[Front cover]
This prospectus has information you should know before you invest. Please read
it carefully and keep it with your investment records.
Although these securities have been registered with the Securities and Exchange
Commission, the commission has not judged them for investment merit and does not
guarantee the accuracy or adequacy of the information in this prospectus. Anyone
who informs you otherwise is committing a federal crime.
[State Street Research logo]
Investment Trust
- ----------------------------------------------
{Graphic of Boston's Custom House]
One of America's oldest mutual funds, investing for long-term growth of capital
and income.
Prospectus
May 1, 1998
<PAGE>
Who May Want to Invest
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State Street Research Investment Trust is designed for investors who seek one or
more of the following:
[bullet] a less aggressive long-term stock investment
[bullet] a fund that takes a growth and income approach to stock investing
[bullet] a fund with an exceptionally long track record
The fund is NOT appropriate for investors who:
[bullet] want to avoid moderate to high volatility or possible losses
[bullet] are making short-term investments
[bullet] are investing emergency reserve money
The fund's shares will rise and fall in
value. There is a risk that you could
lose money by investing in the fund.
The fund cannot be certain that it will
achieve its goal.
Fund shares are not bank deposits and
are not guaranteed, endorsed or insured
by any financial institution, government
entity or the FDIC.
<PAGE>
Contents 1
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2 The Fund
The fund's goal and strategy,
main risks, expenses and performance,
plus financial highlights
12 Your Account
Managing your State Street Research
investments
12 Opening an Account
12 Choosing a Share Class
14 Sales Charges
16 Policies for Buying Shares
18 Policies for Selling Shares
20 Account Policies
21 Distributions and Taxes
23 Investor Services
24 Fund Details
The fund's business structure and
dealer compensation, plus
additional policies
26 Other Securities and Risks
Information on additional portfolio
securities and practices, and the
risks associated with them
Back Cover For Additional Information
<PAGE>
2 The Fund
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[Graphic of Knight chess piece]
Goal and Strategy
FUNDAMENTAL GOAL The fund seeks to provide long-term growth of capital and,
secondarily, long-term growth of income.
STRATEGY Under normal market conditions, the fund invests at least 65% of net
assets in stocks and convertible securities that have long-term growth
potential.
In selecting stocks, the fund generally attempts to identify the industries that
over the long term will grow faster than the economy as a whole. It looks for
companies within those industries and others that appear most capable of
sustained growth. These companies usually are large, established entities whose
size, financial resources and market share may enable them to maintain
competitive advantages and leadership positions. The fund may also invest in
stocks that are selling below what the portfolio manager believes to be their
intrinsic values as well as cyclical stocks believed to be at attractive points
in their market cycles. In keeping with its secondary goal, the fund also
considers a company's potential for paying dividends.
The fund reserves the right to invest up to 35% of net assets in other
securities. These may include U.S. government securities, as well as corporate
bonds rated investment-grade at the time of purchase and their unrated
equivalents.
The fund may adjust the composition of its portfolio as market conditions and
economic outlooks change. For more information about the fund's investments and
practices, see page 26.
<PAGE>
3
[Graphic: Traffic sign, arrows pointing in different directions]
Portfolio Risks
Because the fund invests primarily in stocks, its major risks are those of stock
investing, including sudden, unpredictable drops in value and the potential for
periods of lackluster performance.
Larger, more established companies may be unable to respond quickly to new
competitive challenges, such as changes in technology and consumer tastes. Many
larger companies also cannot sustain the high growth rates of successful smaller
companies, especially during extended periods of economic expansion.
[sidebar text]
[Graphic: Magnifying glass showing enlarged words on paper]
Growth and
Income Investing
Compared to a pure growth strategy, a growth and income strategy is considered a
less aggressive approach to equity investing. This strategy weighs the potential
for capital growth against the opportunity to earn current income. In making
this trade-off, different growth and income funds assign different levels of
importance to these two goals. This fund, for example, attaches primary
importance to growth of capital and secondary importance to income.
Although the goals of investing for capital growth and current income are very
different, they can be complementary. Stocks, especially growth stocks,
historically have offered long-term investors greater overall returns than many
other types of securities, but have also shown greater volatility. With dividend
stocks, the dividend income tends to support the stock's value during economic
downturns, thus reducing short-term volatility. Even when market conditions make
capital growth appear unlikely, dividend stocks may remain attractive to
investors because of their current income.
While this fund does not emphasize income or bonds, other growth and income
funds may.
[end of sidebar text]
<PAGE>
4 The Fund continued
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Because of these and other risks, the fund may underperform certain other stock
funds (those emphasizing small company stocks, for example) during periods when
growth and income stocks are out of favor. The success of the fund's investment
strategy depends largely on the portfolio manager's skill in assessing the
potential of the stocks the fund buys.
Information on other securities and risks appears on page 26.
A "snapshot" of the fund's investments may be found in the current annual or
semiannual report (see back cover).
[Graphic: "The Thinker" statue]
Investment Management
The fund's investment manager is State Street Research & Management Company. The
firm traces its heritage back to 1924 and the founding of this fund, one of
America's first mutual funds. Today the firm has more than $51 billion in assets
under management (as of March 31, 1998), including more than $16 billion in
mutual funds.
John T. Wilson has had primary responsibility for the fund's day-to-day
portfolio management since July 1996. A vice president, he joined the firm in
1996 and has worked as an investment professional since 1990.
<PAGE>
Investor Expenses 5
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Shareholder fees are paid directly by investors.
Class descriptions begin on page 12
-----------------------------------
Shareholder Fees
(% of offering price)(1) Class A Class B Class C(2) Class S(2)
- --------------------------------------------------------------------------------
Maximum front-end sales charge 4.50 0.00 0.00 0.00
Maximum deferred sales charge 0.00(3) 5.00 1.00 0.00
Annual fund expenses are deducted from fund assets.
Annual Fund Expenses
(% of average net assets) Class A Class B Class C Class S
- --------------------------------------------------------------------------------
Management fee(4) 0.49 0.49 0.49 0.49
Marketing/service
(12b-1) fees(5) 0.25 1.00 1.00 0.00
Other expenses 0.16 0.16 0.16 0.16
---- ---- ---- ----
Total annual fund expenses 0.90 1.65 1.65 0.65
==== ==== ==== ====
Example Here is what you would pay if you invested $1,000 over the years
indicated. The example is for comparison only and does not represent the fund's
actual expenses, either past or future(6).
Year Class A Class B(7) Class C(7) Class S
- --------------------------------------------------------------------------------
1 $54 $67/$17 $27/$17 $7
3 $72 $82/$52 $52/$52 $21
5 $93 $110/$90 $90/$90 $36
10 $151 $175/$175 $195/$195 $81
(1) Not charged on reinvestments or exchanges.
(2) Before November 1, 1997, Class C shares were designated Class D and Class S
shares were designated Class C.
(3) Except for investments of $1 million or more; see page 14.
(4) Estimate, based on the level of assets on December 31, 1997. Until August
18, 1998, the management fee is 0.41% of average net assets annually. After
that, the fee will vary with the fund's level of assets. See "Fund Details"
on page 24.
(5) For share classes that have marketing/service (12b-1) fees, long-term
shareholders may pay more than the equivalent of the regulatory maximum
sales charge.
(6) Example assumes dividend reinvestment, hypothetical 5% annual return,
maximum applicable sales charges and conversion of Class B shares to
Class A after eight years.
(7) The first number assumes you sold all your shares at the end of the period,
the second assumes you stayed in the fund.
<PAGE>
6 Financial Highlights
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The information in these tables has been audited by Coopers & Lybrand L.L.P.,
the fund's independent accountants. The top section of each table shows
information for a single share of the fund. Total return figures assume
reinvestment of all distributions.
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------------------------
Class A 1993(1) 1994 1995(2) 1996(2) 1997(2)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 8.75 8.69 7.74 9.16 9.07
----- ----- ----- ----- -----
Net investment income ($) 0.10 0.11 0.14 0.12 0.10
Net realized and unrealized gain (loss)
on investments ($) 0.81 (0.44) 2.39 1.80 2.54
----- ----- ----- ----- -----
Total from investment operations ($) 0.91 (0.33) 2.53 1.92 2.64
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.13) (0.12) (0.13) (0.13) (0.10)
Distributions from capital gains ($) (0.84) (0.50) (0.98) (1.87) (1.20)
Distributions in excess of capital gains ($) -- -- -- (0.01) --
----- ----- ----- ----- -----
Total distributions ($) (0.97) (0.62) (1.11) (2.01) (1.30)
----- ----- ----- ----- -----
Net asset value, end of year ($) 8.69 7.74 9.16 9.07 10.41
===== ===== ===== ===== =====
Total return (%)(3) 10.53(4) (3.84) 32.85 21.03 28.91
Ratios/Supplemental Data:
Net assets at end of year ($ thousands) 75,259 92,137 135,676 223,868 367,759
Expense ratio (%) 0.75(5) 0.89 0.78 0.75 0.76
Ratio of net investment income to
average net assets (%) 1.27(5) 1.26 1.54 1.17 0.90
Portfolio turnover rate (%) 43.57 33.08 39.21 73.51 75.21
Average commission rate ($)(6) n/a n/a n/a 0.0499 0.0515
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
7
Years ended December 31
----------------------------------------------------------
Class B 1993(1) 1994 1995(2) 1996(2) 1997(2)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 9.15 8.66 7.72 9.13 9.03
----- ----- ----- ----- -----
Net investment income ($) 0.06 0.06 0.07 0.04 0.02
Net realized and unrealized gain (loss)
on investments ($) 0.39 (0.44) 2.38 1.80 2.51
----- ----- ----- ----- -----
Total from investment operations ($) 0.45 (0.38) 2.45 1.84 2.53
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.10) (0.06) (0.06) (0.06) (0.02)
Distributions from capital gains ($) (0.84) (0.50) (0.98) (1.87) (1.20)
Distributions in excess of capital gains ($) -- -- -- (0.01) --
----- ----- ----- ----- -----
Total distributions ($) (0.94) (0.56) (1.04) (1.94) (1.22)
----- ----- ----- ----- -----
Net asset value, end of year ($) 8.66 7.72 9.13 9.03 10.34
===== ===== ===== ===== =====
Total return (%)(3) 4.95(4) (4.43) 31.86 20.15 27.80
Ratios/Supplemental Data:
Net assets at end of year ($ thousands) 73,110 113,301 183,446 315,766 558,568
Expense ratio (%) 1.51(5) 1.64 1.53 1.50 1.51
Ratio of net investment income to
average net assets (%) 0.48(5) 0.51 0.79 0.41 0.15
Portfolio turnover rate (%) 43.57 33.08 39.21 73.51 75.21
Average commission rate ($)(6) n/a n/a n/a 0.0499 0.0515
</TABLE>
(1) Commencement of share class designations (February 17, 1993 for Class A and
March 15, 1993 for Class B) to December 31, 1993.
(2) Per-share figures have been calculated using the average shares method.
(3) Does not reflect any front-end or contingent deferred sales charge.
(4) Not annualized.
(5) Annualized.
(6) Average commission rate per share paid by the fund for security trades on
which commissions are charged beginning with the fiscal year ended December
31, 1996.
<PAGE>
8 Financial Highlights continued
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<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------------------------
Class C (formerly Class D) 1993(1) 1994 1995(2) 1996(2) 1997(2)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 9.15 8.68 7.74 9.15 9.05
----- ----- ----- ----- -----
Net investment income ($) 0.06 0.05 0.07 0.04 0.02
Net realized and unrealized gain (loss)
on investments ($) 0.40 (0.43) 2.38 1.79 2.53
----- ----- ----- ----- -----
Total from investment operations ($) 0.46 (0.38) 2.45 1.83 2.55
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.09) (0.06) (0.06) (0.05) (0.02)
Distributions from capital gains ($) (0.84) (0.50) (0.98) (1.87) (1.20)
Distributions in excess of capital gains ($) -- -- -- (0.01) --
----- ----- ----- ----- -----
Total distributions ($) (0.93) (0.56) (1.04) (1.93) (1.22)
----- ----- ----- ----- -----
Net asset value, end of year ($) 8.68 7.74 9.15 9.05 10.38
===== ===== ===== ===== =====
Total return (%)(3) 5.10(4) (4.45) 31.75 20.09 27.93
Ratios/Supplemental Data:
Net assets at end of year ($ thousands) 9,729 11,707 16,841 25,658 36,290
Expense ratio (%) 1.51(5) 1.64 1.53 1.50 1.51
Ratio of net investment income
to average net assets (%) 0.51(5) 0.51 0.79 0.42 0.15
Portfolio turnover rate (%) 43.57 33.08 39.21 73.51 75.21
Average commission rate ($)(6) n/a n/a n/a 0.0499 0.0515
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
9
Years ended December 31
------------------------------------------------------
Class S (formerly Class C) 1988 1989 1990 1991 1992
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 7.30 7.24 8.65 7.67 9.04
----- ----- ----- ----- -----
Net investment income ($) 0.21 0.26 0.22 0.19 0.16
Net realized and unrealized gain (loss)
on investments ($) 0.54 2.05 (0.31) 1.96 0.40
----- ----- ----- ----- -----
Total from investment operations ($) 0.75 2.31 (0.09) 2.15 0.56
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.21) (0.26) (0.23) (0.20) (0.16)
Distributions from capital gains ($) (0.60) (0.64) (0.66) (0.58) (0.64)
Distributions in excess of capital gains ($) -- -- -- -- --
----- ----- ----- ----- -----
Total distributions ($) (0.81) (0.90) (0.89) (0.78) (0.80)
----- ----- ----- ----- -----
Net asset value, end of year ($) 7.24 8.65 7.67 9.04 8.80
===== ===== ===== ===== =====
Total return (%)(3) 10.24 32.14 (0.95) 28.08 6.28
Ratios/Supplemental Data:
Net assets at end of year ($ thousands) 486,385 575,114 519,475 657,762 726,671
Expense ratio (%) 0.51 0.47 0.50 0.50 0.51
Ratio of net investment income to
average net assets (%) 2.71 3.09 2.64 2.24 1.92
Portfolio turnover rate (%) 15.39 12.35 10.07 16.28 23.99
Average commission rate ($)(6) n/a n/a n/a n/a n/a
<CAPTION>
Years ended December 31
------------------------------------------------------
Class S (formerly Class C) 1993 1994 1995(2) 1996(2) 1997(2)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ($) 8.80 8.70 7.76 9.18 9.11
----- ----- ----- ----- -----
Net investment income ($) 0.15 0.13 0.16 0.14 0.12
Net realized and unrealized gain (loss)
on investments ($) 0.74 (0.43) 2.39 1.82 2.54
----- ----- ----- ----- -----
Total from investment operations ($) 0.89 (0.30) 2.55 1.96 2.66
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.15) (0.14) (0.15) (0.15) (0.12)
Distributions from capital gains ($) (0.84) (0.50) (0.98) (1.87) (1.20)
Distributions in excess of capital gains ($) -- -- -- (0.01) --
----- ----- ----- ----- -----
Total distributions ($) (0.99) (0.64) (1.13) (2.03) (1.32)
----- ----- ----- ----- -----
Net asset value, end of year ($) 8.70 7.76 9.18 9.11 10.45
===== ===== ===== ===== =====
Total return (%)(3) 10.20 (3.47) 33.07 21.48 29.08
Ratios/Supplemental Data:
Net assets at end of year ($ thousands) 729,536 627,551 738,649 780,627 883,276
Expense ratio (%) 0.49 0.65 0.54 0.50 0.51
Ratio of net investment income to
average net assets (%) 1.63 1.54 1.81 1.44 1.17
Portfolio turnover rate (%) 43.57 33.08 39.21 73.51 75.21
Average commission rate ($)(6) n/a n/a n/a 0.0499 0.0515
</TABLE>
(1) Commencement of share class designations (March 15, 1993) to December 31,
1993.
(2) Per-share figures have been calculated using the average shares method.
(3) Does not reflect any front-end or contingent deferred sales charge.
(4) Not annualized.
(5) Annualized.
(6) Average commission rate per share paid by the fund for security trades on
which commissions are charged beginning with the fiscal year ended December
31, 1996.
<PAGE>
10 Performance and Volatility
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As of December 31, 1997
-------------------------------------
Average Annual Total Return(1) 1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Class A (%) 23.11 15.91 15.18
Class B (%) 22.80 15.96 15.31
Class C (%) 26.93 16.19 15.32
Class S (%) 29.08 17.29 15.86
S&P 500 Index (%) 33.35 20.25 18.02
Lipper Growth & Income
Funds Index (%) 26.96 18.06 16.03
- ------------------------------[Bar Chart]---------------------------------------
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Class A
Year-by-Year
Total Return(1) 10.24 32.14 (0.95) 28.08 6.28 9.90 (3.84) 32.85 21.03 28.91
</TABLE>
- --------------------------------------------------------------------------------
(1) Fund returns include performance from before the creation of share classes
in 1993. Because Classes A, B and C involve higher marketing/service
(12b-1) fees (as described on page 5), performance since that time is
somewhat lower for these classes.
<PAGE>
11
[sidebar text]
[Graphic: Magnifying glass showing enlarged words on paper]
Understanding Performance
and Volatility
The information on the opposite page is designed to show two aspects of the
fund's track record:
[bullet] Average annual total return is a measure of the fund's performance over
time. It is determined by taking the fund's performance over a given
period and expressing it as an average annual rate. Average annual
total return includes the effects of fund expenses and maximum sales
charges for each class, and assumes that you sold your shares at the
end of the period.
[bullet] The graph of year-by-year returns shows how volatile the fund has been:
how much the difference has been, historically, between its best years
and worst years. In general, funds with higher average annual total
returns will also have higher volatility. The graph includes the
effects of fund expenses, but not sales charges.
Also included are two independent measures of performance. The S&P 500
(officially, the "Standard & Poor's 500 Composite Stock Price Index") is an
unmanaged index of 500 domestic stocks. The Lipper Growth & Income Funds Index
shows the performance of a category of mutual funds with similar goals. The
Lipper Index shows you how well the fund has done compared to competing funds.
While the fund does not seek to match the returns or the volatility of the S&P
500, this index is a good indicator of general stock market performance and can
be used as a rough guide when gauging the return of this and other investments.
When making comparisons, keep in mind that neither the S&P 500 nor the Lipper
Index includes the effects of sales charges. Also, even if your stock portfolio
were identical to the S&P 500, your returns would always be lower, because the
S&P 500 doesn't include brokerage and administrative expenses.
[end of sidebar text]
<PAGE>
12 Your Account
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[Graphic: Key]
Opening an Account
If you are opening an account through a financial professional, he or she can
assist you with all phases of your investment.
If you are investing through a large retirement plan or other special program,
follow the instructions in your program materials.
To open an account without the help of a financial professional, please use the
instructions on these pages.
[Graphic: List of share types on paper,
pencil ready to mark choice of share]
Choosing a Share Class
The fund offers four share classes, each with its own sales charge and expense
structure.
If you are investing a substantial amount and plan to hold your shares for a
long period, Class A shares may make the most sense for you. If you are
investing a lesser amount, you
[sidebar text, bottom of page]
- --------------------------------------------------------------------------------
Class A -- Front Load
[bullet] Initial sales charge of 4.5% or less; schedule on page 14
[bullet] Lower sales charges for larger investments; see sidebar on facing page
and sales charge schedule
[bullet] Lower annual expenses than Class B or C shares due to lower
marketing/service (12b-1) fee of 0.25%
Class B -- Back Load
[bullet] No initial sales charge
[bullet] Deferred sales charge of 5% or less on shares you sell within five
years; schedule on page 14
[bullet] Annual marketing/service (12b-1) fee
[bullet] Automatic conversion to Class A shares after eight years, reducing
future annual expenses
Class C(1) -- Level Load
[bullet] No initial sales charge
[bullet] Deferred sales charge of 1%, paid if you
sell shares within one year of purchase
[bullet] Lower deferred sales charge than Class B shares
[bullet] Annual marketing/service (12b-1) fee
[bullet] No conversion to Class A shares after eight years, so annual expenses
do not decrease
(1) Before November 1, 1997, these were designated Class D.
- --------------------------------------------------------------------------------
[end of sidebar text, bottom of page]
<PAGE>
13
may want to consider Class B shares (if investing for at least five years) or
Class C shares (if investing for less than five years). If you are investing
through a special program, such as a large employer-sponsored retirement plan or
certain programs available through brokers, you may be eligible to purchase
Class S shares.
Because all future investments in your account will be made in the share class
you designate when opening the account, you should make your decision carefully.
Your financial professional can help you choose the share class that makes the
most sense for you.
[sidebar text]
- --------------------------------------------------------------------------------
[Graphic: Viewing paper through magnifying glass,
showing words enlarged on paper]
Class A Sales
Charge Reductions
and Waivers
[bullet] Substantial investments receive lower sales charge rates; see
information on the following page.
[bullet] The "right of accumulation" allows you to include your existing State
Street Research investments (except Money Market Fund Class E shares)
as part of your current investment for sales charge purposes.
[bullet] A "letter of intent" allows you to count all investments in this or
other State Street Research funds over the next 13 months as if you
were making them all at once, for purposes of calculating sales
charges.
To take advantage of right of accumulation or letter of intent waivers, consult
your financial professional or State Street Research.
- --------------------------------------------------------------------------------
[end of sidebar]
[sidebar text, bottom of page]
- --------------------------------------------------------------------------------
Class S(2) -- No Load
[bullet] No sales charges of any kind
[bullet] No marketing/service (12b-1) fees; annual expenses
are lower than other share classes
[bullet] Available through certain retirement accounts, advisory accounts of the
investment manager and special programs, including broker programs with
recordkeeping and other services; these programs usually involve
special conditions and separate fees (contact your financial
professional for information).
(2) Before November 1, 1997, these were designated Class C.
- --------------------------------------------------------------------------------
[end of sidebar text, bottom of page]
<PAGE>
14 Your Account continued
- --------------------------------------------------------------------------------
Sales Charges
Class A -- Front Load
when you invest this % is which equals
this amount deducted this % of
for sales your net
charges investment
- -------------------------------------------------------
Up to $99,999 4.50 4.71
$100,000 - $249,999 3.50 3.63
$250,000 - $499,999 2.50 2.56
$500,000 - $999,999 2.00 2.04
$1 million or more see next column
With Class A shares, you pay a sales charge only when you buy shares.
If you are investing $1 million or more (either as a lump sum or through any of
the methods described on the previous page), you can purchase Class A shares
without any sales charge. However, you may be charged a "contingent deferred
sales charge" (CDSC) if you sell any shares you have held for less than one
year. Policies regarding the calculation of the CDSC are the same as for
Class B.
