[COVER PAGE]
[LOGO] STATE STREET RESEARCH
STATE STREET RESEARCH
EXCHANGE FUND
ANNUAL REPORT [ILLUSTRATION]
December 31, 1996 MAN CLIMBING AND LOOKING AT STARS
WHAT'S INSIDE
Prom the Chairman
Positive performance from
stocks and bonds
Portfolio Manager's Review
Strong performance from
large-cap stocks
Fund Information
Facts and figures
Plus, Complete Portfolio Holdings
and Financial Statements
[DALBAR LOGO]
For Excellence
in
Shareholder Service
<PAGE>
FROM THE CHAIRMAN
[photo--Ralph F. Verni]
To Our Shareholders:
1996 was another year of strong returns for many investors in the stock market.
For much of the past year, there were strong corporate profits, low inflation
and steady-but-slow economic growth. The Dow Jones Industrial Average broke the
6000 point barrier in October, and the Standard & Poor's 500 Composite Index was
up +22.95% for the 12 months ended December 31, 1996. Investors in the bond
market also enjoyed positive returns, with the Lehman Brothers Aggregate Bond
Index gaining +3.63% for the same time period.(1)
Stocks
Many of the gains in the stock market in 1996, especially in the second half,
were concentrated in the largest companies and industry giants. Two steep
corrections, one in July and one in December, caused an abundance of investor
concern, which resulted in a lopsided recovery that benefited mostly larger
stocks, the type Exchange Fund primarily invests in.
Bonds
High-yield bonds were steady performers throughout the year, benefiting
from the stronger than expected economy, which never overheated enough to
precipitate any action by the Federal Reserve. Higher-quality bonds rallied
through the summer and fall. In 1997, bonds should continue to take their cue
from the economy and the Fed.
Tax-Time Reminder
In closing, I'd like to remind State Street Research investors of our
extended call-in hours for tax time. Starting March 1 and continuing through
April 15, 1997, Shareholder Services representatives will be available from
8:00 a.m. until 8:00 p.m., and on Saturdays from 10:00 a.m. until 2:00 p.m.
Call them with your account and tax-related questions during these extended
hours.
Thank you for investing in State Street Research Exchange Fund.
Sincerely,
/s/ Ralph F. Verni
Ralph F. Verni
Chairman
January 31, 1997
(1)The Standard & Poor's 500 Composite Index (S&P 500) includes 500 widely
traded common stocks and is a commonly used measure of U.S. stock market
performance. The Lehman Brothers Aggregate Bond Index is a commonly used
measure of bond market performance. The indices are unmanaged. Direct
investment in the indices is not possible; results are for illustrative
purposes only.
(2)Investment results are based on an assumed $10,000 investment. Also
assumes reinvestment of capital gain distributions and income dividends. No
adjustment has been made for income taxes payable by shareholders on income
dividends or capital gain distributions.
(3)All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends.
(4)Cumulative total returns are not annualized.
Please note that the discussion throughout this shareholder report is dated
as indicated and, because of possible changes in viewpoint, data and
transactions, should not be relied upon as being current thereafter
FUND INFORMATION (all data are for periods ended December 31, 1996)
Total value of $10,000 invested on January 1, 1987(2)
[mountain chart]
12/86 10,000
12/87 10,565
12/88 12,452
12/89 16,699
12/90 15,610
12/91 20,289
12/92 21,658
12/93 22,716
12/94 23,497
12/95 31,591
12/96 39,823
SEC Average Annual Compound
Rates of Return(3)
Life of Fund
(since 12/17/76) 10 Years 5 Years 1 Year
- ------------------- ----------- --------- ---------
+13.77% +14.82% +14.44% +26.06%
Cumulative Total Returns(3,4)
Life of Fund
(since 12/17/76) 10 Years 5 Years 1 Year
- ------------------- ----------- --------- ---------
+1229.19% +298.23% +96.27% +26.06%
Top 5 Industry Positions
(by percentage of net assets)
[bar chart]
Drugs 10.0%
Oil 8.1%
Food and beverage 7.1%
Chemicals 6.8%
Aerospace 6.5%
Total: 38.5%
<PAGE>
PORTFOLIO MANAGER'S REVIEW
[photo]
Kennard "Pete"
Woodworth
Portfolio Manager
The following is a discussion with portfolio manager Kennard "Pete" Woodworth.
