State Street Research Global Resources Fund
a series of
State Street Research Equity Trust
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1995
(As supplemented November 17,1995)
TABLE OF CONTENTS
Page
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS ........................... 2
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES ............................................. 5
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS ........................... 15
RATING CATEGORIES OF DEBT SECURITIES ...................................... 18
TRUSTEES AND OFFICERS ..................................................... 21
INVESTMENT ADVISORY SERVICES .............................................. 27
PURCHASE AND REDEMPTION OF SHARES ......................................... 28
NET ASSET VALUE ........................................................... 30
PORTFOLIO TRANSACTIONS .................................................... 31
CERTAIN TAX MATTERS ....................................................... 33
DISTRIBUTION OF SHARES OF THE FUND ........................................ 35
CALCULATION OF PERFORMANCE DATA ........................................... 39
CUSTODIAN ................................................................. 42
INDEPENDENT ACCOUNTANTS ................................................... 42
FINANCIAL STATEMENTS ...................................................... 42
The following Statement of Additional Information is not a Prospectus.
It should be read in conjunction with the Prospectus of State Street Research
Global Resources Fund (the "Fund") dated November 1, 1995, which may be obtained
without charge from the offices of State Street Research Equity Trust (the
"Trust") or State Street Research Investment Services, Inc. (the "Distributor"),
One Financial Center, Boston, Massachusetts 02111-2690.
CONTROL NUMBER: 1285S-951101(1296) SSR-LD EG-879D-1195
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ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under "The Fund's Investments" and "Limiting Investment
Risk" in the Fund's Prospectus, the Fund has adopted certain investment
restrictions.
All of the Fund's fundamental investment restrictions are set forth
below. These fundamental restrictions may not be changed except by the
affirmative vote of a majority of the Fund's outstanding voting securities as
defined in the Investment Company Act of 1940, as amended (the "1940 Act").
(Under the 1940 Act, a "vote of the majority of the outstanding voting
securities" means the vote, at the annual or a special meeting of security
holders duly called, (i) of 67% or more of the voting securities present at a
meeting if the holders of more than 50% of the outstanding voting securities are
present or represented by proxy or (ii) of more than 50% of the outstanding
voting securities, whichever is less.) Under these restrictions, it is the
Fund's policy:
(1) not to invest in a security if the transaction would result in
the Fund owning more than 10% of any class of voting
securities of an issuer, except that this restriction does not
apply to investments in securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities or backed
by the U.S. Government;
(2) not to issue senior securities;
(3) not to underwrite or participate in the marketing of
securities of other issuers, except (a) the Fund may purchase
or otherwise acquire securities of other issuers for
investment, either from the issuers or from persons in a
control relationship with the issuers or from underwriters of
such securities; and (b) to the extent that, in connection
with the disposition of the Fund's securities, the Fund may be
deemed to be an underwriter under certain federal securities
laws;
(4) not to purchase or sell fee simple interests in real estate or
illiquid interests in limited partnerships that invest in real
estate, although the Fund may purchase and sell other
interests in real estate including readily marketable
interests in real estate investment trusts or companies which
own or invest or deal in real estate;
(5) 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;
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(6) not to make loans, except that the Fund may lend portfolio
securities and purchase bonds, debentures, notes and similar
obligations (including repurchase agreements with respect
thereto);
(7) not to conduct arbitrage transactions (provided that
investments in futures and options shall not be deemed
arbitrage transactions);
(8) not to invest directly as a joint venturer or general partner
in oil, gas or other mineral exploration or development joint
ventures or general partnerships (provided that the Fund may
invest in securities issued by companies which invest in or
sponsor such programs and in securities indexed to the price
of oil, gas or other minerals);
(9) not to 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 Fund will not purchase additional portfolio
securities at any time when it has outstanding money
borrowings in excess of 5% of the Fund's total assets (taken
at current value); and
(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
other than any energy industry [for purposes of this
restriction, (a) energy and nonenergy industries will be
divided according to their services, so that, for example, in
the case of (i) utilities, gas, gas transmission, electric and
telephone companies each will be deemed to be in a separate
industry, and (ii) oil and oil related companies will be
divided by types, with oil production companies, oil service
companies and marketing companies each deemed to be in a
separate industry, (b) finance companies will be classified
according to the industries of their parent companies and (c)
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].
The following investment restrictions may be changed by a vote of a
majority of the Trustees. Under these restrictions, it is the Fund's policy:
(1) not to invest more than 5% of its total assets in securities
of private companies including predecessors with less than
three years' continuous operations except (a) securities
guaranteed or backed by an affiliate of the issuer with three
years of continuous operations, (b) securities issued or
guaranteed as to principal or interest by the U.S. Government,
or its agencies or instrumentalities, or a
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mixed-ownership Government corporation, (c) securities of
issuers with debt securities rated at least "BBB" by Standard
& Poor's Corporation or "Baa" by Moody's Investor's Service,
Inc. (or their equivalent by any other nationally recognized
statistical rating organization) or securities of issuers
considered by the Investment Manager to be equivalent, (d)
securities issued by a holding company with at least 50% of
its assets invested in companies with three years of
continuous operations including predecessors, and (e)
securities which generate income which is exempt from local,
state or federal taxes; provided that the Fund may invest up
to 15% in such issuers so long as such investments plus
investments in restricted securities (other than those which
are eligible for resale under Rule 144A, Regulation S or other
exemptive provisions) do not exceed 15% of the Fund's total
assets;
(2) not to engage in transactions in options except in connection
with options on securities, securities indices and currencies,
and options on futures contracts 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" (the Fund will not make short sales or
maintain a short position unless not more than 5% of the
Fund's net assets (taken at current value) is held as
collateral for such sales at any time);
(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 and
options, 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 futures and
options, are not deemed to involve a hypothecation, mortgage
or pledge of assets);
(5) not to purchase a security issued by another investment
company if, immediately after such purchase, the Fund would
own, in the aggregate, (i) more than 3% of the total
outstanding voting stock of such other investment company;
(ii) securities issued by such other investment company having
an aggregate value in excess of 5% of the value of the Fund's
total assets; or (iii) securities issued by such other
investment company and all other investment companies (other
than treasury stock of the Fund) having an aggregate value in
excess of 10% of the value of the Fund's total assets;
provided, however, that the Fund may purchase investment
company securities without limit for the purpose of completing
a merger, consolidation or other acquisition of assets;
(6) not to purchase or retain any security of an issuer if, to the
knowledge of the Trust, those of its officers and Trustees and
officers and directors of its investment advisers who
individually own more than 1/2 of 1% of the securities
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of such issuer, when combined, own more than 5% of the
securities of such issuer taken at market;
(7) not to invest in warrants more than 5% of the value of its
total assets and not to invest in warrants that are not listed
on the New York or American Stock Exchange more than 2% of its
total assets, in each case taken at the lower of cost or
market value (warrants initially attached to securities and
acquired by the Fund upon original issuance thereof shall be
deemed to be without value);
(8) not to invest in companies for the purpose of exercising
control over their management, although the Fund may from time
to time present its views on various matters to the management
of issuers in which it holds investments; and
(9) not to purchase any security or enter into a repurchase
agreement if as a result more than 15% of its total assets
would be invested in (a) securities that are illiquid because
of the absence of a readily available market or because such
securities are restricted securities (i.e., subject to legal
or contractual restrictions on resale), provided that such
restricted securities, excluding restricted securities
eligible for resale pursuant to exemptive rules or regulations
under the Securities Act of 1933, shall be limited to 5% of
total assets, and (b) repurchase agreements not entitling the
holder to payment of principal and interest within seven days.
The Fund has undertaken with a state securities authority that,
pursuant to clause (7) above, for so long as the Fund's shares are required to
be registered in that state, the Fund's investment in warrants, valued at the
lower of cost or market, may not exceed 5% of its net assets and included within
that amount, but not to exceed 2% of the value of its net assets, may be
warrants which are not listed on the New York or American Stock Exchange.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Among other investments described below, the Fund may buy and sell
options, futures contracts and options on futures contracts with respect to
securities, securities indices, and currencies, and may enter into closing
transactions with respect to each of the foregoing under circumstances in which
such instruments and techniques are expected by State Street Research &
Management Company (the "Investment Manager") to aid in achieving the investment
objective of the Fund. The Fund on occasion may also purchase instruments with
characteristics of both futures and securities (e.g., debt instruments with
interest and principal payments determined by reference to the value of a
commodity or currency at a future time) and which, therefore, possess the risks
of both futures and securities investments.
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Futures Contracts
Futures contracts are publicly traded contracts to buy or sell
underlying assets, such as certain securities, currencies, or an index of
securities, at a future time at a specified price. A contract to buy establishes
a "long" position while a contract to sell establishes a "short" position.
The purchase of a futures contract on securities or an index of
securities normally enables a buyer to participate in the market movement of the
underlying asset or index after paying a transaction charge and posting margin
in an amount equal to a small percentage of the value of the underlying asset or
index. The Fund will initially be required to deposit with the Trust's custodian
or the broker effecting the futures transaction an amount of "initial margin" in
cash or U.S. Treasury obligations.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will terminate
its 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 securities,
such delivery and acceptance are seldom made.
Futures contracts will be executed primarily (a) to establish a short
position, and thus protect the Fund from experiencing the full impact of an
expected decline in market value of portfolio holdings without requiring the
sale of holdings, or (b) to establish a long position, and thus to participate
in an expected rise in market value of securities which the Fund intends to
purchase. In transactions establishing a long position in a futures contract,
money market instruments equal to the face value of the futures contract will be
identified by the Fund to the Trust's custodian for maintenance in a separate
account to insure that the use of such futures contracts is unleveraged.
Similarly, a representative portfolio of securities having a value equal to the
aggregate face value of the futures contract will be identified with respect to
each
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short position. The Fund will employ any other appropriate method of cover which
is consistent with applicable regulatory and exchange requirements.
Options on Securities
The Fund may use options on securities to implement its investment
strategy. A call option on a security, for example, gives the purchaser of the
option the right to buy, and the writer the obligation to sell, the underlying
asset at the exercise price during the option period. Conversely, a put option
on a security gives the purchaser the right to sell, and the writer the
obligation to buy, the underlying asset at the exercise price during the option
period.
Purchased options have defined risk, i.e., the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset.
Written options have varying degrees of risk. An uncovered written call
option theoretically carries unlimited risk, as the market price of the
underlying asset could rise far above the exercise price before its expiration.
This risk is tempered when the call option is covered, i.e., when the option
writer owns the underlying asset. In this case, the writer runs the risk of the
lost opportunity to participate in the appreciation in value of the asset rather
than the risk of an out-of-pocket loss. A written put option has defined risk,
i.e., the difference between the agreed-upon price that the Fund must pay to the
buyer upon exercise of the put and the value, which could be zero of the asset
at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
his obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Options on Securities Indices
The Fund may engage in transactions in call and put options on
securities indices. For example, the Fund may purchase put options on indices of
fixed income securities in anticipation of or during a market decline to attempt
to offset the decrease in market value of its securities that might otherwise
result.
Put options on indices of securities are similar to put options on the
securities themselves except that the delivery requirements are different.
Instead of giving the right to make delivery of a security at a specified price,
a put option on an index of securities gives the holder the right to receive an
amount of cash upon exercise of the option if the value of the underlying index
has fallen below the exercise price. The amount of cash received will be equal
to the difference between the closing price of the index and the exercise price
of the option expressed in dollars times a specified multiple. As with options
on equity or fixed
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income securities, futures contracts or commodities, the Fund may offset its
position in index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.
