Supplement No. 1 dated July 17, 1995
to
Prospectus dated May 1, 1995
for
STATE STREET RESEARCH TAX-EXEMPT FUND
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
series of State Street Research Tax-Exempt Trust
Other Programs
Immediately after the first sentence of the first paragraph under the caption
"Purchase of Shares--Class A Shares--Initial Sales Charges--Other Programs,"
the following is added:
"Sales without a sales charge, or with a reduced sales charge, may also be made
through brokers, financial planners, institutions, and others, under managed
fee-based programs (e.g., "wrap fee" or similar programs) which meet certain
requirements established from time to time by the Distributor, in the event the
Distributor determines to implement such arrangements."
Additional Information
Under the caption "Redemption of Shares--Additional Information," the first
paragraph is revised in its entirety as follows:
"Because of the relatively high cost of maintaining small shareholder accounts,
the Fund reserves the right to involuntarily redeem at its option any
shareholder account which remains below $1,500 for a period of 60 days after
notice is mailed to the applicable shareholder, or to impose a maintenance fee
on such account after 60 days' notice. Such involuntary redemptions will be
subject to applicable sales charges, if any. The Fund may increase such minimum
account value above such amount in the future after notice to affected
shareholders. Involuntarily redeemed shares will be priced at the net asset
value on the date fixed for redemption by the Fund, and the proceeds of the
redemption will be mailed 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."
CONTROL NUMBER: 2456I-950717(0896) SR-LDSSR-258E-795IBS
<PAGE>
State Street Research
Tax-Exempt Fund
Prospectus
May 1, 1995
The investment objective of State Street Research Tax-Exempt Fund (the
"Fund") is to seek a high level of interest income exempt from federal income
taxes. In seeking to achieve its investment objective, the Fund invests
primarily in tax-exempt debt obligations which the investment manager
believes will not involve undue risk.
State Street Research & Management Company serves as investment adviser
(the "Investment Manager") for the Fund. As of February 28, 1995, the
Investment Manager had assets of approximately $23.9 billion under
management. State Street Research Investment Services, Inc. serves as
distributor (the "Distributor") for the Fund.
Shareholders may have their shares redeemed directly by the Fund at net
asset value plus the applicable contingent deferred sales charge, if any;
redemptions processed through securities dealers may be subject to processing
charges.
There are risks in any investment program, including the risk of changing
economic and market conditions, and there is no assurance that the Fund will
achieve its investment objective. The net asset value of a share of the Fund
will fluctuate as market conditions change.
This Prospectus sets forth concisely the information a prospective
investor ought to know about the Fund before investing. It should be retained
for future reference. A Statement of Additional Information about the Fund
dated May 1, 1995 has been filed with the Securities and Exchange Commission
and is incorporated by reference in this Prospectus. It is available, at no
charge, upon request to the Fund at the address indicated on the back cover
or by calling 1-800-562-0032.
The Fund is a diversified series of State Street Research Tax-Exempt Trust
(the "Trust"), an open-end management investment company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Table of Contents Page
Table of Expenses 3
Financial Highlights 5
The Fund's Investments 6
Limiting Investment Risk 8
Purchase of Shares 9
Redemption of Shares 17
Shareholder Services 19
The Fund and Its Shares 22
Management of the Fund 23
Dividends and Distributions; Taxes 24
Calculation of Performance Data 25
Appendix--Tax-Exempt vs. Taxable Yield
Comparison 28
<PAGE>
The Fund offers four classes of shares which may be purchased at the next
determined net asset value per share plus, in the case of all classes except
Class C shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a deferred
basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5% and
(ii) an annual service fee of 0.25% of the average daily net asset value of the
Class A shares.
Class B shares are subject to (i) a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made within
five years of purchase, and (ii) annual distribution and service fees of 1% of
the average daily net asset value of such shares. Class B shares automatically
convert into Class A shares (which pay lower ongoing expenses) at the end of
eight years after purchase. No contingent deferred sales charge applies after
the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or redemption
of Class C shares. Class C shares do not pay any distribution or service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1% if
redeemed within one year following purchase and (ii) annual distribution and
service fees of 1% of the average daily net asset value of such shares.
2
<PAGE>
Table of Expenses
<TABLE>
<CAPTION>
Class A Class B Class C Class D
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses (1)
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.5% None None None
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering
price) None None None None
Maximum Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, as applicable) None(2) 5% None 1%
Redemption Fees (as a percentage of amount
redeemed, if applicable) None None None None
Exchange Fees None None None None
</TABLE>
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
thereafter, and no contingent deferred sales charge is imposed after the
fifth year. Class D shares are subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the sale.
Long-term investors in a class of shares with a distribution fee may, over a
period of years, pay more than the economic equivalent of the maximum sales
charge permissible under applicable rules. See "Purchase of Shares."
(2) Purchases of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption. See
"Purchase of Shares."
<TABLE>
<CAPTION>
Class A Class B Class C Class D
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses (as a
percentage of average net assets)
Management Fees 0.55% 0.55% 0.55% 0.55%
12b-1 Fees 0.25% 1.00% None 1.00%
Other Expenses 0.36% 0.36% 0.36% 0.36%
----- ----- ----- -----
Total Fund Operating Expenses 1.16% 1.91% 0.91% 1.91%
===== ===== ===== =====
</TABLE>
Example:
You would pay the following expenses on a $1,000 investment
including, for Class A shares, the maximum initial sales charge and
assuming (1) 5% annual return and (2) redemption of the entire
investment at the end of each time period:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A shares $56 $80 $106 $180
Class B shares (1) $69 $90 $123 $204
Class C shares $ 9 $29 $ 50 $112
Class D shares $29 $60 $103 $223
</TABLE>
You would pay the following expenses on the same investment, assuming no
redemption:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class B (1) $19 $60 $103 $204
Class D $19 $60 $103 $223
</TABLE>
(1) Ten-year figures assume conversion of Class B shares to Class A shares at
the end of eight years.
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than
shown.
3
<PAGE>
The purpose of the table above is to assist the investor in understanding the
various costs and expenses that an investor will bear directly or indirectly.
The percentage expense levels shown in the table above are based on experience
with expenses during the fiscal year ended December 31, 1994; actual expense
levels for the current fiscal year and future years may vary from the amounts
shown. The table does not reflect charges for optional services elected by
certain shareholders, such as the $7.50 fee for remittance of redemption
proceeds by wire. For further information on sales charges, see "Purchase of
Shares--Alternative Purchase Program"; for further information on management
fees, see "Management of the Fund"; and for further information on 12b-1 fees,
see "Purchase of Shares--Distribution Plan."
4
<PAGE>
Financial Highlights
The data set forth below has been audited by Price Waterhouse LLP,
independent accountants, and their report thereon for the latest five years
is included in the Statement of Additional Information. For further
information about the performance of the Fund, see the Fund's Annual Report,
which appears under the caption "Financial Statements" in the Statement of
Additional Information.(a)
<TABLE>
<CAPTION>
Class A
August 25, 1986
(Commencement of
Year ended December 31 Operations) to
1994 1993 1992 1991 1990 1989 1988 1987 December 31, 1986
-------- -------- -------- -------- ------- ------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
year $ 8.43 $ 7.94 $ 7.69 $ 7.30 $ 7.42 $ 7.24 $ 6.86 $ 7.49 $ 7.40
Net investment
income* .40 .40 .43 .44 .46 .50 .52 .50 .17
Net realized and
unrealized gain
(loss) on
investments (.98) .54 .27 .39 (.12) .18 .38 (.61) .09
Dividends from net
investment
income (.38) (.39) (.43) (.44) (.46) (.50) (.52) (.50) (.17)
Distribution from
net realized
gains (.01) (.06) (.02) -- -- -- -- (.02) --
-------- -------- -------- -------- ------- ------- ------- ------- --------
Net asset value,
end of year $ 7.46 $ 8.43 $ 7.94 $ 7.69 $ 7.30 $ 7.42 $ 7.24 $ 6.86 $ 7.49
======== ======== ======== ======== ======= ======= ======= ======= =======
Total return (6.90)%+ 12.11%+ 9.34%+ 11.81%+ 4.84%+ 9.63%+ 13.50%+ (1.43%)+ 3.56%++
Net assets at end
of year (000s) $238,097 $302,845 $203,312 $118,157 $84,925 $68,392 $31,378 $30,462 $14,383
Ratio of operating
expenses to
average net
assets* 1.20% 1.20% 1.20% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%#
Ratio of net
investment
income to
average net
assets* 5.07% 4.85% 5.48% 6.00% 6.43% 6.72% 7.24% 7.23% 6.42%#
Portfolio turnover
rate 78.63% 36.16% 27.44% 81.75% 84.12% 106.86% 126.27% 190.50% 53.19%
*Reflects
voluntary
assumption of
fees or expenses
per share in
each year $ 0.00 -- $ 0.00 $ 0.00 $ 0.01 $ 0.02 $ 0.03 $ 0.03 $ 0.02
</TABLE>
#Annualized.
+Total return figures do not reflect any front-end or contingent deferred
sales charges.
++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges.
(a)Past results may not be indicative of future performance because of,
among other things, changes in the Fund's investment objective and policies
in March 1992. See "Calculation of Performance Data."
5
<PAGE>
<TABLE>
<CAPTION>
Class B Class C Class D
Year ended Year ended Year ended
December 31, 1994 1993** December 31, 1994 1993** December 31, 1994 1993**
----------------- ------- ----------------- ------ ----------------- ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $ 8.43 $ 8.25 $ 8.41 $ 8.25 $ 8.43 $ 8.25
Net investment income* .34 .19 .42 .23 .34 .19
Net realized and unrealized gain
(loss) on investments (.97) .24 (.96) .22 (.97) .23
Dividends from net investment
income (.33) (.19) (.41) (.23) (.33) (.18)
Distribution from net realized
gains (.01) (.06) (.01) (.06) (.01) (.06)
------- ------- ------ ------ ------ ------
Net asset value, end of year $ 7.46 $ 8.43 $ 7.45 $ 8.41 $ 7.46 $ 8.43
======= ======= ====== ====== ====== ======
Total return (7.59)%+ 5.20%++ (6.56)%+ 5.54%++ (7.59)%+ 5.19%++
Net assets at end of year (000s) $35,338 $27,695 $ 334 $ 477 $ 958 $1,115
Ratio of operating expenses to
average net assets* 1.95% 1.95%# 0.95% 0.96%# 1.95% 1.99%#
Ratio of net investment income to
average net assets* 4.35% 3.93%# 5.26% 4.92%# 4.31% 3.92%#
Portfolio turnover rate 78.63% 36.16% 78.63% 36.16% 78.63% 36.16%
*Reflects voluntary assumption of
fees or expenses per share in --
each year. $ 0.00 -- $ 0.00 -- $ 0.00
</TABLE>
**June 7, 1993 (commencement of share class designations) to December 31,
1993.
#Annualized.
+Total return figures do not reflect any front-end or contingent deferred
sales charges.
++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charge.
The Fund's Investments
The Fund's investment objective is to seek a high level of interest income
exempt from federal income taxes. The Fund's investment objective is a
fundamental policy and may not be changed without the approval of the holders
of a majority of the Fund's outstanding voting securities.
In seeking to achieve its investment objective, the Fund invests at least
80% of its assets under normal circumstances in tax-exempt debt obligations
which the investment manager believes will not involve undue risks. The Fund
invests primarily in notes and bonds issued by or on behalf of state and
local governmental units, the interest income of which, in the opinion of
bond counsel to the issuer, is exempt from federal income taxes ("tax-exempt"
bonds and notes) and which at the time of purchase are considered investment
grade i.e., rated AAA, AA, A or BBB by Standard & Poor's Corporation ("S&P")
or Aaa, Aa, A or Baa by Moody's Investors Service, Inc. ("Moody's"), or which
are not rated but believed by the Investment Manager to be of comparable
quality. Bonds rated Baa by Moody's lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Up to 20% of the Fund's assets may be invested without regard to the
limitations described above. However, during the current year, the Investment
Manager does not anticipate that the Fund will invest more than 5% of its net
assets in securities rated below BBB by S&P or below Baa by Moody's or in
unrated securities of comparable investment quality. See the Statement of
Additional Information for risks associated with lower rated, "high yield"
securities.
The Fund will purchase unrated securities only when the Investment Manager
believes that the issuers of such securities are in financial circumstances
similar to the financial circumstances of issuers of securities rated BB or
Ba or above and the securities themselves are otherwise similar in quality to
those rated BB or Ba or above. In no event will the Fund invest more than 25%
of its total assets in unrated tax-exempt bonds.
The Fund may invest in obligations which have fixed interest rates or
variable or floating interest rates, including short-term obligations which
have daily adjustable rates. Variable or floating rates may be adjusted in
relation to market rates for other instruments, prime rates, indices or
similar indicators.
6
<PAGE>
Certain of these adjustable obligations may carry a demand feature that
permits the Fund to receive the par value of the security upon demand prior
to maturity. These obligations may also be subject to prepayment without
penalty at the option of the issuer.
In addition, the Fund may invest in lease obligations or installment purchase
contract obligations, which are instruments supported by lease payments made by
a municipality ("municipal lease obligations"). Municipal lease obligations may
be issued by state and local government authorities to obtain funds to acquire a
wide variety of equipment and facilities such as fire and sanitation vehicles,
computer equipment, buildings and other capital assets. Although municipal lease
obligations do not normally constitute general obligations of the municipality,
a lease obligation is ordinarily backed by the municipality's agreement to make
the payments due under the lease obligation. However, certain lease obligations
contain "non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in later years unless
money is appropriated in the future. Municipal lease obligations are a
relatively new form of financing instrument and the market for such obligations
is still developing.
Depending on the development of such markets, such municipal lease
obligations may be deemed to be liquid as determined by or in accordance with
methods adopted by the Trustees. In determining the liquidity and appropriate
valuation of a municipal lease obligation, the following factors relating to the
security are considered, among others: (1) the frequency of trades and quotes;
(2) the number of dealers willing to purchase or sell the security; (3) the
willingness of dealers to undertake to make a market; (4) the nature of the
marketplace trades; and (5) the likelihood that the obligation will continue to
be marketable based on the credit quality of the municipality or relevant
obligor. Municipal lease obligations initially deemed to be liquid could later
become illiquid.
There are risks in any investment program, and there is no assurance that the
Fund will achieve its investment objective. Tax-exempt bonds are subject to
relative degrees of credit risk and market volatility. Credit risk relates to
the issuer's (and any guarantor's) ability to make timely payments of principal
and interest. Market volatility relates to the changes in market price that
occur as a result of variations in the level of prevailing interest rates and
yield relationships between sectors in the tax-exempt bond market and other
market factors.
For information concerning the risks and ratings of tax-exempt bonds, see
"Appendix--Description of Municipal Debt Ratings" in the Statement of Additional
Information.
Portfolio Maturity and Turnover
The Fund's holdings may include issues from across the maturity spectrum.
Ordinarily, the Fund will emphasize investments in longer term tax-exempt
bonds. However, the weighted average maturity of portfolio holdings may be
shortened or lengthened depending upon the Investment Manager's outlook for
interest rates.
The Fund reserves full freedom with respect to portfolio turnover. In periods
when there are rapid changes in economic conditions or security price levels or
when investment strategy is changed significantly, portfolio turnover may be
significantly higher than during times of economic and market price stability or
when investment strategy remains relatively constant. Increases in the rate of
portfolio turnover will result in increased transaction costs for the Fund and
may also result in an increase in the realization of short-term capital gains.
Portfolio Diversification
The Fund reserves the right to invest more than 25% of its total assets in
tax-exempt industrial development revenue bonds. The Fund also reserves the
right to invest more than 25% of its total assets in securities issued in
connection with the financing of projects with similar characteristics, such
as toll road revenue bonds, housing revenue bonds or electric power project
revenue bonds, or in industrial development revenue bonds which are based,
directly or indirectly, on the credit of private entities in any one
industry. See "Limiting Investment Risk" below and the Statement of
Additional Information. This may make the Fund more susceptible to economic,
political or regulatory occurrences affecting a particular
7
<PAGE>
industry or sector and increase the potential for fluctuation of net asset
value. Investments in industrial development revenue bonds which may result
in federal alternative minimum taxes will be limited under present policy to
20% of the Fund's net assets; see "Dividends and Distributions; Taxes."
However, the Fund will not invest more than 25% of its total assets in
securities of issuers conducting their principal activities in the same
state.
Limiting Investment Risk
In seeking to lessen investment risk, the Fund operates under certain
fundamental investment restrictions. The restrictions in this and the
following paragraph may be changed only by a vote of the holders of a
majority of the Fund's outstanding voting securities. The remaining
restrictions and policies are subject to change by the Trustees. The Fund may
not invest in a security if the transaction would result in: (a) more than 5%
of the Fund's total assets being invested in any one issuer; (b) the Fund's
owning more than 10% of any class of voting securities of an issuer; (c) more
than 5% of the Fund's total assets being invested in securities of issuers
(including predecessors) with less than three years of continuous operations
unless such securities are rated BBB or higher by S&P or Baa or higher by
Moody's; or (d) more than 25% of the Fund's total assets being invested in
securities of issuers conducting their principal activities in the same
state. These restrictions do not apply to investments in securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities or
backed by the U.S. Government.
The Fund may also invest in tax-exempt derivative products including stripped
tax-exempt bonds, synthetic floating rate tax-exempt bonds, and tax-exempt asset
backed securities, including interests in trusts holding tax-exempt lease
receivables. Some of these products may generate taxable income or become
illiquid. To reduce counter-party risk, the Fund will only deal with
established, reputable institutions.
The Fund may not invest more than 10% of its total assets in illiquid
securities, including securities restricted as to resale (limited to 5% of total
assets), repurchase agreements extending for more than seven days and other
securities which are not readily marketable. The Fund will not make loans except
that it may purchase debt obligations, including money market instruments,
directly from the issuer thereof or in the open market and may engage in
repurchase transactions collateralized by obligations of the U.S. Government and
its agencies and instrumentalities. For further discussion of these and other
investment restrictions, including nonfundamental investment restrictions which
may be changed without a shareholder vote, see the Statement of Additional
Information.
Although the Fund intends to invest primarily in tax- exempt fixed income
securities, to aid in achieving its investment objective it may, subject to
certain limitations, buy and sell options, futures contracts and options on
futures contracts, on securities and securities indices. 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; similar policies apply
to options which are not commodities. The Fund may also enter various forms of
swap arrangements, which have simultaneously the characteristics of a security
and a futures contract, although the Fund does not presently expect to invest
more than 5% of its total assets in such items. These swap arrangements include
interest rate swaps and index swaps. In addition, the Fund may purchase
securities on a "when-issued" basis and enter into repurchase agreements,
subject to certain limitations. See the Statement of Additional Information.
The Fund may hold up to 100% of its assets in cash or short-term securities
for temporary defensive purposes. The Fund will adopt a temporary defensive
position when, in the opinion of the Investment Manager, such a position is more
likely to provide protection against adverse market conditions than adherence to
the Fund's other investment policies. 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
8
<PAGE>
deposit, time deposits and bankers' acceptances of certain qualified
financial institutions and corporate commercial paper rated at least "A" by
S&P or "Prime" by Moody's (or, if not rated, issued by companies having an
outstanding long-term unsecured debt issue rated at least "A" by S&P or
Moody's). See the Statement of Additional Information.
The Fund intends that short-term securities acquired for temporary defensive
purposes will be tax-exempt. However, if suitable short-term tax-exempt
securities are not available or if such securities are available only on a
when-issued basis, the Fund may invest up to 50% of its total assets in
short-term securities the interest on which is not exempt from federal income
taxes.
Information on the Purchase of Shares, Redemption of Shares and Shareholder
Services is set forth on pages 9 to 22 below.
The Fund is available for investment by many kinds of investors including
participants investing through savings plans sponsored by employers,
corporations, individuals, etc. The applicability of the general information
and administrative procedures set forth below accordingly will vary depending
on the investor and the recordkeeping system established for a shareholder's
investment in the Fund. Participants in plans should first consult with the
appropriate person at their employer or refer to the plan materials before
following any of the procedures below. For more information or assistance,
anyone may call 1-800-562-0032.
Purchase of Shares
Methods of Purchase
Through Dealers
Shares of the Fund are continuously offered through securities dealers who
have entered into sales agreements with the Distributor. Purchases through
dealers are confirmed at the offering price, which is the net asset value
plus the applicable sales charge, next determined after the order is duly
received by State Street Research Shareholder Services ("Shareholder
Services"), a division of State Street Research Investment Services, Inc.
from the dealer. ("Duly received" for purposes herein means in accordance
with the conditions of the applicable method of purchase as described below.)
The dealer is responsible for transmitting the order promptly to Shareholder
Services in order to permit the investor to obtain the current price. See
"Purchase of Shares--Net Asset Value" herein.
By Mail
Initial investments in the Fund may be made by mailing or delivering to the
investor's securities dealer a completed Application (accompanying this
Prospectus), together with a check for the total purchase price payable to
the Fund. The dealer must forward the Application and check in accordance
with the instructions on the Application.
Additional shares may be purchased by mailing to Shareholder Services a check
payable to the Fund in the amount of the total purchase price together with any
one of the following: (i) an Application; (ii) the stub from a shareholder's
account statement; or (iii) a letter setting forth the name of the Fund, the
class of shares and the shareholder's account name and number. Shareholder
Services will deliver the purchase order to the transfer agent and dividend
paying agent, State Street Bank and Trust Company (the "Transfer Agent").
If a check is not honored for its full amount, the purchaser could be subject
to additional charges to cover collection costs and any investment loss, and the
purchase may be cancelled.
By Wire
An investor may purchase shares by wiring Federal Funds of not less than
$5,000 to State Street Bank and Trust Company, which also serves as the
Trust's custodian (the "Custodian"), as set forth below. Prior to making an
investment by wire, an investor must notify Shareholder Services at
1-800-521-6548 and obtain a control number and instructions. Following such
notification, Federal Funds should be wired through the Federal Reserve
System to:
9
<PAGE>
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF=State Street Research Tax-Exempt
Fund and class of shares (A, B, C or D)
AC=99029761
OBI=Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street
Research Shareholder Services)
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make
such investment by 12 noon Boston time on the day of his or her investment;
and (ii) the wire must be received by 4 P.M. Boston time that same day.
An investor making an initial investment by wire must promptly complete
the Application accompanying this Prospectus and deliver it to his or her
securities dealer, who should forward it as required. No redemptions will be
effected until the Application has been duly processed.
The Fund may in its discretion discontinue, suspend or change the practice
of accepting orders by any of the methods described above. Orders for the
purchase of shares are subject to acceptance by the Fund. The Fund reserves
the right to reject any purchase order, including orders in connection with
exchanges, for any reason which the Fund in its sole discretion deems
appropriate. The Fund reserves the right to suspend the sale of shares.
Minimum Investment
<TABLE>
<CAPTION>
Class of Shares
A B C D
<S> <C> <C> <C> <C>
Minimum Initial Investment
By Wire $5,000 $5,000 (a) $5,000
By Investamatic $1,000 $1,000 (a) $1,000
All Other $2,500 $2,500 (a) $2,500
Minimum Subsequent Investment
By Wire $5,000 $5,000 (a) $5,000
By Investamatic $ 50 $ 50 (a) $ 50
All Other $ 50 $ 50 (a) $ 50
</TABLE>
(a) Special conditions apply; contact Distributor.
The Fund reserves the right to vary the minimums for initial or subsequent
investments from time to time as in the case of, for example, exchanges and
investments under various employee benefit plans, sponsored arrangements
involving group solicitation of the members of an organization, or other
investment plans such as for reinvestment of dividends and distributions or
for periodic investments (e.g. Investamatic Check Program).
Alternative Purchase Program
General
Alternative classes of shares permit investors to select a purchase program
which they believe will be the most advantageous for them, given the amount
of their purchase, the length of time they anticipate holding Fund shares, or
the flexibility they desire in this regard, and other relevant circumstances.
Investors will be able to determine whether in their particular circumstances
it is more advantageous to incur an initial sales charge and not be subject
to certain ongoing charges or to have their entire initial purchase price
invested in the Fund with the investment being subject thereafter to ongoing
service fees and distribution fees.
10
<PAGE>
As described in greater detail below, securities dealers are paid
differing amounts of commission and other compensation depending on which
class of shares they sell.
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
<S> <C> <C> <C> <C>
Sales Charges Initial sales Contingent None Contingent
charge at time deferred sales deferred sales
of investment charge of 5% charge of 1%
of up to 4.5% to 2% applies applies to any
depending on to any shares shares redeemed
amount of redeemed within one year
investment within first following their
five years purchase
following
their
purchase; no
contingent
deferred sales
charge after
five years
On investments
of $1 million
or more, no
initial sales
charge; but
contingent
deferred sales
charge of 1%
applies to any
shares
redeemed
within one
year following
their purchase
Distribution None 0.75% for None 0.75% each year
Fee first eight
years; Class B
shares convert
automatically
to Class A
shares after
eight years
Service Fee 0.25% each 0.25% each None 0.25% each year
year year
Initial Above 4% None 1%
Commission described
Received by initial sales
Selling charge less
Securities 0.25% to 0.50%
Dealer retained by
Distributor
On investments
of $1 million
or more, 0.25%
to 0.70% paid
to dealer by
Distributor
</TABLE>
11
<PAGE>
In deciding which class of shares to purchase, the investor should
consider the amount of the investment, the length of time the investment is
expected to be held, and the ongoing service fee and distribution fee, among
other factors.
Class A shares are sold at net asset value plus an initial sales charge of
up to 4.5% of the public offering price. Because of the sales charge, not all
of an investor's purchase amount is invested unless the purchase equals
$1,000,000 or more. Class B shareholders pay no initial sales charge, but a
contingent deferred sales charge of up to 5% generally applies to shares
redeemed within five years of purchase. Class D shareholders also pay no
initial sales charge, but a contingent deferred sales charge of 1% generally
applies to redemptions made within one year of purchase. For Class B and
Class D shareholders, therefore, the entire purchase amount is immediately
invested in the Fund.
An investor who qualifies for a significantly reduced initial sales
charge, or a complete waiver of the sales charge on investments of $1,000,000
or more, on the purchase of Class A shares might elect that option to take
advantage of the lower ongoing service and distribution fees that
characterize Class A shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. Class B shares are assessed an annual
distribution fee of 0.75% of daily net assets for an eight year period
following the date of purchase and are then automatically converted to Class
A shares. Class D shares are assessed an annual distribution fee of 0.75% of
daily net assets for as long as the shares are held. The prospective investor
should consider these fees plus the initial or contingent deferred sales
charges in estimating the costs of investing in the various classes of the
Fund's shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are also allocated to dealers
(see "Distribution Plan" below). In addition, the Distributor will, at its
expense, provide additional cash and noncash incentives to securities dealers
that sell shares. Such incentives may be extended only to those dealers who
have sold or may sell significant amounts of shares and/or meet other
conditions established by the Distributor; for example, the Distributor may
sponsor special promotions to develop particular distribution channels or to
reach certain investor groups. The incentives may include merchandise and
trips to and attendance at sales seminars at resorts.
Class A Shares--Initial Sales Charges
Sales Charges
The purchase price of a Class A share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar
amount of the shares purchased as set forth in the table below. A major
portion of this sales charge is reallowed by the Distributor to the
securities dealer responsible for the sale.
<TABLE>
<CAPTION>
Sales Sales
Charge Charge
Paid by Paid by Dealer
Dollar Investor Investor Concession
Amount of As % of As % of As % of
Purchase Purchase Net Asset Purchase
Transaction Price Value Price
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 or above but less than $250,000 3.50% 3.63% 3.00%
$250,000 or above but less than $500,000 2.50% 2.56% 2.00%
$500,000 or above but less than $1
million 2.00% 2.04% 1.75%
See
following
$1 million and above 0% 0% discussion
</TABLE>
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
a commission as follows:
12
<PAGE>
<TABLE>
<CAPTION>
Amount of Sale Commission
<S> <C>
(a) $1 million to $3 million 0.70%
(b) Next $2 million 0.50%
(c) Amount over $5 million 0.25%
</TABLE>
On such sales of $1,000,000 or more, the investor is subject to a 1%
contingent deferred sales charge on any portion of the purchase redeemed
within one year of the sale. However, such redeemed shares will not be
subject to the contingent deferred sales charge to the extent that their
value represents (1) capital appreciation or (2) reinvestment of dividends or
capital gains distributions. In addition, the contingent deferred sales
charge will be waived for certain other redemptions as described under
"Contingent Deferred Sales Charge Waivers" below (as otherwise applicable to
Class B shares).
Class A shares of the Fund that are purchased without a sales charge may
be exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption
within one year of the Class A shares which are acquired through such
exchange. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any contingent
deferred sales charge will be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement
of Additional Information, of $100,000 or more of Class A shares of the Fund
or a combination of "Eligible Funds." "Eligible Funds" include the Fund and
other funds so designated by the Distributor from time to time. Class B,
Class C and Class D shares may also be included in the combination under
certain circumstances. Securities dealers should call Shareholder Services
for details concerning the other Eligible Funds and any persons who may
qualify for reduced sales charges and related information. See the Statement
of Additional Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A
shares of the Fund and any other Eligible Funds within a 13-month period.
Class B, Class C and Class D shares may be included in the combination under
certain circumstances. Additional information on a Letter of Intent is
available from dealers, or from the Distributor, and also appears in the
Statement of Additional Information.
Right of Accumulation
Investors may purchase Class A shares of the Fund or a combination of shares
of the Fund and other Eligible Funds at reduced sales charges pursuant to a
Right of Accumulation. Under the Right of Accumulation, the sales charge is
determined by combining the current purchase with the value of the Class A
shares of other Eligible Funds held at the time of purchase. Class B, Class C
and Class D shares may also be included in the combination under certain
circumstances. See the Statement of Additional Information and call
Shareholder Services for details concerning the Right of Accumulation.
Other Programs
Class A shares of the Fund may be sold or issued in an exchange at a reduced
sales charge or without a sales charge pursuant to certain sponsored
arrangements, which include programs under which a company, employee benefit
plan or other organization makes recommendations to, or permits group
solicitation of, its employees, members or participants, except any
organization created primarily for the purpose of obtaining shares of the
Fund at a reduced sales charge or without a sales charge. Information on such
arrangements and further conditions and limitations is available from the
Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and persons: (A) the
Investment Manager, Distributor, or any affiliated entities, including any
direct or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or
13
<PAGE>
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.
Class B Shares--Contingent Deferred Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is duly received, as defined herein.
No sales charge is imposed at the time of purchase; thus the full amount of
the investor's purchase payment will be invested in the Fund. However, a
contingent deferred sales charge may be imposed upon redemptions of Class B
shares as described below.
The Distributor will pay securities dealers at the time of sale a 4%
commission for selling Class B shares. The proceeds of the contingent
deferred sales charge and the distribution fee are used to offset
distribution expenses and thereby permit the sale of Class B shares without
an initial sales charge.
Class B shares that are redeemed within a five year period after their
purchase will not be subject to a contingent deferred sales charge to the
extent that the value of such shares represents (1) capital appreciation of
Fund assets or (2) reinvestment of dividends or capital gains distributions.
The amount of any applicable contingent deferred sales charge will be
calculated by multiplying the net asset value of such shares at the time of
redemption or at the time of purchase, whichever is lower, by the applicable
percentage shown in the table below:
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
As A Percentage Of Net Asset
Redemption During Value At Redemption
<S> <C>
1st Year Since Purchase 5%
2nd Year Since Purchase 4
3rd Year Since Purchase 3
4th Year Since Purchase 3
5th Year Since Purchase 2
6th Year Since Purchase and Thereafter None
</TABLE>
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first
of those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of the Fund acquired through an exchange from
another Eligible Fund will be measured from the date that such shares were
initially acquired in the other Eligible Fund, and Class B shares being
redeemed will be considered to represent, as applicable, capital appreciation
or dividend and capital gains distribution reinvestments in such other
Eligible Fund. These determinations will result in any contingent deferred
sales charge being imposed at the lowest possible rate. For federal income
tax purposes, the amount of the contingent deferred sales charge will reduce
the gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any contingent deferred sales charge will be paid
to the Distributor.
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic withdrawal plan which meets certain
conditions. In addition, the contingent deferred sales charge will be waived
for: (i) redemptions made within one year of the death or total disability,
as defined by the Social Security Administration, of all shareholders of an
account; (ii) redemptions made after attainment of a specific age in an
amount which represents the minimum distribution required at such age under
Section 401(a)(9) of the Internal Revenue Code for retirement
14
<PAGE>
accounts or plans (e.g., age 70-1/2 for IRAs and Section 403(b) plans),
calculated solely on the basis of assets invested in the Fund or other
Eligible Funds; and (iii) a redemption resulting from a tax-free return of an
excess contribution to an IRA. (The foregoing waivers do not apply to a
tax-free rollover or transfer of assets out of the Fund.) The Fund may modify
or terminate the waivers at any time; for example, the Fund may limit the
application of multiple waivers.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends or
distributions with respect to such shares, will automatically convert to
Class A shares of the Fund at the end of eight years following the issuance
of the Class B shares; consequently, they will no longer be subject to the
higher expenses borne by Class B shares. The conversion rate will be
determined on the basis of the relative per share net asset values of the two
classes and may result in a shareholder receiving either a greater or fewer
number of Class A shares than the Class B shares so converted. As noted
above, holding periods for Class B shares received in exchange for Class B
shares of other Eligible Funds will be counted toward the eight-year period.
Class C Shares--Institutional; No Sales Charge
The purchase price of a Class C share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase or
redemption. The Fund will receive the full amount of the investor's purchase
payment.
Class C shares are only available for new investments by certain employee
benefit plans and large institutions. See the Statement of Additional
Information. Information on the availability of Class C shares and further
conditions and limitations is available from the Distributor.
Class C shares may be also issued in connection with mergers and acquisitions
involving the Fund, and under certain other circumstances as described in this
Prospectus (e.g., see "Shareholder Services--Exchange Privilege").
Class C shares may have also been issued directly or through exchanges to
those shareholders of the Fund and other Eligible Funds who previously held
shares which are not subject to any future sales charge or service fees or
distribution fees.
Class D Shares--Spread Sales Charges
The purchase price of a Class D share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase; thus the
full amount of the investor's purchase payment will be invested in the Fund.
Class D shares are subject to a 1% contingent deferred sales charge on any
portion of the purchase redeemed within one year of the sale. The contingent
deferred sales charge will be 1% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. The Distributor
pays securities dealers a 1% commission for selling Class D shares at the
time of purchase. The proceeds of the contingent deferred sales charge and
the distribution fee are used to offset distribution expenses and thereby
permit the sale of Class D shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will not be
subject to the contingent deferred sales charge to the extent that the value
of such shares represents (1) capital appreciation of Fund assets or (2)
reinvestment of dividends or capital gains distributions. In addition, the
contingent deferred sales charge will be waived for certain other redemptions
as described under "Contingent Deferred Sales Charge Waivers" above (as
otherwise applicable to Class B shares). For federal income tax purposes, the
amount of the contingent deferred sales charge will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption.
The amount of any contingent deferred sales charge will be paid to the
Distributor.
Net Asset Value
The Fund's per share net asset values are determined Monday through Friday as
of the close of the New York Stock Exchange (the "NYSE") exclusive of days on
which the NYSE is closed. The NYSE ordi-
15
<PAGE>
narily closes at 4 P.M. New York City time. Market quotations for most
municipal securities are not readily available on a daily basis; therefore,
the Fund uses one or more pricing services to value such assets. The pricing
services utilize information with respect to market transactions, quotations
from dealers and various relationships among securities in determining value
and may provide prices determined as of times prior to the close of the NYSE.
Assets for which market quotations are readily available are valued as of the
close of business on the valuation date. Securities for which there is no
pricing service valuation or last reported sale price are valued as
determined in good faith by or under the authority of the Trustees of the
Trust. 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. Further information with respect to the valuation of the Fund's
assets is included in the Statement of Additional Information.
Distribution Plan
The Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the provisions of the
Distribution Plan, the Fund makes payments to the Distributor based on an
annual percentage of the average daily value of the net assets of each class
of shares as follows:
<TABLE>
<CAPTION>
Class Service Fee Distribution Fee
<S> <C> <C>
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
</TABLE>
Some or all of the service fees are used to reimburse securities dealers
(including securities dealers that are affiliates of the Distributor) for
personal services and/or the maintenance of shareholder accounts. A portion
of any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance of
shareholder accounts by such dealer. Dealers who have sold Class A shares are
eligible for further reimbursements commencing as of the time of such sale.
Dealers who have sold Class B and Class D shares are eligible for further
reimbursements 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 of shareholder
accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to securities 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 securities dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs
similar expenses on behalf of, such other funds. When expenses of the
Distributor cannot be identified as relating to a specific fund, the
Distributor allocates expenses among the funds in a manner deemed fair and
equitable to each fund.
Commissions and other cash and noncash incentives and payments to dealers,
to the extent payable out of the general profits, revenues or other sources
of the Distributor (including the advisory fees paid by the Fund), have also
been authorized pursuant to the Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which the Fund may incur under the
Distribution Plan to 1%, of which 0.75% may be used to pay distribution
expenses and 0.25% may be used to pay shareholder service fees. The NASD rule
also limits the aggregate amount which the Fund may pay for such distribution
costs to 6.25% of gross share sales of a class since the inception of any
asset-based sales charge plus interest at the prime rate plus 1% on unpaid
amounts thereof (less any contingent deferred sales charges). Such limitation
does not apply to shareholder service fees. Payments to the Distributor or to
dealers funded under the Distribution Plan may be discontinued at any time by
the Trustees of the Trust.
16
<PAGE>
Redemption of Shares
Shareholders may redeem all or any portion of their accounts on any day the
NYSE is open for business. Redemptions will be effective at the net asset
value per share next determined (see "Purchase of Shares--Net Asset Value"
herein) after receipt of the redemption request, in accordance with the
requirements described below, by Shareholder Services and delivery of the
request by Shareholder Services to the Transfer Agent. To allow time for the
clearance of checks used for the purchase of any shares which are tendered
for redemption shortly after purchase, the remittance of the redemption
proceeds for such shares could be delayed for 15 days or more after the
purchase. Shareholders who anticipate a potential need for immediate access
to their investments should, therefore, purchase shares by wire. Except as
noted, redemption proceeds are normally remitted within seven days after
receipt of the redemption request and any necessary documents in good order.
Methods of Redemption
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed to
the shareholder or wired to a predesignated bank account (see "Proceeds By
Wire" below) by sending to State Street Research Shareholder Services, P.O.