Class A shares are also offered with low or no sales charges through various
wrap-fee programs and other sponsored arrangements (contact your financial
professional for information).
Class B -- Back Load
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is
bought them deducted from your proceeds
- ---------------------------------------------------------------
First year 5.00
Second year 4.00
Third year 3.00
Fourth year 3.00
Fifth year 2.00
Sixth year or later None
With Class B shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for five years or less, as described in the table above. Any shares
acquired through reinvestment are not subject to the CDSC. There is no CDSC on
exchanges into other State Street Research funds, and the
<PAGE>
15
date of your initial investment will continue to be used as the basis for CDSC
calculations when you exchange. To ensure that you pay the lowest CDSC possible,
the fund will always use the shares with the lowest CDSC to fill your sell
requests.
The CDSC is waived on shares sold for mandatory retirement distributions or
because of disability or death. Consult your financial professional or the State
Street Research Service Center.
Class B shares automatically convert to Class A shares after eight years,
lowering your annual expenses from that time on.
Class C (Formerly Class D) -- Level Load
this % of net asset value
when you sell shares at the time of purchase (or
in this year after you of sale, if lower) is
bought them deducted from your proceeds
- -----------------------------------------------------------------
First year 1.00
Second year or later None
With Class C shares, you pay no sales charge when you invest, but you are
charged a "contingent deferred sales charge" (CDSC) when you sell shares you
have held for one year or less, as described in the table above. Policies
regarding the calculation of the CDSC are the same as for Class B.
Class C shares currently have the same annual expenses as Class B shares, but
never convert to Class A shares (with their lower annual expenses).
Class S (Formerly Class C) -- No Load
Class S shares have no sales charges or CDSC.
<PAGE>
16 Your Account continued
- --------------------------------------------------------------------------------
[Graphic: Old-fashioned hand-cranked cash register]
Policies for
Buying Shares
Once you have chosen a share class, the next step is to determine the amount you
want to invest.
Minimum Initial Investments:
[bullet] $1,000 for accounts that use the Investamatic program
[bullet] $2,000 for Individual Retirement Accounts
[bullet] $2,500 for all other accounts
Minimum Additional Investments:
[bullet] $50 for any account
Complete the enclosed application. You can avoid future inconvenience by signing
up now for any services you might later use.
Timing of Requests All requests received by State Street Research before 4:00
p.m. eastern time will be executed the same day, at that day's closing share
price. Orders received after 4:00 p.m. will be executed the following day, at
that day's closing share price.
Wire Transactions Funds may be wired between 8:00 a.m. and 4:00 p.m. eastern
time. To make a same-day wire investment, please notify State Street Research by
12:00 noon of your intention to wire funds, and make sure your wire arrives by
4:00 p.m. Your bank may charge a fee for wiring money.
<PAGE>
Buying Shares 17
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
To Open an Account To Add to an Account
<S> <C> <C>
Through a Financial Contact your financial Contact your financial
Professional professional. professional.
[Graphic: Briefcase]
By Mail Make your check payable to Fill out the investment stub
[Graphic: Mail Box] "State Street Research from an account statement, or
Funds." Forward the check indicate the fund name and
and your application to account number on your check.
State Street Research. Make your check payable to
"State Street Research Funds."
Forward the check and stub to
State Street Research.
By Federal Funds Wire Forward your application to Call State Street Research to
[Graphic: Capitol State Street Research, then obtain a control number.
Building] call to obtain an account Instruct your bank to wire funds
number. Wire funds using the to:
instructions at right.
[bullet] State Street Bank and
Trust Company,
Boston, MA
[bullet] ABA: 011000028
[bullet] BNF: fund name and
share class you want
to buy
[bullet] AC: 99029761
[bullet] OBI: your name and your
account number
[bullet] Control: the number
given to you by
State Street Research
By Electronic Funds Verify that your bank is a Call State Street Research to
Transfer (ACH) member of the ACH (Automated verify that the necessary bank
[Graphic: plug] Clearing House) system. information is on file for your
Forward your application to account. If it is, you may
State Street Research. request a transfer with the same
Please be sure to include phone call. If not, please ask
the appropriate bank State Street Research to provide
information. Call State you with an EZ Trader application.
Street Research to request a
purchase.
By Investamatic Forward your application, Call State Street Research to
[Graphic: calendar] with all appropriate verify that Investamatic is in
sections completed, to State place on your account, or to
Street Research, along with request a form to add it.
a check for your initial Investments are automatic once
investment payable to "State Investamatic is in place.
Street Research Funds."
By Exchange Call State Street Research Call State Street Research or
[Graphic: arrows or visit our Web site. visit our Web site.
pointing in 2
different directions]
</TABLE>
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408
Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m.,
eastern time)
<PAGE>
18 Your Account continued
- --------------------------------------------------------------------------------
[Graphic: Old-fashioned hand-crank adding machine]
Policies for
Selling Shares
Circumstances that Require Written Requests Please submit instructions in
writing when any of the following apply:
[bullet] you are selling more than $100,000 worth of shares
[bullet] the name or address on the account has changed within the last 30 days
[bullet] you want the proceeds to go to a name or address not on the account
registration
[bullet] you are transferring shares to an account with a different registration
or share class
[bullet] you are selling shares held in a corporate or fiduciary account; for
these accounts, additional documents are required:
corporate accounts: certified copy of a corporate resolution
fiduciary accounts: copy of power of attorney or other governing
document
To protect your account against fraud, all signatures on these documents must be
guaranteed. You may obtain a signature guarantee at most banks and securities
dealers. A notary public cannot provide a signature guarantee.
INCOMPLETE SELL REQUESTS State Street Research will attempt to notify you
promptly if any information necessary to process your request is missing.
TIMING OF REQUESTS All requests received in good order by State Street Research
before 4:00 p.m. eastern time will be executed the same day, at that day's
closing share price. Requests received after 4:00 p.m. will be executed the
following day, at that day's closing share price.
WIRE TRANSACTIONS Proceeds sent by federal funds wire must total at least
$5,000. A fee of $7.50 will be deducted from all proceeds sent by wire, and your
bank may charge an additional fee to receive wired funds.
SELLING RECENTLY PURCHASED SHARES If you sell shares before the check or
electronic funds transfer (ACH) for those shares has been collected, you will
not receive the proceeds until your initial payment has cleared. This may take
up to 15 days after your purchase was recorded (in rare cases, longer). If you
open an account with shares purchased by wire, you cannot sell those shares
until your application has been processed.
<PAGE>
Selling Shares 19
- --------------------------------------------------------------------------------
To Sell Some or All of Your Shares
Through a Financial Contact your financial professional.
Professional
[Graphic: Briefcase]
By Mail Send a letter of instruction, an endorsed stock
[Graphic: Mailbox] power or share certificates (if you hold
certificate shares) to State Street Research.
Specify the fund, the account number and the
dollar value or number of shares. Be sure to
include all necessary signatures and any
additional documents, as well as signature
guarantees if required (see facing page).
By Federal Check with State Street Research to make sure that
Funds Wire a wire redemption privilege, including a bank
[Graphic: Capitol designation, is in place on your account. Once
Building] this is established, you may place your request
to sell shares with State Street Research.
Proceeds will be wired to your pre-designated
bank account. (See "Wire Transactions" on facing
page.)
By Electronic Funds Check with State Street Research to make sure that
Transfer (ACH) the EZ Trader feature, including a bank
[Graphic: plug] designation, is in place on your account. Once
this is established, you may place your request to
sell shares with State Street Research. Proceeds
will be sent to your pre-designated bank account.
By Telephone As long as the transaction does not require a
[Graphic: telephone] written request (see facing page), you or your
financial professional can sell shares by calling
State Street Research. A check will be mailed to
you on the following business day.
By Exchange Read the prospectus for the fund into which you
[Graphic: arrows are exchanging. Call State Street Research or
pointing in 2 visit our Web site.
different directions]
By Systematic See plan information on page 23.
Withdrawal Plan
[Graphic: calendar]
State Street Research Service Center PO Box 8408, Boston, MA 02266-8408
Internet www.ssrfunds.com
Call toll-free: 1-800-562-0032 (business days 8:00 a.m. - 6:00 p.m.,
eastern time)
<PAGE>
20 Your Account continued
- --------------------------------------------------------------------------------
[Graphic: A stack of papers]
Account Policies
THE FUND'S BUSINESS HOURS The fund is open the same days as the New York Stock
Exchange (generally Monday through Friday). Fund representatives are available
from 8:00 a.m. to 6:00 p.m. eastern time on these days.
CALCULATING SHARE PRICE The fund calculates its net asset value per share (NAV)
every business day at the close of regular trading on the New York Stock
Exchange (usually at 4:00 p.m. eastern time). Each class's share price is
calculated by dividing its net assets by the number of its shares outstanding.
TELEPHONE REQUESTS When you open an account you automatically receive telephone
privileges, allowing you to place requests on your account by telephone. Your
financial professional can also use these privileges to request exchanges on
your account and, with your written permission, redemptions. For your
protection, all telephone calls are recorded.
As long as State Street Research takes certain measures to authenticate
telephone requests on your account, you may be held responsible for unauthorized
requests. Unauthorized telephone requests are rare, but if you want to protect
yourself completely, you can decline the telephone privilege on your
application. The fund may suspend or eliminate the telephone privilege at any
time.
EXCHANGE PRIVILEGES There is no fee to exchange shares among State Street
Research funds. Your new fund shares will be the equivalent class as your
current shares. Any contingent deferred sales charges will continue to be
calculated from the date of your initial investment.
Frequent exchanges can interfere with fund management and drive up costs for all
shareholders. Because of this, the fund currently limits each account, or group
of accounts under common ownership or control, to six exchanges per calendar
year. The fund may change or eliminate the exchange privilege at any time, may
limit or cancel any shareholder's exchange privilege and may refuse to
<PAGE>
21
accept any exchange request, particularly those associated with "market timing"
strategies.
For Merrill Lynch customers, exchange privileges extend to Summit Cash Reserves
Fund, which is related to the fund for purposes of investment and investor
services.
ACCOUNTS WITH LOW BALANCES If the value of your account falls below $1,500,
State Street Research may mail you a notice asking you to bring the account back
up to $1,500 or close it out. If you do not take action within 60 days, State
Street Research may either sell your shares and mail the proceeds to you at the
address of record or may deduct an annual maintenance fee (currently $18).
REINSTATING RECENTLY SOLD SHARES For 120 days after you sell shares, you have
the right to "reinstate" your investment by putting some or all of the proceeds
into any currently available State Street Research fund at net asset value. Any
CDSC you paid on the amount you are reinstating will be credited to your
account. You may only use this privilege once in any twelve-month period with
respect to your shares of a given fund.
[Graphic: "Uncle Sam")
Distributions and Taxes
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund typically distributes its net
income to shareholders four times a year. Net capital gains, if any, are
typically distributed around the end of the fund's fiscal year, which is
December 31.
You may have your distributions reinvested in the fund, invested in a different
State Street Research fund, deposited in a bank account, or mailed out by check.
If you do not give State Street Research other instructions, your distributions
will automatically be reinvested in the fund.
<PAGE>
22 Your Account continued
[sidebar text]
- --------------------------------------------------------------------------------
[Graphic: Magnifying glass showing enlarged words on paper]
Tax Considerations
Unless your investment is in a tax deferred account, you may want to avoid:
[bullet] investing a large amount in the fund close to the end of its fiscal
year (if the fund makes a capital gains distribution, you will receive
some of your investment back as a taxable distribution)
[bullet] selling shares at a loss for tax purposes and investing in a
substantially identical investment within 30 days before or after that
sale (such a transaction is usually considered a "wash sale," and you
will not be allowed to claim a tax loss)
- --------------------------------------------------------------------------------
[end of sidebar]
TAX EFFECTS OF DISTRIBUTIONS AND TRANSACTIONS In general, any dividends and
short-term capital gain distributions you receive from the fund are taxable as
ordinary income. Distributions of other capital gains are generally taxable as
capital gains. This is true no matter how long you have owned your shares and
whether you reinvest your distributions or take them in cash.
Every year, the fund will send you information detailing the amount of ordinary
income and capital gains distributed to you for the previous year.
The sale of shares in your account may produce a gain or loss, and is a taxable
event. For tax purposes, an exchange is the same as a sale.
Your investment in the fund could have additional tax consequences. Please
consult your tax professional for assistance.
BACKUP WITHHOLDING By law, the fund must withhold 31% of your distributions and
proceeds if you have not provided complete, correct taxpayer information.
<PAGE>
23
[Graphic: 2 hands, handshake greeting]
INVESTOR SERVICES
INVESTAMATIC PROGRAM
Use Investamatic to set up regular automatic investments in the fund from your
bank account. You determine the frequency and amount of your investments, and
you can skip an investment with three days notice. Not available with Class S
shares.
SYSTEMATIC WITHDRAWAL PLAN
This plan is designed for retirees and other investors who want regular
withdrawals from a fund account. The plan is free and allows you to withdraw up
to 8% of your fund assets a year without incurring any contingent deferred sales
charges. Certain terms and minimums apply.
DIVIDEND ALLOCATION PLAN This plan automatically invests your distributions
from the fund into another fund of your choice, without any fees or sales
charges.
AUTOMATIC BANK CONNECTION This plan lets you route any distributions or
Systematic Withdrawal Plan payments directly to your bank account.
State Street Research also offers a full range of prototype retirement plans for
individuals, sole proprietors, partnerships, corporations and employees. Call
1-800-562-0032 for information on retirement plans or any of the services
described above.
<PAGE>
24 Fund Details
- --------------------------------------------------------------------------------
[Graphic: Top of ionic column]
Business Structure
Originally formed in 1924 as State Street Investment Corporation, the fund was
reorganized in 1989 as a diversified series of State Street Research Master
Investment Trust, an open-end management investment company that is organized as
a Massachusetts business trust. The fund has been open to the public
periodically since its inception and has continuously offered its shares to the
public since May 1990.
A board of trustees representing shareholder interests oversees the trust's
operations, including the hiring of the investment manager and other service
providers. The fund does not hold regular shareholder meetings, but may call
meetings when matters arise that require shareholder approval. These may include
amendments to the investment management agreement, the election of trustees or
proposed changes in the fund's fundamental goal, which cannot be changed without
shareholder approval.
The investment manager is responsible for the fund's investment and business
activities, and receives the management fee as compensation. The management fee
is 0.41% of fund assets annually until August 18, 1998, and then 0.55% of the
first $500 million of fund assets, annually, 0.50% of the next $500 million, and
0.45% of any amount over $1 billion. The investment manager and the distributor
are subsidiaries of Metropolitan Life Insurance Company.
Brokers for Portfolio Trades
When placing trades for the fund's portfolio, State Street Research chooses
brokers that provide the best execution (a term defined by service as well as
price), but may also consider a broker's sales of fund shares.
Investment Manager
State Street Research & Management Company
One Financial Center, Boston, MA 02111
Distributor
State Street Research Investment Services, Inc.
One Financial Center, Boston, MA 02111
Service Center
State Street Research Service Center
P.O. Box 8408, Boston, MA 02266
Custodian
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
<PAGE>
25
[Graphic: Check or money order]
Dealer Compensation
Dealers who sell shares of the fund and perform services for fund investors
receive sales commissions and annual fees. These are paid by the fund's
distributor, using money from sales charges, marketing/service (12b-1) fees and
its other resources.
Maximum Dealer Compensation Class A Class B Class C Class S
Initial commission (%) -- 4.00 1.00 0.00
Investments up to $100,000 (%) 4.00 -- -- --
$100,000 - $249,999 (%) 3.00 -- -- --
$250,000 - $499,999 (%) 2.00 -- -- --
$500,000 - $999,999 (%) 1.75 -- -- --
First $1-3 million (%) 1.00(1) -- -- --
Next $2 million (%) 0.50(1) -- -- --
Next $1 and above (%) 0.25(1) -- -- --
Annual fee (%) 0.25 0.25 0.90 0.00
ADDITIONAL POLICIES Please note that the fund maintains additional policies and
reserves certain rights, including:
[bullet] The fund may vary its initial or additional investments in the case of
exchanges, reinvestments, periodic investment plans, retirement and
employee benefit plans, sponsored arrangements and other similar
programs.
[bullet] All orders to purchase shares are subject to acceptance by the fund.
[bullet] At any time, the fund may change or discontinue its sales charge
waivers and any of its order acceptance practices, and may suspend the
sale of its shares.
[bullet] To permit investors to obtain the current price, dealers are
responsible for transmitting all orders to the State Street Research
Service Center promptly.
[bullet] Dealers may impose a transaction fee on the purchase or sale of shares
by shareholders.
[bullet] The distributor may pay its affiliate MetLife Securities, Inc.
additional compensation of up to 0.25% of certain sales or assets.
(1) If your broker declines this commission, the one-year CDSC on your
investment is waived.
<PAGE>
26 Other Securities and Risks
- --------------------------------------------------------------------------------
[Graphic: Stock certificates]
Other Securities
and Risks
Each of the fund's portfolio securities and investment practices offers certain
opportunities and carries various risks. Major investments and risk factors are
outlined in the fund description starting on page 2. Below are brief
descriptions of other securities and practices, along with their associated
risks. A table of limitations follows.
FOREIGN INVESTMENTS Foreign securities are generally more volatile than their
domestic counterparts, in part because of higher political and economic risks,
lack of reliable information, and fluctuations in currency exchange rates. These
risks are usually higher in less developed countries. The fund may use foreign
currencies and related instruments to hedge its foreign investments.
In addition, foreign securities may be more difficult to resell and the markets
for them less efficient than for comparable U.S. securities. Even where a
foreign security increases in price in its local currency, the appreciation may
be diluted by the negative effect of exchange rates when the security's value is
converted to U.S. dollars. Foreign withholding taxes also may apply and errors
and delays may occur in the settlement process for foreign securities.
DERIVATIVES Derivatives, a category that includes options and futures, are
financial instruments whose value derives from another security or an index. The
fund may use derivatives for hedging (attempting to offset a potential loss in
one position by establishing an interest in an opposite position). The fund may
also use derivatives for speculation (investing for potential income or capital
gain).
While hedging can guard against potential risks, it adds to the fund's expenses
and can eliminate some opportunities for gains. There is also a risk that a
derivative intended as a hedge may not perform as expected.
<PAGE>
27
The main risk with derivatives is that some types can amplify a gain or loss,
potentially earning or losing substantially more money than the actual cost of
the derivative.
With all derivatives, whether used for hedging or speculation, there is also the
risk that the counterparty may fail to honor its contract terms, causing a loss
for the fund.
SECURITIES LENDING The fund may seek additional income by lending portfolio
securities to qualified institutions. By reinvesting collateral it receives in
these transactions, the fund could magnify any gain or loss it realizes on the
underlying investment. If the borrower fails to return the securities and the
collateral is insufficient to cover the loss, the fund could lose money.
WHEN-ISSUED SECURITIES The fund may invest in securities prior to the date of
their issue. These securities could fall in value by the time they are actually
issued, which may be anytime from a few days to over a year.
RESTRICTED AND ILLIQUID SECURITIES Any securities that are thinly traded or
whose resale is restricted can be difficult to sell at a desired time and price.
Some of these securities are new and complex, and trade only among institutions;
the markets for these securities are still developing, and may not function as
efficiently as established markets. Owning a large percentage of restricted and
illiquid securities could hamper the fund's ability to raise cash to meet
redemptions. Also, because there may not be an established market price for
these securities, the fund may have to estimate their value, which means that
their valuation (and, to a much smaller extent, the valuation of the fund) may
have a subjective element.
SHORT-TERM TRADING While the fund ordinarily does not trade securities for
short-term profits, it will sell any security at any time it believes best,
which may result in short-term profits. Short-term trading can increase the
fund's transaction costs and may increase your tax liability.
REPURCHASE AGREEMENTS The fund may buy securities with the understanding that
the seller will buy them back with interest at a later date. If the seller is
unable to honor its commitment to repurchase the securities, the fund could lose
money.
<PAGE>
28 Other Securities and Risks continued
- --------------------------------------------------------------------------------
BONDS The value of any bonds held by the fund is likely to decline when
interest rates rise; this risk is greater for bonds with longer maturities. A
less significant risk is that a bond issuer could default on principal or
interest payments, causing a loss for the fund.
DEFENSIVE INVESTING During unusual market conditions, the fund may place up to
100% of total assets in cash or quality short-term debt securities.
Investment Limitations
Limitation at the time of investment
-------------------------------------------
Practice % of total assets % of net assets
- --------------------------------------------------------------------------------
Investing in securities of any
given issuer (other than the
U.S. government and its
agencies)(1) 5(2) --
Investing in any given industry(1) 25 --
Investing in issuers with less
than 3 years of continuous
operations(1) 5
Lending securities 33-1/3 --
Lending money(1) Prohibited --
Repurchase agreements -- 30
Swap arrangements -- 5
Security
- --------------------------------------------------------------------------------
Commodity futures contracts
and options contracts
(for non-hedging purposes) -- 5(3)
Other options contracts
(for non-hedging purposes) -- 5(3)
Illiquid securities -- 15(5)
Restricted securities 10(5) --
Foreign securities 35(6) --
(1) Fundamental policy; may not be changed without shareholder approval.
(2) Applies only to 75% of fund's total assets. The fund also is prohibited
from investing in more than 10% of an issuer's voting securities.
(3) Initial margin deposits plus premiums may not exceed 5% of the market value
of the fund's net assets in non-hedging transactions. No limits apply when
used in hedging strategies.
(4) Includes repurchase agreements extending over more than seven days.
(5) Does not include Rule 144A securities.
(6) Applies to all direct and indirect interests in securities of non-U.S.
issuers.
<PAGE>
Notes 29
- --------------------------------------------------------------------------------
<PAGE>
[back cover]
For Additional Information
- --------------------------------------------------------------------------------
You can obtain a free copy of the current annual/semiannual report or SAI by
contacting:
[State Street Research logo]
Service Center
P.O. Box 8408, Boston, MA 02266
Telephone: 1-800-562-0032
Internet: www.ssrfunds.com
Or you can visit the SEC Web site at:
www.sec.gov
You can find additional information on the fund's structure and its performance
in the following documents:
Annual/Semiannual Reports While the prospectus describes the fund's potential
investments, these reports detail the fund's actual investments as of the report
date. Reports include a discussion by fund management of recent economic and
market trends and fund performance. The annual report also includes the report
of the fund's independent accountants.