A securities index assigns relative values to the securities included
in the index and the index options are based on a broad market index. Although
there are at present few available options on indices of fixed income
securities, other than tax-exempt securities, or futures and related options
based on such indices, such instruments may become available in the future. In
connection with the use of such options, the Fund may cover its position by
identifying a representative portfolio of securities having a value equal to the
aggregate face value of the option position taken. However, the Fund may employ
any appropriate method to cover its positions that is consistent with applicable
regulatory and exchange requirements.
Options on Futures Contracts
An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified exercise price at any time during the period of the option.
Options Strategy
A basic option strategy for protecting the Fund against a decline in
securities prices could involve (a) the purchase of a put -- thus "locking in"
the selling price of the underlying securities or securities indices -- or (b)
the writing of a call on securities or securities indices held by the Fund --
thereby generating income (the premium paid by the buyer) by giving the holder
of such call the option to buy the underlying asset at a fixed price. The
premium will offset, in whole or in part, a decline in portfolio value; however,
if prices of the relevant securities or securities indices rose instead of
falling, the call might be exercised, thereby resulting in a potential loss of
appreciation in the underlying securities or securities indices.
A basic option strategy when a rise in securities prices is anticipated
is the purchase of a call -- thus "locking in" the purchase price of the
underlying security or other asset. In transactions involving the purchase of
call options by the Fund, money market instruments equal to the aggregate
exercise price of the options will be identified by the Fund to the Trust's
custodian to insure that the use of such investments is unleveraged.
The Fund may write options in connection with buy-and-write
transactions; that is, the Fund may purchase a security and concurrently write a
call option against that security or other asset. If the call option is
exercised in such a transaction, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upward or downward by the
difference between the Fund's purchase price of the security and the exercise
price of the option. If the option is not exercised and the price of the
underlying security declines, the amount of such decline will be offset in part,
or entirely, by the premium received.
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The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security or other asset rises or otherwise is above the exercise
price, the put option will expire worthless and the Fund's gain will be limited
to the premium received. If the market price of the underlying security declines
or otherwise is below the exercise price, the Fund's return will be the premium
received from writing the put option minus the amount by which the market price
of the security is below the exercise price.
Limitations and Risks of Options and Futures Activity
The Fund will engage in transactions in futures contracts or options
only as a hedge against changes resulting from market conditions which produce
changes in the values of its investments or the investments which it intends to
purchase (e.g., to replace portfolio securities which will mature in the near
future) and, subject to the limitations described below, to enhance return. The
Fund will not purchase any futures contract or purchase any call option if,
immediately thereafter, more than one third of the Fund's net assets would be
represented by long futures contracts or call options. The Fund will not write a
covered call or put option if, immediately thereafter, the aggregate value of
the assets (securities in the case of written calls and cash or cash equivalents
in the case of written puts) underlying all such options, determined as of the
dates such options were written, would exceed 25% of the Fund's net assets. In
addition, the Fund may not establish a position in a commodity futures contract
or purchase or sell a commodity option contract for other than bona fide hedging
purposes if immediately thereafter the sum of the amount of initial margin
deposits and premiums required to establish such positions for such nonhedging
purposes would exceed 5% of the market value of the Fund's net assets.
Although effective hedging can generally capture the bulk of a desired
risk adjustment, no hedge is completely effective. The Fund's ability to hedge
effectively through transactions in futures and options depends on the degree to
which price movements in its holdings correlate with price movements of the
futures and options.
Some positions in futures and options may be closed out only on an
exchange which provides a secondary market therefor. There can be no assurance
that a liquid secondary market will exist for any particular futures contract or
option at any specific time. Thus, it may not be possible to close such an
option or futures position prior to maturity. The inability to close options and
futures positions also could have an adverse impact on the Fund's ability to
effectively hedge its securities and might, in some cases, require the Fund to
deposit cash to meet applicable margin requirements. The Fund will enter into an
option or futures position only if it appears to be a liquid investment.
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.
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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. 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 up to a month 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 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
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collateral in an amount equal to at least 100% of the current market value of
the loaned security plus accrued interest. Collateral received by the Fund will
generally be held in the form tendered, although cash may be invested in
securities in which the Fund is authorized to invest. The collateral will be
reflected as an asset, with an offsetting liability to the counterparty, on the
records of the Fund. Such loans may be terminated at any time. The Fund will
retain most rights of ownership including rights to dividends, interest or other
distributions on the loaned securities. Voting rights pass with the lending,
although the Fund may call loans to vote proxies if desired. Should the borrower
of securities fail financially, there is a risk of delay in recovery of the
securities or loss of rights in the collateral. Loans are made only to borrowers
which are deemed by the Investment Manager to be of good financial standing.
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.
Rule 144A Securities
The Fund may buy or sell restricted securities in accordance with Rule
144A under the Securities Act of 1933 ("Rule 144A Securities"). Securities may
be resold pursuant to Rule 144A under certain circumstances only to qualified
institutional buyers as defined in the rule, and the markets and trading
practices for such securities are relatively new and still developing; depending
on the development of such markets, Rule 144A Securities may be deemed to be
liquid as determined by or in accordance with methods adopted by the Trustees.
Under such methods the following factors are considered, among others: the
frequency of trades and quotes for the security, the number of dealers and
potential purchasers in the market, marketmaking activity, and the nature of the
security and marketplace trades. Investments in Rule 144A Securities could have
the effect of increasing the level of the Fund's illiquidity to the extent that
qualified institutional buyers become, for a time, uninterested in purchasing
such securities. Also, the Fund may be adversely impacted by the possible
illiquidity and subjective valuation of such securities in the absence of a
market for them.
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
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period to pay a bank or investment banker the floating rate of interest on a
so-called notional principal amount (i.e., an assumed figure selected by the
parties for this purpose) in exchange for agreement by the bank or investment
banker to pay the Fund a fixed rate of interest on the notional principal
amount. In a currency swap, the Fund would agree with the other party to
exchange cash flows based on the relative differences in values of a notional
amount of two (or more) currencies; in an index swap, the Fund would agree to
exchange cash flows on a notional amount based on changes in the values of the
selected indices. Purchase of a cap entitles the purchaser to receive payments
from the seller on a notional amount to the extent that the selected index
exceeds an agreed upon interest rate or amount whereas purchase of a floor
entitles the purchaser to receive such payments to the extent the selected index
falls below an agreed-upon interest rate or amount. A collar combines a cap and
a floor.
Most swaps entered into by the Fund will be on a net basis; for
example, in an interest rate swap, amounts generated by application of the fixed
rate and the floating rate to the notional principal amount would first offset
one another, with the Fund either receiving or paying the difference between
such amounts. In order to be in a position to meet any obligations resulting
from swaps, the Fund will set up a segregated custodial account to hold
appropriate liquid assets, including cash; for swaps entered into on a net
basis, assets will be segregated having a daily net asset value equal to any
excess of the Fund's accrued obligations over the accrued obligations of the
other party, while for swaps on other than a net basis assets will be segregated
having a value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a part of the Fund's portfolio.
However, the Fund may enter into such arrangements for income purposes to the
extent permitted by the CFTC for entities which are not commodity pool
operators, such as the Fund. In entering a swap arrangement, the Fund is
dependent upon the creditworthiness and good faith of the counterparty. The Fund
attempts to reduce the risks of nonperformance by the counterparty by dealing
only with established, reputable institutions. The swap market is still
relatively new and emerging; positions in swap arrangements may become illiquid
to the extent that nonstandard arrangements with one counterparty are not
readily transferable to another counterparty or if a market for the transfer of
swap positions does not develop. The use of interest rate swaps is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. If the
Investment Manager is incorrect in its forecasts of market values, interest
rates and other applicable factors, the investment performance of the Fund would
diminish compared with what it would have been if these investment techniques
were not used. Moreover, even if the Investment Manager is correct in its
forecasts, there is a risk that the swap position may correlate imperfectly with
the price of the asset or liability being hedged.
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
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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. 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.
Industry Classifications
In determining how much of the Fund's portfolio is invested in a given
industry, the following industry classifications, grouped by sectors, are
currently used:
13
<PAGE>
<TABLE>
<CAPTION>
Basic Industries Consumer Staple Science & Technology
- ---------------- --------------- --------------------
<S> <C> <C>
Chemical Business Service Aerospace
Diversified Container Computer Software & Service
Electrical Equipment Drug Electronic Equipment
Forest Products Food & Beverage Office Equipment
Machinery Hospital Supply
Metal & Mining Personal Care
Railroad Printing & Publishing
Truckers Tobacco
Utility Energy Consumer Cyclical
- ------- ------ -----------------
Electric Oil Airline
Natural Gas Oil Service Automotive
Telephone Building
Hotel & Restaurant
Photography
Recreation
Retail Trade
Textile & Apparel
Miscellaneous Finance
- ------------- -------
Bank
Financial Service
Insurance
</TABLE>
Other Investment Limitations
The Fund may invest up to 10% of its total assets in shares of other
investment companies as described herein under "Additional Investment Policies
and Restrictions." Such investments may involve the payment of duplicative
management or other fees. To mitigate such duplication, however, the Investment
Manager has agreed to waive up to the full amount of its investment advisory fee
with respect to investments, if any, in other open-end investment companies; the
amount of such waived fee will be deemed to be a reduction in management fees or
an assumption of expenses relating to the Fund as described under "Table of
Expenses" in the Prospectus.
The Fund has undertaken with a state securities authority that, for so
long as the Fund's shares are required to be registered for sale in such state,
the Fund will not purchase real estate limited partnerships or make investments
in oil, gas or mineral leases.
14
<PAGE>
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
Debt securities and short term investments acquired by the Fund may
include the following:
U.S. Government and Related Securities. U.S. Government securities are
securities which are issued or guaranteed as to principal or interest by the
U.S. Government, a U.S. Government agency or instrumentality, or certain
mixed-ownership Government corporations as described herein. The U.S. Government
securities in which the Fund invests include, among others:
(bullet) direct obligations of the U.S. Treasury, i.e., U.S. Treasury bills,
notes, certificates and bonds;
(bullet) obligations of U.S. Government agencies or instrumentalities such as
the Federal Home Loan Banks, the Federal Farm Credit Banks, the
Federal National Mortgage Association, the Government National
Mortgage Association and the Federal Home Loan Mortgage Corporation;
and
(bullet) obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a
variety of ways by the U.S. Government, its agencies or instrumentalities. Some
of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. Other obligations, such as those of the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government to
purchase certain obligations of agencies or instrumentalities, although the U.S.
Government has no legal obligation to do so. Obligations such as those of the
Federal Home Loan Banks, the Federal Farm Credit 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
15
<PAGE>
independently under the Separate Trading of Registered Interest and Principal of
Securities ("STRIPS") program. Under the STRIPS program, the principal and
interest components are individually numbered and separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade
the component parts independently. Obligations of Resolution Funding Corporation
are similarly divided into principal and interest components and maintained as
such on the book entry records of the Federal Reserve Banks.
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Bank Money Investments. Bank money investments include but are not
limited to certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are generally short-term (i.e., less than one year),
interest-bearing negotiable certificates issued by commercial banks or savings
and loan associations against funds deposited in the issuing institution. A
banker's acceptance is a time draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods). A banker's acceptance may be
obtained from a domestic or foreign bank, including a U.S. branch or agency of a
foreign bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. The Fund will not invest
in any such bank money investment unless the investment is issued by a U.S. bank
that is a member of the Federal Deposit Insurance Corporation ("FDIC"),
including any foreign branch thereof, a U.S. branch or agency of a foreign bank,
a foreign branch of a foreign bank, or a savings bank or savings and loan
association that is a member of the FDIC and which at the date of investment has
capital, surplus and undivided profits (as of the date of its most recently
published financial statements) in excess of $50 million. The Fund will not
invest in time deposits maturing in more than seven days and will not invest
more than 10% of its total assets in time deposits maturing in two to seven
days.
