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As filed with the Securities and Exchange Commission on December 3, 1998
1933 Act Registration No. 2-86271
1940 Act File No. 811-3838
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM N-1a
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. ___ [ ]
Post-Effective Amendment No. 16 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 22 [X]
-------------------------------
STATE STREET RESEARCH CAPITAL TRUST
-------------------------------
(Exact Name of Registrant as Specified in Charter)
One Financial Center, Boston, Massachusetts 02111
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (617) 357-1200
Francis J. McNamara, III
Executive Vice President, Secretary & General Counsel
State Street Research & Management Company
One Financial Center
Boston, Massachusetts 02111
Geoffrey R.T. Kenyon, Esq.
Goodwin, Procter & Hoar LLP
Exchange Place, Boston, Massachusetts 02109
It is proposed that this filing will become effective under Rule 485:
[ ] Immediately upon filing pursuant to paragraph (b),
[ ] On __________________ pursuant to paragraph (b),
[ ] 60 days after filing pursuant to paragraph (a)(1),
[X] On February 1, 1999 pursuant to paragraph (a)(1),
[ ] 75 days after filing pursuant to paragraph (a)(2),
[ ] On __________________ pursuant to paragraph (a)(2).
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
================================================================================
<PAGE>
[Photo of building]
STATE STREET RESEARCH
Capital Fund
An aggressive growth
fund investing in a
broad range of stocks.
Prospectus
February 1, 1999
[sidebar text]
This prospectus has information you should know before you invest. Please read
it carefully and keep it with your investment records.
Although these securities have been registered with the Securities and Exchange
Commission, the SEC has not approved or disapproved them and does not guarantee
the accuracy or adequacy of the information in this prospectus. Anyone who
informs you otherwise is committing a federal crime.
[end of sidebar text]
<PAGE>
Contents
- --------------------------------------------------------------------------------
1 The Fund
--------
1 Goal and Strategies
3 Principal Risks
4 Volatility and Performance
6 Investor Expenses
7 Investment Management
8 Your Investment
---------------
8 Opening an Account
8 Choosing a Share Class
10 Sales Charges
Dealer Compensation
12 Buying and Selling Shares
16 Account Policies
18 Distributions and Taxes
19 Investor Services
22 Other Information
-----------------
22 Other Securities and Risks
24 Financial Highlights
Back Cover For Additional Information
<PAGE>
The Fund 1
- --------------------------------------------------------------------------------
[chess piece graphic] Goal and Strategies
Fundamental Goal The fund seeks to provide maximum capital appreciation by
investing primarily in common and preferred stocks and convertible debt
securities of emerging growth companies and companies considered to be
undervalued special situations, as determined by the fund's investment manager.
Principal Strategies Under normal market conditions, the fund invests at least
65% of total assets in stocks and other securities as described above.
In selecting stocks, the fund combines elements of growth investing and value
investing, focusing its attention on companies of any size that appear to fall
into one or both of the following categories:
[bullet] less mature companies with the potential for rapid growth
[bullet] companies whose unusual circumstances have not been fully recognized
by the market
The fund uses research to identify potential investments, examining such
features as a firm's financial condition, business prospects, competitive
position and business strategy. The fund looks for companies that have good
current or prospective earnings, attractive valuations and strong management
teams. At different times, the fund may emphasize a particular size or type of
company.
[sidebar text]
[magnifying glass graphic] Who May Want to Invest
State Street Research Capital Fund is designed for investors who seek one or
more of the following:
[bullet] an aggressive stock fund for a long-term goal
[bullet] a fund to complement a portfolio of more conservative investments
[bullet] a fund with the flexibility to emphasize different sizes of companies
during different markets
The fund is not appropriate for investors who:
[bullet] want to avoid high volatility or possible losses
[bullet] are making short-term investments
[bullet] are investing emergency reserve money
[bullet] are seeking regular income
[end of sidebar text]
<PAGE>
2 The Fund continued
- --------------------------------------------------------------------------------
The fund reserves the right to invest up to 35% of total assets in other
securities. These may include other types of stocks, such as those of more
mature companies or so-called blue-chip companies. They may also include U.S.
government securities, as well as bonds rated investment-grade at the time of
purchase and their unrated equivalents.
The fund may adjust the composition of its portfolio as market conditions and
economic outlooks change. For more information about the fund's investments and
practices, see page 24.
[sidebar text]
[magnifying glass graphic] Emerging Growth
and Special Situation
Companies
Over the long term, emerging growth stocks have generally offered greater risks
and greater rewards than the stock market as a whole.
During good economic periods, these companies have the potential to grow more
quickly than others because they are typically in growing industries and may
have innovative products or services and strong, entrepreneurial leaders. In
poor or uncertain economic periods, however, emerging growth stocks may tumble
as investors abandon them in search of companies with the resources and the
broad business lines to weather hard times.
Special situations are companies whose current status is strongly influenced by
events outside the normal course of business, such as a potential corporate
restructuring or a strategic business alliance. Stocks of these companies often
trade at what appears to be less than their true worth. The fund emphasizes
special situation stocks on the theory that they may be positioned to rise in
value in the near future as investors come to recognize that the company's
situation is improving.
[end of sidebar text]
<PAGE>
3
[traffic sign graphic] Principal Risks
Because the fund invests primarily in stocks, its major risks are those of stock
investing, including sudden, unpredictable drops in value and the potential for
periods of lackluster performance.
Emerging growth stocks can be particularly sensitive to market movements,
because they may be thinly traded and their market prices tend to reflect future
expectations. With special situation stocks, the main risk is that they may not
achieve their expected value because events do not materialize as anticipated.
During times of high volatility, the fund may have difficulty finding buyers for
portfolio securities.
Because of these and other risks, the fund may underperform certain other stock
funds (such as index funds or those emphasizing dividend stocks) during periods
when emerging growth or special situation stocks are out of favor. The success
of the fund's investment strategy depends largely on the portfolio manager's
skill in assessing the potential of the stocks the fund buys.
The fund's management approach, which may include short-term trading, could
cause the fund's portfolio turnover rate to be above-average for a stock fund.
High turnover will increase the fund's brokerage costs and may increase your tax
liability if there are capital gains.
Because the fund may invest in U.S. companies with some international business,
and also may invest in foreign companies, it is subject to the risks associated
with international investing.
The fund's shares will rise and fall in value and there is a risk that you could
lose money by investing in the fund. Also, the fund cannot be certain that it
will achieve its goal. Finally, fund shares are not bank deposits and are not
guaranteed, endorsed or insured by any financial institution, government entity
or the FDIC.
Information on other securities and risks appears on page 22.
A "snapshot" of the fund's investments may be found in the current annual or
semiannual report (see back cover)
<PAGE>
4 Volatility and Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31, 1998
---------------------------------------------------------------------------------------
Year-by-Year Total Return (Class A) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
28.81% (13.94) 75.72 6.26 31.53 0.21 31.86 7.56 6.25
[up arrow graphic] Best quarter:
[down arrow graphic] Worst quarter:
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998
---------------------------------------------
Average Annual Total Return 1 Year 5 Years 10 Years
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (%)
Class B(1) (introduced January 1, 1999) -- -- --
Class B (%)
Class C (%)
Class S (%)
Russell Midcap Growth Index
S&P 500 Index (%)
Lipper Capital Appreciation Funds Index (%)
</TABLE>
<PAGE>
5
[magnifying glass graphic] Understanding
Volatility and
Performance
The chart and table on the opposite page are designed to show two aspects of the
fund's track record:
[bullet] Year-by-Year Total Return shows how volatile the fund has been: how
much the difference has been, historically, between its best years and
worst years. In general, funds with higher average annual total
returns will also have higher volatility. The graph includes the
effects of fund expenses, but not sales charges. If sales charges had
been included, returns would have been less than shown.
[bullet] Average Annual Total Return is a measure of the fund's performance
over time. It is determined by taking the fund's performance over a
given period and expressing it as an average annual rate. Average
annual total return includes the effects of fund expenses and maximum
sales charges for each class, and assumes that you sold your shares at
the end of the period.
Also included are three independent measures of performance. Two are unmanaged
stock indices: the S&P 500 (officially, the "Standard & Poor's 500 Composite
Stock Price Index"), which includes 500 domestic stocks, and the Russell Midcap
Growth Index, which contains only those stocks within the Russell Midcap Index
(a mid-size company index) that show above-average growth. The Lipper Capital
Appreciation Funds Index shows the performance of a category of mutual funds
with similar goals. This index, which is also unmanaged, shows you how well the
fund has done compared to competing funds.
While the fund does not seek to match the returns or the volatility of any
index, these indices are good indicators of general stock market performance and
can be used as rough guides when gauging the return of this and other
investments. When making comparisons, keep in mind that none of the indices
includes the effects of sales charges. Also, even if your stock portfolio were
identical to the S&P 500 or the Russell Midcap Growth Index, your returns would
always be lower, because these indices don't include brokerage and
administrative expenses.
In both the chart and the table, the returns shown for the fund include
performance from before the creation of certain share classes in 1993. If the
returns for Class A, Class B and Class C from before 1993 had reflected their
current distributions/service (12b-1) fees as described on page 6), these
returns would have been lower.
Keep in mind that past performance is no guarantee of future results.
<PAGE>
6 Investor Expenses
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class descriptions begin on page 11
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shareholder Fees (% of offering price) Class A Class B(1) Class B Class C Class S
- -----------------------------------------------------------------------------------------------------------------------------------
Maximum front-end sales charge (load) 5.75 0.00 0.00 0.00 0.00
Maximum deferred sales charge (load) 0.00(a) 5.00 5.00 1.00 0.00
Annual Fund Operating Expenses (% of average net assets) Class A Class B(1) Class B Class C Class S
- -----------------------------------------------------------------------------------------------------------------------------------
Management fee (b) 0.72 0.72 0.72 0.72 0.72
Distribution/service (12b-1) fees 0.25 1.00 1.00 1.00 0.00
Other expenses 0.39 0.39 0.39 0.39 0.39
---- ---- ---- ---- ----
Total annual fund operating expenses 1.36 2.11 2.11 2.11 1.11
==== ==== ==== ==== ====
Example Year Class A Class B(1) Class B Class C Class S
- -----------------------------------------------------------------------------------------------------------------------------------
1 $ 706 $714/214 $714/214 $314/214 $113
3 $ 981 $961/661 $961/661 $661 $353
5 $1,277 $1,334/1,134 $1,334/1,134 $1,134 $612
10 $2,116 $2,250 $2,250 $2,441 $1,352
</TABLE>
(a) Except for investments of $1 million or more; see page 10.
(b) Reflects fee schedule that become effective August 1, 1998
as if it had been in place during the Fund's previous
fiscal year.
<PAGE>
7
[sidebar text]
[magnifying glass graphic] Understanding Investor
Expenses
The information on the opposite page is designed to give you an idea of what you
should expect to pay in expenses as an investor in the fund:
[bullet] Shareholder Fees are costs that are charged to you directly. These
fees are not charged on reinvestments or exchanges.
[bullet] Annual Fund Operating Expenses are deducted from the fund's assets
every year, and are thus paid indirectly by all fund investors.
[bullet] The Example is designed to allow you to compare the costs of this fund
with those of other funds. It assumes that you invested $10,000 over
the years indicated, reinvested all distributions, earned a
hypothetical 5% annual return and paid the maximum applicable sales
charges. For Class B(1) and Class B shares, it also assumes the
automatic conversion to Class A shares after eight years.
Where two numbers are shown separated by a slash, the first one assumes you sold
all your shares at the end of the period, while the second assumes you stayed in
the fund. Where there is only one number, the costs would be the same either
way.
Investors should keep in mind that the example is for comparison purposes only.
The fund's actual performance and expenses may be higher or lower.
[end of sidebar text]
[Thinker graphic] Investment
Management
The fund's investment manager is State Street Research & Management Company. The
firm traces its heritage back to 1924 and the founding of one of America's first
mutual funds. Today the firm has more than $__billion in assets under management
(as of December 31, 1998), including $__billion in mutual funds.
The investment manager is responsible for the fund's investment and business
activities, and receives the management as compensation. The management fee is
0.75% of the first $500 million of fund assets, annually, 0.70% of the next $500
million, and 0.65% of any amount over $1 billion. The investment manager is a
subsidiary of Metropolitan Life Insurance Company.
Richard J. Jodka has been responsible for the fund's day-to-day portfolio
management since February 1998. A senior vice president, he joined the firm in
1998 and has worked as an investment professional since 1968.
<PAGE>
8 Your Investment
- --------------------------------------------------------------------------------
[key graphic] Opening an Account
If you are opening an account through a financial professional, he or she can
assist you with all phases of your investment.
If you are investing through a large retirement plan or other special program,
follow the instructions in your program materials.
To open an account without the help of a financial professional, please use the
instructions on these pages.
[checklist graphic] Choosing a Share
Class
The fund generally offers four share classes, each with its own sales charge and
expense structure: Classes A, B(1), C and S. The fund also offers Class B
shares, but only to current Class B shareholders through reinvestment of
dividends and distributions or through exchanges from existing Class B accounts
of the State Street Research funds.
If you are investing a substantial amount and plan to hold your shares for a
long period, Class A shares may make the most sense for you. If you are
investing a lesser amount, you may want to consider Class B(1) shares (if
investing for at least six years) or Class C shares (if investing for less than
six years). If you are investing through a special program, such as a large
employer-sponsored retirement plan or certain programs available through
financial professionals, you may be eligible to purchase Class S shares.
Because all future investments in your account will be made in the share class
you designate when opening the account, you should make your decision carefully.
Your financial professional can help you choose the share class that makes the
most sense for you.
<PAGE>
9
Class A -- Front Load
[bullet] Initial sales charge of 5.75% or less;
[bullet] Lower sales charges for larger investments; see sales charge schedule
on facing page
[bullet] Lower annual expenses than Class B(1) or C shares because of lower
distribution/service (12b-1) fee of 0.25%
Class B(1) -- Back Load
[bullet] No initial sales charge
[bullet] Deferred sales charge of 5% or less on shares you sell within six
years;
[bullet] Annual distribution/service (12b-1) fee of 1.00%
[bullet] Automatic conversion to Class A shares after eight years, reducing
future annual expenses
Class C -- Level Load
[bullet] No initial sales charge
[bullet] Deferred sales charge of 1%, paid if you sell shares within one year
of purchase
[bullet] Lower deferred sales charge than Class B(1) shares
[bullet] Annual distribution/service (12b-1) fee of 1.00%
[bullet] No conversion to Class A shares after eight years, so annual expenses
do not decrease
Class S -- Special Programs
[bullet] Available only through certain retirement accounts, advisory accounts
of the investment manager and other special programs, including
programs through financial professionals with record-keeping and other
services; these programs usually involve special conditions and
separate fees (consult your financial professional or your program
materials)
[bullet] No sales charges of any kind
[bullet] No distribution/service (12b-1) fees; annual expenses are lower than
other share classes
<PAGE>
10 Your Investment continued
- --------------------------------------------------------------------------------
Sales Charges
Class A -- Front Load
<TABLE>
<CAPTION>
when you invest this % is which equals
this amount deducted this % of
for sales your net
charges investment
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Up to $50,000 5.75 6.10
$50,000 to $100,000 4.50 4.71
$100,000 to $250,000 3.50 3.63
$250,000 to $500,000 2.50 2.56
$500,000 to to $1 million 2.00 2.04
$1 million or more see next column
</TABLE>
With Class A shares, you pay a sales charge only when you buy shares.
If you are investing $1 million or more (either as a lump sum or through any of
the methods described on the application), you can purchase Class A shares
without any sales charge. However, you may be charged a "contingent deferred
sales charge" (CDSC) of 1% if you sell any shares within one year of purchasing
them. See "Other CDSC Policies" on page 11.
Class A shares are also offered with low or no sales charges through various
wrap-fee programs and other sponsored arrangements (consult your financial
professional or your program materials).
Class B(1) -- Back Load
<TABLE>
<CAPTION>
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
- -------------------------------------------------------------------------------
<S> <C>
First year 5.00
Second year 4.00
Third year 3.00
Fourth year 3.00
Fifth year 2.00
Sixth year 1.00
Seventh or eighth year None
</TABLE>
With Class B(1) shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for six years or less, as described in the table above.
Class B(1) shares automatically convert to Class A shares after eight years;
Class A shares have lower annual expenes.
<PAGE>
11
- --------------------------------------------------------------------------------
Class B -- Back Load
Class B shares are available only to current shareholders through reinvestment
of dividends and distributions or through exchanges from existing Class B
accounts of the State Street Research funds. Other investments made by current
Class B shareholders will in Class B(1) shares.
With Class B shares, you are charged a "contingent deferred sales charge" (CDSC)
when you sell shares you have held for five years or less. The CDSC is a
percentage of net asset value at the time of purchase (or of sale, if lower) and
is deducted from your proceeds. When you sell shares in the first year after you
bought them, the CDSC is 5.00%; second year, 4.00%; third year, 3.00%; fourth
year, 3.00%; fifth year, 2.00%; sixth year or later, none. See "Other CDSC
Policies" on this page.
Class B shares automatically convert to Class A shares after eight years.
Class C -- Level Load
<TABLE>
<CAPTION>
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
- ---------------------------------------------------------
<S> <C>
First year 1.00
Second year or later None
</TABLE>
With Class C shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for one year or less, as described in the table above. See "Other CDSC
Policies" on this page.
Class C shares currently have the same annual expenses as Class B(1) shares but
never convert to Class A shares.
Class S -- Special Programs
Class S shares have no sales charges.
Other CDSC Policies
The CDSC will be based on the net asset value of the shares at the time of
purchase (or sale, if lower). Any shares acquired through reinvestment are not
subject to the CDSC. There is no CDSC on exchanges into other State Street
Research funds, and the date of your initial investment will continue to be used
as the basis for CDSC calculations when you exchange. To ensure that you pay the
lowest CDSC possible, the fund will always use the shares with the lowest CDSC
possible, the fund will always use the shares with the lowest CDSC to fill your
sell requests.
The CDSC is waived on shares sold for participant initiated distributions from
State Street Research prototype retirement plans. In other cases, the CDSC is
waived on shares sold for mandatory retirement distributions or for
distributions because of disability or death. Consult your financial
professional or the State Street Research Service Center.
<PAGE>
12 Buying and Selling Shares
- --------------------------------------------------------------------------------
[sidebar text]
[magnifying glass graphic] Understanding
Distribution/Service
Fees
As noted in the descriptions on pages xx to xx all share classes except Class S
have an annual distribution/service fee, also called a 12b-1fee.
Under its current 12b-1 plan, the fund may pay certain distribution and service
fees for these classes out of fund assets. Because 12b-1 fees are an ongoing
expense, they will increase the cost of your investment and, over time, could
potentially cost you more than if you had paid other types of sales charges. For
that reason, you should consider the effects of 12b-1 fees as well as sales
loads when choosing a share class.
Some of the 12b-1 fee is used to compensate those financial professionals who
sell fund shares and provide ongoing service to shareholders. The table on the
next page shows how these professionals' compensation is calculated.
The fund may continue to pay 12b-1 fees even if the fund is subsequently closed
to new investors.
[end of sidebar text]
[cash register graphic] Policies for
Buying Shares
Once you have chosen a share class, the next step is to determine the amount you
want to invest.
Minimum Initial Investments:
[bullet] $1,000 for accounts that use the Investamatic program
[bullet] $2,000 for Individual Retirement Accounts
[bullet] $2,500 for all other accounts
Minimum Additional Investments:
[bullet] $50 for any account
Complete the enclosed application. You can avoid future inconvenience by signing
up now for any services you might later use.
Timing of Requests All requests received in good order by State Street Research
before the close of regular trading on the New York Stock Exchange (usually 4:00
p.m. eastern time) will be executed the same day, at that day's closing share
price. Orders received thereafter will be executed the following day, at that
day's closing share price.
Wire Transactions Funds may be wired between 8:00 a.m. and 4:00 p.m. eastern
time. To make a same-day wire investment, please notify State Street Research by
12:00 noon of your intention to wire funds, and make sure your wire arrives by
4:00 p.m. If the New York Stock Exchange closes before 4 p.m. eastern time, you
may be unable to make a same-day wire investment. Your bank may charge a fee for
wiring money.
<PAGE>
13
- --------------------------------------------------------------------------------
[graphic of a check] Dealer Compensation
Financial professionals who sell shares of State Street Research funds and
perform services for fund investors may receive sales commissions and annual
fees. These are paid by the fund's distributor, using money from sales charges,
distribution/service (12b-1) fees and its other resources.
Brokers and agents may charge a transaction fee on orders of fund shares placed
directly through them. The distributor may pay its affiliate MetLife Securities,
Inc. additional compensation of up to 0.25% of certain sales or assets.
(1) If your financial professional declines this commission, the one-year CDSC
on your investment is waived.
<TABLE>
<CAPTION>
Maximum Dealer Compensation (%) Class A Class B(1) Class B Class C Class S
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commission see below 4.00 4.00 1.00 0.00
Investments up to $50,000 5.00 -- -- -- --
$50,000 to $100,000 4.00 -- -- -- --
$100,000 to $250,000 3.00 -- -- -- --
$250,000 to $500,000 2.00 -- -- -- --
$500,000 to $1 million 1.75 -- -- -- --
First $1 to 3 million 1.00(1) -- -- -- --
Next $2 million 0.75(1) -- -- -- --
Next $2 million 0.50(1) -- -- -- --
Next $1 and above 0.25(1) -- -- -- --
Annual fee 0.25 0.25 0.25 1.00 0.00
</TABLE>
Brokers for Portfolio
Trades When placing trades for the fund's portfolio, State Street Research
chooses brokers that provide the best execution (a term defined by service as
well as price), but may also consider a broker's sales of fund shares.
<PAGE>
14 Instructions for Buying Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
To Open an Account To Add to an Account
<S> <C> <C> <C>
[Graphic of briefcase} Through a Consult your financial professional Consult your financial professional or your
Professional or or your program materials. program materials.
Program
By Mail [Graphic Make your check payable to "State Fill out an investment slip or indicate the
of Mailbox] Street Research Funds." Forward the fund name and account number on your check.
check and your application to State Make your check payable to "State Street
Street Research. Research Funds." Forward the check and slip
to State Street Research.
[Graphic of By Federal Call to obtain an account number, and Call State Street Research to obtain a
Federal Building] Funds Wire forward your application to State control number. Instruct your bank to wire
Street Research. Wire funds using the funds to:
instructions at right. [bullet] State Street Bank and Trust Company,
Boston, MA
[bullet] ABA: 011000028
[bullet] BNF: fund name and share class you want
to buy
[bullet] AC: 99029761
[bullet] OBI: your name and your account number
[bullet] Control: the number given to you by
State Street Research
By Electronic [Graphic Verify that your bank is a member of Call State Street Research to verify that the
Funds Transfer of Electric the ACH (Automated Clearing House) necessary bank information is on file for
(ACH) Plug] system. Forward your application to your account. If it is, you may request a
State Street Research. Please be sure transfer with the same phone call. If not,
to include the appropriate bank please ask State Street Research to provide
information. Call State Street you with an EZ Trader application.
Research to request a purchase.
[Graphic of
Calendar] By Investamatic Forward your application, with all Call State Street Research to verify that
appropriate sections completed, to Investamatic is in place on your account, or
State Street Research, along with a to request a form to add it. Investments are
check for your initial investment automatic once Investamatic is in place.
payable to "State Street Research
Funds."
By Exchange [Graphic of Call State Street Research or visit our Call State Street Research or visit our Web
Exchange] Web site. site.
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408 Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. -- 6:00 p.m., eastern time)
</TABLE>
<PAGE>
Your Investment continued 15
- --------------------------------------------------------------------------------
[graphic of receipt] Policies for
Selling Shares
Circumstances that Require Written Requests Please submit instructions in
writing when any of the following apply:
[bullet] you are selling more than $100,000 worth of shares
[bullet] the name or address on the account has changed within the last 30 days
[bullet] you want the proceeds to go to a name or address not on the account
registration
[bullet] you are transferring shares to an account with a different
registration or share class
[bullet] you are selling shares held in a corporate or fiduciary account; for
these accounts, additional documents are required:
corporate accounts: certified copy of a corporate resolution
fiduciary accounts: copy of power of attorney or other governing
document
To protect your account against fraud, all signatures on these documents must be
guaranteed. You may obtain a signature guarantee at most banks and securities
dealers. A notary public cannot provide a signature guarantee.
Incomplete Sell Requests State Street Research will attempt to notify you
promptly if any information necessary to process your request is missing.
Timing of Requests All requests received in good order by State Street Research
before the close of regular trading on the New York Stock Exchange (usually 4:00
p.m. eastern time) will be executed the same day, at that day's closing share
price. Requests received thereafter will be executed the following day, at that
day's closing share price.
Wire Transactions Proceeds sent by federal funds wire must total at least
$5,000. A fee of $7.50 will be deducted from all proceeds sent by wire, and your
bank may charge an additional fee to receive wired funds.
Selling Recently Purchased Shares If you sell shares before the check or
electronic funds transfer (ACH) for those shares has been collected, you will
not receive the proceeds until your initial payment has cleared. This may take
up to 15 days after your purchase was recorded (in rare cases, longer). If you
open an account with shares purchased by wire, you cannot sell those shares
until your application has been processed.
<PAGE>
16 Instructions for Selling Shares
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
[Graphic of briefcase] Through a Consult your financial professional
Professional or your program materials.
or Program
By Mail [Graphic of Mailbox] Send a letter of instruction, an endorsed stock power or share certificates (if you hold
certificate shares) to State Street Research. Specify the fund, the account number and the
dollar value or number of shares. Be sure to include all necessary signatures and any
additional documents, as well as signature guarantees if required (see facing page).
[Graphic of Federal By Federal Check with State Street Research to make sure that a wire redemption privilege, including
Building] Funds Wire a bank designation, is in place on your account. Once this is established, you may place
your request to sell shares with State Street Research. Proceeds will be wired to your
pre-designated bank account. (See "Wire Transactions" on facing page).
By Electronic [Graphic of Check with State Street Research to make sure that the EZ Trader feature, including a
Funds Transfer Electric bank designation, is in place on your account. Once this is established, you may place
(ACH) Plug] your request to sell shares with State Street Research. Proceeds will be sent to your
pre-designated bank account.
[Graphic of Telephone] By Telephone As long as the transaction does not require a written request (see facing page),
you or your financial professional can sell shares by calling State Street Research. A
check will be mailed to your address of record on the following business day.
By Exchange [Graphic of Exchage] Read the prospectus for the fund into which you are exchanging. Call State Street
Research or visit our Web site.
[Graphic of Calendar] By Systematic See plan information on page 21.
Withdrawal Plan
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408 Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. -- 6:00 p.m., eastern time)
</TABLE>
<PAGE>
Your Investment continued 17
- --------------------------------------------------------------------------------
[graphic of policies] Account Policies
Telephone Requests When you open an account you automatically receive telephone
privileges, allowing you to place requests for your account by telephone. Your
financial professional can also use these privileges to request exchanges on
your account and, with your written permission, redemptions. For your
protection, all telephone calls are recorded.
As long as State Street Research takes certain measures to authenticate
telephone requests on your account, you may be held responsible for unauthorized
requests. Unauthorized telephone requests are rare, but if you want to protect
yourself completely, you can decline the telephone privilege on your
application. The fund may suspend or eliminate the telephone privilege at any
time.
Exchange Privileges There is no fee to exchange shares among State Street
Research funds. Your new fund shares will be the equivalent class of your
current shares. Any contingent deferred sales charges will continue to be
calculated from the date of your initial investment.
You must hold Class A shares of any fund for at least 30 days before you can
exchange them for Class A shares of a different fund with a higher applicable
sales charge. Frequent exchanges can interfere with fund management and drive up
costs for all shareholders. Because of this, the fund currently limits each
account, or group of accounts under common ownership or control, to six
exchanges per calendar year. The fund may change or eliminate the exchange
privilege at any time, may limit or cancel any shareholder's exchange privilege
and may refuse to accept any exchange request, particularly those associated
with "market timing" strategies.
For Merrill Lynch customers, exchange privileges extend to Summit Cash Reserves
Fund, which is related to the fund for purposes of investment and investor
services.
Accounts with Low Balances If the value of your account falls below $1,500,
State Street Research may mail you a notice asking you to bring the account back
up to $1,500 or close it out. If you do not take action within 60 days, State
Street Research may either sell your shares and mail the proceeds to you at the
address of record or, depending on the cir-
<PAGE>
18
cumstances, may deduct an annual maintenance fee (currently $18).
The Fund's Business Hours The fund is open the same days as the New York Stock
Exchange (generally Monday through Friday). Fund representatives are available
from 8:00 a.m. to 6:00 p.m. eastern time on these days.
Calculating Share Price The fund calculates its share price every business day
at the close of regular trading on the New York Stock Exchange (usually at 4:00
p.m. eastern time). The share price is the fund's total assets minus its
liabilities (net asset value, or NAV) divided by the number of existing shares.
In calculating its NAV, the fund uses the last reported sale price or quotation
for portfolio securities. However, in cases where these are unavailable, or when
the investment manager believes that subsequent events have rendered them
unreliable, the fund may use fair-value estimates instead.
Because foreign securities markets are sometimes open on different days from
U.S. markets, there may be instances when the value of the fund's portfolio
changes on days when you cannot buy or sell fund shares.
Reinstating Recently Sold Shares For 120 days after you sell shares, you have
the right to "reinstate" your investment by putting some or all of the proceeds
into any currently available State Street Research fund at net asset value. Any
CDSC you paid on the amount you are reinstating will be credited to your
account. You may only use this privilege once in any twelve-month period with
respect to your shares of a given fund.
Additional Policies Please note that the fund maintains additional policies and
reserves certain rights, including:
[bullet] The fund may vary its requirements for initial or additional
investments, exchanges, reinvestments, periodic investment plans,
retirement and employee benefit plans, sponsored arrangements and
other similar programs
[bullet] All orders to purchase shares are subject to acceptance by the fund
[bullet] At any time, the fund may change or discontinue its sales charge
waivers and any of its order acceptance practices, and may suspend the
sale of its shares
[bullet] The fund may delay sending you redemption proceeds for up to seven
days, or longer if permitted by the SEC
[bullet] To permit investors to obtain the current price, dealers are
responsible for transmitting all orders to the State Street Research
Service Center promptly
<PAGE>
Your Investment continued 19
- --------------------------------------------------------------------------------
[sidebar text]
[magnifying glass graphic] Tax Considerations
Unless your investment is in a tax-deferred account, you may want to avoid:
[bullet] investing a large amount in the fund close to the end of its fiscal
year or calendar year (if the fund makes a distribution, you will
receive some of your investment back as a taxable distribution)
[bullet] selling shares at a loss for tax purposes and investing in a
substantially identical investment within 30 days before or after that
sale (such a transaction is usually considered a "wash sale," and you
will not be allowed to claim a tax loss in the current year)
[end of sidebar text]
[graphic of Uncle Sam] Distributions and Taxes
Income and Capital Gains Distributions The fund typically distributes any net
income and net capital gains to shareholders around the end of the fund's fiscal
year, which is September 30. To comply with tax regulations, the fund may also
pay an additional capital gains distribution in December.
You may have your distributions reinvested in the fund, invested in a different
State Street Research fund, deposited in a bank account or mailed out by check.
If you do not give State Street Research other instructions, your distributions
will automatically be reinvested in the fund.
Tax Effects of Distributions and Transactions In general, any dividends and
short-term capital gains distributions you receive from the fund are taxable as
ordinary income. Distributions of other capital gains are generally taxable as
capital gains -- in most cases, at different rates from those that apply to
ordinary income.
The tax you pay on a given capital gains distribution generally depends on how
long the fund has held the portfolio securities it sold. It does not depend on
how long you have owned your fund shares or whether you reinvest your
distributions.
Every year, the fund will send you information detailing the amount of ordinary
income and capital gains distributed to you for the previous year.
<PAGE>
20
The sale of shares in your account may produce a gain or loss, and is a taxable
event. For tax purposes, an exchange is the same as a sale.
Your investment in the fund could have additional tax consequences. Please
consult your tax professional for assistance.
Backup Withholding By law, the fund must withhold 31% of your distributions and
proceeds if you have not provided complete, correct taxpayer information.
[interlocked hands graphic] Investor Services
Investamatic Program Use Investamatic to set up regular automatic investments in
the fund from your bank account. You determine the frequency and amount of your
investments.
Systematic Withdrawal Plan This plan is designed for retirees and other
investors who want regular withdrawals from a fund account. The plan is free and
allows you to withdraw up to 8% of your fund assets a year without incurring any
contingent deferred sales charges. Certain terms and minimums apply.
EZ Trader This service allows you to purchase or sell fund shares over the
telephone through the ACH (Automated Clearing House) system.
Dividend Allocation Plan This plan automatically invests your distributions from
the fund into another fund of your choice, without any fees or sales charges.
Automatic Bank Connection This plan lets you route any distributions or
Systematic Withdrawal Plan payments directly to your bank account.
Retirement Plans State Street Research also offers a full range of prototype
retirement plans for individuals, sole proprietors, partnerships, corporations
and employees.
Call 1-800-562-0032 for information on any of the services described above.
<PAGE>
Other Information 21
- --------------------------------------------------------------------------------
[graphic of securities certificates] Other Securities
and Risks
Each of the fund's portfolio securities and investment practices offers certain
opportunities and carries various risks. Major investments and risk factors are
outlined in the fund description starting on page 2. Below are brief
descriptions of other securities and practices, along with their associated
risks.
Restricted and Illiquid Securities Any securities that are thinly traded or
whose resale is restricted can be difficult to sell at a desired time and price.
Some of these securities are new and complex, and trade only among institutions;
the markets for these securities are still developing, and may not function as
efficiently as established markets. Owning a large percentage of restricted and
illiquid securities could hamper the fund's ability to raise cash to meet
redemptions. Also, because there may not be an established market price for
these securities, the fund may have to estimate their value, which means that
their valuation (and, to a much smaller extent, the valuation of the fund) may
have a subjective element.
International Exposure Many U.S. companies in which the fund may invest generate
significant revenues and earnings from abroad. As a result, these companies and
the prices of their securities may be affected by weaknesses in global and
regional economies and the relative value of foreign currencies to the U.S.
dollar. These factors, taken as a whole, could adversely affect the price of
fund shares.
Foreign Investments Foreign securities are generally more volatile than their
domestic counterparts, in part because of higher political and economic risks,
lack of reliable information and fluctuations in currency exchange rates. These
risks are usually higher in less developed countries. The fund may use foreign
currencies and related instruments to hedge its foreign investments.
In addition, foreign securities may be more difficult to resell and the markets
<PAGE>
22
for them less efficient than for comparable U.S. securities. Even where a
foreign security increases in price in its local currency, the appreciation may
be diluted by the negative effect of exchange rates when the security's value is
converted to U.S. dollars. Foreign withholding taxes also may apply and errors
and delays may occur in the settlement process for foreign securities.
Derivatives Derivatives, a category that includes options and futures, are
financial instruments whose value derives from one or more securities, indices
or currencies. The fund may use certain derivatives for hedging (attempting to
offset a potential loss in one position by establishing an interest in an
opposite position). This includes the use of currency-based derivatives for
hedging its positions in foreign securities. The fund may also use certain
derivatives for speculation (investing for potential income or capital gain).
While hedging can guard against potential risks, it adds to the fund's expenses
and can eliminate some opportunities for gains. There is also a risk that a
derivative intended as a hedge may not perform as expected.
The main risk with derivatives is that some types can amplify a gain or loss,
potentially earning or losing substantially more money than the actual cost of
the derivative.
With some derivatives, whether used for hedging or speculation, there is also
the risk that the counterparty may fail to honor its contract terms, causing a
loss for the fund.
Securities Lending The fund may seek additional income or fees by lending
portfolio securities to qualified institutions. By reinvesting any cash
collateral it receives in these transactions, the fund could realize additional
gains or losses. If the borrower fails to return the securities and the invested
collateral has declined in value, the fund could lose money.
Bonds The value of any bonds held by the fund is likely to decline when interest
rates rise; this risk is greater for bonds with longer maturities. A less
significant risk is that a bond issuer could default on principal or interest
payments, causing a loss for the fund.
When-issued Securities The fund may invest in securities prior to their date of
issue. These securities could fall in value by the time they are actually
issued, which may be any time from a few days to over a year.
Defensive Investing During unusual market conditions, the fund may place up to
100% of total assets in cash or high-quality, short-term debt securities. To the
extent the fund does this, it is not pursuing its goal.
Year 2000 The investment manager does not currently anticipate that computer
problems related to the year 2000 will have a material effect on the fund.
However, there can be no assurances in this area, including the possibility that
year 2000 computer problems could negatively affect communication systems,
investment markets or the economy in general.
<PAGE>
Financial Highlights 23
- --------------------------------------------------------------------------------
These highlights are intended to help you understand the fund's performance over
the past five years. The information in these tables has been audited by
PricewaterhouseCoopers LLP, the fund's independent accountants. Their report and
the fund's financial statements are included in the fund's annual report, which
is available upon request. Total return figures assume reinvestment of all
distributions.
<TABLE>
<CAPTION>
Class A Class B
-------------------------------------------------------------------------------------------------------
Years ended September 30 Year Ended September 30
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Data 1994 1995(1) 1996(1) 1997(1) 1998(1) 1994 1995(1) 1996(1) 1997(1) 1998(1)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of year ($) 10.43 9.92 13.53 13.76 14.74 10.40 9.82 13.29 13.40 14.24
----- ---- ----- ----- ----- ----- ---- ----- ----- -----
Net investment (0.04) (0.04) (0.05) (0.08) (0.12) (0.08) (0.12) (0.14) (0.17) (0.22)
loss ($)
Net realized and
unrealized
gain (loss) on
investments ($) 0.28 3.69 1.30 1.06 (2.54) 0.25 3.63 1.27 1.01 (2.44)
----- ---- ----- ----- ----- ----- ---- ----- ----- -----
Total from
investment
operations ($) 0.24 3.65 1.25 0.98 (2.66) 0.17 3.51 1.13 0.84 (2.66)
----- ---- ----- ----- ----- ----- ---- ----- ----- -----
Distributions
from capital gains ($) (0.75) (0.04) (1.02) -- (0.13) (0.75) (0.04) (1.02) -- (0.13)
----- ---- ----- ----- ----- ----- ---- ----- ----- -----
Total distributions ($) (0.75) (0.04) (1.02) -- (0.13) (0.75) (0.04) (1.02) -- (0.13)
----- ---- ----- ----- ----- ----- ---- ----- ----- -----
Net asset value, end
of year ($) 9.92 13.53 13.76 14.74 11.95 9.82 13.29 13.40 14.24 11.45
==== ===== ===== ===== ===== ==== ===== ===== ===== =====
Total return (%)(2) 2.51 36.95 10.12 7.12 (18.14) 1.79 35.90 9.33 6.27 (18.78)
Ratios/Supplemental Data:
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets at end of
year ($ thousands) 19,891 55,250 114,247 470,977 319,014 73,354 203,446 386,899 562,392 365,547
Expense ratio (%) 1.41 1.33 1.26 1.21 1.39 2.16 2.08 2.01 1.98 2.13
Ratio of net
investment loss
to average net
assets (%) (0.55) (0.34) (0.39) (0.60) (0.88) (1.28) (1.10) (1.13) (1.32) (1.63)
Portfolio turnover
rate (%) 167.08 214.59 215.07 230.66 86.34 167.08 214.59 215.07 230.66 86.34
</TABLE>
<PAGE>
24
<TABLE>
<CAPTION>
Class C Class S
-------------------------------------------------------------------------------------------------------
Years ended September 30 Years ended September 30
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Data 1994 1995(1) 1996(1) 1997(1) 1998(1) 1994 1995(1) 1996(1) 1997(1) 1998(1)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of year ($) 10.39 9.83 13.31 13.42 14.26 10.46 9.99 13.66 13.94 14.96
----- ---- ----- ----- ----- ----- ---- ----- ----- -----
Net investment
loss ($) (0.09) (0.12) (0.14) (0.17) (0.22) (0.03) (0.01) (0.01) (0.05) (0.09)
Net realized
and unrealized
gain (loss) on
investments ($) 0.28 3.64 1.27 1.01 (2.44) 0.31 3.72 1.31 1.07 (2.58)
---- ---- ---- ---- ----- ---- ---- ---- ---- -----
Total from
investment
operations ($) 0.19 3.52 1.13 0.84 (2.66) 0.28 3.71 1.30 1.02 (2.67)
---- ---- ---- ---- ----- ---- ---- ---- ---- -----
Distributions from
capital gains ($) (0.75) (0.04) (1.02) -- (0.13) (0.75) (0.04) (1.02) -- (0.13)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions ($) (0.75) (0.04) (1.02) -- (0.13) (0.75) (0.04) (1.02) -- (0.13)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value,
end of year ($) 9.83 13.31 13.42 14.26 11.47 9.99 13.66 13.94 14.96 12.16
==== ===== ===== ===== ===== ==== ===== ===== ===== =====
Total return (%)(2) 2.00 36.07 9.23 6.26 (18.76) 2.91 37.30 10.41 7.32 (17.94)
Ratios/Supplemental Data:
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets at end of
year ($ thousands) 37,783 95,797 190,319 120,051 55,208 23,967 47,553 34,835 189,778 113,118
Expense ratio (%) 2.16 2.08 2.01 1.98 2.13 1.16 1.08 1.01 0.96 1.14
Ratio of net investment
loss to average net
assets (%) (1.28) (1.09) (1.13) (1.30) (1.63) (0.32) (0.07) (0.08) (0.37) (0.63)
Portfolio
turnover rate (%) 167.08 214.59 215.07 230.66 86.34 167.08 214.59 215.07 230.66 86.34
</TABLE>
(1) Per-share figures have been calculated using the average shares method.
(2) Does not reflect any front-end or contingent deferred sales charges.
<PAGE>
Notes 25
- --------------------------------------------------------------------------------
<PAGE>
For Additional Information
- --------------------------------------------------------------------------------
If you have have questions about the fund or would like to request a free copy
of the current annual/semiannual report or SAI, contact State Street Research or
your financial professional.
[State Street Research Logo]
Service Center
P.O. Box 8408, Boston, MA 02266
Telephone: 1-800-562-0032
Internet: www.ssrfunds.com
You can also obtain information about the fund, including the SAI and certain
other fund documents, on the Internet at www.sec.gov, in person at the SEC's
Public Reference Room in Washington, DC (telephone 1-800-SEC-0330) or by mail by
sending your request, along with a duplicating fee, to the SEC's Public
Reference Section, Washington, DC 20549-6009.
You can find additional information on the fund's structure and its performance
in the following documents:
Annual/Semiannual Reports While the prospectus describes the fund's potential
investments, these reports detail the fund's actual investments as of the report
date. Reports include a discussion by fund management of recent economic and
market trends and fund performance. The annual report also includes the report
of the fund's independent accountants.
<TABLE>
<CAPTION>
Ticker Symbols
- --------------------------------------------------------------------------------
<S> <C>
Class A SCFAX
Class B(1) (proposed) XXXXX
Class B SCFBX
Class C SCFDX
Class S SCFCX
</TABLE>
Statement of Additional Information (SAI)
A supplement to the prospectus, the SAI contains further information about the
fund and its investment limitations and policies. A current SAI for this fund is
on file with the Securities and Exchange Commission and is incorporated by
reference (is legally part of this prospectus).
prospectus
SEC File Number: 811-3838
CF-869E-298IBS
Control Number: (exp 0200)SSR-LD
<PAGE>
[Photo of building]
STATE STREET RESEARCH
Emerging Growth Fund
An aggressive growth
fund focusing on
small emerging
growth companies.
Prospectus
February 1, 1999
[sidebar text]
This prospectus has information you should know before you invest. Please read
it carefully and keep it with your investment records.
Although these securities have been registered with the Securities and Exchange
Commission, the SEC has not approved or disapproved them and does not guarantee
the accuracy or adequacy of the information in this prospectus. Anyone who
informs you otherwise is committing a federal crime.
[end of sidebar text]
<PAGE>
Contents
- --------------------------------------------------------------------------------
1 The Fund
--------
1 Goals and Strategies
1 Principal Risks
4 Volatility and Performance
6 Investor Expenses
7 Investment Management
8 Your Investment
--------------
8 Opening an Account
8 Choosing a Share Class
9 Sales Charges
13 Dealer Compensation
14 Buying and Selling Shares
18 Account Policies
20 Distributions and Taxes
21 Investor Services
22 Other Information
-----------------
22 Other Securities and Risks
24 Financial Highlights
Back Cover For Additional Information
<PAGE>
The Fund 1
- --------------------------------------------------------------------------------
[chesspiece graphic] Goal and Strategies
Fundamental Goal The fund seeks to provide growth of capital.
Principal Strategies Under normal market conditions, the fund invests at least
65% of total assets in emerging growth companies, with emphasis on small size
companies.
The fund defines emerging growth companies as those that are less mature and
appear to have the potential for rapid growth. While the fund may invest in
emerging growth companies of any size, the fund generally expects to invest in
companies which are small at the time it first invests in them -- that is, not
larger than the stocks of the largest companies in the Russell 2000 Growth
Index. The fund's stock investments may include common and preferred stocks,
convertible securities and warrants.
In selecting stocks, the fund favors entrepreneurial companies that appear to be
reasonably valued. The fund uses research to identify attractive companies,
examining such features as a firm's financial condition, business prospects,
competitive position and business strategy. The fund looks for companies that
have good current or prospective earnings and strong management teams.
[sidebar text]
[magnifying glass graphic] Who May Want To
Invest
State Street Research Emerging Growth Fund is designed for investors who seek
one or more of the following:
[bullet] an aggressive stock fund for a long-term goal
[bullet] a fund to complement a portfolio of more conservative investments
[bullet] a small company fund that emphasizes growth stocks over value stocks
The fund is not appropriate for investors who:
[bullet] want to avoid high volatility or possible losses
[bullet] are making short-term investments
[bullet] are investing emergency reserve money
[bullet] are seeking regular income
[end of sidebar text]
<PAGE>
2 The Fund continued
- --------------------------------------------------------------------------------
The fund reserves the right to invest up to 35% of total assets in other
securities. These may include other types of stocks, such as value or dividend
stocks. They may also include bonds rated investment-grade at the time of
purchase and their unrated equivalents, as well as U.S. government securities.
The fund may adjust the composition of its portfolio as market conditions and
economic outlooks change. For more information about the fund's investments and
practices, see page 22.
[sidebar text]
[magnifying glass graphic] Small Emerging
Growth Companies
Over the long term, small emerging growth stocks have generally offered greater
risks and greater rewards than the stock market as a whole.
During good economic periods, these companies have the potential to grow more
quickly than others because they can be more nimble and focused and are
typically in growing industries. Small emerging growth companies often generate
enthusiasm among investors for their innovative products or services and strong,
entrepreneurial leaders. Because they are aiming for maximum growth, most of
these companies reinvest their earnings rather than pay dividends.
Poor or uncertain economic periods may cause the performance of small emerging
growth companies to reverse direction. These companies usually lack the
resources and the broad business lines to weather hard times, and their stock
prices may tumble as investors abandon them in search of less volatile
investments. Small emerging growth companies can also be more vulnerable to
business setbacks than larger companies.
[end of sidebar text]
<PAGE>
3
[traffic sign graphic] Principal Risks
Because the fund invests primarily in stocks, its major risks are those of stock
investing, including sudden, unpredictable drops in value and the potential for
periods of lackluster performance.
Emerging growth stocks of any size often have an above-average sensitivity to
market movements because their market prices tend to reflect future
expectations. Small company stocks can be particularly sensitive, because they
may be thinly traded and can be subject to rapid changes in investor sentiment.
During times of high volatility, the fund may have difficulty finding buyers for
portfolio securities.
Because of these and other risks, the fund may underperform certain other stock
funds (those emphasizing value stocks or large company stocks, for example)
during periods when small company stocks or emerging growth stocks in general
are out of favor. The success of the fund's investment strategy depends largely
on the portfolio manager's skill in assessing the potential of the stocks the
fund buys.
The fund's management approach, which may include short-term trading, could
cause the fund's portfolio turnover rate to be above-average for a stock fund.
High turnover will increase the fund's brokerage costs and may increase your tax
liability if there are capital gains.
Because the fund may invest in U.S. companies with some international business,
and also may invest in foreign companies, it is subject to the risks associated
with international investing.
The fund's shares will rise and fall in value and there is a risk that you could
lose money by investing in the fund. Also, the fund cannot be certain that it
will achieve its goal. Finally, fund shares are not bank deposits and are not
guaranteed, endorsed or insured by any financial institution, government entity
or the FDIC.
Information on other securities and risks appears on page 22.
A "snapshot" of the fund's investments may be found in the current annual or
semiannual report (see back cover).