Box 8408, Boston, Massachusetts 02266-8408: (1) a written request for
redemption signed by the registered owner(s) of the shares, exactly as the
account is registered; (2) an endorsed stock power in good order with respect
to the shares or, if issued, the share certificates for the shares endorsed
for transfer or accompanied by an endorsed stock power; (3) any required
signature guarantees (see "Redemption of Shares--Signature Guarantees"
below); and (4) any additional documents which may be required for redemption
in the case of corporations, trustees, etc., such as certified copies of
corporate resolutions, governing instruments, powers of attorney, and the
like. The Transfer Agent will not process requests for redemption until it
has received all necessary documents in good order. A shareholder will be
notified promptly if a redemption request cannot be accepted. Shareholders
having any questions about the requirements for redemption should call
Shareholder Services toll-free at 1-800-562-0032.
Request By Telephone
Shareholders may request redemption by telephone with proceeds to be
transmitted by check or by wire (see "Proceeds By Wire" below). A shareholder
can request a redemption for $50,000 or less to be transmitted by check. Such
check for the proceeds will be made payable to the shareholder of record and
will be mailed to the address of record. There is no fee for this service. It
is not available for shares held in certificate form or if the address of
record has been changed within 30 days of the redemption request. The Fund
may revoke or suspend the telephone redemption privilege at any time and
without notice. See "Shareholder Services-- Telephone Services" for a
discussion of the conditions and risks associated with Telephone Privileges.
Request By Check (Class A Shares Only)
Shareholders of Class A shares of the Fund may redeem shares by checks drawn
on State Street Bank and Trust Company. Checks may be made payable to the
order of any person or organization designated by the shareholder and must be
for amounts of at least $500 but not more than $100,000. Shareholders will
continue to earn dividends on the shares to be redeemed until the check
clears. There is currently no charge associated with redemption of shares by
check. Checkbooks are supplied for a $2 fee. Checks will be sent only to the
registered owner at the address of record. A $10 fee will be charged against
an account in the event a redemption check is presented for payment and not
honored pursuant to the terms and conditions established by State Street Bank
and Trust Company.
Shareholders can request the checkwriting privilege by completing the
signature card which is part of the Application. In order to arrange for
redemption-by-check after an account has been opened, a revised Application
with signature card and signatures guaranteed must be sent to Shareholder
Services. Cancelled checks will be returned to shareholders at the end of
each month.
The redemption-by-check service is subject to State Street Bank and Trust
Company's rules and regulations applicable to checking accounts (as amended
from time to time), and is governed by the
17
<PAGE>
Massachusetts Uniform Commercial Code. All notices with respect to checks
drawn on State Street Bank and Trust Company must be given to State Street
Bank and Trust Company. Stop payment instructions with respect to checks must
be given to State Street Bank and Trust Company by calling 1-617-985-8543.
Shareholders may not close out an account by check.
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder has
Telephone Privileges (see "Shareholder Services--Telephone Services" herein),
the Trust's custodian will wire redemption proceeds to the shareholder's
predesignated bank account. To make the request, the shareholder should call
1-800-521-6548 prior to 4 P.M. Boston time. A $7.50 charge against the
shareholder's account will be imposed for each wire redemption. This charge
is subject to change without notice. The shareholder's bank may also impose a
charge for receiving wires of redemption proceeds. The minimum redemption by
wire is $5,000.
Request to Dealer to Repurchase
For the convenience of shareholders, the Fund has authorized the Distributor
as its agent to accept orders from dealers by wire or telephone for the
repurchase of shares by the Distributor from the dealer. The Fund may revoke
or suspend this authorization at any time. The repurchase price is the net
asset value for the applicable shares next determined following the time at
which the shares are offered for repurchase by the dealer to the Distributor.
The dealer is responsible for promptly transmitting a shareholder's order to
the Distributor. Payment of the repurchase proceeds is made to the dealer who
placed the order promptly upon delivery of certificates for shares in proper
form for transfer or, for Open Accounts, upon the receipt of a stock power
with signatures guaranteed as described below, and, if required, any
supporting documents. Neither the Fund nor the Distributor imposes any charge
upon such a repurchase. However, a dealer may impose a charge as agent for a
shareholder in the repurchase of his or her shares.
The Fund has reserved the right to change, modify or terminate the services
described above at any time.
Additional Information
Because of the relatively high cost of maintaining small shareholder
accounts, the Fund reserves the right to involuntarily redeem at its option
any shareholder account which remains below $1,500 for a period of 60 days
after notice is mailed to the applicable shareholder, or to impose a
maintenance fee on such account after 60 days notice. Such involuntary
redemptions will be subject to applicable sales charges, if any. The Fund may
increase such minimum account value above such amount in the future after
notice to affected shareholders. Involuntarily redeemed shares will be priced
at the net asset value on the date fixed for redemption by the Fund, and the
proceeds of the redemption will be mailed promptly to the affected
shareholder at the address of record. Imposition of a maintenance fee on a
small account could, over time, exhaust the assets of such account.
To cover the cost of additional compliance administration, a $20 fee will be
charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date of
payment of redemption proceeds for more than seven days, except that (a) it
may elect to suspend the redemption of shares or postpone the date of payment
of redemption proceeds: (1) during any period that the NYSE is closed (other
than customary weekend and holiday closings) or trading on the NYSE is
restricted; (2) during any period in which an emergency exists as a result of
which disposal of portfolio securities is not reasonably practicable or it is
not reasonably practicable to determine the Fund's net asset values; or (3)
during such other periods as the Securities and Exchange Commission may by
order permit for the protection of investors; and (b) the payment of
redemption proceeds may be postponed as otherwise provided under "Redemption
of Shares" herein.
Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Fund, the Investment
Manager and the Distributor
18
<PAGE>
from possible fraud, signature guarantees are required for certain
redemptions. Signature guarantees enable the Transfer Agent to be certain
that the person who has authorized a redemption from the account is, in fact,
the shareholder. Signature guarantees are required for: (1) all redemptions
requested by mail; (2) requests to transfer the registration of shares to
another owner; and (3) authorizations to establish the checkwriting
privilege. 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 by the Fund in certain
instances.
Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of the Fund owned by
shareholders are credited to their accounts by the Transfer Agent, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110. Certificates representing Class B or Class D shares will not be
issued, while certificates representing Class A or Class C shares will only
be issued if specifically requested in writing and, in any case, will only be
issued for full shares, with any fractional shares to be carried on the
shareholder's account. Shareholders will receive periodic statements of
transactions in their account.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through dealers,
by wire or by mailing a check payable to the Fund to Shareholder Services under
the terms set forth above under "Purchase of Shares."
2. The following methods of receiving dividends from investment income and
distributions from capital gains are available:
(a) All income dividends and capital gains distributions reinvested in
additional shares of the Fund.
(b) All income dividends in cash; all capital gains distributions
reinvested in additional shares of the Fund.
(c) All income dividends and capital gains distributions in cash.
(d) All income dividends and capital gains distributions invested in any
one available Eligible Fund designated by the shareholder as described below.
See "Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will automatically be coded for reinvestment of all
dividends and distributions in additional shares of the same class of the
Fund. Selections may be changed at any time by telephone or written notice to
Shareholder Services. Dividends and distributions are reinvested at net asset
value without a sales charge.
Exchange Privilege
Shareholders of the Fund may exchange their shares for available shares with
corresponding characteristics of any of the other Eligible Funds at any time
on the basis of the relative net asset values of the respective shares to be
exchanged, subject to compliance with applicable securities laws.
Shareholders of any other Eligible Fund may similarly exchange their shares
for Fund shares with corresponding characteristics. Prior to making an
exchange, shareholders should obtain the Prospectus of the Eligible Fund into
which they are exchanging. Under the Direct Program, subject to certain
conditions, shareholders may make arrangements for regular exchanges from the
Fund into other Eligible Funds. To effect an exchange, Class A, Class B and
Class D shares may be redeemed without the payment of any contingent deferred
sales charge that might otherwise be due upon an ordinary redemption of such
shares. The MetLife - State Street Research Money Market Fund issues Class E
shares which are sold without any sales charge. Exchanges of MetLife - 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
19
<PAGE>
purposes of computing the contingent deferred sales charge that may be
payable upon disposition of the acquired Class A, Class B and Class D shares,
the holding period of the redeemed shares is "tacked" to the holding period
of the acquired shares. The period any Class E shares are held is not tacked
to the holding period of any acquired shares. No exchange transaction fee is
currently imposed on any exchange.
For the convenience of its shareholders who have Telephone Privileges, the
Fund permits exchanges by telephone request from either the shareholder or
his or her dealer. Shares may be exchanged by telephone provided that the
registration of the two accounts is the same. The toll-free number for
exchanges is 1-800-521-6548. See "Telephone Services" herein for a discussion
of conditions and risks associated with Telephone Privileges.
The exchange privilege may be exercised only in those states where shares of
the relevant other Eligible Fund may legally be sold. For tax purposes, each
exchange actually represents the sale of shares of one fund and the purchase
of shares of another. Accordingly, exchanges may produce a capital gain or
loss for tax purposes. The exchange privilege may be terminated or suspended
or its terms changed at any time, subject, if required under applicable
regulations, to 60 days prior notice. New accounts established for investment
upon exchange from an existing account in another fund will have the same
Telephone Privileges as the existing account, unless Shareholder Services is
notified 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. In order to limit exchange activity
where the Fund believes doing so would be in the best interests of the Fund,
it reserves the right to revise or terminate the exchange privilege, limit
the amount or number of exchanges or reject any exchange for any person.
These measures may be imposed at any time. Subject to the foregoing, if an
exchange request in good order is received by Shareholder Services and
delivered by Shareholder Services to the Transfer Agent by 12 noon Boston
time on any business day, the exchange usually will occur that day. Consult
Shareholder Services before requesting an exchange or for further
information.
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 30 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 in which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by Shareholder
Services of such shareholder's written purchase request and delivery of the
request by Shareholder Services to the Transfer Agent. A shareholder may
exercise this reinvestment privilege only once with respect to his or her
shares of the Fund. No charge is imposed by the Fund for such reinvestments;
however, dealers may charge fees in connection with the reinvestment
privilege. The reinvestment privilege may be exercised with respect to an
Eligible Fund only in those states where shares of the relevant other
Eligible Fund may legally be sold.
Investment Plans
The Fund offers Class A, Class B and Class D shareholders the Investamatic
Check Program. Under this Program, shareholders may make regular investments
20
<PAGE>
by authorizing withdrawals from their bank accounts each month or quarter on
the Investamatic application form available from Shareholder Services.
Systematic Withdrawal Plan
A shareholder who owns noncertificated Class A or Class C shares with a value
of $5,000 or more, or Class B or Class D shares with a value of $10,000 or
more, may elect, by participating in the Fund's Systematic Withdrawal Plan,
to have periodic checks issued for specified amount. These amounts may not be
less than certain minimums, depending on the class of shares held. The Plan
provides that all income dividends and capital gains distributions of the
Fund shall be credited to participating shareholders in additional shares of
the Fund. Thus, the withdrawal amounts paid can only be realized by redeeming
shares of the Fund under the Plan. To the extent such amounts paid exceed
dividends and distributions from the Fund, a shareholder's investment will
decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales charges,
no such charges will be imposed on withdrawals of up to 8% annually of either
(a) the value, at the time the Plan is initiated, of the shares then in the
account, or (b) the value, at the time of a withdrawal, of the same number of
shares as in the account when the Plan was initiated, whichever is higher.
Expenses of the Plan are borne by the Fund. A participating shareholder may
withdraw from the Plan, and the Fund may terminate the Plan at any time on
written notice. Purchase of additional shares while a shareholder is
receiving payments under a Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate
in the Investamatic Check Program and the Systematic Withdrawal Plan at the
same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all 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 investment
is made is initially funded with the requisite minimum amount. The number of
shares purchased will be determined as of the dividend payment date. The
Dividend Allocation Plan is subject to state securities law requirements, to
suspension at any time, and to such policies, limitations and restrictions,
as, for instance may be applicable to street name or master accounts, that
may be adopted from time to time.
Automatic Bank Connection
A shareholder may elect, by participating in the Fund's Automatic Bank
Connection ("ABC"), to have dividends and other distributions, including
Systematic Withdrawal Plan payments, automatically deposited in the
shareholder's bank account by electronic funds transfer. Some contingent
deferred sales charges may apply. See "Systematic Withdrawal Plan" herein.
Reports
Reports for the Fund will be sent to shareholders of record at least
semiannually. These reports will include a list of the securities owned by
the Fund as well as the Fund's financial statements.
Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing the shareholder to make telephone redemptions for
amounts up to $50,000 to be mailed to the shareholder's address of record is
available automatically;
(2) the privilege allowing the shareholder or his or her dealer to make
telephone exchanges is available automatically; and
(3) the privilege allowing the shareholder to make telephone redemptions for
amounts over $5,000, to be remitted by wire to the shareholder's
predesignated bank account, is available by election on the Application
accompanying this Prospectus. A current shareholder who did not previously
request such telephone wire privilege on his or her original Application may
21
<PAGE>
request the privilege by completing a Telephone Redemption-by-Wire Form which
may be obtained by calling 1-800-521-6548. The Telephone Redemption-by-Wire
Form requires a signature guarantee.
A shareholder may decline the automatic Telephone Privileges set forth in (1)
and (2) above by so indicating on the Application accompanying this
Prospectus.
A shareholder may discontinue any Telephone Privilege at any time by advising
Shareholder Services that the shareholder wishes to discontinue the use of such
privileges in the future.
Unless such Telephone Privileges are declined, a shareholder is deemed to
authorize Shareholder Services and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder to
redeem, or purporting to be the shareholder or the shareholder's dealer to
exchange, shares from any account; and (2) honor any written instructions for
a change of address regardless of whether such request is accompanied by a
signature guarantee. All telephone calls will be recorded. None of the Fund,
the other Eligible Funds, the Transfer Agent, the Investment Manager or the
Distributor will be liable for any loss, expense or cost arising out of any
request, including any fraudulent or unauthorized requests. Shareholders
assume the risk to the full extent of their accounts that telephone requests
may be unauthorized. Reasonable procedures will be followed to confirm that
instructions communicated by telephone are genuine. The shareholder will not
be liable for any losses arising from unauthorized or fraudulent instructions
if such procedures are not followed.
Shareholders may redeem or exchange shares by calling toll-free
1-800-521-6548. Although it is unlikely, during periods of extraordinary
market conditions, a shareholder may have difficulty in reaching Shareholder
Services at such telephone number. In that event, the shareholder should
contact Shareholder Services at 1-800-562-0032, 1-617-357-7805 or otherwise
at its main office at One Financial Center, Boston, Massachusetts 02111-2690.
Shareholder Account Inquiries:
Please call 1-800-562-0032
Call this number for assistance in answering general questions on your
account, including account balance, available shareholder services, statement
information and performance of the Fund. Account inquiries may also be made
in writing to State Street Research Shareholder Services, P.O. Box 8408,
Boston, Massachusetts 02266-8408. A fee of up to $10 will be charged against
an account for providing additional account transcripts or photocopies of
paid redemption checks or for researching records in response to special
requests.
Shareholder Telephone Transactions:
Please call 1-800-521-6548
Call this number for assistance in purchasing shares by wire and for
telephone redemptions or telephone exchange transactions. Shareholder
Services will require some form of personal identification prior to acting
upon instructions received by telephone. Written confirmation of each
transaction will be provided.
The Fund and Its Shares
The Fund was organized in 1985 as a series of State Street Research
Tax-Exempt Trust, a Massachusetts business trust. The Trustees have
authorized shares of the Fund to be issued in four classes: Class A, Class B,
Class C and Class D. The Trust is registered with the Securities and Exchange
Commission as an open- end management investment company. The fiscal year end
of the Fund is December 31.
Except for those differences between the classes of shares described below
and elsewhere in the Prospectus, each share of a Fund has equal dividend,
redemption and liquidation rights with other shares of the Fund and when
issued is fully paid and nonassessable. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common usage of terms which may develop in the mutual fund
industry. For example, Class C shares may be redesignated as Class Y shares
and Class D shares may be redesignated as Class C shares. Any redesignation
would not affect any substantive rights respecting the shares.
22
<PAGE>
Each share of each class of shares represents an identical legal interest in
the same portfolio of investments of the Fund, has the same rights and is
identical in all respects, except that Class B and Class D shares bear the
expenses of the deferred sales arrangement and any expenses (including the
higher service and distribution fees) resulting from such sales arrangement,
and certain other incremental expenses related to a class. Each class will
have exclusive voting rights with respect to provisions of the Rule 12b-1
distribution plan pursuant to which the service and distribution fees, if
any, are paid. Although the legal rights of holders of each class of shares
are identical, it is likely that the different expenses borne by each class
will result in different net asset values and dividends. The different
classes of shares of the Fund also have different exchange privileges.
The rights of holders of shares may be modified by the Trustees at any time,
so long as such modifications do not have a material adverse effect on the
rights of any shareholder. On any matter submitted to the shareholders, the
holder of shares of the Fund is entitled to one vote per share (with
proportionate voting for fractional shares) regardless of the relative net
asset value thereof.
Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder
meetings unless required by the 1940 Act. Except as otherwise provided under
said Act, the Board of Trustees will be a self-perpetuating body until fewer
than two-thirds of the Trustees serving as such are Trustees who were elected
by shareholders of the Trust. In the event less than a majority of the
Trustees serving as such were elected by shareholders of the Trust, a meeting
of shareholders will be called to elect Trustees. Under the Master Trust
Agreement, any Trustee may be removed by vote of two-thirds of the
outstanding Trust shares; holders of 10% or more of the outstanding 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 of the Trust.
However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for
indemnification for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund would be unable to meet its
obligations. The Investment Manager believes that, in view of the above, the
risk of personal liability to shareholders is remote.
As of March 31, 1995, Metropolitan Life Insurance Company ("Metropolitan"),
was the record and/or beneficial owner of approximately 48.4% of the
outstanding Class D shares of the Fund, and may be deemed to be in control of
such Class D shares of the Fund. 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 are so owned, such owners will be presumed to be in control
of such class of shares for purposes of voting on certain matters, such as
any Distribution Plan for a given class.
Management of the Fund
Under the provisions of the Trust's Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees.
The Fund's investment manager is State Street Research & Management Company.
The Investment Manager is charged with the overall responsibility for
managing the investments and business affairs of the Fund, subject to the
authority of the Board of Trustees.
23
<PAGE>
The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve as investment adviser to one of the nation's first
mutual funds, presently known as State Street Research Investment Trust,
which they had formed in 1924. Their investment management philosophy, which
continues to this day, emphasized comprehensive fundamental research and
analysis, including meetings with the management of companies under
consideration for investment. The Investment Manager's portfolio management
group has extensive investment industry experience managing equity and debt
securities. In managing debt securities, if any, for a portfolio, the
Investment Manager may consider yield curve, sector rotation and duration,
among other factors.
The Investment Manager is an indirect wholly- owned subsidiary of
Metropolitan and the Distributor is a wholly-owned subsidiary of the
Investment Manager, and both are located at One Financial Center, Boston,
Massachusetts 0211-2690.
The Investment Manager has entered into an Advisory Agreement with the Trust
pursuant to which investment research and management, administrative
services, office facilities, and personnel are provided to the Fund in
consideration of a fee from the Fund.
Under its Advisory Agreement with the Trust, the Investment Manager receives
a monthly investment advisory fee equal to 0.55% (on an annual basis) of the
average daily value of the net assets of the Fund. The Fund bears all costs
of its operation other than those incurred by the Investment Manager under
the Advisory Agreement. In particular, the Fund pays, among other expenses,
investment advisory fees, certain distribution expenses under the Fund's
Distribution Plan and the compensation and expenses of the Trustees who are
not otherwise currently affiliated with the Investment Manager or any of its
affiliates. The Investment Manager will reduce its management fee payable by
the Fund up to the amount of any expenses (excluding permissible items, such
as brokerage commissions, Rule 12b-1 payments, interest, taxes and litigation
expenses) paid or incurred in any year in excess of the most restrictive
expense limitation imposed by any state in which the Fund sells shares, if
any. The Investment Manager provides the Fund with office space, facilities
and personnel. The Investment Manager compensates Trustees of the Trust if
such persons are employees or affiliates of the Investment Manager or its
affiliates.
The Fund is managed by Susan W. Drake. Ms. Drake has managed the Fund since
March 1990. Ms. Drake's principal occupation currently is Vice President of
State Street Research & Management Company. During the past five years she
has also served as a securities analyst for State Street Research &
Management Company.
Subject to the policy of seeking best overall price and execution, sales of
shares of the Fund may be considered by the Fund and the Investment Manager
in the selection of broker or dealer firms for the Fund's portfolio
transactions.
The Investment Manager has a Code of Ethics governing personal securities
transactions of its employees; see the Statement of Additional Information.
Dividends and Distributions; Taxes
The Fund qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code for its most recent
fiscal year and intends to qualify as such in future years, although it
cannot give complete assurance that it will do so. As long as it so qualifies
and satisfies certain distribution requirements, it will not be subject to
federal income tax on its taxable income (including capital gains, if any)
distributed to its shareholders. Consequently, the Fund intends to distribute
annually to its shareholders substantially all of its net investment income
and any capital gain net income (capital gains net of capital losses). As
long as the Fund qualifies as a regulated investment company and meets
certain other Internal Revenue Code requirements, distributions of tax-exempt
interest income will be excluded from a shareholder's gross income for
federal income tax purposes.
Dividends from net investment income will be declared daily during each
calendar month and paid monthly; distributions of long-term and short-term
capital gain net income will generally be made on an annual basis (or as
otherwise required for compliance with applicable tax regulations), except to
the extent
24
<PAGE>
that net short-term gains, if any, are included in the monthly income
dividends for the purpose of stabilizing, to the extent possible, the amount
of net monthly distributions as described below. Both dividends from net
investment income and distributions of capital gain net income will be paid
in additional shares of the Fund at net asset value (except in the case of
shareholders who elect a different available distribution method). The Fund
will provide its shareholders of record with annual information on a timely
basis concerning the federal tax status of dividends and distributions during
the preceding calendar year.
The Fund has adopted distribution procedures which differ from those which
have been customary for investment companies in general. The Fund will
declare a dividend each day in an amount based on monthly projections of its
future net investment income and will pay such dividends monthly as described
above.
Consequently, the amount of each daily dividend may differ from actual net
investment income as determined under generally accepted accounting
principles. The purpose of these distribution procedures is to attempt to
eliminate, to the extent possible, fluctuations in the level of monthly
dividend payments that might result if the Fund declared dividends in the
exact amount of its daily net investment income.
Each daily dividend is payable to shareholders of record at the time of its
declaration (for this purpose, including only holders of shares purchased for
which payment has been received by the Transfer Agent and excluding holders
of shares redeemed on that day).
Dividends paid by the Fund from taxable net investment income and
distributions of net short-term capital gains, whether they are paid in cash
or reinvested in additional shares, will be taxable for federal income tax
purposes to shareholders as ordinary income. Distributions of net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) which are designated as capital gains distributions, whether paid in
cash or reinvested in additional shares, will be taxable for federal income
tax purposes to shareholders as long-term capital gains, regardless of how
long shareholders have held their shares. However, it is expected that any
taxable income will be insubstantial in relation to the tax-exempt interest
generated by the Fund. If shares of the Fund which are sold at a loss have
been held six months or less, the loss (not otherwise disallowed as
attributable to an exempt-interest dividend) will be considered as a
long-term capital loss to the extent of any capital gain distributions
received.
Dividends and other distributions and proceeds of redemption of Fund shares
paid to individuals and other nonexempt payees will be subject to a 31%
federal backup withholding tax if the Transfer Agent is not provided with the
shareholder's correct taxpayer identification number or certification that
the shareholder is not subject to such backup withholding. However,
exempt-interest dividends will not be subject to backup withholding.
Moreover, backup withholding will not apply to any taxable dividends and
distributions provided the Fund reasonably estimates that 95% or more of all
dividends or distributions paid or treated as paid during the year are
exempt-interest dividends.
Tax-exempt interest from "private activity" bonds (principally industrial
development revenue bonds) issued after August 7, 1986, is considered a tax-
preference item for purposes of the federal alternative minimum tax. For
corporations, all tax-exempt interest will be considered in calculating the
alternative minimum tax as part of the current earnings adjustments. Further,
shareholders who are "substantial users" (or "related persons" of substantial
users), within the meaning of Section 147 of the Internal Revenue Code, of
facilities financed by private activity bonds should consult their tax
advisers as to whether the Fund is a desirable investment.
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any
state or local taxing authority. Prospective shareholders should therefore
consult their tax advisers about the status of dividends and distributions
from the Fund in their own states and localities.
Calculation of Performance Data
From time to time, in advertisements or in communications to shareholders or
prospective investors, the
25
<PAGE>
Fund may compare the performance of its Class A, Class B, Class C or Class D
shares to that of other mutual funds with similar investment objectives, to
certificates of deposit, to taxable debt instruments, such as Treasury bonds,
as may be included in the Merrill Lynch Treasury Bond Index, and/or to other
financial alternatives. The Fund may also compare its performance to
appropriate indices such as the Lehman Brothers Municipal Revenue Bond Index,
the Merrill Lynch Revenue Index, the Merrill Lynch 500 Municipal Index or the
Bond Buyer Revenue Bond Index and/or to appropriate rankings or averages such
as the Lipper General Municipal Bond Funds Group compiled by Lipper
Analytical Services, Inc., or to those compiled by Morningstar, Inc., Money
Magazine, Business Week, Forbes Magazine, The Wall Street Journal, Fortune
Magazine or Investor's Daily.
Total return is computed separately for each class of shares of the Fund. The
average annual total return ("standard total return") for shares of the Fund is
computed by determining the average annual compounded rate of return for a
designated period that, if applied to a hypothetical $1,000 initial investment
less the maximum initial or contingent deferred sales charges, if applicable,
would produce the redeemable value of that investment at the end of the period,
assuming reinvestment of all dividends and distributions and with recognition of
all recurring charges. Standard total return may be accompanied with nonstandard
total return information, but for differing periods and computed in the same
manner with or without annualizing the total return or taking sales charges into
account.
The Fund's yield is computed separately for each class of shares by dividing
the net investment income, after recognition of all recurring charges, per
share earned during the most recent month or other specified thirty-day
period by the maximum offering price per share on the last day of such period
and annualizing the result. Yield information may be accompanied by
information on tax equivalent yields computed in the same manner, with
adjustment for assumed federal income tax rates.
The standard total return, yield and tax equivalent yield results take sales
charges into account, if applicable, but do not take into account recurring
and nonrecurring charges for optional services which only certain
shareholders elect and which involve nominal fees, such as the $7.50 fee for
remittance of redemption proceeds by wire. Where sales charges are not
applicable and therefore not taken into account in the calculation of
standard total return, yield and tax equivalent yield, the results will be
increased.
The Fund's distribution rate is calculated separately for each class of
shares by annualizing the latest distribution and dividing the result by the
maximum offering price per share as of the end of the period to which the
distribution relates. The distribution rate is not computed in the same
manner as the above described yield, and therefore can be significantly
different from it. In its supplemental sales literature, the Fund may quote
its distribution rate together with the above described standard total
return, yield and tax equivalent yield information. The use of such
distribution rates would be subject to an appropriate explanation of how the
components of the distribution rate differ from the above described yield.
Performance information may be useful in evaluating the Fund and for
providing a basis for comparison with other financial alternatives. Since the
performance of the Fund varies in response to fluctuations in economic and
market conditions, interest rates and Fund expenses, among other things, no
performance quotation should be considered a representation as to the Fund's
performance for any future period. In evaluating the Fund's performance,
consideration should be given to changes in the Fund's investment objective
and policies in March 1992. Prior to that time, the Fund was required to
invest 80% of its total assets under normal circumstances in tax-exempt
obligations rated A, BBB or BB by S&P or equivalent. In March 1992, such
percentage requirement was eliminated, thereby providing the Fund with
greater investment flexibility.
In addition, the net asset value of shares of the Fund will fluctuate, with
the result that shares of the Fund, when redeemed, may be worth more or less
than their original cost. Neither an investment in the Fund nor its
performance is insured or guaranteed; such lack of insurance or guarantees
should accord-
26
<PAGE>
ingly be given appropriate consideration when comparing the Fund to financial
alternatives which have such features.
Shares of the Fund had no class designations until June 5, 1993, when
designations were assigned based on the pricing and Rule 12b-1 fees
applicable to shares sold thereafter. Performance data for a specified class
includes periods prior to the adoption of class designations. Performance
data for periods prior to June 5, 1993 will not reflect additional Rule 12b-1
Distribution Plan fees, if any, of up to 1% per year depending on the class
of shares, which will adversely affect performance results for periods after
such date. Performance data or rankings for a given class of shares should be
interpreted carefully by investors who hold or may invest in a different
class of shares.
27
<PAGE>
Appendix
Tax-Exempt vs. Taxable Yield Comparison
Based on current 1995 federal tax rates, this table shows the rate of return
you would have to earn from a taxable investment to equal tax-exempt yields
ranging from 3% to 6%. For example, if you are single and your annual taxable
income is $21,000, you would have to earn 7.06% on taxable investment income
to equal a tax-exempt return of 6%.
1995 Tax Year
<TABLE>
<CAPTION>
Sample Federal Tax-Exempt Yields
Taxable Marginal
Income Rate 3.00% 4.00% 5.00% 6.00%
- --------- -------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Joint Return Equivalent Taxable Yield
$30,000 15.00% 3.53% 4.71% 5.88% 7.06%
50,000 28.00 4.17 5.56 6.94 8.33
100,000 31.00 4.35 5.80 7.25 8.70
150,000 36.00 4.69 6.25 7.81 9.38
260,000 39.60 4.97 6.62 8.28 9.93
Single Return
$21,000 15.00% 3.53% 4.71% 5.88% 7.06%
25,000 28.00 4.17 5.56 6.94 8.33
60,000 31.00 4.35 5.80 7.25 8.70
120,000 36.00 4.69 6.25 7.81 9.38
260,000 39.60 4.97 6.62 8.28 9.93
</TABLE>
There can be no guarantee that the Fund will achieve any particular
tax-exempt yield. While a substantial portion of the income will be exempt
from federal income tax, investors may be subject to some state or local tax.
To convert a specific tax-exempt yield to the taxable equivalent, the
investor should divide his or her tax-exempt yield by the complement of his
or her tax bracket (e.g., an investor in the 28% tax bracket would divide by
.72; [1.00-.28=.72]). The effect of reductions in itemized deductions and
personal exemptions for taxpayers with incomes exceeding certain levels has
not been taken into account.
28
<PAGE>
(LOGO) State Street Research
State Street Research
Tax-Exempt Fund
May 1, 1995
PROSPECTUS
STATE STREET RESEARCH
TAX-EXEMPT FUND
One Financial Center
Boston, MA 02111
INVESTMENT ADVISER
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
DISTRIBUTOR
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
SHAREHOLDER SERVICES
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266
800-562-0032
CUSTODIAN
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
TE-607D-595IBS CONTROL NUMBER:2297-950426(0596)SSR-LD
<PAGE>
Supplement No. 1 dated July 17, 1995
to
Prospectus dated May 1, 1995
for
STATE STREET RESEARCH TAX-EXEMPT FUND
STATE STREET RESEARCH NEW YORK TAX-FREE FUND
series of State Street Research Tax-Exempt Trust
Other Programs
Immediately after the first sentence of the first paragraph under the caption
"Purchase of Shares--Class A Shares--Initial Sales Charges--Other Programs,"
the following is added:
"Sales without a sales charge, or with a reduced sales charge, may also be made
through brokers, financial planners, institutions, and others, under managed
fee-based programs (e.g., "wrap fee" or similar programs) which meet certain
requirements established from time to time by the Distributor, in the event the
Distributor determines to implement such arrangements."
Additional Information
Under the caption "Redemption of Shares--Additional Information," the first
paragraph is revised in its entirety as follows:
"Because of the relatively high cost of maintaining small shareholder accounts,
the Fund reserves the right to involuntarily redeem at its option any
shareholder account which remains below $1,500 for a period of 60 days after
notice is mailed to the applicable shareholder, or to impose a maintenance fee
on such account after 60 days' notice. Such involuntary redemptions will be
subject to applicable sales charges, if any. The Fund may increase such minimum
account value above such amount in the future after notice to affected
shareholders. Involuntarily redeemed shares will be priced at the net asset
value on the date fixed for redemption by the Fund, and the proceeds of the
redemption will be mailed 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."
CONTROL NUMBER: 2456I-950717(0896) SR-LDSSR-258E-795IBS
<PAGE>
State Street Research
New York Tax-Free Fund
Prospectus
May 1, 1995
The investment objective of State Street Research New York Tax-Free Fund (the
"Fund") is to seek a high level of interest income exempt from federal income
taxes and New York State and New York City personal income taxes. To achieve
its investment objective, the Fund intends to invest primarily in securities
which are issued by or on behalf of New York State or its political
subdivisions and by other governmental entities.
State Street Research & Management Company serves as investment adviser
(the "Investment Manager") for the Fund. As of February 28, 1995, the
Investment Manager had assets of approximately $23.9 billion under
management. State Street Research Investment Services, Inc. serves as
distributor (the "Distributor") for the Fund.
Shareholders may have their shares redeemed directly by the Fund at net
asset value plus the applicable contingent deferred sales charge, if any;
redemptions processed through securities dealers may be subject to processing
charges.
There are risks in any investment program, including the risk of changing
economic and market conditions, and there is no assurance that the Fund will
achieve its investment objective. The net asset value of a share of the Fund
will fluctuate as market conditions change.
This Prospectus sets forth concisely the information a prospective
investor ought to know about the Fund before investing. It should be retained
for future reference. A Statement of Additional Information about the Fund
dated May 1, 1995 has been filed with the Securities and Exchange Commission
and is incorporated by reference in this Prospectus. It is available, at no
charge, upon request to the Fund at the address indicated on the back cover
or by calling 1-800-562-0032.
The Fund is a diversified series of State Street Research Tax-Exempt Trust
(the "Trust"), an open-end management investment company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Table of Contents Page
<S> <C>
Table of Expenses 3
Financial Highlights 5
The Fund's Investments 6
Limiting Investment Risk 8
Purchase of Shares 10
Redemption of Shares 18
Shareholder Services 20
The Fund and Its Shares 23
Management of the Fund 25
Dividends and Distributions; Taxes 25
Calculation of Performance Data 27
Appendix--Taxable Equivalent Yield Table 29
</TABLE>
<PAGE>
The Fund offers four classes of shares which may be purchased at the next
determined net asset value per share plus, in the case of all classes except
Class C shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5%
and (ii) an annual service fee of 0.25% of the average daily net asset value
of the Class A shares.
Class B shares are subject to (i) a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made
within five years of purchase, and (ii) annual distribution and service fees
of 1% of the average daily net asset value of such shares. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after purchase. No contingent deferred sales charge
applies after the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and
large institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1%
if redeemed within one year following purchase and (ii) annual distribution
and service fees of 1% of the average daily net asset value of such shares.
2
<PAGE>
<TABLE>
<CAPTION>
Table of Expenses Class A Class B Class C Class D
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses (1)
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.5% None None None
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering price) None None None None
Maximum Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, as applicable) None (2) 5% None 1%
Redemption Fees (as a percentage of amount
redeemed, if applicable) None None None None
Exchange Fees None None None None
</TABLE>
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
annually through the fifth year, and no contingent deferred sales charge
is imposed after the fifth year. Class D shares are subject to a 1%
contingent deferred sales charge on any portion of the purchase redeemed
within one year of the sale. Long-term investors in a class of shares
with a distribution fee may, over a period of years, pay more than the
economic equivalent of the maximum sales charge permissible under
applicable rules. See "Purchase of Shares."
(2) Purchase of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption.
See "Purchase of Shares."
<TABLE>
<CAPTION>
Class A Class B Class C Class D
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses (as a percentage of
average net assets)
Management Fees 0.55% 0.55% 0.55% 0.55%
12b-1 Fees 0.25% 1.00% None 1.00%
Other Expenses 0.62% 0.62% 0.62% 0.62%
Less Voluntary Reduction (0.32%) (0.32%) (0.32%) (0.32%)
------- ------- ------- -------
Total Fund Operating Expenses
(after voluntary reduction) 1.10% 1.85% 0.85% 1.85%
======= ======= ======= =======
</TABLE>
3
<PAGE>
Example:
You would pay the following expenses on a $1,000 investment including, for
Class A shares, the maximum initial sales charge and assuming (1) 5% annual
return and (2) redemption of the entire investment at the end of each time
period:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A shares $56 $78 $103 $173
Class B shares (1) $69 $88 $120 $197
Class C shares $ 9 $27 $ 47 $105
Class D shares $29 $58 $100 $217
</TABLE>
You would pay the following expenses on the same investment,
assuming no redemption:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class B (1) $19 $58 $100 $197
Class D $19 $58 $100 $217
</TABLE>
(1) Ten-year figures assume conversion of Class B shares to Class A shares at
the end of eight years.
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than
shown.
The purpose of the table above is to assist the investor in understanding
the various costs and expenses that an investor will bear directly or
indirectly. The percentage expense levels shown in the table above are based
on experience with expenses during the fiscal year ended December 31, 1994;
actual expense levels for the current fiscal year and future years may vary
from the amounts shown. The table does not reflect charges for optional
services elected by certain shareholders, such as the $7.50 fee for
remittance of redemption proceeds by wire. For further information on sales
charges, see "Purchase of Shares--Alternative Purchase Program"; for further
information on management fees, see "Management of the Fund"; and for further
information on 12b-1 fees, see "Purchase of Shares--Distribution Plan."
The Fund has been advised that the Distributor and its affiliates may from
time to time and in varying amounts voluntarily assume some portion of fees
or expenses relating to the Fund. For the fiscal year ended December 31,
1994, Total Fund Operating Expenses with respect to the average net assets of
Class A, Class B, Class C and Class D shares, respectively, would have been
1.42%, 2.18%, 1.17% and 2.17% in the absence of the voluntary assumption of
fees or expenses by the Distributor and its affiliates. Such assumption of
fees or expenses, as a percentage of average net assets, amounted to 0.32%,
0.33%, 0.32% and 0.32% of the Class A, Class B, Class C and Class D shares of
the Fund, respectively. The amount of fees or expenses assumed during the
fiscal year ended December 31, 1994 differed among certain classes because of
fluctuations during the year in relative levels of assets in each class and
in expenses before reimbursement. The Fund expects the subsidization of fees
or expenses to continue in the current year, although it cannot give complete
assurance that such assistance will be received.
4
<PAGE>
Financial Highlights
The data set forth below has been audited by Price Waterhouse LLP,
independent accountants, and their report thereon is included in the
Statement of Additional Information. For further information about the
performance of the Fund, see the Fund's Annual Report, which appears under
the caption "Financial Statements" in the Statement of Additional
Information.