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under state law. U.S. federal branches or agencies
of foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches
16
<PAGE>
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 (i.e., short-term, unsecured promissory
notes) to finance short-term credit needs issued by corporations including but
not limited to (a) domestic or foreign bank holding companies or (b) their
subsidiaries or affiliates where the debt instrument is guaranteed by the bank
holding company or an affiliated bank or where the bank holding company or the
affiliated bank is unconditionally liable for the debt instrument. Commercial
paper is usually sold on a discounted basis and has a maturity at the time of
issuance not exceeding nine months.
Commercial Paper Ratings. Commercial paper investments at the time of
purchase will be rated A by S&P or Prime by Moody's, or, if not rated, issued by
companies having an outstanding long-term unsecured debt issue rated at least A
by S&P or Prime by Moody's. The money market investments in corporate bonds and
debentures (which must have maturities at the date of settlement of one year or
less) must be rated at the time of purchase at least A by S&P or by Moody's.
Commercial paper rated A (highest quality) by S&P is issued by entities
which have liquidity ratios which are adequate to meet cash requirements.
Long-term senior debt is rated A or better, although in some cases BBB credits
may be allowed. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. The relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1, A-2
or A-3. (Those A-1 issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: evaluation of the management of the issuer; economic evaluation of
the issuer's industry or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
management of obligations which may be present or may arise as a result of
public interest questions and preparations to meet such obligations. These
factors are all considered in determining whether the commercial paper is rated
Prime-1, Prime-2 or Prime-3.
In the event the lowering of ratings of debt instruments held by the
Fund by applicable rating agencies results in a material decline in the overall
quality of such Fund's
17
<PAGE>
portfolio, the Trustees of the Trust will review the situation and take such
action as they deem in the best interests of such Fund's shareholders,
including, if necessary, changing the composition of the portfolio.
RATING CATEGORIES OF DEBT SECURITIES
Set forth below is a description of corporate bond and debenture
ratings of Standard & Poor's Corporation ("S&P"):
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Debt rated BB, B, CCC, CC and C is regarded as having speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
B: Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial
18
<PAGE>
or economic conditions, it is not likely to have the capacity to pay interest
and repay principal. The CCC rating category is also used for debt subordinated
to senior debt that is assigned an actual or implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC debt rating.
C: The rating C is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to noncredit risks created by the terms of the
obligation, such as securities whose principal or interest return is indexed to
equities, commodities, or currencies, certain swaps and options, and interest
only (IO) and principal only (PO) mortgage securities.
Set forth below is a description of corporate bond and debenture
ratings of Moody's Investors Service, Inc. ("Moody's"):
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
19
<PAGE>
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
1, 2 or 3: The ratings from Aa through B may be modified by the
addition of a numeral indicating a bond's rank within its rating category.
20
<PAGE>
TRUSTEES AND OFFICERS
The Trustees and officers of the Trust, their addresses, and their
principal occupations and positions with certain affiliates of the Investment
Manager are set forth below.
*+Peter C. Bennett, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 57. His principal occupation is Executive
Vice President and Director of State Street Research & Management Company.
During the past five years he has also served as Senior Vice President and Vice
President of State Street Research & Management Company. Mr. Bennett's other
principal business affiliation is Director, State Street Research Investment
Services, Inc.
*+Bartlett R. Geer, One Financial Center, Boston, MA 02111 serves as
Vice President of the Trust. He is 40. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as Vice President of State Street Research & Management
Company.
*+Frederick R. Kobrick, One Financial Center, Boston, MA 02111, serves
as Vice President of the Trust. He is 52. His principal occupation is currently,
and during the past five years has been, Senior Vice President of State Street
Research & Management Company.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791,
serves as Trustee of the Trust. He is 68. He is engaged principally in private
investments and civic affairs, and is an author of business history. Previously,
he was with Morgan Guaranty Trust Company of New York.
+Robert A. Lawrence, Saltonstall & Co., 50 Congress Street, Boston, MA
02109, serves as Trustee of the Trust. He is 69. His principal occupation during
the past five years has been Partner, Saltonstall & Co., a private investment
firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 44. His principal occupation is Executive Vice
President, Treasurer and Director of State Street Research & Management Company.
During the past five years he has also served as Executive Vice President and
Chief Financial Officer of New England Investment Companies and as Senior Vice
President and Vice President of New England Mutual Life Insurance Company. Mr.
Maus's other principal business affiliations include Executive Vice President,
Treasurer, Chief Financial Officer and Director of State Street Research
Investment Services, Inc.
*+Francis J. McNamara, III has served as Secretary and General Counsel
of the Trust since May, 1995. He is 40. His principal occupation is Senior Vice
President, Secretary and General Counsel of the Investment Manager. During the
past five years he has also served as Senior Vice President, General Counsel and
Assistant Secretary of The Boston Company, Inc., Boston Safe Deposit and Trust
Company and The Boston Company
- ------------------
* or + see footnotes on page 23
21
<PAGE>
Advisors, Inc. Mr. McNamara's other principal business affiliations include
Senior Vice President, Clerk and General Counsel of State Street Research
Investment Services, Inc.
*+Thomas P. Moore, Jr., One Financial Center, Boston, MA 02111, serves
as Vice President of the Trust. He is 57. His principal occupation is Senior
Vice President of State Street Research & Management Company. During the past
five years he has also served as Vice President of State Street Research &
Management Company.
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 63. He is retired, having served during the past
five years, until October 1992, as Executive Vice President, Chief Operating
Officer and Director of Hewlett-Packard Company.
+Thomas L. Phillips, 141 Spring Street, Lexington, MA 02173 serves as
Trustee of the Trust. He is 71. He is retired and was formerly Chairman of the
Board and Chief Executive Officer of Raytheon Company, of which he remains a
Director.
*Daniel J. Rice III, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 43. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as Vice President of State Street Research & Management
Company.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves
as Trustee of the Trust. He is 57. His principal occupations during the past
five years have been President of The Glen Ellen Company, a private investment
company, and Vice President of Founders Investments Ltd.
+Michael S. Scott Morton, Massachusetts Institute of Technology, 77
Massachusetts Avenue, Cambridge, MA 02139, serves as Trustee of the Trust. He is
58. His principal occupation during the past five years has been Jay W.
Forrester Professor of Management at Sloan School of Management, Massachusetts
Institute of Technology.
*+Ralph F. Verni, One Financial Center, Boston, MA 02111, serves as
Chairman of the Board, President, Chief Executive Officer and Trustee of the
Trust. He is 52. His principal occupation is Chairman of the Board, President,
Chief Executive Officer and Director of State Street Research & Management
Company. During the past five years he also served as President and Chief
Executive Officer of New England Investment Companies and as Chief Investment
Officer and Director of New England Mutual Life Insurance Company. Mr. Verni's
other principal business affiliations include Chairman of the Board,
- ------------------
* or + see footnotes on page 23
22
<PAGE>
President, Chief Executive Officer and Director of State Street Research
Investment Services, Inc.
+Jeptha H. Wade, 251 Old Billerica Road, Bedford, MA 01730, serves as
Trustee of the Trust. He is 70. He is retired and was formerly Of Counsel for
the law firm Choate, Hall & Stewart. He was a partner of that firm from 1960 to
1987.
- ------------------
+Serves as a Trustee and/or officer of one or more of the following
investment companies, each of which has an advisory or distribution relationship
with the Investment Manager or its affiliates: State Street Research Equity
Trust, MetLife - State Street 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.
*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.
23
<PAGE>
As of July 31, 1995, the Trustees and officers of the Trust as a group
owned approximately 1.2% of the Fund's outstanding Class A shares and owned no
shares of the Fund's outstanding Class B, Class C or Class D shares.
Also as of July 31, 1995, the following persons or entities were the
record and/or beneficial owners of the approximate amounts of each class of
shares of the Fund as set forth beside their names:
Shareholder %
----------- ---
Class A Merrill Lynch 22.6
Class B Merrill Lynch 11.5
Class C United States Trust Company 86.0
Class D Metropolitan Life 19.7
Merrill Lynch 7.4
P.A. Spitalieri 5.5
PaineWebber 13.8
The full name and address of each of the above persons or entities are
as follows:
Merrill Lynch, Pierce, Fenner & Smith, Inc. (a)
One Liberty Plaza
165 Broadway
New York, New York 10080
United States Trust Company (a)(b)
770 Broadway
New York, New York 10003
Metropolitan Life Insurance Company (c)
One Madison Avenue
New York, New York 10010
P.A. Spitalieri
c/o State Street Research Shareholder Services
One Financial Center
Boston, Massachusetts 02111
PaineWebber, Incorporated (a)
1285 Avenue of the Americas
New York, New York 10019
24
<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.
- ------------------
(a) The Fund believes that such entity does not have beneficial ownership of
such shares.
(b) United States Trust Company holds such shares as a trustee under certain
employee benefit plans serviced by Metropolitan Life Insurance Company.
(c) Metropolitan Life Insurance Company ("Metropolitan"), a New York
corporation, was the record and/or beneficial owner, directly or indirectly
through its subsidiaries or affiliates, of such shares.
25
<PAGE>
During the fiscal year ended June 30, 1995, the Trustees were
compensated as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Total
Compensation
Aggregate From Trust and
Name of Compensation Complex Paid
Trustee From Trust(a) to Trustees(b)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Edward M. Lamont $ 10,300 $ 58,446
Robert A. Lawrence $ 10,300 $ 86,110
Dean O. Morton $ 11,500 $ 95,360
Thomas L. Phillips $ 10,500 $ 65,560
Toby Rosenblatt $ 10,300 $ 58,446
Michael S. Scott Morton $ 12,300 $ 96,510
Ralph F. Verni $ 0 $ 0
Jeptha H. Wade $ 10,500 $ 65,860
</TABLE>
(a) Includes compensation from multiple series of the Trust. See
"Distribution of Shares" for a listing of series.
(b) Includes compensation from Metropolitan Series Fund, Inc., for which
the Investment Manager serves as sub-investment adviser, State Street
Research Portfolios, Inc., for which State Street Research Investment
Services, Inc. serves as distributor, and all investment companies for
which the Investment Manager serves as primary investment adviser,
comprising a total of 29 series. The Trust does not provide any pension
or retirement benefits for the Trustees.
26
<PAGE>
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Advisory
Agreement provides that the Investment Manager shall furnish the Fund with an
investment program, office facilities and such investment advisory, research and
administrative services as may be required from time to time. The Investment
Manager compensates all executive and clerical personnel and Trustees of the
Trust if such persons are employees of the Investment Manager or its affiliates.
The Investment Manager is an indirect wholly-owned subsidiary of Metropolitan.
The advisory fee payable monthly by the Fund to the Investment Manager
is computed as a percentage of the average of the value of the net assets of the
Fund as determined at the close of the New York Stock Exchange (the "NYSE") on
each day the NYSE is open for trading, at the annual rate of 0.75% of the net
assets of the Fund. The Fund has been advised that the Distributor and its
affiliates may from time to time and in varying amounts voluntarily assume some
portion of fees or expenses relating to the Fund. For the fiscal years ended
June 30, 1993, 1994 and 1995, the Fund's investment advisory fee prior to the
assumption of fees or expenses was $177,220, $281,318 and $284,926,
respectively. For the same periods, the voluntary reduction of fees or
assumption of expenses amounted to $80,236, $360,878 and $307,559, respectively.