<PAGE>
4 Volatility and Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31
------------------------------
Year-by-Year Total Return (Class A) 1994 1995 1996 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(14.32) 16.34 25.44 29.60
[up arrow graphic] Best Quarter:
[down arrow graphic] Worst Quarter:
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998
------------------------------------------------
Average Annual Total Return 1 Year 5 Years Since Inception*
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A (%)
Class B(1) (introduced January 1, 1999) -- -- --
Class B (%)
Class C (%)
Class S (%)
Russell 2000 Growth Index (%)
S&P 500 Index (%)
Lipper Small Company Funds Index (%)
</TABLE>
*Since inception (10/4/93)
<PAGE>
5
[magnifying glass graphic] Understanding
Volatility and
Performance
The chart and table on the opposite page are designed to show two aspects of the
fund's track record:
[bullet] Year-by-Year Total Return shows how volatile the fund has been: how
much the difference has been, historically, between its best years and
worst years. In general, funds with higher average annual total
returns will also have higher volatility. The graph includes the
effects of fund expenses, but not sales charges. If sales charges had
been included, returns would have been less than shown.
[bullet] Average Annual Total Return is a measure of the fund's performance
over time. It is determined by taking the fund's performance over a
given period and expressing it as an average annual rate. Average
annual total return includes the effects of fund expenses and maximum
sales charges for each class, and assumes that you sold your shares at
the end of the period.
Also included are three independent measures of performance. Two are unmanaged
stock indices: the S&P 500 (officially, the "Standard & Poor's 500 Composite
Stock Price Index"), which includes 500 domestic stocks, and the Russell 2000
Growth Index, which contains only those stocks within the complete Russell 2000
Index (a small company index) that show above average growth. The Lipper Small
Company Funds Index shows the performance of a category of mutual funds with
similar goals. This index, which is also unmanaged, shows you how well the fund
has done compared to competing funds.
While the fund does not seek to match the returns or the volatility of any
index, these indices can be used as rough guides when gauging the return of this
and other investments. When making comparisons, keep in mind that none of the
indices includes the effects of sales charges. Also, even if your stock
portfolio were identical to the S&P 500 or the Russell 2000 Growth, your returns
would always be lower, because these indices don't include brokerage and
administrative expenses.
The returns in both the chart and the table would have been lower if the
distributor had not voluntarily reduced the fund's expenses.
In both the chart and the table, the returns shown for the fund include
performance from before the creation of certain share classes in 1994. If the
returns for Class B and Class C from before 1994 had reflected their current
distribution/service (12b-1) fees (as described on page 12, these returns would
have been lower.
Keep in mind that past performance is no guarantee of future results.
<PAGE>
6 Investor Expenses
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class descriptions begin on page 10
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shareholder Fees (% of offering price) Class A Class B(1) Class B Class C Class S
- -----------------------------------------------------------------------------------------------------------------------------------
Maximum front-end sales charge (load) 5.75 0.00 0.00 0.00 0.00
Maximum deferred sales charge (load) 0.00(a) 5.00 5.00 1.00 0.00
Annual Fund Operating Expenses (% of average net assets) Class A Class B(1) Class B Class C Class S
- -----------------------------------------------------------------------------------------------------------------------------------
Management fee 0.75 0.75 0.75 0.75 0.75
Distribution/service (12b-1) fees 0.25 1.00 1.00 1.00 0.00
Other expenses 0.51 0.51 0.51 0.51 0.51
---- ---- ---- ---- ----
Total annual fund operating expenses 1.51 2.26 2.26 2.26 1.26
==== ==== ==== ==== ====
*Because some of the fund's expenses have
been subsidized, actual total operating
expenses for the prior year were: 1.35 -- 2.10 2.10 1.10
The fund expects the expense subsidy to
continue through the current fiscal year,
although there is no guarantee that it
will.
Example Year Class A Class B(1) Class B Class C Class S
- -----------------------------------------------------------------------------------------------------------------------------------
1 $720 $729/$229 $729/$229 $329/229 128
3 $1,025 $1,006/$706 $1,006/$706 $706 400
5 $1,351 $1,410/$1,210 $1,410/$1,210 $1,210 692
10 $2,273 $2,407 $2,407 $2,595 1,523
</TABLE>
(a) Except for investments of $1 million or more;
see page 9.
<PAGE>
7
[sidebar text]
[magnifying glass graphic] Understanding Investor
Expenses
The information on the opposite page is designed to give you an idea of what you
should expect to pay in expenses as an investor in the fund:
[bullet] Shareholder Fees are costs that are charged to you directly. These
fees are not charged on reinvestments or exchanges.
[bullet] Annual Fund Operating Expenses are deducted from the fund's assets
every year, and are thus paid indirectly by the fund's investors.
[bullet] The Example is designed to allow you to compare the costs of this fund
with those of other funds. It assumes that you invested $10,000 over
the years indicated, reinvested all distributions, earned a
hypothetical 5% annual return and paid the maximum applicable sales
charges. For Class B(1) and Class B shares, it also assumes the
automatic conversion to Class A shares after eight years.
Where two numbers are shown separated by a slash, the first one assumes you sold
all your shares at the end of the period, while the second assumes you stayed in
the fund. Where there is only one number, the costs would be the same either
way.
The figures in the Example assume full annual expenses, and would be lower if
they reflected the subsidy.
Investors should keep in mind that the example is for comparison purposes only.
The fund's actual performance and expenses may be higher or lower.
[end of sidebar text]
[Thinker graphic] Investment
Management
The fund's investment manager is State Street Research & Management Company. The
firm traces its heritage back to 1924 and the founding of one of America's first
mutual funds. Today the firm has more than $__ billion in assets under
management (as of December 31, 1998), including $__ billion in mutual funds.
The investment manager is responsible for the fund's investment and business
activities, and receives the management fee as compensation. The management fee
is 0.75% of the first $500 million of fund assets, annually, 0.70% of the next
$500 million, and 0.65% of any amount over $1 billion. The investment manager is
a subsidiary of Metropolitan Life Insurance Company.
Jesus A. Cabrera has been responsible for the fund's day-to-day portfolio
management since August 1997, and also managed the fund in 1996 from August
through November. A vice president, he joined the firm in 1996 and has worked as
an investment professional since 1985.
<PAGE>
8 Your Investment
- --------------------------------------------------------------------------------
[key graphic] Opening an Account
If you are opening an account through a financial professional, he or she can
assist you with all phases of your investment.
If you are investing through a large retirement plan or other special program,
follow the instructions in your program materials.
To open an account without the help of a financial professional, please use the
instructions on these pages.
[checklist graphic] Choosing a Share Class
The fund generally offers four share classes, each with its own sales charge and
expense structure: Classes A, B(1), C and S. The fund also offers Class B
shares, but only to current Class B shareholders through reinvestment of
dividends and distributions or through exchanges from existing Class B accounts
of State Street Research funds.
If you are investing a substantial amount and plan to hold your shares for a
long period, Class A shares may make the most sense for you. If you are
investing a lesser amount, you may want to consider Class B(1) shares (if
investing for at least six years) or Class C shares (if investing for less than
six years). If you are investing through a special program, such as a large
employer-sponsored retirement plan or certain programs available through
financial professionals, you may be eligible to purchase Class S shares.
Because all future investments in your account will be made in the share class
you designate when opening the account, you should make your decision carefully.
Your financial professional can help you choose the share class that makes the
most sense for you.
<PAGE>
9
Class A -- Front Load
[bullet] Initial sales charge of 5.75% or less
[bullet] Lower sales charges for larger investments; see sales charge schedule
at right
[bullet] Lower annual expenses than Class B(1) or C shares because of lower
distribution/service (12b-1) fee of 0.25%
Class B(1) -- Back Load
[bullet] No initial sales charge
[bullet] Deferred sales charge of 5% or less on shares you sell within six
years
[bullet] Annual distribution/service (12b-1) fee of 1.00%
[bullet] Automatic conversion to Class A shares after eight years, reducing
future annual expenses
Class C -- Level Load
[bullet] No initial sales charge
[bullet] Deferred sales charge of 1%, paid if you sell shares within one year
of purchase
[bullet] Lower deferred sales charge than Class B(1) shares
[bullet] Annual distribution/service (12b-1) fee of 1.00%
[bullet] No conversion to Class A shares after eight years, so annual expenses
do not decrease
Class S -- Special Programs
[bullet] Available only through certain retirement accounts, advisory accounts
of the investment manager and other special programs, including
programs through financial professionals with record keeping and other
services; these programs usually involve special conditions and
separate fees (consult your financial professional or your program
materials)
[bullet] No sales charges of any kind
[bullet] No distribution/service (12b-1) fees; annual expenses are lower than
other share classes
Sales Charges
Class A -- Front Load
<TABLE>
<CAPTION>
when you invest this % is which equals
this amount deducted this % of
for sales your net
charges investment
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Up to $50,000 5.75 6.10
$50,000 to $100,000 4.50 4.71
$100,000 to $250,000 3.50 3.63
$250,000 to $500,000 2.50 2.56
$500,000 to $1 million 2.00 2.04
$1 million or more see below
</TABLE>
With Class A shares, you pay a sales charge only when you buy shares.
If you are investing $1 million or more (either as a lump sum or through any of
the methods described on the application page), you can purchase Class A shares
without any sales charge. However, you may be charged a "contingent deferred
sales charge"
<PAGE>
10 Your Investment continued
- --------------------------------------------------------------------------------
(CDSC) of 1% if you sell any shares within one year of purchasing them. See
"Other CDSC Policies" on page 11.
Class A shares are also offered with low or no sales charges through various
wrap-fee programs and other sponsored arrangements (consult your financial
professional).
Class B(1) -- Back Load
<TABLE>
<CAPTION>
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
- --------------------------------------------------------------------------------
<S> <C>
First year 5.00
Second year 4.00
Third year 3.00
Fourth year 3.00
Fifth year 2.00
Sixth year 1.00
Seventh or eighth year None
</TABLE>
With Class B(1) shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for six years or less, as described in the table above. See "Other
CDSC Policies" on page 11.
Class B(1) shares automatically convert to Class A shares after eight years;
Class A shares have lower annual expenses.
Class B -- Back Load
Class B shares are available only to current shareholders through reinvestments
of dividends and distributions or through exchanges from existing Class B
accounts of the State Street Research funds. Other investments made by current
Class B shareholders will in Class B(1) shares.
With Class B shares, you are charged a "contingent deferred sales charge" (CDSC)
when you sell shares you have held for five years or less. The CDSC is a
percentage of net asset value at the time of purchase (or of sale, if lower) and
is deducted from your proceeds. When you sell shares in the first year after you
bought them, the CDSC is 5.00%; second year, 4.00%; third year, 3.00%; fourth
year, 3.00%; fifth year, 2.00%; sixth year or later, none. See "Other CDSC
Policies" on page 11.
Class B shares automatically convert to Class A shares after eight years.
<PAGE>
11
Class C -- Level Load
<TABLE>
<CAPTION>
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deduct-
bought them ed from your proceeds
- --------------------------------------------------------------------------------
<S> <C>
First year 1.00
Second year or later None
</TABLE>
With Class C shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for one year or less, as described in the table above. See "Other CDSC
Policies" at right.
Class C shares currently have the same annual expenses as Class B(1) shares.
Class S -- Special Programs Class S shares have no sales charges.
Other CDSC Policies
The CDSC will be based on the net asset value of the shares at the time of
purchase (or sale, if lower). Any shares acquired through reinvestment are not
subject to the CDSC. There is no CDSC on exchanges into other State Street
Research funds, and the date of your initial investment will continue to be used
as the basis for CDSC calculations when you exchange. To ensure that you pay the
lowest CDSC possible, the fund will always use the shares with the lowest CDSC
to fill your sell requests.
The CDSC is waived on shares sold for participant initiated distributions from
State Street Research prototype retirement plans. In other cases, the CDSC is
waived on shares sold for mandatory retirement distributions or for
distributions because of disability or death. Consult your financial
professional or the State Street Research Service Center.
<PAGE>
12 Your Investment continued
- --------------------------------------------------------------------------------
[sidebar text]
[magnifying glass graphic] Understanding
Distribution/Service Fees
As noted in the descriptions on pages 9 to 11 all share classes except Class S
have an annual distribution/service fee, also called a 12b-1 fee.
Under its current 12b-1 plan, the fund may pay certain distribution and service
fees for these classes out of fund assets. Because 12b-1 fees are an ongoing
expense, they will increase the cost of your investment and, over time, could
potentially cost you more than if you had paid other types of sales charges. For
that reason, you should consider the effects of 12b-1 fees as well as sales
loads when choosing a share class.
Some of the 12b-1 fee is used to compensate those financial professionals who
sell fund shares and provide ongoing service to shareholders. The table on the
next page shows how these professionals' compensation is calculated.
The fund may continue to pay 12b-1 fees even if the fund is subsequently closed
to new investors.
[end of sidebar text]
<PAGE>
13
[graphic of a check] Dealer Compensation
Financial professionals who sell shares of State Street Research funds and
perform services for fund investors may receive sales commissions and annual
fees. These are paid by the fund's distributor, using money from sales charges,
distribution/service (12b-1) fees and its other resources.
Brokers and agents may charge a transaction fee on orders of fund shares placed
directly through them. The distributor may pay its affiliate, MetLife
Securities, Inc. additional compensation of up to 0.25% of certain sales or
assets.
Brokers for Portfolio Trades
When placing trades for the fund's portfolio, State Street Research Research
choose brokers that provide the best execution (a term defined by service as
well as price), but may also consider a broker's sales of fund shares.
<TABLE>
<CAPTION>
Maximum Dealer Compensation (%) Class A Class B(1) Class B Class C Class S
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commission 4.00 4.00 1.00 0.00
Investments up to $50,000 5.00 -- -- -- --
$50,000 to $100,000 4.00 -- -- -- --
$100,000 to $250,000 3.00 -- -- -- --
$250,000 to $500,000 2.00 -- -- -- --
$500,000 to $1 million 1.75 -- -- -- --
First $1 to 3 million 1.00(a) -- -- -- --
Next $2 million 0.75(a) -- -- -- --
Next $2 million 0.50(a) -- -- -- --
Next $1 and above 0.25(a) -- -- -- --
Annual fee 0.25 0.25 0.25 1.00 0.00
</TABLE>
(a) If your financial professional declines this commission, the one-year CDSC
on your investment is waived.
<PAGE>
14 Buying and Selling Shares
- --------------------------------------------------------------------------------
[cash register graphic] Policies for
Buying Shares
Once you have chosen a share class, the next step is to determine the amount you
want to invest.
Minimum Initial Investments:
[bullet] $1,000 for accounts that use the Investamatic program
[bullet] $2,000 for Individual Retirement Accounts
[bullet] $2,500 for all other accounts
Minimum Additional Investments:
[bullet] $50 for any account
Complete the enclosed application. You can avoid future inconvenience by signing
up now for any services you might later use.
Timing of Requests All requests received in good order by State Street Research
before the close of regular trading on the New York Stock Exchange (usually 4:00
p.m. eastern time) will be executed the same day, at that day's closing share
price. Orders received thereafter will be executed the following day, at that
day's closing share price.
Wire Transactions Funds may be wired between 8:00 a.m. and 4:00 p.m. eastern
time. To make a same-day wire investment, please notify State Street Research by
12:00 noon of your intention to wire funds, and make sure your wire arrives by
4:00 p.m. If the New York Stock Exchange closes before 4:00 p.m. eastern time,
you may be unable to make a same-day wire investment. Your bank may charge a fee
for wiring money.
<PAGE>
Instructions for Buying Shares 15
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
To Open an Account To Add to an Account
<S> <C> <C> <C>
[Graphic of briefcase} Through a Consult your financial professional Consult your financial professional or your
Professional or or your program materials. program materials.
Program
By Mail [Graphic Make your check payable to "State Fill out an investment slip or indicate the
of Mailbox] Street Research Funds." Forward the fund name and account number on your check.
check and your application to State Make your check payable to "State Street
Street Research. Research Funds." Forward the check and slip
to State Street Research.
[Graphic of By Federal Call to obtain an account number, and Call State Street Research to obtain a
Federal Building] Funds Wire forward your application to State control number. Instruct your bank to wire
Street Research. Wire funds using the funds to:
instructions at right. [bullet] State Street Bank and Trust Company,
Boston, MA
[bullet] ABA: 011000028
[bullet] BNF: fund name and share class you want
to buy
[bullet] AC: 99029761
[bullet] OBI: your name and your account number
[bullet] Control: the number given to you by
State Street Research
By Electronic [Graphic Verify that your bank is a member of Call State Street Research to verify that the
Funds Transfer of Electric the ACH (Automated Clearing House) necessary bank information is on file for
(ACH) Plug] system. Forward your application to your account. If it is, you may request a
State Street Research. Please be sure transfer with the same phone call. If not,
to include the appropriate bank please ask State Street Research to provide
information. Call State Street you with an EZ Trader application.
Research to request a purchase.
[Graphic of
Calendar] By Investamatic Forward your application, with all Call State Street Research to verify that
appropriate sections completed, to Investamatic is in place on your account, or
State Street Research, along with a to request a form to add it. Investments are
check for your initial investment automatic once Investamatic is in place.
payable to "State Street Research
Funds."
By Exchange [Graphic of Call State Street Research or visit our Call State Street Research or visit our Web
Exchange] Web site. site.
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408 Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. -- 6:00 p.m., eastern time)
</TABLE>
<PAGE>
16 Your Investment continued
- --------------------------------------------------------------------------------
[graphic of receipt] Policies for
Selling Shares
Circumstances that Require Written Requests Please submit instructions in
writing when any of the following apply:
[bullet] you are selling more than $100,000 worth of shares
[bullet] the name or address on the account has changed within the last 30 days
[bullet] you want the proceeds to go to a name or address not on the account
registration
[bullet] you are transferring shares to an account with a different
registration or share class
[bullet] you are selling shares held in a corporate or fiduciary account; for
these accounts, additional documents are required:
corporate accounts: certified copy of a corporate resolution
fiduciary accounts: copy of power of attorney or other governing
document
To protect your account against fraud, all signatures on these documents must be
guaranteed. You may obtain a signature guarantee at most banks and securities
dealers. A notary public cannot provide a signature guarantee.
Incomplete Sell Requests State Street Research will attempt to notify you
promptly if any information necessary to process your request is missing.
Timing of Requests All requests received in good order by State Street Research
before the close of regular trading on the New York Stock Exchange (usually 4:00
p.m. eastern time) will be executed the same day, at that day's closing share
price. Requests received thereafter will be executed the following day, at that
day's closing share price.
Wire Transactions Proceeds sent by federal funds wire must total at least
$5,000. A fee of $7.50 will be deducted from all proceeds sent by wire, and your
bank may charge an additional fee to receive wired funds.
Selling Recently Purchased Shares If you sell shares before the check or
electronic funds transfer (ACH) for those shares has been collected, you will
not receive the proceeds until your initial payment has cleared. This may take
up to 15 days after your purchase was recorded (in rare cases, longer). If you
open an account with shares purchased by wire, you cannot sell those shares
until your application has been processed.
<PAGE>
Instructions for Selling Shares 17
- --------------------------------------------------------------------------------
To Sell Some or All of Your Shares
<TABLE>
<S> <C>
[Graphic of briefcase] Through a Consult your financial professional
Professional or your program materials.
or Program
By Mail [Graphic of Mailbox] Send a letter of instruction, an endorsed stock power or share certificates (if you hold
certificate shares) to State Street Research. Specify the fund, the account number and the
dollar value or number of shares. Be sure to include all necessary signatures and any
additional documents, as well as signature guarantees if required (see facing page).
[Graphic of Federal By Federal Check with State Street Research to make sure that a wire redemption privilege, including
Building] Funds Wire a bank designation, is in place on your account. Once this is established, you may place
your request to sell shares with State Street Research. Proceeds will be sent to your
pre-designated bank account.
By Electronic [Graphic of Check with State Street Research to make sure that the EZ Trader feature, including a
Funds Transfer Electric bank designation, is in place on your account. Once this is established, you may place
(ACH) Plug] your request to sell shares with State Street Research. Proceeds will be sent to your
pre-designated bank account.
[Graphic of Telephone] By Telephone As long as the transaction does not require a written request (see facing page),
you or your financial professional can sell shares by calling State Street Research. A
check will be mailed to your address of record on the following business day.
By Exchange [Graphic of Exchage] Read the prospectus for the fund into which you are exchanging. Call State Street
Research or visit our Web site.
[Graphic of Calendar] By Systematic See plan information on page 21.
Withdrawal Plan
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408 Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m., eastern time)
</TABLE>
<PAGE>
18 Your Investment continued
- --------------------------------------------------------------------------------
[graphic of policies] Account Policies
Telephone Requests When you open an account you automatically receive telephone
privileges, allowing you to place requests for your account by telephone. Your
financial professional can also use these privileges to request exchanges on
your account, and, with your written permission, redemptions. For your
protection, all telephone calls are recorded.
As long as State Street Research takes certain measures to authenticate
telephone requests on your account, you may be held responsible for unauthorized
requests. Unauthorized telephone requests are rare, but if you want to protect
yourself completely, you can decline the telephone privilege on your
application. The fund may suspend or eliminate the telephone privilege at any
time.
Exchange Privileges There is no fee to exchange shares among State Street
Research funds. Your new fund shares will be the equivalent class of your
current shares. Any contingent deferred sales charges will continue to be
calculated from the date of your initial investment.
You must hold Class A shares of any fund for at least 30 days before you can
exchange them for Class A shares of a different fund with a higher applicable
sales charges.
Frequent exchanges can interfere with fund management and drive up costs for all
shareholders. Because of this, the fund currently limits each account, or group
of accounts under common ownership or control, to six exchanges per calendar
year. The fund may change or eliminate the exchange privilege at any time, may
limit or cancel any shareholder's exchange privilege and may refuse to accept
any exchange request, particularly those associated with "market timing"
strategies.
For Merrill Lynch customers, exchange privileges extend to Summit Cash Reserves
Fund, which is related to the fund for purposes of investment and investor
services.
Accounts with Low Balances If the value of your account falls below $1,500,
State Street Research may mail you a notice asking you to bring the account back
up to $1,500 or close it out. If you do not take action within 60 days, State
Street Research may either sell your shares and mail
<PAGE>
19
the proceeds to you at the address of record or, depending on the circumstances,
may deduct an annual maintenance fee (currently $18).
The Fund's Business Hours The fund is open the same days as the New York Stock
Exchange (generally Monday through Friday). Fund representatives are available
from 8:00 a.m. to 6:00 p.m. eastern time on these days.
Calculating Share Price The fund calculates its share price every business day
at the close of regular trading on the New York Stock Exchange (usually at 4:00
p.m. eastern time). The share price is the fund's total assets minus its
liabilities (net asset value, or NAV) divided by the number of existing shares.
In calculating its NAV, the fund uses the last reported sale price or quotation
for portfolio securities. However, in cases where these are unavailable, or when
the investment manager believes that subsequent events have rendered them
unreliable, the fund may use fair-value estimates instead.
Because foreign securities markets are sometimes open on diffeerent days from
U.S. markets, there may be instances when the value of the fund's portfolio
changes on days when you cannot buy or sell shares.
Reinstating Recently Sold Shares For 120 days after you sell shares, you have
the right to "reinstate" your investment by putting some or all of the proceeds
into any currently available State Street Research fund at net asset value. Any
CDSC you paid on the amount you are reinstating will be credited to your
account. You may only use this privilege once in any twelve-month period with
respect to your shares of a given fund.
Additional Policies Please note that the fund maintains additional policies and
reserves certain rights, including:
[bullet] The fund may vary its requirements for initial or additional
investments, exchanges, reinvestments, periodic investment plans,
retirement and employee benefit plans, sponsored arrangements and
other similar programs
[bullet] All orders to purchase shares are subject to acceptance by the fund
[bullet] At any time, the fund may change or discontinue its sales charge
waivers and any of its order acceptance practices, and may suspend the
sale of its shares
[bullet] The fund may delay sending you redemption proceeds for up to seven
days, or longer if permitted by the SEC
[bullet] To permit investors to obtain the current price, dealers are
responsible for transmitting all orders to the State Street Research
Service Center promptly
<PAGE>
20 Your Investment continued
- --------------------------------------------------------------------------------
[sidebar text]
[magnifying glass graphic] Tax Considerations
Unless your investment is in a tax-deferred account, you may want to avoid:
[bullet] investing a large amount in the fund close to the end of its fiscal
year or calendar year (if the fund makes a distribution, you will
receive some of your investment back as a taxable distribution)
[bullet] selling shares at a loss for tax purposes and investing in a
substantially identical investment within 30 days before or after that
sale (such a transaction is usually considered a "wash sale," and you
will not be allowed to claim a tax loss in the current year)
[end of sidebar text]
[graphic of Uncle Sam] Distributions and Taxes
Income and Capital Gains Distributions The fund typically distributes any net
income and net capital gains to shareholders around the end of the fund's fiscal
year, which is September 30. To comply with tax regulations, the fund may also
pay an additional capital gains distribution in December.
You may have your distributions reinvested in the fund, invested in a different
State Street Research fund, deposited in a bank account, or mailed out by check.
If you do not give State Street Research other instructions, your distributions
will automatically be reinvested in the fund.
Tax Effects of Distributions and Transactions In general, any dividends and
short-term capital gain distributions you receive from the fund are taxable as
ordinary income. Distributions of other capital gains are generally taxable as
capital gains -- in most cases, at different rates from those that apply to
ordinary income.
The tax you pay on a given capital gains distribution generally depends on how
long the fund has held the portfolio securities it sold. It does not depend on
how long you have owned your fund shares or whether you reinvest your
distributions.
Every year, the fund will send you information detailing the amount of ordinary
income and capital gains distributed to you for the previous year.
<PAGE>
21
The sale of shares in your account may produce a gain or loss, and is a taxable
event. For tax purposes, an exchange is the same as a sale.
Your investment in the fund could have additional tax consequences. Please
consult your tax professional for assistance.
Backup Withholding By law, the fund must withhold 31% of your distributions and
proceeds if you have not provided complete, correct taxpayer information.
[interlocked hands graphic] Investor Services
Investamatic Program Use Investamatic to set up regular automatic investments in
the fund from your bank account. You determine the frequency and amount of your
investments.
Systematic Withdrawal Plan This plan is designed for retirees and other
investors who want regular withdrawals from a fund account. The plan is free and
allows you to withdraw up to 8% of your fund assets a year without incurring any
contingent deferred sales charges. Certain terms and minimums apply.
EZTrader This service allows you to purchase or sell fund shares over the
telephone through ACH (Automated Clearing House)system.
Dividend Allocation Plan This plan automatically invests your distributions from
the fund into another fund of your choice, without any fees or sales charges.
Automatic Bank Connection This plan lets you route any distributions or
Systematic Withdrawal Plan payments directly to your bank account.
Retirement Plans State Street Research also offers a full range of prototype
retirement plans for individuals, sole proprietors, partnerships, corporations
and employees.
Call 1-800-562-0032 for information on any of the services described above.
<PAGE>
22 Other Information
- --------------------------------------------------------------------------------
[graphic of securities certificates] Other Securities
and Risks
Each of the fund's portfolio securities and investment practices offers certain
opportunities and carries various risks. Major investments and risk factors are
outlined in the fund description starting on page 1. Below are brief
descriptions of other securities and practices, along with their associated
risks.
Restricted and Illiquid Securities Any securities that are thinly traded or
whose resale is restricted can be difficult to sell at a desired time and price.
Some of these securities are new and complex, and trade only among institutions;
the markets for these securities are still developing, and may not function as
efficiently as established markets. Owning a large percentage of restricted and
illiquid securities could hamper the fund's ability to raise cash to meet
redemptions. Also, because there may not be an established market price for
these securities, the fund may have to estimate their value, which means that
their valuation (and, to a much smaller extent, the valuation of the fund) may
have a subjective element.
International Exposure Many U.S. companies in which the fund may invest generate
significant revenues and earnings from abroad. As a result, these companies and
the prices of their securities may be affected by weaknesses in global and
regional economies and the relative value of foreign currencies to the U.S.
dollar. These factors, taken as a whole, could adversely affect the price of
fund shares.
Foreign Investments Foreign securities are generally more volatile than their
domestic counterparts, in part because of higher political and economic risks,
lack of reliable information and fluctuations in currency exchange rates. These
risks are usually higher in less developed countries. The fund may use foreign
currencies and related instruments to hedge its foreign investments.
In addition, foreign securities may be more difficult to resell and the markets
for them less efficient than for comparable U.S. securities. Even where a
foreign security increases in price in its local currency, the appreciation may
be diluted by the negative effect of exchange rates when the security's value
is converted to U.S. dollars. Foreign withholding taxes also may apply and
errors and delays may occur in the settlement process for foreign securities.
<PAGE>
23
Derivatives Derivatives, a category that includes options and futures, are
financial instruments whose value derives from one or more securities, indices
or currencies. The fund may use certain derivatives for hedging (attempting to
offset a potential loss in one position by establishing an interest in an
opposite position). This includes the use of currency-based derivatives for
hedging its positions in foreign securities. The fund may also use certain
derivatives for speculation (investing for potential income or capital gain).
While hedging can guard against potential risks, it adds to the fund's expenses
and can eliminate some opportunities for gains. There is also a risk that a
derivative intended as a hedge may not perform as expected.
The main risk with derivatives is that some types can amplify a gain or loss,
potentially earning or losing substantially more money than the actual cost of
the derivative.
With some derivatives, whether used for hedging or speculation, there is also
the risk that the counterparty may fail to honor its contract terms, causing a
loss for the fund.
Securities Lending The fund may seek additional income or fees by lending
portfolio securities to qualified institutions. By reinvesting any cash
collateral it receives in these transactions, the fund could realize additional
gains or losses. If the borrower fails to return the securities and the invested
collateral has declined in value, the fund could lose money.
Bonds The value of any bonds held by the fund is likely to decline when interest
rates rise; this risk is greater for bonds with longer maturities. A less
significant risk is that a bond issuer could default on principal or interest
payments, causing a loss for the fund.
When-issued Securities The fund may invest in securities prior to their date of
issue. These securities could fall in value by the time they are actually
issued, which may be any time from a few days to over a year.
Defensive Investing During unusual market conditions, the fund may place up to
100% of total assets in cash or high quality, short-term debt securities. To the
extent that the fund does this, it is not pursuing its goal.
Year 2000 The investment manager does not currently anticipate that computer
problems related to the year 2000 will have a material effect on the fund.
However, there can be no assurances in this area, including the possibility that
year 2000 computer problems could negatively affect communication systems,
investment markets or the economy in general.
<PAGE>
24 Financial Highlights
- --------------------------------------------------------------------------------
These highlights are intended to help you understand the fund's performance
since its inception. The information in these tables has been audited by
PricewaterhouseCoopers LLP, the fund's independent accountants. Their report and
the fund's financial statements are included in the fund's annual report, which
is available upon request. Total return figures assume reinvestment of all
distributions.
<TABLE>
<CAPTION>
Class A Class B
-------------------------------------------------------------------------------------------------------
Years ended September 30 Years ended September 30
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Data 1994(1) 1995(2) 1996(2) 1997(2) 1998(2) 1994(1) 1995(2) 1996(2) 1997(2) 1998(2)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of year ($) 9.45 8.56 9.69 11.33 15.53 9.45 8.52 9.58 11.11 15.09
---- ---- ---- ----- ----- ---- ---- ---- ----- -----
Net investment
loss ($)* (0.02) (0.08) (0.09) (0.08) (0.05) (0.06) (0.14) (0.17) (0.16) (0.14)
Net realized and
unrealized gain
(loss) on
investments (0.87) 1.21 1.73 5.13 (4.01) (0.87) 1.20 1.70 4.99 (3.86)
----- ---- ---- ---- ----- ----- ---- ---- ---- -----
Total from investment
operations ($) (0.89) 1.13 1.64 5.05 (4.06) (0.93) 1.06 1.53 4.83 (4.00)
----- ---- ---- ---- ----- ----- ---- ---- ---- -----
Distributions from
capital gains ($) -- -- -- (0.85) (2.61) -- -- -- (0.85) (2.61)
----- ---- ---- ---- ----- ----- ---- ---- ---- -----
Total distributions ($) -- -- -- (0.85) (2.61) -- -- -- (0.85) (2.61)
----- ---- ---- ---- ----- ----- ---- ---- ---- -----
Net asset value,
end of year ($) 8.56 9.69 11.33 15.53 8.86 8.52 9.58 11.11 15.09 8.48
==== ==== ===== ===== ==== ==== ==== ===== ===== ====
Total return (%)(3) (9.42)(4) 13.20 16.92 48.00 (29.97) (9.84)(4) 12.44 15.97 46.91 (30.56)
Ratios/Supplemental Data:
- ----------------------------------------------------------------------------------------------------------------------------------
Net assets at end of
year ($ thousands) 21,986 21,480 19,791 34,446 30,858 29,287 26,489 23,656 40,512 46,315
Expense ratio (%)* 1.35(5) 1.35 1.35 1.35 1.35 2.10(5) 2.10 2.10 2.10 2.10
Ratio of net
investment loss to
average net
assets (%)* (0.58)(5) (0.93) (0.96) (0.64) (0.45) (1.32)(5) (1.67) (1.71) (1.40) (1.20)
Portfolio turnover
rate (%) 83.61 178.60 155.85 273.33 98.30 83.61 178.60 155.85 273.33 98.30
* Reflects voluntary
reduction of
expenses per
share of these
amounts ($) 0.02 0.06 0.04 0.04 0.02 0.02 0.06 0.04 0.03 0.02
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Class C Class S
-------------------------------------------------------------------------------------------------------
Years ended September 30 Years ended September 30
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Data 1994(1) 1995(2) 1996(2) 1997(2) 1998(1) 1994(1) 1995(2) 1996(2) 1997(2) 1998(1)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value,
beginning of year ($) 9.45 8.52 9.58 11.10 15.10 9.55 8.60 9.77 11.44 15.73
---- ---- ---- ----- ----- ---- ---- ---- ----- -----
Net investment
loss ($)* (0.06) (0.14) (0.16) (0.16) (0.14) (0.06) (0.06) (0.07) (0.04) (0.02)
Net realized and
unrealized gain
(loss) on
investments (0.87) 1.20 1.68 5.01 (3.86) (0.89) 1.23 1.74 5.18 (4.08)
---- ---- ---- ----- ----- ---- ---- ---- ----- -----
Total from investment
operations ($) (0.93) 1.06 1.52 4.85 (4.00) (0.95) 1.17 1.67 5.14 (4.10)
---- ---- ---- ----- ----- ---- ---- ---- ----- -----
Distributions from
capital gains ($) -- -- -- (0.85) (2.61) -- -- -- (0.85) (2.61)
---- ---- ---- ----- ----- ---- ---- ---- ----- -----
Total distributions ($) -- -- -- (0.85) (2.61) -- -- -- (0.85) (2.61)
---- ---- ---- ----- ----- ---- ---- ---- ----- -----
Net asset value,
end of year ($) 8.52 9.58 11.10 15.10 (8.49) 8.60 9.77 11.44 15.73 9.02
===== ===== ===== ===== ====== ===== ===== ===== ===== ======
Total return (%)(3) (9.84)(4) 12.44 15.87 47.15 (30.52) (9.95)(4) 13.60 17.09 48.34 (29.83)
Ratios/Supplemental Data:
- -------------------------------------------------------------------------------------------------------------------------------
Net assets at end of
year ($ thousands) 10,032 7,391 4,503 7,460 7,012 7,033 12,380 13,311 7,008 4,958
Expense ratio (%)* 2.10(5) 2.10 2.10 2.10 2.10 1.10(5) 1.10 1.10 1.10 1.10
Ratio of net
investment loss
to average net
assets (%)* (1.32)(5) (1.67) (1.71) (1.41) (1.20) (0.68)(5) (0.71) (0.71) (0.39) (0.19)
Portfolio turnover
rate (%) 83.61 178.60 155.85 273.33 98.30 83.61 178.60 155.85 273.33 98.30
*Reflects voluntary
reduction of
expenses per share
of these amounts ($) 0.02 0.06 0.04 0.03 0.02 0.04 0.06 0.04 0.03 0.02
</TABLE>
(1) Commencement of share class designations (February 1, 1994 for Class C) and
commencement of operations (October 4, 1993 for Class S) to September 30,
1994.
(2) Per-share figures have been calculated using the average shares method.
(3) 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 reduced the fund's expenses.
(4) Not annualized.
(5) Annualized.
<PAGE>
26 Notes
- --------------------------------------------------------------------------------
<PAGE>
For Additional Information
- --------------------------------------------------------------------------------
If you have questions about the fund or would like to request a free copy of the
current annual/semiannual report or SAI, contact State Street Research or your
financial professional.
[State Street Research Logo]
Service Center
P.O. Box 8408, Boston, MA 02266
Telephone: 1-800-562-0032
Internet: www.ssrfunds.com
You can also obtain information about the fund, including the SAI and certain
other fund documents, on the Internet at www.sec.gov, in person at the SEC's
Public Reference Room in Washington, DC (telephone 1-800-SEC-0330) or by mail by
sending your request, along with a duplicating fee, to the SEC's Public
Reference Section, Washington, DC 20549-6009.
You can find additional information on the fund's structure and its performance
in the following documents:
Annual/Semiannual Reports While the prospectus describes the fund's potential
investments, these reports detail the fund's actual investments as of the report
date. Reports include a discussion by fund management of recent economic and
market trends and fund performance. The annual report also includes the report
of the fund's independent accountants.
<TABLE>
<CAPTION>
Ticker Symbols
- --------------------------------------------------------------------------------
<S> <C>
Class A SCGAX
Class B(1) (proposed) XXXXX
Class B SCABX
Class C SGCDX
Class S (proposed) SGCCX
</TABLE>
Statement of Additional Information (SAI)
A supplement to the prospectus, the SAI contains further information about the
fund and its investment limitations and policies. A current SAI for this fund is
on file with the Securities and Exchange Commission and is incorporated by
reference (is legally part of this prospectus).
prospectus
SEC File Number 811-3838 Control Number: (exp. 0200)SSR-LD
<PAGE>
[photo of Boston's Custom House]
State Street Research
Aurora Fund
- -------------------------------------------------------------------------------
This prospectus has information you should know before you invest. Please read
it carefully and keep it with your investment records.
Although these securities have been registered with the Securities and Exchange
Commission, the SEC has not approved or disapproved them and does not guarantee
the accuracy or adequacy of the information in this prospectus. Anyone who
informs you otherwise is committing a federal crime.
An aggressive growth fund with a value approach to small company investing.
Prospectus
February 1, 1999
<PAGE>
Contents
- -------------------------------------------------------------------------------
1 The Fund
- -------------------------------------------------------------------------------
1 Goal and Strategies
3 Principal Risks
4 Volatility and Performance
6 Investor Expenses
8 Investment Management
9 Your Investment
- -------------------------------------------------------------------------------
9 Opening an Account
9 Choosing a Share Class
10 Sales Charges
Dealer Compensation
14 Buying and Selling Shares
18 Account Policies
20 Distributions and Taxes
22 Investor Services
24 Other Information
- -------------------------------------------------------------------------------
24 Other Securities and Risks
26 Financial Highlights
Back Cover For Additional Information
<PAGE>
The Fund 1
- -------------------------------------------------------------------------------
[CHESS PIECE GRAPHIC]
Goal and Strategies
Fundamental Goal The fund seeks to provide high total return, consisting
principally of capital appreciation.
Principal Strategies Under normal market conditions, the fund invests at least
65% of total assets in small company value stocks.
The fund generally expects that most investments will be in stocks of
companies no larger than the largest companies in the Russell 2000 Value Index.
The fund may continue to hold or buy additional stock in a company that has
outgrown this range if the stock remains attractive. The fund's stock
investments may include common and preferred stocks, convertible securities and
warrants.
In choosing among small company stocks, the fund takes a value approach,
searching for those companies that appear to be trading below their true worth.
The fund uses research to identify potential investments, examining such
features as a firm's financial condition, business prospects, competitive
position and business strategy. The fund looks for companies that appear likely
to come back into favor with investors, for reasons that may range from good
prospective earnings or strong management teams to new products or services.
[Begin Sidebar]
[MAGNIFYING GLASS EXAMINING DOCUMENT GRAPHIC]
Who May Want To Invest
State Street Research Aurora Fund is designed for investors who seek one or more
of the following:
[bullet] an aggressive stock fund for a long-term goal
[bullet] a fund to complement a portfolio of more conservative investments
[bullet] a small company fund that emphasizes value stocks over growth stocks
The fund is not appropriate for investors who:
[bullet] want to avoid high volatility or possible losses
[bullet] are making short-term investments
[bullet] are investing emergency reserve money
[bullet] are seeking regular income
[End Sidebar]
<PAGE>
2 The Fund continued
- -------------------------------------------------------------------------------
The fund reserves the right to invest up to 35% of total assets in other
securities. These may include other types of stocks, such as larger company
stocks or growth stocks. The fund may also invest up to 5% of total assets in
junk bonds that, at the time of purchase, are as low in credit quality as the
Standard & Poor's or Moody's C rating category, or their unrated equivalents.
Any other bond investments must be investment grade at the time of purchase, or
U.S. government securities.
The fund may adjust the composition of its portfolio as market conditions and
economic outlooks change. For more information about the fund's investments and
practices, see page 24.
[Begin Sidebar]
[MAGNIFYING GLASS EXAMINING DOCUMENT GRAPHIC]
Small Size Companies and Value Investing
Over the long term, small companies have offered generally greater risks and
rewards than the stock market as a whole, making their performance volatile.
This is one reason why a value stock strategy, which has historically been
associated with lower volatility, can be a logical approach to small company
investing.
During good economic times, small companies often generate enthusiasm among
investors because they can be more nimble and focused than larger companies.
Poor or uncertain economic periods may cause small company stocks to reverse
direction. These companies usually lack the resources and the broad business
lines to weather hard times, and their stock prices may tumble as investors
abandon them in search of less volatile investments. Small companies can also be
more vulnerable to business setbacks than larger companies.
Some small company stocks can have comparatively high stock prices, based on
investor expectations of rapid company growth. But others can be out of favor
with investors or may be overlooked by most analysts, and may as a result have
comparatively low stock prices. By focusing on stocks that in theory are already
underpriced, a value investor can seek to limit some of the volatility
associated with small company investing.
[End Sidebar]
<PAGE>
3
----
[YIELD SIGN GRAPHIC]
Principal Risks
Because the fund invests primarily in stocks, its major risks are those of stock
investing, including sudden, unpredictable drops in value and the potential for
periods of lackluster performance.
Small company stocks -- even those that may already be low in price -- can be
particularly sensitive to market movements, because they may be thinly traded
and their market prices tend to reflect future expectations. With value
investing, the main risk is that a stock may not achieve its expected value
because the circumstances causing it to be underpriced do not change. During
times of high volatility, the fund may have difficulty finding buyers for
portfolio securities.
Because of these and other risks, the fund may underperform certain other stock
funds (those emphasizing growth stocks or large company stocks, for example)
during periods when small company stocks are out of favor. The success of the
fund's investment strategy depends largely on the portfolio manager's skill in
assessing the potential of the stocks the fund buys.
Because the fund may invest in U.S. companies with some international business,
and also may invest in foreign companies, it is subject to the risks associated
with international investing.
The fund's shares will rise and fall in value and there is a risk that you could
lose money by investing in the fund. Also, the fund cannot be certain that it
will achieve its goal. Finally, fund shares are not bank deposits and are not
guaranteed, endorsed or insured by any financial institution, government entity
or the FDIC.
Information on other securities and risks appears on page 24.
A "snapshot" of the fund's investments may be found in the current annual or
semiannual report (see back cover).
<PAGE>
4 Volatility and Performance
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31
- -----------------------------------------------------------------------
Year-by-Year Total Return (Class A) 1996 1997 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Best quarter: 56.47% 46.64%
Worst quarter:
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998
------------------------------------------------
Average Annual Total Return 1 Year 3 Years Since Inception*
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A (%)
Class B(1) (introduced January 1, 1999) -- -- --
Class B (%)
Class C (%)
Class S (%)
Russell 2000 Value Index (%)
S&P 500 Index (%)
Lipper Small Cap Funds Index (%)
* Since inception (2/13/95)
</TABLE>
<PAGE>
5
[Begin Sidebar] -----
[MAGNIFYING GLASS EXAMINING DOCUMENT GRAPHIC]
Understanding Volatility and Performance
The chart and table on the opposite page are designed to show two aspects of the
fund's track record:
[bullet] Year-by-Year Total Return shows how volatile the fund has been: how
much the difference has been, historically, between its best years and
worst years. In general, funds with higher average annual total returns
will also have higher volatility. The graph includes the effects of
fund expenses, but not sales charges. If sales charges had been
included, returns would have been less than shown.
[bullet] Average Annual Total Return is a measure of the fund's performance over
time. It is determined by taking the fund's performance over a given
period and expressing it as an average annual rate. Average annual
total return includes the effects of fund expenses and maximum sales
charges for each class, and assumes that you sold your shares at the
end of the period.
Also included are three independent measures of performance. Two are
unmanaged stock indices: the S&P 500 (officially, the "Standard &
Poor's 500 Composite Stock Price Index"), which includes 500 U.S.
stocks, and the Russell 2000 Value Index, which contains only those
stocks within the complete Russell 2000 Index (a small company index)
that show below average growth. The Lipper Small Company Funds Index
shows the performance of a category of mutual funds with similar goals.
This index, which is also unmanaged, shows you how well the fund has
done compared to competing funds.
While the fund does not seek to match the returns or the volatility of
any index, these indices can be used as rough guides when gauging the
return of this and other investments. When making comparisons, keep in
mind that none of the indices includes the effects of sales charges.
Also, even if your stock portfolio were identical to the S&P 500 or the
Russell 2000 Value, your returns would always be lower, because these
indices don't include brokerage and administrative expenses.
Keep in mind that past performance is no guarantee of future results.
[End Sidebar]
<PAGE>
6 Investor Expenses
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class descriptions begin on page XX
Shareholder Fees (% of ------------------------------------------------------------
offering price)(1) Class A Class B(1) Class B Class C Class S(1)
==================================================================================================================================
<S> <C> <C> <C> <C> <C>
Maximum front-end sales charge (load) 5.75 0.00 0.00 0.00 0.00
Maximum deferred sales charge (load) 0.00(1) 5.00 5.00 1.00 0.00
Annual Fund Operating Expenses
(% of average net assets) Class A Class B(1) Class B Class C Class S
==================================================================================================================================
Management fee 0.85 0.85 0.85 0.85 0.85
Distribution/service (12b-1) fees 0.25 1.00 1.00 1.00 0.00
Other expenses 0.30 0.30 0.30 0.30 0.30
---- ---- ---- ---- ----
Total annual fund operating expenses 1.40 2.15 2.15 2.15 1.15
==== ==== ==== ==== ====
Example Year Class A Class B(1) Class B Class C Class S
==================================================================================================================================
1 $709 $718/$218 $718/$218 $318/$218 $117
3 $993 $973/$673 $973/$673 $673 $365
5 $1,297 $1354/$1154 $1354/$1154 $1154 $633
10 $2,158 $2292 $2292 $2483 $1398
</TABLE>
(1) Except for investments of $1 million or more; see page 11.
<PAGE>
7
[Begin Sidebar] ------
[MAGNIFYING GLASS EXAMINING DOCUMENT GRAPHIC]
Understanding Investor Expenses
The information on the opposite page is designed to give you an idea of what you
should expect to pay in expenses as an investor in the fund:
[bullet] Shareholder Fees are costs that are charged to you directly. These fees
are not charged on reinvestments or exchanges.
[bullet] Annual Fund Operating Expenses are deducted from the fund's assets
every year, and are thus paid indirectly by all fund investors.
[bullet] The Example is designed to allow you to compare the costs of this fund
with those of other funds. It assumes that you invested $10,000 over
the years indicated, reinvested all distributions, earned a
hypothetical 5% annual return and paid the maximum applicable sales
charges. For ClassB(1) and Class B shares, it also assumes the
automatic conversion to Class A after eight years.
When two numbers are shown separated by a slash, the first one assumes
you sold all your shares at the end of the period, while the second
assumes you stayed in the fund. Where there is only one number, the
costs would be the same either way.
Investors should keep in mind that the example is for comparison
purposes only. The fund's actual performance and expenses may be higher
or lower.
[End Sidebar]
<PAGE>
8 The Fund continued
- -------------------------------------------------------------------------------
[THINKER GRAPHIC]
Investment Management
The fund's investment manager is State Street Research & Management Company. The
firm traces its heritage back to 1924 and the founding of one of America's first
mutual funds. Today the firm has more than $XX billion in assets under
management (as of December 31, 1998), including $XX billion in mutual funds.
The investment manager is responsible for the fund's investment and business
activities, and receives the management fee (0.85% of fund assets, annually) as
compensation. The investment manager is a subsidiary of Metropolitan Life
Insurance Company.
Rudolph K. Kluiber has been responsible for the fund's day-to-day portfolio
management since its inception in February 1995. A senior vice president, he
joined the firm in 1989 and has worked as an investment professional since 1988.
<PAGE>
Your Investment 9
- -------------------------------------------------------------------------------
[KEY GRAPHIC]
Opening an Account
If you are opening an account through a financial professional, he or she can
assist you with all phases of your investment.
If you are investing through a large retirement plan or other special program,
follow the instructions in your program materials.
To open an account without the help of a financial professional, please use the
instructions on these pages.
[CHECKLIST GRAPHIC]
Choosing a Share Class
The fund generally offers four share classes, each with its own sales charge and
expense structure: Class A, Class B(1), Class C and Class S shares. The fund
also offers Class B shares, but only to current Class B shareholders through
reinvestment of dividends and distributions or through exchanges from existing
Class B accounts of the State Street Research funds.