Statement of Additional Information (SAI) A supplement to the prospectus, the
SAI contains further information about the fund and its investment limitations
and policies. It also includes the most recent annual report and the independent
accountants' report. A current SAI for this fund is on file with the Securities
and Exchange Commission and is incorporated by reference (is legally part of
this prospectus).
prospectus
--------------
<PAGE>
STATE STREET RESEARCH INVESTMENT TRUST
a Series of
STATE STREET RESEARCH MASTER INVESTMENT TRUST
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1998
TABLE OF CONTENTS
Page
INVESTMENT OBJECTIVE......................................................2
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS...........................2
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES....................................4
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS..........................14
THE TRUST, THE FUND AND ITS SHARES.......................................19
TRUSTEES AND OFFICERS....................................................20
INVESTMENT ADVISORY SERVICES.............................................25
PURCHASE AND REDEMPTION OF SHARES........................................27
SHAREHOLDER ACCOUNTS.....................................................32
NET ASSET VALUE..........................................................36
PORTFOLIO TRANSACTIONS...................................................37
CERTAIN TAX MATTERS......................................................41
DISTRIBUTION OF SHARES OF THE FUND.......................................43
CALCULATION OF PERFORMANCE DATA..........................................48
CUSTODIAN................................................................51
INDEPENDENT ACCOUNTANTS..................................................52
FINANCIAL STATEMENTS.....................................................52
The following Statement of Additional Information is not a Prospectus.
It should be read in conjunction with the Prospectus of State Street Research
Investment Trust (the "Fund") dated May 1, 1998, which may be obtained without
charge from the offices of State Street Research Master Investment Trust (the
"Trust") or State Street Research Investment Services, Inc. (the "Distributor"),
One Financial Center, Boston, Massachusetts 02111-2690.
<PAGE>
INVESTMENT OBJECTIVE
As set forth under "The Fund--Goal and Strategy--Fundamental Goal" in
the Prospectus of State Street Research Investment Trust (the "Fund"), the
Fund's investment goal, which is to seek long-term growth of capital and,
secondarily, long-term growth of income, is fundamental and may not be changed
by the Fund except by the affirmative vote of a majority of the outstanding
voting securities of the Fund, as defined in the Investment Company Act of 1940,
as amended (the "1940 Act"). (Under the 1940 Act, a "vote of the majority of the
outstanding voting securities" means the vote, at the annual or a special
meeting of security holders duly called, (i) of 67% or more of the voting
securities present at the meeting if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy or (ii) of
more than 50% of the outstanding voting securities, whichever is less.)
ADDITIONAL INVESTMENT POLICIES AND RESTRICTIONS
As set forth under "Investment Trust--Portfolio Risks" and "Other
Securities and Risks" in the Fund's Prospectus, the Fund has adopted certain
investment restrictions, and those investment restrictions are either
fundamental or not fundamental. Fundamental restrictions may not be changed by
the Fund except by the affirmative vote of a majority of the outstanding voting
securities of the Fund. Restrictions that are not fundamental may be changed by
a vote of a majority of the Trustees of the Trust.
The Fund's fundamental investment restrictions are set forth below.
Under these restrictions, it is the Fund's policy:
(1) not to purchase a security of any one issuer (other than
securities issued or guaranteed as to principal or interest by
the U.S. Government or its agencies or instrumentalities or
mixed-ownership Government corporations) if such purchase
would, with respect to 75% of the Fund's total assets, cause
more than 5% of the Fund's total assets to be invested in the
securities of such issuer or cause more than 10% of the voting
securities of such issuer to be held by the Fund;
(2) not to purchase securities of any issuer that has a record of
less than three years' continuous operation if such purchase
would cause more than 5% of the Fund's total assets (taken at
market value) to be invested in the securities of such
issuers, provided that any such three-year period may include
the operation of any predecessor company, partnership, or
individual enterprise if the issuer whose securities are to be
purchased came into existence as a result of a merger,
consolidation, reorganization, or the purchase of
substantially all the assets of such predecessor;
2
<PAGE>
(3) not to make any investment that would cause more than 25% of
the Fund's total assets, taken at market value, to be invested
in any one industry;
(4) not to issue senior securities other than in connection with
the borrowing of money as permitted under sub-paragraph (9) of
this paragraph;
(5) not to underwrite or participate in the marketing of
securities of other issuers although the Fund may, acting
alone or in syndicates or groups, purchase or otherwise
acquire securities of other issuers for, investment, either
from issuers or from persons in a control relationship with
the issuers or from underwriters of such securities [as a
matter of interpretation, which is not part of the fundamental
policy, this restriction does not apply to the extent that, in
connection with the disposition of the Fund's securities, the
Fund may be deemed to be an underwriter under certain federal
securities laws];
(6) not to make any investment in real property, although the Fund
may purchase and sell other interests in real estate,
including securities which are secured by real estate, or
securities of companies which own or invest or deal in real
estate;
(7) not to invest in commodities or commodity contracts except for
futures and options on futures with respect to securities and
securities indices;
(8) not to lend money; however, the Fund may lend portfolio
securities and purchase bonds, debentures notes, bills and any
other debt-related instruments or interests (and enter into
repurchase agreements with respect thereto);
(9) not to borrow money except on an unsecured basis and then only
up to an amount equal to 10% of its net assets (see
"Additional Information Concerning Certain Investment
Techniques--Other Techniques" herein);
(10) not to purchase securities for its portfolio on margin, except
that this shall not prevent such short term credits as are
necessary for the clearance of transactions, and except that
the Fund may use escrow or custodian receipts or letters,
margin or safekeeping accounts, or enter into similar industry
arrangements in connection with trading futures and options;
(11) not to make a short sale of any securities, or purchase or
write puts, calls, straddles or spreads except in connection
with options on securities and securities indices and options
on futures with respect to securities and securities indices;
(12) 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
3
<PAGE>
(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);
(13) not to purchase securities for its portfolio issued by another
investment company except by a purchase in the open market
involving no more than customary brokers' commissions or to
complete a merger, consolidation or other acquisition of
assets; and
(14) not to purchase or retain any securities of an issuer if, to
the knowledge of the Fund, those of its officers and Trustees
and those officers and Directors of its investment adviser who
individually own more than 1/2 of 1% of the securities of such
issuer, when combined, own more than 5% of such issuer taken
at market.
The following investment restrictions are not fundamental. Under these
restrictions, it is the Fund's policy:
(1) not to purchase any security or enter into a repurchase agreement
if as a result more than 15% of its net assets would be invested in securities
that are illiquid (including repurchase agreements not entitling the holder to
payment of principal and interest within seven days); and
(2) not to make investments for the purpose of exercising control or
management of other companies although the Fund may from time to time present
its views on various matters to the management of companies in which it holds an
investment.
ADDITIONAL INFORMATION CONCERNING
CERTAIN INVESTMENT TECHNIQUES
Derivatives
The Fund may buy and sell certain types of derivatives, such as
options, futures contracts, options on futures contracts, and swaps under
circumstances in which such instruments are expected by State Street Research &
Management Company (the "Investment Manager") to aid in achieving the Fund's
investment objective. The Fund may also purchase instruments with
characteristics of both futures and securities (e.g., debt instruments with
interest and principal payments determined by reference to the value of a
commodity or a currency at a future time) and which, therefore, possess the
risks of both futures and securities investments.
Derivatives, such as options, futures contracts, options on futures
contracts, and swaps enable the Fund to take both "short" positions (positions
which anticipate a decline in the market value of a particular asset or index)
and "long" positions (positions which anticipate an
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increase in the market value of a particular asset or index). The Fund may also
use strategies which involve simultaneous short and long positions in response
to specific market conditions, such as where the Investment Manager anticipates
unusually high or low market volatility.
The Investment Manager may enter into derivative positions for the Fund
for either hedging or non-hedging purposes. The term hedging is applied to
defensive strategies designed to protect the Fund from an expected decline in
the market value of an asset or group of assets that the Fund owns (in the case
of a short hedge) or to protect the Fund from an expected rise in the market
value of an asset or group of assets which it intends to acquire in the future
(in the case of a long or "anticipatory" hedge). Non-hedging strategies include
strategies designed to produce incremental income (such as the option writing
strategy described below) or "speculative" strategies, which are undertaken to
profit from (i) an expected decline in the market value of an asset or group of
assets which the Fund does not own or (ii) expected increases in the market
value of an asset which it does not plan to acquire. Information about specific
types of instruments is provided below.
Futures Contracts. Futures contracts are publicly traded contracts to
buy or sell an underlying asset or group of assets, such as a currency or an
index of securities, at a future time at a specified price. A contract to buy
establishes a long position while a contract to sell establishes a short
position.
The purchase of a futures contract on an equity security or an index of
equity securities normally enables a buyer to participate in the market movement
of the underlying asset or index after paying a transaction charge and posting
margin in an amount equal to a small percentage of the value of the underlying
asset or index. The Fund will initially be required to deposit with the Trust's
custodian or the broker effecting the futures transaction an amount of "initial
margin" in cash or securities, as permitted under applicable regulatory
policies.
Initial margin in futures transactions is different from margin in
securities transactions in that the former does not involve the borrowing of
funds by the customer to finance the transaction. Rather, the initial margin is
like a performance bond or good faith deposit on the contract. Subsequent
payments (called "maintenance margin") to and from the broker will be made on a
daily basis as the price of the underlying asset fluctuates. This process is
known as "marking to market." For example, when the Fund has taken a long
position in a futures contract and the value of the underlying asset has risen,
that position will have increased in value and the Fund will receive from the
broker a maintenance margin payment equal to the increase in value of the
underlying asset. Conversely, when the Fund has taken a long position in a
futures contract and the value of the underlying instrument has declined, the
position would be less valuable, and the Fund would be required to make a
maintenance margin payment to the broker.
At any time prior to expiration of the futures contract, the Fund may
elect to close the position by taking an opposite position which will terminate
the Fund's position in the futures contract. A final determination of
maintenance margin is then made, additional cash is
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required to be paid by or released to the Fund, and the Fund realizes a loss or
a gain. While futures contracts with respect to securities do provide for the
delivery and acceptance of such securities, such delivery and acceptance are
seldom made.
In transactions establishing a long position in a futures contract,
assets equal to the face value of the futures contract will be identified by the
Fund to the Trust's custodian for maintenance in a separate account to insure
that the use of such futures contracts is unleveraged. Similarly, assets having
a value equal to the aggregate face value of the futures contract will be
identified with respect to each short position. The Fund will utilize such
assets and methods of cover as appropriate under applicable exchange and
regulatory policies.
Options. The Fund may use options to implement its investment strategy.
There are two basic types of options: "puts" and "calls." Each type of option
can establish either a long or a short position, depending upon whether the Fund
is the purchaser or the writer of the option. A call option on a security, for
example, gives the purchaser of the option the right to buy, and the writer the
obligation to sell, the underlying asset at the exercise price during the option
period. Conversely, a put option on a security gives the purchaser the right to
sell, and the writer the obligation to buy, the underlying asset at the exercise
price during the option period.
Purchased options have defined risk, that is, the premium paid for the
option, no matter how adversely the price of the underlying asset moves, while
affording an opportunity for gain corresponding to the increase or decrease in
the value of the optioned asset. In general, a purchased put increases in value
as the value of the underlying security falls and a purchased call increases in
value as the value of the underlying security rises.
The principal reason to write options is to generate extra income (the
premium paid by the buyer). Written options have varying degrees of risk. An
uncovered written call option theoretically carries unlimited risk, as the
market price of the underlying asset could rise far above the exercise price
before its expiration. This risk is tempered when the call option is covered,
that is, when the option writer owns the underlying asset. In this case, the
writer runs the risk of the lost opportunity to participate in the appreciation
in value of the asset rather than the risk of an out-of-pocket loss. A written
put option has defined risk, that is, the difference between the agreed-upon
price that the Fund must pay to the buyer upon exercise of the put and the
value, which could be zero, of the asset at the time of exercise.
The obligation of the writer of an option continues until the writer
effects a closing purchase transaction or until the option expires. To secure
its obligation to deliver the underlying asset in the case of a call option, or
to pay for the underlying asset in the case of a put option, a covered writer is
required to deposit in escrow the underlying security or other assets in
accordance with the rules of the applicable clearing corporation and exchanges.
Among the options which the Fund may enter are options on securities
indices. In general, options on indices of securities are similar to options on
the securities themselves
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except that delivery requirements are different. For example, a put option on an
index of securities does not give the holder the right to make actual delivery
of a basket of securities but instead gives the holder the right to receive an
amount of cash upon exercise of the option if the value of the underlying index
has fallen below the exercise price. The amount of cash received will be equal
to the difference between the closing price of the index and the exercise price
of the option expressed in dollars times a specified multiple. As with options
on equity securities, or futures contracts, a Fund may offset its position in
index options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
A securities index assigns relative values to the securities included
in the index and the index options are based on a broad market index. In
connection with the use of such options, the Fund may cover its position by
identifying assets having a value equal to the aggregate face value of the
option position taken.
Options on Futures Contracts. An option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call and a short position
if the option is a put) at a specified exercise price at any time during the
period of the option.
Limitations and Risks of Options and Futures Activity. The Fund may not
establish a position in a commodity futures contract or purchase or sell a
commodity option contract for other than bona fide hedging purposes if
immediately thereafter the sum of the amount of initial margin deposits and
premiums required to establish such positions for such nonhedging purposes would
exceed 5% of the market value of the Fund's net assets. The Fund applies a
similar policy to options that are not commodities.
As noted above, the Fund may engage in both hedging and nonhedging
strategies. Although effective hedging can generally capture the bulk of a
desired risk adjustment, no hedge is completely effective. The Fund's ability to
hedge effectively through transactions in futures and options depends on the
degree to which price movements in its holdings correlate with price movements
of the futures and options.
Nonhedging strategies typically involve special risks. The
profitability of the Fund's nonhedging strategies will depend on the ability of
the Investment Manager to analyze both the applicable derivatives market and the
market for the underlying asset or group of assets. Derivatives markets are
often more volatile than corresponding securities markets and a relatively small
change in the price of the underlying asset or group of assets can have a
magnified effect upon the price of a related derivative instrument.
Derivatives markets also are often less liquid than the market for the
underlying asset or group of assets. Some positions in futures and options may
be closed out only on an exchange which provides a secondary market therefor.
There can be no assurance that a liquid secondary market will exist for any
particular futures contract or option at any specific time.
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Thus, it may not be possible to close such an option or futures position prior
to maturity. The inability to close options and futures positions also could
have an adverse impact on the Fund's ability to effectively carry out their
derivative strategies and might, in some cases, require a Fund to deposit cash
to meet applicable margin requirements. The Fund will enter into an option or
futures position only if it appears to be a liquid investment.
Swaps. The Fund may enter into various forms of swap arrangements with
counterparties with respect to interest rates, currency rates or indices,
including purchase of caps, floors and collars as described below. In an
interest rate swap the Fund could agree for a specified period to pay a bank or
investment banker the floating rate of interest on a so-called notional
principal amount (i.e., an assumed figure selected by the parties for this
purpose) in exchange for agreement by the bank or investment banker to pay the
Fund a fixed rate of interest on the notional principal amount. In a currency
swap the Fund would agree with the other party to exchange cash flows based on
the relative differences in values of a notional amount of two (or more)
currencies; in an index swap, the Fund would agree to exchange cash flows on a
notional amount based on changes in the values of the selected indices. Purchase
of a cap entitles the purchaser to receive payments from the seller on a
notional amount to the extent that the selected index exceeds an agreed upon
interest rate or amount whereas purchase of a floor entitles the purchaser to
receive such payments to the extent the selected index falls below an agreed
upon interest rate or amount. A collar combines a cap and a floor.
The Fund may enter credit protection swap arrangements involving the
sale by the Fund of a put option on a debt security which is exercisable by the
buyer upon certain events, such as a default by the referenced creditor on the
underlying debt or a bankruptcy event of the creditor.
Most swaps entered into by the Fund will be on a net basis; for
example, in an interest rate swap, amounts generated by application of the fixed
rate and the floating rate to the notional principal amount would first offset
one another, with the Fund either receiving or paying the difference between
such amounts. In order to be in a position to meet any obligations resulting
from swaps, the Fund will set up a segregated custodial account to hold
appropriate liquid assets, including cash; for swaps entered into on a net
basis, assets will be segregated having a daily net asset value equal to any
excess of the Fund's accrued obligations over the accrued obligations of the
other party, while for swaps on other than a net basis assets will be segregated
having a value equal to the total amount of the Fund's obligations.
These arrangements will be made primarily for hedging purposes, to
preserve the return on an investment or on a portion of the Fund's portfolio.
However, the Fund may, as noted above, enter into such arrangements for income
purposes to the extent permitted by the Commodities Futures Trading Commission
for entities which are not commodity pool operators, such as the Fund. In
entering a swap arrangement, the Fund is dependent upon the creditworthiness and
good faith of the counterparty. The Fund attempts to reduce the risks of
nonperformance by the counterparty by dealing only with established, reputable
institutions. The swap market is still relatively new and emerging; positions in
swap arrangements may
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<PAGE>
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 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.
Repurchase Agreements
The Fund may enter into repurchase agreements. Repurchase agreements
occur when the Fund acquires a security and the seller, which may be either (i)
a primary dealer in U.S. Government securities or (ii) an FDIC-insured bank
having gross assets in excess of $500 million, simultaneously commits to
repurchase it at an agreed-upon price on an agreed-upon date within a specified
number of days (usually not more than seven) from the date of purchase. The
repurchase price reflects the purchase price plus an agreed-upon market rate of
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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 net 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 15% of the
Fund's net assets.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements. However, the
Fund may not engage in reverse repurchase agreements in excess of 5% of the
Fund's total assets. In a reverse repurchase agreement the Fund transfers
possession of a portfolio instrument to another person, such as a financial
institution, broker or dealer, in return for a percentage of the instrument's
market value in cash, and agrees that on a stipulated date in the future the
Fund will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed-upon rate. The ability to use reverse
repurchase agreements may enable, but does not ensure the ability of, the Fund
to avoid selling portfolio instruments at a time when a sale may be deemed to be
disadvantageous.
When effecting reverse repurchase agreements, assets of the Fund in a
dollar amount sufficient to make payment of the obligations to be purchased are
segregated on the Fund's records at the trade date and maintained until the
transaction is settled.
When-Issued Securities
The Fund may purchase "when-issued" securities, which are traded on a
price or yield basis prior to actual issuance. Such purchases will be made only
to achieve the Fund's investment objective and not for leverage. The when-issued
trading period generally lasts from a few days to months, or over a year or
more; during this period dividends or interest on the securities are not
payable. A frequent form of when-issued trading occurs when corporate securities
to be created by a merger of companies are traded prior to the actual
consummation of the merger. Such transactions may involve a risk of loss if the
value of the securities falls below the price committed to prior to actual
issuance. The Trust's custodian will establish a segregated account when the
Fund purchases securities on a when-issued basis consisting of cash or liquid
securities equal to the amount of the when-issued commitments. Securities
transactions involving delayed deliveries or forward commitments are frequently
characterized as when-issued transactions and are similarly treated by the Fund.
Restricted Securities
It is the Fund's policy not to make an investment in restricted
securities, including restricted securities sold in accordance with Rule 144A
under the Securities Act of 1933 ("Rule 144A Securities") if, as a result, more
than 35% of the Fund's total assets are invested in
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restricted securities, provided not more than 10% of the Fund's total assets are
invested in restricted securities other than Rule 144A Securities.
Securities may be resold pursuant to Rule 144A under certain
circumstances only to qualified institutional buyers as defined in the rule, and
the markets and trading practices for such securities are relatively new and
still developing; depending on the development of such markets, Rule 144A
Securities may be deemed to be liquid as determined by or in accordance with
methods adopted by the Trustees. Under such methods the following factors are
considered, among others: the frequency of trades and quotes for the security,
the number of dealers and potential purchasers in the market, market making
activity, and the nature of the security and marketplace trades. Investments in
Rule 144A Securities could have the effect of increasing the level of the Fund's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing such securities. Also, the Fund may be
adversely impacted by the subjective valuation of such securities in the absence
of a market for them. Restricted securities that are not resalable under Rule
144A may be subject to risks of illiquidity and subjective valuations to a
greater degree than Rule 144A Securities.
Foreign Investments
The Fund reserves the right to invest without limitation in securities
of non-U.S. issuers directly, or indirectly in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs"). Under current
policy, however, the Fund limits such investments, including ADRs and EDRs, to a
maximum of 35% of its total assets.
ADRs are receipts, typically issued by a U.S. bank or trust company,
which evidence ownership of underlying securities issued by a foreign
corporation or other entity. EDRs are receipts issued in Europe which evidence a
similar ownership arrangement. Generally, ADRs in registered form are designed
for use in U.S. securities markets and EDRs are designed for use in European
securities markets. The underlying securities are not always denominated in the
same currency as the ADRs or EDRs. Although investment in the form of ADRs or
EDRs facilitates trading in foreign securities, it does not mitigate all the
risks associated with investing in foreign securities.
ADRs are available through facilities which may be either "sponsored"
or "unsponsored." In a sponsored arrangement, the foreign issuer establishes the
facility, pays some or all of the depository's fees, and usually agrees to
provide shareholder communications. In an unsponsored arrangement, the foreign
issuer is not involved, and the ADR holders pay the fees of the depository.
Sponsored ADRs are generally more advantageous to the ADR holders and the issuer
than are unsponsored ADRs. More and higher fees are generally charged in an
unsponsored program compared to a sponsored facility. Only sponsored ADRs may be
listed on the New York or American Stock Exchanges. Unsponsored ADRs may prove
to be more risky due to (a) the additional costs involved to the Fund; (b) the
relative illiquidity of the issue in U.S. markets; and (c) the possibility of
higher trading costs in the over-the-counter market as opposed to exchange based
tradings. The Fund
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<PAGE>
will take these and other risk considerations into account before making an
investment in an unsponsored ADR.
The risks associated with investments in foreign securities include
those resulting from fluctuations in currency exchange rates, revaluation of
currencies, future political and economic developments, including the risks of
nationalization or expropriation, the possible imposition of currency exchange
blockages, higher operating expenses, foreign withholding and other taxes which
may reduce investment return, reduced availability of public information
concerning issuers, the difficulties in obtaining and enforcing a judgment
against a foreign issuer and the fact that foreign issuers are not generally
subject to uniform accounting, auditing and financial reporting standards or to
other regulatory practices and requirements comparable to those applicable to
domestic issuers. Moreover, securities of many foreign issuers may be less
liquid and their prices more volatile than those of securities of comparable
domestic issuers.
These risks are usually higher in less-developed countries. Such
countries include countries that have an emerging stock market on which trade a
small number of securities and/or countries with economies that are based on
only a few industries. The Fund may invest in the securities of issuers in
countries with less developed economies as deemed appropriate by the Investment
Manager. However, it is anticipated that a majority of the foreign investments
by the Fund will consist of securities of issuers in countries with developed
economies.
