAPITAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1997
TABLE OF CONTENTS
Page
INVESTMENT POLICIES AND RESTRICTIONS 2
ADDITIONAL INFORMATION CONCERNING CERTAIN INVESTMENT TECHNIQUES 5
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS 12
TRUSTEES AND OFFICERS 19
INVESTMENT ADVISORY SERVICES 23
PURCHASE AND REDEMPTION OF SHARES 24
NET ASSET VALUE 26
PORTFOLIO TRANSACTIONS 27
CERTAIN TAX MATTERS 30
DISTRIBUTION OF SHARES OF THE FUND 32
CALCULATION OF PERFORMANCE DATA 35
CUSTODIAN 37
INDEPENDENT ACCOUNTS 37
FINANCIAL STATEMENTS 37
The following Statement of Additional Information is not a Prospectus.
It should be read in conjunction with the Prospectus of State Street Research
Aurora 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: 1285R-960201(0397)SSR-LD SCV-879D-296
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
As set forth in part under "The Fund's Investments" and "Limiting
Investment Risk" in the Fund's Prospectus, the Fund has adopted certain
investment restrictions.
The fundamental and nonfundamental policies of the Fund do not apply to
any matters involving the issuance of multiple classes of shares of the Fund or
the creation or use of a structure allowing the Fund to invest substantially all
its assets in a related collective investment vehicle for similar funds or
allowing the Fund to serve as such a collective investment vehicle for other
similar funds, to the extent permitted by law and regulatory authorities.
All of the Fund's fundamental investment restrictions are set forth
below. These fundamental investment restrictions may not be changed except by
the affirmative vote of a majority of the Fund's outstanding voting securities
as defined in the Investment Company Act of 1940, as amended (the "1940 Act").
(Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at a meeting of security holders duly called, (i) of
67% or more of the voting securities present at a meeting if the holders of more
than 50% of the outstanding voting securities are present or represented by
proxy or (ii) of more than 50% of the outstanding voting securities, whichever
is less.) Under these restrictions, it is the Fund's policy:
(1) not to purchase a security of any one issuer (other than
securities issued or guaranteed as to principal or interest by
the U.S. Government or its agencies or instrumentalities or
mixed-ownership Government corporations) if such purchase
would, with respect to 75% of the Fund's total assets, cause
more than 5% of the Fund's total assets to be invested in the
securities of such issuer or cause more than 10% of the voting
securities of such issuer to be held by the Fund;
(2) not to issue senior securities as defined in the 1940 Act,
except as permitted by that Act and the rules thereunder or as
permitted by the Securities and Exchange Commission (the
creation of general liens or security interests under normal
brokerage arrangements for transactions in portfolio assets
are not deemed to involve the issuance of senior securities);
(3) not to underwrite or participate in the marketing of
securities of other issuers, except (a) the Fund may, acting
alone or in syndicates or groups, purchase or otherwise
acquire securities of other issuers for investment, either
from the issuers or from persons in a control relationship
with the issuers or from underwriters of such securities; and
(b) to the extent that, in connection with the disposition of
the Fund's securities, the Fund may be a selling shareholder
in an offering or deemed to be an underwriter under certain
federal securities laws;
(4) not to purchase fee simple interests in real estate unless
acquired as a result of ownership of securities or other
instruments, although the Fund may purchase and sell other
interests in real estate including securities which are
secured by real estate, or securities of companies which make
real estate loans or own, or invest or deal in, real estate;
(5) not to invest in physical commodities or physical commodity
contracts in excess of 10% of the Fund's total assets, except
that investments in essentially financial items
<PAGE>
such as, but not limited to, swap arrangements, hybrids,
currencies, currency and other forward contracts, futures
contracts and options on futures contracts on securities,
securities indices and currencies shall not be deemed
investments in commodities or commodities contracts;
(6) not to lend money; however, the Fund may lend portfolio
securities and purchase bonds, debentures, notes and similar
obligations (and enter into repurchase agreements with respect
thereto);
(7) not to make any investment which would cause more than 25% of
the value of the Fund's total assets to be invested in
securities of issuers principally engaged in any one industry
[for purposes of this restriction, (a) utilities may be
divided according to their services so that, for example, gas,
gas transmission, electric and telephone companies may each be
deemed in a separate industry, (b) oil and oil related
companies may be divided by type so that, for example, oil
production companies, oil service companies and refining and
marketing companies may each be deemed in a separate industry,
(c) finance companies may be classified according to the
industries of their parent companies, and (d) securities
issued or guaranteed as to principal or interest by the U.S.
Government or its agencies or instrumentalities or
mixed-ownership Government corporations (including repurchase
agreements involving such U.S. Government securities to the
extent excludable under relevant regulatory interpretations)
may be excluded]; and
(8) not to borrow money, including reverse repurchase agreements
in so far as such agreements may be regarded as borrowings,
except for borrowings not in an amount in excess of 33-1/3% of
the value of its total assets.
The following nonfundamental investment restrictions may be changed
without shareholder approval. Under these restrictions, it is the Fund's policy:
(1) not to purchase any security or enter into a repurchase
agreement if as a result more than 15% of its net assets would
be invested in securities that are illiquid (including
repurchase agreements not entitling the holder to payment of
principal and interest within seven days);
(2) not to invest more than 15% of its net assets in restricted
securities of all types (including not more than 5% of its net
assets in restricted securities which are not eligible for
resale pursuant to Rule 144A, Regulation S or other exemptive
provisions under the Securities Act of 1933);
(3) not to invest more than 5% of its total assets in securities
of private issuers including predecessors with less than three
years' continuous operations (except (a) securities guaranteed
or backed by an affiliate of the issuer with three years of
continuous operations, (b) securities issued or guaranteed as
to principal or interest by the U.S. Government, or its
agencies or instrumentalities, or a mixed-ownership Government
corporation, (c) securities of issuers with debt securities
rated at least "BBB" by Standard & Poor's Corporation or "Baa"
by Moody's Investor's Service, Inc. or equivalent by any other
nationally recognized statistical rating organization,
3
<PAGE>
or securities of issuers considered by the Investment Manager
to be equivalent, (d) securities issued by a holding company
with at least 50% of its assets invested in companies with
three years of continuous operations including predecessors,
and (e) securities which generate income which is exempt from
local, state or federal taxes); provided that the Fund may
invest up to 15% in such issuers so long as such investments
plus investments in restricted securities (other than those
which are eligible for resale under Rule 144A, Regulation S or
other exemptive provisions as noted above) do not exceed 15%
of the Fund's total assets;
(4) not to engage in transactions in options except in connection
with options on securities, securities indices and currencies,
and options on futures on securities, securities indices and
currencies;
(5) not to purchase securities on margin or make short sales of
securities or maintain a short position except for short sales
"against the box" (as a matter of current operating policy,
the Fund will not make short sales or maintain a short
position unless not more than 5% of the Fund's net assets
(taken at current value) are held as collateral for such sales
at any time; and for the purpose of this restriction, escrow
or custodian receipts or letters, margin or safekeeping
accounts, or similar arrangements used in the industry in
connection with the trading of futures, options and forward
commitments are not deemed to involve the use of margin);
(6) not to purchase a security issued by another investment
company, except to the extent permitted under the 1940 Act or
except by purchases in the open market involving only
customary brokers' commissions, or securities acquired as
dividends or distributions or in connection with a merger,
consolidation or similar transaction or other exchange;
(7) not to purchase or retain any security of an issuer if those
of its officers and Trustees and officers and directors of its
investment adviser who individually own more than 1/2 of 1% of
the securities of such issuer, when combined, own more than 5%
of the securities of such issuer taken at market;
(8) not to invest directly as a joint venturer or general partner
in oil, gas or other mineral exploration or development joint
ventures or general partnerships (provided that the Fund may
invest in securities issued by companies which invest in or
sponsor such programs and in securities indexed to the price
of oil, gas or other minerals);
(9) not to invest in warrants in excess of 5% of the value, at the
lower of cost or market, of its net assets, provided that
warrants not listed on the New York or American Stock Exchange
shall be further limited to 2% of the Fund's net assets
(warrants initially attached to securities and acquired by the
Fund upon original issuance thereof shall be deemed to be
without value); and
(10) not to purchase any security while borrowings, including
reverse repurchase agreements, representing more than 5% of
the Fund's total assets are outstanding.
Compliance with the above nonfundamental investment restrictions (1)
and (2) will be determined independently.
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ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Among other investments described below, the Fund may buy and sell
domestic and foreign options, futures contracts, and options on futures
contracts, with respect to securities, securities indices, and currencies, and
may enter into closing transactions with respect to each of the foregoing, and
invest in other derivatives, under circumstances in which such instruments and
techniques are expected by State Street Research & Management Company (the
"Investment Manager") to aid in achieving the investment objective of the Fund.
The Fund on occasion may also purchase instruments with characteristics of both
futures and securities (e.g., debt instruments with interest and principal
payments determined by reference to the value of a commodity or a currency at a
future time) and which, therefore, possess the risks of both futures and
securities investments.