If you are investing a substantial amount and plan to hold your shares for a
long period, Class A shares may make the most sense for you. If you are
investing a lesser amount, you may want to consider Class B(1) shares (if
investing for at least six years) or Class C shares (if investing for less than
six years). If you are investing through a special program, such as a large
employer-sponsored retirement plan or certain programs available through
financial professionals, you may be eligible to purchase Class S shares.
Because all future investments in your account will be made in the share class
you designate when opening the account, you should make your decision carefully.
Your financial professional can help you choose the share class that makes the
most sense for you.
<PAGE>
10 Your Investment continued
- -------------------------------------------------------------------------------
Class A -- Front Load
[bullet] Initial sales charge of 5.75% or less
[bullet] Lower sales charges for larger investments; see sales charge schedule
at right
[bullet] Lower annual expenses than Class B(1) or C shares because of lower
distribution/service (12b-1) fee of 0.25%
Class C -- Level Load
[bullet] No initial sales charge
[bullet] Deferred sales charge of 1%, paid if you sell shares within one year of
purchase
[bullet] Lower deferred sales charge than Class B(1) shares
[bullet] Annual distribution/service (12b-1) fee of 1.00%
[bullet] No conversion to Class A shares after eight years, so annual expenses
do not decrease
Class B(1) -- Back Load
[bullet] No initial sales charge
[bullet] Deferred sales charge of 5% or less on shares you sell within six years
[bullet] Annual distribution/service (12b-1) fee of 1.00%
[bullet] Automatic conversion to Class A shares after eight years, reducing
future annual expenses
Class S -- Special Programs
[bullet] Available only through certain retirement accounts, advisory accounts
of the investment manager and other special programs, including
programs through financial professionals with recordkeeping and other
services; these programs usually involve special conditions and
separate fees (consult your financial professional or your program
materials)
[bullet] No sales charges of any kind
[bullet] No distribution/service (12b-1) fees; annual expenses are lower than
other share classes
Sales Charges
Class A -- Front Load
<TABLE>
<CAPTION>
when you invest this % is which equals
this amount deducted this % of
for sales your net
charges investment
- -------------------------------------------------------
<S> <C> <C>
Up to $50,000 5.75 6.10
$50,000 to $100,000 4.50 4.71
$100,000 to $250,000 3.50 3.63
$250,000 to $500,000 2.50 2.56
$500,000 to $1 million 2.00 2.04
$1 million or more see next column
</TABLE>
With Class A shares, you pay a sales charge only when you buy shares.
<PAGE>
If you are investing $1 million or more (either as a lump sum or through any of
the methods described on the application), you can purchase Class A shares
without any sales charge. However, you may be charged a "contingent deferred
sales charge" (CDSC) of 1% if you sell any shares within one year of purchasing
them. See "Other CDSC Policies" on page XX.
Class A shares are also offered with low or no sales charges through various
wrap-fee programs and other sponsored arrangements (consult your financial
professional or your program materials).
Class B(1) -- Back Load
<TABLE>
<CAPTION>
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deducted
bought them from your proceeds
- ----------------------------------------------------------
<S> <C>
First year 5.00
Second year 4.00
Third year 3.00
Fourth year 3.00
Fifth year 2.00
Sixth year 1.00
Seventh or eighth year None
</TABLE>
With Class B(1) shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for six years or less, as described in the table above. See "Other
CDSC Policies" on page XX.
Class B(1) shares automatically convert to Class A shares after eight years;
Class A shares have lower annual expenses.
<PAGE>
12 Your Investment continued
- -------------------------------------------------------------------------------
Class B -- Back Load
Class B shares are available only to current shareholders through reinvestment
of dividends and distributions or through exchanges from existing Class B
accounts of the State Street Research funds. Other investments made by current
Class B shareholders will be in Class B(1) shares.
With Class B shares, you are charged a "contingent deferred sales charge" (CDSC)
when you sell shares you have held for five years or less. The CDSC is a
percentage of net asset value at the time of purchase (or of sale, if lower) and
is deducted from your proceeds. When you sell shares in the first year after you
bought them, the CDSC is 5.00%; second year, 4.00%; third year, 3.00%; fourth
year, 3.00%; fifth year, 2.00%; sixth year or later, none. See "Other CDSC
Policies" on page XX.
Class B shares automatically convert to Class A shares after eight years.
Class C -- Level Load
<TABLE>
<CAPTION>
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is deducted
bought them from your proceeds
- ----------------------------------------------------------
<S> <C>
First year 1.00
Second year or later None
</TABLE>
With Class C shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for one year or less, as described in the table above. See "Other CDSC
Policies" on page XX.
Class C shares currently have the same annual expenses as Class B(1) shares, but
never convert to Class A shares.
Class S -- Special Programs
Class S shares have no sales charges.
<PAGE>
13
----
[Begin Sidebar]
[MAGNIFYING GLASS Understanding
EXAMINING DOCUMENT Distribution/Service
GRAPHIC] Fees
As noted in the descriptions on pages xx to xx, all share classes except Class S
have an annual distribution/service fee, also called a 12b-1 fee.
Under its current 12b-1 plan, the fund may pay certain distribution and service
fees for these classes out of fund assets. Because 12b-1 fees are an ongoing
expense, they will increase the cost of your investment and, over time, could
potentially cost you more than if you had paid other types of sales charges. For
that reason, you should consider the effects of 12b-1 fees as well as sales
loads when choosing a share class.
Some of the 12b-1 fee is used to compensate those financial professionals who
sell fund shares and provide ongoing service to shareholders. The table on the
next page shows how these professionals' compensation is calculated.
The fund may continue to pay 12b-1 fees even if the fund is subsequently closed
to new investors.
[End Sidebar]
Other CDSC Policies
The CDSC will be based on the net asset value of the shares at the time of
purchase (or sale, if lower). Any shares acquired through reinvestment are not
subject to the CDSC. There is no CDSC on exchanges into other State Street
Research funds, and the date of your initial investment will continue to be used
as the basis for CDSC calculations when you exchange. To ensure that you pay the
lowest CDSC possible, the fund will always use the shares with the lowest CDSC
to fill your sell requests.
The CDSC is waived on shares sold for participant initiated distributions from
State Street Research prototype retirement plans. In other cases, the CDSC is
waived on shares sold for mandatory retirement distributions or for
distributions because of disability or death. Consult your financial
professional or the State Street Research Service Center.
Dealer Compensation
Financial professionals who sell shares of State Street Research funds and
perform services for fund investors may receive sales commissions and annual
fees. These are paid by the fund's distributor, using money from sales charges,
distribution/service (12b-1) fees and its other resources.
Brokers and agents may charge a transaction fee on orders of fund shares placed
directly through them. The distributor may pay its affiliate MetLife Securities,
Inc. additional compensation of up to 0.25% of certain sales or assets.
<PAGE>
14 Buying and Selling Shares
- -------------------------------------------------------------------------------
[CHECK (MONEY) GRAPHIC]
Policies for Buying Shares
Once you have chosen a share class, the next step is to determine the amount you
want to invest.
Minimum Initial Investments:
[bullet] $10,000 for accounts that use the Investamatic program
[bullet] $2,000 for Individual Retirement Accounts
[bullet] $100,000 for all other accounts
Minimum Additional Investments:
[bullet] $1,000 for Individual Retirement Accounts
[bullet] $50 for all other accounts
Complete the enclosed application. You can avoid future inconvenience by signing
up now for any services you might later use.
Timing of Requests All requests received in good order by State Street Research
before the close of regular trading on the New York Stock Exchange (usually 4:00
p.m. eastern time) will be executed the same day, at that day's closing share
price. Orders received thereafter will be executed the following day, at that
day's closing share price.
Wire Transactions Funds may be wired between 8:00 a.m. and 4:00 p.m. eastern
time. To make a same-day wire investment, please notify State Street Research by
12:00 noon of your intention to wire funds, and make sure your wire arrives by
4:00 p.m. If the New York Stock Exchange closes before 4:00 p.m. eastern time,
you may be unable to make a same-day wire investment. Your bank may charge a fee
for wiring money.
<PAGE>
Instructions for Buying Shares 15
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
To Open an Account To Add to an Account
<S> <C> <C>
[BRIEFCASE
GRAPHIC]
Through a Consult your financial professional or your Consult your financial professional or your program materials.
Professional program materials.
or Program
[MAILBOX
GRAPHIC]
By Mail Make your check payable to "State Street Fill out an investment slip from an account statement, or indicate
Research Funds." Forward the check and your the fund name and account number on your check. Make your check
application to State Street Research. payable to "State Street Research Funds." Forward the check and
slip to State Street Research.
[CAPITOL
GRAPHIC]
By Federal Call to obtain an account number and forward Call State Street Research to obtain a control number. Instruct
Funds Wire your application to State Street Research. your bank to wire funds to:
Wire funds using the instructions at right. [bullet] State Street Bank and Trust Company, Boston, MA
[bullet] ABA: 011000028
[bullet] BNF: fund name and share class you want to buy
[bullet] AC: 99029761
[bullet] OBI: your name and your account number
[bullet] Control: the number given to you by State Street Research
[ELECTRONIC
PLUG GRAPHIC]
By Electronic Verify that your bank is a member of the ACH Call State Street Research to verify that the necessary bank
Funds Transfer (Automated Clearing House) system. Forward information is on file for your account. If it is, you may request
(ACH) your application to State Street Research. be a transfer with the same phone call. If not, please ask State
Please sure to include the appropriate bank Street Research to provide you with an EZ Trader application.
information. Call State Street Research to
request a purchase.
[TELEPHONE
GRAPHIC]
By Investamatic Forward your application, with all appropriate Call State Street Research to verify that Investamatic is in place
sections completed, to State Street Research, on your account, or to request a form to add it. Investments are
along with a check for your initial investment automatic once Investamatic is in place.
payable to "State Street Research Funds."
[ARROWS POINTING
IN OPPOSITE
DIRECTION
GRAPHIC]
By Exchange Call State Street Research or visit our Web Call State Street Research or visit our Web site.
site.
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408 Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m., eastern time)
</TABLE>
<PAGE>
16 Your Investment continued
- -------------------------------------------------------------------------------
[Begin Sidebar]
[ADDING MACHINE GRAPHIC]
Policies for Selling Shares
Circumstances that Require Written Requests Please submit instructions in
writing when any of the following apply:
[bullet] you are selling more than $100,000 worth of shares
[bullet] the name or address on the account has changed within the last 30 days
[bullet] you want the proceeds to go to a name or address not on the account
registration
[bullet] you are transferring shares to an account with a different registration
or share class
[bullet] you are selling shares held in a corporate or fiduciary account; for
these accounts, additional documents are required:
corporate accounts: certified copy of a corporate resolution
fiduciary accounts: copy of power of attorney or other governing
document
[End Sidebar]
To protect your account against fraud, all signatures on these documents must be
guaranteed. You may obtain a signature guarantee at most banks and securities
dealers. A notary public cannot provide a signature guarantee.
Incomplete Sell Requests State Street Research will attempt to notify you
promptly if any information necessary to process your request is missing.
Timing of Requests All requests received in good order by State Street Research
before the close of regular trading on the New York Stock Exchange (usually 4:00
p.m. eastern time) will be executed the same day, at that day's closing share
price. Requests received thereafter will be executed the following day, at that
day's closing share price.
Wire Transactions Proceeds sent by federal funds wire must total at least
$5,000. A fee of $7.50 will be deducted from all proceeds sent by wire, and your
bank may charge an additional fee to receive wired funds.
Selling Recently Purchased Shares If you sell shares before the check or
electronic funds transfer (ACH) for those shares has been collected, you will
not receive the proceeds until your initial payment has cleared. This may take
up to 15 days after your purchase was recorded (in rare cases, longer). If you
open an account with shares purchased by wire, you cannot sell those shares
until your application has been processed.
<PAGE>
Instructions for Selling Shares 17
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
[BRIEFCASE GRAPHIC]
Through a Consult your financial professional or your program materials.
Professional
or Program
[MAILBOX GRAPHIC]
By Mail Send a letter of instruction, an endorsed stock power or share certificates (if
you hold certificate shares) to State Street Research. Specify the fund, the
account number and the dollar value or number of shares. Be sure to include all
necessary signatures and any additional documents, as well as signature
guarantees if required (see facing page).
[CAPITOL GRAPHIC]
By Federal Check with State Street Research to make sure that a wire redemption privilege,
Funds Wire including a bank designation, is in place on your account. Once this is
established, you may place your request to sell shares with State Street
Research. Proceeds will be wired to your pre-designated bank account.
(See "Wire Transactions" on facing page).
[ELECTRIC PLUG GRAPHIC]
By Electronic Check with State Street Research to make sure that the EZ Trader feature,
Funds Transfer including a bank designation, is in place on your account. Once this is
(ACH) established, you may place your request to sell shares with State Street
Research. Proceeds will be sent to your pre-designated bank account.
[TELEPHONE GRAPHIC]
By Telephone As long as the transaction does not require a written request (see facing page),
you or your financial professional can sell shares by calling State Street
Research. A check will be mailed to your address of record on the following
business day.
[ARROWS POINTING IN
OPPOSITE DIRECTIONS GRAPHIC]
By Exchange Read the prospectus for the fund into which you are exchanging. Call State
Street Research or visit our Web site.
[CALENDAR WITH DATE
CIRCLED GRAPHIC]
By Systematic See plan information on page 22.
Withdrawal Plan
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408 Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m., eastern time)
</TABLE>
<PAGE>
18 Your Investment continued
- -------------------------------------------------------------------------------
[STACK OF PAPERS GRAPHICS] Account Policies
Telephone Requests When you open an account you automatically receive telephone
privileges, allowing you to place requests for your account by telephone. Your
financial professional can also use these privileges to request exchanges on
your account and, with your written permission, redemptions. For your
protection, all telephone calls are recorded.
As long as State Street Research takes certain measures to authenticate
telephone requests on your account, you may be held responsible for unauthorized
requests. Unauthorized telephone requests are rare, but if you want to protect
yourself completely, you can decline the telephone privilege on your
application. The fund may suspend or eliminate the telephone privilege at any
time.
Exchange Privileges There is no fee to exchange shares among State Street
Research funds. Your new fund shares will be the equivalent class of your
current shares. Any contingent deferred sales charges will continue to be
calculated from the date of your initial investment.
You must hold Class A shares of any fund for at least 30 days before you can
exchange them for Class A shares of a different fund with a higher applicable
sales charge.
Frequent exchanges can interfere with fund management and drive up costs for all
shareholders. Because of this, the fund currently limits each account, or group
of accounts under common ownership or control, to six exchanges per calendar
year. The fund may change or eliminate the exchange privilege at any time, may
limit or cancel any shareholder's exchange privilege and may refuse to accept
any exchange request, particularly those associated with "market timing"
strategies.
For Merrill Lynch customers, exchange privileges extend to Summit Cash Reserves
Fund, which is related to the fund for purposes of investment and investor
services.
Accounts with Low Balances If the value of your account falls below $1,500,
State Street Research may mail you a notice asking you to bring the account back
up to $1,500 or close it out. If you do not take action within 60 days, State
Street Research may either sell your shares and mail
<PAGE>
19
----
the proceeds to you at the address of record or, depending on the circumstances,
may deduct an annual maintenance fee (currently $18).
The Fund's Business Hours The fund is open the same days as the New York Stock
Exchange (generally Monday through Friday). Fund representatives are available
from 8:00 a.m. to 6:00 p.m. eastern time on these days.
Calculating Share Price The fund calculates its share price every business day
at the close of regular trading on the New York Stock Exchange (usually at 4:00
p.m. eastern time).The share price is the fund's total assets minus its
liabilities (net asset value, or NAV) divided by the number of existing shares.
In calculating its NAV, the fund uses the last reported sale price or quotation
for portfolio securities.
However, in cases where these are unavailable, or when the investment manager
believes that subsequent events have rendered them unreliable, the fund may use
fair-value estimates instead.
Because foreign securities markets are sometimes open on different days from
U.S. markets, there may be instances when the value of the fund's portfolio
changes on days when you cannot buy or sell fund shares.
Reinstating Recently Sold Shares For 120 days after you sell shares, you have
the right to "reinstate" your investment by putting some or all of the proceeds
into any currently available State Street Research fund at net asset value. Any
CDSC you paid on the amount you are reinstating will be credited to your
account. You may only use this privilege once in any twelve-month period with
respect to your shares of a given fund.
Additional Policies Please note that the fund maintains additional policies and
reserves certain rights, including:
[bullet] The fund may vary its requirements for initial or additional
investments, exchanges, reinvestments, periodic investment plans,
retirement and employee benefit plans, sponsored arrangements and other
similar programs
[bullet] All orders to purchase shares are subject to acceptance by the fund
[bullet] At any time, the fund may change or discontinue its sales charge
waivers and any of its order acceptance practices, and may suspend the
sale of its shares
[bullet] The fund may delay sending you redemption proceeds for up to seven
days, or longer if permitted by the SEC
[bullet] To permit investors to obtain the current price, dealers are
responsible for transmitting all orders to the State Street Research
Service Center promptly
<PAGE>
20 Your Investment continued
- -------------------------------------------------------------------------------
[Begin Sidebar]
[MAGNIFYING GLASS Tax Considerations
EXAMINING DOCUMENT
GRAPHIC]
Unless your investment is in a tax-deferred account, you may want to avoid:
[bullet] investing a large amount in the fund close to the end of its fiscal
year or calendar year (if the fund makes a distribution, you will
receive some of your investment back as a taxable distribution)
[bullet] selling shares at a loss for tax purposes and investing in a
substantially identical investment within 30 days before or after that
sale (such a transaction is usually considered a "wash sale," and you
will not be allowed to claim a tax loss) in the current year
[End Sidebar]
[UNCLE SAM GRAPHIC] Distributions and Taxes
Income and Capital Gains Distributions The fund typically distributes any net
income and net capital gains to shareholders around the end of the fund's fiscal
year, which is Septem-ber 30. To comply with tax regulations, the fund may also
pay an additional capital gains distribution in December.
You may have your distributions reinvested in the fund, invested in a different
State Street Research fund, deposited in a bank account or mailed out by check.
If you do not give State Street Research other instructions, your distributions
will automatically be reinvested in the fund.
Tax Effects of Distributions and Transactions In general, any dividends and
short-term capital gains distributions you receive from the fund are taxable as
ordinary income. Distributions of other capital gains are generally taxable as
capital gains -- in most cases, at different rates from those that apply to
ordinary income.
The tax you pay on a given capital gains distribution generally depends on how
long the fund has held the portfolio securities it sold. It does not depend on
how long you have owned your fund shares or whether you reinvest your
distributions.
Every year, the fund will send you information detailing the amount of ordinary
income and capital gains distributed to you for the previous year.
<PAGE>
21
----
The sale of shares in your account may produce a gain or loss, and is a taxable
event. For tax purposes, an exchange is the same as a sale.
Your investment in the fund could have additional tax consequences. Please
consult your tax professional for assistance.
Backup Withholding By law, the fund must withhold 31% of your distributions and
proceeds if you have not provided complete, correct taxpayer information.
<PAGE>
22 Your Investment continued
- -------------------------------------------------------------------------------
[HANDSHAKE GREETING GRAPHIC] Investor Services
Investamatic Program Use Investamatic to set up regular automatic investments
in the fund from your bank account. You determine the frequency and amount of
your investments.
Systematic Withdrawal Plan This plan is designed for retirees and other
investors who want regular withdrawals from a fund account. The plan is free and
allows you to withdraw up to 8% of your fund assets a year without incurring any
contingent deferred sales charges. Certain terms and minimums apply.
EZ Trader This service allows you to purchase or sell fund shares over the
telephone through the ACH (Automated Clearing House) system.
Dividend Allocation Plan This plan automatically invests your distributions
from the fund into another fund of your choice, without any fees or sales
charges.
Automatic Bank Connection This plan lets you route any distributions or
Systematic Withdrawal Plan payments directly to your bank account.
Retirement Plans State Street Research also offers a full range of prototype
retirement plans for individuals, sole proprietors, partnerships, corporations
and employees.
Call 1-800-562-0032 for information on any of the services described above.
<PAGE>
23
----
[CHECK (MONEY) GRAPHIC]
<TABLE>
<CAPTION>
Maximum Dealer Compensation (%) Class A Class B(1) Class B Class C Class S
<S> <C> <C> <C> <C> <C>
Commission See below 4.00 4.00 1.00 0.00
Investments up to $50,000 5.00 -- -- -- --
$50,000 to $100,000 4.00 -- -- -- --
$100,000 to $250,000 3.00 -- -- -- --
$250,000 to $500,000 2.00 -- -- -- --
$500,000 to $1 million 1.75 -- -- -- --
First $1 to 3 million 1.00(1) -- -- -- --
Next $2 million 0.75(1) -- -- -- --
Next $2 million 0.50(1) -- -- -- --
Next $1 and above 0.25(1) -- -- -- --
Annual fee 0.25 0.25 0.25 1.00 0.00
</TABLE>
Brokers for Portfolio Trades
When placing trades for the fund's portfolio, State Street Research chooses
brokers that provide the best execution (a term defined by service as well as
price), but may also consider a broker's sales of fund shares.
(1) If your financial professional declines this commission, the one-year CDSC
on your investment is waived. Class B
<PAGE>
24 Other Information
- -------------------------------------------------------------------------------
[STOCK Other Securities
CERTIFICATE and Risks
GRAPHIC]
Each of the fund's portfolio securities and investment practices offers certain
opportunities and carries various risks. Major investments and risk factors are
outlined in the fund description starting on page 1. Below are brief
descriptions of other securities and practices, along with their associated
risks.
Restricted and Illiquid Securities Any securities that are thinly traded or
whose resale is restricted can be difficult to sell at a desired time and price.
Some of these securities are new and complex, and trade only among institutions;
the markets for these securities are still developing, and may not function as
efficiently as established markets. Owning a large percentage of restricted and
illiquid securities could hamper the fund's ability to raise cash to meet
redemptions. Also, because there may not be an established market price for
these securities, the fund may have to estimate their value, which means that
their valuation (and, to a much smaller extent, the valuation of the fund) may
have a subjective element.
International Exposure Many U.S. companies in which the fund may invest
generate significant revenues and earnings from abroad. As a result, these
companies and the prices of their securities may be affected by weaknesses in
global and regional economies and the relative value of foreign currencies to
the U.S. dollar. These factors, taken as a whole, could adversely affect the
price of fund shares.
Foreign Investments Foreign securities are generally more volatile than their
domestic counterparts, in part because of higher political and economic risks,
lack of reliable information and fluctuations in currency exchange rates. These
risks are usually higher in less developed countries. The fund may use foreign
currencies and related instruments to hedge its foreign investments.
In addition, foreign securities may be more difficult to resell and the markets
for them less efficient than for comparable U.S. securities. Even where a
foreign security increases in price in its local currency, the appreciation may
be diluted by the negative effect of exchange rates when the security's value is
converted to U.S. dollars. Foreign withholding taxes also may apply and errors
and delays may occur in the settlement process for foreign securities.
Derivatives Derivatives, a category that includes options and futures, are
financial instruments whose value derives from one or more securities, indices
or currencies. The fund may use certain
<PAGE>
25
----
derivatives for hedging (attempting to offset a potential loss in one position
by establishing an interest in an opposite position). This includes the use of
currency-based derivatives for hedging its positions in foreign securities. The
fund may also use certain derivatives for speculation (investing for potential
income or capital gain).
While hedging can guard against potential risks, it adds to the fund's expenses
and can eliminate some opportunities for gains. There is also a risk that a
derivative intended as a hedge may not perform as expected.
The main risk with derivatives is that some types can amplify a gain or loss,
potentially earning or losing substantially more money than the actual cost of
the derivative.
With some derivatives, whether used for hedging or speculation, there is also
the risk that the counterparty may fail to honor its contract terms, causing a
loss for the fund.
Securities Lending The fund may seek additional income or fees by lending
portfolio securities to qualified institutions. By reinvesting any cash
collateral it receives in these transactions, the fund could realize additional
gains or losses. If the borrower fails to return the securities and the invested
collateral has declined in value, the fund could lose money.
Bonds The value of any bonds held by the fund is likely to decline when
interest rates rise; this risk is greater for bonds with longer maturities. A
less significant risk is that a bond issuer could default on principal or
interest payments, causing a loss for the fund. However, junk bonds (those in
rating categories below BBB/Baa) have a higher risk of default than investment
grade bonds, and their market prices can be more volatile.
When-issued Securities The fund may invest in securities prior to their date of
issue. These securities could fall in value by the time they are actually
issued, which may be any time from a few days to over a year.
Short-term Trading While the fund ordinarily does not trade securities for
short-term profits, it will sell any security at the time it believes best,
which may result in short-term trad-ing. Short-term trading can increase the
fund's brokerage costs and may increase your tax liability if there are capital
gains.
Defensive Investing During unusual market conditions, the fund may place up to
100% of total assets in cash or high-quality, short-term debt securities. To the
extent that the fund does this, it is not pursuing its goal.
Year 2000 The investment manager does not currently anticipate that computer
problems related to the year 2000 will have a material effect on the fund.
However, there can be no assurances in this area, including the possibility that
year 2000 compu-ter problems could negatively affect communication systems,
investment markets or the economy in general.
<PAGE>
26 Financial Highlights
- -------------------------------------------------------------------------------
These highlights are intended to help you understand the fund's performance
since its inception. The information in these tables has been audited by
PricewaterhouseCoopers LLP, the fund's independent accountants. Their report and
the fund's financial statements are included in the fund's annual report, which
is available upon request. Total return figures assume reinvestment of all
distributions.
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------
Years ended September 30
------------------------------------------------------------
Per-share Data 1995(1) 1996(2) 1997(2) 1998(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ($) 9.55 11.13 15.14 20.71
----- ------ ----- -----
Net investment income (loss) ($)* 0.07 (0.06) 0.03 0.02
Net realized and unrealized gain(loss) on
investments ($) 1.51 4.66 9.02 (5.03)
----- ------ ----- -----
Total from investment operations ($) 1.58 4.60 9.05 (5.01)
----- ------ ----- -----
Dividend from net investment income ($) -- (0.09) -- --
Distributions from capital gains ($) -- (0.50) (3.48) (0.23)
----- ------ ----- -----
Total distributions ($) -- (0.59) (3.48) (0.23)
----- ------ ----- -----
Net asset value, end of year ($) 11.13 15.14 20.71 15.47
===== ====== ===== =====
Total return (%)(3) 16.54(4) 43.63 72.70 (24.42)
Ratios/supplemental data:
- -------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 5,782 1,110 157,853 115,973
Expense ratio (%)* 1.45(5) 1.45 1.34 1.39
Ratio of net investment income (loss) to
average net assets (%)* 1.05(5) (0.56) 0.17 0.09
Portfolio turnover rate (%) 47.34 124.79 25.03 67.80
*Reflects voluntary reduction of expenses
per share of these amounts ($) 0.15 0.32 0.02 --
<CAPTION>
Class B
----------------------------------------------------------
Years ended September 30
----------------------------------------------------------
Per-share Data 1995(1) 1996(2) 1997(2) 1998(1)
- -----------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ($) 9.55 11.08 15.02 20.33
----- ------ ----- -----
Net investment income (loss) ($)* 0.02 (0.17) (0.09) (0.13)
Net realized and unrealized gain(loss) on
investments ($) 1.51 4.65 8.88 (4.90)
----- ------ ----- -----
Total from investment operations ($) 1.53 4.48 8.79 (5.03)
----- ------ ----- -----
Dividend from net investment income ($) -- (0.04) -- --
Distributions from capital gains ($) -- (0.50) (3.48) (0.23)
----- ------ ----- -----
Total distributions ($) -- (0.54) (3.48) (0.23)
----- ------ ----- -----
Net asset value, end of year ($) 11.08 15.02 20.33 15.07
===== ====== ===== =====
Total return (%)(3) 16.02(4) 42.52 71.34 (24.98)
Ratios/supplemental data:
- -----------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 116 165 235,938 210,408
Expense ratio (%)* 2.20(5) 2.20 2.08 2.15
Ratio of net investment income (loss) to
average net assets (%)* 0.32(5) (1.38) (0.55) (0.68)
Portfolio turnover rate (%) 47.34 124.79 25.03 67.80
*Reflects voluntary reduction of expenses
per share of these amounts ($) 0.15 0.32 0.01 --
</TABLE>
<PAGE>
27
----
<TABLE>
<CAPTION>
Class C
----------------------------------------------------------
Years ended September 30
----------------------------------------------------------
Per-share Data 1995(1) 1996(2) 1997(2) 1998(1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year ($) 9.55 11.08 15.02 20.32
----- ------ ----- -----
Net investment income (loss) ($)* 0.02 (0.17) (0.09) (0.13)
Net realized and unrealized gain (loss) on
investments ($) 1.51 4.65 8.87 (4.90)
----- ------ ----- -----
Total from investment operations ($) 1.53 4.48 8.78 (5.03)
----- ------ ----- -----
Dividend from net investment income ($) -- (0.04) -- --
Distributions from capital gains ($) -- (0.50) (3.48) (0.23)
Total distributions ($) -- (0.54) (3.48) (0.23)
----- ------ ----- -----
Net asset value, end of year ($) 11.08 15.02 20.32 15.06
===== ====== ===== =====
Total return (%)(3) 16.02(4) 42.52 71.26 (25.00)
Ratios/supplemental data:
- -------------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 116 165 67,121 61,504
Expense ratio (%)* 2.20(5) 2.20 2.09 2.15
Ratio of net investment income (loss) to
average net assets (%)* 0.32(5) (1.38) (0.58) (0.68)
Portfolio turnover rate (%) 47.34 124.79 25.03 67.80
*Reflects voluntary reduction of expenses
per share of these amounts ($) 0.15 0.32 0.01 --
<CAPTION>
Class S
-----------------------------------------------------
Years ended September 30
-----------------------------------------------------
Per-share Data 1995(1) 1996(2) 1997(2) 1998(1)
- ---------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ($) 9.55 11.15 15.18 20.83
----- ----- ----- -----
Net investment income (loss) ($)* 0.09 (0.06) (0.00) 0.10
Net realized and unrealized gain (loss) on
investments ($) 1.51 4.70 9.13 (5.10)
----- ----- ----- -----
Total from investment operations ($) 1.60 4.64 9.13 (5.00)
----- ----- ----- -----
Dividend from net investment income ($) -- (0.11) -- --
Distributions from capital gains ($) -- (0.50) (3.48) (0.23)
Total distributions ($) -- (0.61) (3.48) (0.23)
----- ----- ----- -----
Net asset value, end of year ($) 11.15 15.18 20.83 15.60
===== ===== ===== =====
Total return (%)(3) 16.75(4) 43.95 73.10 (24.23)
Ratios/supplemental data:
- ---------------------------------------------------------------------------------------------------------
Net assets at end of year ($ thousands) 117 7,752 14,542 750
Expense ratio (%)* 1.20(5) 1.20 1.16 1.04
Ratio of net investment income (loss) to
average net assets (%)* 1.32(5) (0.43) (0.02) 0.53
Portfolio turnover rate (%) 47.34 124.79 25.03 67.80
*Reflects voluntary reduction of expenses
per share of these amounts ($) 0.15 0.32 0.12 --
</TABLE>
(1) February 13, 1995 (commencement of operations) to September 30, 1995.
(2) Per-share figures have been calculated using the average shares method.
(3) 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.
(4) Not annualized.
(5) Annualized.
<PAGE>
28 Notes
- --------------------------------------------------------------------------------
<PAGE>
29
----
If you have questions about the fund or would like to request a free copy of the
current annual/semiannual report or SAI, contact State Street Research or your
financial professional.
[LOGO: STATE STREET RESEARCH]
Service Center
P.O. Box 8408, Boston, MA 02266
Telephone: 1-800-562-0032
Internet: www.ssrfunds.com
You can also obtain information about the fund, including the SAI and certain
other fund documents, on the Internet at www.sec.gov, in person at the SEC's
Public Reference Room in Washington, DC (telephone 1-800-SEC-0330) or by mail by
sending your request, along with a duplicating fee, to the SEC's Public
Reference Section, Washington, DC 20549-6009.
You can find additional information on the fund's structure and its performance
in the following documents:
Annual/Semiannual Reports While the prospectus describes the fund's potential
investments, these reports detail the fund's actual investments as of the report
date. Reports include a discussion by fund management of recent economic and
market trends and fund performance. The annual report also includes the report
of the fund's independent accountants.
Statement of Additional Information (SAI) A supplement to the prospectus, the
SAI contains further information about the fund and its investment limitations
and policies. A current SAI for this fund is on file with the Securities and
Exchange Commission and is incorporated by reference (is legally part of this
prospectus).
<TABLE>
<CAPTION>
Ticker Symbols
- ------------------------------------
<S> <C>
Class A SSRAX
Class B(1) (proposed)
Class B SSRBX
Class C SSRDX
Class S (proposed) SSRCX
</TABLE>
prospectus
SEC File Number: 811-3838
Control Number: (exp0200)SSR-LD AR-868E-298IBS
<PAGE>
STATE STREET RESEARCH CAPITAL FUND
a Series of
STATE STREET RESEARCH CAPITAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVE............................................... 2
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS.................... 2
ADDITIONAL INFORMATION CONCERNING
CERTAIN RISKS AND INVESTMENT TECHNIQUES................ 5
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS.................... 16
THE TRUST, THE FUND AND ITS SHARES................................. 20
TRUSTEES AND OFFICERS.............................................. 22
MANAGEMENT OF THE FUND AND INVESTMENT ADVISORY SERVICES............ 26
PURCHASE AND REDEMPTION OF SHARES.................................. 28
SHAREHOLDER ACCOUNTS............................................... 35
NET ASSET VALUE.................................................... 39
PORTFOLIO TRANSACTIONS............................................. 40
CERTAIN TAX MATTERS................................................ 44
DISTRIBUTION OF SHARES OF THE FUND................................. 47
CALCULATION OF PERFORMANCE DATA.................................... 52
CUSTODIAN ....................................................... 54
INDEPENDENT ACCOUNTANTS............................................ 54
FINANCIAL STATEMENTS............................................... 55
</TABLE>
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, 1999, 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.
The Fund's financial statements as of and for the fiscal year ended
September 30, 1998, which are included in the Fund's Annual Report to
Shareholders for that year, are incorporated by reference. The Annual Report is
available without charge, upon request by calling 1-800-562-0032.
CONTROL NUMBER: 1285C-980201(0200)SSR-LD CF-879D-0298
<PAGE>
INVESTMENT OBJECTIVE
As set forth under " The Fund--Goal and Strategies--Fundamental
Goal" in the Prospectus of State Street Research Capital Fund (the "Fund"), the
Fund's investment goal, which 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 State Street Research & Management Company, the
Fund's investment manager (the "Investment Manager"), is fundamental and may not
be changed by the Fund except by the affirmative vote of a majority of the
outstanding voting securities of the Fund, as defined in the Investment Company
Act of 1940, as amended (the "1940 Act"). (Under the 1940 Act, a "vote of the
majority of the outstanding voting securities" means the vote, at the annual or
a special meeting of security holders duly called, (i) of 67% or more of the
voting securities present at the meeting if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy or (ii) of
more than 50% of the outstanding voting securities, whichever is less.)
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under " The Fund-- Principal Risks" and "Other
Information--Other Securities and Risks" in the Fund's Prospectus, the Fund has
adopted certain investment restrictions, and those restrictions are either
fundamental or not fundamental. Fundamental restrictions may not be changed by
the Fund except by the affirmative vote of a majority of the outstanding voting
securities of the Fund. Restrictions that are not fundamental may be changed by
a vote of a majority of the Trustees of the Trust.
The Fund's fundamental investment restrictions are set forth below.
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;
2
<PAGE>
(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;
(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
3
<PAGE>
guaranteed by the U.S. Government or its agencies or
instrumentalities shall be excluded); and
(11) not to borrow money (through reverse repurchase
agreements or otherwise) except for extraordinary and
emergency purposes, such as permitting redemption
requests to be honored, and then not in an amount in
excess of 10% of the value of its net assets, provided
that additional investments will be suspended during any
period when borrowings exceed 5% of the Fund's net
assets, and provided further that reverse repurchase
agreements shall not exceed 5% of the Fund's net assets.
The Board of Trustees may authorize the borrowing of
money only on an unsecured basis for the general
purposes of the Fund and may authorize the issue
therefor of notes or debentures of the Fund, but no
money shall be borrowed by the Fund except pursuant to
the authority of the Board of Trustees, and no
borrowings by the Fund shall be authorized to an
aggregate amount greater than ten percent, as noted, of
the net assets of the Fund.
The following investment restrictions may be changed without
shareholder approval. 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 companies for the purpose of exercising
control over their management, although the Trust may
from time to time present its views on various matters
to the management of issuers in which it holds
investments;
(3) 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);
(4) not to purchase securities on margin or make short sales
of securities except for short sales "against the box";
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;
(5) not to engage in transactions in options except that
investments in essentially financial items or
arrangements such as, but not limited to, options on
4
<PAGE>
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
(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.
ADDITIONAL INFORMATION CONCERNING
CERTAIN RISKS AND INVESTMENT TECHNIQUES
Derivatives
The Fund may buy and sell certain types of derivatives, such as
options, futures contracts, options on futures contracts, and swaps under
circumstances in which such instruments are expected by State Street Research &
Management Company, the Fund's Investment Manager (the "Investment Manager"), to
aid in achieving the Fund's investment objective. The Fund 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.
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Fund to take both "short" positions (positions
which anticipate a decline in the market value of a particular asset or index)
and "long" positions (positions which anticipate an increase in the market value
of a particular asset or index). The Fund may also use strategies which involve
simultaneous short and long positions in response to specific market conditions,
such as where the Investment Manager anticipates unusually high or low market
volatility.
The Investment Manager may enter into derivative positions for the
Fund for either hedging or non-hedging purposes. The term hedging is applied to
defensive strategies designed to protect the Fund from an expected decline in
the market value of an asset or group of assets that the Fund owns (in the case
of a short hedge) or to protect the Fund from an expected rise in the market
value of an asset or group of assets which it intends to acquire in the future
(in the case of a long or "anticipatory" hedge). Non-hedging strategies include
strategies designed to produce incremental income (such as the option writing
strategy described below) or "speculative" strategies which are undertaken to
profit from (i) an expected decline in the market value of an asset or group of
assets which the Fund does not own or (ii) expected increases in the market
value of an asset which it does not plan to acquire. Information about specific
types of instruments is provided below.
5
<PAGE>
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell an
underlying asset or group of assets, such as a currency, or an index of
securities, at a future time at a specified price. A contract to buy establishes
a long position while a contract to sell establishes a short position.
The purchase of a futures contract on an equity security or an index
of equity securities normally enables a buyer to participate in the market
movement of the underlying asset or index after paying a transaction charge and
posting margin in an amount equal to a small percentage of the value of the
underlying asset or index. The Fund will initially be required to deposit with
the Trust's custodian or the futures commission merchant effecting the futures
transaction an amount of "initial margin" in cash or securities, as permitted
under applicable regulatory policies.
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.
In transactions establishing a long position in a futures contract,
assets 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, assets 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 utilize such
assets and methods of cover as appropriate under applicable exchange and
regulatory policies.
6
<PAGE>
Options
The Fund may use options to implement its investment strategy. There
are two basic types of options: "puts" and "calls." Each type of option can
establish either a long or a short position, depending upon whether the Fund is
the purchaser or the writer of the option. 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, that is, 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. In general, a purchased put
increases in value as the value of the underlying security falls and a purchased
call increases in value as the value of the underlying security rises.
The principal reason to write options is to generate extra income
(the premium paid by the buyer). 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,
that is, 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, that is, 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
its 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.
Among the options which the Fund may enter are options on securities
indices. In general, options on indices of securities are similar to options on
the securities themselves except that delivery requirements are different. For
example, a put option on an index of securities does not give the holder the
right to make actual delivery of a basket of securities but instead gives the
holder the right to receive an amount of cash upon exercise of the option if the
value of the underlying index has fallen below the exercise price. The amount of
cash received will be equal to the difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple. As with options on equity securities or futures contracts, a
Fund may offset its position in index options prior to expiration by entering
into a closing transaction on an exchange or it may let the option expire
unexercised.
7
<PAGE>
A securities index assigns relative values to the securities
included in the index and the index options are based on a broad market index.
In connection with the use of such options, the Fund may cover its position by
identifying assets having a value equal to the aggregate face value of the
option position taken.
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.
Limitations and Risks of Options and Futures Activity
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. The Fund applies a similar policy to options that are not commodities.
As noted above, the Fund may engage in both hedging and nonhedging
strategies. 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.
Nonhedging strategies typically involve special risks. The
profitability of the Fund's non-hedging strategies will depend on the ability of
the Investment Manager to analyze both the applicable derivatives market and the
market for the underlying asset or group of assets. Derivatives markets are
often more volatile than corresponding securities markets and a relatively small
change in the price of the underlying asset or group of assets can have a
magnified effect upon the price of a related derivative instrument.
Derivatives markets also are often less liquid than the market for
the underlying asset or group of assets. 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 carry out their derivative
strategies and might, in some cases, require a 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.
8
<PAGE>
Short Sales Against the Box
The Fund may effect short sales, but only if such transactions are
short sale transactions known as short sales "against the box." A short sale is
a transaction in which the Fund sells a security it does not own by borrowing it
from a broker, and consequently becomes obligated to replace that security. A
short sale against the box is a short sale where the Fund owns the security sold
short or has an immediate and unconditional right to acquire that security
without additional cash consideration upon conversion, exercise or exchange of
options with respect to securities held in its portfolio. The effect of selling
a security short against the box is to insulate that security against any future
gain or loss.
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.
The Fund may enter credit protection swap arrangements involving the
sale by the Fund of a put option on a debt security which is exercisable by the
buyer upon certain events, such as default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
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.
9
<PAGE>
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, as noted above, 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 forecasts, there is a risk that the swap
position may correlate imperfectly with the price of the asset or liability
being hedged.
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
any other illiquid securities held by the Fund 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
10
<PAGE>
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The ability to use
reverse repurchase agreements may enable, but does not ensure the ability of,
the Fund to avoid selling portfolio instruments at a time when a sale may be
deemed to be disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in
a dollar amount sufficient to make payment of the obligations to be purchased
are segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
When-Issued Securities
The Fund may purchase "when-issued" securities, which are traded on
a price or yield 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 or interest on the securities are not
payable. 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 falls below the price committed to prior to actual
issuance. The Trust's custodian will establish a segregated account when the
Fund purchases securities on a when-issued basis consisting of cash or liquid
securities equal to the amount of the when-issued commitments. Securities
transactions involving delayed deliveries or forward commitments are frequently
characterized as when-issued transactions and are similarly treated by the Fund.
Restricted Securities
It is the Fund's policy not to make an investment in restricted
securities, including restricted securities sold in accordance with Rule 144A
under the Securities Act of 1933 ("Rule 144A Securities") if, as a result, more
than 35% of the Fund's total assets are invested in restricted securities,
provided not more than 10% of the Fund's total assets are invested in restricted
securities other than Rule 144A Securities.
Securities may be resold pursuant to Rule 144A under certain
circumstances only to qualified institutional buyers as defined in the rule, and
the markets and trading practices for such securities are relatively new and
still developing; depending on the development of such markets, Rule 144A
Securities may be deemed to be liquid as determined by or in accordance with
methods adopted by the Trustees. Under such methods the following factors are
considered, among others: the frequency of trades and quotes for the security,
the number of dealers and potential purchasers in the market, market making
activity, and the nature of the security and marketplace trades. Investments in
Rule 144A Securities could have the effect of increasing the level of 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 subjective valuation of such securities in the absence
of a market for
11
<PAGE>
them. Restricted securities that are not resalable under Rule 144A may be
subject to risks of illiquidity and subjective valuations to a greater degree
than Rule 144A Securities.
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") and Global
Depository Receipts ("GDRs"). Under current policy, however, the Fund limits
such investments to a maximum of 35% of its total investments.
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. GDRs are receipts issued to one country which
also 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. GDRs are designed for use when the issuer is
raising capital in more than one market simultaneously, such as the issuer's
local market and the U.S., and have been used to overcome local selling
restrictions to foreign investors. In addition, many GDRs are eligible for
book-entry settlement through Cedel, Euroclear and DTC. The underlying
securities are not always denominated in the same currency as the ADRs, EDRs or
GDRs. Although investment in the form of ADRs , EDRs or GDRs 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 tradings. 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
12
<PAGE>
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 presently does not 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.
Currency Transactions
The Fund may engage in currency exchange transactions in order to
protect against the effect of uncertain future exchange rates on securities
denominated in foreign currencies. The Fund will conduct its 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. Under current policy, 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.
In entering a forward currency contract, 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. 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.
13
<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 any loaned securities plus accrued interest. Collateral
received by the Fund will generally be held in the form tendered, although cash
may be invested in unaffiliated mutual funds with quality short-term portfolios,
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities , or repurchase agreements, or other similar investments. 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 may receive a lending fee and will retain 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 or
its agents to be of good financial standing.
Short-Term Trading
The Fund may engage in short-term trading of securities and reserves
full freedom with respect to portfolio turnover. In periods where there are
rapid changes in economic conditions and 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 quarter
transaction costs, relative to other funds in general, and may have tax and
other consequences.
Temporary and Defensive Investments
The Fund may hold up to 100% of its assets in cash or short-term
debt 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. The types of
short-term instruments in which the Fund may invest for such purposes include
short-term money market securities, such as repurchase agreements, and
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, certificates of deposit, time deposits and bankers'
acceptances of certain qualified financial institutions and corporate commercial
paper, which at the time of purchase are rated at least within the "A" major
rating category by Standard & Poor's Corporation ("S&P") or the "Prime" major
rating category by Moody's Investor's Service, Inc. ("Moody's"), or, if not
rated, issued by companies having an
14
<PAGE>
outstanding long-term unsecured debt issued rated at least within the "A"
category by S&P or Moody's.
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 may be classified
according to the industries of their parent or sponsor 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>
<S> <C> <C>
Basic Industries Consumer Staple Science & Technology
- ---------------- --------------- --------------------
Chemical Business Service Aerospace
Diversified Container Computer Software &
Electrical Equipment Drug Service
Forest Products Food & Beverage Electronic
Components
- ----------
Machinery Hospital Supply Electronic Equipment
Metal & Mining Personal Care Office Equipment
Railroad Printing & Publishing
Truckers Tobacco
Utility Energy Consumer Cyclical
- ------- ------ -----------------
Electric Oil Refining & Marketing Airline
Gas Oil Production Automotive
Gas Transmission Oil Service Building
Telephone Hotel & Restaurant
Photography
Other Finance Recreation
- ----- ------- Retail Trade
Trust Certificates -- Bank Textile & Apparel
Government Related Lending Financial Service
Asset-backed -- Mortgages Insurance
Asset-backed -- Credit
Card Receivables
</TABLE>
15
<PAGE>
Computer-Related Risks
Many mutual funds and other companies that issue securities, as well
as government entities upon whom those mutual funds and companies depend, may be
adversely affected by computer systems (whether their own systems or systems of
their service providers) that do not properly process dates beginning with
January 1, 2000 and information related to those dates. In addition, many funds
and other companies, especially those funds and companies that do business in
one or more national currencies of the countries in the European Union (the
"EU"), may be adversely affected by computer systems that cannot accommodate
concurrent references to two currencies, the national currency and the euro (the
proposed currency unit of the EU). Beginning on January 1, 1999 and for the
three years thereafter, businesses and governments in most EU countries
generally must be prepared to conduct their businesses in their national
currency and the euro. After such three-year period, they must conduct their
businesses only in the euro.
The euro conversion presents additional risks for the Fund to the
extent that it invests in securities denominated in a national currency that
eventually will be replaced by the euro. For example, trading, accounting and
other administrative systems must be able to reflect exchange rates between a
national currency of an EU member and the euro and to redenominate outstanding
tradeable debt securities into the euro in accordance with specific technical
requirements.
The Investment Manager currently is in the process of reviewing
its internal computer systems as they relate to the Fund, as well as the
computer systems of those service providers upon which the Fund relies, in order
to obtain reasonable assurances that the Fund will not experience a material
adverse impact related to either problem. The Fund does not currently anticipate
that either problem will have a material adverse impact on its portfolio
investments, taken as a whole. There can be no assurances in either area,
however, including the possibility that either or both problems could negatively
affect the investment markets or the economy generally.
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
The Fund may invest in long-term and short-term debt securities.
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:
o direct obligations of the U.S. Treasury, i.e., U.S.
Treasury bills, notes, certificates and bonds;
16
<PAGE>
o obligations of U.S. Government agencies or
instrumentalities, such as the Federal Home Loan Banks,
the Federal Farm Credit Banks, the Federal National
Mortgage Association, the Government National Mortgage
Association and the Federal Home Loan Mortgage
Corporation; and
o obligations of mixed-ownership Government corporations
such as Resolution Funding Corporation.
U.S. Government securities which 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 Bank, the Federal Farm Credit Bank, the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation are backed
by the credit of the agency or instrumentality issuing the obligations. Certain
obligations of Resolution Funding Corporation, a mixed-ownership Government
corporation, are backed with respect to interest payments by the U.S. Treasury,
and with respect to principal payments by U.S. Treasury obligations held in a
segregated account with a Federal Reserve Bank. Except for certain
mortgage-related securities, the Fund will only invest in obligations issued by
mixed-ownership Government corporations where such securities are guaranteed as
to payment of principal or interest by the U.S. Government or a U.S. Government
agency or instrumentality, and any unguaranteed principal or interest is
otherwise supported by U.S. Government obligations held in a segregated account.