Further, to the extent required under applicable state regulatory
requirements, the Investment Manager will reduce its management fee up to the
amount of any expenses (excluding permissible items, such as Rule 12b-1
Distribution Plan payments, brokerage commissions, interest, taxes and
litigation expenses) paid or incurred by the Fund in any fiscal year which
exceed specified percentages of the average daily net assets of the Fund for
such fiscal year. The most restrictive of such percentage limitations is
currently 2.5% of the first $30 million of average net assets, 2.0% of the next
$70 million of average net assets and 1.5% of the remaining average net assets.
These commitments may be amended or rescinded in response to changes in the
requirements of the various states by the Trustees without shareholder approval.
The Advisory Agreement provides that it shall continue in effect with
respect to the Fund for a period of two years after its initial effectiveness
and will continue from year to year thereafter as long as it is approved at
least annually both (i) by a vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act) or by the Trustees of the
Trust, and (ii) in either event by a vote of a majority of the Trustees who are
not parties to the Advisory Agreement or "interested persons" of any party
thereto, cast in person at a meeting called for the purpose of voting on such
approval. The Advisory Agreement may be terminated on 60 days' written notice by
either party and will terminate automatically in the event of its assignment, as
defined under the 1940 Act and regulations thereunder. Such regulations provide
that a transaction which does not result in a change of actual control or
management of an adviser is not deemed an assignment.
27
<PAGE>
Under a Funds Administration Agreement between the Investment Manager
and the Distributor, the Distributor provides assistance to the Investment
Manager in performing certain fund administration services for the Trust, such
as assistance in determining the daily net asset value of shares of series of
the Trust and in preparing various reports required by regulations.
Under a Shareholders' Administrative Services Agreement between the
Trust and the Distributor, the Distributor provides shareholders' administrative
services, such as responding to inquiries and instructions from investors
respecting the purchase and redemption of shares of the Fund, and is entitled to
reimbursements of its costs for providing such services. Under certain
arrangements for Metropolitan to provide subadministration services,
Metropolitan may receive a fee for the maintenance of certain share ownership
records for participants in sponsored arrangements, such as employee benefit
plans, through or under which Fund shares may be purchased.
Under the Code of Ethics of the Investment Manager, its employees in
Boston, where investment management operations are conducted, are only permitted
to engage in personal securities transactions in accordance with certain
conditions relating to an employee's position, the identity of the security, the
timing of the transaction, and similar factors. Such employees must report their
personal securities transactions quarterly and supply broker confirmations of
such transactions to the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by the Distributor. The Fund offers
four classes of shares which may be purchased at the next determined net asset
value per share plus, in the case of all classes except Class C shares, a sales
charge which, at the election of the investor, may be imposed (i) at the time of
purchase (the Class A shares) or (ii) on a deferred basis (the Class B and Class
D shares). General information on how to buy shares of the Fund, as well as
sales charges involved, is set forth under "Purchase of Shares" in the
Prospectus. The following supplements that information.
Public Offering Price - The public offering price for each class of
shares of the Fund is based on their net asset value determined as of the close
of the NYSE on the day the purchase order is received by State Street Research
Shareholder Services provided that the order is received prior to the close of
the NYSE on that day; otherwise the net asset value used is that determined as
of the close of the NYSE on the next day it is open for unrestricted trading.
When a purchase order is placed through a dealer, that dealer is responsible for
transmitting the order promptly to State Street Research Shareholder Services in
order to permit the investor to obtain the current price. Any loss suffered by
an investor which results from a dealer's failure to transmit an order promptly
is a matter for settlement between the investor and the dealer.
Reduced Sales Charges - For purposes of determining whether a purchase
of Class A shares qualifies for reduced sales charges, the term "person"
includes: (i) an individual, or
28
<PAGE>
an individual combining with his or her spouse and their children and purchasing
for his, her or their own account; (ii) a "company" as defined in Section
2(a)(8) of the 1940 Act; (iii) a trustee or other fiduciary purchasing for a
single trust estate or single fiduciary account (including a pension, profit
sharing or other employee benefit trust created pursuant to a plan qualified
under Section 401 of the Internal Revenue Code); (iv) a tax-exempt organization
under Section 501(c)(3) or (13) of the Internal Revenue Code; and (v) an
employee benefit plan of a single employer or of affiliated employers.
Investors may purchase Class A shares of the Fund at reduced sales
charges by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds" as
designated by the Distributor within a 13-month period. The sales charge
applicable to each purchase made pursuant to a Letter of Intent will be that
which would apply if the total dollar amount set forth in the Letter of Intent
were being bought in a single transaction. Purchases made within a 90-day period
prior to the execution of a Letter of Intent may be included therein; in such
case the date of the earliest of such purchases marks the commencement of the
13-month period.
An investor may include toward completion of a Letter of Intent the
value (at the current public offering price) of all of his or her Class A shares
of the Fund and of any of the other Class A shares of Eligible Funds held of
record as of the date of his or her Letter of Intent, plus the value (at the
current offering price) as of such date of all of such shares held by any
"person" described herein as eligible to join with the investor in a single
purchase. Class B, Class C and Class D shares may also be included in the
combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the purchase with the value (at the current
public offering price) of all Class A shares of the other Eligible Funds owned
as of the purchase date by the investor plus the value (at the current public
offering price) of all such shares owned as of such date by any "person"
described herein as eligible to join with the investor in a single purchase.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
29
<PAGE>
Class C Shares - Class C shares are currently available to certain
benefit plans such as qualified retirement plans, other than individual
retirement accounts and self-employed retirement plans, which meet criteria
relating to level of assets, number of participants, service agreements, or
similar factors; banks and insurance companies; endowment funds of nonprofit
organizations with substantial minimum assets; and other similar institutional
investors.
Reorganizations - In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined 1940 Act, as amended, the Fund may issue its shares at net asset
value (or more) to such entities or to their security holders.
Redemptions - The Fund reserves the right to pay redemptions in kind
with portfolio securities in lieu of cash. In accordance with its election
pursuant to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of
redemption proceeds paid in cash. Although it has no present intention to do so,
the Fund may, under unusual circumstances, limit redemptions in cash with
respect to each shareholder during any ninety-day period to the lesser of (i)
$250,000, or (ii) 1% of the net asset value of the Fund at the beginning of such
period. In connection with any redemptions paid in kind with portfolio
securities, brokerage and other costs may be incurred by the redeeming
shareholder in the sale of the securities received.
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily
as of the close of the NYSE, ordinarily 4 P.M. New York City time, Monday
through Friday, on each day during which the NYSE is open for unrestricted
trading. The NYSE is currently closed on New Year's Day, Presidents Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
The net asset value per share of the Fund is computed by dividing the
sum of the value of the securities held by the Fund plus any cash or other
assets minus all liabilities by the total number of outstanding shares of the
Fund at such time. Any expenses, except for extraordinary or nonrecurring
expenses, borne by the Fund, including the investment management fee payable to
the Investment Manager, are accrued daily.
In determining the values of portfolio assets as provided below, the
Trustees may utilize one or more pricing services in lieu of market quotations
for certain securities which are not readily available on a daily basis. Such
services may provide prices determined as of times prior to the close of the
NYSE.
In general, securities are valued as follows. Securities which are
listed or traded on the New York or American Stock Exchange are valued at the
price of the last quoted sale on the respective exchange for that day.
Securities which are listed or traded on a national securities exchange or
exchanges, but not on the New York or American Stock Exchange,
30
<PAGE>
are valued at the price of the last quoted sale on the exchange for that day
prior to the close of the NYSE. Securities not listed on any national securities
exchange which are traded "over the counter" and for which quotations are
available on the National Association of Securities Dealers' NASDAQ System, or
other system, are valued at the closing price supplied through such system for
that day at the close of the NYSE. Other securities are, in general, valued at
the mean of the bid and asked quotations last quoted prior to the close of the
NYSE if there are market quotations readily available, or in the absence of such
market quotations, then at the fair value thereof as determined by or under
authority of the Trustees of the Trust utilizing such pricing services as may be
deemed appropriate as described above. Securities deemed restricted as to resale
are valued at the fair value thereof as determined by or in accordance with
methods adopted by the Trustees of the Trust.
Short-term debt instruments issued with a maturity of one year or less
which have a remaining maturity of 60 days or less are valued using the
amortized cost method, provided that during any period in which more than 25% of
the Fund's total assets is invested in short-term debt securities the current
market value of such securities will be used in calculating net asset value per
share in lieu of the amortized cost method. The amortized cost method is used
when the value obtained is fair value. Under the amortized cost method of
valuation, the security is initially valued at cost on the date of purchase (or
in the case of short-term debt instruments purchased with more than 60 days
remaining to maturity, the market value on the 61st day prior to maturity), and
thereafter a constant amortization to maturity of any discount or premium is
assumed regardless of the impact of fluctuating interest rates on the market
value of the security.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
The Fund's portfolio turnover rate is determined by dividing the lesser
of securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time of their acquisition were one
year or less). The portfolio turnover rates for the fiscal years ended June 30,
1994 and 1995 were 30.98% and 62.94%, respectively.
The Investment Manager believes the portfolio turnover rate for the
fiscal year ended June 30, 1994 was significantly lower than that for the
previous fiscal year because there was less volatility in the natural gas
markets, thereby leading to fewer changes in portfolio strategy; and also
because there were fewer redemptions of Fund shares which allowed the Investment
Manager to hold portfolio securities longer, as additional cash was not needed
to meet redemption requests.
Conversely, the Investment Manager believes the portfolio turnover rate
for the fiscal year ended June 30, 1995 was significantly higher than that for
the previous fiscal year because of opposite forces, namely, more volatility in
the natural gas markets, thereby leading to more changes in portfolio strategy,
and more redemptions of Fund shares which required the Investment Manager to
liquidate portfolio securities.
31
<PAGE>
Brokerage Allocation
The Fund and the Investment Manager seek the best overall execution of
purchase or sale orders and the most favorable net price in securities
transactions consistent with their judgment as to the business qualifications of
the various broker or dealer firms with which the Fund may do business.
Decisions with respect to the market in which the transaction is to be
completed, and to the allocation of orders among brokers or dealers, are made in
accordance with this policy. In selecting brokers or dealers to effect portfolio
transactions, consideration is given to the performance, integrity and financial
responsibility of the various firms as well as to their demonstrated execution
experience and capability generally and in regard to particular markets or
securities and, in agency transactions, to the competitiveness of the commission
rates (or in principal transactions of the net prices) they charge. The
Investment Manager keeps current as to the range of rates or prices charged by
various firms and against this background evaluates the reasonableness of a
commission or price charged with respect to a particular transaction by
considering such factors as difficulty of execution or security positioning by
the executing firm.
When it appears that a number of firms can satisfy the required
standards in respect of a particular transaction, consideration may also be
given to services other than execution services which such firms have provided
in the past or may provide in the future. Among such other services are the
supplying of supplemental investment research, general economic and political
information, analytical and statistical data, relevant market information and
daily market quotations for computation of net asset value. In this connection
it should be noted that a substantial portion of brokerage commissions paid, or
principal transactions entered, by the Fund may be with brokers and investment
banking firms which, in the normal course of business, publish statistical,
research and other material which is received by the Investment Manager and
which may or may not prove useful to the Investment Manager, the Fund or other
clients of the Investment Manager.