<TABLE>
<CAPTION>
Class A Class B
Year ended Year ended
December 31 December 31
1994 1993** 1994 1993**
<S> <C> <C> <C> <C>
Net asset value,
beginning of year $8.43 $8.20 $8.43 $8.20
Net investment income* .40 .22 .34 .19
Net realized and unrealized gain (loss) on
investments (.90) .25 (.90) .25
Dividends from net investment income (.39) (.22) (.33) (.19)
Distributions from net realized gains (.01) (.02) (.01) (.02)
-------- -------- -------- -------
Net asset value, end of year $7.53 $8.43 $7.53 $8.43
======== ======== ======== =======
Total return (6.04)%+ 5.79%++ (6.74)%+ 5.35%++
Net assets at end of year (000s) $18,214 $15,175 $12,131 $7,567
Ratio of operating expenses to average net
assets* 1.10% 1.10%# 1.85% 1.85%#
Ratio of net investment income to average
net assets* 5.07% 4.68%# 4.34% 3.93%#
Portfolio turnover rate 64.80% 33.11% 64.80% 33.11%
*Reflects voluntary assumption of fees or
expenses per share in each year $0.03 $0.01 $0.03 $0.01
</TABLE>
**June 7, 1993 (commencement of share class designations) to December 31,
1993.
#Annualized.
+Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charge. Total return
would be lower if the Distributor and its affiliates had not voluntarily
assumed a portion of the Fund's expenses.
5
<PAGE>
<TABLE>
<CAPTION>
Class C Class D
July 5, 1989 Year
(Commencement of ended
Year ended December 31 Operations) to December 31
1994 1993 1992 1991 1990 December 31, 1989 1994 1993**
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of
year $8.44 $7.84 $7.61 $7.11 $7.32 $7.40 $8.44 $8.20
Net investment
income* .42 .42 .44 .45 .45 .20 .34 .19
Net realized and
unrealized
gain (loss) on
investments (.90) .62 .23 .51 (.22) (.08) (.91) .25
Dividends from
net investment
income (.41) (.42) (.44) (.46) (.44) (.20) (.33) (.18)
Distributions
from net
realized gains (.01) (.02) -- -- -- -- (.01) (.02)
------ ------ ----- ----- ----- ------ ------ ------
Net asset value,
end of year $7.54 $8.44 $7.84 $7.61 $7.11 $7.32 $7.53 $8.44
====== ====== ===== ===== ===== ====== ====== ======
Total return (5.79)%+ 13.46%+ 9.08%+ 13.88%+ 3.32%+ 1.72%++ (6.86)%+ 5.46%++
Net assets at
end of year
(000s) $40,750 $56,515 $41,558 $21,512 $12,620 $8,154 $ 774 $ 821
Ratio of
operating
expenses to
average net
assets* 0.85% 0.85% 0.85% 0.85% 0.85% 0.85%# 1.85% 1.85%#
Ratio of net
investment
income to
average net
assets* 5.29% 5.10% 5.71% 6.21% 6.39% 5.84%# 4.31% 3.94%#
Portfolio
turnover rate 64.80% 33.11% 29.39% 30.24% 35.54% 0.00% 64.80% 33.11%
*Reflects
voluntary
assumption of
fees or
expenses per
share in each
year $0.03 $0.01 $0.02 $0.05 $0.07 $0.06 $0.03 $0.01
</TABLE>
**June 7, 1993 (commencement of share class designations) to December 31,
1993.
#Annualized.
+Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charge. Total return
would be lower if the Distributor and its affiliates had not voluntarily
assumed a portion of the Fund's expenses.
The Fund's Investments
The Fund's investment objective is to seek a high level of interest income
exempt from federal income taxes and New York State and New York City
personal income taxes. The Fund's investment objective is a fundamental
policy and may not be changed without approval of the Fund's shareholders.
Under normal circumstances at least 80% of the Fund's net assets will be
invested in New York Municipal Obligations. New York Municipal Obligations
include securities issued by or on behalf of New York State, its political
subdivisions, municipalities and public authorities and by other governmental
entities (for example, U.S. possessions such as Puerto Rico) if such
6
<PAGE>
securities generate interest income which is, in the opinion of issuer's
counsel at the time of issuance, exempt from both federal income taxes and
New York State ("New York State" or the "State") and New York City ("New York
City" or the "City") personal income taxes.
To achieve its investment objective, the Fund intends to invest primarily
in securities which are investment grade, although this is not a fundamental
policy. Investment grade securities include securities rated, at the time of
purchase, AAA, AA, A, BBB, SP-1 or SP-2 by Standard & Poor's Corporation
("S&P") or Aaa, Aa, A, Baa, MIG-1 or MIG-2 by Moody's Investors Service, Inc.
("Moody's"), securities comparably rated by any other national rating service
and securities not rated but considered by the Investment Manager to be of
equivalent investment quality to comparable rated securities. Securities
rated Baa by Moody's lack outstanding investment characteristics and in fact
have speculative characteristics as well. The Fund may also invest up to 25%
of its total assets in securities rated at the time of purchase as low as CC
by S&P or Ca by Moody's or securities that are not rated but considered by
the Investment Manager to be of equivalent investment quality to comparable
rated securities. Such investments may be considered by the rating agencies
to be speculative in a high degree or to have major risk exposures. For
information concerning the risks and ratings of tax-exempt bonds, see
"Appendix--Description of Municipal Debt Ratings" in the Statement of
Additional Information.
Up to 20% of the Fund's assets may be invested without regard to the
limitations described above. However, during the current year, the Investment
Manager does not anticipate that the Fund will invest more than 5% of its net
assets in securities rated BB or lower by S&P or Ba or lower by Moody's or in
unrated securities of comparable investment quality. See the Statement of
Additional Information for risks associated with lower rated, "high yield"
securities.
The Fund may invest up to 25% of its total assets in unrated securities
considered by the Investment Manager to be of equivalent investment quality
to comparable rated securities in which the Fund may invest. Many issuers of
tax-exempt securities choose not to have their obligations rated. Although
unrated securities usually provide a higher yield than rated securities, they
may also involve a greater degree of risk. Medium and lower rated or unrated
tax-exempt bonds are frequently traded in markets in which liquidity may be
limited. This factor might limit the ability to sell such securities at their
fair value either to meet redemption requests or to respond to changes in the
economy or the financial markets.
The Fund reserves the right to invest more than 25% of its total assets in
tax-exempt industrial development revenue bonds. The Fund may invest up to
25% of its total assets in securities issued in connection with the financing
of projects with similar characteristics, such as toll road revenue bonds,
housing revenue bonds or electric power project revenue bonds, or in
industrial development revenue bonds which are based, directly or indirectly,
on the credit of private entities in any one industry. This may make the Fund
more susceptible to economic, political or regulatory occurrences affecting a
particular industry or sector and increase the potential for fluctuation of
net asset value. Investments in industrial development revenue bonds which
may result in federal alternative minimum taxes will under present policy be
limited to 20% of the Fund's net assets; see "Dividends and Distributions;
Taxes."
The Fund may invest in New York Municipal Obligations which have fixed
interest rates or variable or floating interest rates, including short-term
obligations which have daily adjustable rates. Variable or floating rates may
be adjusted in relation to market rates for other instruments, prime rates,
indices or similar indicators. Certain of these adjustable obligations may
carry a demand feature that permits the Fund to receive the par value of the
security upon demand prior to maturity. These obligations may also be subject
to prepayment without penalty at the option of the issuer.
The Fund may invest in lease obligations or installment purchase contract
obligations, which are instruments supported by lease payments made by a
municipality ("municipal lease obligations"). Municipal lease obligations may
be issued by state and government authorities to obtain funds to acquire a
wide variety of
7
<PAGE>
equipment and facilities such as fire and sanitation vehicles, computer
equipment, buildings and other capital assets. Although municipal lease
obligations do not normally constitute general obligations of the
municipality, a lease obligation is ordinarily backed by the municipality's
agreement to make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide
that the municipality has no obligation to make lease or installment purchase
payments in later years unless money is appropriated in the future. Municipal
lease obligations are a relatively new form of financing instrument and the
market for such obligations is still developing.
Depending on the development of such markets, such municipal lease
obligations may be deemed to be liquid as determined by or in accordance with
methods adopted by the Trustees. In determining the liquidity and appropriate
valuation of a municipal lease obligation, the following factors relating to
the security are considered, among others: (1) the frequency of trades and
quotes; (2) the number of dealers willing to purchase or sell the security;
(3) the willingness of dealers to undertake to make a market; (4) the nature
of the marketplace trades; and (5) the likelihood that the obligation will
continue to be marketable based on the credit quality of the municipality or
relevant obligor. Municipal lease obligations initially deemed to be liquid
could later become illiquid.
Special Considerations and Risk Factors
There are risks in any investment program, and there is no assurance that the
Fund will achieve its investment objective. Tax-exempt securities are subject
to relative degrees of credit risk and market volatility. Credit risk relates
to the issuer's (and any guarantor's) ability to make timely payments of
principal and interest. Market volatility relates to the changes in market
price that occur as a result of variations in the level of prevailing
interest rates and yield relationships between sectors in the tax-exempt
securities market and other market factors.
The Fund's ability to achieve its investment objective is dependent on the
ability of the issuers of New York Municipal Obligations to meet their
continuing obligations for the payment of principal and interest. New York
State and New York City face long-term economic problems that could seriously
affect their ability and that of other issuers of New York Municipal
Obligations to meet their financial obligations.
Certain substantial issuers of New York Municipal Obligations (including
issuers whose obligations may be acquired by the Fund) have experienced
serious financial difficulties in recent years. These difficulties have at
times jeopardized the credit standing and impaired the borrowing abilities of
all New York issuers and have generally contributed to higher interest costs
for their borrowing and fewer markets for their outstanding debt obligations.
In recent years, several different issues of municipal securities of New York
State and its agencies and instrumentalities and of New York City have been
downgraded by S&P and Moody's. On the other hand, strong demand for New York
Municipal Obligations has at times had the effect of permitting New York
Municipal Obligations to be issued with yields relatively lower, and after
issuance, to trade in the market at prices relatively higher, than comparably
rated municipal obligations issued by other jurisdictions. A recurrence of
the financial difficulties previously experienced by certain issuers of New
York Municipal Obligations could result in defaults or declines in the market
values of those issuers' existing obligations and, possibly, in the
obligations of other issuers of New York Municipal Obligations. Although as
of the date of this Prospectus, no issuers of New York Municipal Obligations
are in default with respect to the payment of their municipal obligations,
the occurrence of any such default could adversely affect the market values
and marketability of all New York Municipal Obligations and, consequently,
the net asset value of the Fund's portfolio.
For other considerations affecting the Fund's investments in New York
Municipal Obligations, see the Statement of Additional Information.
Limiting Investment Risk
In seeking to lessen investment risk, the Fund operates under certain
fundamental investment restrictions. Under these restrictions the Fund may
not invest in a
8
<PAGE>
security if the transaction would result in: (a) with respect to 75% of its
total assets, more than 5% of the Fund's total assets being invested in any
one issuer; (b) the Fund owning more than 10% of any class of voting
securities of an issuer; (c) more than 5% of the Fund's total assets being
invested in securities of private issuers (including predecessors) with less
than three years of continuous operations unless such securities are rated
BBB, SP-2 or higher by S&P or Baa, MIG-2 or higher by Moody's; or (d) more
than 25% of the Fund's total assets being invested in industrial revenue
bonds which are based directly or indirectly on the credit of private issuers
in any one industry. New York State and each of its separate political
subdivisions, agencies, authorities or instrumentalities are treated as
separate issuers in accordance with prevailing regulatory interpretations.
The foregoing restrictions do not apply to investments in securities issued
or guaranteed by the U.S. Government or its agencies or instrumentalities or
backed by the U.S. Government or to repurchase agreements involving such U.S.
Government securities to the extent excludable under relevant regulatory
interpretations. In addition, the Fund may not invest more than 10% of its
total assets in illiquid securities, which may include, to the extent any are
not readily marketable, securities restricted as to resale, repurchase
agreements extending for more than seven days and other securities. The
fundamental investment restrictions set forth in this paragraph may not be
changed except by vote of the holders of a majority of the outstanding voting
securities of the Fund. For further information on these and other investment
restrictions, including other nonfundamental investment restrictions which
may be changed without a shareholder vote, see the Statement of Additional
Information.
To aid in achieving its investment objective, the Fund may, subject to
certain limitations, buy and sell options, futures contracts and options on
futures contracts, on securities and securities indices. 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; similar
policies apply to options which are not commodities. The Fund may also enter
various forms of swap arrangements, which have simultaneously the
characteristics of a security and a futures contract, although the Fund does
not presently expect to invest more than 5% of its total assets in such
items. These swap arrangements include interest rate swaps and index swaps.
In addition, the Fund may purchase securities on a "when-issued" basis and
enter into repurchase agreements, subject to certain limitations. See the
Statement of Additional Information.
The Fund may also invest in tax-exempt derivative products including
stripped tax-exempt bonds, synthetic floating rate tax-exempt bonds, and
tax-exempt asset backed securities, including interests in trusts holding
tax-exempt lease receivables. Some of these products may generate taxable
income or become illiquid. To reduce counterparty risk, the Fund will only
deal with established, reputable institutions.
The Fund may hold up to 100% of its assets in cash or short-term
securities for temporary defensive purposes, subject to limitations. 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 New York Municipal
Obligations, short-term money market securities such as 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 rated at
least "A" by S&P or "Prime" by Moody's (or, if not rated, issued by companies
having an outstanding long-term unsecured debt issue rated at least "A" by
S&P or Moody's). See the Statement of Additional Information.
The Fund intends that short-term securities acquired for temporary
defensive purposes will be exempt from federal income taxes and New York
State and New York City personal income taxes. However, if suitable
short-term securities are not available or if securities are available only
on a when-issued basis or in the event of an emergency, the Fund may invest
up to 100% of its total assets in short-term securities which may not be
exempt from such taxes.
9
<PAGE>
Portfolio Turnover
The Fund reserves full freedom with respect to portfolio turnover. In periods
when there are rapid changes in economic conditions or security price levels
or when investment strategy is changed significantly, portfolio turnover may
be significantly higher than during times of economic and market price
stability or when investment strategy remains relatively constant. A high
rate of portfolio turnover will result in increased transaction costs for the
Fund and may also result in an increase in the realization of short-term
capital gains.
Information on the Purchase of Shares, Redemption of Shares and Shareholder
Services is set forth on pages 10-23 below.
The Fund is available for investment by many kinds of investors including
participants investing through savings plans sponsored by employers,
corporations, individuals, etc. The applicability of the general information
and administrative procedures set forth below accordingly will vary depending
on the investor and the recordkeeping system established for a shareholder's
investment in the Fund. Participants in plans should first consult with the
appropriate person at their employer or refer to the plan materials before
following any of the procedures below. For more information or assistance,
anyone may call 1-800-562-0032.
Purchase of Shares
Methods of Purchase
Through Dealers
Shares of the Fund are continuously offered through securities dealers who
have entered into sales agreements with the Distributor. Purchases through
dealers are confirmed at the offering price, which is the net asset value
plus the applicable sales charge, next determined after the order is duly
received by State Street Research Shareholder Services ("Shareholder
Services"), a division of State Street Research Investment Services, Inc.,
from the dealer. ("Duly received" for purposes herein means in accordance
with the conditions of the applicable method of purchase as described below.)
The dealer is responsible for transmitting the order promptly to Shareholder
Services in order to permit the investor to obtain the current price. See
"Purchase of Shares -- Net Asset Value" herein.
By Mail
Initial investments in the Fund may be made by mailing or delivering to the
investor's securities dealer a completed Application (accompanying this
Prospectus), together with a check for the total purchase price payable to
the Fund. The dealer must forward the Application and check in accordance
with the instructions on the Application.
Additional shares may be purchased by mailing to Shareholder Services a
check payable to the Fund in the amount of the total purchase price together
with any one of the following: (i) an Application; (ii) the stub from a
shareholder's account statement; or (iii) a letter setting forth the name of
the Fund, the class of shares and the shareholder's account name and number.
Shareholder Services will deliver the purchase order to the transfer agent
and dividend paying agent, State Street Bank and Trust Company (the "Transfer
Agent").
If a check is not honored for its full amount, the purchaser could be
subject to additional charges to cover collection costs and any investment
loss, and the purchase may be cancelled.
By Wire
An investor may purchase shares by wiring Federal Funds of not less than
$5,000 to State Street Bank and Trust Company, which also serves as the
Trust's custodian (the "Custodian"), as set forth below. Prior to making an
investment by wire, an investor must notify Shareholder Services at
1-800-521-6548 and obtain a control number and instructions. Following such
notification, Federal Funds should be wired through the Federal Reserve
System to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF=State Street Research New York
Tax-Free Fund and class of shares
(A, B, C or D)
AC=99029761
10
<PAGE>
OBI=Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street
Research Shareholder Services)
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make
such investment by 12 noon Boston time on the day of his or her investment;
and (ii) the wire must be received by 4 P.M. Boston time that same day.
An investor making an initial investment by wire must promptly complete
the Application accompanying this Prospectus and deliver it to his or her
securities dealer, who should forward it as required. No redemptions will be
effected until the Application has been duly processed.
The Fund may in its discretion discontinue, suspend or change the practice
of accepting orders by any of the methods described above. Orders for the
purchase of shares are subject to acceptance by the Fund. The Fund reserves
the right to reject any purchase order, including orders in connection with
exchanges, for any reason which the Fund in its sole discretion deems
appropriate. The Fund reserves the right to suspend the sale of shares.
Minimum Investment
<TABLE>
<CAPTION>
Class of Shares
A B C D
<S> <C> <C> <C> <C>
Minimum Initial Investment
By Wire $5,000 $5,000 (a) $5,000
By Investamatic $1,000 $1,000 (a) $1,000
All Other $2,500 $2,500 (a) $2,500
Minimum Subsequent Investment
By Wire $5,000 $5,000 (a) $5,000
By Investamatic $ 50 $ 50 (a) $ 50
All Other $ 50 $ 50 (a) $ 50
(a) Special conditions apply; contact Distributor.
</TABLE>
The Fund reserves the right to vary the minimums for initial or subsequent
investments from time to time as in the case of, for example, exchanges and
investments under various employee benefit plans, sponsored arrangements
involving group solicitation of the members of an organization, or other
investment plans such as for reinvestment of dividends and distributions or
for periodic investments (e.g. Investamatic Check Program).
Alternative Purchase Program
General
Alternate classes of shares permit investors to select a purchase program
which they believe will be the most advantageous for them, given the amount
of their purchase, the length of time they anticipate holding Fund shares, or
the flexibility they desire in this regard, and other relevant circumstances.
Investors will be able to determine whether in their particular circumstances
it is more advantageous to incur an initial sales charge and not be subject
to certain ongoing charges or to have their entire initial purchase price
invested in the Fund with the investment being subject thereafter to ongoing
service fees and distribution fees.
As described in greater detail below, securities dealers are paid
differing amounts of commission and other compensation depending on which
class of shares they sell.
11
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
<S> <C> <C> <C> <C>
Sales Charges Initial sales charge at Contingent deferred None Contingent deferred
time of investment of sales charge of 5% to sales charge of 1%
up to 4.5% depending on 2% applies to any applies to any shares
amount of investment shares redeemed within redeemed within one year
first five years following their purchase
following their
purchase; no contingent
deferred sales charge
after five years
On investments of $1
million or more, no
initial sales charge;
but contingent deferred
sales charge of 1%
applies to any shares
redeemed within one
year following their
purchase
Distribution None 0.75% for first eight None 0.75% each year
Fee years; Class B shares
convert automatically
to Class A shares after
eight years
Service Fee 0.25% each year 0.25% each year None 0.25% each year
Initial Above described 4% None 1%
Commission initial sales charge
Received by less 0.25% to 0.50%
Selling retained by
Securities Distributor
Dealer
On investments of $1
million or more,
0.25% to 0.70% paid
to dealer by
Distributor
</TABLE>
12
<PAGE>
In deciding which class of shares to purchase, the investor should
consider the amount of the investment, the length of time the investment is
expected to be held, and the ongoing service fee and distribution fee, among
other factors.
Class A shares are sold at net asset value plus an initial sales charge of
up to 4.5% of the public offering price. Because of the sales charge, not all
of an investor's purchase amount is invested unless the purchase equals
$1,000,000 or more. Class B shareholders pay no initial sales charge, but a
contingent deferred sales charge of up to 5% generally applies to shares
redeemed within five years of purchase. Class D shareholders also pay no
initial sales charge, but a contingent deferred sales charge of 1% generally
applies to redemptions made within one year of purchase. For Class B and
Class D shareholders, therefore, the entire purchase amount is immediately
invested in the Fund.
An investor who qualifies for a significantly reduced initial sales
charge, or a complete waiver of the sales charge on investments of $1,000,000
or more, on the purchase of Class A shares might elect that option to take
advantage of the lower ongoing service and distribution fees that
characterize Class A shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. Class B shares are assessed an annual
distribution fee of 0.75% of daily net assets for an eight year period
following the date of purchase and are then automatically converted to Class
A shares. Class D shares are assessed an annual distribution fee of 0.75% of
daily net assets for as long as the shares are held. The prospective investor
should consider these fees plus the initial or contingent deferred sales
charges in estimating the costs of investing in the various classes of the
Fund's shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are allocated to dealers (see
"Distribution Plan" below). In addition, the Distributor will, at its
expense, provide additional cash and noncash incentives to securities dealers
that sell shares. Such incentives may be extended only to those dealers who
have sold or may sell significant amounts of shares and/or meet other
conditions established by the Distributor; for example, the Distributor may
sponsor special promotions to develop particular distribution channels or to
reach certain investor groups. The incentives may include merchandise and
trips to and attendance at sales seminars at resorts.
Class A Shares--Initial Sales Charges
Sales Charges
The purchase price of a Class A share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar
amount of the shares purchased as set forth in the table below. A major
portion of this sales charge is reallowed by the Distributor to the
securities dealer responsible for the sale.
<TABLE>
<CAPTION>
Sales Sales
Charge Charge
Paid by Paid by Dealer
Dollar Investor Investor Concession
Amount of As % of As % of As % of
Purchase Purchase Net Asset Purchase
Transaction Price Value Price
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 or above but
less than $250,000 3.50% 3.63% 3.00%
$250,000 or above but
less than $500,000 2.50% 2.56% 2.00%
$500,000 or above but
less than
$1 million 2.00% 2.04% 1.75%
$1 million and above 0% 0% See
following
discussion
</TABLE>
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
a commission as follows:
13
<PAGE>
<TABLE>
<CAPTION>
Amount of Sale Commission
<S> <C>
(a) $1 million to $3 million 0.70%
(b) Next $2 million 0.50%
(c) Amount over $5 million 0.25%
</TABLE>
On such sales of $1,000,000 or more, the investor is subject to a 1%
contingent deferred sales charge on any portion of the purchase redeemed
within one year of the sale. However, such redeemed shares will not be
subject to the contingent deferred sales charge to the extent that their
value represents (1) capital appreciation or (2) reinvestment of dividends or
capital gains distributions. In addition, the contingent deferred sales
charge will be waived for certain other redemptions as described under
"Contingent Deferred Sales Charge Waivers" below (as otherwise applicable to
Class B shares).
Class A shares of the Fund that are purchased without a sales charge may
be exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption
within one year of the Class A shares which are acquired through such
exchange. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any contingent
deferred sales charge will be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement
of Additional Information, of $100,000 or more of Class A shares of the Fund
or a combination of "Eligible Funds." "Eligible Funds" include the Fund and
other funds so designated by the Distributor from time to time. Class B,
Class C and Class D shares may also be included in the combination under
certain circumstances. Securities dealers should call Shareholder Services
for details concerning the other Eligible Funds and any persons who may
qualify for reduced sales charges and related information. See the Statement
of Additional Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A
shares of the Fund and any other Eligible Funds within a 13-month period.
Class B, Class C and Class D shares may be included in the combination under
certain circumstances. Additional information on a Letter of Intent is
available from dealers, or from the Distributor, and also appears in the
Statement of Additional Information.
Right of Accumulation
Investors may purchase Class A shares of the Fund or a combination of shares
of the Fund and other Eligible Funds at reduced sales charges pursuant to a
Right of Accumulation. Under the Right of Accumulation, the sales charge is
determined by combining the current purchase with the value of the Class A
shares of other Eligible Funds held at the time of purchase. Class B, Class C
and Class D shares may also be included in the combination under certain
circumstances. See the Statement of Additional Information and call
Shareholder Services for details concerning the Right of Accumulation.
Other Programs
Class A shares of the Fund may be sold or issued in an exchange at a reduced
sales charge or without a sales charge pursuant to certain sponsored
arrangements, which include programs under which a company, employee benefit
plan or other organization makes recommendations to, or permits group
solicitation of, its employees, members or participants, except any
organization created primarily for the purpose of obtaining shares of the
Fund at a reduced sales charge or without a sales charge. Information on such
arrangements and further conditions and limitations is available from the
Distributor.
In addition, no sales charge is imposed in connection with the sale of
Class A shares of the Fund to the following entities and persons: (A) the
Investment Manager, Distributor, or any affiliated entities, including any
direct or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or
14
<PAGE>
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.
Class B Shares--Contingent Deferred Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is duly received, as defined herein.
No sales charge is imposed at the time of purchase; thus the full amount of
the investor's purchase payment will be invested in the Fund. However, a
contingent deferred sales charge may be imposed upon redemptions of Class B
shares as described below.
The Distributor will pay securities dealers at the time of sale a 4%
commission for selling Class B shares. The proceeds of the contingent
deferred sales charge and the distribution fee are used to offset
distribution expenses and thereby permit the sale of Class B shares without
an initial sales charge.
Class B shares that are redeemed within a five year period after their
purchase will not be subject to a contingent deferred sales charge to the
extent that the value of such shares represents (1) capital appreciation of
Fund assets or (2) reinvestment of dividends or capital gains distributions.
The amount of any applicable contingent deferred sales charge will be
calculated by multiplying the net asset value of such shares at the time of
redemption or at the time of purchase, whichever is lower, by the applicable
percentage shown in the table below:
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
As A Percentage Of
Net Asset Value
Redemption During At Redemption
<S> <C>
1st Year Since Purchase 5%
2nd Year Since Purchase 4
3rd Year Since Purchase 3
4th Year Since Purchase 3
5th Year Since Purchase 2
6th Year Since Purchase and Thereafter None
</TABLE>
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first
of those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of the Fund acquired through an exchange from
another Eligible Fund will be measured from the date that such shares were
initially acquired in the other Eligible Fund, and Class B shares being
redeemed will be considered to represent, as applicable, capital appreciation
or dividend and capital gains distribution reinvestments in such other
Eligible Fund. These determinations will result in any contingent deferred
sales charge being imposed at the lowest possible rate. For federal income
tax purposes, the amount of the contingent deferred sales charge will reduce
the gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any contingent deferred sales charge will be paid
to the Distributor.
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic 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 with represents the minimum distribution required at such age under
Section 401(a)(9) of the Internal Revenue Code for retirement
15
<PAGE>
accounts or plans (e.g., age 70-1/2 for IRAs and Section 403(b) plans),
calculated solely on the basis of assets invested in the Fund or other
Eligible Funds; and (iii) a redemption resulting from a tax-free return of an
excess contribution to an IRA. (The foregoing waivers do not apply to a
tax-free rollover or transfer of assets out of the Fund.) The Fund may modify
or terminate the waivers at any time; for example, the Fund may limit the
application of multiple waivers.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends or
distributions with respect to such shares, will automatically convert to
Class A shares of the Fund at the end of eight years following the issuance
of such Class B shares; consequently, they will no longer be subject to the
higher expenses borne by Class B shares. The conversion rate will be
determined on the basis of the relative per share net asset values of the two
classes and may result in a shareholder receiving either a greater or fewer
number of Class A shares than the Class B shares so converted. As noted
above, holding periods for Class B shares received in exchange for Class B
shares of other Eligible Funds will be counted toward the eight-year period.
Class C Shares--Institutional; No Sales Charge
The purchase price of a Class C share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase or
redemption. The Fund will receive the full amount of the investor's purchase
payment.
Class C shares are only available for new investments by certain employee
benefit plans and large institutions. See the Statement of Additional
Information. Information on the availability of Class C shares and further
conditions and limitations with respect thereto is available from the
Distributor.
Class C shares may be also issued in connection with mergers and
acquisitions involving the Fund, and under certain other circumstances as
described in this Prospectus (e.g., see "Shareholder Services--Exchange
Privilege").
Shares held prior to June 5, 1993 are deemed to be Class C shares, but
shareholders thereof may not acquire additional Class C shares except through
reinvestment of dividends and distributions. Class C shares may have also
been issued directly or through exchanges to those shareholders of other
Eligible Funds who previously held shares which are not subject to any future
sales charge or service fees or distribution fees.
Class D Shares--Spread Sales Charges
The purchase price of a Class D share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase; thus the
full amount of the investor's purchase payment will be invested in the Fund.
Class D shares are subject to a 1% contingent deferred sales charge on any
portion of the purchase redeemed within one year of the sale. The contingent
deferred sales charge will be 1% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. The Distributor
pays securities dealers a 1% commission for selling Class D shares at the
time of purchase. The proceeds of the contingent deferred sales charge and
the distribution fee are used to offset distribution expenses and thereby
permit the sale of Class D shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will not
be subject to the contingent deferred sales charge to the extent that the
value of such shares represents (1) capital appreciation of Fund assets or
(2) reinvestment of dividends or capital gains distributions. In addition,
the contingent deferred sales charge will be waived for certain other
redemptions as described under "Contingent Deferred Sales Charge Waivers"
above (as otherwise applicable to Class B shares). For federal income tax
purposes, the amount of the contingent deferred sales charge will reduce the
gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any contingent deferred sales charge will be paid
to the Distributor.
16
<PAGE>
Net Asset Value
The Fund's per share net asset values are determined Monday through Friday as
of the close of the New York Stock Exchange (the "NYSE") exclusive of days on
which the NYSE is closed. The NYSE ordinarily closes at 4 P.M. New York City
time. Market quotations for most municipal securities are not readily
available on a daily basis; therefore, the Fund uses one or more pricing
services to value such assets. The pricing services utilize information with
respect to market transactions, quotations from dealers and various
relationships among securities in determining value and may provide prices
determined as of times prior to the close of the NYSE. Assets for which
market quotations are readily available are valued as of the close of
business on the valuation date. Securities for which there is no pricing
service valuation or last reported sale price are valued as determined in
good faith by or under the authority of the Trustees of the Trust. 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. Further information with respect to the valuation of the Fund's
assets is included in the Statement of Additional Information.
Distribution Plan
The Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the provisions of the
Distribution Plan, the Fund makes payments to the Distributor based on an
annual percentage of the average daily value of the net assets of each class
of shares as follows:
<TABLE>
<CAPTION>
Class Service Fee Distribution Fee
<S> <C> <C>
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
</TABLE>
Some or all of the service fees are used to reimburse securities dealers
(including securities dealers that are affiliates of the Distributor) for
personal services and/or the maintenance of shareholder accounts. A portion
of any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance of
shareholder accounts by such dealer. Dealers who have sold Class A shares are
eligible for further reimbursements commencing as of the time of such sale.
Dealers who have sold Class B and Class D shares are eligible for further
reimbursements 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 of shareholder
accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to securities dealers for selling such shares. Any
distribution fees received by the Distributor and not allocated to dealers
may be applied by the Distributor in reduction of expenses waived by it or in
connection with sales or marketing efforts, including special promotional
fees and cash and noncash incentives based upon sales by securities dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs
similar expenses on behalf of, such other funds. When expenses of the
Distributor cannot be identified as relating to a specific fund, the
Distributor allocates expenses among the funds in a manner deemed fair and
equitable to each fund.
Commissions and other cash and noncash incentives and payments to dealers,
to the extent payable out of the general profits, revenues or other sources
of the Distributor (including the advisory fees paid by the Fund), have also
been authorized pursuant to the Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which the Fund may incur under the
Distribution Plan to 1%, of which 0.75% may be used to pay distribution
expenses and 0.25% may be used to pay shareholder service fees. The NASD rule
also limits
17
<PAGE>
the aggregate amount which the Fund may pay for such distribution costs to
6.25% of gross share sales of a class since the inception of any asset-based
sales charge plus interest at the prime rate plus 1% on unpaid amounts
thereof (less any contingent deferred sales charges). Such limitation does
not apply to shareholder service fees. Payments to the Distributor or to
dealers funded under the Distribution Plan may be discontinued at any time by
the Trustees of the Trust.
Redemption of Shares
Shareholders may redeem all or any portion of their accounts on any day the
NYSE is open for business. Redemptions will be effective at the net asset
value per share next determined (see "Purchase of Shares -- Net Asset Value"
herein) after receipt of the redemption request, in accordance with the
requirements described below, by Shareholder Services and delivery of the
request by Shareholder Services to the Transfer Agent. To allow time for the
clearance of checks used for the purchase of any shares which are tendered
for redemption shortly after purchase, the remittance of the redemption
proceeds for such shares could be delayed for 15 days or more after the
purchase. Shareholders who anticipate a potential need for immediate access
to their investments should, therefore, purchase shares by wire. Except as
noted, redemption proceeds are normally remitted within seven days after
receipt of the redemption request and any necessary documents in good order.
Methods of Redemption
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed to
the shareholder or wired to a predesignated bank account (see "Proceeds By
Wire" below) by sending to State Street Research Shareholder Services, P.O.
Box 8408, Boston, Massachusetts 02266-8408: (1) a written request for
redemption signed by the registered owner(s) of the shares, exactly as the
account is registered; (2) an endorsed stock power in good order with respect
to the shares or, if issued, the share certificates for the shares endorsed
for transfer or accompanied by an endorsed stock power; (3) any required
signature guarantees (see "Redemption of Shares -- Signature Guarantees"
below); and (4) any additional documents which may be required for redemption
in the case of corporations, trustees, etc., such as certified copies of
corporate resolutions, governing instruments, powers of attorney, and the
like. The Transfer Agent will not process requests for redemption until it
has received all necessary documents in good order. A shareholder will be
notified promptly if a redemption request cannot be accepted. Shareholders
having any questions about the requirements for redemption should call
Shareholder Services toll-free at 1-800-562-0032.
Request By Telephone
Shareholders may request redemption by telephone with proceeds to be
transmitted by check or by wire (see "Proceeds By Wire" below). A shareholder
can request a redemption for $50,000 or less to be transmitted by check. Such
check for the proceeds will be made payable to the shareholder of record and
will be mailed to the address of record. There is no fee for this service. It
is not available for shares held in certificate form or if the address of
record has been changed within 30 days of the redemption request. The Fund
may revoke or suspend the telephone redemption privilege at any time and
without notice. See "Shareholder Services -- Telephone Services" for a
discussion of the conditions and risks associated with Telephone Privileges.
Request By Check (Class A Shares Only)
Shareholders of Class A shares of the Fund may redeem shares by checks drawn
on State Street Bank and Trust Company. Checks may be made payable to the
order of any person or organization designated by the shareholder and must be
for amounts of at least $500 but not more than $100,000. Shareholders will
continue to earn dividends on the shares to be redeemed until the check
clears. There is currently no charge associated with redemption of shares by
check. Checkbooks are supplied for a $2 fee. Checks will be sent only to the
registered owner at the address of record. A $10 fee will be charged against
an account in the event a redemption check is pre-
18
<PAGE>
sented for payment and not honored pursuant to the terms and conditions
established by State Street Bank and Trust Company.
Shareholders can request the checkwriting privilege by completing the
signature card which is part of the Application. In order to arrange for
redemption-by-check after an account has been opened, a revised Application
with signature card and signatures guaranteed must be sent to Shareholder
Services. Cancelled checks will be returned to shareholders at the end of
each month.
The redemption-by-check service is subject to State Street Bank and Trust
Company's rules and regulations applicable to checking accounts (as amended
from time to time), and is governed by the Massachusetts Uniform Commercial
Code. All notices with respect to checks drawn on State Street Bank and Trust
Company must be given to State Street Bank and Trust Company. Stop payment
instructions with respect to checks must be given to State Street Bank and
Trust Company by calling 1-617-985-8543. Shareholders may not close out an
account by check.
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder has
Telephone Privileges (see "Shareholder Services -- Telephone Services"
herein), the Trust's custodian will wire redemption proceeds to the
shareholder's predesignated bank account. To make the request, the
shareholder should call 1-800-521-6548 prior to 4 P.M. Boston time. A $7.50
charge against the shareholder's account will be imposed for each wire
redemption. This charge is subject to change without notice. The
shareholder's bank may also impose a charge for receiving wires of redemption
proceeds. The minimum redemption by wire is $5,000.
Request to Dealer to Repurchase
For the convenience of shareholders, the Fund has authorized the Distributor
as its agent to accept orders from dealers by wire or telephone for the
repurchase of shares by the Distributor from the dealer. The Fund may revoke
or suspend this authorization at any time. The repurchase price is the net
asset value for the applicable shares next determined following the time at
which the shares are offered for repurchase by the dealer to the Distributor.
The dealer is responsible for promptly transmitting a shareholder's order to
the Distributor. Payment of the repurchase proceeds is made to the dealer who
placed the order promptly upon delivery of certificates for shares in proper
form for transfer or, for Open Accounts, upon the receipt of a stock power
with signatures guaranteed as described below, and, if required, any
supporting documents. Neither the Fund nor the Distributor imposes any charge
upon such a repurchase. However, a dealer may impose a charge as agent for a
shareholder in the repurchase of his or her shares.
The Fund has reserved the right to change, modify or terminate the
services described above at any time.
Additional Information
Because of the relatively high cost of maintaining small shareholder
accounts, the Fund reserves the right to involuntarily redeem at its option
any shareholder account which remains below $1,500 for a period of 60 days
after notice is mailed to the applicable shareholder, or to impose a
maintenance fee on such account after 60 days' notice. Such involuntary
redemptions will be subject to applicable sales charges, if any. The Fund may
increase such minimum account value above such amount in the future after
notice to affected shareholders. Involuntarily redeemed shares will be priced
at the net asset value on the date fixed for redemption by the Fund, and the
proceeds of the redemption will be mailed promptly to the affected
shareholder at the address of record. Imposition of a maintenance fee on a
small account could, over time, exhaust the assets of such account.
To cover the cost of additional compliance administration, a $20 fee will
be charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date of
payment of redemption proceeds for more than seven days, except that (a) it
may elect to suspend the redemption of shares or postpone the date of payment
of redemption pro-
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ceeds: (1) during any period that the NYSE is closed (other than customary
weekend and holiday closings) or trading on the NYSE is restricted; (2)
during any period in which an emergency exists as a result of which disposal
of portfolio securities is not reasonably practicable or it is not reasonably
practicable to fairly determine the Fund's net asset values; or (3) during
such other periods as the Securities and Exchange Commission may by order
permit for the protection of investors; and (b) the payment of redemption
proceeds may be postponed as otherwise provided under "Redemption of Shares"
herein.
Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Fund, the Investment
Manager and the Distributor from possible fraud, signature guarantees are
required for certain redemptions. Signature guarantees enable the Transfer
Agent to be certain that the person who has authorized a redemption from the
account is, in fact, the shareholder. Signature guarantees are required for:
(1) all redemptions requested by mail; (2) requests to transfer the
registration of shares to another owner; and (3) authorizations to establish
the checkwriting privilege. 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 by the Fund in certain
instances.
Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of the Fund owned by
shareholders are credited to their accounts by the Transfer Agent, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110. Certificates representing Class B or Class D shares will not be
issued, while certificates representing Class A or Class C shares will only
be issued if specifically requested in writing and, in any case, will only be
issued for full shares, with any fractional shares to be carried on the
shareholder's account. Shareholders will receive periodic statements of
transactions in their account.
The Fund's Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through dealers,
by wire or by mailing a check payable to the Fund to Shareholder
Services under the terms set forth above under "Purchase of Shares."
2. The following methods of receiving dividends from investment income and
distributions from capital gains are available:
(a) All income dividends and capital gains distributions reinvested in
additional shares of the Fund.
(b) All income dividends in cash; all capital gains distributions
reinvested in additional shares of the Fund.
(c) All income dividends and capital gains distributions in cash.
(d) All income dividends and capital gains distributions invested in
any one available Eligible Fund designated by the shareholders as
described below. See "Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will automatically be coded for reinvestment of all
dividends and distributions in additional shares of the same class of the
Fund. Selections may be changed at any time by telephone or written notice to
Shareholder Services. Dividends and distributions are reinvested at net asset
value without a sales charge.
Exchange Privilege
Shareholders of the Fund may exchange their shares for available shares with
corresponding characteristics of any of the other Eligible Funds at any time
on the basis of the relative net asset values of the respective shares to be
exchanged, subject to compliance with applicable securities laws.
Shareholders of any other Eligible Fund may similarly exchange their shares
for Fund shares with corresponding characteristics. Prior
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to making an exchange, shareholders should obtain the Prospectus of the
Eligible Fund into which they are exchanging. Under the Direct Program,
subject to certain conditions, shareholders may make arrangements for regular
exchanges from the Fund into other Eligible Funds. To effect an exchange,
Class A, Class B and Class D shares may be redeemed without the payment of
any contingent deferred sales charge that might otherwise be due upon an
ordinary redemption of such shares. The MetLife - State Street Research Money
Market Fund issues Class E shares which are sold without any sales charge.
Exchanges of MetLife - State Street Research Money Market Fund Class E shares
into Class A shares of the Fund or any other Eligible Fund are subject to the
initial sales charge or contingent deferred sales charge applicable to an
initial investment in such Class A shares, unless a prior Class A sales
charge has been paid directly or indirectly with respect to the shares
redeemed. For purposes of computing the contingent deferred sales charge that
may be payable upon disposition of the acquired Class A, Class B and Class D
shares, the holding period of the redeemed shares is "tacked" to the holding
period of the acquired shares. The period any Class E shares are held is not
tacked to the holding period of any acquired shares. No exchange transaction
fee is currently imposed on any exchange.
For the convenience of its shareholders who have Telephone Privileges, the
Fund permits exchanges by telephone request from either the shareholder or
his or her dealer. Shares may be exchanged by telephone provided that the
registration of the two accounts is the same. The toll-free number for
exchanges is 1-800-521-6548. See "Telephone Services" herein for a discussion
of conditions and risks associated with Telephone Privileges.
The exchange privilege may be exercised only in those states where shares
of the relevant other Eligible Fund may legally be sold. For tax purposes,
each exchange actually represents the sale of shares of one fund and the
purchase of shares of another. Accordingly, exchanges may produce a capital
gain or loss for tax purposes. The exchange privilege may be terminated or
suspended or its terms changed at any time, subject, if required under
applicable regulations, to 60 days prior notice. New accounts established for
investments upon exchange from an existing account in another fund will have
the same Telephone Privileges as the existing account, unless Shareholder
Services is instructed otherwise. Related administrative policies and
procedures may also be adopted with regard to a series of exchanges, street
name accounts, sponsored arrangements and other matters.
The exchange privilege is not designed for use in connection with
short-term trading or market timing strategies. In order to limit exchange
activity where the Fund believes doing so would be in the best interests of
the Fund, it reserves the right to revise or terminate the exchange
privilege, limit the amount or number of exchanges or reject any exchange for
any person. These measures may be imposed at any time. Subject to the
foregoing, if an exchange request in good order is received by Shareholder
Services and delivered by Shareholder Services to the Transfer Agent by 12
noon Boston time on any business day, the exchange usually will occur that
day. Consult Shareholder Services before requesting an exchange or for
further information.
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 30 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
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account standards imposed by the fund in which the reinvestment is made.
Shares are sold to a reinvesting shareholder at the net asset value thereof
next determined following timely receipt by Shareholder Services of such
shareholder's written purchase request and delivery of the request by
Shareholder Services to the Transfer Agent. A shareholder may exercise this
reinvestment privilege only once with respect to his or her shares of the
Fund. No charge is imposed by the Fund for such reinvestments; however,
dealers may charge fees in connection with the reinvestment privilege. The
reinvestment privilege may be exercised with respect to an Eligible Fund only
in those states where shares of the relevant other Eligible Fund may legally
be sold.
Investment Plans
The Fund offers Class A, Class B and Class D shareholders the Investamatic
Check Program. Under this Program, shareholders may make regular investments
by authorizing withdrawals from their bank accounts each month or quarter on
the Investamatic application form available from Shareholder Services.
Systematic Withdrawal Plan
A shareholder who owns noncertificated Class A or Class C shares with a value
of $5,000 or more, or Class B or Class D shares with a value of $10,000 or
more, may elect, by participating in the Fund's Systematic Withdrawal Plan,
to have periodic checks issued for specified amounts. These amounts may not
be less than certain minimums, depending on the class of shares held. The
Plan provides that all income dividends and capital gains distributions of
the Fund shall be credited to participating shareholders in additional shares
of the Fund. Thus, the withdrawal amounts paid can only be realized by
redeeming shares of the Fund under the Plan. To the extent such amounts paid
exceed dividends and distributions from the Fund, a shareholder's investment
will decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales
charges, no such charges will be imposed on withdrawals of up to 8% annually
of either (a) the value, at the time the Plan is initiated, of the shares
then in the account, or (b) the value, at the time of a withdrawal, of the
same number of shares as in the account when the Plan was initiated,
whichever is higher.
Expenses of the Plan are borne by the Fund. A participating shareholder
may withdraw from the Plan, and the Fund may terminate the Plan at any time
on written notice. Purchase of additional shares while a shareholder is
receiving payments under a Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate
in the Investamatic Check Program and the Systematic Withdrawal Plan at the
same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all 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 investment
is made is initially funded with the requisite minimum amount. The number of
shares purchased will be determined as of the dividend payment date. The
Dividend Allocation Plan is subject to state securities law requirements, to
suspension at any time, and to such policies, limitations and restrictions,
as, for instance, may be applicable to street name or master accounts, that
may be adopted from time to time.
Automatic Bank Connection
A shareholder may elect, by participating in the Fund's Automatic Bank
Connection ("ABC"), to have dividends and other distributions, including
Systematic Withdrawal Plan payments, automatically deposited in the
shareholder's bank account by electronic funds transfer. Some contingent
deferred sales charges may apply. See "Systematic Withdrawal Plan" herein.
Reports
Reports for the Fund will be sent to shareholders of record at least
semiannually. These reports will include a list of the securities owned by
the Fund as well as the Fund's financial statements.
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<PAGE>
Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing the shareholder to make telephone redemptions
for amounts up to $50,000 to be mailed to the shareholder's address of
record is available automatically;
(2) the privilege allowing the shareholder or his or her dealer to make
telephone exchanges is available automatically; and
(3) the privilege allowing the shareholder to make telephone redemptions
for amounts over $5,000, to be remitted by wire to the shareholder's
predesignated bank account, is available by election on the
Application accompanying this Prospectus. A current shareholder who
did not previously request such telephone wire privilege on his or her
original Application may request the privilege by completing a
Telephone Redemption-by-Wire Form which may be obtained by calling
1-800-521-6548. The Telephone Redemption-by-Wire Form requires a
signature guarantee.
A shareholder may decline the automatic Telephone Privileges set forth in
(1) and (2) above by so indicating on the Application accompanying this
Prospectus.
A shareholder may discontinue any Telephone Privilege at any time by
advising Shareholder Services that the shareholder wishes to discontinue the
use of such privileges in the future.
Unless such Telephone Privileges are declined, a shareholder is deemed to
authorize Shareholder Services and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder to
redeem, or purporting to be the shareholder or the shareholder's dealer to
exchange, shares from any account; and (2) honor any written instructions for
a change of address regardless of whether such request is accompanied by a
signature guarantee. All telephone calls will be recorded. None of the Fund,
the other Eligible Funds, the Transfer Agent, the Investment Manager or the
Distributor will be liable for any loss, expense or cost arising out of any
request, including any fraudulent or unauthorized requests. Shareholders
assume the risk to the full extent of their accounts that telephone requests
may be unauthorized. Reasonable procedures will be followed to confirm that
instructions communicated by telephone are genuine. The shareholder will not
be liable for any losses arising from unauthorized or fraudulent instructions
if such procedures are not followed.
Shareholders may redeem or exchange shares by calling toll-free
1-800-521-6548. Although it is unlikely, during periods of extraordinary
market conditions, a shareholder may have difficulty in reaching Shareholder
Services at such telephone number. In that event, the shareholder should
contact Shareholder Services at 1-800-562-0032, 1-617-357-7805 or otherwise
at its main office at One Financial Center, Boston, Massachusetts 02111-2690.
Shareholder Account Inquiries:
Please call 1-800-562-0032
Call this number for assistance in answering general questions on your
account, including account balance, available shareholder services, statement
information and performance of the Fund. Account inquiries may also be made
in writing to State Street Research Shareholder Services, P.O. Box 8408,
Boston, Massachusetts 02266-8408. A fee of up to $10 will be charged against
an account for providing additional account transcripts or photocopies of
paid redemption checks or for researching records in response to special
requests.
Shareholder Telephone Transactions:
Please call 1-800-521-6548
Call this number for assistance in purchasing shares by wire and for
telephone redemptions or telephone exchange transactions. Shareholder
Services will require some form of personal identification prior to acting
upon instructions received by telephone. Written confirmation of each
transaction will be provided.
The Fund and Its Shares
The Fund was organized in 1989 as an additional series of State Street
Research Tax-Exempt Trust, a Massachusetts business trust. The Trustees have
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<PAGE>
authorized shares of the Fund to be issued in four classes: Class A, Class B,
Class C and Class D shares. The Trust is registered with the Securities and
Exchange Commission as an open-end management investment company. The fiscal
year end of the Fund is December 31.
Except for those differences between the classes of shares described below
and elsewhere in the Prospectus, each share of a Fund has equal dividend,
redemption and liquidation rights with other shares of the Fund and when
issued is fully paid and nonassessable. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common usage of terms which may develop in the mutual fund
industry. For example, Class C shares may be redesignated as Class Y shares
and Class D shares may be redesignated as Class C shares. Any redesignation
would not affect any substantive rights respecting the shares.
Each share of each class of shares represents an identical legal interest
in the same portfolio of investments of the Fund, has the same rights and is
identical in all respects, except that Class B and Class D shares bear the
expenses of the deferred sales arrangement and any expenses (including the
higher service and distribution fees) resulting from such sales arrangement,
and certain other incremental expenses related to a class. Each class will
have exclusive voting rights with respect to provisions of the Rule 12b-1
distribution plan pursuant to which the service and distribution fees, if
any, are paid. Although the legal rights of holders of each class of shares
are identical, it is likely that the different expenses borne by each class
will result in different net asset values and dividends. The different
classes of shares of the Fund also have different exchange privileges.
The rights of holders of shares may be modified by the Trustees at any
time, so long as such modifications do not have a material adverse effect on
the rights of any shareholder. On any matter submitted to the shareholders,
the holder of shares of the Fund is entitled to one vote per share (with
proportionate voting for fractional shares) regardless of the relative net
asset value thereof.
Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder
meetings unless required by the 1940 Act. Except as otherwise provided under
said Act, the Board of Trustees will be a self-perpetuating body until fewer
than two-thirds of the Trustees serving as such are Trustees who were elected
by shareholders of the Trust. In the event less than a majority of the
Trustees serving as such were elected by shareholders of the Trust, a meeting
of shareholders will be called to elect Trustees. Under the Master Trust
Agreement, any Trustee may be removed by vote of two-thirds of the
outstanding Trust shares; holders of 10% or more of the outstanding 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 of the
Trust. However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for
indemnification for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund would be unable to meet its
obligations. The Investment Manager believes that, in view of the above, the
risk of personal liability to shareholders is remote.
As of March 31, 1995, Metropolitan Life Insurance Company ("Metropolitan")
was the record and/or beneficial owner of approximately 59.5% of the
outstanding Class D shares of the Fund, and may be deemed to be in control of
such Class D shares of the Fund. 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 are so owned, such owners will be presumed to be in
24
<PAGE>
control of such class of shares for purposes of voting on certain matters,
such as any Distribution Plan for a given class.
Management of the Fund
Under the provisions of the Trust's Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees.
The Fund's investment manager is State Street Research & Management
Company. The Investment Manager is charged with the overall responsibility
for managing the investments and business affairs of the Fund, subject to the
authority of the Board of Trustees.
The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve as investment adviser to one of the nation's first
mutual funds, presently known as State Street Research Investment Trust,
which they had formed in 1924. Their investment management philosophy, which
continues to this day, emphasized comprehensive fundamental research and
analysis, including meetings with the management of companies under
consideration for investment. The Investment Manager's portfolio management
group has extensive investment industry experience managing equity and debt
securities. In managing debt securities, if any, for a portfolio, the
Investment Manager may consider yield curve, sector rotation and duration,
among other factors.
The Investment Manager is an indirect wholly-owned subsidiary of
Metropolitan and the Distributor is a wholly-owned subsidiary of the
Investment Manager, and both are located at One Financial Center, Boston,
Massachusetts 02111-2690.
The Investment Manager has entered into an Advisory Agreement with the
Trust pursuant to which investment research and management, administrative
services, office facilities and personnel are provided to the Fund in
consideration of a fee from the Fund.
Under its Advisory Agreement with the Trust, the Investment Manager
receives a monthly investment advisory fee equal to 0.55% (on an annual
basis) of the average daily value of the net assets of the Fund. The Fund
bears all costs of its operation other than those incurred by the Investment
Manager under the Advisory Agreement. In particular, the Fund pays, among
other expenses, investment advisory fees and the compensation and expenses of
the Trustees who are not otherwise currently affiliated with the Investment
Manager or any of its affiliates. The Investment Manager will reduce its
management fee payable by the Fund up to the amount of any expenses
(excluding permissible items, such as brokerage commissions, Rule 12b-1
payments, interest, taxes and litigation expenses) paid or incurred in any
year in excess of the most restrictive expense limitation imposed by any
state in which the Fund sells shares, if any. The Investment Manager provides
the Fund with office space, facilities and personnel. The Investment Manager
compensates Trustees of the Trust if such persons are employees or affiliates
of the Investment Manager or its affiliates.
The Fund is managed by Paul J. Clifford, Jr. Mr. Clifford has managed the
Fund since March 1993. Mr. Clifford's principal occupation currently is Vice
President of State Street Research & Management Company. During the past five
years he has also served as a securities analyst for State Street Research &
Management Company.
Subject to the policy of seeking best overall price and execution, sales
of shares of the Fund may be considered by the Fund and the Investment
Manager in the selection of broker or dealer firms for the Fund's portfolio
transactions.
The Investment Manager has a Code of Ethics governing personal securities
transactions of its employees; see the Statement of Additional Information.
Dividends and Distributions; Taxes
The Fund qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code for its most recent
fiscal year and intends to qualify as such in future years, although it
cannot give complete assurance that it will do so. As long as it so qualifies
and satisfies certain distribution requirements, it will not be subject to
federal income tax on its taxable income (including capital gains, if any)
distributed to its
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<PAGE>
shareholders. Consequently, the Fund intends to distribute annually to its
shareholders substantially all its net investment income and any capital gain
net income (capital gains net of capital losses). As long as the Fund
qualifies as a regulated investment company and meets certain other Internal
Revenue Code requirements, distributions of tax-exempt interest income will
be excluded from a shareholder's gross income for federal income tax
purposes.
Dividends from net investment income will be declared daily during each
calendar month and paid monthly; distributions of long-term and short-term
capital gain net income will generally be made on an annual basis (or as
otherwise required for compliance with applicable tax regulations), except to
the extent that net short-term gains, if any, are included in the monthly
income dividends for the purpose of stabilizing, to the extent possible, the
amount of net monthly distributions as described below. Both dividends from
net investment income and distributions of capital gain net income will be
paid in additional shares of the Fund at net asset value (except in the case
of shareholders who elect a different available distribution method). The
Fund will provide its shareholders of record with annual information on a
timely basis concerning the federal and state tax status of dividends and
distributions during the preceding calendar year.
The Fund has adopted distribution procedures which differ from those which
have been customary for investment companies in general. The Fund will
declare a dividend each day in an amount based on monthly projections of its
future net investment income and will pay such dividends monthly as described
above. Consequently, the amount of each daily dividend may differ from actual
net investment income as determined under generally accepted accounting
principles. The purpose of these distribution procedures is to attempt to
eliminate, to the extent possible, fluctuations in the level of monthly
dividend payments that might result if the Fund declared dividends in the
exact amount of its daily net investment income.
Each daily dividend is payable to shareholders of record at the time of
its declaration (for this purpose, including only holders of shares purchased
for which payment has been received by the Transfer Agent and excluding
holders of shares redeemed on that day).
To the extent distributions by the Fund are derived from interest on
qualifying New York Municipal Obligations and are designated as
exempt-interest dividends, such distributions shall be excluded from gross
income for federal income tax purposes and exempt from New York State and New
York City personal income, but not corporate franchise, taxes. If shares of
the Fund which are sold at a loss have been held six months or less, the loss
will be disallowed to the extent of any exempt-interest dividends received.
Dividends paid by the Fund from taxable net investment income and
distributions of any net short-term capital gains, whether they are paid in
cash or reinvested in additional shares, will be taxable for federal income
tax purposes to shareholders as ordinary income. Distributions of net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) which are designated as capital gains distributions, whether paid in
cash or reinvested in additional shares, will be taxable for federal income
tax purposes to shareholders as long-term capital gains, regardless of how
long shareholders have held their shares. However, it is expected that any
taxable income will be insubstantial in relation to the tax-exempt interest
generated by the Fund. If shares of the Fund which are sold at a loss have
been held six months or less, the loss (not otherwise disallowed as
attributable to an exempt-interest dividend) will be considered as a
long-term capital loss to the extent of any capital gain distributions
received.
Dividends and other distributions and proceeds of redemption of Fund
shares paid to individuals and other nonexempt payees will be subject to a
31% federal backup withholding tax if the Transfer Agent is not provided with
the shareholder's correct taxpayer identification number or certification
that the shareholder is not subject to such backup withholding. However,
exempt-interest dividends will not be subject to backup withholding.
Moreover, backup withholding will not apply to any taxable dividends and
distributions provided the Fund reasonably esti-
26
<PAGE>
mates that 95% or more of all dividends or distributions paid or treated as
paid during the year are exempt-interest dividends.
Tax-exempt interest from "private activity" bonds (principally industrial
development revenue bonds) issued after August 7, 1986, is considered a tax
preference item for purposes of the federal alternative minimum tax. However,
the Fund's present intention is to invest no more than 20% of its net assets
in such securities. For corporations, all tax-exempt interest will be
considered in calculating the alternative minimum tax as part of the current
earnings adjustments. Further, shareholders who are "substantial users" (or
"related persons" of substantial users), within the meaning of Section 147 of
the Internal Revenue Code, of facilities financed by private activity bonds
should consult their tax advisers as to whether the Fund is a desirable
investment.
As noted above, exempt-interest dividends derived from interest earned on
qualifying New York Municipal Obligations will be exempt from New York State
and New York City personal income, but not corporate franchise, taxes.
Shareholders will receive an annual notification stating the portion of the
Fund's tax-exempt income attributable to such New York Municipal Obligations.
Dividends and distributions derived from taxable income and capital gains are
not exempt from New York State and New York City taxes. Interest on
indebtedness incurred or continued by a shareholder to purchase or carry
shares of the Fund is not deductible for New York State and New York City
personal income tax purposes.
The foregoing discussion relates only to generally applicable federal and
New York State and New York City income tax provisions in effect as of the
date of this Prospectus and is not a substitute for careful tax planning.
Therefore, prospective shareholders are urged to consult their own tax
advisers with specific reference to their own tax situations including their
liabilities with respect to any other state and local taxes.
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 D shares to that of other mutual funds with similar
investment objectives, to certificates of deposit, to taxable debt
instruments, such as Treasury bonds, as may be included in the Merrill Lynch
Treasury Bond Index, and/or to other financial alternatives. The Fund may
also compare its performance to appropriate indices such as the Lehman
Brothers Municipal Revenue Bond Index, the Merrill Lynch Revenue Index, the
Merrill Lynch 500 Municipal Index, the Lehman Brothers New York Bond Index,
or the Bond Buyer Revenue Bond Index and/or to appropriate rankings or
averages such as the Lipper New York State Municipal Bond Funds Group
compiled by Lipper Analytical Services, Inc., or to those compiled by
Morningstar, Inc., Money Magazine, Business Week, Forbes Magazine, The Wall
Street Journal, Fortune Magazine or Investor's Daily.
Total return is computed separately for each class of shares of the Fund.
The average annual total return ("standard total return") for shares of the
Fund is computed by determining the average annual compounded rate of return
for a designated period that, if applied to a hypothetical $1,000 initial
investment less the maximum initial or contingent deferred sales charges, if
applicable, would produce the redeemable value of that investment at the end
of the period, assuming reinvestment of all dividends and distributions and
with recognition of all recurring charges. Standard total return may be
accompanied with nonstandard total return information, but for differing
periods and computed in the same manner with or without annualizing the total
return or taking sales charges into account.
The Fund's yield is computed separately for each class of shares by
dividing the net investment income, after recognition of all recurring
charges, per share earned during the most recent month or other specified
thirty-day period by the applicable maximum offering price per share on the
last day of such period and annualizing the result. Yield information may be
accompanied by information on tax equivalent yields computed in the same
manner, with adjustment for assumed relevant income tax rates.
The standard total return, yield and tax equivalent yield results take
sales charges into account, if appli-
27
<PAGE>
cable, but do not take into account recurring and nonrecurring charges for
optional services which only certain shareholders elect and which involve
nominal fees, such as the $7.50 fee for remittance of redemption proceeds by
wire. Where sales charges are not applicable and therefore not taken into
account in the calculation of standard total return, yield and tax equivalent
yield, the results will be increased. Any voluntary waiver of fees or
assumption of expenses by the Fund's affiliates will also increase
performance results.
The Fund's distribution rate is calculated separately for each class of
shares by annualizing the latest distribution and dividing the result by the
maximum offering price per share as of the end of the period to which the
distribution relates. The distribution rate is not computed in the same
manner as the above described yield, and therefore can be significantly
different from it. In its supplemental sales literature, the Fund may quote
its distribution rate together with the above described standard total
return, yield and tax equivalent yield information. The use of such
distribution rates would be subject to an appropriate explanation of how the
components of the distribution rate differ from the above described yield.
Performance information may be useful in evaluating the Fund and for
providing a basis for comparison with other financial alternatives. Since the
performance of the Fund varies in response to fluctuations in economic and
market conditions, interest rates and Fund expenses, among other things, no
performance quotation should be considered a representation as to the Fund's
performance for any future period.
In addition, the net asset value of shares of the Fund will fluctuate,
with the result that shares of the Fund, when redeemed, may be worth more or
less than their original cost. Neither an investment in the Fund nor its
performance is insured or guaranteed; such lack of insurance or guarantees
should accordingly be given appropriate consideration when comparing the Fund
to financial alternatives which have such features.
Shares of the Fund had no class designations until June 5, 1993, when
designations were assigned based on the pricing and Rule 12b-1 fees
applicable to shares sold thereafter. Performance data for a specified class
includes periods prior to the adoption of class designations. Performance
data for periods prior to June 5, 1993 will not reflect additional Rule 12b-1
Distribution Plan fees, if any, of up to 1% per year depending on the class
of shares, which will adversely affect performance results for periods after
such date. Performance data or rankings for a given class of shares should be
interpreted carefully by investors who hold or may invest in a different
class of shares.
28
<PAGE>
Appendix
Taxable Equivalent Yield Table
The table below is for illustrative purposes only, and shows the effect of
the tax status on the effective yield received by shareholders under the
federal income tax laws and New York State and New York City personal income
tax laws. It gives the approximate yield a taxable security must earn at
various income levels to produce after-tax yields equivalent to those of
tax-exempt obligations yielding from 4.0% to 8.0%. The combined effective
marginal tax rate is lower than the sum of federal, New York State and New
York City marginal rates because the state and city personal income taxes
paid are deductible from federal taxable income. Of course, no assurance can
be given that the Fund will achieve any specific tax-exempt yield. While it
is expected that the Fund will invest principally in obligations the interest
from which is exempt from federal income taxes and New York State and New
York City personal income taxes, to the extent this is not the case, other
income received by the Fund may be taxable at the state and city levels or at
the federal, state and city levels.
The tax-exempt yields are for illustration only and are not intended to
represent current or future yields for the Fund, which may be higher or lower
than those shown.
<TABLE>
<CAPTION>
Tax-Exempt Yields
New York
State and Combined
Sample Federal New York City Combined Effective
Taxable Marginal Marginal Marginal Marginal
Income Rate Rate Rate Rate* 4.00% 5.00% 6.00% 7.00% 8.00%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Joint Return Equivalent Taxable Yield
$ 27,000 15.00% 11.42% 26.42% 24.71% 5.31% 6.64% 7.97% 9.30% 10.63%
40,000 28.00 11.98 39.98 36.63 6.31 7.89 9.47 11.05 12.62
95,000 31.00 11.99 42.99 39.28 6.59 8.23 9.88 11.53 13.17
150,000 36.00 12.05 48.05 43.71 7.11 8.88 10.66 12.44 14.21
260,000 39.60 12.05 51.65 46.88 7.53 9.41 11.29 13.18 15.06
Single Return
$ 17,000 15.00% 11.98% 26.98% 25.19% 5.35% 6.68% 8.02% 9.36% 10.69%
30,000 28.00 11.99 39.99 36.64 6.31 7.89 9.47 11.05 12.63
62,000 31.00 12.05 43.05 39.32 6.59 8.24 9.89 11.54 13.18
125,000 36.00 12.05 48.05 43.71 7.11 8.88 10.66 12.44 14.21
260,000 39.60 12.05 51.65 46.88 7.53 9.41 11.29 13.18 15.06
</TABLE>
*Combined effective marginal tax rate represents the combined federal, New
York State and New York City tax rates adjusted to account for the federal
deduction of state and city personal income taxes paid. The effect of
reductions in itemized deductions and personal exemptions for taxpayers with
incomes exceeding certain levels has not been taken into account.
The federal, New York State and New York City tax rates shown are those
presently in effect for 1995 and are subject to change. These calculations
assume that no income will be subject to the federal individual alternative
minimum tax and do not reflect the effect of the New York State supplemental
income tax.
29
<PAGE>
(LOGO) State Street Research
State Street Research
New York
Tax-Free Fund
May 1, 1995
PROSPECTUS
STATE STREET RESEARCH
NEW YORK
TAX-FREE FUND
One Financial Center
Boston, MA 02111
INVESTMENT ADVISER
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
DISTRIBUTOR
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
SHAREHOLDER SERVICES
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266
800-562-0032
CUSTODIAN
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
NYTF-606D-595IBS CONTROL NUMBER:2294-950425(0596)SSR-LD
<PAGE>
Supplement No. 1 dated July 17, 1995
to
Prospectus dated May 1, 1995
for
STATE STREET RESEARCH CALIFORNIA TAX-FREE FUND
STATE STREET RESEARCH FLORIDA TAX-FREE FUND
STATE STREET RESEARCH PENNSYLVANIA TAX-FREE FUND
Series of State Street Research Tax-Exempt Trust
Availability of Shares;
Proposed Reorganizations
Shares of the State Street Research California Tax-Free Fund ("California
Fund"), State Street Research Florida Tax-Free Fund ("Florida Fund") and State
Street Research Pennsylvania Tax-Free Fund ("Pennsylvania Fund") are currently
available only to existing shareholders of each respective Fund through
reinvestment of dividends and distributions, additional investments or
exchanges.
Special Meetings of Shareholders of the California Fund, Florida Fund and
Pennsylvania Fund have been tentatively scheduled for November or December,
1995. At these meetings, shareholders will be asked to consider and approve an
Agreement and Plan of Reorganization between each Fund and the State Street
Research Tax-Exempt Fund ("Tax-Exempt Fund").
If the proposal is approved by the respective shareholders of the California
Fund, Florida Fund and/or Pennsylvania Fund, the Tax-Exempt Fund would acquire
substantially all of the assets and liabilities of each such Fund. As a result
of this transaction, shareholders of the California Fund, Florida Fund and/or
Pennsylvania Fund would receive in exchange for shares of their Fund, shares of
the corresponding class of the Tax-Exempt Fund with an aggregate value
equivalent to the aggregate net asset value of their Fund investment at the time
of the transaction. The transaction is conditioned upon the receipt of an
opinion of counsel to the effect that each transaction would be free from
Federal income taxes to the shareholders of the California Fund, Florida Fund
and/or Pennsylvania Fund and each such Fund itself.
Other Programs
Immediately after the first sentence of the first paragraph under the caption
"Purchase of Shares--Class A Shares--Initial Sales Charges--Other Programs,"
the following is added:
"Sales without a sales charge, or with a reduced sales charge, may also be made
through brokers, financial planners, institutions, and others, under managed
fee-based programs (e.g., "wrap fee" or similar programs) which meet certain
requirements established from time to time by the Distributor, in the event the
Distributor determines to implement such arrangements."
Additional Information
Under the caption "Redemption of Shares--Additional Information," the first
paragraph is revised in its entirety as follows:
"Because of the relatively high cost of maintaining small shareholder accounts,
the Fund reserves the right to involuntarily redeem at its option any
shareholder account which remains below $1,500 for a period of 60 days after
notice is mailed to the applicable shareholder, or to impose a maintenance fee
on such account after 60 days' notice. Such involuntary redemptions will be
subject to applicable sales charges, if any. The Fund may increase such minimum
account value above such amount in the future after notice to affected
shareholders. Involuntarily redeemed shares will be priced at the net asset
value on the date fixed for redemption by the Fund, and the proceeds of the
redemption will be mailed 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."
CONTROL NUMBER: 2456A-950717(0896) SSR-LDSSR-249E-795IBS
<PAGE>
State Street Research
California Tax-Free Fund
Prospectus
May 1, 1995
The investment objective of State Street Research California Tax-Free Fund
(the "Fund") is to seek a high level of interest income exempt from federal
income taxes and California State personal income taxes. To achieve its
investment objective, the Fund intends to invest primarily in securities
which are issued by or on behalf of California State or its political
subdivisions and by other governmental entities.
State Street Research & Management Company serves as investment adviser (the
"Investment Manager") for the Fund. As of February 28, 1995, the Investment
Manager had assets of approximately $23.9 billion under management. State
Street Research Investment Services, Inc. serves as distributor (the
"Distributor") for the Fund.
Shareholders may have their shares redeemed directly by the Fund at net asset
value plus the applicable contingent deferred sales charge, if any;
redemptions processed through securities dealers may be subject to processing
charges.
There are risks in any investment program, including the risk of changing
economic and market conditions, and there is no assurance that the Fund will
achieve its investment objective. The net asset value of a share of the Fund
will fluctuate as market conditions change.
This Prospectus sets forth concisely the information a prospective investor
ought to know about the Fund before investing. It should be retained for
future reference. A Statement of Additional Information about the Fund dated
May 1, 1995 has been filed with the Securities and Exchange Commission and is
incorporated by reference in this Prospectus. It is available, at no charge,
upon request to the Fund at the address indicated on the back cover or by
calling 1-800-562-0032.
The Fund is a diversified series of State Street Research Tax-Exempt Trust
(the "Trust"), an open- end management investment company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Table of Contents Page
<S> <C>
Table of Expenses 3
Financial Highlights 5
The Fund's Investments 7
Limiting Investment Risk 8
Purchase of Shares 10
Redemption of Shares 18
Shareholder Services 20
The Fund and Its Shares 23
Management of the Fund 24
Dividends and Distributions; Taxes 25
Calculation of Performance Data 27
Appendix--Taxable Equivalent Yield Table 29
</TABLE>
1
<PAGE>
The Fund offers four classes of shares which may be purchased at the next
determined net asset value per share plus, in the case of all classes except
Class C shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5% and
(ii) an annual service fee of 0.25% of the average daily net asset value of
the Class A shares.
Class B shares are subject to (i) a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made
within five years of purchase, and (ii) annual distribution and service fees
of 1% of the average daily net asset value of such shares. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after purchase. No contingent deferred sales charge
applies after the fifth year following the purchase of Class B shares.
Class C shares are offered only to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1% if
redeemed within one year following purchase and (ii) annual distribution and
service fees of 1% of the average daily net asset value of such shares.
2
<PAGE>
Table of Expenses
<TABLE>
<CAPTION>
Class A Class B Class C Class D
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses (1)
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) 4.5% None None None
Maximum Sales Charge Imposed on Reinvested
Dividends (as a percentage of offering
price) None None None None
Maximum Deferred Sales Charge (as a
percentage of original purchase price or
redemption proceeds, as applicable) None(2) 5% None 1%
Redemption Fees (as a percentage of amount
redeemed, if applicable) None None None None
Exchange Fees None None None None
</TABLE>
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
thereafter, and no contingent deferred sales charge is imposed after the
fifth year. Class D shares are subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the sale.
Long-term investors in a class of shares with a distribution fee may, over a
period of years, pay more than the economic equivalent of the maximum sales
charge permissible under applicable rules. See "Purchase of Shares."
(2) Purchases of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption. See
"Purchase of Shares."
<TABLE>
<CAPTION>
Class A Class B Class C Class D
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses (as a
percentage of average net assets)
Management Fees 0.55% 0.55% 0.55% 0.55%
12b-1 Fees 0.25% 1.00% None 1.00%
Other Expenses 0.90% 0.90% 0.90% 0.90%
Less Voluntary Reduction (0.60%) (0.60%) (0.60%) (0.60%)
------- ------- ------- -------
Total Fund Operating Expenses
(after voluntary reduction) 1.10% 1.85% 0.85% 1.85%
======= ======= ======= =======
</TABLE>
3
<PAGE>
Example:
You would pay the following expenses on a $1,000 investment including, for
Class A shares, the maximum applicable initial sales charge and assuming (1)
5% annual return and (2) redemption of the entire investment at the end of
each time period:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A shares $56 $78 $103 $173
Class B shares (1) $69 $88 $120 $197
Class C shares $ 9 $27 $47 $105
Class D shares $29 $58 $100 $217
</TABLE>
You would pay the following expenses on the same
investment, assuming no redemption:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class B (1) $19 $58 $100 $197
Class D $19 $58 $100 $217
</TABLE>
(1) Ten-year figures assume conversion of Class B shares to Class A shares at
the end of eight years.
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than
shown.
The purpose of the table above is to assist the investor in understanding the
various costs and expenses that an investor will bear directly or indirectly.
The percentage expense levels shown in the table above are based on
experience with expenses during the fiscal year ended December 31, 1994;
actual expense levels for the current fiscal year and future years may vary
from the amounts shown. The table does not reflect charges for optional
services elected by certain shareholders, such as the $7.50 fee for
remittance of redemption proceeds by wire. For further information on sales
charges, see "Purchase of Shares--Alternative Purchase Program"; for further
information on management fees, see "Management of the Fund"; and for further
information on 12b-1 fees, see "Purchase of Shares--Distribution Plan."
The Fund has been advised that the Distributor and its affiliates may from
time to time and in varying amounts voluntarily assume some portion of fees
or expenses relating to the Fund. For the fiscal year ended December 31,
1994, Total Fund Operating Expenses with respect to the average net assets of
Class A, Class B, Class C and Class D shares, respectively, would have been
1.72%, 2.46%, 1.45% and 2.44% in the absence of the voluntary assumption of
fees or expenses by the Distributor and its affiliates. Such assumption of
fees or expenses, as a percentage of average net assets, amounted to 0.62%,
0.61%, 0.60% and 0.59% of the Class A, Class B, Class C and Class D shares of
the Fund, respectively. The amount of fees or expenses assumed during the
fiscal year ended December 31, 1994 differed among classes because of
fluctuations during the year in relative levels of assets in each class and
in expenses before reimbursement. The Fund expects the subsidization of fees
or expenses to continue in the current year, although it cannot give complete
assurance that such assistance will be received.
4
<PAGE>
Financial Highlights
The data set forth below has been audited by Price Waterhouse LLP,
independent accountants, and their report thereon is included in the
Statement of Additional Information. For further information about the
performance of the Fund, see the Fund's Annual Report, which appears under
the caption "Financial Statements" in the Statement of Additional
Information.
<TABLE>
<CAPTION>
Class A Class B
Year ended Year ended
December 31, 1994 1993** December 31, 1994 1993**
<S> <C> <C> <C> <C>
Net asset value, beginning of year $8.37 $8.24 $8.38 $8.24
Net investment income* .40 .22 .34 .19
Net realized and unrealized gain (loss) on
investments (1.00) .21 (1.01) .21
Dividends from net investment income (.39) (.22) (.33) (.18)
Distributions from net realized gains -- (.08) -- (.08)
------ ------ ------ ------
Net asset value, end of year $7.38 $8.37 $7.38 $8.38
====== ====== ====== ======
Total return (7.26)%+ 5.26%++ (8.07)%+ 4.94%++
Net assets at end of year (000s) $8,044 $4,392 $3,122 $2,076
Ratio of operating expenses to average net
assets* 1.10% 1.10%# 1.85% 1.85%#
Ratio of net investment income to average
net assets* 5.16% 4.66%# 4.40% 3.91%#
Portfolio turnover rate 59.22% 56.62% 59.22% 56.62%
*Reflects the voluntary assumption of fees
or expenses per share in each year $0.05 $0.03 $0.05 $0.03
</TABLE>
**June 7, 1993 (commencement of share class designations) to December 31,
1993.
#Annualized.
+Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charge. Total return
would be lower if the Distributor and its affiliates had not voluntarily
assumed a portion of the Fund's expenses.