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell
underlying assets, such as certain securities, currencies or an index of
securities, at a future time at a specified price. A contract to buy establishes
a "long" position while a contract to sell establishes a "short" position.
The purchase of a futures contract on securities or an index of
securities normally enables a buyer to participate in the market movement of the
underlying asset or index after paying a transaction charge and posting margin
in an amount equal to a small percentage of the value of the underlying asset or
index. The Fund will initially be required to deposit with the Trust's custodian
or the broker effecting the futures transaction an amount of "initial margin" in
cash or U.S. Treasury obligations.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will terminate
the Fund's position in the futures contract. A final determination of
maintenance margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain. While futures
contracts with respect to securities do provide for the delivery and acceptance
of such securities, such delivery and acceptance are seldom made.
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
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enhancing return. In transactions establishing a long position in a futures
contract, money market instruments equal to the face value of the futures
contract will be identified by the Fund to the Trust's custodian for maintenance
in a separate account to insure that the use of such futures contracts is
unleveraged. Similarly, a representative portfolio of securities having a value
equal to the aggregate face value of the futures contract will be identified
with respect to each short position. The Fund will employ any other appropriate
method of cover which is consistent with applicable regulatory and exchange
requirements.
Options on Securities
The Fund may use options on securities to implement its investment
strategy. A call option on a security, for example, gives the purchaser of the
option the right to buy, and the writer the obligation to sell, the underlying
asset at the exercise price during the option period. Conversely, a put option
on a security gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying asset at the exercise price during the option
period.
Purchased options have defined risk, i.e., the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset.
Written options have varying degrees of risk. An uncovered written call
option theoretically carries unlimited risk, as the market price of the
underlying asset could rise far above the exercise price before its expiration.
This risk is tempered when the call option is covered, i.e., when the option
writer owns the underlying asset. In this case, the writer runs the risk of the
lost opportunity to participate in the appreciation in value of the asset rather
than the risk of an out-of-pocket loss. A written put option has defined risk,
i.e., the difference between the agreed-upon price that the Fund must pay to the
buyer upon exercise of the put and the value, which could be zero, of the asset
at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
his obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Options on Securities Indices
The Fund may engage in transactions in call and put options on
securities indices. For example, the Fund may purchase put options on indices of
securities in anticipation of or during a market decline to attempt to offset
the decrease in market value of its securities that might otherwise result.
Put options on indices of securities are similar to put options on the
securities themselves except that the delivery requirements are different.
Instead of giving the right to make delivery of a security at a specified price,
a put option on an index of securities gives the holder the right to receive an
amount of cash upon exercise of the option if the value of the underlying index
has fallen below the exercise price. The amount of cash received will be equal
to the difference between the closing price of the index and the exercise price
of the option expressed in dollars times a specified multiple. As with options
on securities or futures contracts, the Fund may offset its position in index
options prior
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<PAGE>
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.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund's return will be the premium received from
writing the put option minus the amount by which the market price of the
security is below the exercise price.
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Limitations and Risks of Options and Futures Activity
The Fund will engage in transactions in futures contracts or options as
a hedge against changes resulting from market conditions which produce changes
in the values of their securities or the securities which it intends to purchase
(e.g., to replace portfolio securities which will mature in the near future)
and, subject to the limitations described below, to enhance return. The Fund
will not purchase any futures contract or purchase any call option if,
immediately thereafter, more than one third of the Fund's net assets would be
represented by long futures contracts or call options. The Fund will not write a
covered call or put option if, immediately thereafter, the aggregate value of
the assets (securities in the case of written calls and cash or cash equivalents
in the case of written puts) underlying all such options, determined as of the
dates such options were written, would exceed 25% of that Fund's net assets. The
Fund may not establish a position in a commodity futures contract or purchase or
sell a commodity option contract for other than bona fide hedging purposes if
immediately thereafter the sum of the amount of initial margin deposits and
premiums required to establish such positions for such nonhedging purposes would
exceed 5% of the market value of the Fund's net assets.
Although effective hedging can generally capture the bulk of a desired
risk adjustment, no hedge is completely effective. The Fund's ability to hedge
effectively through transactions in futures and options depends on the degree to
which price movements in its holdings correlate with price movements of the
futures and options.
Some positions in futures and options may be closed out only on an
exchange which provides a secondary market therefor. There can be no assurance
that a liquid secondary market will exist for any particular futures contract or
option at any specific time. Thus, it may not be possible to close such an
option or futures position prior to maturity. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
effectively hedge its securities and might, in some cases, require the Fund to
deposit cash to meet applicable margin requirements. The Fund will enter into an
option or futures position only if it appears to be a liquid investment.
Foreign Investments
To the extent the Fund invests in securities of issuers in less
developed countries or emerging foreign markets, it will be subject to a variety
of additional risks, including risks associated with political instability,
economies based on relatively few industries, lesser market liquidity, high
rates of inflation, significant price volatility of portfolio holdings and high
levels of external debt in the relevant country.
Although the Fund may invest in securities denominated in foreign
currencies, the Fund values its securities and other assets in U.S. dollars. As
a result, the net asset value of the Fund's shares may fluctuate with U.S.
dollar exchange rates as well as with price changes of the Fund's securities in
the various local markets and currencies. Thus, an increase in the value of the
U.S. dollar compared to the currencies in which the Fund makes its investments
could reduce the effect of increases and 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.
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<PAGE>
Currency Transactions
The Fund's dealings in forward currency exchange contracts will be
limited to hedging involving either specific transactions or aggregate portfolio
positions. A forward currency contract involves an obligation to purchase or
sell a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts are not commodities and are entered into
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. Although spot and forward contracts
will be used primarily to protect the Fund from adverse currency movements, they
also involve the risk that anticipated currency movements will not be accurately
predicted, which may result in losses to the Fund. This method of protecting the
value of the Fund's portfolio securities against a decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange that can be achieved at
some future point in time. Although such contracts tend to minimize the risk of
loss due to a decline in the value of hedged currency, they tend to limit any
potential gain that might result should the value of such currency increase.
Repurchase Agreements
The Fund may enter into repurchase agreements. Repurchase agreements
occur when the Fund acquires a security and the seller, which may be either (i)
a primary dealer in U.S. Government securities or (ii) an FDIC-insured bank
having gross assets in excess of $500 million, simultaneously commits to
repurchase it at an agreed-upon price on an agreed-upon date within a specified
number of days (usually not more than seven) from the date of purchase. The
repurchase price reflects the purchase price plus an agreed-upon market rate of
interest which is unrelated to the coupon rate or maturity of the acquired
security. The Fund will only enter into repurchase agreements involving U.S.
Government securities. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
Repurchase agreements will be limited to 30% of the Fund's total assets, except
that repurchase agreements extending for more than seven days when combined with
other illiquid securities will be limited to 15% of the Fund's net assets.
Currently, the Fund does not expect to invest more than 5% of its net assets in
repurchase agreements.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. However, the
Fund has no present intention of engaging in reverse repurchase agreements in
excess of 5% of the Fund's total assets. In a reverse repurchase agreement the
Fund transfers a portfolio instrument to another person, such as a financial
institution, broker or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed-upon rate. The ability to use reverse
repurchase agreements may enable, but does not ensure the ability of, the Fund
to avoid selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
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When-Issued Securities
The Fund may purchase "when-issued" equity securities, which are traded
on a price basis prior to actual issuance. Currently, the Fund does not expect
to invest more than 5% of its net assets in when-issued securities. Such
purchases will be made only to achieve the Fund's investment objective and not
for leverage. The when-issued trading period generally lasts from a few days to
months, or over a year or more; during this period dividends on equity
securities are not payable. No income accrues to the Fund prior to the time it
takes delivery. A frequent form of when-issued trading occurs when corporate
securities to be created by a merger of companies are traded prior to the actual
consummation of the merger. Such transactions may involve a risk of loss if the
value of the securities fall below the price committed to prior to the actual
issuance. The Trust's custodian will establish a segregated account for the Fund
when it purchases securities on a when-issued basis consisting of cash or liquid
securities equal to the amount of the when-issued commitments. Securities
transactions involving delayed deliveries or forward commitments are frequently
characterized as when-issued transactions and are similarly treated by the Fund.
Rule 144A Securities
The Fund may buy or sell restricted securities in accordance with Rule
144A under the Securities Act of 1933 ("Rule 144A Securities"). Securities may
be resold pursuant to Rule 144A under certain circumstances only to qualified
institutional buyers as defined in the rule, and the markets and trading
practices for such securities are relatively new and still developing; depending
on the development of such markets, such Rule 144A Securities may be deemed to
be liquid as determined by or in accordance with methods adopted by the
Trustees. Under such methods the following factors are considered, among others:
the frequency of trades and quotes for the security, the number of dealers and
potential purchasers in the market, marketmaking activity, and the nature of the
security and marketplace trades. Investments in Rule 144A Securities could have
the effect of increasing the level of the Fund's illiquidity to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
such securities. Also, the Fund may be adversely impacted by the possible
illiquidity and subjective valuation of such securities in the absence of a
market for them.