Neither the Fund nor the Investment Manager has any definite agreements
with any firm as to the amount of business which that firm may expect to receive
for services supplied or otherwise. There may be, however, understandings with
certain firms that in order for such firms to be able to continuously supply
certain services, they need to receive allocation of a specified amount of
business. These understandings are honored to the extent possible in accordance
with the policy set forth above. Neither the Fund nor the Investment Manager
intends to pay a firm in excess of that which another would charge for handling
the same transaction in recognition of services (other than execution services)
provided. However, the Fund and the Investment Manager are aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, rely on the provisions of Section 28(e) of the
Securities Exchange Act of 1934, to the extent applicable. During the fiscal
years ended June 30, 1993, 1994 and 1995, the Fund paid $73,056, $99,253 and
$149,770, respectively, in brokerage commissions. During and at the end of its
most recent fiscal year, the Fund held in its portfolio no securities of any
entity that might be deemed to be a regular broker-dealer of the Fund as defined
under the 1940 Act.
32
<PAGE>
Occasions may arise when the Investment Manager determines that an
investment in a particular security, or the disposition of a particular
security, is simultaneously a proper investment decision for the Fund as well as
for the portfolio of one or more of its other clients. In this event, a purchase
or sale, as the case may be, of any such security on any given day will be
normally averaged as to price and allocated as to amount among the several
clients in a manner deemed equitable to each client.
On occasions when the Investment Manager deems the purchase or sale of
a security to be in the best interests of the Fund, as well as other clients of
the Investment Manager, the Investment Manager, to the extent permitted by
applicable laws and regulations, may aggregate such securities to be sold or
purchased for the Fund with those to be sold or purchased for other customers in
order to obtain best execution and lower brokerage commissions, if any. In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Investment Manager in
the manner it considers to be most equitable and consistent with its fiduciary
obligations to all such customers, including the Fund. In some instances, this
procedure may affect the price and size of the positions obtainable for the
Fund.
CERTAIN TAX MATTERS
Federal Income Taxation of the Fund -- In General
The Fund intends to qualify and elect to be treated each taxable year
as a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), although it cannot give complete
assurance that it will do so. Accordingly, the Fund must, among other things,
(a) derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures or forward
contracts) derived with respect to its business of investing in such stock,
securities or currencies (the "90% test"); (b) derive less than 30% of its gross
income in each taxable year from the sale or other disposition of any of the
following held for less than three months (the "30% test"): (i) stock or
securities; (ii) options, futures or forward contracts (other than options,
futures or forward contracts on foreign currencies); or (iii) foreign currencies
(or options, futures or forward contracts on foreign currencies) but only if
such currencies (or options, futures or forward contracts) are not directly
related to the Fund's principal business of investing in stocks or securities
(or options and futures with respect to stocks or securities); (c) satisfy
certain diversification requirements; and (d) in order to be entitled to utilize
the dividends paid deduction, distribute annually at least 90% of its investment
company taxable income (determined without regard to the deduction for dividends
paid).
The 30% test will limit the extent to which the Fund may sell
securities held for less than three months, write options which expire in less
than three months, and effect closing transactions with respect to call or put
options that have been written or purchased within the preceding three months.
(If the Fund purchases a put option for the purpose of hedging an
33
<PAGE>
underlying portfolio security, the acquisition of the option is treated as a
short sale of the underlying security unless, for purposes only of the 30% test,
the option and the security are acquired on the same date.) Finally, as
discussed below, this requirement may also limit investments by the Fund in
options on stock indices, listed options on nonconvertible debt securities,
futures contracts, options on interest rate futures contracts and certain
foreign currency contracts.
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income 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 of
the Fund would be taxable as gain realized from the sale of such shares.
The Fund will be liable for a nondeductible 4% excise tax on amounts
not distributed on a timely basis in accordance with a calendar year
distribution requirement. To avoid the tax, during each calendar year the Fund
must distribute an amount equal to at least 98% of the sum of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, and its capital gain net income for the 12-month period ending on October
31, in addition to any undistributed portion of the respective balances from the
prior year. The Fund intends to make sufficient distributions to avoid this 4%
excise tax.
Federal Income Taxation of the Fund's Investments
Original Issue Discount. For federal income tax purposes, debt
securities purchased by the Fund may be treated as having original issue
discount. Original issue discount represents interest for federal income tax
purposes and can generally be defined as the excess of the stated redemption
price at maturity of a debt obligation over the issue price. Original issue
discount is treated for federal income tax purposes as income earned by the
Fund, whether or not any income is actually received, and therefore is subject
to the distribution requirements of the Code. Generally, the amount of original
issue discount is determined on the basis of a constant yield to maturity which
takes into account the compounding of accrued interest. Under section 1286 of
the Code, an investment in a stripped bond or stripped coupon may result in
original issue discount.
Debt securities may be purchased by the Fund at a discount that exceeds
the original issue discount plus previously accrued original issue discount
remaining on the securities, if any, at the time the Fund purchases the
securities. This additional discount represents market discount for 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
34
<PAGE>
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, the 30% test,
the excise tax and the distribution requirements applicable to regulated
investment companies; (ii) defer recognition of realized losses; and (iii)
characterize both realized and unrealized gain or loss as short-term or
long-term gain or loss. Such provisions generally apply to, among other
investments, options on debt securities, indices on securities and futures
contracts.
Federal Income Taxation of Shareholders
Dividends paid by the Fund may be eligible for the 70%
dividends-received deduction for corporations. The percentage of the Fund's
dividends eligible for such tax treatment may be less than 100% to the extent
that less than 100% of the Fund's gross income may be from qualifying dividends
of domestic corporations. Any dividend declared in October, November or December
and made payable to shareholders of record in any such month is treated as
received by such shareholders on December 31, provided that the Fund pays the
dividend during January of the following calendar year.
Distributions by the Fund can result in a reduction in the fair market
value of the Fund's shares. Should a distribution reduce the fair market value
below a shareholder's cost basis, such distribution nevertheless may be taxable
to the shareholder as ordinary income or long-term capital gain, even though,
from an investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a taxable distribution. The price of shares
purchased at that time includes the amount of any forthcoming distribution.
Those investors purchasing shares just prior to a taxable distribution will then
receive a return of investment upon distribution which will nevertheless be
taxable to them.
DISTRIBUTION OF SHARES OF THE FUND
State Street Research Equity Trust (formerly, MetLife - State Street
Equity Trust) is currently comprised of the following series: State Street
Research Capital Appreciation Fund, State Street Research Equity Investment
Fund, State Street Research Equity Income Fund and State Street Research Global
Resources Fund (formerly, MetLife - State Street Research Capital Appreciation
Fund, MetLife - State Street Research Equity Investment Fund, MetLife - State
Street Research Equity Income Fund and State Street Research Global
35
<PAGE>
Energy Fund, respectively). The Trustees have authorized the Fund to issue four
classes of shares: Class A, Class B, Class C and Class D shares. The Trustees of
the Trust have authority to issue an unlimited number of shares of beneficial
interest of separate series, $.001 par value per share. A "series" is a separate
pool of assets of the Trust which is separately managed and has a different
investment objective and different investment policies from those of another
series. The Trustees have authority, without the necessity of a shareholder
vote, to create any number of new series or classes or to commence the public
offering of shares of any previously established series or classes.
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (Class B and Class D shares). The Distributor may reallow all or
portions of such sales charges as concessions to dealers. For the fiscal years
ended June 30, 1993, 1994 and 1995, total sales charges on Class A shares paid
to the Distributor amounted to approximately $223,639, $218,494 and $93,586,
respectively. For the same periods, the Distributor retained $33,002, $25,672
and $10,670, respectively, after reallowance of concessions to dealers.
The differences in the price at which the Fund's Class A shares are
offered due to scheduled variations in sales charges, as described in the Fund's
Prospectus, result from cost savings inherent in economies of scale. Management
believes that the cost of sales efforts of the Distributor and broker-dealers
tends to decrease as the size of purchases increases, or does not involve any
incremental sales expenses as in the case of, for example, exchanges,
reinvestments or dividend investments at net asset value. Similarly, no
significant sales effort is necessary for sales of shares at net asset value to
certain Directors, Trustees, officers, employees, their relatives and other
persons directly or indirectly related to the Fund or associated entities. Where
shares of the Fund are offered at a reduced sales charge or without a sales
charge pursuant to sponsored arrangements and managed fee-based programs, the
amount of the sales charge reduction will similarly reflect the anticipated
reduction in sales expenses associated with such arrangements. The reduction in
sales expenses, and therefore the reduction in sales charge, will vary depending
on factors such as the size and other characteristics of the organization or
program, and the nature of its membership or the participants. The Fund reserves
the right to make variations in, or eliminate, sales charges at any time or to
revise the terms of or to suspend or discontinue sales pursuant to sponsored
arrangements at any time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission on the shares sold. Such commission also is
payable to authorized securities dealers upon sales of Class A shares made
pursuant to a Letter of Intent to purchase shares having a net asset value of
$1,000,000 or more. Shares sold with such commissions payable are subject
36
<PAGE>
to a one-year contingent deferred sales charge of 1.00% on any portion of such
shares redeemed within one year following their sale. After a particular
purchase of Class A shares is made under the Letter of Intent, the commission
will be paid only in respect of that particular purchase of shares. If the
Letter of Intent is not completed, the commission paid will be deducted from any
discounts or commissions otherwise payable to such dealer in respect of shares
actually sold. If an investor is eligible to purchase shares at net asset value
on account of the Right of Accumulation, the commission will be paid only in
respect of the incremental purchase at net asset value.
For the periods shown below, the Distributor received contingent
deferred sales charges upon redemption of Class A, Class B and Class D shares
and paid initial commissions to securities dealers for sales of such Class A,
Class B and Class D shares as follows:
<TABLE>
<CAPTION>
June 1, 1993
(commencement
of share class
Fiscal Year Fiscal Year designations) to
Ended June 30, 1995 Ended June 30, 1994 June 30, 1993
------------------------------- ------------------------------- -----------------------
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 $21,450 $0 $0 $0 $0 $0
Class B $36,122 $29,957 $8,308 $163,664 $0 $15,233
Class D $1,185 $0 $310 $ 15,955 $0 $502
</TABLE>
The Fund has adopted a "Plan of Distribution Pursuant to Rule 12b-1"
(the "Distribution Plan") under which the Fund may engage, directly or
indirectly, in financing any activities primarily intended to result in the sale
of Class A, Class B and Class D shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to underwriters, securities dealers
and others engaged in the sale of shares, including payments to the Distributor
to be used to pay commissions and/or reimbursement to securities dealers (which
securities dealers may be affiliates of the Distributor) engaged in the
distribution and marketing of shares and furnishing ongoing assistance to
investors, (2) reimbursement of direct out-of-pocket expenditures incurred by
the Distributor in connection with the distribution and marketing of shares and
the servicing of investor accounts including special promotional fees and cash
and noncash incentives based upon sales by securities dealers, expenses relating
to the formulation and implementation of marketing strategies and promotional
activities such as direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising, the preparation, printing and
distribution of Prospectuses of the Fund and reports for recipients other than
existing shareholders of the Fund, and obtaining such information, analyses and
reports with respect to marketing and promotional activities and investor
accounts as the Fund may, from time to time, deem advisable, and (3)
reimbursement of expenses incurred by the Distributor in connection with the
servicing of shareholder accounts including payments to securities dealers and
others in
37
<PAGE>
consideration of the provision of personal services to investors and/or the
maintenance of shareholder accounts and expenses associated with the provision
of personal services by the Distributor directly to investors. In addition, the
Distribution Plan is deemed to authorize the Distributor and the Investment
Manager to make payments out of general profits, revenues or other sources to
underwriters, securities dealers and others in connection with sales of shares,
to the extent, if any, that such payments may be deemed to be within the scope
of Rule 12b-1 under the 1940 Act.