5
<PAGE>
<TABLE>
<CAPTION>
Class C Class D
July 5, 1989
(Commencement of Year ended
Year ended December 31 Operations) to December 31,
1994 1993 1992 1991 1990 December 31, 1989 1994 1993**
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $8.38 $7.90 $7.73 $7.30 $7.35 $7.40 $8.38 $8.24
Net investment income* .43 .42 .42 .44 .45 .21 .34 .19
Net realized and unrealized gain (loss) on
investments (1.01) .55 .22 .42 (.05) (.05) (1.00) .21
Dividends from net investment income (.41) (.41) (.43) (.43) (.44) (.21) (.33) (.18)
Distributions from net realized gains -- (.08) (.04) -- (.01) -- -- (.08)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value,
end of year $7.39 $8.38 $7.90 $7.73 $7.30 $7.35 $7.39 $8.38
====== ====== ====== ====== ====== ====== ====== ======
Total return (7.02)%+ 12.53%+ 8.51%+ 12.19%+ 5.59% 2.18%++ (7.95)%+ 4.93%++
Net assets at end
of year (000s) $16,786 $29,398 $25,558 $12,757 $8,131 $6,560 $542 $885
Ratio of operating expenses to average net
assets* 0.85% 0.85% 0.85% 0.85% 0.85% 0.85%# 1.85% 1.85%#
Ratio of net investment income to average
net assets* 5.34% 5.06% 5.51% 5.94% 6.22% 5.88%# 4.35% 3.91%#
Portfolio turnover rate 59.22% 56.62% 31.55% 42.24% 34.62 3.77% 59.22% 56.62%
*Reflects the voluntary assumption of fees
or expenses per share in each year $0.05 $0.03 $0.05 $0.09 $0.13 $0.07 $0.05 $0.02
</TABLE>
**June 7, 1993 (commencement of share class designations) to December 31, 1993.
#Annualized.
+Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charge. Total return
would be lower if the Distributor and its affiliates had not voluntarily
assumed a portion of the Fund's expenses.
6
<PAGE>
The Fund's Investments
The Fund's investment objective is to seek a high level of interest income
exempt from federal income taxes and California State personal income taxes.
The Fund's investment objective is a fundamental policy and may not be
changed without approval of the Fund's shareholders.
Under normal circumstances at least 80% of the Fund's net assets will be
invested in California Municipal Obligations. California Municipal
Obligations include securities issued by or on behalf of California State,
its political subdivisions, municipalities and public authorities and by
other governmental entities (for example, U.S. possessions such as Puerto
Rico) if such securities generate interest income which is, in the opinion of
issuer's counsel at the time of issuance, exempt from both federal income
taxes and California State personal income taxes to the holders of shares in
the Fund.
To achieve its investment objective, the Fund intends to invest primarily in
securities which are investment grade, although this is not a fundamental
policy. Investment grade securities include securities rated, at the time of
purchase, AAA, AA, A, BBB, SP-1 or SP-2 by Standard & Poor's Corporation
("S&P") or Aaa, Aa, A, Baa, MIG-1 or MIG-2 by Moody's Investors Service, Inc.
("Moody's"), securities comparably rated by any other national rating service
and securities not rated but considered by the Investment Manager to be of
equivalent investment quality to comparable rated securities. Securities
rated Baa by Moody's lack outstanding investment characteristics and in fact
have speculative characteristics as well. The Fund may also invest up to 25%
of its total assets in securities rated at the time of purchase as low as CC
by S&P or Ca by Moody's or securities that are not rated but considered by
the Investment Manager to be of equivalent investment quality to comparable
rated securities. Such investments may be considered by the rating agencies
to be speculative in a high degree or have major risk exposures. For
information concerning the risks and ratings of tax- exempt bonds, see
"Appendix--Description of Municipal Debt Ratings" in the Statement of
Additional Information.
Up to 20% of the Fund's assets may be invested without regard to the
limitations described above. However, during the current year, the Investment
Manager does not anticipate that the Fund will invest more than 5% of its net
assets in securities rated BB or lower by S&P or Ba or lower by Moody's or in
unrated securities of comparable investment quality. See the Statement of
Additional Information for risks associated with lower rated, "high yield"
securities.
The Fund may invest up to 25% of its total assets in unrated securities
considered by the Investment Manager to be of equivalent investment quality
to comparable rated securities in which the Fund may invest. Many issuers of
tax-exempt securities choose not to have their obligations rated. Although
unrated securities usually provide a higher yield than rated securities, they
may also involve a greater degree of risk. Medium and lower rated or unrated
tax-exempt bonds are frequently traded in markets in which liquidity may be
limited. This factor might limit the ability to sell such securities at their
fair value either to meet redemption requests or to respond to changes in the
economy or the financial markets.
The Fund reserves the right to invest more than 25% of its total assets in
tax-exempt industrial development revenue bonds. The Fund may invest up to
25% of its total assets in securities issued in connection with the financing
of projects with similar characteristics, such as toll road revenue bonds,
housing revenue bonds or electric power project revenue bonds, or in
industrial development revenue bonds which are based, directly or indirectly,
on the credit of private entities in any one industry. This may make the Fund
more susceptible to economic, political or regulatory occurrences affecting a
particular industry or sector and increase the potential for fluctuation of
net asset value. Investments in industrial development revenue bonds which
may result in federal alternative minimum taxes will under present policy be
limited to 20% of the Fund's net assets; see "Dividends and Distributions;
Taxes."
The Fund may invest in California Municipal Obligations which have fixed
interest rates or variable or floating interest rates, including short-term
obligations which have daily adjustable rates. Variable or floating
7
<PAGE>
rates may be adjusted in relation to market rates for other instruments,
prime rates, indices or similar indicators. Certain of these adjustable
obligations may carry a demand feature that permits the Fund to receive the
par value of the security upon demand prior to maturity. These obligations
may also be subject to prepayment without penalty at the option of the
issuer.
The Fund may invest in lease obligations or installment purchase contract
obligations, which are instruments supported by lease payments made by a
municipality ("municipal lease obligations"). Municipal lease obligations may
be issued by state and local government authorities to obtain funds to
acquire a wide variety of equipment and facilities such as fire and
sanitation vehicles, computer equipment, buildings and other capital assets.
Although municipal lease obligations do not normally constitute general
obligations of the municipality, a lease obligation is ordinarily backed by
the municipality's agreement to make the payments due under the lease
obligation. However, certain lease obligations contain "non- appropriation"
clauses which provide that the municipality has no obligation to make lease
or installment purchase payments in later years unless money is appropriated
in the future. Municipal lease obligations are a relatively new form of
financing instrument and the market for such obligations is still developing.
Depending on the development of such markets, such municipal lease
obligations may be deemed to be liquid as determined by or in accordance with
methods adopted by the Trustees. In determining the liquidity and appropriate
valuation of a municipal lease obligation, the following factors relating to
the security are considered, among others: (1) the frequency of trades and
quotes; (2) the number of dealers willing to purchase or sell the security;
(3) the willingness of dealers to undertake to make a market; (4) the nature
of the marketplace trades; and (5) the likelihood that the obligation will
continue to be marketable based on the credit quality of the municipality or
relevant obligor. Municipal lease obligations initially deemed to be liquid
could later become illiquid.
Special Considerations and Risk Factors
There are risks in any investment program, and there is no assurance that the
Fund will achieve its investment objective. Tax-exempt securities are subject
to relative degrees of credit risk and market volatility. Credit risk relates
to the issuer's (and any guarantor's) ability to make timely payments of
principal and interest. Market volatility relates to the changes in market
price that occur as a result of variations in the level of prevailing
interest rates and yield relationships between sectors in the tax-exempt
securities market and other market factors.
The Fund's ability to achieve its investment objective depends on the ability
of the issuers of California Municipal Obligations to meet their continuing
obligations for the payment of principal and interest. Investors should be
aware that certain California constitutional amendments, legislative
measures, executive orders, administrative regulations and voter initiatives
could result in certain adverse consequences affecting California Municipal
Obligations. For instance, certain provisions of the California Constitution
and statutes that limit the taxing and spending authority of California
governmental entities may impair the ability of the issuers of some
California Municipal Obligations to maintain debt service on their
obligations. Other measures affecting the taxing or spending authority of
California or its political subdivisions may be approved or enacted in the
future. Finally, the Fund will be affected by general changes in interest
rates nationally which will result in increases or decreases in the value of
the obligations held by the Fund.
For a more detailed discussion of the risks to which California Municipal
Obligations are subject, see the Statement of Additional Information.
Limiting Investment Risk
In seeking to lessen investment risk, the Fund operates under certain
fundamental investment restrictions. Under these restrictions the Fund may
not invest in a security if the transaction would result in: (a) with respect
to 75% of its total assets, more than
8
<PAGE>
5% of the Fund's total assets being invested in any one issuer; (b) the Fund
owning more than 10% of any class of voting securities of an issuer; (c) more
than 5% of the Fund's total assets being invested in securities of private
issuers (including predecessors) with less than three years of continuous
operations unless such securities are rated BBB, SP-2 or higher by S&P or
Baa, MIG-2 or higher by Moody's; or (d) more than 25% of the Fund's total
assets being invested in industrial revenue bonds which are based directly or
indirectly on the credit of private issuers in any one industry. California
State and each of its separate political subdivisions, agencies, authorities
or instrumentalities are treated as separate issuers in accordance with
prevailing regulatory interpretations. The foregoing restrictions do not
apply to investments in securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities or backed by the U.S.
Government or to repurchase agreements involving such U.S. Government
securities to the extent excludable under relevant regulatory
interpretations. In addition, the Fund may not invest more than 10% of its
total assets in illiquid securities, which may include, to the extent any are
not readily marketable, securities restricted as to resale, repurchase
agreements extending for more than seven days and other securities. The
fundamental investment restrictions set forth in this paragraph may not be
changed except by vote of the holders of a majority of the outstanding voting
securities of the Fund. For further information on these and other investment
restrictions, including other nonfundamental investment restrictions which
may be changed without a shareholder vote, see the Statement of Additional
Information.
To aid in achieving its investment objective, the Fund may, subject to
certain limitations, buy and sell options, futures contracts and options on
futures contracts, on securities and securities indices. 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 non-hedging purposes
would exceed 5% of the market value of the Fund's net assets; similar
policies apply to options which are not commodities. The Fund may also enter
various forms of swap arrangements, which have simultaneously the
characteristics of a security and a futures contract, although the Fund does
not presently expect to invest more than 5% of its total assets in such
items. These swap arrangements include interest rate swaps and index swaps.
In addition, the Fund may purchase securities on a "when-issued" basis and
enter into repurchase agreements, subject to certain limitations. See the
Statement of Additional Information.
The Fund may also invest in tax-exempt derivative products including stripped
tax-exempt bonds, synthetic floating rate tax-exempt bonds, and tax-exempt
asset backed securities, including interests in trusts holding tax-exempt
lease receivables. Some of these products may generate taxable income or
become illiquid. To reduce counterparty risk, the Fund will only deal with
established, reputable institutions.
The Fund may hold up to 100% of its assets in cash or short-term securities
for temporary defensive purposes, subject to limitations. 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 California Municipal Obligations, short- term
money market securities such as 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 rated at least "A" by S&P or
"Prime" by Moody's (or, if not rated, issued by companies having an
outstanding long-term unsecured debt issue rated at least "A" by S&P or
Moody's). See the Statement of Additional Information.
The Fund intends that short-term securities acquired for temporary defensive
purposes will be exempt from federal income taxes and California State
personal income taxes. However, if suitable short-term securities are not
available or if securities are available only on a when-issued basis or in
the event of an emergency, the Fund may invest up to
9
<PAGE>
100% of its total assets in short-term securities which may not be exempt
from such taxes.
Portfolio Turnover
The Fund reserves full freedom with respect to portfolio turnover. In periods
when there are rapid changes in economic conditions or security price levels
or when investment strategy is changed significantly, portfolio turnover may
be significantly higher than during times of economic and market price
stability or when investment strategy remains relatively constant. A high
rate of portfolio turnover will result in increased transaction costs for the
Fund and may also result in an increase in the realization of short- term
capital gains.
Information on the Purchase of Shares, Redemption of Shares and Shareholder
Services is set forth on pages 10-23 below.
The Fund is available for investment by many kinds of investors including
participants investing through savings plans sponsored by employers,
corporations, individuals, etc. The applicability of the general information
and administrative procedures set forth below accordingly will vary depending
on the investor and the recordkeeping system established for a shareholder's
investment in the Fund. Participants in plans should first consult with the
appropriate person at their employer or refer to the plan materials before
following any of the procedures below. For more information or assistance,
anyone may call 1-800-562-0032.
Purchase of Shares
Methods of Purchase
Through Dealers
Shares of the Fund are continuously offered through securities dealers who
have entered into sales agreements with the Distributor. Purchases through
dealers are confirmed at the offering price, which is the net asset value
plus the applicable sales charge, next determined after the order is duly
received by State Street Research Shareholder Services ("Shareholder
Services"), a division of State Street Research Investment Services, Inc.,
from the dealer. ("Duly received" for purposes herein means in accordance
with the conditions of the applicable method of purchase as described below.)
The dealer is responsible for transmitting the order promptly to Shareholder
Services in order to permit the investor to obtain the current price. See
"Purchase of Shares--Net Asset Value" herein.
By Mail
Initial investments in the Fund may be made by mailing or delivering to the
investor's securities dealer a completed Application (accompanying this
Prospectus), together with a check for the total purchase price payable to
the Fund. The dealer must forward the Application and check in accordance
with the instructions on the Application.
Additional shares may be purchased by mailing to Shareholder Services a check
payable to the Fund in the amount of the total purchase price together with
any one of the following: (i) an Application; (ii) the stub from a
shareholder's account statement; or (iii) a letter setting forth the name of
the Fund, the class of shares and the shareholder's account name and number.
Shareholder Services will deliver the purchase order to the transfer agent
and dividend paying agent, State Street Bank and Trust Company (the "Transfer
Agent").
If a check is not honored for its full amount, the purchaser could be subject
to additional charges to cover collection costs and any investment loss, and
the purchase may be cancelled.
By Wire
An investor may purchase shares by wiring Federal Funds of not less than
$5,000 to State Street Bank and Trust Company, which also serves as the
Trust's custodian (the "Custodian"), as set forth below. Prior to making an
investment by wire, an investor must notify Shareholder Services at
1-800-521-6548 and obtain a control number and instructions. Following such
notification, Federal Funds should be wired through the Federal Reserve
System to:
10
<PAGE>
ABA #011000028
State Street Bank and Trust Company
Boston, MA
BNF = State Street Research California Tax- Free Fund and class of shares
(A, B, C or D)
AC = 99029761
OBI = Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street Research Shareholder Services)
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make
such investment by 12 noon Boston time on the day of his or her investment;
and (ii) the wire must be received by 4 P.M. Boston time that same day.
An investor making an initial investment by wire must promptly complete the
Application accompanying this Prospectus and deliver it to his or her
securities dealer, who should forward it as required. No redemptions will be
effected until the Application has been duly processed.
The Fund may in its discretion discontinue, suspend or change the practice of
accepting orders by any of the methods described above. Orders for the
purchase of shares are subject to acceptance by the Fund. The Fund reserves
the right to reject any purchase order, including orders in connection with
exchanges, for any reason which the Fund in its sole discretion deems
appropriate. The Fund reserves the right to suspend the sale of shares.
Minimum Investment
<TABLE>
<CAPTION>
Class of Shares
A B C D
<S> <C> <C> <C> <C>
Minimum Initial Investment
By Wire $5,000 $5,000 (a) $5,000
By Investamatic $1,000 $1,000 (a) $1,000
All Other $2,500 $2,500 (a) $2,500
Minimum Subsequent Investment
By Wire $5,000 $5,000 (a) $5,000
By Investamatic $50 $50 (a) $50
All Other $50 $50 (a) $50
(a) Special conditions apply; contact Distributor.
</TABLE>
The Fund reserves the right to vary the minimums for initial or subsequent
investments from time to time as in the case of, for example, exchanges and
investments under various employee benefit plans, sponsored arrangements
involving group solicitation of the members of an organization, or other
investment plans such as for reinvestment of dividends and distributions or
for periodic investments (e.g. Investamatic Check Program).
Alternative Purchase Program
General
Alternate classes of shares permit investors to select a purchase program
which they believe will be the most advantageous for them, given the amount
of their purchase, the length of time they anticipate holding Fund shares, or
the flexibility they desire in this regard, and other relevant circumstances.
Investors will be able to determine whether in their particular circumstances
it is more advantageous to incur an initial sales charge and not be subject
to certain ongoing charges or to have their entire initial purchase price
invested in the Fund with the investment being subject thereafter to ongoing
service fees and distribution fees.
As described in greater detail below, securities dealers are paid differing
amounts of commission and other compensation depending on which class of
shares they sell.
11
<PAGE>
The major differences among the various classes of shares are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
<S> <C> <C> <C> <C>
Sales Charges Initial sales Contingent deferred None Contingent deferred
charge at time of sales charge of 5% sales charge
investment of up to 2% applies to of 1% applies
to 4.5% depending any shares re- to any shares re-
on amount of deemed within deemed within one
investment first five years year following
following their their purchase
purchase; no
contingent deferred
sales charge
after five years
On investments of
$1 million or more, no
initial sales charge;
but contingent
deferred sales charge
of 1% applies to
any shares redeemed
within one year
following their
purchase
Distribution None 0.75% for first None 0.75% each year
Fee eight years;
Class B shares
convert auto-
matically to
Class A shares
after eight years
Service Fee 0.25% each year 0.25% each year None 0.25% each year
Initial Above described 4% None 1%
Commission initial sales charge
Received by less 0.25% to 0.50%
Selling retained by
Securities Distributor
Dealer
On investments of
$1 million or more,
0.25% to 0.70% paid
to dealer by Distributor
</TABLE>
12
<PAGE>
In deciding which class of shares to purchase, the investor should consider
the amount of the investment, the length of time the investment is expected
to be held, and the ongoing service fee and distribution fee, among other
factors.
Class A shares are sold at net asset value plus an initial sales charge of up
to 4.5% of the public offering price. Because of the sales charge, not all of
an investor's purchase amount is invested unless the purchase equals
$1,000,000 or more. Class B shareholders pay no initial sales charge, but a
contingent deferred sales charge of up to 5% generally applies to shares
redeemed within five years of purchase. Class D shareholders also pay no
initial sales charge, but a contingent deferred sales charge of 1% generally
applies to redemptions made within one year of purchase. For Class B and
Class D shareholders, therefore, the entire purchase amount is immediately
invested in the Fund.
An investor who qualifies for a significantly reduced initial sales charge,
or a complete waiver of the sales charge on investments of $1,000,000 or
more, on the purchase of Class A shares might elect that option to take
advantage of the lower ongoing service and distribution fees that
characterize Class A shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. Class B shares are assessed an annual
distribution fee of 0.75% of daily net assets for an eight year period
following the date of purchase and are then automatically converted to Class
A shares. Class D shares are assessed an annual distribution fee of 0.75% of
daily net assets for as long as the shares are held. The prospective investor
should consider these fees plus the initial or contingent deferred sales
charges in estimating the costs of investing in the various classes of the
Fund's shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are allocated to dealers (see
"Distribution Plan" below). In addition, the Distributor will, at its
expense, provide additional cash and noncash incentives to securities dealers
that sell shares. Such incentives may be extended only to those dealers who
have sold or may sell significant amounts of shares and/or meet other
conditions established by the Distributor; for example, the Distributor may
sponsor special promotions to develop particular distribution channels or to
reach certain investor groups. The incentives may include merchandise and
trips to and attendance at sales seminars at resorts.
Class A Shares--Initial Sales Charges
Sales Charges
The purchase price of a Class A share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar
amount of the shares purchased as set forth in the table below. A major
portion of this sales charge is reallowed by the Distributor to the
securities dealer responsible for the sale.
<TABLE>
<CAPTION>
Sales Sales
Charge Charge
Paid by Paid by Dealer
Dollar Investor Investor Concession
Amount of As % of As % of As % of
Purchase Purchase Net Asset Purchase
Transaction Price Value Price
<S> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00%
$100,000 or above
but less than $250,000 3.50% 3.63% 3.00%
$250,000 or above
but less than $500,000 2.50% 2.56% 2.00%
$500,000 or above
but less than $1 million 2.00% 2.04% 1.75%
See following
$1 million and above 0% 0% discussion
</TABLE>
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
a commission as follows:
13
<PAGE>
<TABLE>
<CAPTION>
Amount of Sale Commission
<S> <C>
(a)$1 million to $3 million 0.70%
(b)Next $2 million 0.50%
(c)Amount over $5 million 0.25%
</TABLE>
On such sales of $1,000,000 or more, the investor is subject to a 1%
contingent deferred sales charge on any portion of the purchase redeemed
within one year of the sale. However, such redeemed shares will not be
subject to the contingent deferred sales charge to the extent that their
value represents (1) capital appreciation or (2) reinvestment of dividends or
capital gains distributions. In addition, the contingent deferred sales
charge will be waived for certain other redemptions as described under
"Contingent Deferred Sales Charge Waivers" below (as otherwise applicable to
Class B shares).
Class A shares of the Fund that are purchased without a sales charge may be
exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption
within one year of the Class A shares which are acquired through such
exchange. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any contingent
deferred sales charge will be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement
of Additional Information, of $100,000 or more of Class A shares of the Fund
or a combination of "Eligible Funds." "Eligible Funds" include the Fund and
other funds so designated by the Distributor from time to time. Class B,
Class C and Class D shares may also be included in the combination under
certain circumstances. Securities dealers should call Shareholder Services
for details concerning the other Eligible Funds and any persons who may
qualify for reduced sales charges and related information. See the Statement
of Additional Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A
shares of the Fund and any other Eligible Funds within a 13-month period.
Class B, Class C and Class D shares may be included in the combination under
certain circumstances. Additional information on a Letter of Intent is
available from dealers, or from the Distributor, and also appears in the
Statement of Additional Information.
Right of Accumulation
Investors may purchase Class A shares of the Fund or a combination of shares
of the Fund and other Eligible Funds at reduced sales charges pursuant to a
Right of Accumulation. Under the Right of Accumulation, the sales charge is
determined by combining the current purchase with the value of the Class A
shares of other Eligible Funds held at the time of purchase. Class B, Class C
and Class D shares may also be included in the combination under certain
circumstances. See the Statement of Additional Information and call
Shareholder Services for details concerning the Right of Accumulation.
Other Programs
Class A shares of the Fund may be sold or issued in an exchange at a reduced
sales charge or without a sales charge pursuant to certain sponsored
arrangements, which include programs under which a company, employee benefit
plan or other organization makes recommendations to, or permits group
solicitation of, its employees, members or participants, except any
organization created primarily for the purpose of obtaining shares of the
Fund at a reduced sales charge or without a sales charge. Information on such
arrangements and further conditions and limitations is available from the
Distributor.
In addition, no sales charge is imposed in connection with the sale of Class
A shares of the Fund to the following entities and persons: (A) the
Investment Manager, Distributor, or any affiliated entities, including any
direct or indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated Companies"); (B) employees, officers, sales
representatives or
14
<PAGE>
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.
Class B Shares--Contingent Deferred Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is duly received, as defined herein.
No sales charge is imposed at the time of purchase; thus the full amount of
the investor's purchase payment will be invested in the Fund. However, a
contingent deferred sales charge may be imposed upon redemptions of Class B
shares as described below.
The Distributor will pay securities dealers at the time of sale a 4%
commission for selling Class B shares. The proceeds of the contingent
deferred sales charge and the distribution fee are used to offset
distribution expenses and thereby permit the sale of Class B shares without
an initial sales charge.
Class B shares that are redeemed within a five year period after their
purchase will not be subject to a contingent deferred sales charge to the
extent that the value of such shares represents (1) capital appreciation of
Fund assets or (2) reinvestment of dividends or capital gains distributions.
The amount of any applicable contingent deferred sales charge will be
calculated by multiplying the net asset value of such shares at the time of
redemption or at the time of purchase, whichever is lower, by the applicable
percentage shown in the table below:
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
As A Percentage Of Net Asset Value
Redemption During At Redemption
<S> <C>
1st Year Since Purchase 5%
2nd Year Since Purchase 4
3rd Year Since Purchase 3
4th Year Since Purchase 3
5th Year Since Purchase 2
6th Year Since Purchase
and Thereafter None
</TABLE>
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first
of those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of the Fund acquired through an exchange from
another Eligible Fund will be measured from the date that such shares were
initially acquired in the other Eligible Fund, and Class B shares being
redeemed will be considered to represent, as applicable, capital appreciation
or dividend and capital gains distribution reinvestments in such other
Eligible Fund. These determinations will result in any contingent deferred
sales charge being imposed at the lowest possible rate. For federal income
tax purposes, the amount of the contingent deferred sales charge will reduce
the gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any contingent deferred sales charge will be paid
to the Distributor.
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic withdrawal plan which meets certain
conditions. In addition, the contingent deferred sales charge will be waived
for: (i) redemptions made within one year of the death or total disability,
as defined by the Social Security Administration, of all shareholders of an
account; (ii) redemptions made after attainment of a specific age in an
amount which represents the minimum distribution required at such age under
Section 401(a)(9) of the Internal Revenue Code for retirement accounts or
plans (e.g., age 70-1/2 for IRAs and Section 403(b) plans), calculated solely
on the basis of assets invested in the
15
<PAGE>
Fund or other Eligible Funds; and (iii) a redemption resulting from a
tax-free return of an excess contribution to an IRA. (The foregoing waivers
do not apply to a tax-free rollover or transfer of assets out of the Fund.)
The Fund may modify or terminate the waivers at any time; for example, the
Fund may limit the application of multiple waivers.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends or
distributions with respect to such shares, will automatically convert to
Class A shares of the Fund at the end of eight years following the issuance
of such Class B shares; consequently, they will no longer be subject to the
higher expenses borne by Class B shares. The conversion rate will be
determined on the basis of the relative per share net asset values of the two
classes and may result in a shareholder receiving either a greater or fewer
number of Class A shares than the Class B shares so converted. As noted
above, holding periods for Class B shares received in exchange for Class B
shares of other Eligible Funds will be counted toward the eight-year period.
Class C Shares--Institutional; No Sales Charge
The purchase price of a Class C share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase or
redemption. The Fund will receive the full amount of the investor's purchase
payment.
Class C shares are only available for new investments by certain employee
benefit plans and large institutions. See the Statement of Additional
Information. Information on the availability of Class C shares and further
conditions and limitations is available from the Distributor.
Class C shares may be also issued in connection with mergers and acquisitions
involving the Fund, and under certain other circumstances as described in
this Prospectus (e.g., see "Shareholder Services-- Exchange Privilege").
Shares held prior to June 5, 1993 are deemed to be Class C shares, but
shareholders thereof may not acquire additional Class C shares except through
reinvestment of dividends and distributions. Class C shares may have also
been issued directly or through exchanges to those shareholders of other
Eligible Funds who previously held shares which are not subject to any future
sales charge or service fees or distribution fees.
Class D Shares--Spread Sales Charges
The purchase price of a Class D share of the Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase; thus the
full amount of the investor's purchase payment will be invested in the Fund.
Class D shares are subject to a 1% contingent deferred sales charge on any
portion of the purchase redeemed within one year of the sale. The contingent
deferred sales charge will be 1% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. The Distributor
pays securities dealers a 1% commission for selling Class D shares at the
time of purchase. The proceeds of the contingent deferred sales charge and
the distribution fee are used to offset distribution expenses and thereby
permit the sale of Class D shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will not be
subject to the contingent deferred sales charge to the extent that the value
of such shares represents (1) capital appreciation of Fund assets or (2)
reinvestment of dividends or capital gains distributions. In addition, the
contingent deferred sales charge will be waived for certain other redemptions
as described under "Contingent Deferred Sales Charge Waivers" above (as
otherwise applicable to Class B shares). For federal income tax purposes, the
amount of the contingent deferred sales charge will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption.
The amount of any contingent deferred sales charge will be paid to the
Distributor.
Net Asset Value
The Fund's per share net asset values are determined Monday through Friday as
of the close of the New York Stock Exchange (the "NYSE") exclusive of days on
which the NYSE is closed. The NYSE ordi-
16
<PAGE>
narily closes at 4 P.M. New York City time. Market quotations for most
municipal securities are not readily available on a daily basis; therefore,
the Fund uses one or more pricing services to value such assets. The pricing
services utilize information with respect to market transactions, quotations
from dealers and various relationships among securities in determining value
and may provide prices determined as of times prior to the close of the NYSE.
Assets for which market quotations are readily available are valued as of the
close of business on the valuation date. Securities for which there is no
pricing service valuation or last reported sale price are valued as
determined in good faith by or under the authority of the Trustees of the
Trust. 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. Further information with respect to the valuation of the Fund's
assets is included in the Statement of Additional Information.
Distribution Plan
The Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the provisions of the
Distribution Plan, the Fund makes payments to the Distributor based on an
annual percentage of the average daily value of the net assets of each class
of shares as follows:
<TABLE>
<CAPTION>
Class Service Fee Distribution Fee
<S> <C> <C>
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
</TABLE>
Some or all of the service fees are used to reimburse securities dealers
(including securities dealers that are affiliates of the Distributor) for
personal services and/or the maintenance of shareholder accounts. A portion
of any initial commission paid to dealers for the sale of shares of the Fund
represents payment for personal services and/or the maintenance of
shareholder accounts by such dealer. Dealers who have sold Class A shares are
eligible for further reimbursements commencing as of the time of such sale.
Dealers who have sold Class B and Class D shares are eligible for further
reimbursements 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 of shareholder
accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to securities dealers for selling such shares. Any
distribution fees received by the Distributor and not allocated to dealers
may be applied by the Distributor in reduction of expenses waived by it or in
connection with sales or marketing efforts, including special promotional
fees and cash and noncash incentives based upon sales by securities dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs
similar expenses on behalf of, such other funds. When expenses of the
Distributor cannot be identified as relating to a specific fund, the
Distributor allocates expenses among the funds in a manner deemed fair and
equitable to each fund.
Commissions and other cash and noncash incentives and payments to dealers, to
the extent payable out of the general profits, revenues or other sources of
the Distributor (including the advisory fees paid by the Fund), have also
been authorized pursuant to the Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which the Fund may incur under the
Distribution Plan to 1%, of which 0.75% may be used to pay distribution
expenses and 0.25% may be used to pay shareholder service fees. The NASD rule
also limits the aggregate amount which the Fund may pay for such distribution
costs to 6.25% of gross share sales of a class since the inception of any
asset-based sales charge plus interest at 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
17
<PAGE>
the Distributor or to dealers funded under the Distribution Plan may be
discontinued at any time by the Trustees of the Trust.
Redemption of Shares
Shareholders may redeem all or any portion of their accounts on any day the
NYSE is open for business. Redemptions will be effective at the net asset
value per share next determined (see "Purchase of Shares-- Net Asset Value"
herein) after receipt of the redemption request, in accordance with the
requirements described below, by Shareholder Services and delivery of the
request by Shareholder Services to the Transfer Agent. To allow time for the
clearance of checks used for the purchase of any shares which are tendered
for redemption shortly after purchase, the remittance of the redemption
proceeds for such shares could be delayed for 15 days or more after the
purchase. Shareholders who anticipate a potential need for immediate access
to their investments should, therefore, purchase shares by wire. Except as
noted, redemption proceeds are normally remitted within seven days after
receipt of the redemption request and any necessary documents in good order.
Methods of Redemption
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed to
the shareholder or wired to a predesignated bank account (see "Proceeds By
Wire" below) by sending to State Street Research Shareholder Services, P.O.
Box 8408, Boston, Massachusetts 02266- 8408: (1) a written request for
redemption signed by the registered owner(s) of the shares, exactly as the
account is registered; (2) an endorsed stock power in good order with respect
to the shares or, if issued, the share certificates for the shares endorsed
for transfer or accompanied by an endorsed stock power; (3) any required
signature guarantees (see "Redemption of Shares-- Signature Guarantees"
below); and (4) any additional documents which may be required for redemption
in the case of corporations, trustees, etc., such as certified copies of
corporate resolutions, governing instruments, powers of attorney, and the
like. The Transfer Agent will not process requests for redemption until it
has received all necessary documents in good order. A shareholder will be
notified promptly if a redemption request cannot be accepted. Shareholders
having any questions about the requirements for redemption should call
Shareholder Services toll-free at 1-800-562-0032.
Request By Telephone
Shareholders may request redemption by telephone with proceeds to be
transmitted by check or by wire (see "Proceeds By Wire" below). A shareholder
can request a redemption for $50,000 or less to be transmitted by check. Such
check for the proceeds will be made payable to the shareholder of record and
will be mailed to the address of record. There is no fee for this service. It
is not available for shares held in certificate form or if the address of
record has been changed within 30 days of the redemption request. The Fund
may revoke or suspend the telephone redemption privilege at any time and
without notice. See "Shareholder Services-- Telephone Services" for a
discussion of the conditions and risks associated with Telephone Privileges.
Request By Check (Class A Shares Only)
Shareholders of Class A shares of the Fund may redeem shares by checks drawn
on State Street Bank and Trust Company. Checks may be made payable to the
order of any person or organization designated by the shareholder and must be
for amounts of at least $500 but not more than $100,000. Shareholders will
continue to earn dividends on the shares to be redeemed until the check
clears. There is currently no charge associated with redemption of shares by
check. Checkbooks are supplied for a $2 fee. Checks will be sent only to the
registered owner at the address of record. A $10 fee will be charged against
an account in the event a redemption check is presented for payment and not
honored pursuant to the terms and conditions established by State Street Bank
and Trust Company.
Shareholders can request the checkwriting privilege by completing the
signature card which is part of the Application. In order to arrange for
redemption-by- check after an account has been opened, a revised Application
with signature card and signatures guaranteed must be sent to Shareholder
Services. Cancelled checks will be returned to shareholders at the end of
each month.
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The redemption-by-check service is subject to State Street Bank and Trust
Company's rules and regulations applicable to checking accounts (as amended
from time to time), and is governed by the Massachusetts Uniform Commercial
Code. All notices with respect to checks drawn on State Street Bank and Trust
Company must be given to State Street Bank and Trust Company. Stop payment
instructions with respect to checks must be given to State Street Bank and
Trust Company by calling 1-617-985-8543. Shareholders may not close out an
account by check.
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder has
Telephone Privileges (see "Shareholder Services--Telephone Services" herein),
the Trust's custodian will wire redemption proceeds to the shareholder's
predesignated bank account. To make the request, the shareholder should call
1-800-521-6548 prior to 4 P.M. Boston time. A $7.50 charge against the
shareholder's account will be imposed for each wire redemption. This charge
is subject to change without notice. The shareholder's bank may also impose a
charge for receiving wires of redemption proceeds. The minimum redemption by
wire is $5,000.
Request to Dealer to Repurchase
For the convenience of shareholders, the Fund has authorized the Distributor
as its agent to accept orders from dealers by wire or telephone for the
repurchase of shares by the Distributor from the dealer. The Fund may revoke
or suspend this authorization at any time. The repurchase price is the net
asset value for the applicable shares next determined following the time at
which the shares are offered for repurchase by the dealer to the Distributor.
The dealer is responsible for promptly transmitting a shareholder's order to
the Distributor. Payment of the repurchase proceeds is made to the dealer who
placed the order promptly upon delivery of certificates for shares in proper
form for transfer or, for Open Accounts, upon the receipt of a stock power
with signatures guaranteed as described below, and, if required, any
supporting documents. Neither the Fund nor the Distributor imposes any charge
upon such a repurchase. However, a dealer may impose a charge as agent for a
shareholder in the repurchase of his or her shares.
The Fund has reserved the right to change, modify or terminate the services
described above at any time.
Additional Information
Because of the relatively high cost of maintaining small shareholder
accounts, the Fund reserves the right to involuntarily redeem at its option
any shareholder account which remains below $1,500 for a period of 60 days
after notice is mailed to the applicable shareholder, or to impose a
maintenance fee on such account after 60 days notice. Such involuntary
redemptions will be subject to applicable sales charges, if any. The Fund may
increase such minimum account value above such amount in the future after
notice to affected shareholders. Involuntarily redeemed shares will be priced
at the net asset value on the date fixed for redemption by the Fund, and the
proceeds of the redemption will be mailed promptly to the affected
shareholder at the address of record. Imposition of a maintenance fee on a
small account could, over time, exhaust the assets of such account.
To cover the cost of additional compliance administration, a $20 fee will be
charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
The Fund may not suspend the right of redemption or postpone the date of
payment of redemption proceeds for more than seven days, except that (a) it
may elect to suspend the redemption of shares or postpone the date of payment
of redemption proceeds: (1) during any period that the NYSE is closed (other
than customary weekend and holiday closings) or trading on the NYSE is
restricted; (2) during any period in which an emergency exists as a result of
which disposal of portfolio securities is not reasonably practicable or it is
not reasonably practicable to fairly determine the Fund's net asset values;
or (3) during such other periods as the Securities and Exchange Commission
may by order permit for the protection of investors; and (b) the payment of
redemption proceeds may be postponed as otherwise provided under "Redemption
of Shares" herein.
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Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Fund, the Investment
Manager and the Distributor from possible fraud, signature guarantees are
required for certain redemptions. Signature guarantees enable the Transfer
Agent to be certain that the person who has authorized a redemption from the
account is, in fact, the shareholder. Signature guarantees are required for:
(1) all redemptions requested by mail; (2) requests to transfer the
registration of shares to another owner; and (3) to authorizations to
establish the checkwriting privilege. 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 by the Fund in
certain instances.
Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of the Fund owned by
shareholders are credited to their accounts by the Transfer Agent, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110. Certificates representing Class B or Class D shares will not be
issued, while certificates representing Class A or Class C shares will only
be issued if specifically requested in writing and in any case will only be
issued for full shares, with any fractional shares to be carried on the
shareholder's account. Shareholders will receive periodic statements of
transactions in their account.
The Fund's Open Account System provides the following options:
1.Additional purchases of shares of the Fund may be made through dealers, by
wire or by mailing a check payable to the Fund to Shareholder Services under
the terms set forth above under "Purchase of Shares."
2.The following methods of receiving dividends from investment income and
distributions from capital gains are available:
(a)All income dividends and capital gains distributions reinvested in
additional shares of the Fund.
(b)All income dividends in cash; all capital gains distributions reinvested
in additional shares of the Fund.
(c)All income dividends and capital gains distributions in cash.
(d)All income dividends and capital gains distributions invested in any one
available Eligible Fund designated by the shareholder as described below. See
"Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will automatically be coded for reinvestment of all
dividends and distributions in additional shares of the same class of the
Fund. Selections may be changed at any time by telephone or written notice to
Shareholder Services. Dividends and distributions are reinvested at net asset
value without a sales charge.