Pete has 36 years of investment experience.
Q: How did the Fund perform during the year?
A: The Fund had a good year in 1996, in line with generally strong
performance in U.S. equity markets. For the 12 months ended December 31,
1996, the Fund returned +26.06%, handsomely outperforming the +20.78% average
return for the 522 fund classes in Lipper Analytical Services' Growth and
Income Funds category as well as the S&P 500.
Q: What factors contributed to the Fund's strong year?
A: Stocks in general did better than expected in 1996, with
large-capitalization, high-quality growth companies turning in the best results.
This trend benefited the Fund, which is composed primarily of high-quality
names. In terms of sectors, energy stocks--which accounted for about 11% of the
portfolio--did exceedingly well due to the combination of industry restructuring
and generally higher commodity prices. Exxon, the Fund's eighth largest holding
and Schlumberger, the leading oil-service equipment provider, were both strong
contributors to performance.
Q: What other sectors affected performance?
A: Finance stocks had good returns, especially at the end of the year. We
owned BankAmerica, American Express and Chase Manhattan. We also participated
in the growth of the science and technology sector with holdings of IBM and
Microsoft. Interestingly, the consumer staples sector, which represents a
significant portion of the Fund, has traditionally been a repository of great
growth companies, but did not help the portfolio this year. Both Johnson &
Johnson and American Home Products detracted from performance in the fourth
quarter.
Q: Have you made any changes to the Fund's investment strategy?
A: The Fund basically employs a buy and hold strategy, and that has not
changed. But in response to the needs of the shareholders, we have increased
our emphasis on income. Strategically, that translates to favoring stocks
that pay dividends, particularly dividends that are likely to increase over
time. This year we sold Toys 'R Us and AT&T and bought General Motors, which
we hope will produce the level of dividends we're looking for.
Q: What are the tax implications of the Fund's realized capital gains in
1996?
A: In 1996, Exchange Fund realized taxable net long- term capital gains of
$7,423,884 and paid federal capital gains taxes of $2,598,359 on behalf of
Fund shareholders. The balance was retained by the Fund. In late January you
received a 1996 IRS Form 2439. On your 1996 income tax return, you should
take a tax credit of $3.0719 per share and increase the cost basis of your
Fund shares by $5.7049 per share.
Q: Stock markets have had a very strong two years. What is your outlook for
1997?
A: The Standard & Poor's 500 Index has gained 60.48% in the two years since
January 1, 1995.(1) Much of this growth has been powered by a steady inflow
of new investor money into the markets. With valuations at their current
levels, we believe there is still room for growth, but at a more modest pace
than a year ago. While we aren't expecting any dramatic changes in overall
market conditions, we believe the Fund's high-quality portfolio is a good
investment for these markets.
December 31, 1996
Top 10 Stock Positions
(by percentage of net assets)
1 Johnson & Johnson Healthcare products 4.9%
2 Coca-Cola Beverages 3.9%
3 Raytheon Aerospace/defense 3.9%
4 Merck Pharmaceuticals 3.4%
5 Gillette Healthcare products 3.3%
6 IBM Computer 3.3%
7 Mobil Oil 3.0%
8 Exxon Oil 3.0%
9 Microsoft Computer software 3.0%
10 Hewlett-Packard Electronic equipment 2.9%
These securities represent an aggregate of 34.6% of the portfolio. Because of
active management, there is no guarantee that the Fund currently invests, or
will continue to invest, in the securities listed in this table or in the
text above.
Best and Worst Contributors to Performance
(January 1, 1996 through December 31, 1996)
Best [up triangle]
Microsoft
Market position and strong profitability propelled this software giant's
earnings growth.
IBM
Efficient downsizing in 1996 and demand for its products boosted this
computer company's stock.
Coca-Cola
Maintenance of strong growth rate of earnings made this stock attractive to
investors.