The expenditures to be made pursuant to the Distribution Plan may not
exceed (i) with respect to Class A shares, an annual rate of 0.25% of the
average daily value of net assets represented by such Class A shares, and (ii)
with respect to Class B and Class D shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class D
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class D shares (as the case may be) to make payments for personal
services and/or the maintenance of shareholder accounts. Proceeds from the
service fee will be used by the Distributor to compensate securities dealers and
others selling shares of the Fund for rendering service to shareholders on an
ongoing basis. Such amounts are based on the net asset value of shares of the
Fund held by such dealers as nominee for their customers or which are owned
directly by such customers for so long as such shares are outstanding and the
Distribution Plan remains in effect with respect to the Fund. Any amounts
received by the Distributor and not so allocated may be applied by the
Distributor as reimbursement for expenses incurred in connection with the
servicing of investor accounts. The distribution and servicing expenses of a
particular class will be borne solely by that class.
38
<PAGE>
During the fiscal year ended June 30, 1995, the Fund paid the
Distributor fees under the Distribution Plan and the Distributor used all of
such payments for expenses incurred on behalf of the Fund as follows:
<TABLE>
<CAPTION>
Class A Class B Class D
------- ------- -------
<S> <C> <C> <C>
Advertising $ 5,671 $ 0 $ 1,338
Printing and mailing
of prospectuses to
other than current
shareholders 1,810 0 427
Compensation to dealers 82,408 64,359 11,751
Compensation to sales
personnel 16,914 0 3,990
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses; marketing; general 13,185 0 3,110
---------- ---------- ----------
Total fees $119,988 $64,359 $20,616
========== ========= =========
</TABLE>
The Distributor may have also used additional resources of its own for further
expenses on behalf of the Fund.
No interested Trustee of the Trust has any direct or indirect
financial interest in the operation of the Distribution Plan or any related
agreements thereunder. The Distributor's interest in the Distribution Plan is
described above.
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Fund will attempt to make
alternative arrangements for such services for shareholders who acquired shares
through such institutions.
CALCULATION OF PERFORMANCE DATA
The average annual total return ("standard total return") of
the Class A, Class B, Class C and Class D shares of the Fund will be
calculated as set forth below. Total
39
<PAGE>
return is computed separately for each class of shares of the Fund. Performance
data for a specified class includes periods prior to the adoption of class
designations. Shares of the Fund had no class designations until June 1, 1993,
when designations were assigned based on the pricing and Rule 12b-1 fees
applicable to shares sold thereafter.
The performance data below reflects Rule 12b-1 fees and, where
applicable, sales charges as follows:
<TABLE>
<CAPTION>
Rule 12b-1 Fees Sales Charges
--------------------------------------------------- ---------------------------------
Current
Class Amount Period
<S> <C> <C> <C>
A 0.25% 0.50% until March 10, 1995; Maximum 4.5% sales charge reflected
0.25% thereafter
B 1.00% 0.50% until June 1, 1993; 1.00% 1- and 5-year periods reflect a 5% and
June 1, 1993 to present; fee will reduce a 2% contingent deferred sales charge,
performance for periods after June 1, respectively
1993
C None 0.50% until June 1, 1993; None
0% thereafter
D 1.00% 0.50% until June 1, 1993; 1.00% 1-year period reflects a 1% contingent
June 1, 1993 to present; fee will reduce deferred sales charge
performance for periods after June 1,
1993
</TABLE>
All calculations of performance data in this section reflect the
voluntary measures by the Fund's affiliates to reduce fees or expenses relating
to the Fund; see "Accrued Expenses" later in this section.
Total Return
The Fund's average annual total return ("standard total return") of
each class of shares was as follows:
<TABLE>
<CAPTION>
Commencement of
Operations Five Years One Year
(March 2, 1990) Ended Ended
to June 30, 1995 June 30, 1995 June 30, 1995
---------------- ------------- -------------
With Without With Without With Without
Subsidy Subsidy Subsidy Subsidy Subsidy Subsidy
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Class A -0.40% -1.01% 0.80% 0.16% -1.92% -2.95%
Class B 0.26% -0.40% 1.13% 0.43% -2.88% -3.96%
Class C 0.63% -0.06% 1.91% 1.19% 3.11% 2.03%
Class D 0.24% -0.40% 1.49% 0.82% 1.12% 0.04%
</TABLE>
40
<PAGE>
Standard total return is computed separately for each class of shares
by determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value, in accordance with the following formula:
P(1+T)(n) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated
period assuming a hypothetical $1,000 payment made at
the beginning of the designated period
The calculation is based on the further assumptions that the maximum
initial or contingent deferred sales charge applicable to the investment is
deducted, and that all dividends and distributions by the Fund are reinvested at
net asset value on the reinvestment dates during the periods. All accrued
expenses and recurring charges are also taken into account as described later
herein.
Accrued Expenses
Accrued expenses include all recurring expenses that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return results take sales charges, if applicable, into account,
although the results do not take into account recurring and nonrecurring charges
for optional services which only certain shareholders elect and which involve
nominal fees, such as the $7.50 fee for wire orders.
Accrued expenses do not include the subsidization, if any, by
affiliates of fees or expenses during the subject period. In the absence of such
subsidization, the performance of the Fund 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 D shares for periods which end no
earlier than the most recent calendar quarter end and which begin twelve months
before, five years before and at the time of commencement of 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,
41
<PAGE>
and as noted any applicable sales charge, if any, 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
June 30, 1995 without taking sales charges into account, were as follows:
With Without
Subsidy Subsidy
------ ------
Class A 13.22% 12.62%
Class B 12.85% 12.25%
Class C 13.40% 12.80%
Class D 12.86% 12.26%
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, is the Trust's custodian. As custodian State Street Bank
and Trust Company is responsible for, among other things, safeguarding and
controlling the Fund's cash and securities, handling the receipt and delivery of
securities and collecting interest and dividends on the Fund's investments.
State Street Bank and Trust Company is not an affiliate of the Investment
Manager or its affiliates.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as the Trust's independent accountants, providing professional services
including (1) audit of the Fund's annual financial statements, (2) assistance
and consultation in connection with Securities and Exchange Commission filings
and (3) review of the annual income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a
semiannual basis, other supplementary financial reports may be made available
from time to time and holders of record may request a copy of a current
supplementary report, if any, by calling State Street Research Shareholder
Services.
The following financial statements are for the Fund's fiscal year ended
June 30, 1995:
42
<PAGE>
STATE STREET RESEARCH GLOBAL RESOURCES FUND
INVESTMENT PORTFOLIO
June 30, 1995
Value
Shares (Note 1)
-------------- ----------------
EQUITY SECURITIES 98.6%
Basic Industries 5.3%
Metal & Mining 5.3%
Aber Resources, Ltd.* 40,000 $ 287,500
Crown Resources Corp.* 100,000 462,500
Cyprus Amax Minerals Co. 5,000 142,500
DeBeers Consolidated Mines Ltd. ADR 1,000 25,875
Dia Met Minerals Ltd. Cl. A* 5,000 47,324
Dia Met Minerals Ltd. Cl. B* 20,000 196,578
Gibraltar Mines Ltd.* 30,000 144,703
Magma Copper Co. Cl. B* 15,000 243,750
Southernera Resources Ltd.* 80,000 267,929
TVX Gold, Inc.* 30,000 217,500
----------------
2,036,159
----------------
Total Basic Industries 2,036,159
----------------
Energy 84.6%
Oil 60.8%
Abacan Resource Corp.* 129,900 392,490
Ballistic Energy Corp.* 80,000 458,682
Basin Exploration, Inc.* 55,200 327,750
Belden & Blake Corp.* 30,000 487,500
Tom Brown, Inc.* 100,000 1,487,500
CS Resources Ltd.* 200,000 1,201,311
Coda Energy, Inc.* 75,000 515,625
Crystal Oil Corp.* 41,600 1,279,200
Discovery West Corp.* 70,000 203,859
Edisto Resources Corp.* 25,000 181,250
Forest Oil Corp.* 150,000 243,750
Fortune Petroleum Corp.* 75,000 173,438
Garnet Resources Corp.* 60,000 135,000
Gerrity Oil & Gas Co.* 110,000 371,250
Global Natural Resources Inc.* 165,500 1,779,125
Intensity Resources, Ltd.* 270,400 600,451
Inverness Petroleum Ltd.* 98,967 531,403
Louisiana Land & Exploration Co. 5,000 199,375
Morgan Hydrocarbons, Inc.* 300,000 873,680
Nuevo Energy Co.* 70,000 1,408,750
Optima Petroleum Corp.* 46,700 113,831
Oryx Energy Co.* 39,700 545,875
Phoenix Resource Cos., Inc. 95,900 3,044,825
Plains Resources, Inc.* 120,000 1,050,000
Ranchmens Resources Ltd.* 60,000 196,578
Ranger Oil Ltd.* 250,000 1,562,500
Oil (cont'd)
Richland Petroleum Corp.* 40,000 $ 269,385
Summit Resources Ltd. 60,600 716,964
Swift Energy Co.* 53,110 484,629
Tatham Offshore, Inc.* 100,000 350,000
Tipperary Corp.* 20,700 120,319
Ulster Petroleum Ltd.* 275,000 1,001,092
United Meridian Corp.* 22,800 353,400
Wascana Energy, Inc.* 50,000 432,290
Clayton Williams Energy, Inc.* 40,000 120,000
XCL Ltd.* 117,200 95,225
----------------
23,308,302
----------------
Oil Service 23.8%
Atwood Oceanics, Inc.* 4,100 65,856
BJ Services Co.* 38,000 864,500
Dawson Geophysical Co.* 20,000 235,000
Dreco Energy Services Ltd.* 30,000 435,000
Energy Ventures, Inc.* 57,600 1,036,800
Ensco International, Inc.* 40,000 635,000
Grant Geophysical, Inc.* 70,000 148,750
Landmark Graphics Corp.* 15,000 382,500
J. Ray McDermott S.A.* 6,800 150,450
Nabors Industries, Inc.* 67,200 554,400
Noble Drilling Corp.* 175,000 1,290,625
Nowsco Well Service Ltd. 100,000 975,000
Oceaneering International, Inc.* 25,600 227,200
Pool Energy Services Co.* 70,000 577,500
Rowan Companies, Inc.* 50,000 406,250
Solid State Geophysical, Inc.* 9,500 40,635
TMBR/Sharp Drilling, Inc.* 50,000 346,875
Tesco Corp.* 50,000 107,390
Tuboscope Vetco International Corp.* 75,000 478,125
Unit Corp.* 50,000 181,250
----------------
9,139,106
----------------
Total Energy 32,447,408
----------------
Utility 8.7%
Natural Gas 8.7%
ENSERCH Corp. 80,000 1,370,000
TransTexas Gas Corp.* 129,500 1,958,687
----------------
3,328,687
----------------
Total Utility 3,328,687
----------------
Total Equity Securities (Cost
$34,815,947) 37,812,254
----------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH GLOBAL RESOURCES FUND
Principal Maturity Value
Amount Date (Note 1)
------------ ------------ -------------
SHORT-TERM OBLIGATIONS 2.9%
American Express Credit
Corp., 5.85% $398,000 7/5/1995 $ 398,000
American Express Credit
Corp., 5.80% 152,000 7/6/1995 152,000
Ford Motor Credit Co., 5.92% 566,000 7/3/1995 566,000
-------------
Total Short-Term Obligations (Cost $1,116,000) 1,116,000
-------------
Total Investments (Cost $35,931,947)--101.5% 38,928,254
Cash and Other Assets, Less Liabilities--(1.5)% (569,266)
-------------
Net Assets--100.0% $38,358,988
=============
Federal Income Tax Information:
At June 30, 1995, the net unrealized appreciation of
investments based on cost for Federal income tax purposes of
$36,019,398 was as follows:
Aggregate gross unrealized appreciation for all investments
in which there is an excess of value over tax cost $ 8,104,767
Aggregate gross unrealized depreciation for all investments
in which there is an excess of tax cost over value (5,195,911)
-------------
$ 2,908,856
=============
* Nonincome-producing securities
ADR stands for American Depositary Receipt, representing ownership of foreign
securities.