Securities Lending
The Fund may lend portfolio securities with a value of up to 33-1/3% of
its total assets. The Fund will receive cash or cash equivalents (e.g., U.S.
Government obligations) as collateral in an amount equal to at least 100% of the
current market value of any loaned securities plus accrued interest. Collateral
received by the Fund will generally be held in the form tendered, although cash
may be invested in unaffiliated mutual funds with quality short-term portfolios,
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities or certain unaffiliated mutual funds, irrevocable stand-by
letters of credit issued by a bank, or repurchase agreements, or other similar
investments. The investing of cash collateral received from loaning portfolio
securities involves leverage which magnifies the potential for gain or loss on
monies invested and, therefore, results in an increase in the volatility of the
Fund's outstanding securities. Such loans may be terminated at any time.
The Fund will retain rights to dividends, interest or other
distributions, on the loaned securities. Voting rights pass with the lending,
although the Fund may call loans to vote proxies if desired. Should the borrower
of the securities fail financially, there is a risk of delay in recovery of the
securities or loss of rights in the collateral. Loans are made only to
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borrowers which are deemed by the Investment Manager or its agents to be of good
financial standing.
Short-Term Trading
The Fund may engage in short-term trading of securities and reserves
full freedom with respect to portfolio turnover. In periods where there are
rapid changes in economic conditions and security price levels or when
reinvestment strategy changes significantly, portfolio turnover may be higher
than during times of economic and market price stability or when investment
strategy remains relatively constant. The Fund's portfolio turnover rate may
involve greater transaction costs, relative to other funds in general, and may
have tax and other consequences.
Temporary and Defensive Investments
The Fund may hold up to 100% of its assets in cash or short-term debt
securities for temporary defensive purposes. The Fund will adopt a temporary
defensive position when, in the opinion of the Investment Manager, such a
position is more likely to provide protection against adverse market conditions
than adherence to the Fund's other investment policies. The types of short-term
instruments in which the Fund may invest for such purposes include short-term
money market securities, such as repurchase agreements, and securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities,
certificates of deposit, time deposits and bankers' acceptances of certain
qualified financial institutions and corporate commercial paper, which at the
time of purchase are rated at least within the "A" major rating category by
Standard & Poor's Corporation ("S&P") or the "Prime" major rating category by
Moody's Investor's Service, Inc. ("Moody's"), or, if not rated, issued by
companies having an outstanding long-term unsecured debt issued rated at least
within the "A" category by S&P or Moody's.
Industry Classifications
In determining how much of the Fund's portfolio is invested in a given
industry, the following industry classifications are currently used. Securities
issued or guaranteed as to principal or interest by the U.S. Government or its
agencies or instrumentalities or mixed-ownership Government corporations or
sponsored enterprises (including repurchase agreements involving U.S. Government
securities to the extent excludable under relevant regulatory interpretations)
are excluded. Securities issued by foreign governments are also excluded.
Companies engaged in the business of financing may be classified according to
the industries of their parent or sponsor companies or industries that otherwise
most affect such financing companies. Issuers of asset-backed pools will be
classified as separate industries based on the nature of the underlying assets,
such as mortgages and credit card receivables. "Asset-backed-Mortgages" includes
private pools of nongovernment backed mortgages.
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Science &
Basic Industries Consumer Staple Technology
- ---------------- --------------- -----------
Chemical Business Service Aerospace
Diversified Container Computer Software
Electrical Equipment Drug & Service
Forest Products Food & Beverage Electronic
Machinery Hospital Supply Components
Metal & Mining Personal Care Electronic
Railroad Printing & Publishing Equipment
Truckers Tobacco Office Equipment
Utility Energy Consumer Cyclical
- ------- ------ -----------------
Electric Oil Refining & Marketing Airline
Gas Oil Production Automotive
Gas Transmission Oil Service Building
Telephone Hotel & Restaurant
Photography
Recreation
Other Finance Retail Trade
- ----- ------- Textile & Apparel
Trust Certificates-- Bank
Government Related Lending Financial Service
Asset-backed--Mortgages Insurance
Asset-backed--Credit Card
Receivables
Other Investment Limitations
Although the Fund is permitted to borrow up to 10% of its net assets,
the Fund has no present intention to engage in any borrowing except for
temporary purposes and has no intention to borrow for leverage purposes. For
purposes of this restriction, reverse repurchase agreements shall constitute
borrowings subject to the 10% limitation on all borrowing. The Fund will not
purchase any securities for its portfolio while outstanding borrowings exceed 5%
of the Fund's net assets; any borrowing in excess of 5% of its total assets
would be from banks.
DEBT INSTRUMENTS AND PERMITTED CASH INVESTMENTS
The Fund may invest in long-term and short-term debt securities.
Certain debt securities and money market instruments in which the Fund may
invest are described below.
Managing Volatility. In administering the Fund's portfolio, the
Investment Manager attempts to manage volatility in part by managing the
duration and weighted average maturity of the Fund's bond position.
Duration is an indicator of the expected volatility of a bond position
in response to changes in interest rates. In calculating duration, the Fund
measures the average time required to receive all cash flows associated with
those debt securities held in the Fund's portfolio -- representing payments of
principal and interest -- by considering the timing, frequency and amount of
payment expected from each portfolio security. The higher the duration, the
greater the gains and losses when interest rates change. Duration generally is a
more accurate measure of potential volatility with a portfolio composed of
high-quality debt securities, such as U.S. government securities, municipal
securities and high-grade U.S. corporate bonds, than with lower-grade
securities.
The Investment Manager may use several methods to manage the duration
of the Fund's bond position in order to increase or decrease its exposure to
changes in interest rates. First, the Investment Manager may adjust portfolio
duration by adjusting the mix of debt securities held by the Fund. For example,
if the Investment Manager intends to shorten duration, it may sell debt
instruments that individually have a long duration and purchase other debt
instruments that individually have a shorter duration. Among the factors that
will affect a debt security's duration are the length of time to maturity, the
timing of interest and principal payments, and whether the terms of the security
give the issuer of the security the right to call the security prior to
maturity. Second, the Investment Manager may adjust bond portfolio duration
using derivative transactions, especially with interest rate futures and options
contracts. For example, if the Investment Manager wants to lengthen the duration
of the Fund's bond position, it could purchase interest rate futures contracts
instead of buying longer-term bonds or selling shorter-term bonds. Similarly,
during periods of lower interest rate volatility, the Investment Manager may use
a technique to extend duration in the event rates rise by writing an out-of-the-
money put option and receiving premium income with the expectation that the
option could be exercised. In managing duration, the use of such derivatives may
be faster and more efficient than trading specific portfolio securities.
Weighted average maturity is another indicator of potential volatility
used by the Investment Manager with respect to the Fund's bond portfolio,
although for certain types of debt securities, such as high quality debt
securities, it is not as accurate as duration in quantifying potential
volatility. Weighted average maturity is the average of all maturities of the
individual debt securities held by the Fund, weighted by the market value of
each security. Generally, the longer the weighted average maturity, the more
bond prices will vary in response to changes in interest rates.
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
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as described herein. The U.S. Government securities in which the Fund invests
include, among others:
[bullet] direct obligations of the U.S. Treasury, i.e., U.S. Treasury bills,
notes, certificates and bonds;
[bullet] obligations of U.S. Government agencies or instrumentalities, such as
the Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal
National Mortgage Association, the Government National Mortgage
Association and the Federal Home Loan Mortgage Corporation; and
[bullet] obligations of mixed-ownership Government corporations such as
Resolution Funding Corporation.
U.S. Government securities which the Fund may buy are backed in a
variety of ways by the U.S. Government, its agencies or instrumentalities. Some
of these obligations, such as Government National Mortgage Association
mortgage-backed securities, are backed by the full faith and credit of the U.S.
Treasury. Other obligations, such as those of the Federal National Mortgage
Association, are backed by the discretionary authority of the U.S. Government to
purchase certain obligations of agencies or instrumentalities, although the U.S.
Government has no legal obligation to do so. Obligations such as those of the
Federal Home Loan Banks, the Federal Farm Credit Banks, the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation are backed
by the credit of the agency or instrumentality issuing the obligations. Certain
obligations of Resolution Funding Corporation, a mixed-ownership Government
corporation, are backed with respect to interest payments by the U.S. Treasury,
and with respect to principal payments by U.S. Treasury obligations held in a
segregated account with a Federal Reserve Bank. Except for certain
mortgage-related securities, the Fund will only invest in obligations issued by
mixed-ownership Government corporations where such securities are guaranteed as
to payment of principal or interest by the U.S. Government or a U.S. Government
agency or instrumentality, and any unguaranteed principal or interest is
otherwise supported by U.S. Government obligations held in a segregated account.
U.S. Government securities may be acquired by the Fund in the form of
separately traded principal and interest components of securities issued or
guaranteed by the U.S. Treasury. The principal and interest components of
selected securities are traded independently under the Separate Trading of
Registered Interest and Principal of Securities ("STRIPS") program. Under the
STRIPS program, the principal and interest components are individually numbered
and separately issued by the U.S. Treasury at the request of depository
financial institutions, which then trade the component parts independently.
Obligations of Resolution Funding Corporation are similarly divided into
principal and interest components and maintained as such on the book entry
records of the Federal Reserve Banks.
15
<PAGE>
In addition, the Fund may invest in custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
U.S. Treasury notes or bonds in connection with programs sponsored by banks and
brokerage firms. Such notes and bonds are held in custody by a bank on behalf of
the owners of the receipts. These custodial receipts are known by various names,
including "Treasury Receipts" ("TRs"), "Treasury Investment Growth Receipts"
("TIGRs") and "Certificates of Accrual on Treasury Securities" ("CATS"), and may
not be deemed U.S. Government securities.
The Fund may also invest from time to time in collective investment
vehicles, the assets of which consist principally of U.S. Government securities
or other assets substantially collateralized or supported by such securities,
such as Government trust certificates.
Bank Money Investments. Bank money investments include, but are not
limited to, certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are generally short-term (i.e., less than one year),
interest-bearing negotiable certificates issued by commercial banks or savings
and loan associations against funds deposited in the issuing institution. A
banker's acceptance is a time draft drawn on a commercial bank by a borrower,
usually in connection with an international commercial transaction (to finance
the import, export, transfer or storage of goods). A banker's acceptance may be
obtained from a domestic or foreign bank, including a U.S. branch or agency of a
foreign bank. The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
secondary markets prior to maturity. Time deposits are nonnegotiable deposits
for a fixed period of time at a stated interest rate. The Fund will not invest
in any such bank money investment unless the investment is issued by a U.S. bank
that is a member of the Federal Deposit Insurance Corporation ("FDIC"),
including any foreign branch thereof, a U.S. branch or agency of a foreign bank,
a foreign branch of a foreign bank, or a savings bank or savings and loan
association that is a member of the FDIC and which at the date of investment has
capital, surplus and undivided profits (as of the date of its most recently
published financial statements) in excess of $50 million. The Fund will not
invest in time deposits maturing in more than seven days and will not invest
more than 10% of its total assets in time deposits maturing in two to seven
days.
U.S. branches and agencies of foreign banks are offices of foreign
banks and are not separately incorporated entities. They are chartered and
regulated either federally or under state law. U.S. federal branches or agencies
of foreign banks are chartered and regulated by the Comptroller of the Currency,
while state branches and agencies are chartered and regulated by authorities of
the respective states or the District of Columbia. U.S. branches of foreign
banks 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.
16
<PAGE>
Short-Term Corporate Debt Instruments. Short-term corporate debt
instruments include commercial paper to finance short-term credit needs (i.e.,
short-term, unsecured promissory notes) issued by corporations including but not
limited to (a) domestic or foreign bank holding companies or (b) their
subsidiaries or affiliates where the debt instrument is guaranteed by the bank
holding company or an affiliated bank or where the bank holding company or the
affiliated bank is unconditionally liable for the debt instrument. Commercial
paper is usually sold on a discounted basis and has a maturity at the time of
issuance not exceeding nine months.
Commercial Paper Ratings. Commercial paper investments at the time of
purchase will be rated within the "A" major rating category by S&P or within the
"Prime" major rating category by Moody's, or, if not rated, issued by companies
having an outstanding long-term unsecured debt issue rated at least within the
"A" category by S&P or by Moody's. The money market investments in corporate
bonds and debentures (which must have maturities at the date of settlement of
one year or less) must be rated at the time of purchase at least within the "A"
category by S&P or within the "Prime" category by Moody's.
Commercial paper rated within the "A" category (highest quality) by S&P
is issued by entities which have liquidity ratios which are adequate to meet
cash requirements. Long-term senior debt is rated within the "A" category or
better, although in some cases credits within the "BBB" category may be allowed.
The issuer has access to at least two additional channels of borrowing. Basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances. Typically, the issuer's industry is well established and the
issuer has a strong position within the industry. The reliability and quality of
management are unquestioned. The relative strength or weakness of the above
factors determines whether the issuer's commercial paper is rated A-1, A-2 or
A-3. (Those A-1 issues determined to possess overwhelming safety characteristics
are denoted with a plus (+) sign: A-1+.)
The rating Prime is the highest commercial paper rating category
assigned by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: evaluation of the management of the issuer; economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; evaluation of the
issuer's products in relation to competition and customer acceptance; liquidity;
amount and quality of long-term debt; trend of earnings over a period of 10
years; financial management of obligations which may be present or may arise as
a result of public interest questions and preparations to meet such obligations.
These factors are all considered in determining whether the commercial paper is
rated Prime-1, Prime-2 or Prime-3.
In the event the lowering of ratings of debt instruments held by the
Fund by applicable rating agencies results in a material decline in the overall
quality of the Fund's portfolio, the Trustees of the Trust will review the
situation and take such action as they deem in the best interests of the Fund's
shareholders, including, if necessary, changing the composition of the
portfolio.
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<PAGE>
Rating Categories of Debt Securities. Set forth below is a description
of S&P corporate bond and debenture rating categories for securities which are
deemed to be investment grade:
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Plus (+) or Minus (-): The ratings from AA to BBB may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
S&P may attach the "r" symbol to derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to noncredit risks created by the terms of the
obligation, such as securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only (IO) and principal only (PO) mortgage securities.
Set forth below is a description of Moody's corporate bond and
debenture ratings for securities which are deemed to be investment grade:
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt-edge." Interest payments are protected by a large or by an
exceptionally stable margin, and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally know 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 then in Aaa securities.
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<PAGE>
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
1, 2, or 3: The ratings from Aa through Baa may be modified by the
addition of a numeral indicating a bond's rank within its major rating category.
THE TRUST, THE FUND AND ITS SHARES
State Street Research Master Investment Trust is currently comprised of
only one series: State Street Research Investment Trust. The Trustees of the
Trust have authority to issue an unlimited number of shares of beneficial
interest of separate series, $.001 par value per share. The Trustees also have
authority, without the necessity of a shareholder vote, to create any number of
new series or classes or to commence the public offering of shares of any
previously established series or classes. 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 authorized shares of the Fund to be issued in four
classes: Class A, Class B, Class C and Class S shares. Prior to November 1,
1997, the Fund's current Class C shares were designated as Class D shares and
the Fund's current Class S shares were designated as Class C shares.
Each share of each class of shares represents an identical legal
interest in the same portfolio of investments of the Fund, has the same rights
and is identical in all respects, except that Class A, Class B and Class C
shares bear the expenses of the deferred sales arrangement and any expenses
(including the higher service and distribution fees) resulting from such sales
arrangement, and certain other incremental expenses related to a class. Each
class will have exclusive voting rights with respect to provisions of the Rule
12b-1 distribution plan pursuant to which the service and distribution fees, if
any, are paid. Although the legal rights of holders of each class of shares are
identical, it is likely that the different expenses borne by each class will
result in different net asset values and dividends. The different classes of
shares of the Fund also have different exchange privileges. Except for those
differences between classes of shares described above, in the Fund's Prospectus
and otherwise this Statement of Additional Information, each share of the Fund
has equal dividend, redemption
19
<PAGE>
and liquidation rights with other shares of the Fund, and when issued, is fully
paid and nonassessable by the Fund.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have a material, adverse effect on
the rights of any shareholder. On any matter submitted to the shareholders, the
holder of a Fund share is entitled to one vote per share (with proportionate
voting for fractional shares) regardless of the relative net asset value
thereof.
Under the Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there ordinarily will be no shareholder meetings
unless required by the 1940 Act. Except as otherwise provided under the 1940
Act, the Board of Trustees will be a self-perpetuating body until fewer than
two-thirds of the Trustees serving as such are Trustees who were elected by
shareholders of the Trust. In the event less than a majority of the Trustees
serving as such were elected by shareholders of the Trust, a meeting of
shareholders will be called to elect Trustees. Under the Master Trust Agreement,
any Trustee may be removed by vote of two-thirds of the outstanding Trust
shares; holders of 10% or more of the outstanding shares of the Trust can
require that the Trustees call a meeting of shareholders for purposes of voting
on the removal of one or more Trustees. In connection with such meetings called
by shareholders, shareholders will be assisted in shareholder communications to
the extent required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under
certain circumstances, be held personally liable for the obligations for the
Trust. However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for indemnification
for all losses and expenses of any shareholder of the Fund held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Fund would be unable to meet its obligations. The
Investment Manager believes that, in view of the above, the risk of personal
liability to shareholders is remote.
TRUSTEES AND OFFICERS
The Trustees and principal officers of the Trust, their addresses, and
their principal occupations and positions with certain affiliates of the
Investment Manager are set forth below.
*+Peter C. Bennett, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 59. His principal occupation is currently,
and during the past five years has been, Executive Vice President of State
Street Research & Management Company. Mr. Bennett is also a Director of State
Street Research & Management Company. Mr. Bennett's other principal business
affiliations include Director, State Street Research
- -------------------
* or +, see footnotes on page 23.
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<PAGE>
Investment Services, Inc. and Executive Vice President, GFM International
Investors, Inc.
+Steve A. Garban, The Pennsylvania State University, 210 Old Main,
University Park, PA 16802, serves as Trustee of the Trust. He is 60. He is
retired and was formerly Senior Vice President for Finance and Operations and
Treasurer of The Pennsylvania State University.
+Malcolm T. Hopkins, 14 Brookside Road, Biltmore Forest, Asheville, NC
28803, serves as Trustee of the Trust. He is 70. He is engaged principally in
private investments. Previously, he was Vice Chairman of the Board and Chief
Financial Officer of St. Regis Corp.
+Edward M. Lamont, Box 1234, Moores Hill Road, Syosset, NY 11791,
serves as Trustee of the Trust. He is 71. He is engaged principally in private
investments and civic affairs and is an author of business history. Previously,
he was with an affiliate of J.P. Morgan & Co. in New York.
+Robert A. Lawrence, 175 Federal Street, Boston, MA 02110, serves as
Trustee of the Trust. He is 71. He is retired and was formerly a Partner in
Saltonstall & Co., a private investment firm.
*+Gerard P. Maus, One Financial Center, Boston, MA 02111, serves as
Treasurer of the Trust. He is 47. His principal occupation is currently, and
during the past five years has been, Executive Vice President, Treasurer, Chief
Financial Officer and Director of State Street Research & Management 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. and Executive Vice President, Chief Financial
Officer, Administrative Officer and Director, GFM International Investors,
Inc.
*+Francis J. McNamara, III, One Financial Center, Boston, MA 02111,
serves as Secretary and General Counsel of the Trust. He is 42. His principal
occupation is Executive Vice President, General Counsel and Secretary of State
Street Research & Management Company. During the past five years he has also
served as Senior Vice President of State Street Research & Management Company
and as Senior Vice President, General Counsel and Assistant Secretary of The
Boston Company, Inc., Boston Safe Deposit and Trust Company and The Boston
Company Advisors, Inc. Mr. McNamara's other principal business affiliations
include Executive Vice President, Clerk and General Counsel of State Street
Research Investment Services, Inc. and Executive Vice President and General
Counsel, GFM International Investors, Inc.
- -------------------
* or +, see footnotes on page 23.
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<PAGE>
+Dean O. Morton, 3200 Hillview Avenue, Palo Alto, CA 94304, serves as
Trustee of the Trust. He is 66. 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.
+Toby Rosenblatt, 3409 Pacific Avenue, San Francisco, CA 94118, serves
as Trustee of the Trust. He is 59. 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
60. 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 55. His principal occupation is currently, and during the past five
years has been, Chairman of the Board, President, Chief Executive Officer and
Director of State Street Research & Management Company. Mr. Verni's other
principal business affiliations include Chairman of the Board and Director of
State Street Research Investment Services, Inc. (and until February 1996, prior
positions as President and Chief Executive Officer of that company) and Chairman
of the Board, President, Chief Executive Officer and Director of GFM
International Investors, Inc.
*+Dudley F. Wade, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 79. His principal occupation during the past
five years has been Senior Vice President of State Street Research & Management
Company.
*+James M. Weiss, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 51. His principal occupation is Senior Vice
President of State Street Research & Management Company. During the past five
years he has also served as President and Chief Investment Officer of IDS
Advisory Group, Inc.
- -------------------
* or +, see footnotes on page 23.
22
<PAGE>
*+John T. Wilson, One Financial Center, Boston, MA 02111, serves as
Vice President of the Trust. He is 34. His principal occupation is Vice
President of State Street Research & Management Company. During the past five
years he has also served as an analyst and portfolio manager at Phoenix Home
Life Mutual Insurance Company and, from 1995 to 1996, as a Vice President of
Phoenix Investment Counsel, Inc.
- -----------------
* These Trustees and/or officers are or may be deemed to be "interested
persons" of the Trust under the 1940 Act because of their affiliations with
the Fund's investment adviser.
+ Serves as a Trustee/Director and/or officer of one or more of the following
investment companies, each of which has an advisory relationship with the
Investment Manager or its parent, Metropolitan Life Insurance Company
("Metropolitan"): State Street Research Equity Trust, State Street Research
Financial Trust, State Street Research Income Trust, State Street Research
Money Market Trust, State Street Research Tax-Exempt Trust, State Street
Research Capital Trust, State Street Research Exchange Trust, State Street
Research Growth Trust, State Street Research Master Investment Trust, State
Street Research Securities Trust, State Street Research Portfolios, Inc.
and Metropolitan Series Fund, Inc.
23
<PAGE>
As of January 31, 1998, the Trustees and principal officers of the
Trust owned as a group less than 1% of the outstanding Class A and Class S
shares of the Fund, respectively. They owned none of the Fund's outstanding
Class B or Class C shares.
Record ownership of shares of the Fund as of January 31, 1998 was as
follows:
Class Holder % of Class
- ----- ------ ----------
B Merrill Lynch 8.2
C(a) Merrill Lynch 44.6
The full name and address of the above person or institution is:
Merrill Lynch, Pierce, Fenner & Smith Incorporated (b)
4800 Deerlake Drive East
Jacksonville, FL 32246
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) Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
(b) The Fund believes that each named recordholder does not have beneficial
ownership of such shares.