Worst [down triangle]
Tele-Com
Company's financial condition hurt by heavy capital expenditures and slow
cash-flow growth.
Nucor
Downward pressure on steel prices caused earnings to drop in 1996.
AirTouch Communications
Investor concerns about competitive threat of new wireless systems drove
stock price down.
2
<PAGE>
STATE STREET RESEARCH EXCHANGE FUND
INVESTMENT PORTFOLIO
December 31, 1996
Value
Shares (Note 1)
-------------------------------- --------- -------------
COMMON STOCKS 98.0
Basic Industries 12.8%
Chemicals 6.8%
Dow Chemical Co. 60,000 $ 4,702,500
E.I. Du Pont De Nemours & Co. 68,500 6,464,688
Monsanto Co. 193,500 7,522,312
-------------
18,689,500
-------------
Electrical Equipment 2.2%
General Electric Co. 32,495 3,212,943
General Signal Corp. 70,372 3,008,403
-------------
6,221,346
-------------
Forest Product 0.7%
Georgia-Pacific Corp. 26,251 1,890,072
-------------
Machinery 3.1%
Caterpillar Inc. 58,400 4,394,600
Millipore Corp. 99,400 4,112,675
-------------
8,507,275
-------------
Total Basic Industries 35,308,193
-------------
Consumer Cyclical 7.2%
Automotive 1.0%
General Motors Corp. 50,000 2,787,500
-------------
Recreation 3.1%
Tele-Communications Liberty
Media Group, Inc. Cl. A* 31,899 911,115
Walt Disney Co. 112,283 7,817,704
-------------
8,728,819
-------------
Retail Trade 3.1%
Dayton Hudson Corp. 150,552 5,909,166
Wal-Mart Stores, Inc. 111,600 2,552,850
-------------
8,462,016
-------------
Total Consumer Cyclical 19,978,335
-------------
Consumer Staple 31.3%
Drug 10.0%
American Home Products Corp. 103,472 6,066,046
Merck & Company, Inc. 117,259 9,292,776
Novartis AG ADR* 92,693 5,291,412
Pfizer Inc. 83,800 6,944,925
-------------
27,595,159
-------------
Food & Beverage 7.1%
Anheuser-Busch Companies, Inc. 112,600 4,504,000
Coca-Cola Co. 207,535 10,921,529
General Mills Inc. 69,200 4,385,550
-------------
19,811,079
-------------
Hospital Supply 5.6%
Columbia/HCA Healthcare Corp. 44,550 $ 1,815,412
Johnson & Johnson 272,992 13,581,352
-------------
15,396,764
-------------
Personal Care 5.7%
Gillette Co. 118,200 9,190,050
Procter & Gamble Co. 61,600 6,622,000
-------------
15,812,050
-------------
Tobacco 2.9%
Philip Morris Companies, Inc. 71,300 8,030,163
-------------
Total Consumer Staple 86,645,215
-------------
Energy 10.9%
Oil 8.1%
Amoco Corp. 71,032 5,718,076
Exxon Corp. 85,068 8,336,664
Mobil Corp. 68,400 8,361,900
-------------
22,416,640
-------------
Oil Service 2.8%
Halliburton Co. 35,012 2,109,473
Schlumberger Ltd. 54,619 5,455,073
-------------
7,564,546
-------------
Total Energy 29,981,186
-------------
Finance 11.4%
Bank 4.7%
Banc One Corp. 55,902 2,403,786
BankAmerica Corp. 68,400 6,822,900
Chase Manhattan Corp. 41,576 3,710,658
-------------
12,937,344
-------------
Financial Service 4.4%
American Express Co. 141,591 7,999,891
Federal National Mortgage
Association 110,400 4,112,400
-------------
12,112,291
-------------
Insurance 2.3%
General Re Corp. 40,941 6,458,443
-------------
Total Finance 31,508,078
-------------
Science & Technology 23.3%
Aerospace 6.5%
Boeing Co. 65,900 7,010,112
Raytheon Co. 225,742 10,863,834
-------------
17,873,946
-------------
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
STATE STREET RESEARCH EXCHANGE FUND
Value
Shares (Note 1)
-------------------------------- --------- -------------
Computer Software & Service 3.8%
First Data Corp. 65,338 $ 2,384,837
Microsoft Corp.* 99,500 8,221,188
-------------
10,606,025
-------------
Electronic Components 1.3%
AMP Inc. 96,000 3,684,000
-------------
Electronic Equipment 5.5%
L.M. Ericsson Telephone Co. ADR
Cl. B* 152,460 4,602,386
Lucent Technologies Inc.* 90,522 4,186,643
Motorola Inc. 50,600 3,105,575
Perkin-Elmer Corp. 58,000 3,414,750
-------------
15,309,354
-------------
Office Equipment 6.2%
Hewlett-Packard Co. 160,000 8,040,000
International Business Machines
Corp. 59,800 9,029,800
-------------
17,069,800
-------------
Total Science & Technology 64,543,125