Diversification of Equity Securities and Short-Term Obligations at June 30,
1995 (as a percentage of net assets) was United States 80.2%, Canada 19.7%
and South Africa 0.1%.
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1995
Assets
Investments, at value (Cost $35,931,947) (Note 1) $38,928,254
Cash 1,884
Receivable for fund shares sold 74,499
Receivable from Distributor (Note 3) 10,907
Dividends and interest receivable 4,470
Other assets 1,630
------------
39,021,644
Liabilities
Payable for securities purchased 310,240
Payable for fund shares redeemed 149,085
Accrued transfer agent and shareholder services
(Note 2) 89,605
Accrued management fee (Note 2) 25,738
Accrued distribution fee (Note 5) 14,402
Accrued trustees' fees (Note 2) 4,507
Other accrued expenses 69,079
------------
662,656
------------
Net Assets $38,358,988
============
Net Assets consist of:
Unrealized appreciation of investments $ 2,996,307
Accumulated net realized loss (4,928,307)
Shares of beneficial interest 40,290,988
------------
$38,358,988
============
Net Asset Value and redemption price per share of
Class A shares ($25,691,662 / 2,112,869 shares of
beneficial interest) $12.16
============
Maximum Offering Price per share of Class A shares
($12.16 / .955) $12.73
============
Net Asset Value and offering price per share of
Class B shares ($7,029,514 / 584,193 shares of
beneficial interest)* $12.03
============
Net Asset Value, offering price and redemption
price per share of Class C shares ($3,287,790 /
267,853 shares of beneficial interest) $12.27
============
Net Asset Value and offering price per share of
Class D shares ($2,350,022 / 195,480 shares of
beneficial interest)* $12.02
============
* Redemption price per share for Class B and Class D is equal to net asset
value less any applicable contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH GLOBAL RESOURCES FUND
STATEMENT OF OPERATIONS
For the year ended June 30, 1995
Investment Income
Dividends, net of foreign taxes of $7,810 $ 94,420
Interest 36,910
------------
131,330
Expenses
Transfer agent and shareholder services (Note 2) 303,332
Management fee (Note 2) 284,926
Custodian fee 71,781
Registration fees 48,427
Reports to shareholders 33,122
Audit fee 30,449
Distribution fee--Class A (Note 5) 119,988
Distribution fee--Class B (Note 5) 64,359
Distribution fee--Class D (Note 5) 20,616
Amortization of organization costs (Note 1) 15,762
Trustees' fees (Note 2) 14,971
Legal fees 3,579
Miscellaneous 7,035
------------
1,018,347
Expenses borne by the Distributor (Note 3) (307,559)
------------
710,788
------------
Net investment loss (579,458)
------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized loss on investments (Notes 1 and 4) (1,268,036)
Net unrealized appreciation of investments 2,488,313
------------
Net gain on investments 1,220,277
------------
Net increase in net assets resulting from operations $ 640,819
============
STATEMENT OF CHANGES IN NET ASSETS
Year ended June 30
1995 1994
------------------------------------------------------------
Increase (Decrease) in Net Assets
Operations:
Net investment loss $ (579,458) $ (566,197)
Net realized loss on
investments and foreign
currency* (1,268,036) (93,001)
Net unrealized appreciation
(depreciation) of investments 2,488,313 (3,484,508)
----------- ------------
Net increase (decrease)
resulting from operations 640,819 (4,143,706)
----------- ------------
Net increase (decrease) from
fund share transactions
(Note 7) (2,185,277) 8,751,694
----------- ------------
Total increase (decrease) in
net assets (1,544,458) 4,607,988
Net Assets
Beginning of year 39,903,446 35,295,458
----------- ------------
End of year $38,358,988 $39,903,446
=========== ============
* Net realized loss for
Federal income tax purposes
(Note 1) $(1,203,874) $ (760,656)
=========== ============
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATE STREET RESEARCH GLOBAL RESOURCES FUND
NOTES TO FINANCIAL STATEMENTS
June 30, 1995
Note 1
State Street Research Global Resources Fund, formerly State Street Research
Global Energy Fund (the "Fund"), is a series of MetLife-State Street Equity
Trust (the "Trust"), which was organized as a Massachusetts business trust in
March, 1986 and is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company. The Fund commenced
operations in March, 1990. The Trust presently consists of four separate
funds: State Street Research Global Resources Fund, MetLife-State Street
Research Capital Appreciation Fund, MetLife-State Street Research Equity
Income Fund and MetLife-State Street Research Equity Investment Fund.
The Fund offers four classes of shares. Class A shares are subject to an
initial sales charge of up to 4.50% and an annual service fee of 0.25% of
average daily net assets. Prior to March 10, 1995, Class A shares paid annual
distribution and service fees of 0.50% of average daily net assets.
Investments of $1 million or more in Class A shares, which are not subject to
any initial sales charge, are subject to a 1.00% contingent deferred sales
charge if redeemed within one year of purchase. Class B shares are subject to
a contingent deferred sales charge on certain redemptions made within five
years of purchase and pay annual distribution and service fees of 1.00%.
Class B shares automatically convert into Class A shares (which pay lower
ongoing expenses) at the end of eight years after the issuance of the Class B
shares. Class C shares are only offered to certain employee benefit plans and
large institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees. Class D shares are subject to a contingent deferred sales
charge of 1.00% on any shares redeemed within one year of their purchase.
Class D shares also pay annual distribution and service fees of 1.00%. The
Fund's expenses are borne pro-rata by each class, except that each class
bears expenses, and has exclusive voting rights with respect to provisions of
the Plan of Distribution, relating specifically to that class.
The Trustees declare separate dividends on each class of shares
The following significant accounting policies are consistently followed by
the Fund in preparing its financial statements, and such policies are in
conformity with generally accepted accounting principles for investment
companies.
A. Investment Valuation
Values for listed securities reflect final sales on national securities
exchanges quoted prior to the close of the New York Stock Exchange.
Over-the-counter securities quoted on the National Association of Securities
Dealers Automated Quotation ("NASDAQ") system are valued at closing prices
supplied through such system. In the absence of recorded sales and for those
over-the-counter securities not quoted on the NASDAQ system, valuations are
at the mean of the closing bid and asked quotations. Securities quoted in
foreign currencies are translated into U.S. dollars at the current exchange
rate. Gains and losses that arise from changes in exchange rates are not
segregated from gains and losses that arise from changes in market prices of
investments. Short-term securities maturing within sixty days are valued at
amortized cost. Other securities, if any, are valued at their fair value as
determined in accordance with established methods consistently applied.
B. Security Transactions
Security transactions are accounted for on the trade date (date the order to
buy or sell is executed). Realized gains or losses are reported on the basis
of identified cost of securities delivered.
C. Net Investment Income
Investment income is accrued daily as earned. Dividend income is accrued on
the ex-dividend date. The Fund is charged for expenses directly attributable
to it, while indirect expenses are allocated among all funds in the Trust.
D. Dividends
Dividends from net investment income, if any, are declared and paid or
reinvested semiannually. Net realized capital gains, if any, are distributed
annually, unless additional distributions are required for compliance with
applicable tax regulations.
Income dividends and capital gains distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles.
E. Federal Income Taxes
No provision for Federal income taxes is necessary because the Fund has
elected to qualify under Subchapter M of the Internal Revenue Code and its
policy is to distribute all of its taxable income, including net realized
capital gains, within the prescribed time periods. At June 30, 1995, the Fund
had a capital loss carryforward of $4,210,961 available, to the extent
provided in regulations, to offset future capital gains, if any, of which
$278,720, $1,767,752, $199,959, $760,656 and $1,203,874 expire on June 30,
1999, 2000, 2001, 2002 and 2003, respectively.
In order to meet certain excise tax distribution requirements under Section
4982 of the Internal Revenue Code, the Fund is required to measure and
distribute annually, if necessary, net capital gains realized during a
twelve-month period ending October 31. In this connection, the Fund is
permitted to defer into its next fiscal year any net capital losses incurred
between each November 1 and the end of its fiscal year. From November 1, 1993
through June 30, 1994, the Fund incurred net capital losses of $649,003 and
it has deferred and treated such losses as arising in the fiscal year ending
June 30, 1995. From November 1, 1994 through June 30, 1995, the Fund incurred
net capital losses of approximately $630,000 and it intends to defer and
treat such losses as arising in the fiscal year ending June 30, 1996.
F. Deferred Organization Costs
Certain costs incurred in the organization and registration of the Fund were
capitalized and amortized under the straight-line method over a period of
five years.
<PAGE>
STATE STREET RESEARCH GLOBAL RESOURCES FUND
NOTES (cont'd)
Note 2
The Trust and State Street Research & Management Company (the "Adviser"), an
indirect wholly-owned subsidiary of Metropolitan Life Insurance Company
("Metropolitan"), have entered into an agreement under which the Adviser
earns monthly fees at an annual rate of 0.75% of the Fund's average daily net
assets. In consideration of these fees, the Adviser furnishes the Fund with
management, investment advisory, statistical and research facilities and
services. The Adviser also pays all salaries, rent and certain other expenses
of management. During the year ended June 30, 1995, the fees pursuant to such
agreement amounted to $284,926.
State Street Research Shareholder Services, a division of State Street
Research Investment Services, Inc., the Trust's principal underwriter (the
"Distributor"), an indirect wholly-owned subsidiary of Metropolitan, provides
certain shareholder services to the Fund such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Fund. In addition, Metropolitan receives a fee for maintenance
of the accounts of certain shareholders who are participants in sponsored
arrangements, employee benefit plans and similar programs or plans, through
or under which shares of the Fund may be purchased. During the year ended
June 30, 1995, the amount of such shareholder servicing and account
maintenance expenses was $72,518.
The fees of the Trustees not currently affiliated with the Adviser amounted
to $14,971 during the year ended June 30, 1995.
Note 3
The Distributor and its affiliates may from time to time and in varying
amounts voluntarily assume some portion of fees or expenses relating to the
Fund. During the year ended June 30, 1995, the amount of such expenses
assumed by the Distributor and its affiliates was $307,559.
Note 4
For the year ended June 30, 1995, purchases and sales of securities,
exclusive of short-term obligations, aggregated $23,450,521 and $26,659,165,
respectively.