24
<PAGE>
The Trustees were compensated as follows:
Total
Compensation
Aggregate From Trust and
Name of Compensation Complex Paid
Trustee From Trust(a) to Trustees (b)
- ------- ------------- ---------------
Steven A. Garban $1,467 $ 75,899
Malcolm T. Hopkins $1,467 $ 78,499
Edward M. Lamont $4,000 $ 68,741
Robert A. Lawrence $4,100 $ 93,125
Dean O. Morton $4,300 $ 97,125
Toby Rosenblatt $4,000 $ 68,741
Michael S. Scott Morton $4,600 $103,625
Ralph F. Verni $ 0 $ 0
(a) For the Fund's fiscal year ended December 31, 1997. See "The Trust, the
Fund and its Shares" in this Statement of Additional Information for a
listing of series.
(b) Includes compensation received on behalf of all series of 12 investment
companies for which the Investment Manager or its parent, Metropolitan,
served as investment adviser. "Total Compensation from Trust and Complex
Paid to Trustees" for the 12 months ended December 31, 1997. The Trust does
not provide any pension or retirement benefits for the Trustees.
INVESTMENT ADVISORY SERVICES
State Street Research & Management Company, the Investment Manager, a
Delaware corporation, with offices at One Financial Center, Boston,
Massachusetts 02111-2690, acts as investment adviser to the Fund. The Investment
Manager was founded by Paul Cabot, Richard Saltonstall and Richard Paine to
serve as investment adviser to the Fund, one of the nation's first mutual funds,
which they had formed in 1924.
Their investment management philosophy emphasized comprehensive
fundamental research and analysis, including meetings with the management of
companies under consideration for investment. The Investment Manager's portfolio
management group has extensive investment industry experience managing equity
and debt securities. In managing debt securities, if any, for a portfolio, the
Investment Manager may consider yield curve positioning, sector rotation and
duration, among other factors.
The 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
25
<PAGE>
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 regular trading on the New York Stock
Exchange (the "NYSE") on each day the NYSE is open for trading, at the annual
rate of 0.41% of the net assets of the Fund until August 18, 1998 and then 0.55%
of the first $500 million of Fund net assets, annually, 0.50% of the next $500
million, and 0.45% of any amount over $1 billion.
The advisory fees paid by the Fund to the Investment Manager for the
last three fiscal years, prior to the assumption of fees or expenses, were as
follows: 1997, $5,717,422; 1996, $3,866,070; and 1995, $3,158,324.
The Advisory Agreement provides that in the event that the total
expenses incurred by the Fund in any fiscal year, excluding interest, taxes,
brokerage commissions, extraordinary litigation costs and expenses pursuant to
the Fund's Plan of Distribution Pursuant to Rule 12b-1, but including payments
to the Investment Manager, shall exceed 1% of the average value of the net
assets (computed without deducting amounts borrowed for investment purposes) of
the Fund during said fiscal year, based upon computations of such value made as
of the close of business on each business day during such fiscal year, then the
Investment Manager shall reimburse the Fund for such excess expenses by making a
payment to the Fund in the amount of such excess expenses within 30 days
following the close of such fiscal year.
The Advisory Agreement further provides that it shall remain in effect
from year to year only so long as (i) such continuance is specifically approved
at least annually by either (a) the Board of Trustees of the Trust, or (b) "
vote of a majority of the outstanding voting securities " (as defined in Section
2(a)(42) of the 1940 Act) of the Fund, and (ii) the terms of the Advisory
Agreement are approved at least annually by the vote of a majority of the
Trustees of the Trust, who are not parties to the Advisory Agreement or
"interested persons" of any such party (as such terms are used in Section 15(c)
of the 1940 Act), cast in person at a meeting called for the purpose of voting
on such approval.
The Advisory Agreement may be terminated at any time without the
payment of any penalty by vote of the Board of Trustees of the Trust or by "vote
of a majority of the outstanding voting securities" (as defined in Section
2(a)(42) of the 1940 Act) of the Fund, or by the Investment Manager, in each
case upon sixty calendar days' prior written notice to the other party to the
Advisory Agreement.
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
26
<PAGE>
receive a fee for the maintenance of certain share ownership records for
participants in sponsored arrangements, such as employee benefit plans, through
or under which the Fund's shares may be purchased.
Under the Code of Ethics of the Investment Manager, personnel are only
permitted to engage in personal securities transactions in accordance with
certain conditions relating to such person's position, the identity of the
security, the timing of the transaction, and similar factors. Such personnel
must report their personal securities transactions quarterly and supply broker
confirmations of such transactions to the Investment Manager.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are distributed by State Street Research Investment
Services, Inc., the Distributor. The Fund offers 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 S shares, a sales charge which, at the election
of the investor, may be imposed (i) at the time of purchase (the Class A shares)
or (ii) on a deferred basis (the Class B and Class C shares). General
information on how to buy shares of the Fund, as well as sales charges involved,
are set forth under "Your Account" in the Prospectus. The following supplements
that information.
Public Offering Price. The public offering price for each class of
shares is based on their net asset value determined as of the close of regular
trading on the NYSE on the day the purchase order is received by State Street
Research Service Center (the "Service Center"), provided that the order is
received prior to the close of regular trading on the NYSE on that day;
otherwise the net asset value used is that determined as of the close of the
NYSE on the next day it is open for unrestricted trading. When a purchase order
is placed through a dealer, that dealer is responsible for transmitting the
order promptly to the Service Center in order to permit the investor to obtain
the current price. Any loss suffered by an investor which results from a
dealer's failure to transmit an order promptly is a matter for settlement
between the investor and the dealer.
Class A Shares--Reduced Sales Charges. The reduced sales charges set
forth under "Your Account--Class A Sales Charge Reductions and Waivers" in the
Fund's Prospectus apply to purchases made at any one time by any "person," which
includes: (i) an individual, or an individual combining with his or her spouse
and their children and purchasing for his, her or their own account; (ii) a
"company" as defined in Section 2(a)(8) of the 1940 Act; (iii) a trustee or
other fiduciary purchasing for a single trust estate or single fiduciary account
(including a pension, profit sharing or other employee benefit trust created
pursuant to a plan qualified under Section 401 of the Internal Revenue Code);
(iv) a tax-exempt organization under Section 501(c)(3) or (13) of the Internal
Revenue Code; and (v) an employee benefit plan of a single employer or of
affiliated employers.
27
<PAGE>
Investors may purchase Class A shares of the Fund at reduced sales
charges by executing a Letter of Intent to purchase no less than an aggregate of
$100,000 of the Fund or any combination of Class A shares of "Eligible Funds"
(which include the Fund and other funds as designated by the Distributor from
time to time) within a 13-month period. The sales charge applicable to each
purchase made pursuant to a Letter of Intent will be that which would apply if
the total dollar amount set forth in the Letter of Intent were being bought in a
single transaction. Purchases made within a 90-day period prior to the execution
of a Letter of Intent may be included therein; in such case the date of the
earliest of such purchases marks the commencement of the 13-month period.
An investor may include toward completion of a Letter of Intent the
value (at the current public offering price) of all of his or her Class A shares
of the Fund and of any of the other Class A shares of Eligible Funds held of
record as of the date of his or her Letter of Intent, plus the value (at the
current offering price) as of such date of all of such shares held by any
"person" described herein as eligible to join with the investor in a single
purchase. Class B, Class C and Class S shares may also be included in the
combination under certain circumstances.
A Letter of Intent does not bind the investor to purchase the specified
amount. Shares equivalent to 5% of the specified amount will, however, be taken
from the initial purchase (or, if necessary, subsequent purchases) and held in
escrow in the investor's account as collateral against the higher sales charge
which would apply if the total purchase is not completed within the allotted
time. The escrowed shares will be released when the Letter of Intent is
completed or, if it is not completed, when the balance of the higher sales
charge is, upon notice, remitted by the investor. All dividends and capital
gains distributions with respect to the escrowed shares will be credited to the
investor's account.
Investors may purchase Class A shares of the Fund or a combination of
Eligible Funds at reduced sales charges pursuant to a Right of Accumulation. The
applicable sales charge under the right is determined on the amount arrived at
by combining the dollar amount of the 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 S shares may also be included in the combination
under certain circumstances. Investors must submit to the Distributor sufficient
information to show that they qualify for this Right of Accumulation.
Other Programs Related to Class A Shares. Class A shares of the Fund
may be sold or issued in an exchange at a reduced sales charge or without sales
charge pursuant to certain sponsored arrangements, which include programs under
which a company, employee benefit plan or other organization makes
recommendations to, or permits group solicitation of, its employees, members or
participants, except any organization created primarily for the purpose of
obtaining shares of the Fund at a reduced sales charge or without a sales
charge. Sales
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without a sales charge, or with a reduced sales charge, may also be made through
brokers, registered investment advisers, financial planners, institutions, and
others, under managed fee-based programs (e.g., "wrap fee" or similar programs)
which meet certain requirements established from time to time by the
Distributor. Information on such arrangements and further conditions and
limitations is available from the Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and person: (A) the
Investment Manager, Distributor or any affiliated entities, including any direct
or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or current or retired directors or trustees of the Affiliated
Companies or any investment company managed by any of the Affiliated Companies,
any relatives of any such individuals whose relationship is directly verified by
such individuals to the Distributor, or any beneficial account for such
relatives or individuals; and (C) employees, officers, sales representatives or
directors of dealers and other entities with a selling agreement with the
Distributor to sell shares of any aforementioned investment company, any spouse
or child of such person, or any beneficial account for any of them. The purchase
must be made for investment and the shares purchased may not be resold except
through redemption. This purchase program is subject to such administrative
policies, regarding the qualification of purchasers and any other matters, as
may be adopted by the Distributor from time to time.
Conversion of Class B Shares to Class A Shares. A shareholder's Class B
shares of the Fund, including all shares received as dividends or distributions
with respect to such shares, will automatically convert to Class A shares of the
Fund at the end of eight years following the issuance of such Class B shares;
consequently, they will no longer be subject to the higher expenses borne by
Class B shares. The conversion rate will be determined on the basis of the
relative per share net asset values of the two classes and may result in a
shareholder receiving either a greater or fewer number of Class A shares than
the Class B shares so converted. As noted above, holding periods for Class B
shares received in exchange for Class B shares of other Eligible Funds will be
counted toward the eight-year period.
Contingent Deferred Sales Charges. The amount of any contingent
deferred sales charge paid on Class A shares (on sales of $1 million or more and
which do not involve an initial sales charge) or on Class B or Class C shares of
the Fund will be paid to the Distributor. The Distributor will pay dealers at
the time of sale a 4% commission for selling Class B shares and a 1% commission
for selling Class C shares. In certain cases, a dealer may elect to waive the 4%
commission on Class B shares and receive in lieu thereof a 1% annual fee with
respect to such outstanding shares until the shares convert to Class A shares.
The proceeds of the contingent deferred sales charges and the distribution fees
are used to offset distribution expenses and thereby permit the sale of Class B
and Class C shares without an initial sales charge.
In determining the applicability and rate of any contingent deferred
sales charge of Class B or Class C shares, it will be assumed that a redemption
of the shares is made first of
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those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by shareholder for the longest period of time.
Class B shares that are redeemed within a five-year period after their purchase,
and Class C shares that are redeemed within a one-year period after their
purchase, will not be subject to a contingent deferred sales charge to the
extent that the value of such shares represents (1) capital appreciation of Fund
assets or (2) reinvestment of dividends or capital gains distributions. The
holding period for purposes of applying a contingent deferred sales charge for a
particular class of shares of the Fund acquired through an exchange from another
Eligible Fund will be measured from the date that such shares were initially
acquired in the other Eligible Fund, and shares of the same class being redeemed
will be considered to represent, as applicable, capital appreciation or dividend
and capital gains distribution reinvestments in such other Eligible Fund. These
determinations will result in any contingent deferred sales charge being imposed
at the lowest possible rate. For federal income tax purposes, the amount of the
contingent deferred sales charge will reduce the gain or increase the loss, as
the case may be, on the amount realized on redemption.
Contingent Deferred Sales Charge Waivers. With respect to Class A
shares (on sales of $1 million or more and which do not involve an initial sales
charge), and Class B and Class C shares of the Fund, the contingent deferred
sales charge does not apply to exchanges or to redemptions under a systematic
withdrawal plan which meets certain conditions. In addition, the contingent
deferred sales charge will be waived for: (i) redemptions made within one year
of the death or total disability, as defined by the Social Security
Administration, of all shareholders of an account; (ii) redemptions made after
attainment of a specific age in an amount which represents the minimum
distribution required at such age under Section 401(a)(9) of the Internal
Revenue Code of 1986, as amended, for retirement accounts or plans (e.g., age 70
1/2 for Individual Retirement Accounts and Section 403(b) plans), calculated
solely on the basis of assets invested in the Fund or other Eligible Funds; and
(iii) a redemption resulting from a tax-free return of an excess contribution to
an Individual Retirement Account. (The foregoing waivers do not apply to a
tax-free rollover or transfer of assets out of the Fund). The Fund may modify or
terminate the waivers at any time; for example, the Fund may limit the
application of multiple waivers and establish other conditions for employee
benefit plans.
Class S Shares. Class S shares are currently available to certain
employee benefit plans such as qualified retirement plans which meet criteria
relating to number of participants, service arrangements, or similar factors;
insurance companies; investment companies; advisory accounts of the Investment
Manager; endowment funds of nonprofit organizations with substantial minimum
assets (currently a minimum of $10 million); and other similar institutional
investors. Class S shares may be acquired through programs or products sponsored
by Metropolitan, its affiliates, or both for which Class S shares have been
designated. In addition, Class S shares are available through programs under
which, for example, investors pay an asset-based fee and/or a transaction fee to
intermediaries. Class S share availability is determined by the Distributor and
intermediaries based on the overall
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direct and indirect costs of a particular program, expected assets, account
sizes and similar considerations.
Reorganizations. In the event of mergers or reorganizations with other
public or private collective investment entities, including investment companies
as defined in the 1940 Act, the Fund may issue its shares at net asset value (or
more) to such entities or to their security holders.
Redemptions. The Fund reserves the right to pay redemptions in kind
with portfolio securities in lieu of cash. In accordance with its election
pursuant to Rule 18f-1 under the 1940 Act, the Fund may limit the amount of
redemption proceeds paid in cash. Although it has no present intention to do so,
the Fund may, under unusual circumstances, limit redemptions in cash with
respect to each shareholder during any ninety-day period to the lesser of (i)
$250,000 or (ii) 1% of the net asset value of the Fund at the beginning of such
period. In connection with any redemptions paid in kind with portfolio
securities, brokerage and other costs may be incurred by the redeeming
shareholder in the sale of the securities received.
Systematic Withdrawal Plan. A shareholder who owns noncertificated
Class A or Class S shares with a value of $5,000 or more, or Class B or Class C
shares with a value of $10,000 or more, may elect, by participating in the
Fund's Systematic Withdrawal Plan, to have periodic checks issued for specified
amounts. These amounts may not be less than certain minimums, depending on the
class of shares held. The Plan provides that all income dividends and capital
gains distributions of the Fund shall be credited to participating shareholders
in additional shares of the Fund. Thus, the withdrawal amounts paid can only be
realized by redeeming shares of the Fund under the Plan. To the extent such
amounts paid exceed dividends and distributions from the Fund, a shareholder's
investment will decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually of
either (a) the value, at the time the Systematic Withdrawal Plan is initiated,
of the shares then in the account or (b) the value, at the time of a withdrawal,
of the same number of shares as in the account when the Systematic Withdrawal
Plan was initiated, whichever is higher.
Expenses of the Systematic Withdrawal Plan are borne by the Fund. A
participating shareholder may withdraw from the Systematic Withdrawal Plan, and
the Fund may terminate the Systematic Withdrawal Plan at any time on written
notice. Purchase of additional shares while a shareholder is receiving payments
under a Systematic Withdrawal Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate in
the Investamatic Program (see "Your Account--Investor Services--Investamatic
Program" in the Fund's Prospectus) and the Systematic Withdrawal Plan at the
same time.
Request to Dealer to Repurchase. For the convenience of shareholders,
the Fund has authorized the Distributor as its agent to accept orders from
dealers by wire or telephone for
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the repurchase of shares by the Distributor from the dealer. The Fund may revoke
or suspend this authorization at any time. The repurchase price is the net asset
value for the applicable shares next determined following the time at which the
shares are offered for repurchase by the dealer to the Distributor. The dealer
is responsible for promptly transmitting a shareholder's order to the
Distributor.
Signature Guarantees. Signature guarantees are required for, among
other things: (1) written requests for redemptions for more than $100,000; (2)
written requests for redemptions for any amount if the proceeds are transmitted
to other than the current address of record (unchanged in the past 30 days); (3)
written requests for redemptions for any amount submitted by corporations and
certain fiduciaries and other intermediaries; and (4) requests to transfer the
registration of shares to another owner. Signatures must be guaranteed by a
bank, a member firm of a national stock exchange, or other eligible guarantor
institution. The Transfer Agent will not accept guarantees (or notarizations)
from notaries public. The above requirements may be waived in certain instances.
Dishonored Checks. If a purchaser's check is not honored for its full
amount, the purchaser could be subject to additional charges to cover collection
costs and any investment loss, and the purchase may be canceled.
Processing Charges. Purchases and redemptions processed through
securities dealers may be subject to processing charges imposed by the
securities dealer in addition to sales charges that may be imposed by the Fund
or the Distributor.
SHAREHOLDER ACCOUNTS
General information on shareholder accounts is included in the Fund's
Prospectus under "Your Account." The following supplements that information.
Maintenance Fees and Involuntary Redemption. Because of the relatively
high cost of maintaining small shareholder accounts, the Fund reserves the right
to redeem at its option any shareholder account which remains below $1,500 for a
period of 60 days after notice is mailed to the applicable shareholder, or to
impose a maintenance fee on such account after 60 days' notice. Such
involuntarily redemptions will be subject to applicable sales charges, if any.
The Fund may increase such minimum account value above such amount in the future
after notice to affected shareholders. Involuntarily redeemed shares will be
priced at the net asset value on the date fixed for redemption by the Fund, and
the proceeds of the redemption will be mailed to the affected shareholder at the
address of record. Currently, the maintenance fee is $18 annually, which is paid
to the Transfer Agent. The fee does not apply to certain retirement accounts or
if the shareholder has more than an aggregate $50,000 invested in the Fund and
other Eligible Funds combined. Imposition of a maintenance fee on a small
account could, over time, exhaust the assets of such account.
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To cover the cost of additional compliance administration, a $20 fee
will be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date
of payment of redemption proceeds for more than seven days, except that (a) it
may elect to suspend the redemption of shares or postpone the date of payment of
redemption proceeds: (1) during any period that the NYSE is closed (other than
customary weekend and holiday closings) or trading on the NYSE is restricted;
(2) during any period in which an emergency exists as a result of which disposal
of portfolio securities is not reasonably practicable or it is not reasonably
practicable to fairly determine the Fund's net asset values; or (3) during such
other periods as the Securities and Exchange Commission (the "SEC") may by order
permit for the protection of investors; and (b) the payment of redemption
proceeds may be postponed as otherwise provided under "Purchase and Redemption
of Shares" in this Statement of Additional Information.
The Open Account System. Under the Open Account System full and
fractional shares of the Fund owned by shareholders are credited to their
accounts by the Transfer Agent, State Street Bank and Trust Company, 225
Franklin Street, Boston, Massachusetts 02110. Certificates representing Class B
or Class C shares will not be issued, while certificates representing Class A or
Class S shares will only be issued if specifically requested in writing and, in
any case, will only be issued for full shares, with any fractional shares to be
carried on the shareholder's account. Shareholders will receive periodic
statements of transactions in their accounts.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through
dealers, by wire or by mailing a check payable to "State Street
Research Funds" under the terms set forth above under "Purchase
and Redemption of Shares" in this Statement of Additional
Information.
2. The following methods of receiving dividends from investment
income and distributions from capital gains generally are
available:
(a) All income dividends and capital gains distributions
reinvested in additional shares of the Fund.
(b) All income dividends and capital gains distributions in
cash.
(c) All income dividends and capital gains distributions
invested in any one available Eligible Fund designated by
the shareholder as described below. See "--Dividend
Allocation Plan" herein.
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Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will be automatically coded for reinvestment of all
dividends and distributions in additional shares of the same class of the Fund.
Selections may be changed at any time by telephone or written notice to the
Service Center. Dividends and distributions are reinvested at net asset value
without a sales charge.
Exchange Privileges. Shareholders of the Fund may exchange their shares
for available shares with corresponding characteristics of any of the other
Eligible Funds at any time on the basis of the relative net asset values of the
respective shares to be exchanged, subject to compliance with applicable
securities laws. Shareholders of any other Eligible Fund may similarly exchange
their shares for Fund shares with corresponding characteristics. Prior to making
an exchange, shareholders should obtain the Prospectus of the Eligible Fund into
which they are exchanging. Under the Direct Program, subject to certain
conditions, shareholders may make arrangements for regular exchanges from the
Fund into other Eligible Funds. To effect an exchange, Class A, Class B and
Class C shares may be redeemed without the payment of any contingent deferred
sales charge that might otherwise be due upon an ordinary redemption of such
shares. The State Street Research Money Market Fund issues Class E shares which
are sold without any sales charge. Exchanges of State Street Research Money
Market Fund Class E shares into Class A shares of the Fund or any other Eligible
Fund are subject to the initial sales charge or contingent deferred sales charge
applicable to an initial investment in such Class A shares, unless a prior Class
A sales charge has been paid directly or indirectly with respect to the shares
redeemed. For purposes of computing the contingent deferred sales charge that
may be payable upon disposition of any acquired Class A, Class B and Class C
shares, the holding period of the redeemed shares is "tacked" to the holding
period of any acquired shares. No exchange transaction fee is currently imposed
on any exchange.
Shares of the Fund may also be acquired or redeemed in exchange for
shares of the Summit Cash Reserves Fund ("Summit Cash Reserves") by customers of
Merrill Lynch, Pierce, Fenner & Smith Incorporated (subject to completion of
steps necessary to implement the program). The Fund and Summit Cash Reserves are
related mutual funds for purposes of investment and investor services. Upon the
acquisition of shares of Summit Cash Reserves by exchange for redeemed shares of
the Fund, (a) no sales charge is imposed by Summit Cash Reserves, (b) no
contingent deferred sales charge is imposed by the Fund on the Fund shares
redeemed, and (c) any applicable holding period of the Fund shares redeemed is
"tolled," that is, the holding period clock stops running pending further
transactions. Upon the acquisition of shares of the Fund by exchange for
redeemed shares of Summit Cash Reserves, (a) the acquisition of Class A shares
shall be subject to the initial sales charges or contingent deferred sales
charges applicable to an initial investment in such Class A shares, unless a
prior Class A sales charge has been paid indirectly, and (b) the acquisition of
Class B or Class C shares of the Fund shall restart any holding period
previously tolled, or shall be subject to the contingent deferred sales charge
applicable to an initial investment in such shares.