U.S. Government securities may be acquired by the Fund in the form
of separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
17
<PAGE>
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Bank Money Investments
Bank money investments include, but are not limited to certificates
of deposit, bankers' acceptances and time deposits. Certificates of deposit are
generally short-term (i.e., less than one year), interest-bearing negotiable
certificates issued by commercial banks or savings and loan associations against
funds deposited in the issuing institution. A banker's acceptance is a time
draft drawn on a commercial bank by a borrower, usually in connection with an
international commercial transaction (to finance the import, export, transfer or
storage of goods). A banker's acceptance may be obtained from a domestic or
foreign bank, including a U.S. branch or agency of a foreign bank. The borrower
is liable for payment as well as the bank, which unconditionally guarantees to
pay the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity. Time deposits are nonnegotiable deposits for a fixed period of time at
a stated interest rate. The Fund will not invest in any such bank money
investment unless the investment is issued by a U.S. bank that is a member of
the Federal Deposit Insurance Corporation ("FDIC"), including any foreign branch
thereof, a U.S. branch or agency of a foreign bank, a foreign branch of a
foreign bank, or a savings bank or savings and loan association that is a member
of the FDIC and which at the date of investment has capital, surplus and
undivided profits (as of the date of its most recently published financial
statements) in excess of $50 million. The Fund will not invest in time deposits
maturing in more than seven days and will not invest more than 10% of its total
assets in time deposits maturing in two to seven days.
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under state law. U.S. federal branches or agencies
of foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks may accept deposits and thus are eligible for FDIC insurance; however, not
all such branches elect FDIC insurance. Unlike U.S. branches of foreign banks,
U.S. agencies of foreign banks may not accept deposits and thus are not eligible
for FDIC insurance. Both branches and agencies can maintain credit balances,
which are funds received by the office incidental to or arising out of the
exercise of their banking powers and can exercise other commercial functions,
such as lending activities.
Short-Term Corporate Debt Instruments
Short-term corporate debt instruments include commercial paper to
finance short-term credit needs (i.e., short-term, unsecured promissory notes)
issued by corporations including but not limited to (a) domestic or foreign bank
holding companies or (b) their subsidiaries or
18
<PAGE>
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.
Zero and Step Coupon Securities
Zero and step coupon securities are debt securities that may pay no
interest for all or a portion of their life but are purchased at a discount to
face value at maturity. Their return consists of the amortization of the
discount between their purchase price and their maturity value, plus in the case
of a step coupon, any fixed rate interest income. Zero coupon securities pay no
interest to holders prior to maturity even though interest on these securities
is reported as income to the Fund. The Fund will be required to distribute all
or substantially all of such amounts annually to its shareholders. These
distributions may cause the Fund to liquidate portfolio assets in order to make
such distributions at a time when the Fund may have otherwise chosen not to sell
such securities. The market value of such securities may be more volatile than
that of securities which pay interest at regular intervals.
Commercial Paper Ratings
Commercial paper investments at the time of purchase will be rated
within the "A" major rating category by S&P or within the "Prime" major rating
category by Moody's, or, if not rated, issued by companies having an outstanding
long-term unsecured debt issue rated at least within the "A" category 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 within the "A" category by S&P or
within the "Prime" category by Moody's.
Commercial paper rated within the "A" category (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 within the "A" category or
better, although in some cases credits within the "BBB" category 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 category
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
19
<PAGE>
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.
THE TRUST, 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. 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
Trust is currently comprised of the following series: State Street Research
Capital Fund, State Street Research Emerging Growth Fund and State Street
Research Aurora Fund. 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. The Trustees also 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 Trustees have authorized shares of the Fund to be issued in five classes:
Class A, Class B(1), Class B, Class C and Class S 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 C
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. Except for those
differences between classes of shares described above, in the Fund's Prospectus
and otherwise this Statement of Additional Information, 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 by the Fund.
20
<PAGE>
Shareholder rights granted under the Master Trust Agreement may be
modified by the Trustees , provided, however, that the Master Trust Agreement
may not be amended if such amendment (a) repeals the limitations on personal
liability of any shareholder, or repeals the prohibition of assessment upon
shareholders, without the express consent of each shareholder involved or (b)
adversely modifies any shareholder right without the consent of the holders of a
majority of the outstanding shares entitled to vote. On any matter submitted to
the shareholders, the holder of a Fund share is entitled to one vote per share
(with proportionate voting for fractional shares) regardless of the relative net
asset value thereof. Except as provided by law, the Trustees may otherwise
modify the rights of shareholders at any time.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there ordinarily will be no shareholder meetings
unless required by the 1940 Act. Except as otherwise provided under the 1940
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 shares of the Trust 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 for 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.
21
<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 60. His principal occupation is currently,
and during the past five years has been, Executive Vice President of State
Street Research & Management Company. Mr. Bennett is also a Director of State
Street Research & Management Company. Mr. Bennett's other principal business
affiliations include 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 37. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he also has served as Vice President of State Street Research & Management
and was Vice President and portfolio manager at First Chicago Investment
Management Company.
+Steve A. Garban, The Pennsylvania State University, 210 Old Main,
University Park, PA 16802, serves as Trustee of the Trust. He is 61. He is
retired and was formerly Senior Vice President for Finance and Operations and
Treasurer of The Pennsylvania State University.
*Lawrence J. Haverty, Jr., One Financial Center, Boston, MA 02111,
serves as Vice President of the Trust. He is 54. His principal occupation is,
and during the past five years has been Senior Vice President of State Street
Research & Management Company.
+Malcolm T. Hopkins, 14 Brookside Road, Biltmore Forest, Asheville,
NC 28803, serves as Trustee of the Trust. He is 70. He is engaged principally in
private investments. Previously, he was Vice Chairman of the Board and Chief
Financial Officer of St. Regis Corp.
*Richard J. Jodka, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 55. His principal occupation is Senior Vice
President of State Street Research & Management Company. Previously, he was a
portfolio manager for Frontier Capital Management.
*+Rudolph K. Kluiber, One Financial Center, Boston, MA 02111, serves
as Vice President of the Trust. He is 39. His principal occupation currently is
Senior Vice President of State Street Research & Management Company. During the
past five years he has also served as Vice President and analyst of State Street
Research & Management Company.
- ----------------------
* or +, see footnotes on page 24.
22
<PAGE>
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791,
serves as Trustee of the Trust. He is 72. He is engaged principally in private
investments and civic affairs and is an author of business history. Previously,
he was with an affiliate of J.P. Morgan & Co. in New York.
+Robert A. Lawrence, 175 Federal Street, Boston, MA 02110, serves
as Trustee of the Trust. He is 72. He is retired and was formerly a partner at
Saltonstall & Co., a private investment firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 47. His principal occupation is currently and
during the past five years has been Executive Vice President, Treasurer, Chief
Financial Officer, Chief Administrative Officer and Director of State Street
Research & Management Company. Mr. Maus's other principal business affiliations
include Executive Vice President, Treasurer, Chief Financial Officer, Chief
Administrative 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 43. 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 Executive 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 66. He is retired and was formerly Executive
Vice President, Chief Operating Officer and Director of Hewlett-Packard Company.
+Susan M. Phillips, The George Washington University, 710 21st
Street, Suite 206, Washington, DC 20052, serves as Trustee of the Trust. She is
55. Her principal occupation is currently Dean and Professor of Finance and
Administration, School of Business and Public Management, The George Washington
University. Previously, she was a member of the Board of Governors of the
Federal Reserve System and Chairman and Commissioner of the Commodity Futures
Trading Commission.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118,
serves as Trustee of the Trust. He is 60. 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 24.
23
<PAGE>
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
61. 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 56. His principal occupation is currently, and during the past five
years has been, Chairman of the Board, President, Chief Executive Officer and
Director of State Street Research & Management 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 of that company) .
*+James M. Weiss, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 52. His principal occupation is Executive
Vice President 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 President and Chief Investment Officer of IDS Advisory
Group .
- ---------------------
* 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/Director and/or officer of one or more of the
following investment companies, each of which has an advisory
relationship with the Investment Manager or its parent, Metropolitan
Life Insurance Company ("Metropolitan"): 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.
24
<PAGE>
Record ownership of shares of the Fund as of October 31, 1998 was as
follows:
<TABLE>
<CAPTION>
Class Holder % of Class
- ----- ------ ----------
<S> <C> <C>
B Merrill Lynch 28.4
C Merrill Lynch 57.3
S Chase Manhattan 76.5
MetLife Defined
Contribution Group 5.4
</TABLE>
The full name and address of the above persons or institutions are:
Merrill Lynch, Pierce, Fenner & Smith Incorporated (b)
4800 Deerlake Drive East
Jacksonville, FL 32246
Chase Manhattan Bank, N.A. (a)(b)
770 Broadway
New York, NY 10003
MetLife Defined Contribution Group (a)
72 Eagle Rock Ave.
East Hanover, NJ 07936
- -------------------
(a) Chase Manhattan Bank, N.A. and Metlife Defined Contribution Group
hold such shares as trustee or as plan sponsor under certain employee
benefit plans serviced by Metropolitan Life Insurance Company
("Metropolitan").
(b) The Fund believes that each named recordholder does not have
beneficial ownership of such shares.
Ownership of 25% or more of a voting security is deemed "control,"
as defined in the 1940 Act. So long as 25% of a class of shares is so owned,
such owners will be presumed to be in control of such class of shares for
purposes of voting on certain matters submitted to a vote of shareholders, such
as any Distribution Plan for a given class.
25
<PAGE>
As of October 31, 1998, the Trustees and principal officers of the
Trust as a group owned less than 1% of the outstanding Class A and Class S
shares of the Fund, respectively, and none of the Fund's Class B or Class C
shares.
The Trustees were compensated as follows:
<TABLE>
<CAPTION>
Total
Compensation
Aggregate From Fund and
Compensation Fund Complex Paid
Name of Trustee From Fund(a) to Trustees(b)
--------------- ------------- -----------------
<S> <C> <C>
Steve A. Garban $4,300 $
Malcolm T. Hopkins $4,000 $
Edward M. Lamont $3,700 $
Robert A. Lawrence $4,000 $
Dean O. Morton $4,500 $
Susan M. Phillips $235 $
Toby Rosenblatt $3,900 $
Michael S. Scott Morton $4,700 $
Ralph F. Verni $ 0 $ 0
</TABLE>
- -----------------
(a) For the Fund's fiscal year ended September 30, 1998.
(b) Includes compensation on behalf of all series of 12 investment
companies for which the Investment Manager or its parent,
Metropolitan, served as investment adviser . "Total Compensation
from Fund and Fund Complex Paid to Trustees" for the 12 months ended
December 31, 1998. The Trust does not provide any pension or
retirement benefits for the Trustees.
MANAGEMENT OF THE FUND AND INVESTMENT ADVISORY SERVICES
Under the provisions of the Trust's Master Trust Agreement and the
laws of Massachusetts, responsibility for the management and supervision of the
Fund rests with the Trustees.
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 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 emphasized comprehensive fundamental
research and analysis, including meetings with the management of companies under
26
<PAGE>
consideration for investment. The Investment Manager's portfolio management
group has extensive investment industry experience managing equity and debt
securities.
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 Advisory Agreement provides that the
Investment Manager shall furnish the Fund with an investment program, office
facilities and such investment advisory, research and administrative services as
may be required from time to time. The Investment Manager compensates all
executive and clerical personnel and Trustees of the Trust if such persons are
employees of the Investment Manager or its affiliates. The Investment Manager is
an indirect wholly-owned subsidiary of Metropolitan Life Insurance Company
("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 regular trading on the New York
Stock Exchange (the "NYSE") on each day the NYSE is open for trading.
The advisory fees paid by the Fund to the Investment Manager for the
last three fiscal years were as follows: 1998, $8,487,275; 1997, $5,786,403; and
1996, $4,024,320.
The Advisory Agreement provides that it shall continue in effect
from year to year with respect to the Fund 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 the Code of Ethics of the Investment Manager, investment
management personnel are only permitted to engage in personal securities
transactions in accordance with certain conditions relating to such person's
position, the identity of the security, the timing of the transaction, and
similar factors. Such personnel must report their personal securities
transactions quarterly and supply broker confirmations of such transactions to
the Investment Manager.
27
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by State Street Research
Investment Services, Inc., the Distributor. The Fund offers five classes of
shares. Class A, Class B(1), Class C and Class S shares are available to all
eligible investors. Class B shares are available only to current Class B
shareholders through dividend reinvestment or through exchanges from existing
Class B accounts of the State Street Research Funds. Class A, Class B(1), Class
C and Class S shares of the fund may be purchased at the next determined net
asset value per share plus, in the case of all classes except Class S 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(1) and Class C shares). General information on how to buy shares of the Fund,
as well as sales charges involved, are set forth under "Your Investment" in the
Prospectus. The following supplements that information.
Public Offering Price. The public offering price for each class of
shares is based on their net asset value determined as of the close of regular
trading on the NYSE on the day the purchase order is received by State Street
Research Service Center (the "Service Center"), provided that the order is
received prior to the close of regular trading on 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 the Service Center 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.
Alternative Purchase Program. 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, financial professionals are
paid differing amounts of compensation depending on which class of shares they
sell.
28
<PAGE>
The major differences among the various classes of shares are as
follows:
<TABLE>
<CAPTION>
Class A Class B(1) Class B Class C Class S
------- ---------- ------- ------- -------
(currently offered) (previously offered)
<S> <C> <C> <C> <C> <C>
Sales Charges Paid Initial sales charge Contingent Contingent Contingent None
by Investor to at time of deferred sales deferred sales deferred sales
Distributor investment of up charge of 5% to charge of 5% to charge of 1%
to 5.75% 1% applies to any 2% applies to any applies to any
depending on shares redeemed shares redeemed shares redeemed
amount of within first six within first five within one year
investment years following years following following their
their purchase; no their purchase; no purchase
contingent contingent
deferred sales deferred sales
charge after six charge after five
years 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
Initial Commission Above described 4% 4% 1% None
Paid by initial sales charge
Distributor to less 0.25% to
Financial 0.75% retained by
Professional distributor
On investments of
$1 million or
more, 0.25% to
1% paid to dealer
by Distributor
Rule 12b-1 Service
Fee
Paid by Fund 0.25% each year 0.25% each year 0.25% each year 0.25% each year None
to Distributor
Paid by 0.25% each year 0.25% each year 0.25% each year 0.25% each year None
Distributor to commencing after commencing after commencing after
Financial one year following one year following one year following
Professional purchase purchase purchase
Rule 12b-1
Distribution Fee
Paid by Fund None 0.75% for first 0.75% first eight 0.75% each year None
to Distributor eight years; Class years; Class B
B(1) shares shares convert
convert automatically to
automatically to to Class A shares
Class A shares after eight years
after eight years
29
<PAGE>
Paid by None None None 0.75% each year None
Distributor to commencing after
Financial one year following
Professional purchase
</TABLE>
Class A Shares--Reduced Sales Charges. The reduced sales charges
set forth under "Your Investment--Choosing a Share Class" in the Fund's
Prospectus apply to purchases made at any one time by any "person," which
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"
(which include the Fund and other funds as designated by the Distributor from
time to time) 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(1), Class B, Class C and Class S shares may also be included
in the combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the
specified amount. Shares equivalent to 5% of the specified amount will, however,
be taken from the initial purchase (or, if necessary, subsequent purchases) and
held in escrow in the investor's account as collateral against the higher sales
charge which would apply if the total purchase is not completed within the
allotted time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination
of Eligible Funds at reduced sales charges pursuant to a Right of Accumulation.
The applicable sales charge under the right is determined on the amount arrived
at by combining the dollar amount of the
30
<PAGE>
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(1), Class B, Class C and Class S 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.
Other Programs Related to Class A Shares. Class A shares of the Fund
may be sold or issued in an exchange at a reduced sales charge or without 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, registered investment advisers, 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.
In addition, no sales charge is imposed in connection with the sale
of Class A shares of the Fund to the following entities and person: (A) the
Investment Manager, Distributor or any affiliated entities, including any direct
or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated Companies,
any relatives of any such individuals whose relationship is directly verified by
such individuals to the Distributor, or any beneficial account for such
relatives or individuals; and (C) employees, officers, sales representatives or
directors of dealers and other entities with a selling agreement with the
Distributor to sell shares of any aforementioned investment company, any spouse
or child of such person, or any beneficial account for any of them. The purchase
must be made for investment and the shares purchased may not be resold except
through redemption. This purchase program is subject to such administrative
policies, regarding the qualification of purchasers and any other matters, as
may be adopted by the Distributor from time to time.
Conversion of Class B(1) and Class B Shares to Class A Shares. A
shareholder's Class B(1) and Class B shares of the Fund, 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 shares; consequently, they will no longer be
subject to the higher expenses borne by Class B(1) and 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 shares so converted. As
noted above, holding periods for Class B(1) shares received in exchange for
Class B(1) shares of other Eligible Funds and for Class B
31
<PAGE>
shares received in exchange for Class B shares of other Eligible Funds, will be
counted toward the eight-year period.
Contingent Deferred Sales Charges. The amount of any contingent
deferred sales charge paid on Class A shares (on sales of $1 million or more and
which do not involve an initial sales charge) or on Class B(1), Class B or Class
C shares of the Fund will be paid to the Distributor. The Distributor will pay
dealers at the time of sale a 4% commission for selling Class B(1) shares and a
1% commission for selling Class C shares. In certain cases, a dealer may elect
to waive the 4% commission on Class B(1) shares and receive in lieu thereof an
annual fee, usually 1%, with respect to such outstanding shares . The proceeds
of the contingent deferred sales charges and the distribution fees are used to
offset distribution expenses and thereby permit the sale of Class B(1), Class B
and Class C shares without an initial sales charge.
In determining the applicability and rate of any contingent deferred
sales charge of Class B(1), Class B or Class C shares, it will be assumed that a
redemption of the 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 shareholder
for the longest period of time. Class B(1) shares that are redeemed within a
six-year period after purchase, Class B shares that are redeemed within a
five-year period after their purchase, and Class C shares that are redeemed
within a one-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 holding period for purposes of
applying a contingent deferred sales charge for a particular class of 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 Fund, and shares of the same class 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.
Contingent Deferred Sales Charge Waivers. With respect to Class A
shares (on sales of $1 million or more and which do not involve an initial sales
charge), and Class B(1), Class B and Class C shares of the Fund, the contingent
deferred sales charge does not apply to exchanges or to redemptions under a
systematic withdrawal plan which meets certain conditions. The contingent
deferred sales charge will be waived for participant initiated distributions
from State Street Research prototype employee retirement plans. 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 of 1986, as amended, for retirement accounts or plans
32
<PAGE>
(e.g., age 70 1/2 for Individual Retirement Accounts 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 Individual Retirement Account. (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 at any time; for example, the Fund may limit
the application of multiple waivers and establish other conditions for employee
benefit plans. Certain employee benefit plans sponsored by a financial
professional may be subject to other conditions under which the plans may
initially invest in Class B(1) shares and subsequently invest in Class A shares
upon meeting specific criteria.
Class S Shares. Class S shares are currently available to certain
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants, service arrangements, or similar factors;
insurance companies; investment companies; advisory accounts of the Investment
Manager; endowment funds of nonprofit organizations with substantial minimum
assets (currently a minimum of $10 million); and other similar institutional
investors. Class S shares may be acquired through programs or products sponsored
by Metropolitan, its affiliates, or both for which Class S shares have been
designated. In addition, Class S shares are available through programs under
which, for example, investors pay an asset-based fee and/or a transaction fee to
intermediaries. Class S share availability is determined by the Distributor and
intermediaries based on the overall direct and indirect costs of a particular
program, expected assets, account sizes and similar considerations.
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.
Systematic Withdrawal Plan. A shareholder who owns noncertificated
Class A or Class S shares with a value of $5,000 or more, or Class B(1), Class B
or Class C 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
33
<PAGE>
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 Systematic Withdrawal 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 Systematic Withdrawal
Plan was initiated, whichever is higher.
Expenses of the Systematic Withdrawal Plan are borne by the Fund. A
participating shareholder may withdraw from the Systematic Withdrawal Plan, and
the Fund may terminate the Systematic Withdrawal Plan at any time on written
notice. Purchase of additional shares while a shareholder is receiving payments
under a Systematic Withdrawal Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate in
the Investamatic Program (see "Your Investment--Investor Services--Investamatic
Program" in the Fund's Prospectus) and the Systematic Withdrawal Plan at the
same time.
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.
Signature Guarantees. Signature guarantees are required for, among
other things: (1) written requests for redemptions for more than $100,000; (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.
Dishonored Checks. If a purchaser's 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 canceled.
Processing Charges. Purchases and redemptions processed through
securities dealers may be subject to processing charges imposed by the
securities dealer in addition to sales charges that may be imposed by the Fund
or the Distributor.
34
<PAGE>
SHAREHOLDER ACCOUNTS
General information on shareholder accounts is included in the Fund's
Prospectus under "Your Investment." The following supplements that information.
Maintenance Fees and Involuntary Redemption. Because of the relatively
high cost of maintaining small shareholder accounts, the Fund reserves the right
to 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
involuntarily redemptions will be subject to applicable sales charges, if any.
The Fund may increase such minimum account value above such amount in the future
after notice to affected shareholders. Involuntarily redeemed shares will be
priced at the net asset value on the date fixed for redemption by the Fund, and
the proceeds of the redemption will be mailed to the affected shareholder at the
address of record. Currently, the maintenance fee is $18 annually, which is paid
to the Transfer Agent. The fee does not apply to certain retirement accounts or
if the shareholder has more than an aggregate $50,000 invested in the Fund and
other Eligible Funds combined. Imposition of a maintenance fee on a small
account could, over time, exhaust the assets of such account.
To cover the cost of additional compliance administration, a $20 fee will
be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
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 (the "SEC") may by order
permit for the protection of investors; and (b) the payment of redemption
proceeds may be postponed as otherwise provided under "Purchase and Redemption
of Shares" in this Statement of Additional Information.
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(1), Class B or
Class C shares will not be issued, while certificates representing Class A or
Class S 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
35
<PAGE>
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 "State Street
Research Funds" under the terms set forth above under "Purchase and
Redemption of Shares" in this Statement of Additional Information.
2. The following methods of receiving dividends from investment income
and distributions from capital gains generally are available:
(a) All income dividends and capital gains distributions
reinvested in additional shares of the Fund.
(b) All income dividends and capital gains distributions in cash.
(c) 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, that account will be automatically 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 the
Service Center. Dividends and distributions are reinvested at net asset value
without a sales charge.
Exchange Privileges. 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(1),
Class B and Class C 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
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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 any acquired Class A, Class B(1), Class B and Class C
shares, the holding period of the redeemed shares is "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(1), Class B or Class C 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.
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 with
respect to the Fund (see "Your Investment--Account Policies--Telephone Requests"
in the Fund's Prospectus and "--Telephone Privileges," below) as the existing
account unless the Service Center 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
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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 the Service Center and delivered by the Service Center to the
Transfer Agent by 12 noon Boston time on any business day with normal trading
conditions, the exchange usually will occur that day. For further information
regarding the exchange privilege, shareholders should contact the Service
Center.
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 the Service
Center of such shareholder's written purchase request and delivery of the
request by the Service Center 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.
Dividend Allocation Plan. The Dividend Allocation Plan allows shareholders
to elect to have all 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.
Telephone Privileges. The following telephone privileges are available:
o Telephone Exchange Privilege for Shareholder and Shareholder's
Financial Professional
o Shareholders automatically receive this privilege unless
declined.
o This privilege allows the shareholder or the shareholder's
financial professional to request exchanges into other State
Street Research funds.
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o Telephone Redemption Privilege for Shareholder
o Shareholders automatically receive this privilege unless
declined.
o This privilege allows the shareholder to phone requests to sell
shares, with the proceeds sent to the address of record.
o Telephone Redemption Privilege for Shareholder's Financial
Professional
(This privilege is not automatic; a shareholder must specifically
elect it)
o This privilege allows the shareholder's financial professional
to phone requests to sell shares, with the proceeds sent to the
address of record on the account.
A shareholder with the above telephone privileges is deemed to authorize
the Service Center and the Transfer Agent to: (1) act upon the telephone
instructions of any person purporting to be the shareholder or the shareholder's
financial professional; 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. Neither the Fund, the other
Eligible Funds, the Transfer Agent, the Investment Manager nor 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.
Alternative Means of Contacting the Fund. It is unlikely, during periods
of extraordinary market conditions, that a shareholder may have difficulty in
reaching the Service Center. In that event, however, the shareholder should
contact the Service Center at 1-800-562-0032, 1-617-357-7800 or otherwise at its
main office at One Financial Center, Boston, Massachusetts 02111-2690.
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once
daily as of the close of regular trading on 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, Martin
Luther King, Jr. 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.
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In determining the values of portfolio assets as provided below, the
Trustees utilize one or more pricing services in lieu of market quotations for
certain securities which are not readily available on a daily basis. Such
services 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.
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, Inc.'s (the "NASD") NASDAQ System are valued
at the closing price supplied through such system for that day at the close of
the NYSE. Other securities are, in general, valued at the mean of the bid and
asked quotations last quoted prior to the close of the NYSE if there are market
quotations readily available, or in the absence of such market quotations, then
at the fair value thereof as determined by or under authority of the Trustees of
the Trust with the use of such pricing services as may be deemed appropriate or
methodologies approved by the Trustees. The Trustees also reserve the right to
adopt other valuations based on fair value in pricing in unusual circumstances
where use of other methods as discussed in part above, could otherwise have a
material adverse effect on the Fund as a whole.
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 and
having a remaining maturity of 60 days or less when the value obtained is fair
value, 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. 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's portfolio turnover rates for the fiscal
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years ended September 30, 1997 and 1998, respectively, were as follows: 230.66%
and 86.34%.
The Investment Manager believes the portfolio turnover rate for the
fiscal year ended September 30, 1998 was significantly lower than that for the
previous fiscal year because of steps taken to restructure the portfolios in
light of volatile market conditions, to focus on the stocks of mid-cap size
companies which can be held longer for capital appreciation in seeking to
achieve the fund's objective.
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;
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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 including software providing investment personnel with efficient
access to current and historical data from a variety of internal and external
sources); and portfolio evaluation services and relative performance of
accounts.
In the case of the Fund and other registered investment companies
advised by the Investment Manager or its affiliates, the above services may
include data relating to performance, expenses and fees of those investment
companies and other investment companies; this information is used by the
Trustees or Directors of the investment companies to fulfill their
responsibility to oversee the quality of the Investment Manager's advisory
contracts between the investment companies and the Investment Manager. The
Investment Manager considers these investment company services only in
connection with the execution of transactions on behalf of its investment
company clients and not its other clients. Certain of the 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 regularly reviews and evaluates the services
furnished by broker-dealers. The Investment Manager's investment management
personnel seek to evaluate the quality of the research and other services
provided by various broker-dealer firms, and the results of these efforts are
made available to the equity trading department, which uses this information as
consideration to the extent described above in the selection of brokers to
execute portfolio transactions.
Some services furnished by broker-dealers 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 the services to determine the proportion which is
allocable to research or investment decision-making and the proportion allocable
to other purposes. The Investment Manager pays directly from its own funds for
that portion that is allocable to uses other than research or investment
decision-making. 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
providing the services.
The Investment Manager has no fixed agreements or understandings
with any broker-dealer as to the amount of brokerage business which the firm may
expect to receive for services supplied to the Investment Manager or otherwise.
There may be, however, understandings with certain firms that in order for such
firms to be able to continuously supply certain services, they need to receive
allocation of a specified amount of brokerage business. These understandings are
honored to the extent possible in accordance with the policies set forth above.
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It is not the Investment Manager's policy to intentionally pay a
firm a brokerage commission higher than that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided. However, the Investment Manager is aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, the Investment Manager relies on the provisions of
Section 28(e) of the Securities Exchange Act of 1934. Brokerage commissions paid
by the Fund in secondary trading during the last three fiscal years ended
September 30 were as follows: 1996, $2,032,000; 1997, $3,182,000; and 1998,
$2,470,969.
During and at the end of its most recent fiscal year, the Fund did
not hold in its portfolio 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
commissions and designations to brokers or dealers which provide the client with
research, performance evaluation, master trustee and other services. In the
absence of instructions from the client, the Investment Manager may make such
allocations to broker-dealers which have provided the Investment Manager with
research and brokerage services.
In some instances, certain clients of the Investment Manager request
it to place all or part of the orders for their account with certain brokers or
dealers, which in some cases provide services to those clients. The Investment
Manager generally agrees to honor these requests to the extent practicable.
Clients may condition their requests by requiring the Investment Manager only
effect transactions with the specified broker-dealers if the broker-dealers are
competitive as to price and execution. In other cases, the Investment Manager
may be unable to negotiate commissions or obtain volume discounts or best
execution. In addition, a disparity may exist among the commissions charged to
clients who request the Investment Manager to use particular brokers or dealers,
and also between those clients and those who do not make such requests. A client
who requests the use of a particular broker-dealer should understand that it may
lose the possible advantage which non-requesting clients derive from aggregation
of orders for several clients as a single transaction for the purchase or sale
of a particular security. Among other reasons why best execution may not be
achieved with directed brokerage is that, in an effort to achieve orderly
execution of transactions, execution of orders that have designated particular
brokers may, at the discretion of the trading desk, be delayed until execution
of other non-designated orders have been completed.
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
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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 elects 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 qualify to 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"); and (b) satisfy certain
diversification requirements on a quarterly basis.
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 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.
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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.
Taxation of the Fund's Investments
Original Issue Discount; Market 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 federal
income tax purposes. In the case of any debt security issued after July 18,
1984, having a fixed maturity date of more than one year from the date of issue
and having market discount, the gain realized on disposition will be treated as
interest to the extent it does not exceed the accrued market discount on the
security (unless 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 or
continued 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,
and require inclusion of unrealized gains in the Fund's income for purposes of
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 and
long-term gain or loss irrespective of the holding period of the investment.
Such provisions generally apply to,
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among other investments, options on debt securities, indices on securities and
futures contracts. The Fund will monitor its transactions and may make certain
tax elections available to it in order to mitigate the impact of these rules and
prevent disqualification of the Fund as a regulated investment company.
Gains or losses attributable to foreign currency contracts or
fluctuations in exchange rates that occur between the time the Fund accrues
income or expenses denominated in a foreign currency and the time the Fund
actually collects such income or pays such expenses are treated as ordinary
income or loss. The portion of any gain or loss on the disposition of a debt
security denominated in a foreign currency that is attributable to fluctuations
in the value of the foreign currency during the holding period of the debt
security may likewise be treated as ordinary income or loss. Such ordinary
income or loss will increase or decrease the amount of the Fund's net investment
income.
If the Fund invests in the stock of certain "passive foreign
investment companies" ("PFICs"), income of such companies may become taxable to
the Fund prior to its distribution to the Fund or, alternatively, ordinary
income taxes and interest charges may be imposed on the Fund on "excess
distributions" received by the Fund or on gain from the disposition of such
investments by the Fund. The Fund does not intend to invest in PFICs. Because of
the broad scope of the PFIC rules, however, there can be no assurance that the
Fund can avoid doing so.
Taxation Of The Fund's Shareholders
The Fund may be subject to foreign taxes, including foreign income
taxes. If so, the Fund intends to meet the requirements of the Code for passing
through to its shareholders the tax benefit of foreign income taxes paid,
although there is no assurance that it will be able to do so. Under this
provision, if more than half of the value of the total assets of the Fund at the
close of its taxable year consists of stock or securities of foreign
corporations, the Fund will be eligible and intends to elect to pass through to
its shareholders the amount of foreign taxes it paid if such amounts are
material. Pursuant to this election, a United States shareholder will, in
general, be required to (i) include in gross income, in addition to taxable
distributions actually received, his or her pro rata share of the foreign taxes
paid by the Fund, (ii) treat that share of taxes as having been paid directly by
him or her, and (iii) either deduct such share of taxes or treat such share of
taxes as a credit against United States income tax liability. A tax-exempt
shareholder will ordinarily not benefit from this election.
Generally, a credit for foreign taxes paid by the Fund may not
exceed a shareholder's United States income tax attributable to the
shareholder's foreign source income. This limitation applies separately to
different categories of income, one of which is foreign-source passive income,
which is likely to include all of the foreign-source income of the Fund. As a
result of these limitations, some shareholders may not be able to utilize
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fully any foreign tax credits generated by an investment in the Fund. The Fund
will provide its shareholders with information about the source of its income
and the foreign taxes it has paid for use in preparing the shareholder's United
States income tax return.
Dividends from domestic corporations are not expected to comprise a
substantial part of the income of the Fund. If such dividends are earned by the
Fund, then a portion of the dividends paid by the Fund may qualify for the 70%
deduction for dividends received which is available to corporate shareholders of
the Fund. Shareholders will be informed of any portion of the dividends paid by
the Fund which qualifies for this deduction. The dividends-received deduction is
reduced to the extent the dividends received are treated as debt-financed, under
the Code, and is eliminated if the stock is held for less than 46 days.
Any dividend declared in October, November or December and made
payable to shareholders of record in any such month is treated as received by
such shareholder on December 31, provided that the Fund pays the dividend during
January of the following calendar year.
Distributions by the Fund 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 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.
The foregoing discussion of United States federal income tax law
relates solely to the application of that law to United States persons, that is,
United States citizens and residents and United States corporations,
partnerships, trusts and estates. Each shareholder who is not a United States
person should consider the United States and foreign tax consequences of
ownership of shares of the Fund, including the possibility that such a
shareholder may be subject to United States withholding tax at a rate of up to
30% (or at a lower rate under applicable treaty) on distributions from the Fund.
Shareholders should consult their tax advisers about the application
of the provisions of tax law described in this Statement of Additional
Information in light of their particular tax situations.
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DISTRIBUTION OF SHARES OF THE FUND
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 (Class B and Class C shares). The
Distributor may reallow all or portions of such sales charges as concessions to
dealers. For the fiscal years ended September 30, 1996, 1997 and 1998, total
sales charges on Class A shares paid to the Distributor amounted to $1,597,620,
$757,196 and $760,369, respectively. For the same periods, the Distributor
retained $188,067, $106,989 and $89,146, respectively, after reallowance of
concessions to dealers. The Distributor may also pay its affiliate Metlife
Securities, Inc. additional sales compensation of up to 0.25% of certain sales
or assets.
The differences in the price at which the Fund's Class A shares are
offered due to scheduled variations in sales charges, or Class S shares are
offered, as described in the Fund's Prospectus, result from cost savings
inherent in economies of scale, among other factors. 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, managed fee-based programs and so-called "mutual fund
supermarkets," among other special programs, the amount of the sales charge
reduction will similarly reflect the anticipated reduction in sales expenses
associated with such arrangements. The reductions in sales expenses, and
therefore the reduction in sales 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
or similar programs 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
48
<PAGE>
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(1), Class B and Class
C shares of the Fund and paid initial commissions to securities dealers for
sales of such Class A, Class B(1), Class B and Class C shares as follows:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended September 30, 1998 Ended September 30, 1997 Ended September 30, 1996
------------------------ ------------------------ ------------------------
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 $ 671,755 $ 0 $ 650,207 $ 0 $ 1,409,553
Class B $ 987,982 $ 1,353,004 $ 983,625 $ 2,925,793 $ 312,620 $ 6,661,535
Class C $ 11,026 $ 36,621 $ 47,574 $ 317,862 $ 29,193 $ 929,607
</TABLE>
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "Class A/B/C 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 C 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 and (3) reimbursement of expenses incurred by
the Distributor in connection with the servicing of shareholder accounts
including payments to securities dealers and others in consideration of the
provision of personal service to investors and/or the maintenance or servicing
of shareholder accounts . In addition, the Class A/B/C 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 Class A/B/C 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
49
<PAGE>
Class C shares, an annual rate of 0.75% of the average daily value of the net
assets represented by such Class B or Class C 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 C shares (as
the case may be) to make payments for personal services and/or the maintenance
or servicing of shareholder accounts.
The Fund also has adopted "Rule 12b-1 Plan for Class B(1) Shares"
(the "Class B(1) Distribution Plan") under which the Fund shall pay the
Distributor (a) a service fee at the end of each month at the annual rate of
0.25% of average daily net assets attributable to the Class (B)1 Shares to
compensate the Distributor and any securities firms or other third parties who
render personal services to and/or maintain shareholder accounts for the
shareholders of the respective class and (b) a distribution fee under the
Distribution Plan at the end of each month at the annual rate of 0.75% of
average daily net assets attributable to the Class B(1) Shares to compensate the
Distributor for services provided and expenses incurred by it in connection with
sales, promotional and marketing activities relating to the respective class. To
the extent that any payments made by Fund to the Distributor or the Investment
Manager, including payment of investment management fees, should be deemed to be
an indirect financing of any activity primarily resulting in the sale of shares
of the Fund within the scope of Rule 12b-1 under the 1940 Act, then such
payments shall be deemed to be authorized by the Class B(1) Distribution Plan.
A rule of the National Association of Securities Dealers, Inc.
("NASD") limits annual expenditures that the Fund may incur to 0.75% for
distribution expenses and 0.25% for service fees. The NASD Rule also limits the
aggregate amount that 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 the
service fees. Payments to the Distributor or to dealers funded under either the
Class A/B/C Distribution Plan or the Class B(1) Distribution Plan may be
discontinued at any time.
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(1), Class B and Class C 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).
The distribution fees are used primarily to offset initial and
ongoing commissions paid to dealers for selling such shares and for other sales
and marketing expenditures.
The Distributor provides distribution services on behalf of other
funds having distribution plans and receives similar payments from, and incurs
similar expenses on behalf
50
<PAGE>
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.
The payment of service and distribution fees may continue even if
the Fund ceases, temporarily or permanently, to sell one or more classes of
shares to new accounts. During the period the Fund is closed to new accounts,
the distribution fee will not be used for promotion expenses. The service and
distribution fees are used during a closed period to cover services provided to
current shareholders and to cover the compensation of financial professionals in
connection with the prior sale of Fund shares, among other non- promotional
distribution expenditures.
The Distributor may pay certain dealers and other intermediaries
additional compensation for sales and administrative services. The Distributor
may provide cash and noncash incentives to intermediaries who, for example, sell
significant amounts of shares or develop particular distribution channels. The
Distributor may compensate dealers with clients who maintain their investments
in the Fund over a period of years. The incentives can include merchandise and
trips to, and attendance at, sales seminars at resorts. The Distributor may pay
for administrative services, such as technological and computer systems support
for the maintenance of pension plan participant records, for subaccounting, and
for distribution through mutual fund supermarkets or similar arrangements.
During the fiscal year ended September 30, 1998, 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:
51
<PAGE>
<TABLE>
<CAPTION>
Class A Class B Class C
---------- ----------- ---------
<S> <C> <C> <C>
Advertising $ 649 $ 0 $ 44,711
Printing and mailing of prospectuses
to other than current shareholders 98 0 6,835
Compensation to dealers 1,029,558 4,811,732 617,590
Compensation to sales
personnel 1,282 0 93,576
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses: marketing; general 966 0 68,589
---------- ----------- --------
Total fees received $1,032,553 $ 4,811,732 $831,301
=======================================
</TABLE>
The Distributor may have also used additional resources of its own
for further expenses on behalf of the Fund.
No interested Trustee of the Trust has any direct or indirect
financial interest in the operation of the Distribution Plan or any related
agreements thereunder. The Distributor's interest in the Distribution Plan is
described above.
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Fund will make alternative
arrangements for such services for shareholders who acquired shares through such
institutions.
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 or Class S shares to the performance 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 Standard & Poor's 500 Index,
Consumer Price Index and Dow Jones Industrial Average and/or to appropriate
rankings and averages such as those compiled by Lipper Analytical Services,
Inc., Morningstar, Inc., Money Magazine,
52
<PAGE>
Business Week, Forbes Magazine, The Wall Street Journal and Investor's Daily.
For example, the performance of the Fund might be compared to the Lipper Capital
Appreciation Funds Index or Average.
The average annual total return ("standard total return") of the
Class A, Class B, Class C and Class S 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 on February 17, 1993, when designations were
assigned based on the pricing and Rule 12b-1 fees applicable to shares sold
thereafter. The application of the additional Rule 12b-1 fees, if any, of up to
1% will, for periods after February 17, 1993, adversely affect Fund performance
results. Thus, 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.
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 and Recurring Charges" later in
this section.
Total Return
The average annual total return ("standard total return") of each
class of the Fund's shares was as follows:
<TABLE>
<CAPTION>
Five Years One Year
Ten Years Ended Ended Ended
September 30, 1998 September 30, 1998 September 30, 1998
-------------------- ------------------ -----------------
<S> <C> <C> <C>
Class A 13.40% 5.30% -21.82%
Class B 13.47% 5.15% -22.80%
Class C 13.49% 5.53% -19.56%
Class S 14.10% 6.56% -17.94%
</TABLE>
Standard total return is computed separately for each class of
shares by determining the average annual compounded rates of return over the
designated periods that, if applied to the initial amount invested, would
produce the ending redeemable value in accordance with the following formula:
53
<PAGE>
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 highest
applicable initial or contingent deferred sales charge 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 and Recurring Charges
Accrued expenses include all recurring charges 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 are determined without giving effect to the
subsidization, if any, by affiliates of fees or expenses during the subject
period. In calculating performance, the accrued expenses are reduced by the
amount of any subsidy. In the absence of such subsidization, the performance of
the fund may 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 S shares for periods which end
no earlier than the most recent calendar quarter end and which begin twelve
months before, five years before and ten years before. 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. For example, the
Fund's nonstandardized total returns for the six months ended September 30,
1998, without taking sales charges into account, were as follows:
54
<PAGE>
Class A -22.75%
Class B -23.00%
Class C -23.02%
Class S -22.65%
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
PricewaterhouseCoopers LLP, 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 SEC filings and
(3) review of the annual income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
Each of the Investment Portfolio, Statement of Assets and
Liabilities, Statement of Operations and Statement of Changes in Net Assets
included in the Fund's Annual Report to Shareholders as of and for the fiscal
year ended September 30, 1998, including any notes thereto or Report of
Independent Accountants is hereby incorporated by reference from the Fund's
Annual Report, filed with the Securities and Exchange Commission (EDGAR
accession number 0000950146-98-002042). Shareholder reports are available
without charge upon request. For more information, call the State Street
Research Service Center at (800) 562-0032.
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 through electronic or other media. Shareholders with
substantial holdings in one or more State Street Research Funds may also receive
reports and other information which reflect or analyze their positions in a
consolidated manner.
55
DOCSC\561050.7
<PAGE>
STATE STREET RESEARCH EMERGING GROWTH FUND
a Series of
STATE STREET RESEARCH CAPITAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVE.............................................................2
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS..................................2
ADDITIONAL RISKS AND INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES..............................................4
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS................................ 16
THE TRUST, THE FUND AND ITS SHARES............................................. 19
TRUSTEES AND OFFICERS.......................................................... 22
MANAGEMENT OF THE FUND AND INVESTMENT ADVISORY SERVICES........................ 27
PURCHASE AND REDEMPTION OF SHARES.............................................. 28
SHAREHOLDER ACCOUNTS........................................................... 36
NET ASSET VALUE................................................................ 40
PORTFOLIO TRANSACTIONS......................................................... 41
CERTAIN TAX MATTERS............................................................ 45
DISTRIBUTION OF SHARES OF THE FUND............................................. 48
CALCULATION OF PERFORMANCE DATA................................................ 53
CUSTODIAN ................................................................... 55
INDEPENDENT ACCOUNTANTS........................................................ 55
FINANCIAL STATEMENTS........................................................... 55
</TABLE>
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, 1999, 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.
The Fund's financial statements as of and for the fiscal year
ended September 30, 1998, which are included in the Fund's Annual Report for
that year, are incorporated by reference. The Annual Report is available,
without charge, upon request by calling 1-800-562-0032.
CONTROL NUMBER: (EXP0200)SSR-LD EM-377-F-0299
<PAGE>
INVESTMENT OBJECTIVE
As set forth under " The Fund--Goal and Strategies--Fundamental
Goal" in the Prospectus of State Street Research Emerging Growth Fund (the
"Fund"), the Fund's investment goal, which is to provide growth of capital, is
fundamental and may not be changed by the Fund except by the affirmative vote of
a majority of the outstanding voting securities of the Fund, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"). (Under the 1940
Act, a "vote of the majority of the outstanding voting securities" means the
vote, at the annual or a special meeting of security holders duly called, (i) of
67% or more of the voting securities present at the meeting if the holders of
more than 50% of the outstanding voting securities are present or represented by
proxy or (ii) of more than 50% of the outstanding voting securities, whichever
is less.)
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under " The Fund-- Principal Risks" and "Other
Information--Other Securities and Risks" in the Fund's Prospectus, the Fund has
adopted certain investment restrictions, and those restrictions are either
fundamental or not fundamental. Fundamental restrictions may not be changed by
the Fund except by the affirmative vote of a majority of the outstanding voting
securities of the Fund. Restrictions that are not fundamental may be changed by
a vote of a majority of the Trustees of the Trust.
The Fund's fundamental investment restrictions are set forth below.
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
2
<PAGE>
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 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 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
3
<PAGE>
(including repurchase agreements not entitling the
holder to payment of principal and interest within seven
days);
(2) 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;
(3) not to purchase securities on margin or make short sales
of securities or maintain a short position except for
short sales "against the box;"
(4) 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);
(5) 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;
(6) not to invest in companies for the purpose of exercising
control over their management, although the Trust may
from time to time present its views on various matters
to the management of issuers in which it holds
investments.
ADDITIONAL RISKS AND INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Derivatives
The Fund may buy and sell certain types of derivatives, such as
options, futures contracts, options on futures contracts, and swaps under
circumstances in which such instruments are expected by State Street Research &
Management Company, the Fund's Investment Manager (the "Investment Manager"), to
aid in achieving the Fund's investment objective. The Fund 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.
4
<PAGE>
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Fund to take both "short" positions (positions
which anticipate a decline in the market value of a particular asset or index)
and "long" positions (positions which anticipate an increase in the market value
of a particular asset or index). The Fund may also use strategies which involve
simultaneous short and long positions in response to specific market conditions,
such as where the Investment Manager anticipates unusually high or low market
volatility.
The Investment Manager may enter into derivative positions for the
Fund for either hedging or non-hedging purposes. The term hedging is applied to
defensive strategies designed to protect the Fund from an expected decline in
the market value of an asset or group of assets that the Fund owns (in the case
of a short hedge) or to protect the Fund from an expected rise in the market
value of an asset or group of assets which it intends to acquire in the future
(in the case of a long or "anticipatory" hedge). Non-hedging strategies include
strategies designed to produce incremental income (such as the option writing
strategy described below) or "speculative" strategies which are undertaken to
profit from (i) an expected decline in the market value of an asset or group of
assets which the Fund does not own or (ii) expected increases in the market
value of an asset which it does not plan to acquire. Information about specific
types of instruments is provided below.
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell an
underlying asset or group of assets, such as a currency, or an index of
securities, at a future time at a specified price. A contract to buy establishes
a long position while a contract to sell establishes a short position.
The purchase of a futures contract on an equity security or an index
of equity securities normally enables a buyer to participate in the market
movement of the underlying asset or index after paying a transaction charge and
posting margin in an amount equal to a small percentage of the value of the
underlying asset or index. The Fund will initially be required to deposit with
the Trust's custodian or the futures commission merchant effecting the futures
transaction an amount of "initial margin" in cash or securities, as permitted
under applicable regulatory policies.
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
5
<PAGE>
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.
In transactions establishing a long position in a futures contract,
assets 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, assets 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 utilize such
assets and methods of cover as appropriate under applicable exchange and
regulatory policies.
Options
The Fund may use options to implement its investment strategy. There
are two basic types of options: "puts" and "calls." Each type of option can
establish either a long or a short position, depending upon whether the Fund is
the purchaser or the writer of the option. 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, that is, 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. In general, a purchased put
increases in value as the value of the underlying security falls and a purchased
call increases in value as the value of the underlying security rises.
The principal reason to write options is to generate extra income
(the premium paid by the buyer). 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,
that is, 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, that is, 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.
6
<PAGE>
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
its 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.
Among the options which the Fund may enter are options on securities
indices. In general, options on indices of securities are similar to options on
the securities themselves except that delivery requirements are different. For
example, a put option on an index of securities does not give the holder the
right to make actual delivery of a basket of securities but instead gives the
holder the right to receive an amount of cash upon exercise of the option if the
value of the underlying index has fallen below the exercise price. The amount of
cash received will be equal to the difference between the closing price of the
index and the exercise price of the option expressed in dollars times a
specified multiple. As with options on equity securities or futures contracts, a
Fund may offset its position in index options prior to expiration by entering
into a closing transaction on an exchange or it may let the option expire
unexercised.
A securities index assigns relative values to the securities
included in the index and the index options are based on a broad market index.
In connection with the use of such options, the Fund may cover its position by
identifying assets having a value equal to the aggregate face value of the
option position taken.
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.