Note 5
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Plan") under the Investment Company Act of 1940, as amended. Under the Plan,
the Fund pays annual service fees to the Distributor at a rate of 0.25% of
average daily net assets for Class A, Class B and Class D shares. In
addition, the Fund pays annual distribution fees of 0.75% of average daily
net assets for Class B and Class D shares. Prior to March 10, 1995, the Fund
paid annual distribution fees of 0.25% of average daily net assets for Class
A shares. The Distributor uses such payments for personal services and/or the
maintenance of shareholder accounts, to reimburse securities dealers for
distribution and marketing services, to furnish ongoing assistance to
investors and to defray a portion of its distribution and marketing expenses.
For the year ended June 30, 1995, fees pursuant to such plan amounted to
$119,988, $64,359 and $20,616 for Class A, Class B and Class D, respectively.
The Fund has been informed that the Distributor and MetLife Securities, Inc.,
a wholly-owned subsidiary of Metropolitan, earned initial sales charges
aggregating $10,670 and $24,466, respectively, on sales of Class A shares of
the Fund during the year ended June 30, 1995, and that MetLife Securities,
Inc. earned commissions aggregating $29,957 on sales of Class B shares, and
that the Distributor collected contingent deferred sales charges of $21,450,
$36,122 and $1,185 on redemptions of Class A, Class B and Class D shares,
respectively, during the same period.
Note 6
Under normal market conditions the Fund invests not less than 65% of its
total assets in equity securities of domestic and foreign companies in the
energy and natural resources industries. Also, the Fund may invest up to 35%
of its total assets in the securities of issuers in industries that are not
related to the energy or natural resources industries. Accordingly, the
Fund's investments will fluctuate in response to a variety of economic,
political and other factors peculiar to the energy industries and may
fluctuate more widely than a portfolio that invests in a broader range of
industries.
<PAGE>
STATE STREET RESEARCH GLOBAL RESOURCES FUND
Note 7
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share. At June 30, 1995,
Metropolitan owned 38,491 Class D shares and the Distributor owned one Class
A share of the Fund.
Share transactions were as follows:
<TABLE>
<CAPTION>
Year ended June 30
-------------------------------------------------------
1995 1994
------------------------- ---------------------------
Class A Shares Amount Shares Amount
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,514,296 $ 28,346,425 2,293,708 $ 27,669,872
Shares repurchased (2,992,842) (33,679,131) (2,182,001) (26,635,350)
---------- ----------- ---------- -------------
Net increase
(decrease) (478,546) $ (5,332,706) 111,707 $ 1,034,522
========== =========== ========== =============
Class B Shares Amount Shares Amount
- ---------------------------------------------------------------------------------
Shares sold 314,583 $ 3,497,941 652,256 $ 7,742,089
Shares repurchased (267,978) (3,006,916) (192,274) (2,299,142)
---------- ----------- ---------- -------------
Net increase 46,605 $ 491,025 459,982 $ 5,442,947
========== =========== ========== =============
Class C Shares Amount Shares Amount
- ---------------------------------------------------------------------------------
Shares sold 280,275 $ 3,409,713 137,750 $ 1,700,753
Shares repurchased (93,086) (1,092,177) (67,902) (824,239)
---------- ----------- ---------- -------------
Net increase 187,189 $ 2,317,536 69,848 $ 876,514
========== =========== ========== =============
Class D Shares Amount Shares Amount
- ---------------------------------------------------------------------------------
Shares sold 108,958 $ 1,239,952 176,812 $ 2,112,870
Shares repurchased (77,489) (901,084) (56,352) (715,159)
---------- ----------- ---------- -------------
Net increase 31,469 $ 338,868 120,460 $ 1,397,711
========== =========== ========== =============
</TABLE>
<PAGE>
STATE STREET RESEARCH GLOBAL RESOURCES FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year.
<TABLE>
<CAPTION>
Class A Class B
---------------------------------------------------- ---------------------------------
June 1,
1993
(Commencement
of Share
Class
Designations)
Year ended June 30 Year ended June 30 to
---------------------------------------------------- ------------------ June 30,
1995** 1994** 1993 1992 1991 1995** 1994** 1993
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.84 $13.51 $8.02 $9.12 $11.23 $11.78 $13.51 $12.99
Net investment income (loss)* (.16) (.17) (.13) (.12) .03 (.23) (.23) (.02)
Net realized and unrealized gain
(loss) on investments .48 (1.50) 5.62 (.98) (2.07) .48 (1.50) .54
Distribution from net realized
gains -- -- -- -- (.06) -- -- --
Dividends from net investment
income -- -- -- -- (.01) -- -- --
------- ------- ------- ------- ------- ------- ------- -----------
Net asset value, end of year $12.16 $11.84 $13.51 $8.02 $9.12 $12.03 $11.78 $13.51
======= ======= ======= ======= ======= ======= ======= ===========
Total return 2.70%+ (12.36)%+ 68.45%+ (12.06)%+ (18.28)%+ 2.12%+ (12.81)%+ 4.00%++
Net assets at end of year (000s) $25,692 $30,679 $33,513 $19,227 $29,760 $7,030 $6,333 $1,048
Ratio of operating expenses to
average net assets* 1.75% 1.75% 1.75% 1.75% 1.75% 2.33% 2.25% 2.25%+++
Ratio of net investment income
(loss) to average net assets (1.41)% (1.46)% (1.44)% (1.16%) 0.25% (1.98)% (1.93)% (1.98)%+++
Portfolio turnover rate 62.94% 30.98% 61.00% 47.09% 108.18% 62.94% 30.98% 61.00%
*Reflects voluntary assumption of
fees or expenses per share in each
year (Note 3). $ .09 $ .11 $ .03 $ .05 $ .03 $ .09 $ .14 $ .00
</TABLE>
<TABLE>
<CAPTION>
Class C Class D
--------------------------------------- -----------------------------------------
June 1,
1993 June 1, 1993
(Commencement (Commencement
of of
Share Class Share Class
Designations) Designations)
Year ended June 30 to Year ended June 30 to
------------------- June 30, ------------------ June 30,
1995** 1994** 1993 1995** 1994** 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.90 $13.52 $12.99 $11.77 $13.51 $12.99
Net investment loss* (.11) (.15) (.00) (.23) (.23) (.02)
Net realized and unrealized gain (loss)
on investments .48 (1.47) .53 .48 (1.51) .54
----------- ----------- ----------- ----------- ----------- ------------
Net asset value, end of year $12.27 $11.90 $13.52 $12.02 $11.77 $13.51
=========== =========== =========== =========== =========== ============
Total return 3.11%+ (11.98)%+ 4.08%++ 2.12%+ (12.88)%+ 4.00%++
Net assets at end of year (000s) $3,288 $960 $146 $2,350 $1,931 $588
Ratio of operating expenses to average
net assets* 1.33% 1.25% 1.25%++ 2.33% 2.25% 2.25%+++
Ratio of net investment loss to average
net assets* (1.01)% (0.95)% (1.05)%++ (1.99)% (1.94)% (2.00)%+++
Portfolio turnover rate 62.94% 30.98% 61.00% 62.94% 30.98% 61.00%
*Reflects voluntary assumption of fees
or expenses per share in each year
(Note 3). $ .08 $ .16 $ .00 $ .09 $ .13 $ .00
</TABLE>
**Per share figures have been calculated using the average shares method.
+++Annualized
+Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total return
would be lower if the Distributor and its affiliates had not voluntarily
assumed a portion of the Fund's expenses.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees of MetLife-State Street
Equity Trust and the Shareholders of
State Street Research Global Resources Fund:
In our opinion, the accompanying statement of assets and liabilities,
including the investment portfolio, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in
all material respects, the financial position of State Street Research Global
Resources Fund (formerly State Street Research Global Energy Fund) (a series
of MetLife-State Street Equity Trust, hereafter referred to as the "Trust")
at June 30, 1995, and the results of its operations, the changes in its net
assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Trust's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at June 30, 1995 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable
basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Boston, Massachusetts
August 4, 1995
<PAGE>
STATE STREET RESEARCH GLOBAL RESOURCES FUND
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
Global Resources Fund (formerly Global Energy Fund) underperformed the
average for Lipper Analytical Services' natural resources fund category for
the 12 months ended June 30, 1995 (does not reflect sales charge). The sharp
drop in natural gas prices caused Fund performance to decline. Historically,
the Fund's performance has been closely linked to natural gas and oil prices.
Currently, the Fund has substantial holdings in small-capitalization stocks,
which typically experience greater price fluctuation than larger stocks.
Generally, we target stocks that offer long-term growth, low debt levels, and
attractive valuations.
Our oil holdings focus on small exploration companies. Oil service stocks
represent nearly 25% of the portfolio. This percentage is lower than in the
past because of mergers and acquisitions among the many small oil service
companies. We took advantage of sharp price declines and added to our natural
gas holdings late in 1994.
The Standard & Poor's 500 Composite Index (S&P 500) includes 500 widely
traded common stocks and is a commonly used measure of U.S. stock market
performance. The index is unmanaged and does not take sales charges into
consideration. Direct investment in the index is not possible; results are
for illustrative purposes only. All returns represent past performance, which
is no guarantee of future results. The investment return and principal value
of an investment made in the Fund will fluctuate and shares, when redeemed,
may be worth more or less than their original cost. All returns assume
reinvestment of capital gain distributions and income dividends. Performance
for a class includes periods prior to the adoption of class designations in
1993. Performance reflects up to a maximum 4.5% front-end sales charge or 5%
contingent deferred sales charge. "C" shares, offered without a sales charge,
are available only to certain employee benefit plans and institutions.
Performance for "B" and "D" shares prior to class designations in 1993
reflects annual 12b-1 fees of .50% and subsequent performance reflects annual
12b-1 fees of 1%. Performance results for the Fund are increased by the
Distributor's voluntary reduction of Fund fees and expenses. The first figure
reflects expense reduction; the second shows what results would have been
without subsidization.
Comparison Of Change In Value Of A $10,000
Investment In State Street Research
Global Resources Fund and The S&P 500
[line chart] Class A Shares
Average Annual Total Return
1 Year 5 Years Life of Fund
- -1.92%/-2.95% +0.80%/+0.16% -0.40%/-1.01%
Global S&P
3/90 $ 9,550 $10,000
6/90 8,982 10,913
6/91 7,339 11,720
6/92 6,454 13,290
6/93 10,872 15,101
6/94 9,528 15,313
6/95 9,786 19,299
[line chart] Class B Shares
Average Annual Total Return
1 Year 5 Years Life of Fund
- -2.88%/-3.96% +1.13%/+0.43% +0.26%/-0.40%
Global S&P
3/90 $10,000 $10,000
6/90 9,405 10,913
6/91 7,685 11,720
6/92 6,758 13,290
6/93 11,385 15,101
6/94 9,927 15,313
6/95 10,137 19,299
[line chart] Class C Shares
Average Annual Total Return
1 Year 5 Years Life of Fund
+3.11%/+2.03% +1.91%/+1.19% +0.63%/-0.06%
Global S&P
3/90 $10,000 $10,000
6/90 9,405 10,913
6/91 7,685 11,720
6/92 6,758 13,290
6/93 11,393 15,101
6/94 10,028 15,313
6/95 10,340 19,299
[line chart] Class D Shares
Average Annual Total Return
1 Year 5 Years Life of Fund
+1.12%/+0.04% +1.49%/+0.82% +0.24%/-0.40%
Global S&P
3/90 $10,000 $10,000
6/90 9,405 10,913
6/91 7,685 11,720
6/92 6,758 13,290
6/93 11,385 15,101
6/94 9,918 15,313
6/95 10,129 19,299
[legend for line charts]
solid line = Global Resources Fund
broken rule = S&P 500