Exchange Privilege
Shareholders of the Fund may exchange their shares for available shares with
corresponding characteristics of any of the other Eligible Funds at any time
on the basis of the relative net asset values of the respective shares to be
exchanged, subject to compliance with applicable securities laws.
Shareholders of any other Eligible Fund may similarly exchange their shares
for Fund shares with corresponding characteristics. Prior to making an
exchange, shareholders should obtain the Prospectus of the Eligible Fund into
which they are exchanging. Under the Direct Program, subject to certain
conditions, shareholders may make arrangements for regular exchanges from the
Fund into other Eligible Funds. To effect an exchange, Class A, Class B and
Class D shares may be redeemed without the payment of any contingent deferred
sales charge that might otherwise be due upon an ordinary redemption of such
shares. The MetLife - State Street Research Money Market Fund issues Class E
shares which are sold without any sales
20
<PAGE>
charge. Exchanges of MetLife - State Street Research Money Market Fund Class
E shares into Class A shares of the Fund or any other Eligible Fund are
subject to the initial sales charge or contingent deferred sales charge
applicable to an initial investment in such Class A shares, unless a prior
Class A sales charge has been paid directly or indirectly with respect to the
shares redeemed. For purposes of computing the contingent deferred sales
charge that may be payable upon disposition of the acquired Class A, Class B
and Class D shares, the holding period of the redeemed shares is "tacked" to
the holding period of the acquired shares. The period any Class E shares are
held is not tacked to the holding period of any acquired shares. No exchange
transaction fee is currently imposed on any exchange.
For the convenience of its shareholders who have Telephone Privileges, the
Fund permits exchanges by telephone request from either the shareholder or
his or her dealer. Shares may be exchanged by telephone provided that the
registration of the two accounts is the same. The toll-free number for
exchanges is 1-800-521-6548. See "Telephone Services" herein for a discussion
of conditions and risks associated with Telephone Privileges.
The exchange privilege may be exercised only in those states where shares of
the relevant other Eligible Fund may legally be sold. For tax purposes, each
exchange actually represents the sale of shares of one fund and the purchase
of shares of another. Accordingly, exchanges may produce a capital gain or
loss for tax purposes. The exchange privilege may be terminated or suspended
or its terms changed at any time, subject, if required under applicable
regulations, to 60 days prior notice. New accounts established for
investments upon exchange from an existing account in another fund will have
the same Telephone Privileges as the existing account, unless Shareholder
Services is instructed otherwise. Related administrative policies and
procedures may also be adopted with regard to a series of exchanges, street
name accounts, sponsored arrangements and other matters.
The exchange privilege is not designed for use in connection with short-term
trading or market timing strategies. In order to limit exchange activity
where the Fund believes doing so would be in the best interest of the Fund,
it reserves the right to revise or terminate the exchange privilege, limit
the amount or number of exchanges or reject any exchange for any person.
These measures may be imposed at any time. Subject to the foregoing, if an
exchange request in good order is received by Shareholder Services and
delivered by Shareholder Services to the Transfer Agent by 12 noon Boston
time on any business day, the exchange usually will occur that day. Consult
Shareholder Services before requesting an exchange or for further
information.
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 or all 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 30 calendar days after a redemption or
repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the
amount reinvested. The redemption of shares is, for federal income tax
purposes, a sale on which the shareholder may realize a gain or loss. If a
redemption at a loss is followed by a reinvestment within 30 days, the
transaction may be a "wash sale" resulting in a denial of the loss for
federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by Shareholder
Services of such shareholder's written purchase request and delivery of the
request by Shareholder Services to the Transfer Agent. A shareholder may
exercise this reinvestment privilege only once with respect to his or her
shares of the Fund. No charge is imposed by the Fund for such reinvestments;
however, dealers may charge fees in connection with the reinvestment
privilege. The reinvest-
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<PAGE>
ment privilege may be exercised with respect to an Eligible Fund only in
those states where shares of the relevant other Eligible Fund may legally be
sold.
Investment Plans
The Fund offers Class A, Class B and Class D shareholders the Investamatic
Check Program. Under this Program, shareholders may make regular investments
by authorizing withdrawals from their bank accounts each month or quarter on
the Investamatic application form available from Shareholder Services.
Systematic Withdrawal Plan
A shareholder who owns noncertificated Class A or Class C shares with a value
of $5,000 or more, or Class B or Class D shares with a value of $10,000 or
more, may elect, by participating in the Fund's Systematic Withdrawal Plan,
to have periodic checks issued for specified amounts. These amounts may not
be less than certain minimums, depending on the class of shares held. The
Plan provides that all income dividends and capital gains distributions of
the Fund shall be credited to participating shareholders in additional shares
of the Fund. Thus, the withdrawal amounts paid can only be realized by
redeeming shares of the Fund under the Plan. To the extent such amounts paid
exceed dividends and distributions from the Fund, a shareholder's investment
will decrease and may eventually be exhausted.
In the case of shares otherwise subject to contingent deferred sales charges,
no such charges will be imposed on withdrawals of up to 8% annually of either
(a) the value, at the time the Plan is initiated, of the shares then in the
account, or (b) the value, at the time of a withdrawal, of the same number of
shares as in the account when the Plan was initiated, whichever is higher.
Expenses of the Plan are borne by the Fund. A participating shareholder may
withdraw from the Plan, and the Fund may terminate the Plan at any time on
written notice. Purchase of additional shares while a shareholder is
receiving payments under a Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate
in the Investamatic Check Program and the Systematic Withdrawal Plan at the
same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all 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 investment
is made is initially funded with the requisite minimum amount. The number of
shares purchased will be determined as of the dividend payment date. The
Dividend Allocation Plan is subject to state securities law requirements, to
suspension at any time, and to such policies, limitations and restrictions,
as, for instance, may be applicable to street name or master accounts, that
may be adopted from time to time.
Automatic Bank Connection
A shareholder may elect, by participating in the Fund's Automatic Bank
Connection ("ABC"), to have dividends and other distributions, including
Systematic Withdrawal Plan payments, automatically deposited in the
shareholder's bank account by electronic funds transfer. Some contingent
deferred sales charges may apply. See "Systematic Withdrawal Plan" herein.
Reports
Reports for the Fund will be sent to shareholders of record at least
semiannually. These reports will include a list of the securities owned by
the Fund as well as the Fund's financial statements.
Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1)the privilege allowing the shareholder to make telephone redemptions for
amounts up to $50,000 to be mailed to the shareholder's address of record is
available automatically;
(2)the privilege allowing the shareholder or his or her dealer to make
telephone exchanges is available automatically; and
(3)the privilege allowing the shareholder to make telephone redemptions for
amounts over
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<PAGE>
$5,000, to be remitted by wire to the shareholder's pre-designated bank
account, is available by election on the Application accompanying this
Prospectus. A current shareholder who did not previously request such
telephone wire privilege on his or her original Application may request the
privilege by completing a Telephone Redemption-by-Wire Form which may be
obtained by calling 1-800-521-6548. The Telephone Redemption-by-Wire Form
requires a signature guarantee.
A shareholder may decline the automatic Telephone Privileges set forth in (1)
and (2) above by so indicating on the Application accompanying this
Prospectus.
A shareholder may discontinue any Telephone Privilege at any time by advising
Shareholder Services that the shareholder wishes to discontinue the use of
such privileges in the future.
Unless such Telephone Privileges are declined, a shareholder is deemed to
authorize Shareholder Services and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder to
redeem, or purporting to be the shareholder or the shareholder's dealer to
exchange, shares from any account; and (2) honor any written instructions for
a change of address regardless of whether such request is accompanied by a
signature guarantee. All telephone calls will be recorded. None of the Fund,
the other Eligible Funds, the Transfer Agent, the Investment Manager or the
Distributor will be liable for any loss, expense or cost arising out of any
request, including any fraudulent or unauthorized requests. Shareholders
assume the risk to the full extent of their accounts that telephone requests
may be unauthorized. Reasonable procedures will be followed to confirm that
instructions communicated by telephone are genuine. The shareholder will not
be liable for any losses arising from unauthorized or fraudulent instructions
if such procedures are not followed.
Shareholders may redeem or exchange shares by calling toll-free
1-800-521-6548. Although it is unlikely, during periods of extraordinary
market conditions, a shareholder may have difficulty in reaching Shareholder
Services at such telephone number. In that event, the shareholder should
contact Shareholder Services at 1-800-562-0032, 1-617-357-7805 or otherwise
at its main office at One Financial Center, Boston, Massachusetts 02111-2690.
Shareholder Account Inquiries:
Please call 1-800-562-0032
Call this number for assistance in answering general questions on your
account, including account balance, available shareholder services, statement
information and performance of the Fund. Account inquiries may also be made
in writing to State Street Research Shareholder Services, P.O. Box 8408,
Boston, Massachusetts 02266-8408. A fee of up to $10 will be charged against
an account for providing additional account transcripts or photocopies of
paid redemption checks or for researching records in response to special
requests.
Shareholder Telephone Transactions:
Please call 1-800-521-6548
Call this number for assistance in purchasing shares by wire and for
telephone redemptions or telephone exchange transactions. Shareholder
Services will require some form of personal identification prior to acting
upon instructions received by telephone. Written confirmation of each
transaction will be provided.
The Fund and Its Shares
The Fund was organized in 1989 as an additional series of State Street
Research Tax-Exempt Trust, a Massachusetts business trust. The Trustees have
authorized Shares of the Fund to be issued in four classes: Class A, Class B,
Class C and Class D shares. The Trust is registered with the Securities and
Exchange Commission as an open-end management investment company. The fiscal
year end of the Fund is December 31.
Except for those differences between the classes of shares described below
and elsewhere in the Prospectus, each share of a Fund has equal dividend,
redemption and liquidation rights with other shares of the Fund and when
issued is fully paid and nonassessable. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common
23
<PAGE>
usage of terms which may develop in the mutual fund industry. For example,
Class C shares may be redesignated as Class Y shares and Class D shares may
be redesignated as Class C shares. Any redesignation would not affect any
substantive rights respecting the shares.
Each share of each class of shares represents an identical legal interest in
the same portfolio of investments of the Fund, has the same rights and is
identical in all respects, except that Class B and Class D shares bear the
expenses of the deferred sales arrangement and any expenses (including the
higher service and distribution fees) resulting from such sales arrangement,
and certain other incremental expenses related to a class. Each class will
have exclusive voting rights with respect to provisions of the Rule 12b-1
distribution plan pursuant to which the service and distribution fees, if
any, are paid. Although the legal rights of holders of each class of shares
are identical, it is likely that the different expenses borne by each class
will result in different net asset values and dividends. The different
classes of shares of the Fund also have different exchange privileges.
The rights of holders of shares may be modified by the Trustees at any time,
so long as such modifications do not have a material adverse effect on the
rights of any shareholder. On any matter submitted to the shareholders, the
holder of shares of the Fund is entitled to one vote per share (with
proportionate voting for fractional shares) regardless of the relative net
asset value thereof.
Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder
meetings unless required by the 1940 Act. Except as otherwise provided under
said Act, the Board of Trustees will be a self- perpetuating body until fewer
than two-thirds of the Trustees serving as such are Trustees who were elected
by shareholders of the Trust. In the event less than a majority of the
Trustees serving as such were elected by shareholders of the Trust, a meeting
of shareholders will be called to elect Trustees. Under the Master Trust
Agreement, any Trustee may be removed by vote of two-thirds of the
outstanding Trust shares; holders of 10% or more of the outstanding 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 of the Trust.
However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for
indemnification for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Fund would be unable to meet its
obligations. The Investment Manager believes that, in view of the above, the
risk of personal liability to shareholders is remote.
As of March 31, 1995, Metropolitan Life Insurance Company ("Metropolitan"),
was the record and/or beneficial owner, directly or indirectly through its
subsidiaries or affiliates, of approximately 68.4% of the outstanding Class D
shares of the Fund and may be deemed to be in control of such Class D shares.
Ownership of 25% or more of a voting security is deemed "control" as defined
in the 1940 Act. So long as 25% of a class of shares are so owned, such
owners will be presumed to be in control of such class of shares for purposes
of voting on certain matters, such as any Distribution Plan for a given
class.
Management of the Fund
Under the provisions of the Trust's Master Trust Agreement and the laws of
Massachusetts, responsibility for the management and supervision of the Fund
rests with the Trustees.
The Fund's investment manager is State Street Research & Management Company.
The Investment Manager is charged with the overall responsibility for
managing the investments and business affairs of the Fund, subject to the
authority of the Board of Trustees.
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<PAGE>
The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve as investment adviser to one of the nation's first
mutual funds, presently known as State Street Research Investment Trust,
which they had formed in 1924. Their investment management philosophy, which
continues to this day, emphasized comprehensive fundamental research and
analysis, including meetings with the management of companies under
consideration for investment. The Investment Manager's portfolio management
group has extensive investment industry experience managing equity and debt
securities. In managing debt securities, if any, for a portfolio, the
Investment Manager may consider yield curve, sector rotation and duration,
among other factors.
The Investment Manager is an indirect wholly- owned subsidiary of
Metropolitan and the Distributor is a wholly-owned subsidiary of the
Investment Manager, and both are located at One Financial Center, Boston,
Massachusetts 02111-2690.
The Investment Manager has entered into an Advisory Agreement with the Trust
pursuant to which investment research and management, administrative
services, office facilities and personnel are provided to the Fund in
consideration of a fee from the Fund.
Under its Advisory Agreement with the Trust, the Investment Manager receives
a monthly investment advisory fee equal to 0.55% (on an annual basis) of the
average daily value of the net assets of the Fund. The Fund bears all costs
of its operation other than those incurred by the Investment Manager under
the Advisory Agreement. In particular, the Fund pays, among other expenses,
investment advisory fees and the compensation and expenses of the Trustees
who are not otherwise currently affiliated with the Investment Manager or any
of its affiliates. The Investment Manager will reduce its management fee
payable by the Fund up to the amount of any expenses (excluding permissible
items, such as brokerage commissions, Rule 12b-1 payments, interest, taxes
and litigation expenses) paid or incurred in any year in excess of the most
restrictive expense limitation imposed by any state in which the Fund sells
shares, if any. The Investment Manager provides the Fund with office space,
facilities and personnel. The Investment Manager compensates Trustees of the
Trust if such persons are employees or affiliates of the Investment Manager
or its affiliates.
The Fund is managed by Paul J. Clifford, Jr. Mr. Clifford has managed the
Fund since March, 1993. Mr. Clifford's principal occupation currently is Vice
President of State Research & Management Company. During the past five years
he has also served as a securities analyst for State Street Research &
Management Company.
Subject to the policy of seeking best overall price and execution, sales of
shares of the Fund may be considered by the Fund and the Investment Manager
in the selection of broker or dealer firms for the Fund's portfolio
transactions.
The Investment Manager has a Code of Ethics governing personal securities
transactions of its employees; see the Statement of Additional Information.
Dividends and Distributions; Taxes
The Fund qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code for its most recent
fiscal year and intends to qualify as such in future years, although it
cannot give complete assurance that it will do so. As long as it so qualifies
and satisfies certain distribution requirements, it will not be subject to
federal income tax on its taxable income (including capital gains, if any)
distributed to its shareholders. Consequently, the Fund intends to distribute
annually to its shareholders substantially all its net investment income and
any capital gain net income (capital gains net of capital losses). As long as
the Fund qualifies as a regulated investment company and meets certain other
Internal Revenue Code requirements, distributions of tax-exempt interest
income will be excluded from a shareholder's gross income for federal income
tax purposes.
Dividends from net investment income will be declared daily during each
calendar month and paid monthly; distributions of long-term and short-term
capital gain net income will generally be made on an annual basis (or as
otherwise required for compliance with applicable tax regulations), except to
the extent that net short-term gains, if any, are included in the monthly
income dividends for the purpose of stabiliz-
25
<PAGE>
ing, to the extent possible, the amount of net monthly distributions as
described below. Both dividends from net investment income and distributions
of capital gain net income will be paid in additional shares of the Fund at
net asset value (except in the case of shareholders who elect a different
available distribution method). The Fund will provide its shareholders of
record with annual information on a timely basis concerning the federal and
state tax status of dividends and distributions during the preceding calendar
year.
The Fund has adopted distribution procedures which differ from those which
have been customary for investment companies in general. The Fund will
declare a dividend each day in an amount based on monthly projections of its
future net investment income and will pay such dividends monthly as described
above. Consequently, the amount of each daily dividend may differ from actual
net investment income as determined under generally accepted accounting
principles. The purpose of these distribution procedures is to attempt to
eliminate, to the extent possible, fluctuations in the level of monthly
dividend payments that might result if the Fund declared dividends in the
exact amount of its daily net investment income.
Each daily dividend is payable to shareholders of record at the time of its
declaration (for this purpose, including only holders of shares purchased for
which payment has been received by the Transfer Agent and excluding holders
of shares redeemed on that day).
Dividends paid by the Fund from taxable net investment income and
distributions of any net short- term capital gains, whether they are paid in
cash or reinvested in additional shares, will be taxable for federal income
tax purposes to shareholders as ordinary income. Distributions of net capital
gains (the excess of net long-term capital gains over net short- term capital
losses) which are designated as capital gains distributions, whether paid in
cash or reinvested in additional shares, will be taxable for federal income
tax purposes to shareholders as long-term capital gains, regardless of how
long shareholders have held their shares. However, it is expected that any
taxable income will be insubstantial in relation to the tax-exempt interest
generated by the Fund. If shares of the Fund which are sold at a loss have
been held six months or less, the loss (not otherwise disallowed as
attributable to an exempt-interest dividend) will be considered as a
long-term capital loss to the extent of any capital gain distributions
received.
Dividends and other distributions and proceeds of redemptions of Fund shares
paid to individuals and other nonexempt payees will be subject to a 31%
federal backup withholding tax if the Transfer Agent is not provided with the
shareholder's correct taxpayer identification number or certification that
the shareholder is not subject to such backup withholding. However,
exempt-interest dividends will not be subject to backup withholding.
Moreover, backup withholding will not apply to any taxable dividends and
distributions provided the Fund reasonably estimates that 95% or more of all
dividends and distributions paid or treated as paid during the year are
exempt-interest dividends.
Tax-exempt interest from "private activity" bonds (principally industrial
development revenue bonds) issued after August 7, 1986, is considered a tax
preference item for purposes of the federal alternative minimum tax. However,
the Fund's present intention is to invest no more than 20% of its net assets
in such securities. For corporations, all tax-exempt interest will be
considered in calculating the alternative minimum tax as part of the current
earnings adjustments. Further, shareholders who are "substantial users" (or
"related persons" of substantial users), within the meaning of Section 147 of
the Internal Revenue Code, of facilities financed by private activity bonds
should consult their tax advisers as to whether the Fund is a desirable
investment.
California law relating to taxation of regulated investment companies and
their shareholders was generally conformed to federal law effective January
1, 1993. Any portion of the dividends paid by the Fund and derived from
interest on obligations that pay interest (when such obligations are held by
an individual) which is excludable from California personal income under
California law will be exempt from California personal income tax (although
not from the California franchise tax). To the extent the Fund's dividends
are derived from interest on debt obligations other than those described
directly above, such dividends will be subject to California personal income
tax even though the dividends may be excludable from gross income for federal
income tax purposes. In addition, distributions of short-
26
<PAGE>
term capital gains realized by the Fund will be taxable to the shareholders
as ordinary income. Distributions of long-term capital gains will be taxable
as such to the shareholders regardless of how long they held their shares.
With respect to individual shareholders, California does not treat tax-exempt
interest as a tax preference item for purposes of its alternative minimum
tax. To the extent a corporate shareholder receives dividends which are
exempt from California taxation, a portion of such dividends may be subject
to the alternative minimum tax. Interest on indebtedness incurred or
continued to purchase or carry shares of an investment company paying
exempt-interest dividends, such as the Fund, will not be deductible by the
investor for state personal income tax purposes. If shares of the Fund that
are sold at a loss have been held six months or less, the loss will be
disallowed to the extent of any exempt-interest dividends received on such
shares.
The foregoing discussion relates only to generally applicable federal and
California State income tax provisions in effect as of the date of this
Prospectus. Therefore, prospective shareholders are urged to consult their
own tax advisers regarding tax matters.
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 D shares to that of other mutual funds with similar
investment objectives, to certificates of deposit, to taxable debt
instruments, such as Treasury bonds, as may be included in the Merrill Lynch
Treasury Bond Index, and/or to other financial alternatives. The Fund may
also compare its performance to appropriate indices such as the Lehman
Brothers Municipal Revenue Bond Index, the Merrill Lynch Revenue Index, the
Merrill Lynch 500 Municipal Index, the Lehman Brothers California Bond Index
or the Bond Buyer Revenue Bond Index and/or to appropriate rankings or
averages such as the Lipper California Municipal Bond Funds Group compiled by
Lipper Analytical Services, Inc., or to those compiled by Morningstar, Inc.,
Money Magazine, Business Week, Forbes Magazine, The Wall Street Journal,
Fortune Magazine or Investor's Daily.
Total return is computed separately for each class of shares of the Fund. The
average annual total return ("standard total return") for shares of the Fund
is computed by determining the average annual compounded rate of return for a
designated period that, if applied to a hypothetical $1,000 initial
investment less the maximum initial or contingent deferred sales charges, if
applicable, would produce the redeemable value of that investment at the end
of the period, assuming reinvestment of all dividends and distributions and
with recognition of all recurring charges. Standard total return may be
accompanied with nonstandard total return information, but for differing
periods and computed in the same manner with or without annualizing the total
return or taking sales charges into account.
The Fund's yield is computed separately for each class of shares by dividing
the net investment income, after recognition of all recurring charges, per
share earned during the most recent month or other specified thirty-day
period by the applicable maximum offering price per share on the last day of
such period and annualizing the result. Yield information may be accompanied
with information on tax equivalent yields computed in the same manner, with
adjustment for assumed relevant income tax rates.
The standard total return, yield and tax equivalent yield results take sales
charges into account, if applicable, but do not take into account recurring
and nonrecurring charges for optional services which only certain
shareholders elect and which involve nominal fees, such as the $7.50 fee for
remittance of redemption proceeds by wire. Where sales charges are not
applicable and therefore not taken into account in the calculation of
standard total return, yield and tax equivalent yield, the results will be
increased. Any voluntary waiver of fees or assumption of expenses by the
Fund's affiliates will also increase performance results.
The Fund's distribution rate is calculated separately for each class of
shares by annualizing the latest distribution and dividing the result by the
maximum offering price per share as of the end of the period to which the
distribution relates. The distribution rate is not computed in the same
manner as the above described yield, and therefore can be significantly
different from it. In its supplemental sales literature, the Fund may quote
its distribution rate together with the above described standard total
27
<PAGE>
return, yield and tax equivalent yield information. The use of such
distribution rates would be subject to an appropriate explanation of how the
components of the distribution rate differ from the above described yield.
Performance information may be useful in evaluating the Fund and for
providing a basis for comparison with other financial alternatives. Since the
performance of the Fund varies in response to fluctuations in economic and
market conditions, interest rates and Fund expenses, among other things, no
performance quotation should be considered a representation as to the Fund's
performance for any future period.
In addition, the net asset value of shares of the Fund will fluctuate, with
the result that shares of the Fund, when redeemed, may be worth more or less
than their original cost. Neither an investment in the Fund nor its
performance is insured or guaranteed; such lack of insurance or guarantees
should accordingly be given appropriate consideration when comparing the Fund
to financial alternatives which have such features.
Shares of the Fund had no class designations until June 5, 1993, when
designations were assigned based on the pricing and Rule 12b-1 fees
applicable to shares sold thereafter. Performance data for a specified class
includes periods prior to the adoption of class designations. Performance
data for periods prior to June 5, 1993 will not reflect additional Rule 12b-1
Distribution Plan fees, if any, of up to 1% per year depending on the class
of shares, which will adversely affect performance results for periods after
such date. Performance data or rankings for a given class of shares should be
interpreted carefully by investors who hold or may invest in a different
class of shares.
28
<PAGE>
Appendix
Taxable Equivalent Yield Table
The table below is for illustrative purposes only, and shows the effect of
the tax status on the effective yield received by shareholders under the
federal income tax laws and California State personal income tax laws. It
gives the approximate yield a taxable security must earn at various income
levels to produce after-tax yields equivalent to those of tax- exempt
obligations yielding from 4.0% to 8.0%. The combined effective marginal tax
rate is lower than the sum of federal and California State marginal rates
because the state personal income taxes paid are deductible from federal
taxable income. Of course, no assurance can be given that the Fund will
achieve any specific tax-exempt yield. While it is expected that the Fund
will invest principally in obligations the interest from which is exempt from
federal income taxes and California State personal income taxes, to the
extent this is not the case, other income received by the Fund may be taxable
at the state level or at the federal and state levels.
The tax-exempt yields are for illustration only and are not intended to
represent current or future yields for the Fund, which may be higher or lower
than those shown.
<TABLE>
<CAPTION>
Tax-Exempt Yields
Combined
Sample Federal California Combined Effective
Taxable Marginal State Marginal Marginal Marginal
Income Rate Rate Rate Rate* 4.00% 5.00% 6.00% 7.00% 8.00%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Joint Return Equivalent Taxable Yield
$30,000 15.00% 4.00% 19.00% 18.40% 4.90% 6.13% 7.35% 8.58% 9.80%
50,000 28.00 8.00 36.00 33.76 6.04 7.55 9.06 10.57 12.08
100,000 31.00 9.30 40.30 37.42 6.39 7.99 9.59 11.19 12.78
150,000 36.00 9.30 45.30 41.95 6.89 8.61 10.34 12.06 13.78
260,000 39.60 10.00 49.60 45.64 7.36 9.20 11.04 12.88 14.72
Single Return
$25,000 28.00% 8.00% 36.00% 33.76% 6.04% 7.55% 9.06% 10.57% 12.08%
60,000 31.00 9.30 40.30 37.42 6.39 7.99 9.59 11.19 12.78
120,000 36.00 10.00 46.00 42.40 6.94 8.68 10.42 12.15 13.89
260,000 39.60 11.00 50.60 46.24 7.44 9.30 11.16 13.02 14.88
</TABLE>
*Combined effective marginal tax rate represents the combined federal and
California State tax rates adjusted to account for the federal deduction of
state personal income taxes paid. The effect of reductions in itemized
deductions and personal exemptions for taxpayers with incomes exceeding
certain levels has not been taken into account.
The federal tax rates shown are those presently in effect for 1995. The
California State tax rates are those that were in effect for 1994. Such tax
rates are subject to change in subsequent years. These calculations assume
that no income will be subject to the federal individual alternative minimum
tax.
29
<PAGE>
(LOGO) State Street Research
State Street Research
California
Tax-Free Fund
May 1, 1995
PROSPECTUS
STATE STREET RESEARCH
CALIFORNIA TAX-FREE FUND
One Financial Center
Boston, MA 02111
INVESTMENT ADVISER
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
DISTRIBUTOR
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
SHAREHOLDER SERVICES
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266
800-562-0032
CUSTODIAN
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
CTF-608D-595IBS CONTROL NUMBER:2295-950424(0596)SSR-LD
<PAGE>
Supplement No. 1 dated July 17, 1995
to
Prospectus dated May 1, 1995
for
STATE STREET RESEARCH CALIFORNIA TAX-FREE FUND
STATE STREET RESEARCH FLORIDA TAX-FREE FUND
STATE STREET RESEARCH PENNSYLVANIA TAX-FREE FUND
Series of State Street Research Tax-Exempt Trust
Availability of Shares;
Proposed Reorganizations
Shares of the State Street Research California Tax-Free Fund ("California
Fund"), State Street Research Florida Tax-Free Fund ("Florida Fund") and State
Street Research Pennsylvania Tax-Free Fund ("Pennsylvania Fund") are currently
available only to existing shareholders of each respective Fund through
reinvestment of dividends and distributions, additional investments or
exchanges.
Special Meetings of Shareholders of the California Fund, Florida Fund and
Pennsylvania Fund have been tentatively scheduled for November or December,
1995. At these meetings, shareholders will be asked to consider and approve an
Agreement and Plan of Reorganization between each Fund and the State Street
Research Tax-Exempt Fund ("Tax-Exempt Fund").
If the proposal is approved by the respective shareholders of the California
Fund, Florida Fund and/or Pennsylvania Fund, the Tax-Exempt Fund would acquire
substantially all of the assets and liabilities of each such Fund. As a result
of this transaction, shareholders of the California Fund, Florida Fund and/or
Pennsylvania Fund would receive in exchange for shares of their Fund, shares of
the corresponding class of the Tax-Exempt Fund with an aggregate value
equivalent to the aggregate net asset value of their Fund investment at the time
of the transaction. The transaction is conditioned upon the receipt of an
opinion of counsel to the effect that each transaction would be free from
Federal income taxes to the shareholders of the California Fund, Florida Fund
and/or Pennsylvania Fund and each such Fund itself.
Other Programs
Immediately after the first sentence of the first paragraph under the caption
"Purchase of Shares--Class A Shares--Initial Sales Charges--Other Programs,"
the following is added:
"Sales without a sales charge, or with a reduced sales charge, may also be made
through brokers, financial planners, institutions, and others, under managed
fee-based programs (e.g., "wrap fee" or similar programs) which meet certain
requirements established from time to time by the Distributor, in the event the
Distributor determines to implement such arrangements."
Additional Information
Under the caption "Redemption of Shares--Additional Information," the first
paragraph is revised in its entirety as follows:
"Because of the relatively high cost of maintaining small shareholder accounts,
the Fund reserves the right to involuntarily redeem at its option any
shareholder account which remains below $1,500 for a period of 60 days after
notice is mailed to the applicable shareholder, or to impose a maintenance fee
on such account after 60 days' notice. Such involuntary redemptions will be
subject to applicable sales charges, if any. The Fund may increase such minimum
account value above such amount in the future after notice to affected
shareholders. Involuntarily redeemed shares will be priced at the net asset
value on the date fixed for redemption by the Fund, and the proceeds of the
redemption will be mailed 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."
CONTROL NUMBER: 2456A-950717(0896) SSR-LDSSR-249E-795IBS
<PAGE>
State Street Research
Florida Tax-Free Fund
State Street Research
Pennsylvania Tax-Free Fund
Prospectus
May 1, 1995
The investment objective of State Street Research Florida Tax-Free Fund (the
"Florida Tax-Free Fund" or a "Fund") and State Street Research Pennsylvania
Tax-Free Fund (the "Pennsylvania Tax-Free Fund" or a "Fund") is to seek
interest income exempt from federal income taxes and personal income taxes,
if any, of the applicable State. To achieve its investment objective, each of
the Funds invests primarily in securities that are issued by or on behalf of
the applicable State or its political subdivisions and by other governmental
entities.
State Street Research & Management Company serves as investment adviser (the
"Investment Manager") for the Funds. As of February 28, 1995, the Investment
Manager had assets of approximately $23.9 billion under management. State
Street Research Investment Services, Inc. serves as distributor (the
"Distributor") for the Funds.
Shareholders may have their shares redeemed directly by the Funds at net
asset value plus the applicable contingent deferred sales charge, if any;
redemptions processed through securities dealers may be subject to processing
charges.
There are risks in any investment program, including the risk of changing
market and economic conditions, including economic conditions in the relevant
States, and there is no assurance that a Fund will achieve its investment
objective. The net asset value of a share of a Fund will fluctuate as market
conditions change.
This Prospectus sets forth concisely the information a prospective investor
ought to know about the Funds before investing. It should be retained for
future reference. A Statement of Additional Information about the Funds dated
May 1, 1995 has been filed with the Securities and Exchange Commission and is
incorporated by reference in this Prospectus. It is available, at no charge,
upon request to the Funds at the address indicated on the back cover or by
calling 1-800-562-0032.
Each Fund is a non-diversified series of State Street Research Tax-Exempt
Trust (the "Trust"), an open-end management investment company.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Table of Contents Page
Table of Expenses 2
Financial Highlights 4
The Funds' Investments 5
Limiting Investment Risk 7
Purchase of Shares 8
Redemption of Shares 16
Shareholder Services 18
The Funds and Their Shares 21
Management of the Funds 22
Dividends and Distributions; Taxes 23
Calculation of Performance Data 25
Appendix A--State Taxation and Special
Considerations Relating to the Funds 26
Appendix B--Taxable Equivalent
Yield Table 28
<PAGE>
The Funds offer four classes of shares which may be purchased at the next
determined net asset value per share plus, in the case of all classes except
Class C shares, a sales charge which, at the election of the investor, may be
imposed (i) at the time of purchase (the Class A shares) or (ii) on a
deferred basis (the Class B and Class D shares).
Class A shares are subject to (i) an initial sales charge of up to 4.5% and
(ii) an annual service fee of 0.25% of the average daily net asset value of
the Class A shares.
Class B shares are subject to (i) a contingent deferred sales charge
(declining from 5% to 2%), which will be imposed on most redemptions made
within five years of purchase, and (ii) annual distribution and service fees
of 1% of the average daily net asset value of such shares. Class B shares
automatically convert into Class A shares (which pay lower ongoing expenses)
at the end of eight years after purchase. No contingent deferred sales charge
applies after the fifth year following the purchase of the Class B shares.
Class C shares are offered only to certain employee benefit plans and large
institutions. No sales charge is imposed at the time of purchase or
redemption of Class C shares. Class C shares do not pay any distribution or
service fees.
Class D shares are subject to (i) a contingent deferred sales charge of 1% if
redeemed within one year following purchase and (ii) annual distribution and
service fees of 1% of the average daily net asset value of such shares.
TABLE OF EXPENSES
<TABLE>
<CAPTION>
Class A Class B Class C Class D
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses (1)
Maximum Sales Charge Imposed on Purchases (as a
percentage of offering price) 4.5% None None None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None None None None
Maximum Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as
applicable) None (2) 5% None 1%
Redemption Fees (as a percentage of amount redeemed,
if applicable) None None None None
Exchange Fees None None None None
</TABLE>
(1) Reduced sales charge purchase plans are available for Class A shares. The
maximum 5% contingent deferred sales charge on Class B shares applies to
redemptions during the first year after purchase; the charge declines
annually thereafter, and no contingent deferred sales charge is imposed after
the fifth year. Class D shares are subject to a 1% contingent deferred sales
charge on any portion of the purchase redeemed within one year of the sale.
Long-term investors in a class of shares with a distribution fee may, over a
period of years, pay more than the economic equivalent of the maximum sales
charge permissible under applicable rules. See "Purchase of Shares."
(2) Purchases of Class A shares of $1 million or more are not subject to a
sales charge. If such shares are redeemed within 12 months of purchase, a
contingent deferred sales charge of 1% will be applied to the redemption. See
"Purchase of Shares."
2
<PAGE>
Florida Tax-Free Fund
<TABLE>
<CAPTION>
Class A Class B Class C Class D
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses (as a
percentage of average net assets)
Management Fees 0.55% 0.55% 0.55% 0.55%
12b-1 Fees 0.25% 1.00% None 1.00%
Other Expenses 1.52% 1.52% 1.52% 1.52%
Less Voluntary Reduction (1.82%) (1.82%) (1.82%) (1.82%)
------- ------- ------- -------
Total Fund Operating Expenses
(after voluntary reduction) 0.50% 1.25% 0.25% 1.25%
======= ======= ======= =======
</TABLE>
Pennsylvania Tax-Free Fund
<TABLE>
<CAPTION>
Class A Class B Class C Class D
<S> <C> <C> <C> <C>
Annual Fund Operating Expenses (as a
percentage of average net assets)
Management Fees 0.55% 0.55% 0.55% 0.55%
12b-1 Fees 0.25% 1.00% None 1.00%
Other Expenses 1.37% 1.37% 1.37% 1.37%
Less Voluntary Reduction (1.67%) (1.67%) (1.67%) (1.67%)
------- ------- ------- -------
Total Fund Operating Expenses
(after voluntary reduction) 0.50% 1.25% 0.25% 1.25%
======= ======= ======= =======
</TABLE>
Example:
You would pay the following expenses on a $1,000 investment including, for
Class A shares, the maximum applicable initial sales charge and assuming (1)
5% annual return and (2) redemption of the entire investment at the end of
each time period:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class A shares $50 $60 $72 $105
Class B shares $63 $70 $89 $130
Class C shares $ 3 $ 8 $14 $ 32
Class D shares $23 $40 $69 $151
</TABLE>
You would pay the following expenses on the same investment, assuming no
redemption:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
<S> <C> <C> <C> <C>
Class B shares $13 $40 $69 $130
Class D shares $13 $40 $69 $151
</TABLE>
The example should not be considered as a representation of past or future
return or expenses. Actual return or expenses may be greater or less than
shown.
The purpose of the table above is to assist the investor in understanding the
various costs and expenses that an investor will bear directly or indirectly.
The percentage expense levels shown in the table are based on experience with
expenses for the fiscal year ended December 31, 1994; actual expense levels
for the current fiscal year and future years may vary from the amounts shown.
The table does not reflect charges for optional services elected by certain
shareholders, such as the $7.50 fee for remittance of redemption proceeds by
wire. For further information on sales charges, see "Purchase of
Shares--Alternative Purchase Program"; for further information on management
fees, see "Management of the Funds"; and for further information on 12b-1
fees, see "Purchase of Shares--Distribution Plan."
The Funds have been advised that the Distributor and its affiliates may from
time to time and in varying amounts voluntarily assume some portion of fees
3
<PAGE>
or expenses relating to a Fund. Each Fund presently expects such assistance
to be provided for the next 12 months or until such Fund's net assets reach
$100 million, whichever first occurs. However, no Fund has received any firm
commitment that such assistance will in fact be provided.
For the fiscal year ended December 31, 1994, Total Fund Operating Expenses
with respect to the average net assets of Class A, Class B, Class C and Class
D shares, respectively, would have been 2.32%, 3.05%, 2.11% and 3.09% of the
Florida Tax-Free Fund; and 2.17%, 2.94%, 1.97% and 2.95% of the Pennsylvania
Tax-Free Fund, in the absence of the voluntary assumption of fees or expenses
by the Distributor and its affiliates. Such assumption of fees or expenses,
as a percentage of average net assets, amounted to 1.82%, 1.80%, 1.86% and
1.84% of the Class A, Class B, Class C and Class D shares of the Florida
Tax-Free Fund, respectively; and 1.67%, 1.69%, 1.72% and 1.70% of the Class
A, Class B, Class C and Class D shares of the Pennsylvania Tax-Free Fund,
respectively. The amount of fees or expenses assumed during the fiscal year
ended December 31, 1994 differed among classes because of fluctuations during
the year in relative levels of assets in each class and in expenses before
reimbursement.
Financial Highlights
The data set forth below has been audited by Price Waterhouse LLP,
independent accountants, and their reports thereon are included in the
Statement of Additional Information. For further information about the
performance of the Funds, see the Funds' Annual Reports, which appear under
the caption "Financial Statements" in the Statement of Additional
Information.