-------------
Utility 1.1%
Telephone 1.1%
AirTouch Communications Inc.* 123,800 3,125,950
-------------
Total Utility 3,125,950
-------------
Total Common Stocks (Cost $90,335,478) 271,090,082
-------------
Principal Maturity
Amount Date
- --------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS 3.6%
American General Finance Corp.,
6.15% $9,913,000 1/02/1997 9,913,000
Ford Motor Credit Co., 5.80% 120,000 1/07/1997 120,000
--------------
Total Short-Term Obligations (Cost $10,033,000) 10,033,000
--------------
Total Investments (Cost $100,368,478)--101.6% 281,123,082
Cash and Other Assets, Less Liabilities--(1.6%) (4,398,754)
--------------
Net Assets--100.0% $276,724,328
==============
Federal Income Tax Information:
At December 31, 1996, the net unrealized appreciation
of investments based on cost for Federal income tax
purposes of $87,311,334 was as follows:
Aggregate gross unrealized appreciation for all
investments in which there is an excess of value
over tax cost $193,922,713
Aggregate gross unrealized depreciation for all
investments in which there is an excess of tax cost
over value (110,965)
---------------
$193,811,748
===============
* Nonincome-producing securities.
ADR stands for American Depositary Receipt, representing ownership of
foreign securities.
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
STATE STREET RESEARCH EXCHANGE FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1996
Assets
Investments, at value (Cost $100,368,478) (Note 1) $281,123,082
Cash 20,027
Dividends and interest receivable 320,359
Other assets 18,877
--------------
281,482,345
Liabilities
Federal income tax payable 2,598,359
Dividends payable 1,419,088
Accrued management fee (Note 2) 345,421
Capital gain distribution payable 302,124
Payable for fund shares redeemed 27,153
Accrued trustees' fees (note 2) 8,480
Accrued transfer agent and shareholder services (Note 2) 7,189
Other accrued expenses 50,203
--------------
4,758,017
--------------
Net Assets $276,724,328
==============
Net Assets consist of:
Undistributed net investment income $ 77,382
Unrealized appreciation of investments 180,754,604
Shares of beneficial interest 95,892,342
--------------
$276,724,328
==============
Net Asset Value per share ($276,724,328 / 847,083 shares
of beneficial interest) $326.68
==============
STATEMENT OF OPERATIONS
For the year ended December 31, 1996
Investment Income
Dividends, net of foreign taxes of $19,559 $ 4,703,149
Interest 260,552
--------------
4,963,701
Expenses
Management fee (Note 2) 1,281,051
Custodian fee 70,511
Trustees' fees (Note 2) 32,519
Audit fee 25,286
Transfer agent and shareholder services (Note 2) 21,429
Reports to shareholders 15,258
Legal fees 5,707
Miscellaneous 21,339
--------------
1,473,100
--------------
Net investment income 3,490,601
--------------
Realized and Unrealized Gain on Investments
Net realized gain on investments (Notes 1 and 3) 15,724,519
Provision for federal income tax (2,598,359)
--------------
13,126,160
Net unrealized appreciation of investments 40,186,634
--------------
Net gain on investments 53,312,794
--------------
Net increase in net assets resulting from operations $56,803,395
==============
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
STATE STREET RESEARCH EXCHANGE FUND
STATEMENT OF CHANGES IN NET ASSETS
Year ended December 31
-------------------------------
1996 1995
--------------------------------- --------------- ---------------
Increase (Decrease) in Net Assets
Operations:
Net investment income $ 3,490,601 $ 3,205,778
--------------- ---------------
Net realized gain on investments* 15,724,519 26,724,341
Provision for federal income tax (2,598,359) (4,069,573)
--------------- ---------------
13,126,160 22,654,768
--------------- ---------------
Net unrealized appreciation of
investments 40,186,634 33,669,225
--------------- ---------------
Net increase resulting from
operations 56,803,395 59,529,771
--------------- ---------------