Limitations and Risks of Options and Futures Activity
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. The Fund applies a similar policy to options that are not commodities.
As noted above, the Fund may engage in both hedging and nonhedging
strategies. 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.
7
<PAGE>
Nonhedging strategies typically involve special risks. The
profitability of the Fund's non-hedging strategies will depend on the ability of
the Investment Manager to analyze both the applicable derivatives market and the
market for the underlying asset or group of assets. Derivatives markets are
often more volatile than corresponding securities markets and a relatively small
change in the price of the underlying asset or group of assets can have a
magnified effect upon the price of a related derivative instrument.
Derivatives markets also are often less liquid than the market for
the underlying asset or group of assets. 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 carry out their derivative
strategies and might, in some cases, require a 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.
Short Sales Against the Box
The Fund may effect short sales, but only if such transactions are
short sale transactions known as short sales "against the box." A short sale is
a transaction in which the Fund sells a security it does not own by borrowing it
from a broker, and consequently becomes obligated to replace that security. A
short sale against the box is a short sale where the Fund owns the security sold
short or has an immediate and unconditional right to acquire that security
without additional cash consideration upon conversion, exercise or exchange of
options with respect to securities held in its portfolio. The effect of selling
a security short against the box is to insulate that security against any future
gain or loss.
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
8
<PAGE>
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.
The Fund may enter credit protection swap arrangements involving the
sale by the Fund of a put option on a debt security which is exercisable by the
buyer upon certain events, such as default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
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, as noted above, 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 forecasts, there is a risk that the swap
position may correlate imperfectly with the price of the asset or liability
being hedged.
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
9
<PAGE>
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 any other illiquid securities held by the Fund
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.
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" securities, which are traded on
a price or yield 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 or interest on the securities are not
payable. 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 falls below the price committed to prior to actual
issuance. The Trust's custodian will establish a segregated account when the
Fund purchases securities on a when-issued basis consisting of cash or liquid
securities equal to the amount of the when-issued commitments. Securities
transactions involving delayed deliveries or forward commitments are frequently
characterized as when-issued transactions and are similarly treated by the Fund.
10
<PAGE>
Restricted Securities
It is the Fund's policy not to make an investment in restricted
securities, including restricted securities sold in accordance with Rule 144A
under the Securities Act of 1933 ("Rule 144A Securities") if, as a result, more
than 35% of the Fund's total assets are invested in restricted securities,
provided not more than 10% of the Fund's total assets are invested in restricted
securities other than Rule 144A Securities.
Securities may be resold pursuant to Rule 144A under certain
circumstances only to qualified institutional buyers as defined in the rule, and
the markets and trading practices for such securities are relatively new and
still developing; depending on the development of such markets, Rule 144A
Securities may be deemed to be liquid as determined by or in accordance with
methods adopted by the Trustees. Under such methods the following factors are
considered, among others: the frequency of trades and quotes for the security,
the number of dealers and potential purchasers in the market, market making
activity, and the nature of the security and marketplace trades. Investments in
Rule 144A Securities could have the effect of increasing the level of 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 subjective valuation of such securities in the absence
of a market for them. Restricted securities that are not resalable under Rule
144A may be subject to risks of illiquidity and subjective valuations to a
greater degree than Rule 144A Securities.
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") and Global
Depository Receipts ("GDRs"). Under current policy, however, the Fund limits
such investments, including ADRs, EDRs and GDRs, to a maximum of 35% of total
investments.
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. GDRs are receipts issued to one country which
also 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. GDRs are designed for use when the issuer is
raising capital in more than one market simultaneously, such as the issuer's
local market and the U.S., and have been used to overcome local selling
restrictions to foreign investors. In addition, many GDRs are eligible for
book-entry settlement through Cedel, Euroclear and DTC. The underlying
securities are not always denominated in the same currency as the ADRs , EDRs or
GDRs. Although investment in the form of ADRs , EDRs or GDRs facilitates trading
in foreign securities, it does not mitigate all the risks associated with
investing in foreign securities.
11
<PAGE>
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 tradings. 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 presently does not 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.
Currency Transactions
The Fund may engage in currency exchange transactions in order to
protect against the effect of uncertain future exchange rates on securities
denominated in foreign currencies. The Fund will conduct its 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. Under current policy, the Fund's dealings in forward currency
exchange contracts will be limited to hedging involving
12
<PAGE>
either specific transactions or aggregate portfolio positions. A forward
currency contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
These contracts are not commodities and are entered into in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. In entering a forward currency contract, 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. 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.
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 any loaned securities plus accrued interest. Collateral
received by the Fund will generally be held in the form tendered, although cash
may be invested in unaffiliated mutual funds with quality short-term portfolios,
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities , or repurchase agreements, or other similar investments. 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 may receive a lending fee and will retain 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 or
its agents to be of good financial standing.
Short-Term Trading
The Fund may engage in short-term trading of securities and reserves
full freedom with respect to portfolio turnover. In periods where there are
rapid changes in economic conditions and 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
13
<PAGE>
strategy remains relatively constant. The Fund's portfolio turnover rate
involves quarter transaction costs, relative to other funds in general, and may
have tax and other consequences.
Temporary and Defensive Investments
The Fund may hold up to 100% of its assets in cash or short-term
debt 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. The types of
short-term instruments in which the Fund may invest for such purposes include
short-term money market securities, such as repurchase agreements, and
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, certificates of deposit, time deposits and bankers'
acceptances of certain qualified financial institutions and corporate commercial
paper, which at the time of purchase are rated at least within the "A" major
rating category by Standard & Poor's Corporation ("S&P") or the "Prime" major
rating category by Moody's Investor's Service, Inc. ("Moody's"), or, if not
rated, issued by companies having an outstanding long-term unsecured debt issued
rated at least within the "A" category by S&P or Moody's.
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 may be classified
according to the industries of their parent or sponsor 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.
14
<PAGE>
<TABLE>
<CAPTION>
Basic Industries Consumer Staple Science & Technology
- ---------------- --------------- --------------------
<S> <C> <C>
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
<CAPTION>
Utility Energy Consumer Cyclical
- ------- ------ -----------------
<S> <C> <C>
Electric Oil Refining & Marketing Airline
Gas Oil Production Automotive
Gas Transmission Oil Service Building
Telephone Hotel & Restaurant
Photography
<CAPTION>
Other Finance Recreation
- ----- ------- Retail Trade
<S> <C> <C>
Trust Certificates -- Bank Textile & Apparel
Government Related Lending Financial Service
Asset-backed -- Mortgages Insurance
Asset-backed -- Credit
Card Receivables
</TABLE>
Computer-Related Risks
Many mutual funds and other companies that issue securities, as well
as government entities upon whom those mutual funds and companies depend, may be
adversely affected by computer systems (whether their own systems or systems of
their service providers) that do not properly process dates beginning with
January 1, 2000 and information related to those dates. In addition, many funds
and other companies, especially those funds and companies that do business in
one or more national currencies of the countries in the European Union (the
"EU"), may be adversely affected by computer systems that cannot accommodate
concurrent references to two currencies, the national currency and the euro (the
proposed currency unit of the EU). Beginning on January 1, 1999 and for the
three years thereafter, businesses and governments in most EU countries
generally must be prepared to conduct their businesses in their national
currency and the euro. After such three-year period, they must conduct their
businesses only in the euro.
The euro conversion presents additional risks for the Fund to the
extent that it invests in securities denominated in a national currency that
eventually will be replaced by the euro. For example, trading, accounting and
other administrative systems must be
15
<PAGE>
able to reflect exchange rates between a national currency of an EU member and
the euro and to redenominate outstanding tradeable debt securities into the euro
in accordance with specific technical requirements.
The Investment Manager currently is in the process of reviewing
its internal computer systems as they relate to the Fund, as well as the
computer systems of those service providers upon which the Fund relies, in order
to obtain reasonable assurances that the Fund will not experience a material
adverse impact related to either problem. The Fund does not currently anticipate
that either problem will have a material adverse impact on its portfolio
investments, taken as a whole. There can be no assurances in either area,
however, including the possibility that either or both problems could negatively
affect the investment markets or the economy generally.
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
The Fund may invest in long-term and short-term debt securities.
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:
o direct obligations of the U.S. Treasury, i.e., U.S.
Treasury bills, notes, certificates and bonds;
o obligations of U.S. Government agencies or
instrumentalities, such as the Federal Home Loan Banks,
the Federal Farm Credit Banks, the Federal National
Mortgage Association, the Government National Mortgage
Association and the Federal Home Loan Mortgage
Corporation; and
o obligations of mixed-ownership Government corporations
such as Resolution Funding Corporation.
U.S. Government securities which 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 Bank, the Federal Farm Credit Bank, the Federal National
Mortgage Association and the Federal
16
<PAGE>
Home Loan Mortgage Corporation are backed by the credit of the agency or
instrumentality issuing the obligations. Certain obligations of Resolution
Funding Corporation, a mixed-ownership Government corporation, are backed with
respect to interest payments by the U.S. Treasury, and with respect to principal
payments by U.S. Treasury obligations held in a segregated account with a
Federal Reserve Bank. Except for certain mortgage-related securities, the Fund
will only invest in obligations issued by mixed-ownership Government
corporations where such securities are guaranteed as to payment of principal or
interest by the U.S. Government or a U.S. Government agency or instrumentality,
and any unguaranteed principal or interest is otherwise supported by U.S.
Government obligations held in a segregated account.
U.S. Government securities may be acquired by the Fund in the form
of separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
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.
17
<PAGE>
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.
Zero and Step Coupon Securities
Zero and step coupon securities are debt securities that may pay no
interest for all or a portion of their life but are purchased at a discount to
face value at maturity. Their return consists of the amortization of the
discount between their purchase price and their maturity value, plus in the case
of a step coupon, any fixed rate interest income. Zero coupon securities pay no
interest to holders prior to maturity even though interest on these securities
is reported as income to the Fund. The Fund will be required to distribute all
or substantially all of such amounts annually to its shareholders. These
distributions may cause the Fund to liquidate portfolio assets in order to make
such distributions at a
18
<PAGE>
time when the Fund may have otherwise chosen not to sell such securities. The
market value of such securities may be more volatile than that of securities
which pay interest at regular intervals.
Commercial Paper Ratings
Commercial paper investments at the time of purchase will be rated
within the "A" major rating category by S&P or within the "Prime" major rating
category by Moody's, or, if not rated, issued by companies having an outstanding
long-term unsecured debt issue rated at least within the "A" category 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 within the "A" category by S&P or
within the "Prime" category by Moody's.
Commercial paper rated within the "A" category (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 within the "A" category or
better, although in some cases credits within the "BBB" category 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 category
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.
19
<PAGE>
THE TRUST, THE FUND AND ITS SHARES
The Fund was organized in 1994 as a separate series of State Street
Research Capital Trust , a Massachusetts business trust. A "series" is a
separate pool of assets of the Trust which is separately managed and may have a
different investment objective from the objective
and policies of another series. The Trust currently is comprised of three
series: State Street Research Capital Fund, State Street Research Emerging
Growth Fund and State Street Research Aurora Fund. 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. The Trustees also 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 Trustees have authorized shares of the Fund
to be issued in five classes: Class A, Class B(1), Class B, Class C and Class S
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 C
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. Except for those
differences between classes of shares described above, in the Fund's Prospectus
and otherwise this Statement of Additional Information, 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 by the Fund.
Shareholder rights granted under the Master Trust Agreement may be
modified by the Trustees , provided, however, that the Master Trust Agreement
may not be amended if such amendment (a) repeals the limitations on personal
liability of any shareholder, or repeals the prohibition of assessment upon
shareholders, without the express consent of each shareholder involved or (b)
adversely modifies any shareholder right without the consent of the holders of a
majority of the outstanding shares entitled to vote. On any matter submitted to
the shareholders, the holder of a Fund share is entitled to one vote per share
(with proportionate voting for fractional shares) regardless of the relative net
asset value thereof. Except as provided by law, the Trustees may otherwise
modify the rights of shareholders at any time.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there ordinarily will be no shareholder meetings
unless required by the 1940 Act. Except as otherwise provided under the 1940
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
20
<PAGE>
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 shares of the Trust 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 for 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.
21
<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 60. His principal occupation is currently,
and during the past five years has been, Executive Vice President of State
Street Research & Management Company. Mr. Bennett is also a Director of State
Street Research & Management Company. Mr. Bennett's other principal business
affiliations include 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 37. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he also has served as Vice President of State Street Research & Management
Company and was Vice President and portfolio manager at First Chicago Investment
Management Company.
+Steve A. Garban, The Pennsylvania State University, 210 Old Main,
University Park, PA 16802, serves as Trustee of the Trust. He is 61. He is
retired and was formerly Senior Vice President for Finance and Operations and
Treasurer of The Pennsylvania State University.
*Lawrence J. Haverty, Jr., One Financial Center, Boston, MA 02111,
serves as Vice President of the Trust. He is 54. His principal occupation is,
and during the past five years has been Senior Vice President of State Street
Research & Management Company.
+Malcolm T. Hopkins, 14 Brookside Road, Biltmore Forest, Asheville,
NC 28803, serves as Trustee of the Trust. He is 70. He is engaged principally in
private investments. Previously, he was Vice Chairman of the Board and Chief
Financial Officer of St. Regis Corp.
*Richard J. Jodka, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 55. His principal occupation is Senior Vice
President of State Street Research & Management Company. Previously, he was a
portfolio manager for Frontier Capital Management.
*+Rudolph K. Kluiber, One Financial Center, Boston, MA 02111, serves
as Vice President of the Trust. He is 39. His principal occupation currently is
Senior Vice President of State Street Research & Management Company. During the
past five years he has also served as Vice President and analyst of State Street
Research & Management Company.
- ----------------------
* or +, see footnotes on page 24.
22
<PAGE>
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791,
serves as Trustee of the Trust. He is 72. He is engaged principally in private
investments and civic affairs and is an author of business history. Previously,
he was with an affiliate of J.P. Morgan & Co. in New York.
+Robert A. Lawrence, 175 Federal Street, Boston, MA 02110, serves
as Trustee of the Trust. He is 72. He is retired and was formerly a partner at
Saltonstall & Co., a private investment firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 47. His principal occupation is currently and
during the past five years has been Executive Vice President, Treasurer, Chief
Financial Officer, Chief Administrative Officer and Director of State Street
Research & Management Company. Mr. Maus's other principal business affiliations
include Executive Vice President, Treasurer, Chief Financial Officer, Chief
Administrative 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 43. 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 Executive 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 66. He is retired and was formerly Executive
Vice President, Chief Operating Officer and Director of Hewlett-Packard Company.
+Susan M. Phillips, The George Washington University, 710 21st
Street, Suite 206, Washington, DC 20052, serves as Trustee of the Trust. She is
55. Her principal occupation is currently Dean and Professor of Finance and
Administration, School of Business and Public Management, The George Washington
University. Previously, she was a member of the Board of Governors of the
Federal Reserve System and Chairman and Commissioner of the Commodity Futures
Trading Commission.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118,
serves as Trustee of the Trust. He is 60. 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 24.
23
<PAGE>
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
61. 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 56. His principal occupation is currently, and during the past five
years has been, Chairman of the Board, President, Chief Executive Officer and
Director of State Street Research & Management 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 of that company) .
*+James M. Weiss, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 52. His principal occupation is Executive
Vice President 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 President and Chief Investment Officer of IDS Advisory
Group .
- ---------------------
* 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/Director and/or officer of one or more of the
following investment companies, each of which has an advisory
relationship with the Investment Manager or its parent,
Metropolitan Life Insurance Company ("Metropolitan"): 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.
24
<PAGE>
Record ownership of shares of the Fund as of October 31, 1998 was as
follows:
<TABLE>
<CAPTION>
Class Shareholder % of Class
----- ----------- ----------
<S> <C> <C>
A Merrill Lynch 5.4
Bear Stearns 9.5
B Merrill Lynch 18.3
C Merrill Lynch 39.7
J.C. Bradford & Co. Cust. 5.6
S Chase Manhattan Bank, N.A. 87.1
</TABLE>
The full name and address of the above institutions are:
Chase Manhattan Bank, N.A. (a)(b)
770 Broadway
New York, New York 10003
Merrill Lynch, Pierce, Fenner & Smith, Inc. (b)
4800 Deerlake Drive East
Jacksonville, FL 32246
J.C. Bradford & Co. Cust.
330 Commerce St.
Nashville, TN 37201
- -----------------
(a) Chase Manhattan Bank, N.A. holds such shares as trustee under certain
employee benefit plans serviced by Metropolitan Life Insurance
Company ("Metropolitan").
(b) The Fund believes that each named recordholder does not have
beneficial ownership of such shares.
25
<PAGE>
Ownership of 25% or more of a voting security is deemed "control,"
as defined in the 1940 Act. So long as 25% of a class of shares is so owned,
such owners will be presumed to be in control of such class of shares for
purposes of voting on certain matters submitted to a vote of shareholders, such
as any Distribution Plan for a given class.
As of October 31, 1998, the Trustees and principal officers of the
Trust as a group owned approximately 3.8% of the outstanding Class A shares of
the Fund, and none of the outstanding Class B, Class C or Class S shares.
The Trustees were compensated as follows:
<TABLE>
<CAPTION>
Total
Compensation
Aggregate From Fund and
Compensation Fund Complex Paid
Name of Trustee From Fund(a) to Trustees(b)
--------------- ------------- -----------------
<S> <C> <C>
Steve A. Garban $ 2,200 $
Malcolm T. Hopkins $ 1,900 $
Edward M. Lamont $ 1,800 $
Robert A. Lawrence $ 1,900 $
Dean O. Morton $ 2,400 $
Susan M. Phillips $ 125 $
Toby Rosenblatt $ 2,000 $
Michael S. Scott Morton $ 2,600 $
Ralph F. Verni $ 0 $ 0
</TABLE>
(a) For the Fund's fiscal year ended September 30, 1998.
(b) Includes compensation on behalf of all series of 12 investment
companies for which the Investment Manager or its parent,
Metropolitan, served as investment adviser. "Total Compensation from
Fund and Fund Complex Paid to Trustees" for the 12 months ended
December 31, 1998. The Trust does not provide any pension or
retirement benefits for the Trustees.
26
<PAGE>
MANAGEMENT OF THE FUND AND INVESTMENT ADVISORY SERVICES
Under the provisions of the Trust's Master Trust Agreement and the
laws of Massachusetts, responsibility for the management and supervision of the
Fund rests with the Trustees.
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 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 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.
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 Advisory Agreement provides that the
Investment Manager shall furnish the Fund with an investment program, office
facilities and such investment advisory, research and administrative services as
may be required from time to time. The Investment Manager compensates all
executive and clerical personnel and Trustees of the Trust if such persons are
employees of the Investment Manager or its affiliates. The Investment Manager is
an indirect wholly-owned subsidiary of Metropolitan Life Insurance Company
("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 regular trading on 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 advisory fees paid by the Fund to the Investment Manager for the
last three fiscal years, prior to the assumption of fees or expenses, were as
follows: 1998, $784,289; 1997, $461,544; and 1996, $443,318. 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. The voluntary reduction
of fees or assumption of expenses for the same periods were as follows: 1998,
$164,484; 1997, $185,818; and 1996, $233,624.
The Advisory Agreement provides that it shall continue in effect
from year to year with respect to the Fund 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
27
<PAGE>
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 the Code of Ethics of the Investment Manager, investment
management personnel are only permitted to engage in personal securities
transactions in accordance with certain conditions relating to such person's
position, the identity of the security, the timing of the transaction, and
similar factors. Such personnel 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 State Street Research
Investment Services, Inc., the Distributor. The Fund offers five classes of
shares. Class A, Class B(1), Class C and Class S shares are available to all
eligible investors. Class B shares are available only to current Class B
shareholders through dividend reinvestment or through exchanges from existing
Class B accounts of the State Street Research Funds. Class A, Class B(1), Class
C and Class S shares of the fund may be purchased at the next determined net
asset value per share plus, in the case of all classes except Class S 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(1) and Class C shares). General information on how to buy shares of the Fund,
as well as sales charges involved, are set forth under "Your Investment" in the
Prospectus. The following supplements that information.
Public Offering Price. The public offering price for each class of
shares is based on their net asset value determined as of the close of regular
trading on the NYSE on the day the purchase order is received by State Street
Research Service Center (the "Service Center"), provided that the order is
received prior to the close of regular trading on 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 the Service Center 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.
Alternative Purchase Program. 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.
28
<PAGE>
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, financial professionals are
paid differing amounts of compensation depending on which class of shares they
sell.
29
<PAGE>
The major differences among the various classes of shares are as
follows:
<TABLE>
<CAPTION>
Class A Class B(1) Class B Class C Class S
------- ---------- ------- ------- -------
(currently offered) (previously offered)
<S> <C> <C> <C> <C> <C>
Sales Charges Paid Initial sales charge Contingent deferred Contingent deferred Contingent deferred None
by Investor to at time of sales charge of 5% sales charge of 5% sales charge of 1%
Distributor investment of up to to 1% applies to to 2% applies to applies to any
5.75% depending any shares any shares shares redeemed
on amount of redeemed within redeemed within within one year
investment first six years first five years following their
following their following their purchase
purchase; no purchase; no
contingent deferred contingent deferred
sales charge after sales charge after
six years 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
Initial Commission Above described 4% 4% 1% None
Paid by initial sales charge
Distributor to less 0.25% to
Financial 0.75% retained by
Professional distributor
On investments of
$1 million or more,
0.25% to 1% paid
to dealer by
Distributor
Rule 12b-1 Service
Fee
Paid by Fund 0.25% each year 0.25% each year 0.25% each year 0.25% each year None
to Distributor
Paid by 0.25% each year 0.25% each year 0.25% each year 0.25% each year None
Distributor to commencing after commencing commencing
Financial one year following one year following one year following
Professional purchase purchase purchase
Rule 12b-1
Distribution Fee
Paid by Fund
to Distributor None 0.75% for first 0.75% for first 0.75% each year None
eight years; Class eight years; Class
B(1) shares convert B shares convert
automatically to automatically to
Class A shares after Class A shares after
eight years eight years
30
<PAGE>
Paid by None None None 0.75% each year None
Distributor to commencing after
Financial one year following
Professional purchase
</TABLE>
Class A Shares--Reduced Sales Charges. The reduced sales charges set
forth under "Your Investment--Choosing a Share Class" in the Prospectus apply to
purchases made at any one time by any "person," which 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"
(which include the Fund and other funds as designated by the Distributor from
time to time) 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(1), Class B, Class C and Class S shares may also be included
in the combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the
specified amount. Shares equivalent to 5% of the specified amount will, however,
be taken from the initial purchase (or, if necessary, subsequent purchases) and
held in escrow in the investor's account as collateral against the higher sales
charge which would apply if the total purchase is not completed within the
allotted time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination
of Eligible Funds at reduced sales charges pursuant to a Right of Accumulation.
The applicable sales charge under the right is determined on the amount arrived
at by combining the dollar amount of the
31
<PAGE>
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(1), Class B, Class C and Class S 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.
Other Programs Related to Class A Shares. Class A shares of the Fund
may be sold or issued in an exchange at a reduced sales charge or without 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, registered investment advisers, 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.
In addition, no sales charge is imposed in connection with the sale
of Class A shares of the Fund to the following entities and person: (A) the
Investment Manager, Distributor or any affiliated entities, including any direct
or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated Companies,
any relatives of any such individuals whose relationship is directly verified by
such individuals to the Distributor, or any beneficial account for such
relatives or individuals; and (C) employees, officers, sales representatives or
directors of dealers and other entities with a selling agreement with the
Distributor to sell shares of any aforementioned investment company, any spouse
or child of such person, or any beneficial account for any of them. The purchase
must be made for investment and the shares purchased may not be resold except
through redemption. This purchase program is subject to such administrative
policies, regarding the qualification of purchasers and any other matters, as
may be adopted by the Distributor from time to time.
Conversion of Class B(1) and Class B Shares to Class A Shares. A
shareholder's Class B(1) and Class B shares of the Fund, 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 shares; consequently, they will no longer be
subject to the higher expenses borne by Class B(1) and 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 shares so converted. As
noted above, holding periods for Class B(1) shares received in exchange for
Class B(1) shares of other Eligible Funds and for Class B
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shares received in exchange for Class B shares of other Eligible Funds, will be
counted toward the eight-year period.
Contingent Deferred Sales Charges. The amount of any contingent
deferred sales charge paid on Class A shares (on sales of $1 million or more and
which do not involve an initial sales charge) or on Class B(1), Class B or Class
C shares of the Fund will be paid to the Distributor. The Distributor will pay
dealers at the time of sale a 4% commission for selling Class B(1) shares and a
1% commission for selling Class C shares. In certain cases, a dealer may elect
to waive the 4% commission on Class B(1) shares and receive in lieu thereof an
annual fee, usually 1%, with respect to such outstanding shares . The proceeds
of the contingent deferred sales charges and the distribution fees are used to
offset distribution expenses and thereby permit the sale of Class B(1), Class B
and Class C shares without an initial sales charge.
In determining the applicability and rate of any contingent deferred
sales charge of Class B(1), Class B or Class C shares, it will be assumed that a
redemption of the 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 shareholder
for the longest period of time. Class B(1) shares that are redeemed within a
six-year period after purchase, Class B shares that are redeemed within a
five-year period after their purchase, and Class C shares that are redeemed
within a one-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 holding period for purposes of
applying a contingent deferred sales charge for a particular class of 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 Fund, and shares of the same class 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.
Contingent Deferred Sales Charge Waivers. With respect to Class A
shares (on sales of $1 million or more and which do not involve an initial sales
charge), and Class B(1), Class B and Class C shares of the Fund, the contingent
deferred sales charge does not apply to exchanges or to redemptions under a
systematic withdrawal plan which meets certain conditions. The contingent
deferred sales charge will be waived for participant initiated distributions
from State Street Research prototype employee retirement plans. 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 of 1986, as amended, for retirement accounts or plans
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(e.g., age 70 1/2 for Individual Retirement Accounts 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 Individual Retirement Account. (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 at any time; for example, the Fund may limit
the application of multiple waivers and establish other conditions for employee
benefit plans. Certain employee benefit plans sponsored by a financial
professional may be subject to other conditions under which the plans may
initially invest in Class B(1) shares and subsequently invest in Class A shares
upon meeting specific criteria.
Class S Shares. Class S shares are currently available to certain
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants, service arrangements, or similar factors;
insurance companies; investment companies; advisory accounts of the Investment
Manager; endowment funds of nonprofit organizations with substantial minimum
assets (currently a minimum of $10 million); and other similar institutional
investors. Class S shares may be acquired through programs or products sponsored
by Metropolitan, its affiliates, or both for which Class S shares have been
designated. In addition, Class S shares are available through programs under
which, for example, investors pay an asset-based fee and/or a transaction fee to
intermediaries. Class S share availability is determined by the Distributor and
intermediaries based on the overall direct and indirect costs of a particular
program, expected assets, account sizes and similar considerations.
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.
Systematic Withdrawal Plan. A shareholder who owns noncertificated
Class A or Class S shares with a value of $5,000 or more, or Class B(1), Class B
or Class C 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
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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 Systematic Withdrawal 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 Systematic Withdrawal
Plan was initiated, whichever is higher.
Expenses of the Systematic Withdrawal Plan are borne by the Fund. A
participating shareholder may withdraw from the Systematic Withdrawal Plan, and
the Fund may terminate the Systematic Withdrawal Plan at any time on written
notice. Purchase of additional shares while a shareholder is receiving payments
under a Systematic Withdrawal Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate in
the Investamatic Program (see "Your Investment--Investor Services--Investamatic
Program" in the Fund's Prospectus) and the Systematic Withdrawal Plan at the
same time.
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.
Signature Guarantees. Signature guarantees are required for, among
other things: (1) written requests for redemptions for more than $100,000; (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.
Dishonored Checks. If a purchaser's 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 canceled.
Processing Charges. Purchases and redemptions processed through
securities dealers may be subject to processing charges imposed by the
securities dealer in addition to sales charges that may be imposed by the Fund
or the Distributor.
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SHAREHOLDER ACCOUNTS
General information on shareholder accounts is included in the
Fund's Prospectus under "Your Investment." The following supplements that
information.
Maintenance Fees and Involuntary Redemption. Because of the
relatively high cost of maintaining small shareholder accounts, the Fund
reserves the right to 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 involuntarily redemptions will be subject to applicable sales
charges, if any. The Fund may increase such minimum account value above such
amount in the future after notice to affected shareholders. Involuntarily
redeemed shares will be priced at the net asset value on the date fixed for
redemption by the Fund, and the proceeds of the redemption will be mailed to the
affected shareholder at the address of record. Currently, the maintenance fee is
$18 annually, which is paid to the Transfer Agent. The fee does not apply to
certain retirement accounts or if the shareholder has more than an aggregate
$50,000 invested in the Fund and other Eligible Funds combined. Imposition of a
maintenance fee on a small account could, over time, exhaust the assets of such
account.
To cover the cost of additional compliance administration, a $20 fee
will be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
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 (the
"SEC") may by order permit for the protection of investors; and (b) the payment
of redemption proceeds may be postponed as otherwise provided under "Purchase
and Redemption of Shares" in this Statement of Additional Information.
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(1), Class B or Class C shares will not be issued, while certificates
representing Class A or Class S 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.
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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 "State Street Research Funds" under the terms set
forth above under "Purchase and Redemption of Shares" in
this Statement of Additional Information.
2. The following methods of receiving dividends from
investment income and distributions from capital gains
generally are available:
(a) All income dividends and capital gains
distributions reinvested in additional shares
of the Fund.
(b) All income dividends and capital gains
distributions in cash.
(c) 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, that account will be automatically 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
the Service Center. Dividends and distributions are reinvested at net asset
value without a sales charge.
Exchange Privileges. 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(1),
Class B and Class C 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 any acquired Class A, Class B(1),
Class B and Class C shares, the holding period of the redeemed
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shares is "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(1), Class B or Class C 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.
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 with
respect to the Fund (see "Your Investment--Account Policies--Telephone Requests"
in the Fund's Prospectus and "--Telephone Privileges," below) as the existing
account unless the Service Center 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 the Service
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Center and delivered by the Service Center to the Transfer Agent by 12 noon
Boston time on any business day with normal trading conditions, the exchange
usually will occur that day. For further information regarding the exchange
privilege, shareholders should contact the Service Center.
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 the
Service Center of such shareholder's written purchase request and delivery of
the request by the Service Center 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.
Dividend Allocation Plan. The Dividend Allocation Plan allows
shareholders to elect to have all 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.
Telephone Privileges. The following telephone privileges are
available:
o Telephone Exchange Privilege for Shareholder and
Shareholder's Financial Professional
o Shareholders automatically receive this privilege
unless declined.
o This privilege allows the shareholder or the
shareholder's financial professional to request
exchanges into other State Street Research funds.
o Telephone Redemption Privilege for Shareholder
o Shareholders automatically receive this privilege
unless declined.
o This privilege allows the shareholder to phone requests
to sell shares, with the proceeds sent to the address
of record.
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o Telephone Redemption Privilege for Shareholder's
Financial Professional
(This privilege is not automatic; a shareholder must
specifically elect it)
o This privilege allows the shareholder's financial
professional to phone requests to sell shares, with the
proceeds sent to the address of record on the account.
A shareholder with the above telephone privileges is deemed to
authorize the Service Center and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder or the
shareholder's financial professional; 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. Neither the Fund, the
other Eligible Funds, the Transfer Agent, the Investment Manager nor 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.
Alternative Means of Contacting the Fund. It is unlikely, during
periods of extraordinary market conditions, that a shareholder may have
difficulty in reaching the Service Center. In that event, however, the
shareholder should contact the Service Center at 1-800- 562-0032, 1-617-357-7800
or otherwise at its main office at One Financial Center, Boston, Massachusetts
02111-2690.
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once
daily as of the close of regular trading on 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, Martin
Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is computed by dividing
the sum of the value of the securities held by the Fund plus any cash or other
assets minus all liabilities by the total number of outstanding shares of the
Fund at such time. Any expenses, except for extraordinary or nonrecurring
expenses, borne by the Fund, including the investment management fee payable to
the Investment Manager, are accrued daily.
In determining the values of portfolio assets as provided below, the
Trustees utilize one or more pricing services in lieu of market quotations for
certain securities which are not readily available on a daily basis. Such
services utilize information with respect to market
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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.
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, Inc.'s (the "NASD") NASDAQ System are valued
at the closing price supplied through such system for that day at the close of
the NYSE. Other securities are, in general, valued at the mean of the bid and
asked quotations last quoted prior to the close of the NYSE if there are market
quotations readily available, or in the absence of such market quotations, then
at the fair value thereof as determined by or under authority of the Trustees of
the Trust with the use of such pricing services as may be deemed appropriate or
methodologies approved by the Trustees. The Trustees also reserve the right to
adopt other valuations based on fair value in pricing in unusual circumstances
where use of other methods as discussed in part above, could otherwise have a
material adverse effect on the Fund as a whole.
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 and
having a remaining maturity of 60 days or less when the value obtained is fair
value, 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. 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's portfolio turnover rates for the fiscal years ended
September 30, 1997 and 1998, respectively, were 273.33% and 98.30%,
respectively.
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The Investment Manager believes the portfolio turnover rate for the
fiscal year ended September 30, 1998 was significantly lower than that of the
previous year because of steps taken to restructure the portfolio in light of
very volatile market conditions for small cap stocks, to focus on the stocks of
companies which can be held longer in seeking to achieve the Fund's objective of
growth of capital.
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 including software
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providing investment personnel with efficient access to current and historical
data from a variety of internal and external sources); and portfolio evaluation
services and relative performance of accounts.
In the case of the Fund and other registered investment companies
advised by the Investment Manager or its affiliates, the above services may
include data relating to performance, expenses and fees of those investment
companies and other investment companies; this information is used by the
Trustees or Directors of the investment companies to fulfill their
responsibility to oversee the quality of the Investment Manager's advisory
contracts between the investment companies and the Investment Manager. The
Investment Manager considers these investment company services only in
connection with the execution of transactions on behalf of its investment
company clients and not its other clients. Certain of the 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 regularly reviews and evaluates the services
furnished by broker-dealers. The Investment Manager's investment management
personnel seek to evaluate the quality of the research and other services
provided by various broker-dealer firms, and the results of these efforts are
made available to the equity trading department, which uses this information as
consideration to the extent described above in the selection of brokers to
execute portfolio transactions.
Some services furnished by broker-dealers 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 the services to determine the proportion which is
allocable to research or investment decision-making and the proportion allocable
to other purposes. The Investment Manager pays directly from its own funds for
that portion that is allocable to uses other than research or investment
decision-making. 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
providing the services.
The Investment Manager has no fixed agreements or understandings
with any broker-dealer as to the amount of brokerage business which the firm may
expect to receive for services supplied to the Investment Manager or otherwise.
There may be, however, understandings with certain firms that in order for such
firms to be able to continuously supply certain services, they need to receive
allocation of a specified amount of brokerage business. These understandings are
honored to the extent possible in accordance with the policies set forth above.
It is not the Investment Manager's policy to intentionally pay a
firm a brokerage commission higher than that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided. However, the
43
<PAGE>
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
Exchange Act of 1934. Brokerage commissions paid by the Fund in secondary
trading during the last three fiscal years ended September 30 were as follows:
1996, $133,000; 1997, $328,000; and 1998, $224,404.
During and at the end of its most recent fiscal year, the Fund did
not hold in its portfolio 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
commissions and designations to brokers or dealers which provide the client with
research, performance evaluation, master trustee and other services. In the
absence of instructions from the client, the Investment Manager may make such
allocations to broker-dealers which have provided the Investment Manager with
research and brokerage services.
In some instances, certain clients of the Investment Manager request
it to place all or part of the orders for their account with certain brokers or
dealers, which in some cases provide services to those clients. The Investment
Manager generally agrees to honor these requests to the extent practicable.
Clients may condition their requests by requiring the Investment Manager only
effect transactions with the specified broker-dealers if the broker-dealers are
competitive as to price and execution. In other cases, the Investment Manager
may be unable to negotiate commissions or obtain volume discounts or best
execution. In addition, a disparity may exist among the commissions charged to
clients who request the Investment Manager to use particular brokers or dealers,
and also between those clients and those who do not make such requests. A client
who requests the use of a particular broker-dealer should understand that it may
lose the possible advantage which non-requesting clients derive from aggregation
of orders for several clients as a single transaction for the purchase or sale
of a particular security. Among other reasons why best execution may not be
achieved with directed brokerage is that, in an effort to achieve orderly
execution of transactions, execution of orders that have designated particular
brokers may, at the discretion of the trading desk, be delayed until execution
of other non-designated orders have been completed.
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
44
<PAGE>
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 elects 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 qualify to 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"); and (b) satisfy certain
diversification requirements on a quarterly basis.
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 to the extent thereof. Any distribution in excess of a shareholder's basis
in the shareholder's shares would be taxable as gain realized from the sale of
such shares.
The Fund will be liable for a nondeductible 4% excise tax on amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement. To avoid the tax, during each calendar year the Fund
must distribute an amount equal to at least 98% of the sum of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, and its capital gain net income for the 12-month period ending on October
31,
45
<PAGE>
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.
Taxation of the Fund's Investments
Original Issue Discount; Market 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 federal
income tax purposes. In the case of any debt security issued after July 18,
1984, having a fixed maturity date of more than one year from the date of issue
and having market discount, the gain realized on disposition will be treated as
interest to the extent it does not exceed the accrued market discount on the
security (unless 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 or
continued 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,
and require inclusion of unrealized gains in the Fund's income for purposes of
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 and
long-term gain or loss irrespective of the holding period of the investment.
Such provisions generally apply to, among other investments, options on debt
securities, indices on securities and futures contracts. The Fund will monitor
its transactions and may make certain tax elections available to it in order to
mitigate the impact of these rules and prevent disqualification of the Fund as a
regulated investment company.
46
<PAGE>
Gains or losses attributable to foreign currency contracts or
fluctuations in exchange rates that occur between the time the Fund accrues
income or expenses denominated in a foreign currency and the time the Fund
actually collects such income or pays such expenses are treated as ordinary
income or loss. The portion of any gain or loss on the disposition of a debt
security denominated in a foreign currency that is attributable to fluctuations
in the value of the foreign currency during the holding period of the debt
security may likewise be treated as ordinary income or loss. Such ordinary
income or loss will increase or decrease the amount of the Fund's net investment
income.
If the Fund invests in the stock of certain "passive foreign
investment companies" ("PFICs"), income of such companies may become taxable to
the Fund prior to its distribution to the Fund or, alternatively, ordinary
income taxes and interest charges may be imposed on the Fund on "excess
distributions" received by the Fund or on gain from the disposition of such
investments by the Fund. The Fund does not intend to invest in PFICs. Because of
the broad scope of the PFIC rules, however, there can be no assurance that the
Fund can avoid doing so.
Taxation Of The Fund's Shareholders
The Fund may be subject to foreign taxes, including foreign income
taxes. If so, the Fund intends to meet the requirements of the Code for passing
through to its shareholders the tax benefit of foreign income taxes paid,
although there is no assurance that it will be able to do so. Under this
provision, if more than half of the value of the total assets of the Fund at the
close of its taxable year consists of stock or securities of foreign
corporations, the Fund will be eligible and intends to elect to pass through to
its shareholders the amount of foreign taxes it paid if such amounts are
material. Pursuant to this election, a United States shareholder will, in
general, be required to (i) include in gross income, in addition to taxable
distributions actually received, his or her pro rata share of the foreign taxes
paid by the Fund, (ii) treat that share of taxes as having been paid directly by
him or her, and (iii) either deduct such share of taxes or treat such share of
taxes as a credit against United States income tax liability. A tax-exempt
shareholder will ordinarily not benefit from this election.
Generally, a credit for foreign taxes paid by the Fund may not
exceed a shareholder's United States income tax attributable to the
shareholder's foreign source income. This limitation applies separately to
different categories of income, one of which is foreign-source passive income,
which is likely to include all of the foreign-source income of the Fund. As a
result of these limitations, some shareholders may not be able to utilize fully
any foreign tax credits generated by an investment in the Fund. The Fund will
provide its shareholders with information about the source of its income and the
foreign taxes it has paid for use in preparing the shareholder's United States
income tax return.
Dividends from domestic corporations are not expected to comprise a
substantial part of the income of the Fund. If such dividends are earned by the
Fund, then a portion of the
47
<PAGE>
dividends paid by the Fund may qualify for the 70% deduction for dividends
received which is available to corporate shareholders of the Fund. Shareholders
will be informed of any portion of the dividends paid by the Fund which
qualifies for this deduction. The dividends-received deduction is reduced to the
extent the dividends received are treated as debt-financed, under the Code, and
is eliminated if the stock is held for less than 46 days.
Any dividend declared in October, November or December and made
payable to shareholders of record in any such month is treated as received by
such shareholder on December 31, provided that the Fund pays the dividend during
January of the following calendar year.
Distributions by the Fund 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 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.
The foregoing discussion of United States federal income tax law
relates solely to the application of that law to United States persons, that is,
United States citizens and residents and United States corporations,
partnerships, trusts and estates. Each shareholder who is not a United States
person should consider the United States and foreign tax consequences of
ownership of shares of the Fund, including the possibility that such a
shareholder may be subject to United States withholding tax at a rate of up to
30% (or at a lower rate under applicable treaty) on distributions from the Fund.
Shareholders should consult their tax advisers about the application
of the provisions of tax law described in this Statement of Additional
Information in light of their particular tax situations.
DISTRIBUTION OF SHARES OF THE FUND
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 (Class B(1) and Class C shares). The
Distributor may reallow all or portions of such sales
48
<PAGE>
charges as concessions to dealers. For the fiscal years ended September 30,
1998, 1997 and 1996 total sales charges on Class A shares paid to the
Distributor amounted to $380,618; $108,632; and $17,809 respectively. For the
same periods, the Distributor retained respectively after reallowance of
concessions to dealers: $45,401; $13,429; and $2,120. The Distributor may also
pay its affiliate MetLife Securities, Inc. additional sales compensation of
up to 0.25% of certain sales or assets.
The differences in the price at which the Fund's Class A shares are
offered due to scheduled variations in sales charges, or Class S shares are
offered, as described in the Fund's Prospectus, result from cost savings
inherent in economies of scale, among other factors. 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, managed fee-based programs and so-called "mutual fund
supermarkets," among other special programs, the amount of the sales charge
reduction will similarly reflect the anticipated reduction in sales expenses
associated with such arrangements. The reductions in sales expenses, and
therefore the reduction in sales 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
or similar programs 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(1), Class B and Class
C shares of the Fund and paid initial commissions to securities dealers for
sales of such Class A, Class B(1), Class B and Class C shares as follows:
49
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended September 30, 1998 Ended September 30, 1997 Ending September 30, 1996
------------------------- ------------------------- --------------------------
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 $ 335,218 $ 0 $ 95,203 $ 0 $ 15,689
Class B $ 81,822 $ 1,074,456 $ 69,904 $ 289,915 $ 81,122 $ 20,187
Class C $ 1,186 $ 35,861 $ 163 $ 13,320 $ 264 $ 1,054
</TABLE>
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "Class A/B/C 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 C 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 and (3) reimbursement of expenses incurred by
the Distributor in connection with the servicing of shareholder accounts
including payments to securities dealers and others in consideration of the
provision of personal service to investors and/or the maintenance or servicing
of shareholder accounts . In addition, the Class A/B/C 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 Class A/B/C 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 C shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class C
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 C shares (as the case may be) to make payments for personal
services and/or the maintenance or servicing of shareholder accounts.
The Fund also has adopted Rule 12b-1 Plan for Class B(1) Shares (the
"B(1) Distribution Plan") under which the Fund shall pay the Distributor (a) a
service fee at the end of each month at the annual rate of 0.25% of average
daily net assets attributable to the Class (B)1 Shares to compensate the
Distributor and any securities firms or other third parties who render personal
services to and/or maintain shareholder accounts for
50
<PAGE>
the shareholders of the respective class and (b) a distribution fee under the
Distribution Plan at the end of each month at the annual rate of 0.75% of
average daily net assets attributable to the Class B(1) Shares to compensate the
Distributor for services provided and expenses incurred by it in connection with
sales, promotional and marketing activities relating to the respective class. To
the extent that any payments made by Fund to the Distributor or the Investment
Manager, including payment of investment management fees, should be deemed to be
an indirect financing of any activity primarily resulting in the sale of shares
of the Fund within the scope of Rule 12b-1 under the 1940 Act, then such
payments shall be deemed to be authorized by the Class B(1) Distribution Plan.
A rule of the National Association of Securities Dealers, Inc.
("NASD") limits annual expenditures that the Fund may incur to 0.75% for
distribution expenses and 0.25% for service fees. The NASD Rule also limits the
aggregate amount that 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 the
service fees. Payments to the Distributor or to dealers funded under either the
Class A/B/C Distribution Plan or the Class B(1) Distribution Plan may be
discontinued at any time.
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(1), Class B and Class C 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).
The distribution fees are used primarily to offset initial and
ongoing commissions paid to dealers for selling such shares and for other sales
and marketing expenditures.
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.
The payment of service and distribution fees may continue even if
the Fund ceases, temporarily or permanently, to sell one or more classes of
shares to new accounts. During the period the Fund is closed to new accounts,
the distribution fee will not be used for promotion expenses. The service and
distribution fees are used during a closed period to cover services provided to
current shareholders and to cover the compensation of
51
<PAGE>
financial professionals in connection with the prior sale of Fund shares, among
other non-promotional distribution expenditures.
The Distributor may pay certain dealers and other intermediaries
additional compensation for sales and administrative services. The Distributor
may provide cash and noncash incentives to intermediaries who, for example, sell
significant amounts of shares or develop particular distribution channels. The
Distributor may compensate dealers with clients who maintain their investments
in the Fund over a period of years. The incentives can include merchandise and
trips to, and attendance at, sales seminars at resorts. The Distributor may pay
for administrative services, such as technological and computer systems support
for the maintenance of pension plan participant records, for subaccounting, and
for distribution through mutual fund supermarkets or similar arrangements.
During the fiscal year ended September 30, 1998, the Fund paid the
Distributor fees under the Distribution Plan and the Distributor used all of
such payments for expenses incurred on behalf of the Fund as follows:
<TABLE>
<CAPTION>
Class A Class B Class C
------- -------- ---------
<S> <C> <C> <C>
Advertising $ 375 $ 9,663 $ 2,116
Printing and mailing of
prospectuses to other
than current shareholders 58 1,478 326
Compensation to dealers 90,836 477,608 73,751
Compensation to sales personnel 799 20,339 4,621
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses: marketing;
general 580 14,870 3,324
------- -------- -------
Total fees $92,648 $523,958 $84,138
======= ======== =======
</TABLE>
The Distributor may have also used additional resources of its own
for further expenses on behalf of the Fund.
No interested Trustee of the Trust has any direct or indirect
financial interest in the operation of the Distribution Plan or any related
agreements thereunder. The Distributor's interest in the Distribution Plan is
described above.
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Fund
52
<PAGE>
will make alternative arrangements for such services for shareholders who
acquired shares through such institutions.
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 or Class S shares to the performance 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 Standard & Poor's 500 Index, Russell
2000 Growth Index, Consumer Price Index and Dow Jones Industrial Average and/or
to appropriate rankings and averages such as those compiled by Lipper Analytical
Services, Inc., Morningstar, Inc., Money Magazine, Business Week, Forbes
Magazine, The Wall Street Journal and Investor's Daily. For example, the
performance of the Fund might be compared to the Lipper Small Company Funds
Index or Average.
The average annual total return ("standard total return") of the
Class A, Class B(1), Class B, Class C and Class S 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 on February 1, 1994, when
designations were assigned based on the pricing and Rule 12b-1 fees applicable
to shares sold thereafter. The application of the additional Rule 12b-1 fees, if
any, of up to 1% will, for periods after February 1, 1994, adversely affect Fund
performance results. Thus, 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.
Total Return
The average annual total return ("standard total return") of each
class of the Fund's shares was as follows:
<TABLE>
<CAPTION>
Commencement of
Operations (October 4, 1993) One Year Ended
to September 30, 1998 September 30, 1998
---------------------- ------------------
<S> <C> <C>
Class A 3.27% -33.13%
Class B 3.18% -33.37%
Class C 3.51% -31.09%
Class S 4.52% -29.83%
</TABLE>
Standard total return is computed separately for each class of
shares by determining the average annual compounded rates of return over the
designated periods that, if applied to the initial amount invested, would
produce the ending redeemable value in accordance with the following formula:
54
<PAGE>
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 highest
applicable initial or contingent deferred sales charge 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 and Recurring Charges
Accrued expenses include all recurring charges 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 are determined without giving effect to the
subsidization, if any, by affiliates of fees or expenses during the subject
period. In calculating the performance, the accrued expenses are reduced by the
amount of any subsidy. In the absence of such subsidization, the performance of
the Fund would be lower.