Florida Tax-Free Fund
<TABLE>
<CAPTION>
Class A Class B Class C Class D
Year ended Year ended Year ended Year ended
December December December December
31, 31, 31, 31,
1994 1993** 1994 1993** 1994 1993** 1994 1993**
----------- ------ ---------- ------ ----------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $ 9.74 $ 9.55 $ 9.74 $ 9.55 $ 9.74 $ 9.55 $ 9.74 $ 9.55
Net investment
income* .45 .13 .37 .11 .47 .15 .37 .11
Net realized and
unrealized gain
(loss) on
investments (.83) .20 (.82) .20 (.82) .19 (.82) .20
Dividends from net
investment income (.42) (.13) (.35) (.11) (.44) (.14) (.35) (.11)
Distribution from
net realized gains (.02) (.01) (.02) (.01) (.02) (.01) (.02) (.01)
-------- ------- -------- ------- -------- ------- -------- -------
Net asset value, end
of year $ 8.92 $ 9.74 $ 8.92 $ 9.74 $ 8.93 $ 9.74 $ 8.92 $ 9.74
======== ======= ======== ======= ======== ======= ======== =======
Total return (4.02)%+ 3.46%++ (4.73)%+ 3.21%++ (3.67)%+ 3.55%++ (4.73)%+ 3.21%++
Net assets at end of
year (000s) $ 3,618 $3,554 $ 2,879 $1,689 $ 3,283 $3,573 $ 1,337 $1,292
Ratio of operating
expenses to average
net assets* 0.50% 0.50%# 1.25% 1.25%# 0.25% 0.25%# 1.25% 1.25%#
Ratio of net
investment income to
average net assets* 4.81% 3.98%# 4.11% 3.14%# 5.05% 3.97%# 4.06% 3.12%#
Portfolio turnover
rate 119.46% 49.38% 119.46% 49.38% 119.46% 49.38% 119.46% 49.38%
*Reflects voluntary
assumption of fees
or expenses per
share in each year $ .17 $ .08 $ .17 $ .09 $ .17 $ .10 $ .17 $ .09
</TABLE>
**August 10, 1993 (commencement of operations) to December 31, 1993.
#Annualized
+Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total return
would be lower if the Distributor and its affiliates had not voluntarily
assumed a portion of the Fund's expenses.
4
<PAGE>
Pennsylvania Tax-Free Fund
<TABLE>
<CAPTION>
Class A Class B Class C Class D
Year ended Year ended Year ended Year ended
December December December December
31, 31, 31, 31,
1994 1993** 1994 1993** 1994 1993** 1994 1993**
----------- ------ ---------- ------ ----------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year $9.74 $9.55 $9.73 $9.55 $9.74 $9.55 $9.74 $9.55
Net investment
income* .44 .14 .38 .11 .47 .17 .38 .12
Net realized and
unrealized gain
(loss) on
investments (.79) .20 (.80) .19 (.79) .17 (.80) .19
Dividends from net
investment income (.42) (.14) (.35) (.11) (.45) (.14) (.35) (.11)
Distribution from
net realized gains -- (.01) -- (.01) -- (.01) -- (.01)
-------- ------- -------- ------- -------- ------- -------- -------
Net asset value, end
of year $8.97 $9.74 $8.96 $9.73 $8.97 $9.74 $8.97 $9.74
======== ======= ======== ======= ======== ======= ======== =======
Total return (3.60)%+ 3.52%++ (4.36)%+ 3.19%++ (3.37)%+ 3.60%++ (4.33)%+ 3.26%++
Net assets at end of
year (000s) $7,330 $3,598 $4,603 $3,506 $3,304 $3,585 $1,095 $899
Ratio of operating
expenses to average
net assets* 0.50% 0.50%# 1.25% 1.25%# 0.25% 0.25%# 1.25% 1.25%#
Ratio of net
investment income to
average net assets* 4.93% 4.21%# 4.14% 3.45%# 5.10% 4.52%# 4.13% 3.49%#
Portfolio turnover
rate 80.90% 26.18% 80.90% 26.18% 80.90% 26.18% 80.90% 26.18%
*Reflects voluntary
assumption of fees
or expenses per
share in each year $.15 $.09 $.15 $.09 $.15 $.11 $.15 $.10
</TABLE>
**August 10, 1993 (commencement of operations) to December 31, 1993.
#Annualized
+Total return figures do not reflect any front-end or contingent deferred
sales charges. Total return would be lower if the Distributor and its
affiliates had not voluntarily assumed a portion of the Fund's expenses.
++Represents aggregate return for the period without annualization and does
not reflect any front-end or contingent deferred sales charges. Total return
would be lower if the Distributor and its affiliates had not voluntarily
assumed a portion of the Fund's expenses.
THE FUNDS' INVESTMENTS
Each Fund's investment objective is to seek interest income exempt from
federal income taxes and personal income taxes, if any, of the applicable
State. Each Fund's investment objective is a fundamental policy of that Fund
and may not be changed without approval of the shareholders of that Fund.
Under normal circumstances and as a fundamental policy at least 80% of a
Fund's net assets will be invested in tax-exempt securities ("Municipal
Obligations"). Municipal Obligations include securities issued by or on
behalf of the relevant State and its political subdivisions, municipalities
and public authorities and by other governmental entities (for example, U.S.
possessions such as Puerto Rico) if such securities generate interest income
which is, in the opinion of issuer's counsel at the time of issuance, exempt
from both federal income taxes and State personal income taxes, if any, to
the holders of shares in the Fund. Under normal circumstances and as a
fundamental policy, at least 65% of a Fund's net assets will be invested in
Municipal Obligations issued by or on behalf of the relevant state and its
political subdivisions and public authorities.
To achieve its investment objective, each Fund intends to invest primarily in
securities which are investment grade, although this is not a fundamental
policy. Investment grade securities include securities rated, at the time of
purchase, AAA, AA, A, BBB, SP-1 or SP-2 by Standard & Poor's Corporation
("S&P") or Aaa, Aa, A, Baa, MIG-1 or MIG-2 by Moody's Investors Service, Inc.
("Moody's"), securities comparably rated by any other national rating service
and securities not rated but considered by the Investment Manager to be of
equivalent investment quality to comparable rated securities. Securities
rated BBB by S&P or Baa by Moody's lack outstanding investment
characteristics and in fact have speculative characteris-
5
<PAGE>
tics as well, and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to pay interest and repay
principal. The Fund may also invest up to 25% of its total assets in
securities rated at the time of purchase as low as CC by S&P or Ca by Moody's
or securities that are not rated but considered by the Investment Manager to
be of equivalent investment quality to comparable rated securities. Such
investments may be considered by the rating agencies to be speculative in a
high degree or have major risk exposures. During the current year, the
Investment Manager does not anticipate that any Fund will invest more than 5%
of its net assets in securities rated BB or lower by S&P or Ba or lower by
Moody's or in unrated securities of comparable investment quality. For
information concerning the risks and ratings of tax-exempt bonds, including
risks associated with lower rated high yield, high risk securities, see the
Statement of Additional Information.
A Fund may invest up to 25% of its total assets in unrated securities
considered by the Investment Manager to be of equivalent investment quality
to comparable rated securities in which a Fund may invest. Many issuers of
tax-exempt securities choose not to have their obligations rated. Although
unrated securities usually provide a higher yield than rated securities, they
may also involve a greater degree of risk. Medium and lower rated or unrated
tax-exempt bonds are frequently traded in markets in which liquidity may be
limited. This factor might limit the ability to sell such securities at their
fair value either to meet redemption requests or to respond to changes in the
economy or the financial markets.
Each Fund reserves the right to invest more than 25% of its total assets in
tax-exempt industrial development revenue bonds. Each Fund may invest up to
25% of its total assets in securities issued in connection with the financing
of projects with similar characteristics, such as toll road revenue bonds,
housing revenue bonds or electric power project revenue bonds, or in
industrial development revenue bonds which are based, directly or indirectly,
on the credit of private entities in any one industry. This may make each
Fund more susceptible to economic, political or regulatory occurrences
affecting a particular industry or sector and increase the potential for
fluctuation of net asset value. Investments in industrial development revenue
and other bonds which could subject certain shareholders to the federal
alternative minimum taxes will under present policy be limited to 20% of a
Fund's net assets; see "Dividends and Distributions; Taxes."
Each Fund may invest in Municipal Obligations which have fixed interest rates
or variable or floating interest rates, including short-term obligations
which have daily adjustable rates. Variable or floating rates may be adjusted
in relation to market rates for other instruments, prime rates, indices or
similar indicators. Certain of these adjustable obligations may carry a
demand feature that permits a Fund to receive the par value of the security
upon demand prior to maturity. These obligations may also be subject to
prepayment without penalty at the option of the issuer.
Each Fund may invest in lease obligations or installment purchase contract
obligations, which are instruments supported by lease payments made by a
municipality ("municipal lease obligations"). Municipal lease obligations may
be issued by state and local government authorities to obtain funds to
acquire a wide variety of equipment and facilities such as fire and
sanitation vehicles, computer equipment, buildings and other capital assets.
Although municipal lease obligations do not normally constitute general
obligations of the municipality, a lease obligation is ordinarily backed by
the municipality's agreement to make the payments due under the lease
obligation. However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease
or installment purchase payments in later years unless money is appropriated
in the future. In evaluating a potential investment in such a lease
obligation, the Investment Manager will consider: (1) the credit quality of
the obligor, (2) whether the underlying property is essential to a
governmental function, and (3) whether the lease obligation contains
covenants prohibiting the obligor from substituting similar property if the
obligor fails to make appropriations for the lease obligations. Municipal
lease obligations are a relatively new
6
<PAGE>
form of financing instrument and the market for such obligations is still
developing.
Depending on the development of such markets, such municipal lease
obligations may be deemed to be liquid as determined by or in accordance with
methods adopted by the Trustees. In determining the liquidity and appropriate
valuation of a municipal lease obligation, the following factors relating to
the security are considered, among others: (1) the frequency of trades and
quotes; (2) the number of dealers willing to purchase or sell the security;
(3) the willingness of dealers to undertake to make a market; (4) the nature
of the marketplace trades; and (5) the likelihood that the obligation will
continue to be marketable based on the credit quality of the municipality or
relevant obligor. Municipal lease obligations initially deemed to be liquid
could later become illiquid.
Risk Factors and Special Considerations
There are risks in any investment program, and there is no assurance that a
Fund will achieve its investment objective. Tax-exempt securities are subject
to relative degrees of credit risk and market volatility. Credit risk relates
to the issuer's (and any guarantor's) ability to make timely payments of
principal and interest. Market volatility relates to the changes in market
price that occur as a result of variations in the level of prevailing
interest rates and yield relationships between sectors in the tax-exempt
securities market and other market factors.
A Fund's ability to achieve its investment objective depends on the ability
of the issuers of Municipal Obligations to meet their continuing obligations
for the payment of principal and interest.
For a more detailed discussion of the risks to which Municipal Obligations
are subject, including the risks associated with investing in the municipal
securities of a single state, see Appendix A to this Prospectus and the
Statement of Additional Information.
Each Fund is a non-diversified fund, which is defined under the Investment
Company Act of 1940, as amended (the "1940 Act"), as any fund other than a
diversified fund. A diversified fund means, with certain exceptions, any fund
that with respect to 75% of its total assets does not invest more than 5% of
its total assets in any one issuer or invest in more than 10% of the
outstanding voting securities of any such issuer. The Funds therefore will be
subject to greater risk from adverse developments which affect such issuers
than would funds that have greater diversification of investments.
Limiting Investment Risk
In seeking to lessen investment risk, each Fund operates under certain
fundamental and nonfundamental investment restrictions. Fundamental
investment restrictions may not be changed with respect to any Fund except by
a vote of the shareholders of that Fund. Nonfundamental investment
restrictions are subject to change without shareholder approval.
Pursuant to a nonfundamental investment restriction, a Fund may not invest
more than 15% of its total assets in illiquid securities, repurchase
agreements extending for more than seven days and other securities which are
not readily marketable.
For further information on these and other fundamental and nonfundamental
investment restrictions, see the Statement of Additional Information.
To aid in achieving its investment objective, each Fund may, subject to
certain limitations, buy and sell options, futures contracts and options on
futures contracts, on securities and securities indices. These techniques
will not be employed for speculation, but only as a hedge against changes in
market conditions and, subject to certain limitations, to enhance return. A
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 non-hedging
purposes would exceed 5% of the market value of the Fund's net assets;
similar policies apply to options which are not commodities. A Fund's
positions in futures and options may be closed out only on an exchange or in
a market which provides liquidity, and there can be no assurance that a
liquid market will exist. See the Statement of Additional Information. In
addition, a Fund may invest in securities on a "when-issued" basis.
7
<PAGE>
The Funds may also invest in tax-exempt derivative products including
stripped tax-exempt bonds, synthetic floating rate tax-exempt bonds, and
tax-exempt asset backed securities, including interests in trusts holding
tax-exempt lease receivables. Some of these products may generate taxable
income or become illiquid. To reduce counterparty risks, the Funds will only
deal with established, reputable institutions.
Each Fund may hold up to 100% of its assets in cash or short-term securities
for temporary defensive purposes. Each 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 Funds may invest for such purposes include short-
term Municipal Obligations, short-term money market securities such as
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 rated at least "A" by S&P or "Prime" by Moody's (or, if not
rated, issued by companies having an outstanding long-term unsecured debt
issue rated at least "A" by S&P or Moody's). See the Statement of Additional
Information.
The Funds intend that short-term securities acquired for temporary defensive
purposes will be exempt from federal income taxes and State personal income
taxes, if any. However, if suitable short-term securities are not available
or if securities are available only on a when-issued basis or in the event of
an emergency, the Funds may invest up to 100% of its total assets in
short-term securities which may not be exempt from such taxes. When a Fund
adopts a temporary defensive position its investment objective may not be
achieved.
Portfolio Turnover
Portfolio turnover for a Fund is not expected to exceed 75%. However, the
Funds reserve full freedom with respect to portfolio turnover. In periods
when there are rapid changes in economic conditions or security price levels
or when investment strategy is changed significantly, portfolio turnover may
be significantly higher than during times of economic and market price
stability or when investment strategy remains relatively constant. Increases
in the rate of portfolio turnover will result in increased transaction costs
for a Fund and may also result in an increase in the realization of
short-term capital gains.
Information on the Purchase of Shares, Redemption of Shares and Shareholder
Services is set forth on pages 8 to 21 below.
A Fund is available for investment by many kinds of investors including
participants investing through savings plans sponsored by employers,
corporations, individuals, etc. The applicability of the general information
and administrative procedures set forth below accordingly will vary depending
on the investor and the recordkeeping system established for a shareholder's
investment in the Funds. Participants in plans should first consult with the
appropriate person at their employer or refer to the plan materials before
following any of the procedures below. For more information or assistance,
anyone may call 1-800-562-0032.
Purchase of Shares
Methods of Purchase
Through Dealers
Shares of the Funds are continuously offered through securities dealers who
have entered into sales agreements with the Distributor. Purchases through
dealers are confirmed at the offering price, which is the net asset value
plus the applicable sales charge, next determined after the order is duly
received by State Street Research Shareholder Services ("Shareholder
Services"), a division of State Street Research Investment Services, Inc.,
from the dealer. ("Duly received" for purposes herein means in accordance
with the conditions of the applicable method of purchase as described below.)
The dealer is responsible for transmitting the order promptly to Shareholder
Services in order to permit the investor to obtain the current price. See
"Purchase of Shares--Net Asset Value" herein.
8
<PAGE>
By Mail
Initial investments in a Fund may be made by mailing or delivering to the
investor's securities dealer a completed Application (accompanying this
Prospectus), together with a check for the total purchase price payable to
the Fund. The dealer must forward the Application and check in accordance
with the instructions on the Application.
Additional shares may be purchased by mailing to Shareholder Services a check
payable to the Fund in the amount of the total purchase price together with
any one of the following: (i) an Application; (ii) the stub from a
shareholder's account statement; or (iii) a letter setting forth the name of
the Fund, the class of shares and the shareholder's account name and number.
Shareholder Services will deliver the purchase order to the transfer agent
and dividend paying agent, State Street Bank and Trust Company (the "Transfer
Agent").
If a check is not honored for its full amount, the purchaser could be subject
to additional charges to cover collection costs and any investment loss, and
the purchase may be cancelled.
By Wire
An investor may purchase shares by wiring Federal Funds of not less than
$5,000 to State Street Bank and Trust Company, which also serves as the
Trust's custodian (the "Custodian"), as set forth below. Prior to making an
investment by wire, an investor must notify Shareholder Services at
1-800-521-6548 and obtain a control number and instructions. Following such
notification, Federal Funds should be wired through the Federal Reserve
System to:
ABA #011000028
State Street Bank and Trust Company
Boston, MA $(amount)
BNF = Name of Fund and class of shares
(A, B, C or D)
AC = 99029761
OBI = Shareholder Name
Shareholder Account Number
Control #K (assigned by State Street
Research Shareholder Services)
In order for a wire investment to be processed on the same day (i) the
investor must notify Shareholder Services of his or her intention to make
such investment by 12 noon Boston time on the day of his or her investment;
and (ii) the wire must be received by 4 P.M. Boston time that same day.
An investor making an initial investment by wire must promptly complete the
Application accompanying this Prospectus and deliver it to his or her
securities dealer, who should forward it as required. No redemptions will be
effected until the Application has been duly processed.
A Fund may in its discretion discontinue, suspend or change the practice of
accepting orders by any of the methods described above. Orders for the
purchase of shares are subject to acceptance by a Fund. A Fund reserves the
right to reject any purchase order, including orders in connection with
exchanges, for any reason which a Fund in its sole discretion deems
appropriate. A Fund reserves the right to suspend the sale of shares.
Minimum Investment
<TABLE>
<CAPTION>
Class of Shares
A B C D
<S> <C> <C> <C> <C>
Minimum Initial Investment
By Wire $5,000 $5,000 (a) $5,000
By Investamatic $1,000 $1,000 (a) $1,000
All Other $2,500 $2,500 (a) $2,500
Minimum Subsequent Investment
By Wire $5,000 $5,000 (a) $5,000
By Investamatic $ 50 $ 50 (a) $ 50
All Other $ 50 $ 50 (a) $ 50
</TABLE>
(a) Special conditions apply; contact Distributor.
The Funds reserve the right to vary the minimums for initial or subsequent
investments from time to time as in the case of, for example, exchanges and
investments under various employee benefit plans, sponsored arrangements
involving group solicitation of the members of an organization, or other
investment plans such as for reinvestment of dividends and distributions or
for periodic investments (e.g. Investamatic Check Program).
9
<PAGE>
Alternative Purchase Program
General
Alternative classes of shares permit investors to select a purchase program
which they believe will be the most advantageous for them, given the amount
of their purchase, the length of time they anticipate holding Fund shares, or
the flexibility they desire in this regard, and other relevant circumstances.
Investors will be able to determine whether in their particular circumstances
it is more advantageous to incur an initial sales charge and not be subject
to certain ongoing charges or to have their entire initial purchase price
invested in a Fund with the investment being subject thereafter to ongoing
service fees and distribution fees.
As described in greater detail below, securities dealers are paid differing
amounts of commission and other compensation depending on which class of
shares they sell.
The major differences among the various classes of shares
are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS D
<S> <C> <C> <C> <C>
Sales Charges Initial sales charge at time of Contingent deferred sales None Contingent deferred sales
investment of up to 4.5% charge of 5% to 2% applies to charge of 1% applies to any
depending on amount of any shares redeemed within shares redeemed within one
investment first five years following year following their
their purchase; no contingent purchase
deferred sales charge after
five years
On investments of $1 million or
more, no initial sales charge;
but contingent deferred sales
charge of 1% applies to any
shares redeemed within one year
following their purchase
Distribution Fee None 0.75% for first eight years; None 0.75% each year
Class B shares convert
automatically to Class A shares
after eight years
Service Fee 0.25% each year 0.25% each year None 0.25% each year
Initial Above described 4% None 1%
Commission initial sales charge
Received by less 0.25% to 0.50%
Selling retained by
Securities Distributor
Dealer
On investments of $1 million or
more, 0.25% to 0.70% paid
to dealer by Distributor
</TABLE>
10
<PAGE>
In deciding which class of shares to purchase, the investor should consider
the amount of the investment, the length of time the investment is expected
to be held, and the ongoing service fee and distribution fee, among other
factors.
Class A shares are sold at net asset value plus an initial sales charge of up
to 4.5% of the public offering price. Because of the sales charge, not all of
an investor's purchase amount is invested unless the purchase equals
$1,000,000 or more. Class B shareholders pay no initial sales charge, but a
contingent deferred sales charge of up to 5% generally applies to shares
redeemed within five years of purchase. Class D shareholders also pay no
initial sales charge, but a contingent deferred sales charge of 1% generally
applies to redemptions made within one year of purchase. For Class B and
Class D shareholders, therefore, the entire purchase amount is immediately
invested in a Fund.
An investor who qualifies for a significantly reduced initial sales charge,
or a complete waiver of the sales charge on investments of $1,000,000 or
more, on the purchase of Class A shares, might elect that option to take
advantage of the lower ongoing service and distribution fees that
characterize Class A shares compared with Class B or Class D shares.
Class A, Class B and Class D shares are assessed an annual service fee of
0.25% of average daily net assets. Class B shares are assessed an annual
distribution fee of 0.75% of daily net assets for an eight year period
following the date of purchase and are then automatically converted to Class
A shares. Class D shares are assessed an annual distribution fee of 0.75% of
daily net assets for as long as the shares are held. The prospective investor
should consider these fees plus the initial or contingent deferred sales
charges in estimating the costs of investing in the various classes of Fund
shares.
Only certain employee benefit plans and large institutions may make
investments in Class C shares.
Some of the service and distribution fees are also allocated to dealers (see
"Distribution Plan" below). In addition, the Distributor will, at its
expense, provide additional cash and noncash incentives to securities dealers
that sell shares. Such incentives may be extended only to those dealers that
have sold or may sell significant amounts of shares and/or meet other
conditions established by the Distributor; for example, the Distributor may
sponsor special promotions to develop particular distribution channels or to
reach certain investor groups. The incentives may include merchandise and
trips to and attendance at sales seminars at resorts.
Class A Shares--Initial Sales Charges
Sales Charges
The purchase price of a Class A share of a Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein, plus a sales charge which varies depending on the dollar
amount of the shares purchased as set forth in the table below. A major
portion of this sales charge is reallowed by the Distributor to the
securities dealer responsible for the sale.
<TABLE>
<CAPTION>
Sales
Sales Charge
Charge Paid
Paid By By Dealer
Dollar Investor Investor Concession
Amount of As % of As % of As % of
Purchase Purchase Net Asset Purchase
Transaction Price Value Price
<S> <C> <C> <C>
Less than
$100,000 4.50% 4.71% 4.00%
$100,000 or
above but less
than $250,000 3.50% 3.63% 3.00%
$250,000 or
above but less
than $500,000 2.50% 2.56% 2.00%
$500,000 or
above but less
than $1 million 2.00% 2.04% 1.75%
See
$1 million and following
above 0% 0% discussion
</TABLE>
On any sale of Class A shares to a single investor in the amount of
$1,000,000 or more, the Distributor will pay the authorized securities dealer
a commission at the time of sale as follows:
11
<PAGE>
<TABLE>
<CAPTION>
Amount of Sale Commission
<S> <C>
(a) $1 million to $3 million 0.70%
(b) Next $2 million 0.50%
(c) Amount over $5 million 0.25%
</TABLE>
On such sales of $1,000,000 or more, the investor is subject to a 1%
contingent deferred sales charge on any portion of the purchase redeemed
within one year of the sale. However, such redeemed shares will not be
subject to the contingent deferred sales charge to the extent that their
value represents (1) capital appreciation or (2) reinvestment of dividends or
capital gains distributions. In addition, the contingent deferred sales
charge will be waived for certain other redemptions as described under
"Contingent Deferred Sales Charge Waivers" below (as otherwise applicable to
Class B shares).
Class A shares of a Fund that are purchased without a sales charge may be
exchanged for Class A shares of certain other Eligible Funds, as described
below, without the imposition of a contingent deferred sales charge, although
contingent deferred sales charges may apply upon a subsequent redemption
within one year of the Class A shares which are acquired through such
exchange. For federal income tax purposes, the amount of the contingent
deferred sales charge will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any contingent
deferred sales charge will be paid to the Distributor.
Reduced Sales Charges
The reduced sales charges set forth in the table above are applicable to
purchases made at any one time by any "person," as defined in the Statement
of Additional Information, of $100,000 or more of Class A shares of the Funds
or a combination of "Eligible Funds." "Eligible Funds" include the Funds and
other funds so designated by the Distributor from time to time. Class B,
Class C and Class D shares may also be included in the combination under
certain circumstances. Securities dealers should call Shareholder Services
for details concerning the other Eligible Funds and any persons who may
qualify for reduced sales charges and related information. See the Statement
of Additional Information.
Letter of Intent
Any investor who provides a Letter of Intent may qualify for a reduced sales
charge on purchases of no less than an aggregate of $100,000 of Class A
shares of the Funds and any other Eligible Funds within a 13-month period.
Class B, Class C and Class D shares may also be included in the combination
under certain circumstances. Additional information on a Letter of Intent is
available from dealers, or from the Distributor, and also appears in the
Statement of Additional Information.
Right of Accumulation
Investors may purchase Class A shares of a Fund or a combination of shares of
the Funds and other Eligible Funds at reduced sales charges pursuant to a
Right of Accumulation. Under the Right of Accumulation, the sales charge is
determined by combining the current purchase with the value of the Class A
shares of other Eligible Funds held at the time of purchase. Class B, Class C
and Class D shares may also be included in the combination under certain
circumstances. See the Statement of Additional Information and call
Shareholder Services for details concerning the Right of Accumulation.
Other Programs
Class A shares of the Funds may be sold at a reduced sales charge or without
a sales charge pursuant to certain sponsored arrangements, which include
programs under which a company, employee benefit plan or other organization
makes recommendations to, or permits group solicitation of, its employees,
members or participants, except any organization created primarily for the
purpose of obtaining shares of the Funds at a reduced sales charge or without
a sales charge. 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 a Fund to the following entities and persons: (A) the Investment
Manager, Distributor, or any affiliated entities, including any direct or
indirect parent companies and other subsidiaries of such parents
(collectively "Affiliated
12
<PAGE>
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.
Class B Shares--Contingent Deferred Sales Charges
Contingent Deferred Sales Charges
The public offering price of Class B shares is the net asset value per share
next determined after the purchase order is duly received, as defined herein.
No sales charge is imposed at the time of purchase; thus the full amount of
the investor's purchase payment will be invested in a Fund. However, a
contingent deferred sales charge may be imposed upon redemptions of Class B
shares as described below.
The Distributor will pay securities dealers at the time of sale a 4%
commission for selling Class B shares. The proceeds of the contingent
deferred sales charge and the distribution fee are used to offset
distribution expenses and thereby permit the sale of Class B shares without
an initial sales charge.
Class B shares that are redeemed within a five-year period after their
purchase will not be subject to a contingent deferred sales charge to the
extent that the value of such shares represents (1) capital appreciation of
Fund assets or (2) reinvestment of dividends or capital gains distributions.
The amount of any applicable contingent deferred sales charge will be
calculated by multiplying the net asset value of such shares at the time of
redemption or at the time of purchase, whichever is lower, by the applicable
percentage shown in the table below:
<TABLE>
<CAPTION>
Contingent Deferred Sales
Charge As A Percentage Of Net
Redemption During Asset Value At Redemption
<S> <C>
1st Year Since Purchase 5%
2nd Year Since Purchase 4
3rd Year Since Purchase 3
4th Year Since Purchase 3
5th Year Since Purchase 2
6th Year Since Purchase and
Thereafter None
</TABLE>
In determining the applicability and rate of any contingent deferred sales
charge, it will be assumed that a redemption of Class B shares is made first
of those shares having the greatest capital appreciation, next of shares
representing reinvestment of dividends and capital gains distributions and
finally of remaining shares held by the shareholder for the longest period of
time. The holding period for purposes of applying a contingent deferred sales
charge on Class B shares of a 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 Class B shares being redeemed will
be considered to represent, as applicable, capital appreciation or dividend
and capital gains distribution reinvestments in such other Eligible Fund.
These determinations will result in any contingent deferred sales charge
being imposed at the lowest possible rate. For federal income tax purposes,
the amount of the contingent deferred sales charge will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption.
The amount of any contingent deferred sales charge will be paid to the
Distributor.
Contingent Deferred Sales Charge Waivers
The contingent deferred sales charge does not apply to exchanges, or to
redemptions under a systematic withdrawal plan which meets certain
conditions. In addition, the contingent deferred sales charge will be waived
for: (i) redemptions made within one year of the death or total disability,
as defined by the Social Security Administration, of all shareholders of an
account; (ii) redemptions made after attainment of a specific age in an
amount which represents the minimum distribution required at such age under
Section 401(a)(9) of the Internal Revenue Code for retirement accounts or
plans
13
<PAGE>
(e.g., age 70-1/2 for IRAs and Section 403(b) plans), calculated solely on
the basis of assets invested in a Fund or other Eligible Funds; and (iii) a
redemption resulting from a tax-free return of an excess contribution to an
IRA. (The foregoing waivers do not apply to a tax-free rollover or transfer
of assets out of a Fund.) A Fund may modify or terminate the waivers at any
time; for example, a Fund may limit the application of multiple waivers.
Conversion of Class B Shares to Class A Shares
A shareholder's Class B shares, including all shares received as dividends or
distributions with respect to such shares, will automatically convert to
Class A shares of a Fund at the end of eight years following the issuance of
such Class B shares; consequently, they will no longer be subject to the
higher expenses borne by Class B shares. The conversion rate will be
determined on the basis of the relative per share net asset values of the two
classes and may result in a shareholder receiving either a greater or fewer
number of Class A shares than the Class B shares so converted. As noted
above, holding periods for Class B shares received in exchange for Class B
shares of other Eligible Funds will be counted toward the eight-year period.
Class C Shares--Institutional; No Sales Charge
The purchase price of a Class C share of a Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase or
redemption. The Funds will receive the full amount of the investor's purchase
payment.
Class C shares are only available for new investments by certain employee
benefit plans and large institutions. See the Statement of Additional
Information. Information on the availability of Class C shares and further
conditions and limitations is available from the Distributor.
Class C shares may be also issued in connection with mergers and acquisitions
involving a Fund, and under certain other circumstances as described in this
Prospectus (e.g., see "Shareholder Services--Exchange Privilege").
Class C shares may have also been issued directly or through exchanges to
those shareholders of the Funds and other Eligible Funds who previously held
shares which are not subject to any future sales charge or service fees or
distribution fees.
Class D Shares--Spread Sales Charges
The purchase price of a Class D share of a Fund is the Fund's per share net
asset value next determined after the purchase order is duly received, as
defined herein. No sales charge is imposed at the time of purchase; thus the
full amount of the investor's purchase payment will be invested in the Funds.
Class D shares are subject to a 1% contingent deferred sales charge on any
portion of the purchase redeemed within one year of the sale. The contingent
deferred sales charge will be 1% of the lesser of the net asset value of the
shares at the time of purchase or at the time of redemption. The Distributor
pays securities dealers a 1% commission for selling Class D shares at the
time of purchase. The proceeds of the contingent deferred sales charge and
the distribution fee are used to offset distribution expenses and thereby
permit the sale of Class D shares without an initial sales charge.
Class D shares that are redeemed within one year after purchase will not be
subject to the contingent deferred sales charge to the extent that the value
of such shares represents (1) capital appreciation of Fund assets or (2)
reinvestment of dividends or capital gains distributions. In addition, the
contingent deferred sales charge will be waived for certain other redemptions
as described under "Contingent Deferred Sales Charge Waivers" above (as
otherwise applicable to Class B shares). For federal income tax purposes, the
amount of the contingent deferred sales charge will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption.
The amount of any contingent deferred sales charge will be paid to the
Distributor.
Net Asset Value
Each Fund's per share net asset values are determined Monday through Friday
as of the close of the New York Stock Exchange (the "NYSE") exclusive of days
on which the NYSE is closed. The NYSE ordinarily closes at 4 P.M. New York
City time. Market quotations for most municipal securities are not
14
<PAGE>
readily available on a daily basis; therefore, the Funds use one or more
pricing services to value such assets. The pricing services utilize
information with respect to market transactions, quotations from dealers and
various relationships among securities in determining value and may provide
prices determined as of times prior to the close of the NYSE. Assets for
which market quotations are readily available are valued as of the close of
business on the valuation date. Securities for which there is no pricing
service valuation or last reported sale price are valued as determined in
good faith by or under the authority of the Trustees of the Trust. 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. Further information with respect to the valuation of the Funds'
assets is included in the Statement of Additional Information.
Distribution Plan
The Funds have adopted a Plan of Distribution Pursuant to Rule 12b-1 (the
"Distribution Plan") in accordance with the regulations under the Investment
Company Act of 1940, as amended (the "1940 Act"). Under the provisions of the
Distribution Plan, each Fund makes payments to the Distributor based on an
annual percentage of the average daily value of the net assets of each class
of shares as follows:
<TABLE>
<CAPTION>
Class Service Fee Distribution Fee
<S> <C> <C>
A 0.25% None
B 0.25% 0.75%
C None None
D 0.25% 0.75%
</TABLE>
Some or all of the service fees are used to reimburse securities dealers
(including securities dealers that are affiliates of the Distributor) for
personal service and/or the maintenance of shareholder accounts. A portion of
any initial commission paid to dealers for the sale of shares of the Funds
represents payment for personal services and/or the maintenance of
shareholder accounts by such dealer. Dealers who have sold Class A shares are
eligible for further reimbursements commencing as of the time of such sale.
Dealers who have sold Class B and Class D shares are eligible for further
reimbursements 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 of shareholder
accounts.
The distribution fees are used primarily to offset initial and ongoing
commissions paid to securities 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 securities dealers.
The Distributor provides distribution services on behalf of other funds
having distribution plans and receives similar payments from, and incurs
similar expenses on behalf of, such other funds. When expenses of the
Distributor cannot be identified as relating to a specific fund, the
Distributor allocates expenses among the funds in a manner deemed fair and
equitable to each fund.
Commissions and other cash and noncash incentives and payments to dealers, to
the extent payable out of the general profits, revenues or other sources of
the Distributor (including the advisory fees paid by the Funds), have also
been authorized pursuant to the Distribution Plan.
A rule of the National Association of Securities Dealers, Inc. ("NASD")
limits the annual expenditures which a Fund may incur under the Distribution
Plan to 1%, of which 0.75% may be used to pay distribution expenses and 0.25%
may be used to pay shareholder service fees. The NASD rule also limits the
aggregate amount which a Fund may pay for such distribution costs to 6.25% of
gross share sales of a class commencing at the inception of any asset-based
sales charge plus interest at the prime rate plus 1% on unpaid amounts
thereof (less any contingent deferred sales charges). Such limitation does
not apply to shareholder service fees. Payments to the Distributor or to
dealers funded under the Distribution Plan may be discontinued at any time by
the Trustees of the Trust.
15
<PAGE>
Redemption of Shares
Shareholders may redeem all or any portion of their accounts on any day the
NYSE is open for business. Redemptions will be effective at the net asset
value per share next determined (see "Purchase of Shares--Net Asset Value"
herein) after receipt of the redemption request, in accordance with the
requirements described below, by Shareholder Services and delivery of the
request by Shareholder Services to the Transfer Agent. To allow time for the
clearance of checks used for the purchase of any shares which are tendered
for redemption shortly after purchase, the remittance of the redemption
proceeds for such shares could be delayed for 15 days or more after the
purchase. Shareholders who anticipate a potential need for immediate access
to their investments should, therefore, purchase shares by wire. Except as
noted, redemption proceeds are normally remitted within seven days after
receipt of the redemption request and any necessary documents in good order.
Methods of Redemption
Request By Mail
A shareholder may request redemption of shares, with proceeds to be mailed to
the shareholder or wired to a predesignated bank account (see "Proceeds By
Wire" below) by sending to State Street Research Shareholder Services, P.O.
Box 8408, Boston, Massachusetts 02266-8408: (1) a written request for
redemption signed by the registered owner(s) of the shares, exactly as the
account is registered; (2) an endorsed stock power in good order with respect
to the shares or, if issued, the share certificates for the shares endorsed
for transfer or accompanied by an endorsed stock power; (3) any required
signature guarantees (see "Redemption of Shares--Signature Guarantees"
below); and (4) any additional documents which may be required for redemption
in the case of corporations, trustees, etc., such as certified copies of
corporate resolutions, governing instruments, powers of attorney, and the
like. The Transfer Agent will not process requests for redemption until it
has received all necessary documents in good order. A shareholder will be
notified promptly if a redemption request cannot be accepted. Shareholders
having any questions about the requirements for redemption should call
Shareholder Services toll-free at 1-800-562-0032.
Request By Telephone
Shareholders may request redemption by telephone with proceeds to be
transmitted by check or by wire (see "Proceeds By Wire" below). A shareholder
can request a redemption for $50,000 or less to be transmitted by check. Such
check for the proceeds will be made payable to the shareholder of record and
will be mailed to the address of record. There is no fee for this service. It
is not available for shares held in certificate form or if the address of
record has been changed within 30 days of the redemption request. The Funds
may revoke or suspend the telephone redemption privilege at any time and
without notice. See "Shareholder Services--Telephone Services" for a
discussion of the conditions and risks associated with Telephone Privileges.
Request By Check (Class A shares only)
Shareholders of Class A shares of a Fund may redeem shares by checks drawn on
State Street Bank and Trust Company. Checks may be made payable to the order
of any person or organization designated by the shareholder and must be for
amounts of at least $500 but not more than $100,000. Shareholders will
continue to earn dividends on the shares to be redeemed until the check
clears. There is currently no charge associated with redemption of shares by
check. Checkbooks are supplied for a $2 fee. Checks will be sent only to the
registered owner at the address of record. A $10 fee will be charged against
an account in the event a redemption check is presented for payment and not
honored pursuant to the terms and conditions established by State Street Bank
and Trust Company.
Shareholders can request the checkwriting privilege by completing the
signature card which is part of the Application. In order to arrange for
redemption-by-check after an account has been opened, a revised Application
with signature card and signatures guaranteed must be sent to Shareholder
Services. Cancelled checks will be returned to shareholders at the end of
each month.
The redemption-by-check service is subject to State Street Bank and Trust
Company's rules and regulations applicable to checking accounts (as amended
from time to time), and is governed by the
16
<PAGE>
Massachusetts Uniform Commercial Code. All notices with respect to checks
drawn on State Street Bank and Trust Company must be given to State Street
Bank and Trust Company. Stop payment instructions with respect to checks must
be given to State Street Bank and Trust Company by calling 1-617-985-8543.
Shareholders may not close out an account by check.