Indexed Securities
The Fund may purchase securities the value of which is indexed to
interest rates, foreign currencies and various indices and financial indicators.
These securities are generally short- to intermediate-term debt securities. The
interest rates or values at maturity fluctuate with the index to which they are
connected and may be more volatile than such index.
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Swap Arrangements
The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below. In an
interest rate swap the Fund could agree for a specified period to pay a bank or
investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an assumed figure selected by the parties for this
purpose) in exchange for agreement by the bank or investment banker to pay the
Fund a fixed rate of interest on the notional principal amount. In a currency
swap the Fund would agree with the other party to exchange cash flows based on
the relative differences in values of a notional amount of two (or more)
currencies; in an index swap, the Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices. Purchase
of a cap entitles the purchaser to receive payments from the seller on a
notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an agreed
upon interest rate or amount. A collar combines a cap and a floor.
Most swaps entered into by the Fund will be on a net basis; for
example, in an interest rate swap, amounts generated by application of the fixed
rate and the floating rate to the notional principal amount would first offset
one another, with the Fund either receiving or paying the difference between
such amounts. In order to be in a position to meet any obligations resulting
from swaps, the Fund will set up a segregated custodial account to hold
appropriate liquid assets, including cash; for swaps entered into on a net
basis, assets will be segregated having a daily net asset value equal to any
excess of the Fund's accrued obligations over the accrued obligations of the
other party, while for swaps on other than a net basis assets will be segregated
having a value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a part of the Fund's portfolio.
However, the Fund may enter into such arrangements for income purposes to the
extent permitted by the CFTC for entities which are not commodity pool
operators, such as the Fund. In entering a swap arrangement, the Fund is
dependent upon the creditworthiness and good faith of the counterparty. The Fund
attempts to reduce the risks of nonperformance by the counterparty by dealing
only with established, reputable institutions. The swap market is still
relatively new and emerging; positions in swap arrangements may become illiquid
to the extent that nonstandard arrangements with one counterparty are not
readily transferable to another counterparty or if a market for the transfer of
swap positions does not develop. The use of interest rate swaps is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Investment Manager is incorrect in its forecasts of market values, interest
rates and other applicable factors, the investment performance of the Fund would
diminish compared with what it would have been if these investment techniques
were not used. Moreover, even if the Investment Manager is correct in its
forecasts, there is a risk that the swap position may correlate imperfectly with
the price of the asset or liability being hedged.
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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 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.
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 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
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.
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U.S. Government and Related Securities
U.S. Government securities are securities which are issued or
guaranteed as to principal or interest by the U.S. Government, a U.S. Government
agency or instrumentality, or certain mixed-ownership Government corporations as
described herein. The U.S. Government securities in which the Fund invests
include, among others:
[bullet] direct obligations of the U.S. Treasury, i.e., U.S. Treasury
bills, notes, certificates and bonds;
[bullet] obligations of U.S. Government agencies or instrumentalities
such as the Federal Home Loan Banks, the Federal Farm Credit
Banks, the Federal National Mortgage Association, the
Government National Mortgage Association and the Federal Home
Loan Mortgage Corporation; and
[bullet] obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a
variety of ways by the U.S. Government, its agencies or instrumentalities. Some
of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. Other obligations, such as those of the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government to
purchase certain obligations of agencies or instrumentalities, although the U.S.
Government has no legal obligation to do so. Obligations such as those of the
Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation are backed
by the credit of the agency or instrumentality issuing the obligations. Certain
obligations of Resolution Funding Corporation, a mixed-ownership Government
corporation, are backed with respect to interest payments by the U.S. Treasury,
and with respect to principal payments by U.S. Treasury obligations held in a
segregated account with a Federal Reserve Bank. Except for certain
mortgage-related securities, the Fund will only invest in obligations issued by
mixed-ownership Government corporations where such securities are guaranteed as
to payment of principal or interest by the U.S. Government or a U.S. Government
agency or instrumentality, and any unguaranteed principal or interest is
otherwise supported by U.S. Government obligations held in a segregated account.
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.
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In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Rating Categories of Debt Securities
Set forth below is a description of corporate bond and debenture
ratings of Standard & Poor's Corporation ("S&P"):
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B: Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
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CCC: Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal. The CCC rating category
is also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to noncredit risks created by the terms of the
obligation, such as securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only (IO) and principal only (PO) mortgage securities.
Set forth below is a description of corporate bond and debenture
ratings of Moody's Investors Service, Inc. ("Moody's"):
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
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<PAGE>
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
1, 2 or 3: The ratings from Aa through B may be modified by the
addition of a numeral indicating a bond's rank within its rating category.
Risk Factors of Lower Quality Debt Securities
Lower quality debt securities generally involve more credit risk than
higher rated securities and are considered by S&P and Moody's to be speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. Further, such securities may be subject to greater
market fluctuations and risk of loss of income and principal than lower
yielding, higher rated debt securities. Risks of lower quality debt securities,
commonly known as "junk bonds," include (i) limited liquidity and secondary
market support; (ii) substantial market price volatility resulting from changes
in prevailing interest rates and/or investor perceptions; (iii) subordination to
the prior claims of banks and other senior lenders; (iv) the operation of
mandatory sinking fund or call/redemption provisions during periods of declining
interest rates when the Fund may be required to reinvest premature redemption
proceeds in lower yielding portfolio securities; (v) the possibility that
earnings of the issuer may be insufficient to meet its debt service; and (vi)
the issuer's low creditworthiness and potential for insolvency during periods of
rising interest rates and economic downturn.
16
<PAGE>
Bank Money Investments
Bank money investments include but are not limited to certificates of
deposit, bankers' acceptances and time deposits. Certificates of deposit are
generally short-term (i.e., less than one year), interest-bearing negotiable
certificates issued by commercial banks or savings and loan associations against
funds deposited in the issuing institution. A banker's acceptance is a time
draft drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction (to finance the import, export, transfer or
storage of goods). A banker's acceptance may be obtained from a domestic or
foreign bank, including a U.S. branch or agency of a foreign bank. The borrower
is liable for payment as well as the bank, which unconditionally guarantees to
pay the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity. Time deposits are nonnegotiable deposits for a fixed period of time at
a stated interest rate. The Fund will not invest in any such bank money
investment unless the investment is issued by a U.S. bank that is a member of
the Federal Deposit Insurance Corporation ("FDIC"), including any foreign branch
thereof, a U.S. branch or agency of a foreign bank, a foreign branch of a
foreign bank, or a savings bank or savings and loan association that is a member
of the FDIC and which at the date of investment has capital, surplus and
undivided profits (as of the date of its most recently published financial
statements) in excess of $50 million. The Fund will not invest in time deposits
maturing in more than seven days and will not invest more than 10% of its total
assets in time deposits maturing in two to seven days.
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under state law. U.S. federal branches or agencies
of foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such branches elect FDIC insurance. Unlike U.S. branches of foreign banks,
U.S. agencies of foreign banks may not accept deposits and thus are not eligible
for FDIC insurance. Both branches and agencies can maintain credit balances,
which are funds received by the office incidental to or arising out of the
exercise of their banking powers and can exercise other commercial functions,
such as lending activities.
Short-Term Corporate Debt Instruments
Short-term corporate debt instruments include commercial paper to
finance short-term credit needs (i.e., short-term, unsecured promissory notes)
issued by corporations including but not limited to (a) domestic or foreign bank
holding companies or (b) their subsidiaries or affiliates where the debt
instrument is guaranteed by the bank holding company or an affiliated bank or
where the bank holding company or the affiliated bank is unconditionally liable
for the debt instrument. Commercial paper is usually sold on a discounted basis
and has a maturity at the time of issuance not exceeding nine months.
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
17
<PAGE>
the time of purchase at least A by S&P or by Moody's.
Commercial paper rated A (highest quality) by S&P is issued by entities
which have liquidity ratios which are adequate to meet cash requirements.
Long-term senior debt is rated A or better, although in some cases BBB credits
may be allowed. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. The relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1, A-2
or A-3. (Those A-1 issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.
In the event the lowering of ratings of debt instruments held by the
Fund by applicable rating agencies results in a material decline in the overall
quality of the Fund's portfolio, the Trustees of the Trust will review the
situation and take such action as they deem in the best interests of the Fund's
shareholders, including, if necessary, changing the composition of the
portfolio.
18
<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 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 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.
+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.
- -----------------------------
* or + See footnotes on page 21.
19
<PAGE>
*+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 serves as Secretary and General Counsel of
the Trust. He is 41. His principal occupation is Executive Vice President,
General Counsel and Secretary of the Investment Manager. 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.
+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.
- -----------------------------
* or + See footnotes on page 21.