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The exchange privilege may be terminated or suspended or its terms
changed at any time, subject, if required under applicable regulations, to 60
days' prior notice. New accounts established for investments upon exchange from
an existing account in another fund will have the same telephone privileges with
respect to the Fund (see "Your Account--Account Policies--Telephone Requests" in
the Fund's Prospectus and "--Telephone Privileges," below) as the existing
account unless the Service Center is instructed otherwise. Related
administrative policies and procedures may also be adopted with regard to a
series of exchanges, street name accounts, sponsored arrangements and other
matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. To protect the interests of
shareholders, the Fund reserves the right to temporarily or permanently
terminate the exchange privilege for any person who makes more than six
exchanges out of or into the Fund per calendar year. Accounts under common
ownership or control, including accounts with the same taxpayer identification
number, may be aggregated for purposes of the six exchange limit.
Notwithstanding the six exchange limit, the Fund reserves the right to refuse
exchanges by any person or group if, in the Investment Manager's judgment, the
Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
Exchanges may be restricted or refused if the Fund receives or anticipates
simultaneous orders affecting significant portions of the Fund's assets. In
particular, a pattern of exchanges that coincides with a "market timing"
strategy may be disruptive to the Fund. The Fund may impose these restrictions
at any time. The exchange limit may be modified for accounts in certain
institutional retirement plans because of plan exchange limits, Department of
Labor regulations or administrative and other considerations. Subject to the
foregoing, if an exchange request in good order is received by the Service
Center and delivered by the Service Center to the Transfer Agent by 12 noon
Boston time on any business day, the exchange usually will occur that day. For
further information regarding the exchange privilege, shareholders should
contact the Service Center.
Reinvestment Privilege. A shareholder of the Fund who has redeemed
shares or had shares repurchased at his or her request may reinvest all or any
portion of the proceeds (plus that amount necessary to acquire a fractional
share to round off his or her reinvestment to full shares) in shares, of the
same class as the shares redeemed, of the Fund or any other Eligible Fund at net
asset value and without subjecting the reinvestment to an initial sales charge,
provided such reinvestment is made within 120 calendar days after a redemption
or repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the amount
reinvested. The redemption of shares is, for federal income tax purposes, a sale
on which the shareholder may realize a gain or loss. If a redemption at a loss
is followed by a reinvestment within 30 days, the transaction may be a "wash
sale" resulting in a denial of the loss for federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject
to any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next
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determined following timely receipt by the Service Center of such shareholder's
written purchase request and delivery of the request by the Service Center to
the Transfer Agent. A shareholder may exercise this reinvestment privilege only
once per 12-month period with respect to his or her shares of the Fund.
Dividend Allocation Plan. The Dividend Allocation Plan allows
shareholders to elect to have all their dividends and any other distributions
from the Fund or any Eligible Fund automatically invested at net asset value in
one other such Eligible Fund designated by the shareholder, provided the account
into which the dividends and distributions are directed is initially funded with
the requisite minimum amount.
Telephone Privileges. A shareholder with telephone privileges that are
offered with his or her Account (see "Your Account--Account Policies--Telephone
Requests") is deemed to authorize the Service Center and the Transfer Agent to:
(1) act upon the telephone instructions of any person purporting to be the
shareholder or the shareholder's financial professional to exchange, or to
redeem with the shareholder's permission, shares from any account; and (2) honor
any written instructions for a change of address regardless of whether such
request is accompanied by a signature guarantee. All telephone calls will be
recorded. Neither the Fund, the other Eligible Funds, the Transfer Agent, the
Investment Manager nor the Distributor will be liable for any loss, expense or
cost arising out of any request, including any fraudulent or unauthorized
requests. Shareholders assume the risk to the full extent of their accounts that
telephone requests may be unauthorized. Reasonable procedures will be followed
to confirm that instructions communicated by telephone are genuine. The
shareholder will not be liable for any losses arising from unauthorized or
fraudulent instructions if such procedures are not followed.
Alternative Means of Contacting the Fund. It is unlikely, during
periods of extraordinary market conditions, that a shareholder may have
difficulty in reaching the Service Center. In that event, however, the
shareholder should contact the Service Center at 1-800-562-0032, 1-617-357-7800
or otherwise at its main office at One Financial Center, Boston, Massachusetts
02111-2690.
NET ASSET VALUE
The net asset value of the shares of the Fund is determined once daily
as of the close of regular trading on the NYSE, ordinarily 4 P.M. New York City
time, Monday through Friday, on each day during which the NYSE is open for
unrestricted trading. The NYSE is currently closed on New Year's Day, Martin
Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share of the Fund is computed by dividing the
sum of the value of the securities held by the Fund plus any cash or other
assets minus all liabilities by the total number of outstanding shares of the
Fund at such time. Any expenses, except for
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extraordinary or nonrecurring expenses, borne by the Fund, including the
investment management fee payable to the Investment Manager, are accrued daily.
In determining the values of portfolio assets as provided below, the
Trustees utilize one or more pricing services in lieu of market quotations for
certain securities which are not readily available on a daily basis. Such
services utilize information with respect to market transactions, quotations
from dealers and various relationships among securities in determining value and
may provide prices determined as of times prior to the close of the NYSE.
In general, securities are valued as follows. Securities which are
listed or traded on the New York or American Stock Exchange are valued at the
price of the last quoted sale on the respective exchange for that day.
Securities which are listed or traded on a national securities exchange or
exchanges, but not on the New York or American Stock Exchange, are valued at the
price of the last quoted sale on the exchange for that day prior to the close of
the NYSE. Securities not listed on any national securities exchange which are
traded "over the counter" and for which quotations are available on the National
Association of Securities Dealers, Inc.'s (the "NASD") NASDAQ System are valued
at the closing price supplied through such system for that day at the close of
the NYSE. Other securities are, in general, valued at the mean of the bid and
asked quotations last quoted prior to the close of the NYSE if there are market
quotations readily available, or in the absence of such market quotations, then
at the fair value thereof as determined by or under authority of the Trustees of
the Trust with the use of such pricing services as may be deemed appropriate or
methodologies approved by the Trustees.
The Trustees have authorized the use of the amortized cost method to
value short-term debt instruments issued with a maturity of one year or less and
having a remaining maturity of 60 days or less when the value obtained is fair
value, provided that during any period in which more than 25% of the Fund's
total assets is invested in short-term debt securities the current market value
of such securities will be used in calculating net asset value per share in lieu
of the amortized cost method. Under the amortized cost method of valuation, the
security is initially valued at cost on the date of purchase (or in the case of
short-term debt instruments purchased with more than 60 days remaining to
maturity, the market value on the 61st day prior to maturity), and thereafter a
constant amortization to maturity of any discount or premium is assumed
regardless of the impact of fluctuating interest rates on the market value of
the security.
PORTFOLIO TRANSACTIONS
Portfolio Turnover
The Fund's portfolio turnover rate is determined by dividing the lesser
of securities purchases or sales for a year by the monthly average value of
securities held by the Fund (excluding, for purposes of this determination,
securities the maturities of which as of the time
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of their acquisition were one year or less). The Fund's portfolio turnover rates
for the fiscal years ended December 31, 1996 and 1997 were 73.51% and 75.21%,
respectively.
Brokerage Allocation
The Investment Manager's policy is to seek for its clients, including
the Fund, what in the Investment Manager's judgment will be the best overall
execution of purchase or sale orders and the most favorable net prices in
securities transactions consistent with its judgment as to the business
qualifications of the various broker or dealer firms with whom the Investment
Manager may do business, and the Investment Manager may not necessarily choose
the broker offering the lowest available commission rate. Decisions with respect
to the market where the transaction is to be completed, to the form of
transaction (whether principal or agency), and to the allocation of orders among
brokers or dealers are made in accordance with this policy. In selecting brokers
or dealers to effect portfolio transactions, consideration is given to their
proven integrity and financial responsibility, their demonstrated execution
experience and capabilities both generally and with respect to particular
markets or securities, the competitiveness of their commission rates in agency
transactions (and their net prices in principal transactions), their willingness
to commit capital, and their clearance and settlement capability. The Investment
Manager makes every effort to keep informed of commission rate structures and
prevalent bid/ask spread characteristics of the markets and securities in which
transactions for the Fund occur. Against this background, the Investment Manager
evaluates the reasonableness of a commission or a net price with respect to a
particular transaction by considering such factors as difficulty of execution or
security positioning by the executing firm. The Investment Manager may or may
not solicit competitive bids based on its judgment of the expected benefit or
harm to the execution process for that transaction.
When it appears that a number of firms could satisfy the required
standards in respect of a particular transaction, consideration may also be
given by the Investment Manager to services other than execution services which
certain of such firms have provided in the past or may provide in the future.
Negotiated commission rates and prices, however, are based upon the Investment
Manager's judgment of the rate which reflects the execution requirements of the
transaction without regard to whether the broker provides services in addition
to execution. Among such other services are the supplying of supplemental
investment research; general economic, political and business information;
analytical and statistical data; relevant market information, quotation
equipment and services; reports and information about specific companies,
industries and securities; purchase and sale recommendations for stocks and
bonds; portfolio strategy services; historical statistical information; market
data services providing information on specific issues and prices; financial
publications; proxy voting data and analysis services; technical analysis of
various aspects of the securities markets, including technical charts; computer
hardware used for brokerage and research purposes; computer software and
databases (including those contained in certain trading systems and used for
portfolio analysis and modeling and also including software providing investment
personnel with efficient access to current and historical data from a variety of
internal and external sources) and portfolio evaluation services and relative
performance of accounts.
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In the case of the Fund and other registered investment companies
advised by the Investment Manager or its affiliates, the above services may
include data relating to performance, expenses and fees of those investment
companies and other investment companies; this information is used by the
Trustees or Directors of the investment companies to fulfill their
responsibility to oversee the quality of the Investment Manager's advisory
contracts between the investment companies and the Investment Manager. The
Investment Manager considers these investment company services only in
connection with the execution of transactions on behalf of its investment
company clients and not its other clients. Certain of the nonexecution services
provided by broker-dealers may in turn be obtained by the broker-dealers from
third parties who are paid for such services by the broker-dealers.
The Investment Manager regularly reviews and evaluates the services
furnished by broker-dealers. The Investment Manager's investment management
personnel conduct internal surveys and use other methods to evaluate the quality
of the research and other services provided by various broker-dealer firms, and
the results of these efforts are made available to the equity trading
department, which uses this information as consideration to the extent described
above in the selection of brokers to execute portfolio transactions.
Some services furnished by broker-dealers may be used for research and
investment decision-making purposes, and also for marketing or administrative
purposes. Under these circumstances, the Investment Manager allocates the cost
of the services to determine the proportion which is allocable to research or
investment decision-making and the proportion allocable to other purposes. The
Investment Manager pays directly from its own funds for that portion allocable
to uses other than research or investment decision-making. Some research and
execution services may benefit the Investment Manager's clients as a whole,
while others may benefit a specific segment of clients. Not all such services
will necessarily be used exclusively in connection with the accounts which pay
the commissions to the broker-dealer providing the services.
The Investment Manager has no fixed agreements or understandings with
any broker-dealer as to the amount of brokerage business which the firm may
expect to receive for services supplied to the Investment Manager or otherwise.
There may be, however, understandings with certain firms that in order for such
firms to be able to continuously supply certain services, they need to receive
an allocation of a specified amount of brokerage business. These understandings
are honored to the extent possible in accordance with the policies set forth
above.
39
<PAGE>
It is not the Investment Manager's policy to intentionally pay a firm a
brokerage commission higher than that which another firm would charge for
handling the same transaction in recognition of services (other than execution
services) provided. However, the Investment Manager is aware that this is an
area where differences of opinion as to fact and circumstances may exist, and in
such circumstances, if any, the Investment Manager relies on the provisions of
Section 28(e) of the Securities Exchange Act of 1934. Brokerage commissions paid
by the Fund in secondary trading during the last three fiscal years were as
follows: 1997, $2,399,034, 1996, $2,015,000, and 1995, $815,000. The Investment
Manager believes the amount of brokerage commissions paid by the Fund during the
fiscal year ended December 31, 1997 was significantly higher than during the
previous fiscal years because of increased levels of assets and increased market
volatility, and the Investment Manager's efforts to invest cash inflows, to
restructure the portfolio, and to take advantage of opportunities to purchase
certain securities at attractive prices and to sell certain securities in order
to realize gains.
During and at the end of its most recent fiscal year, the Fund did not
hold in its portfolio securities of any entity that might be deemed to be a
regular broker-dealer of the Fund as defined under the 1940 Act.
In the case of the purchase of fixed income securities in underwriting
transactions, the Investment Manager follows any instructions received from its
clients as to the allocation of new issue discounts, selling commissions and
designations to brokers or dealers which provide the client with research,
performance evaluation, master trustee and other services. In the absence of
instructions from the client, the Investment Manager may make such allocations
to broker-dealers which have provided the Investment Manager with research and
brokerage services.
In some instances, certain clients of the Investment Manager request it
to place all or part of the orders for their account with certain brokers or
dealers, which in some cases provide services to those clients. The Investment
Manager generally agrees to honor these requests to the extent practicable.
Clients may condition their requests by requiring that the Investment Manager
only effect transactions with the specified broker-dealers if the broker-dealers
are competitive as to price and execution. In other cases, the Investment
Manager may be unable to negotiate commissions or obtain volume discounts or
best execution. In addition, a disparity may exist among the commissions charged
to clients who request the Investment Manager to use particular brokers or
dealers, and also between those clients and those who do not make such requests.
A client who requests the use of a particular broker-dealer should understand
that it may lose the possible advantage which non-requesting clients derive from
aggregation of orders for several clients as a single transaction for the
purchase or sale of a particular security. Among other reasons why best
execution may not be achieved with directed brokerage is that, in an effort to
achieve orderly execution of transactions, execution of orders that have
designated particular brokers may, at the discretion of the trading desk, be
delayed until execution of other non-designated orders has been completed.
When more than one client of the Investment Manager is seeking to buy
or sell the same security, the sale or purchase is carried out in a manner which
is considered fair and equitable to all accounts. In allocating investments
among various clients (including in what sequence orders for trades are placed),
the Investment Manager will use its best business judgment and will take into
account such factors as the investment objectives of the clients, the amount of
investment funds available to each, the size of the order, the amount already
committed for each client to a specific investment and the relative risks of the
investments, all in order to provide on balance a fair and equitable result to
each client over time. Although sharing in large transactions may sometimes
affect price or volume of shares acquired or sold, overall it is believed there
may be an advantage in execution. The Investment Manager may follow the practice
of grouping orders of various clients for execution to get the benefit of lower
prices or commission rates. In certain cases where the aggregate order may be
executed in a series of transactions at various prices, the transactions are
allocated as to amount and price in a manner considered equitable to each so
that each receives, to the extent practicable, the average price of such
transactions. Exceptions may be made based on such factors as the size of the
account and the size of the trade. For example, the Investment Manager may not
aggregate trades where it believes that it is in the best interests of clients
not to do so, including situations
40
<PAGE>
where aggregation might result in a large number of small transactions with
consequent increased custodial and other transactional costs which may
disproportionately impact smaller accounts. Such disaggregation, depending on
the circumstances, may or may not result in such accounts receiving more or less
favorable execution relative to other clients.
CERTAIN TAX MATTERS
Federal Income Taxation of 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) satisfy certain diversification
requirements; and (c) 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).
If the Fund should fail to qualify as a regulated investment company in
any year, it would lose the beneficial tax treatment accorded regulated
investment companies under Subchapter M of the Code and all of its taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders, and such distributions will be taxable to
shareholders as ordinary income to the extent of the Fund's current or
accumulated earnings and profits. Also, the shareholders, if they received a
distribution in excess of current or accumulated earnings and profits, would
receive a return of capital that would reduce the basis of their shares of the
Fund to the extent thereof. Any distribution in excess of a shareholder's basis
in the shareholder's shares would be taxable as gain realized from the sale of
such shares.
The Fund will be liable for a nondeductible 4% excise tax on amounts
not distributed (or deemed 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 (or be deemed to have distributed) 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. For that purpose, any
income or gain retained by the Fund that is subject to corporate tax will be
considered to have been distributed by year-end. The Fund intends to make
sufficient distributions to avoid this 4% excise tax.
41
<PAGE>
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 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 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, medium-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
42
<PAGE>
received by such shareholder on December 31, provided that the Fund pays the
dividend during January of the following calendar year.
Distributions by the Fund 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 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
The Trust has entered into a Distribution Agreement with State Street
Research Investment Services, Inc., as Distributor, whereby the Distributor acts
as agent to sell and distribute shares of the Fund. Shares of the Fund are sold
through dealers who have entered into sales agreements with the Distributor. The
Distributor distributes shares of the Fund on a continuous basis at an offering
price which is based on the net asset value per share of the Fund plus (subject
to certain exceptions) a sales charge which, at the election of the investor,
may be imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (Class B and Class C shares). The Distributor may reallow all or
portions of such sales charges as concessions to dealers.
Total sales charges on Class A shares paid to the Distributor for the
last three fiscal years were as follows: 1997, $3,063,618; 1996, $2,411,055; and
1995, $1,155,661.
For the same periods, the Distributor retained the following amounts
after reallowance of concessions to dealers: 1997, $382,856; 1996, $292,754; and
1995, $140,645.
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, managed fee-based programs and
so-called "mutual fund supermarkets," among other programs, the amount of the
sales charge reduction will similarly reflect the anticipated reduction in sales
expenses associated with such
43
<PAGE>
arrangements. The reductions in sales expenses, and therefore the reduction in
sales charges, will vary depending on factors such as the size and other
characteristics of the organization or program, and the nature of its membership
or the participants. The Fund reserves the right to make variations in, or
eliminate, sales charges at any time or to revise the terms of or to suspend or
discontinue sales pursuant to sponsored arrangements or similar programs at any
time.
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
making such sale a commission based on the aggregate of such sales. Such
commission also is payable to authorized securities dealers upon sales of Class
A shares made pursuant to a Letter of Intent to purchase shares having a net
asset value of $1,000,000 or more. Shares sold with such commissions payable are
subject to a one-year contingent deferred sales charge of 1.00% on any portion
of such shares redeemed within one year following their sale. After a particular
purchase of Class A shares is made under the Letter of Intent, the commission
will be paid only in respect of that particular purchase of shares. If the
Letter of Intent is not completed, the commission paid will be deducted from any
discounts or commissions otherwise payable to such dealer in respect of shares
actually sold. If an investor is eligible to purchase shares at net asset value
on account of the Right of Accumulation, the commission will be paid only in
respect of the incremental purchase at net asset value.
For the periods shown below, the Distributor received contingent
deferred sales charges upon redemption of Class A, Class B and Class C shares of
the Fund and paid initial commissions to securities dealers for sales of such
Class A, Class B and Class C shares as follows:
<TABLE>
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
December 31, 1997 December 31, 1996 December 31, 1995
----------------------------- ----------------------------- -----------------------------
Contingent Commissions Contingent Commissions Contingent Commissions
Deferred Paid to Deferred Paid to Deferred Paid to
Sales Charges Dealers Sales Charges Dealers Sales Charges Dealers
------------- ------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Class A $ 0 $2,688,190 $ 0 $2,118,301 $ 0 $1,015,016
Class B $612,487 $6,342,919 $329,954 $4,092,738 $688,624 $1,815,979
Class C* $ 3,122 $ 72,365 $ 6,250 $ 77,583 $ 5,125 $ 40,514
</TABLE>
- --------------------
* Prior to November 1, 1997, Class C shares were designated Class D.
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 C shares, including, but not limited to, (1) the
payment of commissions and/or reimbursement to underwriters, securities dealers
and others engaged in the sale of shares, including payments to
44
<PAGE>
the Distributor to be used to pay commissions and/or reimbursement to securities
dealers (which securities dealers may be affiliates of the Distributor) engaged
in the distribution and marketing of shares and furnishing ongoing assistance to
investors, (2) reimbursement of direct out-of-pocket expenditures incurred by
the Distributor in connection with the distribution and marketing of shares and
the servicing of investor accounts including expenses relating to the
formulation and implementation of marketing strategies and promotional
activities such as direct mail promotions and television, radio, newspaper,
magazine and other mass media advertising, the preparation, printing and
distribution of Prospectuses of the Fund and reports for recipients other than
existing shareholders of the Fund, and obtaining such information, analyses and
reports with respect to marketing and promotional activities and investor
accounts as the Fund may, from time to time, deem advisable, and (3)
reimbursement of expenses incurred by the Distributor in connection with the
servicing of shareholder accounts including payments to securities dealers and
others in consideration of the provision of personal service to investors and/or
the maintenance or servicing of shareholder accounts and expenses associated
with the provision of personal service by the Distributor directly to investors.
In addition, the Distribution Plan is deemed to authorize the Distributor and
the Investment Manager to make payments out of general profits, revenues or
other sources to underwriters, securities dealers and others in connection with
sales of shares, to the extent, if any, that such payments may be deemed to be
within the scope of Rule 12b-1 under the 1940 Act.
Some or all of the service fees are used to pay or reimburse dealers
(including dealers that are affiliates of the Distributor) or others for
personal services and/or the maintenance of shareholder accounts. A portion of
any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance or servicing of
shareholder accounts by such dealers. Dealers who have sold Class A shares are
eligible for further reimbursement commencing as of the time of such sale.
Dealers who have sold Class B and Class C shares are eligible for further
reimbursement after the first year during which such shares have been held of
record by such dealer as nominee for its clients (or by such clients directly).
Any service fees received by the Distributor and not allocated to dealers may be
applied by the Distributor in reduction of expenses incurred by it directly for
personal services and the maintenance or servicing of shareholder accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to dealers for selling such shares. Any distribution fees
received by the Distributor and not allocated to dealers may be applied by the
Distributor in connection with sales or marketing efforts, including special
promotional fees and cash and noncash incentives based upon sales by dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs similar
expenses on behalf of, such other funds. When expenses of the Distributor cannot
be identified as relating to a specific fund, the Distributor allocates expenses
among the funds in a manner deemed fair and equitable to each fund.
45
<PAGE>
Commissions and other cash and noncash incentives and payments to
dealers, to the extent payable out of the general profits, revenues or other
sources of the Distributor (including the advisory fees paid by the Fund), have
also been authorized pursuant to the Distribution Plan.