Proceeds By Wire
Upon a shareholder's written request or by telephone if the shareholder has
Telephone Privileges (see "Shareholder Services--Telephone Services" herein),
the Trust's custodian will wire redemption proceeds to the shareholder's
predesignated bank account. To make the request, the shareholder should call
1-800-521-6548 prior to 4 P.M. Boston time. A $7.50 charge against the
shareholder's account will be imposed for each wire redemption. This charge
is subject to change without notice. The shareholder's bank may also impose a
charge for receiving wires of redemption proceeds. The minimum redemption by
wire is $5,000.
Request to Dealer to Repurchase
For the convenience of shareholders, the Funds have authorized the
Distributor as its agent to accept orders from dealers by wire or telephone
for the repurchase of shares by the Distributor from the dealer. The Funds
may revoke or suspend this authorization at any time. The repurchase price is
the net asset value for the applicable shares next determined following the
time at which the shares are offered for repurchase by the dealer to the
Distributor. The dealer is responsible for promptly transmitting a
shareholder's order to the Distributor. Payment of the repurchase proceeds is
made to the dealer who placed the order promptly upon delivery of
certificates for shares in proper form for transfer or, for Open Accounts,
upon the receipt of a stock power with signatures guaranteed as described
below, and, if required, any supporting documents. Neither the Funds nor the
Distributor imposes any charge upon such a repurchase. However, a dealer may
impose a charge as agent for a shareholder in the repurchase of his or her
shares.
The Funds have reserved the right to change, modify or terminate the services
described above at any time.
Additional Information
Because of the relatively high cost of maintaining small shareholder
accounts, a Fund reserves the right to involuntarily redeem at its option any
shareholder account which remains below $1,500 for a period of 60 days after
notice is mailed to the applicable shareholder, or to impose a maintenance
fee on such account after 60 days notice. Such involuntary redemptions will
be subject to applicable sales charges, if any. The Fund may increase such
minimum account value above such amount in the future after notice to
affected shareholders. Involuntarily redeemed shares will be priced at the
net asset value on the date fixed for redemption by a Fund, and the proceeds
of the redemption will be mailed promptly to the affected shareholder at the
address of record. Imposition of a maintenance fee on a small account could,
over time, exhaust the assets of such account.
To cover the cost of additional compliance administration, a $20 fee will be
charged against any shareholder account that has been determined to be
subject to escheat under applicable state laws.
A 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 value; or
(3) during such other periods as the Securities and Exchange Commission may
by order permit for the protection of investors; and (b) the payment of
redemption proceeds may be postponed as otherwise provided under "Redemption
of Shares" herein.
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<PAGE>
Signature Guarantees
To protect shareholder accounts, the Transfer Agent, the Funds, the
Investment Manager and the Distributor from possible fraud, signature
guarantees are required for certain redemptions. Signature guarantees enable
the Transfer Agent to be certain that the person who has authorized a
redemption from the account is, in fact, the shareholder. Signature
guarantees are required for: (1) all redemptions requested by mail; (2)
requests to transfer the registration of shares to another owner; and (3)
authorizations to establish the checkwriting privilege. 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
by a Fund in certain instances.
Shareholder Services
The Open Account System
Under the Open Account System full and fractional shares of each Fund owned
by shareholders are credited to their accounts by the Transfer Agent, State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts
02110. Certificates representing Class B or Class D shares will not be
issued, while certificates representing Class A or Class C shares will only
be issued if specifically requested in writing and, in any case, will only be
issued for full shares, with any fractional shares to be carried on the
shareholder's account. Shareholders will receive periodic statements of
transactions in their account.
The Funds' Open Account System provides the following options:
1. Additional purchases of shares of the Fund may be made through dealers, by
wire or by mailing a check payable to the applicable Fund to Shareholder
Services under the terms set forth above under "Purchase of Shares."
2. The following methods of receiving dividends from investment income and
distributions from capital gains are available:
(a) All income dividends and capital gains distributions reinvested in
additional shares of the applicable Fund.
(b) All income dividends in cash; all capital gains distributions
reinvested in additional shares of the applicable Fund.
(c) All income dividends and capital gains distributions in cash.
(d) All income dividends and capital gains distributions invested in any
one available Eligible Fund designated by the shareholder as described below.
See "Dividend Allocation Plan" herein.
Dividend and distribution selections should be made on the Application
accompanying the initial investment. If no selection is indicated on the
Application, that account will automatically be coded for reinvestment of all
dividends and distributions in additional shares of the same class of the
applicable Fund. Selections may be changed at any time by telephone or
written notice to Shareholder Services. Dividends and distributions are
reinvested at net asset value without a sales charge.
Exchange Privilege
Shareholders of a 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 a
Fund into other Eligible Funds. To effect an exchange, Class A, Class B and
Class D shares may be redeemed without the payment of any contingent deferred
sales charge that might otherwise be due upon an ordinary redemption of such
shares. The MetLife - State Street Research Money Market Fund issues Class E
shares which are sold without any sales charge. Exchanges of MetLife - State
Street Research Money Market Fund Class E shares into Class A shares of the
Funds or any other Eligible Fund are subject to the initial sales charge or
18
<PAGE>
contingent deferred sales charge applicable to an initial investment in such
Class A shares, unless a prior Class A sales charge has been paid directly or
indirectly with respect to the shares redeemed. For purposes of computing the
contingent deferred sales charge that may be payable upon disposition of the
acquired Class A, Class B and Class D shares, the holding period of the
redeemed shares is "tacked" to the holding period of the acquired shares. The
period any Class E shares are held is not tacked to the holding period of any
acquired shares. No exchange transaction fee is currently imposed on any
exchange.
For the convenience of its shareholders who have Telephone Privileges, the
Funds permit exchanges by telephone request from either the shareholder or
his or her dealer. Shares may be exchanged by telephone provided that the
registration of the two accounts is the same. The toll-free number for
exchanges is 1-800-521-6548. See "Telephone Services" herein for a discussion
of conditions and risks associated with Telephone Privileges.
The exchange privilege may be exercised only in those states where shares of
the relevant other Eligible Fund may legally be sold. For tax purposes, each
exchange actually represents the sale of shares of one fund and the purchase
of shares of another. Accordingly, exchanges may produce a capital gain or
loss for tax purposes. The exchange privilege may be terminated or suspended
or its terms changed at any time, subject, if required under applicable
regulations, to 60 days' prior notice. New accounts established for
investment upon exchange from an existing account in another fund will have
the same Telephone Privileges as the existing account, unless Shareholder
Services is instructed otherwise. Related administrative policies and
procedures may also be adopted with regard to a series of exchanges, street
name accounts, sponsored arrangements and other matters.
The exchange privilege is not designed for use in connection with short-term
trading or market timing strategies. In order to limit exchange activity
where a Fund believes doing so would be in the best interests of a Fund, it
reserves the right to revise or terminate the exchange privilege, limit the
amount or number of exchanges or reject any exchange for any person. These
measures may be imposed at any time. Subject to the foregoing, if an exchange
request in good order is received by Shareholder Services and delivered by
Shareholder Services to the Transfer Agent by 12 noon Boston time on any
business day, the exchange usually will occur that day. Consult Shareholder
Services before requesting an exchange or for further information.
Reinvestment Privilege
A shareholder of a 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 a 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 30 calendar days after a redemption or
repurchase. Upon such reinvestment, the shareholder will be credited with any
contingent deferred sales charge previously charged with respect to the
amount reinvested. The redemption of shares is, for federal income tax
purposes, a sale on which the shareholder may realize a gain or loss. If a
redemption at a loss is followed by a reinvestment within 30 days, the
transaction may be a "wash sale" resulting in a denial of the loss for
federal income tax purposes.
Any reinvestment pursuant to the reinvestment privilege will be subject to
any applicable minimum account standards imposed by the fund into which the
reinvestment is made. Shares are sold to a reinvesting shareholder at the net
asset value thereof next determined following timely receipt by Shareholder
Services of such shareholder's written purchase request and delivery of the
request by Shareholder Services to the Transfer Agent. A shareholder may
exercise this reinvestment privilege only once with respect to his or her
shares of a Fund. No charge is imposed by the Funds for such reinvestments;
however, dealers may charge fees in connection with the reinvestment
privilege. The reinvestment privilege may be exercised with respect to an
Eligible Fund only in those states where shares of the relevant other
Eligible Fund may legally be sold.
19
<PAGE>
Investment Plans
The Funds offer Class A, Class B and Class D shareholders the Investamatic
Check Program. Under this Program, shareholders may make regular investments
by authorizing withdrawals from their bank accounts each month or quarter on
the Investamatic application form available from Shareholder Services.
Systematic Withdrawal Plan
A shareholder who owns noncertificated Class A or Class C shares with a value
of $5,000 or more, or Class B or Class D shares with a value of $10,000 or
more, may elect, by participating in the Funds' 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 designated Fund shall be credited to participating shareholders in
additional shares of that 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 relevant Fund or
Funds, a shareholder's investment will decrease and may eventually be
exhausted.
In the case of shares otherwise subject to contingent deferred sales charges,
no such charges will be imposed on withdrawals of up to 8% annually of either
(a) the value, at the time the Plan is initiated, of the shares then in the
account, or (b) the value, at the time of withdrawal, of the same number of
shares as in the account when the Plan was initiated, whichever is higher.
Expenses of the Plan are borne by the Funds. A participating shareholder may
withdraw from the Plan, and a Fund may terminate the Plan at any time on
written notice. Purchase of additional shares while a shareholder is
receiving payments under a Plan is ordinarily disadvantageous because of
duplicative sales charges. For this reason, a shareholder may not participate
in the Investamatic Check Program and the Systematic Withdrawal Plan at the
same time.
Dividend Allocation Plan
The Dividend Allocation Plan allows shareholders to elect to have all their
dividends and any other distributions from a 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 investment
is made is initially funded with the requisite minimum amount. The number of
shares purchased will be determined as of the dividend payment date. The
Dividend Allocation Plan is subject to state securities law requirements, to
suspension at any time, and to such policies, limitations and restrictions,
as, for instance, may be applicable to street name or master accounts, that
may be adopted from time to time.
Automatic Bank Connection
A shareholder may elect, by participating in the Funds' Automatic Bank
Connection ("ABC"), to have dividends and other distributions, including
Systematic Withdrawal Plan payments, automatically deposited in the
shareholder's bank account by electronic funds transfer. Some contingent
deferred sales charges may apply. See "Systematic Withdrawal Plan" herein.
Reports
Reports for each Fund will be sent to shareholders of record of that Fund at
least semiannually. These reports will include a list of the securities owned
by the applicable Fund as well as such Fund's financial statements.
Telephone Services
The following telephone privileges ("Telephone Privileges") can be used:
(1) the privilege allowing the shareholder to make telephone redemptions for
amounts up to $50,000 to be mailed to the shareholder's address of record is
available automatically;
(2) the privilege allowing the shareholder or his or her dealer to make
telephone exchanges is available automatically; and
(3) the privilege allowing the shareholder to make telephone redemptions for
amounts over $5,000, to be remitted by wire to the shareholder's
predesignated bank account, is available by election on the Application
accompa-
20
<PAGE>
nying this Prospectus. A current shareholder who did not previously request
such telephone wire privilege on his or her original Application may request
the privilege by completing a Telephone Redemption-by-Wire Form which may be
obtained by calling 1-800-521-6548. The Telephone Redemption-by-Wire Form
requires a signature guarantee.
A shareholder may decline the automatic Telephone Privileges set forth in (1)
and (2) above by so indicating on the Application accompanying this
Prospectus.
A shareholder may discontinue any Telephone Privilege at any time by advising
Shareholder Services that the shareholder wishes to discontinue the use of
such privileges in the future.
Unless such Telephone Privileges are declined, a shareholder is deemed to
authorize Shareholder Services and the Transfer Agent to: (1) act upon the
telephone instructions of any person purporting to be the shareholder to
redeem, or purporting to be the shareholder or the shareholder's dealer to
exchange, shares from any account; and (2) honor any written instructions for
a change of address regardless of whether such request is accompanied by a
signature guarantee. All telephone calls will be recorded. None of the Funds,
the other Eligible Funds, the Transfer Agent, the Investment Manager or the
Distributor will be liable for any loss, expense or cost arising out of any
request, including any fraudulent or unauthorized requests. Shareholders
assume the risk to the full extent of their accounts that telephone requests
may be unauthorized. Reasonable procedures will be followed to confirm that
instructions communicated by telephone are genuine. The shareholder will not
be liable for any losses arising from unauthorized or fraudulent instructions
if such procedures are not followed.
Shareholders may redeem or exchange shares by calling toll-free
1-800-521-6548. Although it is unlikely, during periods of extraordinary
market conditions, a shareholder may have difficulty in reaching Shareholder
Services at such telephone number. In that event, the shareholder should
contact Shareholder Services at 1-800-562-0032, 1-617-357-7805 or otherwise
at its main office at One Financial Center, Boston, Massachusetts 02111-2690.
Shareholder Account Inquiries:
Please call 1-800-562-0032
Call this number for assistance in answering general questions on your
account, including account balance, available shareholder services, statement
information and performance of the Funds. Account inquiries may also be made
in writing to State Street Research Shareholder Services, P.O. Box 8408,
Boston, Massachusetts 02266-8408. A fee of up to $10 will be charged against
an account for providing additional account transcripts or photocopies of
paid redemption checks or for researching records in response to special
requests.
Shareholder Telephone Transactions:
Please call 1-800-521-6548
Call this number for assistance in purchasing shares by wire and for
telephone redemptions or telephone exchange transactions. Shareholder
Services will require some form of personal identification prior to acting
upon instructions received by telephone. Written confirmation of each
transaction will be provided.
The Funds and Their Shares
The Funds were organized in 1992 as additional series of State Street
Research Tax-Exempt Trust, a Massachusetts business trust. The Trustees have
authorized shares of the Funds to be issued in four classes: Class A, Class
B, Class C and Class D shares. The Trust is registered with the Securities
and Exchange Commission as an open-end management investment company. The
fiscal year end of the Funds is December 31.
Except for those differences between the classes of shares described below
and elsewhere in the Prospectus, each share of a Fund has equal dividend,
redemption and liquidation rights with other shares of the Fund and when
issued is fully paid and nonassessable. In the future, certain classes may be
redesignated, for administrative purposes only, to conform to standard class
designations and common usage of terms which may develop in the mutual fund
industry. For example, Class
21
<PAGE>
C shares may be redesignated as Class Y shares and Class D shares may be
redesignated as Class C shares. Any redesignation would not affect any
substantive rights respecting the shares.
Each share of each class of shares represents an identical legal interest in
the same portfolio of investments of a Fund, has the same rights and is
identical in all respects, except that Class B and Class D shares bear the
expenses of the deferred sales arrangement and any expenses (including the
higher service and distribution fees) resulting from such sales arrangement,
and certain other incremental expenses related to a class. Each class will
have exclusive voting rights with respect to provisions of the Rule 12b-1
distribution plan pursuant to which the service and distribution fees, if
any, are paid. Although the legal rights of holders of each class of shares
are identical, it is likely that the different expenses borne by each class
will result in different net asset values and dividends. The different
classes of shares of the Funds also have different exchange privileges.
The rights of holders of shares may be modified by the Trustees at any time,
so long as such modifications do not have a material adverse effect on the
rights of any shareholder. On any matter submitted to the shareholders, the
holder of each Fund share is entitled to one vote per share (with
proportionate voting for fractional shares) regardless of the relative net
asset value thereof.
Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder
meetings unless required by the 1940 Act. Except as provided under said Act,
the Board of Trustees will be a self-perpetuating body until fewer than
two-thirds of the Trustees serving as such are Trustees who were elected by
shareholders of the Trust. In the event less than a majority of the Trustees
serving as such were elected by shareholders of the Trust, a meeting of
shareholders will be called to elect Trustees. Under the Master Trust
Agreement, any Trustee may be removed by vote of two-thirds of the
outstanding Trust shares; holders of 10% or more of the outstanding 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 as required by applicable law.
Under Massachusetts law, the shareholders of the Trust could, under certain
circumstances, be held personally liable for the obligations of the Trust.
However, the Master Trust Agreement of the Trust disclaims shareholder
liability for acts or obligations of the Trust and provides for
indemnification for all losses and expenses of any shareholder of a 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 a Fund would be unable to meet its
obligations. The Investment Manager believes that, in view of the above, the
risk of personal liability to shareholders is remote.
As of March 31, 1995, Metropolitan Life Insurance Company ("Metropolitan")
was the record and/or beneficial owner of approximately 99.9% and 34.9%,
respectively, of the Class C and Class D shares of the Florida Tax-Free Fund
and of 99.6% and 43.7%, respectively, of the Class C and Class D shares of
the Pennsylvania Tax-Free Fund and may be deemed to be in control of such
classes of shares of the Funds. Ownership of 25% or more of a voting security
is deemed "control" as defined in the 1940 Act. So long as 25% of a class of
shares is so owned, such owners will be presumed to be in control of such
class of shares for purposes of voting on certain matters, such as any
Distribution Plan for a given class.
Management of the Funds
Under the provisions of the Trust's Master Trust Agreement and the laws of
Massachusetts, primary responsibility for the management and supervision of
the Funds rests with the Trustees.
The Funds' investment manager is State Street Research & Management Company.
The Investment Manager is charged with the overall responsibility for
managing the investments and business affairs of the Funds, subject to the
authority of the Board of Trustees.
The Investment Manager was founded by Paul Cabot, Richard Saltonstall and
Richard Paine to serve
22
<PAGE>
as investment adviser to one of the nation's first mutual funds, presently
known as State Street Research Investment Trust, which they had formed in
1924. Their investment management philosophy, which continues to this day,
emphasized comprehensive fundamental research and analysis, including
meetings with the management of companies under consideration for investment.
The Investment Manager's portfolio management group has extensive investment
industry experience managing equity and debt securities. In managing debt
securities, if any, for a portfolio, the Investment Manager may consider
yield curve positioning, sector rotation and duration, among other factors.
The Investment Manager is an indirect wholly-owned subsidiary of
Metropolitan and the Distributor is a wholly-owned subsidiary of the
Investment Manager, and both are located at One Financial Center, Boston,
Massachusetts 02111-2690.
The Investment Manager has entered into an Advisory Agreement with the Trust
pursuant to which investment research and management, administrative
services, office facilities and personnel are provided for each Fund in
consideration of a fee from each Fund.
Under its Advisory Agreement with the Trust, the Investment Manager receives
a monthly investment advisory fee equal to 0.55% (on an annual basis) of the
average daily value of the net assets of each Fund. Each Fund bears all costs
of its operation other than those incurred by the Investment Manager under
the Advisory Agreement. In particular, the Funds pay investment advisory
fees, and the compensation and expenses of the Trustees who are not otherwise
currently affiliated with the Trust, the Investment Manager or any of its
affiliates. The Investment Manager will reduce its management fee payable by
each Fund up to the amount of any expenses (excluding permissible items, such
as brokerage commissions, Rule 12b-1 payments, interest, taxes and litigation
expenses) paid or incurred in any year in excess of the most restrictive
expense limitation imposed by any state in which that Fund sells shares, if
any. The Investment Manager compensates Trustees of the Trust if such persons
are employees or affiliates of the Investment Manager or its affiliates.
The Funds are managed by Paul J. Clifford, Jr. and Susan W. Drake. Mr.
Clifford and Ms. Drake have managed these funds since commencement of
operations in August 1993.
Mr. Clifford's principal occupation currently is Vice President of State
Street Research & Management Company. During the past five years he has also
served as a securities analyst for State Street Research & Management
Company. Ms. Drake's principal occupation currently is Vice President of
State Street Research & Management Company. During the past five years she
has also served as a securities analyst for State Street Research &
Management Company.
Subject to the policy of seeking best overall price and execution, sales of
shares of a Fund may be considered by the Investment Manager in the selection
of broker or dealer firms for a Fund's portfolio transactions.
The Investment Manager has a Code of Ethics governing personal securities
transactions of its employees; see the Statement of Additional Information.
Dividends and Distributions; Taxes
Each Fund is treated as a separate entity for federal income tax purposes.
Each Fund intends to qualify and elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code, although
they cannot give complete assurance that they will do so. As long as a Fund
so qualifies and satisfies certain distribution requirements, it will not be
subject to federal income tax on its taxable income (including capital gains,
if any) distributed to its shareholders. Consequently, each Fund intends to
distribute annually to its shareholders substantially all its net investment
income and any capital gain net income (capital gains net of capital losses).
As long as a Fund qualifies as a regulated investment company and meets
certain other Internal Revenue Code requirements, distributions of tax-
exempt interest income will be excluded from a shareholder's gross income for
federal income tax purposes.
Dividends from net investment income will be declared daily during each
calendar month and, after
23
<PAGE>
a brief start-up period, paid monthly; distributions of long-term and
short-term capital gain net income will generally be made on an annual basis
(or as otherwise required for compliance with applicable tax regulations),
except to the extent that net short-term gains, if any, are included in the
monthly income dividends for the purpose of stabilizing, to the extent
possible, the amount of net monthly distributions as described below. Both
dividends from net investment income and distributions of capital gain net
income will be paid in additional shares of the relevant Fund at net asset
value (except in the case of shareholders who elect a different available
distribution method). Each Fund will provide its shareholders of record with
annual information on a timely basis concerning the federal and state tax
status of dividends and distributions during the preceding calendar year.
Each Fund has adopted distribution procedures which differ from those which
have been customary for investment companies in general. Each Fund will
declare a dividend each day in an amount based on monthly projections of its
future net investment income and will pay such dividends monthly as described
above. Consequently, the amount of each daily dividend may differ from actual
net investment income as determined under generally accepted accounting
principles. The purpose of these distribution procedures is to attempt to
eliminate, to the extent possible, fluctuations in the level of monthly
dividend payments that might result if a Fund declared dividends in the exact
amount of its daily net investment income.
Each daily dividend is payable to shareholders of record at the time of its
declaration (for this purpose, including only holders of shares purchased for
which payment has been received by the Transfer Agent and excluding holders
of shares redeemed on that day).
Dividends paid by a Fund from taxable net investment income and distributions
of any net short-term capital gains, whether they are paid in cash or
reinvested in additional shares, will be taxable for federal income tax
purposes to shareholders as ordinary income. Distributions of net capital
gains (the excess of net long-term capital gains over net short-term capital
losses) which are designated as capital gains distributions, whether paid in
cash or reinvested in additional shares, will be taxable for federal income
tax purposes to shareholders as long-term capital gains, regardless of how
long shareholders have held their shares. However, it is expected that any
taxable income will be insubstantial in relation to the tax-exempt interest
generated by a Fund. If shares of a Fund which are sold at a loss have been
held six months or less, the loss (not otherwise disallowed as attributable
to an exempt-interest dividend) will be considered as a long-term capital
loss to the extent of any capital gain distributions received.
Dividends and other distributions and proceeds of redemptions of Fund shares
paid to individuals and other nonexempt payees will be subject to a 31%
federal backup withholding tax if the Transfer Agent is not provided with the
shareholder's correct taxpayer identification number or certification that
the shareholder is not subject to such backup withholding. However,
exempt-interest dividends will not be subject to backup withholding.
Moreover, backup withholding will not apply to any taxable dividends and
distributions provided a Fund reasonably estimates that 95% or more of all
dividends paid or treated as paid during the year are exempt-interest
dividends.
Tax-exempt interest from "private activity" bonds (principally industrial
development revenue bonds) issued after August 7, 1986 is considered a tax
preference item for purposes of the federal alternative minimum tax. However,
each Fund's present intention is to invest no more than 20% of its net assets
in such securities. For corporations, all tax-exempt interest generally will
be considered in calculating adjusted current earnings for purposes of the
federal alternative minimum tax as part of the current earnings adjustments.
Further, shareholders who are "substantial users" (or "related persons" of
substantial users), within the meaning of Section 147 of the Internal Revenue
Code, of facilities financed by private activity bonds should consult their
tax advisers as to whether the Funds are a desirable investment.
State and Local Tax Treatment
Each Fund will invest primarily in Municipal Obligations of the State after
which the Fund is named.
24
<PAGE>
Dividends paid by a Fund are not subject to a personal income tax, if any, by
such State to the extent that dividends are attributable to interest on such
Municipal Obligations. However, some or all of the other dividends or
distributions by a Fund may be taxable in those States that have personal
income taxes, if the dividends or distributions are attributable to income of
the Fund derived from obligations of the United States or its agencies or
instrumentalities.
The Trust anticipates that a substantial portion of the dividends paid by
each Fund will not be subject to the personal income tax, if any, imposed by
the State after which the Fund is named. However, to the extent that a
shareholder is subject to State or local taxes outside of such State,
dividends earned by an investment in such Fund may represent taxable income.
Also, all or a portion of the dividends paid by a Fund that are not subject
to personal income tax of the State after which the Fund is named may be a
preference item for such State's alternative minimum tax (where imposed).
Finally, State and local taxes, other than those described above, may apply
to the dividends, distributions or shares of a Fund. For a further discussion
of state tax treatment relating to each Fund, see Appendix A to this
Prospectus.
The foregoing discussion relates only to generally applicable federal and
State income tax provisions in effect as of the date of this Prospectus.
Therefore, prospective shareholders are urged to consult their own tax
advisers regarding tax matters.
Calculation of Performance Data
From time to time, in advertisements or in communications to shareholders or
prospective investors, a Fund may compare the performance of its Class A,
Class B, Class C or Class D shares to that of other mutual funds with similar
investment objectives, to certificates of deposit, to taxable debt
instruments, such as Treasury bonds, as may be included in the Merrill Lynch
Treasury Bond Index and/or to other financial alternatives. A Fund may also
compare the performance of such classes to appropriate indices such as the
Lehman Brothers Municipal Revenue Bond Index, the Merrill Lynch Revenue
Index, the Merrill Lynch 500 Municipal Index, the Merrill Lynch Municipal
Index Intermediate, the Merrill Lynch Municipal Bond Index State Three to
Seven Years, the Merrill Lynch Municipal Index Seven to Twelve Years or the
Bond Buyer Revenue Bond Index and/or to appropriate rankings or averages such
as the Lipper Municipal Bond Funds Group compiled by Lipper Analytical
Services, Inc., or to those compiled by Morningstar, Inc., Money Magazine,
Business Week, Forbes Magazine, The Wall Street Journal, Fortune Magazine or
Investor's Daily.
Total return is computed separately for each class of shares of the Funds.
The average annual total return ("standard total return") for shares of the
Funds is computed by determining the average annual compounded rate of return
for a designated period that, if applied to a hypothetical $1,000 initial
investment (less the maximum initial or contingent deferred sales charge, if
applicable) would produce the redeemable value of that investment at the end
of the period, assuming reinvestment of all dividends and distributions and
with recognition of all recurring charges. Standard total return may be
accompanied with nonstandard total return information computed in the same
manner, but for differing periods and with or without annualizing the total
return or taking sales charges into account. During the first year of
operations, a Fund may also advertise its aggregate total return without
annualization.
A Fund's yield is computed separately for each class of shares by dividing
the net investment income, after recognition of all recurring charges, per
share earned during the most recent month or other specified thirty-day
period by the applicable maximum offering price per share on the last day of
such period and annualizing the result. Yield information may be accompanied
with information on tax equivalent yields computed in the same manner, with
adjustment for assumed relevant income tax rates.
The standard total return, yield and tax equivalent yield results take sales
charges into account, if applicable, but do not take into account recurring
and nonrecurring charges for optional services which only certain
shareholders elect and which involve nominal fees, such as the $7.50 fee for
remittance of redemption proceeds by wire. Where sales charges are not
applicable and therefore not taken into account in the calculation of
standard total return, yield and tax equivalent yield, the results will be
increased. Any voluntary waiver of fees
25
<PAGE>
or assumption of expenses by the Fund's affiliates will also increase
performance results.
A Fund's distribution rate is calculated separately for each class of shares
by annualizing the latest distribution and dividing the result by the maximum
offering price per share as of the end of the period to which the
distribution relates. The distribution rate is not computed in the same
manner as the above described yield, and therefore can be significantly
different from it. In its supplemental sales literature, a Fund may quote its
distribution rate together with the above described standard total return,
yield and tax equivalent yield information. The use of such distribution
rates would be subject to an appropriate explanation of how the components of
the distribution rate differ from the above described yield.
Performance information may be useful in evaluating a Fund and for providing
a basis for comparison with other financial alternatives. Since the
performance of a Fund varies in response to fluctuations in economic and
market conditions, interest rates and Fund expenses, among other things, no
performance quotation should be considered a representation as to a Fund's
performance for any future period. In addition, the net asset value of shares
of a Fund will fluctuate, with the result that shares of a Fund, when
redeemed, may be worth more or less than their original cost. Neither an
investment in a Fund nor its performance is insured or guaranteed; such lack
of insurance or guarantees should accordingly be given appropriate
consideration when comparing a Fund to financial alternatives which have such
features. Performance data or rankings for a given class of shares should be
interpreted carefully by investors who hold or may invest in a different
class of shares.
Appendix A
State Taxation and Special Considerations
Relating to the Funds
General information regarding the taxation of investors in the Funds and
special considerations regarding the relevant states is provided below and in
the Statement of Additional Information.
State Street Research Florida Tax-Free Fund
Dividends and distributions paid by the Florida Tax-Free Fund (the "Fund")
to individuals who are residents of Florida are not taxable by Florida,
because Florida does not impose a personal income tax. Distributions of
investment income and capital gains by the Fund will be subject to Florida
corporate income taxes. Accordingly, investors in the Fund, including in
particular corporate investors that may be subject to the Florida corporate
income tax, should consult their tax advisers with respect to the application
of the Florida corporate income tax to the receipt of Fund dividends and to
the investor's Florida tax situation in general.
Florida imposes a tax on intangible personal property owned by Florida
residents. The Fund has received a ruling from the Florida Department of
Revenue that if, on the last business day of any calendar year, the Fund's
investments consist solely of assets exempt from Florida intangible personal
property tax, shares of the Fund will be exempt from Florida intangible
personal property tax in the following year. Based on the ruling, if the
Fund's assets consist, on the last business day of the calendar year, solely
of assets exempt from Florida intangible personal property tax, shares of the
Fund owned by Florida residents will be exempt from Florida intangible
personal property tax. Assets exempt from Florida intangible personal
property tax include obligations issued by the State of Florida and its
political subdivisions, municipalities and public authorities, obligations of
the United States Government or its agencies, and cash. If shares of the Fund
are subject to Florida intangible personal property tax, because less than
100% of the Fund's assets on the last business day of the calendar year
consists of assets exempt from Florida intangible personal property tax, only
the portion of the net asset value of the Fund that is attributable to
obligations of the United States Government will be exempt from taxation. The
Fund contemplates that, on the last business day of each calendar year, the
Fund's assets will consist solely of assets exempt from Florida intangible
personal property tax.
The Fund ordinarily will invest significantly in Florida Municipal
Obligations, and therefore it is
26
<PAGE>
more susceptible to factors adversely affecting issuers of Florida Municipal
Obligations than is a municipal bond mutual fund that is not concentrated in
issuers of Florida Municipal Obligations to this degree. In November 1994, an
amendment to the Florida Constitution was approved which limits the increase
in revenues collected by the state of Florida for any fiscal year to an
amount equal to the average annual rate of growth in state personal income
over the most recent twenty quarters times the state revenues allowed under
the amendment for the prior fiscal year. State revenues collected for any
fiscal year in excess of this limitation may be refunded to taxpayers. The
Fund cannot predict the impact of this amendment on the finances of the state
or its local governments. Such revenue limitations may adversely affect the
operations of state and local government.
State Street Research Pennsylvania Tax-Free Fund
Distributions paid by the Pennsylvania Tax-Free Fund (the "Fund") will not be
subject to the Pennsylvania personal income tax or to the Philadelphia School
District investment net income tax to the extent that the distributions are
attributable to interest received by the Fund from its investments in
Pennsylvania Municipal Obligations. Distributions by the Fund to a
Pennsylvania resident that are attributable to most other sources may be
subject to the Pennsylvania personal income tax and (for residents of
Philadelphia) to the Philadelphia School District investment net income tax.
Distributions paid by the Fund which are excludable as exempt income for
federal tax purposes are not subject to the Pennsylvania corporate net income
tax. An additional deduction from Pennsylvania taxable income is permitted
for the amount of distributions paid by the Fund attributable to interest
received by the Fund from its investments in Pennsylvania Municipal
Obligations, to the extent included in federal taxable income, but such a
deduction is reduced by any interest on indebtedness incurred to carry the
securities and other expenses incurred in the production of such interest
income, including expenses deducted on the federal income tax return that
would not have been allowed under the Internal Revenue Code if the interest
were exempt from federal income tax. Distributions by the Fund attributable
to most other sources may be subject to the Pennsylvania corporate net income
tax. It is the current position of the Pennsylvania Department of Revenue
that shares of the Fund are considered exempt assets (with a pro rata
exclusion based on the value of the Fund attributable to its investments in
Pennsylvania Municipal obligations) for purposes of determining a
corporation's capital stock value subject to the Pennsylvania capital
stock/franchise tax.
Shares of the Fund are exempt from personal property taxes imposed by the
Pittsburgh School District and some counties in Pennsylvania to the extent
that the Fund invests in Pennsylvania Municipal Obligations.
Under normal conditions, the Fund will have considerable investments in
Pennsylvania Municipal Obligations. As a result, the Fund will be more
susceptible to factors which adversely affect issuers of Pennsylvania
Municipal Obligations than would a mutual fund which does not have as great a
concentration in Pennsylvania Municipal Obligations. Economic difficulties
and fiscal problems in the Commonwealth of Pennsylvania may affect the
securities held by the Fund. For example, financial difficulties of the
Commonwealth, its counties, cities and school districts could affect its
ability to borrow money and lower credit ratings of Pennsylvania Municipal
Obligations which could adversely affect the Fund.
Although Pennsylvania has been identified historically as a heavy industry
state, that reputation has changed more recently as the coal, steel and
railroad industries have declined. A more diversified economy has developed
in Pennsylvania as a long-term shift in jobs, investments and workers away
from the Northeast part of the nation has taken place. The major new sources
of growth are in the service sector, including trade, medical and health
services, education and financial institutions. Pennsylvania is highly
urbanized, with approximately 50% of the Commonwealth's total population
contained in the metropolitan areas which include the cities of Philadelphia
and Pittsburgh. The Common-
27
<PAGE>
wealth's adopted fiscal 1994-95 General Fund budget provided for no new taxes
and as of March 1995, the General Fund had a surplus of $262.7 million, or
2.9% over the official estimates.
Appendix B
Taxable Equivalent Yield Table
The table below is for illustrative purposes only, and shows the effect of
the tax status on the effective yield received by shareholders under the
federal income tax laws and State personal income tax laws, if any. It gives
the approximate yield a taxable security must earn at various income levels
to produce after-tax yields equivalent to those of tax-exempt obligations
yielding from 3.0% to 6.0%. The combined effective marginal tax rate is lower
than the sum of federal and State marginal rates, where applicable, because
the state personal income taxes paid are deductible from federal taxable
income. Of course, no assurance can be given that a Fund will achieve any
specific tax-exempt yield. While it is expected that each Fund will invest
principally in obligations the interest from which is exempt from federal
income taxes and State personal income taxes, if any, to the extent this is
not the case, other income received by a Fund may be taxable at the state
level or at the federal and state levels.
The tax-exempt yields are for illustration only and are not intended to
represent current or future yields for a Fund, which may be higher or lower
than those shown.
FLORIDA
1995 Tax Year
<TABLE>
<CAPTION>
Tax-Exempt Yields/1/
Sample Federal
Taxable Marginal
Income Rate 3.00% 4.00% 5.00% 6.00%
<S> <C> <C> <C> <C> <C>
Joint Return Equivalent Taxable Yield
$ 30,000 15.00% 3.53% 4.71% 5.88% 7.06%
50,000 28.00 4.17 5.56 6.94 8.33
100,000 31.00 4.35 5.80 7.25 8.70
150,000 36.00 4.69 6.25 7.81 9.38
260,000 39.60 4.97 6.62 8.28 9.93
Single Return
$ 21,000 15.00% 3.53% 4.71% 5.88% 7.06%
25,000 28.00 4.17 5.56 6.94 8.33
60,000 31.00 4.35 5.80 7.25 8.70
120,000 36.00 4.69 6.25 7.81 9.38
260,000 39.60 4.97 6.62 8.28 9.93
</TABLE>
/1/ Net amount subject to Federal personal income tax (Florida does not
impose a personal income tax).
28
<PAGE>
PENNSYLVANIA
1995 Tax Year
<TABLE>
<CAPTION>
Tax-Exempt Yields
Combined
Sample Federal Pennsylvania Combined Effective
Taxable Marginal State Marginal Marginal Marginal
Income Rate Rate Rate Rate 3.00% 4.00% 5.00% 6.00%
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joint Return Equivalent Taxable Yield
$ 30,000 15.00% 2.80% 17.80% 17.38% 3.63% 4.84% 6.05% 7.26%
50,000 28.00 2.80 30.80 30.02 4.29 5.72 7.14 8.57
100,000 31.00 2.80 33.80 32.93 4.47 5.96 7.46 8.95
150,000 36.00 2.80 38.80 37.79 4.82 6.43 8.04 9.65
260,000 39.60 2.80 42.40 41.29 5.11 6.81 8.52 10.22
Single Return
$ 21,000 15.00% 2.80% 17.80% 17.38% 3.63% 4.84% 6.05% 7.26%
25,000 28.00 2.80 30.80 30.02 4.29 5.72 7.14 8.57
60,000 31.00 2.80 33.80 32.93 4.47 5.96 7.46 8.95
120,000 36.00 2.80 38.80 37.79 4.82 6.43 8.04 9.65
260,000 39.60 2.80 42.40 41.29 5.11 6.81 8.52 10.22
</TABLE>
The effect of reductions in itemized deductions and personal exemptions for
taxpayers with incomes exceeding certain levels has not been taken into
account. Rates shown are those presently in effect for 1995.
29
<PAGE>
(LOGO) State Street Research
State Street Research
Florida Tax-Free Fund
Pennsylvania Tax-Free Fund
May 1, 1995
PROSPECTUS
STATE STREET RESEARCH
Florida Tax-Free Fund
Pennsylvania Tax-Free Fund
One Financial Center
Boston, MA 02111
INVESTMENT ADVISER
State Street Research &
Management Company
One Financial Center
Boston, MA 02111
DISTRIBUTOR
State Street Research
Investment Services, Inc.
One Financial Center
Boston, MA 02111
SHAREHOLDER SERVICES
State Street Research
Shareholder Services
P.O. Box 8408
Boston, MA 02266
800-562-0032
CUSTODIAN
State Street Bank and
Trust Company
225 Franklin Street
Boston, MA 02110
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
STF-762D-595IBS CONTROL NUMBER:2296-950426(0596)SSR-LD