20
<PAGE>
*+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 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. 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 Trustees and principal officers of the
Trust as a group owned approximately 47.2% of the outstanding Class A shares of
the Fund and owned none of the Fund's Class B, Class C or Class D shares.
As of December 31, 1996, the following entities were the record and/or
beneficial owners of the approximate amounts of each class of shares of the Fund
as set forth beside their names:
Shareholder %
Class A D. O. Morton and L. Morton 40.0
Metropolitan Life 17.5
D. L. Swanson 6.9
Class B Metropolitan Life 99.8
Class C Metropolitan Life 99.9
Class D Metropolitan Life 99.8
The full name and address of the above entities are as follows:
D. O. Morton and L. Morton
c/o State Street Research
Shareholder Services
One Financial Center
Boston, MA 02111
Metropolitan Life Insurance Company
One Madison Avenue
New York, NY 10010
D. L. Swanson
c/o State Street Research
Shareholder Services
One Financial Center
Boston, MA 02111
- --------------------
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.
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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 trading, at the annual rate
23
<PAGE>
of 0.85% of the net assets of the Fund. The Distributor and its affiliates have
from time to time and in varying amounts voluntarily assumed some portion of
fees or expenses relating to the Fund. For the period February 13, 1995
(commencement of operations) through September 30, 1995 and for the fiscal year
ended September 30, 1996, the Fund's investment advisory fee prior to the
assumption of fees or expenses was $30,298 and $62,107, respectively. For the
same period, the voluntary reduction of fees of assumption of expenses amounted
to $80,022 and $187,754, respectively.
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund for a period of two years after its initial effectiveness
and will continue from year to year thereafter as long as it is approved at
least annually both (i) by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act) or by the Trustees of the
Trust, and (ii) in either event by a vote of a majority of the Trustees who are
not parties to the Advisory Agreement or "interested persons" of any party
thereto, cast in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement may be terminated on 60 days' written notice by
either party and will terminate automatically in the event of its assignment, as
defined under the 1940 Act and regulations thereunder. Such regulations provide
that a transaction which does not result in a change of actual control or
management of an adviser is not deemed an assignment.
Under a Funds Administration Agreement between the Investment Manager and
the Distributor, the Distributor provides assistance to the Investment Manager
in performing certain fund administration services for the Trust, such as
assistance in determining the daily net asset value of shares of series of the
Trust and in preparing various reports required by regulations.
Under a Shareholders' Administrative Services Agreement between the Trust
and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Fund, and is entitled to
reimbursements of its costs for providing such services. Under certain
arrangements for Metropolitan to provide subadministration services,
Metropolitan may receive a fee for the maintenance of certain share ownership
records for participants in sponsored arrangements, such as employee benefit
plans, through or under which the Fund's shares may be purchased.
Under the Code of Ethics of the Investment Manager, its employees in
Boston, where investment management operations are conducted, are only permitted
to engage in personal securities transactions in accordance with certain
conditions relating to an employee's position, the identity of the security, the
timing of the transactions, and similar factors. Such employees must report
their personal securities transactions quarterly and supply broker confirmations
to the Investment Manager.
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.
24
<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 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.
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.
25
<PAGE>
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Class C Shares
Class C shares are currently available to certain 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 similar institutional investors.
Reorganizations
In the event of mergers or reorganizations with other public or private
collective investment entities, including investment companies as defined in the
1940 Act, as amended, the Fund may issue its shares at net asset value (or more)
to such entities or to their security holders.
Redemptions
The Fund reserves the right to pay redemptions in kind with portfolio
securities in lieu of cash. In accordance with its election pursuant to Rule
18f-1 under the 1940 Act, the Fund may limit the amount of redemption proceeds
paid in cash. Although it has no present intention to do so, the Fund may, under
unusual circumstances, limit redemptions in cash with respect to each
shareholder during any ninety-day period to the lesser of (i) $250,000 or (ii)
1% of the net asset value of the Fund at the beginning of such period. In
connection with any redemptions paid in kind with portfolio securities,
brokerage and other costs may be incurred by the redeeming shareholder in the
sale of the securities received.
NET ASSET VALUE
The net asset values of the shares of the Fund are determined once daily as
of the close of the NYSE, ordinarily 4 P.M. New York City time, Monday through
Friday, on each day during which the NYSE is open for unrestricted trading. The
NYSE is currently closed on New Year's Day, Presidents Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is computed by dividing the sum
of the value of the securities held by the Fund plus any cash or other assets
minus all liabilities by the total number of outstanding shares of the Fund at
such time. Any expenses, except for extraordinary or nonrecurring expenses,
borne by the Fund, including the investment management fee payable to the
Investment Manager, are accrued daily.
26
<PAGE>
In determining the values of portfolio assets as provided below, the
Trustees utilize one or more pricing services to value certain securities for
which market quotations are not readily available on a daily basis. Most debt
securities are valued on the basis of data provided by such pricing services.
The pricing services may provide prices determined as of times prior to the
close of the NYSE.
In general, securities are valued as follows. Securities which are listed
or traded on the New York or American Stock Exchange are valued at the price of
the last quoted sale on the respective exchange for that day. Securities which
are listed or traded on a national securities exchange or exchanges, but not on
the New York or American Stock Exchange, are valued at the price of the last
quoted sale on the exchange for that day prior to the close of the NYSE.
Securities not listed on any national securities exchange which are traded "over
the counter" and for which quotations are available on the National Association
of Securities Dealers' NASDAQ System, or other system, are valued at the closing
price supplied through such system for that day at the close of the NYSE. Other
securities are, in general, valued at the mean of the bid and asked quotations
last quoted prior to the close of the NYSE if there are market quotations
readily available, or in the absence of such market quotations, then at the fair
value thereof as determined by or under authority of the Trustees of the Trust
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.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
The Fund's portfolio turnover rate is determined by dividing the lesser of
securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The Fund reserves full freedom with respect to portfolio
turnover, as described in the Prospectus. The portfolio turnover rate for the
period February 13, 1995 (commencement of operations) through September 30, 1995
and for the fiscal year ended September 30, 1996 was 47.34% and 124.79%,
respectively.
27
<PAGE>
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.
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.
28
<PAGE>
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.
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 period February 13,
1995 (commencement of operations) through September 30, 1995 and for the fiscal
year ended September 30, 1996 amounted to approximately $15,000 and $20,000
respectively. During and at the end of its most recent fiscal year, the Fund
held in its portfolio no securities of any entity that might be deemed to be a
regular broker-dealer of the Fund as defined under the 1940 Act.
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.
29
<PAGE>
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 Fund -- In General
The Fund intends to qualify and elect to be treated each taxable year as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"), although it cannot give complete assurance
that it will do so. Accordingly, the Fund must, among other things, (a) derive
at least 90% of its gross income in each taxable year from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of the
following held for less than three months (the "30% test"): (i) stock or
securities, (ii) options, futures, or forward contracts (other than options,
futures or forward contracts on foreign currencies), or (iii) foreign currencies
(or options, futures, or forward contracts on foreign currencies) but only if
such currencies (or options, futures, or forward contracts) are not directly
related to the Fund's principal business of investing in stocks or securities
(or options and futures with respect to stocks or securities); (c) satisfy
certain diversification requirements; and (d) in order to be entitled to utilize
the dividends paid deduction, distribute annually at least 90% of its investment
company taxable income (determined without regard to the deduction for dividends
paid).
The 30% test will limit the extent to which the Fund may sell securities
held for less than three months, write options which expire in less than three
months, and effect closing transactions with respect to call or put options that
have been written or purchased within the preceding three months. (If the Fund
purchases a put option for the purpose of hedging an underlying portfolio
security, the acquisition of the option is treated as a short sale of the
underlying security unless, for purposes only of the 30% test, the option and
the security are acquired on the same date.) Finally, as discussed below, this
requirement may also limit investments by the Fund in options on stock indices,
listed options on nonconvertible debt securities, futures contracts, options on
interest rate futures contracts and certain foreign currency contracts.
If the Fund should fail to qualify as a regulated investment company in any
year, it would lose the beneficial tax treatment accorded regulated investment
companies under Subchapter M of the Code and all of its taxable income would be
subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of such Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of the
Fund to the extent thereof. Any distribution in excess of a shareholder's basis
in the shareholder's shares would be taxable as gain realized from the sale of
such shares.
The Fund will be liable for a nondeductible 4% excise tax on amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement. To avoid the tax, during each
30
<PAGE>
calendar year the Fund must distribute an amount equal to at least 98% of the
sum of its ordinary income (not taking into account any capital gains or losses)
for the calendar year, and its capital gain net income for the 12-month period
ending on October 31, in addition to any undistributed portion of the respective
balances from the prior year. The Fund intends to make sufficient distributions
to avoid this 4% excise tax.