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 C shares, an annual rate of 0.75% of the
average daily value of the net assets represented by such Class B or Class C
shares (as the case may be) to finance sales or promotion expenses and an annual
rate of 0.25% of the average daily value of the net assets represented by such
Class B or Class C shares (as the case may be) to make payments for personal
services and/or the maintenance or servicing of shareholder accounts. The
distribution and servicing expenses of a particular class will be borne solely
by that class. In addition, a rule of the NASD limits annual expenditures that
the Fund may incur under the Distribution Plan to 1%, of which 0.75% may be used
to pay distribution expenses and 0.25% may be used to pay shareholder service
fees. The NASD rule also limits the aggregate amount that the Fund may pay for
such distribution costs to 6.25% of gross share sales of a class since the
inception of any asset-based sales charge plus interest at the prime rate plus
1% on unpaid amounts thereof (less any contingent deferred sales charges). Such
limitation does not apply to shareholder service fees. Payments to the
Distributor or to dealers funded under the Distribution Plan may be discontinued
at any time.
The Distributor may pay certain dealers and other intermediaries
additional compensation for sales and administrative services. The Distributor
may provide cash and noncash incentives to intermediaries who, for example, sell
significant amounts of shares or develop particular distribution channels. The
Distributor may compensate dealers with clients who maintain their investments
in the Fund over a period of years. The incentives can include merchandise and
trips to, and attendance at, sales seminars at resorts. The Distributor may pay
for administrative services, such as technological and computer systems support
for the maintenance of pension plan participant records, for subaccounting, and
for distribution through mutual fund supermarkets or similar arrangements.
During the fiscal year ended December 31, 1997, 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:
46
<PAGE>
Class A Class B Class C*
------- ------- --------
Advertising $ 259 $ 232,156 $ 20,443
Printing and mailing of prospectuses
to other than current shareholders 78 70,012 6,165
Compensation to dealers 755,120 3,467,968 231,017
Compensation to sales
personnel 505 448,213 42,567
Interest 0 0 0
Carrying or other
financing charges 0 0 0
Other expenses: marketing; general 262 234,147 20,741
-------- ----------- -------
Total fees received $756,224 $4,460,868 $320,933
======== ========== ========
Difference $ 8,372**
==========
- -----------------
* Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares.
** Net fees result from the timing of expenditures and are used against future
expenses.
The Distributor may have also used additional resources of its own for
further expenses on behalf of the Fund.
No interested Trustee of the Trust has any direct or indirect financial
interest in the operation of the Distribution Plan or any related agreements
thereunder. The Distributor's interest in the Distribution Plan is described
above.
To the extent that the Glass-Steagall Act may be interpreted as
prohibiting banks and other depository institutions from being paid for
performing services under the Distribution Plan, the Fund will make alternative
arrangements for such services for shareholders who acquired shares through such
institutions.
47
<PAGE>
CALCULATION OF PERFORMANCE DATA
From time to time, in advertisements or in communications to
shareholders or prospective investors, the Fund may compare the performance of
its Class A, Class B, Class C or Class S shares to the performance of other
mutual funds with similar investment objectives, to certificates of deposit
and/or to other financial alternatives. The Fund may also compare its
performance to appropriate indices, such as Standard & Poor's 500 Index,
Consumer Price Index and Dow Jones Industrial Average and/or to appropriate
rankings and averages such as those compiled by Lipper Analytical Services,
Inc., Morningstar, Inc., Money Magazine, Business Week, Forbes Magazine, The
Wall Street Journal and Investor's Daily. For example, the performance of the
Fund might be compared to the Lipper Capital Appreciation Funds Index.
The average annual total return ("standard total return") of the Class
A, Class B, Class C and Class S shares of the Fund will be calculated as set
forth below. Total return is computed separately for each class of shares of the
Fund. Performance data for a specified class includes periods prior to the
adoption of class designations on February 17, 1993, when designations were
assigned based on the pricing and Rule 12b-1 fees applicable to shares sold
thereafter. The application of the additional Rule 12b-1 fees, if any, of up to
1% will, for periods after February 17, 1993, adversely affect Fund performance
results. Thus, performance data or rankings for a given class of shares should
be interpreted carefully by investors who hold or may invest in a different
class of shares.
The performance data below reflect Rule 12b-1 fees and, where
applicable, sales charges as follows:
48
<PAGE>
Rule 12b-1 Fees Sales Charges
----------------------------------------- ---------------------------
Class Amount Period
- ----- ------ ------
A 0.25% February 17, 1993 to present; Maximum 4.5% sales charge
Fee will reduce performance reflected
for periods after February 17,
1993
B 1.00% March 15, 1993 to present; fee 1- and 5-year periods
will reduce performance for reflect a 5% and a 2%
periods after March 15, 1993 contingent deferred sales
charge, respectively
C* 1.00% March 15, 1993 to present; fee 1-year period reflects a 1%
will reduce performance for contingent deferred sales
periods after March 15, 1993 charge
S* 0.00% Since commencement of None
operations to present
- --------------------
* Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
All calculations of performance data in this section reflect the
voluntary measures, if any, by the Fund's affiliates to reduce fees or expenses
relating to the Fund; see "--Accrued Expenses and Recurring Charges" later in
this section.
49
<PAGE>
Total Return
The Fund's standard average annual total returns ("standard total
return") of each class of shares were as follows:
Five Years One Year
Ten Years Ended Ended Ended
December 31, 1997 December 31, 1997 December 31, 1997
----------------- ----------------- -----------------
Class A 15.18% 15.91% 23.11%
Class B 15.31% 15.96% 22.80%
Class C* 15.32% 16.19% 26.93%
Class S* 15.86% 17.29% 29.08%
- ----------------
* Prior to November 1, 1997, the Fund's current Class C shares were
designated as Class D shares and the Fund's current Class S shares were
designated as Class C shares.
Standard total return is computed separately for each class of shares
by determining the average annual compounded rates of return over the designated
periods that, if applied to the initial amount invested, would produce the
ending redeemable value in accordance with the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the designated
period assuming a hypothetical $1,000 payment made at
the beginning of the designated period
The calculation is based on the further assumptions that the highest
applicable initial or contingent deferred sales charge is deducted, and that all
dividends and distributions by the Fund are reinvested at net asset value on the
reinvestment dates during the periods. All accrued expenses and recurring
charges are also taken into account as described later herein.
Accrued Expenses and Recurring Charges
Accrued expenses include all recurring charges that are charged to all
shareholder accounts in proportion to the length of the base period. The
standard total return results take
50
<PAGE>
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 S shares for periods which end no
earlier than the most recent calendar quarter end and which begin twelve months
before, five years before and ten years before. In addition, the Fund may
provide nonstandardized total return results for differing periods, such as for
the period since the Fund commenced operations in 1924, and/or without taking
sales charges into account. Such nonstandardized total return is computed as
otherwise described under "--Total Return" except the result may or may not be
annualized, and as noted any applicable sales charge may not be taken into
account and therefore not deducted from the hypothetical initial payment of
$1,000. For example, the Fund's nonstandardized total returns for the six months
ended December 31, 1997, without taking sales charges into account, were as
follows:
Class A 8.14%
Class B 7.70%
Class C* 7.75%
Class S* 8.23%
- -----------------
* Prior to November 1, 1997, Class C shares were designated as Class D,
and Class S shares were designated as Class C.
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.
51
<PAGE>
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., One Post Office Square, Boston, Massachusetts
02109, serves as the Trust's independent accountants, providing professional
services including (1) audits of the Fund's annual financial statements, (2)
assistance and consultation in connection with SEC filings and (3) review of the
annual income tax returns filed on behalf of the Fund.
FINANCIAL STATEMENTS
In addition to the reports provided to holders of record on a
semiannual basis, other supplementary financial reports may be made available
from time to time through electronic or other media. Shareholders with
substantial holdings in one or more State Street Research Funds may also receive
reports and other information which reflect or analyze their positions in a
consolidated manner. For more information, call State Street Research Service
Center.
The following financial statements are for the Fund's fiscal year ended
December 31, 1997.
DOCSC\600835.3
52
<PAGE>
STATE STREET RESEARCH INVESTMENT TRUST
- --------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
- --------------------------------------------------------------------------------
December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Value
Shares (Note 1)
- --------------------------------------------------------------------------------------------
COMMON STOCKS 94.9%
BASIC INDUSTRIES 14.6%
CHEMICAL 5.0%
<S> <C> <C>
E.I. Du Pont De Nemours & Co. ............................. 749,800 $ 45,034,862
Monsanto Co. .............................................. 175,400 7,366,800
Rohm & Haas Co. ........................................... 425,200 40,712,900
-------------
93,114,562
-------------
ELECTRICAL EQUIPMENT 3.2%
General Electric Co. ...................................... 798,700 58,604,613
-------------
FOREST PRODUCT 2.5%
Fort James Corp. .......................................... 482,800 18,467,100
IKON Office Solutions Inc. ................................ 306,300 8,614,688
Weyerhaeuser Co. .......................................... 382,200 18,751,687
-------------
45,833,475
-------------
MACHINERY 3.0%
Tyco International Ltd. ................................... 1,227,600 55,318,725
-------------
METAL & MINING 0.9%
British Steel PLC ADR ..................................... 695,600 14,911,925
Ispat International NV Cl. A* ............................. 98,400 2,127,900
-------------
17,039,825
-------------
Total Basic Industries .................................... 269,911,200
-------------
CONSUMER CYCLICAL 18.4%
AUTOMOTIVE 1.9%
General Motors Corp. ...................................... 294,300 17,841,937
Renault SA* ............................................... 622,100 17,507,305
-------------
35,349,242
-------------
RECREATION 6.0%
CBS Corp. ................................................. 574,200 16,903,013
Time Warner Inc. .......................................... 585,200 36,282,400
US West Inc.* ............................................. 1,024,800 29,591,100
Viacom Inc. Cl. B* ........................................ 213,500 8,846,906
Walt Disney Co. ........................................... 185,532 18,379,264
-------------
110,002,683
-------------
RETAIL TRADE 10.5%
Cendant Corp.* ............................................ 318,891 10,961,891
CVS Corp. ................................................. 421,200 26,983,125
Dayton Hudson Corp. ....................................... 392,900 26,520,750
Home Depot Inc. ........................................... 337,600 19,876,200
Kroger Co.* ............................................... 876,000 32,357,250
Rite Aid Corp. ............................................ 487,600 28,616,025
Safeway Inc.* ............................................. 381,300 24,117,225
Toys "R" Us Inc.* ......................................... 784,600 24,665,862
-------------
194,098,328
-------------
Total Consumer Cyclical ................................... 339,450,253
-------------
CONSUMER STAPLE 19.6%
BUSINESS SERVICE 2.4%
Browning-Ferris Industries Inc. ........................... 362,200 13,401,400
HBO & Co. ................................................. 204,200 9,801,600
Interpublic Group of Companies, Inc. ...................... 428,850 21,362,091
-------------
44,565,091
-------------
DRUG 7.6%
American Home Products Corp. .............................. 201,000 15,376,500
Bristol-Myers Squibb Co. .................................. 368,800 34,897,700
Eli Lilly & Co. ........................................... 83,712 5,828,448
Novartis AG ADR ........................................... 255,797 20,782,227
Pfizer Inc. ............................................... 280,700 20,929,694
Schering-Plough Corp. ..................................... 280,800 17,444,700
Warner-Lambert Co. ........................................ 208,700 25,878,800
-------------
141,138,069
-------------
FOOD & BEVERAGE 3.3%
Coca-Cola Co. ............................................. 187,000 12,458,875
General Mills Inc. ........................................ 276,100 19,775,662
H.J. Heinz Co. ............................................ 555,600 28,231,425
-------------
60,465,962
-------------
HOSPITAL SUPPLY 2.0%
Boston Scientific Corp.* .................................. 167,500 7,684,063
Guidant Corp. ............................................. 124,000 7,719,000
Johnson & Johnson ......................................... 318,300 20,968,012
-------------
36,371,075
-------------
PERSONAL CARE 2.2%
Gillette Co. .............................................. 214,100 21,503,669
Procter & Gamble Co. ...................................... 242,800 19,378,475
-------------
40,882,144
-------------
TOBACCO 2.1%
Philip Morris Companies, Inc. ............................. 841,900 38,148,594
-------------
Total Consumer Staple ..................................... 361,570,935
-------------
ENERGY 8.2%
OIL 7.6%
ENI SPA ADR ............................................... 170,800 9,746,275
Exxon Corp. ............................................... 264,700 16,196,331
Oryx Energy Co.* .......................................... 605,200 15,432,600
Seagull Energy Corp.* ..................................... 809,800 16,702,125
Shell Transport & Trading PLC ............................. 724,200 31,683,750
Total SA Cl. B ADR ........................................ 557,608 30,947,244
Unocal Corp. .............................................. 479,200 18,598,950
-------------
139,307,275
-------------
OIL SERVICE 0.6%
Schlumberger Ltd. ......................................... 144,724 11,650,282
-------------
Total Energy .............................................. 150,957,557
-------------
FINANCE 16.2%
BANK 9.3%
Banc One Corp. ............................................ 647,600 35,172,775
BankAmerica Corp. ......................................... 576,000 42,048,000
Chase Manhattan Corp. ..................................... 158,300 17,333,850
H.F. Ahmanson & Co. ....................................... 501,700 33,582,544
NationsBank Corp. ......................................... 483,700 29,415,006
Washington Mutual Inc. .................................... 206,000 13,145,375
-------------
170,697,550
-------------
INSURANCE 6.9%
Ace Ltd. .................................................. 376,200 36,303,300
American General Corp. .................................... 423,642 22,903,146
General Re Corp. .......................................... 112,200 23,786,400
Saint Paul Companies, Inc. ................................ 194,100 15,928,331
Travelers Group Inc. ...................................... 544,200 29,318,775
-------------
128,239,952
-------------
Total Finance ............................................. 298,937,502
-------------
SCIENCE & TECHNOLOGY 12.0%
AEROSPACE 2.4%
Boeing Co. ................................................ 531,200 $ 25,995,600
Raytheon Co. Cl. A ........................................ 18,768 925,473
Raytheon Co. Cl. B ........................................ 350,800 17,715,400
-------------
44,636,473
-------------
COMPUTER SOFTWARE & SERVICE 2.0%
Cisco Systems Inc.* ....................................... 294,000 16,390,500
Microsoft Corp.* .......................................... 160,600 20,757,550
-------------
37,148,050
-------------
ELECTRONIC COMPONENTS 1.4%
Analog Devices Inc.* ...................................... 203,300 5,628,869
Intel Corp. ............................................... 167,200 11,745,800
Texas Instruments Inc. .................................... 168,000 7,560,000
-------------
24,934,669
-------------
ELECTRONIC EQUIPMENT 2.0%
L.M. Ericsson Telephone Co. ADR Cl. B ..................... 276,640 10,322,130
Lucent Technologies Inc. .................................. 225,700 18,027,788
Teradyne Inc.* ............................................ 284,100 9,091,200
-------------
37,441,118
-------------
OFFICE EQUIPMENT 4.2%
Compaq Computer Corp. ..................................... 319,800 18,048,713
Hewlett-Packard Co. ....................................... 264,000 16,500,000
International Business Machines Corp. ..................... 216,900 22,679,606
Xerox Corp. ............................................... 269,000 19,855,562
-------------
77,083,881
-------------
Total Science & Technology ................................ 221,244,191
-------------
UTILITY 5.9%
ELECTRIC 2.4%
FPL Group Inc. ............................................ 321,100 19,005,106
Texas Utilities Co. ....................................... 631,200 26,234,250
-------------
45,239,356
-------------
TELEPHONE 3.5%
Bell Atlantic Corp. ....................................... 386,500 35,171,500
WorldCom Inc.* ............................................ 945,000 28,586,250
-------------
63,757,750
-------------
Total Utility ............................................. 108,997,106
-------------
Total Common Stocks (Cost $1,194,510,262) ................. 1,751,068,744
-------------
SHORT-TERM INVESTMENTS 4.0%
Navigator Securities Lending Prime Portfolio .............. 74,267,129 74,267,129
-------------
Total Short-Term Investments (Cost $74,267,129) ........... 74,267,129
-------------
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PRINCIPAL MATURITY VALUE
AMOUNT DATE (NOTE 1)
- ------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER 6.2%
<S> <C> <C> <C>
American Express Credit Corp., 5.83% ............ $ 11,279,000 1/06/1998 $ 11,279,000
American Express Credit Corp., 5.75% ............ 315,000 1/13/1998 315,000
Beneficial Corp., 5.86% ......................... 6,344,000 1/06/1998 6,344,000
Chevron USA Inc., 5.58% ......................... 24,000,000 1/14/1998 24,000,000
Commercial Credit Co., 5.95% .................... 5,773,000 1/09/1998 5,773,000
Deere & Co., 5.75% .............................. 9,685,000 1/13/1998 9,685,000
General Electric Capital Corp., 6.08% ........... 9,794,000 1/05/1998 9,794,000
Household Finance Corp., 6.10% .................. 31,742,000 1/09/1998 31,742,000
John Deere Capital Corp., 5.83% ................. 15,148,000 1/06/1998 15,148,000
----------------
Total Commercial Paper (Cost $114,080,000) ............................................ 114,080,000
----------------
Total Investments (Cost $1,382,857,391) - 105.1% ...................................... 1,939,415,873
Cash and Other Assets, Less Liabilities - (5.1%) ...................................... (93,523,239)
----------------
Net Assets - 100.0% ................................................................... $ 1,845,892,634
================
Federal Income Tax Information:
At December 31, 1997, the net unrealized appreciation of investments based on
cost for Federal income tax purposes of $1,381,382,083 was as follows: Aggregate
gross unrealized appreciation for all investments in which there is an excess
of value over tax cost ................................................................ $ 578,494,539
Aggregate gross unrealized depreciation for all investments in which there is an excess
of tax cost over value ................................................................ (20,460,749)
----------------
$ 558,033,790
================
- ------------------------------------------------------------------------------------------------------------------
* Non-income-producing securities.
ADR stands for American Depositary Receipt, representing ownership of foreign
securities.
</TABLE>
The accompanying notes are an integral part of the financial statements.
54
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
December 31, 1997
ASSETS
Investments, at value (Cost $1,382,857,391)
(Note 1) ............................................. $ 1,939,415,873
Cash .................................................. 159
Receivable for securities sold ........................ 6,386,223
Dividends and interest receivable ..................... 2,615,960
Receivable for fund shares sold ....................... 1,889,330
Other assets .......................................... 18,145
---------------
1,950,325,690
LIABILITIES
Payable for collateral received on securities loaned 74,267,129
Payable for securities purchased ...................... 20,184,613
Payable for fund shares redeemed ...................... 6,789,588
Accrued management fee (Note 2) ....................... 1,918,339
Accrued distribution and service fees (Note 4) ........ 585,075
Accrued transfer agent and shareholder services
(Note 2) ............................................ 449,888
Accrued trustees' fees (Note 2) ....................... 9,464
Other accrued expenses ................................ 228,960
---------------
104,433,056
---------------
Net Assets ............................................ $ 1,845,892,634
===============
Net Assets consist of:
Unrealized appreciation of investments .............. $ 556,558,482
Accumulated net realized gain ....................... 39,632,205
Paid-in capital ..................................... 1,249,701,947
---------------
$ 1,845,892,634
===============
Net Asset Value and redemption price per share
of Class A shares ($367,759,039/35,337,294 shares) ... $10.41
======
Maximum Offering Price per share of Class
shares ($10.41/.955) ................................. $10.90
======
Net Asset Value and offering price per share of
Class B shares ($558,567,869/54,006,968 shares)* .... $10.34
======
Net Asset Value and offering price per share
of Class C shares ($36,289,866/3,497,034 shares)* ... $10.38
======
Net Asset Value, offering price and redemption
price per share of Class S shares
($883,275,860/84,512,635 shares) ..................... $10.45
======
- -----------------------------------------------------------------------
*Redemption price per share for Class B and Class C is equal to net asset
value less any applicable contingent deferred sales charge.
The accompanying notes are an integral part of the financial statements.
55
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the year ended December 31, 1997
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Dividends, net of foreign taxes of $429,595 ............................. $ 24,269,765
Interest (Note 1) ....................................................... 3,263,149
------------
27,532,914
EXPENSES
Management fee (Note 2) ................................................. 5,717,422
Transfer agent and shareholder services (Note 2) ........................ 1,961,540
Service fee - Class A (Note 4) .......................................... 756,224
Distribution and service fees - Class B (Note 4) ........................ 4,460,868
Distribution and service fees - Class C (Note 4) ........................ 320,933
Custodian fee ........................................................... 300,298
Reports to shareholders ................................................. 150,033
Registration fees ....................................................... 131,030
Trustees' fees (Note 2) ................................................. 30,714
Audit fee ............................................................... 27,223
Legal fees .............................................................. 10,551
Miscellaneous ........................................................... 54,103
------------
13,920,939
------------
Net investment income ................................................... 13,611,975
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments (Notes 1 and 3) ........................ 233,740,026
Net unrealized appreciation of investments .............................. 153,903,428
------------
Net gain on investments ................................................. 387,643,454
------------
Net increase in net assets resulting from operations .................... $401,255,429
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
56
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
------------------------------
1996 1997
- -----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income .................. $ 14,467,750 $ 13,611,975
Net realized gain on investments ....... 240,753,684 233,740,026
Net unrealized appreciation
(depreciation) of investments ........ (18,848,278) 153,903,428
-------------- --------------
Net increase resulting from
operations ........................... 236,373,156 401,255,429
-------------- --------------
Dividends from net investment income:
Class A .............................. (2,367,239) (2,789,737)
Class B .............................. (1,492,489) (870,683)
Class C .............................. (139,420) (52,743)
Class S .............................. (11,670,468) (9,898,812)
-------------- --------------
(15,669,616) (13,611,975)
-------------- --------------
Distributions from net realized gains:
Class A .............................. (38,241,853) (37,498,390)
Class B .............................. (54,345,452) (56,883,383)
Class C .............................. (4,419,675) (3,712,939)
Class S .............................. (144,043,972) (96,107,440)
-------------- --------------
(241,050,952) (194,202,152)
-------------- --------------
Distribution in excess of net realized
gains:
Class A .............................. (151,663) --
Class B .............................. (215,528) --
Class C .............................. (17,528) --
Class S .............................. (571,263) --
-------------- --------------
(955,982) --
-------------- --------------
Net increase from fund share
transactions (Note 5) ................ 292,610,905 306,531,257
-------------- --------------
Total increase in net assets............ 271,307,511 499,972,559
Net Assets
Beginning of year ...................... 1,074,612,564 1,345,920,075
-------------- --------------
End of year ............................ $1,345,920,075 $1,845,892,634
============== ==============
The accompanying notes are an integral part of the financial statements.