Dividends from net investment
income (3,498,914) (3,378,495)
--------------- ---------------
Distributions from net realized
gains (432,035) (236,946)
--------------- ---------------
Share transactions:
Net asset value of shares issued
in payment of:
Distributions from net
realized gains 130,117 80,260
Dividends from net
investment income 333,745 847,325
Cost of shares repurchased (10,034,082) (18,569,970)
--------------- ---------------
Net decrease from fund share
transactions (9,570,220) (17,642,385)
--------------- ---------------
Total increase in net assets 43,302,226 38,271,945
Net Assets
Beginning of year 233,422,102 195,150,157
--------------- ---------------
End of year (including
undistributed net investment
income of $77,382 and $85,983,
respectively) $276,724,328 $233,422,102
=============== ===============
Number of shares:
Issued upon reinvestment of:
Distributions from net
realized gains 398 302
Dividends from net
investment income 934 3,354
Repurchased (33,611) (80,284)
--------------- ---------------
Net decrease in fund shares (32,279) (76,628)
--------------- ---------------
*Net realized gain for Federal
income tax purposes
(Note 1) $ 7,855,919 $ 11,864,297
=============== ===============
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
Note 1
State Street Research Exchange Fund (the "Fund"), is a series of State Street
Research Exchange Trust (the "Trust"), which is a Massachusetts business
trust registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. The Trust was organized in February,
1989 as a successor to State Street Exchange Fund, Inc., a Massachusetts
corporation. The Fund is presently the only series of the Trust.
The investment objective of the Fund is to provide long-term growth of capital
and, secondarily, long-term growth of income. In seeking to achieve its
investment objective, the Fund invests primarily in common stocks, or securities
convertible into common stocks, that have long-term growth potential.
The following significant policies are consistently followed by the Fund in
preparing its financial statements, and such policies are in conformity with
generally accepted accounting principles for investment companies.
A. Investments in Securities
Values for listed securities represent the last sale on national securities
exchanges quoted prior to the close of the New York Stock Exchange.
Over-the-counter securities quoted on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") system are valued at the closing price
supplied through such system. In the absence of recorded sales and for those
over-the-counter securities not quoted on the NASDAQ system, valuations are at
the mean of the closing bid and asked quotations, except for securities that may
be restricted as to public resale, which are valued in accordance with methods
adopted by the Trustees. Security transactions are accounted for on the trade
date (date the order to buy or sell is executed), and dividends declared but not
received are accrued on the ex-dividend date. Interest income is determined on
the accrual basis. Realized gains and losses from security transactions are
reported on the basis of average cost of securities delivered.
B. Federal Income Taxes
No provision for Federal income taxes is necessary with respect to net
investment income since the Fund has elected to qualify under Subchapter M of
the Internal Revenue Code and its policy is to distribute substantially all
of such income. It is also the intention of the Fund to distribute an amount
sufficient to avoid imposition of any Federal Excise Tax under Section 4982
of the Internal Revenue Code. The Fund retains and designates as
undistributed gains all of its taxable net long-term capital gains and pays
Federal income taxes thereon on behalf of the shareholders.
C. Dividends
Dividends from net investment income are declared and paid or reinvested
quarterly. Net realized short-term capital gains, if any, are distributed
annually.