Federal Income Taxation of the Fund's Investments
Original Issue Discount. For federal income tax purposes, debt securities
purchased by the Fund may be treated as having original issue discount. Original
issue discount represents interest for federal income tax purposes and can
generally be defined as the excess of the stated redemption price at maturity of
a debt obligation over the issue price. Original issue discount is treated for
federal income tax purposes as income earned by the Fund, whether or not any
income is actually received, and therefore is subject to the distribution
requirements of the Code. Generally, the amount of original issue discount is
determined on the basis of a constant yield to maturity which takes into account
the compounding of accrued interest. Under section 1286 of the Code, an
investment in a stripped bond or stripped coupon may result in original issue
discount.
Debt securities may be purchased by the Fund at a discount that exceeds the
original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for income tax
purposes. In the case of any debt security issued after July 18, 1984, having a
fixed maturity date of more than one year from the date of issue and having
market discount, the gain realized on disposition will be treated as interest to
the extent it does not exceed the accrued market discount on the security
(unless the Fund elects to include such accrued market discount in income in the
tax year to which it is attributable). Generally, market discount is accrued on
a daily basis. The Fund may be required to capitalize, rather than deduct
currently, part or all of any direct interest expense incurred to purchase or
carry any debt security having market discount, unless the Fund makes the
election to include market discount currently. Because the Fund must include
original issue discount in income, it will be more difficult for the Fund to
make the distributions required for the Fund to maintain its status as a
regulated investment company under Subchapter M of the Code or to avoid the 4%
excise tax described above.
Options and Futures Transactions. Certain of the Fund's investments may be
subject to provisions of the Code that (i) require inclusion of unrealized gains
or losses in the Fund's income for purposes of the 90% test, the 30% test, the
excise tax and the distribution requirements applicable to regulated investment
companies; (ii) defer recognition of realized losses; and (iii) characterize
both realized and unrealized gain or loss as short-term or long-term gain or
loss. Such provisions generally apply to, among other investments, options on
debt securities, indices on securities and futures contracts.
Federal Income Taxation of Shareholders
Dividends paid by the Fund may be eligible for the 70% dividends-received
deduction for corporations. The percentage of the Fund's dividends eligible for
such tax treatment may be less than 100% to the extent that less than 100% of
the Fund's gross income may be from qualifying dividends of domestic
corporations. Any dividend declared in October, November or December and made
payable to shareholders of record in any such month is treated as received by
such shareholder on December 31, provided that the Fund pays the dividend during
January of the following calendar year.
31
<PAGE>
Distributions by the Fund can result in a reduction in the fair market
value of such Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as ordinary income or long-term capital gain, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
DISTRIBUTION OF SHARES OF THE FUND
State Street Research Capital Trust is currently comprised of the following
series: State Street Research Capital Fund, State Street Research 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 class.
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class D shares). The Distributor may reallow all
or portions of such sales charges as concessions to dealers. For the period
February 13, 1995 (commencement of operations) through September 30, 1995 and
for the fiscal year ended September 30, 1996, total sales charges on Class A
shares paid to the Distributor amounted to $642 and $449, respectively. For the
same periods the Distributor retained $74 and $49, 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
32
<PAGE>
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 1.00% 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 or Class D shares of the Fund and paid initial
commissions to securities dealers for sales of such shares as follows:
February 13, 1995
(Commencement of Operations)
Fiscal Year Ended through Period Ended
September 30, 1996 September 30, 1995
---------------------------- -----------------------------
Contingent Commissions Contingent Commissions
Deferred Paid Deferred Paid
Sales Charges to Dealers Sales Charges to Dealers
------------- ---------- ------------- ----------
Class A $ 0 $ 400 $ 0 $ 568
Class B $ 0 $ 0 $ 0 $ 4,008
Class D $ 0 $ 0 $ 0 $ 1,002
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1" (the
"Distribution Plan") under which the Fund may engage, directly or indirectly, in
financing any activities primarily intended to result in the sale of Class A,
Class B and Class D shares, including, but not limited to, (1) the payment of
commissions and/or reimbursement to underwriters, securities dealers and others
engaged in the sale of shares, including payments to the Distributor to be used
to pay commissions and/or reimbursement to securities dealers (which securities
dealers may be affiliates of the Distributor) engaged in the distribution and
marketing of shares and furnishing ongoing assistance to investors, (2)
reimbursement of direct out-of-pocket expenditures incurred by the Distributor
in connection with the distribution and marketing of shares and the servicing of
investor accounts including expenses relating to the formulation and
implementation of marketing strategies and promotional activities such as direct
mail promotions and television, radio, newspaper, magazine and other mass media
advertising, the preparation, printing and distribution of Prospectuses of the
Fund and reports for recipients other than existing shareholders of the Fund,
and obtaining such information, analyses and reports with respect to marketing
and promotional activities and investor accounts as the Fund may, from time to
time, deem advisable, and (3) reimbursement of expenses incurred by the
Distributor in connection with the servicing of shareholder accounts including
payments to securities dealers and others in consideration of the provision of
personal services to investors and/or the maintenance of shareholder accounts
and expenses associated with the provision of personal services by the
Distributor directly to investors. In addition, the Distribution Plan is deemed
to authorize the Distributor to make
33
<PAGE>
payments out of general profits, revenues or other sources to underwriters,
securities dealers and others in connection with sales of shares, to the extent,
if any, that such payments may be deemed to be within the scope of Rule 12b-1
under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class D shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class D
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class D shares (as the case may be) to make payments for personal
services and/or the maintenance 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 rendering service to
shareholders on an ongoing basis. Such amounts are based on the net asset value
of shares of the Fund held by such dealers as nominee for their customers or
which are owned directly by such customers for so long as such shares are
outstanding and the Distribution Plan remains in effect with respect to the
Fund. Any amounts received by the Distributor and not so allocated may be
applied by the Distributor as reimbursement for expenses incurred in connection
with the servicing of investor accounts. The distribution and servicing expenses
of a particular class will be borne solely by that class.
For the fiscal year ended September 30, 1996, the Fund paid the Distributor
fees under the Distribution Plan and the Distributor used all of such payments
for expenses incurred on behalf of the Fund as follows:
Class A Class B Class D
Advertising $1,370 $ 249 $ 249
Printing and mailing of
prospectuses to other
than current shareholders 530 97 97
Compensation to dealers 0 0 0
Compensation to
sales personnel 2,400 437 437
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses:
marketing; general 3,156 574 574
------ ------ -------
Total fees $7,456 $1,357 $1,357
====== ====== =======
The Distributor may also use additional resources of its own for further
expenses on behalf of the Fund.
34
<PAGE>
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as prohibiting
banks and other depository institutions from being paid for performing services
under the Distribution Plan, the Fund will make alternative arrangements for
such services for shareholders who acquired shares through such institutions.
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") of the Class A,
Class B, Class C and Class D shares of the Fund will be calculated as set forth
below. Total return is computed separately for each class of shares of the Fund.
The Fund's performance is shown below, and where noted, reflects the
voluntary measures, if any, by the Fund's affiliates to reduce fees or expenses
relating to the Fund; see "Accrued Expenses" later in this section.
Total Return
The standard total return of each class of the Fund's shares were as
follows:
Commencement of Operations
(February 13, 1995) to One Year Ended
September 30, 1996 September 30, 1996
-------------------- --------------------
With Subsidy Without Subsidy With Subsidy Without Subsidy
------------ --------------- ------------ ---------------
Class A 33.28% 31.28% 37.16% 35.00%
Class B 34.04% 31.55% 37.52% 35.26%
Class C 37.43% 34.89% 43.95% 41.68%
Class D 35.56% 33.03% 41.52% 39.26%
35
<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:
P(1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated period
assuming a hypothetical $1,000 payment made at the beginning
of the designated period
The calculation is based on the further assumptions that the maximum
initial or contingent deferred sales charge applicable to the investment is
deducted, and that all dividends and distributions by the Fund are reinvested at
net asset value on the reinvestment dates during the periods. All accrued
expenses are also taken into account as described later herein.
Accrued Expenses
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return results take sales charges, if applicable, into account,
although the results do not take into account recurring and nonrecurring charges
for optional services which only certain shareholders elect and which involve
nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by affiliates of
fees or expenses relating to the Fund, during the subject period. In the absence
of such subsidization, the performance of the Fund will be lower.
36
<PAGE>
Nonstandardized Total Return
The Fund may provide the above described standard total return results for
Class A, Class B, Class C and Class D shares for periods which end no earlier
than the most recent calendar quarter end and which begin twelve months before
and at the time of commencement of such Fund's operations. In addition, the Fund
may provide nonstandardized total return results for differing periods, such as
for the most recent six months, and/or without taking sales charges into
account. Such nonstandardized total return is computed as otherwise described
under "Total Return" except the result may or may not be annualized, and as
noted any applicable sales charge may not be taken into account and therefore
not deducted from the hypothetical initial payment of $1,000 or ending value.