Nonstandardized Total Return
The Fund may provide the above described standard total return
results for Class A, Class B(1), Class B, Class C and Class S 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, and/or without taking
sales charges into account. Such nonstandardized total return is computed as
otherwise described under "--Total Return" except the result may or may not be
annualized, and as noted any applicable sales charge may not be taken into
account and therefore not deducted from the hypothetical initial payment of
$1,000. For example, the Fund's nonstandardized total returns for the six months
ended September 30, 1998, without taking sales charges into account, were as
follows:
55
<PAGE>
Class A -33.68%
Class B -33.96%
Class C -33.93%
Class S -33.63%
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
PricewaterhouseCoopers LLP, 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 SEC filings and
(3) review of the annual income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
Each of the Investment Portfolio, Statement of Assets and
Liabilities, Statement of Operations and Statement of Changes in Net Assets
included in the Fund's Annual Report to Shareholders as of and for the fiscal
year ended September 30, 1998, including any notes thereto or Report of
Independent Accountants is hereby incorporated by reference from the Fund's
Annual Report, filed with the Securities and Exchange Commission (EDGAR
accession number 000095O146-98-002042). Shareholder reports are available
without charge upon request. For more information, call the State Street
Research Service Center at (800) 562-0032.
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 through electronic or other media. Shareholders with
substantial holdings in one or more State Street Research Funds may also receive
reports and other information which reflect or analyze their positions in a
consolidated manner.
DOCSC\561052.7
<PAGE>
STATE STREET RESEARCH AURORA FUND
a Series of
STATE STREET RESEARCH CAPITAL TRUST
STATEMENT OF ADDITIONAL INFORMATION
February 1, 1999
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
INVESTMENT OBJECTIVE......................................................2
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS...........................2
ADDITIONAL INFORMATION CONCERNING
CERTAIN RISKS AND INVESTMENT TECHNIQUES..............................4
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS..........................15
THE TRUST, THE FUND AND ITS SHARES...................................... 19
TRUSTEES AND OFFICERS................................................... 21
MANAGEMENT OF THE FUND AND INVESTMENT ADVISORY SERVICES................. 25
PURCHASE AND REDEMPTION OF SHARES........................................26
SHAREHOLDER ACCOUNTS.................................................... 34
NET ASSET VALUE......................................................... 38
PORTFOLIO TRANSACTIONS.................................................. 39
CERTAIN TAX MATTERS..................................................... 43
DISTRIBUTION OF SHARES OF THE FUND...................................... 46
CALCULATION OF PERFORMANCE DATA......................................... 51
CUSTODIAN ............................................................ 53
INDEPENDENT ACCOUNTANTS................................................. 53
FINANCIAL STATEMENTS.................................................... 53
</TABLE>
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, 1999, 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.
The Fund's financial statements for the fiscal year ended September
30, 1998, which are included in the Fund's Annual Report for that year, are
incorporated by reference. The Annual Report is available, without charge, upon
request by calling 1-800-562-0032.
CONTROL NUMBER: 1285R-980201(0200)SSR-LD AR-879D-298
<PAGE>
INVESTMENT OBJECTIVE
As set forth under " The Fund--Goal and Strategies--Fundamental
Goal" in the Prospectus of State Street Research Aurora Fund (the "Fund"), the
Fund's investment goal, which is to provide high total return consisting
principally of capital appreciation, is fundamental and may not be changed by
the Fund except by the affirmative vote of a majority of the outstanding voting
securities of the Fund, as defined in the Investment Company Act of 1940, as
amended (the "1940 Act"). (Under the 1940 Act, a "vote of the majority of the
outstanding voting securities" means the vote, at the annual or a special
meeting of security holders duly called, (i) of 67% or more of the voting
securities present at the meeting if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy or (ii) of
more than 50% of the outstanding voting securities, whichever is less.)
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under " The Fund--Principal Risks" and "Other
Information--Other Securities and Risks" in the Fund's Prospectus, the Fund has
adopted certain investment restrictions, and those restrictions are either
fundamental or not fundamental. Fundamental restrictions may not be changed by
the Fund except by the affirmative vote of a majority of the outstanding voting
securities of the Fund. Restrictions that are not fundamental may be changed by
a vote of a majority of the Trustees of the Trust.
The Fund's fundamental investment restrictions are set forth below.
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
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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 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 investment restrictions may be changed without
shareholder approval. Under these restrictions, it is the Fund's policy:
3
<PAGE>
(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 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;
(3) not to purchase securities on margin or make short sales
of securities or maintain a short position except for
short sales "against the box;" 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; and
(4) 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 RISKS AND INVESTMENT TECHNIQUES
Derivatives
The Fund may buy and sell certain types of derivatives, such as
options, futures contracts, options on futures contracts, and swaps under
circumstances in which such instruments are expected by State Street Research &
Management Company, the Fund's Investment Manager (the "Investment Manager"), to
aid in achieving the Fund's investment objective. The Fund 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.
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Fund to take both "short" positions (positions
which anticipate a decline in the market value of a particular asset or index)
and "long" positions (positions which anticipate an increase in the market value
of a particular asset or index). The Fund may also use strategies which involve
simultaneous short and long positions in response to specific market conditions,
such as where the Investment Manager anticipates unusually high or low market
volatility.
4
<PAGE>
The Investment Manager may enter into derivative positions for the
Fund for either hedging or non-hedging purposes. The term hedging is applied to
defensive strategies designed to protect the Fund from an expected decline in
the market value of an asset or group of assets that the Fund owns (in the case
of a short hedge) or to protect the Fund from an expected rise in the market
value of an asset or group of assets which it intends to acquire in the future
(in the case of a long or "anticipatory" hedge). Non-hedging strategies include
strategies designed to produce incremental income (such as the option writing
strategy described below) or "speculative" strategies which are undertaken to
profit from (i) an expected decline in the market value of an asset or group of
assets which the Fund does not own or (ii) expected increases in the market
value of an asset which it does not plan to acquire. Information about specific
types of instruments is provided below.
Futures Contracts
Futures contracts are publicly traded contracts to buy or sell an
underlying asset or group of assets, such as a currency, or an index of
securities, at a future time at a specified price. A contract to buy establishes
a long position while a contract to sell establishes a short position.
The purchase of a futures contract on an equity security or an index
of equity securities normally enables a buyer to participate in the market
movement of the underlying asset or index after paying a transaction charge and
posting margin in an amount equal to a small percentage of the value of the
underlying asset or index. The Fund will initially be required to deposit with
the Trust's custodian or the futures commission merchant effecting the futures
transaction an amount of "initial margin" in cash or securities, as permitted
under applicable regulatory policies.
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
5
<PAGE>
futures contracts with respect to securities do provide for the delivery and
acceptance of such securities, such delivery and acceptance are seldom made.
In transactions establishing a long position in a futures contract,
assets 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, assets 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 utilize such
assets and methods of cover as appropriate under applicable exchange and
regulatory policies.
Options
The Fund may use options to implement its investment strategy. There
are two basic types of options: "puts" and "calls." Each type of option can
establish either a long or a short position, depending upon whether the Fund is
the purchaser or the writer of the option. 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, that is, 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. In general, a purchased put
increases in value as the value of the underlying security falls and a purchased
call increases in value as the value of the underlying security rises.
The principal reason to write options is to generate extra income
(the premium paid by the buyer). 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,
that is, 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, that is, 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
its 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.
Among the options which the Fund may enter are options on securities
indices. In general, options on indices of securities are similar to options on
the securities themselves
6
<PAGE>
except that delivery requirements are different. For example, a put option on an
index of securities does not give the holder the right to make actual delivery
of a basket of securities but instead gives the holder the right to receive an
amount of cash upon exercise of the option if the value of the underlying index
has fallen below the exercise price. The amount of cash received will be equal
to the difference between the closing price of the index and the exercise price
of the option expressed in dollars times a specified multiple. As with options
on equity securities or futures contracts, a Fund may offset its position in
index options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
A securities index assigns relative values to the securities
included in the index and the index options are based on a broad market index.
In connection with the use of such options, the Fund may cover its position by
identifying assets having a value equal to the aggregate face value of the
option position taken.
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.
Limitations and Risks of Options and Futures Activity
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. The Fund applies a similar policy to options that are not commodities.
As noted above, the Fund may engage in both hedging and nonhedging
strategies. 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.
Nonhedging strategies typically involve special risks. The
profitability of the Fund's non-hedging strategies will depend on the ability of
the Investment Manager to analyze both the applicable derivatives market and the
market for the underlying asset or group of assets. Derivatives markets are
often more volatile than corresponding securities markets and a relatively small
change in the price of the underlying asset or group of assets can have a
magnified effect upon the price of a related derivative instrument.
7
<PAGE>
Derivatives markets also are often less liquid than the market for
the underlying asset or group of assets. 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 carry out their derivative
strategies and might, in some cases, require a 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.
Short Sales Against the Box
The Fund may effect short sales, but only if such transactions are
short sale transactions known as short sales "against the box." A short sale is
a transaction in which the Fund sells a security it does not own by borrowing it
from a broker, and consequently becomes obligated to replace that security. A
short sale against the box is a short sale where the Fund owns the security sold
short or has an immediate and unconditional right to acquire that security
without additional cash consideration upon conversion, exercise or exchange of
options with respect to securities held in its portfolio. The effect of selling
a security short against the box is to insulate that security against any future
gain or loss.
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.
The Fund may enter credit protection swap arrangements involving the
sale by the Fund of a put option on a debt security which is exercisable by the
buyer upon certain events, such as default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
8
<PAGE>
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, as noted above, 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 forecasts, there is a risk that the swap
position may correlate imperfectly with the price of the asset or liability
being hedged.
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
9
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that repurchase agreements extending for more than seven days when combined with
any other illiquid securities held by the Fund 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.
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" securities, which are traded on
a price or yield 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 or interest on the securities are not
payable. 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 falls below the price committed to prior to actual
issuance. The Trust's custodian will establish a segregated account when the
Fund purchases securities on a when-issued basis consisting of cash or liquid
securities equal to the amount of the when-issued commitments. Securities
transactions involving delayed deliveries or forward commitments are frequently
characterized as when-issued transactions and are similarly treated by the Fund.
Restricted Securities
It is the Fund's policy not to make an investment in restricted
securities, including restricted securities sold in accordance with Rule 144A
under the Securities Act of 1933 ("Rule 144A Securities") if, as a result, more
than 35% of the Fund's total assets are invested in restricted securities,
provided not more than 10% of the Fund's total assets are invested in restricted
securities other than 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
10
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such securities are relatively new and still developing; depending on the
development of such markets, Rule 144A Securities may be deemed to be liquid as
determined by or in accordance with methods adopted by the Trustees. Under such
methods the following factors are considered, among others: the frequency of
trades and quotes for the security, the number of dealers and potential
purchasers in the market, market making activity, and the nature of the security
and marketplace trades. Investments in Rule 144A Securities could have the
effect of increasing the level of 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 subjective
valuation of such securities in the absence of a market for them. Restricted
securities that are not resalable under Rule 144A may be subject to risks of
illiquidity and subjective valuations to a greater degree than Rule 144A
Securities.
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") and Global
Depository Receipts ("GDRs"). Under current policy, however, the Fund limits
such investments, including ADRs, EDRs and GDRs to a maximum of 35% of its
total investments.
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. GDRs are receipts issued to one country which
also 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. GDRs are designed for use when the issuer is
raising capital in more than one market simultaneously, such as the issuer's
local market and the U.S., and have been used to overcome local selling
restrictions to foreign investors. In addition, many GDRs are eligible for
book-entry settlement through Cedel, Euroclear and DTC. The underlying
securities are not always denominated in the same currency as the ADRs , EDRs or
GDRs. Although investment in the form of ADRs , EDRs or GDRs 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 tradings. The Fund
11
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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 presently does not 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.
Currency Transactions
The Fund may engage in currency exchange transactions in order to
protect against the effect of uncertain future exchange rates on securities
denominated in foreign currencies. The Fund will conduct its 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. Under current policy, 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.
In entering a forward currency contract, 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. 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
12
<PAGE>
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.
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 any loaned securities plus accrued interest. Collateral
received by the Fund will generally be held in the form tendered, although cash
may be invested in unaffiliated mutual funds with quality short-term portfolios,
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities , or repurchase agreements, or other similar investments. 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 may receive a lending fee and will retain 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 or
its agents to be of good financial standing.
Short-Term Trading
The Fund may engage in short-term trading of securities and reserves
full freedom with respect to portfolio turnover. In periods where there are
rapid changes in economic conditions and 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 quarter
transaction costs, relative to other funds in general, and may have tax and
other consequences.
Temporary and Defensive Investments
The Fund may hold up to 100% of its assets in cash or short-term
debt 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. The types of
short-term instruments in which the Fund may invest for such purposes include
13
<PAGE>
short-term money market securities, such as repurchase agreements, and
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, certificates of deposit, time deposits and bankers'
acceptances of certain qualified financial institutions and corporate commercial
paper, which at the time of purchase are rated at least within the "A" major
rating category by Standard & Poor's Corporation ("S&P") or the "Prime" major
rating category by Moody's Investor's Service, Inc. ("Moody's"), or, if not
rated, issued by companies having an outstanding long-term unsecured debt issued
rated at least within the "A" category by S&P or Moody's.
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 may be classified
according to the industries of their parent or sponsor 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 &
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
<CAPTION>
Utility Energy Consumer Cyclical
- ------- ------ ------------------
<S> <C> <C>
Electric Oil Refining & Marketing Airline
Gas Oil Production Automotive
Gas Transmission Oil Service Building
Telephone Hotel & Restaurant
Photography
<CAPTION>
Other Finance Recreation
- ----- ------- Retail Trade
<S> <C> <C>
Trust Certificates -- Bank Textile & Apparel
Government Related Lending Financial Service
Asset-backed -- Mortgages Insurance
Asset-backed -- Credit
Card Receivables
</TABLE>
14
<PAGE>
Computer-Related Risks
Many mutual funds and other companies that issue securities, as well
as government entities upon whom those mutual funds and companies depend, may be
adversely affected by computer systems (whether their own systems or systems of
their service providers) that do not properly process dates beginning with
January 1, 2000 and information related to those dates. In addition, many funds
and other companies, especially those funds and companies that do business in
one or more national currencies of the countries in the European Union (the
"EU"), may be adversely affected by computer systems that cannot accommodate
concurrent references to two currencies, the national currency and the euro (the
proposed currency unit of the EU). Beginning on January 1, 1999 and for the
three years thereafter, businesses and governments in most EU countries
generally must be prepared to conduct their businesses in their national
currency and the euro. After such three-year period, they must conduct their
businesses only in the euro.
The euro conversion presents additional risks for the Fund to the
extent that it invests in securities denominated in a national currency that
eventually will be replaced by the euro. For example, trading, accounting and
other administrative systems must be able to reflect exchange rates between a
national currency of an EU member and the euro and to redenominate outstanding
tradeable debt securities into the euro in accordance with specific technical
requirements.
The Investment Manager currently is in the process of reviewing
its internal computer systems as they relate to the Fund, as well as the
computer systems of those service providers upon which the Fund relies, in order
to obtain reasonable assurances that the Fund will not experience a material
adverse impact related to either problem. The Fund does not currently anticipate
that either problem will have a material adverse impact on its portfolio
investments, taken as a whole. There can be no assurances in either area,
however, including the possibility that either or both problems could negatively
affect the investment markets or the economy generally.
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
The Fund may invest in long-term and short-term debt securities.
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:
15
<PAGE>
o direct obligations of the U.S. Treasury, i.e., U.S.
Treasury bills, notes, certificates and bonds;
o obligations of U.S. Government agencies or
instrumentalities, such as the Federal Home Loan Banks,
the Federal Farm Credit Banks, the Federal National
Mortgage Association, the Government National Mortgage
Association and the Federal Home Loan Mortgage
Corporation; and
o obligations of mixed-ownership Government corporations
such as Resolution Funding Corporation.
U.S. Government securities which 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 Bank, the Federal Farm Credit Bank, 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
16
<PAGE>
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 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.
17
<PAGE>
Short-Term Corporate Debt Instruments
Short-term corporate debt instruments include commercial paper to
finance short-term credit needs (i.e., short-term, unsecured promissory notes)
issued by corporations including but not limited to (a) domestic or foreign bank
holding companies or (b) their subsidiaries or affiliates where the debt
instrument is guaranteed by the bank holding company or an affiliated bank or
where the bank holding company or the affiliated bank is unconditionally liable
for the debt instrument. Commercial paper is usually sold on a discounted basis
and has a maturity at the time of issuance not exceeding nine months.
Zero and Step Coupon Securities
Zero and step coupon securities are debt securities that may pay no
interest for all or a portion of their life but are purchased at a discount to
face value at maturity. Their return consists of the amortization of the
discount between their purchase price and their maturity value, plus in the case
of a step coupon, any fixed rate interest income. Zero coupon securities pay no
interest to holders prior to maturity even though interest on these securities
is reported as income to the Fund. The Fund will be required to distribute all
or substantially all of such amounts annually to its shareholders. These
distributions may cause the Fund to liquidate portfolio assets in order to make
such distributions at a time when the Fund may have otherwise chosen not to sell
such securities. The market value of such securities may be more volatile than
that of securities which pay interest at regular intervals.
Commercial Paper Ratings
Commercial paper investments at the time of purchase will be rated
within the "A" major rating category by S&P or within the "Prime" major rating
category by Moody's, or, if not rated, issued by companies having an outstanding
long-term unsecured debt issue rated at least within the "A" category 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 within the "A" category by S&P or
within the "Prime" category by Moody's.
Commercial paper rated within the "A" category (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 within the "A" category or
better, although in some cases credits within the "BBB" category 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+.)
18
<PAGE>
The rating Prime is the highest commercial paper rating category
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.
THE TRUST, THE FUND AND ITS SHARES
The Fund was organized in 1995 as a separate series of State Street
Research Capital Trust, a Massachusetts business trust. 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 Trust is currently comprised of the following series: State Street
Research Capital Fund, State Street Research Emerging Growth Fund and State
Street Research Aurora Fund. 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. The Trustees also 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
Trustees have authorized shares of the Fund to be issued in five classes: Class
A, Class B(1), Class B, Class C and Class S 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 C
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. Except for those
differences between classes of shares described above, in the Fund's Prospectus
and otherwise this Statement of Additional Information, each share of the Fund
has equal dividend, redemption
19
<PAGE>
and liquidation rights with other shares of the Fund, and when issued, is fully
paid and nonassessable by the Fund.
Shareholder rights granted under the Master Trust Agreement may be
modified by the Trustees , provided, however, that the Master Trust Agreement
may not be amended if such amendment (a) repeals the limitations on personal
liability of any shareholder, or repeals the prohibition of assessment upon
shareholders, without the express consent of each shareholder involved or (b)
adversely modifies any shareholder right without the consent of the holders of a
majority of the outstanding shares entitled to vote. On any matter submitted to
the shareholders, the holder of a Fund share is entitled to one vote per share
(with proportionate voting for fractional shares) regardless of the relative net
asset value thereof. Except as provided by law, the Trustees may otherwise
modify the rights of shareholders at any time.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there ordinarily will be no shareholder meetings
unless required by the 1940 Act. Except as otherwise provided under the 1940
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 shares of the Trust 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 for 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.
20
<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 60. His principal occupation is currently,
and during the past five years has been, Executive Vice President of State
Street Research & Management Company. Mr. Bennett is also a Director of State
Street Research & Management Company. Mr. Bennett's other principal business
affiliations include 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 37. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he also has served as Vice President of State Street Research & Management
Company and was Vice President and portfolio manager at First Chicago Investment
Management Company.
+Steve A. Garban, The Pennsylvania State University, 210 Old Main,
University Park, PA 16802, serves as Trustee of the Trust. He is 61. He is
retired and was formerly Senior Vice President for Finance and Operations and
Treasurer of The Pennsylvania State University.
*Lawrence J. Haverty, Jr., One Financial Center, Boston, MA 02111,
serves as Vice President of the Trust. He is 54. His principal occupation is,
and during the past five years has been Senior Vice President of State Street
Research & Management Company.
+Malcolm T. Hopkins, 14 Brookside Road, Biltmore Forest, Asheville,
NC 28803, serves as Trustee of the Trust. He is 70. He is engaged principally in
private investments. Previously, he was Vice Chairman of the Board and Chief
Financial Officer of St. Regis Corp.
*Richard J. Jodka, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 55. His principal occupation is Senior Vice
President of State Street Research & Management Company. Previously, he was a
portfolio manager for Frontier Capital Management.
*+Rudolph K. Kluiber, One Financial Center, Boston, MA 02111, serves
as Vice President of the Trust. He is 39. His principal occupation currently is
Senior Vice President of State Street Research & Management Company. During the
past five years he has also served as Vice President and analyst of State Street
Research & Management Company.
- ----------------------
* or +, see footnotes on page 23.
21
<PAGE>
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791,
serves as Trustee of the Trust. He is 72. He is engaged principally in private
investments and civic affairs and is an author of business history. Previously,
he was with an affiliate of J.P. Morgan & Co. in New York.
+Robert A. Lawrence, 175 Federal Street, Boston, MA 02110, serves
as Trustee of the Trust. He is 72. He is retired and was formerly a partner at
Saltonstall & Co., a private investment firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 47. His principal occupation is currently and
during the past five years has been Executive Vice President, Treasurer, Chief
Financial Officer, Chief Administrative Officer and Director of State Street
Research & Management Company. Mr. Maus's other principal business affiliations
include Executive Vice President, Treasurer, Chief Financial Officer, Chief
Administrative 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 43. 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 Executive 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 66. He is retired and was formerly Executive
Vice President, Chief Operating Officer and Director of Hewlett-Packard Company.
+Susan M. Phillips, The George Washington University, 710 21st
Street, Suite 206, Washington, DC 20052, serves as Trustee of the Trust. She is
55. Her principal occupation is currently Dean and Professor of Finance and
Administration, School of Business and Public Management, The George Washington
University. Previously, she was a member of the Board of Governors of the
Federal Reserve System and Chairman and Commissioner of the Commodity Futures
Trading Commission.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118,
serves as Trustee of the Trust. He is 60. 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 23.
22
<PAGE>
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
61. 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 56. His principal occupation is currently, and during the past five
years has been, Chairman of the Board, President, Chief Executive Officer and
Director of State Street Research & Management 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 of that company) .
*+James M. Weiss, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 52. His principal occupation is Executive
Vice President 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 President and Chief Investment Officer of IDS Advisory
Group .
- ---------------------
* 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/Director and/or officer of one or more of the
following investment companies, each of which has an advisory
relationship with the Investment Manager or its parent, Metropolitan
Life Insurance Company ("Metropolitan"): 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.
23
<PAGE>
Record ownership of shares of the Fund as of October 31, 1998 was as
follows:
<TABLE>
<CAPTION>
Class Holder % of Class
- ----- ------ ----------
<S> <C> <C>
A Merrill Lynch 18.19
B Merrill Lynch 43.66
C Merrill Lynch 53.68
S Donaldson Lufkin 33.35
Timel & Co. 8.52
M. Vlantikas Ttee. 5.16
State Street Bank 11.06
</TABLE>
The full name and address of the above institutions are:
Merrill Lynch, Pierce, Fenner & Smith (a)
4800 Deerlake Drive East
Jacksonville, FL 32246
Donaldson Lufkin Jenrette Securities Corporation Inc. (a)
P.O. Box 2052
Jersey City, NY 07303
Timel & Co., MetLife Trust Company N.A.
One Crossroads Drive, Building A 3rd Fl
Bedminster, NJ 07921
M. Vlantikas Ttee.
c/o State Street Research Service Center
One Financial Center
Boston, MA 02111
State Street Bank and Trust Company (a)
225 Franklin Street
Boston, MA 02110
- -----------------
(a) The Fund believes that each named recordholder does not have beneficial
ownership of such shares.
Ownership of 25% or more of a voting security is deemed "control,"
as defined in the 1940 Act. So long as 25% of a class of shares is so owned,
such owners will be presumed to be in control of such class of shares for
purposes of voting on certain matters submitted to a vote of shareholders, such
as any Distribution Plan for a given class.
As of October 31, 1998, the Trustees and principal officers of the
Trust as a group owned approximately 1.63% of the outstanding Class A shares of
the Fund, and none of the outstanding Class B, Class C or Class S shares.
27
<PAGE>
The Trustees were compensated as follows:
<TABLE>
<CAPTION>
Total Compensation
Aggregate From Fund and
Compensation Fund Complex Paid
Name of Trustee From Fund (a) to Trustees (b)
--------------- ------------- ---------------
<S> <C> <C>
Steve A. Garban $4,300 $
Malcolm T. Hopkins $4,000 $
Edward M. Lamont $3,700 $
Robert A. Lawrence $4,000 $
Dean O. Morton $4,500 $
Susan M. Phillips $ 235 $
Toby Rosenblatt $4,300 $
Michael S. Scott Morton $4,700 $
Ralph F. Verni $ 0 $ 0
</TABLE>
- ----------------
(a) For the Fund's fiscal year ended September 30, 1998.
(b) Includes compensation on behalf of all series of 12 investment
companies for which the Investment Manager or its parent,
Metropolitan, served as investment adviser . "Total Compensation
from Fund and Fund Complex Paid to Trustees" for the 12 months ended
December 31, 1998. The Trust does not provide any pension or
retirement benefits for the Trustees.
MANAGEMENT OF THE FUND AND INVESTMENT ADVISORY SERVICES
Under the provisions of the Trust's Master Trust Agreement and the
laws of Massachusetts, responsibility for the management and supervision of the
Fund rests with the Trustees.
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 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 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.
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 Advisory Agreement provides that the
Investment Manager shall furnish the
28
<PAGE>
Fund with an investment program, office facilities and such investment advisory,
research and administrative services as may be required from time to time. The
Investment Manager compensates all executive and clerical personnel and Trustees
of the Trust if such persons are employees of the Investment Manager or its
affiliates. The Investment Manager is an indirect wholly-owned subsidiary of
Metropolitan Life Insurance Company ("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 regular trading on the New York
Stock Exchange (the "NYSE") on each day the NYSE is open for trading. The
advisory fees paid by the Fund to the Investment Manager for the last three
fiscal years, prior to the assumption of fees or expenses, were as follows:
1998, $4,919,113; 1997, $726,266; and 1996, $62,107. The Distributor and its
affiliates have from time to time and in varying amounts voluntarily reduced the
Fund's expenses. The voluntary reduction of expenses for the same periods were
as follows: 1998, $0; 1997, $135,389; and 1996, $187,754.
The Advisory Agreement provides that it shall continue in effect
from year to year with respect to the Fund 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 the Code of Ethics of the Investment Manager, investment
management personnel are only permitted to engage in personal securities
transactions in accordance with certain conditions relating to such person's
position, the identity of the security, the timing of the transaction, and
similar factors. Such personnel 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 State Street Research
Investment Services, Inc., the Distributor. The Fund offers five classes of
shares. Class A, Class B(1), Class C and Class S shares are available to all
eligible investors. Class B shares are available only to current Class B
shareholders through dividend reinvestment or through exchanges from existing
Class B accounts of the State Street Research Funds. Class A, Class B(1), Class
29
<PAGE>
C and Class S shares of the fund may be purchased at the next determined net
asset value per share plus, in the case of all classes except Class S 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(1) and Class C shares). General information on how to buy shares of the Fund,
as well as sales charges involved, are set forth under "Your Investment" in the
Prospectus. The following supplements that information.
Public Offering Price. The public offering price for each class of
shares is based on their net asset value determined as of the close of regular
trading on the NYSE on the day the purchase order is received by State Street
Research Service Center (the "Service Center"), provided that the order is
received prior to the close of regular trading on 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 the Service Center 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.
Alternative Purchase Program. 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, financial professionals are
paid differing amounts of compensation depending on which class of shares they
sell.
30
<PAGE>
The major differences among the various classes of shares are as
follows:
<TABLE>
<CAPTION>
Class A Class B(1) Class B Class C Class S
------- ---------- ------- ------- -------
(previously offered)
<S> <C> <C> <C> <C> <C>
Sales Charges Paid Initial sales charge Contingent Contingent Contingent None
by Investor to at time of deferred sales deferred sales deferred sales
Distributor investment of up charge of 5% to charge of 5% to charge of 1%
to 5.75% 1% applies to any 2% applies to any applies to any
depending on shares redeemed shares redeemed shares redeemed
amount of within first six within first five within one year
investment years following years following following their
their purchase; no their purchase; no purchase
contingent contingent
deferred sales deferred sales
charge after six charge after five
years 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
Initial Commission Above described 4% 4% 1% None
Paid by initial sales charge
Distributor to less 0.25% to
Financial 0.75% retained by
Professional distributor
On investments of
$1 million or
more, 0.25% to
1% paid to dealer
by Distributor
Rule 12b-1 Service
Fee
Paid by Fund 0.25% each year 0.25% each year 0.25% each year 0.25% each year None
to Distributor
Paid by 0.25% each year 0.25% each year 0.25% each year 0.25% each year None
Distributor to commencing after commencing after commencing after
Financial one year following one year following one year following
Professional purchase purchase purchase
Rule 12b-1
Distribution Fee
Paid by Fund None 0.75% for first 0.75% for first 0.75% each year None
to Distributor eight years; Class eight years; Class
B(1) shares B shares convert
convert automatically to
automatically to Class A shares
Class A shares after eight years
after eight years
Paid by None None None 0.75% each year None
Distributor to commencing after
Financial one year following
Professional purchase
</TABLE>
31
<PAGE>
Class A Shares--Reduced Sales Charges. The reduced sales charges set
forth under "Your Investment--Choosing a Share Class" in the Fund's Prospectus
apply to purchases made at any one time by any "person," which 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"
(which include the Fund and other funds as designated by the Distributor from
time to time) 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(1), Class B, Class C and Class S shares may also be included
in the combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the
specified amount. Shares equivalent to 5% of the specified amount will, however,
be taken from the initial purchase (or, if necessary, subsequent purchases) and
held in escrow in the investor's account as collateral against the higher sales
charge which would apply if the total purchase is not completed within the
allotted time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination
of Eligible Funds at reduced sales charges pursuant to a Right of Accumulation.
The applicable sales charge under the right is determined on the amount arrived
at by combining the dollar amount of the
32
<PAGE>
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(1), Class B, Class C and Class S 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.
Other Programs Related to Class A Shares. Class A shares of the Fund
may be sold or issued in an exchange at a reduced sales charge or without 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, registered investment advisers, 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.
In addition, no sales charge is imposed in connection with the sale
of Class A shares of the Fund to the following entities and person: (A) the
Investment Manager, Distributor or any affiliated entities, including any direct
or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated Companies,
any relatives of any such individuals whose relationship is directly verified by
such individuals to the Distributor, or any beneficial account for such
relatives or individuals; and (C) employees, officers, sales representatives or
directors of dealers and other entities with a selling agreement with the
Distributor to sell shares of any aforementioned investment company, any spouse
or child of such person, or any beneficial account for any of them. The purchase
must be made for investment and the shares purchased may not be resold except
through redemption. This purchase program is subject to such administrative
policies, regarding the qualification of purchasers and any other matters, as
may be adopted by the Distributor from time to time.
Conversion of Class B(1) and Class B Shares to Class A Shares. A
shareholder's Class B(1) and Class B shares of the Fund, 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 shares; consequently, they will no longer be
subject to the higher expenses borne by Class B(1) and 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 shares so converted. As
noted above, holding periods for Class B(1) shares received in exchange for
Class B(1) shares of other Eligible Funds and for Class B
33
<PAGE>
shares received in exchange for Class B shares of other Eligible Funds, will be
counted toward the eight-year period.
Contingent Deferred Sales Charges. The amount of any contingent
deferred sales charge paid on Class A shares (on sales of $1 million or more and
which do not involve an initial sales charge) or on Class B(1), Class B or Class
C shares of the Fund will be paid to the Distributor. The Distributor will pay
dealers at the time of sale a 4% commission for selling Class B(1) shares and a
1% commission for selling Class C shares. In certain cases, a dealer may elect
to waive the 4% commission on Class B(1) shares and receive in lieu thereof an
annual fee, usually 1%, with respect to such outstanding shares . The proceeds
of the contingent deferred sales charges and the distribution fees are used to
offset distribution expenses and thereby permit the sale of Class B(1), Class B
and Class C shares without an initial sales charge.
In determining the applicability and rate of any contingent deferred
sales charge on Class B(1), Class B or Class C shares, it will be assumed that a
redemption of the 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 shareholder
for the longest period of time. Class B(1) shares that are redeemed within a
six-year period after purchase, Class B shares that are redeemed within a
five-year period after their purchase, and Class C shares that are redeemed
within a one-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 holding period for purposes of
applying a contingent deferred sales charge for a particular class of 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 Fund, and shares of the same class 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.
Contingent Deferred Sales Charge Waivers. With respect to Class A
shares (on sales of $1 million or more and which do not involve an initial sales
charge), and Class B(1), Class B and Class C shares of the Fund, the contingent
deferred sales charge does not apply to exchanges or to redemptions under a
systematic withdrawal plan which meets certain conditions. The contingent
deferred sales charge will be waived for participant initiated distributions
from State Street Research prototype employee retirement plans. 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 of 1986, as amended, for retirement accounts or plans
34
<PAGE>
(e.g., age 70 1/2 for Individual Retirement Accounts 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 Individual Retirement Account. (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 at any time; for example, the Fund may limit
the application of multiple waivers and establish other conditions for employee
benefit plans. Certain employee benefit plans sponsored by a financial
professional may be subject to other conditions under which the plans may
initially invest in Class B(1) shares and subsequently invest in Class A shares
upon meeting specific criteria.
Class S Shares. Class S shares are currently available to certain
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants, service arrangements, or similar factors;
insurance companies; investment companies; advisory accounts of the Investment
Manager; endowment funds of nonprofit organizations with substantial minimum
assets (currently a minimum of $10 million); and other similar institutional
investors. Class S shares may be acquired through programs or products sponsored
by Metropolitan, its affiliates, or both for which Class S shares have been
designated. In addition, Class S shares are available through programs under
which, for example, investors pay an asset-based fee and/or a transaction fee to
intermediaries. Class S share availability is determined by the Distributor and
intermediaries based on the overall direct and indirect costs of a particular
program, expected assets, account sizes and similar considerations.
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.
Systematic Withdrawal Plan. A shareholder who owns noncertificated
Class A or Class S shares with a value of $5,000 or more, or Class B(1), Class B
or Class C 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
35
<PAGE>
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 Systematic Withdrawal 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 Systematic Withdrawal
Plan was initiated, whichever is higher.
Expenses of the Systematic Withdrawal Plan are borne by the Fund. A
participating shareholder may withdraw from the Systematic Withdrawal Plan, and
the Fund may terminate the Systematic Withdrawal Plan at any time on written
notice. Purchase of additional shares while a shareholder is receiving payments
under a Systematic Withdrawal Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate in
the Investamatic Program (see "Your Investment--Investor Services--Investamatic
Program" in the Fund's Prospectus) and the Systematic Withdrawal Plan at the
same time.
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.
Signature Guarantees. Signature guarantees are required for, among
other things: (1) written requests for redemptions for more than $100,000; (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.
Dishonored Checks. If a purchaser's 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 canceled.
Processing Charges. Purchases and redemptions processed through
securities dealers may be subject to processing charges imposed by the
securities dealer in addition to sales charges that may be imposed by the Fund
or the Distributor.
36
<PAGE>
SHAREHOLDER ACCOUNTS
General information on shareholder accounts is included in the
Fund's Prospectus under "Your Investment." The following supplements that
information.
Maintenance Fees and Involuntary Redemption. Because of the
relatively high cost of maintaining small shareholder accounts, the Fund
reserves the right to 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 involuntarily redemptions will be subject to applicable sales
charges, if any. The Fund may increase such minimum account value above such
amount in the future after notice to affected shareholders. Involuntarily
redeemed shares will be priced at the net asset value on the date fixed for
redemption by the Fund, and the proceeds of the redemption will be mailed to the
affected shareholder at the address of record. Currently, the maintenance fee is
$18 annually, which is paid to the Transfer Agent. The fee does not apply to
certain retirement accounts or if the shareholder has more than an aggregate
$50,000 invested in the Fund and other Eligible Funds combined. Imposition of a
maintenance fee on a small account could, over time, exhaust the assets of such
account.
To cover the cost of additional compliance administration, a $20 fee
will be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
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 (the
"SEC") may by order permit for the protection of investors; and (b) the payment
of redemption proceeds may be postponed as otherwise provided under "Purchase
and Redemption of Shares" in this Statement of Additional Information.
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(1), Class B or Class C shares will not be issued, while certificates
representing Class A or Class S 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.
37
<PAGE>
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 "State Street Research Funds" under the terms set
forth above under "Purchase and Redemption of Shares" in
this Statement of Additional Information.
2. The following methods of receiving dividends from
investment income and distributions from capital gains
generally are available:
(a) All income dividends and capital gains
distributions reinvested in additional
shares of the Fund.
(b) All income dividends and capital gains
distributions in cash.
(c) 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, that account will be automatically 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
the Service Center. Dividends and distributions are reinvested at net asset
value without a sales charge.
Exchange Privileges. 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(1),
Class B and Class C 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 any acquired Class A, Class B(1),
Class B and Class C shares, the holding period of the redeemed
38
<PAGE>
shares is "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(1), Class B or Class C 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.
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 with
respect to the Fund (see "Your Investment--Account Policies--Telephone Requests"
in the Fund's Prospectus and "--Telephone Privileges," below) as the existing
account unless the Service Center 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 the Service
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Center and delivered by the Service Center to the Transfer Agent by 12 noon
Boston time on any business day with normal trading conditions, the exchange
usually will occur that day. For further information regarding the exchange
privilege, shareholders should contact the Service Center.
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 the
Service Center of such shareholder's written purchase request and delivery of
the request by the Service Center 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.
Dividend Allocation Plan. The Dividend Allocation Plan allows
shareholders to elect to have all 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.
Telephone Privileges. The following telephone privileges are
available:
o Telephone Exchange Privilege for Shareholder and Shareholder's
Financial Professional
o Shareholders automatically receive this privilege unless
declined.
o This privilege allows the shareholder or the shareholder's
financial professional to request exchanges into other State
Street Research funds.
o Telephone Redemption Privilege for Shareholder
o Shareholders automatically receive this privilege unless
declined.
o This privilege allows the shareholder to phone requests to
sell shares, with the proceeds sent to the address of record.
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o Telephone Redemption Privilege for Shareholder's Financial
Professional (This privilege is not automatic; a shareholder must
specifically elect it)
o This privilege allows the shareholder's financial professional
to phone requests to sell shares, with the proceeds sent to
the address of record on the account.
A shareholder with the above telephone privileges is deemed to
authorize the Service Center and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder or the
shareholder's financial professional; 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. Neither the Fund, the
other Eligible Funds, the Transfer Agent, the Investment Manager nor 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.
Alternative Means of Contacting the Fund. It is unlikely, during
periods of extraordinary market conditions, that a shareholder may have
difficulty in reaching the Service Center. In that event, however, the
shareholder should contact the Service Center at 1-800- 562-0032, 1-617-357-7800
or otherwise at its main office at One Financial Center, Boston, Massachusetts
02111-2690.
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once
daily as of the close of regular trading on 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, Martin
Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is computed by dividing
the sum of the value of the securities held by the Fund plus any cash or other
assets minus all liabilities by the total number of outstanding shares of the
Fund at such time. Any expenses, except for extraordinary or nonrecurring
expenses, borne by the Fund, including the investment management fee payable to
the Investment Manager, are accrued daily.
In determining the values of portfolio assets as provided below, the
Trustees utilize one or more pricing services in lieu of market quotations for
certain securities which are not readily available on a daily basis. Such
services utilize information with respect to market
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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.
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, Inc.'s (the "NASD") NASDAQ System are valued
at the closing price supplied through such system for that day at the close of
the NYSE. Other securities are, in general, valued at the mean of the bid and
asked quotations last quoted prior to the close of the NYSE if there are market
quotations readily available, or in the absence of such market quotations, then
at the fair value thereof as determined by or under authority of the Trustees of
the Trust with the use of such pricing services as may be deemed appropriate or
methodologies approved by the Trustees. The Trustees also reserve the right to
adopt other valuations based on fair value in pricing in unusual circumstances
where use of other methods as discussed in part above, could otherwise have a
material adverse effect on the Fund as a whole.
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 and
having a remaining maturity of 60 days or less when the value obtained is fair
value, 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. 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's portfolio turnover rates for the fiscal years ended
September 30, 1997 and 1998, respectively, were as follows: 25.03% and 67.80%.
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The Investment Manager believes the portfolio turnover rate for the
fiscal year ended September 30, 1998 was significantly higher than for the
previous year because of transactions at different times in a very volatile
market during the year to invest cash proceeds from the sales of shares of the
Fund, and to also liquidate portfolio holdings to meet redemption requests.
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 including software providing investment
personnel with efficient access to current and historical data from a
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variety of internal and external sources); and portfolio evaluation services and
relative performance of accounts.
In the case of the Fund and other registered investment companies
advised by the Investment Manager or its affiliates, the above services may
include data relating to performance, expenses and fees of those investment
companies and other investment companies; this information is used by the
Trustees or Directors of the investment companies to fulfill their
responsibility to oversee the quality of the Investment Manager's advisory
contracts between the investment companies and the Investment Manager. The
Investment Manager considers these investment company services only in
connection with the execution of transactions on behalf of its investment
company clients and not its other clients. Certain of the 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 regularly reviews and evaluates the services
furnished by broker-dealers. The Investment Manager's investment management
personnel seek to evaluate the quality of the research and other services
provided by various broker-dealer firms, and the results of these efforts are
made available to the equity trading department, which uses this information as
consideration to the extent described above in the selection of brokers to
execute portfolio transactions.
Some services furnished by broker-dealers 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 the services to determine the proportion which is
allocable to research or investment decision-making and the proportion allocable
to other purposes. The Investment Manager pays directly from its own funds for
that portion that is allocable to uses other than research or investment
decision-making. 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
providing the services.
The Investment Manager has no fixed agreements or understandings
with any broker-dealer as to the amount of brokerage business which the firm may
expect to receive for services supplied to the Investment Manager or otherwise.
There may be, however, understandings with certain firms that in order for such
firms to be able to continuously supply certain services, they need to receive
allocation of a specified amount of brokerage business. These understandings are
honored to the extent possible in accordance with the policies set forth above.
It is not the Investment Manager's policy to intentionally pay a
firm a brokerage commission higher than that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided. However, the Investment Manager is aware that this is an
area where differences of opinion as to fact and
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<PAGE>
circumstances may exist, and in such circumstances, if any, the Investment
Manager relies on the provisions of Section 28(e) of the Securities Exchange Act
of 1934. Brokerage commissions paid by the Fund in secondary trading during the
last three fiscal years ended September 30 were as follows: 1996, $20,000; 1997,
$347,000; and 1998, $710,885.
During and at the end of its most recent fiscal year, the Fund did
not hold in its portfolio 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
commissions and designations to brokers or dealers which provide the client with
research, performance evaluation, master trustee and other services. In the
absence of instructions from the client, the Investment Manager may make such
allocations to broker-dealers which have provided the Investment Manager with
research and brokerage services.
In some instances, certain clients of the Investment Manager request
it to place all or part of the orders for their account with certain brokers or
dealers, which in some cases provide services to those clients. The Investment
Manager generally agrees to honor these requests to the extent practicable.
Clients may condition their requests by requiring the Investment Manager only
effect transactions with the specified broker-dealers if the broker-dealers are
competitive as to price and execution. In other cases, the Investment Manager
may be unable to negotiate commissions or obtain volume discounts or best
execution. In addition, a disparity may exist among the commissions charged to
clients who request the Investment Manager to use particular brokers or dealers,
and also between those clients and those who do not make such requests. A client
who requests the use of a particular broker-dealer should understand that it may
lose the possible advantage which non-requesting clients derive from aggregation
of orders for several clients as a single transaction for the purchase or sale
of a particular security. Among other reasons why best execution may not be
achieved with directed brokerage is that, in an effort to achieve orderly
execution of transactions, execution of orders that have designated particular
brokers may, at the discretion of the trading desk, be delayed until execution
of other non-designated orders have been completed.
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
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<PAGE>
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 elects 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 qualify to 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"); and (b) satisfy certain
diversification requirements on a quarterly basis.
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 to the extent thereof. Any distribution in excess of a shareholder's basis
in the shareholder's shares would be taxable as gain realized from the sale of
such shares.
The Fund will be liable for a nondeductible 4% excise tax on amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement. To avoid the tax, during each calendar year the Fund
must distribute an amount equal to at least 98% of the sum of its ordinary
income (not taking into account any capital gains or losses) for the
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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.
Taxation of the Fund's Investments
Original Issue Discount; Market 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 federal
income tax purposes. In the case of any debt security issued after July 18,
1984, having a fixed maturity date of more than one year from the date of issue
and having market discount, the gain realized on disposition will be treated as
interest to the extent it does not exceed the accrued market discount on the
security (unless 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 or
continued 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,
and require inclusion of unrealized gains in the Fund's income for purposes of
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 and
long-term gain or loss irrespective of the holding period of the investment.
Such provisions generally apply to, among other investments, options on debt
securities, indices on securities and futures contracts. The Fund will monitor
its transactions and may make certain tax elections available to it in order to
mitigate the impact of these rules and prevent disqualification of the Fund as a
regulated investment company.
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Gains or losses attributable to foreign currency contracts or
fluctuations in exchange rates that occur between the time the Fund accrues
income or expenses denominated in a foreign currency and the time the Fund
actually collects such income or pays such expenses are treated as ordinary
income or loss. The portion of any gain or loss on the disposition of a debt
security denominated in a foreign currency that is attributable to fluctuations
in the value of the foreign currency during the holding period of the debt
security may likewise be treated as ordinary income or loss. Such ordinary
income or loss will increase or decrease the amount of the Fund's net investment
income.
If the Fund invests in the stock of certain "passive foreign
investment companies" ("PFICs"), income of such companies may become taxable to
the Fund prior to its distribution to the Fund or, alternatively, ordinary
income taxes and interest charges may be imposed on the Fund on "excess
distributions" received by the Fund or on gain from the disposition of such
investments by the Fund. The Fund does not intend to invest in PFICs. Because of
the broad scope of the PFIC rules, however, there can be no assurance that the
Fund can avoid doing so.
Taxation Of The Fund's Shareholders
The Fund may be subject to foreign taxes, including foreign income
taxes. If so, the Fund intends to meet the requirements of the Code for passing
through to its shareholders the tax benefit of foreign income taxes paid,
although there is no assurance that it will be able to do so. Under this
provision, if more than half of the value of the total assets of the Fund at the
close of its taxable year consists of stock or securities of foreign
corporations, the Fund will be eligible and intends to elect to pass through to
its shareholders the amount of foreign taxes it paid if such amounts are
material. Pursuant to this election, a United States shareholder will, in
general, be required to (i) include in gross income, in addition to taxable
distributions actually received, his or her pro rata share of the foreign taxes
paid by the Fund, (ii) treat that share of taxes as having been paid directly by
him or her, and (iii) either deduct such share of taxes or treat such share of
taxes as a credit against United States income tax liability. A tax-exempt
shareholder will ordinarily not benefit from this election.
Generally, a credit for foreign taxes paid by the Fund may not
exceed a shareholder's United States income tax attributable to the
shareholder's foreign source income. This limitation applies separately to
different categories of income, one of which is foreign-source passive income,
which is likely to include all of the foreign-source income of the Fund. As a
result of these limitations, some shareholders may not be able to utilize fully
any foreign tax credits generated by an investment in the Fund. The Fund will
provide its shareholders with information about the source of its income and the
foreign taxes it has paid for use in preparing the shareholder's United States
income tax return.
Dividends from domestic corporations are not expected to comprise a
substantial part of the income of the Fund. If such dividends are earned by the
Fund, then a portion
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of the dividends paid by the Fund may qualify for the 70% deduction for
dividends received which is available to corporate shareholders of the Fund.
Shareholders will be informed of any portion of the dividends paid by the Fund
which qualifies for this deduction. The dividends-received deduction is reduced
to the extent the dividends received are treated as debt-financed, under the
Code, and is eliminated if the stock is held for less than 46 days.
Any dividend declared in October, November or December and made
payable to shareholders of record in any such month is treated as received by
such shareholder on December 31, provided that the Fund pays the dividend during
January of the following calendar year.
Distributions by the Fund 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 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.
The foregoing discussion of United States federal income tax law
relates solely to the application of that law to United States persons, that is,
United States citizens and residents and United States corporations,
partnerships, trusts and estates. Each shareholder who is not a United States
person should consider the United States and foreign tax consequences of
ownership of shares of the Fund, including the possibility that such a
shareholder may be subject to United States withholding tax at a rate of up to
30% (or at a lower rate under applicable treaty) on distributions from the Fund.
Shareholders should consult their tax advisers about the application
of the provisions of tax law described in this Statement of Additional
Information in light of their particular tax situations.
DISTRIBUTION OF SHARES OF THE FUND
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
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(Class B and Class C shares). The Distributor may reallow all or portions of
such sales charges as concessions to dealers. For the fiscal years ended
September 30, 1996, 1997 and 1998, total sales charges on Class A shares paid to
the Distributor amounted to $449, $2,602,606 and $ , respectively. For the same
periods, the Distributor retained $49, $314,023 and $174,206, respectively,
after reallowance of concessions to dealers. The Distributor may also pay its
affiliate Metlife Securities, Inc. additional sales compensation of up to 0.25%
of certain sales or assets.