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
STATE STREET RESEARCH EXCHANGE FUND
NOTES (cont'd)
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is primarily due to differing
treatments for nontaxable redemptions in kind and the disposition of
securities that have different bases for financial reporting and tax
purposes. The permanent book and tax basis difference relating to shareholder
distributions will result in reclassifications to shares of beneficial
interest.
D. Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into a contract that provides for an annual
fee equal to 0.50% of the Fund's average daily net assets. In consideration
of these fees, the Adviser furnishes the Fund with management, investment
advisory, statistical and research facilities and services. The Adviser also
pays all salaries, rent and certain other expenses of management. During the
year ended December 31, 1996, the fees pursuant to such agreement amounted to
$1,281,051.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. During the year ended December 31, 1996, the amount of
such expenses was $3,680.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $32,519 during the year ended December 31, 1996.
Note 3
For the year ended December 31, 1996, exclusive of short-term investments and
U.S. Government obligations, purchases and sales of securities, including
$9,473,298 representing redemptions in kind, aggregated $13,559,897 and
$33,028,031, respectively.
Note 4
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share.
At December 31, 1996, the Adviser owned 13,766 shares of the Fund.
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $265.44 $204.13 $205.81 $205.98 $198.84
Net investment income 4.09 3.63 3.79 3.47 3.28
Net realized and unrealized gain (loss) on
investments* 61.76 61.75 (1.67) (0.24) 7.06
Dividends from net investment income (4.10) (3.80) (3.80) (3.40) (3.20)
Distributions from net realized gains (0.51) (0.27) -- -- --
----------- ----------- ----------- ----------- -----------
Net asset value, end of year $326.68 $265.44 $204.13 $205.81 $205.98
=========== =========== =========== =========== ===========
Total return 26.06% 34.44% 3.44% 4.88% 6.75%
Net assets at end of year (000s) $276,724 $233,422 $195,150 $206,153 $209,922
Ratio of operating expenses to average net assets 0.57% 0.58% 0.57% 0.62% 0.59%
Ratio of net investment income to average net
assets 1.36% 1.49% 1.80% 1.65% 1.63%
Portfolio turnover rate 5.39% 11.67% 16.31% 22.10% 10.68%
Average commission rate@ $0.03 -- -- -- --
*After provision for Federal tax on retained
capital gains at end of year of $3.07 $4.64 $4.88 $6.79 $2.94
</TABLE>
@ For fiscal years beginning on or after January 1, 1996, the Fund is
required to disclose its average commission rate per share paid for
security trades.
7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of State Street Research Exchange Trust
and Shareholders of State Street Research Exchange Fund:
We have audited the accompanying statement of assets and liabilities of State
Street Research Exchange Fund, including the schedule of portfolio
investments, as of December 31, 1996, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of
the two years in the period then ended, and the financial highlights for each
of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements.
Our procedures included confirmation of securities owned as of December 31,
1996 by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
State Street Research Exchange Fund as of December 31, 1996, the results of
its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 7, 1997
8
<PAGE>
STATE STREET RESEARCH EXCHANGE FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
State Street Research Exchange Fund had a good year in 1996, in line with
generally strong performance in U.S. equity markets. The Fund outperformed
both the S&P 500 and the average return for funds in Lipper Analytical
Services' Growth and Income Funds category.
Stocks in general did better than expected in 1996, with large-capitalization,
high-quality growth companies turning in the best results. This trend benefited
the Fund, which is composed primarily of high-quality names.
Fund management increased the Fund's emphasis on income by favoring stocks
that pay dividends.
Energy stocks--which accounted for about 11% of the portfolio--did well due
to the combination of industry restructuring and generally higher commodity
prices. Financial stocks had good returns, especially at the end of the year.
The Fund also participated in the growth of the technology sector. The
consumer staples sector, which Fund management typically considers to be a
repository of solid growth companies and represents a significant portion of
the Fund, did not help the portfolio this year.