For example, the nonstandardized total returns for the six months ended
September 30, 1996 without taking sales charges into account, were as follows:
With Subsidy Without Subsidy
------------ ---------------
Class A 43.63% 41.36%
Class B 42.52% 40.26%
Class C 43.95% 41.68%
Class D 42.52% 40.26%
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian, State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as the Trust's independent accountants, providing professional
services including (1) audits of the Fund's annual financial statements, (2)
assistance and consultation in connection with Securities and Exchange
Commission filings and (3) review of the annual income tax returns filed on
behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a semiannual
basis, other supplementary financial reports may be made available from time to
time and holders of record may request a copy of a current supplementary report,
if any, by calling State Street Research Shareholder Services.
The following financial statements of State Street Research Small
Capitalization Value Fund are for the fiscal year ended September 30, 1996.
State Street Research Small Capitalization Value Fund changed its name to "State
Street Research Aurora Fund" in December 1996.
<PAGE>
State Street Research Small Capitalization Value Fund
Investment Portfolio
September 30, 1996
Value
Shares (Note 1)
------------------------------------------- -------- -------------
COMMON STOCKS 98.4%
Basic Industries 26.6%
Chemical 2.9%
Applied Extrusion Technologies Inc.* 3,000 $ 27,375
Cambrex Corp. 2,250 76,219
McWhorter Technologies Inc.* 2,000 39,000
Mississippi Chemical Corp. 4,500 105,187
Triple S Plastics Inc.* 3,000 16,125
-------------
263,906
-------------
Diversified 4.0%
Alltrista Corp.* 1,000 21,250
Apogee Enterprises Inc. 500 17,500
Commercial Intertech Corp. 3,500 40,250
Noel Group Inc.* 15,000 114,375
Photran Corp.* 6,000 36,750
Quixote Corp. 10,000 75,000
Triton Group Ltd. 5,600 3,850
Zero Corp. 3,300 62,700
-------------
371,675
-------------
Electrical Equipment 1.4%
Keystone Consolidated Industries Inc.* 11,198 92,379
TB Wood's Corp. 4,000 34,000
-------------
126,379
-------------
Forest Product 1.3%
Gaylord Container Corp. Wts.* 13,500 98,719
Greenstone Industrial Inc.* 5,000 23,750
-------------
122,469
-------------
Machinery 5.6%
Arden Industrial Products Inc.* 8,000 39,000
Cuno Inc.* 3,500 54,250
Gelman Sciences Inc.* 1,500 42,188
Greenfield Industrial Inc. 1,500 36,000
Hardinge Inc. 1,000 24,000
Inter-City Products Corp.* 10,000 30,000
Memtec Ltd. ADR* 1,500 42,000
Penn Engineering & Manufacturing Corp. 3,500 61,250
Pfeiffer Vacuum Technology AG* 7,500 115,312
Rofin-Sinar Technologies Inc.* 5,000 54,375
Specialty Equipment Companies Inc.* 1,000 13,250
-------------
511,625
-------------
Metal & Mining 10.8%
Carbide / Graphite Group Inc.* 15,000 $ 275,625
Chase Brass Industries Inc.* 6,000 104,250
Easco Inc. 15,000 75,000
Encore Wire Corp.* 1,000 14,625
Interlake Corp.* 15,000 65,625
Maxxam Inc.* 1,000 44,250
N.N. Ball and Roller Inc. 3,000 42,000
Sinter Metals Inc. Cl. A* 5,000 100,000
Sunshine Mining Co. 22,310 25,099
Webco Industries Inc.* 25,000 146,875
Wyman-Gordon Co.* 4,500 102,937
-------------
996,286
-------------
Railroad 0.6%
Genesee & Wyoming Inc. Cl. A* 800 21,800
Westinghouse Air Brake Co. 3,000 33,750
-------------
55,550
-------------
Total Basic Industries 2,447,890
-------------
Consumer Cyclical 29.6%
Automotive 8.0%
Borg Warner Automotive Inc. 3,000 106,500
Defiance Inc. 20,000 130,000
Dura Automotive Systems Inc. Cl. A* 200 3,725
Exide Corp. 3,500 90,563
Federal-Mogul Corp. 8,000 169,000
Motorcar Parts & Accessories Inc.* 2,000 26,500
Strattec Security Corp.* 1,000 14,500
TransPro Inc. 10,000 80,000
Wescast Industries Inc. Cl. A 6,000 114,000
-------------
734,788
-------------
Building 8.5%
Belmont Homes Inc.* 3,000 75,750
Cameron Ashley Inc.* 8,500 107,312
Castle & Cooke Inc.* 4,500 74,250
Centex Construction Products Inc. 7,500 120,000
Dayton Superior Corp. Cl. A* 5,000 61,875
Falcon Building Products Inc. Cl. A* 7,200 93,600
Miles Homes Inc.* 10,000 17,500
Nortek Inc.* 11,000 151,250
Simpson Manufacturing Inc.* 4,000 80,000
-------------
781,537
-------------
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
State Street Research Small Capitalization Value Fund
Value
Shares (Note 1)
------------------------------------------- -------- -------------
Hotel & Restaurant 1.1%
Primadonna Resorts Inc.* 5,500 $ 100,375
-------------
Recreation 5.4%
All American Communications Inc. Cl. B* 8,000 68,000
AMC Entertainment Inc.* 1,500 23,437
Bacou USA Inc.* 3,500 59,500
Cineplex Odeon Corp.* 44,300 66,450
Granite Broadcasting Co.* 5,000 71,250
HMG Worldwide Corp.* 27,000 33,750
Rockshox Inc.* 7,000 105,000
Safety 1st, Inc.* 1,500 13,313
Silver King Communications Inc.* 1,400 32,900
Steinway Musical Instruments Inc.* 1,500 25,125
-------------
498,725
-------------
Retail Trade 5.0%
99 Cents Only Stores Co.* 4,000 56,000
Cole National Corp. Cl. A* 4,500 104,062
Finlay Enterprises Inc.* 4,000 50,000
Hanover Direct Inc.* 30,200 28,313
Krause's Furniture Inc.* 24,200 30,250
Little Switzerland Inc.* 16,000 69,000
TBC Corp.* 7,000 44,625
York Group Inc.* 5,000 80,000
-------------
462,250
-------------
Textile & Apparel 1.6%
Chic by H.I.S. Inc.* 19,000 83,125
Marisa Christina Inc.* 5,500 50,875
Tag Heuer International SA ADR* 600 11,850
-------------
145,850
-------------
Total Consumer Cyclical 2,723,525
-------------
Consumer Staple 25.0%
Business Service 15.2%
Abacus Direct Corp.* 8,000 168,000
American Residential Services Inc.* 5,000 95,625
Carriage Services Inc. Cl. A* 4,200 80,850
Data Documents Inc.* 11,000 119,625
Lamar Advertising Co. Cl. A* 3,000 124,500
Protection One Inc.* 6,000 75,750
Rental Service Corp.* 4,500 97,313
RMH Teleservices Inc.* 6,000 88,500
Scanforms Inc.* 700 3,806
Staffing Resources Inc.* 6,500 139,750
Staffmark Inc.* 9,900 139,837
Business Service (cont'd)
Strayer Education Inc.* 4,000 $ 65,500
Triad Systems Corp.* 16,000 86,000
Universal Outdoor Holdings Inc.* 3,000 108,000
-------------
1,393,056
-------------
Container 2.6%
Continental Can Company Inc.* 3,000 38,250
Lufkin Industries Inc. 2,000 41,500
Rock-Tenn Co. Cl. A 2,500 50,625
U.S. Can Corp.* 6,500 104,813
-------------
235,188
-------------
Drug 0.8%
ImmuLogic Pharmaceutical Corp.* 5,000 40,625
Martek Biosciences Corp.* 1,500 37,500
-------------
78,125
-------------
Food & Beverage 1.3%
Garden Fresh Restaurant Corp* 2,000 19,500
Northland Cranberries Inc. Cl. A 4,000 68,000
Robert Mondavi Corp. Cl. A* 1,000 32,750
-------------
120,250
-------------
Hospital Supply 4.1%
Arrow International Inc. 1,000 34,500
Fusion Medical Technologies Inc.* 9,000 90,000
General Surgical Innovations Inc.* 3,000 33,000
Imagyn Medical Inc.* 3,000 32,250
Invivo Corp.* 16,000 168,000
Sunrise Medical Inc.* 1,000 15,875
-------------
373,625
-------------
Printing & Publishing 0.2%
Katz Media Group Inc.* 2,000 17,750
-------------
Tobacco 0.8%
Dimon Inc. 3,000 57,375
Schweitzer-Mauduit International Inc. 500 16,750
-------------
74,125
-------------
Total Consumer Staple 2,292,119
-------------
Energy 7.0%
Oil 3.2%
Crystal Oil Co.* 3,800 136,800
Gerrity Oil & Gas Corp. Cv. Pfd. 8,000 112,000
Optima Petroleum Corp.* 15,000 49,688
-------------
298,488
-------------
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
State Street Research Small Capitalization Value Fund
Investment Portfolio (cont'd)
Value
Shares (Note 1)
------------------------------------------- -------- -------------
Oil Service 3.8%
Atwood Oceanics Inc.* 3,600 $ 158,400
Ensco International Inc.* 1,087 35,327
Patterson Energy, Inc.* 4,332 75,810
Timber/Sharp Drilling Inc.* 7,000 77,875
-------------
347,412
-------------
Total Energy 645,900
-------------
Finance 3.9%
Bank 1.1%
AMBANC Holding Co. Inc.* 6,000 63,375
Ambase Corp.* 10,000 17,300
Meritor Savings Bank* 10,000 17,188
-------------
97,863
-------------
Financial Service 2.8%
First Enterprise Financial Group* 5,000 50,000
Gentra Inc.* 12,000 17,267
Hawthorne Financial Corp.* 10,000 72,500
Midland Financial Group Inc. 2,000 19,000
Union Acceptance Corp. Cl. A* 2,000 38,500
Willis Lease Finance Corp.* 6,800 62,900
-------------
260,167
-------------
Total Finance 358,030
-------------
Science & Technology 4.1%
Computer Software & Service 3.5%
AlphaNet Solutions Inc.* 2,000 19,000
Computervision Corp.* 6,000 52,500
Dataware Technologies Inc.* 3,000 11,250
Document Sciences Corp.* 3,000 37,875
Information Storage Devices Inc.* 3,000 21,000
MAI Systems Corp.* 4,000 34,000
Phoenix International Inc.* 4,000 70,000
Technology Modeling Associates Inc.* 3,500 45,500
Walsh International Inc.* 3,000 30,000