57
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1997
NOTE 1
State Street Research Investment Trust (the "Trust"), is a series of State
Street Research Master Investment Trust (the "Master Trust"), which is a
Massachusetts business trust registered under the Investment Company Act of
1940, as amended, as an open-end management investment company. The Trust is
presently the only series of the Master Trust.
The investment objective of the Trust is to provide long-term growth of capital
and, secondarily, long-term growth of income. In seeking to achieve its
investment objective, the Trust invests primarily in common stocks, or
securities convertible into common stocks, that have long-term growth potential.
The Trust offers four classes of shares. Before November 1, 1997, Class C shares
were designated Class D and Class S shares were designated Class C. Class A
shares are subject to an initial sales charge of up to 4.50% and pay a service
fee equal to 0.25% of average daily net assets. Class B shares are subject to a
contingent deferred sales charge on certain redemptions made within five years
of purchase and pay annual distribution and service fees of 1.00%. Class B
shares automatically convert into Class A shares (which pay lower ongoing
expenses) at the end of eight years after the issuance of the Class B shares.
Class C shares are subject to a contingent deferred sales charge of 1.00% on any
shares redeemed within one year of their purchase. Class C shares also pay
annual distribution and service fees of 1.00%. Class S shares are only offered
to certain retirement accounts, advisory accounts of State Street Research &
Management Company (the "Adviser"), an indirect wholly owned subsidiary of
Metropolitan Life Insurance Company ("Metropolitan"), and special programs. No
sales charge is imposed at the time of purchase or redemption of Class S shares.
Class S shares do not pay any distribution or service fees. The Trust's expenses
are borne pro-rata by each class, except that each class bears expenses, and has
exclusive voting rights with respect to provisions of the Plan of Distribution,
related specifically to that class. The Trustees declare separate dividends on
each class of shares.
The following significant accounting policies are consistently followed by the
Trust in preparing its financial statements, and such policies are in conformity
with generally accepted accounting principles for investment companies.
A. INVESTMENTS IN SECURITIES
Values for listed securities represent the last sale on national securities
exchanges quoted prior to the close of the New York Stock Exchange. Over-the-
counter securities quoted on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") system are valued at closing price supplied
through such system. In the absence of recorded sales and for those
over-the-counter securities not quoted on the NASDAQ system, valuations are at
the mean of the closing bid and asked quotations, except for securities that may
be restricted as to public resale, which are valued in accordance with methods
adopted by the Trustees. Security transactions are accounted for on the trade
date (date the order to buy or sell is executed), and dividends declared but not
received are accrued on the ex-dividend date. Interest income is determined on
the accrual basis. Realized gains and losses from security transactions are
reported on the basis of identified cost of securities delivered.
B. FEDERAL INCOME TAXES
No provision for Federal income taxes is necessary since the Trust has elected
to qualify under Subchapter M of the Internal Revenue Code and maintains a
policy to distribute all of its taxable income, including net realized capital
gains, within the prescribed time periods. It is also the intention of the Trust
to distribute an amount sufficient to avoid imposition of any Federal Excise Tax
under Section 4982 of the Internal Revenue Code.
C. DIVIDENDS
Dividends from net investment income are declared and paid or reinvested
quarterly. Net realized capital gains are distributed annually, unless
additional distributions are required for compliance with applicable tax
regulations. For the year ended December 31, 1997, the Trust has designated its
distributions from net realized gains as $87,537,185 from 20% rate gains and
$50,664,876 from 28% rate gains.
Income dividends and capital gain distributions are determined in accordance
with Federal income tax regulations which may differ from generally accepted
accounting principles. The difference is due to the disposition of securities
that have different bases for financial reporting and tax purposes.
D. ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
E. SECURITIES LENDING
The Trust may seek additional income by lending portfolio securities to
qualified institutions. The Trust will receive cash or securities as collateral
in an amount equal to at least 100% of the current market value of any loaned
securities plus accrued interest. If the borrower fails to return the securities
and the value of the collateral has declined during the term of the loan, the
Trust will bear the loss. At December 31, 1997, the value of the securities
loaned and the value of collateral were $71,241,423 and $74,267,129,
respectively. During the year ended December 31, 1997, income from securities
lending amounted to $3,440 and is included in interest income.
NOTE 2
Prior to August 18, 1997, the Adviser received an annual fee equal to 0.50% of
the average net assets up to and including $200,000,000, 0.375% of the average
net assets in excess of $200,000,000 up to and including $300,000,000, 0.30% of
the average net assets in excess of $300,000,000 up to and including
$500,000,000, and 0.25% of the average net assets in excess of $500,000,000.
Effective August 18, 1997 and continuing for a period of one year, the
management fee is equal to 0.41% of average daily net assets on an annualized
basis. Beginning on August 18, 1998 and continuing thereafter, the management
fee will be equal to 0.55% annually on average net assets up to $500,000,000,
0.50% annually of the next $500,000,000 in average net assets, and 0.45%
annually of average net assets in excess of $1,000,000,000. In consideration of
these fees, the Adviser furnishes the Trust with management, investment
advisory, statistical and research facilities and services. The Adviser also
pays all salaries, rent and certain other expenses of management. During the
year ended December 31, 1997, the fees pursuant to such agreement amounted to
$5,717,422.
State Street Research Service Center, 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 Trust such as responding to inquiries and
instructions from investors with respect to the purchase and redemption of
shares of the Trust. 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 Trust may be purchased. During the year ended December
31, 1997, the amount of such shareholder servicing and account maintenance
expenses was $502,952.
The fees of the Trustees not currently affiliated with the Adviser amounted to
$30,714 during the year ended December 31, 1997.
NOTE 3
For the year ended December 31, 1997, exclusive of short-term investments and
U.S. Government obligations, purchases and sales of securities aggregated
$1,225,130,872 and $1,190,967,338, respectively.
NOTE 4
The Trust has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the "Plan")
under the Investment Company Act of 1940, as amended. Under the Plan, the Trust
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 C shares. In addition, the Trust pays
annual distribution fees of 0.75% of average daily net assets for Class B and
Class C shares. The Distributor uses such payments for personal service and/or
the maintenance or servicing of shareholder accounts, to reimburse securities
dealers for distribution and marketing services, to furnish ongoing assistance
to investors and to defray a portion of its distribution and marketing expenses.
For the year ended December 31, 1997, fees pursuant to such plan amounted to
$756,224, $4,460,868 and $320,933 for Class A, Class B and Class C shares,
respectively.
The Trust has been informed that the Distributor and MetLife Securities, Inc., a
wholly owned subsidiary of Metropolitan, earned initial sales charges
aggregating $382,856 and $2,313,586, respectively, on sales of Class A shares of
the Trust during the year ended December 31, 1997, and that MetLife Securities,
Inc. earned commissions aggregating $4,914,177 on sales of Class B shares, and
that the Distributor collected contingent deferred sales charges of $612,487 and
$3,122 on redemptions of Class B and Class C shares, respectively, during the
same period.
NOTE 5
The Trustees have the authority to issue an unlimited number of shares of
beneficial interest, $.001 par value per share.
Share transactions were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------------------------
1996 1997
---------------------------------- ----------------------------------
CLASS A SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold ................... 8,496,436 $ 85,083,629 11,892,218 $125,284,553
Issued upon reinvestment of:
Distributions from net
realized gains ............ 4,105,073 37,233,009 3,437,670 36,542,436
Dividends from net investment
income .................... 238,083 2,245,230 269,405 2,789,580
Shares redeemed ............... (2,981,620) (29,917,407) (4,933,408) (51,867,529)
---------- ------------- ---------- ------------
Net increase .................. 9,857,972 $ 94,644,461 10,665,885 $112,749,040
========== ============= ========== ============
CLASS B SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
Shares sold ................... 11,730,491 $ 117,507,067 19,674,761 $206,270,802
Issued upon reinvestment of:
Distributions from net
realized gains ............ 5,847,959 52,807,070 5,211,853 54,985,047
Dividends from net investment
income .................... 153,378 1,415,675 79,052 792,716
Shares redeemed ............... (2,861,202) (28,467,433) (5,930,757) (62,779,979)
---------- ------------- ---------- ------------
Net increase .................. 14,870,626 $143,262,379 19,034,909 $199,268,586
========== ============ ========== ============
CLASS C (FORMERLY CLASS D) SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
Shares sold ................... 910,947 $ 9,099,923 1,100,245 $ 11,484,215
Issued upon reinvestment of:
Distributions from net
realized gains ............ 466,008 4,217,370 334,491 3,539,567
Dividends from net investment
income .................... 13,599 126,917 3,760 37,536
Shares redeemed ............... (397,252) (3,972,443) (775,363) (8,173,619)
---------- ------------ ---------- ------------
Net increase .................. 993,302 $ 9,471,767 663,133 $ 6,887,699
========== ============ ========== ============
CLASS S (FORMERLY CLASS C) SHARES AMOUNT SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------
Shares sold ................... 1,551,667 $ 15,248,056 1,718,321 $ 18,233,635
Issued upon reinvestment of:
Distributions from net
realized gains ............ 8,570,372 78,065,167 5,286,697 56,461,922
Dividends from net investment
income .................... 468,693 4,537,303 361,083 3,744,987
Shares redeemed ............... (5,305,991) (52,618,228) (8,574,756) (90,814,612)
---------- ------------ ---------- ------------
Net increase (decrease) ....... 5,284,741 $ 45,232,298 (1,208,655) $(12,374,068)
========== ============ ========== ============
</TABLE>
58
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share outstanding throughout each year:
<TABLE>
<CAPTION>
Class A
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Years ended December 31
------------------------------------------------------------------------------------
1993(2) 1994 1995(1) 1996(1) 1997(1)
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<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 8.75 8.69 7.74 9.16 9.07
----- ----- ----- ----- -----
Net investment income ($) 0.10 0.11 0.14 0.12 0.10
Net realized and unrealized gain (loss) on
investments ($) 0.81 (0.44) 2.39 1.80 2.54
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.91 (0.33) 2.53 1.92 2.64
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.13) (0.12) (0.13) (0.13) (0.10)
Distributions from net realized gains ($) (0.84) (0.50) (0.98) (1.87) (1.20)
Distribution in excess of net realized
gains ($) -- -- -- (0.01) --
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS ($) (0.97) (0.62) (1.11) (2.01) (1.30)
----- ----- ----- ----- -----
NET ASSET VALUE, END OF YEAR ($) 8.69 7.74 9.16 9.07 10.41
===== ===== ===== ===== =====
Total return(4) (%) 10.53(5) (3.84) 32.85 21.03 28.91
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 75,259 92,137 135,676 223,868 367,759
Ratio of operating expenses to average net
assets (%) 0.75(6) 0.89 0.78 0.75 0.76
Ratio of net investment income to average
net assets (%) 1.27(6) 1.26 1.54 1.17 0.90
Portfolio turnover rate (%) 43.57 33.08 39.21 73.51 75.21
Average commission rate(7) ($) -- -- -- 0.0499 0.0515
<CAPTION>
Class B
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Years ended December 31
------------------------------------------------------------------------------------
1993(3) 1994 1995(1) 1996(1) 1997(1)
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<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 9.15 8.66 7.72 9.13 9.03
----- ----- ----- ----- -----
Net investment income ($) 0.06 0.06 0.07 0.04 0.02
Net realized and unrealized gain (loss) on
investments ($) 0.39 (0.44) 2.38 1.80 2.51
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.45 (0.38) 2.45 1.84 2.53
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.10) (0.06) (0.06) (0.06) (0.02)
Distributions from net realized gains ($) (0.84) (0.50) (0.98) (1.87) (1.20)
Distribution in excess of net realized
gains ($) -- -- -- (0.01) --
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS ($) (0.94) (0.56) (1.04) (1.94) (1.22)
----- ----- ----- ----- -----
NET ASSET VALUE, END OF YEAR ($) 8.66 7.72 9.13 9.03 10.34
===== ===== ===== ===== =====
Total return(4) (%) 4.95(5) (4.43) 31.86 20.15 27.80
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 73,110 113,301 183,446 315,766 558,568
Ratio of operating expenses to average net
assets (%) 1.51(6) 1.64 1.53 1.50 1.51
Ratio of net investment income to average
net assets (%) 0.48(6) 0.51 0.79 0.41 0.15
Portfolio turnover rate (%) 43.57 33.08 39.21 73.51 75.21
Average commission rate(7) ($) -- -- -- 0.0499 0.0515
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</TABLE>
(1)Per-share figures have been calculated using the average shares method.
(2)February 17, 1993 (commencement of share class designations) to December 31,
1993.
(3)March 15, 1993 (commencement of share class designations) to December
31, 1993.
(4)Does not reflect any front-end or contingent deferred sales charges.
(5)Not annualized.
(6)Annualized.
(7)Average commission rate per share paid by the Trust for security trades on
which commissions are charged beginning with the fiscal year ended December
31, 1996.
59
<PAGE>
<TABLE>
<CAPTION>
Class C (Formerly Class D)
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Years ended December 31
-------------------------------------------------------------------------------------
1993(3) 1994 1995(1) 1996(1) 1997(1)
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<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 9.15 8.68 7.74 9.15 9.05
----- ----- ----- ----- -----
Net investment income ($) 0.06 0.05 0.07 0.04 0.02
Net realized and unrealized gain (loss)
on investments ($) 0.40 (0.43) 2.38 1.79 2.53
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.46 (0.38) 2.45 1.83 2.55
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.09) (0.06) (0.06) (0.05) (0.02)
Distributions from net realized gains ($) (0.84) (0.50) (0.98) (1.87) (1.20)
Distribution in excess of net realized
gains ($) -- -- -- (0.01) --
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS ($) (0.93) (0.56) (1.04) (1.93) (1.22)
----- ----- ----- ----- -----
NET ASSET VALUE, END OF YEAR ($) 8.68 7.74 9.15 9.05 10.38
===== ===== ===== ===== =====
Total return(4) (%) 5.10(5) (4.45) 31.75 20.09 27.93
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 9,729 11,707 16,841 25,658 36,290
Ratio of operating expenses to average net
assets (%) 1.51(6) 1.64 1.53 1.50 1.51
Ratio of net investment income to average
net assets (%) 0.51(6) 0.51 0.79 0.42 0.15
Portfolio turnover rate (%) 43.57 33.08 39.21 73.51 75.21
Average commission rate(7) ($) -- -- -- 0.0499 0.0515
<CAPTION>
Class S (Formerly Class C)
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Years ended December 31
-------------------------------------------------------------------------------------
1993 1994 1995(1) 1996(1) 1997(1)
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<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR ($) 8.80 8.70 7.76 9.18 9.11
----- ----- ----- ----- -----
Net investment income ($) 0.15 0.13 0.16 0.14 0.12
Net realized and unrealized gain (loss)
on investments ($) 0.74 (0.43) 2.39 1.82 2.54
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS ($) 0.89 (0.30) 2.55 1.96 2.66
----- ----- ----- ----- -----
Dividends from net investment income ($) (0.15) (0.14) (0.15) (0.15) (0.12)
Distributions from net realized gains ($) (0.84) (0.50) (0.98) (1.87) (1.20)
Distribution in excess of net realized
gains ($) -- -- -- (0.01) --
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS ($) (0.99) (0.64) (1.13) (2.03) (1.32)
----- ----- ----- ----- -----
NET ASSET VALUE, END OF YEAR ($) 8.70 7.76 9.18 9.11 10.45
===== ===== ===== ===== =====
Total return(4) (%) 10.20 (3.47) 33.07 21.48 29.08
RATIOS/SUPPLEMENTAL DATA:
Net assets at end of year ($ thousands) 729,536 627,551 738,649 780,627 883,276
Ratio of operating expenses to average net
assets (%) 0.49 0.65 0.54 0.50 0.51
Ratio of net investment income to average
net assets (%) 1.63 1.54 1.81 1.44 1.17
Portfolio turnover rate (%) 43.57 33.08 39.21 73.51 75.21
Average commission rate(7) ($) -- -- -- 0.0499 0.0515
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</TABLE>
(1)Per-share figures have been calculated using the average shares method.
(2)February 17, 1993 (commencement of share class designations) to December 31,
1993.
(3)March 15, 1993 (commencement of share class designations) to December
31, 1993.
(4)Does not reflect any front-end or contingent deferred sales charges.
(5)Not annualized.
(6)Annualized.
(7)Average commission rate per share paid by the Trust for security trades on
which commissions are charged beginning with the fiscal year ended December
31, 1996.
60
<PAGE>
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REPORT OF INDEPENDENT ACCOUNTANTS
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TO THE TRUSTEES OF STATE STREET RESEARCH MASTER INVESTMENT TRUST AND
SHAREHOLDERS OF STATE STREET RESEARCH INVESTMENT TRUST:
We have audited the accompanying statement of assets and liabilities of State
Street Research Investment Trust, including the schedule of portfolio
investments, as of December 31, 1997, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of the
two years in the period then ended and the financial highlights for each of the
periods indicated therein. These financial statements and financial highlights
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of State
Street Research Investment Trust as of December 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the periods indicated therein, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 9, 1998
61
<PAGE>
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MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
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Investment Trust provided shareholders with strong performance during the year.
For the 12 months ended December 31, 1997, Class A shares returned +28.91%
[without sales charge]. The Trust outperformed the average growth and income
fund, which was up 27.14%, according to Lipper Analytical Services. It lagged
the S&P 500, which gained 33.35% for the same period.
The core of the Trust's portfolio consists primarily of large companies with
global market leadership as well as income-producing securities that offer a
potential cushion against stock market volatility.
The Trust's investments in high quality global market leaders accounted for much
of its strong performance during the year. A reduction in the Trust's technology
holdings was well-timed. Profits were taken and the proceeds reinvested in
retail drug and food companies, selected for their relatively stable prospects
for revenues and earnings.
Stock selection in the energy sector and an underweighting in utilities stocks
resulted in a weak fourth quarter for the Trust. Looking ahead, the manager
continues to focus on companies with strong market presence and relatively
stable sales and earnings growth potential.
December 31, 1997
All returns represent past performance, which is no guarantee of future results.
The investment return and principal value of an investment made in the Trust
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 may include periods prior to the
adoption of class designations in 1993, which resulted in new or increased 12b-1
fees of up to 1% per class thereafter and which will reduce subsequent
performance. During the period prior to 1990 that shares of the Trust were not
offered to the general public, the Trust was not subject to the cash inflows and
higher redemptions and expenses that have occurred during the Trust's current
continuous public offering. "S" shares, offered without a sales charge, are
available through certain employee benefit plans and special programs. Before
November 1, 1997, Class C shares were designated Class D, and Class S shares
were designated Class C. Performance reflects maximum 4.5% "A" share front-end
sales charge or 5% "B" share or 1% "C" share contingent deferred sales charges
where applicable. The Standard & Poor's 500 Composite Index (S&P 500) includes
500 widely traded common stocks and is a commonly used measure of U.S. stock
market performance.
CHANGE IN VALUE OF $10,000
BASED ON THE S&P 500 COMPARED
TO CHANGE IN VALUE OF $10,000
INVESTED IN INVESTMENT TRUST
CLASS A SHARES
Average Annual Total Return
1 year 5 years 10 years
+23.11% +15.91% +15.18%
Investment Trust S&P 500
12/87 9,550 10,000
12/88 10,530 11,660
12/89 13,910 15,340
12/90 13,780 14,870
12/91 17,650 19,390
12/92 18,760 20,860
12/93 20,620 22,990
12/94 19,820 23,260
12/95 26,340 31,990
12/96 31,870 39,330
12/97 41,086 52,448
CLASS B SHARES
Average Annual Total Return
1 year 5 years 10 years
+22.80% +15.96% +15.31%
Investment Trust S&P 500
12/87 10,000 10,000
12/88 11,020 11,660
12/89 14,580 15,340
12/90 14,430 14,870
12/91 18,480 19,390
12/92 19,640 20,860
12/93 21,480 22,960
12/94 20,530 23,260
12/95 27,070 31,990
12/96 32,520 39,330
12/97 41,566 52,448
CLASS C SHARES
Average Annual Total Return
1 year 5 years 10 years
+26.93% +16.19% +15.32%
Investment Trust S&P 500
12/87 10,000 10,000
12/88 11,020 11,660
12/89 14,570 15,340
12/90 14,420 14,870
12/91 18,480 19,390
12/92 19,640 20,860
12/93 21,490 22,960
12/94 20,530 23,260
12/95 27,070 31,990
12/96 32,520 39,330
12/97 41,570 52,448
CLASS S SHARES
Average Annual Total Return
1 year 5 years 10 years
+29.08% +17.29% +15.86%
Investment Trust S&P 500
12/87 10,000 10,000
12/88 11,030 11,660
12/89 14,580 15,340
12/90 14,430 14,870
12/91 18,480 19,390
12/92 19,640 20,860
12/93 21,650 22,960
12/94 20,890 23,260
12/95 27,800 31,990
12/96 33,780 39,330
12/97 43,597 52,448
62
<PAGE>
STATE STREET RESEARCH INVESTMENT TRUST
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REPORT ON SPECIAL MEETING OF SHAREHOLDERS
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A Special Meeting of Shareholders of the State Street Research Investment Trust
("Trust"), a series of State Street Research Master Investment Trust ("Master
Trust"), was convened on August 8, 1997 ("Meeting"). The results of the Meeting
are set forth below.
VOTES (MILLIONS OF SHARES)
--------------------------
FOR WITHHELD
--- --------
1. The following persons were elected as Trustees:
Steve A. Garban 87.8 5.0
Malcolm T. Hopkins 87.8 5.0
Edward M. Lamont 88.5 4.3
Robert A. Lawrence 88.6 4.3
Dean O. Morton 88.6 4.2
Thomas L. Phillips 88.6 4.3
Toby Rosenblatt 88.7 4.2
Michael S. Scott Morton 88.6 4.2
Ralph F. Verni 88.5 4.3
Jeptha H. Wade 88.6 4.3
VOTES (MILLIONS OF SHARES)
---------------------------
FOR AGAINST ABSTAIN
PROPOSAL --- ------- -------
2. The Trust's investment advisory contract was
amended to increase the management fee and to
make related changes ............................ 61.1 22.1 7.0
3. The Trust's fundamental policy on lending was
amended to clarify the permissibility of
securities lending .............................. 70.0 12.1 8.1
4. The Trust's fundamental policies regarding
diversification of investments were amended ..... 73.1 8.6 8.6
5. The selection of Coopers & Lybrand L.L.P. as
the Master Trust's independent accountants was
ratified ........................................ 85.6 1.3 6.0
63