December 31, 1996
All returns represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment made in
the Fund will fluctuate and shares, when redeemed, may be worth more or less
than their original cost. All returns assume reinvestment of capital gain
distributions and income dividends. The Standard & Poor's 500 Composite Index
(S&P 500) includes 500 widely traded common stocks and is a commonly used
measure of U.S. stock market performance. The index is unmanaged. Direct
investment in the index is not possible; results are for illustrative
purposes only.
Change In Value Of $10,000 Based On
The S&P 500 Compared To Change In Value
Of $10,000 Invested In Exchange Fund
- ----------------------------------------
Average Annual Total Return
- ----------------------------------------
1 Year 5 Years 10 Years
- ----------------------------------------
+26.06% +14.44% +14.82
- ----------------------------------------
[line chart]
Exchange Fund S&P 500
12/86 10,000 10,000
12/87 10,565 10,525
12/88 12,452 12,268
12/89 16,699 16,149
12/90 15,610 15,647
12/91 20,289 20,403
12/92 21,658 21,956
12/93 22,716 24,164
12/94 23,497 24,481
12/95 31,591 33,670
12/96 39,823 41,396
9
<PAGE>
STATE STREET RESEARCH EXCHANGE FUND
FUND INFORMATION, OFFICERS AND TRUSTEES OF STATE STREET RESEARCH EXCHANGE
TRUST
Fund Information
State Street Research
Exchange Fund
One Financial Center
Boston, MA 02111
Investment Adviser
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
Distributor
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
Shareholder Services
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
1-800-562-0032
Custodian
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
Legal Counsel
Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02111
Independent Accountants
Coopers & Lybrand L.L.P.
One Post Office Square
Boston, MA 02109
Officers
Ralph F. Verni
Chairman of the Board,
President and
Chief Executive Officer
Peter C. Bennett
Vice President
James M. Weiss
Vice President
Kennard Woodworth, Jr.
Vice President
Gerard P. Maus
Treasurer
Joseph W. Canavan
Assistant Treasurer
Douglas A. Romich
Assistant Treasurer
Francis J. McNamara, III
Secretary and General Counsel
Darman A. Wing
Assistant Secretary and
Assistant General Counsel
Amy L. Simmons
Assistant Secretary
Trustees
Ralph F. Verni
Chairman of the Board,
President, Chief Executive
Officer and Director,
State Street Research &
Management Company
Steve A. Garban
Retired; formerly Senior Vice
President for Finance and
Operations and Treasurer, The
Pennsylvania State University
Malcolm T. Hopkins
Former Vice Chairman of the
Board and Chief Financial Officer,
St. Regis Corp.
Edward M. Lamont
Formerly in banking
(Morgan Guaranty Trust
Company of New York);
presently engaged in private
investments and civic affairs
Robert A. Lawrence
Partner, Saltonstall & Co.
Dean O. Morton
Retired; formerly Executive
Vice President, Chief
Operating Officer and Director,
Hewlett-Packard Company
Thomas L. Phillips
Retired; formerly Chairman of
the Board and Chief Executive
Officer, Raytheon Company
Toby Rosenblatt
President,
The Glen Ellen Company
Vice President,
Founders Investments Ltd.
Michael S. Scott Morton
Jay W. Forrester Professor of
Management, Sloan School of
Management, Massachusetts
Institute of Technology
Jeptha H. Wade
Retired; formerly Of Counsel,
Choate, Hall & Stewart
10
<PAGE>
[BACK COVER]
State Street Research Exchange Fund
One Financial Center Bulk Rate
Boston, MA 02111 U.S. Postage
PAID
Brockton, MA
Permit No. 600
Questions? Comments?
Call us at 1-800-562-0032,
or write us at:
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266-8408
[LOGO] STATE STREET RESEARCH
This report is prepared for the general information of current shareholders
only. It is not authorized for use as sales material with prospective investors.
Portfolio changes should not be considered recommendations for action by
individual investors.
The Dalbar awards recognize quality shareholder service and should not be
considered a rating of fund performance. The survey included mutual fund
complexes that volunteered or were otherwise selected to participate and was
not industry-wide.
CONTROL NUMBER: 3733-970225(0398)SSR-LD EX-400E-297
Cover Illustration by Dorothy Cullinan