-------------
321,125
-------------
Electronic Components 0.6%
Augat Inc. 2,500 53,125
-------------
Electronic Equipment 0.0%
Advanced Fibre Communications, Inc.* 100 2,500
-------------
Total Science & Technology 376,750
-------------
Utility 2.2%
Natural Gas 1.6%
TransTexas Gas Corp.* 12,500 $ 143,750
-------------
Telephone 0.6%
Lightbridge Inc.* 5,000 58,750
-------------
Total Utility 202,500
-------------
Total Common Stocks (Cost $7,735,340) 9,046,714
-------------
Principal Maturity
Amount Date
--------------------------------- ----------- ------------- -------------
SHORT-TERM OBLIGATIONS 1.5%
Ford Motor Credit Co., 5.15% $136,000 10/02/1996 136,000
-------------
Total Short-Term Obligations (Cost $136,000) 136,000
-------------
Total Investments (Cost $7,871,340)--99.9% 9,182,714
Cash and Other Assets, Less Liabilities--0.1% 8,928
-------------
Net Assets--100.0% $9,191,642
=============
Federal Income Tax Information:
At September 30, 1996, the net unrealized appreciation of
investments based on cost for Federal income tax purposes
of $7,871,340 was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost $1,748,030
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value (436,656)
-------------
$1,311,374
=============
- --------------------------------------------------------------------------
* 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 Small Capitalization Value Fund
Statement of Assets and Liabilities
September 30, 1996
Assets
Investments, at value (Cost $7,871,340) (Note 1) $9,182,714
Cash 135,942
Receivable for securities sold 333,231
Receivable from Distributor (Note 3) 27,999
Dividends and interest receivable 928
Deferred organization costs and other assets (Note 1) 37,660
-------------
9,718,474
Liabilities
Payable for securities purchased 456,605
Accrued transfer agent and shareholder services (Note 2) 19,066
Accrued management fee (Note 2) 5,897
Accrued trustees' fees (Note 2) 4,952
Accrued distribution and service fees (Note 5) 452
Other accrued expenses 39,860
-------------
526,832
-------------
Net Assets $9,191,642
=============
Net Assets consist of:
Unrealized appreciation of investments $1,311,374
Accumulated net realized gain 1,928,878
Shares of beneficial interest 5,951,390
-------------
$9,191,642
=============
Net Asset Value and redemption price per share of Class A
shares ($1,109,903 / 73,305 shares of beneficial
interest) $15.14
=============
Maximum Offering Price per share of Class A shares
($15.14 / .955) $15.85
=============
Net Asset Value and offering price per share of Class B
shares ($165,044 / 10,991 shares of beneficial
interest)* $15.02
=============
Net Asset Value, offering price and redemption price per
share of Class C shares ($7,751,651 / 510,530 shares of
beneficial interest) $15.18
=============
Net Asset Value and offering price per share of Class D
shares ($165,044 / 10,991 shares of beneficial
interest)* $15.02
=============
* 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 $72 $ 55,733
Interest 4,549
------------
60,282
Expenses
Management fee (Note 2) 62,107
Custodian fee 75,663
Transfer agent and shareholder services (Note 2) 44,793
Registration fees 23,046
Audit fee 15,343
Amortization of organization costs (Note 1) 14,595
Reports to shareholders 13,510
Trustees' fees (Note 2) 11,049
Legal fees 7,376
Service fee--Class A (Note 5) 7,456
Distribution and service fees--Class B (Note 5) 1,357
Distribution and service fees--Class D (Note 5) 1,357
Miscellaneous 8,396
------------
286,048
Expenses borne by the Distributor (Note 3) (187,754)
------------
98,294
------------
Net investment loss (38,012)
------------
Realized and Unrealized Gain on Investments
Net realized gain on investments (Notes 1 and 3) 1,978,638
Net unrealized appreciation of investments 774,969
------------
Net gain on investments 2,753,607
------------
Net increase in net assets resulting from operations $2,715,595
============
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
State Street Research Small Capitalization Value Fund
Statement of Changes in Net Assets
February 13, 1995
(Commencement of
Year ended Operations) to
September 30, 1996 September 30, 1995
- ------------------------- ------------------- --------------------
Increase (Decrease) in Net Assets
Operations:
Net investment income
(loss) $ (38,012) $ 36,497
Net realized gain on
investments* 1,978,638 275,486
Net unrealized
appreciation of
investments 774,969 536,405
Net increase resulting
from operations 2,715,595 848,388
Dividend from net
investment income:
Class A (46,536) --
Class B (430) --
Class C (1,112) --
Class D (430) --
----------- -----------
(48,508) --
----------- -----------
Distribution from net
realized gains:
Class A (259,563) --
Class B (5,268) --
Class C (5,268) --
Class D (5,268) --
----------- -----------
(275,367) --
----------- -----------
Net increase from fund
share transactions
(Note 6) 668,649 5,282,885
----------- -----------
Total increase in net
assets 3,060,369 6,131,273
Net Assets
Beginning of year 6,131,273 --
----------- -----------
End of year (including
undistributed net
investment income of $0
and $36,497,
respectively) $9,191,642 $6,131,273
=========== ===========
* Net realized gain for
Federal income tax
purposes (Note 1) $1,940,770 $ 275,486
=========== ===========
The accompanying notes are an integral part of the financial statements.
Notes to Financial Statements
September 30, 1996
Note 1
State Street Research Small Capitalization Value 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 Small Capitalization Value
Fund, State Street Research Small Capitalization Growth Fund and State Street
Research Capital Fund.
The investment objective of the Fund is to provide high total return
consisting principally of capital appreciation. In seeking to achieve its
investment objective, the Fund invests primarily in the equity securities of
small capitalization companies which are trading at prices believed to be
below the true values of such securities.
The Fund is authorized to issue four classes of shares. At the present time,
only Class A shares are generally available for purchase. Class B, Class C
and Class D shares are not being offered at this time. Class A shares are
subject to an initial sales charge of up to 4.50% and pay an annual service
fee equal to 0.25% of average daily net assets. Class B shares are subject to
a contingent deferred sales charge on certain redemptions made within five
years of purchase and pay annual distribution and service fees of 1.00%.
Class B shares automatically convert into Class A shares (which pay lower
ongoing expenses) at the end of eight years after the issuance of the Class B
shares. Class C shares are only offered to certain employee benefit plans and
large institutions. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro-rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, related specifically to that class. The Trustees
declare separate dividends on each class of shares.
The following significant policies are consistently followed by the Fund in
preparing its financial statements, and such policies are in conformity with
generally accepted accounting principles for investment companies.
A. 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
7
<PAGE>
State Street Research Small Capitalization Value Fund
accounted for on the trade date (date the order to buy or sell is executed),
and dividends declared but not received are accrued on the ex-dividend date.
Interest income is determined on the accrual basis. Realized gains and losses
from security transactions are reported on the basis of identified cost of
securities delivered for both financial reporting and Federal income tax
purposes.
B. Federal Income Taxes
No provision for Federal income taxes is necessary since the Fund intends to
qualify under Subchapter M of the Internal Revenue Code and its policy is to
distribute all of its taxable income, including net realized capital gains,
if any, within the prescribed time periods.
C. Dividends
Dividends from net investment income, if any, are declared and paid or
reinvested annually. Net realized capital gains, if any, are distributed
annually, unless additional distributions are required for compliance with
applicable tax regulations.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
D. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and are being amortized under the straight-line method over a
period of five years.
E. 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 0.85% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. The fees of the Trustees not currently affiliated with the
Adviser amounted to $11,049 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 $7,786.