The differences in the price at which the Fund's Class A shares are
offered due to scheduled variations in sales charges, or Class S shares are
offered, as described in the Fund's Prospectus, result from cost savings
inherent in economies of scale, among other factors. 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, managed fee-based programs and so-called "mutual fund
supermarkets," among other special programs, the amount of the sales charge
reduction will similarly reflect the anticipated reduction in sales expenses
associated with such arrangements. The reductions in sales expenses, and
therefore the reduction in sales 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
or similar programs 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(1), Class B and Class
C shares of the Fund and paid
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initial commissions to securities dealers for sales of such Class A, Class B(1),
Class B and Class C shares as follows:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended September 30, 1998 Ended September 30, 1997 Ended September 30, 1996
------------------------ ------------------------ ------------------------
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 $ 1,247,116 $ 0 $ 2,288,583 $ 0 $ 400
Class B $ 702,451 $ 3,873,069 $ 8,896 $ 7,025,505 $ 0 $ 0
Class C $ 39,391 $ 348,378 $ 3,376 $ 505,683 $ 0 $ 0
</TABLE>
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "Class A/B/C 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 C 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 and (3) reimbursement of expenses incurred by
the Distributor in connection with the servicing of shareholder accounts
including payments to securities dealers and others in consideration of the
provision of personal service to investors and/or the maintenance or servicing
of shareholder accounts . In addition, the Class A/B/C 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 Class A/B/C 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 C shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class C
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of average daily value of the net assets represented by such Class
B or Class C shares (as the case may be) to make payments for personal services
and/or the maintenance or servicing of shareholder accounts.
The Fund also has adopted "Rule 12b-1 Plan for Class B(1) Shares"
(the "B(1) Distribution Plan") under which the Fund shall pay the Distributor
(a) a service fee at the end of each month at the annual rate of 0.25% of
average daily net assets attributable to the Class (B)1 Shares to compensate the
Distributor and any securities firms or other third parties who render personal
services to and/or maintain shareholder accounts for
51
<PAGE>
the shareholders of the respective class and (b) a distribution fee under the
Distribution Plan at the end of each month at the annual rate of 0.75% of
average daily net assets attributable to the Class B(1) Shares to compensate the
Distributor for services provided and expenses incurred by it in connection with
sales, promotional and marketing activities relating to the respective class. To
the extent that any payments made by Fund to the Distributor or the Investment
Manager, including payment of investment management fees, should be deemed to be
an indirect financing of any activity primarily resulting in the sale of shares
of the Fund within the scope of Rule 12b-1 under the 1940 Act, then such
payments shall be deemed to be authorized by the Class B(1) Distribution Plan.
A rule of the National Association of Securities Dealers, Inc.
("NASD") limits annual expenditures that the Fund may incur to 0.75% for
distribution expenses and 0.25% for service fees. The NASD Rule also limits the
aggregate amount that 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 the
service fees. Payments to the Distributor or to dealers funded under either the
Class A/B/C Distribution Plan or the Class B(1) Distribution Plan may be
discontinued at any time.
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(1), Class B and Class C 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).
The distribution fees are used primarily to offset initial and
ongoing commissions paid to dealers for selling such shares and for other sales
and marketing expenditures.
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.
The payment of service and distribution fees may continue even if
the Fund ceases, temporarily or permanently, to sell one or more classes of
shares to new accounts. During the period the Fund is closed to new accounts,
the distribution fee will not be used for promotion expenses. The service and
distribution fees are used during a closed period to cover services provided to
current shareholders and to cover the compensation of
52
<PAGE>
financial professionals in connection with the prior sale of Fund shares, among
other non- promotional distribution expenditures.
The Distributor may pay certain dealers and other intermediaries
additional compensation for sales and administrative services. The Distributor
may provide cash and noncash incentives to intermediaries who, for example, sell
significant amounts of shares or develop particular distribution channels. The
Distributor may compensate dealers with clients who maintain their investments
in the Fund over a period of years. The incentives can include merchandise and
trips to, and attendance at, sales seminars at resorts. The Distributor may pay
for administrative services, such as technological and computer systems support
for the maintenance of pension plan participant records, for subaccounting, and
for distribution through mutual fund supermarkets or similar arrangements.
During the fiscal year ended September 30, 1998, the Fund paid the
Distributor fees under the Distribution Plan and the Distributor used all of
such payments for expenses incurred on behalf of the Fund as follows:
<TABLE>
<CAPTION>
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Advertising $ 0 $ 35,389 $ 47,294
Printing and mailing of prospectuses to
other than current shareholders 0 5,364 7,225
Compensation to dealers 0 2,821,725 418,313
Compensation to sales personnel 471,627 98,624
Interest 0 0 0
Carrying or other financing charges 0 0 0
Other expenses: marketing; general 0 52,939 72,406
--------- ----------- ---------
Total fees $ 471,627 $ 2,986,138 $ 643,862
========= =========== =========
Difference 241,909*
=========
*Net fees result from timing of expenditures and are used against future
expenses.
</TABLE>
The Distributor may have also used additional resources of its own
for further expenses on behalf of the Fund.
No interested Trustee of the Trust has any direct or indirect
financial interest in the operation of the Distribution Plan or any related
agreements thereunder. The Distributor's interest in the Distribution Plan is
described above.
53
<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
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 or Class S shares to the performance 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 Standard & Poor's 500 Index, Russell
2000 Value Index, Consumer Price Index and Dow Jones Industrial Average and/or
to appropriate rankings and averages such as those compiled by Lipper Analytical
Services, Inc., Morningstar, Inc., Money Magazine, Business Week, Forbes
Magazine, The Wall Street Journal and Investor's Daily. For example, the
performance of the Fund might be compared to the Lipper Small Cap Funds Index or
Average.
The average annual total return ("standard total return") of the
Class A, Class B, Class C and Class S shares of the Fund will be calculated as
set forth below. Total return is computed separately for each class of shares of
the Fund.
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 and Recurring Charges" later in
this section.
Total Return
The Fund's annual total return ("standard total return") of each
class of the Fund's shares was as follows:
<TABLE>
<CAPTION>
Commencement of Operations One Year
(February 13, 1995) Ended
to September 30, 1998 September 30, 1998
-------------------------- ------------------
<S> <C> <C>
Class A 22.44% -27.82%
Class B 22.58% -28.69%
Class C 23.04% -25.74%
Class S 24.30% -24.23%
</TABLE>
54
<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 highest
applicable initial or contingent deferred sales charge 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 and Recurring Charges
Accrued expenses include all recurring charges 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 are determined without giving effect to the
subsidization, if any, by affiliates of fees or expenses during the subject
period. In calculating performance, the accrued expenses are reduced by the
amount of any subsidy. In the absence of such subsidization, the performance of
the fund would have been lower.
Nonstandardized Total Return
The Fund may provide the above described standard total return
results for Class A, Class B, Class C and Class S shares for periods which end
no earlier than the most recent calendar quarter end and which begin twelve
months before, five years before and ten years before. 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
55
<PAGE>
payment of $1,000. For example, the Fund's nonstandardized total returns for the
six months ended September 30, 1998, without taking sales charges into account,
were as follows:
<TABLE>
<S> <C>
Class A -28.97%
Class B -29.22%
Class C -29.26%
Class S -28.86%
</TABLE>
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
PricewaterhouseCoopers LLP, 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 SEC filings and
(3) review of the annual income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
Each of the the Investment Portfolio, Statement of Assets and
Liabilities, Statement of Operations and Statement of Changes in Net Assets,
included in the Fund's Annual Report to Shareholders for the fiscal year ended
September 30, 1998, including any notes thereto or Report of Independent
Accountants is hereby incorporated by reference from the Fund's Annual Report,
filed with the Securities and Exchange Commission (EDGAR accession number
0000950146-98-002042). Shareholder reports are available without charge upon
request. For more information, call the State Street Research Service Center at
(800) 562-0032.
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 through electronic or other media. Shareholders with
substantial holdings in one or more State Street Research Funds may also receive
reports and other information which reflect or analyze their positions in a
consolidated manner.
56
<PAGE>
DOCSC\561047.7
57
<PAGE>
STATE STREET RESEARCH CAPITAL TRUST
PART C
OTHER INFORMATION
-----------------
Item 23: Exhibits
(1)(a) First Amended and Restated Master Trust Agreement, Amendment
No. 1 and Amendment No. 2 (xi)
(1)(b) Amendment No. 3 to First Amended and Restated Master Trust
Agreement (xii)
(1)(c) Amendment No. 4 to First Amended and Restated Master Trust
Agreement (xiv)
(1)(d) Amendment No. 5 to First Amended and Restated Master Trust
Agreement (xv)
(2)(a) By-Laws of the Registrant (iii)**
(2)(b) Amendment No. 1 to By-Laws, effective September 30, 1992
(vii)**
(3) Not Applicable
(4)(a) Deleted.
(4)(b) Deleted.
(5)(a) Investment Advisory Contract with respect to State Street
Capital Fund (iii)**
(5)(b) Restated Advisory Agreement with respect to State Street
Research Small Capitalization Growth Fund and Letter
Agreement relating to State Street Research Small
Capitalization Value Fund (xi)
(6)(a) Distribution Agreement with State Street Research Investment
Services, Inc. (viii)**
(6)(b) Form of Selected Dealer Agreement, as Supplemented (xiv)
(6)(c) Form of Bank and Bank-Affiliated Broker-Dealer Agreement
(x)**
C-1
<PAGE>
(6)(d) Letter Agreement with respect to the Distribution Agreement
relating to State Street Research Small Capitalization
Value Fund (xi)
(7) Not Applicable
(8)(a) Custodian Contract (iii)**
(8)(c) Letter Agreement with respect to the Custodian Contract
relating to State Street Small Capitalization Growth Fund
(vii)**
(8)(d) Letter Agreement with respect to the Custodian Contract
relating to State Street Research Small Capitalization Value
Fund (xi)
(9) Agreement and Plan of Reorganization and Liquidation (iii)**
(10)(a) Consent and Opinion of counsel on legality of shares being
issued with respect to State Street Capital Fund (vii)**
(10)(b) Consent and Opinion of counsel on legality of shares being
issued with respect to State Street Small Capitalization
Growth Fund (vi)**
(10)(c) Consent and Opinion of counsel on legality of shares being
issued with respect to MetLife - State Street Research Small
Capitalization Value Fund (x)**
(11) Consent of PricewaterhouseCoopers LLP
(12) Not Applicable
(13)(a) Subscription and Investment Letters -- State Street Small
Capitalization Growth Fund (vii)**
(13)(b) Subscription and Investment Letters -- State Street Research
Small Capitalization Value Fund (xi)
(14)(a) Deleted
C-2
<PAGE>
(14)(b) Deleted
(14)(c) Deleted
(15)(a) Plan of Distribution Pursuant to Rule 12b-1 with respect to
State Street Research Capital Fund (x)**
(15)(b) Letter Agreement with respect to Plan of Distribution
Pursuant to Rule 12b-1 relating to State Street Research
Small Capitalization Growth Fund (viii)**
(15)(c) Letter Agreement with respect to Plan of Distribution
Pursuant to Rule 12b-1 relating to State Street Research
Small Capitalization Value Fund (xi)
(15)(d) Form of Rule 12b-1 Plan for Class B(1) Shares
(16)(a) Deleted
(16)(b) Deleted
(17)(a) First Amended and Restated Multiple Class Expense Allocation
Plan Adopted Pursuant to Rule 18f-3 (xiv)
(17)(b) Form of Addendum to First Amended and Restated Multiple
Class Expense Allocation Plan
(18)(a) Powers of Attorney (xv)
(18)(b) Certificate of Board Resolution Respecting Powers of
Attorney (xv)
(18)(c) Power of Attorney for Susan M. Phillips
(18)(d) Certificate of Board Resolution Respecting Power of Attorney
for Susan M. Phillips
(19)(a) New Account Application
(19)(b) Additional Services Application
(19)(c) MetLife Securities, Inc. New Account Application
(27) Financial Data Schedules
- -------------
**Restated in electronic format in Post-Effective Amendment No. 15 filed on
December 3, 1997.
*The Series of the Registrant have changed their names at various times.
Documents in this listing of Financial Statements and Exhibits which were
effective prior to the most recent name change accordingly refer to a former
name of such Series.
C-3
<PAGE>
- ----------
Filed as part of the Registration Statement as noted below and incorporated
herein by reference:
Footnote Securities Act of 1933
Reference Registration/Amendment Date Filed
i Initial Registration August 22, 1983
ii Post-Effective Amendment No. 1 July 15, 1988
iii Post-Effective Amendment No. 2 December 2, 1988
iv Post-Effective Amendment No. 3 January 26, 1990
v Post-Effective Amendment No. 4 January 31, 1991
vi Post-Effective Amendment No. 6 May 26, 1992
vii Post-Effective Amendment No. 7 November 25, 1992
viii Post-Effective Amendment No. 8 November 26, 1993
ix Post-Effective Amendment No. 9 January 21, 1994
x Post-Effective Amendment No. 10 November 18, 1994
xi Post-Effective Amendment No. 11 October 11, 1995
xii Post-Effective Amendment No. 12 November 29, 1995
xiii Post-Effective Amendment No. 13 January 31, 1996
xiv Post-Effective Amendment No. 14 January 21, 1997
xv Post-Effective Amendment No. 15 December 3, 1997
C-4
<PAGE>
Item 24. Inapplicable
Item 25. Indemnification
Article VI of Registrant's First Amended and Restated Master Trust
Agreement as further amended ("Master Trust Agreement") provides: The Trust
shall indemnify (from the assets of the Sub-Trust or Sub-Trusts in question)
each of its Trustees and officers (including persons who serve at the Trust's
request as directors, officers or trustees of another organization in which the
Trust has any interest as a shareholder, creditor or otherwise (hereinafter
referred to as a "Covered Person")) against all liabilities, including but not
limited to amounts paid in satisfaction of judgments, in compromise or as fines
and penalties, and expenses, including reasonable accountants' and counsel fees,
incurred by any Covered Person in connection with the defense or disposition of
any action, suit or other proceeding, whether civil or criminal, before any
court or administrative or legislative body, in which such Covered Person may be
or may have been involved as a party or otherwise or with which such person may
be or may have been threatened, while in office or thereafter, by reason of
being or having been such a Trustee or officer, director or trustee, except with
respect to any matter as to which it has been determined that such Covered
Person had acted with willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such Covered
Person's office (such conduct referred to hereafter as "Disabling Conduct"). A
determination that the Covered Person is entitled to indemnification may be made
by (i) a final decision on the merits by a court or other body before whom the
proceeding was brought that the person to be indemnified was not liable by
reason of Disabling Conduct, (ii) dismissal of a court action or an
administrative proceeding against a Covered Person for insufficiency of evidence
of Disabling Conduct, or (iii) a reasonable determination, based upon a review
of the facts, that the indemnitee was not liable by reason of Disabling Conduct
by (a) a vote of a majority of a quorum of Trustees who are neither "interested
persons" of the Trust as defined in section 2(a)(19) of the 1940 Act nor parties
to the proceeding, or (b) an independent legal counsel in a written opinion.
Under the Distribution Agreement between the Registrant and State Street
Research Investment Services, Inc., the Registrant's distributor, the Registrant
has agreed to indemnify and hold harmless State Street Research Investment
Services, Inc. and each person who has been, is, or may hereafter be an officer,
director, employee or agent of State Street Research Investment Services, Inc.
against any loss, damage or expense reasonably incurred by any of them in
connection with any claim or in connection with any action, suit or proceeding
to which any of them may be a party, which arises out of or is alleged to arise
out of or is based upon a violation of any of its covenants herein contained or
any untrue or alleged untrue statement of material fact, or the omission or
alleged omission to state a material fact necessary to make the statements made
not misleading, in a Registration Statement or Prospectus of the Registrant, or
any amendment or supplement thereto, unless such statement or omission was made
in reliance upon written information furnished by State Street Research
Investment Services, Inc.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 may be permitted to trustees, officers, underwriters
and controlling persons of the Registrant, pursuant to Article VI of the
Registrant's Master Trust Agreement, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such trustee, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
C-5
<PAGE>
Item 26. Business and Other Connections of Investment Adviser
Describe any other business, profession, vocation or employment of a
substantial nature in which each investment adviser of the Registrant, and each
director, officer or partner of any such investment adviser, is or has been, at
any time during the past two fiscal years, engaged for his own account or in the
capacity of director, officer, employee, partner or trustee.
<TABLE>
<CAPTION>
Principal business
Name Connection Organization address of organization
- ----- ---------- ------------ -----------------------
<S> <C> <C> <C>
State Street Research & Investment Adviser Various investment advisory Boston, MA
Management Company clients
Arpiarian, Tanya None
Vice President
Bangs, Linda L. None
Vice President
Barnwell, Amy F.
Vice President
Beaudry, Matthew F.
Vice President
Bennett, Peter C. Vice President State Street Research Capital Trust Boston, MA
Director and Vice President State Street Research Exchange Trust Boston, MA
Executive Vice Vice President State Street Research Financial Trust Boston, MA
President Vice President State Street Research Growth Trust Boston, MA
Vice President State Street Research Master Investment Trust Boston, MA
Vice President State Street Research Equity Trust Boston, MA
Director State Street Research Investment Services, Inc. Boston, MA
Director and Chairman Boston Private Bank & Trust Co. Boston, MA
of Exec. Comm.
Vice President State Street Research Income Trust Boston, MA
Vice President State Street Research Portfolios, Inc. Boston, MA
Vice President State Street Research Securities Trust Boston, MA
President and Director Christian Camps & Conferences, Inc. Boston, MA
Chairman and Trustee Gordon College Wenham, MA
Bochman, Kathleen None
Vice President
Borzilleri, John Vice President Montgomery Securities San Francisco, CA
Senior Vice President (until 6/97)
(Vice President
until 4/98)
Bray, Michael J. None
Senior Vice President
(Vice President
until 4/98)
Brezinski, Karen None
Vice President
Brown, Susan H. None
Vice President
Buffum, Andrea L. None
Burbank, John F. None
Senior Vice President
Cabrera, Jesus A. Vice President State Street Research Capital Trust Boston, MA
Senior Vice President
(Vice President
until 4/98)
C-6
<PAGE>
Principal business
Name Connection Organization address of organization
- ----- ---------- ------------ -----------------------
Calame, Mara D. Vice President and State Street Research Energy, Inc. Boston, MA
Vice President and Assistant Counsel
Assistant Secretary
Canavan, Joseph W. Assistant Treasurer State Street Research Equity Trust Boston, MA
Senior Vice President Assistant Treasurer State Street Research Financial Trust Boston, MA
(Vice President Assistant Treasurer State Street Research Income Trust Boston, MA
until 4/98) Assistant Treasurer State Street Research Money Market Trust Boston, MA
Assistant Treasurer State Street Research Tax-Exempt Trust Boston, MA
Assistant Treasurer State Street Research Capital Trust Boston, MA
Assistant Treasurer State Street Research Exchange Trust Boston, MA
Assistant Treasurer State Street Research Growth Trust Boston, MA
Assistant Treasurer State Street Research Master Investment Trust Boston, MA
Assistant Treasurer State Street Research Securities Trust Boston, MA
Assistant Treasurer State Street Research Portfolios, Inc. Boston, MA
Carstens, Linda C. Vice President State Street Research Investment Boston, MA
Vice President Services, Inc.
Clifford, Jr., Paul J. Vice President State Street Research Tax-Exempt Trust Boston, MA
Vice President
Coleman, Thomas J. None
Vice President
Cowling, Dyann H. Vice President State Street Research Money Market Trust Boston, MA
Vice President
Cullen, Terrence J. Vice President Keystone-Evergreen Boston, MA
Vice President and Counsel
and Counsel, and (until 2/98)
Assistant Secretary
D'Vari, Ronald None
Vice President
Depp, Maureen G. Vice President Wellington Management Company Boston, MA
Vice President (until 9/97)
DeVeuve, Donald None
Vice President
DiFazio, Susan M.W. Senior Vice President State Street Research Investment Services, Inc. Boston, MA
Vice President
Dillman, Thomas J. Vice President State Street Research Securities Trust Boston, MA
Senior Vice President
Drake, Susan W. None
Vice President
Dudley, Catherine Senior Portfolio Manager Chancellor Capital Management Boston, MA
Senior Vice President (until 2/98)
Duggan, Peter J. None
Senior Vice President
Even, Karen K. None
Vice President
Federoff, Alex G. None
Vice President
Fee, Richard E. Vice President CIGNA Retirement and Investment Services Hartford, CT
Vice President (until 3/97)
Vice President State Street Research Investment Services, Inc. Boston, MA
Feliciano, Rosalina None
Vice President
Ficco, Bonnie A. None
Vice President
Fochtman, Jr., Leo None
Vice President
C-7
<PAGE>
Principal business
Name Connection Organization address of organization
- ----- ---------- ------------ -----------------------
Fromm, Stuart Vice President State Street Research Investment Services, Inc. Boston, MA
Vice President
Gardner, Michael D. None
Senior Vice President
Geer, Bartlett R. Vice President State Street Research Equity Trust Boston, MA
Senior Vice President Vice President State Street Research Income Trust Boston, MA
Vice President State Street Research Securities Trust Boston, MA
Giroux, June M. None
Vice President
Govoni, Electra None
Vice President
Grace, Evan None
Vice President
Granger, Allison None
Vice President
Haggerty, Bryan D. None
Vice President
Hamilton, Jr., William A. Treasurer and Director Ellis Memorial and Eldredge House Boston, MA
Senior Vice President Treasurer and Director Nautical and Aviation Publishing Company, Inc. Baltimore, MD
Treasurer and Director North Conway Institute Boston, MA
Hanson, Phyllis None
Vice President
Haverty, Jr., Lawrence J. Vice President State Street Research Capital Trust Boston, MA
Senior Vice President
Healy, Laura J. None
Vice President
Heineke, George R. None
Vice President
Hickman, Joanne Managing Director Zurich Investment Management Chicago, IL
Senior Vice President (until 1/98)
Senior Vice President State Street Research Investment Services, Inc. Boston, MA
Huang, Jesse C. None
Vice President
Jackson, Jr., Vice President State Street Research Equity Trust Boston, MA
F. Gardner Trustee Certain trusts of related and
Senior Vice President non-related individuals
Trustee and Chairman of the Vincent Memorial Hospital Boston, MA
Board
Jamieson, Frederick H. Vice President and
Senior Vice President Asst. Treasurer State Street Research Investment Services, Inc. Boston, MA
Vice President and Asst.
Treasurer SSRM Holdings, Inc. Boston, MA
Vice President and MetLife Securities, Inc. New York, NY
Controller (until 1/97)
Jodka, Richard Portfolio Manager Frontier Capital Management Boston, MA
Senior Vice President (until 1/98)
Vice President State Street Research Capital Trust Boston, MA
C-8
<PAGE>
Principal business
Name Connection Organization address of organization
- ----- ---------- ------------ -----------------------
Kallis, John H. Vice President State Street Research Financial Trust Boston, MA
Senior Vice President Vice President State Street Research Income Trust Boston, MA
Vice President State Street Research Money Market Trust Boston, MA
Vice President State Street Research Portfolios, Inc. Boston, MA
Vice President State Street Research Tax-Exempt Trust Boston, MA
Vice President State Street Research Securities Trust Boston, MA
Trustee 705 Realty Trust Washington, D.C.
Kasper, M. Katherine Vice President State Street Research Investment Services, Inc. Boston, MA
Vice President
Kern, Stephen None
Vice President
King, Stephen Vice President State Street Research Investment Services, Inc. Boston, MA
Vice President
Kluiber, Rudolph K. Vice President State Street Research Capital Trust Boston, MA
Senior Vice President
(Vice President
until 4/98)
Kuhn, Stephen P. None
Vice President
Langholm, Knut Director State Street Research Luxembourg
Vice President
Leary, Eileen M. None
Vice President
Levanson, David E. None
Vice President
Lomasney, Mary T. Business Analyst Fidelity Investments Boston, MA
Vice President (until 6/97)
Marinella, Mark A. Portfolio Manager STW Fixed Income Management, Ltd. Boston, MA
Senior Vice President (Until 8/98)
Maurer, Jacqueline J. None
Vice President
C-9
<PAGE>
Principal business
Name Connection Organization address of organization
- ----- ---------- ------------ -----------------------
McNamara, III, Francis J. Executive Vice President, State Street Research Investment Services, Inc. Boston, MA
Executive Vice Clerk and General Counsel
President, Secretary Secretary and General Counsel State Street Research Master Investment Trust Boston, MA
and General Counsel Secretary and General Counsel State Street Research Capital Trust Boston, MA
Secretary and General Counsel State Street Research Exchange Trust Boston, MA
Secretary and General Counsel State Street Research Growth Trust Boston, MA
Secretary and General Counsel State Street Research Securities Trust Boston, MA
Secretary and General Counsel State Street Research Equity Trust Boston, MA
Secretary and General Counsel State Street Research Financial Trust Boston, MA
Secretary and General Counsel State Street Research Income Trust Boston, MA
Secretary and General Counsel State Street Research Money Market Trust Boston, MA
Secretary and General Counsel State Street Research Tax-Exempt Trust Boston, MA
Secretary and General Counsel State Street Research Portfolios, Inc. Boston, MA
Secretary and General Counsel SSRM Holdings, Inc. Boston, MA
Maus, Gerard P. Treasurer State Street Research Equity Trust Boston, MA
Director, Executive Treasurer State Street Research Financial Trust Boston, MA
Vice President Treasurer State Street Research Income Trust Boston, MA
Treasurer, Chief Treasurer State Street Research Money Market Trust Boston, MA
Financial Officer and Treasurer State Street Research Tax-Exempt Trust Boston, MA
Chief Administrative Treasurer State Street Research Capital Trust Boston, MA
Officer Treasurer State Street Research Exchange Trust Boston, MA
Treasurer State Street Research Growth Trust Boston, MA
Treasurer State Street Research Master Investment Trust Boston, MA
Treasurer State Street Research Portfolios, Inc. Boston, MA
Treasurer State Street Research Securities Trust Boston, MA
Director, Executive Vice State Street Research Investment Services, Inc. Boston, MA
President, Treasurer and
Chief Financial Officer
Director Metric Holdings, Inc. San Francisco, CA
Director Certain wholly-owned subsidiaries
of Metric Holdings, Inc.
Treasurer and Chief SSRM Holdings, Inc. Boston, MA
Financial Officer
Treasurer (until 1/97) MetLife Securities, Inc. New York, NY
Director State Street Research Luxembourg
Milder, Judith J. None
Senior Vice President
Miller, Joan D. Senior Vice President State Street Research Investment Services, Inc. Boston, MA
Senior Vice President
C-10
<PAGE>
Principal business
Name Connection Organization address of organization
- ----- ---------- ------------ -----------------------
Moore, Jr., Thomas P.
Senior Vice Vice President State Street Research Capital Trust Boston, MA
President (until 11/96)
Vice President State Street Research Exchange Trust Boston, MA
(until 2/97)
Vice President State Street Research Growth Trust Boston, MA
(until 2/97)
Vice President State Street Research Master Investment Trust Boston, MA
(until 2/97)
Vice President State Street Research Equity Trust Boston, MA
Director Hibernia Savings Bank Quincy, MA
Governor on the Board Association for Investment Management Charlottesville, VA
of Governors and Research
Morey, Andrew None
Vice President
Mulligan, JoAnne C. None
Senior Vice President
Orr, Stephen C. Member Technology Analysts of Boston Boston, MA
Vice President Member Electro-Science Analysts (of NYC) New York, NY
Paddon, Steven W. None
Vice President
Pannell, James C. None
Senior Vice President
(Vice President
until 4/97)
Peters, Kim M. Vice President State Street Research Securities Trust Boston, MA
Senior Vice President
Pierce, James D. None
Vice President
Poritzky, Dean E. Portfolio Manager Fidelity Management Boston, MA
Vice President (until 4/97)
Pyle, David J. Analyst Oak Value Capital Management Durham, NC
Vice President (until 4/97)
Ragsdale, E.K. Easton Vice President State Street Research Financial Trust Boston, MA
Senior Vice President
Ranson, Clifford Director of NatWest Markets
Vice President Special Situations
Rawlins, Jeffrey A. None
Senior Vice President
Rice III, Daniel Joseph Vice President State Street Research Equity Trust Boston, MA
Senior Vice President
Richards, Scott None
Vice President
C-11
<PAGE>
Principal business
Name Connection Organization address of organization
- ----- ---------- ------------ -----------------------
Romich, Douglas A. Assistant Treasurer State Street Research Equity Trust Boston, MA
Senior Vice President Assistant Treasurer State Street Research Financial Trust Boston, MA
(Vice President Assistant Treasurer State Street Research Income Trust Boston, MA
until 4/98) Assistant Treasurer State Street Research Money Market Trust Boston, MA
Assistant Treasurer State Street Research Tax-Exempt Trust Boston, MA
Assistant Treasurer State Street Research Capital Trust Boston, MA
Assistant Treasurer State Street Research Exchange Trust Boston, MA
Assistant Treasurer State Street Research Growth Trust Boston, MA
Assistant Treasurer State Street Research Master Investment Trust Boston, MA
Assistant Treasurer State Street Research Securities Trust Boston, MA
Assistant Treasurer State Street Research Portfolios, Inc. Boston, MA
Ryan, Michael J. Vice President Delaware Management Philadelphia, PA
Senior Vice President (until 1/98)
Sanderson, Derek Senior Vice President Freedom Capital Management Boston, MA
Senior Vice President (until 10/97)
Saperstone, Paul None
Vice President
Schrage, Michael None
Vice President
Schultz, David C. Director and Treasurer Mafraq Hospital Association Mafraq, Jordan
Executive Vice President Member Association of Investment
Management Sales Executives Atlanta, GA
Member, Investment Committee Lexington Christian Academy Lexington, MA
Shaver, Jr. C. Troy President, Chief State Street Research Investment Services, Inc. Boston, MA
Executive Vice Executive Officer and
President Executive Vice President
Shean, William G. None
Vice President
Shively, Thomas A. Vice President State Street Research Financial Trust Boston, MA
Director and Vice President State Street Research Money Market Trust Boston, MA
Executive Vice Vice President State Street Research Tax-Exempt Trust Boston, MA
President Director State Street Research Investment Services, Inc Boston, MA
Vice President State Street Research Securities Trust Boston, MA
Vice President State Street Research Portfolios, Inc. Boston, MA
Shoemaker, Richard D. None
Senior Vice President
Stambaugh, Kenneth None
Vice President
(Assistant Vice
President until 9/97)
Strelow, Dan R. None
Senior Vice President
C-12
<PAGE>
Principal business
Name Connection Organization address of organization
- ----- ---------- ------------ -----------------------
Stolberg, Thomas None
Vice President
Swanson, Amy McDermott None
Senior Vice President
Trebino, Anne M. Vice President SSRM Holdings, Inc. Boston, MA
Senior Vice President
Verni, Ralph F. Chairman, President, Chief State Street Research Capital Trust Boston, MA
Chairman, President, Executive Officer and Trustee
Chief Executive Chairman, President, Chief State Street Research Exchange Trust Boston, MA
Officer and Executive Officer and Trustee
Director Chairman, President, Chief State Street Research Growth Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Master Investment Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Securities Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Equity Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Financial Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Income Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Money Market Trust Boston, MA
Executive Officer and Trustee
Chairman, President, Chief State Street Research Portfolios, Inc. Boston, MA
Executive Officer and Director
Chairman, President, Chief State Street Research Tax-Exempt Trust Boston, MA
Executive Officer and Trustee
Chairman and Director State Street Research Investment Services, Inc. Boston, MA
(President and Chief Executive
Officer until 2/96)
Chairman and Director Metric Holdings, Inc. San Francisco, CA
Director and Officer Certain wholly-owned subsidiaries
of Metric Holdings, Inc.
Chairman of the Board MetLife Securities, Inc. New York, NY
and Director (until 1/97)
President, Chief Executive SSRM Holdings, Inc. Boston, MA
Officer and Director
Director Colgate University Hamilton, NY
Director State Street Research Luxembourg
Chairman and Director SSR Realty Advisors, Inc. San Francisco, CA
C-13
<PAGE>
Principal business
Name Connection Organization address of organization
- ----- ---------- ------------ -----------------------
Wade, Dudley Vice President State Street Research Growth Trust Boston, MA
Freeman Vice President State Street Research Master Investment Trust Boston, MA
Senior Vice
President
Wallace, Julie K. None
Vice President
Walsh, Tucker None
Vice President
Watts, Evan D., Jr. Vice President State Street Research Investment Services, Inc. Boston, MA
Vice President
Weiss, James M. Vice President State Street Research Exchange Trust Boston, MA
Executive Vice President Vice President State Street Research Growth Trust Boston, MA
(Senior Vice President) Vice President State Street Research Securities Trust Boston, MA
until 6/98) Vice President State Street Research Capital Trust Boston, MA
Vice President State Street Research Equity Trust Boston, MA
Vice President State Street Research Income Trust Boston, MA
Vice President State Street Research Master Investment Trust Boston, MA
Welch, Timothy None
Vice President
Westvold, Vice President State Street Research Securities Trust Boston, MA
Elizabeth McCombs
Senior Vice President
Wilkins, Kevin Senior Vice President State Street Research Investment Boston, MA
Senior Vice President (Vice President until 9/98) Services, Inc.
(Vice President Vice President Fidelity Investments Boston, MA
until 9/98) (until 7/97)
Wilson, John T. Vice President State Street Research Equity Trust Boston, MA
Senior Vice President Vice President State Street Research Master Investment Trust Boston, MA
(Vice President
until 4/98)
C-14
<PAGE>
Principal business
Name Connection Organization address of organization
- ----- ---------- ------------ -----------------------
Wing, Darman A. Senior Vice President and State Street Research Investment Services, Inc. Boston, MA
Senior Vice President, Asst. Clerk
Assistant Secretary Assistant Secretary and State Street Research Capital Trust Boston, MA
and Assistant Assistant General Counsel
General Counsel Assistant Secretary and State Street Research Exchange Trust Boston, MA
(Vice President Assistant General Counsel
until 4/98) Assistant Secretary and State Street Research Growth Trust Boston, MA
Assistant General Counsel
Assistant Secretary and State Street Research Master Investment Trust Boston, MA
Assistant General Counsel
Assistant Secretary and State Street Research Securities Trust Boston, MA
Assistant General Counsel
Assistant Secretary and State Street Research Equity Trust Boston, MA
Assistant General Counsel
Assistant Secretary and State Street Research Financial Trust Boston, MA
Assistant General Counsel
Assistant Secretary and State Street Research Income Trust Boston, MA
Assistant General Counsel
Assistant Secretary and State Street Research Money Market Trust Boston, MA
Assistant General Counsel
Assistant Secretary and State Street Research Tax-Exempt Trust Boston, MA
Assistant General Counsel
Assistant Secretary and State Street Research Portfolios, Inc. Boston, MA
Assistant General Counsel
Assistant Secretary and SSRM Holdings, Inc. Boston, MA
Assistant General Counsel
Woodbury, Robert S. None
Vice President
Woodworth, Jr., Kennard Vice President State Street Research Exchange Trust Boston, MA
Senior Vice Vice President State Street Research Growth Trust Boston, MA
President Vice President State Street Research Securities Trust Boston, MA
Wu, Norman N. Partner Atlantic-Acton Realty Framingham, MA
Senior Vice President Director Bond Analysts Society of Boston Boston, MA
</TABLE>
C-15
<PAGE>
Item 27. Principal Underwriters
(a) State Street Research Investment Services, Inc. serves as principal
underwriter for 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 Growth Trust, State Street Research Master
Investment Trust, State Street Research Securities Trust and State Street
Research Portfolios, Inc.
(b) Directors and Officers of State Street Research Investment
Services, Inc. are as follows:
<TABLE>
<CAPTION>
(1) (2) (3)
Positions Positions
Name and Principal and Offices and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
Ralph F. Verni Chairman of the Chairman of the Board,
One Financial Center Board and Director President, Chief Executive
Boston, MA 02111 Officer and Trustee
Peter C. Bennett Director Vice President
One Financial Center
Boston, MA 02111
Gerard P. Maus Executive Vice President, Treasurer
One Financial Center Chief Financial Officer,
Boston, MA 02111 Chief Administrative Officer,
Treasurer and Director
Thomas A. Shively Director None
One Financial Center
Boston, MA 02111
C. Troy Shaver, Jr. President, Chief Executive None
One Financial Center Officer and
Boston, MA 02111 Executive Vice President
Francis J. McNamara, III Executive Vice Secretary
One Financial Center President, General Counsel
Boston, MA 02111 and Clerk
Peter Borghi Senior Vice President None
One Financial Center
Boston, MA 02111
</TABLE>
C-16
<PAGE>
<TABLE>
<CAPTION>
(1) (2) (3)
Positions Positions
Name and Principal and Offices and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
Paul V. Daly Senior Vice President None
One Financial Center
Boston, MA 02111
Susan M.W. DiFazio Senior Vice President None
One Financial Center
Boston, MA 02111
Joanne Hickman Senior Vice President None
One Financial Center
Boston, MA 02111
Russell A. LaBresca Senior Vice President None
One Financial Center
Boston, MA 02111
Joan D. Miller Senior Vice President None
One Financial Center
Boston, MA 02111
Kevin Wilkins Senior Vice President None
One Financial Center
Boston, MA 02111
Darman A. Wing Senior Vice President, Assistant Secretary
One Financial Center Assistant General Counsel
Boston, MA 02111 and Assistant Clerk
Amy F. Barnwell Vice President None
One Financial Center
Boston, MA 02111
Matthew F. Beaudry Vice President None
One Financial Center
Boston, MA 02111
Linda C. Carstens Vice President None
One Financial Center
Boston, MA 02111
Terrence J. Cullen Vice President and None
One Financial Center Counsel
Boston, MA 02111
Richard E. Fee Vice President None
One Financial Center
Boston, MA 02111
Stuart Fromm Vice President None
One Financial Center
Boston, MA 02111
Patricia Howell Vice President None
One Financial Center
Boston, MA 02111
Frederick H. Jamieson Vice President and None
One Financial Center Assistant Treasurer
Boston, MA 02111
M. Katharine Kasper Vice President None
One Financial Center
Boston, MA 02111
Steven R. King Vice President None
One Financial Center
Boston, MA 02111
Amy L. Simmons Vice President Assistant Secretary
One Financial Center
Boston, MA 02111
Evan D. Watts, Jr. Vice President None
One Financial Center
Boston, MA 02111
</TABLE>
C-17
<PAGE>
Item 28. Location of Accounts and Records
Gerard P. Maus
State Street Research & Management Company
One Financial Center
Boston, MA 02111
Item 29. Management Services
Under a Shareholders' Administrative Services Agreement between the
Registrant 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 series of the
Registrant and received the amounts set forth below:
<TABLE>
<CAPTION>
Year-end Year-end Year-end
Fund September 30, 1996 September 30, 1997 September 30, 1998*
- ---- ------------------ ------------------ -------------------
<S> <C> <C> <C>
State Street Research
Capital Fund $538,097 $647,808 $746,073
State Street Research
Emerging Growth Fund $ 33,871 $ 31,061 $ 76,725
State Street Research
Aurora Fund $ 7,893 $ 32,786 $247,250
</TABLE>
- -------------
*Estimate.
Item 30. Undertakings
(a) Inapplicable.
(b) Deleted.
(c) Deleted.
(d) Deleted.
(e) The Registrant undertakes to hold a special meeting of shareholders
of the Trust for the purpose of voting upon the question of removal of any
trustee or trustees when requested in writing to do so by the record holders of
not less than 10 per centum of the outstanding shares of the Trust and, in
connection with such meeting, to comply with the provisions of Section 16(c) of
the Investment Company Act of 1940 relating to shareholder communications.
(f) The Registrant has elected to include the information required by
Item 5A of Form N-1A in its annual report to shareholders. The Registrant
undertakes to furnish each person to whom a prospectus is delivered with a copy
of the applicable fund's latest annual report to shareholders upon request and
without charge.
(g) Deleted.
C-18
<PAGE>
NOTICE
A copy of the First Amended and Restated Master Trust Agreement, as
further amended ("Master Trust Agreement") of the Registrant is on file with the
Secretary of State of the Commonwealth of Massachusetts and notice is hereby
given that the obligations of the Registrant hereunder, and the authorization,
execution and delivery of this Registration Statement and Amendment, shall not
be binding upon any of the Trustees, shareholders, nominees, officers, agents or
employees of the Registrant as individuals or personally, but shall bind only
the property of the series of the Registrant, as provided in the Master Trust
Agreement. Each series of the Registrant shall be solely and exclusively
responsible for all of its direct or indirect debts, liabilities, and
obligations, and no other series shall be responsible for the same.
C-19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Post-Effective Amendment No. 16 to its Registration Statement on Form N-1A
to be signed on its behalf by the undersigned, thereto duly authorized, in the
City of Boston and The Commonwealth of Massachusetts on the 3rd day of December,
1998.
STATE STREET RESEARCH CAPITAL TRUST
By: *
-------------------------------------
Ralph F. Verni
Chief Executive Officer and President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed on the
above date by the following persons in the capacities indicated:
* Trustee, Chairman of the Board
- ------------------------------------ and Chief Executive Officer
Ralph F. Verni (principal executive officer)
* Treasurer (principal financial
- ------------------------------------ and accounting officer)
Gerard P. Maus
*
- ------------------------------------ Trustee
Steve A. Garban
*
- ------------------------------------ Trustee
Malcolm T. Hopkins
*
- ------------------------------------ Trustee
Edward M. Lamont
* Trustee
- ------------------------------------
Robert A. Lawrence
* Trustee
- ------------------------------------
Dean O. Morton
* Trustee
- ------------------------------------
Susan M. Phillips
*
- ------------------------------------ Trustee
Toby Rosenblatt
* Trustee
- ------------------------------------
Michael S. Scott Morton
*By: /s/ Francis J. McNamara, III
----------------------------
Francis J. McNamara, III,
Attorney-in-Fact under Powers of
Attorney incorporated by
reference from Post-Effective
Amendment No. 15 filed December 3, 1997,
and under a Power of Attorney filed herein.
C-20
<PAGE>
1933 Act Registration No. 2-86271
1940 Act File No. 811-3838
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. ____ [ ]
Post-Effective Amendment No. 16 [X]
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 22 [X]
--------------------
STATE STREET RESEARCH CAPITAL TRUST
(Exact Name of Registrant as Specified in Articles of Organization)
--------------------
EXHIBITS
================================================================================
<PAGE>
INDEX TO EXHIBITS
(11) Consent of PricewaterhouseCoopers LLP
(15)(d) Form of Rule 12b-1 Plan for Class B(1) Shares
(17)(b) Form of Addendum to First Amended and Restated Multiple Class
Expense Allocation Plan
(18)(c) Power of Attorney for Susan M. Phillips
(18)(d) Certificate of Board Resolution Respecting Power of Attorney for
Susan M. Phillips
(19)(a) New Account Application
(19)(b) Additional Services Application
(19)(c) MetLife Securities, Inc., New Account Application
(27) Financial Data Schedules
[PricewaterhouseCoopers letterhead]
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Trustees of State Street Research Capital Trust
We consent to the incorporation by reference in Post-Effective Amendment No. 16
to the Registration Statement of State Street Research Capital Fund, State
Street Research Emerging Growth Fund and State Street Research Aurora Fund (each
a series of State Street Research Capital Trust and collectively the "Funds") on
Form N1-A (File No. 2-86271) of our reports dated November 6, 1998 on our audits
of the financial statements and financial highlights of the Funds, which reports
are incorporated by reference in the Post-Effective Amendment to the
Registration Statement. We also consent to the references to our Firm under the
captions "Financial Highlights" in the Prospectuses and "Independent
Accountants" in the Statements of Additional Information for the aforementioned
Funds.
/s/ PricewaterhouseCoopers LLP
--------------------------
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 3, 1998
STATE STREET RESEARCH CAPITAL TRUST
RULE 12b-1 PLAN FOR CLASS B(1) SHARES
WHEREAS, State Street Research Capital Trust, an unincorporated
association of the type commonly known as a business trust organized under the
laws of the Commonwealth of Massachusetts (the "Trust"), engages in business as
an open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "Act");
WHEREAS, the Trust is authorized to (a) issue shares of beneficial
interest in separate series, with the shares of each such series representing
the interests in a separate portfolio of securities and other assets, and (b)
divide the shares within each such series into two or more classes;
WHEREAS, one such class has been designated as Class B(1) (the shares of
such class being hereinafter referred to as "Shares");
WHEREAS, the Trust has established the State Street Research Capital Fund,
the State Street Research Emerging Growth Fund and the State Street Research
Aurora Fund, (each such portfolio, together with all other series made subject
to this Rule 12b-1 Plan (this "Plan"), being referred to herein individually as
a "Series" and collectively as the "Series");
WHEREAS, the Trust may be deemed a distributor of the Shares within the
meaning of Rule 12b-1 under the Act, and desires to adopt this Plan, and has
adopted a related Distribution Agreement (the "Agreement") with State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor") pursuant to such Rule; and
WHEREAS, the Board of Trustees as a whole, and the Trustees who are not
interested persons (as defined in the Act) of the Trust and who have no direct
or indirect financial interest in the operation of this Plan or the Agreement
and any agreements relating to it (the "Qualified Trustees"), having determined,
in the exercise of their reasonable business judgment and in light of their
fiduciary duties under state law and under Section 36(a) and (b) of the Act,
that there is a reasonable likelihood that this Plan and the Agreement will
benefit each Series and its shareholders, have accordingly approved this Plan
and the Agreement by votes cast in person at a meeting called for the purpose of
voting on this Plan and the Agreement and any agreements related thereto.
NOW, THEREFORE, the Trust hereby adopts this Plan in accordance with Rule
12b-1 under the Act, on the following terms and conditions:
<PAGE>
SECTION 1. PAYMENTS TO THE DISTRIBUTOR
(a) Service Fees. The Trust shall pay the Distributor a service fee at the
end of each month at the annual rate of 0.25% of average daily net assets
attributable to the Shares of each Series to compensate the Distributor and any
securities firms or other third parties who render personal services to and/or
maintain shareholder accounts for the holders of Shares of such Series.
(b) Distribution Fees. The Trust shall pay the Distributor a distribution
fee under the Plan at the end of each month at the annual rate of 0.75% of
average daily net assets attributable to the Shares of each Series to compensate
the Distributor for services provided and expenses incurred by it in connection
with sales, promotional and marketing activities relating to the Shares of such
Series.
Payment of the distribution fee described in this Paragraph 1(b) shall be
subject to any limitation set forth in any applicable regulation of the National
Association of Securities Dealers, Inc.
SECTION 2. PAYMENTS FROM OTHER SOURCES
To the extent that any payments made by the Trust to the Distributor or
State Street Research & Management Company (the "Adviser"), including payment of
investment management fees, should be deemed to be an indirect financing of any
activity primarily resulting in the sale of Shares within the scope of Rule
12b-1 under the Act, then such payments shall be deemed to be authorized
by this Plan.
SECTION 3. TERM AND TERMINATION
(a) Effectiveness. This Plan shall become effective with respect to each
Series as of the later of (i) the date on which a Registration Statement with
respect to Shares of such Series becomes effective under the Securities Act of
1933, as amended, or (ii) the date on which such Series commences offering its
Shares to the public. This Plan shall continue in effect with respect to each
Series until one (1) year from the date of such effectiveness, unless the
continuation of this Plan shall have been approved with respect to the Series in
accordance with the provisions of Section 3(b) hereof.
(b) Continuation. This Plan and the Agreement shall continue in effect
with respect to each Series thereof subsequent to the initial term specified in
Section 3(a) for so long as such continuance is specifically approved at least
annually by votes of a majority of both (i) the Board of Trustees of the Trust
and (ii) the Qualified Trustees, cast in person at a meeting called for the
purpose of voting on this Plan, subject to any shareholder approval requirements
existing under applicable law.
2
<PAGE>
(c) Termination.
(i) This Plan may be terminated at any time with respect to the
Trust or any Series thereof, as the case may be, by vote of a majority of
the Qualified Trustees, or by vote of a majority of the outstanding voting
securities of the Trust or that Series, as the case may be. This Plan may
remain in effect with respect to a Series thereof even if it has been
terminated in accordance with this Section 3(c) with respect to such
Series or one or more other Series of the Trust.
(ii) The Agreement may be terminated at any time, without penalty,
with respect to the Trust or any Series, as the case may be, by vote of a
majority of the Qualified Trustees or by vote of a majority of the
outstanding voting securities of the Trust or that Series, as the case may
be, on sixty (60) days' written notice to the Distributor. In addition,
the Agreement provides for automatic termination in the event of its
assignment.
SECTION 4. AMENDMENTS
This Plan may be amended with respect to the Trust or a Series thereof in
the manner provided for annual renewal in Section 3(b) hereof; provided,
however, that this Plan may not be amended to increase materially the amount of
distribution expenditures provided for in Section 1 hereof unless such amendment
is approved by a vote of a majority of the outstanding voting securities of each
Series thereof with respect to which a material increase in the amount of
distribution expenditures is proposed.
SECTION 5. INDEPENDENT TRUSTEES
While this Plan is in effect with respect to any Series, the selection and
nomination of Trustees who are not interested persons (as defined in the Act) of
the Trust shall be committed to the discretion of the Trustees who are not
interested persons.
SECTION 6. QUARTERLY REPORTS
The Treasurer of the Trust and the Treasurer of the Distributor shall
provide to the Trustees of the Trust and the Trustees shall review, at least
quarterly, a written report of the amounts expended for distribution pursuant to
this Plan and the purposes for which such expenditures were made.
3
<PAGE>
SECTION 7. RECORD KEEPING
The Trust shall preserve copies of this Plan, the Agreement and any
related agreements and all reports made pursuant to Section 6 hereof, for a
period of not less than six (6) years from the date of this Plan, and the
Agreement, the agreements or such reports, as the case may be, for the first two
(2) years in an easily accessible place.
SECTION 8. LIMITATION OF LIABILITY
The term "State Street Research Capital Trust" means and refers to the
Trustees of the Trust from time to time serving under the First Amended and
Restated Master Trust Agreement dated February 5, 1993 (the "Master Trust
Agreement") as the same may subsequently thereto have been, or subsequently
hereto be, amended. It is expressly agreed that the obligations of the Trust
hereunder shall not be binding upon any of the Trustees, shareholders, nominees,
officers, agents or employees of the Trust, personally, but bind only the trust
property of the Trust, as provided in the Master Trust Agreement. This Plan and
its execution and delivery have been authorized by the Trustees of the Trust and
signed by an authorized officer of the Trust, acting as such, and neither such
authorization by such Trustees nor such execution and delivery by such officer
shall be deemed to have been made by any of them individually or to impose any
liability on any of them personally, but shall bind only the trust property of
the Trust as provided in the Master Trust Agreement. The Master Trust Agreement
further provides, and it is expressly agreed, that each Series shall be solely
and exclusively responsible for the payment of its debts, liabilities and
obligations and that no other Series shall be responsible or liable for the
same.
4
<PAGE>
IN WITNESS WHEREOF, the Trust and the Distributor have executed this Rule
12b-1 Plan on the day and year set forth below in Boston, Massachusetts.
ATTEST: STATE STREET RESEARCH
CAPITAL TRUST
_____________________________ By:_______________________________
ATTEST: STATE STREET RESEARCH INVESTMENT
SERVICES, INC.
_____________________________ By:_______________________________
Date: __________ __, ____
STATE STREET RESEARCH CAPITAL TRUST
Addendum
to
First Amended and Restated Multiple Class Allocation Plan
[DATE]
WHEREAS, State Street Research Capital Trust (the "Trust") has adopted the
First Amended and Restated Multiple Class Expense Allocation Plan dated May 8,
1996 (the "Plan") in accordance with Rule 18f-3 under the Investment Company Act
of 1940, as amended, pursuant to which the Trust, for each of its portfolio
series (each a "Series") and separate classes thereof, may issue multiple
classes of shares representing interests in the same portfolio of securities,
assess a contingent deferred sales charge (the "CDSC") on certain redemptions of
shares and waive the CDSC in certain cases;
WHEREAS, the Trust currently has established one or more Series, and each
such series has established four classes of shares: Class A, Class B, Class C
(formerly Class D) and Class S (formerly Class C), all of which are subject to
the Plan;
WHEREAS, the Trust has established an additional class of shares, Class
B(1), for each Series, and such shares are to be made subject to the Plan;
NOW, THEREFORE, the Trust hereby adopts this Addendum pursuant to the
current terms of the Plan:
1. Class B(1) shares of each Series are made subject to the Plan pursuant to
Section 4(b) of the Plan.
2. All class differences, differences in distribution and shareholder services
and the allocation of expenses between Class B(1) shares and the other
authorized classes of shares of each Series shall be as described in the current
prospectus for such class and such Series or as otherwise described in the Plan.
POWER OF ATTORNEY
The undersigned, a Trustee of State Street Research Capital Trust
("Trust"), a Massachusetts business trust, hereby constitutes and appoints
Francis J. McNamara, III and Darman A. Wing as the true and lawful attorneys of
the undersigned, with full power to each of them alone to sign for the
undersigned, in the name and in the capacity of the undersigned indicated below,
any Registration Statements and any and all amendments thereto of the Trust
filed with the Securities and Exchange Commission and generally to do all such
things in the name and in the indicated capacity of the undersigned as are
required to enable the Trust to comply with provisions of the Securities Act of
1933, as amended, and/or the Investment Company Act of 1940, as amended, and all
requirements and regulations of the Securities and Exchange Commission, hereby
ratifying and confirming the signature of the undersigned as it has been and may
be signed by said attorneys to said Registration Statements, and any and all
amendments thereto.
IN WITNESS WHEREOF, executed the 3rd day of December, 1998.
Signature Capacity
- --------- --------
/s/ Susan M. Phillips Trustee
- ---------------------
Susan M. Phillips
STATE STREET RESEARCH CAPITAL TRUST
Certificate of Resolution
I, the undersigned Amy L. Simmons, hereby certify that I am Assistant
Secretary of State Street Research Capital Trust (the "Trust"), a Massachusetts
business trust duly authorized and validly existing under Massachusetts law, and
that the following is a true, correct and complete statement of a vote duly
adopted by the Trustees of said Trust on February 5, 1997:
"VOTED: That Francis J. McNamara, III and Darman A. Wing be, and each hereby
is, authorized and empowered, for and on behalf of the Investment
Company, its principal financial and accounting officer, and in their
name, to execute, and file a Power of Attorney relating to, the
Investment Company's Registration Statements under the Investment
Company Act of 1940 and/or the Securities Act of 1933, including any
N-14 Registration Statement, and amendments thereto, the execution and
delivery of such Power of Attorney, Registration Statements and
amendments thereto, to constitute conclusive proof of such
authorization."
I further certify that said vote has not been amended or revoked and
that the same is now in full force and effect.
IN WITNESS WHEREOF, I have hereunto set my hand this 3rd day of
December, 1998.
/s/ Amy L. Simmons
-----------------------
Amy L. Simmons
Assistant Secretary
Exhibit (19)(a)
State Street Research Funds
<TABLE>
<CAPTION>
New Account Application
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
[round bullet] Use a pen. Please print in CAPITAL LETTERS.
[round bullet] Use the Additional Services Application to take advantage
of a range of services, including checkwriting and Systematic
Withdrawal Plan.
[ ] Check here if you are including the Additional Services
Application with your New Account Application.
[Graphic: Telephone]
[1] Your Account
- ------------------------------------------------------------------------------------------------------------------------------------
[round bullet] Fill in one account type only.
[round bullet] Individual Retirement Accounts require a different application.
To obtain an IRA application, call 1-800-562-0032.
[square bullet] Individual / Joint Account
[ ][ ][ ][ ][ ][ ][ ][ ] [ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
First name Middle Last name
[ ][ ][ ]-[ ][ ]-[ ][ ][ ][ ] [ ][ ]/[ ][ ]/[ ][ ]
Social Security number Date of birth [month / day / year]
[ ][ ][ ][ ][ ][ ][ ][ ] [ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Joint owner (if applicable): first name Middle Last name
[ ][ ][ ]-[ ][ ]-[ ][ ][ ][ ] [ ][ ]/[ ][ ]/[ ][ ]
Joint owner's Social Security number Joint owner's date of birth [month / day / year]
Joint owners will be joint tenants with rights of survivorship unless you check a different option:
[ ] Tenants in common [ ] Tenants by entirety [ ] Community property
[square bullet] Gift / Transfer to a Minor (UGMA/UTMA)
[ ][ ][ ][ ][ ][ ][ ][ ] [ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Custodian's first name Middle Last name
[ ][ ][ ][ ][ ][ ][ ][ ] [ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
As custodian for: first name Middle Last name
Under the [ ][ ] [minor's state of residence] Uniform Gifts / Transfers to Minors Act
[ ][ ][ ]-[ ][ ]-[ ][ ][ ][ ] [ ][ ]/[ ][ ]/[ ][ ]
Minor's Social Security number Minor's date of birth [month / day / year]
[square bullet] Trust Account
[ ][ ][ ][ ][ ][ ][ ][ ] [ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Trustee's first name Middle Last name
[ ][ ][ ][ ][ ][ ][ ][ ] [ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Co-trustee (if applicable): first name Middle Last name
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
As trustees of [name of trust]
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
For the benefit of [trust beneficiary]
[ ][ ]-[ ][ ][ ][ ][ ][ ][ ] [ ][ ]/[ ][ ]/[ ][ ]
Trust's federal tax identification number Date of trust agreement [month / day / year]
[square bullet] Business / Other Account
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Name of entity
[ ][ ][ ][ ][ ][ ][ ][ ][ ]
Federal tax identification or Social Security number
[ ][ ] I / We have included a corporate resolution, as is required to open this account.
Type of entity: [ ] Corporation [ ] Partnership [ ] Estate [ ] Unincorporated association [ ] Guardian
For all other types of accounts, please call 1-800-562-0032 for a different application.
Page 1.
<PAGE>
[2] Your Address
- ------------------------------------------------------------------------------------------------------------------------------------
[ ][ ][ ][ ][ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Street number / P.O. Box Street name
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ] [ ][ ] [ ][ ][ ][ ][ ]
City State Zip code
[ ][ ][ ]-[ ][ ][ ]-[ ][ ][ ][ ] [ ][ ][ ]-[ ][ ][ ]-[ ][ ][ ][ ]
Daytime phone number Evening phone number
Check one: [ ] U.S. citizen [ ] Non-U.S. citizen
Check one: [ ] U.S. resident [ ] Resident of: [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Country
[3] Your Investment
- ------------------------------------------------------------------------------------------------------------------------------------
[round bullet] Choose one share class and one distribution option for each fund.
[round bullet] Unless noted below, the minimum investment is $2,500 per account ($1,000 using Investamatic).
Please refer to prospectus for details.
Fund Name Amount You Are Investing Share Class All Distributions
- ------------------------------------------------------------------------------------------------------------------------------------
State Street Research: A B C Reinvested In Cash
[ ] Alpha $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Aurora(1) $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Capital $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Emerging Growth $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Equity Investment $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Galileo(2) $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Global Resources $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Government Income $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Growth $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] High Income $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] International Equity $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Investment Trust $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Legacy(2) $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Managed Assets $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Money Market $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] Class E only [ ] [ ]
[ ] New York Tax-Free $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Strategic Income $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Tax-Exempt $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
[ ] Other: ________________ $ [ ] , [ ][ ][ ] , [ ][ ][ ] . [ ][ ] [ ] [ ] [ ] [ ] [ ]
(1) Check with your financial professional about the current availability of this fund. Minimum investment is $100,000.
(2) For these funds, the minimum investment is $25,000 per account ($10,000 using Investamatic).
This investment is being made: [ ] by mail -- make check payable to State Street Research Funds
[ ] by Federal Funds Wire; the control number is: [ ] through a dealer; the wire order confirmation number is:
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
[4] Options for Reducing Sales Charges
- ------------------------------------------------------------------------------------------------------------------------------------
[square bullet] I wish to apply for reduced Class A sales charges through:
[ ] Right of Accumulation
When calculating my sales charges for this investment, please include the
assets owned by me, my family members or other eligible persons.
[ ] Check here if you have existing accounts.
[ ] Letter of Intent
I plan to invest, without obligation, a total of at least the following
amount in eligible mutual funds over the next 13 months:
[ ] $100,000 [ ] $250,000
[ ] $500,000 [ ] $1 Million
[ ] Please include investments made within the past 90 days
in these accounts.
[ ] Check here if you have existing accounts.
Page 2.
<PAGE>
[5] Telephone Exchanges / Redemptions
- ------------------------------------------------------------------------------------------------------------------------------------
[round bullet] See terms and conditions for telephone requests in current prospectus(es).
[round bullet] Not available for certificate shares.
[square bullet] Telephone Exchange Privilege For You and Your Dealer
[round bullet] You automatically receive this privilege unless you decline it.
[round bullet] Allows you or your dealer to request exchanges into other State Street Research funds
(and assumes you have read the relevant prospectuses).
[ ] I DO NOT want this privilege on my account. [ ]
Initial here
[square bullet] Telephone Redemption Privilege For You
[round bullet] You automatically receive this privilege unless you decline it.
[round bullet] Allows you to phone requests to sell shares, with the proceeds sent to the address of record.
[ ] I DO NOT want this privilege on my account. [ ]
Initial here
[square bullet] Telephone Redemption Privilege For Your Dealer
(This privilege is not automatic; you must specifically select it below).
[ ] I DO NOT want this privilege on my account. [ ]
Initial here
[ ] I DO want this privilege on my account. [ ]
Initial here
[6] Transfers To / From Your Bank
- ------------------------------------------------------------------------------------------------------------------------------------
[round bullet] Convenient services to help you buy or sell fund shares.
[round bullet] Be sure to attach a deposit slip or voided, unsigned check depending on the service(s) you are requesting.
[square bullet] I would like to request one or more of the following services
(Please provide your Bank Account Information below):
[ ] Investamatic
Makes periodic investments in the State Street Research fund of your choice.
I authorize automatic withdrawals from the bank account specified at the bottom
of the page. I request these withdrawals to occur [ ] every month, on the [ ] 5th of the month.
[ ] every quarter, [ ] 20th of the month
[ ] 5th and 20th of the month.
Starting month: [ ][ ]
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Fund name
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ] $ [ ][ ][ ],[ ][ ][ ].[ ][ ]
Account number (if existing account) Investment amount ($50 minimum)
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Fund name
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ] $ [ ][ ][ ],[ ][ ][ ].[ ][ ]
Account number (if existing account) Investment amount ($50 minimum)
[ ] EZ Trader
Allows you to move money between your fund account and bank account by calling State Street Research.
NOTE: Your bank must be a member of the Automated Clearing House (ACH)system.
[ ] Wire Redemption Capability
Lets you designate a bank account to receive proceeds by wire when you sell State Street Research shares.
- ------------------------------------------------------------------------------------------------------------------------------------
[square bullet] Bank Account Information
Please establish the service(s) between my fund account and my:
[ ] Checking account (voided, unsigned check attached)
[ ] NOW / money market / savings account (deposit slip attached)
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Bank name
[ ][ ][ ][ ][ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Street number of bank Street name
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ] [ ][ ] [ ][ ][ ][ ][ ]
City State Zip code
[ ][ ][ ][ ][ ][ ][ ][ ][ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Bank routing number Bank account number
[ ][ ][ ][ ][ ][ ][ ][ ] [ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Bank account holder's first name Middle Last name (list exactly as on bank statements)
[ ][ ][ ][ ][ ][ ][ ][ ] [ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Second bank account holder Middle Last name
(if applicable): first name
______________________________________ ______________________________________
[______________________________________] [______________________________________]
Signature of first bank account holder, exactly as on bank statements Signature of second bank account holder (if applicable)
Page 3.
<PAGE>
[7] Your Signature
- ------------------------------------------------------------------------------------------------------------------------------------
[round bullet] All owners listed in Section 1 need to sign this application. [Graphic: Pen]
[round bullet] Please note that the certification below and the provision of your federal tax identification number are
the only portions of this application for which the IRS requires your certification.
I acknowledge that I:
[round bullet] have received current prospectus(es) for all funds in which I am investing.
[round bullet] accept the terms of investment described in the prospectus(es) and this application.
[round bullet] understand that these same terms will also apply to all shares obtained by exchange.
[round bullet] accept responsibility for unauthorized telephone instructions unless the fund's agents are negligent or unless I
declined the privileges in Section 5.
I certify, under penalties of perjury, that:
[round bullet] (1) the number shown on this form is my correct taxpayer identification number (or I am waiting for a number to be
issued to me), and
[round bullet] (2) I am not subject to backup withholding because (a) I am exempt from backup withholding, or (b) I have not been
notified by the Internal Revenue Service that I am subject to backup withholding as a result of a failure to
report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup
withholding.
______________________________________
[______________________________________] [ ][ ]/[ ][ ]/[ ][ ]
Your signature, exactly as your name appears in Section 1 Date [month / day / year]
______________________________________
[______________________________________] [ ][ ]/[ ][ ]/[ ][ ]
Signature of joint owner (if applicable) exactly as name appears in Section 1 Date [month / day / year]
[8] Signature Guarantee
- ------------------------------------------------------------------------------------------------------------------------------------
[round bullet] If you are investing directly, have Part I completed; if not, have your dealer fill out Part II.
[square bullet] I -- For Direct Investments
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Name of bank or other guarantor
[ ][ ][ ][ ][ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Street number Street name
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ] [ ][ ] [ ][ ][ ][ ][ ]
City State Zip code
The bank or guarantor guarantees the owner's legal capacity and all signatures on this application and on related investment
checks and instructions, including the Additional Services Application.
______________________________________
[______________________________________] [ ][ ]/[ ][ ]/[ ][ ]
Signature of bank's or guarantor's authorized representative Date [month / day / year]
[square bullet] II -- For Investments Through a Dealer
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Dealer name
[ ][ ][ ][ ][ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Street number of home office Street name
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ] [ ][ ] [ ][ ][ ][ ][ ]
City State Zip code
[ ][ ][ ][ ][ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Street number of branch office Street name
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ] [ ][ ] [ ][ ][ ][ ][ ]
City State Zip code
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ] [ ][ ][ ]-[ ][ ][ ]-[ ][ ][ ][ ]
Branch office number Branch office phone number
The Dealer:
[round bullet] agrees to the terms of the current prospectus(es), application and
current dealer agreement, which is included by reference.
[round bullet] represents that it has given the owner(s) the relevant prospectus(es).
[round bullet] represents that it has completed this application according to
instructions from the owner(s).
[round bullet] will indemnify the fund, its adviser, distributor or other agents
from any losses resulting from these instructions.
[round bullet] guarantees the owner's legal capacity and all signatures on this
application and on related investment checks and instructions,
including the Additional Services Application.
[ ][ ][ ][ ][ ][ ][ ][ ] [ ] [ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Registered Representative's first name Middle Last name
[ ][ ][ ][ ][ ][ ][ ][ ][ ][ ]
Registered Representative number
______________________________________
[______________________________________] [ ][ ]/[ ][ ]/[ ][ ]
Signature of authorized officer of dealer Date [month / day / year]
[State Street Research logo] Mail this application, along with any other required documents to:
State Street Research Funds, P.O. Box 8408, Boston, MA 02266-8408.
Registered representatives, mail this application to your home office for approval.
Questions? Call 1-800-562-0032.
SSR-760E-0498
</TABLE>
[FRONT SIDE OF CARD] Exhibit 19(b)
STATE STREET RESEARCH FUNDS
- --------------------------------------------------------------------------------
Additional Services Application
[bullet] Use a pen. Please print in CAPITAL LETTERS.
[bullet] Use this application to add any of the features below to a new or
existing State Street Research account.
[bullet] When providing bank information, be sure to attach a deposit slip or
voided, unsigned check
[bullet] Be sure to sign this application.
[bullet] If you are submitting this application with a New Account Application,
you don't need to duplicate any bank information or signature
guarantees that are included with that application.
A Name
- --------------------------------------------------------------------------------
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Name (as it appears on the account)
|_|_|_|_|_|_|_|_|_| |_|_|_|-|_|_|_|-|_|_|_|_|
Federal tax identification or Daytime phone number
Social Security number
B Regular Transfers and Redemptions
- --------------------------------------------------------------------------------
[bullet] Not available on retirement plan accounts.
[bullet] Choose one option only. To add different options to different accounts,
please fill out a separate application.
[bullet] Be sure to attach a deposit slip or voided, unsigned check depending
on the service you are requesting.
[ ] I request the following automatic redemptions or transfers:
[ ] Please deposit my income dividends directly into my bank account.
[ ] Please deposit my income dividends and capital gains distribtions directly
into my bank account.
[ ] Systematic Withdrawal Plan: Please redeem $|_|_|,|_|_|_|.00 ($50 minimum)
from my fund account: [ ] every month [ ] every 3 months
[ ] every 6 months [ ] every 12 months
I would like these redemptions to begin in month number |_|_|.
I would like the money [ ] deposited directly into my bank account
[ ] sent to me by check
[ ] sent by check to the following payee:
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Payee's name
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Payee's street address/P.O. Box
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| |_|_| |_|_|_|_|_|-|_|_|_|_|
City State Zip
[] Please make these redemptions or transfers from my accounts in each of the
following State Street Research funds:
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| |_|_|_|_|_|_|_|_|_|_|_|_|_|
Fund name Account number
(if existing account)
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| |_|_|_|_|_|_|_|_|_|_|_|_|_|
Fund name Account number
(if existing account)
[] Please direct any bank deposits to my:
[ ] Checking account (voided, unsigned check attached)
[ ] NOW / money market / savings account (deposit slip attached)
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Bank name
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Bank address
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| |_|_| |_|_|_|_|_|-|_|_|_|_|
City State Zip
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Bank routing number Bank account number
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| ____________________________________
Name of one bank account holder, Signature
exactly as on bank statements
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| ____________________________________
Name of second bank account holder, Signature
if any
C Checkwriting
- --------------------------------------------------------------------------------
[bullet] Available on some funds' Class A shares and on Money Market Fund
Class E shares.
[bullet] For corporate and other accounts, include the appropriate resolution
forms.
[bullet] Please do not detach the perforated card.
[] I request State Street Bank and Trust Company to provide me with
checkwriting on these funds:
|_|_|_|_|_|_|_|_|_|_|
Account number (if existing account)
|_|_|_|_|_|_|_|_|_|_|
Account number (if existing account)
[ ] Government Income
[ ] High Income
[ ] Money Market
[ ] New York Tax-Free
[ ] Strategic Income
[ ] Tax-Exempt
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Your name
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Address
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
City
|_|_| |_|_|_|_|_|_|_|_|_|_|
State Zip
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Federal tax identification or Social Security number
_______________________________________________________
Your signature exactly as your name appears on your new
account application or your fund statements
(including any capacity)
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Name of joint owner, if any
_______________________________________________________
Signature of joint owner exactly as name appears on
fund statements (including any capacity)
Number of signatures you with to be required on a check:
See reverse side of card for additional terms and conditions.
[REVERSE SIDE OF CARD]
D Dividend Allocation Plan (DAP)
- --------------------------------------------------------------------------------
[] Please collect my dividends and distributions from this fund/account...
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Fund name
|_|_|_|_|_|_|_|_|_|_|_|_|
Account number (if existing account)
[]...and invest them in this fund/account (new accounts must meet initial
investment minimums):
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Fund name
|_|_|_|_|_|_|_|_|_|_|_|_|
Account number (if existing account)
E Signature Guarantee
- --------------------------------------------------------------------------------
[bullet] If you are investing directly, have Part I completed; if not, have your
dealer fill out Part II.
[bullet] If you are submitting this application with a New Account Application,
you don't need to duplicate the signature guarantee if it is included
with that application.
[] I - For Direct Investments
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Name of bank or other guarantor
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Street address
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| |_|_| |_|_|_|_|_|-|_|_|_|_|
City State Zip
The bank or guarantor guarantees the owner's legal capacity and all signatures
on this application and on related investment checks and instructions.
_______________________________________ |_|_| / |_|_| / |_|_|
Signature of bank's or guarantor's Date [month/day/year/
authorized representative
[] II - For Investments Through a Dealer
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Dealer Name
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Home office address
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| |_|_| |_|_|_|_|_|-|_|_|_|_|
City State Zip
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Branch office address City
|_|_| |_|_|_|_|_|-|_|_|_|_| |_|_|_|-|_|_|_|-|_|_|_|_|
State Zip Branch office telephone number
The dealer:
[bullet] Agrees to the terms of the current prospectus(es) and current dealer
agreement, which is included by reference.
[bullet] represents that it has given the owner(s) the relevant prospectus(es).
[bullet] represents that it has completed this application according to
instructions from the owner(s).
[bullet] will indemnify the fund, its adviser, distributor or other agents from
any losses resulting from these instructions.
[bullet] guarantees the owner's legal capacity and all signatures on this
application and on related investment checks and instructions.
|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_| |_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|_|
Registered Representative Registered Representative number
_________________________________________ |_|_| / |_|_| / |_|_|
Signature of authorized officer or dealer Date [month/day/year/
F Your Signature
- --------------------------------------------------------------------------------
[bullet] All owners whose names are on the account [graphic of a pen]
need to sign this application.
I acknowledge that I:
[bullet] am authorizing the additional services described above.
[bullet] have received current prospectus(es) for all funds in which I am
investing.
[bullet] have the right to cancel any service at any time by writing to
State Street Research.
___________________________________________
Your signature exactly as your name appears
on your New Account Application or your
fund statements
___________________________________________
Signature of joint owner (if any) exactly
as anem appears on fund application or
statements
|_|_| / |_|_| / |_|_|
Date [month/day/year/
By signing this form, I agree to all of the provisions and applicable rules
under the Massachusetts Uniform Commercial Code and to any conditions on
redeeming shares from the State Street Research funds.
I also agree that:
[bullet] this form applies to any other identically registered State Street
Research fund account with the checkwriting privilege I establish
later.
[bullet] if I am subject to IRS backup withholding, I may write checks only on
money fund accounts;
[bullet] State Street Bank and Trust Company and the fund reserve the right to
terminate my checkwriting privelege.
I represent that the signatures are authentic, and, for organizations, I have
submitted a certified resolution authorizing the individuals with legal capacity
to sign and act on behlaf of the organization.
I understand that I am authorizing the bank to instruct State Street Research
to sell sufficient shares in my mutual fund account to honor the check.
[Logo: State Street Research] State Street Research
Mail this application, along with any other required documents to:
State Street Research Funds
P.O. Box 8408, Boston, MA 02266-8408.
Questions? Call 1-800-562-0032.
SSR-759E-1097
State Street Reserach is not affiliated with State Street Bank and Trust
Company.
Exhibit 19(c)
[STATE STREET RESEARCH LOGO] [METLIFE SECURITIES LOGO]
MUTUAL FUND ACCOUNT APPLICATION
Mail this application to MetLife Securities, Inc., P.O. Box 30421, Tampa, FL
33630
[ ] New Application [ ] Change-Account #____________________________
Type of Account (PLEASE PRINT FULL NAME(S) CONSISTENT WITH YOUR SIGNATURE(S) IN
SECTION 6.)
<TABLE>
<S> <C> <C>
[ ] Individual-complete (a) only [ ] Joint Tenant-complete (a & b) only [ ] Gift to a Minor-complete (c) only
[ ] Trust(1)-complete (d) only [ ] Corporation(1)-complete (e) only [ ] Partnership/Other Entity-complete (e) only
</TABLE>
Note: If the investment is to be used for an Individual Retirement Account
(IRA), a separate IRA application must be used.
(1)Call 1-800-638-8378 for additional forms.
Do you have any other mutual fund accounts with State Street Research?
[ ] Yes [ ] No
Individual or Joint Tenant
a _____________________________________________________________-______-_________
Name of Investor Social Security Number
b ______________________________________________________________________________
Name(s) of Joint Tenant(s)
Gift to a Minor
c _____________________________________ as custodian for _____________ under the
Name of Custodian (one only) Name of Minor (one only)
___________________________ "Uniform Gifts to Minors Act" _____-______-_________
Minor's State of Residence Minor's Social Security Number
Trust Account
d ______________________________________________________________________________
Trustee(s) Name(s)
_______________________________________________________________-______-_________
Name and Date of Trust Agreement Tax Identification
Number
Corporation, Partnership or Other Entity (Please include corporate resolution.)
e ______________________________________________________________________________
Name of Corporation or Other Entity
________________________________________________________________________________
Type of Business (specify corporation, Tax Identification Number
partnership, estate, guardian, etc.)
2 Your Mailing Address (PLEASE PRINT.)
( )
________________________________________________________________________________
Street Address Home Telephone Number
( )
________________________________________________________________________________
City State ZIP Business Telephone
Number
Residency [ ] U.S. (State _______________) [ ] Other(2) __________________
Specify Country
(2)Call 1-800-638-8378 for additional forms.
3 Fund Selection(s) and Distribution Option(s) (Choose only one distribution
option per Fund; see Fund prospectus for minimum initial investment
requirements.)
[ ] By Mail-Make check payable to "State Street Research"
[ ] By Federal Funds Wire
<TABLE>
<CAPTION>
Fund Name Class Designation(3) Amount Distribution Option
- ---------------------------------------------------------------------------------------------------------------------
Dividends & Dividends in Dividends & Dividend
Capital Gains Cash; Capital Capital Gains Allocation
A B(4) Reinvested Gains Reinvested(5) in Cash Plan (DAP)(6)
<S> <C> <C> <C> <C> <C> <C>
_________________ [ ] [ ] $_____ [ ] [ ] [ ] [ ]
_________________ [ ] [ ] $_____ [ ] [ ] [ ] [ ]
_________________ [ ] [ ] $_____ [ ] [ ] [ ] [ ]
_________________ [ ] [ ] $_____ [ ] [ ] [ ] [ ]
</TABLE>
(3)All Money Market Fund investments will purchase Class E shares. Be sure to
designate Class A or B shares for Money Market Fund DAP allocations.
(4)For purchase of Class B shares of more than $250,000, I hereby acknowledge
that I am aware of the reduced front-end sales charges available to me for the
purchase of Class A shares, and have chosen to purchase Class B shares. I am
aware that Class B shares have higher asset-based charges than Class A shares
for the first eight years.
(5)Does not apply to Money Market Fund.
(6)Dividend Allocation Plan: The Transfer Agent is authorized to invest all
dividends and distributions from________________________________________________
Fund Name
in the following Eligible Fund:_________________________________________________
Fund Name (Fund must meet Account
minimum investment requirements) Number (if
existing
account)
Authorization of Dividend Allocation Plan constitutes an acknowledgment that the
shareholder has received the current prospectus of the Fund to be acquired.
Except for Money Market Fund Class E, DAP must be allocated to same class
designation.
<PAGE>
4 Reduced Sales Charges (Applies to Class A shares only)
[ ] Right of Accumulation (ROA): I apply for Right of Accumulation reduced sales
charges subject to the Transfer Agent's confirmation of the following holdings
of certain designated persons, e.g. family members, in the Eligible Funds:
________________________________________________________________________________
Name on Account Account Number
________________________________________________________________________________
Name on Account Account Number
[ ] Letter of Intent (LOI): Although I am not obligated to purchase and the
Funds are not obligated to sell, I intend to invest over a 13-month period
beginning _______________, 19__ (purchase date not more than 90 days prior to
this letter) at least an aggregate of
[ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000 of Eligible Funds.
5 Optional Shareholder Services
Your Bank Account (You must complete this section if you request Section A, B, C
or D below.)
Type of Bank Account: [ ] Checking [ ] NOW or Money Market
________________________________________________________________________________
Account Title (print exactly as it Bank Routing Number
appears on bank records)
________________________________________________________________________________
Bank Account Number Bank Name
________________________________________________________________________________
Bank Address City State ZIP
________________________________________________________________________________
Depositor's Signature(s) (exactly as it Date
appears on bank records)
________________________________________________________________________________
Depositor's Address City State ZIP
YOU MUST ATTACH A BLANK CHECK MARKED "VOID."
A Telephone Redemption and Exchange Privileges (Service available only for
shares held on deposit with Transfer Agent)
None of the Transfer Agent, the Fund, any other Eligible Funds, State Street
Research Shareholder Services, the Investment Manager or the Distributor will be
liable for any loss, injury, damage or expense as a result of acting upon, and
will not be responsible for the authenticity of, any telephone instructions. I
understand that all telephone calls are tape recorded. My liability shall be
subject to the use of reasonable procedures to confirm that instructions
communicated by telephone are genuine.
Telephone Exchange By Shareholder OR DEALER
The Transfer Agent may effect exchanges for my account according to telephone
instructions FROM ME OR MY DEALER as set forth in the Prospectus, and may
register the shares of the fund to be acquired exactly the same as my existing
account. Authorizing an exchange constitutes an acknowledgment that the
shareholder has received the current prospectus of the fund to be acquired. The
account will automatically have this privilege unless it is expressly declined
by providing your initials in the space below.
I DO NOT WANT THE TELEPHONE EXCHANGE PRIVILEGE. _____ (Initial here.)
Telephone Redemption By Shareholder Only
1. Proceeds to Shareholder's Address of Record. The Transfer Agent may effect
redemptions of shares from my account according to telephone instructions from
me, as set forth in the Prospectus, and send the proceeds to my address of
record. The account will automatically have this privilege unless it is
expressly declined by providing your initials in the space below.
I DO NOT WANT THE TELEPHONE REDEMPTION PRIVILEGE (to address of record).
_____ (Initial here.)
2. Proceeds to Bank Designated by Shareholder. The Telephone Redemption
Privilege (to bank designated by shareholder) is not provided automatically;
please check the box below if you want this Privilege for the account. ATTACH A
BLANK CHECK MARKED "VOID" AND FILL OUT "YOUR BANK ACCOUNT" SECTION.
The Transfer Agent may effect redemptions of shares from my account according to
telephone instructions from me, as set forth in the Prospectus, and send the
proceeds to the bank named in "Your Bank Account." [ ] (Check here.)
<PAGE>
B Investamatic Check Program (YOU MUST ATTACH A BLANK CHECK MARKED "VOID.")
I hereby request and authorize the bank named in "Your Bank Account" section to
pay and charge checks drawn on, or debits against, my account initiated by and
payable to the order of the mutual fund transfer agent designated by the
Distributor. I agree that the named Bank's rights in respect to each such check
or debit shall be the same as if it were a check drawn on or debit against my
account authorized personally by me. This authority is to remain in effect until
revoked by me in writing, and until the named Bank actually receives such
notice, I agree that the named Bank shall be fully protected in honoring any
such check or debit authorization. I further agree that if any check or debit
authorization be dishonored, whether with or without cause and whether
intentionally or inadvertently, the named Bank shall be under no liability
whatsoever, unless the nonpayment is because of insufficient funds. I understand
that this Program may be revoked by the Transfer Agent or the Distributor
without prior notice if any check is not paid upon presentation, and that this
Program may be discontinued by the Distributor, the Transfer Agent or me upon
thirty (30) business days' notice prior to the due date of any deposit.
$
________________________________________________________________________________
Fund Name Class Designation Amount ($50 minimum) Account Number
$
________________________________________________________________________________
Fund Name Class Designation Amount ($50 minimum) Account Number
_____________________________________
Total Amount of Investment: $______ Account Registration (exactly as it
appears on Fund records)
[ ] Monthly Investment Date: [ ] 5th or [ ] 20th If you do not choose a date,
[ ] Quarterly Investment Date: [ ] 5th or [ ] 20th the 5th will be chosen
automatically.
C Automatic Bank Connection (ABC) Not available for retirement plan accounts.
YOU MUST ATTACH A BLANK CHECK MARKED "VOID."
[ ] I authorize the Transfer Agent to liquidate $______________ (minimum-$50)
from my fund account beginning the month of to provide [ ] monthly,
[ ] quarterly, [ ] semiannual or [ ] annual payments. I would like the following
payment to be deposited directly into the bank account named in "Your Bank
Account" section. (Choose only one.)
[ ] Income dividends only [ ] Income dividends and capital gains
[ ] Systematic Withdrawal Plan payments (see below)
________________________________________________________________________________
Fund Name Class Designation
________________________________________________________________________________
Fund Name Class Designation
I hereby authorize the Fund and the Transfer Agent to effect the deposit of the
above indicated items by initiating credit entries to my account at the bank
named in "Your Bank Account" section. The named Bank shall not be responsible
for the correctness of the items, and the Transfer Agent is authorized to
correct and adjust any incorrect items to my bank account. This authorization
may be terminated at any time by written notification to the Fund, the Transfer
Agent and the Bank.
D Systematic Withdrawal Plan (SWP) Not available for retirement plan accounts.
See the prospectus for minimum account size and maximum withdrawal amounts.
YOU MUST ATTACH A BLANK CHECK MARKED "VOID."
[ ] I authorize the Transfer Agent to liquidate shares in and withdraw cash
(minimum-$50) from my fund account beginning the month of ____________________
to provide [ ] monthly, [ ] quarterly, [ ] semiannual or [ ] annual Systematic
Withdrawal Plan (SWP) payments in the amount of $_________________ to [ ] me
[ ] the bank named in "Your Bank Account" section, or [ ] the following payee.
(Note: If you authorize a SWP, you may not receive dividend or capital gain
distributions in cash.)
________________________________________________________________________________
Name of Payee
________________________________________________________________________________
Street Address City State ZIP
________________________________________________________________________________
Fund Name Class Designation
________________________________________________________________________________
Fund Name Class Designation
E Checkwriting Privilege
(Available for Class A shares and Money Market
Fund Class E shares only)
[ ] I request the checkwriting feature and have
completed the signature card below.
_______________________________________________
Account Number (if existing account)
_______________________________________________
Account Number (if existing account)
Signature Card Complete and sign this card and return it with your application
and investment. Do not detach.
Check applicable Fund(s) TO: State Street Bank and Trust Company ("Bank")
[ ] Money Market, Class E ________________________________________________
[ ] High Income Name (please print)
[ ] Tax-Exempt ________________________________________________
[ ] Government Income Name (please print)
[ ] NY Tax-Free ________________________________________________
[ ] Strategic Income Address City State ZIP
________________________________________________
Signature (exactly as it appears in the
Application, including any capacity)
________________________________________________
Signature (exactly as it appears in the
Application, including any capacity)
________________________________________________
Indicate the number of signatures required
______-_________________________________________
Tax Identification Number
Corporate and other accounts must include appropriate resolution forms. In
signing this signature card, the signator(s) signifies his/her or their
agreement to be subject to the rules and regulations of State Street Bank and
Trust Company pertaining thereto, as amended from time to time, and subject to
the conditions printed on the reverse side.
<PAGE>
MetLife Securities, Inc. Customer Profile
1
________________________________________________________________________________
Client's Name (or minor if U.G.M.A.) Age Social Security Number
________________________________________________________________________________
Joint Tenant Name (if any, or Age Social Security Number
custodian if U.G.M.A.)
Occupation ______________________ State of Residence ______________________
Name/Address of Employer _______________________________________________________
Is client an associated person of a broker/dealer? [ ] Yes [ ] No
If yes, furnish name and address _______________________________________________
2 Client's Estimated Annual Income (Not including income from this investment)
(N/A for UGMA, Trust, Partnership or Corp.)
[ ] $0-9,999 [ ] $20-39,999 [ ] $60-79,999 [ ] $100,000-199,999
[ ] $10-19,999 [ ] $40-59,999 [ ] $80-99,999 [ ] $200,000+
3 Savings and Investments (Exclusive of personal residence, home furnishings,
personal automobiles, and the amount of this investment) (N/A for UGMA, Trust,
Partnership or Corp.)
[ ] $0-9,999 [ ] $20-39,999 [ ] $60-79,999 [ ] $100,000-199,999 [ ] $400,000+
[ ] $10-19,999 [ ] $40-59,999 [ ] $80-99,999 [ ] $200,000-399,999
4 Net Worth (Assets minus liabilities exclusive of assets and liabilities
relating to personal residence, home furnishings and automobiles) (N/A for
UGMA, Trust, Partnership or Corp.)
[ ] $0-9,999 [ ] $20-39,999 [ ] $60-79,999 [ ] $100,000-199,999 [ ] $400,000+
[ ] $10-19,999 [ ] $40-59,999 [ ] $80-99,999 [ ] $200,000-399,999
<TABLE>
<CAPTION>
5 Main Investment Objective (select one) Secondary Investment Objective (optional)
<S> <C> <C> <C> <C> <C>
[ ] Aggressive Growth [ ] Growth & Income [ ] Tax Advantages [ ] Aggressive Growth [ ] Growth & Income [ ] Tax Advantages
[ ] Growth [ ] Current Income [ ] Growth [ ] Current Income
</TABLE>
<TABLE>
<CAPTION>
6 Source of Funds for This Investment
<S> <C> <C>
[ ] CD (Certificate of Deposit) [ ] Savings [ ] Money Market Fund
[ ] Surrender Life/Annuity Contract [ ] Rollover/Transfer of Pension Assets [ ] Another MetLife Policy, Account or Contract
[ ] Discretionary Income [ ] Loan [ ] Other ___________________________________
</TABLE>
7 This account was: [ ] Solicited [ ] Unsolicited
8 Tax Status of These Funds: [ ] Qualified [ ] Non-Qualified
9 Prior Investment Experience: Stocks ___ yrs. Bonds ___ yrs.
(complete all that apply) Mutual Funds ___ yrs. Margin ___ yrs.
Limited Partnerships ___ yrs. Options ___ yrs.
Other __________________ None ___
Investor Receipt and Arbitration Agreement
1. Arbitration
(i) Arbitration is final and binding on the parties.
(ii) The parties are waiving their right to seek remedies in court, including
the right to jury trial.
(iii) Pre-arbitration discovery is generally more limited than and different
from court proceedings.
(iv) The arbitrators' award is not required to include factual findings or
legal reasoning and any party's right to appeal or to seek modification of
rulings by the arbitrators is strictly limited.
(v) The panel of arbitrators will typically include a minority of arbitrators
who were or are affiliated with the securities industry.
(vi) No person shall bring a putative or certified class action to
arbitration, nor seek to enforce any pre-dispute arbitration agreement
against any person who has initiated in court a putative class action; or who
is a member of a putative class who has not opted out of the class with
respect to any claims encompassed by the putative class action until: (i) the
class certification is denied; or (ii) the class is decertified; or (iii) the
customer is excluded from the class by the court. Such forbearance to enforce
an agreement to arbitrate shall not constitute a waiver of any rights under
this agreement except to the extent stated herein.
2. MetLife Securities, Inc. (hereinafter "MSI") and the purchaser of the
shares, who is the signatory below (hereinafter the "Customer"), agree that
any controversy between MSI, its employees, directors, agents, officers or
affiliates and the Customer arising out of or relating to any transactions
between such parties shall be determined by arbitration. Any arbitration
pursuant to this agreement shall be conducted before, and under the rules of,
the National Association of Securities Dealers, Inc. Judgment upon the award
of the arbitrators may be entered in any federal or state court having
jurisdiction.
3. This agreement and any arbitration hereunder shall be governed and
construed in accordance with the laws of the State of New York, United States
of America, including New York procedural and substantive arbitration laws
and rules, without giving effect to conflicts of law principles.
The predispute arbitration agreement located immediately above is accepted and
agreed to. I have also received the current prospectus of the fund and have
given a check in the amount of $___________________ on this, the ____________
day of ________________ 19__
_______________________________________ ________________________________________
Customer Signature (exactly as your Registered Representative's Signature
name appears in Section 1)
/s/ Elaine S. Stevenson
_______________________________________ ________________________________________
Customer Signature MetLife Securities, Inc.; by:
Elaine S. Stevenson, President
_______________________________________ ________________________________________
Capacity
<PAGE>
6 Your Signature (All registered shareholders must sign.)
The undersigned confirms that all the information, instructions and agreements
set forth hereon shall apply to the account, and if applicable, shall also apply
to any other fund account with shares acquired upon exchange of shares of the
Fund.
Under penalties of perjury, I certify that (1) the number shown on this form is
my correct taxpayer identification number (or I am waiting for a number to be
issued to me), and (2) I am not subject to backup withholding because (a) I am
exempt from backup withholding, or (b) I have not been notified by the Internal
Revenue Service that I am subject to backup withholding as a result of a failure
to report all interest or dividends, or (c) the IRS has notified me that I am no
longer subject to backup withholding.
Certification instructions: You must cross out item (2) above if you have been
notified by the IRS that you are currently subject to backup withholding because
of underreporting interest or dividends on your tax return.
1. Arbitration
(i) Arbitration is final and binding on the parties.
(ii) The parties are waiving their right to seek remedies in court, including
the right to jury trial.
(iii) Pre-arbitration discovery is generally more limited than and different
from court proceedings.
(iv) The arbitrators' award is not required to include factual findings or
legal reasoning and any party's right to appeal or to seek modification of
rulings by the arbitrators is strictly limited.
(v) The panel of arbitrators will typically include a minority of arbitrators
who were or are affiliated with the securities industry.
(vi) No person shall bring a putative or certified class action to
arbitration, nor seek to enforce any pre-dispute arbitration agreement
against any person who has initiated in court a putative class action; or who
is a member of a putative class who has not opted out of the class with
respect to any claims encompassed by the putative class action until (i) the
class certification is denied; or (ii) the class is decertified; or (iii) the
customer is excluded from the class by the court. Such forbearance to enforce
an agreement to arbitrate shall not constitute a waiver of any rights under
this agreement except to the extent stated herein.
2. MetLife Securities, Inc. (hereinafter "MSI") and the purchaser of the shares,
who is the signatory below (hereinafter the "Customer"), agree that any
controversy between MSI, its employees, directors, agents, officers or
affiliates and the Customer arising out of or relating to any transactions
between such parties shall be determined by arbitration. Any arbitration
pursuant to this agreement shall be conducted before, and under the rules of,
the National Association of Securities Dealers, Inc. Judgment upon the award of
the arbitrators may be entered in any federal or state court having
jurisdiction.
3. This agreement and any arbitration hereunder shall be governed and construed
in accordance with the laws of the State of New York, United States of America,
including New York procedural and substantive arbitration laws and rules,
without giving effect to conflicts of law principles.
The predispute arbitration agreement located immediately above is accepted and
agreed to. I have also received the current prospectus of the fund and have
given a check in the amount of $_________________ on this, the ______________
day of ___________________________ 19__
The Internal Revenue Service does not require your consent to any provision of
this document other than the certification required to avoid backup withholding.
_______________________________________ ________________________________________
Customer Signature (exactly as your Registered Representative's Signature
name appears in Section 1)
/s/ Elaine S. Stevenson
_______________________________________ ________________________________________
Customer Signature MetLife Securities, Inc.;
by: Elaine S. Stevenson, President
_______________________________________
Capacity
7 Dealer Information and Signature Guarantee (For Dealer use only)
The Dealer agrees to all applicable provisions in this application and in the
Prospectus, guarantees the signature and legal capacity of the shareholder, and
represents that it has provided a current Prospectus to the Applicant and that
the application is properly executed by a person authorized by the Dealer to
guarantee signatures. The Dealer warrants that this application is completed in
accordance with the shareholder's instructions and information and agrees to
indemnify the Fund, any other Eligible Funds, the Investment Manager, the
Distributor, State Street Research Shareholder Services and the Transfer Agent
for any loss or liability from acting or relying upon such instructions and
information. Signature(s) Guaranteed By
MetLife Securities, Inc.
_______________________________________ ________________________________________
Dealer Name Branch Office Number
P.O. Box 30421
_______________________________________ ________________________________________
Address of Home Office Address of Branch Office
Servicing Account
Tampa, FL 33630
_______________________________________ ________________________________________
City State ZIP City State ZIP
_______________________________________ ________________________________________
Authorized Signature of Dealer Registered Representative's
- Tampa, FL Name and Number
_______________________________________
Signature Guarantee
The payment of monies is authorized by the signature(s) on the reverse side.
If the shareholder's account with the Fund is joint, all checks drawn upon this
account must include the signatures of all persons named in the account, unless
the persons signing this card have indicated on the reverse side of this card
that the Bank is authorized to accept any one signature. Each person guarantees
the genuineness of the other's signature. Checks may not be for less than $500
or such other minimum or maximum amounts as may from time to time be established
by the Fund.
The Bank is hereby appointed agent by the person(s) signing this card (the
"Depositor(s)") and, as agent, is authorized and directed to present checks
drawn on this checking account to the Fund or its redemption agent as requests
to redeem shares of the Fund registered in the name of the Depositor(s) in the
amounts of such checks and to deposit the proceeds of such redemptions in this
checking account. The Bank shall be liable only for its own negligence.
Depositor(s) hereby authorize(s) the Fund or its redemption agent to honor
redemption requests presented in the above manner by the Bank. The Fund and its
redemption agent will not be liable for any loss, expense or cost arising out of
check redemptions. If shares of the Fund are purchased by check, redemption
proceeds will ordinarily be withheld until the Fund is reasonably assured that
payment has been collected on the check. The Bank has the right not to honor
checks in amounts exceeding the value of the depositor(s) shareholder account at
the time the check is presented for payment.
The Bank reserves the right to change, modify or terminate this checking account
at any time upon notification mailed to the address of record of the
Depositor(s).
The terms and conditions of the Distributor's currently effective Selected
Dealer Agreement are included by reference in this section. The Dealer
represents that it has a currently effective Selected Dealer Agreement with the
Distributor authorizing the Dealer to sell shares of the Fund and the Eligible
Funds, and that it may lawfully sell shares of the designated Fund(s) in the
state designated as the Applicant's address of record.
- -------------------------------
DO NOT COMPLETE
MSI - Tampa
Dealer #__________ ST _____
Rep #______________________
Rep Name __________________
- -------------------------------
CONTROL NUMBER: 3672-970214(0398)SSR-LD
ML-598E-297
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000727101
<NAME> STATE STREET RESEARCH CAPITAL TRUST
<SERIES>
<NUMBER> 021
<NAME> STATE STREET RESEARCH EMERGING GROWTH FUND CLASS A
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<INVESTMENTS-AT-COST> 110,703,146
<INVESTMENTS-AT-VALUE> 89,887,949
<RECEIVABLES> 3,529,282
<ASSETS-OTHER> 53,846
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 93,471,077
<PAYABLE-FOR-SECURITIES> 184,812
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 88,959,520
<TOTAL-LIABILITIES> 89,144,332
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 106,444,301
<SHARES-COMMON-STOCK> 3,484,170
<SHARES-COMMON-PRIOR> 2,218,121
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,515,228
<OVERDISTRIBUTION-GAINS> 0
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