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended September 30, 1996, the amount of such expenses
assumed by the Distributor and its affiliates was $187,754.
Note 4
For the year ended September 30, 1996, exclusive of short-term investments
and U.S. Government obligations, purchases and sales of securities aggregated
$9,307,923 and $9,060,535, respectively.
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940. Under the Plan, the Fund
pays annual service fees to the Distributor at a rate of 0.25% of average
daily net assets for Class A, Class B and Class D shares. In addition, the
Fund pays annual distribution fees of 0.75% of average daily net assets for
Class B and Class D shares. The Distributor uses such payments for personal
services and/or the maintenance 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 $7,456, $1,357 and $1,357 for Class A,
Class B and Class D, respectively.
8
<PAGE>
State Street Research Small Capitalization Value Fund
Notes (Cont'd)
Note 6
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At September 30, 1996, the
Adviser owned one share of each of Class A, Class B, Class C and Class D
shares and Metropolitan owned 15,453 Class A shares, 10,968 Class B shares,
510,124 Class C shares and 10,968 Class D shares of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
February 13, 1995
(Commencement
Year ended of Operations) to
September 30, 1996 September 30, 1995
---------------------------- ------------------------
Class A Shares Amount Shares Amount
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 32,682 $ 424,234 519,451 $4,982,255
Issued upon reinvestment of:
Distribution from net realized gains 24,487 259,562 -- --
Dividend from net investment income 211 2,242 -- --
Shares repurchased (503,526) (5,963,085) -- --
------------ --------------- --------- -------------
Net increase (decrease) (446,146) $(5,277,047) 519,451 $4,982,255
============ =============== ========= =============
Class B Shares Amount Shares Amount
--------------------------------------------------------------------------------------------------
Shares sold -- $ -- 10,493 $ 100,210
Issued upon reinvestment of distribution
from net realized gains 498 5,265 -- --
------------ --------------- --------- -------------
Net increase 498 $ 5,265 10,493 $ 100,210
============ =============== ========= =============
Class C Shares Amount Shares Amount
--------------------------------------------------------------------------------------------------
Shares sold 499,540 $ 5,929,901 10,493 $ 100,210
Issued upon reinvestment of distribution
from net realized gains 497 5,265 -- --
------------ --------------- --------- -------------
Net increase 500,037 $ 5,935,166 10,493 $ 100,210
============ =============== ========= =============
Class D Shares Amount Shares Amount
--------------------------------------------------------------------------------------------------
Shares sold -- $ -- 10,493 $ 100,210
Issued upon reinvestment of distribution
from net realized gains 498 5,265 -- --
------------ --------------- --------- -------------
Net increase 498 $ 5,265 10,493 $ 100,210
============ =============== ========= =============
</TABLE>
9
<PAGE>
State Street Research Small Capitalization Value Fund
Financial Highlights
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Class B
---------------------------------------- ----------------------------------------
February 13, 1995 February 13, 1995
(Commencement (Commencement
Year ended of Operations) to Year ended of Operations) to
September 30, 1996** September 30, 1995 September 30, 1996** September 30, 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $11.13 $ 9.55 $11.08 $ 9.55
Net investment income (loss)* (0.06) 0.07 (0.17) 0.02
Net realized and unrealized gain on
investments 4.66 1.51 4.65 1.51
Dividend from net investment income (0.09) -- (0.04) --
Distribution from net realized gains (0.50) -- (0.50) --
-------------------- ------------------ -------------------- ------------------
Net asset value, end of year $15.14 $11.13 $15.02 $11.08
==================== ================== ==================== ==================
Total return 43.63%+ 16.54%+++ 42.52%+ 16.02%+++
Net assets at end of year (000s) $1,110 $5,782 $165 $116
Ratio of operating expenses to average
net assets* 1.45% 1.45%++ 2.20% 2.20%++
Ratio of net investment income (loss) to
average net assets* (0.56)% 1.05%++ (1.38)% 0.32%++
Portfolio turnover rate 124.79% 47.34% 124.79% 47.34%
Average commission rate@ $.0174 -- $.0174 --
*Reflects voluntary assumption of fees
or expenses per share in each
year (Note 3). $0.32 $0.15 $0.32 $0.15
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
---------------------------------------- ----------------------------------------
February 13, 1995 February 13, 1995
(Commencement (Commencement
Year ended of Operations) to Year ended of Operations) to
September 30, 1996** September 30, 1995 September 30, 1996** September 30, 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $11.15 $ 9.55 $11.08 $ 9.55
Net investment income (loss)* (0.06) 0.09 (0.17) 0.02
Net realized and unrealized gain on
investments 4.70 1.51 4.65 1.51
Dividend from net investment income (0.11) -- (0.04) --
Distribution from net realized gains (0.50) -- (0.50) --
-------------------- ------------------ -------------------- ------------------
Net asset value, end of year $15.18 $11.15 $15.02 $11.08
==================== ================== ==================== ==================
Total return 43.95%+ 16.75%+++ 42.52%+ 16.02%+++
Net assets at end of year (000s) $7,752 $117 $165 $116
Ratio of operating expenses to average
net assets* 1.20% 1.20%++ 2.20% 2.20%++
Ratio of net investment income (loss) to
average net assets* (0.43)% 1.32%++ (1.38)% 0.32%++
Portfolio turnover rate 124.79% 47.34% 124.79% 47.34%
Average commission rate@ $.0174 -- $.0174 --
*Reflects voluntary assumption of fees
or expenses per share in each
year (Note 3). $0.32 $0.15 $0.32 $0.15
</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. 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 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.
10
<PAGE>
Report of Independent Accountants
To the Trustees of State Street Research
Capital Trust and Shareholders of
State Street Research Small Capitalization Value Fund
We have audited the accompanying statement of assets and liabilities of State
Street Research Small Capitalization Value Fund, including the schedule of
portfolio investments, as of September 30, 1996, and the related statement of
operations for the year then ended, the statement of changes in net assets
and the financial highlights for the year then ended and the period February
13, 1995 (commencement of operations) to September 30, 1995. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our 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 Small Capitalization Value Fund as of September 30,
1996, the results of its operations for the year then ended, the changes in
its net assets and the financial highlights for the year then ended and the
period February 13, 1995 (commencement of operations) to September 30, 1995,
in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
November 8, 1996
11
<PAGE>
State Street Research Small Capitalization Value Fund
Management's Discussion of Fund Performance
Small Capitalization Value Fund finished its first full year of performance
on September 30, 1996. For the past twelve months, Class A shares of the Fund
provided a total return of +43.63% (does not reflect sales charge). The
Lipper Analytical Services' Small Company Growth Funds category finished up
18.40% (does not include sales charge), just behind the S&P 500 which was up
20.32% for the same time period.
The small-cap sector has been noticeably affected by consolidations and
takeovers. This has impacted our portfolio, particularly the business service
and metal and mining sectors, with varying results. Our increased exposure in
the business service sector was due mainly to the consolidations taking place
within the industry. During the past twelve months, the companies in this
sector have generally produced good values and consistent cash flows.
We reduced our position in the metal and mining sector for two reasons. Some
securities reached price objectives, while others didn't perform as we
expected. Over the past year, approximately ten companies in the portfolio
were acquired, creating a performance boost for the Fund, and providing the
Fund with an increased cash position and opportunities to invest in other
alternatives.
September 30, 1996
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
reflects maximum 4.5% "A" share front-end sales charge or 5% "B" share or 1%
"D" share contingent deferred sales charges, where applicable. "C" shares,
offered without a sales charge, are available only to certain employee
benefit plans and large institutions. Performance results for the Fund are
increased by the Distributor's voluntary reduction of Fund fees and expenses.
The first figure reflects expense reduction; the second shows what results
would have been without subsidization.
Change in Value of $10,000 Based on
the S&P 500 Compared to Change in Value
of $10,000 Invested in the Fund
**********line graphs*********
Class A Shares
Average Annual Total Return
1 Year Life of Fund
+37.16%/+35.00% +33.28%/+31.28%
Small Capitalization Value Fund S&P 500
2/13/95 9550 10000
9/30/95 11130 12425
9/30/96 15986 14949
Class B Shares
Average Annual Total Return
1 Year Life of Fund
+37.52%/+35.26% +34.04%/+31.55%
Small Capitalization Value Fund S&P 500
2/13/95 10000 10000
9/30/95 11602 12425
9/30/96 16135 14949
Class C Shares
Average Annual Total Return
1 Year Life of Fund
+43.95%/+41.68% +37.43%/+34.89%
Small Capitalization Value Fund S&P 500
2/13/95 10000 10000
9/30/95 11675 12425
9/30/96 16806 14949
Class D Shares
Average Annual Total Return
1 Year Life of Fund
+41.52%/+39.26% +35.56%/+33.03%
Small Capitalization Value Fund S&P 500
2/13/95 10000 10000
9/30/95 11602 12425
9/30/96 16535 14949
